SP Plus Corp (SP) 2004 Q3 法說會逐字稿

Excuse me, everyone, we will now begin the conference. All lines will be muted throughout the broadcast. If there are any participants that need operator assistance during the conference, please pick up your handset and press star-zero. A coordinator will be standing by to assist you. There will be an opportunity to ask questions. Instructions will be provided at that time. I would now like to turn the conference over to Mr. Marc Baumann. Please go ahead, sir.

Thank you, Kera, and good morning everyone. As Kera just said, I'm Marc Baumann, I'm the Chief Financial Officer of Standard Parking, and I'm also your primary investor relations contact. Welcome to our conference call for the third quarter of fiscal 2004. I hope you've had a chance to review our earnings announcement that was released this morning. We'll be filing our 10-Q by the end of the day tomorrow. We'll begin our call today with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and then I'll discuss some of the financials in detail. After that, we'll open up the call for a Q and A session.

And I want to remind you that during the call, we'll 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 third quarter release, which is incorporated by reference for purposes of this call. I'd 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 want 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 thirty days after the call. With that, I'll turn the call over to Jim.

Thank you, Marc. Good morning and welcome to the second quarterly conference call as a publicly traded company. I'm pleased to report that we had a terrific quarter with operating income increasing by 38% to $6 million dollars. Even after adjusting for last year's non-recurring items, such as management fees that were discontinued at the time of the IPO, we were up 14% for the quarter, an outstanding performance. Net income reached $3.6 million dollars, contributing to free cash flow for the period of $3 million. I also wanted to mention that by virtue of having applied the bulk of our IPO proceeds to reducing debt, interest expense for the quarter was reduced by almost $1.7 million to $2.4 million. Total parking services revenue for the third quarter, excluding reimbursement of management contract expense, was up by 13% to $57.2 million. These numbers reflect a strong performance across the business, and underscore the fundamental advantages of our business model in challenging market environments.

As you know, during the quarter, the Southeastern part of the country was buffeted by a series of severe hurricanes. Clearly, these adverse weather conditions had a negative impact on the economy in the affected areas. Because of our emphasis on using management contracts rather than leases or property ownership, our revenues were much less impacted by the hurricanes than otherwise might have been the case.

Another factor worth noting is the National Hockey League strike that is currently underway. Because of this dispute, eight hockey arenas that we serve have been dark throughout the Fall, which could continue for the remainder of the season. Again, our focus on management contracts makes us much less vulnerable to short-term swings in volume than would be the case with leases or property ownership.

Comparing this year's performance with that of a year ago, the uptick in the airport side of the business is particularly noteworthy, as that part of the business continues to perform well. In the airport business, we are also seeing better discipline exercised within our industry. There have not been significant giveaway/takeaways due to companies trying to accept meaningful losses in order to get new business.

We continue to be successful on acquiring new key contracts around the country. I'm particularly pleased that we've been awarded a contract by the New Jersey Department of Transit to manage two new garages with a total of 2800 spaces at the Montclair Station Route 17 Park & Ride facility. This relationship represents our entry into the municipally-owned Park & Ride facilities that are popular throughout the country.

Also on the municipal front, Standard Parking was selected to manage three fully automated municipal facilities in the Central Business District in Richmond, Virginia. During the second quarter, we talked about having been awarded a contract by the City of New Orleans to manage more than 400 new state-of-the-art multi-space pay-and-display parking meters. During the third quarter, we began operations of this project, which we view as one of a number of opportunities for on-street parking management.

Municipalities are continuing to request that we submit RFPs for parking-related activities that they have traditionally managed on their own. We also added a high-profile 250 space location in Beverly Hills, California that expanded our relationship with Douglas Emmett, a dominant presence in the Los Angeles real estate management market. We signed a major new contract with Hines, one of the world's largest real estate development investment and management firms. Hines selected us to manage its 590 space parking facility for the dual office tower, U.S. Bank Plaza, in the downtown area of Minneapolis, and we now operate in more than 35 locations in that Midwestern city. During the quarter, we also announced the appointment of Herb Anderson as our Chief Operations Officer, with responsibility for overseeing day-to-day management of the company's parking and transportation operations. Herb has more than 20 years of senior-level management experience within the parking industry, the last ten of which has been managing urban and airport operations for Standard Parking.

