SP Plus Corp (SP) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Standard Parking Earnings Conference Call. My name is Erica, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Marc Baumann, Chief Financial Officer for Standard Parking. You may proceed, sir.

Thank you, Erica, and good morning, everybody. As Erica just said, I'm Marc Baumann, Chief Financial Officer of Standard Parking, and I'm your primary Investor Relations contact. Welcome to our conference call for the second quarter of 2008.

I hope all of you had a chance to review our earnings announcement, which was released after the market closed yesterday. We expect to file the 10-Q for the second quarter 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 a little more detail. After that we'll open the call up for any questions that you may have.

During this 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 website, Standardparking.com, and also at Earnings.com. There will be a replay available on either website for 30 days after the call. With that, I'll turn the call over to Jim.

Thanks, Marc. Good morning, everyone. Thanks for taking the time to sit in with us this morning. Given the current economic environment, I'm obviously very, very proud of what our team achieved this past quarter. We maintained a -- and increased our level of both location and gross profit retention at 91% and 97% respectively.

While we begin to feel some fallout from the decreased travel and higher gas and utility prices at some of our lease in reverse management contract locations, so far the economy's effect on our business has been minimized because the vast majority of our contracts are fixed-fee management agreements that we've described in the past call after call, in terms of our base business model.

We do believe current economic pressures are having an impact on some of our clients, so we're always reviewing staffing levels and operating expenses to ensure efficient operations and maximizing profits returned to our clients in this environment.

We're seeing more of our contracts go out for bid as real estate owners and property managers seek to maximize those returns. And while on one hand, this does expose more of our contracts to competitive bidding, on the other hand, we see it as an opportunity for us to leverage our operating and revenue control expertise to win new business. And that's been evidenced by the new business wins that we're continuing to have.

During the second quarter we came to a final resolution on our claim for damages incurred from Hurricane Katrina. Marc and I talked with some detail about that last quarter, while receiving a final settlement of $2 million.

This benefit, and that of less favorable changes in insurance loss reserve estimates related to prior years and higher costs for post-retirement benefits versus a year ago, contributed $0.03 to the increase in earnings per share. Our same location gross profit increased by 2% over last year's second quarter, a solid performance in what is clearly a difficult operating environment for the reasons I mentioned earlier.

We continued to add new business during the quarter. Among other wins in the second quarter, we began operating a large portfolio of 19 equity-office property locations in Southern California. We were also awarded a multi-year lease for College Park garage in Toronto. The College Park development covers an entire city block and includes residential, commercial, retail, and office space. On the day we took over operations, we installed new [pan foot] equipment to fully automate the parking facility.

The business continues to generate healthy free cash flow and generated free cash flow of $11.3 million in the second quarter of 2008, an increase of $2.5 million over last year. Free cash flow is used to repurchase stock and repay debt.

As we announced previously, we have leveraged our strong relationship with our banking groups, allowing us to put in place an amended credit facility during the quarter that gives us $75 million of additional capacity as well as extends the maturity by two years.

Getting this deal done in the current banking environment is a testament to the confidence our lenders have in our company and our business model. Given our results to date, we reaffirm our 2008 guidance of earnings per share in the range of $0.95 to $1.05. Free cash flow is expected to remain in the range of $27 million to $30 million.

With that, I'll return the call back to Marc so that he can lead you through a more detailed discussion of the quarterly and first half financial performance, and I'll talk a little bit more about the business in this economic cycle when we come back to the Q&A session.

Hello, again. Let's take a look now at our financial results for the quarter. Total revenue for the second quarter of 2008, excluding reimbursement of management contract expenses, increased by $11.9 million or 18% to $76.4 million from $64.5 million the same period a year ago. The Katrina settlement contributed to 3% of the year-over-year growth.

Gross profit for the second quarter of '08 increased by 12% to $23.5 million from $21.1 million a year ago. Again, the Katrina settlement contributed to this growth and added about 8% of that year-over-year growth.

As Jim mentioned, on the same-location basis, gross profit increased 2% year-over-year. G&A expenses for the second quarter of '08 increased 11% to $12 million from $10.8 million in the second quarter of 2007. Increased spending for productivity-enhancing IT initiatives and the annual stock grants to our Board of Directors of almost $250,000, plus some higher-post retirement benefit costs of $400,000 were partially offset by the $400,000 recovery of costs from the Katrina settlement. G&A as a percentage of gross profit declined slightly to 51.1% for this year's second quarter as compared with 51.5% last year.

Depreciation and amortization expense increased by $300,000 year-over-year, largely due to the amortization of acquired contract rights from the businesses that we bought over the past year. Operating income grew 11% to $9.9 million from $8.9 million in the second quarter of last year.

