SP Plus Corp (SP) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2007 Standard Parking Earnings Conference Call.

My name is Lisa, and I will be your operator for today.

At this time, all participants are in a listen only mode. We will conduct a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Marc Baumann, Executive Vice-President and Chief Financial Officer.

Please proceed sir.

Thank you Lisa.

And good morning everybody. Thank you for joining us.

I'm also your primary Investor Relations contact if you have any follow up questions after the call.

Welcome to our call for the third quarter, and I hope you've had a chance to review our earnings release which went out last night after the markets closed. We also expect to file our 10-Q for the third quarter either tonight or tomorrow.

We'll begin our call today with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and then I'll answer -- or discuss, rather, some of the financials in a little more detail. After that we'll open up the call for a Q&A session, as Lisa mentioned.

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 earnings 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 Securities and Exchange Commission.

Finally, before we get started, I want to mention that this call is being broadcast live over the Internet and can be accessed on our Web site standardparking.com, and also at earnings.com. There will be a replay available on either Web site for thirty days after the call.

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

Thank you Marc. And good morning everyone.

I am pleased that we have another strong quarter to report.

Pre-tax income is up 45% and pre-tax income per share is up 56% over a year ago. As we've discussed significantly or consistently this year, we will continue to highlight pre-tax income for 2007 as our effective tax rate for book purposes increased from approximately 15% in last year's third quarter to 41% in this year's third quarter, which impacts the year-over-year net income and EPS comparison somewhat unfairly.

That being said, net income was flat at $4.5 million in the third quarter of both years. However, due to the reduction in shares outstanding as a result of our stock repurchase program, earnings per share increased by $0.03 to $0.47 per share in this year's third quarter, up from $0.44 last year.

Cash taxes for both years were under 5%. As a result the company generated free cash-flow of $8.4 million in the third quarter, which is less than the $9.5 million generated in the third quarter of 2006, primarily due to normal fluctuations and the timing of payments and collections. And Marc has spoken about those fluctuations quarter after quarter as long as I can remember doing these calls.

Taking a longer term view, the company generated $22.4 million of free cash flow in the first nine months of 2007, $2.1 million more than the same period last year, while at the same time spending $2.2 million more in capital expenditures this year to date.

Revenue, excluding reimbursed management expenses, is up 2% in the quarter. This relatively low growth rate was primarily due to differences in the way revenue is recorded when leases convert to management contracts. Revenue from same locations show solid growth of 5%.

Our location retention rate continues to hover at about 90% for the twelve months ended this September, which is below where we'd like it to be. But please note that less than 4% of our trailing twelve month gross profit came from terminated locations.

And I've also spoken about this movement, and I'm not overly concerned with the retention rate at 90%, given the fact that some of the contracts we exited in the last couple of quarters had multiple locations attached, but with pretty low returns to us. So that is a more proper focus for us, is retained gross [profit] from those locations that we have.

Illustrating change in our location count, as of the end of the third quarter of this year, we were at 2,071 locations, and at the same time last year at the end of September we were at 2,004 locations.

We continue to win new contacts across the country. We identified them in the release, including the loss of Howard University contract. But I'd like to highlight some of the gains here.

We were awarded a five year contract to provide parking and shuttle bus services at the Buffalo-Niagara International Airport, one of the nation's fastest growing airports. We'll manage an operation consisting of 7,000 parking spaces and a fleet of 18 buses.

And we've had a series of releases out this year about the gains that we've made in our airport niche, both in our core parking competency as well as in managing transportation contracts at new airports.

In Los Angeles, we were awarded the parking contract at The Grove, a 600,000 square foot retail center with 3,500 parking spaces and 3 valet stations.

In Salt Lake City, we were awarded the parking contract at the prestigious Gateway mixed-use development with 3,000 total spaces.

And we added several real nice deals in New York including the New York Marriott Financial Center and a luxury residence on the Upper East Side, both in Manhattan; in New Rochelle we were awarded the new Trump Plaza, which is a luxury residence and hotel; and in Westchester we were awarded the new Ritz-Carlton.

It's been a very, very active quarter for us. In addition to delivering on our organic growth target, we completed four acquisitions. The two we completed at the beginning of the quarter have been fully integrated. And while they did start to generate profit in the quarter, due to purchase accounting and transaction costs the impact on the quarter as a result were minimal -- excluding a $600,000 gain we reported related to one of those acquisitions.