I also want to acknowledge the recent passing of two patriarchs of our company. Sidney Warshauer, the second-generation owner of Standard Parking, made invaluable contributions to our business during his leadership tenure. Robert Hill played a critical role in the development of the APCOA side of our heritage while growing that business. Both of these gentlemen were highly respected, not only in the company but within the industry as well and they will be sorely missed. Now I'll turn it over to Marc for a more detailed discussion of the numbers.

With Jim having talked about the business, let me give you some detail on the financials. For this year's third quarter, the company reported net income of $3.6 million, or $0.34 cents per basic and $0.33 cents per diluted weighted average share compared with a net loss of $2.5 million a year ago. Last year's net loss included $4.1 million in accrued dividends on preferred stock issues that were retired in conjunction with the IPO.

For the third quarter, we had a number of unusual factors in both 2003 and 2004 that impacted the year-to-year comparison in gross profit. Given the issues that have affected both gross profit and G&A on a quarterly basis, I'd encourage you to focus on annual rather than quarterly gross profit numbers when trying to identify trends in our performance in these areas. Having said that, reported gross profit was $15.4 million in the quarter, relatively unchanged from last year. In last year's third quarter, the company recorded a one-time gain due to a $300,000 reimbursement from the Wayne County airport settlement. In this year's third quarter, the company took a $200,000 charge related to the increased length of time anticipated to collect the long-term receivable. We're all aware of the brutal hurricane season in the Southeastern part of the country, which Jim mentioned a few minutes ago, and that had an impact on us of about $100,000 on gross profit, adverse. However, this year's charges that I just talked about were offset by a 5% reduction in general and administrative expenses during the period to $7.8 million. G&A was positively impacted by a net gain of $200,000 in death benefit proceeds related to a life insurance policy and the collection of a $200,000 long-term receivable that had previously been reserved. As a result, G&A as a percentage of gross profit improved to 50.9% from 53.7% a year ago in the quarter.

Operating income from the third quarter grew by 38% to $6 million, vs. $4.3 million a year ago. It's important to remember, though, that last year's operating expenses included non-recurring items of $800,000 in management fees to the parent company and $200,000 in special charges, which we don't have this year. After eliminating these items, the income from operations increased by approximately 14% year-on-year. As you know, at the time of the IPO, we received nearly $50 million in proceeds, net of the underwriting discount. These proceeds and the IPO related refinancing of our senior credit agreement enabled us to reduce total debt by almost $41 million, compared with June 30, 2003. As Jim mentioned in his comments, this transaction resulted in a significant reduction in interest expense for the third quarter to $2.4 million from $4.1 million a year earlier. The company reduced debt in the third quarter by $3.4 million and entered into $1.4 million of new capital leases. Free cash flow for the quarter was $3 million.

Extending on Jim's earlier comments about cash flow, the $3 million includes our having made a semi-annual interest payment of $2.3 million on 9.25 notes, which theoretically should be allocated between two quarters when looking at free cash flow. The third quarter was the first in which our free cash flow was unencumbered by what had been our previous capital structure, and free of the distorting effects of last quarter's IPO.

Revenue from lease contracts was up more than 16% to $37.1 million, while revenues from management contracts increased by approximately 9% to $20.1 million. Reimbursement of management contract expenses is excluded because its timing and amount fluctuates substantially for reasons unrelated to the company's parking services revenue. The revenue performance reflects the net addition of 14 parking locations during the past 12 months, as well as increased revenue from insurance and other ancillary services.

Now looking at the nine-month numbers, the company reported a net loss of $1.6 million or $0.36 per basic and diluted weighted average share, compared with a loss of $12 million for the comparable 2003 period. The accrual of dividends on preferred stock issues which are no longer outstanding reduced net income by $7.2 million for the nine months ended September 30th, 2004, and $11.6 million for the year-earlier period. For the nine months, gross profit increased by 6% to $47 million. General and administrative expenses for the period grew by only 3% to $25 million. This performance reflects continued improvement in operating leverage as G&A as a percentage of gross profit dropped to 53.2% from 55% a year ago.

