SP Plus Corp (SP) 2010 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the third quarter 2010 Standard Parking earnings conference call. My name is Amy and I will be your operator today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions).

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

Thank you, Amy, and good morning, everybody. As Amy just said, I'm Marc Baumann, and I'm the Chief Financial Officer of Standard Parking. I'm also your primary investor relations contact. Welcome to our conference call for the third quarter of 2010. I hope you've had a chance to read our earnings announcement, which was released last evening.

We will begin the call today, as usual, with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and 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 will 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 at standardparking.com. A replay will be available on the website for 30 days after the call.

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

Thanks, Marc, and good morning, everyone. Thanks for joining us this morning. Obviously, we are pleased to report a real solid quarter.

We detailed that performance in our -- the press release we issues last night, so I won't regurgitate those numbers, and Marc will cover them in some detail as we get through our presentation this morning.

But it goes without saying that double-digit growth and operating income, net income and earnings per share was a welcome performance for us to see. And as Marc will detail for you in just a minute or so, we also generated almost $13 million in free cash flow during the quarter.

In terms of some of the operating metrics that we talk about each quarter, location operating profit retention remains strong at 96%, even though location retention dipped slightly, down to 87% from 88%-89% last quarter.

Paid exits at same-store lease locations experienced solid year-over-year growth, averaging 4% of an upward trend with promising trends across most of the vertical markets.

SP Plus transportation is growing nicely. We now operate about 550 shuttles for airports, hospitals, universities and office buildings that transport almost 30 million passengers per year.

Enplanements at airports where we operate are slightly up overall year-to-date this year versus last year, though airports in the industrial belt of the Midwest and East and certain airports in the South continue to lag.

To add just a little more color to those statistics, the September worldwide enplanements that were announced this week implied restoration towards 2008 enplanement levels. Again, those were worldwide numbers, so September of 2010 compared to September of 2008.

However, when you begin to look at those numbers in some detail, the North American market has only recovered by about half of that number, or less than 4%. And I can tell you that paid exits at our airports trail enplanements slightly.

So what that means is is that people are finding alternative methods to airports or -- slightly, finding alternative modes to airports, and we have a pretty crystal-clear observation that paid exits trail enplanements at airports slightly.

So, to make a long story short, North American airport enplanements up about 4%, and our paid exits just trailing slightly behind that. So while there are some promising signs in there, we still remain slightly cautious on the entire travel industry and the travel industry that trails economic recovery.

Looking forward to the remainder of 2010 and beyond and some of the things we'll talk about today, because this is the last time we'll speak to you all during this fiscal year until we report on year end and give some guidance in February or March. We thought we would talk about some of what we see to be the future for the rest of this year and into 2011.

Obviously, we don't think that the economy is recovered. Some areas we are seeing this upward trending. But if you were to look at office space, vacancy rates; if you were to look at retail sales at large shopping malls, where we market, we're not seeing a whole lot of real positive trending yet.

So, obviously, due to that, we face some challenges. But at the same time, because of the investments that we have been making over the last several years, we're also provided some fairly unique opportunities, almost singular to our business plan.

Certainly, in the area of challenges, the economic uncertainty that I mentioned earlier has a corresponding impact on our pricing, both for new deals and renewals.

It's important to remember that, as we move into the remainder of 2010 and 2011, that our retrading of our deals trails any trends in the economy. What that means is that, as I've talked about all year long, our fees and our prices and our allocations and our product line being provided to our clients is normally a reflection of the revenues that are being generated at those locations, based on economic condition.

So why we are in the cost-plus management contract business, as deals come up for renewal and we then reprice based on that economic trend over the last, say, 24 months, we then contract for fees, prices and allocations on a move-forward basis, based on that.

So the recovery for us on the retrading of deals and pricing on new deals trails that of the economic situation. So I suspect it will be well into 2011 that, if there is an economic trend that continues, that it will enable us to restore our pricing and our negotiations to the pre-recession level.

So obviously what I've been talking about this year is replacing that loss or replacing that pressure on pricing with more volume. And our location count goes up, and we are charging in additional services at locations. So we have been weathering the storm that way.

But I wanted to just provide a little bit of a refresher on how this sort of an economy affects us in terms of the nature of our business model.

Certainly, the area of expanding government intervention, whether it is taxes or regulation, is a challenge, additional SEC reporting, Department of Labor reporting, new laws being written in many of the states on both coasts, whether it's the East Coast, the West Coast or here in Illinois, where there is a strong labor consideration or there are strong considerations of intervention into business.

So certainly we want to see how the recently completed election affects our business and affects the business as it relates to health care issues and labor-related issues in terms of workforce/workplace issues and opportunities. So we certainly consider that to be a challenge for us as life goes on.

