GP Strategies Corporation
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good morning. My name is Keith and I will be your conference operator today for the GP Strategies First Quarter 2018 Earnings Conference Call. All lines will be placed on mute preventing any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Ann Blank, Director of Investor Relations. Please go ahead.

[Ann Blank:]

Thank you. Good morning and welcome to GP Strategies first quarter 2018 earnings call. On the call today are Scott Greenberg, Chief Executive Officer; Adam Stedham, 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, which are subject to certain risks and uncertainties that could cause our actual results to be materially different from expectations. 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 web site at gpstrategies.com. A replay of this call will also be available on our web site later today. At this time, I'd like to turn the call over to Scott.

[Scott Greenberg:]

Thanks Ann. Good morning and welcome to our first quarter 2018 conference call. Today, we will follow our usual quarterly format. To initiate the call, I will provide a brief overview of the results of the first quarter of 2018, then Mike, our CFO will present an in-depth financial analysis. Adam, our President, will then give key updates on our global initiatives. After Adam's presentation, I will provide a financial summary, including an acquisition update, and then we will conclude with the Q&A session. This morning, before the market opened, GP Strategies announced [indiscernible] earnings for the first quarter of 2018. The first quarter of 2018 showed strong cash flow from operations and an increase in revenue. We were able to achieve this performance, while continuing to implement our previously announced restructuring plan. Our core operating units continue to remain solid. Although, we are facing a challenge with our skills apprenticeship program in the U.K., which Adam will talk about in a few minutes. This impacted our gross margin in the first quarter. The first quarter results also included numerous unusual and/or non-recurring items, that both positively and negatively impacted our results, both pre-tax and the income tax expense, as we build our platform for future growth. We anticipate that after the second quarter, GP Strategies will return to a normal operating model without significant unusual items and non-recurring items as well, other than legal costs associated with acquisitions and the implementation of our new ERP system, which is anticipated to go live in the fourth quarter of 2018. In the first quarter, our major financial services customer extended our contract for one year, with the anticipation of entering into a new long term arrangement, and recently, our largest automotive customer named us a prestigious supplier of the year. Those two customers represent over 25% of our overall revenue. In addition, our engineering and technical service practice, which is part of our Workforce Excellence segment, is starting to see an increase in proposal activity which bodes well for the future of the company. This is the group that has struggled in the last few years. Our acquisition initiative, which has enabled the company to grow substantially in the past is now back in full swing, with the completion of a significant acquisition this week of a pharmaceutical training company, our acquisition of the SuccessFactors business of Hula Partners earlier this year, and our previously announced ventures with Manchester CF and Nexus Global. These acquisitions and ventures provide the Company with potential for both incremental high margin business and passive income. These transactions and the enhanced management team put GP Strategies in a good long term position and make us extremely optimistic about the Company's future. We are back to the same fundamental strategy that previously grew the company from $220 million to $500 million in less than a five year period. The company continues to finalize its cost reduction plan announced in December 3017, and took an additional restructuring charge of $400,000 in the first quarter of 2018. Over the last few months, the company continued various cost cutting measures to enable us to invest in key priorities, while reducing operating costs. After some transitioning costs, these savings should be significant on an annual basis in 2019. As part of this change, the company combined four segments into two. Due to the cash flow generated in the optimistic future, the company was active in the buyback program. The company repurchased approximately 312,000 shares for approximately $7.3 million in the first quarter of 2018 of GP Strategies stock in the open market. The buyback reduced the average share count on a fully diluted basis to approximately 16.7 million from 16.8 million shares outstanding from the first quarter ending 2018 and 2017, and is approximately 16.9 million at yearend. As far as management changes; in the fourth quarter of 2017, the company employed Adam Stedham as President and Mike Dugan as CFO. I am very excited about their progress to-date. The employment of Adam reflects our focus on organic growth. Adam has demonstrated the ability to drive growth and performance in his various roles at GP Strategies, including international operations. Mike Dugan has been our high performer, and as well our financial organization for many years, and has been a key person in the integrations of our acquisition strategy. In addition, in January 2018, in first quarter, the company named Russell Becker as Chief Sales Officer. Russell is responsible for developing strategic plan that promote sales growth, including establishing a structure and more centralized business development capability, that will align the company's diverse market sector experience with the service offerings. Russ joined GP Strategies with extensive leadership experience, helping the organizations establish the right organizational strategy, and sales discipline to achieve their aggressive growth. The addition of Russ to our leadership team brings a wealth of knowledge and experience to enable us to build a world class business development organization. Adam will talk later about some of the progress that Russ is currently making. Now, I will now turn the call over to Mike for an in-depth financial review.

