SP Plus Corp (SP) 2004 Q2 法說會逐字稿

We will now begin the conference. All lines will be muted during the broadcast. (OPERATOR INSTRUCTIONS) There will be a question-and-answer session following the presentation. At this time for opening remarks, Mr. Baumann, you may begin.

Thank you and good morning, everybody. I'm Marc Baumann, Chief Financial Officer of Standard Parking and your primary Investor Relations contract. Welcome to our conference call for the second quarter of fiscal 2004. I hope all of you have had a chance to review our earnings announcement that was released earlier this morning. We will begin our call today with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and then I will discuss some of the financials in detail. After that we will open up the call for a Q&A session.

The 10-Q for the Company will be filed tomorrow. During this call we will make some statements that will be considered forward-looking regarding the Company's strategy, operations, and financial performance. Those statements are subject to many uncertainties in the Company's operations and business environment. I refer you to the complete forward-looking statement disclosure in our second quarter release, which is incorporated by reference for purposes of this call. I would also like to refer you to disclosures made in the Company's quarterly and annual filings with the SEC.

Finally before we get started, I would like to mention that this call is being broadcast live over the Internet at www.fulldisclosure.com and also on our website, www.StandardParking.com. There will be a replay available on either website for 30 days after the call.

With that, I would like to turn the call over to Jim.

Thank you, Marc, and good morning everyone and welcome to the first quarterly conference call for Standard Parking as a Company with publicly traded equity. The second quarter of fiscal 2004 was an extremely busy time for us. The obvious significant event occurred in June when the Company completed an initial public offering of 4.5 million shares of Common Stock. The underwriter's decision to fully exercise their over allotment option added another 166,667 shares to the deal.

At a price of $11.50 per share, the Company received nearly $50 million in proceeds net of the underwriting discounts. These proceeds and the Company's IPO related refinancing of our senior credit agreement enabled us to reduce total debt by approximately $41 million compared with June 30, 2003. In conjunction with the IPO, substantially all of the Company's $124 million of preferred stock was retired. The accrual of preferred dividends on these issues reduced net income by $3 million during the quarter and $7.2 million during the first half of 2004. We look forward to the increased operating flexibility which our enhanced capital structure will provide us.

In addition to successfully completing the IPO, we had a very strong operating quarter. Excluding an IPO related one-time non-cash stock option compensation expense of $2.3 million and the $750,000 management fee to the Company's former parent company that has been eliminated in conjunction with the IPO, operating income was up over 24 percent to 5.9 million for the quarter and increased by more than 28 percent to $11.3 million for the first half. This performance reflects our continuing emphasis on improved profitability for new and existing business.

On a reported basis, taking all of the IPO related expenses into account operating income was $2.8 million for the quarter, a decrease of 29 percent; and 7.5 million for the first half, an increase of 3 percent.

Total parking revenue for the quarter excluding reimbursement of management contract expense was up by approximately 7 percent or 3.7 million to $58.7 million. The significant point here is the growth in revenues from our management contracts, which increased by approximately 13 percent for the quarter. Their lower risk, higher margin characteristics have generally made management contracts our model when structuring operating agreements. Currently approximately 84 percent of our locations operate under this format.

Consequently we are better able to produce consistently stable and therefore predictable cash flows. This performance also reflects that we are now on the upswing in terms of net additions to our portfolio of parking locations, having made substantial progress by the end of 2003 and eliminating unprofitable accounts.

Among the noteworthy new business that we announced during the second quarter was our having been selected to manage 2 very prestigious parking locations in New York City. The Hudson River Park Trust awarded us the contract to manage operations of its 2300 space Pier 40 parking facility, the largest in Manhattan. In addition, Metropolitan Life and CB Richard Ellis selected the Company to manage the parking operations at their Premier 200 Park Avenue location.

Another major achievement for the Company was being selected by the City of Fort Myers, Florida to manage its entire parking operation. In addition to managing operations at 2 garages and 7 surface lots, this multi-year agreement also includes enforcement and collections and maintenance operations for 800 parking meters.

We also announced in late March that we have been selected along with a joint venture partner by the City of New Orleans to manage the implementation and maintenance of more than 400 new state-of-the-art multi-space pay and display parking meters which will replace 3000 single space meters.

Also during the first 6 months, the Company was awarded 5 year contract extensions at Pensacola Airport in Florida, Bishop International Airport in Flint, Michigan and Savannah Airport in Georgia. The Company also successfully rebid for 5-year contract renewals at De Moines International Airport in Iowa and the consolidated car rental shuttle operation at Cleveland Hopkins Airport.

With that, I will turn the call back over to Marc, who will discuss additional financial information.

