GP Strategies Corporation
Q2 2017 Earnings Call Transcript

Published: 30 Jul 2017

[Operator:]

Good morning. My name is Suzhi, and I will be your conference operator today for the GP Strategies' Second Quarter 2017 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. Thank you. I will now 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 second quarter 2017 earnings call. On the call today are Scott Greenberg, Chief Executive Officer; and Sharon Esposito-Mayer, 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 website at gpstrategies.com. A replay of this call will also be available on our website later today. At this time, I'd like to turn the call over to Scott.

[Scott Greenberg:]

Thank you, Ann. Good morning, and welcome to our second quarter 2017 conference call. Today we will follow our usual quarterly format. To initiate the call, I'll provide a brief overview of the results of the second quarter 2017. Then Sharon will present an in-depth financial analysis. I will then give key updates on our global initiatives and a final summary including an acquisition update. After the update, we'll conclude with a Q&A session. Doug will not participate today as he is on a client call that could not be rescheduled. This morning before the market opened, GP Strategies announced earnings for the second quarter of 2017. GP Strategies reported second quarter 2017 EBITDA of $10.8 million, compared to $10 million for the corresponding quarter in 2016. The Company achieved the 7% increase in EBITDA, while incurring approximately $1.1 million of financial system implementation costs during the quarter. Without these costs, we would have increased EBITDA by close to 18%. In addition, all of our operating segments reported increased gross margin during the second quarter of 2017, compared to the same quarter in 2016. The Company accomplished this solid performance despite a $3.2 million decline in U.S. dollar reported revenue from foreign currency fluctuations. In the quarter, GP Strategies continued its acquisitions, and in April, completed the acquisition of Emantras, which is based in India and straightens our eLearning content development capabilities. We are currently evaluating additional acquisition opportunities. The Performance Readiness Solutions Group, Sandy Training & Marketing and Learning Solutions segment paved the way for the revenue growth. Overall, the revenue increased by approximately 4.5% despite the above mentioned $3.2 million negative impact due to foreign currency rate declines. In addition, the Company generated free cash flow for the second quarter of 2017 of $14.4 million, compared to $1.1 million for the second quarter of 2016. As previously mentioned, in the second quarter of 2017, the company achieved EBITDA of $10.8 million. Some companies and analysts add back non-cash compensation expense to EBITDA on a pro forma basis. These expenses for the quarter was approximately $1.7 million, so on a pro forma basis, we had $12.5 billion of EBITDA. As far as share buyback, the Company repurchased approximately 101,000 shares for approximately $2.4 million of GP Strategies in the open market for the six months ended June 30, 2017. The buyback activity in the trailing 12 months have kept the shares unchanged on a fully diluted basis with approximately 16.8 million shares outstanding for both periods. A little bit of a summary of the last few years. We have invested heavily in building our global reach and adding high-level personnel, and we anticipate seeing the returns of these investments in years to come. We have added over 15 global offices to the Company, and our annual revenue in the Asia-Pacific region is in excess of $25 million, which is a multiple of where it was just five years ago. We still currently do business with approximately 25% of the Global 500 customers worldwide, and our goal is to continue to establish GP Strategies brand in these highly fragmented industries. On previous calls, we discussed initiatives to expand into the financial insurance sector. We started this initiative performing in this sector approximately six years ago, and for the second quarter our revenue for this sector was approximately 19%. We are currently making a major push into the pharmaceutical industry as it has the same strong attributes as the financial service sector. We will also continue to focus on automotive, which in the second quarter was our largest market sector. With that being said, I'll now turn it over to Sharon, who will give a detailed financial presentation for the quarter.

