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GP Strategies Corporation (NYSE:GPX)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

Scott N. Greenberg - Chief Executive Officer, Director

Douglas E. Sharp – President

Sharon Esposito-Mayer - Chief Financial Officer, Executive Vice President

Analysts

Josh Vogel - Sidoti & Company

Alex Paris - Barrington Research Associates, Inc.

Ross Taylor - Caxton Associates, LLC

Kevin Liu - B. Riley & Co.

Richard Nelson - Jesup Lamont, Inc.

Bill Garrison - Ironworks Capital Management, LP

Operator

Good morning, my name is David and I will be your conference operator today for the GP Strategies conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session.(Operator's instructions)

Thank you. I will now turn the call over to Ann Blank, Director for Investor Relations and Financial Reporting for GP Strategies. Please go ahead

Ann Blank

Thank you. Good morning everyone and welcome to GP Strategies second quarter 2008 earnings call. Financial results for the second quarter were released this morning before the market opened. You can access a copy of this result in the press release which is posted on our website at www.gpwordwide.com. On the call today for GP Strategies are Scott Greenberg, Chief Executive Officer; Doug Sharp, President and Sharon Esposito-Mayer, Chief Financial Officer.

Before I turn over the call to Scott, let me 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.

And with that, I would like to turn the call over to Scott.

Scott Greenberg

Thank you, Ann. Good morning everybody and welcome to our conference call for the quarter ended June 30, 2008. To begin the call, I will give a brief overview of the quarter then Sharon will present a detailed financial analysis of the result and then Doug will give an update on new initiatives and contract awards.

I think you are going to be very pleased with some great news from our United Kingdom operations. After their presentation, I will discuss the future vision of the Company and conclude with a Q&A period. This morning, we came out with our earnings release and we believe the performance was quite impressive. GP Strategies announced net income for the second quarter of $0.18 per share that was after a $0.01 per share nonrecurring charge. This compares to $0.14 per share or roughly a 36% increase in earnings per share compared to the corresponding quarter in 2007 before that nonrecurring charge. We were quite pleased.

In addition to the strong financial results, we announced that the Board of Directors have authorized an additional $5 million dollars available for repurchases under our share buyback program. The thing to realize is since January 2006, we have actually repurchased the total of $33 million inclusive of the private transactions retiring on Class B stock which was $20.3 million and in addition, we had open market purchases of $30 million. We bought back the stock from $6.60 to over $11 dollars per share. The amazing part is we have been able to accomplish this buyback and also fund five acquisitions due to the strong cash flow generated from operations.

When we look at the buyback program, the Company analyzed and the Board analyzed a lot of things. Our ratio of market cap to trailing 12 month EBITDA is currently at approximately $6.5 to $1. At the same time last year, we were roughly $9 to $1. Obviously at this level, we find the stocks very attractive and we will continue to repurchase it.

In addition in today’s press release, we announce that as of June 30, 2008 we have approximately $7.6 million of short-term borrowings outstanding. That was up from the first quarter due to the early extinguishment of the ManTech debt obligation of approximately $5.2 million. But right now, I am pleased to report that as of yesterday, the amount outstanding was reduced to $1.2 million further showing our ability to generate cash. So from June 30, 2008 to yesterday, we have paid down our line $6.4 million.

Revenue for the quarter increased to $72 million which was up from $63.7 million or a 13% increase demonstrating the stability of our revenue base despite the current economic environment. Oil groups of the Company had organic growth in the second quarter of 2008. On the operations front, we continue to invest in our international operations specifically in the Asia Pacific region. We believe that expanding the Asia Pacific operations will provide us with the key differentiator in the future and winning work in both America and Europe, so we will continue with this investment. We are able to make this investment due to the significant accounts we have been able to bring in Europe and Asia Pacific.

Now, I would like to turn it over to Sharon who will give details of the financial results for the quarter.

Sharon Esposito-Mayer

Thanks, Scott. As Scott mentioned, revenue for the second quarter of 2008 increased by $8.4 million or 13%, resulting on a year-to-date revenue increase of $21.7 million or 19%, and organic year-to-date revenue growth of 10%. Revenue in the manufacturing and BPO segment increased during the second quarter by $5.2 million or 19%. This increase was a result of a $2.5 million increase from our United Kingdom operation with $1 million attributable to the SmallPiece acquisition completed in June 2007 and the remaining $1.5 million due to the increase in UK government funded training services and revenue increases with European BPO client.

Other significant increases in this segment include $1.6 million of increased revenue attributable to Via acquisition completed in October 2007 and a $1.3 million net increase in BPO and E-learning services with new and existing US customers. Organic revenue growth this quarter was 9% in this segment excluding the revenue derived form the Via and SmallPiece acquisition. Revenue also increased in the process, energy and government segment by $2.3 million or 14%.

The increase in revenue in this segment was due to $900,000 in net increases in products and services for the energy sector which includes approximately $370,000 of revenue related to PCS acquisition completed on March 1st of this year. A $700,000 increased in engineering services related to LNG and hydrogen construction projects; a $900,000 increase in engineering and technical services primarily for customers in the aerospace industry and a $500,000 increase in the emergency preparedness training for federal and state agencies. These increases were offset by a $700,000 decline in services for customers in the petroleum and refining industry.

