SP Plus Corp (SP) 2020 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Q4 2020 SP Plus Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is not recorded.

I would now like to turn the conference over to Mr. Kristopher Roy, Chief Financial Officer. Please go ahead, sir.

Thank you, Annie, and good afternoon, everyone. As Annie just said, I'm Kristopher Roy, Chief Financial Officer of SP Plus. Welcome to our conference call following the release of our fourth quarter 2020 earnings.

During the call today, management will make remarks that may be considered forward-looking statements, including statements as to the impact of COVID-19, outlook for 2021 and statements regarding the company's strategies, plans, intentions, future operations and expected financial performance. Actual results, performance and achievements could differ materially from those expressed or implied due to a variety of risks, uncertainties or other factors, including those described in the company's earnings release issued earlier this afternoon, which is available on the SP Plus website and the risk factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q and other filings with the SEC. Please refer to these documents for additional information.

In addition, management will discuss non-GAAP financial information during the call. Management believes the presentation of non-GAAP results provides investors with useful supplemental information concerning the company's ongoing operations in an appropriate way to evaluate the company's performance. They are provided for informational purposes only. A full reconciliation of non-GAAP financial measures to comparable GAAP financial measures were presented in the tables accompanying the earnings release.

Please note, this call is being broadcast live over the Internet and is being recorded. A replay will be available on the SP Plus website shortly after the end of the call and will be available for 30 days from today.

I will now turn the call over to Marc Baumann, our Chief Executive Officer.

Thanks, Kris, and thank you all for participating in today's call to review our fourth quarter and full year results and discuss our business outlook.

First, I'd like to thank the entire SP Plus organization for their commitment in 2020, which made it possible for us to remain operational throughout the pandemic and provide a safe environment for our employees, our clients and their customers. This required tremendous focus and determination, given the large number of locations we serve in our broad geographic footprint across North America. We were tested, and the efforts of our leadership teams and employees together with the support from our clients enabled us to successfully navigate through the crisis and post a considerable recovery in the second half of the year.

We ended 2020 as we expected, with Q4 gross profit similar to the prior quarter when you adjust for the early contract termination fee we called out when we reported last quarter's results. Trends were largely steady on a sequential basis, with the pickup in holiday travel partially offset by the restrictions imposed by a spike in COVID-19 infection rates in certain geographies.

We also noted on our last call that fourth quarter G&A would reflect the reinstatement of base salaries to pre-pandemic levels for those employees affected by pay reductions enacted in April at the onset of the pandemic. In fact, we also incurred additional G&A in the fourth quarter for certain compensation programs, which traditionally would have been expensed over several quarters.

Most importantly, we continue to execute on our strategy in the fourth quarter that is designed to minimize our downside while accelerating our growth coming out of the pandemic. In terms of limiting our downside, we made structural changes that have improved our long-term visibility and reduced our exposure to revenue fluctuations and cost inflation. We renegotiated lease terms wherever we could and also exited or converted to management contracts 164 leases in 2020. Today, management contracts, which tend to have greater predictability, comprise 85% of our portfolio in the Commercial Segment.

On the expense side, we substantially reduced our annualized G&A from what it was at the end of 2019 by streamlining administrative functions, driving process efficiencies and tightly controlling discretionary spending. With respect to accelerating our growth post-pandemic, we've significantly expanded our technology offerings, increased the scope of our services to existing clients and leveraged our strengths to gain new business.

We remain committed to developing and deploying new technologies in 2020. Technology was an area in which we continued to invest even during the darkest days of the pandemic. Through Sphere, we were -- we are a one-stop shop for our commercial and aviation clients who have the ability to interact with us as the single provider if they need enhancements or customization with their technology.

As you can imagine, solutions that enable touch-free digital transactions and mitigate congestion as well as support social distancing have become increasingly relevant to clients and consumers in today's environment. And we believe that the consumers' preference for solutions that eliminate touch points will continue long after we're all vaccinated.

One area where we've made significant headway over the last year is in our gateless solutions. This allows a consumer to pay for parking via our Parking.com app or website, or alternatively, text-to-pay or scan-to-pay rather than having to access a traditional pay station. We enabled 300 gateless locations by the end of January 2021. There are many more locations that could benefit from this solution, so the remaining opportunity is large.

We've also been able to extend the use of our technology solutions to special events, and in December, used our proprietary Sphere Technology to presell parking for Cowboy Christmas, a 10-day event that attracted over 127,000 visitors to the Fort Worth Convention Center. During the event, we processed almost 11,000 transactions on our newly developed proprietary mobile point-of-sale platform using handheld devices. Since this initial event, we've been able to use this platform in other operations, including supporting our Check 'N Fly operation at Tampa Airport after the Super Bowl.

