GP Strategies' (GPX) CEO Scott Greenberg on Q2 2014 Results - Earnings Call Transcript

Aug. 2.14 | About: GP Strategies (GPX)

GP Strategies Corp. (NYSE:GPX)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 AM ET

Executives

Ann M. Blank – Investor Relations

Scott N. Greenberg – Chief Executive Officer

Sharon Esposito-Mayer – Executive Vice President and Chief Financial Officer

Douglas E. Sharp – President

Analysts

Josh Vogel – Sidoti & Company, LLC

Jeff Martin – ROTH Capital Partners, LLC

Kevin Liu – B. Riley & Co., Inc.

Wayne J. Archambo – Monarch Partners Asset Management, LLC

Gary Bragar – NelsonHall

Operator

Good morning. My name is Taylor and I will be your conference operator today for the GP Strategies Second Quarter 2014 Earnings Conference Call. All lines will be placed on mute, preventing any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

Thank you. I will now turn the call over to Ann Blank, Director of Investor Relations. Please go ahead.

Ann Blank

Thank you, good morning and welcome to GP Strategies second quarter 2014 earnings call. On the call today our Scott Greenberg, Chief Executive Officer; Doug Sharp, President; and Sharon Esposito-Mayer, Chief Financial Office.

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 Investor section of our website at GPStrategies.com. A replay of this call will also be available on our website later today.

At time I would like to turn the call over to Scott.

Scott N. Greenberg

Thanks Ann. Good morning and welcome to our second quarter 2014 conference. Today, we will follow our usual quarterly format. To initiate the call, I will provide a brief overview of the results of the second quarter of 2014 then Sharon will present an in-depth financial analysis, and Doug will give key updates on our global initiatives. After Doug’s presentation, I will provide a final summary and then we will conclude with a Q&A section.

This morning before the market opened, GP Strategies announced its earnings for the second quarter of 2014. In second quarter, the company achieved record operating results with revenue of $134.9 million and EBITDA of approximately $16.4 million. What is key is that all of the Company’s segments showed organic revenue growth for the quarter and the Company did achieve these record results while continuing to invest in building out its infrastructure to support its growing global business model. We are pleased with the Company’s execution and progress.

In addition to organic growth from all operating segments, the quarter included substantial project work in our energy group. The Company was truly at an inflection point and our continued investments are enabling the Company to execute on a basis. This strategy is becoming the key differentiator of GP Strategies in the training and performance improvement industry. Our goal is to continue to establish GP Strategies’ brand in the highly fragmented training industry. In recent quarters we invested heavily in building our global reach and we anticipate seeing return on these investments in the year to come.

In the second quarter, we actually had very strong organic growth in three of our five operating segments: learning solution, professional and technical services, and energy services. In addition, as discussed on last quarterly conference call, the Sandy Performance Ready and Solutions segment showed growth sequentially compared to first quarter of 2014.

EBITDA for the quarter was $16.4 million, inclusive of the transition costs related to our global initiatives and approximately $53.4 million for the trailing 12 months ended June 30, 2014. This is approximately $2.75 per share on a trailing basis. However, it should be noted that the Company does not add back non-cash compensation EBITDA results at some of our comparatives do.

One of the elements when you look at our results today, you would have seen that our short term borrowings were up to approximately $17.8 million, but I am pleased to report that as of close of business yesterday, it was below $9 million, so we generated approximately $9 million in the month of July since we filed the report, a very positive sign. In addition in the second quarter we repurchased approximately 44,000 shares of GPX stock in our buyback program in the urban market for approximately $1.1 million.

We routinely get asked on the market size of the domestic training industry, which is now estimated to be approximately $60 billion domestically. We understand that is highly fragmented and our largest competitor is actually companies’ internal training organizations. We believe that the outsourcing of training activities is the wave of our future and our commitment is to invest in growing that operation on a global basis for increased service levels. We believe our differentiators are strong technical expertise, our global reach, and our cost effective solutions.

On previous calls we discussed initiatives to expand the financial and insurance service sector. We actually started in this sector in approximately the 2011, 2012 time period. With the major wins we have currently, we now have approximately 60% of our second quarter revenues generated from this sector. During that discussion, we will talk about additional long term contracts and renewals received from customers. This is very important to our strategy as our long term client relationships typically represent 90% of our revenue on a recovering basis.

