GP Strategies Corporation
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good morning, and welcome to the GP Strategies Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note this event 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 everyone and welcome to GP Strategies second 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 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. And at this time, I'd like to turn the call over to Scott Greenberg, CEO.

[Scott Greenberg:]

Thanks Ann. Good morning and welcome to our second quarter 2018 conference call. Today, we will introduce a new quarterly format including the webcast presentation. Hopefully, you'll find the new presentation informative and useful in your analysis of GP Strategies. To initiate the call, I'll provide a brief overview of the results of the second quarter of 2018. Then Adam, our President, will give an operational update. After Adam's presentation, our CFO, Mike Dugan will go over an in-depth financial review. Lastly, I'll provide a summary including a more detailed acquisition update, and then we will conclude with the Q&A session. This morning, before the market opened, GP Strategies announced revenue and earnings for the second quarter of 2018. In the second quarter of 2018, GP Strategies achieved an increase in both revenue and gross profit compared to the second quarter of 2017. Our engineering and technical service practices reported revenue growth of 11% or $3 million in the second quarter. I’m pleased with the traction we're seeing as a result of our investment in business development efforts and the centralization of our sales organization. Our revenue and gross profit increase in the quarter continued to be offset by a decline in U.K. Job Skills Training services due to previously discussed funding changes by the U.K. government for their apprenticeship programs. However, we are adapting well to these changes and have added new apprenticeship programs to our portfolio and believe that during 2019, our revenues in that business should return to levels more comparable to prior years. In addition, we are excited about the previously announced acquisition of IC Axon, which enables our long-term strategies of growing the life sciences and pharmaceutical industry to become a major vertical of the company. If you look at the slide presentation, you'll see that we continue to show growth in all the areas in the Professional & Technical Services, which had its ups and downs in recent history is now saying organic growth and that's a good sign for the company. The second quarter results continued to include numerous unusual and/or nonrecurring items that both positively and negatively impacted our results, both pretax and the income tax expense as we build our platform for future growth. We are happy to say that we anticipate that GP Strategies will return to a normal operating model without significant unusual items and nonrecurring items other than legal costs associated with acquisitions and the final implementation of our new ERP system. This system is anticipated to go live in the beginning of the fourth quarter of 2018 when we should start seeing the benefits of the system. In the first quarter, a major financial services customer extended our contract for a year. We are currently negotiating a new long-term agreement, and recently, our largest automotive kind customer named us a Prestigious Supplier of the Year. Those two customers represent over 25% of our overall revenue. In addition, as stated earlier, our Engineering and Technical Services practice, which is part of our workforce's 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. Excluding this practice, the company has demonstrated steady revenue growth over time, as again, indicated in this slide. I'm pleased to report that this practice has shown growth in the first time in several years with 5% revenue growth during the first half of 2018 compared to the same period in 2017. Our acquisition initiative, which has enabled to grow the company substantially in the past, is now in full swing with the completion of a significant acquisition of a pharmaceutical training company in the second quarter of 2018. Our acquisition of the SuccessFactors business of Hula Partners earlier this year, and our previously announced ventures with ManchesterCF and Nexus Global holds well for the company. These acquisitions and ventures provide the company with potential for both incremental high-margin business and passive income as well. These transactions and the enhanced management team put GP Strategies in the good long-term position and make us extremely optimistic about the company's future. We are now finally 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 finalizes cost-reduction plan announced in December and took an additional restructuring charge of $2.5 million in the second quarter of 2018. The cost reductions have enabled the company to invest in additional sales and marketing initiatives. The Company was also active in its buyback program for the first six months of 2018. The Company repurchased approximately 313,000 shares for approximately $7.3 million in the first six months in the open market. I will now turn the call over to Adam for an in-depth review of our global initiatives.

[Adam Stedham:]

