Q1 2021 GP Strategies Corp Earnings Call
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Good day and welcome.
Okay.
For the GP strategies first quarter 2021 of our earnings call all participants will be in listen only mode.
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After today's presentation of with the opportunity to ask questions.
Please note that this event is being recorded.
Now I'd like to turn the call over the Miscanthus After Vice President Investor Relations. Please go ahead.
Thank you good afternoon, everyone and welcome to GP strategies first quarter 2021 earnings call on the call today are items that I'm, CEO, and President and Mike Dugan, Chief Financial Officer before we begin I would like to remind you of today's comments will include forward looking statements including state.
It's about the of potential effects of the COVID-19, pandemic and related events on our business and the results of operations.
These forward looking statements are based upon management's expectations and assumptions and are subject to risks and uncertainties. There are important factors that could cause our actual results to be materially different from those expressed or implied by these forward looking statements price.
The 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 of GP strategies desktop.
A replay of this webcast will be available on our website for 90 days. Following today's call. The slides that are being presented today are also available on the quarterly earnings release of page of the investors section of our website at this time I'd like to turn the call over to Adam.
Thank you Candice.
Welcome everyone.
Today's call I'll share some highlights of our first quarter 2021 performance followed by some updates on the company's strategy going forward and then Mike will share of the detailed financials for Q1 2021, followed by Q&A session.
We're pleased with the first quarter of 2021 of the result, as we continue to execute on our strategic initiatives as we discussed last quarter. The company's active management of the business enabled us to control the impact of the pandemic and the improved gross margin while at the same time strengthening.
The balance sheet.
Continue to successfully navigate through a complex global environment and our efforts are reflected in the 2021 first quarter performance.
I'd like to share some data that gives us confidence in the company's opportunities for growth going forward.
If you look back at the first quarter of 2020 of our customers began the quarter doing business as usual.
Later in the quarter it became clear that the world was changing.
Late in that quarter, we began to see the impact of COVID-19 on our business and acted swiftly to manage the P&L.
Now a year later, we believe that the macro environment is shifting.
Although our Q1 2021 revenue is below the same period last year due to the global environment, We feel our overall plans for growth are on track.
Consistent with past economic recovery as the world continues to respond favorably.
There will be strong demand for our services and there are several data points that give us confidence about the beliefs.
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We believe that the APAC region is the leading indicator of the macro trends were seeing in the landscape of the global economy.
During the Q1 of 2020 Rfps makes the in the APAC region was the first to be negatively impacted by customers pulled back business and the reaction to the pandemic.
Looking at Q1 of 2021 the.
APAC reach of began its recovery ahead of the rest of the world in line with this trend. Our Q1 2041 eight per revenue is more than 10% above our Q1 2020 APAC revenue.
Second.
Excluding the backlog associated with the divested of IC axon business. We end of Q1 2021 with backlog roughly equal to our backlog at the end of Q1 2020.
Comparatively our backlog for the end of Q3, and Q4 2020 was significantly lower than the same quarter of the prior year.
Q1, 2021, with the second quarter of backlog growth in a row, and we expect backlog to return to historical levels as the global economy recovers.
And third.
Of our opportunity for growth.
So in summary, we are.
Seeing positive trends in the marketplace and believe that we're well positioned to take advantage of these opportunities and deliver revenue growth.
Additionally, we're operating with an improved gross margin profile and a strong balance sheet.
Our gross margin percentages vary from quarter to quarter across of the year.
Now I'd like to point out that our first quarter gross margin percentage in 2021 is the highest we've achieved during the first quarter of any year in the past 10 years.
Net these margin improvement initiatives that have resulted in net we will continue this year with a focus on lowering G&A costs to further improve our EBITDA percentages.
During our Q4 earnings call, we announced the we engaged a firm that has specific expertise in helping organizations address the challenge of simplifying their complexities, while managing the costs associated with business expansion and of global environment.
The objective is to transform our G&A model and we remain on track to complete this project mid 2021.