On the acquisitions front, since 2006, we made approximately 25 acquisitions and we are continuing to integrate these acquisitions to provide cross selling opportunities for future organic growth and recently, we have very strong success in leadership training. In April 2014, we made an acquisition in the human capital space called Effective-People. For the quarter ended June 30, 2014, Effective exceeded our expectations and was accretive to earnings per share.

With that being said, Sharon will now give a detailed financial presentation for the quarter.

Sharon Esposito-Mayer

Thanks Scott and good morning everyone. This morning we reported second quarter revenue of $134.9 million, which represented $30 million or 29% growth over the second quarter of 2013 revenue of a $104.9 million. During the quarter, we achieved organic revenue growth of $24.7 million or 24%. We derived strong revenue growth in the quarter across most of our segments. Revenue in the learning solutions segment increased by $16.8 or 37%.

The Lorien and Prospero acquisitions contributed $3 million of non-organic revenue and the Effective acquisition completed on April 1st contributed $2.3 million of revenue in the quarter. The remaining organic revenue growth in this segment was due to a $9.4 million increase in revenue from a global outsourcing contract with a financial services customer, a $2.1 million net increase in revenue from e-learning and training outsourcing clients, a $500,000 increase in leadership development services, and a $1.7 million revenue increase due to a favorable change in exchange rates. These increases were partially offset by a $2.2 million decline in U.K. government funded skills training.

Revenue in the energy segment increased by $10.2 million or 107% in the quarter. The increase was largely due to a $12.2 million revenue increase from alternative fuel projects, and an $800,000 increase in training services. These increases were partially offset by a $2.8 million decline in software sales and other engineering services.

We expect revenues in the energy segments to decline in future quarters as numerous LNG projects were completed during the second quarter of 2014. Professional and technical services revenue increased $1.7 million or 10% due to a $500,000 increase in training and technical services for oil and gas clients, a $700,000 increase in government services and a $500,000 net increase in training and technical services for various clients.

Performance readiness solutions revenue increased $1.2 million or 9% over the second quarter of 2013, due to a net increase in system implementations, training, and various other consulting services. Sandy’s second quarter of $20.2 million represented a slight increase over the second quarter of 2013.

Publication and portfolio revenues both increased by $400,000 in the quarter, but this was mostly offset by a decline in revenues due to the completion of certain projects in 2013. Sandy’s second quarter results included publication revenue of $3.6 million. We’re projecting $400,000 in the publication revenue in the third quarter of 2014.

As Scott mentioned, financial and insurance sector continues to grow for us and it is now our largest market sector, comprising 15% of our revenue year-to-date, up from 9% year-to-date June of 2013. The automotive sector is now our second largest sector and comprised 14% of revenue year-to-date down from 17% year-to-date June of 2013. Revenue earned from operations outside the United States represented 22% of our year-to-date revenue, up from 20% in 2013.

Gross profit increased in the second quarter by $6.4 million or 35%. The Lorien, Prospero, and Effective acquisitions contributed $1 million of the increase in gross profit. And the remaining $5.4 million increase was primarily due to the organic revenue growth in the various segments. The energy segment experienced a large increase in gross profit margin during the quarter, due to the completion of numerous energy projects under contracts awarded in 2013. We expect gross profit in the energy segment to decline in future quarters as a result of the completion of these projects.

We experienced declines in the gross margin percentage in the quarter in both the learning solutions and professional and technical services segments. The declines in the learning solutions segment were due to a decline in higher margin revenues during the second quarter and the continued startup costs associated with the HSBC contract in this segment. The declines in the professional and technical services segments are due to an increase in lower margins on contractor costs on certain projects in the quarter.

SG&A increased in the quarter by $1.6 million or 16%, the main drivers for the increase in SG&A are $900,000 increase in labor and benefits expense to support international expansion of our IT infrastructure, and a $200,000 increase in expenses associated with the establishment new foreign entities, a $500,000 increase related to the expansion of our IT infrastructure and a $300,000 increase in amortization expense with $100,000 of the amortization increase being related to the Effective acquisition being complete this quarter. These increases were partially offset by a decrease in acquisition related activities in 2014.

