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Edited Transcript of GPX.N earnings conference call or presentation 12-May-20 12:30pm GMT

Q1 2020 GP Strategies Corp Earnings Call

ELKRIDGE Jun 21, 2020 (Thomson StreetEvents) -- Edited Transcript of GP Strategies Corp earnings conference call or presentation Tuesday, May 12, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam H. Stedham

GP Strategies Corporation - President, Interim CEO & Director

* Ann M. Blank

GP Strategies Corporation - Director of Financial Reporting & IR

* Michael R. Dugan

GP Strategies Corporation - Executive VP & CFO

* Scott N. Greenberg

GP Strategies Corporation - Chairman & Senior Advisor

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Conference Call Participants

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* Alexander Peter Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst

* Jeffrey Michael Martin

Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst

* Zachary Cummins

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the GP Strategies First Quarter 2020 Earnings Conference Call.

(Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Ann Blank, Vice President of Investor Relations. Ma'am, please go ahead.

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Ann M. Blank, GP Strategies Corporation - Director of Financial Reporting & IR [2]

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Thank you. Good morning, everyone, and welcome to GP Strategies First Quarter 2020 Earnings Call. On the call today are Scott Greenberg, Chief Executive Officer; Adam Stedham, President; and Mike Dugan, Chief Financial Officer.

Before we begin, I would like to remind you that today's comments will include forward-looking statements, including statements about the anticipated effects of the COVID-19 pandemic and related events on our business and results of operations. Because these forward-looking statements are based on management's expectations and assumptions and are subject to risks and uncertainties, there are important factors that could cause our actual results to be materially different from those expressed or implied by these forward-looking statements. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC, which are posted on the Investors section of our website at gpstrategies.com.

A replay of this webcast will be available on our website for 90 days following today's call. The slides that are being presented today are also available on the quarterly earnings releases page of the Investors section of our website.

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

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [3]

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Thank you, Ann. Good morning, and welcome to our First Quarter 2020 Earnings Conference Call. Today, we will continue to use our regular quarterly format, which will include a WebEx presentation. That being said, our team is at separate locations today for this presentation. Hopefully, you'll find this information informative and useful in your analysis of GP Strategies.

To initiate the call, I will provide a brief overview of results for the first quarter, focusing on free cash flow and liquidity. Then Adam, our President, will give key updates on our global initiatives and the impact of COVID-19. After Adam's presentation, our CFO, Mike Dugan, will present a summary financial analysis. Then I'll provide a recap, followed by a Q&A session.

During the first quarter, we addressed the challenge of COVID-19 by supporting our customers, protecting our workforce, generating free cash flow, reducing leverage and lowering expenses. We have implemented policies and procedures to maximize performance while maintaining and promoting safety in the workplace. The company reduced its debt to approximately $74.8 million at March 31, 2020, from $82.9 million at December 31, 2019, and from approximately $116.6 million at March 31, 2019. In addition, the company has reduced cost in all areas as it deals with the ongoing impact of reduced revenue. With further reductions in the second quarter, we have prioritized maintaining liquidity and supporting our customer base during these trying times.

A positive attribute of our company is our recurring revenue stream, resulting in our strong backlog. In addition, we currently have approximately 125 of the Global 500 companies as customers. As a leader of custom e-learning content development and virtual training, we believe we are well positioned for long-term growth in our industry.

I will now turn the call over to Adam.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [4]

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Thank you, Scott. When I finish, Mike's going to provide detailed financials for the first quarter. I'd like to provide a better understanding of the company's current situation relative to COVID-19. Because of the global scale and pace of the impacts of COVID-19, we had difficulty forecasting the impact on our business in Q1. We entered 2020 with strong momentum and this positioned the company to weather the COVID storm, with strong client relationships, highly capable sales force and operations team and a fully capable business continuity plan and processes. Looking forward, these strengths, combined with our improved balance sheet, give me confidence in our business.

Now we expect our revenues to decline in the second quarter compared to the first quarter, but due to significant cost scaling and cost cutting measures beginning in March of 2020, we expect second quarter 2020 adjusted EBITDA to be consistent with or greater than Q1 of 2020. In addition, unless the existing lockdowns remain in place longer than is expected or there is a return to lockdowns due to the COVID-19 virus, we anticipate the second half of 2020 will outperform the first half of 2020.