And certainly, as I've been talking about all year, there are desperate competitors out there. We are seeing it in some of the pricing. As I've talked about this year, we've shied away from some deals where we knew competitors are taking deals just to add locations, but in a losing situation.

And it's very easy to label that is desperate. And whether people are taking deals in the short-term, betting on some sort of a longer-term recovery, I think we have remained -- we have held our discipline in terms of trying to avoid taking market share deals that are loser locations in the short-term. So certainly, that's a challenge for us.

However, on the side of opportunity, that same situation holds. We know that we have worked very hard in the time that we've gone public to strengthen our balance sheet, to put ourselves in a position to weather this sort of a storm for a prolonged period of time. And Marc and I have detailed that sort of investment, if you will, over the last couple years, while we have suffered through this recession.

We've also, as I've said in the past, invested significantly in resources, whether they are staff that we've brought on board that specialize in transportation or specialize in municipal outsourcing or specialize in institutional land-side management, so the ability for us to, as I've talked about in the past, win an assignment for a university and manage its entire land side -- its parking, its transportation, its stadium events, the maintenance of those facilities and, in some instances, providing security for those universities, as that sort of outsourcing opportunity exists.

We know that our competitors have been unable to make the same investment over the last 24 months. And we certainly consider that investment to be part of our longer-term strategy. And we will pay off multiple time fold for us, having that competency, whether it is in human resources that we've invested in or technology resources that we've invested in to support that sort of an expanding organization.

Which leads towards the opportunity that the continued expansion and diversification into the new vertical markets and service lines have brought us -- transportation, which I cited earlier, just one of those, and getting increased traction and recognition of the SP Plus brand across our vertical markets with our horizontal product line.

Certainly, on the opportunity side, the continuing trend towards municipal outsourcing and privatization has provided us a rather large pipeline of new business opportunities.

Finally, in that area we are evaluating several acquisition opportunities that would allow us to either enter new markets or expand in our existing geographical markets. And barring any surprises in diligence, we hope to close one or two of those, or more of those deals by year end. While those acquisitions will have very little, if any, impact on 2010, they will continue to our -- contribute growth in 2011.

Given what I've outlined, we are comfortable now in reaffirming our full-year earnings per share guidance range of $1.05 to $1.10.

With that, I'll turn the call back over to Marc so that he can lead you through some more of the details and then take your questions after that.

Thanks very much, Jim, hello again, everybody. Let's take a look at some of our financial results in detail for the third quarter.

Excluding reimbursed management contract expenses, total revenue for the quarter grew by 6% over the same period of 2009. While lease revenue was flat, management contract revenue grew nicely by 11%, primarily due to the addition of new airport, transportation and Gameday locations.

Gross profit increased by 5% year-over-year, due primarily to those same new airport transportation and Gameday contract, and the fact that certain legal-related expenses did not recur to the same extent in the third quarter of 2010 as they did in 2009.

G&A expense increased by 2% as compared with the third quarter of 2009. Remember that in 2010 we have restored our performance-based compensation program, which would have increased year-over-year growth in G&A, if not for the benefit we are realizing this year due to investments we've made over the last few years in our technology and process improvement initiatives.

It's interesting to note that, excluding the impact of our bonus restoration, our G&A for the quarter actually decreased by 4% as compared to the third quarter of 2009. Our expectation for G&A for the remainder of year continues unchanged. As we've told you before, we expect G&A for the fourth quarter to be somewhere around $12 million.

Third quarter 2010 operating income increased by 11% as compared with the same period of 2009, and net income attributable to the Company for the third quarter of 2010 increased by 16% over the same period last year.

However, the increase in earnings per share was lower at 11% due to the increase in the weighted average shares outstanding as a result of stock option exercises.

As Jim mentioned, the Company generated $12.7 million of free cash flow during the quarter as compared with $6.4 million generated during last year's third quarter. As you may remember from last quarter's discussion, we had a temporary spike in accounts receivable from several large airport and municipal locations at the end of the second quarter.

We've made good progress in reducing the Company's investment in working capital during the quarter and are seeing the benefit of that in the free cash flow generated during the quarter.

As the rest of the year unfolds, we continue to expect our full 2010 free cash flow to be at least $20 million.

Now I'll touch briefly on some of the year-to-date results. Gross profit for the first nine months increased by 5% over the same period of 2009. Factors contributing to the gross profit increase include the addition of several large airport and transportation contracts, the Gameday acquisition, and the fact that certain large legal related expenses that impacted 2009 did not occur to this same degree in 2010.