Thanks, Scott. Scott gave you an overview of the success within the Engineering and Technical Services practice. The sales initiatives within the practice consisted of identifying and capturing new opportunities as well as developing growth within the existing accounts. During our first earnings call this year, we shared that we would pilot our find, win, grow sales model within the Engineering and Technical Services practice. At this point, we consider the pilot a success. The practice realized improvements across all service lines. One component of the find, win, grow model is prioritizing sales efforts for higher-margin services. During the second quarter, our higher-margin services revenue within the Engineering and Technical Services practice increased 22% year-over-year. As a result, the practice's gross profit improved by more than double the rate of revenue. One significant contributing factor was 150% increase in license revenues over Q2 of 2017. We're beginning to implement the find, win, grow sales model across all practices. Our first priority is implementing the model within the organizational development practice. During the second quarter, we experienced softening sales within this practice, and we're prioritizing our efforts to improve the performance of the practice. We plan to shift the financial performance of this practice just as we did the Engineering and Technical Services practice. Our current plan implements the find, win, grow model company-wide by January 1, 2019. We look forward to having the opportunity to share the results of these efforts with you. The next 2018 priority I'd like to discuss is our U.K. Job Skills Training, which Scott alluded to. This year we've been shifting our offerings to adjust to the new processes and policies for the job skills program. The significant disruption in the overall marketplace and our redesign of our services has affected our revenue and profit throughout the year. At the beginning of this year, we stated the regulation changes will likely affect our operations throughout the year but they should have no long-term impact on our business. During the second half of this year, the gross profit deficit versus 2017 should be much lower than the shortfall during the first half of the year. We anticipate that the 2019 gross profit will be significantly higher than 2018. At this point, I'd like to provide some key updates on other activities across the company. Our Managed Learning practice is currently responding to request for proposals for three separate outsourcing engagements. The combined value of the services included in these proposals is more than $35 million per year. This proposal activity demonstrates the continued opportunity we have in the training outsourcing market. Successfully winning some or all of these outsourcings would have a meaningful impact on our 2019. Another positive area for GP is an increase in the number of capital projects within the U.S. Historically, as our clients invest in capital projects and facility expansion, GP has been able to successfully provide multiple services to support these projects. We are beginning to see increased capital projects within the marketplace. And currently, we have four active proposals and the clients supporting various capital projects they are planning. If this trend continues, it should have a positive impact on our profits going forward. Next, we can shift our conversation to GP Strategies' efforts to increase our sales activity outside of the U.S. We continue to feel that global developing economies and our expansion across APAC presents significant opportunities for GP. I'm pleased to report that our APAC 2018 revenues are up 7% over first half of 2017. Currently, we expect the growth rate will continue if not accelerate during the second half of the year. So last, I'd like to discuss is the growth of our automotive services outside of the U.S. Through the end of the second quarter, our non-U.S. automotive services revenue is up 46% year-over-year. As a result, our automotive revenue generated outside the U.S. is 8% of our total automotive revenue. During the same period in 2017, our non-U.S. automotive revenue only represented 6% of our total automotive revenues. Overall, we're excited about the business development initiatives and they're showing results. We intend to continue focusing our efforts on higher-margin services. We have some portions of the business that are not achieving the results we desire, but we're confident that our find, win, grow model will shift the performance of those operations. At this point, I'll turn the call over to Mike to provide more detailed financials.

[Mike Dugan:]