And we look forward on the next call to sharing the impact of this with you during the next earnings call.
Now lastly.
We remain committed to our focused strategy, which will enable the company to drive increased sales performance by targeting specific industries.
Reduced overhead cost by decreasing our complexity and potentially unlock value from assets.
That are outside of our focus industries.
We're making progress on our assets held for sale that we announced during our last earnings call.
The divestiture of these assets would represent the fourth divestiture in our focused strategy. The we believe creates value for our clients our employees and our shareholders.
During our next earnings call, we look forward to discussing the integration of our capital allocation strategy.
With our margin improvement strategy and our focus strategy.
In summary, we're confident GP strategies has an opportunity for long term growth and in our ability to deliver shareholder value.
So at this point I'll turn the call over to Mike and he'll provide you with some details regarding our current quarter.
Thanks, Adam and good afternoon, everyone turning to revenue and gross profit for the company on slide eight.
Reported Q1 revenue of $114 6 million, which is down $13 7 million or 10, 7% from the revenue reported in Q1 of last year the <unk>.
Primary drivers of the revenue decline or a $7 million decline in revenue due to the cancellation <unk> postponement of revenue that can be directly linked to COVID-19.
None of them, how we calculate the impact of COVID-19.
You recall from prior earnings calls for clients that have contracts that are multiyear in nature or that have repeat business year over year, we can directly quantify the COVID-19 impact based on variance from expected contract volumes. This is how we calculated the $7 million of revenue decline directly related to COVID-19.
Our shorter term duration project based revenue streams are also impacted by the overall macroeconomic conditions caused by COVID-19 disruptions, but since we can't specifically calculate or quantify this impact based on expected contract volumes declines in this area of sharp is.
Other decreases in our MD&A.
Now moving on there was of $2 $8 million declined due to the divestiture of the IC axon business and a net $6 $7 million decrease in revenue that is materially due to the shift in timing of the North America Aps publication shipment into Q2 of 2021 and partially due to the overall macroeconomic.
Gnomic conditions.
Caused by COVID-19, and its impact on our short term project based revenue cycle.
Finally, partially offsetting these declines in the quarter one of the $2 8 million increase in revenue due to FX exchange rate changes.
In terms of company gross profit and gross margin percentage. The company reported gross profit of $21 4 million, which is up $3 8 million or 21, 7% from the gross property losses in Q1 last year.
The gross margin improvement is primarily due to the operating operating restructuring initiatives and our margin expansion focus implemented in fiscal year 2020 that of resulted in reduced cost and improved margins in the first quarter of 2021.
In addition in terms of the gross profit comparison to Q1 of 2020. There is a further positive comparative as you may recall at the end of Q1 of last year, we experienced a sudden decline in revenue as the global economy shutdown due to COVID-19 that took a period of time before we could fully implement cost cut.
Adding in cost scaling actions to align with the lower topline revenues.
Breaking the Q1 revenue and gross profit drivers out by our regional reporting segments on slide nine.
The North America segment reported Q1 revenue of $72 3 million, which is down $12 6 million or 14, 8% from the revenue in Q1 of last year primary drivers of the decline of revenue are of $4 $3 million decrease directly due to the cancellation or postponement of revenue due to COVID-19 impact a two.
$8 million decreased due to the divestitures of the IC axon business in 2020.
Within the North America segment, the organizational performance solutions service offerings saw an increase of $1 2 million, primarily due to an increase in managed learning services and content development for the.
The technical performance solution service offerings saw a decline of $3 8 million, primarily due to a decline in disaster recovery services, along with the reduction of certain government services due to contract completions the.
The automotive performance solution for service offerings saw a net $3 $3 million decline in revenue that was primarily due to the shift of publication of deliverables and of the second quarter of 2021 that was partially offset by an increase in revenue from our previously announced material new contract with an automotive customer.
For additional color additional color on North America Aps, our publication revenue in Q1 of 2021 was <unk> 4 million, which was down for $6 million from the publication revenue reported in Q1 of 2020 due to the previously mentioned publication being moved into Q2 of 2021 for the rig.