[Sharon Esposito-Mayer:]

Thanks, Scott. Good morning, everyone. We reported second quarter revenue of $131.2 million, which represented a $5.6 million or 4.5% increase over the second quarter of 2016 revenue of $152.5 million. As Scott mentioned, during the quarter revenue continued to be impacted by foreign currency exchange rate declines, which resulted in a $3.2 million decrease in revenue and had a negative 3% impact on revenue growth in the quarter. Our revenue performance in the quarter was led by strong revenue growth in the Performance Readiness Solutions segment with the revenue increase of $4.3 million or 22%. Revenue in this segment was $23.7 million compared to $19.4 million in the second quarter of 2016. The Maverick acquisition, which we completed on October 1, 2016, contributed $1.9 million of revenue in the quarter, and the McKinney Rogers acquisition completed on February 1 of this year provided $1.7 million of revenue. The remaining $700,000 or 4% of organic revenue growth was due to a $500,000 increase in technical training for an aerospace client, and a $600,000 increase in platform adoption training services. These increases were partially offset by a $200,000 decrease in performance consulting services and a $200,000 decrease in revenue due to unfavorable changes in exchange rate. Sandy's second quarter revenue of $28.4 million represented a $1 million or 4% increase over the second quarter 2016, primarily due to a $600,000 increase in automotive training services and a $400,000 increase in publication revenue. Sandy's second quarter revenue included $8.5 million of publication revenue compared to $8.1 million of publication revenue in the second quarter of 2016. We are projecting a total of $400,000 of publication revenue in the third quarter, which compares to $3.2 million of publication revenue in the third quarter of 2016 and this represents an $8.1 million decrease over Q2 publication revenue. Currently, fourth quarter publication revenue is projected to be $7.5 million. The Learning Solutions segment was $53.4 million of revenue in the quarter, experienced a slight $700,000 or 1% revenue increase. The Emantras acquisition completed on April 1, provided $500,000 of revenue in the quarter and there was a $2.6 million net increase in e-learning content development and training outsourcing services. These increases were offset by $2.4 million revenue decrease due to unfavorable changes in exchange rate. Excluding the decrease due to exchange rate, revenue would have increased in this segment by 6%. The increases in these segments were partially offset by a slight revenue decline in the Professional & Technical Services segment. Professional & Technical Services revenue of $25.7 million was a $400,000 or 1% decrease compared to the second quarter of 2016 revenue of $26 million. The decrease was due to a $600,000 reduction in revenue due to a decline in exchange rates; a $700,000 decrease in engineering and technical services; and a $400,000 net decline in training services for energy clients. This was partially offset by a $1.3 million increase in alternative fuel projects. Excluding this $600,000 decrease from exchange rate, revenue in this segment was increased slightly over the second quarter of 2016. Revenue for the six months ended June was $253.6 million, or an increase of $12.3 million or 5% over year-to-date June 2016. Year-to-date June, we experienced a $6.9 million reduction in revenue due to the decline in exchange rates, which had a negative 3% impact on year-to-date revenue growth during the year. The automotive sector was our largest sector year-to-date and comprised 23% of revenue, up from 22% year-to-date June of ‘16. We had a revenue concentration from a single automotive customer, which accounted for 14% of our year-to-date revenue in both 2017 and 2016. The financial and insurance sector comprised 19% of year-to-date 2017 revenue compared to 21% year-to-date June of 2016. We also have a revenue concentration from a single financial services customer, which accounted for 13% of our year-to-date 2017 revenue compared to 15% of our year-to-date June 2016 revenue. And revenue earned from operations outside the United States represented 29% of our total revenue compared to 31% in 2016. Gross profit increased in the second quarter by $2.1 million, or 10%, on the 