GP Strategies Corporation
Q3 2018 Earnings Call Transcript

Published: 6 Nov 2018

[Operator:]

Good day, and welcome to the GP Strategies' Third Quarter 2018 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ann Blank, Director of Investor Relations. Please go ahead.

[Ann Blank:]

Thank you. Good morning everyone, and welcome to GP Strategies' third 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 webcast will be available on our Web site 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 Web site. And at this time, I'd like to turn the call over, CEO, Scott Greenberg.

[Scott Greenberg:]

Thank you, Ann. Good morning, and welcome to our third quarter 2018 conference call. Today, we will continue with our new quarterly format which includes a WebEx presentation. Hopefully, you'll find this 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 third quarter of 2018, then Adam, our President, will give key updates on our global initiatives. After Adam's presentation, our CFO, Mike Dugan, will present an in depth financial analysis, then I'll provide a summary, and we will conclude with the Q&A session. I would like to deviate from my prepared text and announce that, this morning, GP Strategies signed a new five-year agreement with our largest financial service customer, which consists of an initial three-year contract with two one-year options. We truly appreciate the confidence that this customer has demonstrated in GP Strategies. This morning, before the market opened, GP Strategies announced revenue and earnings for the third quarter of 2018. GP Strategies' revenue decreased slightly compared to the third quarter of 2017, however recent developments are favorable for improved operating results in 2019. GP Strategies has just been selected by a large multinational insurance company for a global training outsourcing contract subject to contract negotiations. In addition, we recently won a multimillion dollar contract for a U.S. product training launch with a Japanese automobile manufacturer. We have seen increased revenue in our engineering and technical service practices, which was the first area of focus by our new sales organization. So I am pleased with the traction resulting from our investment in business development. Implementation expenses related to our cloud ERP system are expected to decrease significantly since the company went on this system effective October 1, 2018. These expenses totaled $4.9 million in 2017 and $3 million for the first nine months of 2018. Based upon these developments, we believe GP Strategies is strongly positioned for 2019. The third quarter results continue to include numerous unusual and/or nonrecurring items that impacted our results of operations. As we build our platform for future growth, we anticipate that GP Strategies will return from normal operating model in 2019 without significant unusual items and nonrecurring items other than legal and implementation costs associated with acquisitions. In addition to the contract signed this morning by our largest financial service customer, our largest automotive customer named us the Prestigious Supplier of the Year. Those two customers represent over 25% of our overall revenue. Our acquisition initiative, which has enabled the company to grow substantially in the past, is now back in full force with the completion of the significant acquisition in the pharmaceutical training space in the second quarter of 2018, and the acquisition of a European automotive training and research company in the third quarter of 2018. We continue to evaluate and look at deals, and hope to have something for you shortly. Going on to my slide, I just wanted to expand on the U.K job skills. As you can see from the results, we experienced a downturn due to changes in funding by the U.S. government. However, we are starting to see increased activity in the levies that are occurring due to absorption of learners from nonperforming providers, additional sales asset, and companies adapting to the levy spend. We believe by 2019, we will get to the levels that we had in prior periods. So that's good news on the U.K. Job Skills section. As far as the new cloud ERP system that I touched on, and in live [ph] in October, it will give the company enhanced data, daily monitoring, and we are very excited about the robust system that we've installed. GP Strategies is strongly positioned in 2019 and beyond. We are continuing with the same fundamental strategy that previously grew the company $220 million to $500 million in less than a five-year period. The one major change is now we are armed with a significant business development and sales team that has been assembled to support the company's future growth. I will now turn the call over to Adam for an in depth review of our global initiatives.

