SP Plus Corp (SP) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Standard Parking earnings conference call. My name is Dan and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS.)

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

Thank you, Dan, and good morning, everybody. As Dan just said, I'm Marc Baumann, Chief Financial Officer of Standard Parking, and I'm also your primary Investor Relations contact. Welcome to our conference call for the third quarter of 2008. I hope all of you have had a chance to review our earnings announcement which was released after the market's close yesterday. We expect to file our 10-Q for the third 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 questions that you may have.

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 website, 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.

Thanks, Marc. Good morning, everyone, and welcome to our call. We put out -- as Marc referenced, we put out our press release last night. I trust that most of you have been able to look at that. And if you haven't, I suggest that you do, as I'm going to try to avoid being redundant in terms of the more detailed information that we put out in that release, and just maybe spend the time today talking a little bit about what's going on with our business and the business as the result of those conditions in the economic environment that are affecting us today.

Again, obviously we're very pleased with the third quarter's results over the activity experienced a year ago. We -- as I've said in the previous calls, we have worked very, very hard over the last six or seven years to create a business model that could prepare itself for a period of time as we're experiencing now, where the business would be resilient, a focus on a real solid quality product that we offer to our clients, as well as the creation of a portfolio of contracts which is risk-adverse. So obviously we're being tested. That business model is being tested throughout this condition and the results that we have posted this quarter and hope to enjoy on a move-forward basis are reflective of, I think, the successful creation of the business model that we set forth to do several years ago.

As such, as a result of the product side of the business, we continue to retain business at a higher level than [goal]. We're retaining about 90% to 91% of our contracts these days and that remains. We're also retaining 96% of the gross profit from those same stores, which, again, by point of reference means we're keeping those contracts that are more valuable than those that we are losing.

In addition, we're writing a significant amount of new business again this year as a testament to our product offering. We expect that by the end of the year we will have written more new business in this calendar year than in any year previous to that. And again, the good job that our business development people do, in terms of creating pipelines and following up on those pipelines, have been terrific. And I think they certainly have their jobs aided by the quality of products that we bring to our clients and our ability to make -- generate more revenue to our clients as a result of the service offerings we have talked about.

Just some examples of those contract wins that we've had just this quarter, and there are some terrific wins and several worth mentioning. We started operations during the middle of October at the Denver International Airport, which is one of the largest parking operations in the world, with over 40,000 parking spaces. We also just recently started at the Richmond Airport just a week or so ago. And, again, that's about -- more than 7,000 parking spaces, as well as some shuttle work that we'll be doing. Just -- you know, my hat's off to our airport business development team. Obviously, when you get into these larger airports there's a long lead time required in terms of bringing those new contracts to the board and I'm real proud of the job that our folks did in securing those.

Also worth mentioning is the start-up of our services at the St. Joseph Regional Medical Center in New Jersey, two campuses there and about 1,200 parking spaces for us to manage. And again, you've heard us talk about our goals as they relate to winning institutional campus business, whether they're universities or medical center campuses or airport campuses, where we can offer our wider package of services to those sorts of clients.

So we think that those issues, winning new business and retaining the business we have, coupled with the fact that our portfolio tends to be for the most part risk-averse, have resulted in the numbers that you saw this quarter. Those issues are mitigated certainly by what's going on. We have a segment of our portfolio where we have reverse management contracts and leases; about 10%, 10 to 11% of our contracts are leases. And certainly the downturn in the economy has affected the performance of the cars that are parking within those sorts of environments at our leases. Again, we have leases predominantly at airports and we have leases predominantly and management contracts in the hotel sector.

Now, you've heard me in the past talk about the downturn in those sectors specifically. But I think that the story is a little better told by saying because we have airports and hotels and leases and reverse management contracts, as opposed to retail and office buildings and residential condominium complexes, things like that, where we have mostly cost-plus management contracts, we tend to focus more on airports and hotels in these calls. And that might be somewhat away from an overall statement about the economy. If I had lots of office building leases, for instance, in New York, or Chicago, or Boston, or LA, where we've seen the vacancy rates increase, I suspect that the impacts would have been similar to what we're seeing at the hotels and airports.

I think that the general downturn in the economy certainly would have impacted us in any event at those locations where we have leases and reverse management contracts. Again, because they represent a relatively small component of our contract mix, our business model survives and tends to be rather resilient in this case. And the growth that you've seen us experience year over year during this cycle is, again, the result of the new business that we're writing, high retention rates, the quality of the product and building the portfolio as we have the last several years. So I think that adds some flavor and some color to the overall statements that we've made in this press release and what we'll talk about on the call this morning.