[Mike Dugan:]

Thanks Scott and good morning everyone. We reported first quarter revenue of $125 million, which represented $2.6 million or a 2% increase over the $122.4 million of revenue reported in the first quarter of 2017. The Workforce Excellence segment revenue of $74.4 million, represented a $2.9 million or 4% increase over the $71.5 million of revenue recognized in Q1 of 2017. This revenue increase is due to the following; a $3.3 million net increase in revenue across the segment, due to favorable changes in foreign currency exchange rates. A $1.3 million increase in revenue, contributed by the acquisitions completed in this segment within the last 12 months. A $300,000 net decrease in revenue in our managed learning services practice within this segment, due to a $2.6 million decrease in the apprenticeship skills training program in the U.K., as a result of the change in how this program is funded, which is mostly offset by a net increase in revenue in the United States for digital learning and training content development services. There also was a $1.4 million decrease in revenue in our Engineering and Technical services practice within this segment. Primarily due to a $1.1 million decrease in software license and implementation services in our energy business unit, and a $900,000 reduction in revenue from a contract with a foreign oil and gas client, which was terminated in the fourth quarter of 2017. These decreases were partially offset by increases in revenue and other business units within this practice. The business transformation services segment revenue of $50.6 million, represented a $300,000 or a 0.6% decrease over the $50.9 million of revenue recognized in Q1 of 2017. The revenue decrease is due to the following; a $3.5 million net decrease in our organizational development practice, due to a decline in platform adoption, strategic consulting and leadership development services. An $800,000 net decrease in our sales enablement practice, primarily due to the completion of non-recurring vehicle launch events in 2017. These decreases were partially offset by the following; a $3.2 million increase in revenue, contributed by the acquisitions completed in this segment within the last 12 months, and an $800,000 net increase in revenue, due to favorable changes in foreign currency exchange rates. Within this segment, the sales enablement practice had first quarter results included $5.5 million of publication revenue, which was consistent with Q1 of 2017. We are projecting a total of $8.4 million of publication revenue in the second quarter of 2018, which is also consistent with Q2 of 2017. The automotive sector was our largest sector in the first quarter, and comprised 22% of revenue for both Q1 of 2018 and 2017. We have a revenue concentration from a single automotive customer, which accounted for 15% of our Q1 2018 revenue, up from 13% in 2017. The financial and insurance sector comprised 20% of our consolidated revenue for both Q1 of 2018 and 2017. We continue to have a revenue concentration from a single financial services customer, which accounted for 14% of our consolidated revenue for both Q1 of 2018 and 2017. Revenue earned from operations outside of the United States represented 33% of our revenue in Q1 of 2018 compared to 29% in 2017. Gross profit in Q1was $17.7 million, which was a $1.7 million or 8.8% decrease over the first quarter of 2017 gross profit of $19.4 million. Gross profit as a percentage of revenue decreased to 14.1% from 15.8% in the first quarter of 2017. The Workforce Excellence segment gross profit of $11.1 million or 14.9% of revenue for the first quarter of 2018 decreased by $1.9 million or 14.6% compared to the gross profit of $13 million or 18.2% of revenue in the first quarter of 2017, primarily due to the following; a $1.3 million decrease in gross profit for apprenticeship skills training program in the U.K., as a result of the lower revenues noted previously. A $1.1 million decrease in gross profit for software license and implementation services in our energy business unit. [Technical Difficulty]

[Operator:]

One moment ladies and gentlemen, we lost the speaker. Please proceed.