We remain committed to leading the digital transformation of our industry, and we believe that other mobility opportunities enabled by our technology will emerge over the short to medium term that will provide new opportunities for SP Plus.

We've also been successful in selling our existing services and developing new services to address issues caused by the pandemic and the resulting changes in consumer preferences and behaviors, which we believe will persist for the foreseeable future.

As I mentioned, just last week, we provided our Check 'N Fly baggage check-in services to passengers who departed from Tampa International Airport on the day following Super Bowl LV on American, Southwest, Spirit and United Airlines, which enabled them to check their luggage and print boarding passes for a nominal fee. During the pandemic, these airlines suspended traditional Skycap services at Tampa Airport, so Bags' unique capability to check in passengers for multiple airlines enabled travelers to bypass the airline ticket counter lines, maintain social distancing and proceed directly to TSA screening.

This offering is especially useful and important during these times where maintaining social distancing is critical. The comprehensive COVID playbook that we launched early in the pandemic continues to gain traction, enabling us to expand the services we offer to existing and potential clients. The more frequent and enhanced cleaning protocols, effective signage and our use of environmentally sound cleaning products have led our clients to entrust us with additional services that create a health and safe environment for our staff, our clients and their customers.

We're preparing a case study, highlighting the range of services we provided at Super Bowl LV this year, where in addition to running all the transportation, parking and other services as in past years, SP+ Gameday was also responsible for disinfecting the shuttle buses, wheelchairs and golf carts in line with COVID protocols.

Our scale, industry-leading technology solutions and client-centric culture together have enabled SP Plus to capture business from new clients as well. And we've been able to convert many of the inbound requests we received during the worst times of the pandemic into ongoing service contracts. We added 45 new locations in the Commercial Segment during the fourth quarter and over 200 locations for the year. Despite the new locations added during the year, our location count declined somewhat in 2020 due to terminations. Many of them were leases that came to their natural expirations or where we had the ability to exit. Correspondingly, our location retention count -- retention rate dropped to 87% for the calendar year 2020 as compared to 93% for calendar year 2019.

To sum up, while COVID-19 continues to impact our clients and our business, we believe we have enough visibility to reinstate full year guidance metrics for gross profit and G&A costs. Based on our current portfolio of business, we expect gross profit for full year 2021 to range from $140 million to $160 million, which represents a 17% increase over 2020 levels at the midpoint.

G&A expense for the year is expected to be in the range of $75 million to $85 million, which contemplates a return to a more normal levels of performance-based compensation. Taken together, this should result in a considerable year-over-year increase in adjusted EBITDA and higher free cash flow. Supporting this guidance is our expectation that business conditions and our performance in the first half of 2021 will remain similar to those in the second half of 2020, adjusted for seasonality, with a pickup taking place in the second half of the year.

At this point, I'll turn the call back over to Kris for a financial review. Kris?

Thank you, Marc. As we have in the past, I'll discuss adjusted results. Our GAAP results as well as a full reconciliation of all non-GAAP measures to their nearest GAAP measures are presented in the earnings release we issued earlier today, which is available on our SP Plus website. I'll also talk to the year-over-year performance as well as sequential quarter performance, as we think that's a better way to track our operations in the COVID business environment.

In the fourth quarter of 2020, adjusted gross profit was $34.6 million compared to $54.3 million in the year-ago quarter. As in previous quarters of 2020, this decline reflects reduced business activity due to the pandemic. If we look on a sequential basis and adjust for the previously disclosed early contract termination fee that benefited the 2020 third quarter, adjusted gross profit remained relatively stable, given the additional restrictions that were enacted in response to the spike in COVID cases in the latter part of the fourth quarter.

Year-over-year, fourth quarter 2020 adjusted G&A decreased by 20% to $22.5 million, reflecting a reduction in discretionary spending in light of COVID-19 and our disciplined cost management efforts. A significant portion of our G&A expense was permanently reduced, setting the stage for us to operate with an overall lower cost basis going forward. Looking at the G&A guidance Marc just laid out, we expect 2021 adjusted G&A at the midpoint to be 26% lower than 2019's adjusted G&A.

When comparing to the 2020 third quarter, we reported a $7 million increase in adjusted G&A for a number of reasons, including the reinstatement of approximately $1.5 million in base salary reductions that were implemented earlier this year at the onset of the COVID-19 crisis. Also, as Marc noted earlier, we had additional G&A expense this quarter relating to the timing of certain compensation-related costs, which in more normalized times would have been spread out across several quarters.

Fourth quarter 2020 adjusted earnings per share was $0.02 compared to adjusted earnings per share of $0.55 for the fourth quarter of 2019.

