GP Strategies Corporation
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good morning ladies and gentlemen. My name is Francisco and I will be your conference operator today for the GP Strategies First Quarter 2015 Earnings Conference Call. All lines will be placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. Now I would now turn the conference over to Ms. Ann Blank, Director of Investor Relations. Please go ahead ma’am.

[Ann Blank:]

Thank you. Good morning, and welcome to GP Strategies First Quarter 2015 Earnings Call. On the call today are Scott Greenberg, Chief Executive Officer; Douglas Sharp, President; 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 would like to turn the call over to Scott.

[Scott Greenberg:]

Thank you, Ann. Good morning and welcome to our first quarter 2015 conference call. Today, we will follow our usual quarterly format. To initiate the call, I will provide a brief overview of the results of the first quarter of 2015, then Sharon will present an in-depth financial analysis, and Doug will give key updates on our global initiatives. After Doug’s presentation, I will provide a final summary and then we will conclude with a Q&A session. This morning before the market opened, GP Strategies announced its earnings for the first quarter of 2015. In the first quarter, which is historically seasonably the weakest quarter of the year, the company achieved solid operating results with revenue of approximately $115.3 million and earnings per share of $0.24 compared to $0.22 per share in the first quarter of 2014. It should be note that there is approximately $700,000 of foreign currency and loss on contingent consideration that was deducted from this pre-tax income. In the first quarter, the company achieved these results despite a downturn in revenue of approximately $9.7 million from its non-core alternative fuels group and a reduction in revenue of approximately $2.4 million due to the dramatic strengthening of the US dollar predominantly against the British pound compared to last year. It should be noted that that is not the same as the $500,000 of foreign currency loss but in addition to that, there is a profit related to the $2.4 million that did not hit the quarter. Our learning solutions segment achieved double-digit organic growth and overall the company gross margins improved, demonstrating that we are seeing a return on our investments in global expansion. In the first quarter, we realigned our operating groups centralizing our service offerings to better respond to our customers’ global reach while improving operating efficiencies to leverage common technologies and practices across the enterprise. We believe our expanded infrastructure and the ability to deliver globally allow us to better support our existing multinational client base as well as win new business through our comprehensive service offerings. The successful Dutch tender offer completed in the fourth quarter in which we purchased approximately 2.1 million shares for approximately 62.8 million, including expenses reduced our diluted weighted shares outstanding from 19.4 million to 17.3 million shares. We also repurchased shares of GP Strategies stock in our buyback program in the open market for approximately $400,000 during the quarter and have approximately 14.6 million remaining in our buyback program which was announced in the fourth quarter of 2014. Excluding the reduction from alternative fuels, all groups would have shown an increase in gross profit. In addition, our largest segment, the learning solutions group revenue increased by over 80% and operating income by approximately 73%. We believe the company’s investment enabled our company to execute on a global basis. The strategy is becoming a key differentiator of the company in the training and performance industry. We are currently doing business with approximately 25% of the global 500 customers of the world. Our goal is to continue to establish GP Strategies brand in the highly fragmented industries that we operate in. In 2013 and 2014, we invested heavily in building our global reach and we anticipate seeing the returns of these investments in the year to come. We added approximately 13 global officers to the company. EBITDA for the quarter was $9.2 million and approximately $52.9 million for the trailing 12 months ended March 31, 2015. This was approximately $03.05 per share based on the new share count. Our short-term borrowings inclusive of long term debt totaled approximately 56 million at the end of the quarter. However just remember we used $62.9 million of cash to repurchase shares in the Dutch auction in the fourth quarter of 2014. We repeatly get asked about the size of the global training market which is now estimated to be over $60 billion. Our largest competitor is still the company’s in-house training departments. We understand that we are playing in a highly fragmented industry and we plan on growing this in the future. We believe that outsourcing of training activities is on the way up and our commitment is growing in this area to increase service levels. On previous calls we discussed initiatives to expand into financial and insurance service sector. We started this initiative approximately five years ago and I am pleased to report that in the first quarter of 2015 our revenue approached 24%. With that being said, I will hand it over to Sharon who will give a detailed financial presentation for the quarter.

