GP Strategies Corporation
Q4 2020 Earnings Call Transcript

Published: 12 Mar 2021

[Operator:]

Good morning and welcome to the GP Strategies Fourth Quarter and Year End 2020 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Candice Hester, Vice President. Please go ahead.

[Candice Hester:]

Thank you. Good morning, everyone and welcome to GP Strategies fourth quarter and year end 2020 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 will share some high level information about our 2020 performance and provide you with some updates on the company’s strategy going forward. Then Mike will share the detailed financials for Q4 2020, followed by a Q&A session. We are pleased with the fourth quarter of 2020 results as we continue to execute on our initiatives to build a strong balance sheet, managed the company through the disruption caused by the COVID-19 pandemic and ultimately position the company for success going forward. GP Strategies successfully navigated through a challenging market environment, and our efforts are reflected in the 2020 fourth quarter and full year results. Although revenue was impacted during 2020, the company’s active management of the business enabled us to control the impact of the pandemic on margins and strengthen the balance sheet. As we move through the year, our performance continued to improve. In the fourth quarter of 2020, the company delivered a sequential increase in revenue, gross margin, adjusted earnings per share and adjusted EBITDA compared to both the second and third quarters of 2020. Now I’d like to remind everyone that during the second half of 2019, GP Strategies had an organic growth rate of 7% and ended 2019 with a backlog of $349.8 million, which was the highest backlog in the history of the company. The global slowdown tied to COVID impacted the company’s revenue in 2020, yet by leveraging deep knowledge of our customers and the markets we serve, the company took clear and decisive action, which translated into solid momentum. As a result, we finished the fourth quarter with the third consecutive quarter of adjusted EBITDA growth, a strong balance sheet and a clear strategy. Now I’d like to take a minute to highlight the balance sheet just a bit more. Since the summer of 2019, we’ve taken significant steps to delever the company. And as a result, our balance sheet is strong, and the company is positioned well to take advantage of long-term opportunities for growth. During 2020, we improved cash flow conversion, expanded margins and executed divestitures in line with our overall strategy. Now, at this point, I’d like to discuss the company’s business environment. GP’s industry leadership, regional focus, talented team and our ability to scale quickly enable the company to attract clients and deliver superior service. We expect this to translate into organic growth. The opportunity that we anticipate has been demonstrated during past business cycles. Historically, during an economic recovery, businesses scale up, adding people, processes and technology, all requiring training services. In addition, the training outsourcing market has been historically active during the recovery from downward economic cycles. As we come out of the business downturn caused by the pandemic, we expect similar business cycle activity to occur that could drive growth for GP Strategies.

[Mike Dugan:]

Thanks, Adam and good morning everyone. Before I get into the details of the quarter-over-quarter results, I want to briefly go over our 2020 financial highlights on Slide 9. Q4 revenue was up $7.5 million or 6.5% over Q3, which is consistent with our previously communicated outlook of revenue growing sequentially in Q3 and Q4 from Q2 results. Gross profit and gross margin are both up in Q4 over Q3 and Q3 over Q2, demonstrating the results from our focus on margin expansion and cost containment strategy. After adjusting for severance and the PTO item in Q3, G&A in Q4 is down $1.1 million or 7.5% compared to Q3. Adjusted EBITDA in Q4 is up $3.5 million or 35% over Q3 and represents the third quarter in a row of adjusted EBITDA increase over prior quarter in a very challenging economic environment. In Q4, the company was able to generate positive cash flow from operations of $13.6 million. And as a result, along with cash proceeds from our divested businesses in 2020, we were able to flip long-term debt net of cash to a positive net cash balance of $10.3 million, which is an $85 million swing from the net debt balance of $74.7 million at the end of 2019. I will now go through some of the details of the drivers of the Q4 financial results. Turning to revenue and gross profit for the company on Slide 10, we reported Q4 revenue of $123.1 million, which is down $32.3 million or 20.8% from the revenue reported in Q4 last year. The primary drivers of the revenue decline are a $17.9 million decline in revenue due to the cancellation and/or postponement of revenue that can be directly linked to COVID-19, a $6.3 million decline due to the divestitures of the LNG and IC Axon businesses and a net $9.4 million decrease in revenue that cannot be directly attributed to COVID-19 or divestitures. When considering this $9.4 million decrease, I’d like to reiterate how the company is identifying the revenue impact related to COVID-19. Our business can be broken out into three main categories. The first category is long-term multiyear contracts with clients that get funded each year. The second category is annual work that gets renewed each year with existing clients. Declines due to cancellations and delays in delivery in these two categories can be identified and quantified as directly related to COVID as we have contract agreements in place, but the work delivered is less than expected contract volumes. The third category of work is for shorter term duration project-based work with existing and new clients, primarily 1 to 6 months in duration. This category of work is the primary driver of the remaining decline of $9.4 million. For this category, our rate of project completions is slightly outpacing the rate of new project awards. This decline is not directly classified as being related to COVID-19, since it can’t be linked to contracted work that was delayed or canceled. However, this delay in new awards in our short-term project-based cycle is indirectly linked to the overall macroeconomic disruption caused by COVID-19.

