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GP STRATEGIES CP (GPX) Q1 2021 Earnings Call Transcript

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GPX earnings call for the period ending March 31, 2021.

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GP STRATEGIES CP (GPX)
Q1 2021 Earnings Call
May 06, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the GP Strategies first-quarter 2021 earnings call. [Operator instructions] Please note that this event is being recorded. I'd now like to turn the call over to Ms. Candice Hester, vice president, investor relations.

Please go ahead.

Candice Hester -- Vice President, Investor Relations

Thank you. Good afternoon, everyone, and welcome to GP Strategies first-quarter 2021 earnings call. On the call today are Adam Stedham, CEO and 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, including statements about the potential effects of the COVID-19 pandemic and related events on our business and results of operations.

Because 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. 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 release's page of the Investor's section of our website.

At this time, I'd like to turn the call over to Adam Stedham.

Adam Stedham -- Chief Executive Officer and President

Thank you, Candice. And welcome, everyone. For 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. Then Mike will share the detailed financials for Q1 2021, followed by a Q&A session.

We're pleased with the first quarter of 2021 results 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 improve gross margins while, at the same time, strengthening the balance sheet. We 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 give us confidence in the company's opportunities for growth going forward.

If you look back at the first quarter of 2020, our customers began the quarter doing business as usual. But later in the quarter, it became clear that the world was changing. Late in that quarter, we began to see the impact of COVID 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 recoveries, as the world continues to respond favorably, we believe there will be strong demand for our services. And there are several data points that give us confidence about this belief. First, we believe that the APAC region is a leading indicator of the macro trends we're seeing in the landscape of the global economy.

During Q1 of 2020, our business in the APAC region was the first to be negatively impacted by customers who pulled back business in reaction to the pandemic. Looking at Q1 of 2021, the APAC region began its recovery ahead of the rest of the world. In line with this trend, our Q1 2021 APAC revenue is more than 10% above our Q1 2020 APAC revenue. Second, excluding the backlog associated with the divested IC Axon business, we ended Q1 2021 with backlog roughly equal to our backlog at the end of Q1 2020.

Comparatively, our backlog at both the end of Q3 and Q4 2020 was significantly lower than the same quarter of the prior year. Q1 2021 was 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, our Q1 2021 sales pipeline is up 18% versus Q1 2020. In other words, the total value of sales opportunities tracked in our CRM is up 18% versus the same period last year.

The combined view of the sales pipeline and backlog provides a very favorable view of our opportunity for growth. So in summary, we're 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 the year.

But 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. Now these margin-improvement initiatives that have resulted in this 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 that 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 in a 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, reduce overhead costs 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. A divestiture of these assets would represent the fourth divestiture in our focused strategy that 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 focused 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.

Mike Dugan -- Chief Financial Officer

Thanks, Adam. And good afternoon, everyone. Turning to revenue and gross profit for the company on Slide 8. We 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 primary drivers of the revenue decline are: a $7 million decline in revenue due to the cancellation and/or postponement of revenue that can be directly linked to COVID-19. A quick note on how we calculate the impact of COVID-19. If 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 show up as other decreases in our MD&A. Now moving on. There was a $2.8 million decline due to the divestiture of the IC Axon business and a net $6.7 million decrease in revenue that is materially due to a shift in timing of a North America APS publication shipment into Q2 of 2021 and partially due to the overall macroeconomic conditions caused by COVID-19 and its impact on our short-term, project-based revenue cycle.

Finally, partially offsetting these declines in the quarter were the $2.8 million increase in revenue due to FX exchange rate changes. In terms of company gross profit and gross margin percent, the company reported gross profit of $21.4 million, which is up $3.8 million, or 21.7%, from the gross profit reported in Q1 of last year. The gross margin improvement is primarily due to the operating restructuring initiatives and our margin expansion focus implemented in fiscal-year 2020 that have resulted in reduced costs 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 shut down due to COVID-19 that took a period of time before we could fully implement cost-cutting and cost-scaling actions to align with the lower top-line revenues. Breaking the Q1 revenue and gross profit drivers out by our regional reporting segments on Slide 9. 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 in revenue are: a $4.3 million decrease directly due to the cancellation or postponement of revenue due to COVID-19 impact; a $2.8 million decrease due to the divestitures of the IC Axon business in 2020.