Thanks, Adam, and good morning, everyone. Starting with revenue on Slide 7 of the presentation. We reported Q2 revenue of $133.7 million, which is up $2.6 million from the $131.1 million of revenue reported in Q2 of last year. Breaking the revenue out by segment. The Workforce Excellence segment reported Q2 revenue of $80.3 million, which is up $4.3 million from the $76 million of revenue reported in Q2 of 2017. Breaking the revenue drivers in the Workforce Excellence segment. Revenue increases were due to a $1.8 million of foreign currency exchange, $2.3 million of acquisition revenue that wasn't in the prior year, $2.6 million increase in Engineering and Technical Services practice, while this practice is contributing 3.4% increase to the overall segment revenue for Q2 of 2018, for the practice, this represents a 10% increase over the Q2 of 2017 in constant currency. There was a $1.5 million increase in Managed Learning Services practice exclusive of our UK Job Skills Training service line, and partially offsetting these increases was a revenue decrease of $4 million in the UK Job Skills Training Service line due to the UK government changing how this program is administered. Moving on to the Business Transformation Services segment. They reported Q2 revenue of $33.4 million, which is down $1.7 million from the $55.1 million of revenue reported in Q2 of 2017 bridging the revenue drivers in the Business Transformation Services segment. There were some revenue increases that partially offset the overall decrease such as a $0.4 million increase due to foreign currency exchange, and a $2.1 million increase in acquisition revenue that wasn't in Q2 of 2017. The revenue decreases in this segment were due to a $0.6 million decrease in the Automotive Sales Training practice also known as Sales Enablement practice and a $3.6 million decrease in the Organizational Development practice, primarily due to a decline in platform adoption, strategic consulting and leadership development services. Within this segment, the Automotive Sales Training practice had revenue in Q2 2018 that included $8.2 million of publication revenue, which was $0.3 million less than the $8.5 million of publication revenue recorded in Q2 of last year. We are projecting publication revenue in Q3 of 2018 to be $0.7 million compared to $3.7 million in Q3 of 2017. It is important to call out that in Q3 of 2017, part of what is usually a fourth-quarter publication, was shift during the last few days of September 2017, resulting in $3 million of additional pub revenue in Q3 of last year. As a result, our Q4 2018 publication revenue is projected to be $8.7 million compared to $5.9 million in Q4 of 2017. Total year publication revenue forecast for 2018 is $23.1 million versus $23.5 million in 2017. Moving on to gross profit on Slide 8. We reported Q2 gross profit of $22.6 million, which is up $0.2 million from the $22.4 million of gross profit reported in Q2 of 2017. Breaking the gross profit out by segment. The Workforce Excellence segment reported Q2 gross profit of $15 million, which is up $1 million from the $14 million of gross profit reported in Q2 of 2017, bridging the main drivers of the Workforce Excellence gross profit. The increases were due to a $0.4 million of foreign currency exchange, $1.5 million increase in Engineering and Technical Services practice, $1.7 million increase in the Managed Learning Services practice exclusive of our U.K. Job Skills Training service line, and this was primarily due to higher revenue noted above along with cost-cutting initiatives that have taken place. Gross profit decreases in the segment that partially offset the overall increase was a $2.6 million increase in the U.K. Job Skills Training service line due to the revenue decline previously noted. It is worth noting that incremental revenue in this service line above a certain fixed cost level has a high margin contribution rate so as top-end revenue declines, the impact on gross margin can be significant. The Business Transformation Services segment reported Q2 gross profit of $7.6 million, which is down $0.8 million from the $8.4 million of gross profit reported in Q2 of 2017. Gross profit decreases in this segment were due to a $0.8 million decrease in the organizational development practices gross profit, primarily due to a lower revenues noted above. Moving on to SG&A expenses on Slide 9. General and administrative expenses were up $1.3 million quarter-over-quarter and the primary drives are a $0.6 million increase in bad debt expense. The details of this increase is that in Q2 2017, there was a $0.3 million reversal of bad debt expense as payments were previously reserved for items were received during the quarter. In Q2 of 2018, based on analysis that we typically complete, we booked a $0.2 million bad debt expense and this was within expected norms. There was a $0.4 million increase in legal expenses related to acquisitions and $0.3 million of miscellaneous other G&A expenses, primarily due to accounting fees. Within the G&A line item, ERP implementation costs in Q2 of 2.18 were $1.2 million, which is comparable to Q2 of last year. As for the ERP project, as Scott mentioned, we are still on track for an October 1 launch date on the new system. Total remaining implementation costs to be expensed in Q3 and Q4 are projected to be $0.8 million and $0.2 million, respectively. Sales and marketing expense. With the recent investment in the corporate sales initiative, we are now reporting sales and marketing expenses separate from how they were previously aggregated under SG&A. Sales and marketing expenses for Q2 is up $0.6 million quarter-over-quarter with the primary drivers being investment in centralized business development program with the addition of our Chief Sales Officer, inside sales resources and a corporate account management focus. In addition, certain marketing resources that were previously in cost of revenue are now captured here as we centralize the company's marketing efforts. Moving on to other expenses on Slide 10. Restructuring expenses in the quarter were $2.5 million compared to zero in Q2 of 2017. $1.3 million of this relates to facility consolidations, which will reduce annual cost by approximately $1 million, a significant portion of this cost savings will be used to continue to invest in revenue growth initiatives. $1.2 million of the restructuring relates to severance expense booked in the quarter. Gain on