Now let me briefly sum up our 2020 full year performance. Adjusted gross profit for the full year 2020 was $128.6 million as compared to $228.1 million a year ago. This performance reflects reduced business activity due to the pandemic as well as charges related to provision for credit losses and legal settlements, partially offset by fees received relating to terminated contracts.

Adjusted G&A expenses decreased 28% year-over-year to $77.3 million. This improvement reflects our cost management and actions taken to lower compensation and related costs as well as discretionary spending in light of the COVID-19 pandemic. Adjusted earnings per share were $0.44 for the full year 2020 as compared to $2.73 per share in the same period of 2019.

As a result of our disciplined focus on reducing accounts receivable as well as strategic cash management, the company generated solid net cash from operations and free cash flow in fiscal 2020 of $40.2 million and $28.7 million, respectively, as compared to $76 million of net cash from operations and $60.3 million of free cash flow in the same period of 2019.

The CARES Act allowed us to defer the payment of 2020 payroll taxes to 2021. Despite this headwind, we expect to grow free cash flow in 2021. Given our free cash flow generation in 2020, we've reduced our available credit line by $45 million in connection with a recently executed amendment to our senior credit agreement that will also provide more flexibility and availability under revised covenants.

As a reminder, we increased our revolving credit line at the onset of COVID-19 by the same amount out of an abundance of caution, but ultimately, we did not need the additional availability.

For perspective, at the end of last week, we had $173 million of capacity under our senior credit facility, and we would continue to have $128 million available even after the reduction. Our free cash flow and ample credit line gives us confidence and flexibility to operate in these uncertain times.

With that, I'll turn the call back over to Marc for some closing thoughts.

Thank you, Kris. As we move ahead into 2021, we see significant growth opportunities on the horizon that are likely to continue beyond this year.

First of all, at the very core of our business is our ability to facilitate mobility and reduce congestion at the locations we serve. And those attributes are of critical importance during this health crisis and we expect will remain top of mind for clients and consumers for the foreseeable future.

Second, many experts believe there is significant pent-up demand for leisure travel once it's safe to do so. And when people start to travel again, we believe the need and desire to maintain safe distancing, alleviate congestion and transact touch-free will be more important than ever before, and that -- which plays right into our sweet spot as we have the programs and tools in place to accommodate returning travelers.

In particular, our Remote Airline Check-in capabilities can free up congestion at the airport curb, ticket counter or rental car operation. We also provide the option to bypass the congested baggage claim area by arranging to have your bags picked up and delivered to your home, resort or other location of your choosing.

Thirdly, we've seen a migration from shared mobility such as ride share, car share or public transit to personal car utilization during the pandemic. We know that first-time car ownership has skyrocketed during the pandemic. And we believe that for the foreseeable future, the preference will be for commuters to use their personal vehicles, and that will increase the need for off-street parking and more actively managed on-street parking.

Finally, during the crisis, many of our competitors have struggled financially or have been operationally distracted. We believe this presents us with an opportunity to gain market share as we strengthen our national account relationships, leverage our differentiated technology offerings and promote our marketing programs and revenue optimization capabilities. These capabilities become even more important to our clients in sectors that were especially hard hit by the pandemic as they look to rapidly increase their revenues and recapture customers. SP Plus is well suited to meet this challenge.

That concludes our prepared remarks for today. Annie, I'd like to turn the call back over to you, so you can open the line up for questions.

(Operator Instructions) Our first question comes from the line of Daniel Moore from CJS Securities.

Just wanted to drill down, you gave great color on the G&A, because it was a little above what we had expected. How much of that increase was more normalization of incentive comp that, as you described, might have been spread out over quarters if you have a -- maybe a better detail of the delta there? And were there any other insurance reserves or other factors in the quarter that maybe swung things one way or the other a little bit?

Dan, this is Kris. As you look at kind of that additional comp from a quarter perspective, I kind of look at that and say about $5.5 million. I would say a large portion of that is noncash-related. In terms of kind of thinking on the second part in terms of prior casualty, there really wasn't anything meaningful on a year-over-year basis. So I don't think any of that came into play in terms of looking at kind of sequentially the numbers, but also year-over-year.

Okay. I think last quarter, you had said you expect an additional $1.5 million of normalization of compensation. So is the delta more of that sort of onetime or -- not necessarily onetime, but just timing-related? Is that a fair way to look at it?

That's -- I think that's a fair way to look at it.

Okay. That's helpful. Talk about new business wins. I think last quarter, you stated that you've added more new locations in the prior few quarters than at any time within the last few years. Is -- how is the message resonating, Marc? Is the pace of business wins even in COVID research holding up or even accelerating?