Now we've experienced a significant reduction to our face-to-face training deliveries, but other portions of the business remain strong and are growing. One key aspect to consider regarding our face-to-face training business is our ability to scale the business up or down. As classes cancel due to a situation like COVID-19 and our revenues drop, we can reduce the labor cost associated with those deliveries. There is some delay between cancellations and labor cost reductions, but we can react in a timely manner. In a very few countries, legal requirements have limited our ability to respond quickly, but these countries represent a very small portion of GP's revenues, costs and profits associated with training delivery.

Now I mentioned that some aspects of our business are experiencing an upturn. Our content development business where approximately 17% of GP's workforce work, is up double digits from 2019. This award-winning custom content development organization is one of the largest and most capable in the entire industry. The team is very well positioned to benefit from any growth trends in the custom e-learning marketplace.

GP's U.K. apprenticeship services revenue in Q1 2020 exceeded the revenue delivered in the same period last year. This year-over-year trend is expected to continue into Q2. Now we believe that we have significant opportunities within the apprenticeship program due to circumstances related to the COVID virus, especially the increased unemployment in the U.K. Regardless of the current situation, large companies continue to pay the apprenticeship levy and accrue training credits with the government. Going forward, when these companies need to train their staff, they'll be able to preserve cash and avoid income statement expense by utilizing their levy vouchers to pay for apprenticeship related training in lieu of external training spend. Over time, these companies may build back up their head count in a more cost-effective apprenticeship [matter]. Now in addition to the corporate levy apprenticeship business, GP's non-levy apprenticeship business has a strong concentration in the care sector. The U.K. government has put new measures in place due to COVID. These measures are intended to drive recruitment in the care industry, and as a result, we expect to benefit from an increase in apprenticeships in this area and the need to upskill this new workforce by providing mandatory training.

Other parts of our business are maintaining their positions. GP's human capital team is currently maintaining revenues only slightly below 2019, and most of their work does not require face-to-face contact. As for our outsourcing business, although clients have canceled face-to-face training due to COVID-19, the business has not lost a single outsourcing client since the crisis began. We have multiyear contracts with our outsourcing clients that accommodate fluctuations in demand and allow us to scale up and scale down as required. We expect those contracts to remain in place during the COVID-19 situation, and they provide opportunities for future growth after the COVID-19 situation. We're actively working with these clients to convert their live instructor-led training that they historically used to other modalities, such as e-learning and virtual instructor-led training.

Now during 2019, the automotive sector delivered revenue growth that exceeded GP's overall organic growth rate. This year, the automotive industry is facing significant challenges and that's impacting GP Strategies during the second half of Q1 and Q2 for 2020. Going forward, our automotive team is well positioned to enable our clients' successful digital transformation, sorry about that, as they retool their retail model. In our Q4 earnings call, we announced a multiyear several million dollar per year outsourcing contract with an automotive client. This outsourcing is specifically targeted at enabling dealership's digital transformations and demonstrates the type of services GP can offer the automotive industry as it rebounds from COVID-19. This outsourcing engagement is on track to begin next month, and we remain confident in the long-term growth opportunities for GP Strategies within the global automotive industry.

Overall, Q1 2020 backlog is up slightly from Q1 2019. Our sales pipeline at the end of Q1 2020 is down less than 10% from Q1 2019. So obviously, the current COVID situation is impacting GP Strategies as well as our clients. With that said, we're a leading provider of digital transformation and custom e-learning services, and our outsourcing clients continue to benefit from our business continuity processes and procedures. Times such as these strengthen the relationship between GP and key clients as we help them evolve the way they operate their learning. We remain confident in our ability to execute through the current market environment and grow the business over the long term.

Now I'll turn the call over to Mike, and he'll provide more detailed financial review for the first quarter.

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [5]

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Thanks, Adam, and good morning, everyone. Starting with revenue and gross profit on Slide 8, we reported Q1 revenue of $128.3 million, which is down $11.2 million or 8% from the $139.5 million of revenue reported in Q1 of last year.