change in fair value of contingent consideration was up $1.0 million quarter-over-quarter based on lowering the projections of certain acquisitions that are still in the earnout period. Interest expense while down $0.7 million quarter-over-quarter, there was a one-time $1.1 million credit to interest expense in the current quarter due to favorably settling a potential bad interest penalty that had been accrued in Q4 of 2017. Without this $1.1 million credit, interest expense was actually up $0.4 million quarter-over-quarter due to higher borrowings under our credit facility and higher interest rates during the quarter. Other expenses is up $0.9 million due to an increase in foreign currency losses, primarily due to monthly revaluation of intercompany AR and AP balances. While the vast majority of this foreign currency loss is a non-cash item, we will be meeting with our bank to talk about appropriate foreign currency hedging instruments that we can put in place to mitigate the ForEx loss on our intercompany AR and AP balances. Income tax expense. We are projecting an ETR for 2018, 28.8%, which includes 1.9% for discrete items. The primary discrete item is a $0.9 million true-up that was booked in Q1 of this year related to the 2018 repatriation tax recorded in Q4 of last year. Moving on to the earnings summary slide, Page 11. Net income for Q2 was $3.6 million compared to $ 5.9 million in Q2 of last year. Earnings per share for Q2, for both basic and diluted was $0.22 compared to $0.35 in Q2 of last year. Now, since there is still amount of noise in our operating results, we've included an adjusted EPS and adjusted EBITDA to show a more normalized view of the performance of the company. The next few slides show the details and impact of these adjustments. For adjusted EPS, we can move to Slide 12. From reported EPS, add back 2018 restructuring charges of $0.11 and $0.13 per share for Q2 and year-to-date Q2, respectively. Subtract 2018 gain on consideration impact of $0.04 and $0.15 per share for Q2 and year-to-date Q2, respectively. Add back 2018 and 2017 ERP costs impact in Q2 of $0.05 per share for both years and for year-to-date Q2 ERP impact 2018 was $0.11 versus 2017 of $0.07. Add back the foreign exchange loss impact in Q2, it was $0.05 in 2018 versus $0.01 2017, and year-to-date Q2 ForEx loss impact was $0.06 in 2018 versus $0.01 in 2017. And then finally, subtract 2018 interest expense reversal impact in Q2 and year-to-date Q2 of $0.05, the end result is adjusted EPS in Q2 of 2018 of $0.34, versus $0.41. And for year-to-date 2018 a $0.47 versus $0.67. Moving to adjusted EBITDA on Slide 13. Actual reported EBITDA in Q2 of 2018 of $6.7 million versus $10.8 million of Q2 of 2017, and $13.6 million year-to-date Q2 versus $18.7 year-to-date Q2 of 2017. Adjusting for our normal non-cash stock compensation, plus the unusual items noted previously and in the table on Slide 13, the adjusted EBITDA for Q2 of 2018 would be $11.8 million versus $13.9 million for Q2 of 2017. The adjusted EBITDA for year-to-date 2018 would be $19.6 million versus $23.7 million for year-to-date 2017. Moving on to the market sector data. You can see that the diverse set of markets that we serve. We do have a market concentration in the automotive sector with 23% of both our year-to-date Q2 2018 and 2017 revenue coming from this market. In addition, we have a client concentration of revenue from a single automotive customer, which accounted for approximately 15% of year-to-date Q2 consolidated revenue versus 14% of year-to-date Q2 2017. We also have a market concentration in the financial and insurance sector with 20% of our year-to-date Q2 2018 revenue coming from this market compared to 19% in 2017. In addition, we have a client concentration of revenue from a single financial and insurance customer, which accounted for approximately 14% of year-to-date Q2 2018 consolidated revenue compared to 13% of year-to-date Q2 2107. Moving on to some balance sheet highlights on Slide 15. Our cash balance as of Q2 was $14.1 million compared to $23.6 million at the end of 2017. Material drivers of this $9.5 million reduction are as follows. Noting that all of our cash is in foreign subs as the U.S. cash tax sweeps through the credit facility each day, the foreign cash decline is due to a $3.5 million decrease as a result of foreign subs repaying U.S. loans, and a $5.5 million decrease due to an increase in unbilled revenue in Q2 on two projects in the U.K. that have subsequently received client approval to bill and have been or will be invoiced as of early August. Onto the credit agreement. On June 29, we amended our credit agreement to extend the expiration date of the existing $100 million revolving credit facility to June 1, 2023. In addition, we entered into a new term loan in the principal amount of $40 million maturing on October 1, 2021, with monthly installments of $1 million plus interest. The previous term loan was also the amount of $40 million, but it has been paid down to $22 million as of June 2018. As of the end of June, there was $33 million of available borrowings under our credit facility. Debt outstanding under the credit agreement as of Q2 2018 was $101.8 million compared to $65.7 million at the end of 2017. This $36.1 million increase in borrowings was driven primarily by the following uses of cash. Acquisitions totaling $40 million broken out by $10 million for the Hula acquisition and $30 million for the IC Axon acquisition, and share repurchases of $7.8 million. Cash flow from operations year-to-date is $7.1 million. Our cash flow in the second quarter was impacted by three projects that had material unbilled revenue increases in Q2 totaling $8.4 million, two of which I stated above in the UK. $7.4 million of this unbilled revenue has already been billed or will be billed by early August as client approval to bill has been received. Moving onto backlog on Page 16. Backlog as of Q2 2018 was $268.8 million compared to $276.2 million at Q2 2017. And the Q2 2017 figure included approximately $26 million of backlog with a foreign oil and gas client, which was terminated in Q4 of 2017. The Q2 backlog of $268.8 is up $18.6 million over the adjusted Q2 2017 backlog of $250.2 million. This concludes the financial update. One final housekeeping item before I turn the call back to Scott. The company's 10-Q report will be filed tomorrow, August 1. I'll now turn the call back to Scott for an acquisition update.