And 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 work. The technical performance solutions 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 automotive performance solutions service offerings saw a net $3.3 million decline in revenue that was primarily due to the shift of publication deliverables into the second quarter of 2021 that was partially offset by an increase in revenue from a previously announced material new contract with an automotive customer. For additional color on North America APS, our publication revenue in Q1 of 2021 was $0.4 million, which was down $4.6 million from the publication revenue reported in Q1 of 2020 due to the previously mentioned publication being moved into Q2 of 2021.

For the remainder of 2021, the forecasted publication revenue by quarter is $8.1 million in Q2, $5.1 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 in revenue are a $2.4 million decrease directly due to cancellation or postponement of revenue due to COVID-19 impact. And within the EMEA segment, there were small declines in revenue in OPS, primarily in our strategic consulting business; and in APS within EMEA that were offset by an increase due to a favorable FX impact.

The emerging markets segment reported Q1 revenue of $12.2 million, which is up $0.8 million, or 7%, from the revenue in Q1 of last year. Primary drivers of the increase in revenue are a $2 million increase in OPS services, primarily in APAC, as this region was the first to be impacted by COVID-19 in 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 a $0.9 million decrease primarily due to the closure of our automotive body shop business in Thailand and a $0.3 million decline directly due to COVID, primarily in our LatAm region. In terms of gross profit dollars and gross margin percent at a 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 a $0.9 million license fee sale in our TPS energy services business and a $0.5 million license fee sale in our OPS leadership practice. Excluding these license sales, which don't typically recur on a consistent basis, the gross margin in the 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 or 14.2% from Q1 of 2020.

The primary drivers of the decrease are: a $2.8 million decrease in G&A labor expenses due to restructuring and cost-reduction initiatives; a $0.7 million net change in bad debt reserve adjustments; and a $0.5 million reduction in amortization, primarily due to the divestiture of the IC Axon business. Partially offsetting these decreases was $0.9 million of legal expense associated with the two assets held for sale and a $0.7 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 $0.6 million, primarily due to increased investment in global sales resources. Moving on to other P&L items on Slide 11 and to touch upon a few.

Restructuring charges in Q1 totaled $0.7 million, of which $0.6 million relates to a transformation initiative aimed at increasing efficiencies within our G&A function. This initiative is expected to be complete by midyear 2021. There also was a $0.1 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 $0.3 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 expense is down $0.8 million due to the debt now being reduced to zero. 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 $0.24, which is $0.27 more than the adjusted EPS reported in Q1 of 2020. 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 was zero and is a $119.7 million less than the debt we had on our balance sheet just 20 months ago on June 30, 2019. Operating cash flow for Q1 2021 was $0.6 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 deferred tax liability related to COVID 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 approximately $6 million of this balance by the end of the year with the remainder being paid in 2022. I would point out that our 3/31 balance sheet now has a carve-out for two pending sale of businesses that serve our nontarget industries. The assets held for sale are $42.3 million, which is mostly comprised of goodwill, unbilled revenue, accounts receivable and right-of-use assets.

And the liabilities held for sale are $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.

Adam Stedham -- Chief Executive Officer and President

Thank you, Mike. And so we believe that the macroeconomic wins that have 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 a higher margin profile. So at this point, we'd like to open up the call for questions and answers.

Questions & Answers:


Operator

[Operator instructions] First question comes from Jeff Martin of ROTH Capital. Please go ahead.

Jeff Martin -- ROTH Capital Partners -- Analyst

Thanks. Good morning, Adam and Mike. How are you?

Adam Stedham -- Chief Executive Officer and President

Great, Jeff, how are you?

Jeff Martin -- ROTH Capital Partners -- Analyst

Doing 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 APAC.

But specifically North America, geographies starting to open back up. Do you think we're on a path of waning COVID impact in terms of pushouts and cancellations?

Adam Stedham -- Chief Executive Officer and President

So I think that really, to answer that question, you have to answer it in two ways. Geographically, the different markets are 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, China has been faster for us.

Japan, still a little slower. So it's case by case. APAC overall is ahead of the rest of the world, as we mentioned. The second thing that you have to look at is by industry.

And I would say right now that we're seeing different industries bounce back in different paces. The automotive industry, you could call it a COVID impact due to the chip shortage or a non-COVID impact. That is something we're keeping an eye on. It's 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. Our high-tech industry is doing well.

We feel like that's recovering on long global trends. And our government, defense and aerospace industry was not as negatively impacted during the COVID 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. So it's a long answer, Jeff. But hopefully, I gave you what you're looking for.

