SP Plus Corp (SP) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the SP Plus first-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (operator instructions)

I would now like to hand the conference over to Vance Johnston, Executive Vice President, Chief Financial Officer, and Treasurer. Sir, please go ahead.

Thank you, Karen, and good morning, everybody.

As Karen just said, I'm Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the first quarter of 2014. 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 with a brief overview by Jim Wilhelm, our Chief Executive Officer. Then Marc Baumann, our President and Chief Operating Officer, will provide more color on the operations. And then I'll discuss some of the financials in a little bit 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 as to our 2014 financial guidance; statements regarding expectations for the integration of the Central Parking operations; and other statements regarding the Company's strategies, plans, intentions, future operation, and expected financial performance.

Actual results, performance, and achievements could differ materially from those expressed and/or implied by these forward-looking statements, due to a variety of risks, uncertainties, or 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 website 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, Vance, and good morning, everyone. Welcome to our call, and a special welcome to Vance, as he joins us on this call for the first time.

As a reminder, Vance joined us about two months ago as Chief Financial Officer, with Marc assuming the President and Chief Operating Officer role. The breadth and depth of Vance's previous experience make him a wonderful fit for our CFO role.

Turning to the matter at hand, I'd like to talk today about the Company's performance during a quarter that saw some of the coldest, snowiest, and iciest weather in recent memory.

The impact of these challenging weather conditions on our first-quarter financial results were significant. As you probably heard from other companies, when such extreme adverse weather hits, people stop driving, and air travel comes to a virtual halt. That means that parking activity, and therefore revenue at parking facilities, declines.

We operate the majority of our locations under a fixed-fee management contract structure. Therefore, decreases in parking volume and the resulting revenue decline don't affect us at these locations.

We earn our management fee regardless of the number of cars parked. Even though there could be some impact on incentive fees and some of our management contracts are tied to volume, by and large our management contracts shield us from downturns in parking volume.

However, with the Central Parking merger, our portfolio of locations multiplied; and with leased locations, adverse weather conditions directly impact and result in reduced parking revenue and increased costs.

We've also somewhat mitigated this quarter by the fact that we also provide snow-removal services and naturally foresaw, and saw, a favorable impact on this business, given the consistent and excessive snowfall across a large section of the country.

While it wasn't enough to offset the extreme weather's adverse financial impact on our leased locations, it's a good example of the value of our diversified service offerings.

In any event, as a result of the weather, we definitely experienced a challenging start to the year. However, once the severe weather abated somewhat in March, we saw business return towards normal and outperform, in line with our expectations.

This gives us confidence that the core business remains on track and that our results in January and February were primarily impacted by the relentless inclement weather. Marc and Vance will provide additional commentary on the impact of the weather later in the call.

Supporting our view that our core business remains strong, is that we estimate same-location gross profit of the combined operations of both Central and Standard, after removing the adverse impact of the weather and the impacts for leased accounting, increased 3% year over year; as well as the increase in our location-retention rate, excluding the impact of divestitures, to 88% for the 12 months ended March 2014, as compared to 87% for the 12 months ended December 13.

On the integration front, the process continues to move along on schedule. We completed the integration of one of the largest states, Texas, in April; and another large-volume state, California, is on track to be completed by the end of the second quarter.

The process becomes smoother with each group, as we learn and gain experience, and we remain on track to complete the consolidation of Central and Standard locations onto one operating platform by the end of the year, as planned.

With that, I'll turn the call over to Marc so he can provide some additional color on the business.

Thanks, Jim, and good morning, everyone -- and my own welcome to Vance to join our team here. It's been a great addition for us.

Jim mentioned that the bad weather during the first quarter impacted our business. As you can imagine, it's very difficult to measure what didn't happen. But our best estimate as to the amount of revenue lost during the most severe weather conditions in January and February was approximately $1.6 million at same-location leases -- again, considering the combined operations of Central and Standard.

