SP Plus Corp (SP) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 SP Plus conference call. My name is Marcus, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at time.

I would like to turn the conference over your host for today's call, Mr. Marc Baumann, Chief Financial Officer and President of Urban Operations. Please proceed, sir.

Thank you, Marcus, and good morning, everybody. As Marcus just said, I'm Marc Baumann, Chief Financial Officer and President of Urban Operations at SP Plus Corporation. Welcome to the conference call for the fourth quarter of 2013. I hope all of you have had a chance to review our earnings announcement that was released last evening.

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

During the call we'll make some remarks that will be considered forward-looking statements, including statements [on] 2014 financial guidance, statements regarding expectations for the integration of the Central Parking operation, and other statements regarding the Company's strategy, plans, intentions, future operations and expected financial performance. Actual results performance achievements could differ materially from those expressed in or implied by these forward looking statements due to a variety of risks, uncertainties or other factors, including those described in our earnings release issued yesterday, which is incorporated by reference for purposes of this call and is available on our web site at www.spplus.com.

I would also like to refer you to the risk factor disclosures made in the Company's 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 that a replay of the call will be available for 30 days from now.

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

Thanks, Marc, and good morning, everyone. Welcome to our call.

Before we begin our discussion of the results and 2014 plan, I would like to briefly mention the management changes we announced last week. As you probably saw, once we officially close the books on 2013 and file our 10-K our long time, CFO Marc Baumann will complete his transition from primarily financial roll into an operational role.

This change began last year with the appointment as -- Marc's appointment as President of our Urban Operations. As you all know, Marc has led our finance team and has been heavily involved in setting our strategic direction for more than 13 years. I'm delighted he has accepted the President and COO position, and look forward to working with him to fulfill our significant potential.

With Marc's transition, we needed to find a new CFO, and I'm happy Vance Johnson is joining us and will officially assume the CFO role once the 10-K for 2013 is filed next week. Vance has a wealth of financial experience and is a great addition to our time. We welcome Vance, who will be joining us on the earnings call next quarter.

Now turning to our results, I'm pleased to talk to you today about the Company's continuing solid financial performance, which produced 2013 adjusted earnings per share at the top end of our adjusted guidance range. This was all accomplished while we continued to the process of integrating the two businesses.

That integration process has been very complex. Many of our team members are spending a significant amount of time on integration activities while at the same time performing their day jobs exceptionally well. This dedication helped us complete the conversion of operations in 16 states plus the District of Columbia by the end of 2013.

We expect to have completed the integration of about 40% of the acquired locations by midyear. We purposely plan the integration with a slow ramp up so we could take stock and review each of the early launches, which allowed us to adjust and improve the process as we go along. We expect to pick up the conversion pace now, with the goal of being fully integrated by the end of this year.

The location retention rate for Standard's legacy portfolio, excluding the impact of divestitures, dropped to 85% for the 12 months ended December 31, 2013, which includes the impact of losing a single portfolio comprised of 104 small locations. While the impact on our location count of that portfolio loss was significant, the impact on our business is not. Without the loss of that portfolio, Standard's retention rate would have been 90%.

On the Central Parking side, again excluding the impact of divestitures, the location retention rate for the year ended December 31, 2013, was 86%.

In terms of new business, a sampling of our recent wins include a new parking, management and curbside valet contract at the Ft. Lauderdale International Airport. The parking operation encompasses three multilevel garages and an additionally economy surface lot. The first class valet parking service operations across three locations and offers an array of customer car care services.

Brookfield Properties awarded Standard Parking of Canada, Ltd. a contract to manage the parking operations for its First Canadian Place office building. The Company's operations will include the implementation of our Click and Park technology. This location represents the third premier property that the Company operates for Brookfield in downtown Toronto, comprising approximately 3,500 parking spaces.

A private company hired us to manage 17 parking operations throughout several New York City boroughs. The multi-year deal, which began in October of 2013, also includes responsibility for general maintenance, painting, restriping, cleaning and snow removal.

On the university front, two separate agreements to provide consulting services, one with Oregon State University and one with the University of Oregon, will involve our evaluation of various aspects of each university's existing parking and transportation systems.

In terms of entertainment values -- venues, and last year's fourth quarter we provided our parking management services, our facility maintenance services, and our Click and Park online reservation system for performances at the Port of Los Angeles for Cirque Du Soleil's show TOTEM.

Finally, as you know, this last December we changed our corporate name and officially rolled out our new SP Plus logo and website, consistent with the Company's evolution into a provider of services that extend beyond parking. The rollout went smoothly, and we're pleased with the positive reaction we received. Our SP Plus transportation, facility maintenance, and security service lines began their transition to the new look right of way, but as we mentioned previously we're continuing to conduct the bulk of our parking operations under the Standard Parking, Central Parking and USA brands while the association between these strong brands and SP Plus strengthens.

With that I'll turn the call back over to Marc to lead you through a detailed discussion of our financial performance for the fourth quarter and full year 2013.

Thanks, Jim, and hello again, everybody. The fourth quarter of 2013 marks the first quarter where we have comparable -- meaning post merger -- year-over-year results, so we'll no longer provide sequential quarter comparisons.