Well, I think as we indicated, we added almost 50 locations in the commercial group in the quarter, and that's on top of strong adds in the other quarters. So I think the message that we've been putting out there that we have a very strong COVID playbook, we have a technology game plan that's cutting edge, and we can drive costs out of your business, we can optimize revenue with our tools, I think, does play very, very well. And increasingly, we're hearing from people who are being served currently by some of our competitors who are saying, your competitor has lost their focus and doesn't seem to be that interested in parking or your competitor doesn't have the technology that can enable the kind of things that you can do.

I think when we introduced the Sphere technology brand, we were pleasantly surprised that -- by using that as a means of communicating our full array of capabilities, we've generated a lot of excitement from our clients out in the marketplace. And as I indicated in my prepared remarks, we have been implementing that at locations on a rapid basis.

And having implemented our Sphere gateless solution at 300 locations now means that we have more of that type of technology in place at a gateless location than anybody else. So we're moving ahead with more and more on technology, and we expect momentum to build with the clients as they start to see maybe what the people that are served by SP Plus are getting with the relationship with us as opposed to some of the other people in the marketplace.

Got it. One more, and I'll jump back in queue. I appreciate the guide and the look for 2021, very helpful, and obviously, near term still impacted by COVID here. If we look at 2019 EBITDA levels and taking into account all the puts and takes, new business wins, lower G&A, offset by contract terminations and the changes to some of the contracts to reduce variability, post-COVID, is it -- whether it's '22 or beyond, is it reasonable to think we get back to those 2019 profitability levels as we come out and the world normalizes?

Absolutely. I think we may have talked about this on our prior call. We clearly have exited a number of leases. And there are some things from a, let's just call it, gross profit point of view that won't come back post-COVID. But we've also worked very hard on looking at our structural G&A costs. And as we talked in the release and in our comments, and we've taken permanent costs out of our G&A, and obviously, you've seen what we've guided for 2021. So our ambition, as we looked at what we think post-COVID world looks like, is to drive growth through technology and to drive gross profit to eventually get back to pre-COVID levels.

But in the meantime, by bringing our cost base down, put ourselves in a position to get EBITDA and free cash flow back to pre-COVID levels faster. So ultimately, there's no reason why we can't get gross profit back to pre-COVID levels, but I just think that's going to be potentially a slower curve than the one for EBITDA. And that's why we've worked so hard to take costs out of our overhead structure so that we can do that faster.

Our next question comes from the line of Mr. Tim Mulrooney from William Blair.

I wanted to ask one question on guidance. Based on the guidance for gross profit and SG&A, is it fair to assume that translates to an EBITDA guide of $55 million to $85 million? Or is there something else that I'm not taking into consideration?

Well, I think in general, you could take gross profit minus G&A and get EBITDA. So there's nothing else I don't think that you have to take into consideration.

Okay. All right. Marc, in the press release, you said that 2020 had the highest level of new business activity that you've seen in years for your aviation business. That caught my eye, because we know the aviation business was hit pretty hard in 2020. I think I know what you mean, but could you just take a minute and expand on that statement?

Sure. I mean, clearly, the existing operations were definitely impacted as we scaled to the level of activity based on the amount of people traveling. And -- but the good news for us with our existing base, especially with the airport operations, is that all of those airports continue to operate. So it wasn't like in the sporting world where maybe there's nothing going on at a sports stadium. All the airports were operating, if not at lower levels. The other thing is, because the government tends to work on long-term planning and they have contracts coming up on a regular basis for going out to bid, they conducted their sort of rebids of existing deals or bids of -- looking for potential new operators at the same pace that they would in normal times.

And so what ended up happening is that essentially, during 2020, we added more airports -- more new airports to our SP Plus portfolio than I think any 1 year I can remember, and I've been here 21 years. So it has been a fantastic year of wins. And we have a couple more we can't talk about yet, but we will be -- press releases will be coming out shortly. So we expect that to continue. As our airport -- as prospective airport clients, again, look at those same things, what's your COVID playbook, what's your technology capability for promoting social distancing.

We're bringing Bags' capabilities into the discussions with the airports as we did at Tampa after the Super Bowl, and we're in discussions about doing something similar at other airports right now. So I think that's going to be a nice growth area for us. Obviously, the Bags business has been impacted because of the fact that people aren't traveling at the same levels as they would pre-COVID, but we -- and the opportunities for new clients are there for them as well. But the statement is primarily around the expansion of our airport division within our Aviation Segment.

No, that's very helpful actually. I appreciate the color there. Maybe we could just talk about Bags for a second to get a better handle on that business that you acquired several years ago. Can you talk about how that business performed in 2020? The reason I ask is to try to get an idea about what the potential rebound for that business could be if travel does indeed return in the second half of 2021.