[Mike Dugan:]

All right. Sorry about that. We got cutoff somehow. On gross profit, I will start there. Gross profit in Q1 was $17.7 million, which was a $1.7 million or 8.8% decrease over the first quarter of 2017 gross profit of $19.4 million. Gross profit as a percentage of revenue decreased to 14.1% from 15.8% in the first quarter of 2017. The Workforce Excellence segment gross profit of $11.1 million or 14.9% of revenue for the first quarter of 2018, decreased by $1.9 million or 14.6% compared to gross profit of $13 million or 18.2% of revenue on the first quarter of 2017. Primarily, due to the following; a $1.3 million decrease in gross profit for apprenticeship skills training in the U.K., as a result of the lower revenues noted previously. A $1.1 million decrease in gross profit for software license and implementation services in our energy business unit. A $700,000 decrease in gross profit in our oil and gas business, primarily due to lower revenues, as well as ongoing costs to support the close-out of a contract with a foreign oil and gas client, which was terminated in the fourth quarter of 2017. These decreases were partially offset by a $600,000 increase in gross profit, primarily due to margin improvements in our other business units within the segment and cost saving initiatives implemented in Q4 of 2017. And a $600,000 increase in gross profit due to favorable changes in foreign currency exchange rates. The Business Transformation services segment, gross profit of $6.6 million or 13% of revenue for the first quarter of 2018, increased by $200,000 or 3% compared to gross profit of $6.4 million or 12.5% of revenue for the first quarter of 2017. Despite the slight revenue decrease in this segment, gross profit increased, primarily due to an increase in revenue on projects with higher margins, replacing projects with lower margins within our sales enablement practice compared to the prior year. SG&A expenses of $14.6 million in the quarter, represented an increase of $1.6 million or 12.2% from $13 million for the first quarter of 2017. The increase in SG&A expenses is primarily due to a $1.2 million increase in third party costs related to our new financial system implementation, which we anticipate will go live in the fourth quarter of 2018. A $300,000 increase in labor and benefits expense for internal operations resources, charging into G&A to develop trading and process maps, in support of the company's ERP implementation. A $400,000 increase in labor and benefits expense relating to new business development and marketing personnel, a portion of these costs represent new investments in business development, and a portion is due to centralizing marketing costs that were previously recorded in cost of revenue. A $300,000 increase due to unfavorable foreign currency exchange rates compared to the prior year. A $200,000 increase in amortization expense for intangible assets, and these all were partially offset by a $500,000 decrease in bad debt expense, and a $300,000 net decrease in G&A, as a result of the cost savings efforts initiated in the fourth quarter of last year. During the fourth quarter of 2017, we initiated restructuring and transition activities to improve operational efficiency, reduced costs and fund strategic investments to better position the company to drive future revenue growth. In Q4 of last year, we recorded restructuring charges consisting primarily of severance expense of $3.3 million for the year ended December 31, 2017. During the three months ended March 31, 2018, we incurred an additional $400,000 of restructuring charges consisting primarily of severance expense. We expect these restructuring activities to be substantially completed in the first half of 2018. During the quarter, we recognized $2.6 million of income related to a change in the fair value of contingent consideration compared to $200,000 of income reported in the first quarter of 2017. The majority of this gain, came from a $1.3 million gain related to the earnout