With Jim having talked a little bit about the business, let me give you some detail on the financials. I'm sure you will appreciate that because of the IPO there are number of one-time charges throughout our P&L that in total significantly impact our reported numbers for the quarter. Due to the circumstances surrounding the mid-year IPO including these one-time and non-recurring items, we reported pro forma results in addition to actual results in our earnings release.

For the second-quarter pro forma calculations we assumed the IPO took place as of December 31, 2003. Under that assumption, net income for the quarter was 2.5 million or 24 cents per pro forma diluted share versus a net loss of 4.6 million a year ago, an excellent improvement for the business.

On a reported basis for this year's second quarter, taking into account all of the one-time and non-recurring items related to the IPO, the Company showed a net loss of $800,000 or 24 cents per basic and diluted weighted average share. I want to point out that the reported and pro forma earnings per share calculations used different numbers of shares with the pro forma numbers using a constant 10.7 million shares whereas the reported numbers used weighted average share counts that vary depending on the period reported. You should refer to the earnings release for the detailed computations.

The Company's continuing emphasis on improved profitability resulted in an increase versus last year's second quarter of approximately 9 percent in gross profit for the quarter to $16.1 million. This increase resulted primarily from the net addition of 60 locations since June 30, 2003 and a reduction in the cost of parking services.

The second quarter's general and administrative expenses increased by approximately 8 percent to $8.7 million due to higher wage and benefit costs and additional expenses related to being a public equity Company. As a percentage of gross profit, however, G&A remained relatively constant at 53.7 percent.

Interest expense was relatively unchanged year-to-year at $4.1 million as the substantial reduction in interest expense that will result from the IPO and the refinancing of the senior credit facility really do not kick in until the third quarter due to the late second-quarter timing of the IPO and the late second-quarter retirement of the 14 percent senior subordinated notes.

In addition to the one-time non-cash stock option compensation expense of $2.3 million that Jim previously mentioned, another one-time item reflected in our Q2 numbers was a $3.9 million net gain from the extinguishment of debt related in large part to the write-off of carrying value in excess of principal on the 14 percent notes.

Capital expenditures were $400,000 for the quarter, up $100,000 from last year and depreciation and amortization expense was 1.6 million versus 1.9 million a year ago.

Now let's take a look at the six-month numbers. On a pro forma basis, again assuming the Company's IPO occurred as of December 31, 2003, net income was $4.2 million or 40 cents per pro forma diluted share versus a loss of 9.5 million for last year's first half. On a reported basis the net loss for the 6 months was 5.2 million or $3.23 per basic and diluted weighted average shares. Again my point earlier about the difference in share counts used for pro forma and weighted average share counts, and it is worth looking at the release in detail for that.

Gross profit for the 6 months was up by more than 9 percent to 31.6 million fueled by the net addition of 60 locations to our portfolio since June 30 of last year.

Gross margin excluding reimbursement of management contract expense improved to 27.5 percent versus 26.6 percent a year ago. This strong performance resulted from the Company's continuing emphasis on pruning and profitable accounts in 2003 and the reduced cost of parking services on existing contracts.

G&A expenses for the period rose by about 7 percent to 17.1 million and a percentage of gross profit decreased from 55.6 percent to 54.3 percent, reflecting the Company's improved operating leverage.

Total parking services revenue for the 6 month period excluding reimbursement of management contract expense rose by almost 6 percent to 114.7 million from 108.7 million last year. Revenues from management contracts led the way, growing by more than 14 percent, which reflects the net addition of 37 contracts since June 30 of last year.

Capital expenditures for the first half were 600,000 versus 300,000 a year ago. Depreciation and amortization came in at 3.2 million year-to-date versus 3.7 million for the first half of last year.

Now having funded all the one-time expenses related to the IPO and our capital restructuring, we are looking forward to a consistently strong cash flow performance from this point forward.

Going back to one of Jim's points, with about 84 percent of our locations operating under management contracts, we are in an advantageous position to produce consistently stable and therefore predictable cash flows and on the upside there are several factors that will very positively influence our performance in this regard. First, because we don't own any parking properties but rather operate them under leases or management contracts, we have minimal capital expenditures. We also currently operate with negative working capital and do not generally require an investment in working capital to add locations to our portfolio.

Secondly, using a substantial portion of our IPO proceeds to eliminate our high interest rate debt will significantly lower future interest payments.

Finally, the expected use of our approximately $66 million of net operating losses will enable us to minimize our cash tax payments for some time. All in all we expect that free cash flow will be a real positive for us going forward.

