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GP Strategies Corp.  (NYSE:GPX)
Q4 2018 Earnings Conference Call
March 18, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, and welcome to the GP Strategies Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ann Blank, Director of Investor Relations. Please go ahead.

Ann M. Blank -- Director of Investor Relations

Thank you. Good morning, everyone, and welcome to GP Strategies fourth quarter 2018 earnings call. On the call today are Scott Greenberg, Chief Executive Officer; Adam Stedham, President; and Mike Dugan, Chief Financial Officer.

Before we begin, I would like to remind you that today's comments will include forward-looking statements, which are subject to certain risks and uncertainties that could cause our actual results to be materially different from expectations. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC, which are posted on the Investors section of our website at gpstrategies.com. 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 Releases page of the Investors section of our website.

At this time, I'd like to turn the call over to our CEO, Scott Greenberg.

Scott N. Greenberg -- Chief Executive Officer

Thank you, Ann. Good morning and welcome to our fourth quarter 2018 conference call. Today, we will continue with our quarterly format, which includes a WebEx presentation. Hopefully, you'll find this presentation informative and useful in your analysis of GP Strategies. To initiate the call, I'll provide a brief overview of results for the fourth quarter of 2018. Then Adam, our President, will give key updates on our global initiatives. After Adam's presentation, our CFO, Mike Dugan, will present an in-depth financial analysis. Then I'll provide a summary, including acquisitions and we will conclude with a Q&A session.

This morning, before the market opened, GP Strategies reported fourth quarter 2018 financial results and a positive outlook for 2019. The Company has entered 2019 with a positive outlook for the future. We anticipate achieving both significant revenue and EBITDA increases in 2019. While our 2018 results were disappointing, we have made substantial progress in our long-term objectives.

2018 has been a challenging, but a transformational year for GP Strategies. With that said, we have created the foundation for exciting times going forward. During 2018, we entered into long-term renewals with our two largest customers, which represented 27% of our 2018 revenue. Our new sales structure is in place and functioning well. Our backlog currently is at an all time high of $327.4 million, which is up 22% from the prior year. In addition, not included in the backlog number, the Company has been awarded three new multi-year outsourcing contracts. Adam will get terms and details later on in the presentation.

In addition, the acquisition of TTi Global further positions the Company to capitalize on the demand for services related to the unprecedented disruption of the automobile industry. We anticipate TTi Global will contribute positively to our income statement after the first quarter once it's operations are integrated with GP Strategies. In addition to this integration, we expect to reduce operating costs by approximately $4 million on an annual basis beginning in the second quarter of 2019, with approximately $2.5 million expected to be realized in the year.

I will now turn it over to Adam, who will give a detailed operational review.

Adam H. Stedham -- President

Thank you, Scott. I find myself frustrated by 2018 and Q4 in particular and excited about 2019. My goal today is to help you understand how I can be feeling both of these simultaneously. Scott mentioned that the Company has a record backlog. It's important to realize three key points about this. First, that only one year of backlog is included for our multi-year renewals with our two largest customers. In other words, those renewals are not the cause of the significant increase in backlog. Second, the GP backlog excludes the TTi Global backlog and it's still a record backlog, our TTi -- our GP backlog excluding the TTi Global backlog is still a record backlog. Third, our three new outsourcing awards, which I'll talk about a little later, as Scott mentioned, are not included in the backlog.

We're finalizing the specific scope of these outsourcing agreements. They should ramp up throughout 2019, beginning in Q2. Once fully ramped up, they should generate a minimum of $3 million in revenue per quarter. We anticipate these awards will generate approximately $5.4 million in revenue in 2019. We're excited about these three awards that have been in progress for a couple of quarters.

On top of these awards, we currently have over $590 million in our sales pipeline, excluding the pipeline from the TTi Global acquisition that was announced at the end of Q4. Based upon historical win rates, we're targeting a 30% close rate for this pipeline. At this point, we anticipate that the total TTi acquisition should generate a minimum of $50 million in revenue in 2019 above and beyond the GP business. We have significant work to complete the integration of TTi during the year, but we're already realizing cross-selling opportunities between historical GP and TTi. Plus, we plan to improve TTi's gross margins to levels more in line with GP Strategies by the end of 2019.

We shift our focus now to the operating segments. I'd like to provide some insights into our progress. Within the Workforce Excellence segment, we have to Managed Learning Services and Engineering and Technical Services practice. We have discussed previously that the Managed Learning Service has a long sales cycle and Engineering and Technical Services historically have shorter sales cycles. Therefore, backlog is a better indicator of business health for Managed Learning Services and sales pipeline is a better indicator of health for Engineering and Technical Services. So the backlog for Managed Learning Services excluding our job skills business is up 4.5% versus this point in 2018. As we mentioned earlier, the additional $5.4 million of 2019 revenue we anticipate realizing on our three new outsourcing wins is not included in that backlog.