During the quarter, we recognized a $500,000 gain related to a change in the estimated earn out payments and associated fair value of contingent consideration accrued for certain acquisitions which was a $400,000 increase over the gain recorded in the second quarter of 2013. Our operating income increased by $5.2 million or 61% in the quarter due to the changes discussed. Second quarter 2014 income before taxes increased $5.2 million or 60% to $13.8 million.

Our tax expense in the quarter was $5.7 million or a rate of 41.1% compared to $3.3 million or 38.9% in the second quarter of 2013. We experienced an increase in the rate this quarter over what we had previously projected due to an increase in projected U.S. income in 2014 and true-ups for certain prior year foreign tax returns that were booked in the quarter. We are currently projecting a tax rate for 2014 of 39.8%. Second quarter net income was $8.1 million or $2.9 million improvement over the second quarter of 2013 resulting in second quarter earnings per share of $0.42 compared to $0.27 in the second quarter of 2013.

Moving on to some balance sheet highlights, our cash balances were $6 million at June 30, 2014, compared to the $5.6 million on hand at the end of 2013. Year-to-date 2014 we expect $2 million on contingent consideration payments for acquisitions previously completed and $1.4 million on share repurchases in the open market. Also we completed the acquisition of Effective-Learning and Effective-People on April 01 for a purchase price of $9 million. We had borrowings outstanding at June 30th of $17.8 million compared to $400,000 at December 31.

Year-to-date June 2013, total cash used in operating activities was $1.9 million compared to cash generated during the six months June 30th of 2013 of $5.5 million. Cash uses in 2014 were comprised of year-to-date income of $12.4 million, plus non-cash add backs to net income including depreciation and amortization of $5 million, non-cash compensation expense of $2.3 million, offset by a $900,000 gain on contingent consideration. In addition, there was a $20.7 million decrease in cash from changes in other operating items primarily due to an increase in billed and unbilled receivables.

Fixed asset net additions year-to-date were $1.4 million, compared to $2.2 million year-to-date June of 2013. At the end of June, backlog was $226 million in comparison to $244 million at the end of the second quarter of 2013. The decline in backlog is largely due to the completion of numerous LNG projects that occurred during 2014. Approximately 95% of the backlog will be recognized as revenue within the next 12 months.

And that concludes the financial update. So at this time, I will turn the call over to Doug.

Douglas E. Sharp

Thank you, Sharon. Good morning everyone. We’re certainly pleased to report the remarkable second quarter that includes organic growth in all segments of the business. Looking behind the reportable segments, however, is where things get interesting for me. We have grown our business in several key market sectors.

We have expanded our service offerings within our customer base and we have substantially increased our global presence or footprint. For example, as mentioned by Scott, our work in the banking industry is growing quickly such that finance and insurance now represents our largest market, at 15% of our business, which includes customers like HSBC, Bank of America, SunTrust, PNC, Barclays, and recently added, Coldwell Bankers.

There is a strong demand in the banking industry to develop and train their workforce to assure compliance, increased product sales, and gain efficiency. We are pleased to be a leader in meeting this demand with our learning services solutions.

In Q2, we also saw a significant growth in the energy market including power generation, alternative fuels, and oil and gas processing. Companies in the energy sector are dealing with an aging workforce in developed countries and competition for skilled labor in less developed geographies. Our customers are lavaging us to meet their requirements for workforce development and technical documentation services. And again as also mentioned by Sharon and Scott, we have successfully completed a number of liquid natural gas projects.

Over the last decade we have developed significant capability in the design and construction of liquid and compressed gas facilities and have built a reputation for quality and performance. We believe we are well positioned to support the emerging market in the use of natural gas as a transportation fuel, excuse me, in the automotive market.

Although now our second largest market at 14%, the automotive sector continues to be a sustainable business for us with many of the big brand names as customers. These customers have a strong appreciation for our contribution to their sales, numbers and the proficiency of their workforce as a result of our training and product offerings.

And then again, I mentioned our expanded services in the quarter. On previous calls, I have talked to our business of process outsourcing services. I have talked to our technical end user training and I have discussed our sales enablement training services, all which were doing well and contributing to our growth.