Revenue in the Sandy segment increased $800,000 or 4%. Revenue in the acquired Sandy business increase $1.3 million due to the expansion of sales training programs with existing customers. Sandy's results include $3.6 million of second quarter publication revenue in comparison to $4.1 million in the second quarter of 2007 and third quarter publication revenue is projected at $1.3 million. Sandy’s revenue increase is offset by a $500,000 decline in technical automotive training related to the business unit which was transferred into the Sandy segment in 2008.

If you exclude decline in technical automotive training, the acquired Sandy business achieved 7% revenue growth during the quarter. Gross profit increased in the quarter by $1 million or 11%. Gross profit in the manufacturing and BPO segment increased $600,000 or 15% from $4 million to$ 4.6 million primarily due to the revenue increases discussed. Gross profit as a percentage of revenue decreased slightly in this segment due to some courses running below full capacity combined with a lower volume of courses provided in the quarter. The acquired Via business is also running at a lower profit margin than the other business lines within this segment.

Process, energy and government gross profit decreased by $200,000 or 6% to $3.5 million from $3.7 million largely due to a decrease in margin on certain LNG construction projects and the decrease in high margin services provided to petroleum and refining customers during the second quarter of 2008 compared to the second quarter of 2007. Sandy's gross profit increased $700,000 or 40% to $2.3 million from $1.6 million in 2007 primarily due to the increase in revenue.

Second quarter operating income increased $800,000 or 18% and operating income as the percentage of revenue increased from 6.8% in 2007 to 7.1% in 2008. The increase was primarily due to the increase in gross profit of $1 million offset by a $250,000 increase in SG&A expense. SG&A expense increased during the quarter largely due to the $355,000 of deferred financing cost consisting mostly of legal expenses related to an equity offering to be used primarily to finance perspective acquisitions. This offering was aborted during the second quarter of 2008 as a result of market and other conditions.

Interest expense decreased a $140,000 due to a decrease in the debt and a decrease in interest related to short-term borrowing and other income increased approximately a $110,000 due to a negotiated discount on the early retirement of the ManTech note. Income tax expense for the quarter was $2.1 million compared to $1.7 million in 2007 and the projected 2008 tax rate is 41.4% in comparison to 42.3 % in the second quarter of 2007. Net income increased 27% in the second quarter or $636,000 resulting in a 29% increase in earnings per share for the second quarter and a 35% increase in earnings per share year-to-date.

Second quarter EBITDA also increased $700,000 or 14% to $6.1 million in 2008 and with a $16.766 million diluted shares outstanding for the second quarter. We generated $0.37 of EBITDA per share in the second quarter. Leaving on to just some brief balance sheet highlights, our cash balances decreased $360,000 and borrowings increased $4.7 million from December 31, 2007. Cash uses in the year included the $5.2 million early repayment of the ManTech note, $2.5 million related to the year when Sandy are announced, $1.1 million to fund the purchased prize and acquisition cost related to the PCS acquisition and $3.3 million of open-market share repurchases.

Year-to-date fixed asset additions totaled $1.8 million in comparison to $700,000 year-to-date June 2007. The increase in additions year-over-year is primarily due to $330,000 of leasehold improvements and other fixed asset additions related to the move and consolidation of our Troy, Michigan facility and a $500,000 purchase of office based in the UK to support expansion. We generated cash flow from operations year-to-date of $8.1 million compared to a cash used year-to-date 2007 of $8.3 million. The $8.1 million in cash generated is comprised of income of $5.8 million, non cash add back to net income including depreciation and amortization of $1.8 million, deferred taxes of $2.9 million and non cash compensation expense of $1.3 million offset by a decreased in other operating items of $3.8 million largely driven by a $6.5 million increased in AR Aging.

During the second quarter, we repurchased approximately a 193,000 shares for a cost of approximately $1.9 million bringing the open market repurchases to date to approximately 1,443,000 shares or $13 million with a full $5 million recently authorized remaining for future share repurchases. On August 14 of this month, our debt comes due to the belly which currently totals $2.3 million prior to the exercise of the approximate remaining $61,000 warrant which has the potential to reduce the debt by approximately $300,000.

Our funded backlog grew slightly with $136 million of backlog as of June 30, 2008 compared to $134 million at June 30, 2007. Our largest market sector continues to be automotive comprising 29% of revenue in comparison to 31% in 2007 and government comprised 17% of revenue in comparison to 18% in 2007. General Motors remains our largest customer comprising 21% of our year-to date revenue in 2008.

And that completes the overview of the financial result. So, at this time I will turn the call over to Doug.

Doug Sharp

Thank you, Sharon. I will take a couple of minutes and discuss with you some good news items that should be followed by more detailed press release in the days to come and to expand on a couple of points made by Scott and Sharon. You have now heard of our increased revenue in UK from our government funded initiatives, the good news is that we expect the continued significant growth in this area.

In UK, we support regionally-based learning skills councils. These councils are funded by the UK government to propose the developments of apprentice-level skills in a variety of occasions. Recognizing that regulatory changes are going to increase the eligible student population and the funding was going to be available, GP worked hard to keep our quality metrics high and more importantly, win contracts with more regional councils. Last year, we had five contracts; now, we have eight with three additional pending contracts.

The vocational qualifications we currently support with both assessment and training include business administration, customer service, care for the elderly, retail distribution, warehousing and ITQ. Again, 2008 and 2009 should see significant growth in this business area.

