SP Plus Corp (SP) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Standard Parking earnings conference call. My name is Mary. I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. (Operator Instructions)

I would now like to turn the conference over 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, Mary, and good morning, everybody. As Mary 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 third quarter of 2011. I hope all of you've had a chance to review our earnings announcement, which was released last evening. We expect to file the 10-Q sometime early next week.

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 more detail. After that, we'll open up the call for a Q&A session.

During the call, we'll make some statements that will be considered forward-looking regarding the Company's strategy, operations, and financial performance. Those statements are subject to many uncertainties in the 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 & 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 the Investor Relations page of our website at standardparking.com. A replay will be available for 30 days after the call.

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

Thank you, Marc, and good morning, everybody. Thanks for joining us today.

We're obviously very pleased with the third quarter results that we were able to release last night via our press release. All of our key operating statistics indicate a solid year-over-year performance. For instance, location retention increased from 91% to 92% as we've continued to work to maintain good client relationships and make sure that we are providing value to our clients even as many of them are continuing to face economic struggles.

Operating profit retention remained steady at 96%. Paid exits at same lease locations was up 2%. Same location gross profit was up 5% in the quarter, plus we were the beneficiary of favorable changes in insurance loss reserve estimates during the quarter on top of those numbers.

If you remember last quarter, I talked about a charge we took as a result of changing our third party claims administrators and the new TPA taking a more conservative approach to reserving for open claims. Well, that came back in the third quarter along with other favorable changes in loss estimates. Looking forward, I suspect such big swings in insurance revenue estimates will moderate as the new TPA tenure continues.

We've had some nice contract wins almost across the board within the business, as diversified being a relative term for us, but certainly all of our contributing businesses had nice wins in the quarter. Standard Parking of Canada was awarded a contract to -- under the auspices of CB Richard Ellis to manage assets in Canada. SP Plus Municipal Services was awarded the contract to provide parking facility management services for the City of Milwaukee. That's almost 4,000 spaces. The City of Fort Worth, Texas supplied -- selected our SP Plus Maintenance and Equipment Maintenance group to provide and install state of the art parking equipment to the Will Rogers Center in that city.

We were extended in the City of New Orleans under a joint venture agreement that we have operating under the SP Plus Municipal Services group, and the University of Washington selected SP Plus Transportation to operate shuttles on the campus, which, as you know, is a very specific focus point for us in terms of institutional opportunities for the business.

We were also selected to provide SP Plus Transportation services to the Wyndham Hotel in Philadelphia for an airport shuttle, and we were able to open SP Plus Maintenance operations in our Hawaii operation. So, across the board, very successful.

We were also awarded just within the last couple days a contract to provide access and transportation coordination for the Republican National Convention in Tampa, Florida. It was so recent that we weren't able to get that into the release, and we've also recently won additional contracts for the SP Plus Airports division, one of which we've already started with and the other we expect to be awarded shortly and we're still waiting for permission from those new clients to enable us to make a larger release and we will do that as soon as we can. So nice quarter in terms of new business.

The Company's SG&A was in line with run rate expectations but for a temporary increase in some professional fees. As we've discussed with you in the past, we evaluate potential acquisitions on an almost constant basis. Sometimes we bring in outside experts to help us with our acquisition evaluations as deals get a little further down the line. We incurred about $400,000 of such professional costs just in the third quarter.

Looking forward to the remainder of 2011, we are narrowing our guidance range toward the top end of our current guidance. Based on our year-to-date results, we now expect full year EPS to be in the range of $1.15 to $1.20. Keep in mind that this guidance doesn't include any acquisition related costs or benefits in Q4. We have incurred a total of $800,000 of cost to evaluate acquisitions during the first nine months of 2011 and that's $0.03 a share. And we've been able to absorb those costs and those earnings and still narrow the range towards the top end of our current guidance.