Operating income, coupled with a $500,000 decrease in net interest expense, largely due to declining interest rates, produced net income of $5.3 million in the second quarter, an increase of 21% over the second quarter of last year. Earnings per share increased $0.07 or 32% to $0.29, excuse me, in the second quarter of 2008 from $0.22 in the second quarter of last year.

In terms of free cash flow, as Jim mentioned, the company generated $11.3 million of free cash flow in the second quarter, compared to $8.8 million during the same quarter last year. Free cash flow generated in the second quarter was used to make debt repayments totaling $5.9 million and repurchase $5.1 million of common stock during the quarter.

We didn't do any acquisitions during the second quarter of 2008. The Board of Directors recently authorized a $60 million increase in the stock repurchase plan, and we had $10 million remaining under the previous authorization as of June 30, 2008.

Touching briefly on the year-to-date results, gross profit for the first half increased by 11% over the first half of '07 with the Katrina settlement contributing 4% of the year-on-year growth. On a same-location basis for the first half year to date, gross profit also grew by 2% over last year.

G&A expenses for the first half of 2008 increased by 8% to $23.4 million from $21.7 million last year. G&A as a percentage of gross profit decreased from 53.2% for the first half of '07 to 51.9% for the first half of '08. And as we've said many times, our long-term goal is to bring this ratio down below 50% or less.

Net income was $9.6 million for the first half of 2008, or $0.52 per share, an increase of 22% on net income and 30% in EPS over the first half of '07. In terms of free cash flow, the company generated $14.2 million during the first half of '08, $200,000 more than the same period of '07, while spending $900,000 more for cash taxes in the first six months of '08 versus the first six months of '07.

As we said previously, our cash tax rate in 2007 was approximately 5%, and in 2008, we expect our cash tax rate to grow to about 16%. Despite the increase in cash taxes, our trailing 12 months free cash flow through June 30, 2008 was $32.3 million, as compared with $29.7 million for the 12 months ending June 30, 2007, an increase of almost 9%.

On a per share basis, free cash flow grew 16% for the 12 months ending June 30, 2008, compared with the 12 months ending June 30, 2007. Free cash flow generated during the first half of 2008, along with draws on the revolving credit facility, were used to fund one acquisition in the first quarter and repurchase almost $13 million of common stock. That concludes our formal comments. I'll turn the call back over to Erica to begin the Q&A session.

Thank you, sir. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Robert Labick from CJS Securities. You may proceed.

Yes, good morning. This is actually Fred Buonocore calling in for Bob. How are you today?

Good morning. Hi, Fred.

Hi, Fred.

Just wanted to see if you could give us a sense for what percentage of managed contracts are actually variable?

Well, we have approximately 67%. Our fixed fee management contracts, that's the percentage of our total portfolio.

Mm hmm.

And so for the most part, those contracts will be, you know, have a fixed fee that doesn't vary from year to year. There are some exceptions to that, of course. And then, the remainder of our management contracts are reverse management contracts, and those contracts can be a little more variable. Our total management contracts are about 89% of the portfolio.

Got it, and would it be those variable contracts that impacted gross margins during the quarter?

Definitely. And I think, you know, regardless of the economic circumstances, just bringing on a new reverse management contract can have an impact on management contract gross margin because there may be a very large payroll or other large expenses relating to that particular contract.

I see. That's helpful. And then you also alluded to how, kind of, macroeconomic environments may be impacting the bidding on new property for renewal. Can you give a sense for, you know, has there been increased focus by property owners to open up contracts for bidding versus automatic renewal? And it would seem like that would certainly be a benefit to you as you have pointed out. Can you elaborate on that a little?

Sure, the -- what we see traditionally in this sort of economic cycle is property management firms on behalf of owners, or asset managers on behalf of owners, or the owners themselves begin to take a look at every item that comprises the income stream or expense operation at their facility. And that can range from airports to hospitals to office buildings to, you know, any of the venues that we serve.

That generally serves us well in that we seem to be able to -- we -- not seem. We can demonstrate, you know, proven results that when we take over an operation, we give the client the benefit of our expenses which are negotiated on a national basis, so the strength of our shoulders, combined with, you know, our internal revenue control abilities, and our abilities on the technology conversion side of the business to win new business.

So, you know, while some of our clients, you know, tend to get into more detailed discussions with us, and, you know, they may take a facility out to bid that might've been an automatic rollover provision short of that, you know, we generally are winning those back. And that's what's being reflected in the higher retention rate and the higher gross profit retention rate that I cited earlier.

That, then, is compounded by the fact that we're winning new business and writing new business at a higher rate than we were same time last year and projected out for the rest of the year, which enters into our guidance.

So, you know, we kind of like this climate, in terms of net new wins versus losses, and then trying to, you know, discuss with existing clients the value they get through us so as to avoid downward pressure on pricing. And we haven't seen a whole lot of real severe downward pressure on pricing.