We're also excited to share that we anticipate Q1 of 2019 will be the last negative year versus year, quarter versus quarter comparison for our job skills business. The business is growing and we're excited that we will cross over that point at the -- in the beginning of this year. Within this practice, our overall Managed Learning Services, we've launched an effort to increase the percentage of content development work we perform offshore. This effort will enable us to continue to compete effectively in the outsourcing marketplace. Approximately one quarter of the cost savings, Scott mentioned earlier, is achieved by reductions in content development resources and higher cost labor markets. We have a strong pipeline for our digital learning services that are performed by this team. During Q4, we did find ourselves with some overlap of onshore and offshore labor during this transition period and this combination contributed to the reduced gross margin in this practice.

If we shift the conversation now to our Engineering and Technical Services practice, I'll remind everyone that the organization turned around in 2018 and had a good year. Currently, the practice has a record pipeline. This bodes well for this organization in 2019 and we anticipate continued growth for them. I will point out that in 2018, our EtaPRO license sales were up 11% versus 2017. With that said, in Q4, the sales were down year-over-year and this contributed to the gross margin decline in the quarter. But as for the year, it's up year-over-year, it's just a mix of when the sales closed throughout the year.

So now I'd like to discuss our Business Transformation segment for just a bit, and this includes our long sales cycle practice of Sales Enablement and our short sales cycle practice of Organizational Development. The backlog for our Sales Enablement practice is up 25% year-over-year, exclusive of the TTi Global acquisition announced at the end of Q4. This backlog was influenced by some changes in some purchasing policies within our clients and that changed their funding model for the work as well as the backlog within the TTi UK organization, which was acquired in August of 2018. So due to these items, it would -- it wouldn't be accurate to extrapolate 2019 growth rates for this practice from this percentage increase in the backlog, but it's very reasonable to conclude that we feel very comfortable that -- with achieving organic growth within the automotive segment in 2019.

In addition, we're pleased with the distribution of the activity within the automotive segment. We have increased activity within new divisions inside of our top automotive customer divisions we've never worked with previously. We have cross-selling opportunities showing up inside of TTi to cross-sell with new automotive customers and expand with automotive customers and we have sales activity within automotive customers outside of our historical top GP clients. Overall, we're very excited about the ability to grow, expand to leverage the TTi acquisition as well as the relationships that GP has in the automotive sector and the energy of combining those organizations.

The last practice to discuss is our Organizational Development practice. This practice consists of five service line organizations and the pipeline is up for all five of these organizations. I'd like to make specific mention of a new leadership development product we designed and finalized in 2018, our Leadership Essentials product. This product incorporates the unique strength of GP Strategies to provide a learning experience that leverages all modes of learning in a way that blends these capabilities from across the Company. An average deal size for this product is about $250,000. Over the last few months, we've won four out of five opportunities to sell this product and we currently have 16 more opportunities in the pipeline. We're excited by the marketplace reception to this product and the work that's gone into developing this.

So now, I'll hand the call over to Mike and Mike will discuss in detail financial reviews.

Michael R. Dugan -- Executive Vice President and Chief Financial Officer

Thanks, Adam, and good morning, everyone. Starting with revenue and gross profit on slide eight of the presentation. We reported Q4 revenue of $132.9 million, which is up $1.4 million or 1% from the $131.5 million of revenue reported in Q4 of last year. Breaking the revenue out by segment. The Workforce Excellence segment reported Q4 revenue of $77.8 million, which is down $2.2 million or 2.8% from the revenue reported in Q4 of '17. Bridging the revenue drivers in Workforce Excellence. Revenue decreases were due to a $1.4 million decrease in revenue due to changes in foreign currency exchange rates, a $3 million net decrease in Managed Learning services, which is comprised of a $1.9 million decrease in the UK job skills training service line due to the UK Government changing how this programs is administered and a $1.1 million net decrease in revenue in the rest of Managed Learning services, primarily due to a $2.3 million decline in content development services, a $1.3 million decline with the manufacturing customer contract due to a change in the structure of the contract, where certain travel costs are now paid directly by the client. Offsetting these increases is a $2.9 million increase in revenue due to the IC Axon acquisition, which was completed in May of 2018. Partially offsetting the Workforce Excellence segment revenue decreases just noted was a revenue increase of $2.2 million in the Engineering and Technical Services practice, which is up 10% over prior Q4 2017. Primary drivers of the increase are a $0.9 million increase in disaster recovery projects, a $1.4 million increase in Chem Demil training services for the US Government, a $1.4 million increase in alternative fuel projects and partially offsetting these increases within the practice is a $1.3 million decrease in the US related to digital learning and training content development services in this practice.