Back in the United States, as you know we have been pursuing homeland security funded-state run programs and we have had some good success in the second quarter. In Q2, we were informed that we were the successful bidder on a Midwest state contract for public health and safety training exercise support. The contract requires more than 40 instructors and planners. We have since completed negotiations and we are pleased to announce that yesterday, we received a signed contract for this significant effort.

Once approved by the state, we will release more detail on the press release. I will close with a few words on our energy services specifically electric power generation services. As you know, there is a national desire to increase all available alternatives for power generation and for improving the efficiency and cleanliness from all power sources. The result is additional technology in the industry and therefore, additional demand on skilled workers. In addition to that, expansion of use of power generation technologies, industry is facing a skilled labor shortage driven by an aging workforce.

We wanted to let our investors know that we are acutely aware and we will be putting initiatives together to capitalize on this opportunity. We will leverage our four decades of power generation experience. We are adding new content for renewable sources; wind and solar and etc; we are refreshing our content for fossil and nuclear technologies. We have also aligned all power generation services into one business unit that includes our nuclear services unit and the recently acquired acquisition, PSC. But we are also in the process of adding strategic business partner resources to our team and you will be hearing more about that in the future as well.

Finally, in closing we see a potential market trend of outsourcing training in the sector, a combination of technical skills training in this area with the back office administration. We think that is an opportunity that is going to be presenting itself in this industry. As such, our BPO business process outsourcing business unit and our energy services organizations are working closely in anticipation of this potential opportunity.

Those are the three good news items I wanted to tell you a little bit more detail about and I will now turn it over back to Scott.

Scott Greenberg

Thanks Doug. Just so everybody knows the significance of the work in the UK, we believe that 2009, if all the contract are awarded that we expected to that this government work in the UK will become a major account of the corporation. We believe that account could triple from the run rate in 2007 going into 2009. So, that is a very positive significant event that is occurring in the Company. So, thanks Doug.

Right now, what I would like to do is discuss the vision of management and the Board of Directors and where we see GP going forward.

We believe, right now, we are really in a unique position of being a global provider of training and performance improvement services. Right now in our environment, the world is changing. Now, it is changing rapidly, is being driven by new technologies and procedures. This situation is being compounded. There are many corporations particularly in the energy side as well are suffering from an aging workforce.

At the same time this is happening, the companies are saying to themselves that they want to focus on their core competencies and they are willing to outsource these services if a provider could do it efficiently and cost effectively and that this is where GP comes in. Due to our ability to leverage our resources and our systems, we believe we give corporations a viable alternative. When you look at the world today, over 60% of all training services are done internally but we believe more companies will outsource a greater percentage of this solution in year to come.

Basically, what GP has is key differentiator. These key differentiators are enabling us to win work in this marketplace. Well, our differentiators are our strong technical expertise, our global reach, our full line of complimentary services, and the administrative services we provide. On the technical expertise side, GP is providing over 40 years of services in the energy and government sector. About 20 years ago, we branched into the commercial industry but we have maintained and expanded out technical expertise over the years.

When you look at GP, the Company now has over 1700 fulltime employees and a significant number of our employee have a military background. Therefore, we believe our ability is unique. Our senior leadership team that consists of about five people have over 20 years experience with the Company on the average. Global reach, this has been a major initiative of the Company. Few years ago, we had very little global reach. We have expanded it dramatically. We have opened up offices in Shanghai. We have just opened up an office in Ireland. Last year, we opened up an office in Chennai, India. We have expanded our offices in Malaysia and Singapore. We have offices in Canada and Mexico as well. Our fastest growing area has been in the UK and in Europe.

Today, about 85% of our revenue being derived in North America and about 15% international but having this global reach helps us win accounts on a worldwide basis. Even if today, the account is just domestic US work, they want to know if you have the ability to expand with them. We believe that the global revenue will expand in the coming year. The second thing we tried to do was to be a full-service provider. Basically, what we could do is come in and train anyone in the organization. Our motto is we could train from the factory floor to the board room and we offer a full range of complimentary services.

In addition, a unique service that we started doing a few years ago is what we called training BPO services, Business Process Outsourcing. You have heard of business process outsourcing in other industry whether it is HR, IT, finance. What we are able to do is takeover the back office of companies training departments. That will include everything from vendor management, to running their learning management system, to doing tuition reimbursement system. So, what we do here is we takeover the administrative work, alleviate the major companies of the paper work involved, but also cross sell our other services.

And then next, Doug talked about our initiative in energy and that is very important to the Company. Another major initiative, is what I just discussed, is cross selling. Basically, what we are able to do is do everything from product sales training, E-learning, engineering services, lean line six sigma and basically, we go to these customers with a full line of services. So, even if we are only involved in one area today, we hope to expand. When you look at our customer base, we only represent a small percentage of most our clients spend. So, our largest customers that were doing $10 million to $20 million a year in revenue, we probably represent less than 10% of their total training spend. So, we have a lot of room to grow with these customers.

Before I turn it over to questions, I just wanted to talk about out acquisition strategy. In the latest 24 months, we have made five acquisitions. They have been accretive to earnings and we have maintained our strong liquidity position even after making the acquisition. We believe we have a very experienced acquisition team and are looking at acquisitions to expand our global reach. So far to date, the major success of our acquisition strategy has been in product sales training.