[Adam Stedham:]

Thank you, Mike. I appreciate that. And we are excited about where we are, as Mike said, and I believe now we’ll open up for the Q&A.

[Operator:]

Our first question today will come from Alex Paris with Barrington Research. Please go ahead. Pardon me, Alex, you maybe muted.

[Alex Paris:]

Yes. I am sorry. Thanks for taking my call. Congratulations on a strong finish to what was a tough year. I just have a couple of questions here for you. I wanted to dive a little deeper and get a better sense of the restructuring program that you commenced in the fourth quarter by hiring a consulting firm. And then I have a follow-up related to business units held for sale and so on.

[Mike Dugan:]

Yes, Alex. How are you doing? Yes. So the restructuring effort, we’ve done some benchmarking. And if you look at our G&A growth over the year, as we expanded globally, we’ve done some benchmarking and determine that. We’ve got to look at where are opportunities where we can make that organization more efficient. Part of our focused strategy has been, as a company grew globally, the level of complexity outpaced our revenue growth. And that shows up in the G&A support services. So we’ve done that assessment of where are there opportunities that started in Q4. We are currently in the planning phase to outline a plan and then start the implementation of the initiatives identified during that as part of that overall restructuring effort. So it’s an in-process initiative right now. But again, it’s in line with our goal of margin expansion and cost containment and cost reductions to help improve overall margins for the company.

[Alex Paris:]

So a related question, the restructuring charge in the quarter was $1.4 million. We should anticipate additional restructuring charges in Q1 and Q2.

[Mike Dugan:]

I believe in the quarter, it was $500,000.

[Alex Paris:]

Okay, $500,000.

[Mike Dugan:]

Yes. In the quarter is $500,000 and yes, we should – we do anticipate additional restructuring charges in Q1 and Q2 related to this initiative and then we expect in the second half of the year to be primarily done with that initiative and see the results of the efficiencies to be gained there.

[Alex Paris:]

Do you have any target for SG&A or G&A as a percentage of revenue? I realize it has been increasing and are you willing to share that?

[Mike Dugan:]

We don’t have a target that we’re willing to share, but I certainly can share the notion that we’re looking to have our G&A trend to be – start to turn back towards the G&A as a percentage of revenue that we’ve had historically. So I can give you a notional goal there. That’s our objective. That’s why we started this initiative, but we’re not providing any specific targets there.

[Adam Stedham:]

And overall, Alex, between gross margin improvement, which is also a part of what we’re doing within this as well as G&A cost improvement. And as we said, our goal is to get back to EBITDA percentages that we experienced in 2014 to 2016.

[Alex Paris:]

That’s helpful. And then just kind of going back to the restructuring charges, Mike, do you want to – can you offer me at this point or no, an order of magnitude, the size of the remaining restructuring charges to be taken in Q1 and Q2?

[Mike Dugan:]

No. I don’t think we’re going to – we’re providing that information on a forward-looking basis.

[Alex Paris:]

Okay, fair enough. And then my related question and my last question is, I just wanted to talk about the one-third of revenue in industries that are beyond the four focus industries. One-third of revenue means $165 million in revenue in 2020. And you said you have one business unit listed as for sale as of December 31 for $13 million in revenue. How should I think about the difference, the $150 million or so in revenue? Could we see more significant divestitures in that area?