In terms of free cash flow, we experienced a temporary increase in receivables as a result of some of our larger airport clients. We've already collected more than half of the outstanding receivable balance, and we expect to be back to normal levels by the end of the year. Therefore, we still expect to generate at least $20 million of free cash flow for the year.

With that -- with those brief comments, I'll turn the call back over to Marc so that he can lead you through a more detailed discussion of our financial performance for the quarter and first nine months, and then, as always, we'll open the call up for Q&A.

Hello again, and thanks, Jim.

Our earnings release laid out the financial results in much detail, so I'll just focus on a few highlights. Overall, gross profit for the quarter increased 8% year-over-year. Some of that was due to the favorable insurance reserve adjustments during the quarter relating to prior years, and we also saw solid same location growth of 5%. G&A expense increased 2% compared to the third quarter of 2010 due to the increased professional fees that Jim mentioned. Without the $400,000 in acquisition-related professional fees that we incurred in the quarter, G&A would've decreased by 1% year-over-year and would've been in line with the run rate expectation that we gave you during the Q2 call.

Net income attributable to the Company for the third quarter was up 24% over the same period of last year generating earnings per share of $0.37 for the quarter, which is an increase of 23% from the third quarter of last year.

In terms of free cash flow, as Jim mentioned, we had some working capital fluctuations primarily around accounts receivable and ended up with a negative free cash flow of $7.2 million for the third quarter as compared with a positive $12.7 million generated during the third quarter of last year.

Coincidentally, last year's third quarter free cash flow benefitted from a normalization of unusually high AR balances at certain airport locations at the end of the second quarter in 2010. The same situation is occurring in the third quarter with normalization expected to benefit Q4 free cash flow. As Jim mentioned, we believe this is a temporary timing issue, and we've already collected the majority of the past due amounts and expect it all to be collected before the end of the year. As a result, we're able to reiterate our free cash flow expectation of at least $20 million for the year.

Now I'll touch briefly on the year-to-date information. Gross profit for the first nine months of 2011 increased by 3% over the same period last year as strong same location gross profit growth of 6% was tempered by the termination of certain contracts during the period which were anticipated, including the nonrecurrence of certain large game day events.

G&A expense for the first nine months of 2011 decreased by 2% over the same period last year as the benefit from cost reductions due to process and productivity improvement initiatives was somewhat offset by acquisition-related costs. Excluding acquisition-related costs of $800,000 year-to-date, G&A would've declined 4% compared to the nine months of a year ago.

Net income attributable to the Company for the first nine months of 2011 increased by 17% compared to the same period of 2010, and nine-month EPS increased by 16% to $0.89 from $0.77 in the year-ago period.

That's it for our formal comments. I'll turn the call back over to Mary to begin the Q&A session.

Certainly. (Operator Instructions) Our first question comes from Nate Brochmann from William Blair & Company. Your line is open.

Good morning, gentlemen.

Hi, Nate.

Hi.

Hey, Marc, I was wondering -- first, just housekeeping -- if you could talk about a little bit of just specifically what the insurance swing did for you in the quarter?

Sure. The impact on gross profit from prior-year adjustment was about $1.1 million and so on an after-tax basis, that's about $0.04. But, it's important to remember, Nate, that that was really offsetting an almost equal hit that we took in the second quarter, so on a year-to-date basis the two really net out and there's really been no impact.

Okay. Thanks for that. And one just other housekeeping thing. In terms of your guidance, Marc, you spent about $0.03 per share in professional fees this year. Does your guidance exclude or include that $0.03?

Our guidance includes the year-to-date professional fees that we incurred --

Okay.

-- but not anything that might be incurred prospectively.

Okay, so if we excluded that, it'd actually be maybe $0.03 higher than -- depending on how you interpret that; right?

That would be the right way to look at it.

Okay. Great. And then, Jim, just kind of talking a little bit more about the current environment, I mean, I think you guys are, at least from my perspective, performing very well in this sluggish kind of economy, and it's been that way and probably looks like it will be that way for some time. Could you talk a little bit about, other than just your general great execution in terms of blocking and tackling, what, maybe some things on the fringes, you've been able to do to keep up that execution in winning new business and maintain your pricing and seeing particularly that uptick with some of your lease business?