The Business Transformation Services segment reported Q4 revenue of $55.1 million, which is up $3.6 million or 7% from the revenue reported in Q4 of '17, bridging the revenue drivers in the Business Transformation Services segment. Revenue increased $6.7 million net increase in the Sales Enablement practice, consisting of a $2.9 million increase in publications due to the timing of shipment from Q3 to Q4, a $0.7 million increase in training services for automotive customers, a $5.8 million increase due to the TTi acquisition that is included in this practice. And these increases in the Sales Enablement practice were partially offset by a $2.7 million decline due to the completion of non-recurring vehicle launch events in 2017. Partially offsetting the revenue increases in the segment was a net decrease in revenue of $2.8 million and OD, Organizational Development practice, primarily due to a $4.4 million decline in platform adoption, strategic consulting and leadership development services, offset by a $1.6 million increase in revenue contributed by the Hula acquisition, which was completed in January of 2018. Within this segment, the Sales Enablement practice had revenue in Q4 of 2018 that included $8.8 million of publication revenue, which was $2.9 million more than the $5.9 million of pub revenue recorded in Q4 of last year due to the timing of the 2018 fall publication shipment noted previously. We are projecting publication revenue in Q1 of '19 to be $5 million compared to $5.5 million in Q1 of '18.

In terms of gross profit, we reported Q4 gross profit of $18.3 million, which is down $3.3 million or 15.2% from the gross profit reported in Q4 of '17. Breaking the gross profit out by segment, the Workforce Excellence segment reported gross profit of $11.2 million, which is down $2.4 million or 17.9% from the gross profit reported in Q4 of '17. Bridging the main drivers of the Workforce Excellence gross profit, the primary drivers of the decrease in gross profit in this segment were due to a $0.3 million increase in benefits costs, a $0.6 million decrease in the UK job skills training service line due to the revenue declines previously noted and a $1.3 million decrease in E&TS practice, primarily due to a $0.7 million loss due to contract overruns on two contracts in our alternative fuels division and a $0.8 million loss due to the decline in revenue and on subscriptions due to digital learning content -- subscriptions to digital learning content, excuse me. Partially offsetting these losses was additional gross profit on the increase in revenue in this practice. The Business Transformation Services segment reported Q4 gross profit of $7.1 million, which is down $0.8 million or 10.4% from the gross profit reported in Q4 of 2017. Gross profit decreases in this segment were primarily due to lower revenue in the Organizational Development practice and lower gross margins within Sales Enablement practice, primarily within the TTi acquisition, which is still being integrated.

Moving on to slide nine. Touching on a few of the high-level themes when looking at the year-to-date operating results. The Engineering and Technical Services practice has experienced a strong turnaround in 2017. This was the first area, where we deployed our find, win, grow business development sales model and the results have been encouraging. The Organizational Development practice year-to-date results after factoring out acquisitions have been a material drag on the overall Company results. In the middle of Q4, after the successful deployment in ETS, we deployed the find, win, grow model in the OD practice. And while it typically takes a while for BDV and sales efforts to deliver both top and bottom line results, the nature of services in this practice tend to have a shorter selling cycle. So there is an opportunity to see improved results in the near future. The Sales Enablement practice has been impacted by the decline in certain vehicle launch events in 2018 compared to 2017. The outlook, as Adam mentioned, for 2019 is positive, with multiple proposals with existing and new automotive customers in the pipeline. Lastly, the single biggest factor affecting the operating results year-to-date is in the UK Job Skills Training program. The UK Government just announced a 50% reduction of the non-levy fee that small companies pay, which is now down to 5% from 10%. And we have increased marketing efforts and added new qualified services to take advantage of the levy business with larger customers. So we are seeing an improved outlook going into 2019 for this business as well.

Moving on to slide 10, SG&A expenses. General and administrative expenses are down $1.6 million or 9.7% quarter-over-quarter. The primary drivers are a $0.6 million decrease in ERP related costs consisting of a $0.6 million decrease in third-party costs, a $0.3 million reduction in internal labor charged into G&A last year in support of the ERP project, offsetting these decreases is a $0.3 million increase in audit fees associated with having to audit the new ERP system. There was also a $1.6 million decrease in bad debt expense, primarily due to a $1.3 million bad debt reserve in Q4 of 2017 on a terminated contract with a foreign oil and gas client. And finally, a $0.4 million net decrease in miscellaneous other G&A, labor and expenses. These decreases were partially offset by a $0.5 million increase in legal expenses related to acquisitions and a $0.5 million increase in G&A that came over with the TTi acquisition. Sales and marketing expense for Q4 is up $1.3 million quarter-over-quarter, with the driver being the investment in the centralized business development program with the addition of our Chief Sales Officer inside sales resources and a corporate account management focus.