from the Maverick acquisition, and a $1.2 million gain related to the earnout from the McKinney Rogers acquisition. Both of these gains were due to a decrease in the projected earnings for these acquired businesses compared to our prior forecast. While these acquired businesses performed lower than what we originally estimated in purchase accounting, the businesses are profitable, and continue to be a strategic part of our service offering. Interest expense increased to $700,000 for the first quarter of 2018 compared to $400,000 for the first quarter of 2017. This increase is due to both an increase in interest rates and higher borrowings under the credit agreement in 2018. Other expense was $200,000 in the quarter, which is up $100,000 from Q1 of 2017. This increase is primarily due to an increase in foreign currency losses. Income before taxes was $4.4 million compared to $6.1 million in the first quarter of 2017. Income tax expense was $1.7 million in the quarter or a rate of 39.7% compared to $2 million or 32.8% in the first quarter of 2017. The increase in the rate is primarily due to the effect of an $8600,000 increase to the provisional estimate recorded in Q4 of 2017 related to the onetime transition tax on the mandatory deemed repatriation of cumulative foreign earnings, imposed by the U.S. Tax and Jobs act enacted on December 22, 2017. This increase is partially offset by the decrease in U.S. statutory tax rate as of January 1, 2018 to 21%, and other discrete items. Excluding these items, the effective tax rate for Q1 of 2018 was 25.9%. Net income in the first quarter was $2.6 million compared to $4.1 million in the first quarter of 2017. First quarter earnings per share was $0.16 compared to $0.24 in the first quarter of 2017. For the new ERP system update; the ERP implementation is scheduled to go live on October 1 of this year. While we have a considerable amount of work to do, our weekly project status reports have us trending in the right direction, and we are confident of our current plan to get us to the October 1 go-live date. We are also able to report, that we will be going live on the latest release of the vendor's ERP cloud software, and will not have to endure the disruption of going live on an older version of the software, and then immediately taking on an upgrade. In the first quarter of 2018, our SG&A costs included $1.4 million of incremental costs associated with the ERP implementation. Our projected incremental costs for Q2 and Q3, leading up to the go-live date, are $1.2 million and $800,000 respectively. Moving on to the balance sheet; our cash balances were $16.9 million at March 31, 2018 compared to $23.6 million on-hand at the end of 2017. In the first quarter of 2018, we spent $7.8 million on share repurchases and $10 million to fund the Hula acquisition completed on January 2. We generated $9.4 million of cash flow from operations in the first quarter of 2018 compared to $4.1 million in the first quarter of 2017. The $9.4 million is comprised of year-to-date income of $2.6 million plus non-cash addbacks to net income including depreciation and amortization of $1.8 million. Non-cash compensation expense of $1.4 million, plus $6.2 million increasing cash from changes in other operating items, primarily in accounts receivable, offset by a $2.6 million non-cash gain on contingent consideration. Fixed asset additions were $400,000 in the first quarter of 2018, and we generated free cash flow of $9 million in the quarter. At the end of March, backlog was $276 million compared to $294 million at March 31, 2017 and $268 million at the end of December 2017. It is worth noting, that after adjusting the backlog of the cancelled foreign oil and gas contract out of the March 2017 backlog figure, the March 2018 backlog is actually up $14 million over March 2017. Approximately 95% of the backlog will be recognized as revenue within the next 12 months. At this time, I will turn the call over to Adam, who will discuss some operational highlights.