Sure. I think the decision that we made really well before the economic downturn to begin to somewhat diversify the product mix is starting to gain some traction. Certainly, if we're looking just at pure parking fees and the profits from management contracts on parking fees or lease profits from pure parking, the entire industry has re-traded over the last 2.5 or 3 years since the downturn. I'm not saying that we were so clairvoyant as to be able to predict exactly what that downturn would mean, but we've re-traded the entire industry as a result of that downturn.

We've been able to offset a lot of that re-trading, Nate, by performing additional services for clients, bringing new products to them, maximizing the parking revenue that is available to them due to either staff efficiencies or technology advances where we're able to bring a much more strategic organization to them, which gives us some downside protection against that re-trading that I was speaking of. But I think the same-store numbers in really a continuing downturn in the economy speaks to some of the success we've had in transportation and maintenance and security in some areas and some of the advances we were able to make by virtue of getting ourselves much more deeply rooted into event management and stadium special event management and the continued performance of our airport group, expanding with new wins and being able to sort of weather the storm.

I would think that a logical question that someone is going to ask us is -- given this trend, why are you guiding us towards the top end of the existing range? And it really gets to your question, Nate, and that is we take a hard look at the travel industry, for instance, and advance airline bookings and advance hotel bookings. And we still continue to temper our -- any sort of optimism about significant volume increases, the effect of the economy. I spent an hour and 20 minutes on the commute this morning listening to the European situation and its impact around the world. I don't think much of this bodes well for the near term. We don't think anyway it bodes well for the near term in terms of a rapid return to whatever normalcy is in the North American economy. So, we tend to temper just a little bit where we view the economic outlook.

And when I spoke earlier about the re-trading of the industry, we still have some of our legacy airports, deals that go back -- some of those 30 or 40 years, that are scheduled to be re-traded and we're -- have a pretty good idea about where the industry's landed. We tend to -- are able to win higher fees based on the value that we bring but based on continued movements in the market. We take those sorts of re-trades into effect as we guide into -- for the rest of this year and then when we talk to you about next year at some point. So I think that's the best flavor I can give you. Some of the work that we put in towards reducing our dependency on processing costs and G&A combined with some of the new products that we brought to the market five years ago are starting to pay off.

Actually, that's very helpful. And then just one final question -- I don't expect a real, true -- given the political sensitivity of this, but here in Chicago we're talking about this potential parking tax and whether that might have a significant impact. Is that something that would really disrupt your business or would that just be a minor bump in the road if that actually did go through?

Well, I think -- there's a short-term answer and a long-term answer. The short-term answer is that historically our clients have decided to pass any increase in parking taxes along to the consumer in terms of the price at the front gate whether you're a transient parker or a monthly parker. And for a period of time, much like what we see when there's a steep increase in gasoline prices, there might be a short-term decrease in volume, but because there are really a lack of alternatives in terms of getting most people to work or to school or to the hospital or to a game or to the airport. It doesn't affect volumes a whole lot when you look at it over even a 12-month period. Usually, it lasts about a quarter and particularly if they do it in the winter and people are faced with standing out on train platforms or on bus corner, waiting for the bus at a street corner in the snow storm they sort of return to their previous habits. So that's been our history in terms of tax increases.

Now, the longer view is this city and others are beginning to identify these increases in taxes as being designed to alleviate congestion in central business districts. And I think you've heard us talk for the past couple years, we're anticipating that to continue to occur. I heard a -- I won't name the city, it's really not that important -- but I heard a municipal administrator in a city, not in the US, by the way, but Canadian, get up in front of a group of people and say that they will continue to raise their parking tax until they have the desired effect on a percentage decrease in cars that are driving into that central business district.