Breaking the revenue drivers out by segment: The Workforce Excellence segment reported Q1 revenue of $74.4 million, which is down $7.1 million or 8.7% from the $81.5 million of revenue recorded in Q1 of last year. Within this segment, the MLS practice contributed a net decrease of $1.9 million, primarily due to a $5.6 million decrease related to COVID-19 business disruptions and a $1.4 million decrease related to the tuition business that divested October 1, 2019. Partially offsetting these decreases in the MLS practice was a $2.2 million increase in e-learning and virtual instructor-led training content development services and a $2.9 million increase, primarily due to new outsourcing contracts awarded in 2019 that are now fully ramped up. The ETS practice experienced a net $4.8 million decrease in revenue, primarily due to a $2.3 million decrease related to COVID-19 business disruptions and a $2.5 million decrease related to the LNG business that was divested on January 1, 2020. Within this segment, there was a $0.4 million decrease in revenue due to changes in foreign currency exchange rates.

The Business Transformation Services segment reported Q1 revenue of $53.9 million, which is down $4.1 million or 7.1% from the $58 million of revenue reported in Q1 of '19. Within this segment, the sales enablement practice contributed a net decrease in revenue of $3 million, primarily due to a $2.7 million decrease related to COVID-19 business disruptions and a $0.3 million decrease, primarily in automotive sales training services. The organizational development practice contributed net decrease in revenue of $0.8 million, primarily due to a $0.9 million decrease related to COVID-19 business disruptions and a $1.6 million decrease in other OD services, primarily strategic consulting services. Partially offsetting these decreases within OD was a $1.7 million increase in U.K. apprenticeship training services. Within this segment, there was a $0.2 million decrease in revenue due to changes in foreign currency exchange rates. Publication revenue in the sales enablement practice in Q1 of '20 was $5 million, which is consistent with the $5 million of pub revenue recorded in Q1 of '19. For 2020, the publication revenue is now forecasted to be down by approximately $8 million in revenue compared to 2019 as 2 of the 5 scheduled publications in the year have been canceled as a result of COVID disruption and replaced with digital versions. The projected publication revenue by quarter through the end of the year is as follows: Q2, $4.5 million; Q3, $1.8 million; and Q4, $5 million.

In terms of gross profit, we reported Q1 gross profit of $17.6 million, which is down $3.7 million or 17.2% from the $21.3 million of gross profit reported in Q1 of '19. Gross profit for both reporting segments is down quarter-over-quarter, primarily due to the revenue declines related to the COVID-19 disruption. For some additional color on the margin percent decline in Q1. Early on in the quarter, as our clients were notifying us that they were canceling or delaying services in short time period increments like 2 or 3 weeks, our position was to maintain the resources and the capacity to support our clients once they asked us to resume service delivery. Then as the situation evolved and it became clear that this would be a longer and more drawn out disruption, starting in mid-March, we implemented more aggressive cost scaling and cost cutting measures. While these cost cutting measures did not have much positive impact on Q1 margins, we expect that they will help to preserve gross margins and operating income for Q2 and beyond. We continue to monitor the ever-changing landscape, and our objective is to take the necessary steps to preserve gross margin percent to the extent possible during this period of depressed revenue due to global COVID-19 restrictions.

Moving on to SG&A expenses on Slide 9. General and administrative expenses for Q1 are up $1.2 million or 7.2% from the $16.1 million in Q1 of '19. Primary drivers are a $1 million increase in legal and other transaction fees related to a potential transaction that was aborted in March of 2020 and a $0.2 million increase primarily due to higher IT expenses in Q1 of 2020 compared to the first quarter of '19. Sales and marketing expenses for Q1 of 2020 is down $0.2 million, primarily due to lower labor cost.

Moving on to other P&L items on Slide 10 and to touch upon just a few. We reported a $1.1 million pretax gain on sale of our alternative fuels business. The income recorded was net of direct selling cost associated with the deal and was after adjusting for the carrying value of the business, which primarily included net working capital and goodwill. Interest expense in the quarter is down $0.6 million from Q1 last year due to lower borrowings and interest rates under the credit facility and other expenses includes a $0.3 million impairment charge on an operating lease asset due to consolidation of 2 facilities, and a $0.2 million increase in noncash foreign exchange transaction losses in Q1 2020 versus Q1 of '19.