Yes. It operated at a level that you would imagine it would relative to the amount of travel, because they're delivering delayed luggage, they are repairing damaged luggage, they're moving people in wheelchairs, they're operating Skycap services and the like. And that -- those services, in many cases, were curtailed or put a pause on in many places. But we looked at the Bags business during this time, we said to our leadership team there, look, it's important that we continue to serve our clients, continue to pitch new and interesting ideas to them, and at the same time, scale down our cost base so that the Bags business can remain profitable, which it did in 2020.

So that -- they're operating at a low level compared to pre-COVID, but I think are poised to grow. And during the time that all of this is going on, they pitched some new ideas. And I could elaborate a little on the one around Tampa, because the idea was really that we could -- because we have the capability to check in people for multiple airlines from one technology terminal, since the Skycap services at Tampa Airport had been suspended during the COVID crisis, we can offer an alternative where the consumer is paying for the check-in. The typical model that Bags has used in Skycap services and with remote check-in is a sponsored model that is sponsored by an airline or the airport.

And while we still think there's a place for that in the future to alleviate congestion in the terminal and these things save money for the airlines and for the airports, because they don't have everybody crushing into the terminals, we do think that there's room for a consumer pay model. And because it was so successful at the Super Bowl, a number of our other airport clients are saying, hey, that looked interesting. They're aware of it. And the airlines that participated with us are saying, we like this model. And consumer acceptance was very high. So we're going to be trying to pitch that.

The other thing is that the Bags technology historically required you to wait in line and go up to a fixed station to check in. Our new handheld technology that we deployed that was primarily developed for sporting venues to check people in using our own technology, software technology on an Android device, we use that with the Check 'N Fly after the game, and it offered the opportunity to actually collect people's payments while they're in line. And that way, when they actually get to the front to drop off the luggage, it's a much faster process. And so that, of course, opens up to the door of putting someone on a bus and collecting bag fees and payments for checking in while someone is on a bus as opposed to waiting for then the crowd after they get off the bus.

So our focus on continued expansion of technology capabilities, looking for innovative ways to put those in place, I think, will give an opportunity for Bags to scale back up once people resume traveling. And of course, we've seen in the media, Tim, that the airlines are now saying that they're reallocating some of their aircraft away from business hubs to travel and leisure destinations, because they're seeing an uptick, let's call it, in demand for leisure travel. And we expect that to continue throughout 2021.

Yes. You actually hit on my next question, Marc, which was going to be, if you had an idea of how the Bags business kind of splits between travelers for leisure versus travelers for business, is it fair to say that it probably skews leisure?

It's heavily skewed to leisure, because that's the scenario basis, where people have checked luggage. If you're on a business trip, and many of us -- at least we used to travel a lot pre-COVID, we're often bringing our bag as a carry on, because we don't want to be bothered hauling a lot of stuff for a 1-, 2- or 3-day trip. But the people that are going to go on a cruise or going to a resort or any sort of extended leisure trip, those are the people that have a lot of luggage, and they want help with it. And then so the base business, I would say, is -- it's more than just skewed toward it, it's predominantly for the leisure traveler.

Okay. One more from me. I've taken up a lot of time here, but just one more. It's been a couple of quarters since we've talked about your enterprise sales approach due to COVID and other things. But I mean we'd like to check in on that and see if there's -- if that's still something that you're aggressively pursuing? And might we hear about more enterprise deals in the upcoming fiscal year? And do you think the pandemic has accelerated this opportunity in any material way?

Yes, sure. Thanks. That's a great question. Well, we do maintain and continue our focus on national accounts and have actually recently landed an opportunity of a new national account relationship that we are in the process of taking over locations for. And so I think whether -- even if you're a property manager or owner of real estate that's affected by the pandemic, you're starting to scratch your head and say, what's the best way for me to accelerate the recovery of my business coming out of this? And who's got the best technology for helping me figure out what to do to optimize pricing, to capture all the nuances in the marketplace?

And so that is definitely opening up doors for us. We still believe that we are going to continue to add new locations within health care, and -- but the decision-making process in health care is not fast. These are large organizations that have structured procurement processes. But as time passes, we will continue to add locations there. And as I indicated, I think one of our best growth options is to look at somebody who has a national footprint where we already provide services.

And we take our Sphere iQ dashboard and the technology analytics that we have behind that, and we say to them, we can give you this great picture for those few locations that we operate for you, but you're flying blind with regard to the performance of your other locations. And if you give us your whole portfolio or more of your portfolio, we can give you that visibility and provide the creative solutions on how to drive revenue or other variables that are important to you. So that is clearly a major focus for us as we go through 2021, and I'm sure we're going to have some nice wins to announce fairly soon in that area.

(Operator Instructions) We do have another question from the line of Marc Riddick from Sidoti.