And whether that is a popular decision that will continue to affect the decisions being made in Paris or London or New York or Chicago, Boston, San Francisco, or even Los Angeles, although Los Angeles isn't quite as concentrated, as you know, it's something that we're -- we've been aware of. And like anybody else who feels the fiduciary responsibility for the future based on those decisions, whether we like them or not, we've worked very, very hard to expand our technology capabilities and our staff capabilities in SP Plus Municipal Services because those cars are going to end up somewhere, Nate. They're going to end up in a central business district garage or they're going to end up at a suburban commuter station garage or [facilities] that are being added onto commuter towns in order to meet the demand for that commuter.

So, some of the wins that you hear us having on the SP Plus Municipal side -- we're not talking about big wins in New York or Chicago or some of those markets. We're more focused on those not -- or as focused I should say on those markets, those suburban markets where we think those cars that aren't going to be -- won't have destinations of downtown [companies] will be left during the daytime or at nighttime as those cities develop their own entertainment opportunities. We think that those are significant markets for us in the future, and we feel really well positioned to grow that business into the future.

Really interesting. Thanks a lot for all that color, and I'll definitely turn it over and get back in line.

Thank you. Our next question comes from Clint Fendley from Davenport & Company. Your line is open.

Good morning. Thank you for taking my question. I wondered, guys, the winter months always create some volatility in your results due to snow removal activities. I wondered how should we think about that volatility this season given the long string of contract awards that you've had the past several quarters. In this one alone, I guess we have about 7,000 spaces between Milwaukee and Canada in your contract wins.

Yes, well first, Clint, tell me how much snow we're going to get this winter.

Well, I mean, maybe to rephrase it, if we had the same amount that we had last season, the winter was about the same, I mean, how has your contract awards changed the effect on the volatility of your results?

Well, those contracts that you cited in those -- in both of those instances are management contracts, so the cost of providing snow removal services are pass-throughs to our client. Obviously, we manage them for efficiency, but the costs themselves are borne by the client. We have airport leases that are usually the most affected by how bad the storms are. And I think our -- we don't expect the storms to be any worse this year than they were last year. Last year was particularly -- I heard people talk about these 50-year storms that we seem to get every five years now, but last year was particularly bad in the band of geographies where we have responsibility on our own dime for snow removal,. So I wouldn't expect things to be any worse.

In the meantime, we've continued to grow SP Plus Maintenance Services and in a lot of the cities where we have -- where we perform in the snow belts, we're now doing snow removal ourselves and we've turned those into profit centers. Now, the totality of snow removal for us won't be a profit center, but we're able to mitigate some of what we've experienced in the past as losses by getting ourselves into the snow removal business and offsetting some of the direct costs that we might have in some of the leases.

One thing I'd like to add to Jim's comments is that historically the first quarter has been a weaker quarter in terms of bottom line for the Company because of winter weather and travel levels and other factors that we've talked about many times. And last year, we saw that moderated somewhat by virtue of the fact that we did the Vancouver Olympics through our SP Plus Gameday division. So, clearly, we will not have that helping the first quarter in 2012, so I think most likely we'll see 2012's pattern revert back to that normal pattern that we've had over the past several years.

Okay. Thank you. That's very helpful. And Jim, I appreciated the color that you had in the prior question on just the -- what you're seeing in the market. I wondered, as we look to your company, do you still have, when you look at your contract portfolio, about 10% of that portfolio that has exposure to the parking volumes? Has that changed recently?

No, it has not changed, Clint.

Okay, and last question here, how should we think about your share count for the fourth quarter, Marc, post the 7 million in repurchase activity in the current quarter?

Yes, I think normally you would've seen, primarily because of either restricted stock restrictions, coming off, or some stock option exercises, our share count has grown moderately over the last couple of years. And clearly, the share buybacks that we've done have offset that somewhat, so I think what you'll see is a fairly stable share count based on the purchases that we've done to date.

Great. Thank you, and congrats on a nice quarter here, guys.

Thanks, Clint.

Thank you. Our next question comes from Kevin Steinke from Barrington Research. Your line is open.