The two acquisitions that we completed at the end of the quarter are now in the process of being integrated, and we issued a press release announcing those acquisitions on October 1, so please refer to that release for additional details.

Acquisitions will continue to be an important element of our growth strategy. Not only can they assist in expanding our existing operations, but they also provide us with additional expertise that enhances our ability to bring ancillary services to the marketplace.

As we continue to grow both organically and via acquisitions, we do not want to lose sight of our core responsibility of delivering excellence to our clients.

To ensure that we continue to focus on our clients needs, we've appointed Thomas Hagerman to the position of Chief Operating Officer of Standard Parking. Tom reports directly to me and has overall responsibility for supervising our North American operations.

So in summary, a real solid message about our progress and momentum. We have real good underlying business growth, and we are continuing to demonstrate that we have a business model that helps to shield us from any economic fluctuations by virtue of our contract structure, geographic diversity, and market competencies.

We continue to look for additional acquisitions to complement and augment our existing business. And we continue to generate solid free cash flow that we've been selectively channeling into three areas -- stock repurchases, acquiring businesses, and the repayment of our debt -- all with an eye toward enhancing shareholder value.

With that, I'll turn the call back over to Marc so that he can lead you through a more detailed discussion of the quarterly and nine month financial performance, and then I'll be back to wrap up with a guidance update for 2007 before our Q&A.

Thanks, Jim.

And here is some more detailed information about the quarter, obviously which is laid out in your earnings release. As Jim mentioned, total revenue for the third quarter, excluding reimbursement of management contract expenses, increased by $1.6 million, or 2%, to $67.3 million from $65.7 million in the same period a year ago, driven primarily by a 13% growth in management contract revenue.

Gross profit for the third quarter increased by 16% to $22.3 million, in addition to strong same-location gross profit growth that Jim mentioned. The company recorded a $600,000 gain on the sale of a contract right and $700,000 from favorable change in insurance loss experience reserve estimates relating to prior years. And we had no significant comparable insurance reserve estimate for the 2006 third quarter.

General and administrative expenses increased by 9% to $11.4 million, from $10.4 million in the third quarter last year. The third quarters of both 2006 and 2007 were impacted by expense items that do not typically occur. In 2007, the company recorded a $400,000 expense related to reorganizing certain support functions to further enhance productivity, while in 2006 the company incurred $400,000 of due diligence expense related to a potential acquisition that was not pursued.

Excluding the 2007 item, G&A on a sequential basis has been relatively consistent throughout this year, which is something that we've talked about on past calls. Another metric that we tend to look at is G&A as a percentage of gross profit, which decreased to 51% this year in the third quarter from 54.1% in last year's third quarter; as we continue to grow gross profit and obviously look for ways to have a slower growth rate for our G&A and take costs out of our business.

Depreciation and amortization expense was essentially flat at $1.4 million in the third quarters of both 2007 and 2006, as the burn-off of old assets is essentially complete. Due to acquisition purchase accounting and of course the increased level of capital expenditure that you've seen us do this year, we really don't expect further declines in depreciation and amortization going forward.

Operating income growth of 29% from $7.4 million in the third quarter of last year to $9.5 million this year, coupled with reduced net interest expense contributed to a 45% increase in pre-tax income to $7.7 million this year compared to $5.3 million last year.

On a per share basis, reduced shares outstanding due to the stock repurchase program resulted in an increase of 56% in pre-tax income per share, from $0.52 per share in the third quarter of 2006, to $0.81 per share in this year's third quarter.

As you may recall, at the end of 2006 we reversed our valuation allowance for deferred tax assets, resulting in a very large one-time benefit in the fourth quarter last year. From that point on we expected our effective income tax rate to be approximately 40%.

As expected income tax expense increased by $2.4 million to $3.2 million in the third quarter of 2007, an effective rate of 41%, as compared with 15% in the 2006 third quarter.

As Jim mentioned, cash taxes remain at approximately 5% this year as well as last year.

Correspondingly, net income was $4.5 million in the third quarter of 2007, unchanged from the same period last year, obviously due to that big increase in tax rates. However, on a per share basis, earnings per share increased approximately 7%, from $0.44 last year to $0.47 in this year's third quarter, due primarily to a lower share count.

In terms of free cash flow, the company generated $8.4 million of free cash flow during the quarter compared with $9.5 million during the third quarter last year, as Jim mentioned. And again, it is due to just normal fluctuations in working capital.