Moving on to the earnings summary on Slide 11. After adjusting for special items, we reported adjusted loss per share for Q1 of $0.03 versus earnings of $0.16 per share for Q1 of last year. Adjusted EBITDA for Q1 was $3.4 million, which is down from the $8.8 million of adjusted EBITDA reported in Q1 of last year. As we look forward, we expect COVID-19 to negatively impact our revenues more significantly in the second quarter of 2020 as compared to the first quarter of 2020. However, as mentioned previously, due to significant cost scaling and cost cutting measures enacted in mid-March of 2020, we expect second quarter 2020 adjusted EBITDA to be consistent with or greater than the first quarter of 2020. For details on adjusted EPS and adjusted EBITDA, you can refer to the appendices at the end of this presentation.

Moving on to some balance sheet highlights on Slide 12. Operating cash flow for Q1 was $9.8 million. AR is down $27.7 million from year-end 2019, primarily due to lower revenue and continued improvement in collections. Net debt was $65.8 million as of 3/31/20, which is a reduction of $8.9 million from the $74.7 million reported for the 12/31/19. As of 5/11, our net debt has continued this downward trend. The company's leverage ratio as defined under our credit facility as of Q1 2020 was 2.3, which is consistent with the Q4 2019 leverage ratio and is a full turn lower than the 3.3 leverage ratio reported just 6 months ago at the end of Q3 2019.

Lastly, the company disclosed in our 10-Q filing that on May 7, 2020, in partnership with our banks, we have amended our credit facility to provide additional liquidity should we need it through the end of the year. This comes in the form of an increase in the maximum leverage allowed during this time period. Under the compliance terms of the existing credit facility, our available borrowings as of Q1 2020 was $22.3 million. With this amendment, our available borrowings while we currently are not expected to reach these levels, would increase by $24.3 million to $46.6 million.

Finally, turning to backlog on Page 13. Backlog as of Q1 2020 was $341.2 million, which is up $6.5 million or 1.9% compared to the $334.7 million of backlog that was reported for Q1 of '19. After removing the 2019 backlog related to the divested tuition and LNG alt fuels businesses, the increase in backlog is approximately $20.7 million or 6.5%.

This concludes the financial update. I will now turn the call back to Scott.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [6]

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Thank you, Mike. As you heard today, we've had a common theme and the common theme was the company was very proactive dealing with COVID-19, focusing on a highly variable cost structure, and on the balance sheet liquidity side, not only protecting our liquidity, but improving on it. We believe that this will provide long-term opportunities after the impact of COVID-19 lessens. So we're very optimistic in the long-term outlook. With that being said, I will turn it over to the Q&A session, moderator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Jeff Martin from Roth Capital.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [2]

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Wanted to get a sense of what is the revenue base of in-person or instructor-led training? And has that reached a stable stabilization point? And if so, kind of where is that level?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [3]

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Well, a lot of our revenue that's face-to-face is blended in different areas. So we have an estimate of that, Jeff. Our estimate of total face-to-face training is approximately 25% to 30% of our overall revenue in 2019. Looking at our results, that is the area that was hit the most in Q1, and it's the area where we're projecting the downturn in Q2 as well that we discussed.

Adam, would you like to add anything to that?

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [4]

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No. I think, in particular, our face-to-face business consists of 2 components: One is face-to-face, you go to customer locations and you work with clients. We're actually seeing some of that in various areas coming back, different parts of the world, at different paces. And then you have, where you're pulling together a group of people to deliver a class with a group of people. That portion of the business, we're not seeing a resurgence yet. But I would point out, a lot of that business is tied to compliance-related learning. So we are working with clients right now around identifying other modalities to deliver that learning to their employees because the compliance deadlines are not shifting, and they have to come up with alternative solutions to train their employees.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [5]

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Okay. And then kind of tied to that was a question in terms of what percentage do you foresee converting to virtual and e-learning out of that 25% to 30% of base that's face-to-face?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [6]

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Adam?