Good morning.

Good morning.

You touched on it earlier, the kind of re-trading and management fees you've seen over the last couple of years, but at the same time I think last quarter you talked about the pricing environment had at least become a little steadier, not as much downward pressure there. Is that kind of still what you're seeing out there?

It is, Kevin. As I said, I think most of the industry has re-traded itself. Where we think we have some exposure to look at against the sort of trends that we're talking about today are just a -- some legacy large contracts for us that either have come due and we're -- we've been successful in retaining them, but the -- we might have to have taken a look at that contract against historical pricing and a few that come up early next year. But for that, things have mostly settled down. The nice part about all of that is is that even though we've seen a re-trading to pricing based upon an economic recession, our company is still generating fees in excess of that average by virtue of the value that we bring to the client base based on the product that we can deliver and the additional revenues that we're able to generate given our skill sets.

Sure. Sure, great. And even though there might be some perhaps downward pressure on these legacy contracts, do you feel like you're well positioned to compete effectively for those that are coming up for renewal in the next few months?

I would be very disappointed if we didn't renew at almost 100% rate on those deals that I'm thinking about.

Good. Okay, and Marc, just looking at G&A going forward, I think you talked about last quarter perhaps continuing, hopefully, at a similar run rate next year, not expecting much growth in G&A going into 2012. Is that how you're thinking about it still or are there some items you might be spending on or making some investments or anything on that front?

Kevin, it's a little premature for us to answer that specifically. But what I would say to you when we gave the guidance expectation last year is that we had -- I think -- or last quarter we said that the run rate was about 11.4 for the first half excluding acquisition-related costs. And clearly, as we look at the current quarter, we were right. We hit that number basically on the nose because we were at 11.8 including $400,000 of acquisition costs, and certainly, as we look at Q4, we would expect to be in that same ballpark for the year. So I think the statements we made for this year when we gave our guidance that we expected G&A to decrease in absolute dollar terms compared to 2010 are going to come true for us, obviously excluding these acquisition costs.

As we look forward to 2012, there are a couple factors that impact G&A. One, of course, is continued investments in technology and costs that we can take out of our business and we continue to make those investments and focus on trying to become [ever] increasing more efficient. But, on the other hand, we do have pay increases for our team, and we have a performance-based compensation program that also -- the payout of that also grows as the performance of the Company grows. So, I wouldn't expect sitting here today that G&A would decline again in 2012 from 2011 levels, but certainly our goal is always to keep it growing at a moderate rate at worst and have that growth rate be far less than the growth in gross profit so that we can get our double-digit bottom line growth.

Okay. Thanks. That's very helpful. And also just one last one, as you said many times, Jim, no one has a crystal ball on the economy and you may be seeing a little bit of softening in travel and what have you. And I was curious about the 2% growth in paid exits at same location leases still up year-over-year, a bit of a slow down over trends you've seen over the last couple quarters. Is there anything to read into that or is it kind of a year-ago comparison or any comments on trends there?

No. I think it's really -- we're not looking for things based on the data we're looking at to get any worse. We're thinking that there will not be a whole lot of improvement over the existing trends. We're not seeing roller coaster increases in advance bookings for hotel rooms. We're not seeing roller coaster rises in either business or leisure travel bookings on the airline side and you guys have a look at those numbers as well. So, we don't expect that the travel area nor necessarily the retail area based on the upcoming holiday season and consumer spending -- I heard a little bit this morning about consumer spending at relative to back-to-school period and expected consumer spending relative to the holiday period. And I don't think anybody's forecasting a dramatic increase over the numbers from a year ago in those sectors.

And then commercial office buildings and some of our other legacy sweet spots are really not expected to lease up any quicker than they're leasing up now. I think that all of the economists that I've been listening to are talking about slow growth into 2014. And I think the volumes that you're asking about are almost parallel to whatever growth expectations those economists have for the economy. That's, I think, where our comments are coming from.