<unk> 2021, the forecasted publication revenue by quarter is $8 1 million in Q2, five 1 million in Q3, and $8 6 million in Q4 for a total forecasted pub revenue of $22 1 million.
The EMEA segment reported Q1 revenue of $30 million, which is down $1 9 million or 6% from the revenue in Q1 of last year primary drivers of the decline of revenue or a $2 4 million decrease directly due to cancellation or postponement of revenue due to COVID-19 impact.
Excuse me.
Within the EMEA segment, there were small declines in revenue and <unk> <unk>.
Marilee in our strategic consulting business and an EPS within EMEA that were offset by an increase due to a favorable FX impact.
The emerging market segment reported Q1 revenue of $12 2 million, which is up <unk> 8 million or 7% from the revenue in Q1 of last year.
The primary drivers of the increase in revenue or a $2 million increase in Ots services, primarily in APAC. As this region was the first to be impacted by COVID-19 of 2020 and is showing early signs of being the first to start to return to more normal activity in 2021.
Partially offsetting this increase was it $9 million decrease primarily due to the closure of our automotive body shop business in Thailand, and a $3 million decline directly due to COVID-19, primarily in our Latin region.
In terms of gross profit dollars and gross margin percentage at the segment level, our focus on margin expansion and cost reduction strategy is delivering results across all three segments. In addition, the Q1 of 2021 gross profit within the North America segment was also favorably impacted by $8 9 million license fee.
Sale in our TPS energy services business, and a <unk> 5 million the license fee sales in our Ots leadership practice, excluding these license sales, which don't typically recur on a consistent basis. The gross margin in North America segment was still 18, 3%.
Moving on to SG&A on slide 10.
General and administrative expenses for Q1 was $14 8 million, which is down $2 4 million of 14, 2% from Q1 of 2020. The primary drivers of the decrease are a $2 $8 million decrease in G&A labor and expenses due to restructuring and cost reduction initiatives eight seven.
The net change in bad debt reserve adjustments and a $5 million reduction in amortization, primarily due to the divestiture of the IC axon business.
Partially offsetting these decreases was <unk> 9 million of legal expense associated with the two assets held for sale.
A $7 million and $7 million of various other outside costs that are not expected to continue on a going forward basis.
Sales and marketing expense for Q1 of 2020 was $2 5 million, which is up $6 million, primarily due to increased investment in global sales resources.
Moving on to other P&L items on slide 11 of the touch upon a few.
The restructuring charges in Q1 totaled <unk> 7 million of which 6 million relates to the transformation initiatives aimed at increasing efficiencies within our G&A function. This initiative is expected to be complete by mid year 2021.
There also was a $1 1 million restructuring expense related to the loss on the sale of inventory associated with the closing of our automotive body shop in Thailand.
Change in fair value of contingent consideration resulted in a $3 million loss in the quarter, which relates to the divestiture of the alternative fuels division, where certain contingent milestones were not achieved.
Gain on sale of business decreased $1 1 million based on the accounting for the sale of our alternative fuels Division in Q1 of 2020 and there were no divestitures in Q1 of 2021.
Interest expenses down $8 million due to the debt now being reduced to zero the.
The effective income tax rate for Q1 was impacted by certain discrete items for the year. The 2021 effective tax rate is forecasted to be in the range of 28% to 30%.
Moving on to the earnings summary on slide 12 after adjusting for special items, We reported adjusted earnings per share for Q1 of 24.
Is 27 more than the adjusted EPS reported in Q1 of 2020 adjust.
Adjusted EBITDA for Q1 was $9 2 million, which is up $5 8 million from the adjusted EBITDA reported in Q1 last year.
For details on adjusted EPS and adjusted EBITDA, you can refer to the appendices at the end of this presentation.
Moving on to some balance sheet drivers on slide 13.