So I wanted to touch a little bit on one of the other areas that you touched on in the press release. And I really appreciate all the color that you've given already in some of the other areas. I was wondering if you could touch a little bit about the concept of seeing more folks embrace driving, perhaps at the expense of public transportation or the on-street parking needs, what have you. I was wondering if you could touch a little bit on sort of how you can capture those opportunities, because we're certainly seeing that anecdotally and seeing more first-time drivers. And I was wondering if you could sort of touch on maybe what the game plan is to take advantage of that.

Yes, absolutely. Well, I mean I think there's a bunch of anecdotes. And then we do have some facts, because what we're seeing -- and certainly -- and New York as an example, in many -- at certain day parts, we're actually seeing higher transient, which means the people that just come in and pay by the day, higher transient volumes at some of our locations than we did pre-COVID.

And so that's clearly a sign that people are making a decision to drive in a personal vehicle. And of course, there's a lot of data out there about used car sales have skyrocketed, people are buying vehicles for the first time. Now -- and I think there's also a lot of information coming out of mass transit, saying that ridership has gone down in some places 50%, 60%, 90%. So I don't -- those are the things that we're observing.

Now in some cases, the business is just going to come to us anyway, because we have the conveniently located facilities. The people can download the Parking.com app. They can see our locations. We are continuing to expand the technology capability of Parking.com to make it easier for you to prepay or be routed to a facility. So I think that's probably the most important thing that we can do and also capturing more locations.

Now people that choose to be -- choose to use our services are going to be made aware of Parking.com by the signage that we have in our facilities. And we're hoping that, that will be a mechanism for them to find out more about the other places where we can serve them or where they might be able to park. We don't spend a lot of time and money on marketing in the form of advertising per se, but we do a lot of data analytics stuff. And we use that to try to identify people that might be customers or potential customers of ours and create demand from them.

Great. And then one of the things -- I just want to circle back around on to the Super Bowl. So the interesting thing about the Super Bowl is that, that's the overlap of your sporting world exposure and your Gameday exposure vis-à-vis the travel, right? And I wanted to touch a little bit as to how that can help you on the sporting side of things, because obviously, that's such a big event and that draws a lot of eyeballs. And hopefully, we're getting to the point where -- with baseball season beginning, we're beginning to get to the point of stadiums opening again and hopefully maybe concerts down the road. I was wondering if -- are you getting any form of initial communications on some of the efforts that might be available to you as those types of things ramp up as we go into the summer and the like?

Absolutely. And I mean I think one of the good things is that although many sports venues are -- have been shut down due to the lack of sports, they are making plans to come back. And I think people are seeing that there were, I don't know, 22,000 or 25,000 fans at the Super Bowl. And in some jurisdictions, the governors and other officials are allowing fans to attend events at some level. So we are in active conversations with our clients in those places regarding the protocols we can put in place, because SP+ Gameday has provided management of the ground transportation and parking at the Super Bowl for, I don't know, closing in on 20 years.

We had that relationship, and we were able to go to them and say, there are some things that we can do here. And in working it with Tampa Airport where Bags had traditionally done remote airline check-in, we have those relationships. And one of the things that we recognize is there's a need and we're being asked by not just sporting clients, but other clients, can you help us with cleaning protocols." And so we've worked hard to identify cleaning options that are safe, environmentally sensitive and work effectively.

And I think we were so pleased that we were selected to actually clean the buses and the other vehicles that were going to be used by the teams and the media and all the people that were participating in the Super Bowl, and again, using cutting-edge technology to measure bacterial levels on surfaces and be able to demonstrate that we have provided a clean, safe way for people to be transported.

So that's why I refer to the case study, Marc. As we're pulling together all of the story of what happened there, we're going to use that as a major push to get in front of other clients and even some prospective clients in the sporting world to show them what we could do for them during the COVID world, and of course, afterwards as well.

Okay. That's great to hear. And then the last thing from me, you touched a little bit on the competitive environment, some that may be struggling. So wondering if you could talk a little bit about the -- maybe what the opportunity set might be, whether we should think about as a potential use of cash with free cash flow continuing to be strong and actually projectively growing in 2021? I was wondering if you could talk a little bit: a, about maybe potential acquisition opportunities, maybe if there are competitors out there, if that's something that we could see; and then also, if you could talk a little bit about share repurchase resumption and what that might look like in the future?

Okay. Glad to do it. Well, I think we're seeing a bunch of things with some of the competitors. One is, they don't have the technology, and of course, we didn't stand still with technology. We rolled out new capabilities that we've been talking about all year, and we have more under development now that we'll be rolling out over the next few months. So we're able to differentiate ourselves in the minds of prospective clients with our technology offering. And that helps us take business away from competitors, and that's why we have won a lot of the new business that we have won this year.