Okay. Good. Thanks for the color. Nice quarter.

Thank you.

Thank you, Kevin.

Thank you. (Operator Instructions) Our next question comes from Giri Krishnan from Credit Suisse. Your line is open.

Hi. Good morning, Jim and Marc. Jim, I guess my first question is around the environment for acquisitions. I know for the second straight quarter you've been referencing acquisition [greater cost]. Is price still the barrier from getting deals done or are there dynamics that we should keep in mind as you look at potential deals?

I don't know that -- I think prices are -- have fallen into a more realistic space, Giri, so I don't know. There are some. There are some people that have come to us wanting to sell and you go a little bit further down the dance with them and it's ridiculous what their expectations are. And you're able to dismiss those in some of -- in relatively short order. I think that because we've displayed the discipline that we have over the last 36 months or so in that area, people even know better. If you want to keep your business and you want to face the risk of the economy and some of the issues around our industry, then fight yourself through that. But we're not going to value a business based upon what people thought their businesses were worth five years ago. And I think prices are beginning to reflect that.

I would tell you that the -- that space is very active at the moment. Obviously, we wouldn't be spending the kind of money we're spending if we weren't taking serious looks, but also the discipline remains in place. I can tell you I'd be very disappointed if we didn't close a few deals before the end of the year. And it's just making sure that we're very diligent in understanding those businesses that we might want to acquire and keep the discipline that we have around that diligence in place as always. But I think the space is very -- is as active as it has been over the last 12 months.

Okay, and with respect to the SP Plus brand, clearly you've taken a lot of effort in terms of re-branding and the contract wins are coming through. But what are some -- in terms of the conversion, complete conversion to the brand, I think you had mentioned in the past that it will still continue on to 2012. Can you remind us again what at a corporate-wide level -- what steps in your mind need to happen for the transition to be complete?

Well, I'd like to have a look at which acquisitions we get finished before the year ends and into next year's first quarter. Obviously, the conversion of the Company to the full brand is dependent upon the inventory opportunities that we carry into that season, so we've been sort of delaying the full brand to try to understand where we'll be in terms of size and mass. I think that the Company, the organic business itself, we're about ready to make that change. But I'm just -- want to make sure that our timing, that -- as in a lot of other things we've done, that the timing by which we make that sort of an announcement is based upon the Company's inventory and opportunity at the time. So I would suspect that's a long-winded answer and I apologize, Giri, but I don't think that we would go much into the first or second quarter without having gotten that completed.

Okay, and then lastly, I know it may be a bit too early, but could you give us a sense of what we should expect from Gameday in 2012 relative to this year? Any color you could give around that would be helpful.

Yes, the -- we're doing the London Olympic games, so we have some staff that's been over there working with the organizing committee and they will do their thing next summer. Also, the Super Bowl venue is Indianapolis this year as opposed to Dallas. Two different cities in terms of access, so I think our -- we're very excited about the fact that we'll be doing a lot more transportation work in Indianapolis than we did in Dallas so that should help us.

We talked a little bit earlier about the Republican National Convention. That is a Game Day win. And we continue to make inroads into existing stadiums through the Game Day management team. I'll tell you, the question's a good one because I need to begin to ask myself why doing these Olympic games in Vancouver and in London and we're looking at Sochi and there's been some initial contact regarding Rio. The staff that we dedicate -- I have to ask myself, is the staff that we dedicate to those events -- is their time best spent by spending a year in advance planning? Or what additional penetration could I get right here in North America at the event venues where we think we have opportunities, NASCAR, and the like. I didn't mention earlier in the call, but we're -- the [Mack] group has been retained. We're going to do the MLS All-Star game again. We're going to do the NHL All-Star game again. And when you do those, those Super Bowl type events or all-star game events, for those clients, then our skill set in terms of improving access and transportation at all of the leagues' venues become an opportunity. So, it's a question of how we want to allocate those resources in the future.