Moving on to slide 11, other P&L items. Gain on change in fair value of contingent consideration in Q4 was $0.5 million, which is -- consists of $0.4 million for IC Axon and $0.1 million for McKinney Rogers. Interest expense is down $0.3 million due to a $1.1 million non-recurring interest accrual on unremitted VAT payments in Q4 of '17, offset by a $0.8 million increase in interest due to higher borrowings and higher interest rates in 2018. Income tax expense and the effective tax rate. The income tax rate of 33.4% reported for the year includes unique items and other discrete items that impacted the ETR by 6.6%. Breaking these out, there was a non deduct -- the non-deductible acquisition costs that are incurred during the year had a 2.7% impact on ETR and a true-up of the one-time 2017 mandatory repatriation tax had an impact of 1.8% on the ETR and the tax effect on a shortfall -- on shortfall on invested stock compensation had a 2.1% impact on ETR. Excluding these discrete items, the ETR would have been 26.8% for 2018.

Moving on to the earnings slide on -- summary on slide 12. Net income for Q4 was $0.4 million, diluted earnings per share for Q4 was $0.02 per share and the aggregate of special items in Q4 totaled a net $0.09 per share impact, which resulted in an adjusted EPS of $0.11 per share for Q4. A reconciliation of this non-GAAP figure is in the appendix to this presentation. And finally, adjusted EBITDA was $7.5 million for Q4.

Moving on to slide 13 for some balance sheet highlights. Our cash balance as of Q4 was $13.4 million compared to $23.6 million at the end of 2017. All our cash is in our foreign subs and some of the uses of this foreign cash during year was a $3.5 million of cash that was used to repay a US loan and a $3 million used to purchase the TTi UK acquisition. The remainder of the cash usage in the year primarily was to fund working capital. Debt outstanding at the end of Q4 was $116.5 million compared to $65.6 million at the end of 2017 and the major uses of cash was $55.3 million for acquisitions, $8.5 million for stock repurchases and $3.5 million for capitalized ERP and other software development costs. Available borrowings under the credit agreement, in addition to the cash on hand, as of Q4 2018 was $16.8 million based on a maximum leverage ratio of 3.25 times EBITDA. The current leverage ratio as of 12/31 was 2.85. Cash flow from operations for Q4 was $7.7 million and year-to-date is $11.2 million.

Continuing on with some balance sheet detail on slide 14. Working capital is up $54.2 million, primarily due to debt under the new credit facility is all classified as long-term debt. We're under the old credit facility, which had an automatic suite feature, only the amounts of the term loan that was due beyond 12 months was considered long-term debt. AR net of unbilled and deferred excluding the TTi acquisition is up $14.4 million, which is primarily due to a approximate 1.5-week delay in getting billings out the door due to the new system. This delay has been -- has cleared up and has been cleared up during Q1. Offsetting the increase in AR net unbilled is an increase in AP and accrued AP. Again, new system processes with suppliers having to enter invoices in the system and into the system online in order to clear AP has also had an impact and that is also clearing itself out during Q1.

Moving on to slide 15. Backlog as of Q4 2018 was $327.4 million, which is up $58.8 million or 21.9% compared to backlog at the end of '17. Excluding the TTi backlog of $30.7 million, backlog is up $28.1 million or 10.5% over 2017. And it's important to note approximately 90% of our backlog will be recognized as revenue within the next 12 months. And as Adam mentioned, it's also important to note that long-term multi-year projects that are funded each year, like the recent renewals of our two largest customers only including backlog 12 months of funding.

On to slide 16. We will be reporting a material weakness in our internal control over financial reporting in connection with the implementation of our new ERP system. Details of the disclosure will be in Section 9A of our Form 10-K, but I'll provide a high level summary of the issues here. There were three primary areas that resulted in the material weakness finding and they're listed on this slide. First, a failure to maintain documentation to evidence that testing was completed and conversions were validated timely. Second, changes to production configuration without maintaining documentation to evidence review and approvals took place. And third, security roles necessary to support to go live were issued without evidence or review over proper segregation of duties. While these reviews and approvals did take place, the failure to maintain the necessary documentation to evidence these reviews resulted in the material witness findings. There is a material witness finding in the area of program development and in change management and in user access. The impact of these material weaknesses on the financial audit and the mitigation that has been taken is as follows. Management has completed the conversion validations prior to closing of Q4. Management performed extensive and detailed review and analysis of the Q4 results in order to validate the results being reported. And to mitigate the increased risk associated with the material weakness finding, the Q4 financial statement audit sample size more than doubled, while the doubling of the audit sample size has impacted the timing to be able to complete our 10-K filing. When completed, the additional sample size should allow for an unqualified financial audit opinion.

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

Adam H. Stedham -- President

So I just want a couple of closing on the strategy and then Scott will share some closing remarks. But if you look at, we shared before what our strategy was, the strategy continues to stay the same and we're excited about 2019 from this perspective. We're focused on margin improvement and expansion, our EtaPRO sales are up, our new products within our leadership will generate higher gross margins. So we're confident about that strategy.