When we look at the Company about three years ago, we thought the major hold that we had was we were not involve in product sales training and we took that as a major initiative. Thru three acquisitions, with the principal one being Sandy and organic growth, we have now built a $90 million successful sales training company. Sales training is anticipated to be one of the fastest growing outsourcing training areas and your company GP is there. So, obviously we are very excited about the future of the Company.

Before I turn it over to Q&A, I like to thank the shareholders, the Board of Directors and the employees of GP for their support. So now moderator, let us turn it over to the Q&A session.

Question-and-Answer Session

Operator

Thank you, sir. (Operator's instruction) We will pause for just a moment so that we can pile that Q&A roster. And your first question comes in the line of Josh Vogel

Josh Vogel - Sidoti & Company

Hey good morning, thank you.

Doug Sharp

Good morning Josh,

Josh Vogel - Sidoti & Company

My first question was with GM. I was wondering if you could just discuss the relationship and what impact if any that the mess amounts or layoffs you are seeing over there is having on your business.

Doug Sharp

Obviously, a very good question. As Sharon mentioned, we do roughly 20% of our revenue with GM. As the business is growing that has been shrinking as percentage since the acquisition. Sandy has been doing work for General Motors for over 30 years. They are provider of product sales training. We obviously believe that despite the downturn at General Motors, one thing that is required is sales. The Company needs sales and that is what we do, we help and provide them with training that trains their salesmen on new products, current products, and how to sell products.

As you can see, the revenue for the Sandy group was up 6% for the quarter and predominantly, it is up in the quarter due to the incremental revenue we are generating from Hyundai and Toyota Corporations and Ford as well. Basically on the GM front, our revenue is held stable. It is tough out there but we have been able to offset that by the new products we have been doing. We do know that so far, the cost we have gotten from GM that we have been able to offset in other areas represents a very small portion of our trainers and approximately a million dollars a year of revenue run rate.

But again, we have been able to offset that in other areas. So GM continues on. We are hoping that it remains an account for another 30 years and we are obviously doing our best to increase the sales at that level.

Josh Vogel - Sidoti & Company

Okay, it is helpful thank you. Now with the equity offering that your Board, could you maybe give us a sense of how much you were looking to raise?

Scott Greenberg

Yes. Basically Josh, most of the costs were related to legal as we are looking at alternatives. We were looking at a few larger acquisitions. Our stock price was much higher. Based upon our future outlook of the Company, we thought it would even be higher than what it closed at yearend but not lower. So we were looking at various alternatives as far as the acquisition strategy we were doing.

We obviously aborted the offering and decided to continue on the pair of the smaller acquisitions in acquisitions that we have been able to fund by our line of credit and the cash flow being generated from the Company. When you look at the Company right now when I said there was approximately $1 million of debt outstanding, that meant there was $24 million available under our line of credit. In addition, just to repeat something that Sharon said during her call, it ended up that our tax credits were higher than originally anticipated.

So, we are getting the benefit and that 2008 will probably be tax free or mainly tax free on a cash basis. How much we were looking to raise? It would be depending on the acquisition side. We obviously did not do it but the minimum we would have looked out was about $30 million.

Josh Vogel - Sidoti & Company

Okay, great. Sharon, you mentioned that the, I missed the commentary but the gross profits were down in the PEG segment. I think you mentioned something about LNG. I was wondering if you could just discuss that.

Sharon Esposito-Mayer

Yes, sure. They were down in process, energy and government year-over-year by about 6%. There were two drivers. Some profit declines on LNG jobs and that stems from two LNG projects having schedule extension. So basically, we are performing that work over a longer period of time stretching at the revenue generation. We will get a little bit of recovery there in terms of going in for funding on scheduling delays that will not be a full profit recovery.

The other reason for the decline in profit is the decline in revenue coming from our petroleum and refining customers. We had a pullback with one of our clients for budgetary reasons on their end and that is very high margin work for us and we had about $700,000 revenue decline and that has resulted in a corresponding decline in our profits percentage as well.

Josh Vogel - Sidoti & Company

Okay, great.

Scott Greenberg

Josh, if I could just add something to that. Right now, however there is a lot of activity on the LNG side of the equation. So, we look at 2009 to be very, Doug talked about energy as well, we look at 2009 to be a very strong year for the Company in the LNG marketplace.

Josh Vogel - Sidoti & Company

Okay great. What about as we look at the consolidated gross margins or the second half of the year, should we expect them to improve upon what we saw on the first half and possibly be up year-over-year over 2007?

Sharon Esposito-Mayer

In the process, energy and government phase, I think we will see some improvement in margins. I am not sure depending on how quickly we recover in the petroleum and refining space because that is high margin work for us. I am not sure if that will come back to the profit margin that it would add in the first quarter but we should continue to see some growth in profit margins and hopefully, we will see some improvement there year-over-year.

Josh Vogel - Sidoti & Company

Okay and just lastly, I did see that account receivables spiked a little bit last quarter, I was wondering if this is mostly a timing issue?