In the third quarter, we took that free cash flow and along with available cash and some draws on the revolving credit facility, we made acquisitions requiring cash outlay of $5.8 million, we repurchased $5 million of common stock, and we made some other debt repayments, primarily in capital leases of $600,000 during the quarter.

Our share repurchases were made in open market transactions, and we also purchased additional pro-rata shares from our majority shareholder at the same price as we paid in the open market transactions.

Touching briefly on the year-to-date results, gross profit for the first nine months of 2007 increased by 11% over 2006 to $63 million from $56.8 million a year ago. Contributing to the increase was a year-over-year favorable swing of $2.3 million due to changes in estimates for insurance loss experience reserves relating to prior years.

This resulted from a $1.9 million favorable change in loss estimates this year, as compared with a $400,000 unfavorable change in loss estimates last year. And as I mentioned earlier, we also recognized a $600,000 gain from that sale of a contract rights in the third quarter.

G&A expenses for the first nine months of 2007 increased by 6% to $33 million from $31.1 million in 2006. However G&A as a percentage of gross profit decreased from 54.8% in the first nine months of 2006 to 52.4% for the first nine months of 2007.

Operating income for the first nine months of 2007 was $26.1 million, an increase of 23% over the nine month 2006 operating income of $21.3 million. Pre-tax income was $20.9 million for the first nine months of 2007, or $2.15 a share, an increase of 41% on pre-tax income and 49% of pre-tax income per share over the same period last year.

Due to the increase in the effective tax rate to 41% this year compared to 14% last year, net income was $12.4 million, or $1.27 per share, for the first nine months of this year compared with $12.7 million or $1.23 per share for the same period last year -- a 3% decrease in net income but a 3% increase in earnings per share.

In terms of free cash flow, as Jim mentioned, the company generated substantial free cash flow this year -- $22.4 million during the first nine months, $2.1 million more than the same period of '06, plus spending $2.2 million more for capital expenditures in the first nine months of 2007 versus the same period last year.

Free cash flow generated during 2007 along with available cash was used to make acquisitions totaling $5.8 million, repurchase $15 million of common stock, and make debt repayments of $4.7 million for the year.

With that I'll turn the call back over to Jim, who will update our 2007 guidance.

Yes, thanks Marc.

Based on our year-to-date results, we're raising our outlook for 2007 earnings and narrowing the range somewhat. 2007 earnings per share is expected to be in the range of $1.65 to $1.70, increased from the previous expectation of $1.50 to $1.60.

Pre-tax income per share is expected to be in the range of $2.73 to $2.81, an increase from the previous expectation of $2.50 to $2.70.

Free cash flow guidance is also being raised by $5 million to a range from $25 million to $30 million, a range that anticipates approximately $6 million in capital expenditures excluding acquisitions.

That concludes our formal comments today. I'll turn the call back over to the operator to begin the Q&A session.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Robert Labick with CJS Securities.

Please proceed.

Good morning. Congratulations on another strong quarter.

Hi Bob.

Hi Bob. Thanks.

First question I wanted to ask was regarding the new acquisitions and kind of acquisitions going forward. You mentioned in the release and on the call that you, in addition to the locations, you've got new services and expertise that you could transfer to some of your existing customers.

Could you expand on that? and just as a follow up, in terms of future acquisitions that you're looking for, are you looking for location-based acquisitions or new service offerings, or both? And how do you think about those?

Sure. That's a good question. I think our acquisition strategy revolves primarily around additional locations and additions to our core business, so the parking business itself. As service providers and our client base expands, and those clients expand, we increasingly are asked to provide additional value-added services to complement what we do in the parking realm.

So over the last several years, as you know, we've expanded rather significantly in the area of transportation, where we're providing lots of shuttle services at airports and campuses and office buildings to transit stations, transit stations to offices, and within remote transit stations around the country. So transportation has been a focus of ours.

There have also been cases where we've had clients come to us and ask if we can provide basic security services to complement what we do for the parking facilities and the other primary uses on the campus or at the office building or at the stadium that we serve, and we've added those sorts of competencies in over the last several years.

Of the four acquisitions we've done this year, three of those are specifically right in our core area and our sweep spot in the parking area. We had an opportunity in California to take on some additional security competency to sort of augment what we're doing out there in parking and transportation, and we did it.

I think if I see those opportunities in those areas in the future, where pricing is right and we think there's an opportunity to enable that acquisition to serve a broader base of our clients, we'll act on it -- as long as it fits our metric for our desired returns on our capital.