2013 fourth quarter gross profit increased 14% over the same period last year. On a normalized basis gross profit grew 3%. The balance of the gross profit growth came from favorable changes in insurance reserves in the fourth quarter, that offset adverse insurance reserve adjustments in the year's first three quarters, proceedsfrom the sale of some joint venture assets and a benefit from the neat accretion of acquired lease contract rights.

To explain this last item a little more, we had to adjust the rent expense for the acquired Central Parking leases to market rent. An asset is set up for favorable leases and amortized through rent expenses over the life of the lease. Conversely, a liability was accrued for unfavorable leases, and a net accretion is realized [through] a reduction in rent expense over the life of the lease. The net of this amortization accretion contributed 3% of our gross profit growth in the third quarter.

G&A expenses, excluding merger and integration restatement related costs, decreased $4.3 million, from the fourth quarter of 2012 compared to the fourth quarter of 2013. This decrease was primarily due to synergy related cost savings. Adjusted G&A as a percentage of gross profit was 46.1% in the fourth quarter of 2013.

As our I just mentioned, 2013 fourth quarter gross profit benefited from favorable insurance reserve adjustments and some asset sales, which effectively reduced G&A as a percentage of gross profit to a level below current run rate. For 2014 [we expect] G&A as a percentage of gross profit to be closer to 50% and that level is what we had been expecting when we did our long-term models for 2014, 2015, 2016. Our long-term goal for this metric remains at 45%.

EBITDA, adjusted for merger and integration and restatement costs, was $24 million for the fourth quarter of 2013, a 71% increase compared to the fourth quarter of 2012 adjusted EBITDA, which also excludes merger and integration related costs. Earnings per share on a GAAP basis was $0.23 for the fourth quarter of 2013, as compared to a net loss per share of $0.30 for the fourth quarter of 2012. Earnings per share adjusted for merger and integration and restatement related expenses was $0.30 for the fourth quarter of 2013, which is double the $0.15 per share that we did in fourth quarter of 2012.

In terms of free cash flow the Company generated $22.3 million of free cash flow during the fourth quarter of 2013, due in part to significantly reduced outstanding AR balances at year end. For the full year the Company generated $18.2 million of cash flow, slightly less than the $20 million we predicted for the year, in part because we still have more work to do on the AR front over the next several months.

Touching briefly on other full-year results, earning per share on a GAAP basis was $0.54 per share for 2013, as compared to $0.08 per share for the full year 2012. Our reported guidance range of $0.60 to $0.70 per share did not include any costs incurred in connection with the [Bradley] restatement, because we did not have that information when we gave guidance. Those restatement related costs totaled $0.02 per share, thereforerelative to guidance, earnings per share adjusted for restatement related costs but unadjusted for merger and integration related costs was somewhat below the guidance range due to higher than anticipated merger and integration costs.

On an adjusted basis that eliminates both merger and integration as well as restatement related costs, earnings per share for 2013 was $0.85 per share, which was at the top end of our adjusted guidance range. Due to purchase accounting, the Central Parking merger was not yet accreted to earnings.

Looking forward to 2014, the Company expects adjusted earnings per share in the range of $0.77 to $0.87, which excludes expected 2014 merger and integration costs as well as any structural repair and maintenance costs at legacy Central Parking lease properties, as we described in last night's press release. Our earnings release also mentioned two items that are expected to fluctuate significantly between 2013 and 2014.

First, the Company recognized $0.10 per share in 2013 from the sale of long-term contract rights in joint venture assets. The Company regularly engages in such transactions, and this was factored into our 2013 guidance. That same level of activity, however, is not expected to occur in 2014. In fact, our 2014 EPS expectation includes only $0.03 per share from such asset sales, a year-over-year decrease of $0.07 in earnings per share.

Second, the net accretion of acquired lease contract rights contributed $0.11 to 2013 earnings per share. Due to the nature of the individual leases and their respective contract terms, however, the Company expects the net accretion of acquired lease contract rights to contribute only $0.02 per share in 2014. That's a year-over-year decrease of $0.09 per share.

Excluding those two items, as well as merger and integration and restatement costs from our 2013 actual results and our 2014 guidance, results in 20% increase in our expected adjusted earnings per share at the mid-point of our 2014 guidance range.

In terms of free cash flow, the Company expects 2014 free cash flow in a range of $35 million to $40 million, excluding any structural repair and maintenance costs at legacy Central Parking lease locations. And I want to just comment on that briefly. Routine repairs and maintenance are included in our forecast. These would be extraordinary structural repair and maintenance costs, if we incur those during 2014.

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

(Operator Instructions). Our first question comes from the line of Kevin Steinke. Please proceed with your question.

Good morning.

Hi, Kevin.

Hi. On the G&A run rate going into 2014, should we expect that to remain relatively consistent with the fourth quarter merger adjusted G&A, given I think you commented in the past that G&A really won't have a significant step down until you get all the locations converted, and so that's not planned until the end of 2014? So is that the right way to think about G&A?