[Adam Stedham:]

Thank you, Scott. My goal today is to explain a bit about the makeup of GP's two segments, explain their sales cycles, and give some insights into our sales progress. Each of the two segments, Business Transformation and Workforce Excellence, consists of a long sales cycle and short sales cycle practice. The larger practice within each segment primarily consists of long sales cycle operations, and the smaller practice includes many project-based shorter sales cycle services. A significant portion of the sales activity for the long sales cycle operations is aligned to the annual budgeting process of our customers. The inclusion of short and long sales cycle practices within a segment allows us to have both stability and agility inside of that segment. The Workforce Excellence segment, which generates approximately 63% of our revenues includes the Managed Learning Services practice as well as the Engineering & Technical Services practice. Many of the business units within Managed Learning Services, which generates approximately 41% of our revenues, have a long sales cycle. And many of the business units within Technical Services, which generates approximately 22% of our revenues, have short sales cycles. This makeup is important when considering the current quarter performance and our future expectations. The current quarter for Managed Learning Services, exclusive of U.K. Job Skills and acquisitions, is down slightly, and the practice is up slightly year-to-date. During Q4 of 2017, so last year, this organization did not lose any outsourcing contracts or Managed Learning Services contracts, but they were not able to secure any new outsourcing relationships either. Many of the outsourcing contract decisions are made during Q4 of the year to align with the annual budge cycles of our customers. As a result of this, this year has been relatively flat exclusive of acquisitions, job skills, and currency fluctuations. We're very optimistic about 2019 based upon notification that we've secured a new outsourcing relationship, in addition, as Scott mentioned earlier, we're excited about signing of our Managed Learning Services multiyear renewal contract with our largest financial services customer, and we don't see any headwinds with our existing customers going in to next year. Our Engineering & Technical Services practice include some long-term government contracts but outside of those contracts the business operates in an environment of relatively short sales cycles and contracts for projects. Heading into this year, 2018, we identified that turning around the multi-year slide of our technical services business was a priority, when we hired our new chief sales officer his first priority was focusing on the turnaround of this practice. One reason for this initial prioritization is because the nature of the sales cycle within that organization enables us to shift the performance of the business more rapidly. We continue to be pleased with the results of this practice their Q3 performance was strong and adds to their strong year-to-date performance and we're very comfortable with our current booking and backlog for this business and we expect 2019 is going to be another solid year and the business transformation segment which is approximately 37% of our revenues includes the salesman enablement practice as well as the organizational development practice. Many of the business units within sales enablement which generates about 19% of our revenues have long sales cycles and many of the business units within organizational development which generates approximately 18% of our revenues have short sales cycles. As I said previously this is important when considering the current quarter performance and our future expectations. So the sales enablement practice is down year-to-date and in Q3. At the beginning of this year we had anticipated, we would generate significant revenues associated with supporting the launch efforts of an important luxury brand. We've maintained the relationship with that customer but they experienced delays with their in their expansion efforts in 2018. Looking forward, we anticipate that our revenues with that in customers, with that customer will increase in 2019 versus 2018 at their plans had evolved. In addition we've been notified we were selected to support a new automotive customer with an important 2019 product launch. Finally we also anticipated Scott said signing the renewal of a multi-year agreement with our largest automotive customer within this quarter. We're very optimistic for this practice for 2019 as well with these additions. The organizational development practice within business transformation consists primarily of short sales cycle services and we're disappointed that this organization is down for the year and down in Q3, some of the steps that we've taken to move this practice forward are they really assume leadership for the business transformation segment in July we hired a new Vice President of Sales for our leadership services in mid August and Russ Becker our Chief Sales Officer is currently implementing the same sales processes for this organization that we implemented for engineering and technical services. The organizational development practice consists of five service lines. Currently we expect that 4 of these 5 service lines will experience growth in 2019. As a result we anticipate overall growth and a good year for this practice in 2019. So at this point, I'll turn the call over to Mike for detailed financial update.

