SP Plus Corp (SP) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2007 Standard Parking Earnings Conference Call. My name is Annie and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call Mr. Marc Baumann, Executive Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Annie, and good morning, everybody. As Annie just said, I'm Marc Baumann and I'm your primary investor relation's contact at Standard Parking. Welcome to our conference call for the first quarter of 2007. I hope you've all had a chance to review our earnings announcement, which was released after the market closed last night. We expect to file our 10-Q tomorrow.

We'll begin our call today as usual with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and then I'll discuss some of the financials in a little more detail. After that we'll open up the call for a Q&A session. 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 operations and business environment. I refer you to the complete forward-looking statement disclosure in our first 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 webcast live over the Internet, and can be accessed on our website at standardparking.com and also at earnings.com. There'll be a replay available on either website for 30 days after the call.

With that, I'll turn the call over to Jim.

Thank you, Marc. Good morning, everyone. Thanks for joining us. As we indicated in the release we put out last night, we've gotten this fiscal year off to a great start. Pre-tax income per share increased by 40%, $0.59 per share this quarter as compared to $0.42 per share last year.

Earnings per share were $0.35 this quarter as compared to $0.37 per share last year at this time, due to the higher income tax expense we had since reversing our evaluation allowance in late 2006. To that point, we had said that for the remainder of 2007 we'll be focusing our comparison on pre-tax income per share as to avoid an oranges to apples comparison.

The business threw off a healthy free cash flow of $5.2 million during the quarter this year as compared with a negative $2.8 million last year. While normal fluctuations in the timing of payments and accruals can cause working capital to move around somewhat, and Marc generally discusses that with you each quarter, we are on track to generate between $20 million to $25 million in free cash flow this year, after a planned increase in CapEx or capital expenditures to $6 million this year from $2 million last year.

On a same location basis, revenue increased by 8%. However due to the conversion of several lease contracts to management agreements, and we've talked about the business structure of each of those agreements a lot in the past, reported revenue is down slightly.

Our total location count dropped slightly as well to 1,962 from 1,978 at the end of 2006. While we added several terrific new locations, which I'll discuss a little later, we did experience some turnover in one large West Coast portfolio, as well as our previously announced transition from the Chicago Park District facilities, which were sold to private equity investors late last fall. Correspondingly, our retention rate dipped slightly to 90%, but we still expect to end 2007 with retention at or higher than the 92% we achieved in 2006.

Our continuing emphasis in the hospital and university markets is reflected in new contract awards during the first quarter of this year. Some new adds in that area include Lutheran General Hospital here in suburban Chicago, where we'll manage the parking and shuttle operations at the hospital campus, which consists of three garages and ten surface lots totaling over 3,800 spaces.

This award expands our relationship with Advocate Healthcare, recognized as one of the nation's top ten health systems. We manage the parking at several other Advocate System hospitals including Illinois Masonic in Chicago, Christ Medical Center in Oak Lawn, and Good Shepherd Hospital in Barrington, Illinois.

Strictly Pediatrics is a brand new medical center complex in Austin, Texas that will house a variety of pediatric specialty groups. We were awarded the contract to manage its 1,000 space parking facility. In Houston, Texas, Methodist Hospital Willowbrook expanded our existing parking management contract to include shuttle services.

We are pleased to announce that we are now managing parking operations at the University of Maryland's Baltimore campus. The large university campus consists of seven garages with approximately 6,700 spaces that are also used for parking during Baltimore Ravens and Baltimore Orioles football and baseball games respectively.

Finally, New Jersey Transit awarded us another of its park and ride facilities, this one in Hoboken, New Jersey. We also operate the parking at Ramsey Route 17 and Montclair State University rail stations for the same entity.

At the Bradley/Hartford Airport, seasonal fluctuations resulted in our having to make $300,000 in net deficiency payments to the state in the first quarter of this year, as compared to $200,000 in net deficiency payments a year ago.

For all of 2007 however, we expect to receive net repayment. I've talked on this call and in other places in the past about the seasonality to the Bradley/Hartford deal. It's the lowest quarter in a fiscal period or on a calendar period for enplanements coupled with usual high cost of winter, snow removal, and salting, and the like.

In summary, we had a great quarter but it's a little too early to revise guidance for the year. So we're maintaining our current earnings guidance of $1.40 to $1.50 per share and pre-tax income per share of $2.30 to $2.50, which represents an increase of 13% to 23% over 2006. I've already talked about free cash flow being in line with achieving $20 million to $25 million for 2007.