[Sharon Esposito-Mayer:]

Thanks Scott and good morning everyone. Before I get into the financial results for the first quarter, I want to note the realignment that Scott discussed resulted in changes to all of our reporting segments except for Sandy. The energy business that was previously a separate reportable segment is now part of the professional and technical services segment. In addition, our businesses in Europe that provide engineering and technical services that were previously part of the learning solutions segment are also now included in the professional and technical services segment. Our leadership offerings and the business unit that provide content development services, both previously in our learning solutions segment transferred to the performance readiness solutions segment. These changes are reflected in our comparative first quarter results and the restatement of results by segment for the prior year’s quarters and posted on the quarterly earnings release page of the investors section of our website. We reported first quarter revenue of $115.3 million which represented a $2.6 million decline over the first quarter 2014 revenue of $117.9 million. During the quarter, we experienced a $9.7 million reduction in revenue from our alternative fuels business due to the completion of several projects during 2014 and a $2.4 million reduction in revenue from our foreign operations due to a decline in exchange rate compared to the average exchange rate during the first quarter of 2014. These decreases contributed to a 10% decline in revenue over the first quarter of 2014. Excluding these decreases, revenue increased 80%. The revenue growth was primarily due to growth in our learning solutions segment. Revenue in the learning solutions segment increased by $8.1 million or 19% over the first quarter of 2014. The Effective acquisition completed in April 2014 contributed $1.9 million of revenue in the quarter. The remaining $6.2 million of organic revenue growth was due to a $7.1 million net increase in elearning and training outsourcing services primarily for the financial sector and a $900,000 increase in UK government funded skills training. These increases were partially offset by a $1.8 million decrease in revenue due to a decline in exchange rates compared to the first quarter of 2014. Sandy’s first quarter revenue of $14.7 million represented a $500,000 increase over the first quarter of 2014, primarily due to an increase in training services for automotive customers. In the first quarter 2015, publication revenue was $300 million. We are projecting a total of $9.2 million of publication revenue in the second quarter. This projection includes $6.2 million of new publication revenue related to a 2015 contact award. The $6.2 million of new publication’s revenue will have a lower margin in the single digits. Professional and technical services revenue decreased $10.4 million or 26%, largely due to the $9.7 million decline in alternative fuels revenue due to project completions in 2014, the result of a $1.7 million decline in revenue from US government clients due to project completions and a $600,000 decrease in revenue due to unfavorable changes in exchange rate. These decreases were partially offset by a $1.1 million increase in revenue from energy clients and a $500,000 increase in services for oil and gas clients. The performance readiness solutions segment provided $18.8 million of revenue in the quarter, down $800,000 from the first quarter of 2014 due to a net decrease in content development services. The financial and insurance sector is now our largest market sector comprising 24% of first quarter revenue, up from 14% in the first quarter of 2014. The automotive sector is our second largest sector and comprised 13% of revenue in the quarter, up from 12% in the first quarter of 2014. Revenue earned from our operations outside the United States represented 32% of revenue, up from 22% in the first quarter of 2014. We now have a revenue concentration from a single financial services customer which accounted for 15% of our first quarter 2015 revenue. Gross profit increased in the first quarter by $800,000 despite a decline in revenue. The increase in gross profit was primarily due to improved margins across most of our segments except for professional and technical services which had a margin decrease due to the large decline in alternative fuels revenue. Gross margins increased 16.6% compared to 15.6% in the first quarter of 2014. SG&A was flat at $11.6 million. SG&A costs included a net $500,000 increase in labor benefit and other expenses over the first quarter of 2014 related to international expansion efforts during the past 12 months, which was offset in part by a $300,000 decline in the amortization expense. There was also a $200,000 decrease in bad debt expense which is not expected to continue in future quarters. During the quarter, we recognized a $200,000 loss related to an increase in the estimated earn-out payments and associated fair value of contingent consideration accrued for certain acquisition. This resulted in a $600,000 expense increase over the $400,000 then recorded in the first quarter 2014. Excluding the non-operational effect of the contingent consideration adjustment in both years, operating income increased $800,000 or 11%. Interest expense increased by approximately $200,000 due to an increase in short term borrowings and other long term debt primarily related to the Dutch tender offer completed in October of 2014. Other income decreased $400,000 over the first quarter of 2014. First quarter 2015 other expense includes a $500,000 currency loss which reflects a $400,000 increase in foreign currency losses over the first quarter of 2014. First quarter 2015 income before taxes was $6.7 million compared to $7.1 million in the first quarter of 2014. Tax expense was $2.6 million in the quarter or a rate of 39.1% compared to $2.8 million or 39.4% in the first quarter of 2014. We are currently projecting a tax rate of 39.5% for the remainder of 2015. First quarter net income was $4.1 million, or a decline of $200,000 over the first quarter of 2014. First quarter earnings per share were $0.24 compared to $0.22 in the first quarter of last year. The $500,000 foreign currency loss reflected in other income and the $200,000 loss on contingent consideration resulted in a $400,000 decrease in net income and a reduction of $0.02 of earnings per share in the quarter. Moving on to the balance sheet. Our cash balances were $12.1 million at March 31, 2015 compared to $14.5 million on hand at the end of December of 2014. In the first quarter of 2015, we spent $400,000 on share repurchases. We generated $3.2 million of cash flow from operations in the first quarter, comprised of year-to-date income of $4.1 million plus non-cash add-back to net income, including depreciation and the amortization of $2.1 million, non-cash compensation expense of $1.3 million and a $200,000 loss on contingent consideration, offset by a $4.5 million decrease in cash from changes in other operating items. Fixed asset additions were $600,000 in the first quarter of 2015 compared to $900,000 in the first quarter of 2014. At the end of March, backlog $251million and compares with the $234 million at the end of December of 2014 and $237 million at the end of the first quarter of 2014, which included an additional $20 million of alternative fuels backlog over the March 2015 ending balance. Approximately 95% of the backlog will be recognized as revenue within the next 12 months. At this time, I will turn the call over to Doug who will discuss some operational highlights.