Well, I think you're right in your premise, and that is that G&A is not going to step down significantly until we complete the integration, and we still have quite a ways to go on that, as Jim indicated in his comments.

We will, though, see an increase in absolute G&A in 2014 relative to 2013, and part of that is the result of higher than expected turnover in some of our office functions. And we obviously didn't anticipate it being quite as much as it was, and so we had to refill some of those jobs. So we have done that now, and I think that enables us to keep on track with our merger integration. We are expecting to see a modest increase in G&A in 2014 over 2013 levels.

Okay. With regard to the selling of a contract rights and JV assets, just trying to get a -- I think you commented in the past that perhaps you look to get out of leases in certain markets where it might not be strategic for you to be there. Is that what happened -- was happening throughout 2013, and is that kind of a function of the fact that Central had more leases, and now you're trying to exit some of those leases to get more towards your preferred model of management contracts, which are -- tend to be less risky?

I think as an overall premise, yes, we have more leases, and as we look at those leases, from our point of view, if a lease is not profitable -- and I think you know we acquired a number of leases that aren't profitable -- we clearly are looking for ways to improve the financial performance of those leases. And that can include exiting from the lease.

But on the other side of it, we also have landlords who have termination provisions in some of their contracts, particularly if the lease is for a surface lot, and they may be holding a piece of land for redevelopment. So we can sometimes predict when we're going to have these types of sales, and other times they're a little bit hard to predict. Sometimes they're going to be large, and certainly it was a large number in 2013 relative to what we typically experience. But it's somewhat under our control, but it's somewhat under the control of our landlords.

Now, in the case of the sale that we talked about in the first quarter of 2013, that was a situation like I just described where the landlord wanted the property back for development, and they had the right to terminate that lease, and they had to pay us some money in order to be able to do that.

With regard to the ones that came in the fourth quarter, those were pieces of real estate where we had money tied up in them. We didn't see the value in terms of our business model of having physical assets in land, and we had the opportunity to sell those at attractive prices, and so that we took those. In one case it wasn't even a parking facility, and the other case we will continue to operate the parking facility.

So that's kind of our thought process. And we -- as we look forward to 2014, we can always be surprised if the landlord contacts us, but based on what we know now we think the level of that activity will be much more.

A little more color, Kevin, on a couple issues. One with the ladder issue. There were opportunities and positions in properties unrelated to parking that came over with the Central Parking merger. And having a look at the returns that we were getting on those joint ventures and businesses that we didn't control and businesses that are outside of our sweet spot, we thought we could better redeploy the capital back into the Company that we're building at SP Plus.

So that, as Marc said, [inured] in a couple of the transactions in 2013 that we had, and a couple that we might be looking over the next couple years to do. But I think we've given some guidance as to what we're looking at doing in 2014 versus 2013. So not as significant as unloading some of the stuff we didn't like in 2013.

Relative to the G&A, I think the best way to think about our G&A 2013 to 2014 is that we accomplished 100% of what we wanted to do towards $26 million of synergies over the period of integration on the Central Parking purchase. What remains of that $26 million are those costs that will come out of the business as a result, as Marc said and as you queried, the completion of the integration by the end of this year.

So if you think about it, even though we're hiring people in and out of the business, which has a little bit of an impact on G&A, I think the best way to think about it is we're at personnel levels that we need to maintain through the completion of the integration on both the operating and support process side of the business, and we're giving people raises this year in line with inflation to keep our people and our family here whole against prices. So I think that's the best way to think about G&A for 2014, and then obviously the completion of the synergy targets by the time we get into the 2015.

Okay. Thanks. In terms of the free cash flow guidance that implies a pretty significant growth over 2013, are you assuming continued better collection on the airport receivables, and will the primary use of free cash flow be debt pay down, or are there significant capital expenditures out there? I guess like you said, the Central Parking maintenance cost could affect free cash flow, and do you have any idea how significant that could be?

Well, in terms of the first two parts of the question, the answers are yes and yes. As you saw in the fourth quarter, we were able to work pretty hard to collect some legacy receivables that were out there. A lot of those were in the airport division, but not singular to the airport division.

And I think just better process within the business, trying to get -- a year later we're in a much better position in terms of AR invoicing and AR collections, both in the back office and the field to support that. There are still a couple of banditos out there that don't want to get us paid on time, and we're working hard towards getting those done.

And that's certainly -- we're assuming we do our job now that we're into a better record keeping cycle and we have a level of engagement with those locations that think we're bank and not a service provider. So some of that is built in to the number. Kevin, as you know, we'll deploy that free cash flow to bring the debt level down, as we've always done in the past, unless something super crosses my desk, but I don't see that happening in 2014, just given the bandwidth within the organization at the present time.

I don't know, Marc, if you want to talk about the structural side of things other than what you mentioned earlier?

Yes, no, I think, just to add to what Jim was saying, we anticipated in this merger that some of the Central leases had structural repair obligations. That was a legacy obligation in those contracts, and while we weren't able to quantify them in the pre-merger period, we made an estimate and that in part led to the reason why we set up a $27 million hold back from the purchase of Central. And as you know our obligation is to pay that $27 million at the end of three years, if we haven't used it to satisfy obligations of a legal nature or other claims, tax issues or structural repair obligations that are outside the normal course of business.