Additionally, we estimate that we incurred $900,000 of incremental snow-removal costs compared to last year at those leased locations.

On the positive side, as Jim mentioned, our SP Plus facility maintenance-service line is in the snow-removal business, and we estimate that it generated $400,000 more profit from snow-removal services during this time than the comparable period last year.

The third impact of weather-related items is less direct. When there's snow and ice, there are more slip-and-falls and on-the-job injuries.

Going over our claims data, we estimate that casualty insurance losses attributable to winter weather impacted the first quarter of 2014 results by about $[500,000] more than the previous winter's weather affected first-quarter 2013 results.

So all told, we estimate the net impact of the winter weather on first-quarter results was approximately $2.6 million, or $0.07 per share.

Turning to our new business, we (technical difficulty) identified a number of these in our release last night. We hit a very good beginning to the year, and it's particularly showing in our focus on growing our airport, municipal, and institutional sectors.

Some of the highlights that I'll touch on are the new awards in Jacksonville and Charlotte Douglas International Airports, which brings us to about 80 airports in our portfolio, an all-time record, as we build on the strength of our dedicated airport team.

On the municipal side, we were awarded contracts by Broward County, Florida, and the town of Carolina Beach in North Carolina. Again, our dedicated SP Plus Municipal Services team is focusing on this sector as a growth opportunity for the Company.

In the healthcare arena, another focal point for us, SP Plus Healthcare Services received a multi-year contract from Mount Sinai Health System to manage six parking facilities and three valet operations at medical campuses in Manhattan and Brooklyn.

And that represents an expansion that we've ridden along -- as they have done acquisitions to expand their base of healthcare operations, we've gone along with them to expand our operations and our support for that client.

With that, I'll turn to call over to Vance to lead you through a detailed discussion of our financial performance for the first quarter of 2014.

Thanks, Marc. As both Jim and Marc mentioned, the inclement weather had a significant impact on our first-quarter results. Wherever possible, I'll try to separate out the weather impact.

Also affecting the year-over-year comparisons are the impact of the 2013 sale of the long-term contract right, as well as changes in the net accretion (technical difficulty) amortization of accretion from acquired lease contract rights is to (technical difficulty) characteristic of each acquired lease and its corresponding lease terms.

Barring an early termination of the lease, the pattern of the amortization of any given lease contract right is fixed and was determined at the time the merger accounting was finalized. However, in aggregate the amortization pattern is [irregular] and could result in meaningful swings over time.

Therefore, we'll also separate out the impact of asset sales, as well as this net accretion on acquired lease contract rights, when we comment on the year-over-year performance, to get a more normalized basis.

Finally, in the first quarter of 2014, we reversed a valuation allowance for deferred-tax assets that resulted in a discrete tax benefit of $6.4 million, or $0.28 per share. We will exclude this tax benefit from the year-over-year comparison, as well.

Going to the results for the quarter, reported 2014 first-quarter gross profit decreased 12% over the same period last year. On a normalized basis -- in other words, excluding the impact of the winter weather, sale of the long-term contract right, and the net accretion on acquired lease contract rights -- overall gross profit grew 4%.

The reported results for the first quarter of 2013 includes the sale of a long-term contract right of $2.7 million that did not recur in 2014.

Also, the benefit from net accretion on acquired lease contract rights was only $800,000 in the first year's quarter, as compared to $1.9 million in last year's first quarter.

And finally, you have the negative impact of the weather on 2014 results, totaling $2.6 million

First-quarter 2014 G&A expenses, including merger- and integration-related costs, increased $800,000, or 3% from the first quarter of 2013.

As we mentioned on the Q4 2013 call a couple months ago, we expected G&A to increase in 2014 as a result of higher-than-expected turnover at the support offices in 2013. Some of these positions need to be refilled in order to keep the integration on schedule.

Other factors contributing to the increase were fluctuations in the estimate for future earn-out obligations, as well as changes in compensation and benefit costs, including an increased healthcare enrollment and increased healthcare costs.

