SP Plus Corp (SP) 2004 Q4 法說會逐字稿

[Operator Instructions]

I'd now like to turn the call over to Mr. Mike Bauman. Mr. Bauman, you may begin.

Thank you, Denise (ph), and good morning everybody. I'm Marc Bauman, the Chief Financial Officer of Standard Parking and your primary Investor Relations contact. Welcome to our conference call for the fourth quarter of fiscal 2004.

I hope all of you have had a chance to review our earnings announcement which was released before the market opened yesterday.

And although that was a little bit unusual doing it early, I just wanted to let you know that our usual practice in the future will be to hold the conference on the same day as we release earnings. We expect to file the 10-K for 2004 by March 18th.

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 financial information in more detail. After that we'll open up the call for Q&A.

And I want to tell 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. It's also in our fourth quarter release. I would like to refer you to disclosures made in the Company's quarterly and annual filings with the SEC.

And 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 30 days after the call.

With that I'd like to turn the call over to Jim.

Thank you, Marc, and good morning everyone. Welcome to our fourth quarter conference call. I look forward to telling you about the quarter, and our performance for the 2004 calendar year.

Net income for the full year of 2004 was $2.6 million or $0.42 cents per diluted share, based on approximately 6.3 million weighted average shares outstanding during the period. This performance exceeded the guidance that we issued in August, 2004 of between $0.25 and $0.35 per share.

As you recall, we also provided pro forma guidance for the year to present a clear picture of the Company's operating results, free from the impacts of the midyear IPO.

For the year, pro forma for the IPO and income taxes, net income reached $9.4 million or $0.89 cents per diluted share, which is at the high end of our guidance range of between $0.84 and $0.91 cents.

Total parking revenues for the fourth quarter, and the full year, excluding reimbursement of management contract expense, were up approximately 8 %, reflecting our success in adding new locations, and growing revenue at existing locations.

We ended the year with 1,896 locations, a net increase of 35 for the year, and 20 for the quarter.

During the fourth quarter, we entered into contract for managed parking facilities for two major medical institutions in Brooklyn, New York.

Standard Parking was awarded a contract by Kingsbrook Jewish Medical Center to manage two parking locations with a total of 650 spaces. And the Maimonides Medical Center selected the Company to manage its multilevel garage and parking lot operations, which encompass 1,100 spaces.

These new additions to the Company's portfolio reflect the success of our strategy to focus on the hospital market, which is increasingly outsourcing non-core operations.

Also in the New York Metropolitan area, Standard Parking completed agreements with a regional real estate management company to manage multiple garage and parking lot locations comprising 1,300 spaces on its behalf.

In Boston, Standard Parking was awarded a management contract for the 2,300 space government center garage - the largest garage in the City's downtown business district.

During the fourth quarter we also made good progress on existing contracts. The New Orleans "pay and display" parking meter contract that we previously announced came online as plan and has been profitable from the start.

Also, the turnaround in the Honolulu Park/Air Express operation is another strong positive going forward. The moment in our operating performance is evident in our financials for the fourth quarter despite the impact of some one time charges as net income reached $4.3 million or $0.40 cents per diluted weighted average share.

Gross profit was $16.9 million, up 3 % from 2003 fourth quarter. A number of factors impacted the fourth quarter of 2004 gross profit. The Company recorded a $254,000 charge related to increasing the reserve associated with a long term receivable, and a net charge of $157,000, primarily relating to additional rent payments that were partially offset by the recovery of taxes.

Also, consistent with previous Company guidance, significant favorable changes to loss reserves recognized in the fourth quarter of 2003 did not reoccur in 2004, as loss estimates were more consistent with actual loss experience.

Gross profit for the full year 2004 increased by approximately 5 % to $63.9 million from $60.7 million a year earlier. The 2004 results were impacted by a $700,000 charge related to increasing the reserve associated with a long term receivable.

In addition, as I just mentioned, the favorable changes to loss reserves that were recognized in the fourth quarter of 2003 did not reoccur.

Standard Parking's performance in our first two quarters as a public company clearly underscores the predictability, and reliability of our business model. From an earnings point of view, the network exceeded the expectations that were communicated to our investors at the time of our public offering.

While our results were excellent, some unfavorable one time items I previously discussed - the cancellation of the National Hockey League season, and the severe storms that hit the East Coast in the fourth quarter - dampened what would have been otherwise an even stronger performance.