[Adam Stedham:]

Thanks Mike. Scott and Mike gave you an update on the financial results and the business. I want to dive in a little deeper to help you understand more about our organic growth plans, industry strategies in the U.K. Skills Funding business. Our sales initiatives consist of identifying and capturing new opportunities, developing stronger existing account growth, and maximizing the value creation of our acquisitions. Our new opportunity identification and capture program, include centralizing marketing and strategic proposal management, creating a new demand generation function, and implementing our find-win-grow sales model. During the first four months of 2018, our corporate marketing function has converted web site leads into 270% more revenue than the same period in 2017. Currently, our proposal management team is actively bidding on contracts for more new revenue than any quarter in the past five years. Obviously, we want to win this work, and the revenue generation would be spread over time, but the activity is very exciting. In connection with our find-win-grow strategy, we launched our demand generation team this quarter. The launch includes the systems, processes and team associated with the proactive generation and new opportunities. We will continue to grow this team across 2018. Early indications are that the team is having an impact on our early stage pipeline, and we expect they will have an impact on the future bookings and revenue. From an acquisition value creation perspective, we are pleased to report strong traction with our recent acquisition, Hula. The organization has realized revenue growth over their Q1 2017 and we anticipate, they will experience growth in Q2 and beyond. We are also implementing our new value creation process for the pharmaceutical training company Scott mentioned earlier, and we are confident that the process will have a positive impact on net acquisition. As we improve our integration of acquisitions, we feel confident we will experience improved earnings growth from them, compared to our record. Now I'd like to talk some about our key services and industries. Through this call, I will focus on our engineering and technical services, as well as the automotive and pharmaceutical industries. Within our engineering and technical services, we have a rich and long history, that provides us three key advantages. We have deep subject matter expertise, a strong brand and world class technology. As a result, our engineering and technical services organization, historically generated some of the highest operating margins within GP Strategies. Over the past four years, that organization has experienced year-over-year earnings declines. A key component of our transformation strategy, is to return this organization to their historically higher profit percentages. We feel very comfortable stating that 2018, we should experience a reversal of the downward trend for this organization, and this paints a very encouraging picture going forward. Our business development efforts are providing immediate returns and we are investing in our technology offerings to capitalize on additional opportunities in the marketplace. Now I'd like to talk about two industries; the first is the pharmaceutical industry. The acquisition of the pharmaceutical trading company Scott mentioned earlier, demonstrates our focus on expanding our footprint in this industry. Prior to this acquisition, the pharmaceutical industry services only represented 3.6% of GP Strategies revenues. Our goal is to significantly increase this percentage. The Association for Training and Development stated the industry report indicates that the cost per learning hour available in an organization is a good indication of the learning activity for that organization. The pharmaceutical and healthcare industry has the highest cost per hour available. In other words, what that means, this industry spends more per hour of learning than any other industry. The cost of learning and development in that industry, is due to the expertise required to provide the services in that industry. Much like our technical business, as the expertise requirements increase, so does the opportunity for increased margins. Therefore, as our revenues in the pharmaceutical industry increase, this should result in a positive impact on our operating margins. The next industry I'd like to discuss, is the automotive industry. Our business in this industry realized earnings growth Q1 2018 versus Q1 2017. However, the majority of the automotive buying centers, particularly for leading global automotive makers and the emerging markets are largely unserved by GP Strategies, and therefore present a very significant opportunity for growth. We are focused on this opportunity for GP Strategies within the global automotive market. Historically, our revenues have primarily been generated in North America, where we have a very strong position and well developed service lines. The automotive market outside the mature western countries are expanding at a significant growth rate, and analysts project, they will continue to grow. During Q1 2018, GP Strategies automotive industry revenues outside of the United States are up 40% compared to the same period last year. One market of significant opportunity for GP Strategies is China. Our China automotive business grew 23% Q1 2018 versus Q1 2017. We anticipate the growth will continue to ramp up in this region for 2018. In addition, we are aggressively pursuing an acquisition strategy to reinforce our automotive industry capability outside of North America. The last item I would like to provide more detail about, is our U.K. skills funding work. This area continues to face challenges, resulting from the U.K. government's reforms to the apprenticeship funding. It is important to realize, that the reforms were intended to increase the number of new apprentices in the U.K. However, U.S. agencies across the U.K. continue to report on the significant downturn in new starts of apprentices, since the implementation of the new levy program. This unplanned impact from the reform has created significant disruption across the skills funding supplier base. GP is investing in our business development staff, and we have activity to offset the negative impact of these changes. Our sales pipeline has ramped up significantly, but this pipeline has not materialized in the earnings that compare favorably to 2017. The first half of 2017 was the strongest financial six month period GP has experienced in the job skills arena, as new starts numbers were ramped up, due to pre-levy funding advantages. We continue to feel confident, there is a business where we return to previous levels, as our business development efforts take hold and the marketplace begins to adjust to the new levy program. With that said, revenue and earnings from skills fundings in Q2 looks to be challenging from a year-over-year comparison, due to the uniquely high volumes achieved in Q2 2017. At this point, I will turn it back over to Scott.