[Mike Dugan:]

Thanks, Adam, and good morning everyone. Starting with slide eight and the revenue and gross profit, we reported Q3 revenue of a $123.6 million which is down slightly from $124.1 million of revenue reported in Q3 of last year. Bringing the revenue out by segment, their workforce excellence segment reported Q3 revenue of $80.5 million which is up $3.5 million from the revenue reported in Q3 of 2017 bridging the revenue drivers and workforce excellence segment, revenue increases were due to a $4.7 million increase in engineering and technical services practice which is up 18.9% over prior Q3, 2017. Some of the areas that increase in ETS were on hurricane relief projects, training services for U.S. government clients and in our alternative fuels division. There was also a $1.9 million net increase in manage learning services which is comprised of a $3.5 million increase in revenue contributed by the acquisitions in this practice completed within the last 12 months. Offset by a $1.6 million decrease in the U.S. relating to digital learning and training content development services and this practice. Partially offsetting the workforce excellence segment revenue increases where our revenue decrease of $2.5 million and U.K. skills training service line due to the U.K. government changing how this program is administered and the $0.6 million decrease in revenue due to the changes in foreign currency exchange rates. The business transformation services segment reported Q3 revenue of $43.1 million which is down $4 million from the revenue reported in Q3 of 2017, bridging reading the revenue drivers in the business transformation services segment. The revenue decreases in this segment were due to a $2.8 million net decrease in the sales enablement practice consisting of a $2.5 million decline due to the completion of non-recurring vehicle launch events in 2017. a $2.1 million decline in magazine publications due to the timing of shipment of the Fall pub with more of the 2018 vol publication being shipped in October versus the last few days in September as it was in 2017. These decreases in the sales enablement practice were partially offset by a $1.2 million increase in training services for automotive clients and $0.6 million increase in revenue contributed by an acquisition completed in that segment in August. The organizational development practice had a net decrease of $1.1 million in the quarter primarily due to a $3.1 million decline and platform adoption, strategic consulting and leadership development services offset by a $2 million increase in revenue contributed by the acquisitions in this practice completed within the last 12 months. Within that segment, the sales enablement practice had revenue in Q3, 2018 that included $1.6 million of publications which was $2.1 million less than the $3.7 pub revenue recorded in Q3 of last year. Due to the timing of the 2800 fall pubs shipment noted above. We're projecting publication revenue in Q4, 2018 to be $7.6 million compared to $5.9 million in Q4, 2017 with this increase again being due to the timing of the fall pub shipment. Total year publication revenue forecast for 2018 is $23 million versus the $23.5 million in 2017. In terms of gross profit, we reported gross profit of $19.2 million which is up $0.6 million from the gross profit reported in Q3, 2017. Breaking this out by segment, the workforce excellent segment reported Q3 gross profit of $13.4 million which is up $1.5 million from the gross profit reported in Q3 of 2017. Increases were due to a $2.6 million increase in engineering and technical services practice primarily due to the last record on of foreign oil and gas contract in Q3 of 2017 and $8.5 million net increase in the rest of management services practice exclusive of the U.K. job skills service line. Decreases in the segment that partially offset the overall gross profit increase was a $1.5 million decrease 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 at the top that revenue declines the impact on gross margin can be significant. The business transformation services segment reported Q3 gross profit of $5.8 million which is down $0.9 million from the gross profit reported in Q3 of 2017. Gross profit decreases in this segment were due to lower revenue as reported in both the sales enablement and organizational development practices. Moving on the slide nine, year-to-date revenue on gross profit by segment; touching on a few high level things when looking at our year-to-date operating results the engineering and technical service practice has experienced a strong turnaround from 2017. As Adam mentioned this is the first area where we deployed our fine when grow business development and sales model and the results have been encouraging. The organizational development practices year-to-date results after factoring out acquisitions have been a material drag on the overall company results in 2018. In the middle of Q3 in addition to the BTS segment now being under new leadership, we deploy in the second phase of the find win grow model in the OD practice. Well it typically takes a while for the VDV and sales efforts to deliver both top and bottom line results. The nature of service in this practice tend to have a shorter selling cycle, so there is the opportunity to see improved results in the reasonably near future. The sales enablement