And all we're really doing is highlighting now that as we're year and a half in, we're starting to look at some of the locations where we have those legacy obligations, we're starting to have contact from some of the landlords at some of those legacy locations, and that's giving us an opportunity to think about the fact that there's going to be some actual structural repair activity taking place this year. But we're still at a preliminary stage. We're unable to estimate what the costs are going to be, but I think in general our expectation is that the $27 million indemnity basket that we held back should be adequate to cover this stuff off.

Okay. Thanks. That's helpful. Just throw in one last one. Do you feel like the merger is on track to be accretive next year? I think that was the original target anyway, for 2015. Is that correct?

Yes, I think that is a tough one, Kevin. If we hit I think two surprises during 2013, one was the difficulty in getting these AR balances down that we've talked about, and that clearly led for us to have more interest expense in 2013 than we would have thought. And while we're expecting, as Jim said, to get that stuff cleaned up in 2014, and I think we have good reason to believe that, it does mean we're running interest expense levels at a higher level than we anticipated.

And secondly, on the G&A front. When we originally went out with our free cash flow guidance for 2014, we had gone out at $30 million, as you know. And when we reduced it to $20 million, we talked about the fact that we were spending more on merger and integration from a P&L point of view, but also that we spent $5 million more on CapEx. And so for the year, as you'll see in the numbers, we came in around $15 million on CapEx, which was around $5 million more than we expected.

One of the challenges that we are facing now in terms of projecting long term is where are those receivable balances going to be? How much CapEx are we going to have to spend in 2015, and what is that going to do to G&A expense?

So I'm giving you a lot of detail, but whatI'm really saying is we're not prepared now to say yes for sure we'll be accretive in 2013, but I will say that we do believe this deal will be accretive. It's important for us to continue to drive costs out of our business and in particular ultimately reduce the level of CapEx back to a level that we think is appropriate, which is probably about $10 million a year on a maintenance basis.

So the way to think about the business from a macro sense, Kevin, and the measures that I look at, because some of the accounting treatment begins to take care of itself. But you know are we on track to get into the 2015, 2016 time frame at EBITDA near $100 million or in excess of $100 million? And the way we get there is by year-over-year growth in gross profit organically, and as we talked about we're pretty much on target with organic gross profit growth 2013 -- I'm sorry, 2014 over 2013 at around or a little greater than 5%.

That's the result of two things. One, in 2013 we sold more new business than either Central or Standard had ever sold individually in the past. So the pipeline remains robust, and the forecast that we gave you a little while ago assumes that we should write even more new business in 2013 over 2014, and we're off to a pretty good start, this being a couple months in and knowing what we have in the bag.

Second, we begin to look at is that pipeline manageable and sustainable into 2015, 2016, 2017? What are those leads out there that we have probability analyses completed for? And that seems to give us comfort around the total of 5% growth in gross profit. Same store.

Growth now seems to have settled down after years of retrading the business, and we'll be able to highlight same store growth as we get into additional quarters this year and paint that picture for you. And we know that the impact of security and maintenance and Click and Park and transportation are having impacts at same stores as well. So the prime contributors are performing at or above the metrics that we set for them.

So as we begin to look forward, the opportunity is there for us. It's a great time to be here, as a matter of fact. In terms of seeing that opportunity.

On the G&A side, we've talked a little bit about moving towards our goal ultimately of 45% of G&A to gross profit. And if we follow the analysis we provided today, and we look at staying, as we said we'll be on track towards the $26 million in synergies that were forecasted at the beginning of the merger, then that metric remains achievable in our eyes. So again, as we begin to forecast this year for sure, and try to give you -- sort out all the noise and give you an idea of where we're at on an organic basis, 2013 to 2014, and ultimately where we see the business going in 2015 and 2016, we kind of remain on track with the guidance that we've given before.

Obviously, the free cash flow ramps up as the cost of the integration goes away. And we've talked about how that free cash flow would be deployed. Certainly the CapEx that we'll need to deploy in the future will be along the historic lines of how we deployed it at Standard Parking in the past.

Continued investment in IT integration in order to provide processes to make our back office as efficient as it can be in order to get us to 45% G&A. Almost all of our G&A other than field related is in support process. All the things we talked about in the past;payroll, client accounting, receivable and payable tracking, treasury, et cetera, et cetera, and there are additional investments that we see ourselves making in technology that will make that accounting more efficient as the Company grows.

So if you sit in terms of the macro look at the business, we kind of remain on track towards those EBITDA numbers. And then obviously accretion and the free cash flow number will be able to take care of debt ratios and things like that. We are pretty comfortable that the business itself -- the underlying business puts us in a position to succeed.

Those numbers that I'm kind of bandying about this morning in terms of 2015 and 2016 do not assume, because I don't think that we're in a position yet to place a proper value on some of the top line growth that we can achieve by virtue of just our size and leverage. Some of the things that we're working on in terms of getting closer to the consumer, in terms of transaction processing, that is an area that we continue to make investments in and that continue to grows within its current bandwidth at the Company, but certainly what we're looking forward to is a rather rapid expansion of that relationship with the consumer in the future.