[Scott Greenberg:]

Thank you, Adam and Mike. As you heard today, we are very optimistic about GP Strategies future. We believe, we are at an inflection point in the company. You are seeing the results and different types of adjustments, due to changes and restructuring, that we believe will be positive for the company, even beginning in the second half of 2018. We have reinvigorated our acquisition strategy. As I mentioned in the past, we believe in addition, to financial services of automotive, the pharmaceutical industry has the type of attributes, including things like regulatory training, compliance training, that is good for GP Strategies to invest in and have high margin types of business. We talk about two ventures that will give us passive income. Manchester CF has anti-money laundering, generic software, where GP Strategies has a license to sell, and that will give us passive income to our financial service industry at a very high margin. Nexus Global has a liability and maintenance type of software, which again will give us passive income to our professional technical services group. So I believe we are really on the right track, and that we should truly benefit in the long term, and we are pretty excited about it. We hope to take the message out in the next month. We will be at the B. Riley conference coming up, Barrington Conference next week, and for the first time, we have been invited to the Stifel Conference in June. So we look forward to seeing you, as you hear about the new and exciting GP Strategies. With that, we will turn it over to the Q&A session.

[Operator:]

[Operator Instructions]. Our first question here is from the line of Alex Paris with Barrington Research. Please go ahead.

[Chris Howe:]

Good morning everyone. This is Chris sitting in for Alex Paris.

[Scott Greenberg:]

Good morning.

[Chris Howe:]

I had a question; previously, you had mentioned a kind of a guidance range for acquisition activity over the next 12 months. Just wanted to see if you could provide an update on that, if there are any changes or updates to it? And also, your level of confidence in reaching a mid-single digit revenue growth on an annual basis? And my last one is just in reference to this pipeline, how do you see it versus where it was six months or maybe to a year ago?

[Scott Greenberg:]

Okay. So all key questions; let me start with the acquisition pipeline and what we are doing there. The two acquisitions that we have completed this year, gives us approximately $20 million of combined revenue. That being said, as far as where we thought we would be, the higher margin businesses compared to the historical GP Strategies, so the contribution of EBITDA on a relative basis would give us a higher than $20 million revenue run rate. So I think as far as the revenue pro forma for the type of EBITDA, we are achieving, we are right on track with what we set out on our last conference call. So I think we are in good shape. And that doesn't include the two ventures, meaning, Manchester CF or Nexus Global. So while they haven't cost the company upfront money or payments, the equivalent of bringing in new technology, a new software, and the equivalent of being an acquisition by this joint venture, without the upfront costs. So I think between the two completed acquisitions and the two ventures that we have, we are well on track with what we believe to be the case at the beginning of the year. The second question was regarding growth. Obviously, when you look at the first quarter, there was a slight growth with the challenges we have had. And while we don't give short term guidance, we feel pretty comfortable that the long term growth aspects of this company will grow both organically and from acquisition, like we have said in the past. So we think we are in good shape. When you look at what Adam, and I will hand it over to Adam in a second. When you look at the pipeline we have, and we actually have one significant proposal in the pipeline, which is too early to talk about, but it is a significant transaction. We are very excited about the pipeline. With that, I will turn it back to Adam.

[Adam Stedham:]

Thanks Scott. So we feel good about the pipeline increase. Obviously, as I said, we have to win the work, and we have to have it materialize in the revenues. But just comparing year-over-year, if you -- as Mike mentioned earlier, if you exclude the oil and gas issue that we had, our backlog is up. If you look at our early stage pipeline, it's up significantly year-over-year. If we look at our bookings, it's up year-over-year. So we have all of the indicators that would lead us to feel comfortable, but it has to materialize into results, I understand. Does that answer your question? Is that good?

[Chris Howe:]

Yes, that does. And I had one more question if I may; just as it relates to what you are doing within financial services and the investments that you have made towards the HSBC contract. If you could share, if there has been any momentum outside of this contract as far as winning potential financial services customers moving forward?

[Scott Greenberg:]

So first off, we came out with the announcement on the financial service award that we have had. Basically, we [indiscernible], and I discussed it briefly with all of you, we have entered into a one year extension. But the hope is to enter into a long term agreement. If you look at our total revenue, the financial service sector is over 20% of our revenue, if you would, Mike, what was the -- Mike, the percentage of [indiscernible]?

[Mike Dugan:]

Just one second. I will go back -- 13%.

[Scott Greenberg:]

It is HSBC, and over 20%.

[Mike Dugan:]

20% for overall.