4.5% revenue growth. Gross profit as the percentage of revenue increased to 17.1% from 16.2% in the second quarter of 2016. The acquisitions discussed contributed $600,000 of gross profit in the quarter. The remaining $1.5 million increase in gross profit was primarily due to a combined $2.1 million increase in gross profit across all segments, largely due to the organic revenue growth, as well as a cost-cutting initiative in the Performance Readiness Solutions segment. This increase was partially offset by a $600,000 gross profit decline due to unfavorable changes in exchange rates, which predominantly impacted the Learning Solutions segment. SG&A increased $1 million to $13.2 million. The increase in SG&A is primarily due to $1.1 million of expense in the quarter related to our new financial system implementation, which we anticipate to go live in 2018. Projected implementation cost is expected to increase to $1.6 million in Q3 and $1.4 million in Q4. During the quarter, we recognized a $100,000 loss related to a change in the fair value of contingent consideration compared to a $100,000 of income recorded in the second quarter of 2016. Interest expense increased approximately $200,000 due to an increase of $2.8 million in borrowings and an increase in interest rate. In March, we entered into an agreement to fix the interest rate on our remaining term loan, a LIBOR rate of 1.59%, plus the applicable margin under the agreement. And in April, we entered into an interest rate cap agreement to cap LIBOR at 2% on $20 million of borrowings under our credit facility. Hedge accounting has been applied to both of these agreements. Other expense was $100,000 and a $300,000 change over the second quarter of 2016. This was due to a $200,000 foreign currency loss compared to a $100,000 gain in the second quarter of ‘16 and a $100,000 decrease in joint-venture income. Second quarter 2017 income before taxes was $8.5 million, compared to $8 million in the second quarter of ‘16. Tax expense was $2.6 million in the quarter or a rate of 30.7%, compared to a $3.1 million or a 38.3% in the second quarter of 2016. The decrease in the rate is primarily due to a mix of taxable income from higher taxing to lower taxing jurisdiction. Effective January 2017, there was also a change in the treatment for stock compensation that requires excess tax benefits or deficiency to be recorded as a discrete tax benefit or expense. This may result in quarterly fluctuations in our tax rate and resulted in a tax benefit of a 0.5% reduction in the second quarter rate in 2017. Excluding this and other tax adjustments taken in the quarter, we are projecting a rate for the remainder of 2017 of approximately 33%. Second quarter net income was $5.9 million, or a $1 million increase over the second quarter of 2016. And second quarter earnings per share was $0.35 compared to $0.29 in the second quarter of ‘16. Moving on to some balance sheet and cash highlights. Our cash balances were $23.7 million at June 30, compared to $16.3 million at December of 2016. During the year, as Scott mentioned, we spent $2.4 million on share repurchases, $3.2 million just on the McKinney Rogers acquisition and $3.2 million to fund the Emantras acquisition. We generated $19.8 million of cash flow from operations year-to-date June compared to $10 million year-to-date June 2016. The $19.8 million of cash flow from operations is comprised of year-to-date income of $9.9 million, plus non-cash add back to net income including depreciation and amortization of $3.2 million, non-cash compensation expense of $3.2 million and a $4 million increase in cash from changes and other operating items, partially offset by differed income taxes of $400,000 and a $100,000 non-cash gain on contingent consideration. Fixed asset additions were $1.8 million year-to-date resulting in free cash flow for the six months of $18 million. At the end of June, backlog was $276 million compared to $251 million at June 30, 2016. Approximately $31 million of the backlog is for a contract with an international oil and gas customer that will be performed through August of 2021. With the exception of this contract, approximately 95% of the backlog will be recognized as revenue within the next 12 months. At this time, I will turn the call back to Scott, who will discuss some additional operational highlights.