Sharon Esposito-Mayer

Actually, the big driver for the increase right now which is having an impact on our cash flow that we generated from our operations is honestly just an increase in aging. We have had an increase in our accounts receivable aging over 60 days and that has grown almost by the entire increase in AR Aging which is about $6.5 million. We have redirected and focused efforts on that. There is no one really a large driver there. It is a bunch of smaller clients that just have a little bit of slipping in terms of payment. We are focused on that. We have been able to improve that by about a few million just from the end of June and we will continue to focus efforts there. But it is really an aging increase that is driving the AR balance up from where it was at the end of the year.

Josh Vogel - Sidoti & Company

Ok, thank you very much.

Scott Greenberg

Thanks, Josh.

Operator

Your next question comes from line of Alex Paris.

Alex Paris - Barrington Research Associates, Inc.

Hi guys.

Scott Greenberg

Hi, Alex.

Alex Paris - Barrington Research Associates, Inc.

I guess, a couple follow up questions. Firstly of all, with regard to Sandy and GM, I did not realize that there were technical services within Sandy. It was my impression that Sandy was either sales training or publication revenue, am I right on that?

Scott Greenberg

Yes, Alex. As of 2007 when we first bought Sandy Corporation, it was just a publication and training revenue. However, because of their relationship on the technical side, our automobile technical training was moved in to Sandy group as of the beginning of January. That revenue was roughly a million dollars a quarter. When we announced our first quarter results, we basically said that that group was losing money but we expect them to be profitable in the second quarter and that was one of the improvements we anticipated in the second quarter and that occurred.

So basically, that part of the business which is roughly a million dollars a quarter did show a profit in the second quarter of 2008. We were obviously looking at that group as part of Sandy that help our plan launches as General Motors and other companies start the production of the new electric vehicles and we are focusing on that. And obviously due to the work we have done on the energy side, we particularly think we have expertise in that arena. But again, it was put on the Sandy at the beginning of the year due to the great relationship they have with automobile company.

Alex Paris - Barrington Research Associates, Inc.

Okay. In a typical year, Sandy sales training and marketing segment which was roughly $60 million to $67 million in revenue last year and I have it growing this year. How does that breakdown between sales training? Technical services, I guess you said that is $4 million and in publication revenue?

Scott Greenberg

Well, I think, we give the publication revenue on a quarterly basis but why do not you, Sharon?

Sharon Esposito-Mayer

Yes, the publication revenue, Alex, runs probable about $12 million per year give or take. Sandy also has a business. It is kind of slight diversion of the publication in its portfolio that they produced for new vehicles. So, for example when you buy a new car in the glove box comes a like quick reference portfolio guide. That business is about another approximate $5 million per year and the balance is predominantly related to sales training.

Alex Paris - Barrington Research Associates, Inc.

Great.

Scott Greenberg

Now, just so you know, the new work that we are doing for Hyundai and Toyota is predominantly all sales training.

Alex Paris - Barrington Research Associates, Inc.

Okay. Now, in The Wall Street Journal this morning, there was an article about General Motors and its efforts to cut cost. It has been asking its advertising agencies to consider slashing their price by up to 20%. Does that affect the publication business of Sandy?

Scott Greenberg

Well, I think we have done more publications on different vehicles but I think the publication business is more based upon how many vehicles are sold. So, we have had a downturn in certain of our publication lines but it was added on by new products and new vehicles. But again, we are more based upon vehicles being sold right now.

Sharon Esposito-Mayer

Yes, I would say it has a lesser than impact on the pubs and we were projecting to be relatively in line with where it was in 2007. It had a bigger impact on the portfolios as they are actually installed in new vehicles as Scott mentioned.

Alex Paris - Barrington Research Associates, Inc.

Okay. So, unit sale obviously affects the portfolio but the publication would be related to new models, I would assume, right?

Sharon Esposito-Mayer

Yes, there are different versions of publications that go out. They go out to new car buyers. They go out to people that maybe a couple years into the sales cycle and then they go out to people that are basically viewed to the reentering the buying market. So, that has been relatively stable year-over-year. But the portfolio, as they are going into the new vehicles, is what has been impacted slightly.

Alex Paris - Barrington Research Associates, Inc.

Okay, moving on. Another follow up on the equity offering, obviously, you decided not to do it in Q2 that is what resulted in the charge in Q2, I would assume. When did this conversation begin? When was it that you were looking at these larger acquisitions that might have required an equity offering?

Scott Greenberg

Well, we were looking at it, the major lookout was in the fourth quarter. We have only started looking at it. We were looking at a few major acquisitions and decided as a potential and we should be ready in case that occurred. So again, it was preparing for that. And it started in the fourth quarter. Obviously, looking at our stock, when you look at our stock, we ended the year at $10.65. We were coming out with very strong earnings. So, we thought obviously at that time the stock will be significantly higher and the $10.65 and we decided to look into it. Obviously, we do not decide to pursue either acquisition or the equity offering. We made that decision and aborted it in the second quarter and we wrote off roughly, we get to close to $400,000 of legal expense.

Alex Paris - Barrington Research Associates, Inc.

Was it intended that you are going to do the acquisition than the leverage doing equity or were you planning on raising as they call in business, a war chest to make acquisitions ahead of acquisition.

Scott Greenberg

Well, we wanted to have targets. We have specific targets we were looking at. And obviously, it would take time to close the targets. So, we would have the money in advance of the target but knowing what the targets are.

Alex Paris - Barrington Research Associates, Inc.