[Scott Greenberg:]

20% overall, so I was correct on that. And what we are doing there is, if you look at the type of services we are adding to the company and disciplines, whether it was Manchester CF, whether it was Hula, whether it was the leadership training that we have, a lot of that is being brought into the company, disciplines are being brought in, to expand our capabilities in the financial services sector, and we are trying to expand there. And as I have mentioned a little bit on automotive. Automotive, which is our second largest sector, we are now looking to expand internationally, because only a few million dollars of our revenue is generated out of North America. So we see a lot of potential there. And the third element, is that we'd hope to be able to report to you, in a few years, that between our pharmaceutical work and this acquisition, that the pharmaceutical industry becomes the third major arm of GP Strategies, as far as end markets, and in a few years, will be billing [ph] a significant amount of revenue in the pharmaceutical space as well. So those are really our three key areas that we continue to work on.

[Chris Howe:]

Thank you so much.

[Operator:]

The next question is from the line of Jeff Martin with ROTH Capital Partners Please go ahead.

[Jeff Martin:]

Thanks. Good morning.

[Scott Greenberg:]

Good morning.

[Jeff Martin:]

Scott, the pharmaceutical training acquisition, when did that close, and what is the revenue run rate for just that business?

[Scott Greenberg:]

Well I will tell you, it closed this morning, and we have been told this morning, about the acquisition. So that's why, we didn't name it by name, but we will be coming out with a press release. The revenue for this company is between $10 million and $15 million, and it is very-very highly profitable. So I would say, the run rate should be ramping up close to the mid-10s right now.

[Jeff Martin:]

Okay. And then, on HSBC renewal. Do you have any clarity in terms of what that contract looks like upon renewal? Whether it's similar terms expansion of services, expansion of geography, I mean, I think you'd be well spread out across their geographies. But just, any perspective there would help. What kind of things you are discussing at a high level on a renewal or on the new contract?

[Adam Stedham:]

Sure. This is Adam. I will answer that. So we are expecting -- for the renewal, we are expecting very similar scope. We are expecting actually some incremental increase in geographies served, as well as part of them bringing it in the rest of the regions, we will likely do that through kind of the hub model. But so we are basically looking at the same scope. Now, what I would say is, what's the impact of that same scope? As we are going through the negotiations, obviously, both sides are trying to realign to where things are now, after all these years. But we feel pretty good about the impact going forward, because there was quite a steep learning curve and quite a steep expansion in investment that was required for us, as we were launching this contract over several years, which, now that that's in place and the learning curve has reached to a much higher point. We feel pretty comfortable to say that -- and we are optimistic about the impact going forward, even keeping the same scope going forward.

[Jeff Martin:]

Okay. And then, my last question was, can you help us shape what the year-over-year comparison headwind is for U.K. job skills in Q2? You mentioned it qualitatively, but curious if you could quantify it?

[Adam Stedham:]

So we would expect our Q2 -- the impact in Q2 would be slightly higher than the impact in Q1, if you look at it in isolation. Although we have other things happening that we are hopeful are going to mitigate that, and so that's our plan. Once we get to Q3 and beyond, then obviously, we will get past the first half of last year, where we had such a challenging year versus your comparison, and we feel like the variance will start to decrease, looking at it from a year-over-year perspective.

[Jeff Martin:]

Okay. So Q1 was about $2.6 million, so a little bit higher than that, is that accurate?

[Mike Dugan:]

Sounds right. Yeah.

[Jeff Martin:]

Okay. Thanks very much.

[Scott Greenberg:]

Thank you, Jeff.

[Operator:]

[Operator Instructions]. And the next question is from the line of Kevin Liu with B. Riley FBR. Please go ahead.

[Kevin Liu:]

Hi, good morning. Just wanted to follow-up on the job skills issues. Could you just talk a little bit more about whether any changes are required in terms of how they are running the funding right now, for you to be able to see growth again at some point in the future? And then more generally, if you could just elaborate a little bit on what exactly changed, and how you guys are going about the dressing, to ensure that you can drive growth in apprentices, in the next few quarters here?