[Scott Greenberg:]

Thank you, Sharon. What we're particularly proud of is we've been able to increase our profitability and make major investments in the company. Some of these investments that we think will benefit the long-term future of the Company, I'll talk about. Firstly, establishing new offices and expanding new offices. We've expanded in South America with a Center of Excellence, which takes GP into South America and provides expertise for our oil and gas and technical industries. Second is the expansion and opening of our Switzerland office, which I'll talk about shortly. And third, is opening up a new office of high-level capabilities in Poland. So, in the last six months, GP Strategies has opened up three offices. Investment in people. I'm also pleased to say that two former CLOs, Chief Learning Officers, of large financial services and insurance companies has joined GP as a consultant, thereby demonstrating to our clients our expertise in these industries or further demonstrating to our clients. So, investments in offices, people and the third area is systems. The ERP implementation, which we hope to get live by January 1 of next year, is not only being used for internal purposes but is being used for customer-based solutions. So, we're pretty proud of the fact that we'll now give new solutions to our customers as well. And our last investment is improved digital learning, getting better student outcomes, using digital learning and technology. And that's an area that we're currently interested and hope to expand as GP expands. So, those are some of the major initiatives as far as investment. As far as some of our customers and our business model, we talked about in the past the win of the large pharmaceutical customer and we are starting the transition in late second quarter. We started in late second quarter but really expect the transition to occur in Q3 with revenue commencing in Q4 and building up in the first half of 2018. So, by the third quarter of 2018, we expect a significant global contract to produce a major revenue for GP Strategies. The opening of the Switzerland office was to jumpstart this initiative. So, based upon that, you could determine which of the pharmaceutical companies are in Switzerland and that's the ones we're working with. Next what I'd like to talk about is the revenue in oil and gas business that seems to have stabilized and one of the key driving factors there is the work we're doing with our EtaPRO software, which is monitoring software that we use at power plants for vibration analysis, efficiency analysis and pattern recognition. And we do have a lot of potential and we're growing with thus far. The last item I'd like to talk about is renewal and rebids. So far this has been going extremely well. We had some major renewals. But we still have some significant renewals pending in the automotive and financial service industry. Moving onto acquisitions. We announced the acquisition of Emantras, which doubles our capability in India, providing both high level and cost arbitrage effective solutions. So, that was an initiative that we worked on and we completed. We do have a significant pipeline right now, which include both deals in the United States and the U.K. operations. So hopefully you'll hear about additional acquisitions made in the third quarter of 2017. On that, now concludes our opening remarks and we'll turn it over to the Q&A moderator.

[Operator:]

Thank you. [Operator Instructions]. One moment please for the first question. Our first question coming from the line of Jeff Martin with ROTH Capital Partners. Please proceed with your question.

[Jeff Martin:]

Thanks. Good morning, Scott and Sharon.

[Scott Greenberg:]

Good morning, Jeff.

[Sharon Esposito-Mayer:]

Good morning, Jeff.

[Jeff Martin:]

Could you touch on the ABB customer announcement that you had earlier this week?

[Scott Greenberg:]

Yes, I'll let…

[Jeff Martin:]

Didn't catch anything on the call about that.

[Scott Greenberg:]

Yes. I'll let Sharon handle that.

[Sharon Esposito-Mayer:]

Sure. We entered into a global agreement with ABB to provide soft skills training services for them in Europe. We just started to perform services under that contract. We just start to see that contract be fully ramped over the next few quarters. We are in discussions as well to potentially expand that agreement into other parts of the world, predominantly the U.S. and APAC. And by entering into that agreement, we have become a preferred supplier to them, which provides us the opportunity to bid on additional other pieces of training work for them.

[Jeff Martin:]

Okay. Could you give us an idea of what kind of revenue contribution we should expect from there initially?

[Sharon Esposito-Mayer:]

Yes, sure. Initially it'll probably have an immaterial amount on our revenue for the next few quarters, but just the piece related to Europe, we would anticipate to be at least a few million of revenue annually. So probably when fully ramped, about $1 million of revenue a quarter once it's fully ramped over the next few quarters.

[Jeff Martin:]

Okay, great. And then could you...

[Sharon Esposito-Mayer:]

That is just - I'm sorry. That is just for the European piece that we've entered into right now. So, that would not include opportunities in the U.S. or APAC or opportunities from other scopes of work that are starting to trickle in. That's just the stock sale contract that we signed.

[Scott Greenberg:]

So, it's a nice contract and an opening to - would get a really major client for GP Strategies.