And then how do we leverage the Company size in terms of its real estate, whether it's advertising or deployment of other national contracts to use the leases -- the real estate that we lease or manage to our benefit on the top line. Those leverage exercises have not been factored into the 5% gross profit growth that is the foundation of the organics that we're talking about.

Sorry for the long-winded speech, but you gave me the opportunity to sort of explain -- put a little more color on it rather than just black and white numbers that we get out in the press release or support the conference call we're having this morning.

Okay. Thanks for all the commentary.

Our next question comes from the line of Daniel Moore from CJS Securities. Your line is now open.

Thank you. Marc, I think you mentioned that your normalized gross profit growth in Q4 was somewhere around 3%, and Jim obviously talked about long-term goals of 5% still being intact. What is embedded in terms of, quote, normalized growth profit growth in your Q4 guidance range? Excuse me, your 2014 guidance range?

So all we're doing Dan is taking out those two items that we really called out. So the asset sales, we know what the impact was on gross profit in 2013. We know what we expect that to be in 2014.

And we also have this lease contract right accretion, which unfortunately is very volatile between 2013 and 2014. It's dropping from $4.3 million to under $1 million in 2014 before it starts to grow again. And again, as I said in the release, it really is that it's just a function of the timing of when contracts end. And it's a little bit hard to predict from a longer term point of view, because contracts might not end at the time that they are expected to end.

So if we take out those two items, and we just say what gross profit growth are we expecting full year 2014 -- of course we're also excluding anything related to the mergers from our numbers -- that's where Jim is coming back to the 5% underlying growth. So I think on a reported basis we're talking about gross profit growth of about 1%, but on an adjusted basis, taking out those items, we're looking at, in terms of the guidance numbers we're giving you, gross profit growth of 5% in 2014.

Which is exactly on track with the number that we've been seeking to gain on an organic basis, which is a 5% top line growth, ultimately 3% of less G&A growth, and that's how we get the double-digit bottom line growth. That's our business model. And that basis that I just described is the same basis that we're comparing 2013 Q4 to 2012 Q4, where we had a 3% underlying growth.

So we had good growth in the fourth quarter of 2013 relative to 2012. The full year comparisons don't mean anything, because we had the pre-merger periods in there. But then as we look at 2014, on the back of the strong business that we wrote in 2013, the new business expectations for 2014, and all the other stuff that we're doing, we think we're going to grow at a little faster clip in 2014 than we did in 2013.

Let me just, Dan, because you asked the right question and gave us again the right opportunity to maybe be a little bit redundant in terms of that, but given the fact this is the year end, and we're talking about the year looking forward, and we're talking about even periods that are a little more forward than that, the issue is, is that 5% fairly easily sustainable? What are the key components of getting 5% year-over-year growth in gross profit?

And as we said, there are three major components that are interrelated to that, given what we've been working on for the last now seven or eight years, and that is can we grow same-store sales based on an increase in year-over-year profit by CPI, which has been running anywhere between 2% and 3%. So whether it is our ability to raise prices at the leases by at least the CPI -- and for the 30 years that I've been doing this lease pricing tends to move at a higher clip than inflation -- can we move providing at leases at CPI or better?

Can the income from management contracts be sustained at CPI or greater? And that has to do again with making sure our contracts have the correct amount of year-over-year built-in that we've gotten. We've recently introduced a new pricing model that we're putting across the organization in terms of when we have opportunities for retrades or business development opportunities that suit themselves. We have been doing some work towards formulaic management fees, which enable us to when we do our job and increase revenue at our client's facilities, that we automatically share in that uptick as opposed to having to negotiate CPI inflaters on top of $1,000 a month management fees.

So we're getting some traction with that, and I think the pricing model that we're using enables that sort of opportunity, and we're pretty satisfied that we can continue to move the profitability of management contracts at least by CPI in the future.

And the remaining two products that contribute to gross profit are how much new business do we write, and how does that annualize into the year that follows so we get automatic bump from that? What's the business that we lose, and how does that annualize year-over-year? And as I said that trend has now moved in a positive way. We're writing a lot of new business.

The new business that we write and that we wrote in 2013 annualizes itself in a multiplier in 2014, and the same for lost business. That's a positive number for us. That's a contractor to the 5%, as well as any new business that we write in 2014 that Marc talked about in terms of our active pipeline, and then any business that we lose this year. All of that activity is forecasted into this year's gross profit, which has us growing at a little better than 5% and we feel is sustainable.

The last component or product is our ability to sell additional services, the additional product lines into same stores or stores that we don't control today. We've seen maintenance -- we're doing maintenance and snow removal for lots we don't manage. We're doing security at locations we don't manage.

So are those products contributing at least 100 basis points at present, and hopefully more than that in the future, to a 5% growth in the top line? So that's where we feel pretty comfortable about the sustainability of the 5%.

That's helpful. And just obviously you remain comfortable around the $26 million in long-term cost synergies. How much of that is -- will have been fully embedded in your 2014 guidance, and how much is that left for potential additional accretion in 2015 and beyond?

