Q2 2020 GP Strategies Corp Earnings Call

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Good morning, and welcome to the GP strategies second quarter 2020 earnings Conference call. All participants will be in listen only mode. So that you need assistance. Please take a corporate specialist by pressing star keep followed by zero.

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I'd now like to turn the call good overtime and Blake Vice President of Investor Relations. Please go ahead.

Thank you good morning, everyone and welcome to GP strategies second quarter 2020 earnings call on the call today are Adams <unk>, Chief Executive Officer in President and Mike <unk>, Chief Financial Officer before we begin I would like to remind you that today's call that will include forward looking statements.

Including statements about the anticipated effect of the Kobin night, King pandemic unrelated events on our business and results of operation.

Because these forward looking statements are based upon management's expectations and assumptions that are subject to risks and uncertainties.

In courting factor that could cause our actual results to be materially different from those expressed or implied by these forward looking statements.

For a complete discussion of these risks we encourage you to read our documents on file with the C. C, which are posted on the Investor section of our website, a GP strategies dotcom.

Well this webcast will be available on our website for 90 days following today's call.

Slides that are being presented today are also available on the quarterly earnings where we should page of the investor section of our website.

It's trying I'd like to turn the call Webrtc Adams.

Oh.

Thank you and and good morning, everyone.

Everyone is staying safe and healthy and it's an honor to be here today speaking to you for the first time CEO GP strategies.

Before I get started I'd like to take a moment and acknowledge the many contributions of Scott Greenberg gearing. Its 15 years than the role I look forward to continuing to work what Scott in the rest of the board of directors as well as all of our employees.

During my 23 years, what the company David Deep knowledge of our business in the marketplace. We serve looking forward I strongly believe in the future of the company and our ability to strategically capitalize on the many opportunities to grow the business and deliver long term shareholder value.

But these are obviously extraordinary times.

I think all of our employees, who have worked diligently to adjust to the many changes there were all facing ever keeping the business moving forward.

Just one year ago, we outlined three key objectives drive organic growth improve our balance sheet and streamline our business model.

That time, we had anticipated an acceleration of our business in the second half of 2019.

In line with this expectation during the fourth quarter 2019, we delivered organic revenue growth of 12%.

46% increase an adjusted EBITDA compared to the same period in 2018.

Additionally, our backlog was at an all time high and we began 2020 with very high expectations for the year.

That's cool good 19 impacted our clients and the company, we acted swiftly to reduce costs preserve adjusted EBITDA and maintain a strong balance sheet.

Despite an approximately $27 million sequential decrease in revenue during the first quarter 2020 compared to the fourth quarter of 29 team. We delivered positive adjusted EBITDA of 3.4 million.

Our ability to streamline operations gave us confidence that although we expected a decrease in revenues from continued impact of the pandemic, we would deliver adjusted EBITDA in the second quarter up 2020 equivalent or greater to Q1.

As a result of the Swift actions the company increased adjusted EBITDA in the second quarter to $6 million, a 75% increase over the first quarter 20 Twond.

The second objective, we shared one year ago wants to strengthen the balance sheet over the past 12 months, we diligently reduced our long term debt from approximately $120 million.

June Thirtyth 2019 down to $58 million as of June Thirtyth 2020, bringing our leverage down to 2.1.

Now I'd like to take a quick minute to discuss my priorities for the and discuss a little bit about the second half a 2020.

Overall objective is to continue to push the organic growth initiatives that led to growth in 2019.

A key component of that it's our sales strategy and the sales strategy is based upon developing deeper relationships with key clients, which ultimately drove organic growth in 29 gene.

Last month, it was announced the GP strategies has received supplier of the year Award with General Motors Corporation for the third year in a row.

There are many opportunities for us to provide expanded valued at GM and our broader client base and the death the momentum of the G.M. partnership is indicative of our positioning overall with our clients.