[Adam Stedham:]

It’s possible, but it’s also quite possible that we don’t. I don’t think you could really characterize it other than saying that we anticipate there are parts of that business that historically has been very strong in the training outsourcing market, and we would expect that to potentially occur again, in the economic recovery, and we plan to take full advantage of that. But there are other businesses that aren’t necessarily tied to that. So all I can say at this point, Alex, is that we’re continuously evaluating those businesses to determine, do they create the most value inside of the firm or outside of the firm? And are they best for or do they best serve the clients and the shareholders? We have some great clients in this part of the business that we’ve worked with for many, many years. We intend to continue working with those clients. But we do – we are analyzing this part of the business a little differently with the overall goal of reducing the complexity of the company, reducing the overhead of the company and improving the margin profile of the company without impacting our ability to organically grow revenue.

[Alex Paris:]

That’s very helpful. I appreciate the color guys. Thanks again.

[Adam Stedham:]

Thank you.

[Operator:]

And our next question will come from Jeff Martin with ROTH Capital. Please go ahead.

[Jeff Martin:]

Thanks. Good morning, Adam and Mike. I hope you are doing well.

[Adam Stedham:]

Hi, Jeff.

[Jeff Martin:]

I wanted to dive in a little deeper on the non-four industry verticals piece as well. It sounds like a good portion of that is outsourced training, but help us understand from a high level, what the big – the largest pieces of that third of business are comprised of.

[Adam Stedham:]

So we haven’t really broke that down in a way as – if you look at our overall industry sectors, we continue to have a very strong industry sector in life sciences as well, which is not in our four key industries, our core focus industries. Energy, oil and gas is another sector that’s inside of there. And then you have a lot of smaller sectors. So the two largest industry verticals are life sciences and energy, oil and gas. Now, life sciences is a great industry for us. We have strong clients in training, outsourcing. We have a very, very – an exciting proposition for training outsourcing in that space. And we continue to plan to focus on that heavily, training outsourcing in the life sciences space. So those are the two largest industry verticals. And then it breaks down into different pieces from there. Our intention in the future is to break down this business a little bit more in a granular way in terms of service lines to help you understand that, but at this point in time, we haven’t broken it out in that way. Does that make sense?

[Jeff Martin:]

Sure. No, that’s helpful. Well, congratulations on improving the balance sheet, getting back to nice levels of profitability in the second half of 2020. And now that you’ve got the stronger balance sheet, what’s your outlook in terms of acquisitions? What areas would you be targeting and how does this shape the company over the next 3 to 5 years?

[Adam Stedham:]

So I think it positions the company very well. Historically, there have been opportunities to buy businesses during the back end of an economic down cycle at very favorable pricing. So the company would be open to that. And so we’re definitely looking at that, if it was something that was clearly aligned to what we’re trying to do. It’s important that as we look forward on any acquisition that we may do, it’s going to have to be an acquisition that doesn’t add to the complexity of the business. We want something that would enable the business to grow and allow us to drive further organic growth without adding to the complexity of the business. So at this point, from a capital structure, capital allocation structure, we would be open to that. And there are other avenues that we’re looking at in terms of what’s the best use for our capital allocation for in terms of organic growth, shareholder value and all of the factors that we consider. So right now, we have not clearly defined where we think we’re going to go forward with the capital allocation. It’s opportunistic. And we’re comfortable with the balance sheet that we’re in right now. And if we get to a point where we have more cash on hand, we’re obviously going to be looking for what’s the best use of that capital.

[Jeff Martin:]

Right, right. Okay. And then last question, do you have a specific time frame in mind when you’re targeting a return to your historic EBITDA margins?

[Adam Stedham:]

Yes. So not specifically, but what we are targeting is the first half of this year, we want to be done with the restructuring and the positioning of the company to take full advantage of all of the opportunities presented by the recovery from the COVID downturn and return to a more normal clean income statement that doesn’t have the adjustments as much and really is positioned for long-term growth starting the second half of this year to take full advantage of it.

[Jeff Martin:]

Right, right. Okay. Thanks for taking my questions.

[Adam Stedham:]

Thank you, Jeff.

[Operator:]

Our next question will come from Zach Cummins with B. Riley. Please go ahead.

[Zach Cummins:]

Hi. Good morning, Adam and Mike. Thanks for taking my questions. Adam, I just wanted to ask a question about what you’re seeing in the environment so far this year? I mean in terms of the overall recovery, are you seeing a different pace of recovery across each geography?