[Douglas Sharp:]

Thank you, Sharon and good morning everyone. As Scott and Sharon, setting the LNG fueling station business asset, we had a growing first quarter with our learning and development services. I mentioned on past calls our strategy is servicing global companies with centralizing learning solutions, learning our global reach and capability. We believe with the maintaining services remain strong and in our reputation for providing these reputable to a higher degree customer satisfaction remains equally strong. Today I thought I would briefly review four customer engagements that represent the source of growth in contract backlog Sharon mentioned earlier. The four engagements include one customer, two of expanded services unit existing customers, and one contract extension. One new contract this quarter was with a large electric power producer headquartered on the East Coast. We have been asked to install our EtaPro product in 35 plus fossil power generating units across the United States. We will also provide our associated performance engineering support in support of this customer. This is a 15th wide installation which will provide plant by plant performance information that will in turn and be critical for production capability, fuel efficiency and reduced carbon emissions. The next example is a multi-million dollar multi-year expansion work with one of our large automotive customers. Although this is an existing customer, the opportunity was competitively bid in a process that started last summer and followed by a dozen companies. We won the race. The three year contract with two one-year options, and true partnership we are to provide design and development of all product and growth opportunities in supporting the US sales and marketing operations. There is also the likely possible of global interaction, integration and the expansion as the contract progresses. And the awards of the customer, we selected the vendor we believe is most qualified to help us reach our goal of a world class funding organization. The next line of engagement which we had discussed in the past is the skills fund engagements .We had to opportunity to expand the work of discovery and to do no small part to the quality of our service. The UK government recently published its national success for any tables which lets GP Strategies as a top 10 provider based on the number of learners. Of these top 10, GP Strategies is also confirming the higher success rate, i.e. the highest percentage of learners completing their course objectives. The final example is an award of another contract year starting this July for content development and delivery logistics services. We are supporting the sales, service and marketing side of a large West Coast technology company. Although a continuation of existing work, this was a competitive process at source. The customer want to fairly extend the vendor reduction process involving hundreds of companies. We came out on top. Environment is that we are already seeing additional or new candies[pg] for casting from this customer. Again in terms of qualify and performance, hopefully these engagement examples gave some context behind the final performance that we just presented. With that, I will turn it over to Scott.

[Scott Greenberg:]

Thank you, Doug. One of the key elements of Sharon’s presentation is actually talk about backlog. If you work out the numbers and take out LNG for the prior year, the March to March comparison is up 15%. So bought roughly $351,000, $317000. So I mean one hundred – I goes from 251 million for 217 million, or increase of 15%. The second thing as we talked about the customer base, we are now dealing with 120 global 500 customers, their training spend is enormous and really the good of GPI is the caption revenue from these customers. Even though the majority of our customers we still revelerages a small of spend and Tim Cookies looking at a risk which ID besom. Due to the expansion that we had in the last and year half. We shied away from acquisitions. So I think we’re going to go back into the mull. We have done 25 lust acquisitions since 2012. Lastly as I typically say we have some conference are context operating and we have B.ley coming and battery thing conference next year. So we hope see a of the revenue share. With that, Scott march, I’d like to turn about in Q1, 2015.

[Operator:]

[Operator Instructions] Our first question comes from the line of Joe Janssen with Barrington Research,

[Joe Janssen:]

Hey just – so excluding the FX impact, excluding the LNG contract that won, you said revenue was up 8%. You made that one small acquisition last year. I think Sharon observed at about 1.9 million in the quarter. So if I do my math, seems like organic growth on howliday ais around? Is that the right number?

[Scott Greenberg:]

That’s roughly correct, yes.