Jeff Martin -- ROTH Capital Partners -- Analyst

No, that's great. And you touched on the auto question I was going to ask. OK. In terms of the pipeline build, could you help kind of parcel that out? Which areas you're seeing the most activity in this -- or if it's across the board?

Adam Stedham -- Chief Executive Officer and President

So it's across the board. What's encouraging for us is the training outsourcing industry 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 a smaller service line for us, but it's an area that's having a strong growth, strong rebound. And then, our automotive training -- as of right now, our automotive business year over year is recovering very well. And we anticipate that continuing. Just to be clear, as of right now, we don't see that the currency challenges the industry is facing are going to slow down that recovery.

Jeff Martin -- ROTH Capital Partners -- Analyst

OK, great. That's it for me. Thank you.

Thank you, Jeff.

Mike Dugan -- Chief Financial Officer

Thanks, Jeff.

Operator

Thank you. [Operator instructions] The next question comes from Zach Cummins of B. Riley FBR. Please go ahead.

Zach Cummins -- B. Riley FBR -- Analyst

Yeah, hi, good day, Mike and Adam. It's nice to see you, 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 had the expectation that the business here in 2021 could likely return to the normal seasonal trends that we see from quarter to quarter.

Is it still fair to make those assumptions at this juncture?

Adam Stedham -- Chief Executive Officer and President

So if you took a normal trend, which is, say, over the last 10 years, the most frequent trend would be Q1 and Q3 would be our lowest quarters. Q2 and Q4 would be our highest quarters. Now that hasn't been the case every single year, but that is the most typical trend. For this year, I 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 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 no way are we giving guidance that that's going to happen or we're predicting that. But if you look at the recovery and you superimpose the macroeconomic environment on our normal quarterly pattern, I think that that's a realistic point of view of what may happen as a result of that.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. That's helpful. And then, Adam, I know you were referencing to some of the uptick in demand that you've seen for outsourced training. I was just curious.

In terms of the mix for these engagements, are you seeing more people have a demand for in-person type of events? Or is there still a lot of strong traction for your virtual and structured-led training sessions?

Adam Stedham -- Chief Executive Officer and President

So there -- 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. So 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 up new trainings that involve both virtual and face to face.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. And then, it seems with the improving demand environment, you started to make more investments into sales and marketing. I mean, how should we think about that pace of investment as you continue to move forward into improving economic conditions?

Adam Stedham -- Chief Executive Officer and President

So what I think is we are moving to a level, a stabilized level. I talked about earlier on our next earnings call we look forward to giving some more insights into our capital-allocation strategy, our margin expansions, how it plays into our margin expansion and focus strategy. In addition to that, I think our expectation is that we'll give more information on really what our sales cost strategy is. Looking forward, 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, more stable cost of -- or sales cost as a percentage of total revenue. We're moving to that stable, long-term budgetable level.

Zach Cummins -- B. Riley FBR -- Analyst

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 the deferred payroll and 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 to free cash flow.

Is that still kind of a fair assumption as we progress through this year?

Mike Dugan -- Chief Financial Officer

Yes. I think that that is a 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 there's 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 positive cash flow as our revenue declines and that working capital converted through into cash, we might have a little bit of headwinds in terms of cash flow. So I think that that 55 -- 50% to 55% conversion of EBITDA to cash flow is probably good. And then, I would probably leave that as a good metric.

Zach Cummins -- B. Riley FBR -- Analyst

Understood. That's helpful. Well, thanks for taking my questions, and congrats again on a strong progress and start of the year.

Mike Dugan -- Chief Financial Officer

Thanks.

Adam Stedham -- Chief Executive Officer and President

Thanks, Zach.

Operator

This concludes our question-and-answer session. Now I'd like to turn the call back over to Mr. Adam Stedham for closing remarks. Please go ahead.

Adam Stedham -- Chief Executive Officer and President

Thank you. So I appreciate everybody joining the call. Once again, we're happy to be where we are. We're excited that we've been able to navigate through a fairly unique time over the last year and a half.

And we are continuing a 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 in other ways, in strategic ways related to some of the assets that are not tied to our specific strategy. So we look forward to our earnings call next quarter.

Operator

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

Duration: 32 minutes

Call participants:

Candice Hester -- Vice President, Investor Relations

Adam Stedham -- Chief Executive Officer and President

Mike Dugan -- Chief Financial Officer

Jeff Martin -- ROTH Capital Partners -- Analyst

Zach Cummins -- B. Riley FBR -- Analyst

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