Yes, I think this is a challenging one, because we've moved people around on our platforms and are doing our very best to track it, so we have some rough approximations. What I would say is that we think there's about $11 million to go in 2015, and some of that will be a full year effective things that have happening in 2014 and beyond. A year ago we told you we thought that 2014 and fan would generate about $17 million of our $26 million of estimated total synergies. And I think we're on track with that, although there's probably going to be a little more in 2015 than we first thought and maybe a little less in 2014 than we first thought.

Obviously completing the integration gets us to a basis of normalized operations into 2015, because the merger and integration costs that we're talking about go away. The realization of the synergy targets should be in place, if not for the full year 2015, very early on in 2015. So all of this noise that we're having to spend a lot of time on in these calls will have gone away.

And hopefully we just talk about the metrics for gross profit in G&A, and retention rate, and won versus lost, and the penetration of maintenance and security and Click and Park and transportation as we get into more normalized operation of the business. Obviously free cash flow has the 2000 -- this year's effect, the 2015 effect, and onwards which ultimately affects our debt level, as well.

Great. And lastly, you just hit on my last question, Jim. Retention rates at Central obviously impacted by that one portfolio. Would you expect them to trend towards 90% as we look out to 2014?

No, it was us. Central has been around 86% -- 85%, 86%. That's where they're at.

Right.

A rather large financial institution where we were really putting guards out in the lots decided not to do that anymore, aspart of their own national cost cutting basis. We weren't making a lot of money on it. There were a lot of locations that went away, kind of eight hours of a guy standing out in a financial institution parking lot, chalking cars or moving people along, and that financial -- well, I said why.

I don't think that the impact of the loss of those 104 lots, which dropped our normalized retention rate, which is 90%, 91%, down to the number I quoted, had a whole lot of movement on a needle if you look at same store retention gross profit, because we didn't generate a whole lot of money from those lots. Certainly nowhere near the average that we would generate, from the 4,500 locations.

Okay. Thank you very much.

You're welcome, Dan.

(Operator Instructions). Our next question comes from Nate Brochmann from William Blair. Your line is now open.

Good morning, it's Diana Rashkow calling in for Nate today.

Hi, Diana.

Hi. Just first wanted to go back to a comment Marc that you made a little bit earlier in terms of the dynamic of the net accretion causing some pressure on gross profit next year, but then coming back later. Can you elaborate a little bit on what drives that back up over the longer term?

Sure. AndI don't want to go too accounting technical on a call like this, but there is a footnote that will be in the 10-K when you see the 10-K next week that will help you, because it lays out for the next five years what the expected movement of the numbers are.

But I think the important thing to remember is this is a noncash item. The $4.3 million that was in gross profit in 2013 did not generate any cash for the business. It's just an accounting entry. And the purpose of these entries is to try to take above and below market rent on acquired leases and approximate what market rent would be.

And it's a math exercise. It wasn't even done based on doing surveys of rent or anything else. It's just a math exercise. And it's required under the accounting rules, so we did that math exercise, and the result of that was that on a net basis, we were adding a little over $4 million to gross profit in 2013.

In 2014, assuming that none of the leases that lose money and have above market rent , and none of the leases that have below market rent terminate early, we expect that number to be around $1 million. And then as you look forward in 2015, 2016, 2017, and I think there's about five years it's going to be in the 10-K, the number grows to like $1.3 million, $1.6 million, $1.7 million. It never gets back to the $4.3 million.

And eventually it goes away. At a point in the future all this stuff is amortized out, and we're just back to normal rents flowing through. And of course if a contract is unprofitable because it hits too high a rent, when that contract comes up for renewal we aren't going to do that contract or renew that contract at a level that would make it unprofitable. And likewise if a contract comes up and it has below market rent, the landlord is going to be seeking some kind of rent increase, and it's probable that contract would be less profitable in the future.

These adjustments are really an attempt by the accounting rules to try to normalize all of that out and say what's the ongoing situation? But of course, because the unprofitable leases all have unique terms and have different provisions in them, and the same with the leases that have -- are very profitable and maybe have in some cases below market rents, you can't really predict completely accurately how this is going to move.

But I think that's the best we can do. That's about a $3.5 million swing year-over-year in gross profit. And again, as I said at the beginning, it's a noncash item.

Okay. That's helpful. And then changing gears, just wanted to ask a question on weather, which is our favorite topic now in Chicago. In Jim's comments in the press release it had mentioned obviously mindful of the weather impacts. I was wondering how much of that is a positive in terms of driving some more demand because people might elect to drive into work instead of taking public transportation? Obviously some snow removal revenue associated with it, but obviously some extra costs too. So just wanted to understand a little bit better where weather falls out in terms of the benefits and the costs associated with it.

Being in the parking business, it doesn't help at all. At least during the reporting period. And we all know about January's weather, and we obviously have had a look at January, and I can't talk about it with a whole lot of detail other than to tell you that we look at the seasonality of the business, and January wasn't -- it wasn't horrible because while we had areas of the Northeast and Chicago that were impacted by this year's -- I don't know what everybody is calling it. Disney will sue me if I call it the wrong thing, and I can't remember what they insisted upon, but whatever this vortex is has kept -- it keeps people away.