At the core of this business model is a set of business strategies that have been designed to emphasize lower risk, higher margin management contracts that produce consistent earnings, and stable cash flow.

With approximately 85 % of the Company's locations operating under this format, the impact on operations of external factors such as weather is significantly moderated.

Maintaining the integrity of the sizeable amounts of cash flowing through Standard Parking's locations with enhanced systems and dedicated internal audits is another hallmark of the Company's operating strategy.

Standard Parking's commitment to information technology has resulted in state of the art client report systems that also distinguish the Company from many of our competitors. Since the IPO was completed, our competitive position in the marketplace has been further enhanced by a significantly improved capital structure and the ability to leverage what was already a highly successful business model.

In addition, we now have the resources to accelerate investments in infrastructure that are designed to enhance our operating systems; thereby increasing efficiencies, and further leverage general and administrative expenses.

These advantages will serve us well as we pursue opportunities to increase our presence in cities like New York and San Francisco, where our ability to demonstrate the positive impact of the management contract structure to a property owner's bottom line has proven to be compelling.

Outsourcing is also playing an increasingly important role for us. Municipalities are continuing to request RFP's for parking related activities that they have traditionally managed on their own.

Hospitals and universities have decided to focus their resources on core operations and are looking more and more to the parking services industry to manage their parking related operations.

We are also continuing to see a very positive trend in our airport parking locations. In that side of the business we are also seeing better pricing discipline being exercised amongst our competitors.

Consequently, there has not been as much turnover in accounts due to a company's willingness to accept meaningful losses in order to acquire new business.

Now I'll turn it back over to Marc for a more detailed discussion of the finances.

Thanks, Jim. Jim having talked about the business, and some of the trends, let me give you some additional detail on the financials. As Jim mentioned, net income for the fourth quarter was $1.3 million or $0.40 per diluted weighted average share.

Earnings were favorably impacted by a reduction in the Company's contingent tax reserves of approximately $300,000 or $0.03 cents per diluted share following the conclusion of a tax audit conducted by the IRS for fiscal 2002.

In 2003's fourth quarter, the Company reported a net loss of $6.9 million, which included $4.1 million of accrued dividends on preferred stock issues that were retired in conjunction with the IPO in June of last year.

Operating income for the fourth quarter of 2004 was $6.2 million, compared with $2.2 million for the year earlier period.

However, operating expenses for 2003 included $3.2 million in special charges, much of which related to the write off of a long term receivable, and $800,000 in management fees that terminated upon the culmination of our IPO.

Depreciation and amortization expense for the fourth quarter increased by $300,000 due to a net charge of $0.5 million related to the termination of a non-compete agreement with the Company's former owner, City Warshawer (ph).

Stripping away all of these items, the strong underlying business performance resulted in an increase in operating income of approximately 9 % for the fourth quarter of 2004, as compared to 2003.

Interest expense during the fourth quarter of $2.3 million was virtually half of the 2003 fourth quarter's $4.5 million.

This decrease was primarily attributable to the $50 million in proceeds net of underwriting discount from the Company's 2004 second quarter IPO being applied to reduce debt.

And of course, our new expanded senior credit facility contributed to that as well.

In the fourth quarter of 2004, the Company utilized $9.3 million of its $2.1 million free cash flow to further pay down debt. I want to emphasize, though, that the fourth quarter's free cash flow is not indicative of a typical quarter.

During the first three quarters of the year the Company's required to make two semiannual interest payments on the 9.25 senior subordinated notes and payments under performance based compensation plans.

The fourth quarter is also free of these cash requirements, and is also free of a requirement during 2004 that cash obligations for the 2004 insurance program were substantially funded during the first nine months of the year.

So, clearly, the fourth quarter will always be, for us, an unusual quarter with less cash demands on the business.

Looking at the results for 2004 overall, reported net income was $2.6 million or $0.42 per diluted weighted average share compared with a loss of $18.9 million for 2003.

Again, the accrual of dividends on preferred stock issues that are no longer outstanding reduced net income for 2004 by $7.2 million, and for fiscal 2003 by $15.6 million.

Pro forma for the IPO, and income taxes, net income for the year was $9.4 million or $0.89 per basic and diluted share. For pro forma purposes, the statutory tax rate of 39 % has been reduced to 30 %, based on the Company's ability to use its substantial net operating loss carry forwards to shield income for a period beyond five years.

The Company's reported GAAP and tax rates are expected to be less than 10 %, due to the different treatment of certain items for book and tax purposes. Operating income for the full year was $19.7 million, a 42 % increase over 2003.