Recharging our organic growth is a key element for us. And once again, we're optimistic about organic growth in 2019. During our next call, we plan on introducing a method of tracking organic growth within key industries and key customers as a way that we can help you understand how we think we're going to expand our share of wallet within the customers and how that's going to give us both organic revenue growth and expand our margin.

Turning around our declining business, we talked about Sales Enablement. We're very excited about Sales Enablement. The new win with our import automotive that we announced on our last call, which that work is being completed as we speak, as well as the backlog that we have for that team and the cross-selling opportunities with TTi. Our Managed Learning Service business, the major headwind for that was the job skills and we're on a several year trend of not winning outsourcings, whereas we won three new outsourcings and we're -- as this outsourcings ramp up, the combination of the job skills turning around in those three new outsourcing puts Managed Learning Services on very solid footing for 2019.

And then for our Organizational Development practice, we made some leadership changes mid-year last year. We think those changes are beginning to materialize, as I said, the pipeline is up in all five organizations within OD, talked about the new product that we have that's getting great reception in the marketplace and we're very excited about what OD will look like. So that's the turning around of those business units combined with the Engineering and Technical unit. All of them are now fully leveraging the sales practices and sales processes of our Chief Sales Officer, which we -- as Mike mentioned earlier, we're focused on, our Engineering and Technical Services all of last year.

And then lastly, obviously, we're looking to integrate the acquisition and focus on cross-selling opportunities within TTi. Recently, we met with second largest automotive customer, we met with the highest level person in that company that we've ever met with. We find ourselves now with the combined organizations. We're able to move up and speak to ever higher and higher levels of buyers and decision-makers inside of the automotive customers and we're excited by that and we think that opens up an entire new realm of possibilities for us. So in conclusion all, GP Strategies is strongly positioned for 2019.

So Scott, I'll turn over to you for closing remarks.

Scott N. Greenberg -- Chief Executive Officer

Yes. I'd like to give some remarks and then I'll hand it over to Q&A. To start with, GP Strategies has always been a strong cash flow generator. Despite the tribulations in Q4, we were still able to generate $7.7 million of free cash flow. Typically, we generate 50% to 60% of our EBITDA on an annual basis in free cash flow. With that being said, showing support from our banks, we entered into a new credit agreement in the fourth quarter, which gives us plenty of room to grow the business going forward. But in addition to that, the Company is evaluating certain non-core assets of the Company for potential divestitures. The evaluations have just begun.

However, that being said, what are we going to do in 2019? Goal one is to reduce the leverage ratios. Goal two -- and the question is, what do we do with the free cash flow? So historically, we've done three things. First is reduce leverage ratios, which Mike talked about earlier. Second, we've historically used a lot of our free cash flow to repurchase shares. And thirdly, historically, we've also redeployed cash in acquisitions in our core business. So those are really the goals in 2019 to strengthen our balance sheet and reduce leverage ratios and generate a lot of free cash flow from operations.

With that moderator, I like to turn it over to Q&A session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Alex Paris from Barrington Research. Please go ahead.

Chris Howell -- Barrington Research -- Analyst

This is Chris Howell sitting in for Alex Paris. Good morning, everyone.

Adam H. Stedham -- President

Good morning.

Scott N. Greenberg -- Chief Executive Officer

Good morning.

Chris Howell -- Barrington Research -- Analyst

My first question is in regard to TTi. You had mentioned the realization of cross-selling synergies. How should we think about the potential here in regard to cross-selling and as it relates to increasing your share of wallet? I know you had mentioned, there will be a new method of tracking organic revenue growth and margin coming next quarter. How should we look at the potential here and the runway for growth, especially in consideration of these higher end conversations that you're having with the addition of TTi Global?

Scott N. Greenberg -- Chief Executive Officer

Yeah. So to start with the TTi Global acquisition puts GP Strategies in a unique position. If you look at the Company before the acquisition of TTi, our automotive sales were predominantly in the United States, over 95% of our revenue was derived from US customer base. TTi had a significant amount of their revenue that was developed in foreign countries, including Asia-Pac. When you put the two together, we are now currently dealing with all 10 as far as unit sales of the largest automobile manufacturing companies of the world. They're now customers of GP. And in addition, with the acquisition of TTi, we hope to demonstrate to them that we can deliver our services on a global basis. So I think the concept of what we have has completely changed for GP Strategies and that now we're considered a global service company of automotive in the automotive industry. In addition, GP Strategies historically focused on product sales training and TTi has historically focused on both product sales training and service training. So while we've only owned it a few months and Adam gave his projection that we'll do over $50 million of revenue in TTi, we do expect to have organic growth from the combination in addition to the acquisition. Adam, do you want to add anything?