Okay. With regard to the targets, did you decide not to make the acquisitions because you figure the funding was not going to be available given your stock price or was there some other reason you decided not to proceed with the larger acquisition? Was it a financial decision to address harder decision?

Scott Greenberg

It is overall combination of the two. When we evaluate what to do with our cash or if we have a raise equity and we look at the current stock price. We said that these levels, we should be a buyer of the stock. And we decided not to pursue but obviously it had to do with the acquisition itself because a $30 million, we could do other ways of financing it as well if the Company really wanted to. So, on the equity side, it was more due to the stock being low but at the same time, we decided not to pursue the acquisition. So, it is really a combination both. But even if we wanted to do the acquisition, we would have looked at alternative ways of financing.

Alex Paris - Barrington Research Associates, Inc.

Okay, and then I guess the related question that you commented on that briefly, is the acquisition pipeline notwithstanding the acquisitions you passed on is still fairly active, I take it?

Scott Greenberg

Yes, the one thing that I think has occurred is right now, if you look at our quarter where we did $70 million of revenue way up from a few years ago. We are now being perceived in the marketplace as a very strong company in training and performance improvement. And because of that, we are getting to look at a lot of opportunity. Right now, we are focused on the opportunities that we have done in the past, revenues of $5million dollar company to $25 million dollar company. We will not go below $5 million in most cases because the effort involved is just so substantial and we have so many opportunities that those are the base companies we are looking at.

I will say right now that the key element of the acquisition strategy or what is happening is when companies look at selling their company on a business service side, there is an earnout in every transaction that we do. And when the companies are looking at and saying, "Well, let's evaluate the potential proceed from the sale of the company," and they take the earnout into consideration, they believe they have much a better chance of receiving the full earnout by the going to GP. So, actually we are almost becoming to preferred acquirer of the small companies because we have the intangibles and the ability to make them grow and therefore, that the previous owners will get full earnout.

Alex Paris - Barrington Research Associates, Inc.

Okay, well that is very helpful. Sharon, I have number of questions 10-Q related. To save us most in time, when do you expect to have 10-Q filed?

Sharon Esposito-Mayer

Probably, within a few minutes after the call.

Alex Paris - Barrington Research Associates, Inc.

Okay, good then I will just get the information out of that. Thanks a lot.

Sharon Esposito-Mayer

Sure.

Operator

Your next question comes from the line of Ross Taylor.

Ross Taylor - Caxton Associates, LLC

Yes, I know we kind of beaten the potential acquisition horse to death but I am curious on whether the decision to not go ahead has any strategic impact on the Company and its direction.

Scott Greenberg

The answer on that is no. We were looking at one or two acquisitions in training but in the area that is not one of our strong points. So, I do not think that anyway affects any of the other business models what we are working on specific areas whether it is global, energy. You look at our acquisition pipeline, the areas we are particularly interested in is global and I said that earlier. The second one is the product sales training which is another area as well. I do not think those acquisitions will lessen our ability in any of those areas, the acquisition that we do not go through.

Ross Taylor - Caxton Associates, LLC

Okay, can you talk a little bit more about the LNG opportunity? I know it is a big part of Boone Pickens strategy. Obviously, there are lot people who feel that LNG could be potentially competitive alternative energy for fueling automobile. How big is that market? How is that market playing out? How you unique is what you guys do in it?

Scott Greenberg

Well, let us start a little bit about the energy market in total and then, will we talk particularly about LNG. As we try saying, GP has received this thought in the energy side. We have done training at every nuclear power plant in the country. We now have proprietary products such as EtaPRO which is power plant monitoring system that we install and do the related training too. We have open up a facility in Buffalo, New York; it is Amherst, New York whereby we monitor a significant in number of power plants, non nuclear operation as far as efficiency.

As all part of this, we have experienced in wide variety of energy vectors, including hydrogen and related LNG. Historically, we have been involved with several incorporations where they are building hydrogen refueling stations for buses in Michigan and California. There was a whole put on a lot of the work in California, and that is why we suffered the downturn as Sharon mentioned in the first half of 2007. However, a lot of contracts are coming out that we are bidding on and we believe we have the experience to do it better than anybody else in the world.

Now, the thing to realize, Ross, these are the multibillion dollar contracts that we are working on right now. The contracts that we are working on the LNG side have the potential to be between $3 million and $10 million contract which obviously for GP is very significant. We hope to have a few of them in 2009 and I actually feel very confident that we will.

Doug, you want to add anything to that?

Doug Sharp

Yes, Ross. This is Doug. Our niche in the LNG space derives from our experience with cryogenic fuels, bulk fuels. They store LNG and transport LNG and I mean, natural gas in liquid form because they transport it more efficient. They store, our experience is in the storage and distribution at the point of sale if you will, the point of use for LNG that forces the large industrial LNG complex that are being built around the world. Our growth strategy as you pointed out is aligned with the increase use of LNG, the source and the point of use of that across the country.

It seems we are doing quite well in California and we are a leader, if not being leader I think, in the building and the operation and the turnover to the owners of LNG distribution facility. And we have not announced it yet, we have some good dimensions and very good bids in right now, feeling pretty good about those. These jobs range from like a couple million and to the $10 million dollar range that has come out some of the ports in Los Angeles and so forth. So, the application right now is tended for LNG storage and distribution and they oftentimes is converted to high pressure compressed gas raising well.