Today, I thought I would spend a bit of time on the leadership development services. As you know, we executed a strategy to what we believe was a market demand for leadership development and training in the corporate space. We acquired capability in Asia, in the U.S. and in Europe and enlarged this capability across existing accounts. We also linked our leadership development capabilities with our BPO services.

Said differently, we are bringing to the market a leadership development solution for global organizations that are looking for consistency across their enterprise as well as quality and efficiency. We are experiencing success with this strategy including expanded work with BMS, PNC, Chrysler, Wheelabrator, CIGNA and others.

And finally, I mentioned our global growth. As a result of our work with HSBC and a number of other clients, we have expanded our operations in a dozen or more countries in as many months. Our global reach which includes the addition of very talented staff, enables us to provide services to a broader customer base as well as to expand our services with our existing customers. In summary, we believe our market penetration, our expansion of services, and our global reach provides exceptional platform for continued growth for the Company.

With that, I will turn it back to Scott.

Scott N. Greenberg

Thank you, Doug. One of the important things that Doug said during his presentation was the growth of offices within the Company. In the last year, the Company has expanded into over 15 new countries. As Sharon mentioned, the corporate expenses, the salaries and benefits in the quarter were close to $900,000 more. So here we are at GP Strategies, we were able to absorb the changes in our cost structure and our operating model and still post the results that we did. So there has been a major investment made in the global infrastructure of the Company and you’ve seen the results and you can see from Doug about the future that we have in these various regions with our global accounts.

Right now when you’re looking at GP Strategies today, out of what’s considered the Global 500 companies of the world, we are currently providing services to over 100 of these companies. So 30% of the global companies in the world, 500 Global Companies, they are now customers of GP. However in many of these accounts, we are just touching the surface of the spend that they have so our goal in the next five years, in addition to winning new customers, is the focus on growing our business with the 140 global accounts we currently have.

As Doug mentioned as well, we are going down the road with HSBC and we continue to work and you heard from Sharon that the revenue increased from the first quarter and HSBC is well on the well on the way of becoming one of – well, they are one of GP’s top accounts at revenue.

And then lastly before I turn it over to questions, let’s talk about the Investor conferences we are attending. Typically, the summer is a slow month. However, we will be at the BMO back-to-school conference that occurs in the fall and Sharon and myself will be presenting at that conference. With that being said moderator, I would like to turn it over to the Q&A section.

Question-and-Answer Section

Operator

Thank you. (Operator Instructions) And your first question is from the line of Josh Vogel with Sidoti & Company.

Josh Vogel – Sidoti & Company, LLC

Thank you. Good morning, everyone.

Douglas E. Sharp

Good morning Josh.

Josh Vogel – Sidoti & Company, LLC

My first couple questions are around HSBC. Sharon, I was curious if you took HSBC, the contribution out, what was the organic growth we saw in the LS segment?

Sharon Esposito-Mayer

If we took it out? Well, it contributed, Josh, $9.4 million of the increase in the Learning Solutions segment. I think the one thing to keep in mind is HSBC is not a new client for us in 2014. HSBC was an existing client in 2013 and I even think a little bit earlier. So we do view that as organic growth. That was the expansion of those existing relationships that we had, but the organic growth in Learning Solutions overall was $10.5 million and so HSBC comprised $9.4 of that growth.

Josh Vogel – Sidoti & Company, LLC

Okay. And would you consider HSBC as fully ramped today?

Sharon Esposito-Mayer

No. I can let Doug speak to that, but no. We certainly have more countries to bring on and more services to expand upon.

Douglas E. Sharp

Josh, I spared you the ramp up schedule that was drawn from this call. I’ve covered that on the last two or three calls, but, Sharon is right. We are ramping up to – I think we’re on wave three countries. That’s how they start. We started wave one, which are the largest spends in the larger learning populations. UK, Hong Kong, and U.S. was kicked off at the beginning of the year. Wave three countries are coming into place as early as this Friday with Latin America, Brazil, Argentina, and Mexico with some learning population there.