practice has been impacted by the decline in certain vehicle launch events in 2018 compared to 2017. While these headwinds will continue into Q4 there's been increased activity in this practice as evidenced by the recently announced multi-million dollar contract for vehicle launch training with the Japanese automotive manufacturers. Lastly, the single biggest factor affecting our operating results year-to-date is in the U.K. job skills training program. We've increased marketing efforts and added new qualified services to take advantage of the new lending model and we're starting to see an improved outlook going into 2019. Moving on to SG&A expenses on slide 10, general and Administrative Expenses are down about $3 million quarter-over-quarter. Primary drivers are a 1.7 million decrease in ERP related cost of which $1.2 million was a decrease in third party costs and 0.5 million was a decrease in internal labor. The decrease in ERP related cost is primarily due to the capitalization of $1.9 million of implementation costs during the quarter. $1 million of this capitalization relates to the development of certain on-premise solutions associated with the ERP system and 0.9 million relates to the adoption of a new counting standard issued in Q3 which permits the capitalization of certain eligible implementation costs related to cloud-based systems. In addition, there was a 0.6 million decrease in miscellaneous G&A expenses including a 0.2 million reduction in bad debt expense. These decreases were partial offset by a $0.4 million increase in legal expenses related acquisition activity in the quarter. Within the G&A line item external ERP implementation cost in Q3 of '18 were 0.3 million, compared to $1.5 million in 2017. This decline is primarily related to the capitalization called capitalized cost noted above. As for the ERP project, as Scott mentioned and we did go live on October 1 and are now running our business on the new system. Sales and Marketing spends for Q3 is up $0.9 million quarter-over-quarter with the driver being the investment in a centralized Business Development Program. With the addition of our Chief Sales Officer inside sales resources and a corporate account management focus. Moving on to other expenses on slide 11 to touch on just a few of the other expense items, interest expenses is up $0.6 million due to higher borrowings under our credit facility and higher interest rates in the quarter. Other expenses up about $28 million, $0.5 million of which is due to an increase in foreign currency losses, primarily due to the monthly revaluation of inner company AR and AT balances, which is a non-cash item and a $0.3 million loss on a divestiture of a portion of our business unit in the quarter. This divested business unit falls in our organizational development practice. And the operating loss was running at roughly 0.3 million per quarter. Income tax expense, we're projecting a year-end estimated tax rate for 2018 up 29.8%, which includes 1% for discrete items. Moving on to the earnings summary Slide on slide 12, net income for Q3 was $3.2 million compared to $3.3 million last year. Diluted earnings per share was $0.20 compared to $0.19 in Q3 of last year, and the aggregate of special items in Q3 total to a net $0.7 per share impact which resulted in adjusted EPS with $0.27 for Q3. A reconciliation of this non-GAAP figure is in the appendix to this presentation. Moving on to slide 13, balance sheet highlights, our cash balance of the Q3 was $10.3 million, compared to $23.6 million at the end of 2017. As of October 31st, the cash balances up to $16.8 million. Some of the cash tied up and working capital as of September has converted the cash during October. Debt outstanding at the end of Q3 was $106 million. Again, as of October 31, this has also improved slightly as it's down to $104.8 million between October cash balance and October debt outstanding. The net improvement totaled $7.7 million. Cash flow from operations year-to-date is $3.5 million. For some additional insights on cash flow compared to prior years. The 2018 cash flows is negatively impacted by $3.9 million of cash use for ERP cost this year. $3 million of which with the amount of expense year-to-date relating the third-party ERP cost, plus the 0.9 million of year-to-date capitalized cloud efforts, which flows through cash flow from operations, our significant uses of cash, our acquisitions of $42.9 million. Share repurchases of $8.5 million and from capitalized ERP implementation cost for the year totaled $3.3 million, $0.9 million relates to the cloud implementation noted above that flows through cash flow from operation and $2.4 million year-to-date related to on premise solutions associated with the European system that I've been capitalized and that flows to other investing activities. Moving on the backlog on page 16, excuse me, page 14; backlog as the Q3 2018 was $264.4 million, which is up $24.7 million compared to the $239.7 million of adjusted backlog as Q3 2017. The adjustment being a removal of $25.7 million of backlog in Q3 of '17 related to the terminated for an oil and gas client. This concludes the financial update, for more details on the adjusted EBITDA and adjusted EPS calculations. You can refer to the appendices at the end of his presentation, which is on our website. I'll turn the call back to Scott.