[Joe Janssen:]

And then within --

[Scott Greenberg:]

Joe, I think it rounds to six. So that’s in the ballpark.

[Joe Janssen:]

And then on the contact contract, within LNG I believe you have one more quarter one go before we kind of get back to an apples to apples comparison. What was the LNG on that one contract revenue in Q2 of last year. Just I know we’re coming again.

[Scott Greenberg:]

Yes, Q2 was the largest quarter of last year and I think it was about –

[Joe Janssen:]

It was 13.5 million.

[Scott Greenberg:]

13.5 million.

[Joe Janssen:]

And then just kind of one basic, high level question just going out for what Doug’s comments were. Maybe just real quick on the RFP activity kind of -- overall what you are seeing relative to last year and then maybe in terms of size in the RFPs, anything out there kind of at the magnitude of HSBC or in that realm, just curiosity to get to that proposal activity?

[Douglas Sharp:]

I would say the combined on opportunities of all of the ones that are in the pipeline right now, certainly could you call HSBC but that’s unfactored the probability, there is no one – HSBC out there that’s still working on right now. But several smaller ones. And where I was trying to give you my examples, we are winning some of the smaller ones and as Scott mentioned, we’re really excited about the spend that’s going on within our existing customer base of 120 global companies. So we’re going to put a stronger focus on the account management. I know they are spending more money. We know we can help them and that two of the examples I gave today were exactly that, spanning a multi-million, it would be an equivalent to a small offer they may know by themselves.

[Scott Greenberg:]

But Joe, looking at again the results, while we talked about that, we did convert a significant amount of opportunities into new projects during Q1 and that's why ex-LNG you are talking about a15.5% increase in backlog. So I think that's really the positive sign here is that while we were negatively impacted by currency we were negatively impacted by the LNG, the core business, particularly the learning solutions had a 14% growth, 70 plus percent in operating profit and the overall company ex-LNG is sitting with a 15.5% increase in backlog at the end of Q1.

[Joe Janssen:]

And what was -- I am just curious on a sequential basis, what was organic growth in learning solutions last quarter?

[Sharon Esposito-Mayer:]

It was 14% in the first quarter of this year, Joe.

[Operator:]

Our next question comes from the line of Kevin Liu with B. Riley & Company.

[Kevin Liu:]

First question here, just in terms of how results came in within the quarter, absent the FX impact? Was there anything that surprised you? I know Q1 tends to be your seasonally weakest quarter and then things pick up from here. But just curious if things were perhaps more back end loaded than in prior Q1s, if it was generally consistent with your expectations coming into it?

[Scott Greenberg:]

The only expectation Joe – I mean Kevin that changed a little is that when you look at our business model Q1 is historically a weak quarter for the company particularly in the financial services sector. If you ex out our largest customer which did not have a weak Q1, that was the case again, but the thing to realize is that as the financial secor grows it’s going to have more of effect on our cyclical results than it did in the past. So I would say again when you look at overall in the company the financial service sector ex our largest customers typically slowed in the first quarter and was actually a little slow in Q1 otherwise the learning solutions group would have even had better results than Q1.

[Kevin Liu:]

And that actually kind of plays into my second question which is as you look at the financial services group as a whole, how much growth that you’re expecting out of them over the course of the year with respect to the largest customer in that group? I'm just curious if you started to see some of the expansion opportunities that you talked about on past calls?

[Scott Greenberg:]

Obviously the regulatory world going on has increased our ability to sell items in the financial service sector. And in addition we believe we have opportunity with some of our larger customers as well even at the current run rate for expansion. So while the financial service sector represents 24% of our revenue we do not believe we are at the top of the mountain so to speak. We believe we have a lot more to climb and we do believe with a lot of opportunities to expand our revenue especially one with the 13 global officers we have and two, the regulatory world meaning constant type of work being performed to satisfy that.

[Kevin Liu:]

And then just in terms of the FX impact, that sounds like that will continue to affect your guys over the course of the year, particularly with the Dodd [ph] seemingly picking up again. I am just wondering Sharon, if you could quantify what the revenues are at the current rates for the rest of the year?

[Scott Greenberg:]

Well I will say - -let me put it this way, Kevin. Roughly over 20% of our revenue was foreign, with a high amount of it being in British pound so that’s really the level that you’re playing on. We are looking at various ways to reduce our exposure on the balance sheet which was close to $500,000 loss in the quarter. Now just remember if you look at the – and I can’t predict rates but if you look to the rates that occurred, the decline in the British pound versus the dollar was one of the largest declines in the last cycles of 15 year period. So the types of dollars that we are talking wasn’t due to a usual decline, it was a very unusual decline that occurred in the last year. But I will say on the balance sheet side we are looking at ways to reduce the exposure.