G&A expense for the first nine months increased by 3% over the same period of 2009, due mainly to the restoration of the performance-based bonus program in 2010 as well as incremental G&A associated with the acquired Gameday operations.

These increases were partially offset by the absence of certain 2009 legal-related expenses that didn't recur in 2010 and by cost efficiencies that we're continuing to realize from the rollout of our IT initiatives.

Net income attributable to the Company for the first nine months increased by 13% over the same period of 2009. Over the comparable time period, EPS increased by 12% to $0.77.

That concludes our formal comments. I will turn the call back over to Amy in case you have any questions.

(Operator instructions) Bob Labick, CJS Securities.

Congratulations on a nice quarter.

Thanks, Bob.

Bob, good morning to you.

A couple questions -- first, I just wanted to start with a couple of old themes, and you touched on them in your introduction. Could you discuss the cross-selling of ancillary services and share of wallet? You have penetration in stuff like security, striping, transportation, at your existing accounts.

Where do you stand in that process in terms of penetration, and how much more running room is there for you continue to show growth from these cross-selling initiatives in 2011 and beyond?

I think those provide a significant opportunity, Bob. We've just scratched the surface, really, on maintenance opportunities. And security outside of Southern California is virtually nonexistent. So there's lots of opportunity, although we are moving forward with a security initiative now in Canada at some of our locations and getting the Company licensed for providing those services for some specific clients in Canada.

That really, as I've talked about in the past, is positioning us for the future. And why transportation now makes up a significant component, really 10 years later, in our airport sector, the ability to -- us providing transportation services in the university sector -- and I can tell you that we bid on two very significant contracts in the transportation realm in just the last three months -- also is unlimited.

The numbers that Marc and I are talking about today are really driven by the core business of parking. And we are hedging the ability for us to provide parking services and what we think will happen to the parking industry over the next 10 years by having developed, over the last four or five competencies in these other verticals.

So I would say that maintenance and security provide very, very little to the numbers that we're reporting on today. Obviously, both of those are growing. But they don't make up a significant chunk of the gross profit that Marc is talking about, and I think that we'll continue to add significantly to those in 2011 and beyond.

Okay, great. And then one other theme we've talked about for quite some time now -- I think we initiated maybe six years ago, one of the discussions was potentially getting G&A below 50% of gross profit.

Obviously, a lot has happened since then. I think your stock has tripled versus a flat market, so that's fantastic. But G&A has remained stubbornly high. You've made the investments. What do you think has happened, and is that still a goal? And what's it going to take to get there?

Yes, well, as Marc said, we are seeing G&A outside of restoring the bonus plan for our people. The real number, the total dollars allocated to G&A, is shrinking. So that's a testament to that investment.

We've talked about rolling out time and attendance modules, and this past summer we rolled out our purchasing and procurement module. And just over the last three weeks, we rolled out the last of the major modules, which has to do with a monthly parker billing system. And that is now -- the first iteration of that product is being used at some very select sites in California, Texas and Massachusetts.

That -- while being able to cut costs, we're realizing the benefits of cutting costs in that area, maybe more importantly, none of our competitors have those products. Our ability to bill monthly parkers now is far superior to any product that anybody else has in that regard. And so it's really a two-pronged approach. We hope to gain market share by having this product available to the sell side of the business and cut costs because it takes less people to administer on a day-to-day basis, less clerking of that system.

So the percentage of G&A to gross profit, I think, with real numbers, the real dollars going backward, is just merely a ratio that's based on what's happening with gross profit in a recessionary period.

So while gross profit has not been growing during this recession as quickly as it did historically, the real spend, G&A, is going backwards.

Okay, great, one last one, and I'll get back in queue. On the last call -- first, congratulations yet on the Tampa and Naperville. You discussed on the last call, I think, 43 RFPs out there for municipal parking. Could you just give us an update on that and some of the larger ones, where they might stand and if they are potential events in 2011 or if this cycle is very long?

Yes. I can mention by geography a couple that are large. We already won the Chicago lakefront contract; that has been in place for almost a year now. And that was significant and it's gone seamlessly.

Those of you that have been following the industry know about the tragedy that occurred with the municipal parking meters in Chicago. We took over all the lakefront parking meters a year ago, and that has gone seamlessly. There hasn't been one article. Revenues have gone up, it's more customer friendly. Again, we think we have the capacity to take on those assignments, and Chicago was a great example.

The City of Los Angeles at the moment is contemplating the sale of its parking system. The City of Pittsburgh, as opposed to selling its parking system, has decided to, in essence, keep the parking system in-house -- that's both on-street and off-street. But I think that they will look seriously now at out sourcing it for a professional operation.