So as a result, well, to answer your question, we should be through in the next couple of months. There are some laggers, some countries that are lagging a little bit due to some individual laws and regulations and issues that we’re dealing with, but we should be through most of them in the third quarter. And just as a point of reference, I could point out that if we separate out the startup costs or the transition costs of these countries, HSBC is doing fine on the income side, but the income is really offset by the startup cost and transition cost for bringing these countries on.

The reality is, as I mentioned on last call, there is slightly a diminishing return as we go. We’re picking up more and more countries with less training per country, but as we wrap all of this up in the next quarter we should be reducing our transition costs.

Scott N. Greenberg

And, Josh, one of the goals when you talk about ramping up, the ramp up is based upon our current scope of work. What we hope to do with HSBC, like other customers, is sell them additional services. So it doesn’t include all the service lines that we could potentially offer and give to them. It’s just the initial lines of the contract.

Josh Vogel – Sidoti & Company, LLC

Okay.

Douglas E. Sharp

We are clearly in discussions without saying too much, developing other work streams for HSBC right now that are beyond just rolling in countries and rolling in sort of status quo training.

Josh Vogel – Sidoti & Company, LLC

Okay. So it seems like it’s still early in the game, but do you have a handle on any seasonality in the HSBC work from a quarter-to-quarter perspective?

Douglas E. Sharp

No. They are a global company and they’ve got the same sort of holiday schedule. So there’s a little less delivery and training during the holiday months. Asia has their issues. The dips, they get smoothed out over the quarters, right. So some quarters have some holidays in some regions that make a dent in the numbers and they are usually made up in the following quarter and others don’t. But I wouldn’t call it significant.

Josh Vogel – Sidoti & Company, LLC

Okay. I guess what I’m getting at is over the last couple of quarters you had given us a range that you think once fully ramped, HSBC would be between $30 million and $40 million on an annual run rate business but you didn’t, over $9 million last quarter. So at a minimum, I think we are going to be at the high end of that range. I was just curious if you could maybe talk to that, if you think it is going to exceed that and what we should expect longer term.

Scott N. Greenberg

Well, based upon where we’re currently at, we’re already running at closer to the high end of the range. So assuming if we are successful in getting additional services, we’ll exceed that, the maximum, so to speak. So as I said, I thought the numbers we were given, the $30 million to $40 million, was of a conservative nature and we were right in that regard based upon what we currently know.

Josh Vogel – Sidoti & Company, LLC

Okay. And shifting to energy, you guys talked about some projects that were completed. So, Sharon, I was wondering if you could quantify or maybe give a little bit more detail about the decline in revenue and gross margin we should expect to see now that those LNG projects are complete.

Scott N. Greenberg

Well, Josh, I’ll answer that question. We did have a big increase in the energy group in the quarter and we estimate then next quarter the revenue will come to a little more reasonable level from the group, should be approximately $8.5 million less. However, if you look at the current quarter and you took out that $8.5 million, we still would have been at roughly $126 million, $127 million of revenue and exceeded expectations regardless of that. It’s difficult at this stage to estimate the margin on that differential because of the amount of units and how it’s done.

With that being said, we don’t believe that this is a permanent decline in that area. We are working on some other projects, which will probably, if successful, would occur in 2015. So I think that because you are doing facilities, it’s more seasonal and we’ll have to look at it a year at a time, but that’s roughly the numbers we expect to go down in the third quarter. With that being said, we are working on and talking about some significantly large projects that could impact 2015 if we are successful on.

Josh Vogel – Sidoti & Company, LLC

Okay. And as far as the margin profile, we should expect to see that dip back into the mid-20% range?

Scott N. Greenberg

Yes.

Josh Vogel – Sidoti & Company, LLC

Okay. And then just lastly, Sharon, I missed the backlog number. Can you repeat that, please?

Sharon Esposito-Mayer

Yes, sure. At the end of June, our backlog balance was $226 million, Josh, in comparison to $244 million at June of 2013. That decline is largely related to the completion of those LNG projects as well.

Josh Vogel – Sidoti & Company, LLC

Great. Okay. Thanks a lot. Thank you, guys.

Sharon Esposito-Mayer

Sure. Thank you.

Scott N. Greenberg

Thanks Josh.

Operator

Your next question is from the line of Jeff Martin of ROTH Capital Partners.