Although the current environment created by the pandemic has impacted the company's revenues I believe that most of our client relationships. It's only been strengthened throughout this crisis.

In addition to sales growth as CEO, Mike talk to priorities for the company, our focus and responsiveness.

I hear more about how we are operationalizing. These priorities over the remainder of the year and now we believe they will generate shareholder value.

During the past year, we took steps to focus the business with the sale of Chew operating units, we will continue to take strategic actions to reduce the complexity of the business, while providing opportunities for strategic growth initiatives.

Looking out to the second half of 2020, we expect revenue to increase sequentially for the third and fourth quarters of the year.

Additionally, we anticipate adjusted EBITDA for the second half of 2022 improved compared to the first though.

I believe that the actions we've taken over the past year, especially since cobot 19 came onto the scene and put the company on solid footing to manage through out the current environment.

We're now stronger and more flexible which positions the company to benefit for the long term.

Now I'll turn the call over to Mike and he can review the financial results for the quarter.

Thanks, Adam and good morning, everyone.

Before I get into the details of the quarter over quarter results I wanted to briefly go over a comparison of the Q2 results to our outlook for Q2 as stated during the Q1 earnings call.

Starting with revenue, we noted that we expected kobin like change impact revenues more significantly in the second quarter 2020 compared to first you can see this is a case with Q2 revenue dropping to 106.1.

I also mentioned on the Q1 call that we expected Q2, adjusted EBITDA ought to be consistent with first like the accrued over Q1 is the expected cost scaling and cost cutting initiatives to be enacted in Q2.

As you can see our Q2 reported adjusted EBITDA of 6 million is up over 75% from Q1 of 2020. This demonstrates the company's significant ability to scale cost that's top line revenue fluctuates during these uncertain times.

I'd also like to point out that during Q2, the company was able to generate positive cash flow 22.9 billion and as a result, we were able to continue to reduce long term debt net of cash, but the balance now at 45.6 billion compared to 65.8 billion in Q1 I.

Well go through some of the details of the drivers are these results later in this presentation.

Now turning to the traditional quarter over quarter discussion, starting with revenue and gross profit on slide seven.

During today's call I will primarily be focusing on Q2 comparisons at the consolidated company level. However, the details of drivers by segment and by practice are included in this presentation and are also called out in the Mdna section of our 10-Q, which will be filed after this call.

We reported Q2 revenue of 106.1 billion, which was down 43.3, or 29% and 149.4 million of revenue reported in Q2 last year.

The primary drivers of this decline or a 32.5 million decline in revenue due to the postponement of certain training events and other delays in execution of client projects that can be directly linked to cope with my team.

There was also.

Hey, 4.6 million decline in revenue due to due to the divestitures of the LNG intuition businesses.

And a 1.8 million decline due to fluctuations in foreign currency exchange rates. Finally, there is a net 4.4 million decrease and other services much of which can still be indirectly linked to the slow down in the economy due to cope igniting the typical rate of New project Awards has slowed down the decline.

Delaying spending during the call but situation.

In terms of gross profit we reported gross profit of 15.9 billion, which is down 7.1 billion or 30.8% 23 million gross profit reported in Q2 like T.

Excluding severance costs of 2.1 million, which is included in cost of sales in Q2 of 2020.

Gross margin would be 16.9 for said was which is an increase of 1.5% over the gross margin reported in Q2 like team. So while gross profit dollars had declined as a result of the rapid decline due to the cost cutting activities undertaken art <unk> in Q2, our margins have actually increased.

We continue to monitor the ever changing landscape and our objective is to take the necessary steps to preserve gross margin percent the extent possible. During this period of depressed revenues.

Due to the disruption caused by cobot 19 restrictions.

Moving on to ask DNA on slide eight.

General and administrative expenses for Q2 are down 1.2 million or 7.9% from a 15.4 billion in Q2 a banking.

The primary driver being cost cutting actions taken in Q2 to reduce DNA labor expenses to more closely aligned with our lower revenues.