[Scott Greenberg:]

Thank you, Michael. I hopefully – you believe the guidance – that the slides really give a lot of detail. So you could continue on with the analysis of GP Strategies, and hopefully, you find it very useful. Listening to Adam and Mike and going over their presentations with a few observations. The first, when Adam talks about $35 million of potential new outsourcing, this is something that we strive for, global outsourcing, using our global platform, and it is very exciting to be able to bid on these, and that could be very good news for GP Strategies. The second item that you shouldn't overlook is when you look at Michael's slide on the negative impact on the skills funding apprenticeship program, Mike show what's the impact it had on our gross margin in Q2, and you've heard from Adam and myself that with all the new procedures and the new – and the initiative we have in bringing in more types of apprenticeship programs, we really believe that in 2019, this is going to be a positive and not have the headwind that it had in 2018. We’ve increased our program to include things like apprenticeships, IT apprenticeships, lean line Six Sigma apprenticeships. All these areas we have developed courses and programs to enable us to sell it to large companies through the levy program, and we're starting to see it, and we're starting to see an impact. If you look at the skills funding overall, they expect a $2 billion more – $2 billion in total to be put through the apprenticeship programs, and so far, only $1.4 million is left, so only $600,000 has been used. So it creates a huge opportunity for GP Strategies. Before I turn it over to Q&A, I wanted to give a little more on the acquisition and what we're working on. So if you look at GP Strategies, the first thing I want to make clear is, while acquisitions is a big strategy of GP, we're also highly selective, and we do a lot of valuation and we look at numerous transactions before we decide on what is the most suitable to drive our business forward. Our industry focuses at three, life sciences, which is 4% of current revenue, but if you add the IC Axon transaction, it takes us to 7% of revenue. We believe the pharmaceutical industry has the same type of concept as financial services, highly regulated, needs to adopt new products, new products coming through and it tends to be a high-margin business to GP Strategies. So we believe IV Axon with its headquarters in Montreal is a key acquisition for GP Strategies. We also have a disciplined focus. So one is high margin like IC Axon, human capital, leadership and other, if you look at the two major hubs of GP Strategies with its financial services and automotive, which represents over 25% of our revenue, we are hoping that in the three to five year period, we can look at the pharmaceutical and life science industry and have that as the third major vertical within GP Strategies. Before I turn it over to Q&A, like Mike, I'll do a little bit of housekeeping. One is, we'll be at the BMO Back to School Conference in New York City, and I'm very pleased to report that we scheduled an Investor Day, the Investor Day will be on October 7. It will be in New York City, back in – I'm sorry, October 7 is my birthday, October 2 is the investor meeting. So on October 2, it will be at the Yale Club in New York City, and it should be exciting and you'll get a further update on – from GP Strategies. With that being said, I'll now turn it over to the Q&A session.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jeff Martin with ROTH Capital Partners. Please go ahead.

[Jeff Martin:]

Thanks. Good morning, guys.

[Scott Greenberg:]

Good morning.

[Jeff Martin:]

Adam, could you give us a little more detail around the Managed Learning Services, three proposals. Where are those in the various stages? And is anyone of them larger than the other?

[Adam Stedham:]

So yes, they – one of them is – one of them represents over a half of it, and then the other two are about a quarter of the potential work. The larger one is in a later stage. So typically, if you look at this process, there is a request for quote, a request for information. Then we reply to that, then they do a request for proposal. After request for proposal, you're called in for presentations. After the presentations, they do site visits, after the site visits, you go through some sort of negotiation process at the end. So that's the typical end-to-end sales process. So for the larger one of them, we are now at a point where we – there are site visits that are scheduled at multiple locations around the world for GP entities that are happening throughout this month – throughout the month of August. For the other two, one of them is following a little bit different process than the typical process. But we've already provided a detailed presentation and then we're submitting the proposal afterward and they've indicated they're going to make a decision from the proposal after seeing our presentation first. So – and then the last one, we are now just submitting our proposal. We're past the request for information. We're at the formal request for proposal and that proposal is going in shortly. So all-in-all, all of these will run their course through decision within the next quarter if our customers stay on track with their current plans. That answers the question for you?