The second thing is that as we -- as some of our prospective clients have told us, they are concerned about the financial strength of some of our competitors. And there have been people that have defaulted on lease payments and aren't fulfilling their other financial obligations. There's people that seem to have lost their focus as it relates to parking and parking management, and maybe their interests aren't really in parking anymore. And so that's caused a lack of attention to the client and what the client is looking for. And so those have opened up opportunities to us.

So I think rather than looking at our competitors as M&A targets, it's really more of a case of we have a differentiated offering, we are leading the digital transformation of our industry with technology, and we are -- we have the other -- the main laser focus on delivering optimized revenue and the other things that clients are looking for. That's going to allow us to take business away from them. So I think we can grow our market share. That's why I commented on that in the comments.

As far as M&A generally, we always want to be in a position if the opportunity is right and the value is right, then that we would pursue. Now during a time like this, valuation is difficult. It's hard to figure out, because there's a lot of uncertainty around what the recovery curve from COVID is going to be for a lot of businesses in the space that we operate in. So we're going to be careful and not rush down the track to just say, well, now is a good opportunity for us to buy things. We're not a private equity firm. We're a business that's creating value for shareholders, and we want to make sure that we're really doing that if we engage in any M&A activity.

I think as it relates to share buybacks or other things, we need a little time to pay us, and we can see how the year pans out. We still have some restrictions in our credit agreement around that. So you're not likely to see us doing that in the near term. But as we come out of COVID and as the country comes out of COVID, as vaccines roll out, we expect our business performance to continue to recover. And I think that opens up the door to those sort of things in the future.

You have another question -- or a follow-up question rather from Kevin Steinke of Barrington Research.

So in reinstating the guidance for 2021, the gross profit guidance, you mentioned visibility affording you to do that. Can you just kind of talk a little bit more about what's giving you that visibility or giving you that confidence to issue that guidance and maybe also some of the swing factors we might think about from the bottom to the top of that range?

Sure. I think one of the things that's happened over the past several years now is that the proportion of management contracts to lease contracts and our portfolio has grown. And I was just thinking about this the other day, back when Central and Standard merged in 2012, I think we had close to 900 leases in the commercial division. And now we have like half that. So that's been a long-term process. As we recognize the fact that leases create a lot more volatility, there are definitely headwinds in the lease space around ridesharing and maybe some of the cost areas as minimum wages go up and the like.

And so Kris and I have had a very disciplined focus on saying the leases that we are going to do are going to be the kind of leases that we like, are going to have much more predictability, because we're not in new leases taking on responsibilities for things like structural repairs and real estate taxes. And we're negotiating provisions that enable us relief in the event that something unforeseen happens. So that volatility, as time passes, is reducing as a proportion of our total business. And there will certainly be, as we said, I don't know, 170 to 200 less leases in 2021 than there was last year. So that helps us with the visibility on the top line.

The other thing is that we try to be realistic in our expectations. In other words, we didn't want to get ahead of ourselves in how fast the recovery would take place. And as we said in the comments, we expected the first half of 2021 to look a lot like the second half of 2020 as adjusting for seasonality. So we saw the second half of '20 had some really good months, and it had some months that were still recovering. And so I think we felt like we've given ourselves room to have a solid performance in the first half of the year, and there's no reason to expect that things are going to deteriorate markedly from what the second half of 2020 looked like.

And then our resumption of recovery in the second half is modest. So I think that gives us -- that alone gives us confidence that putting a guidance number out there is not going to -- we're not going to get surprised in a fairly major way. As far as the things that could cause performance to deviate one way or the other, obviously, we're really pleased that we've been able to roll out our Sphere gateless solution to 300 locations just in a little less than 6 months, and we have more to go. And we have our Sphere gated solution that we're working on rolling out now as well along with other new technology capabilities.

We've added some new portfolio clients, as I've mentioned, and we have some new airport pitches, some of which we've been successful on and we'll be talking about soon. Others, we're optimistic that we're going to be successful in the bidding process, because we had a great year in 2020.

So I think those are the kind of things, along with our continued focus on safety. It's going to be the kind of things that could cause us to move above the midpoint of the range. And of course, if there's some resurgence of the COVID incidents or lockdowns, because government makes those kind of decisions, that could maybe cause a delay in the recovery in certain sectors. And that's the kind of thing that could cause gross profit to kind of come down a little bit, especially around leases. But that's why with 85% of the portfolio in management now, we feel like we have a lot more visibility on our gross profit line than maybe we've ever had.