It's nice to have the brand doing the work in London or work in Sochi, but we think the opportunity basis is so great here from a parking access, Click and Park, and transportation opportunity that we want to make sure those resources are being channeled in the right direction. Because their success -- look at the success we have in the events they'll be doing next year and a lot of the key team's been in London at the same time.

Right. Okay. Thanks a lot. That was pretty helpful.

Thank you. Our next question comes from David Gold from Sidoti. Your line is open.

Hi. Good morning. Just a couple of quick ones by way of follow up. One is, Marc, on the insurance reserve reversal, how should we think about that on sort of go forward? In other words, presumably does that translate into not just reversal but reserving at a lower rate given that history?

Well, I think, David, what we've seen over the last couple of years is that quarterly changes in insurance reserve estimates have been fairly modest, and by that I mean $100,000 or $200,000 a quarter. Sometimes we don't even mention them because they're so small and negligible. And I think that's really what we would want to see and what we would expect to see because a lot of effort goes in by ourselves and our third party actuarial advisors to estimate accurately where we think losses are going to be. We have established risk management control programs in place that are very good at controlling losses. So we really don't expect to see a lot of fluctuation and over the last couple years, we have not seen a lot of fluctuation.

That changed in the second quarter because whenever you make a change in the third party administrator, there's a process of re-assessing all of the loss estimates that goes on by them. And of course, that factors into the evaluations that our actuary uses to advise us on what is the correct accrual that we should have on the books. So, we saw that happen in Q2 as the new third party administrator came on board and reviewed all the outstanding claims and potential claims.

What we saw in Q3 was that third party actuary -- third party administrator having had more time to evaluate those claims. to have a little more time pass and see what actually happens on some of them. And their viewpoint changed a bit and, of course, that fed into our actuary's viewpoint, as well. So I think I would view these as two kind of aberrational blips, one negative, one positive kind of offsetting each other. And I think as we look forward, our expectation is that we kind of revert back to that fairly moderate adjustment in estimates which on a cumulative basis we generally expect to be positive.

Got you. Okay, but -- so you think more modest though, sort of as -- on a net basis?

More modest, but if I was to guess, I would have to say more likely to be positive than negative.

Got you. Okay. And then one other -- so, broadly speaking, I guess the last few quarters we've seen very strong or improving location retention, 91% to 92%. But even better the trend has been for profit location in the 96% range. And was just curious if there's any -- if there's a conscious effort there as far as, hey, when some of the smaller locations come up that are less profitable to cull some of those or is it just more a function of, hey, number of locations make up [outsizeed] profit for you?

Well, the smaller locations, David, if they generate $1, it's $1 I won't have tomorrow if we don't keep them, so there's no less focus on the portfolio. I think we're structured to handle a portfolio of the size we have and much larger. A lot of the work that we've done over the last five years has -- towards scalability. So there's not particularly a larger focus, but certainly you can imagine those accounts that generate a higher level of profit to us, a, are those -- they certainly require more attention in terms of the complexity of the operation, so we're much -- we're with those clients every day. But I think that because they are of such size, it's really where our value gets determined.

I mean, when we're doing a management contract for $400 a month, it's probably at an automated facility that doesn't require as much attention and when it comes time for renewal, there are a long list of competitors. When you get to the higher end strata, more -- much more complicated complex campuses or settings and the fees are higher, it's because the enablement of revenue generation, the talent that's involved, is much higher and obviously our best people are assigned into those areas and demonstrate value to the clients that no one else -- that no competitor can bring. So that would generally be the thesis on size.

Got you. Perfect. All right. That is helpful. Thank you both.

Thanks, David.

Thanks a lot, David.

There are no more questions at this time. I would like to turn the presentation back to Mr. Jim Wilhelm for closing remarks.

Well, thank you very much, Mary. As always, we appreciate the time and the effort that people put into joining us on these calls, and today's questions, like always, were terrific and on point. So, thank you, everyone, for that and we're obviously pleased about the quarter and we'll be looking forward to talking to you next quarter. Bye-bye, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.