Adam H. Stedham -- President

No, I think that's perfect. I think the big key for us when you combine the two is the fact that there is even with our previous size and TTi was much smaller than us, there was still significant activity within the automotive industry that we weren't viewed as having the size and scale to successfully deliver. And so we couldn't compete for that work effectively against some of the other players. And now the marketplace is reacting very positively to our combined size, scale and breadth of capabilities and they're viewing us now as a legitimate competitor in areas that previously we weren't allowed to compete in.

Chris Howell -- Barrington Research -- Analyst

That's great and very helpful. And it led me to another question. You mentioned competing in other areas that you weren't able to compete in before within the automotive industry. Perhaps as we go beyond automotive or even within automotive, what other areas would be of interest for GP in rounding out the training portfolio that could be beneficial, maybe not in 2019, but longer-term as areas of interest?

Scott N. Greenberg -- Chief Executive Officer

Well, let me talk about industry and then Adam could talk about service -- services. So in industry, three of the industries we are interested in and we've invested in 2018 is the pharmaceutical industry, the automotive industry and financial services. In the pharmaceutical industry, we bought a company called IC Axon in May of 2018 that gives us the ability to do high-level training for the sales force on new product introductions in the pharmaceutical industry. What we really like about this business is that business because of the regulatory aspect and the level of competency needed is a higher margin business than a lot of our other business models. So in that area, in life sciences, pharmaceutical, it's a key area of our future and we're investing in it and it's also an area we could get higher margin businesses in. In the financial service area, one of the outsourcings that we added is an insurance company. So financial services and insurance, we see that. And also our largest customer of the Company just gave us a long-term contract. And again, it has the same attributes as pharmaceutical and that it's a highly regulated industry and a lot of regulatory work needs to be done and that's an area that we're interested as well. And the third area that we previously discussed was the automotive industry.

Chris Howell -- Barrington Research -- Analyst

Got it. And my last question is in regard, you mentioned the 30% close rate that you're seeing in the sales pipeline. As we look at this close rate across the business, what ways of improving this close rate are there? Should we look at this consistently being at 30% as you continue to increase the sales pipeline and increase the positive momentum here?

Adam H. Stedham -- President

Yeah, it's a great question, Alex. So I think -- so actually we feel pretty good with the overall close rate, where we need to get more clarity and where we hope to be able to provide more insight is if you look at that, that close rate represents an end-to-end early mid, late stage pipeline. Obviously, your close rate is going to vary between your early stage, mid stage and late stage pipeline. Right. So I think as our sales process continues to mature and our sales reporting continues to mature, what we hope to do is be able to give more granular information about the three stages of our pipeline and then you can apply more accurate growth rates to each of those three stages instead of using an aggregate growth rate over the pipeline. Does that makes sense to that?

Chris Howell -- Barrington Research -- Analyst

Yes, that makes sense. Thank you. Those are all the questions I have for right now. Thank you for taking them.

Adam H. Stedham -- President

Thank you.

Operator

The next question comes from Jeff Martin from ROTH Capital Partners. Please go ahead.

Jeff Martin -- ROTH Capital Partners -- Analyst

It's not Capital Powers. Good morning, guys. Wanted to...

Scott N. Greenberg -- Chief Executive Officer

Hi, Jeff.

Jeff Martin -- ROTH Capital Partners -- Analyst

...touch on the multi-year -- hi Scott. I wanted to touch on the multi-year outsourcing contracts contribute about $3 million a quarter once it's ramped. You typically have growth potential within those types of clients. I was curious, if you could allude to that?

Adam H. Stedham -- President

Yes, I can allude to it to some -- I can't get into great detail to some extent because of the nature of the contracts. But what I will say is each of those contracts consist of a base amount of services that they're looking for us to do in their contracting over a long period of time. We want you to consistently do this. In addition, those contract is -- those contracts include rate cards for other services above and beyond and specifically one of them requires us to deliver cost savings associated with vertically integrating their spend with other suppliers. So in other words, if you look at the spend with other suppliers and if you compare our rates to some of their other suppliers that they have, our rates are more competitive. So we're actually expected and judged by our ability to transition that work over to us. We're not really -- at this point, we're really not forecasting that because we feel far more comfortable forecasting the base line business that we know, but you're spot on that there's definitely upside potential and upside expectation within those accounts.

Jeff Martin -- ROTH Capital Partners -- Analyst

Okay.

Adam H. Stedham -- President

Does that answer to that make sense?

Jeff Martin -- ROTH Capital Partners -- Analyst

Yes, yes, that confirms what I was thinking. On the $500 million pipeline business, what is the timeline of conversion there? And do you see that contributing much to your potential for organic growth in 2019?

Adam H. Stedham -- President

Oh, definitely. Absolutely. We think that that contributes to 2019. If you look at it and I think we've historically put out inside of the Company about 60% of the Company is longer sales cycle businesses, 40% of the Company is shorter sales cycle businesses. And that mix is moving a little bit with the TTi acquisition. But let's say, it's a third to 40% of the Company has shorter sales cycle businesses. So if you look at those businesses, you would fully expect those sales cycles churn in somewhere 90 days to 180 days. So that pipeline will materialize within the year and then the pipeline will continue to be updated throughout the year. We have more pipeline in those businesses to uncover in the rest of this quarter next quarter that would still materialize inside of the year.