[Jeff Martin:]

Yes, that's helpful. I appreciate that. And then, Mike, on the unbilled deferred revenue, could you go over that again? I think I missed what that was related to. And was that revenue that you expected to be recognized in the second quarter?

[Mike Dugan:]

It's revenue that's been recognized in the second quarter. And based on milestones not yet being achieved, the buildings hadn't gone out of the door in one instance. And then the other two, there's a data pack that needs to go to the client, they need to approve that. There were some delays going back and forth on approval. So those were three projects that had an unusually high amount of unbilled revenue that all kind of hit at once and kind of had an impact on our Q2 cash flow that we do expect with those invoices going out the door by early August that, that should catch back up in terms of the cash flow process.

[Jeff Martin:]

Okay, great. That’s helpful. And then I was wondering if you could give an update on the progress with the update with the largest financial services client for renewed contract.

[Adam Stedham:]

So what I can say is, at this point in the negotiation, we really can't give a lot of details. We're excited about where we are. Everything is on track. We're excited about the future with them for many years to come. And the current plan is – continues to be that multiyear deal will be finalized within the next couple of months. Nothing has derailed that process, and we're pretty pleased with the progress it's making.

[Jeff Martin:]

Okay, great. And then last question. As you mentioned a license piece of revenue that came in and helped margin. I was curious if you could give an idea of what kind of size that was and the margin contribution?

[Adam Stedham:]

We really don't get into the specifics on that. Within that business, we have license revenues that generate for both, our iLEARN library as well as our EtaPRO software. So typically, software just like any other software sale has very high incremental contribution when you sell the software.

[Scott Greenberg:]

Yes. The one thing you should realize, Jeff, is this is not unusual. So it's not an unusual item. We do have licenses pretty consistent on a quarter-by-quarter basis. But in this case, we are seeing traction in these areas, which is generating more licenses than in the past, and we believe it will continue to do so. So this isn't an unusual and nonrecurring item.

[Jeff Martin:]

Okay, great. And thanks for the presentation. That’s helpful.

[Scott Greenberg:]

All right. Thank you, Jeff.

[Operator:]

Next question today comes from Kevin Liu with B. Riley FBR. Please go ahead.

[Kevin Liu:]

Hi, good morning. Just first question, in terms of the Job Skills Training in the UK, could you talk a little bit about what sort of changes that you've made? And why you're so confident that gross profit and revenues bounce back in fiscal 2019?

[Scott Greenberg:]

Yes, Kevin, when you look at the job skills, and I'll just do a summary of what occurred. Last year, in the job skills arena, they went from small companies, which was totally funded by the UK government. Now 10% is being paid by the companies and 90% is being paid by the UK government. Secondly, what they did for large companies, those are companies that have over $3 million in payroll. They're now taxing them 0.5% of their payroll, and the companies get vouchers, which they could use in apprenticeships programs. The significant amount of our revenue was in the smaller companies where we did things like childcare, home healthcare, coaching and that's where GP Strategies historically generated a significant amount of the revenue. When the new policies were put in place, the government actually believed that they wanted to go from 2.3 million apprenticeships per year to 3 million apprenticeships per year. So they're actually putting these practices in place to raise the level of apprenticeships and to spend more money in the arena. However, due to the changes, as I mentioned earlier, not only have they not gone from 2.3 million apprenticeships to 3 million, it's gone from 2.3 million to 1.4 million. Now what GP Strategies has done is we have started – about a year ago, we started putting together a lot of the curriculum we had in other areas of the company. If you remember, we bought a company called YouTrain, which is located in Scotland, which gave us IT training capability in the apprenticeship programs that we never had before. We started putting together a lean training. We started putting together a leadership training from BlessingWhite, and it took some time to get us all this curriculum together, but we started marketing it. And we are getting significant wins and significant opportunities and month-by-month, we are seeing a backlog, and we're also seeing an increase in proposal activities and wins. So based upon all of that, we feel pretty comfortable that in 2019, we'll start improving and as Adam mentioned, the performance in 2019 should beat 2018. Now the one thing I will say is, we're expecting that even without any changes by the UK government to the program, currently the UK government is under a lot of pressure because the amount of apprenticeships have been going down. If they modify the changes, that will only increase GP Strategies improvement. So if they go back and review and modify the changes, which a lot of people are anticipating, that will even increase the levels in 2019 from what we're currently estimating.