Okay, great. That's helpful. And what's the overall state of your lease portfolio as it stands now? Are there still any -- is there still any significant tranche there that you might say is kind of "bad lease," bad lease portfolio in terms of high-fixed rent? Or are you pretty happy with the shape of that portfolio now? And what's the strategy going forward? Is it to continue to exit and renegotiate leases even if maybe there are not some of those "bad contracts."

Well, we definitely have some leases that we would like to get rid of. And some of them have expiration dates in 2021, and more have expiration dates in 2022 and so forth. I think you'd have to say, in general, the bulk of our lease portfolio probably has, on average, 5 years to go. Or there's a few that go longer than that, and there's quite a few that are less than that. So one of the things that Kris and I do is we meet with our operating teams on a quarterly basis, and we review every single lease in our portfolio. And we say, which ones are coming up for renewal, which ones have clauses in them that allow us to either terminate or renegotiate or reduce the rent? I will say a lot of our landlords who we've been with for a long time, many of them have been really receptive to working with us, because they love the job that we do, they like our financial strength, and they understand that these are unusual times.

So I wouldn't want to portray it as that we don't like to do leases, but where we have the opportunity to improve the financial performance of a lease through those measures or increased automation at the lease facility, we're taking those steps. So all in all, I think we will see, as we look at '21, '22, '23, improved gross profit contribution from our -- whatever remains of our lease portfolio.

Okay. Great. I wanted to ask also about a comment you had in the press release in terms of being able to offer your Sphere technology solutions on a standalone basis and how that substantially expands the addressable market for those technology offerings. Maybe any more commentary on that? And what sort of traction you may be getting on offering those on a standalone basis? Or if that -- if it's still preferable to kind of have a little more of a relationship in addition to the -- just kind of offering stand-alone?

Well, I think it goes without saying that if we are given the option, we'd like to provide more services to a client rather than less. And so the ideal client wants us to operate something, put all our technology in place, drive their shuttle buses and do everything else that we can possibly do within the array of SP Plus capabilities. But we have learned over the years that we have clients that choose to bring us onboard for some services and not other services. We have clients that have various preferences. And so as we've been working hard to develop our Sphere technology platform, we -- one of the important guiding principles has been, let's not have it be mandatory that, that platform be deployed where SP Plus is operating in the parking.

If it -- if we can operate the parking, that would be great, we like to do that, and it's something we know how to do very well. But we don't want to limit the possible capabilities or the rollout of that technology to only those places where we are the operator, because we do know that there are some prospective clients out there who, for whatever reason, would prefer to operate themselves. And of course, there are technology companies out there in the marketplace that are trying to sell to them all the time, saying here's our technology platform, and you can operate yourself and use our technology platform. And I think all we're really trying to say by our comments in our release is that we can play in that field too. So if you want a full-service operator that does everything, we do that. If you are simply looking at technology options and you want someone who is going to provide the technology, but you want to operate yourself, we can do that as well.

And we're starting -- just starting now, because we finally have completed the capabilities that we think are going to be attractive to clients. To do that, we started pitching that to a variety of prospects, and I think we've got a number of conversations that are fairly advanced along those lines, where I think some people are going to take us up on it and go that way with us. And maybe later, they'll decide to have us operate too, just like a lot of times we get in with parking management and technology and then we later add other services.

We do have a follow-up question from the line of Daniel Moore from CJS Securities.

Kris, I'm going to ask you to take me up on it if you like or not, but to do a little bit of our job for us. If you think about gross profit, the guidance for 2021 at the midpoint, given your comments around the cadence of recovery, how should we think about the percentage of that gross profit that falls in H1 versus H2?

I probably think about it maybe a little differently, Dan, and hopefully, this helps you out a little bit here. But as you look at the business, naturally, in our business, Q1 is kind of our more seasonally impacted quarter. And so just given the weather conditions, there's just less people kind of traveling and being out and about. And so naturally, you're going to see kind of Q1 be our softer quarter. I think as you look at Q2, that starts to -- you start to get spring breaks, you start to get a lot more people movement, the weather starts to get a little nicer. So you start to see an uptick in people movement.

And then Q4 is generally a pretty good quarter for us. So I think if you look at kind of first half versus second half, naturally, the first half of our business is more seasonally impacted from that aspect. So it's hard for me to kind of give you kind of like percentage from one half to the other. But hopefully, that kind of helps you in terms of kind of thinking about gross profit cadence.

No, that is helpful. Understood. I appreciate the color again.

Welcome.

There are no further questions at this time. I will now turn the call back to Mr. Marc Baumann for closing remarks. Sir?

Okay. Thank you, Annie. And I just want to say thanks to all of you for joining us today. We very much appreciate your interest and support in letting us explain ourselves and our business. And look forward to speaking to you again next quarter. Take care.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating, and have a good day.