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [7]

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I -- so I don't think we can determine that right now. I think the appetite for face to -- the final appetite for face-to-face versus virtual instructor-led, everybody is trying to figure that out. We're having a tremendous amount of success right now with helping clients develop their best practices for virtual instructor-led training. And we're seeing significant ramp-up in the virtual instructor-led training as we see a ramp down in the live instructor-led. But we don't really have a feel for where that ultimately is going to balance out.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [8]

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Okay. And then a lot of companies are giving a look at April trends. Do you have that information? And can you discuss what the revenue trajectory has been in April?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [9]

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Mike?

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [10]

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Well, yes, so we're not able to provide or are not providing specifics on the guidance looking forward. What we've discussed is, we do expect a more significant decline in revenue in Q2 and compared to Q1. You heard Scott discuss that about 20 -- somewhere between 25% and 30% of our business is in-person or face-to-face interaction. And I would say that Q2 is -- based on what happened globally is going to be the most significant shutdown period where the -- had the most significant impact. So those are the factors that we can discuss at this time, but we don't have specifics on what the April results are or specifically what is our -- or what is a specific projection for Q2?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [11]

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But to add to that, Jeff, what we did say is that we have a very variable cost based business. And because of that, even with reductions of revenue, we're projecting for the whole quarter that the Q2 profit, our adjusted EBITDA will be at or above the first quarter levels. So I think one of the positive elements of the company is, we do have the ability to adjust variable costs in the downturn. And then when it starts ramping up, we can ramp up quickly the other way as well. If you go back, and this is a while ago, but if you go back to 2009, the company with the downturn in the automotive and what happened in the world was able to maintain its gross margin percentage on a variable basis and then had a significant ramp-up in the following years. So that's been the type of model the company has under stressful situations.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [12]

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The other thing I would add, since you asked specifically about April, this is Adam. So April, we saw wide-scale cancellations for face-to-face. We are sitting here in the middle of May. So we have seen returns in May of some of those. We've also converted face-to-face instructor-led to virtual instructor-led that's now scheduled, that's running in May. Based upon the current schedule, assuming that things continue on the current track, it looks like more will be scheduled in June. So based upon the insights that we have right now, April is the lowest month. May, we're seeing an improvement from there. And everything that we're seeing as of right now indicates June would be an improvement from May. So May was -- it looks to be the bottom-out month for us.

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Operator [13]

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(Operator Instructions) Our next question is from Zach Cummings from B. Riley FBR.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [14]

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I guess just building on this, it seems like Jeff asked a lot of the same questions. But in terms of the areas on the face-to-face business that were most impacted by COVID-19, I mean can you take a little bit of a deeper dive in terms of what sectors were most impacted here? And then how many of these engagements have been canceled versus maybe some just being pushed to a later date?

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [15]

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Scott, I can answer that.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [16]

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Okay. Go ahead.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [17]

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So thanks for the question, Zach. As we said, as I tried to allude to earlier, automotive is a very strong industry for us. And outside of travel and leisure, there are a few industries that have been hit harder than automotive during this. So by far, automotive has been the hardest hit for us. If you look at our government business, it's intact. If you look at our defense and aerospace business, actually doing well, we're happy with that. There is some impact on finance services, some impact on life sciences, but really automotive is where we're seeing the most significant impact to our business. And with that said, we're actively working with them. The great thing about our business on the automotive side is that it's probably where we have the longest, deepest relationships. So as they recover from this, we're positioned to recover with them. And as Scott mentioned earlier, I would remind everyone of GP's automotive concentration during 2008, 2009, some of the largest automotive companies in the world filed bankruptcy and GP continued through that, and our automotive business grew significantly after that, but that's definitely where we're taking the biggest hit.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [18]

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And if I could just add to that -- Zach, that part of your question, when you look at the revenue stream we've developed, a lot of it is sales training. In the financial services, we do initiatives, we do regulatory and government compliance. So that's why I believe that when you're looking at our backlog, our backlog has been pushed back, right? So the services that we developed are long-term services that they'll continue to need. They're just being delayed currently. And that's -- and again, that's why I believe our backlog was so strong at the end of Q1, despite the revenue decline.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [19]

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Got it. Got it. That's helpful. And Adam, I know you mentioned you're actively trying to transition some of these face-to-face training engagements to more of a virtual format. I was just curious of the client's willingness to do this versus just waiting for a later day to reschedule that training. I know you mentioned there are some compliance deadlines that need to be met.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [20]