But I can't say any more strongly that our primary focus in getting acquisitions done remains in our core business and in our foundation which is parking and valet and those sorts of assignments in the verticals that we've talked about before.

Great. And on previous calls you've discussed that the acquisitions that you're looking at could range from 250,000 EBITDA up to -- I think that you said 8 million to 10 million or 7 million to 8 million in EBITDA. Are there still opportunities in that range out there? And how does the pipeline look?

Yes. Yes, there are. And we're continuing to actively pursue those, certainly for the remainder of this year into the fourth quarter and as we look at next year's slate.

However, at the same time, we are integrating new process change within the organization. And Marc and I on these calls have talked about that in terms of a changeover of our platforms which enable us to process payroll and process payables and process receivables more efficiently with an eye toward a goal that we've stated to you and others in the past of getting our G&A under 50% of our gross profit. And that is moving along nicely.

And also then integrating these acquisitions that we've taken on this year and those that we might take on in the fourth quarter and early into next year.

So I want to make -- be careful, that while the opportunity exists and the pipeline is full for us, that we're successfully integrating process change and acquisitions that we've done before we take a much larger bite.

So that might take us into the first and second quarter of next year, getting all of these things integrated, both from a process perspective and an acquisition perspective. Get a couple more deals done and make sure that we're integrating those and providing results at our hurdle rates.

Great. Thank you very much. I'll get back in queue.

Thanks Bob.

Thanks Bob.

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

Please proceed.

Hi, good morning.

Good morning David.

Hi David.

A couple of questions. One, Marc, on the $600,000 and $700,000 that you broke out in the release, can you give a sense for where that's accounted for on the P&L?

It's -- they're both in gross profit.

They are? Would they be on the management contract side or the lease side? Or split?

Yes, well, on the insurance it's both, so that depends on the relative mix of our contracts. And so some of it goes to leases, some of it goes to management. Obviously, more of it's going to go to management -- and in the Q we'll break that out so you'll be able to see that when it's filed tonight.

As far as the gain from the contract, relinquishing the contract right, that will be in leases because it was a lease contract right that was terminated.

Okay. And then, Jim, can you speak a little bit on thoughts these days on the acquisition front? And, I guess, during the quarter we saw you expand a little bit in the security business and just general thinking. Is that a toe in the water or is it something more, a business line that we'd like to grow maybe bigger?

Well, I think it's a business line that we're interested in pursuing to see if it integrates well with parking and transportation, and power washing and cleaning, some of the other businesses that we've been nurturing along. So I don't know that I would categorize it on either extreme of your question but maybe somewhere in the middle.

As we've done security at stadiums for a long time, we've done some security at special events venues that we run, and we've had clients ask us if we can't provide them security services under our existing parking and transportation contracts.

So I think that we'll have a look and see how the integration goes in California. If it leads to growth of not only the security component itself, but also within the other niches, being able to cross-sell some of those services into the future.

So I would expect that the deal we've made in California will after some time enable us to understand whether it's something we want to grow in our other core cities.

I see. So -- but we're still thinking about it though as an ancillary service so to speak?

We're certainly thinking about it as an ancillary service. That would be accurate.

Got you. And then just one last one if I might. The success in New York, the big contract, the new contracts or the contract wins - I'm curious if we're doing anything different there or if that's more just the success from a fairly focused selling effort.

Yes, no we're not doing anything outside of the business model there, certainly. We've grown enough by volume in New York to have a sizeable operation there so that we can demonstrate success in turning properties around and providing additional income to our clients by virtue of our business model and the management contract niche opening up for us in New York.

So I think I've said on this call that in the past that we really weren't in New York five years ago and we're over 50 locations or so in New York now, for the most part under management contracts with a fairly sizeable pipeline.

So as a result of that success, I've been able to reinvest in terms of strengthening the operating group that we have on the ground in New York, and supplementing that effort with some really dynamic salespeople on the ground in New York as well.

Very good. Thank you both.

Thanks David.

Thank you David.

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Your next question comes from the line of Bruce Simpson with William Blair.

Please proceed.

Good morning guys and congratulations.

Hi Bruce. Thanks.

Hi Bruce. Thanks.

I wonder if you can disaggregate the 9% quarterly gross profit gain? That's what I get when I back out the gains on each side, in sort of pro forma gross profit gain. It looks like it was up 9% in the third quarter.