While some of these DNA cost savings in Q2 were due to temporary actions taken in the quarter. A good portion of the cost reductions are permanent cost cuts that are expected to carry over into future quarters.

Sales and marketing expense for Q2 2020 is inline with the expense incurred in Q2 of last year.

Moving on to other piano lot items on slide nine and to touch upon just a few.

We incurred restructuring charges, a point 9 billion in Q2 2020 to improve operational efficiency and enabled the company to respond locally while at the same time reducing costs.

Interest expense in the quarter is down 1.1 billion from Q2 last year and 1.7 million year to date due to lower borrowings under the credit facility and lower interest rates.

The effective tax rate you today 2020 is 48.8% and is impacted by the jurisdictional mix of income and the decrease in overall pre tax earnings.

Moving onto the earnings slip summary on slide 10.

After adjusting for special items, we reported adjusted earnings per share for Q2 of 12 cents versus earnings of 22 cents per share for Q2 last year. Adjusted EBITDA for Q2 was 6 million, which is down from a 10.4 million of adjusted EBITDA of recorded in Q2 last year and looking forward as Adam mentioned, we expect the.

Adjusted EBITDA in the second half a 2020 to exceed the first half of the or <unk>.

For details on adjusted EPS and adjusted EBITDA, you could you can refer to dependent in the back of this presentation.

Moving on to some balance sheet drivers on slide 11.

Operating cash flow for Q2 was 22.9 million and year to date is 32.8 billion.

One item to note when considering the cash flow performance year to date is that the company currently has deferred payroll tax and other tax liabilities totaling 12.3 million related to the cures Act and other kobin relief, which will be paid throughout.

Through 2022, a rough wind down of this deferred liability as a net $1 million of payments in the second half of 20 $28 million, a payments and 2021 and $3 million of payments in 2022.

Cash flow without the impact of these deferred payments are still 20.5 billion year to date.

Net debt was 45.6 million up to 630, which is the reduction of 29.1 billion from the 74.7 million a net debt reported at the 12 31 night team and the company's leverage ratio as defined under our credit facility. As of Q2 2020 was 2.1, which is down from two point threex leverage ratio repo.

Ordered in Q4, my team and it's more than a full turn lower than a 3.3 leverage ratio reported just nine months ago at the end of Q3 2019.

Finally, turning to backlog on page 12.

Backlog as of Q2, 2020 was 327 million, which is down 3.5 billion for 1.1% compared to the 330.5 million a backlog that was reported for Q2 with Nike.

After considering the $15 million a backlog related to the divested to wish in an LNG. All fuels goes business that was in the Q2 19th figure the increase in backlog was approximately 11.5 million what 3.6%.

This concludes the financial update I'll now turn the call back to Adam.

Thank you Mike.

Before I turn the call over for Q, and Hey, I'd like to provide a little more detail on my priorities a focus and responsiveness.

My first priority is to focus the business in region and industries, where the company has a sustainable competitive advantage and the ability to scale.

And my second priority as responsiveness as we continue to evaluate the risks and opportunities in the marketplace. The evolving needs of our clients very significantly by region and industry. As a result, we implemented structural changes during the quarter to increase our responsiveness.

By empowering more local decision, making that enables us to quickly and effectively serve our clients in their respective region and industry.

I believe that the focus on responsiveness and focus throughout the organization will result in our ability to deliver improved operating performance and ultimately increase shareholder value over the long term.

Look forward to providing further updates on this during our next quarter call. So at this point operator can we turn the call over to kill today.

We will now begun question and answer session to ask a question. Please press Star then one on your Touchtone phone.

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Our first question today comes from Jeff Martin with Roth capital.

Thanks, Good morning, Gotta, Mike Fournier.

I was wondering if you could talk a in detail about the rescheduling efforts that has transpired throughout the quarter in such a quarter ended the quarter and you know how those will come on in the second after the year and how you see that transitioning into the started next year as well.