Wonderful. That's very helpful. Thank you very much.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Clint Fendley from Davenport. You may proceed.

Good morning, guys. Nice quarter in a tough environment here.

Thanks, Clint.

Thank you.

I wondered if you could comment just on the environment and the impact that that might be having on M&A and your opportunities that might be in the pipeline there.

Sure, well, let me talk about -- let me answer the first part first, in terms of the overall environment. You know, if you sort through all of the noise in our statement about year-over-year changes as a result of the hurricane, and while both years had positive impacts on our estimates of retained reserve for the insurance program, you know, one year we, you know, tend to vary that one year for another 'cause we try to sort out things like that and some other expenses that we cited in our press release.

You know, the net effect of all of that, including the hurricane, was $0.03 a share. What I found encouraging in this environment is that the $0.04 that we grew over the $0.22 last year was primarily achieved through the growth in the organic business by virtue of the key metrics, you know, that we tend to talk about with you every quarter, those being retention rate and gross profit retention rate, and new business won, what we've been doing with G&A.

You know, neither Marc and I mentioned in our preamble the fact that we continue to move the technology initiatives ahead in this environment. You know, they are beginning to have an effect on G&A as a percentage of gross profit and as we've talked about before, we're looking to 2009 and 2010, you know, to reap more benefit from that as the business continues to grow.

So, you know, while there is no doubt that in those businesses that are related to the travel industry, airports and hotels, and some office buildings regarding employment rates and office vacancy and absorption rates, you know, that we are seeing, you know, the effect of the economy in paid exits.

You know, the metrics that we tend to look at that I talked about earlier, you know, are sort of holding, you know, our business model together as predicted. If you begin, then, to look at our capital structure, Marc talked with some depth about free cash flow, and the, you know, gap between free cash flow per share and earnings per share and the fact that the business continues to flow cash through itself in this sort of an environment.

So, there are reasons to be, you know -- on a conservative basis, but there are reasons to be optimistic about our business plan, and the fact that, you know, we've been crafting this business plan for many years preparing for economic situations like the one that we're in today.

On the M&A side of the business, you know, the pipeline is there for us. And we certainly have the capital structure to get some of those done, and I think that you'll see us continue to move along at about the pace we have.

When we, Marc and I talked about 2008, we highlighted the fact that we had done six or seven acquisitions in a relatively short period of time. We wanted to use 2008 to integrate those acquisitions into the business. And you can see from our revenue numbers, you know, the increase in revenue year-over-year that the revenues generated from some of those acquisitions are beginning to take place.

You know, we're integrating, you know, Security into our business this year, which is in its incubation stage, and we're optimistic that that business will be a business we'd like to be in in years future, as we bring that around slowly.

So we've sort of successfully integrated all that, and at the same time, we've mentioned, that we're putting in process and technology changes across the broader side of the business, leading to a new -- ultimately, a new accounting platform several years from now.

So we're pretty confident that we've been able to pull that off. So, we're looking again at those acquisitions that might make some sense to us in the parking realm that we can begin to move forward in the third and fourth quarter of this year.

How long do you expect to continue spending on the IT initiatives?

Well, I think we've talked before, Clint, that, you know, it's probably a five-year project. And, you know, we're, you know we're getting close to halfway in terms of the actual spend, but we have quite a ways to go.

So, I mean, this is not near the end, and I think, as Jim and I have talked before, you know, we'll start to see some meaningful savings on the G&A front in 2009. And obviously, as we go forward. And then years after that, you know, we'll continue to try to drive G&A costs out of the business through technology.

What we've said all along, Clint, is that we wanted to take those three initiatives that we've talked about in this forum in the past, and those are a more efficient automated methodology for doing accounts payables within our company, a more efficient and, you know sort of best of industry product for billing our monthly customers and allowing them to do that over the web and enabling technology to replace a lot of manual work in that area, as well as the collection of time and attendance from, you know, 13,000 employees every day.

And those were the first three initiatives that we sort of have bitten off in this area, and those that we're making progress in. We expect that those initiatives are those that will enable us field cost savings in terms of manual processing of that sort of information. All three of those initiatives have to be completed before we can realize that.

So, those were the first three we wanted to move along. But as Marc said, we still have componentry to the overall platform in contract management, location management, ultimately our general ledger, and client reporting systems that have to come aboard in later modules.

Great, thank you. That's very helpful.

You're welcome.

This concludes our question-and-answer session of the conference. I would now like to turn it over to Mr. Jim Wilhelm from -- for closing remarks.

No real closing remarks, I'd just like to thank everybody for spending the time and listening to our call today, and have a great rest of the week. Thank you.