If you exclude the previously discussed special charges, management fees that were discontinued in conjunction with the IPO, and the $0.5 million charge relating to the termination of the non-compete agreement with Mr. Warshawer, and the noncash stock compensation expense - take away all of that - growth in operating income from the underlying business was up 17 % year on year.

An important factor in this performance was management's continued focus on managing cost. This effort resulted in 2004's G&A expenses being held to a 2 % increase on 2003, and a decrease in general and administrative expense as a percentage of gross profit from 52.4 % from 53.9 % a year ago.

Depreciation and amortization expense for 2004 decreased by more that $0.5 million from 2003, reflecting the reduction in capital spending for the last few years. Depreciation and amortization expense would have decreased more, if not for the net charge of $0.5 million related to the termination of Mr. Warshawer's non-compete agreement.

The proceeds of Standard Parking's second quarter IPO, and free cash flow of $9.7 million generated during 2004 enabled Standard Parking to reduce debt by $51 million or 32 % during the year.

These lower debt levels resulted in a decrease in interest expense to $2.8 million in 2004 from $16.6 million a year earlier.

The Company recognized non-operating gains from the early extinguishment of debt of $3.8 million in 2004 and $1.8 million in 2003.

Turning to some balance sheet and cash flow items, cash, and cash equivalents increased from $8.5 million at the end of 2003 to $10.4 million at the end of 2004. The Company routinely enters into LIBOR based contracts of up to six months to fix the interest rate on its variable rate senior credit facility.

At 12/31/04 the Company had 2.5 million in overnight investments, as a result of being in the last stages of a $50 million LIBOR contract with a maturity in early January, 2005.

With respect to the Bradley Airport contract, we made $2 million of net guarantor payments in 2004, a decrease from the $3.3 million in net payments we made in 2003. As of 12/31/04, the net receivable for that contract is $6.5 million.

Capital expenditures were $1.4 million 2004 as compared to $1.8 million in 2003. The Company also entered into new capital lease obligations of $5.1 million in 2004 versus 1.4 million in 2003.

The combination of capital expenditures and capital leases are used to fund capital needs for both technology and systems, as well as parking equipment and in particular, in 2004 we had the renewal of a large shuttle contract that required the replacement of the buses. And that's the principle reason for the increase in capital lease expenditure during 2004.

Having completed my detailed comments on the financials, I'd like to turn the call back to Jim who will talk about guidance and future performance.

Thanks, Marc. After seeing our results and listening to our commentary this morning, you can appreciate that we're meeting the performance objectives that we laid out for you at the time of the IPO. Given that, let me now make some comments with regard to guidance for 2005.

Our earnings guidance reflects the improving trends in our industry, the benefits from which we are deriving from being a public company, and are confident in the predictability of our business model.

The Company expects report net earnings for 2005 to be in the range of $1.35 to $1.45 per weighted average diluted share.

This guidance estimate is based upon continued growth in gross profit coupled with improved operating leverage and enhanced market capabilities resulting from the IPO.

Earnings per share pro forma for income taxes is expected to be in the range of $1.00 to $1.10. Please refer to yesterday's press release for details regarding the pro forma calculation.

We expect the capital spending for 2005 may reach $4 to $5 million, which is an increase over the $1.4 million we spent in 2004.

The Company expects that the additional capital expenditures will be used to invest in attractive internal and external opportunities that will result in improved future gross profit growth.

We anticipate that the Company will generate free cash flow of $50 million or greater after CapEx for the 2005 year.

We anticipate that debt reductions throughout the year will result in net debt - total debt minus cash - at the end of year end 2005 of between $85 and $95 million.

Standard Parking will continue to evaluate its capital structure with the objective of balancing financial flexibility and minimizing the cost of capital while also giving particular consideration to the market environment for acquisitions.

For These reasons, the Company currently does not anticipate refinancing its fixed rate debt until 2006.

Until this refinancing is completed, the Company's fixed rate debt is expected to remain in place and we expect to apply available cash primarily to reduce debt outstanding under our senior credit facility.

As the Company reduces debt, its objective is to achieve over time debt levels consistent with those companies having investment grade ratings.

Nevertheless, the Company may experience intermittent increases in leverage particularly in connection with a potential acquisition, or other attractive business opportunity.

In addition to reducing debt, Standard Parking intends to utilize free cash flows to pursue additional growth opportunities and to return value to shareholders.