[Scott Greenberg:]

Thank you, Mike. You can see why if you listen to some of the things going on at GP Strategies, we're pretty excited about the future of the company. In addition to those changes, there have been changes at both the management team and the Board of Directors that I like to talk about. In August, we elected three new Board of Directors for the company. First is Mimi Strouse. Mimi was a partner of Warburg Pincus and has a lot of expertise in the education space. And at one time, she was on the Board of SkillSoft. The second, Jacque Manardo; Jacque was the Senior Partner at Deloitte and Touche, and he was responsible for the global expansion initiatives, which is pretty prevalent right now with GP Strategies, so we're happy to have him on board as well and the third new director Tamar Elkeles, who is the Chief Learning Officer at Qualcomm and very well known in the industry in the learning and education space, she joined our board as well in August. In addition, Samuel Robinson, who's with our largest shareholder of Sagard Holdings was made Lead Director at our Board meeting, and we're excited to have him in that position. As far as our team, you heard from Adam and Mike today, Adam and Mike was sold in the acquisitions approximately a year ago and I think they're very excited in doing a great job. You heard today about our sales initiatives on new system, on our largest client sign and move long-term arrangement. So, good things are happening at GP Strategies. As far as, investor presentations the next investor conference we have coming up is will be presenting at the Needham Conference and hopefully a lot of you have received updates based upon the recent investor Analyst Day that we had in October. With that being said, I like to turn it over to shareholders for questions at this point and that analysts. Thank you.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Alex Paris of Barrington Research. Please go ahead.

[Chris Howe:]

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

[Scott Greenberg:]

Good morning.

[Mike Dugan:]

Good morning, Chris.

[Chris Howe:]

I had a few questions lined up here. You've touched on them a little bit. You saw the growth in engineering and technical services this quarter, and you talked about the implementation of the sales process towards a shorter sales cycle and the shift in performance more rapidly within this practice. How would you compare and contrast the implementation of this sales process to business transformation in comparison to the engineering and technical services practice? I know you mentioned an improved 2019 outlook, and maybe you could just highlight some more similarities and differences between the implementation process?

[Adam Stedham:]

So, this is Adam. Sure, I think the -- overall, the businesses are pretty similar in terms of the nature of how they engage the marketplace, relatively short sales cycles focusing on them. The current quarter for engineering and technical, our disaster business or disaster support business was aided by some of the hurricane work, but overall, the year had shown progress -- you know, progressive growth, even independent of that. I expect the same thing for our organizational development services. The key with organizational development, I would say is we have changed office sales leader there. We had the same sales leader for engineering and technical services. So, we had someone who was in place, who had been managing sales, and we really just had to change their focus and implement a new model. So that got traction a little bit faster than hiring a new sales leader and then implementing it. With that said, the new sales leader comes to the table with existing relationships and footprint in the marketplace that we plan to take advantage of. So I think it's fairly similar. And overall, we're looking at -- we don't expect this to take forever to get engaged. We expect for the traction to happen in a relatively meaningful period of time. Does that answer it for you?

[Chris Howe:]

It does, thank you, and just had one other one here. Just, congratulation on the renewal of the HSBC contract, and then I remember in the past, Scott had talked about the infrastructure that was put into place in support of this contract. With this renewals I guess, what is your current evaluation of the market within financial services for potential future deals given the renewal?

[Scott Greenberg:]

Well, so the large financial service customer that we just got the renewal from, that's the basis of our whole global initiative from five years ago, when we expanded our global platform. I believe the win that we announced today with the, subject to signing the contract, with the large insurance company, is a global win that's based upon the heels of what we were able to accomplish in the financial service sector. That would be multi-country win. And I think that it's a good sign that now we're starting to see with the new sales force and everything going on traction outside of this. Financial services in total represent over 20% of the revenue in the company, of which this large customer is one of. So I think we continue to market it. But the platform could be used for many industries outside of financial services, and just [indiscernible] inside of the equation.