[Kevin Liu:]

Great, that was a helpful summary. And then just switching gears a little bit, can you talk a little bit about your experience in terms of implementing the find, win, grow model within your Engineering and Technical Services group? Kind of how long that took from implementation through seeing them improve performance? And is there any sort of difference in that timeline as you start to roll this out in organizational development and other areas of the company?

[Scott Greenberg:]

So we don't know if there will be a difference in the other organizations. We think there will. Some may actually move more quickly and other slower. A lot of it depends upon the sales cycles of our customers and how fast the sales cycles are. So really, what the model is focused on, and we updated you on our last call about our conversion rate for our marketing leads to business really. So we're spending a lot of time focusing on our SEO optimization and then as those leads come in, the conversion rates as well as more deliberate account management programs, where our account managers we've changed their incentive compensation. We've changed their performance management, we've also done training and developing for our account managers to help them better understand how to unlock possibilities for us. So if you take the new lead generation that comes in through the website, through the SEO optimization and the conversion of that in a more timely manner as well as the improved capability of the account managers to mine inside of those customers, that's giving us a lot more add back. Then once we have those add backs, we are having a better close rate as well through some training and through some initiatives around improving our close rate. So we know what those numbers are. There, we have a clear sales pipeline and a pipeline process for that part of the business. Other parts of our business, we know for a fact that same pipeline process won't work identically simply because their customers are different, it's a different buying cycle, but we believe we can quickly adopted to that. So we do feel confident that we will experience success in the other parts of the business. Some of them have faster sales cycles. So our leadership practice and others have much faster sales. So our leadership service and other services have a much faster sales cycle. So likely, we will see some things there. But it's hard for us to really commit to anything at this point. Does that answer your question? I hope that it didn't sound like I was avoiding it. But that's the best we know at this point.

[Kevin Liu:]

No, that's certainly helpful. And then just lastly, Mike, it sounds like, with some of the facilities consolidation, those savings will be reinvested. Is there anything else that comes out of either the severance or other restructuring efforts that you've undertaken, where we should expect some cost savings over the remainder of this year?

[Mike Dugan:]

I believe, most of our focus right now is prioritizing where we're spending our money, and we're really looking at spending our money on growth initiatives. So we're looking at where there's an opportunity to save cost. And for the most part, while some of that might drop through to the bottom line, our focus right now is organic growth and top line revenue growth.

[Kevin Liu:]

Understood. And actually one more housekeeping item. Could you just let us know how we should tax effect the add backs in order to get to the EPS calculation?

[Mike Dugan:]

I think for the most part, it's 78.8% – yes, 27% would be the back that you put on there.

[Kevin Liu:]

Okay, great. Thanks a lot.

[Mike Dugan:]

Thank you, Kevin.

[Operator:]

Next question comes from Alex Paris with Barrington Research. Please go ahead.

[Alex Paris:]

Good morning.

[Scott Greenberg:]

Good morning.

[Alex Paris:]

Just got a couple of follow-ups, really, first on UK job skills. What was the peak revenue of that operation for you? I don't know if you break it out publicly. And if so what's the run rate today?

[Scott Greenberg:]

Yes. I mean, we typically don't give out the peak revenue because it's a government contract in total. But I would say, the run rate in pounds is slightly above – in 2019 forecast, it's above £20 million on run rate. So figure overall, at the current exchange rate, it's about $27 million revenue base business.

[Alex Paris:]

And obviously, down from peak levels, and when was the peak?

[Scott Greenberg:]

The peak was actually in 2017 when they – before they initiated the new programs. A lot of people started putting apprenticeships through under the old revenue sharing arrangement that they had when the government paid the whole thing. So literally, the peak was the first half of 2017. So in the trailing 12 months, it was the last two quarters of 2016 and the first two quarters of 2017 were the peak periods. Other than that, it's been fairly consistent.

[Alex Paris:]

Okay. So – the program begin to be negatively impacted in Q3 2017? Q3 2017, Q4, Q1 and Q2 2018…

[Scott Greenberg:]

Wasn't good. There was some carryover because when they have apprenticeships come in, you don't recognize all the revenue in the first quarter afterward. Really, the negative impact started being in the first half of 2018. And again, we believe by Q1 2019, the negative impact will be over and we start seeing positive on a quarter-by-quarter basis.