And those -- we think that after kind of years of analysis there's some pent up demand for trips that might not have been taken, but all in all Diane, if you didn't go to work because it was snowing or cold, you might have taken the train. There's not a lot of [that vise versa], so the weather itself doesn't help us, except the fact that we're in the snow removal business.

So SG Plus maintenance did great. And fortunately that offsets -- has offset for several years now -- someof the volatility that gets created when we get a lot of snow.

In terms of the airport side of the business, we do see weather having an impact, mostly negative, but again those trips then get pent up. So the business guy who didn't travel in January because his flight got canceled is going to go sometime. Whether it was the following week or he put it off for a month, so on an annualized basis we don't think the trips get hurt as much on the hotel and the airport side, the travel side of the business, where we saw impacts in January. But we also operate hotels in Florida, and those places had a particularly good month.

So I would say weather is a negative in the parking business, but we've done what we can to take the volatility out by investing regionally and investing in SP Plus maintenance.

All right. Great. Thank you. Those are all my questions. Appreciate it.

Thanks.

And our next question comes from the line of David Gold from Sidoti. Your line is open.

Hi there.

Hello.

Questions for you, so far one of the things that you mentioned in the release is some stepped up costs for repairs, or maybe bringing up to speed Central facilities. Wanted to get a sense there as to essentially what brings that on to be done now, and how much more of that there could anybody the future?

Sure. I would be happy to explain that a little more. As I said earlier in my remarks, David, when we went into this merger, we knew that we were acquiring leases that had structure repair obligations. Not all of the 800 leases we acquired had those obligations, but some did.

On the Standard side, we had a couple in our portfolio that had that obligation, but it's typically not something that we have had in our portfolio. And because we were unable to estimate what the exposure might be for deferred maintenance, if any, at these locations, we've held back a portion of the purchase price. And that is the $27 million that I talked about that we have -- that we owe at the end of three years if we haven't used it to satisfy indemnified items. And this is really the biggest one.

Now, one of the things the requirements of the merger agreement is two-fold. One is that if we do have structure repairs, and these are repairs that are outside the normal routine stuff, that the selling shareholders are responsible for 80% of the costs, and we are responsible for 20% of the costs. That's what we negotiated at the time that we did the merger.

So the 20% of the costs is going to affect our financial statements and will either become fixed assets that get depreciated or will be charged off the P&L, depending on what the nature of the repair item is and whether it qualifies for being capitalized. The 80% that is the responsibility to the selling shareholders is going to go against the $27 million liability.

But from a cash point of view, of course, we're going to be laying out all the cash. It's just a -- and if we charge the 80% against the liability during 2014, then that is going to represent a portion of the cash that we ultimately expected to disburse over the three years, which is the $27 million.

Now, the other important provision of the merger agreement is that we can only charge the indemnity bucket for repairs that actually take place within three years of the consummation of the merger. And so clearly now we're sitting here getting close to a year and a half in, and while as I indicated earlier we have some landlords who are contacting us and some other -- our own observations about some of these facilities that need some work, it's also important that we don't defer these things into the future. If there are repairs that should have been done prior to the time of the merger, and there are repairs that need to be done now, we want to get those done so that we have the ability to charge the 80% off of the indemnity. So there is an important timing element there.

The challenge that we have, of course, is that if you look at the kind of things that might need repair, it could be concrete repairs, it could be elevator -- major elevator repairs or replacements, things of that nature. And you don't just call up the local guy and have him come out and give you an estimate. You have to hire engineering firms. They have to go do studies. Sometimes they have to do core samples in the concrete to determine the extent of any repairs required. They have to make estimates.

And then obviously we'll have a period of negotiating with landlords over whether or not the repairs are truly our responsibility or not. So that's why at this stage we're unable to quantify what it is, but I think we wanted to call it out and make you aware of it, because it's clearly our expectation that we're going to be doing some of this type of work in 2014, and it will affect both our reported results and our cash flow in the way that I described it.

Got you. But then on a go-forward basis, once we're past that, is it something that, we should think about as maybe some stepped up cost but not as dramatically because you'll be doing that as necessary, or do you really view this as more one time?

Well, I think we are hoping that our $27 million basket, which covers some other things besides structural repairs, is adequate to cover the remedial stuff. I mean, that was the idea behind setting the level at that level. And that as we go forward, we reduce things that are required on an ongoing basis, and that would become part of our regular repair and maintenance.

The Company spends millions of dollars on an annual basis on routine repair and maintenance now. And so I think our expectation is that once we get past this kind of large chunk that we won't have large amounts hitting us down the road, but I think we need to put a slight caveat on that and say we don't -- these 800 locations, we don't want to spend the money to go do engineering studies at 800 locations just in case we might have the need to do something.

We rely a little bit on visually inspecting these facilities and also what goes on on a day-to-day basis. So right now it's premature to say this will cover all of it and there will never be anything else, but I think our hope is we will do -- try to do maintenance on a more planned basis, and hopefully it becomes just part of the regular stuff that we do as opposed to being hit with larger remedial requirements.