Jeff Martin – ROTH Capital Partners, LLC

Thanks. Good morning, guys.

Scott N. Greenberg

Good morning, Jeff.

Jeff Martin – ROTH Capital Partners, LLC

Great to see the quarter results. Fantastic

Sharon Esposito-Mayer

Thank you.

Jeff Martin – ROTH Capital Partners, LLC

Sharon, could you quantify the startup cost ratios we see in the quarter, startup, transition cost, however you want to?

Sharon Esposito-Mayer

Yes. Sure. They were about $1 million.

Jeff Martin – ROTH Capital Partners, LLC

Okay.

Sharon Esposito-Mayer

And as Doug mentioned, Jeff, we should be completing the transition phase of the project during Q3 when we onboard the rest of wave three countries. We would expect to start to see some decline in those transition costs during Q3, but we will still continue to incur transition costs during Q3.

Also, as Doug mentioned, I think the one important thing to note with this, because there are so many various components to this project, that the bulk of the revenues that we will generate on this project do relate to the delivery of training across the globe for HSBC. And if you look at the margins that we’re actually generating right now on the deliver portion of the project, they are consistent with the margins that we have as a company. So once the transition costs subside we will definitely start to see an improvement in margins relating to HSBC overall.

Jeff Martin – ROTH Capital Partners, LLC

Okay. So once the startup is complete, will that $1 million essentially flow through to the pre-tax line?

Sharon Esposito-Mayer

Yes. That is correct.

Jeff Martin – ROTH Capital Partners, LLC

Okay, great. You’ve referred to on past calls that you are generating a lot of interest from additional large, multinational organizations about – maybe not holistic global outsourcing, but significant contracts. Could you kind of give us an update on how those conversations are moving along and how you feel about signing up a similar contract, maybe not as large as HSBC, but that’s one of the big underlying theses here is this leads the way for additional contracts, similar to, but maybe not quite of the same scope.

Douglas E. Sharp

Jeff, I’ll take that one. This is Doug. As we have said in the past and predicted, there is an interest partly because of just who GP is and our market presence, partly because of the growth that we’ve been advertising in the picking up of new customers including HSBC. So we have a number. I don’t want to share what that is with you, but it is more than five, I guess I could say, RFIs, RFPs, new opportunities and you are right.

They are not necessarily as holistic in outsourcing as HSBC was, or CIGNA. Most companies tend to take work streams and try those out first and work their way up the services pyramid, if you will, but there’s a number of them out there. They’re global. They’re big companies and we’re happy to see these companies are starting to move in this direction.

We’re happy to see that they are putting these contracts out for what we would call pure play training services, and not embedding the services into a broader HR outsourcing, which would attract a different type of competitor and a different kind of company. So we’re happy about that. As far as the stage that we’re at, most of these opportunities we’re seeing now are in the early stages, so introductions, second rounds, presentations, those kinds of things. So I can’t tell you that we’re ready to sign a contract in the next few months. These things take some time to develop. The bigger they are, the more time they take to sort of evolve.

Jeff Martin – ROTH Capital Partners, LLC

Great. And then, Scott, can you characterize your appetite for acquisitions currently?

Scott N. Greenberg

Well, if you look at the organic growth and what we’ve been doing as far as building the company with our global business model, while acquisitions aren’t out of the question, I really think we have enough on our plate investing in the company building out the 14, 15 countries, cross selling opportunities that we have, the focus of our time and effort is being devoted to the organic possibilities.

Now, that’s not to say that if something very important comes across our plate we won’t look at it, but the prime focus is on the model that we have and growing organically and winning additional large outsourcing and getting HSBC fully integrated and executed and fully transitioned and that’s really the primary thing that we are looking at currently.

Jeff Martin – ROTH Capital Partners, LLC

Okay, great. And then, Sharon, you gave foreign currency translation benefit for one segment. Do you have it for the whole business for the quarter?

Sharon Esposito-Mayer

Yes. Really the majority of that, Jeff, is in that segment. Just about all of our international operations are in the Learning Solutions segment and that favorable exchange rate gain really was a result of the change in the exchange rates in Europe.