In anticipation of doing the IPO in June, we refinanced our previous $65 million credit agreement, replacing it with a $90 million credit facility which expires in June, 2007. In addition to increasing our borrowing capacity with the new agreement, we achieved better pricing and more favorable terms. At June 30, 2004, there was approximately $61 million of borrowings and about $20 million in letters of credit outstanding under the facility.

I'd like to turn the call back to Jim now, who will discuss guidance with respect to future periods.

Thanks, Marc. The Company expects reported net earnings per share for the 2004 year to be in the range of 25 to 35 cents per weighted average diluted share. Net earnings per share for the second half of 2004 which should not have IPO related impacts is expected to be in the range of 65 to 75 cents per weighted average diluted share.

While the Company expects to see continuing quarter on quarter improvement in gross profit, the year-on-year growth rate will be impacted by the recognition in the fourth quarter of 2003 of favorable changes in loss reserve estimates that are not expected to be duplicated in the second half of this year.

The Company is also providing pro forma guidance for the year to provide a clearer picture of the Company's operating results free from all of the impacts of the mid-year IPO, including very weighted average share counts. For pro forma guidance purposes, the statutory tax rate of 39 percent is reduced to 30 percent based on the Company's ability to use its substantial net operating loss carryforwards to shield income for a period beyond 5 years. The Company's reported GAAP and cash tax rates are expected to be substantially less than 30 percent for the next several years due to the different treatment of certain items for book and tax purposes.

It will be important to bear in mind that the timing of the recognition of these tax benefits may result in wide fluctuations in reported GAAP results. Accordingly on a pro forma basis assuming that the Company's IPO took place as of December 31, 2003, earnings per share for 2004 is expected to be in the range of 84 to 91 cents per pro forma diluted share.

Having wrapped up the Company's comments, let's turn the call back to Kira (ph) for any questions.

(OPERATOR INSTRUCTIONS) Matt Litfin of William Blair & Co.

Good morning. Congratulations on the quarter. I wonder if you could prioritize for us your uses of cash, as you now have this further flexibility in your capital structure?

Well, I think we have talked through this process that we will continue to analyze this. Obviously in the short-term we will be looking at paying down our debt. Having a look at some of the longer-term debt in that realm as well to see what options might be for us as that debt has a period at the end. So we're certainly aware that and want to have a look at that. And then in terms of the Company's growth, how best to grow the Company with the use of that capital other than debt retirement in ways that we may be looking at operating efficiencies on the back office side, or processing side. We might be looking at acquisition opportunities if prices were right and the ability for us to see an adequate return on those investments. I would say, Matt that we would be looking at using our cash in that order.

Great. And just a follow-up there if I could, Jim. You mentioned acquisitions. What are you seeing on pricing in the marketplace and how has that changed perhaps over the last 12 months let's say?

There has not been enough activity, Matt, that I think we can place a multiple comparison or pricing on there. The market has been relatively quiet for the last several years. You can look at multiples that were paid for some smaller companies that may not be attractive to us in our business model. So I would like to -- probably the best answer to your question is there is not a real good market indicator right now.

Okay, that is probably a good thing. One more if I might and then I will jump back in the queue. Can you us an update on what is happening at the Bradley Airport location and have you had any developments there?

I think probably the most important development is that the pace at which we had to make the guarantor payments that we talked about in our public disclosures is slowing down. We've made 1.4 million of payments this year for 6 months compared to 3.3 million for the totality of last year. So we are seeing that the operations are improving. Revenue is growing and strengthening, and we are seeing a downward trend in the amount of the payments that we have had to make. I think there was a price increase coming down the line which will further help our operations there in the coming months. So I think we feel like we have turned the corner and we're starting to move into a phase where that situation is improving rather than deteriorating.

Probably the most significant issue there, Matt, is I believe all but one of the air carriers that were in the old Bradley terminal have moved into the new terminal and once the last carrier -- I believe it's Delta Air Lines moves into -- I'm sorry if American Airlines -- moves into the new terminal, they will be able to shut down the old terminal, which will enable us to operate exclusively out of the new garage and shut down really what is an ambiguous operation. And we're looking forward to seeing that in the next month or so.

Okay, I'll jump back in the queue.

Kevin Monroe with Thomas Weisel Partners.

Good morning. I was wondering if you could comment on capacity utilization in your garages and your ability to get pricing or the overall pricing environment?