[Chris Howe:]

That's very helpful. Thank you for taking my questions.

[Operator:]

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

[Jeff Martin:]

Thanks. Good morning everyone.

[Scott Greenberg:]

Morning, Jeff.

[Jeff Martin:]

Now could you give us an update on your strategy within the pharmaceutical industry? I mean you've made an acquisition there that's obviously an area of focus that you've pinpointed the last 12-18 months as kind of the next vertical you're going after. So, looking for an update in terms of how things are progressing strategically, and also in the sales process.

[Scott Greenberg:]

Sure, Jeff. And Adam can supplement me. When we looked at the various industries we're involved in, the financial services, which is with that and the automotive is our two largest industries. It's a highly regulated complex industry where a lot of the training is done either by government regulations all to keep on top of things. And when we looked at our core business and looked at all the industries we participated in, the pharmaceutical and life science industry was an industry that we were billing roughly 4% of our revenue in. But it had the same type of profile. You have the FDA, highly regulated, a lot of changes being done, new product introductions. And probably compared to most of our other industries, probably one of our highest margin industries just because of the quality and the type of technical ability you need. So it was an area we were very interested in making an acquisition in. And we brought IC Axon, and they did about $12.5 million of revenue. We're now starting to assign or have assigned different people for different customers, some are already GP Strategies', some are IC Axon customers as well, to further penetrate this customer base. Because of the high margin that they have, if we're able to raise the revenue it will be highly profitable to GP Strategies because we have the base business there. So I would say this is one of the priorities of Russ' sales force, and he's currently working on it.

[Jeff Martin:]

Okay. And then if I could shift gears to the U.K Job Skills market, you're comments had indicated that this is the biggest drag on operational performance of the business today. So was just curious if you could elaborate on getting back to the level of 2017 and earlier than that from both a revenue and gross profit point of view. It sounds like that's going to be driven primarily from expanding your services. And then if there's additional policy change there that's upside to it. So, wondering if you can elaborate a little bit and clarify that as well.

[Scott Greenberg:]

Sure. A little bit of the Job Skills history is that the Job Skills was a highly profitable part of GP Strategies. In 2016, the government changed the regulations, and initiated a tax on large providers -- or large employers, I'm sorry, of about a half-a-percent of payroll. And then small providers, there was a 10% contribution. With the vouchers that the large companies got, the government actually anticipated that the number of apprenticeships would rise from 2.3 million apprenticeships a year to three million apprenticeships a year. So the change was actually made to increase the participation in the apprenticeship program. Unfortunately, in the first year, it's had the exact opposite impact, where the number of apprenticeships have gone from 2.3 million apprenticeships to 1.4 million. Part of it was the large companies having to figure out how to use the vouchers, how to work within the system. And part of it was the 10% small companies' contribution; they reduced the level of spending dramatically. What GP Strategies has done is we were mainly in the small providers, and now we got into the large provider trainings area. We've done that by increasing our platform to include things IT, leadership, areas that we took from the rest of the company, and that's where we're starting to see increases. And we're added to our sales force, and in addition, we are now starting to get apprenticeships from some of the providers where the quality isn't up to the level of the U.K. government and they're eliminating it. So one thing that's new but we're not counting on, Jeff, which just occurred, is the government just announced lowering the contribution on the small companies from 10% to 5%, which will most likely take place starting April. We believe even without that we have the ability to continue to raise our revenue stream. We see month-by-month improvements in the revenue stream, but that lowering from 10% to 5% to add to that level at the end of the first quarter of 2019. That being said, 2017, due to the changes, there was in influx in students that distorted probably the first and second quarter of 2017. Other than those quarters, we would hope to get back to the prior level of '16 and before during 2019. So we're seeing it. We've made the changes, we've added sales force, we've added product, the government realizes they have to increase this area. So it's looking pretty positive for GP Strategies in 2019.

[Jeff Martin:]

Great, that's helpful. And good luck with that. Thanks.