Jeff Martin – ROTH Capital Partners, LLC

Okay. Okay, great. And then final question. Is there any update or any material developments going on with the UK Job Skills?

Scott N. Greenberg

No material development currently. The UK Job Skills had a meeting with the top vendors and we were included in them and they’re talking about starting focuses on expansions, but they haven’t done anything definitive. The only thing that we do know is that just like they have talked about a few years ago, there is starting to be a focus on the larger vendors and we might see some changes there, again, which could benefit GP Strategies, but nothing definitive at this point.

Jeff Martin – ROTH Capital Partners, LLC

Okay, great. Thanks for the update, guys.

Sharon Esposito-Mayer

Thanks, Jeff.

Operator

Your next question comes from the line of Kevin Liu with B. Riley.

Kevin Liu – B. Riley & Co., Inc.

Hi, good morning, and congrats on a strong quarter.

Scott N. Greenberg

Thanks, Kevin.

Kevin Liu – B. Riley & Co., Inc.

Just starting with the Sandy segment, obviously nice sequential improvement there even if taking out the publication revenue piece. I am just wondering on a year-over-year basis, would you expect to continue to accelerate the growth rate further over the remainder of the year? And maybe just talk a little bit about kind of the pipeline of opportunities that you have there?

Scott N. Greenberg

Yes, Kevin. In the Sandy growth segment, while we’ve had good sequential growth, the first quarter was below the prior year. So looking at the year for Sandy, we don’t expect this to be a major organic growth part of the business. We were hoping that it would exceed last year, which it started to do and we would hope that it would get in the low single-digits of organic growth, but you’re not going to have. At this stage, things could change, but our feeling is you’re not going to have major organic growth in this sector this year.

Kevin Liu – B. Riley & Co., Inc.

Got it. And just with respect to conversations you might be having with either your existing or prospective customers, any sense for if there are significant programs that could come online that would help out in fiscal 2015?

Scott N. Greenberg

Well, the one thing we are looking at is we are looking at international customers for our automotive sector and expanding with our current customers as well. The one thing that we have been able to accomplish is that we are doing training for Porsche out of China. So we have gotten our first real account in the Asia Pacific market and we would hope to leverage it on our other customers. So I think that’s really part of the opportunity, is expanding and doing the work outside of the States with some of our larger customers and that’s going to be a focus and that I think could give us some growth in future years.

Kevin Liu – B. Riley & Co., Inc.

That’s great. And you guys also mentioned that the effective acquisitions contributed a bit more than you would have expected in Q2. Just wondering what you are seeing in terms of being able to leverage your platform and win some new business there? And then whether you would expect kind of the revenue run rate we saw in Q2 to tick up as we move through the remainder of the year?

Scott N. Greenberg

Right now I’ll break it out into two. The two areas that we’re seeing the largest cross selling opportunities from our recent acquisitions is in our leadership training model where we bought BlessingWhite in New Jersey and the UK and we made some other smaller leadership training acquisitions in the UK. And we are seeing good opportunities to sell it to current customers of GP and that’s been an area that has been growing very nicely for GP, probably the revenue top line in excess of 20% growth rate.

The Effective-Learning, we have won new work since we bought them. We are using Effective-Learning to train additional resources and capabilities at the States. They did have a very strong second quarter, which – if you compare them for the same year in the prior year, they would have grown in excess of 20% on the top line.

Again, it’s all non-organic for GAAP, but if you compare them to the year before, they would have had a 20% growth curve. I think for me right now it’s too early to predict after one quarter what it’s going to be in a longer period of time, but obviously after the first quarter what they did, we were pretty excited.

Kevin Liu – B. Riley & Co., Inc.

Great. And then just one last one on the expense side. Certainly, there are still some of these infrastructure buildup costs that we’re seeing flow through SG&A. I’m just wondering if you expect that to kind of hold steady for the remainder of the year or if there’s some incremental investment that’s going to go back into the business as we make our way through the rest of 2014?

Sharon Esposito-Mayer

I think it’s probably going to hold. The SG&A cost is probably going to hold pretty close to what it was within the quarter. The one thing to note though, Kevin, is as we get out in future quarters though, we started ramping our SG&A cost in the fourth quarter of last year. So SG&A expense in Q4 2013 was actually $10.8 million compared to the $11.5 million of SG&A this quarter. So, we’ll start to definitely see that year-over-year increase start to diminish as we get into Q4, but the rate we’re running right now is probably pretty close to where it’s going to hold to through the remainder of the year.