Debt as of March 31, 2021, with zero ended the $119 $7 million less than the debt. We had on our balance sheet. Just two months ago on June 30 of 2019.
Operating cash flow for Q1, 2021 was <unk> 6 million cash flow in Q1 was impacted by among other things an increase in work in process associated with two publications that will ship in Q2 of 2021 and the payment of $1 $2 million of the year end 2020.
The deferred tax liability related to COVID-19 relief, one item to note when considering cash flow performance for the remainder of the year. The current deferred liability related to COVID-19 relief is $9 $2 million, we expect to pay of approximately $6 million of this balance by the end of the year with the remainder of being paid.
In 2022.
I would point out that our at our $3 31 balance sheet now has the carve out the two pending sale of businesses that serve our non target industries. The assets held for sale of $42 $3 million, which is mostly comprised of goodwill unbilled revenue accounts receivable and right of use assets and.
On the liabilities held for sale, our $7 5 million, which is mostly deferred revenue and operating lease liabilities.
This concludes the financial update I will now turn the call back to Adam.
Thank you Mike.
So we believe that the macroeconomic wins that would historically pushed our industry. During an economic recovery are beginning to blow and we're pleased that we finished the first quarter with a focused strategy no debt significant availability under our credit facility.
And the higher margin profile. So at this point, we'd like to open up the call for questions and answers.
Well now begin the question and answer session.
That's a question you May press Star then one of you touched on the phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
The withdraw your question. Please press Star then two.
This time of pause momentarily to assemble the roster.
The first question comes from Jeff Martin of Roth Capital. Please go ahead.
Thanks, Good morning out of and Mike how are you.
Hey, Jeff how are you.
Well thank you.
I was wondering if you could give us a sense of.
How things are progressing in terms of the reopening.
Are there specific geographies I mean, you touched on Asia Pac, but specifically North America geographies, starting to open back up to the thing.
All of that.
Our path of of waning COVID-19 impact in terms of push outs and cancellations.
So I think the you really to answer that question to answer it in two ways.
Geographically the.
The different markets for opening up at different paces. So we are seeing North America start to reschedule start to open up.
Parts of Europe have been slower for us.
In general of China, it's been faster for us.
And of Japan still slower so it's case by case APAC. Overall is ahead of the rest of the world as we mentioned.
The second thing the TFS to look at is by industry.
And I would say right now the.
We're seeing different industries bounce back at different paces in the automotive industry, you could call. It the COVID-19 impact due to the ships of the chip shortage or a non COVID-19 impact net is something we're keeping an eye on is not negatively impacting us per se right now, but it definitely is.
Something we're keeping an eye on to see if it will slow things down at this point, we do not believe that's the case, we don't have any indication.
But potentially it could be ramping up even faster if not for that.
Hi Tech industry.
<unk> is doing well, we feel like that's recovering of long global trends.
And our government defense and aerospace industry was not as negatively impacted during the COVID-19.
Crisis, so it obviously isn't going to ramp up.
At the same speed as the other organizations that were impacted.
And then our financial services business is one that also is very much influenced by geographic shifts, but overall I think it's rebounding pretty much in line with geographic trends sort of the long answer Jeff, but hopefully that gave you of what youre looking for.
No that's great.
The touched on the auto question I was kind of asked.
Okay.
In terms of the pipeline build could you help kind of.
Parcel that out which areas you are seeing.
For the most activity in or if its across the board.
So it's across the board what's encouraging for us.
<unk> is the training outsourcing industry is is beginning to see activity.
We hope to be able to give some updates on future calls around that but.
That's an area that we're very optimistic about leadership development is the smaller service line for us, but it's an area of this having a strong growth strong rebound.
And then our automotive training as of right now our automotive business year over year.
Suffering very well and we anticipate that continuing just to be clear as of right. Now we don't see that the currency of challenges the industry spacing are going to slow down that recovery.
Okay, Great. That's it for me thank you.
Thank you Jeff.
Thank you and again if you have a question. Please press Star then one.
