GP Strategies Corporation
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good day, and welcome to the GP Strategies First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I'd now like to turn the call over to Ms. Candice Hester, Vice President, Investor Relations. Please go ahead.

[Candice Hester:]

Thank you. Good afternoon, everyone, and welcome to GP Strategies first quarter 2021 earnings call. On the call today are Adam Stedham, CEO and President; and Mike Dugan, Chief Financial Officer. Before we begin, I would like to remind you that today's comments will include forward-looking statements, including statements about the potential effects of the COVID-19 pandemic and related events on our business and results of operations. Because these forward-looking statements are based upon management's expectations and assumptions and are subject to risks and uncertainties, there are important factors that could cause our actual results to be materially different from those expressed or implied by these forward-looking statements. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC, which are posted on the investors section of our website at gpstrategies.com. A replay of this webcast will be available on our website for 90 days following today's call. The slides that are being presented today are also available on the quarterly earnings release's page of the Investors section of our website.

[Adam Stedham:]

Thank you, Candice, and welcome, everyone. For today's call, I'll share some highlights of our first quarter 2021 performance, followed by some updates on the company's strategy going forward, then Mike will share the detailed financials for Q1 2021, followed by a Q&A session. We're pleased with the first quarter of 2021 results as we continue to execute on our strategic initiatives. As we discussed last quarter, the company's active management of the business enabled us to control the impact of the pandemic and improve gross margins while at the same time strengthening the balance sheet. We continue to successfully navigate through a complex global environment, and our efforts are reflected in the 2021 first quarter performance. I'd like to share some data that give us confidence in the company's opportunities for growth going forward. If you look back at the first quarter of 2020, our customers began the quarter doing business as usual. But later in the quarter, it became clear that the world was changing. Late in that quarter, we began to see the impact of COVID on our business and acted swiftly to manage the P&L. Now, a year later, we believe that the macro environment is shifting. Although our Q1 2021 revenue is below the same period last year due to the global environment, we feel our overall plans for growth are on track. Consistent with past economic recoveries, as the world continues to respond favorably, we believe there will be strong demand for our services. And there are several data points that give us confidence about this belief. First, we believe that the APAC region is a leading indicator of the macro trends we're seeing in the landscape of the global economy. During Q1 of 2020, our business in the APAC region was the first to be negatively impacted by customers who pulled back business in reaction to the pandemic. Looking at Q1 of 2021, the APAC region began its recovery ahead of the rest of the world. In line with this trend, our Q1 2021 APAC revenue is more than 10% above our Q1 2020 APAC revenue. Second, excluding the backlog associated with the divested IC Axon business, we ended Q1 2021 with backlog roughly equal to our backlog at the end of Q1 2020. Comparatively, our backlog at both the end of Q3 and Q4 2020 was significantly lower than the same quarter of the prior year. Q1 2021 was the second quarter of backlog growth in a row, and we expect backlog to return to historical levels as the global economy recovers.

[Mike Dugan:]

Thanks, Adam, and good afternoon, everyone. Turning to revenue and gross profit for the company on Slide 8, we reported Q1 revenue of $114.6 million, which is down $13.7 million, or 10.7%, from the revenue reported in Q1 of last year. The primary drivers of the revenue decline are; a $7 million decline in revenue due to the cancellation and/or postponement of revenue that can be directly linked to COVID-19.

[Adam Stedham:]

Thank you, Mike. And so we believe that the macroeconomic wins that have historically pushed our industry during an economic recovery are beginning to blow. And we're pleased that we finished the first quarter with a focused strategy, no debt, significant availability under our credit facility and a higher margin profile. So at this point, we'd like to open up the call for questions and answers.

[Operator:]

First question comes from Jeff Martin of ROTH Capital. Please go ahead.

[Jeff Martin:]

Thanks. Good morning, Adam and Mike. How are you?

[Adam Stedham:]

Great, Jeff. How are you?

[Jeff Martin:]

Doing well. Thank you. I was wondering if you could give us a sense of how things are progressing in terms of the reopening. Are there specific geographies? I mean, you touched on APAC. But specifically North America, geographies starting to open back up. Do you think we're on a path of waning COVID impact in terms of push-outs and cancellations?

[Adam Stedham:]

So I think that really, to answer that question, you have to answer it in two ways. Geographically, the different markets are opening up at different paces, so we are seeing North America start to reschedule, start to open up. Parts of Europe have been slower for us. In general, China has been faster for us. Japan, still a little slower. So it's case by case. APAC overall is ahead of the rest of the world, as we mentioned. The second thing that you have to look at is by industry. And I would say right now that we're seeing different industries bounce back in different paces. The automotive industry, you could call it a COVID impact due to the chip shortage or a non-COVID impact. That is something we're keeping an eye on. It's not negatively impacting us per se right now, but it definitely is something we're keeping an eye on to see if it will slow things down. At this point, we do not believe that's the case. We don't have any indication. But potentially, it could be ramping up even faster, if not for that. Our high-tech industry is doing well. We feel like that's recovering on long global trends. And our government, defense and aerospace industry was not as negatively impacted during the COVID crisis. So it obviously isn't going to ramp-up at the same speed as the other organizations that were impacted. And then our financial services business is one that also is very much influenced by geographic shifts. But overall, I think it's rebounding pretty much in line with geographic trends. So it's a long answer, Jeff. But hopefully, I gave you what you're looking for.