Obviously, what we do in this sort of an economic environment is take a very hard look at costs, not only our own G&A -- our own SG&A here in Chicago and across the country, which we've taken a look at and made some adjustments for, but, most importantly, those expenses at those leases and reverse management contracts, as well as those pass-through management contracts where it affects our sales and our bottom line for our clients. So taking a hard look at staffing requirements at those hotels and at those airports and where we have leases and where we can cut staff in a cost-plus environment is an important exercise that we've gone through this quarter to make sure that we're continuing to maximize the return not only to our own shareholders and our own stakeholders in the business, but for those -- and certainly more importantly, to our clients in the 2,200 locations where we serve our clients. And making sure that it isn't business as usual during this sort of a turn and finding opportunities to maintain the level of profit and in some cases increase it, even during these periods.

That being said, we have not cut back at all in terms of the progress that we've been making towards our improvement of our back office processes that you've heard me talk about now quarter after quarter as we've continued to make significant capital investment into new IT systems and new back-office processes that will enable us to operate more efficiently in the future with, again, an eye towards those sort of process enhancements paying off as we get into the latter parts of 2009 and 2010, in terms of managing and continuing to reduce our own SG&A as a percentage of gross profit on a move-forward basis. So we have not slowed down the work on those. We continue to expend current G&A on making sure that we're staffed properly to transition those new processes and those new systems over to the wider stream of the organization over the next year or so. So I don't want to imply that we've slowed down at all with either our capital investment or our SG&A investment towards making those projects successful.

Regarding free cash flow, we did include a discussion. The business generated about $1.3 million of free cash flow during the third quarter and we're at about $15.5 million during the first nine months of 2008. We believe that working capital investments and new client relationships, as well as reduced revenue at client locations, impacted our free cash flow during the last quarter. While these fluctuations in working capital don't fundamentally change the nature of the Company's free cash flow over time, or in a larger perspective, we don't expect the working capital swings experienced in the third quarter to reverse themselves before this year end. Accordingly, we have lowered our free cash flow expectation for the year to a range of $20 million to $25 million for this year.

However, on the flip side of that we have narrowed our 2008 earnings per share guidance range to $1.00 to $1.05 effectively raising the low end of our guidance by about $0.05.

In summary, we're very pleased with the overall performance during this tough economic environment. Our earnings per share, as I've said, are up 21% for this quarter and 27% year to date and we're very, very proud of that. It certainly has been the test that we talked about a year ago when we foresaw this economic condition emerging and could our business model withstand the challenge that would be brought forward during this particular cycle for however long it lasts. I don't think that there's a person out there, that we believe anyway, that really knows how long we would expect this condition to last. Is it another week, or is it another month, or is it another year? I don't know that anybody has a real good crystal ball in terms of the overall economy as it affects the people who park in our facilities and the clients who we work for. So, again, we feel very, very good about our performance and the fact that our business model did withstand the test. And we expect that it will continue to withstand the test for the reasons that I've cited earlier.

With that, and for the time being, I'll turn the call back over to Marc and he can walk you through a more detailed discussion of the quarter and the year-to-date financial performance. And then I'd be glad to take any questions that you have at the conclusion of that report.

Thanks, Jim, and hello again, everybody. Here's a few financial highlights for the quarter. Revenue for the third quarter, excluding reimbursement of management contract expenses, increased by $8.2 million, or 12%, to $75.5 million from $67.3 million in the same period a year ago. A combination of new business that Jim mentioned, acquisitions, and growth at same locations, generated the year-over-year results.

Our gross profit for the third quarter increased by 5%, to $23.5 million from $22.3 million a year ago. As we've highlighted in the earnings release, insurance and the sale of certain contract rights benefited each year's gross profit. However, on a net basis, these items did not have a significant impact on the year-over-year comparison. For same locations, overall gross profit grew 1% year over year, as 5% growth at same managed locations was offset by a 21% decrease in gross profit at same leased locations, as many of our airport and hotel operations are leases, as Jim mentioned. While the level of same location growth is lower than in the past, given the current economic condition, we're very pleased with these results and, of course, very strong results at management locations, which is the base of our business.

G&A expenses for the third quarter of '08 increased 6% to $12 million from $11.4 million in the third quarter of 2007. On a sequential quarter basis, Q3 G&A expense is unchanged from the second quarter of this year, even though the third quarter included $0.5 million related to the recent restricted stock unit grant. Resulting operating income grew 4% to $9.9 million from $9.5 million in the third quarter of last year.

Interest expense was flat compared to the third quarter of last year, as declining interest rates offset the increased borrowings to fund acquisitions and stock repurchases.

The effective income tax rate decreased to 38% in the third quarter of 2008 as compared to 41.5% in the third quarter of last year, as the result of lower state income tax rates. For the full year we expect our effective income tax rate for book purposes to be 39.9% with cash taxes of approximately 10%.

Resulting net income for the third quarter of 2008 increased by 13% to $5.1 million from $4.5 million. Earnings per share was $0.29, which is an increase of $0.05, or 21%, as compared with the third quarter of last year as our continuing share buybacks have reduced the weighted average diluted shares outstanding by 8% for this quarter as compared with the same quarter of last year.