The next question comes from Black Cummins of B Riley FBR. Please go ahead.
Yes, hi, good Dave My cash.
And Adam it's nice to see you the you're in and congrats on the continued progress here in Q1.
I know you don't typically provide guidance, but I think during the last call you who had the expectation that the business here in 2021, good good likely return to the normal seasonal trends that we see from quarter to quarter or is it still fair to make those assumptions at this juncture.
Okay.
So if you took it.
The normal trend, which is to say over the last 10 years. The most frequent trend would be Q1, and Q3 would be our lowest quarters Q2, and Q4 will be our highest quarters now that hasnt been the case every single year, but that is the most typical trend for this year.
Think it's more likely that that trend is going to be.
A little bit impacted in that it wouldn't surprise me to see.
Q3, not drop as much from Q2 and Q4 not jump as much from Q3 because of the impact of the global recovery.
We anticipate will likely flatten that trend to where it'll be more of a quarter over quarter increase now in the way of we've given guidance that thats going to happen or were predicting that but if you look at the recovery and you superimpose the macroeconomic environment on our new.
Normal quarterly pattern I think that that's a realistic point of view of what may happen as a result of that.
Understood. That's helpful. And then Adam I know you were referencing to some of the uptick in demand that you've seen for for outsource training.
Curious in terms of the mix for these these engagements are you seeing more people have of demand for in person type of events or is there still a lot of strong traction for your virtual instructor led training sessions.
So so what.
What we're seeing is the virtual training is not going down, but we are seeing the emergence of face to face training. In addition to the virtual training for the virtual training.
People are so far for us people are not moving away from virtual back to face to face, but they are ramping of new trainings that involve both virtual and face to face.
Okay.
Understood and then it seems with the improving demand environment, you started to make more investments into sales and marketing.
How should we think about that pace of investment as you continue to move forward and to improving economic conditions.
So what I think is.
We are moving to a level of stabilized level.
<unk> talked about earlier on our next earnings call, we look forward to giving some some more insights into our capital allocation strategy our margin.
Expenses, how it plays into our margin expansion and focused strategy. In addition to that.
Think of our expectation is that we'll give more information on really what our sales cost strategy is looking forward. What are we what are we modeling in terms of sales as a percentage of revenues and how you should think through that.
But I do think that we're coming up on having a more defined and more stable cost of our sales cost as a percentage of total revenue, we're moving to that stable long term budget of all level.
Understood and then just one question on the financial side, Mike in terms of the cash flow performance I really appreciate you outlining.
Some of the payback period for for the deferred payroll tax liabilities, but.
I mean should we think about this and generally I think historically, you've converted anywhere from 50% to 55% of adjusted EBITDA out of free cash flow is that still kind of a fair assumption as we progress through this year.
Yes, I think that that is the fair assumption that's been the historical model.
It might be a little bit higher than that with the lower interest with the lower debt, but I think theres also going to be an offset to that lower interest, perhaps as we're growing and we're starting to build back up that working capital associated with the revenue growth much like we had the the.
For the positive cash flow as our revenue declines of about working capital converted through of the cash we might have a little bit of of headwinds in terms of cash flow. So I think the about 50 by $50 to 55% conversion of EBITDA to.
The cash flow is probably good.
And then.
It'd probably be bad is of good metrics.
Understood. That's helpful. Thanks for taking my question and congrats again on the strong progress of started the year.
Thanks, Thanks Zack.
This concludes our question and answer session.
Like the turn the call back over to Mr. Adam Sussman for closing remarks. Please go ahead.
Thank you.
So I appreciate everybody joining joining the call. Once again, we were happy to be where we are we're excited that we've been able to navigate through.
Fairly unique time over the last year in the half and we are continuing of disciplined strategy of focusing on areas, where we believe that we have a competitive advantage and we believe that we can win and along that path. We think that there are opportunities to enable.
Shareholder value.
Other ways in strategic ways related some of the assets that are not tied to our specific strategy. So we look forward to our earnings call next quarter.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.