There are documents out there for the City of Louisville. There are documents out there for the City of Indianapolis. There are documents out there for the City of Miami, at the moment. So those are all kind of live opportunities. And I could go into mid-market sub-sectors, but quite frankly I'd be boring you with the list.

But I can tell you that that pipeline is extremely active, and maybe one of the best investments that we've made over the last 36 months are bringing in people who used to administer municipal systems as resources for us that can work with their peers across the country towards getting those additional outsourced assignments.

And I hope every quarter, when we have this call, I'm able to speak about the success that we are having in that targeted market.

Great, thank you very much.

Giri Krishnan, Credit Suisse.

I had a couple of questions. Jim, you spoke to some irrational pricing from competitors. Could you maybe shed some light on either what geographies, verticals you are seeing?

And as a follow-up to that, I think you mentioned second half of 2011 you should see some of the pricing pressure ease. Could you maybe help us understand what gives you confidence that that will in fact occur?

Yes, and I'll answer it in that order. What we've seen are some airport contracts, mid-sized to small-sized airports, go out for bid. And we were either the incumbent there, or we -- based on our overall experience, we have a pretty good idea of what the profit margins are based on revenue streams at those airports.

And we've seen competitor pricing come in, and we have no idea how a competitor can make money at the either lease threshold that they are bidding for rent or the amount of dollars that they take out on a concession agreement or a reverse management contract, in terms of operating -- being responsible for the operating costs and having your profit on top of that.

So we've seen it in the airport sector; we've seen it somewhat in the office building sector. Office buildings are terribly stressed at the moment, and hotels in some areas are extremely stressed at the moment.

And the asset manager or the property manager are really looking for price breaks in order to meet a monthly goal, rather than the long-term goal towards customer service or the qualitative side.

And we've seen some operators -- Chicago's no exception, Los Angeles is certainly no exception -- coming in and getting deals retraded at numbers that we know not to be profitable. There's just no way that, whether the fees that are being taken or the rent that's being pledged to pay can support profitability on the side of the operator.

So again, because we are --- I'm not in that sort of situation and we don't need to take on share on a loser basis, we tend to shy away from it. But it's certainly out there.

The reason that I talked about 2000 -- the third and fourth quarter of 2011 is because, if we see positive trends continue in the economy -- and I'm not sold, I'm reading in the taper today that we are going to put more -- we're going to try to encourage inflation, which would be good for pricing. We are going to continue to print money. I don't know, and you guys are all better at this than I am. I park cars for a living, and you forecast the economy.

But I'm not sold yet that we are in the middle of any sort of recovery that affects the consumer. Until we see the unemployment rate change, until we see people going back to work with disposable income available to make that trip to the shopping center or to make that vacation trip and to stay at that hotel or fly that airline, or the businesses are sold enough on this administration's stimulus effect that they are going to rent office space again, and some of the inventory that still remains out there gets filled, I'm not sold.

But, if we see some of these trends, the early trends on enplanements and paid exits at airports and hotel space in some markets and absorption rates in office buildings, if that trend continues, what I was saying is that our ability to price trails that because that revenue has got to be there for us to take historic percentage fees based on revenues.

So it would take that amount of time for us to catch up and reprice based on that sort of recovery, rather than repricing deals in the current environment, which, in my mind, remains down.

Okay, that was very helpful, and then maybe one more. I'm not sure if I have my math right, but looking at just the gross profit per location, especially on the managed facilities, it seemed to slow from the second quarter. And I don't know if it's just tougher comps or maybe some contracts are coming up to -- sort of coming up to speed, so to speak. Could you maybe clarify the trends in terms of gross profit per location?

It does, Giri, move around a little bit, and sometimes that's a function of new contracts coming on that have a lot of locations or a few locations. It can happen that there have been changes in contract mix from contracts that were management locations became leased locations.

So there's always a lot of noise at that. And I think we find for ourselves, when we look at our own business, we look at that trend over a longer time period. And I don't think what you are seeing right now is indicative of any real change in the trend. I think it's just some noise around what happened in one quarter versus another.

Okay, fair enough, thanks a lot.

As there are no more questions in queue at this time, I would like to turn the presentation back over to Jim Wilhelm for closing remarks.

Thank you for that, Amy, and I want to thank everybody for taking the time out of their day to hear our discussion today and for the questions today, which I thought were terrific.

So thanks again, and we won't have this discussion until after the holidays. So a joyous holiday season, we hope, for everyone. And we look forward to speaking to you soon.

Ladies and gentlemen, thank you very much for your participation in today's conference. This concludes our presentation. You may now disconnect. Thank you and have a great day.