Scott N. Greenberg -- Chief Executive Officer

And if I could just add to that, Jeff, because one of the big things we were discussing today is the skills funding and the potential there. If you looked at the results for the year, the skills funding contributed a $6 million downturn in our gross profit. So significant amount of our reduction in EBITDA was the Skills Funding Apprenticeship program. A little bit of the history and that's why I think it's going to improve and improve the pipeline. In about two years ago, the government decided that they wanted to have the smaller companies pay 10% of the apprenticeship programs and that's the main reason why we had a significant drop off in our profitability and revenue. At the same time, we've been building it back outside of the small companies. Right? So we've been working on what we would call the levy providers. Every company now in the UK, large company has to pay a tax on their payroll. And what GP Strategies has been doing has been marketing things like leadership training, like IT training, like Lean Six Sigma training for large companies and we've been building back the business through that. Starting in two weeks, they've reduced the match by the small companies by 50%. So they've reduced it by 10% to 5%. If we could get that back up and going, now in addition to the new business, that's why Adam felt very comfortable with saying in the pipeline that the first quarter of this year should be the last time on a quarter-by-quarter basis that the revenue will be down from the Skills Funding Apprenticeship program. So the hope is to start getting it up to the pass levels, based upon the change of the 10% to 5% and also the levy to the non-levy payers and that's not yet totally in the pipeline because the changes are occurring on April 1st.

Jeff Martin -- ROTH Capital Partners -- Analyst

That's helpful. You headed off my next question on job skills. So thanks for that. My last question is on gross margins. You expect those to trend closer to your historic margins, obviously TTi is a bit of a mix impact there. But curious, as we progress throughout 2019, how quickly should we see the regression back to the mean on gross margins?

Adam H. Stedham -- President

So if you look at gross margin from the perspective of -- we had several anomalies hidden, we have several disappointing things happen in Q4 that we don't look at as sustainable changes to the business model and to the fundamentals of the business. So we're not anticipating that the Q4 gross margin anomalies will continue into 2019. We're expecting that our 2019 gross margins, exclusive of the TTi acquisition, would return to levels that are more appropriate and historically we've seen. And it's still a major effort for us to improve our overall gross margins as well and that's where some of our cost savings targets have come in.

Scott N. Greenberg -- Chief Executive Officer

Yeah. So we have the cost savings that we talked about earlier. But in addition, if you look at the skills funding and the pharmaceutical industry, those two are the -- up there with the higher margin businesses of the Company. So as we get more in the pharmaceutical industry, as we reestablish ourself in the Skills Funding Apprenticeship program, that should start raising our margins because of the nature of those contracts.

Jeff Martin -- ROTH Capital Partners -- Analyst

Great. Thanks for your time.

Operator

Our next question comes from Lisa Dekowski (ph) , a Private Investor. Go ahead, please.

Lisa Dekowski -- Private Investor -- Analyst

Hi, I'm not a private investor. I'm actually an independent rep with LPL Financial. I was just wondering, what percentage of your contracts are related to Power Corporation of Canada and its subsidiaries and specifically its fertility-related subsidiaries?

Scott N. Greenberg -- Chief Executive Officer

0%.

Lisa Dekowski -- Private Investor -- Analyst

0% of your revenue is related to Power Corp. Canada or any of its subsidiaries?

Scott N. Greenberg -- Chief Executive Officer

That's correct.

Lisa Dekowski -- Private Investor -- Analyst

And is Samuel Robinson still the Lead independent Director of your Board?

Scott N. Greenberg -- Chief Executive Officer

Samuel has made the Lead Director in August of last year, so he's just been the Lead Director since then. That's correct.

Lisa Dekowski -- Private Investor -- Analyst

Okay. Are there any other Power Corp. Canada's Senior Management or Executives on your Board?

Scott N. Greenberg -- Chief Executive Officer

No.

Lisa Dekowski -- Private Investor -- Analyst

So just Robinson? Okay. Thank you very much.

Scott N. Greenberg -- Chief Executive Officer

You're welcome.

Operator

Our next question comes from Zach Cummins from B. Riley FBR. Go ahead, please.

Zach Cummins -- B. Riley FBR -- Analyst

Hi. Good morning. Thanks for taking my questions. Can you talk some more about the margin impacts within the Workforce Excellence Group? It sounds like a lot of these are one-time in nature, but just some additional color around that would be helpful.