[Jeff Martin:]

Okay, great. And then you mentioned some contract rebids are still kind of out there. Does that include your large financial services client? Maybe you could kind of give some additional color around the rebid?

[Scott Greenberg:]

Yes. As we mentioned before, we had a contract with a large financial services, which was originally a three-year and then we got a two-year extension as part of the contract. Like most large companies, they put things up for renewal and rebid. So, that contract is - right now, we have a July 2018 period that it goes to, and that's one of the ones we're currently working on.

[Jeff Martin:]

Okay. That's helpful. Thanks. And then finally, could you just talk about the new business pipeline if there is any large deals that you're currently working on that you think are getting closer? It's been a couple of quarters since we've had some bigger ones come through. I know you're working on additional work in Kuwait. Pharmaceutical, obviously and area of focus. But maybe some - look into the perspective pipeline would be helpful.

[Scott Greenberg:]

Yes. I would say right now you look at it and say, the ABB award does have the ability to go global and it could be very significant, but we're trying to be conservative in our initial assessment of that, so that's one award. And we are working on a few other financial service awards, again nowhere near the size of our larger ones, but they are global and they are based upon our international expertise. We do have some very significant proposals in the oil and gas base that are currently out, and most of them are in the Middle East. So, we do have some proposals out there that are very significant in oil and gas industry. And then - so I do think that the pipeline is pretty good. And then lastly, we have - because we haven't generated revenue on that - is the expansion of the large Switzerland-based pharmaceutical company that is not yet reflected in our revenue but will be in 2018. So, I think those are some of the major ones. But every day, Jeff, we - that I always say as we have the major award opportunities and then we have the blocking and tackling that we typically do, trying to expand 125 global accounts that we currently do business with. So, we do see opportunities in some of those as well. In the quarter, for the first time - actually the largest customer for the quarter was in the automobile industry and not in the financial service sector. So, we also do see some ability in expanding our automotive accounts as well.

[Jeff Martin:]

Great. Thanks, helpful. Thanks so much.

[Scott Greenberg:]

Thank you, Jeff.

[Operator:]

Thank you. Our next question coming from the line of Alex Paris with Barrington Research. Please proceed with your question.

[Chris Howe:]

Yes, this is - good morning. This is Chris Howe sitting in for Alex Paris.

[Scott Greenberg:]

Hi Chris.

[Chris Howe:]

Hi. Just had a few questions here just in regard to Maverick, McKinney and Emantras, some of the recent acquisitions that you've done. What are your expectations for these acquisitions in the remainder of the year, and I guess, generally going forward their contribution to your revenue?

[Sharon Esposito-Mayer:]

Yes. The McKinney Rogers and the Maverick acquisition are both somewhere around $8 million to $10 million of revenue annually, margins probably close to what our existing business runs and what you would see the Performance Readiness Solutions segment producing. The Emantras acquisition is a few million of revenue annually, and also again, at similar margins to what the rest of the business runs. If you look at the gross margin overall for the acquisitions in Q2, they provided about 16% of gross margins compared to the 17% that we reported. However, both Maverick and McKinney Rogers have a little bit quarterly fluctuations in their revenue spend, with McKinney's revenue and profit performance tending be higher in Q4 and Q1 as companies are putting in place strategic consulting plans and visions as they go into their next years for planning. And Maverick, because it is an implementation training type business, it will have quarterly fluctuations in revenue as implementation projects are ramping up and ramping down.

[Chris Howe:]

Okay. Sounds very good.

[Scott Greenberg:]

I'm sorry, Chris. So, if you look at the results, obviously, all the acquisitions were made before April 1, so they were reflected in the last quarter's results.

[Chris Howe:]

Okay. And I guess just for my own general knowledge, you mentioned the Switzerland office jumpstarting the pharmaceutical initiative, and also the expansion into Poland. With regard to the current backlog, should we expect further investments to jump start these initiatives once they come to fruition?

[Scott Greenberg:]

Well, they have come to fruition. So, I think the current run rate - we did start ramping up into Q2. So, you won't see additional ramp up at this point until you start seeing the revenue flow through.