On another note, our board has authorized a spending of up to $20 million for stock buy backs, of which we completed transactions totaling $3.4 million during the first quarter of this year, plus and additional $1.6 million in April, so meaning $5 million so far this calendar year. We are actively pursuing several acquisitions which complement our existing business. We have not completed the transactions as of yet, but as we close them we will fill you in on some of the details.

With that, I'll turn the call over to Marc, so that he can lead you through a more detailed discussion of our finances.

Now that Jim's given you an overview of the quarter, here's a few more details. Total revenue for the first quarter excluding reimbursement of management contract expenses decreased $200,000 to $63.4 million, from $63.6 million last year. However, as Jim mentioned same location revenue increased by 8%.

The conversion of several leases to management contracts resulted in the decrease in lease revenue year-over-year as Jim mentioned. And just to give you a little more detail in case you are unfamiliar with how we record things, for parking revenues at leased facilities, those are recorded as our revenue whereas facilities under management contract, our fee is considered revenue. So it can make a big difference on the revenue line.

Our gross profit on any given deal may not be significantly different under a lease or management contract structure, but certainly the revenue and percentage gross margin can be affected by the structure that's in place for any given facility. Gross profit for the first quarter increased by almost 5% from a year ago.

G&A expense for the first quarter of '07 increased by $100,000 or 1% over the prior year. G&A expense continues to behave in a similar fashion as the past. We step up in the first quarter and that sets the new level that it should run at close to during the year. We expect that first quarter G&A expense of $10.8 million is an approximate run rate indicator for the rest of 2007.

And for the first quarter of 2007 the ratio of G&A expense to gross profit was 55%, which has moved down toward our goal of 50% that we established several years ago, and is a decrease from 57% in the first quarter last year.

Depreciation and amortization expense decreased $200,000 as compared with the prior year's first quarter. And really that's due to the continuing low level of capital expenditures we've had to make in the business with some older fixed assets from long ago have started to burn off.

The resulting operating income for the first quarter of '07 was $7.6 million, which is an increase of 14% over the first quarter last year. Total debt continued to decline at the end of the first quarter of 2007 it was $82.3 million, which is down $11.4 million from the end of the first quarter of '06. Reduced borrowings as well as lower interest rates under the senior credit facility resulted in a $400,000 reduction in interest expense in the first quarter of this year compared with a year ago.

Pre-tax income for the first quarter increased by 33% to $5.8 million or $0.59 per share, up from $4.4 million or $0.42 a share last year, an increase of 40% on a per share basis as our stock buy backs last year and this year have reduced our share count. In the fourth quarter of '06 we reversed the valuation allowance for deferred tax assets, as Jim mentioned, resulting in a real large one-time benefit.

Beginning this quarter, we expect to be reporting an effective income tax rate of approximately 40%. Income tax expense increased by $1.8 million to $2.4 million in the first quarter of '07, reflecting that effective rate of 40% as compared with 14% in the 2006 first quarter. I should note that in both years, cash taxes paid were under 5%. So we're continuing to utilize our NOLs and that will keep our cash taxes substantially below the effective tax rate that we're reporting.

Net income was $3.5 million or $0.35 a share in the first quarter this year, compared with $3.8 million or $0.37 per share last year, again due to the increase in the effective tax rate. As Jim mentioned, we generated $5.2 million in free cash flow during the quarter, compared with negative $2.8 million in the same period last year.

Aside from the usual fluctuations and the timing of payments and receivables, which I've talked about many times, these things do move around substantially, sometimes from quarter to quarter. In mid '06 we did repay our 9.25 senior subordinated notes, which had semi-annual interest payments in both March and September each year, and replaced them with a lower interest rate revolving credit facility. And there we pay interest on a monthly basis. So you can see that the timing of payments changes quite a bit.

The impact of the reduction and amount of interest and the change in the timing was to reduce cash interest in the first quarter of '07 by $1.7 million as compared to the same quarter last year. Obviously it's very helpful to free cash flow.

The free cash flow generated in the first quarter of '07 along with available cash was used to repurchase approximately 98,000 shares of stock at an average price of $35.11 in transactions totaling $3.4 million. And we also made $3.4 million in debt repayment. As Jim mentioned, we also repurchased $1.6 million of common stock in April at an average price of $35.76.

Capital expenditures during the first quarter of '07 totaled slightly under $700,000, as compared with $400,000 spent during the first quarter of '06. As historically is the case, CapEx activity tends to pick up later in the year, and we expect to spend approximately $6 million in '07 as some of our technology projects to improve our efficiencies and reduce our G&A are starting to pick up steam. And so I do think we'll get to that $6 million number this year.