The application has more flips so, I think buses, well there are now tractors moving around the ports and moving around shipping extent and large industrial fleets or the current that seem to be attracting a lot of attention in this regulatory development support and convert those from this to cleaner burning LNG. Those were a really good niche area for us. We are pretty excited about it. It does have a potential having ups and downs and with the large contract and wait for the next one to come. But I would say in 2009, as Scott has mentioned, we are feeling really good about it being up for us.

Ross Taylor - Caxton Associates, LLC

Okay. That is good, Scott, back on these deals that you were looking at, would they have been meaningfully additive after the financing if they were equity financed?

Scott Greenberg

The answer is that the ones we have looked at would be free of, everything we looked at would be accretive to earnings obviously with did a combination of that plus financing on each deal. Obviously, Ross, unfortunately they would not have been as accretive to date as they have been. But we all know the result so far of the Sandy acquisition but every deal we looked at so far or the deals look at, we were making sure that they will be accretive to earnings otherwise we will not be interested.

Ross Taylor - Caxton Associates, LLC

Okay. I would say, the re-upping or they are adding a $5 million to the buyback, can we expect that, I have been advocate for years of the idea the Company needs to be more aggressive in retiring its stock particularly at these prices. The market seems to still not quite understand or get or endorse the GPX story. Can we expect you to be more aggressive in buying back stock this shift?

Scott Greenberg

Well, if you look at the month, basically, we start the year because of our 10-K, we start the year with the major blackout period. But you could see or I could tell you that in the June period, we once saw in the May to June period once we filed our 10-K result and then we were very active and also the 10-Q of the first quarter of 2008, we were very active buying back and actually bought back most of the three million dollar buyback in the 45 days or 50 days between the beginning of May and the end of June.

So, the $3 million dollar buyback that we announced last quarter or the end of year, we pretty much all bought back within one quarter. Again, just to repeat, when you look at the total amount we bough back including the retirement of the Class B stock in the last two years that puts us a $33 million and if you add the $5 million more, that would put us total of $38 million. We also think to realize is going into 2007 to 2008, we also did have a lot of overhang and a lot shares that hit the market place. We had, the person you were previously involved with, we had a 1.5 million shares.

As you could see from Jerry Feldman last filings that he sold approximately 5,000 to 10,000 shares and just as importantly that the belly fund that had a convert in the Company of $900,000 warrants and addition at one time on 500,000 shares directly. Those shares went on an overhang position as well. So, if you add the three of them together, that represents approximately 3.5 million shares that hit the market probably in the last 18 months to two years. The belly down to the last 60,000 warrants, we actually bought back some shares from them last quarter as well. So, I think we will be very aggressive, but I also think a lot of overhang that has been affecting the market and GP Strategies stock hopefully as over with.

Ross Taylor - Caxton Associates, LLC

Well, Scott, we just so believe ever been as much in the United States we did when you are the captain. So, keep up the good work.

Scott Greenberg

Thanks, Ross.

Operator

Your next question comes from line of Kevin Liu.

Kevin Liu - B. Riley & Co.

Hi, good morning everyone.

Doug Sharp

Good morning, Kevin.

Kevin Liu - B. Riley & Co.

You guys have obviously been successful in kind of following through on your acquisition strategy but I was just curious at the same time, have your competitors started to role on training and outsourcing providers as well or just what are you seeing there? Are there any other large players emerging today or are you guys still pretty kind of a standalone, dominant company in the industry?

Scott Greenberg

Well, right now, if you look at our industry, I will break it out into few elements. You have, what I will consider the IT training company which we do not compete against and there will be companies like Learning Tree and Global Knowledge. We do not come across some them better upfront. Then you have what I would say is the large corporations and historically, they specialized on more of what I called the training business process outsourcing, the administration on. What they are doing is they are getting their work due to providing other services for these companies. We are getting their work due to the expertise in training.

I have not seen them make other acquisitions or try to do anything like a role out strategy. As far as standalone custom training companies, those types of companies, I have not seen it in the States. So, in the States I believe were one of the few, if not the largest company, that is acquisitive and growing at the same time. Overseas, I have seen companies like the large IT company Top-Top, they bought an Element K, excuse me, an [inaudible], not Top-Top bought an Element K. So I have seen some of the Indian companies try to expand into other areas but as far as being a global training provider consolidating the industry, I have not seen much activity other than us.

Kevin Liu - B. Riley & Co.

Alright and then turning to the sales training on business, I was just curious how much of the business today is concentrated in areas outside of automotive and as supposedly directly in automotive?

Scott Greenberg

Well, if you look at our sales training and we say we have over $90 million initiative, that would mean we are doing over $20 million in sales training outside of the automotive. It is getting us a good resume going after new accounts. When we first bought Sandy, we were solely other than some of the work we were doing internally with Cisco and some other clients, we were totally automotive. But with the acquisition in the United Kingdom which was right before Sandy, PCS and the acquisition of Via Training, excuse me PMC. PCS is a different acquisition. PMC in the United Kingdom and Via Training were now providing sales training for the likes of Microsoft which business should be dramatically up in 2009.