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Zack, that's a great question. And actually, it's interesting. When I talk about some of the things that we think are positive trends for us. So we've actually been a very significant proponent of virtual instructor-led training for a number of years. And typically, the biggest impediment to that type of modality is not the technology itself, it's the appetite of the customer and the willingness for change. Well, a situation like COVID-19, obviously, has significantly increased everyone's appetite for change and willingness to try new things. So we're actually seeing quite a bit of adoption, and the conversion of live -- from live instructor-led training to virtual instructor-led training is not a negative for GP Strategies in our business outlook because once again, whether we're flying somewhere to teach a class or we're teaching it virtually, it's effectively the same revenue for us. And actually, we're able to have better instructor utilization if we're not wasting time flying people around to teach classes. If we can do it virtually, or eliminate the travel time. So I would say that historically, there's been reluctance to change, and we're very optimistic and upbeat around the adoption of that change. And we're -- we don't know where it's going to go, but it could potentially be very positive for us.

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Zachary Cummins, B. Riley FBR, Inc., Research Division - Analyst [21]

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Got it. That's helpful. And then a final question for me. I mean options with the balance sheet, it was impressive in the latest, I guess, the environment early into Q1 to actually see improvements in the balance sheet. I know you have expanded your borrowing capacity within the line of credit, but do you believe that going to be a need to draw down upon that here in the coming quarters? Or how are you thinking about the balance sheet here as we move forward?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [22]

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Well, so far, Zach, for Q2, we continue being cash flow positive and generating free cash flow. So I think while we have this flexibility, we have always been a strong cash flow generator, especially in these times. When you look at our company itself, we have very small capital appropriations and very small deferrals. So there is not a lot of investment in fixed assets in the company. Basically, the services we do are paid for by our customers and not prepared. So we do have the flexibility from the bank, but hopefully, it's something we won't have to need.

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Operator [23]

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And our next question is a follow-up from Jeff Martin.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [24]

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I wanted to get a sense of your observations for return to work, various parts of the world, I mean, everyone has different approaches. But some of your international markets are probably starting to come back. And just, I wanted to get a sense of what you're seeing and observing in terms of how that impacts the business?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [25]

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Adam?

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [26]

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Yes. So we were hit in early on, because in China as other companies who are in China are, we're actually starting to see things recover a little bit there. We're starting to see some business reschedule in China. In the U.K...

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [27]

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I think we just lost Adam. I'm just final checking. Ann, can you hear me? This is Scott. Moderator?

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Ann M. Blank, GP Strategies Corporation - Director of Financial Reporting & IR [28]

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Yes, we can.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [29]

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Okay. So let me go on with Adam's question. First off, Zach, I just want to expand on one thing that we didn't discuss regarding liquidity. One of the things that we do have is that we get to defer certain tax payments, FICA taxes under the new U.S. rules. So basically, that is approximately $2 million a quarter that would start in Q2, where the first payment is in May to late 2021. So we do get some benefit from that and certain tax benefits in the U.K. and the furloughs, which will increase our cash flow as well in the upcoming quarters. Going back...

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [30]

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Scott, this is Adam. I'm back. I don't know what happened. I was dropped, so I'm back on. I -- when you finish, I'll go ahead and finish answering unless you answered what I was on.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [31]

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No, I did not. I went back to liquidity for a second, Adam, so you could go back to your answer.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [32]

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Okay. So the U.K. business has not started to come back. The parts that were canceled have not started to come back as much. I don't know if everyone realizes that the U.K. just extended its furlough scheme this morning. So a lot of our clients are looking at the government furlough plan and employee training and balancing that together. They're also trying to figure out the impact of the people being on furlough versus compliance training, and so we're working with them on that. And then in the U.S., actually, I said the automotive industry has been the hardest hit. We're actually -- we're seeing things start to come back in May. We believe May will be more active than April, and then the current schedule shows June will be more so than May. So the U.S., where we've seen the big automotive downturn, April was the lowest, then May, then June will be the best for the quarter. Did that answer your question? Sorry, I'm not sure what happened when I dropped there. Sorry for the disconnect, but did I answer your question?