With that, I'll turn the call back over to Annie to begin the Q&A session.

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And your first question's coming from the line of Robert Labick with CJS Securities.

Good morning. Congratulations on a strong quarter.

Good morning, Bob. Thanks.

Hi Bob.

Hi. Couple questions, just wanted to ask if you could elaborate, not specifically obviously, but on the acquisitions that you're seeking. You said small to mid sized. Could just give us a sense of what that means, and how material that could be to the future of the company and give us a sense of where you're looking in that regard?

Yes, I can add a little color to that. Regional companies, which are sort of in the target zone for us in cities where we have a core presence, can range anywhere from having EBITDA in the range of 250 million up to 7 million or 8 million or slightly higher depending on the size of the company.

And we've sort of talked about that in the past. So that would be kind of the range of those types of companies that would be in our sights. I'm sorry -- what I think I said was 250,000 in EBITDA up to somewhere around 7 million to 8 million is probably the target zone for the smaller regional operators that we would have a comfort with given what happened with a couple of our competitors, the national competitors last year.

Obviously that isn't a marketplace that we're involved with at the present time. So anywhere in the range, Bob, that I laid out before would be something that are in our target sites and are those deals that we're in the process of putting together now.

Got it. That's very helpful. And in terms of the acquisitions, will this impact your thoughts on the share repurchase? Obviously you have a strong balance sheet and great cash flow. Can you continue to do both or how are you thinking about cash uses in that regard?

Well depending on the size, I'm pretty confident we can do both. We've talked the last several quarters about the board review that we've done. Looking at our debt size and what we've done to bring that down and trying to measure our cost of debt versus our cost of equity, given what we've done with the balance sheet over the last several years.

And I think depending on the size of an acquisition we could continue to do both. And obviously it's in my interest here representing management that we stay within a comfort zone on the debt side but certainly continue to grow the business given the cash flow that we have and room that we think we have, given the lower ratios of our debt.

Great. Last question and I'll get back in queue, could you give us a sense of the next 12, 18 months kind of the organic opportunities, bidding environments? There's been some big airport contracts up in the past and maybe still some out there or other organic opportunities for you to go in and bid and win new business. How is that pipeline looking?

The pipeline itself is full. Our business development people are out there pursuing lots of leads these days. So I think the marketplace is good, just the normal cycle of contracts being re-bid or new opportunities being created by either construction or privatization of municipal or institutional markets. We highlighted the last couple quarters some of the wins we've had in those.

While the new facilities that I talk about each quarter don't represent all the facilities we've added that quarter, I usually try to talk about where we're moving in terms of themeing, where some of the opportunities are in terms of our focus. And that would get to the outsourcing market. So the market itself in terms of the census of opportunity is good.

Certainly there's the usual pressure on pricing, depending on who we're competing with in a market and what their strategy might be at a given moment and a willingness to do loss leaders. We've seen a little more of that lately, depending on the company and the region involved.

So having to keep some discipline in terms of pricing of deals is and remains a basis of our strategy, not to get drawn into bidding wars where we go out and earn a significant amount for the client yet get a very small return for ourselves. We kind of have to let that cycle go through sometimes where competitors will take facilities at little or no profit and a year later the owner finds out they weren't making anywhere near what they might have. So again, maintaining that kind of discipline is important in the kind of marketplace we're out there competing in today.

Great. Thanks, very much. I'll get back in queue. Congratulations on the quarter.

Thanks again, Bob.

And Your next question comes from the line of David Gold with Sidoti & Company.

Hi. Good morning.

Good morning.

Hi.

Just a couple of questions for you, wanted to drill down a little bit more if we can albeit modest in retention in the quarter and so just curious if you can add a little bit of color, particularly on the spots that we lost or where we're losing ground? Would you attribute it to pricing or other factors? I know you mentioned a couple of private equity players would come in and presumably that's precluded you from providing services there. But just more insight if you can.

Yes, there's not a big story there, Dave. I mean there were two folios that are affecting the number this quarter with one client each. The Chicago Park District facilities that we talked about at the end of the year where Morgan Stanley went out and spent a significant amount over market to acquire those facilities and brought in an operator with them to manage those.

And the other was a west coast portfolio of office buildings. And they were all lumped together. That deal was I'd say the decision to change was made based on price. And that can happen every now and then. But there's not much more color to add. There were two clients that happened to have more than one location under that banner. So I wouldn't read much more into it than that.