And, David, it's kind of important to think about this in terms of the context of the business models, because these are I think 100% -- what Marc is talking about is 100% legacy Central Parking locations, and obviously the diligence resulted in the indemnity that Marc has discussed. So as we get through the identification, we'll take care of this in the timing that we're talking about.

On a renewal basis, or looking at leases in the future, I think they will be a little more discipline in terms of the facilities that we take triple net leases on a move forward basis. While a lot of this stuff is profitable, to have a more accurate, forward-looking view, we'll begin to apply the discipline that we've had here forever. I don't mind looking at doing leases, but I think there needs to be a -- maybe a little more prudent and thoughtful approach to exposures than might have been done on some of the leases that we've assumed.

Got you. Okay, that's fair. And then just one other. [The one on] the G&A piece, on the one hand you made good progress, on the other hand we expect some growth. We don't expect it to hold GSA fourth quarter level, but the long-term target sort of remains, call it a 500 basis points below or so below where we're running.

What do we need to do to get there? Is it just pure revenue growth from here, A? And B, is it the type of thing that we'll see gradually, or is it something that things are just going to click? Because it sounds like embedded in the guidance there isn't much improvement, say.

Well, there is definitely synergies taking place in 2014, so we shouldn't give you the impression that we're just in a steady state mode while we finish the integration. I'm aware of -- I'm trying to remember the number now, but it's probably $5 million, $6 million of synergies that we're taking out in 2014. What we're saying though is that in terms of our overall G&A level for 2014 we're going to be ticking up a bit, in part because we had much lower G&A in 2013, some of that the result of open positions that we really needed to fill.

So as far as your question about how we get to the 45, it really is a combination. We stated that our belief is that we can grow gross profit on an organic basis of around 5%, and that remains our goal. As we told you, our expectation for 2014 is that we're going to do just that when we exclude assets sales and this noncash contract right accretion, and that on its own will start to bring that number down, as you know. I' mean, it's simple math.

But we also need to finish the interrogation, and while the integration is going on we're running our business on two platforms and there's a lot of support that goes into making that happen. And there's a lot of inefficiency in the business from a G&A point of view all throughout the business because we have to do that. And as we said, our timing is to try to complete that integration by the end of 2014. We believe we're on track to do that.

And so I think you'll start to see a significant impact in 2015 on G&A levels. It's not going to be a gradual stepping down. So you'll see that percentage come down as gross profit grows at the 5%. You'll see in 2015 I think a significant drop in G&A that will start to move that number down closer to where we are targeting.

The last component of that, David, I alluded to it earlier on the call, but maybe not as low well as I might have. If you recall, those of you that have been with us for a while, remember that during the early 2000s -- or middle 2000s, I guess, we were investing annually in process -- technology that enabled process change within the support side of the organization. So that we bit off things like payroll and getting away from time cards and time sheets and all the manual entries around having now 23,000 employees.

We also streamlined and put in technology changes as it related to treasury bank reconciliation, client statements to some degree, monthly billing, accounts payable with some of the iPay systems that we have within the business now that have streamlined process, and avoided the need for manual entries, even things as -- you might think of simple, as travel and entertainment, expenses no longer require manual work. They're all automated.

But when we did the Central deal, we stopped for a period of time. So we still had some client reporting areas, our general ledger. Bringing Central Parking over enabled us to put some better systems in for strategic analysis for the business, but it added another layer of monthly parking that has to be -- monthly parking process that has to be put into one bucket at some period of time.

Part of the strength that Vance has -- Vance Johnson, who we've spoke of -- and brings to the business is enabling that sort of change. As we complete the integration, it's not like we completed the integration to a platform that we're completely comfortable enables the amount of technology that we need to process more efficiently. Additional investment, that continued investment that we began in 2000 -- five or six years ago will be the next assignment that we have when the integration is over.

And I think it is the completion of that platform that will give us a couple hundred basis points towards getting us to the target of G&A 45% of gross profit. So that work still has to get done.

It's not just with the completion of the integration that we get there. Marc spoke to what we ought to expect in 2015, but there's still additional opportunity, particularly in the area of general ledger, where we're just still making way too many manual entries that would require too many hands each month.

Got you. Okay. That's helpful. Thank you both.

You're welcome, David.

And there are no more questions at this time. I would now like to turn the presentation back over to Jim Wilhelm for closing remarks.

Thanks, Marcus. I want to thank everyone for participating in the call today. As we talked about a year ago, trying to sort through all of this noise and fair market value relations of leases and restatement and Bradley Airport and this and that, we know that is more burden some for you to sort through than need be.

But we didn't promise you a rose garden when we did this deal that we know is pretty exciting and keeps me obviously very excited to take the Company directionally where I think we can, based on the call today. But thanks for taking a deeper dive with us this morning, taking the time to ask us the right questions, which you always do. And we look forward to talking to you at the end of the first quarter. Thanks everybody.

Thank you.

Ladies and gentlemen, thank you for attending today's program. This does conclude today's conference. You may all disconnect. Everyone have a fantastic day.