[Kevin Liu:]

One last one, Scott, you mentioned the interest in acquisitions, now that you have digest the activities around the HSBC rollout. Are you looking at larger transactions that maybe you would have considered historically and then also are there specific areas that you're interested in filling in or expanding into?

[Scott Greenberg:]

Well just by the nature of our size, we have to look at slightly larger acquisitions. I am not saying – we’ve never been a company to buy a very expensive acquisition. We’ve always felt that we like to get an acquisition that it has capability and it’s a good opportunity for the company but without spending all of our money on one opportunity and I think that will continue .However when you look at the company in the past we were making acquisitions 2 million, $3 million in size going up to $75 million in size. I think we will have to look at raising the lowest end in order to accomplish our goals and move the needle and only have a limited amount of resources to do, going to do with certain amount – so I will say that will be slightly larger on the bottom side but it’s not going to be anything that could have material impact on our balance sheet.

[Operator:]

Our next question comes from the line of Jeff Martin with Roth Capital Partners.

[Jeff Martin:]

Could you characterize the pricing environment you have in re-bids, in automotive you mentioned that it was particularly price competitive but could you speak more generally what you are seeing in terms of the pricing environment out there?

[Scott Greenberg:]

Well Jeff, typically how GP Strategies model works is that – and this hasn’t changed for many years in the company, it’s typically when you are doing renewables the customer wants to save money and there is typically some pricing pressure particularly. However in the past we’ve always been able to by becoming more efficient were able to reduce costs to not material impact our margin on the rebids. And that’s been pretty consistent this year compared to every other year. So I think that nothing has really changed in the pricing environment, it’s always competitive on the rebids and GP Strategies reacts this year no differently than they had in the prior years to that.

[Jeff Martin:]

And then could you help us understand how that large new automotive client will play out in terms of revenue throughout the quarter this year, it looks like second quarter is going to have a big quarter from that. But how a certain point quarter [ph] –

[Scott Greenberg:]

Yes, the one thing to realize – and we will break it out to - Sharon mentioned the publications which could be 5 million plus a quarter and next quarter she has to make it to be about 6 million. That is as she mentioned a single-digit margin, that is part of an existing relationship with the customer. In addition we talked about another win that we had which got mentioned with an automobile company .Well the thing to realize is all this revenue with this current customer. So we haven't won new customers in this relationship, it’s with the expansion of current customers, which is obviously the biggest key to GP Strategies future. And that is starting at roughly $7 million run rate, it’s not the full year, so the figure is nine or 10 months out of the year. However just for the US portion of the relationship, the reason that GP Strategies – one of the reasons GP Strategies is selected was due to them being interested in going global with GP Strategies .So we hope in 2016 we could expand from that portion and drive up the revenues on that contract but right now that’s about a $7 million win on an annualized basis. So if you just add those two contracts which should run at close to 20 million and 7 million we’ve added about 5% to our base revenue because of that in the first quarter.

[Jeff Martin:]

And then on the learning solutions side, you had a nice increase in operating profit, a much smaller percentage increase in revenue. Is that sustainable going forward?

[Scott Greenberg:]

At this level I think the first quarter is indicative and the reason it is – and we spoke before and Dough mentioned the job skills, the skills funding agency, when we’re able to achieve higher revenue figures because a lot of our costs are fixed, more of a profit hits the income statement in the pre-tax and I think a big increase in the first quarter driving up the profitability was the result of the skills funding agency. If we get the e-learning with the financial service sector humming in Q2s and 4 potentially it could go up slightly from that point.

[Sharon Esposito-Mayer:]

Jeff, the other thing that you are seeing the effect of in Q1 of this year in their increased margin is we are now starting to see a reduction in the implementation costs associated with the large training outsourcing contract that we launched at the end of 2013. These costs were higher in Q1 than they are running right now. So the benefit is that and in addition to the increase in the new pay job skills funding that have contributed to the increased margin there.

[Jeff Martin:]

And then are you able to quantify the percentage change in British pound that caused the $2.4 million currency impact in the quarter, what was the percentage move?

[Scott Greenberg:]

From the quarter it went from about 155 to 149 which is roughly 4%. End of Q&A

[Operator:]

And there are no more questions at this time. I'll turn the call back to you.

[Scott Greenberg:]

Thank you moderator. Thanks for participating on the call. Hopefully you get a flavour that GP Strategies is still a company with high potential for growth and look for you at the investor meetings in the next few weeks. So thanks for participating.

[Operator:]

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