Operating income for the period increased by 16%, including the impact of non-cash stock compensation expense of $2.3 million in the 2004 period. Management fees for the company's former parent company of $1.5 million in 2004 and $2.3 million in 2003 and a special charge of half a million dollars during 2003, excluding these items, which are clearly not recurring, operating income increased by approximately 20%, which more accurately reflects the improved operating leverage the company has achieved during the first nine months of this year.

Total parking services revenue for the nine month period, excluding reimbursement of management contract expense, rose by 8% to $171.9 million from $159.1 million last year. Capital expenditures for the nine months of $900,000 reflect the company's minimal fixed investment requirements, given our strategy of operating locations under management contracts and non-capital intensive lease agreements.

Depreciation and amortization expense for the period was $4.7 million compared with $5.6 million a year ago. Minimal capital expenditures, coupled with our ability to operate with negative working capital, are real benefits from a cash flow perspective. Nevertheless, we do experience some variability quarter-to-quarter in cash flow given the timing of collections and payables.

Having completed my detailed comments on the financials, I'd like to turn the call back to Jim, who will comment on guidance with respect to future results.

Thanks, Marc. After having listened to our comments this morning, I think you can appreciate that we are meeting our performance objectives for the key metrics that we presented at the time of the IPO. With regard to guidance for the future, the company reaffirms that it expects reported net earnings per share for the 2004 year to be in the range of $0.25 to $0.35 cents per weighted average diluted share. Net earnings per share for the second half of 2004, which will be substantially free of IPO-related impacts, is expected to be in the range of $0.65 to $0.75 per weighted average diluted share. The company expects the year-on-year comparison in gross profit for the fourth quarter to be impacted by the favorable changes in loss reserve estimates that were recognized in the fourth quarter of 2003, but are not expected to be duplicated in this year's fourth quarter.

The company also is reaffirming its pro-forma guidance for the year, to provide a clear picture of its operating results free from the impacts of the mid-year IPO, including varying weighted average share counts. On a pro-forma basis, assuming that the company's IPO took place as of December 31st, 2003, earnings per share is expected to be in the range of $0.84 to $0.91 per pro-forma diluted share. Please refer to this morning's press release for details regarding the pro-forma calculation.

That completes my comments for now. We'll now turn the call over to the operator to proceed with the Q&A.

[OPERATOR INSTRUCTIONS]. And our first question is from Matt Litfin with William Blair & Company.

Hi. Good morning. I wonder if you could talk about what you're seeing in customer retention, discuss your progress on the culling of low or negative margin accounts.

Yes, sure, Matt, that's a great question. We continue to try to apply discipline when it's related to contract renewals for contracts that have not been profitable. Your question bodes another issue that I wanted to talk about during the discussion today. If you, and it regards how we report our location, currently, we report the number of locations in our filings. Now, our locations can be multiple, given one contract. For instance, we average between 1.5 and 1.75 locations per contract. To give a little more definition to that, there are occasions where clients would like us to report revenues by a certain lot rather than the entire parking operation. So an airport, for instance, that might have an economy lot, a short-term lot, a valet lot, and a daily lot, may in essence ask us to report to our systems four locations. So when we set that contract up on our general ledger system for reporting purposes, in essence it's four locations. Again, by far, most of the contracts we had are one-to-one on contracts locations, but the company average is between 1.5 and 1.75, as I mentioned. You might have noticed that our total location count for the third quarter, compared to the second quarter of this year, went from 1,914 contracts at the end of the second quarter to 1,876. Now, when I first saw that statistic, it caused me some alarm because I know we've been layering more gross profit on new business than loss business, and our retention rate remains right in the 90, 91% that we talked about through the IPO process. So when I dug into this a little more, what I found out was, we lost or launched five contracts during the third quarter that represented 64 locations, which is an average of 12 locations per contract. Now that is very atypical of our business, given the averages that I mentioned. One contract alone represented 29 locations where the previous client had wanted individual reports on a bunch of lots.

During that same quarter, we also added three new contracts that represented a net add to our system of 43 locations. Again, an average of 14, which is much higher. So the third quarter was kind of an anomaly. What I can tell you is that from a bottom-line basis, the net of new business that we added vs. those we either discarded or were not retained was higher, the gross profit from the new locations is much higher than that from the locations that were cancelled or lost during the quarter.