[Sharon Esposito-Mayer:]

With that being said though, in terms of backlog there is minimal inclusion in our backlog figures right now for training relating to that initiative. That is ramping currently. So, we would not expect to see any major addition to backlog for that starting until probably Q4 of this year.

[Chris Howe:]

Okay. Those are my questions. Thank you.

[Sharon Esposito-Mayer:]

Thank you.

[Scott Greenberg:]

Okay. Thank you, Chris.

[Operator:]

Thank you. [Operator Instructions]. Our next question coming from the line of Kevin Liu with B. Riley & Company.

[Kevin Liu:]

Hi, good morning.

[Scott Greenberg:]

Good morning, Kevin.

[Kevin Liu:]

For the renewals and rebids that you're seeing out there, can you just talk about your expectations for your ability to drive uplift in your business with those customers? And then, to what extend are any of these opportunities competitive with other vendors out there?

[Scott Greenberg:]

Yes. I mean, I would say it depends on the customers, how competitive they are. They all have a process where they look at our work and alternatives. Most large companies are required to do that. So far, and over the history of years, we've had very good results with rebids and renewals. We typically look as part of the process though is to see what are the areas we can work with the customers, and we try to look at ways to actually enhance our relationship with them to try to get into new areas for GP, which is always good in a way because if you could show the new areas and new things to do, that further cements your relationship with them. So again, that's typically the process of GP. We always have major rebids doing [Technical Difficulty] current customers and having well over half of our business being recurring. There is always rebids going on each year. This year because of the large financial services customer [Technical Difficulty] for GP. But again, we've historically had shown good results.

[Kevin Liu:]

Got it. And with all the international expansion that you've done over the past few years, can you just talk about the opportunities you see to leverage that? Does it require you to expand the relationships with the existing customers that you initially had when building this out, or can you actually leverage that through picking up either new business or just expanding work with other customers in the region?

[Scott Greenberg:]

It's a combination of both, but let me talk of a few examples in Asia. So, we just won our first, a new account, $1 million job with an Asian bank that directly came from our expansion into Asia. We won in the last few years and won just recently two automotive companies where we're now delivering the training in China and that was solely based on the opening of the offices. But then in addition, we have our current customers, which we're able to expand into Asia that might have been in either Europe or the U.S. Another example is the ABB award. While they're starting with Europe, the goal is just to go global. So even though they're starting with Europe and they gave it to GP, the reason or one of the reasons why they picked GP was our global capabilities. So even accounts now where we might only get one region, part of our advantage in the processes we do have the ability to deliver on a global basis, which I believe is important to a lot of our customers today.

[Kevin Liu:]

Great. And just lastly for me, with the Emantras acquisition, could you talk about to what extent the strategic benefit there is from being able to shift some exiting work to lower cost regions, or is it really more of an opportunity to cross-sell some e-learning development work into your existing base?

[Scott Greenberg:]

Well, I will say that what Emantras gives GP - it gives really two things. One is it gives the lower cost arbitrage to some of our Indian-based solutions but also Emantras has very high capabilities. So, they're very high-end as far as capabilities and they include things like simulation and gaming, and it really expands GP further into those areas of higher-level degree of e-learning capability. So, it really gives us some pretty significant resources.

[Kevin Liu:]

Great. Thanks for taking the questions.

[Scott Greenberg:]

All right, thank you, Kevin.

[Operator:]

Thank you. Mr. Greenberg, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

[Scott Greenberg:]

Thank you, Suzhi. It's a pleasure talking to you today. We will see a lot of you at the conferences coming up. I believe the next conference we're at is after the summer. We're at the BMO Back to School Conference. And again, we're available, like always, for any questions that you'd have on GP Strategies. And I do appreciate the investor support, the board support, and particularly, all the hard work that's being done by the employees of GP Strategies. So, thank you very much.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.