[Scott Greenberg:]

Thank you, Jeff.

[Operator:]

[Operator Instructions] The next question is from the line of Zach Cummins of B. Riley FBR. Please go ahead.

[Zach Cummins:]

All right. Good morning everybody.

[Scott Greenberg:]

Morning, Zach.

[Zach Cummins:]

Good morning. And just -- yes, congratulations first on securing some of these larger outsourcing contracts. One question around the outsourcing contract with in terms of product launch training with the Japanese automotive manufacturer. Can you give us any additional color in terms of timing of the revenue recognition for this engagement? Are you anticipating it's going to be fluctuating in terms of quarters of when the company plans to actually launch the cars or -- it would just be helpful to have a little bit of an idea how we should be thinking about revenue recognition from this contract.

[Scott Greenberg:]

Yes, that contract should be a few million dollars. And it'll be launching mainly in the first quarter of this year. But what it really does is it gets us into a customer that we really haven't had for the last few years as well. So we're hoping that's start of another major customer within GP strategies. If you look at our automotive practice, we have four or five customers in the top 20 of GP and this will be a relatively new one who, but we've done work for them in the past. So we're pretty excited about it, but it will be like a first quarter of 2019.

[Zach Cummins:]

Great, that's really helpful. And then, you provided a little bit of an update on implementing your find when grow methodology into the organizational development group. I believe you stated it was in Phase II of the events implementation. So just to get a little more color around that how far along is that to being fully implemented as opposed how many total phases are there for the implementation of this process?

[Scott Greenberg:]

So it's more really a sec this the second area of in a concentrated focus in the phases, what I would say is that that it's pretty far along in terms of implementation now we have had -- we've turned over quite a bit of the Salesforce in that organization. So there is a little bit of a delay associated with turning over the Salesforce as opposed to just retooling an existing Salesforce. So I would say that to the question earlier, comparing the two, I don't think we'll get traction as fast as we did with ETFs, but we expect to get traction quite quickly with it. Does that help -- does that explain

[Zach Cummins:]

Yes, yes, it's very helpful. I appreciate that. And then a final question from me is really around the current M&A pipeline. I know it's a big part of your strategy for growth going forward. So it would be helpful to understand just kind of some of the opportunities that you are pursuing in terms of industry, potential size of the companies and kind of the potential pace that we should be assuming as you as you really evaluate a lot of the M&A pipeline.

[Scott Greenberg:]

Well, again, the one thing I will say we constantly evaluate M&A activity. And while we put in on Investor Day, we have some discussion about long-term objectives in M&A we are really guided and based upon evaluating deals and doing what we think is right for the company at the time. Looking at the areas we are involved in that we said and we will say in the past, I think areas that give us a global reach and expand our reach particularly in Asia Pac and other regions of the world is important to the company. I think, we look at all major industries, we are trying to develop pharmaceutical, we have major industries and financial services and automotive that's important to the company. And then, the third area we look at which we've done certain acquisitions and is areas that we could add disciplines that we could cross sell across our customer basis. We are currently dealing with about 140 of the global 500 companies, our customers in GP strategies, so to the extent we could bring in disciplines as well that we could cross sell like we did an acquisition of who at the beginning of the year, which is success factors implementations, which are done in any industry in any parts of the world. So that's interesting to us. So I think those are the type of things we are looking at. We look at our debt levels and we look at things we feel comfortable with us, as far as leverage and that's part of our activity as well.

[Zach Cummins:]

All right, I appreciate the color and thanks again for taking my questions.

[Scott Greenberg:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Scott Greenberg for any closing remarks.

[Scott Greenberg:]

Thank you. Thank you, Haley. I think in closing, you've heard today the presentation. I think, we are on the right track, you've heard a lot of positive developments. The outsourcing signed with our large financial services, the new win in the insurance sector, the items Adam talked about, the backlog Mike talked about today as well. So again, I think based upon all of these items, we look forward to a positive 2019 and we will give you updates on next quarter. So thanks for participating.

[Operator:]

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