So all the Scott I'll I'll give you what I can Jeff and what we know right now so some of our work would simply delayed we announced in the fourth quarter last year, a large outsourcing.

Outsourcing relationship that we won in the automotive industry and that was delayed for months and its net from when we thought it was kind of star. It's now started and that's moving off in addition to that much of our face to face the livery clients are aggressively moving to move that.

At a choice virtual platform and to try just over a virtual platform, which is ramping up very quickly, but it's it's not to the level of the face to face delivery volume so that we had Phoenix.

Previously as a result of that.

We're working with clients to make sure that they can meet their compliance needs and they can deliver all of their compliance training you just do a virtual format or alive format in some regions of the world as their opening up so we do believe that there's some pent up demand in the system and their clients who have trained.

And that they desire and need to deliver but have not been able to but we really at this point, we don't have a solid understanding of the volume of that and how it's going to flow through over the remainder of the year and and going into next year.

Okay, well do you have a figure on how much of the business historically is face to face delivery versus <unk> virtual or online.

I believe we said on the previous calls it was 25% to 30% and is that correct.

That's correct, that's correct out and 25% to 30%.

Its face to face right historically.

Okay, and then could you discuss the trend as of the sales activity and how it's currently you know fairing in though yeah selling into virtual world.

Okay.

Oh, absolutely. So the sales activity has it didn't the pipeline had sloan for a period of time as everyone was was reprioritizing around dealing with the Covance situation. We're now seeing some activity and improvement in the pipeline.

Yeah, one of the challenges, but that we faced coming into this year is we had a couple of opportunities that we had been verbally told we're going to happen. This year that did not happen because of co bid.

And and as we've talked about on previous calls the second half of the year, particularly Q4 is a big strategic planning for our outsourcing business typically that there's a time that makes sense.

To award Outsourcings and aligned to budget years. So we did have activity in Q4 that we that was very promising and we were very excited about that did not materialize into revenues. This year, because with the covance situation the timing wise that right, we're still having comp.

First agents with those clients. In addition, we're starting to hear clients discussing activities for Q4. This year looking at Okay. How do we manage 2020 and beyond and does it make sense to look at a partner relationship in a post co bid work.

So.

If you recall during previous downturns in the economy typically post downturn, we see we see a lot of activity in that space. We're starting to have conversations about that with clients. None of it hasn't materialized into pipeline activity in terms of lever have <unk>.

Close on hand, but in terms of our early stage pipeline development metrics, we feel as though there are very positive things happening that will develop throughout the year.

Okay. That's helpful. Thank you and then a last question how should we think about cash flow for the second half the year, obviously, you've had you know.

Uh huh.

A catch up in collections.

In first half and then you had cures act related deferrals benefits you. So excluding those you know how should we think about cashcall in second half year, Yeah, Yeah, Jeff doesn't like obviously the in the second half a year. So we had you know as as our revenue decline there is a natural component of.

The working capital converts to cash in that you know we had collections improvement, but we also had that that situation.

Declining revenue that working capital flow through in into cash. So as you look out to the second half of the year you know I already mentioned that the net payments of the current deferred liability is about 800, okay. We actually have more payments and the second half of the year than that but there's also additional accrual of deferrals.

Second or third quarter fourth quarter related to deferred payroll taxes. So it's a matter of about 800 cat and then as as we as revenue ramps up and we mentioned Adam mentioned that revenue is expected to is expected to see financially increase in Q3 in Q4 compared to Q.

To as that revenue increase there is gonna be you know some conversion of that revenue into you know a cash going into the working capital to fund that revenue increased you'd also we have some rough rule of thumb you know 50% the of the revenue increase might you know during that period of time go into working capital but.

Well, that's that's the information I can you know I can give you that does that address what your question was.

That helps yes. Thank you Mike I appreciate your time.