Can you help us -- I know you've already given us information that 5% of that is same location revenue growth. Can you help us determine where the rest of it comes from? How much of it is layering on shuttle bus services and so forth? How much is pricing?

Yes, we really don't break that out Bruce. I mean, obviously, some of the gains for the quarter came from those two elements that we mentioned. The $600,000 contract termination and the $700,000 from insurance, both of those elements, obviously, helped gross profit. In the Q itself, we'll be talking about same-store revenue in a little more detail.

We do know that we had same-store growth on leases for example, even though the overall lease revenue went down. So you'll see that same-store from short-term parking on leases went up 7.1% and for monthly parking went up 4.2% despite an overall drop in lease revenue. And that drop really is because of the continuing trend toward management contracts that we're seeing.

Okay. And then, trying to get the same kind of detail when I think about the $0.10 to $0.15 increase in annual EPS guidance. That's a pretty substantial jump in one quarter's performance as a percentage. And it looks like the EPS number reported this quarter is roughly $0.10 above what consensus is looking for.

So what I'm trying to get you to do is, backing out the non-recurring stuff, which you just talked about, Marc, can you talk about what really happened in the quarter that you think really substantially raises your estimation of the total year's performance?

I mean, is it really, for example, a better retention rate of existing clients? Is it stronger pricing? Is it that you're just winning more accounts than you thought you were going to win, or that you're layering on ancillary services faster than you thought that you would in the beginning of the year when you laid out guidance?

Well, I think that one of the things that we find, Bruce, when we start out the year, obviously we have our own expectations about how the business is going to perform, and we're making those determinations before we've really seen that performance.

Now we look at the business and we say, "Well, year-to-date we're at $1.27, and how do we think the fourth quarter is going to look," given our own expectations that we had earlier in the year, now revised for the new wins that Jim has talked about, the fact that we've brought some of these acquisitions on board and some of them will have an impact on us. And really, saying to ourselves, "How do we feel about Q4 compared to what we thought when the year started?"

But, certainly, some of -- and we feel very good about it obviously, but some of the uplifting of the guidance really stems from the fact that we've performed so well to date. And, quite frankly, it's justified by the fact that we're already at $1.27 through three quarters.

Okay. The last thing for me is, what is the timing and the quantity for the burn-off of the net operating losses? So in other words, when you say your cash tax rate is only 5%, when does that begin to revert to kind of a standard rate where cash taxes will approximate income tax provision? Is there a fixed dollar amount that remains and does it get amortized over a certain period?

There's a number of variables that are driving that. Number one is that obviously we're amortizing goodwill for tax purposes from the original combination of APCOA and Standard back in 1998. We've got the NOL's from the past. Those are burning off because we're obviously performing well and utilizing them. And other tax to book differences.

So what we can say at this point is we expect cash taxes this year to be around 5% for the year. We put in the earnings release our expectation that cash taxes next year are going to step up to about 15%. And that's really a reflection of starting to have profit growth that's really getting taxed at the marginal rates, of 40%.

So as the company grows, we have a tax shield if you will, from those other elements. But the growth in profits means that there's incremental profit now getting taxed at full rates. Now, how quickly we go from 15% to 40% it's not something we've put out there yet. I know that's of big interest to people and we're analyzing that now and trying to think about a good way to communicate that to people. And I'm hopeful that we'll be able to give a little longer view on that in the near future.

But certainly if you'd make some very crude assumptions about continued growth of the business and the fact that we'll layer in some acquisitions, you've got to believe in five years time, we would be at 40% and possibly sooner. So it's not like, "Wow, we've got another ten years at very low rates."

But that being said, we're not going to go to 40% in 2008, and we're not going to go to 40% in 2009. But how -- what the path looks like, I've said, now it will be 15% or so next year. That's our expectation. And, obviously, it will continue to move up in the future years beyond 2008.

And what's the total dollar amount of the NOL right now?

You know I can't remember off the top of my head and I don't have that here.

Okay. I can --

I think it was $42 million at the beginning of the year, but if you go back to the filings it's definitely detailed there.

Okay. Thanks a lot guys.

Okay Bruce, thank you.

There are no additional questions.

At this time, I would now like to turn the presentation back over to Mr. Jim Wilhelm for closing remarks.

Thank you ma'am.

And I just want to thank everybody for taking time out of their day to listen to our call today and follow our company.

Have a great rest of the week and we'll talk to you soon. Bye-bye.

Goodbye.

Thank you for your participation in today's conference. This concludes the presentation.

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