Well, each market is different. So to make a global statement about pricing across the United States or Canada really would not be appropriate. We have some markets that we've seen to be economically depressed over the last couple years and have stayed there and others where pricing moves at its normal higher than inflation number. So there have been stronger pricing opportunities on the West Coast, specifically San Francisco and Los Angeles over the last 12 or 18 months than we have seen 4 or 5 years before that, but a slowdown in pricing in the Boston market for instance. So our ability to raise prices is pretty much dictated, Kevin, by a couple things. One of the local economy and demand, and second the supply of parking spaces that either have been added to the market or are out of the market. So it really varies from city to city.

I would add to what Jim is saying that because of our preponderance of management contracts in our portfolio at 84 percent of locations, our ability to raise prices or not does not really impact us as a business in the way that might a company with a different mix of contracts. So obviously that is an important reason why we are very focused on the management side of our business.

Maybe then foremost the sensitivity on the pricing side rests with our clients and if we're doing a good job for our clients, we are making rate recommendations on a continuous period, and that speaks to performance. But in terms of how garage pricing affects us from corporate standpoint, it is not as significant as you might think.

Okay, and your managed business, it looks like your gross margins were down a bit year-over-year. Is there any particular reason for that or is that a trend that will continue or is it going to reverse?

That is really due to some fluctuations in some of our reverse management contracts, which tend to go up and down. There is a little seasonality to some of those contracts, so I would not focus too much on that margin percentage change. I don't think it is significant.

Last question, your working capital is pretty negative in the quarter in terms of impacting your free cash flow. Is that going to change in terms of for '04 for the full year as -- what are your free cash flow expectations including changes in working capital?

First of all, let me talk about the quarter. The quarter definitely was impacted significantly by a lot of things that went away with the IPO. We had to pay premiums on the 14 percent notes. We had to pay a termination fee in the old senior credit facility. We had some deferred interest on the term loan on the senior credit facility, so we had some fairly substantial uses of cash. We also had the old management fee to our former parent that terminated in conjunction with the IPO. So I don't think the quarter is indicative of our going forward picture.

I think on a going forward basis the way that we look at it is to take EBITDA for the Company and look at the fact that we have minimal cash taxes, which I think are what we have reported so far this year will be indicative of where they will be for the year. We have minimal capital expenditure. We have spent under $2 million each of the last couple of years and while we might increase that in some of the ways that Jim mentioned, at this point in time we have not made any commitments to do so.

Obviously interest expense is going to go down by nearly 50 percent from where it has been in the first half and generally speaking we don't require working capital to be invested in new contracts. So I think if you run the numbers yourself from what I have given you, you will see that we will have substantial free cash flow in the second half and on a going forward basis.

Okay, thank you.

(OPERATOR INSTRUCTIONS) A follow-up from Matt Litfin with William Blair & Co.

Yes, I wanted to drill down if I could on the revenue growth that you saw. If you x out reimbursable expenses, could you maybe qualitatively describe what you are seeing in demand contrasting to your airport parking side of your business with general parking in urban markets? Maybe key in on where you think the sources of the strength really are coming from?

Certainly, Matt, during the first half we saw an increase in airport related revenues, kind of a bounce back from the post 9-11 condition that we were in. Urban properties from a revenue perspective are usually predictable depending on our contract mix at the time and the number of facilities that we are operating at any one time. But I think we saw a much stronger performance in the airport sector during the first half certainly than we did on the urban side, which again is relatively predictable.

That is helpful. One more, actually two more guidance related questions and then I'm jumping off. How are you dealing with Sarbanes-Oxley and what have you included in your guidance for compliance there? And then also what are you assuming interest rates will do in the second half that effects the approximately one-half of your remaining debt that is subject to variable rates?

I can answer those questions. I think from a point of view of Sarbanes-Oxley for the most part really an instigation of our Board of Directors a couple of years ago we started down the track of getting ready for a control environment of being a public company and when Sarbanes-Oxley came along it really didn't add much in the way of new demands on us. So we feel like we're going to be ready for what we need to do. We have already started certifying where it is required. I think in terms of additional costs for the business, our expectation is probably that it is a few hundred thousand dollars a year and that will primarily kick in later when the outside accountants are having to give an opinion on our internal control environment, which will not start for us until 2005.

So in terms of looking at our guidance, it is not really a huge factor in our numbers. Can you just repeat your second question? Oh -- interest rates. I think in terms of our own thinking on top of the 2 rate increases that happened already this year, we've got another 3 quarters of percent factored into our own thinking for the year.

Great, thanks very much.

At this time, there are no additional questions in the queue. I would like to turn the conference back over to Jim Wilhelm for closing remarks.

Thank you, Kira. I would like to thank everybody for participating on this call. As I said, it has been an historic event for us and you can imagine the preparation that has gone into looking at this with lots of moving pieces. So thank you for your patience through this process and we look forward to talking to you again next quarter. Goodbye now.