Oh no problem.

As a reminder, if he would like to ask a question. Please press Star then one.

Our next question today comes from Zach Cummins with B. Riley FBR.

Hi, good morning.

Thanks for taking my question.

[laughter] can you speak do.

I guess, it's probably hard to provide.

A lot of clarity around this but could you.

Due to the progression of the rebound that you're expecting <unk> are there areas of strength versus areas of weakness just trying to get a little more clarity.

As we progressed through the [laughter].

What I can say is.

Obviously, China was the first place that we saw all of our face to face deliveries cancel.

China is the first place that we're seeing face to face deliveries reschedule by and and we're seeing that we're also we're seeing that they were starting to get face to face activities reschedule in the U.S. in Europe different parts of the world.

But it is proving to be.

Unpredictable.

We must schedule classes demo cancer classes, and then we'll add the classes back. So it is unpredictable and so we really don't know about the pent up demand. What we do believe is in Q2, the overwhelming majority of our face to face delivery.

Was cancelled for large parts of Q2, so from that point forward as we continue to reschedule database deliveries. It's just an increased but it's very difficult to get a feel for it I'm, particularly because if you look at the amount of our business.

It's still operates in the United States in many ways. The U.S. market is a little less predictable right now than other parts of the world. So I don't think I answered your questions that other than to say, we're definitely seeing a rebound, but it's very difficult for us to predict.

Oh level.

No I understood appreciate that.

And then I guess, just speaking to the automotive sector since it's been such a good growth driver for you prior to the Pandemics.

I was just wondering what you've seen in that sector since they started to see rebounded.

Production numbers that you're starting to see a pickup in business as a result.

Right. So we we believe we continue to believe that the automotive industry presents a tremendous amount of opportunity for us and the amount of disruption and change that is happening in the <unk> are valued put it this way our value creation is helping them deal with.

Disruption and change and the Kobin situation has only increased the magnitude of disruption and change they're dealing with so we actually continue to feel very positive about it our request for proposal activity is strong in the automotive industry. The.

Street, particularly in U.S. was hit very very hard in Q2, and and we experienced a sick and you'll see in the queue. That's an industry that had a next significant downturn for us, but we continue to believe that this is an industry that provides long term significant.

Growth opportunity for us and as that industry rebounds, we will rebound with it.

Understood. That's helpful. And then Mike just one question for you in terms of the cost cutting and scaling up.

I'm sure you too.

Can you provide a little more context around maybe some of the benefit you recognized here in Q2 with some of those up or if there's any potential reversal [laughter] as we go towards the back.

So you know during during Q2, there was some temporary lubbers that were implemented at the beginning of Q2 or three you know what amounts to you know a furloughs and one day off a week pipe a situation that we're you know quick levers that we could implement and achieve.

Immediate savings then that gave us time to actually as we progressed into Q2 looked at the outlook and we've had to make those difficult decisions and and enacted and implement permanent cost cuts or in the you know.

Based on where we see the volume of the business being and that's why you see the severance charge that was taken in Q2 relates to like you know it basically the way don't think of it in Q2, we had temporary levers in place by the end of Q2, we implemented the permanent lovers and those prominent levers you know are pretty much equal.

You know in terms of the permanent savings to see going on forward. In Q3, you know are equivalent to the temporary levers that we talked in Q2, that's the best way to describe for you.

Understood. That's helpful. Thanks, again for taking my questions and best of luck.

Hi, Bob Thanks.

This concludes our question and answer session I'd like turn the call back over to Adam said I'm for any closing remarks.

No I would just I would thank everybody for joining today and just reiterate that the comments, we feel that there were managing the situation well and that we're positioned well and as as our clients continue to grow back we are well positioned to help them deal with all.

All the change that they're going to have to manage through and opposed scope at world. So we feel that creates opportunities for the company and our shareholders. So thanks, everyone and look forward to talk to you next quarter.

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