[Scott Greenberg:]

Kevin, I will answer with what's going on exactly at the jobs skills, as far as where they thought they would be and where they are. When they had the old financing program, they were doing approximately $2.3 million of apprenticeships per year. They announced as part of the new agreement, they would like to drive the apprenticeship to 3 million apprenticeships per year. So they are actually looking at driving a 35% increase in the number of apprenticeships that would go through the program. Instead, currently, they are running below 1.5 million apprenticeships per year, which is against what their intent was. How they originally structured the program, which was different from the past, is now, all the large companies have to pay a tax on payroll, and for this tax, they get a voucher to use for apprenticeship programs. For large companies, this is a completely different approach. So they are getting the vouchers, and if they don't use them, they actually lose them. So they lose these vouchers if they don't use it. The problem they have with all the new rules and regulations in the program, that companies haven't quite figured out how to use it, how to flow it through, how to get the money, so we won numerous awards, some from big organizations like Crown, where we came out with a press release to start doing additional services. But revenue hasn't started coming, they are trying to navigate the system. So for GP Strategies, the big companies with the vouchers, was really a new and larger opportunity for us, that hasn't materialized yet. But we are still confident, based upon the government going from 2.3 million to 3 million apprenticeships will eventually be reached. The smaller companies, which is also a part of our business, their plan changed slightly, they would go on from being a 100% funded by the government to now being 90% funded by the government. So they have to come up with a 10% cash component, and the government funds 90%. The government again was hoping, that the 10% there would not have an impact on the apprenticeships, but so far it has. So they thought that 10% was minimal, and wouldn't have an impact, but it has. So right now, there is a lot of publicity going on what the government should do, because as I said, their actual volume as opposed to going up, is going down. So that's why we are hoping that with the apprenticeships in mind going from 2.3 million to 3 million apprenticeships, that this is only a blip and not a long term impact on this program.

[Kevin Liu:]

Understood. And then, just moving over to the automotive growth opportunity on the international front; are you being kind of tarried internationally still with your existing customers, or are you actually seeing a lot of the growth translate from new logo wins?

[Scott Greenberg:]

So actually, we are -- so it's new logo wins, it's where we are experiencing a lot of growth. What we are excited about is, if you look at some markets, if you look at China, we have developed a reputation in that market. It's helping companies expand specifically into that market. So that's really the value proposition that we are selling, and we are awarding work. And if you look, our largest customer in China, from an automotive perspective, we don't work with anywhere else in the world. So it is new logos. We think that that new logo work is actually starting to now translate into a compelling value proposition for some of our existing logos. So currently, it's new logo. We think that going forward, it will continue to be a mix of new logo and existing logo.

[Kevin Liu:]

Great. And then, just lastly, Mike, it doesn't sound like there was anything from this, but just wanted to double check and see if the new accounting rules from 606, did that impact any of your revenue recognition on the software pieces of your business?

[Mike Dugan:]

No. Not on the software pieces.

[Kevin Liu:]

All right. Thanks for taking the questions.

[Scott Greenberg:]

All right. Thank you, Kevin. Basically, any plus from Q4 was offset by an offset in Q1. So it is just the flow without really impacting our overall revenue stream.

[Operator:]

There are no other questions queued up.

[Scott Greenberg:]

So, thanks moderator. Hopefully, you saw today or heard today the excitement at GP Strategies. I understand that the fourth quarter and first quarter had a lot of noise in it, due to the restructuring and the non-recurring and unusual events. But I think if you look under the hood and heard what Adam and Mike had to say, and hopefully myself as well, you will see that GP Strategies is really poised again to have the success that it had previously, to the benefit of our investors, and our employees of the company, and we look forward to updating the investors in the future. After the summer, we are hopefully planning on having a Investor Day, where we could rollout more of our strategy and opportunity in the company, where you could really see firsthand, additionally, what's going on with many of the leaders of the company. So we look forward to seeing you at the conferences, and we look forward in updating you, with cleaner quarters as we progress, and again, it's a very exciting time for GP Strategies. So thank you for participating on the call.

[Operator:]

Ladies and gentlemen, that will conclude the conference call for today. We thank you for your participation and you can now disconnect your lines.