That's very helpful. One other one, if I might, and then I'll jump back in the queue. What were the specific leverage points in the quarter that you saw on the SG&A line, given your success in lowering that?

I think, Matt, we've been trending downward throughout the year and that is really the same factors that we've talked about repeatedly, looking at our processes, looking for taking costs out of our processes, and trying to be opportunistic in reengineering the way that we do things. So I think the longer-term nine months trend of G&A as a percentage of gross profit is more indicative of what's really going on in the business. In the quarter, clearly, we had $400,000 dollars of credit that related to really one-time items that I mentioned in my comments. So I don't think the quarter's G&A as a percentage of gross profit is really indicative of where we're at.

[OPERATOR INSTRUCTIONS]. We have a follow-up question from Matt Litfin with William Blair & Company.

Yeah, just a couple more quick ones. Can you talk about the trends that you're seeing in two different areas of costs, one being the insurance costs, and how do you anticipate those to trend going forward? The other bucket being Sarbanes-Oxley, how is that running relative to your expectations and how do you see it playing out over the next few quarters here?

It's Jim. Let me answer the first one. We are in the process now of doing our insurance renewal on our various coverages for '05. The initial discussions that our people have had with brokers and carriers and what you might have read in the paper is favorable to us. We think that we should see less than the double-digit increases in insurance premium pricing that we've experienced in the post-9/11 environment. So I think the outlook is bright, or the outlook is positive for next year's rates, and that obviously is good for ourselves and our clients.

On the second part of your question, Matt, we are not an accelerated filer and so we won't be certifying regarding on the 404 cert for 2004, that will be something we'll be doing for 2005. And we are moving through our process very effectively. The feedback we're getting from Ernst & Young, who are watching what we're doing very closely, is that we're well ahead of other non-accelerated filers in our readiness. So we fully expect to be ready for that when we certify at the end of '05. From a cost point-of-view, we're not seeing this as a major cost to our business. We have added a couple of people to help us with some of the documentation of our controls, but I'd estimate that over a couple of years that it will have taken us to get ready and excluding the cost that we'll have to pay Ernst & Young to audit our controls, we will have incurred under half a million dollars.

Okay. One more question if I might. Could you just walk through for us again your primary uses of the cash flow that you're now generating here, including in that discussion what you're seeing in the acquisition environment?

Well, you saw I think in the release how we used the cash flow in the quarter, which was really to pay down debt. And I think beyond that, we consider the range of possibilities that we talked before, which is potential for acquisitions and obviously the potential to further pay down debt and I think nothing has really changed in that regard. We're obviously now in a position to start looking at what's going on with potential acquisition candidates, which is something we really couldn't do prior to the IPO.

I might add to that, Matt, that in the pre-IPO scenario, until we got our leverage in place and cash flows like we've reported and will be reporting in the future, even though we think we're a good acquirer and we do a pretty good job in an acquisition environment of filling companies into ours, it really didn't make a lot of sense for us to be out there approaching people, because obviously their first question is how are you going to pay for it and what sort of transaction do you want to conduct. So there really weren't genuine discussions going on. These types of discussions can take, you know, quarters of time to put together, understanding what businesses are out there that might want to be folded within ours, which people want to be with us, because our business is really about relationships, and continuing those relationships, so we have a little more credibility, obviously, a lot more credibility in the marketplace now to go out and have more reasonable, realistic discussions with companies that would like to join us.

[OPERATOR INSTRUCTIONS]. The next question is from Paul Koontz with Oppenheimer Funds.

Good morning. Can you hear me?

Yes. Hi, Paul.

You went through the numbers pretty fast. Can you give me what the debt levels are in the revolver and capital leases and senior notes?

Sure. I think probably the best way for me to do that is to say we had about $7.5 million of availability at the end of the third quarter on our $90 million credit facility. I think the total debt was about $113 million, I'm just looking for the revolver. Revolver was about 58.5, senior sub-notes were 48.9. So a total of $116.5 million of debt at the end of the third quarter, $113.5 long-term.

Thank you.

Okay. You're welcome.

And at this time, there are no additional questions. I'd like to turn the conference over to Mr. Baumann for closing remarks.

Thank you for joining us on the conference call. We look forward to talking to you next time.