More specifically, free cash flow may be used to support additional investments aimed at increasing internal growth, as well as to make additional investments in areas such as technology to further increase efficiencies.

In addition, the Company may use free cash flow to fund value enhancing low risk acquisitions.

Finally, in addition to taking advantage of growth opportunities and reducing leverage, the Company also intends to use a portion of its free cash flow to repurchase shares.

As we announced in our earnings release yesterday, the Board of Directors has authorized the Company to repurchase shares of common stock for a value not to exceed $6 million, which represents approximately 4 % of Standard Parking's market capitalization.

The Company intends to repurchase certain shares in open market transactions from time to time and our majority shareholder has agreed in each case to sell shares equal to its pro rata ownership at the same price paid by the Company in each open market purchase.

That completes my formal comments.

We'll now turn the call over to the operator to proceed with our Q&A.

Very good, sir.

(Operator Instructions).

And the first question, gentlemen, is going to come from Bob LaVick (ph) of TGS Securities.

Hi, Bob.

You said you were entering into New York and San Francisco. And I was wondering, how long will it take you to reach critical mass, I guess, at a number of locations, so that you can have the same margins in those cities that you do in the core margins?

That's a good question, Bob. We've actually been in New York and San Francisco - well, San Francisco for quite some time and New York over the last couple of years.

I would suggest to you that both of those cities now would be considered, you know, in the core city definitions that we've given in the past where we have sizeable mass, and are enjoying the margins of being so.

I think we've been in New York now for about four years. And we went from really zero locations at the start to over 30 locations now.

Great. And then just another question. With regard to guidance, you mentioned that - you said free cash flow could be acquisitions. Are there acquisitions in your guidance or not?

Well, in our guidance we've said after the increase in capital expenditure that we're anticipating we'll have $15 million of free cash flow. That maybe used for that purpose, but our earnings guidance does not include acquisitions.

Okay, great. And could you just walk - could you tell us a little about the environment out there for acquisitions, and walk us through what a typical acquisition would be for you?

Sure, you know, first of all, we'd be looking for companies that are attractive to us where we have a sizeable presence.

As we've described for the analysts, and originally to the investor groups in the IPO, and the follow on meetings, it obviously makes sense for us to buy companies, or invite companies to join our organization that have a presence in the cities where we have significant muscle, and can absorb G&A costs and the like to improve the ultimate multiple that we pay.

I would say the environment out there right now is fair. There is still settling in terms of trying to understand price multiples to be paid between buyer and seller.

I think as, you know, market cap rates for ourselves and Central and some of the other competitors get set, there's a more realistic multiple being considered by those people that might be sellers. And we'll see how that goes in 2005.

Great. And then just a last question. You mentioned the Bradley contract. And you improved operations year over year from '03. What's your outlook for '05 for Bradley? For '05 and beyond?

Well, I think we're seeing a very favorable trend in $2 million in net guarantor payments that we made in '04. We actually made about $1.6 million, I think, in the first quarter of '04. So, clearly, the trend is very positive.

We're expecting to continue that positive trend as we get into '05, but I think it will be premature to start recognizing any of the deferred cost that we've talked about in the past in '05.

Okay, great. Thanks very much.

Sure.

Your next question is coming from Matt Litfin of William Blair & Company.

Hi, good morning and congratulations on the quarter.

Hi, Matt.

A few questions here. One is G&A at 52 % of gross profit in '04. How far down do you think you could drive that? Maybe give us a long term goal, and then maybe a goal for this year?

Well, I think that we've said before that our long term goal is to get it below 50 %, and our expectation is that we will continue to make progress on that goal in '05, but we're not going to peg it to a particular number.

Okay, and then another question on the senior sub debt. Is there some kind of a penalty for prepayment of that? Or is your reluctance to pay that down in '05 stemming solely from the attractiveness of acquisitions that you see out there?

There is a prepayment penalty. It kind of amortizes and as time goes on it gets lower and lower.

But I think the principle reason are the reasons that we gave in our comments. We really want to take a chance to see what we might do with acquisitions and other uses of our free cash flow.

And obviously, when we pay down our 9.25 debt it's a permanent pay down. Whereas when we pay down on the revolving line we can utilize that cash if the right opportunity comes along for us.

Okay. And then a question on the guidance. Really, I guess it's pro forma for 12 to 24 % EPS growth in '05. How much of that, you know, generally is coming from the operating income growth versus the benefits of deleveraging?