Michael R. Dugan -- Executive Vice President and Chief Financial Officer

Yeah. So we had just going through a couple of them in the fourth quarter. There was a contract -- two contract overruns in our LNG organization that is not expected to repeat. Just looking through a couple of things here. There was -- we had a unexpected significant increase in benefits costs for the Company, it was about 500,000 above what we ran Q4 of last year and leading up every quarter this year for the first three quarters, our benefits cost was running about 500,000 less than on prior. So there was a significant negative swing impacting the -- from the benefits line and Workforce Excellence probably was absorbing I'd say about 300,000 I think of that item. Let's see what other items are out there. The job skills, we've already mentioned that impact and we did have a decline in our GPiLEARN subscription services in the fourth quarter compared to the prior quarter that that had about an 800,000 impact, I believe, on a quarter-over-quarter comparison in gross margin.

Scott N. Greenberg -- Chief Executive Officer

Yeah. The one thing, Zach, is when you look at backward, we also from time-to-time have EtaPRO licenses, which could impact a quarter-by-quarter basis, but not the year basis. So I think the fourth quarter also with the EtaPRO -- lack of EtaPRO licenses was also an anomaly in the quarter that we don't expect to reoccur.

Zach Cummins -- B. Riley FBR -- Analyst

Understood, that's helpful. And then, can you talk about the progress with the TTi Global integration? Is it pretty well in line with expectations so far? And what are some of the major hurdles that you need to be cleared to get really on full track and get this fully integrated in 2019?

Scott N. Greenberg -- Chief Executive Officer

Well, that's two levels of integration. There is operational integration and then financial and systems integration. We expect that the operations integration to really occur by the end of Q1 in the next few weeks. Basically, there's a lot of laws and rules on how you deal with different personnel in different countries. As you know, part of our working with TTi is to reduce their global course with the consolidation of GP Strategies and TTi. We expect that to be completed by the end of the first quarter or a short time afterwards and that's why we believe it will be accretive starting Q2. As far as financial integrations and things of that, that will be occurring during the year, predominantly in the second half of the year, but we don't expect that to affect the building of the profitability of the group.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. And then, Scott, I think you mentioned in your final comments that you were pondering -- or at least evaluating some potential divestitures and I know it's still early on in the process, but can you just give some kind of high level thinking around that, that process and potentially how we should be thinking about this going forward?

Scott N. Greenberg -- Chief Executive Officer

Yeah. I mean, basically, it's -- as I mentioned, we're just evaluating. We want -- we're looking at redeploying certain cash and generating cash. So there's two areas that we generate cash, one is from operations and EBITDA, where we expect a strong 2019 and the second any sales that we might have. So again, we're looking at certain items and the goal would be is when we decide on these to use those proceeds and typically we use those proceeds for three things. One is to reduce debt and reduce leverage ratios to repurchase shares and three is redeploy cash in core acquisition. That being said, due to the TTi acquisition and integrating that and all the work that needs to be done, more than likely, we won't be doing another acquisition until the second half of the year. So I will say currently the first priorities would be item one and two.

Adam H. Stedham -- President

This is Adam. I would add to that. We still -- long-term our plan, we still feel like there's a major gap in the marketplace for a learning outsourcing company that is a specialist firm and has all of the global footprint to provide the needs of their customers in every geography. So we're convinced by that. All of the data proves that out. We're the closest to it and we're excited about how TTi has helped us move toward that. With that said, there are parts of the business that don't necessarily contribute directly to that vision. Right? And contribute to what we think is going to give us a major strategic advantage in the marketplace. So what we're doing is going through an analysis of identifying what ways could we potentially look at some divestitures that it should have no impact on that overall strategy that we shared in an Investor Day last year. So we've really done a lot of work to make sure that all of the analysis and all of the strategy going forward that we defined in the Investor Meeting still holds true from the perspective of what we're targeting to do strategy-wise, despite the potential to leverage some divestitures to move us further down the path of what we're trying to do.

Zach Cummins -- B. Riley FBR -- Analyst

Great. Well, that's very helpful and thanks again for taking my questions.

Scott N. Greenberg -- Chief Executive Officer

Thank you, Zach.

Operator

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

Scott N. Greenberg -- Chief Executive Officer

Thank you, moderator. As you can see from our presentation today, we really think that all the changes we have made that we're at an inflection point after 2018 and the goal is to execute in 2019 and return GP Strategies as a Company growing organically, generating a lot of free cash flow and strengthening its balance sheet during the year. And we look forward to updating you as the year goes on. Thank you.

Operator

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

Duration: 58 minutes

Call participants:

Ann M. Blank -- Director of Investor Relations

Scott N. Greenberg -- Chief Executive Officer

Adam H. Stedham -- President

Michael R. Dugan -- Executive Vice President and Chief Financial Officer

Chris Howell -- Barrington Research -- Analyst

Jeff Martin -- ROTH Capital Partners -- Analyst

Lisa Dekowski -- Private Investor -- Analyst

Zach Cummins -- B. Riley FBR -- Analyst

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