[Jeff Martin:]

No, that's great. And you touched on the auto question I was going to ask. Okay. In terms of the pipeline build, could you help kind of parcel that out? Which areas you're seeing the most activity in this or if it's across the board?

[Adam Stedham:]

So it's across the board. What's encouraging for us is the training outsourcing industry is beginning to see activity. We hope to be able to give some updates on future calls around that. But that's an area that we're very optimistic about. Leadership development is a smaller service line for us, but it's an area that's having a strong growth, strong rebound. And then, our automotive training; as of right now, our automotive business year-over-year is recovering very well. And we anticipate that continuing. Just to be clear, as of right now, we don't see that the currency challenges the industry is facing are going to slow down that recovery.

[Jeff Martin:]

Okay, great. That's it for me. Thank you.

[Adam Stedham:]

Thank you, Jeff.

[Mike Dugan:]

Thanks, Jeff.

[Operator:]

Thank you. The next question comes from Zach Cummins with B. Riley FBR. Please go ahead.

[Zach Cummins:]

Yes. Hi, good day, Mike and Adam. It's nice to see you, and congrats on the continued progress here in Q1. I know you don't typically provide guidance. But I think during the last call, you had the expectation that the business here in 2021 could likely return to the normal seasonal trends that we see from quarter-to-quarter. Is it still fair to make those assumptions at this juncture?

[Adam Stedham:]

So if you took a normal trend, which is, say, over the last 10 years, the most frequent trend would be, Q1 and Q3 would be our lowest quarters, Q2 and Q4 would be our highest quarters. Now that hasn't been the case every single year, but that is the most typical trend. For this year, I think it's more likely that that trend is going to be a little bit impacted in that it wouldn't surprise me to see Q3 not drop as much from Q2, and Q4 not jump as much from Q3 because the impact of the global recovery we anticipate will likely flatten that trend to where it'll be more of a quarter-over-quarter increase. Now in no way are we giving guidance that that's going to happen or we're predicting that. But if you look at the recovery and you superimpose the macroeconomic environment on our normal quarterly pattern, I think that that's a realistic point of view of what may happen as a result of that.

[Zach Cummins:]

Understood. That's helpful. And then, Adam, I know you were referencing to some of the uptick in demand that you've seen for outsourced training. I was just curious in terms of the mix for these engagements. Are you seeing more people have a demand for in-person type of events? Or is there still a lot of strong traction for your virtual and structured-led training sessions?

[Adam Stedham:]

So there – what we're seeing is the virtual training is not going down, but we are seeing the emergence of face-to-face training, in addition to the virtual training. So the virtual training, people are – so far, for us, people are not moving away from virtual back to face to face, but they are ramping up new trainings that involve both virtual and face to face.

[Zach Cummins:]

Understood. And then, it seems with the improving demand environment, you started to make more investments into sales and marketing. I mean, how should we think about that pace of investment as you continue to move forward into improving economic conditions?

[Adam Stedham:]

So what I think is we are moving to a level, a stabilized level. I talked about earlier on our next earnings call we look forward to giving some more insights into our capital allocation strategy, our margin expansions, how it plays into our margin expansion and focus strategy. In addition to that, I think our expectation is that we'll give more information on really what our sales cost strategy is. Looking forward, what are we modeling in terms of sales as a percentage of revenues and how you should think through that. But I do think that we're coming up on having a more defined, more stable cost of – or sales cost as a percentage of total revenue. We're moving to that stable, long-term budgetable level.

[Zach Cummins:]

Understood. And then, just one question on the financial side. Mike, in terms of the cash flow performance, I really appreciate you outlining some of the payback period for the deferred payroll and tax liabilities. But I mean, should we think about this? And generally, I think historically, you've converted anywhere from 50% to 55% of adjusted EBITDA to free cash flow. Is that still kind of a fair assumption as we progress through this year?

[Mike Dugan:]

Yes. I think that that is a fair assumption. That's been the historical model. It might be a little bit higher than that with the lower interest, with the lower debt. But I think there's also going to be an offset to that lower interest perhaps as we're growing and we're starting to build back up that working capital associated with the revenue growth. Much like we had the positive cash flow as our revenue declines and that working capital converted through into cash, we might have a little bit of headwinds in terms of cash flow. So I think that that 55% – 50% to 55% conversion of EBITDA to cash flow is probably good. And then, I would probably leave that as a good metric.

[Zach Cummins:]

Understood. That's helpful. Well, thanks for taking my questions, and congrats again on a strong progress and start of the year.

[Mike Dugan:]

Thanks.

[Adam Stedham:]

Thanks, Zach.

[Operator:]

This concludes our question-and-answer session. Now I'd like to turn the call back over to Mr. Adam Stedham for closing remarks. Please go ahead.

[Adam Stedham:]

Thank you. So I appreciate everybody joining the call. Once again, we're happy to be where we are. We're excited that we've been able to navigate through a fairly unique time over the last year and a half. And we are continuing a disciplined strategy of focusing on areas where we believe that we have a competitive advantage and we believe that we can win. And along that path, we think that there are opportunities to enable shareholder value in other ways, in strategic ways related to some of the assets that are not tied to our specific strategy. So we look forward to our earnings call next quarter.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.