I think we've talked about our kind of long term growth trends in both gross profit and G&A and therefore operating income. And our expectation as reflected in the guidance is really that those trends will continue.

I think one thing that we should say is that probably G&A will grow a little faster in '05 than it has the last couple of years because we'll have the full year impact of being a public company and some of the costs associated with Sarbanes-Oxley.

Okay, one more if I might. Jim, in January you guys announced the resignation of your COO. How do you feel you're fairing right now in terms of the senior management team? And do you plan to bolster that team further or do you feel like you're where you need to be there?

Well, since that time, Matt, we have bolstered that team. We've done what I would call sort of minor - not minor but maybe mid-changes to our work chart to, you know, sort of re-support the executive vice presidents on the urban side.

We've realigned the Airport Division slightly to allow for the change on the organization chart.

And quite frankly it hasn't been - we haven't recognized it as much of a significant loss.

Great. Thanks and congratulations again.

Thank you.

(Operator Instructions).

And the next question is coming from Kevin Monroe with Thomas Weisel Partners.

Good morning.

Good morning, Kevin.

I'm wondering if you could give a little more detail on exactly how you'll be spending the incremental CapEx? I mean, you're only up from $1 million to the $4 to $5 million level in '05. Can you go over those opportunities?

Yes, when we sit down and budget for the upcoming year, we ask the field organization to look at the potential deal pipeline, and recognize those deals that might require capital investment on either new business where we'd be growing new locations or for the expansions of existing business.

And when we sat down, and did the budget, and did the analysis of this year's requirements, we found that there was lots of opportunity on the organic - what we've defined for you guys in the past, anyway, as organic growth to support that kind of cash demand.

So, obviously, as we discussed with you as we've gone through the process, we have rather high expectations on the return on those investments, and we have enough discipline within the organization to make sure that each of the investments we make, in either reaping a deal, or generating new business make those minimum thresholds.

And when we applied those thresholds, we found that there was that sort of demand.

So, I think it's also reflective of kind of the increased opportunities in the industry that I laid out earlier in my comments.

You know, often times medical centers, universities, airports, municipalities, in particular, that might be cash pressed are looking in the outsourcing process for us to either provide new revenue controlled equipment if they're going to be in the collect revenue, or to replace revenue, or revenue control equipment with an eye toward automation.

You know, we then invest for that client with an opportunity for us to get a rather long term extension and a better than reasonable return on our investment. And that kind of activity is in our pipeline.

Okay, that was helpful. Secondly, on the stock buyback, you know, given the low public float and still pretty high debt levels, why are you guys buying back stock?

Yes, you know, I think we've said from the beginning that we recognize that the business had the capability of generating a significant amount of free cash flow from our earnings given our business model.

And we've always said that we would do really three things with that cash flow. We would fund additional growth both internally and externally.

And the question that you just asked and that I answered sort of talked about our ability to fund organic growth along the lines of increasing EBITDA, as Marc said, we've done on an historical basis.

We've also said that we would use that cash flow to continue to pay down our debt. And we talked earlier about our target ranges for us this year and in the future to get there.

And our Board is very active in making sure that we have our eye on continuing to reduce that debt. As I said, it might change intermittently in the range of multiples if we have acquisitions that are great deals for us.

But for the most part, we're looking to use that free cash flow to pay down debt. And then finally, we said at some point we would try to find a way to return some value to our shareholders.

And we think the best way to do that at this point is to do this sort of limited stock buyback. You know, obviously the Board considered and the amounts we're going to be buying back and the manner by which we do it are based on a Board meeting we had last week and then announced immediately after.

The Board's expectation is that we would do the stock buyback in this manner rather than, you know, so early in the process create some sort of a dividend stream that would become a permanent part of our operating model.

So, we felt that - and really, the Board felt - that this was the best way to return some value back to our shareholders.

Okay, and a final question - you just ended the quarter or the year with 1,896 facilities? What was the mix between lease and managed?

I've got that here. Let me just put my hands on it. Let me just say off the top of my head is that the leased number didn't change much. I've got it now - 293 leased and 1,603 managed.

So, really the growth that you've seen that we've talked about in locations both for the year and also for the quarter really came in the management side.

And I think you noticed - you may have noticed that we said 85 % of our locations are managements, which is an increase from I think 84 % that we've had for awhile.

Great. Thank you.

Okay.

And gentlemen, we have no further questions. You may continue.

We'd like to thank everybody for participating, and we look forward to talking to you after our first quarter results.

Thank you.