We are now doing work for Best Buy. We are now doing work for Pampered Chef. We are now doing work for companies like Avon and addition in the UK, we are now doing sales training for companies like Barclay's Bank, HSBC, Nationwide Financial. So, in effect what we are developing is a strong resume in sales training. There is an outside organization that list global sales training companies including skills training which we do not participated very much in like Richardson and Miller Hyman and us and Richardson were the only sales training companies that were included in all three groups as winning the awards of best sales training companies in the world.

Kevin Liu - B. Riley & Co.

Great and then just lastly, in terms of the proposal activity that you are saying, could you just speak to how it compares in terms of number of transactions versus the prior year? Also, talk about whether or not companies increasing or decreasing on the scope of this engagements given the current environment.

Scott Greenberg

Well, I could say one of the things that is happening as you could hear from Doug’s presentation with the LNG and what is happening on the government side, the jobs that we are looking at or the jobs that we were proposing at appear to be on a larger side. In a lot of cases in the past, a lot of our strategy and this is still is our strategy is getting the foot in the door with major corporations and then expanding. That is still as part of our strategy plus playing in the BPO market, doing the work that we are doing, some of our proposals are larger.

On the CIGNA side, we will experience an upturn in the trainings. We started with CIGNA in August 2007 that is when we received the award and now it is finally starting to up bring and becoming a major account of the corporations. So, I would say overall in the proposal activity the business that we are looking at or a lot of the proposals are more dollars or larger proposals than we have looked at in the past and that is really in occurrence that is happening.

Kevin Liu - B. Riley & Co.

Alright. Thanks a lot.

Operator

Your next questioning comes from line of Richard Nelson.

Richard Nelson - Jesup Lamont, Inc.

Alright, good morning. I realized we are running kind a long but if you could quickly speak to your relationship with CIGNA and what is going on with Wellpoint, the whole insurance initiative, I would appreciated it.

Scott Greenberg

I have the special guest because he is sitting with me right now. I have Don Duquette who I believe, Rick, there is lot of the shareholders who have spoken to me in the past. Don runs our BPO practice. He is in-charge of CIGNA and Wellpoint. So, let me have Don talk to that.

Don Duquette

Okay, yes. We are seeing I think from a just from a healthcare prospective in general, the CIGNA counts remain really strong and we are growing, of course, CIGNA, we are seeing a significant increase here in the last quarter because CIGNA did announced the acquisition of Great West. So, we are a quart, we are now bringing in the Great West training records and starting to take over the Great West training. So, a lot of work is being done to support the CIGNA acquisition and Wellpoint has just started and again, I think through the rest of 2008 until 2009, we will see a significant increase in the activity from Wellpoint. So, healthcare remains a fairly strong market sector and we have two of the largest companies that are involved to that in the United States and as they continue to expand now outside the US, then that will also grow with them there.

Richard Nelson - Jesup Lamont, Inc.

Well, thank you very much. All my other questions have been answered.

Scott Greenberg

Thanks, Rick.

Operator

Your next question comes from miner of Bill Garrison.

Bill Garrison - Ironworks Capital Management, LP

Yes, thank you. You express optimism about the UK government business next year. Could you expand it all in terms of how significant that was in 2007 or 2008?

Scott Greenberg

Yes, I believe in 2007 and I could do quick translations from pounds, it is roughly $5 million. Right now, in 2009… Go ahead.

Sharon Esposito-Mayer

As I was going to say to date in 2008, in comparison to the $5 million from last year, we generated about $3 million of revenue coming from that business.

Scott Greenberg

So, if you will annualize the six months, obviously we expected to be higher in the second six months but if you annualize the six months, it will $6 million. So, I would say it is running more like of $7 million. We would expect that to more than double in 2009. Again, it is preliminarily. It is not totally locked up yet but if you add the estimates there, I would expect that to January over $15 million in revenue in 2009. So, we believe that we are going to have a major bump up from that government work.

Bill Garrison - Ironworks Capital Management, LP

Okay. Thank you and secondly, Sharon, would you be able to expand on just the tax rate and the NOL position at this point?

Sharon Esposito-Mayer

Sure. Right now, we feel based on what we seeing that the rate that we are booking the tax expense at is a good rate for us this year. However, I will just say that all of our tax returns for the most part get filed in the third quarters. So, if there are any adjustments to that rate, we would expect to come during the third quarter provision work. In terms of the NOL, at the end of the year, we had about $10 million of NOL remaining on our book and that was prior to 1048 tax reserve that we had. We are close to being through that book NOL that we have. However, we have some tax NOLs that are in access of the book NOL. So, to just summarize, we expect to remain for the most part relatively a cash free tax payer of the federal front through the remainder of this year. However, expect to probably fully use up most of the NOLs that we have at the end of the fourth quarter and become a cash paying federal tax payer in the 2009 first quarter timeframe.

Bill Garrison - Ironworks Capital Management, LP

Okay, great. Thank you.

Operator

And there are no further questions in queue at this time.

Scott Greenberg

Well, a lot of questions but hopefully you have a good idea about the exciting things happening at GP Strategies. As Doug mentioned, we do hope to have some press releases out in the future about the things that he discussed particularly the UK government and the energy side and we look forward to updating you on the quarter and obviously when you look at the Company and the rules that we follow, the Company just show to the shareholders now. We announced the buyback but we are in a blackout period for the business days. So, that is where we stand on that. And again, I would like to thank everyone for participating on the call.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: GP Strategies Corporation Q2 2008 Earnings Call Transcript
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