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [33]

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Yes, that's helpful. I was just looking for some perspective on the reopening and what your observations have been. I mean it's early in the U.S., but other parts of the world are starting to, so that helps. And then wanted to get a sense of, if unemployment reaches 20-plus percent, how does that impact revenue? Are you paid on a per-head basis in a lot of these contracts? And you don't have to quantify that, but qualitatively looking for some commentary.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [34]

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So what I could say is historically, the unemployment and the amount of training doesn't necessarily correlate exactly. And the reason is because, let's say, you have to train 20 people, and then you let go of 20% of them, which increases unemployment by 20%, you still have to train 16 people. It's just the training is going to be held for 16 people instead of 20, and our revenue basis is based upon whether we actually deliver the event or not. So whether we deliver the event with 20 people in it or 16 people in it, as long as we deliver it, then it's the same. Now that's a gross oversimplification of our business, but hopefully, that -- it helps you understand that there is really not the same correlation between unemployment and training deliveries as you might think.

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [35]

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And then certain -- Jeff, just adding to that. In certain cases as well, if the workforce is diminished, people have to be cross trained, they bring in new people in different positions that need new type of regulatory or different types of training. So sometimes when there is a lessening of the workforce, there is actually more of a demand for cross training, which gives us new opportunities as well.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [36]

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Okay. And the final question is around your acquisition strategy and kind of general outlook and approach. I would imagine that as visibility improves and things stabilize, you'll look to resume that, but just was looking for some commentary around that.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [37]

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Well, we've made significant acquisitions in 2018, (inaudible) for us to leverage on our balance sheet during that period. The focus right now is to continue integration of them and the improvement of those acquisitions and working on our business [model] that we have assembled. So while I can't predict long-term future, right now, the shorter-term future is not to be acquisitive to continue generating liquidity and at the same time, focus on improving all the opportunities that we have.

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Operator [38]

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And our next question comes from Alex Paris with Barrington Research.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [39]

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I just have a couple of follow-up questions. First, you noted that your face-to-face business is 25% to 30% of overall revenue and that's been the hardest hit. Can you break down the rest of the business similarly? Like what percentage is virtual instructor-led or e-learning and then other segments of the business?

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [40]

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I'll start, and then I'll hand it over to Mike and Adam. I think a lot of what we do is blended, and it's very difficult to give those type of numbers. I will say, if you're looking at our business in total, I could do it more by industry than the type of services that we typically do. But we do -- about 12% of our revenue was with the U.K. and U.S. government, about 8% is pharmaceutical as well. I mean we do everything from virtual training to vendor management. So we have a lot of different services that are delivered both by stand-up instructors, and it's delivered virtual as well. But that being said, I don't think we have firm figures on that, but I could turn it over to Adam to see what clarification he could give.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [41]

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Yes. We don't track it that way, Alex. What I would say is, we've looked at our content development and somewhere in the 15% to 20% of all of our employees are dedicated to content development. So we don't track the revenue based upon the work stream, but that gives you an employee account for that side of the business. Then if you look at our outsourcing business and other parts of our business that the way the outsourcing works, we provide a large amount of their infrastructure. So we have people that are permanently assigned to those jobs and to those -- and I mean, a very significant part of -- as Scott talked about, we have -- 60% of our revenue is multiyear contracts. So a very significant part of that 60% of the revenue that's multiyear contracts is actually where we've taken over the infrastructure. So we have a team of people who go there, and they manage their learning and their development and all of their infrastructure on a daily basis. So that -- a very large percentage of that 60% fits in there. So if you look, some of that, by the way, is face-to-face instructor deliveries. But that's more the way we look at it in terms of the multiyear contracts where we provide the infrastructure versus the, in particular, wins that we have to win every single year, which typically is less than 20% of the revenue.