Kevin Liu – B. Riley & Co., Inc.

All right, sounds good. Thanks so much.

Sharon Esposito-Mayer

Thank you.

Scott N. Greenberg

Thanks, Kevin.

Operator

Your next question is from the line of Wayne Archambo with Monarch Partners.

Wayne J. Archambo – Monarch Partners Asset Management, LLC

Yes, thank you. On the HSBC business, as you pick up incremental business, do you just have a flat fee arrangement with them or is there an omnibus arrangement where incremental sales, the overall fee that you charge them comes down or how do you handle that?

Douglas E. Sharp

Well, there are a number of work streams in the HSBC contract, one for design, one for delivery, one for vendor management and overall service management. It is a Master Services Agreement. The Master Services Agreement is superior to a subordinate local services agreement by each country and so the local services agreement can also add additional work streams. And we have some fixed price. And of course there are some transformation costs that was fixed price. So just about every model you can think can think of. So we have unit pricing for some design.

We have hourly rates for delivery. We have – special projects, comes off of a special rate card. There can be some fixed price, but mostly time and material. And then we have a fixed price overall management fee that gets adjusted every year based on some determination. So that’s the variable. There are some incentives that go along year-over-year to improve the efficiency and reduce some cost. So I think that answers one of your questions. And there are service level agreements that have to be met that could impact, if not performance, could have an impact on the numbers.

Scott N. Greenberg

But for example, if we would add new service, and I’ll pick a service that we do for many customers like leadership training, it would be a newly negotiated rate for new service.

Douglas E. Sharp

Yes, there were a number of things that were not necessarily contemplated in the MSA that need to be done to get fully executed learning strategy across the HSBC enterprise and those are negotiated separately, incrementally contributors to the company. So I think I don’t to go…

Wayne J. Archambo – Monarch Partners Asset Management, LLC

No, no. That’s good. I don’t want – no need to go any further. I appreciate it. I think great quarter guys. Thank you.

Sharon Esposito-Mayer

Thank you.

Operator

Thank you. Your next question comes from the line of Gary Bragar with NelsonHall.

Gary Bragar – NelsonHall

Hi, good morning and congratulations on a really nice quarter. I think most of my questions were answered, but I do have two and these are for Doug. Sorry I missed it when you were giving an update on the banking clients and you listed several of the existing banking clients, but then you mentioned there’s a new client that was added and I missed that. If you could comment on who that was and what services are provided?

Douglas E. Sharp

It was Coldwell Bankers, was the new client. So we get into these new clients in different ways depending on how – so sometimes we’ll work for a year on a holistic outsourcing. Other times they will get us engaged with some smaller tasking, sort of test us out and try it. That’s more of the case with Coldwell Bankers. They are, in my mind, leveraging us for the first time based on financial banking experience, on a smaller scale, and they are going to see how we do. We’ve had clients like that have grown over a year into some pretty substantial clients. So we’ll see how that goes. Does that help you?

Gary Bragar – NelsonHall

Yes. Just a follow-up as well though, I was just curious. I know what Scott was talking about, focus on really expansion of the 140 existing clients, which I think is a really good idea, but I was just curious if there is anything in the pipeline of new outsourcing contracts you could talk about, if there is anything by industry you can comment on?

Douglas E. Sharp

Well, the answer for the first question is, yes. And, they’re coming from a variety of industries.

Gary Bragar – NelsonHall

Okay.

Douglas E. Sharp

So, I don’t want to really go into any detail.

Gary Bragar – NelsonHall

Okay, all right. Thank you.

Douglas E. Sharp

Thank you.

Operator

Thank you. And at this time there are no further questions.

Scott N. Greenberg

Thank you, moderator. So I’d like to thank everybody for participating on GP Strategies’ call. We look forward to seeing you at our conferences and speaking to you in the near future. So, thank you very much.

Operator

Thank you, ladies and gentlemen. That does conclude today’s call. You may now disconnect.

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