[Adam Stedham:]

Absolutely. Not only each geography each country. If you look at – for example, if you look at our business in China, it’s recovering much faster than our business in Japan because of the situation, the government’s position, the COVID situation. And so really, our regional strategy that we implemented, our regional structure we implemented during the summer has been very beneficial for us in terms of being able to respond very quickly and still control all of our costs around the world. But it is absolutely a country-by-country situation, industry-by-industry situation. But what we do feel optimistic about and excited about is, as specific industries and specific countries begin to operate in more of a post-COVID type of manner, the patterns of recovery that we’ve historically seen in the business are happening in those specific areas. So we believe as more and more countries, more and more of our verticals start to move into more of a post-COVID recovery environment, it will pick up speed for us.

[Zach Cummins:]

Understood. And then just following up on that, I would be curious to hear your feedback that you’ve received from clients when it comes to training budgets for this year. And also, with you shifting to kind of a hybrid model with both face-to-face and virtual modalities, any sort of insight you can give around the potential mix between those two, as we proceed forward?

[Adam Stedham:]

So we’re definitely seeing budgets for 2021 that are higher than budgets for or higher than actuals for 2020. The vast majority of our clients spent less in 2020 than they had budgeted going into the year, simply because that they did not anticipate the impact of COVID going into the year when their budgets were set at the end of ‘19. So if you compare the budgets for ‘21 versus the actual for ‘20, that’s there. Once again, on a country-by-country, business-by-business basis, we have industries that are eager to return to face-to-face training. We have other businesses that have and other clients that have had to quickly convert to virtual training. And so now they are budgeting a process of taking what was quickly done and making that into something more sustainable, more effective long-term. So if there was a push to move from live instructor to virtual instructor, however, it could be done as fast as possible. Now there is a push to, let’s revisit the curriculum, let’s redesign it, let’s optimize it for this new virtual modality. So once again, it really depends upon the industry and the country in terms of their appetite for face-to-face, going back to face-to-face versus optimizing the virtual.

[Zach Cummins:]

Understood. That’s helpful. And then just one question for Mike to finalize here, really impressive free cash flow generation throughout the year, I know you did get a little bit of a benefit from the deferred payroll tax liabilities and other things around the CARES Act. But how should we be thinking about cash flow on a go-forward basis, I mean, excluding the anticipated headwinds that you’ll see with the payback of those deferred liabilities?

[Mike Dugan:]

Yes. So if you look at what happened in 2020, a couple of things were in play on top of the deferred liability benefit of around $10 million. One, we ended Q4 of 2019 with $155 million of revenue. And as the revenue declined, we kind of converted a lot of that working capital into cash flow generation. So there was a natural increase in cash flow generation from that aspect. And in addition, I think that there was a heightened focus on accounts receivable collections. We’ve seen some improvement in that as well as a laser focus on making sure our unbilled and that we’re getting our billings out the door as rapidly as possible. Again, all steps we took to make sure that we maintained good financial discipline during this time. So I think it’s kind of a factor of the wind down of the working capital at lower revenue volumes, converted a lot of that working capital cash, improved collections and improved timeliness of really laser focus on the timing of getting invoices out the door, along with that benefit of $10 million of COVID relief. As we look forward, we typically, historically, outside of all those anomalies I just talked to, typically, somewhere around 50% of EBITDA converts to cash as we go forward. That’s generally been our rule of thumb. And we might be in the 50% to 55% of EBITDA conversion to cash as we go forward. That’s generally been the profile that we use in our modeling.

[Zach Cummins:]

Great. That’s helpful. Congrats again on the progress here in Q4 and best of luck going forward.

[Adam Stedham:]

Thanks, Zach.

[Mike Dugan:]

Thanks, Zach.

[Operator:]

And this will conclude our question-and-answer session. I’d like to turn the conference back over to Adam for any closing remarks.

[Adam Stedham:]

Thank you. And so as we close, as we said, we believe, historically speaking, that we’re entering into a period of time that has been very positive for the company. We’re positioning ourselves to take advantage of that. We feel that we are positioned to take advantage of it. There is excitement within our client base around how do they equip their workforce with the knowledge, skills and abilities that they need to be successful in the new world that has been defined by the COVID situation. And to enable that human capital to reach its full potential, they need help in terms of developing those knowledge, skills and abilities in their workforce. We believe that presents a significant opportunity for us, and we’re doing everything we can to position ourselves to take full advantage of that, deliver maximum value to our clients and our shareholders. So appreciate everybody taking the time today.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.