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [42]

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And Alex, this is Mike. Just to give a little bit more clarity. The content development, whether it's e-learning content development or virtual instructor-led content development, those modalities are throughout all of our services that we offer. If you look at just our dedicated content development effort, Adam talked about 15% to 20% of our workforce, it's probably 13% to 15% of our revenue. Some of that workforce is outsourced in our lower cost areas. So that's the dedicated teams and the dedicated service lines just on content development activities. And that's where, as I mentioned on the call, we're seeing an increase in demand for those type of services. So just to give you a rough order of magnitude there.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [43]

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And Alex, just to summarize, I mean the reason it's difficult for us is that when we deal with a customer within one customer, we typically would have many modalities. So when you look at our large financial service customers, our large automobile companies and pretty much every customer in the company, it's a combination of face-to-face, as Adam mentioned, managed service outsourcing, content development. And some areas, we have a higher percentage of one modality as opposed to another, but in most customers, we're dealing with many different modalities of service, which we believe is going to give us the opportunity because we've been working with them in many different areas.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [44]

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Would you say that virtual instructor-led training is more profitable or equal in terms of profitability than face-to-face instructor-led training, given you don't have the travel costs, is that really the only difference?

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [45]

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Well, if you -- so the profitability on a day of learning really is probably -- is relatively the same. But the key to driving profitability of a training delivery business is in structure utilization and as virtual instructor-led training scales, your ability to drive better labor utilization for your trainers is theoretically higher, which would improve the profitability of the business.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [46]

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That's real helpful. And then I guess, really, my last question is, I think you had talked about before in a press release, and I recall this from other natural disasters, you have a big emergency preparedness and readiness business at GP. Is there any color you can give us on that business in this current crisis environment?

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [47]

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So -- go ahead. Go ahead, Scott.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [48]

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Well, basically, if you look at GP's history, Alex, we do have a history doing exercise programs, preparedness for things like biological events and pandemics as well. So we do some work. We work with the State of Indiana. We are starting to market it. I get -- typically, what happens is all service prepares for the future and does exercise programs and educates in that area. So we're hoping that, obviously, once the initial crisis we get beyond that and people and organizations want to prepare for the future, then that's how we develop our revenue. So we are getting some jobs now, but really, the impact will occur after the fact when this becomes more normalized. And if you look back at 9/11, it wasn't until a year afterwards, so when people started focusing on preparing in case there was a future event that we generated that type of revenue stream.

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Adam H. Stedham, GP Strategies Corporation - President, Interim CEO & Director [49]

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I mean we had a specific scope of work. We actually did the training in the State of Indiana for bird flu pandemic preparedness, right? So to Scott's point, as people move to the preparedness phase, we've done this type of work, and we have different government vehicles in place that would allow us to be contracted. Just no one's moved to that next phase yet.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [50]

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Great. And then I guess, just one last point of clarification. You said in the press release that you expect the COVID-19 to negatively impact revenues more significantly in the second quarter as compared to the first quarter. Are you talking about a year-over-year percentage decline, a year-over-year dollar decline or a sequential decline in dollars versus the Q1?

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [51]

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So Alex, this is Mike. So that was a comparison to Q1 of 2020. And our reported EBITDA, we expect with the revenue decline in 2020, that would be a further decline compared to Q1 of 2020. And -- but we do expect with the cost scaling and cost cutting that our EBITDA for Q2 should be consistent with or even improved from Q1, just due to the delay -- the late enactment of the cost cutting in mid-March of Q1.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [52]

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So just to be clear, you just reported $128 million in Q1 revenue. Q2 revenue, you expect to be lower than that number, lower than $128 million?

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [53]

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It's -- yes, it's going to be a larger impact in net dollars. So we were down $11 million related to COVID. The COVID impact is going to be significant in Q2, more than the $11 million that we were down in Q1.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [54]

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Got you. And then you get further...

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [55]

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Makes sense?

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [56]

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Yes, absolutely. And then you did say that you expect the second half revenue, Q3 and Q4 revenue, to experience declines as well year-over-year.

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Michael R. Dugan, GP Strategies Corporation - Executive VP & CFO [57]

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Year-over-year, yes. But the second half versus first half of '20, improvement in the second half.

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Operator [58]

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And ladies and gentlemen, at this time, it's showing no additional questions. I would like to turn the conference call back over to Mr. Greenberg for any closing remarks.

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Scott N. Greenberg, GP Strategies Corporation - Chairman & Senior Advisor [59]

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Thank you. Hopefully, you found today informative. GP Strategies will continue to work on maximizing liquidity, reducing cost and then reestablish our business model. So thanks, again, and everybody should stay safe out there.

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Operator [60]

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Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.