In terms of free cash flow, as Jim mentioned, the Company generated $1.3 million of free cash flow in the third quarter compared to $8.4 million during the same quarter last year. Jim mentioned several of the factors that impacted the generation of free cash flow during the quarter by as much as $6 million, and these factors are not expected to reverse out by year end. Free cash flow generated in the third quarter of 2008, along with borrowings under the revolving credit facility, was used to repurchase $24.6 million of common stock during the quarter. Through the first nine months of 2008 the Company has repurchased $37.5 million of common stock, and as of September 30, 2008 we had $45 million remaining under the current Board authorization for stock repurchases.

Just to review our current financing arrangements, you may have noticed in previous releases that we finalized an amended and restated credit agreement in July of this year that increased the facility size by $75 million to $210 million, and extended the maturity date by two years to July 2013. And given the current economic conditions, we're very glad to have extended both the size and maturity of this credit agreement.

Touching briefly on the year-to-date results, gross profit for the first nine months increased by 9% over the first nine months of 2007. On a same-location basis for the first nine months of the year, gross profit grew by 2% over last year.

G&A expenses for the first nine months increased by 7% to $35.5 million from $33 million last year. However, G&A as a percentage of gross profit decreased from 52.4% for the first nine months of '07 to 51.6% for the first nine months of '08. With some of the productivity-focused IT initiatives beginning to roll out in phases next year, we expect to make continued progress toward our long-term goal of getting this ratio down to 50% or less.

Net income was $14.7 million for the first nine months of 2008, or $0.81 per share, an increase of 19% on net income and 27% in earnings per share over the first nine months of 2007.

In terms of free cash flow, the Company generated $15.5 million of free cash flow during the first nine months of 2008 versus $22.4 million of free cash flow a year ago, while spending $1 million more on CapEx and $1.5 million more for cash taxes in the first nine months of 2008 versus the first nine months of 2007.

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

(OPERATOR QUESTIONS.) Robert Labick; CJS Securities.

Good morning. This is actually Fred Buonocore calling in for Bob. Just wanted to follow up -- you mentioned in your release and also in your prepared remarks, talking about how your [leased] and reverse management locations being impacted by the current environment. And can you expand on that a little bit more and maybe talk about what's happened in past recessionary environments and possibly how you can mitigate this?

Well, in terms of mitigation, what that means is during periods like this when there are less cars at airports or less cars at hotels, we make less profit. It's not like these contracts turn into losers. We certainly protect ourselves with the amount of base rent that we pay and the percentage rent calculations on gross prof- -- gross revenue thresholds. But certainly there is an impact on those. And why the contracts remain profitable -- what we see when we get into this sort of a cycle is less profit from those locations. Now, as I said earlier, we've mitigated those losses with a real positive performance in some of the other areas. In terms of a crystal ball for how long this will last or what the overall effect is, I think we're just beginning to see the beginning of a downturn in air travel and a downturn in hotel stays, again, where we have those sorts of exposures. And we don't know how long or what the effect will be yet.

Understood. And you outlined a few new opportunities in your press release. Can you just talk about the overall bidding environment for us please?

Yes. I think the bidding environment is good. As we've been saying, more and more of the agreements that we are bidding on -- and as I said earlier, we're winning our fair share of the new business now -- are in cost-plus management contracts. The airports that I mentioned earlier are both management contracts. And I think that the -- overall, our industry has done a fairly good job of communicating the upside benefits to clients for having management contracts as opposed to long-term leases and the uncertainty that long-term leases with high-base rents generate. So we -- again, our pipeline remains full of opportunity and the success rate we've had is good. And I would say the vast preponderance of everything we're winning lately are management contracts,

Got it. Thank you. And then finally, can you talk a little bit about the acquisition environment, please?

Well, the acquisition environment itself is good. I think that -- and we're active, as always. I think that what we want to try to understand is does the effect of this economy or the more -- the nearing effect of any tax change as it would relate to acquisition transactions as there's a new administration. What would be the impact on the sellers and what should pricing be in that sort of an economic situation? So maybe rather than rush to do a deal at multiples that might have been inflated -- inflation is a relative term -- but at prices that we've seen in the marketplace for the last several years, what does this economic condition mean to the real valuation of companies that we're looking at? So while we're, as always, talking to people, I think we're probably looking at a period to be even more disciplined on price.

Very good. Thank you very much.

If there aren't any more questions today, I think that we very much appreciate your taking the time. Again, these periods -- last quarter, this quarter and what we perceive to be the fourth quarter and into next year -- should be very, very interesting times for us, as well as the overall economic condition for a lot of businesses. Again, we are very pleased that our business is outperforming most of those that you might be comparing us to. And for that we're grateful for our business model and we're, again, very grateful for you taking the time to listen to our call today. Thank you very much.

Thank you. Goodbye.

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