[Alex Paris:]

Okay. And then this whole voucher things, did these large companies, are they sitting on piles of unused vouchers? Is that…

[Scott Greenberg:]

Yes. Right now, the companies are sitting on whales or billion dollars of unused vouchers. And again, our revenue projection, Alex, is based upon things we already have in-house. But we are putting the major effort to try to get our share of the vouchers. But we feel pretty comfortable with what we have now in place. It will bode well from 2019. I mean, if you look at it, the quarter and you look at the six months, this has been one of our major headwinds that we are pleased to say, we've developed a new program. We're marketing it and, again, it should be a positive in 2019 and beyond with the changes that have been made.

[Alex Paris:]

Got you. I think I have two others. I guess the first would be the ERP system implementation. You had to expense the implementation because your ERP system is cloud-based as opposed most ERP systems to date that I've been familiar with, those implementation expenses were capitalized and – with the only difference being their ERP system were loaded onto their central servers. Did I – I believe there's been some sort of proposed accounting change that allows you to capitalize that on a go-forward basis. So could you give us a little more information on that?

[Mike Dugan:]

Yes. Sure, Alex. There is expected to be approved and early adoption is going to be allowed. But again, it has not yet been approved. In Q3, that accounting rule may change. And if it does change, of that remaining spend in Q3 and in – a little bit in Q4, there's probably about $800,000 of that $1 million would qualify as being able to be capitalized under the new cloud implementation. So if you see across the wires that, that new accounting rule is ratified, that would be the expected adjustment to our projected spend there.

[Alex Paris:]

So the impact to you would be $800,800 less and P&L expense for the Q3 if that gets passed?

[Mike Dugan:]

Yes, Q3 and Q4 between $1 million, there's about $200,000 of it is not going to be able to be qualified even under – if the new rule is in place but about $800,000 across the two quarters.

[Alex Paris:]

Okay, got it. And then the last one is, I think you may have alluded to this in your prepared remarks. Now that you've broken out G&A and selling and marketing. You said that you are able to pull some of that marketing expenses that used to be in cost of goods sold down into that line. Is that – did I hear that right?

[Mike Dugan:]

Yes. It's just – we've actually moved those resources that were in cost of sales last year. They were moved into G&A cost center, marketing cost center in 2018.

[Alex Paris:]

Okay, so both Q1 and Q2, that's where there's a little bit of an expense shift, cost of sales to G&A?

[Mike Dugan:]

Yes. Correct.

[Alex Paris:]

And order of magnitude, how much of the shift was that?

[Mike Dugan:]

Probably, between $400,000 and $500,000 on a year-to-date basis.

[Scott Greenberg:]

It's not a material change.

[Alex Paris:]

Okay, thank you very much.

[Scott Greenberg:]

Thank you, Alex.

[Operator:]

At this time, this will conclude today's question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

[Scott Greenberg:]

Thanks, Brian. This is the first time that we presented a presentation like this. Hopefully, you found it useful. We're obviously open to questions or ideas on how to improve it going forward. But overall, we believe that it's very helpful to have this back to WebEx and we're very excited about GP Strategies' future. You could hear from the presentation from where we were at the beginning of the year, of some of the headwinds and most of the headwinds have been eliminated. We talked about skills funding at the beginning of the year, and now we're looking positively on that as the future. We talked about the E&TS Group, which you could see from my slide, which went from high end of $157 million down to $105 million and now we're starting to see growth in that group, which was a major headwind over the last three years. So we're excited about that as well. As far as the corporate structure, we believe that the restructuring period is over. So we could go on and grow the business again. This ERP system, which has been close to two years in the making, should be live and up within the next few months period, which is exciting news again. So I think a lot of the things that we had discussed over one-time nonrecurring items is a thing of the past. And lastly, and very important item I'll allude to one more time is right now, the opportunity for some major global outsourcings, which could be substantial as far as revenue and profitability for the company going forward. We always talk about the build-out of our global platform, becoming a global company with the goals of becoming a much larger company, and I believe the money being spent and effort being spent in business development and our sales effort is starting to see opportunities and proposals coming to door. So it's been a difficult period for GP Strategies, but it looks like we're on the right track, and we should be busting out and being positive in the future. So again, thanks for joining the call.

[Operator:]

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