I guess part two of that is giving guidance or a plan for say the rest of the year to get it back towards that 91%. So presumably without those couple of outliers it shouldn't be that hard then?

No, it shouldn't --

In other words, there were a couple of big outliers that sort of skewed things but that it's basically back to normal course so to speak.

Yes, I would say that that's the story. And the guidance that we've build around it is reflective of that. We're still in May announcing the first quarter with three more quarters to go. But given the list of contracts, we have a very focused at-risk group that focuses on those contracts that might be expiring or subject to change for some reason. And there's no significant change in the facilities that are on that at risk chart.

And just out of curiosity, on the Chicago one I guess we know the answer. But on the west coast one, that was a management contract?

Yes.

Okay. Okay. Fine. And then I guess just lastly, if you can talk a little bit on the shift from leasing to management contracts at some of the facilities. Is that something that you guys are actively encouraging or is it more a function of people sort of run the economics and wake up one day and say this makes a bit more sense.

Yes, we don't encourage them, quite frankly. We're comfortable in both realms, Dave. The issue becomes a decision for the owner. And it could be that they want to finance new construction or refinance a deal around a lease document. Or there's a tax consequence or situation that might make a lease more attractive to an owner or a client than a management contract.

And then of course the flip side of that for them is owners or clients and property managers that want to control the look and the feel and quality of service offerings operations within a parking facility and maybe more importantly, retail pricing for our customers at the front gate.

While there might be a market indicator and a strategic opportunity that we'll bring to the client to raise rates or change parking rates paid by the customers, there might be a second agenda at work. It might be the medical center who doesn't want to create a negative environment for coming and going to that facility, or a shopping center who may want to encourage shoppers in with the primary points of those people buying goods and discounting parking and access as a result.

And certainly in inner-urban areas that compete with mostly free extra-urban or suburban shopping centers that's the case. So we frankly don't care. We enjoy the opportunities created by leases and management contracts. And we're confident that we can provide returns for the clients based on whatever strategy they choose. So again it gets to be, and Marc alluded to we have movement almost every quarter in some of those because even for an existing location there might be a new ownership that has a different agenda for that property than their predecessor, so pretty much the same story.

Got you. Very good. Thank you, both.

You're welcome.

Thanks Dave.

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And Your next question comes from the line of Matt Litfin with William Blair & Company.

Hi. This is actually Kevin Steinke in for Matt Litfin this morning.

Hi, Kevin.

Hi.

Good morning, Kevin.

Good morning. You highlighted in the press release the 8% growth in same location revenue. And I think that represents a slight acceleration over recent trend. Is there anything you can point to driving that, better sales of ancillary services, or anything like that?

Well certainly focus on same store growth is an issue, but when we're talking about 3%, 4%, 5%, 8% growth in same store sales, that is not a significant statistic variance in my mind. Certainly we have the organization in our clients focused on the fact that we can deliver additional services to them as we continue to develop expertise around that product.

While 8% same store growth was great and certainly within the target zone and exceeding our target zone, I don't think a difference between 4% and 8% is significant other than that continued focus within the organization on bringing additional products to the client.

Okay. Thanks. And then can you just give us an update on your progress in penetrating new core markets, for example New York and others that you've talked about in the past?

Yes, I would without being able to quote an exact statistic for you, a lot of the new wins that we've enjoyed so far this year in '07 have been in the New York/New Jersey marketplace. We continue to do very well there and just as well in retaining the business that we've build there over the last three or four years.

We've continued to see some growth in the South Florida market layering in new facilities in the South Florida market, which has also been a target area. And obviously building upon the small acquisition we did a little over a year ago now in the Seattle market where we've layered in double-digit amounts of new locations since that acquisition has been done is within the business model that we've put together for the business.

I would say the only area that we have not seen the same sort of growth, which was in our target zone has been the Bay Area of California. And we're focused on trying to understand where those opportunities are and ratchet up the effort by the business development people in that area because we still think that there are significant opportunities for us in that marketplace.

Okay. Great. Thanks. That's all I had.

Thanks, Kevin.

Thank you.

And at this time, there are no further questions in queue. I would like to turn the call over to Jim Wilhelm for closing remarks.

Well, as always I'd like to thank everybody for taking the time to sit with us this morning and cover our results. We appreciate the questions and the opportunity to tell our story. We look forward to talking to all of you next quarter. Bye-bye now.

Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.