We continue to remain focused on completing the integration of the two businesses and realizing the expected synergy savings. Upon the completion of the integration to one platform, we will then refocus our efforts on refining our systems and business processes to further improve the efficiency and effectiveness of our operations.

Earnings per share on a GAAP basis were $0.19 for the quarter of 2014, as compared to a net loss of $0.01 per share for the first quarter of 2013.

Earnings per share adjusted for merger- and integration-related expenses, as well as a reversal of the valuation allowance for deferred-tax assets, was a loss of $0.05 per share for the first quarter of 2014, a $0.15 decrease as compared with the first quarter of 2013 on the same adjusted basis.

The non-occurrence of the net benefit from the 2013 sale of the long-term contract right, which was $0.07, a decrease in the benefit from the net accretion on acquired lease contract rights of $0.03, and the estimated impact of weather of $0.07 more than explains the year-over-year decrease.

In terms of free cash flow, it was negative $13.9 million during the first quarter of 2014, due primarily to temporary increases in [pass-through] balances at quarter end from some of our large airport clients.

As we reported over the last several quarters, there can be large fluctuations in AR from time to time, but we expect these balances to return to normal levels as we move (technical difficulty) 2014.

While the first two months were disappointing, March gave us comfort that the underlying business is performing. Given what we know at this time and due to the estimated $0.07 impact of weather, we expect adjusted earnings per share to be at the lower end of our previously announced guidance range of $0.77 to $0.87 per share.

In our adjusted results, we are adjusting not only for merger- and integrated-related costs, but also (technical difficulty) benefit from the Q1 2014 reversal of the valuation allowance for deferred-tax assets, as well as for any structural repair-and-maintenance costs we may incur related to legacy Central Parking leased properties, the amount of which is not currently estimate-able. All these items were excluded in our initial guidance.

The Company currently still expects 2014 free cash flow to be in the range of $35 million to $40 million, excluding any structural repair-and-maintenance costs at legacy Central Parking leased locations.

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

(operator instructions) Daniel Moore from CJS Securities.

Good morning. Thanks for taking my questions. Total number of facilities -- you mentioned, obviously, that your retention rate improved -- total number of facilities declined 5% year over year. Talk about whether you expect further declines going forward as you divest lower profitability contracts, or should we start to see growth as we move into the back half of the year?

Well, [let me] overview is that we normally do expect to see growth in our location count. Last quarter when we talked about our results, we did talk about the fact that we had lost a large portfolio of fairly low-margin business that represented a large number of locations.

And clearly, that needs to work itself through our location counts and (technical difficulty) we're reporting to. But I think there's (technical difficulty) leases that don't make money, and if we can move away from those, we will do so. But our expectation is that we will be growing our location count.

Okay. Excluding weather, and you gave us a lot of detail, how did the quarter fare relative to your internal expectations? Where there any other deltas versus your internal budget?

I think we came in pretty close to our original expectations, when you take the weather out.

And one thing that we didn't point out on the call, in the comments that we gave as prepared comments, is that in the month of March, when you exclude the weather impacts -- and weather really didn't impact (technical difficulty) results.

But the underlying performance of the (technical difficulty) in March was well up on last year, and certainly ahead of our expectations for the month. And I think that's really what gave us the confidence to isolate weather (technical difficulty) expectations.

Okay.

And just to reiterate a little bit, Dan -- as we kind of pointed out earlier, if you think about operating income for the month of March, as Marc alluded to, we -- on a normalized basis, comparing kind of March of 2013, it was $1.2 million better than March of 2013.

So that kind of gives us some confidence that the underlying business on a normalized basis is back, and when we got to March, was performing back on track.

Okay. And one more, and I'll jump back in the queue. G&A, obviously, you said you expected it to increase. Still a little bit higher than we'd expected. Is $24.5 million or thereabouts a good run rate? Maybe can you isolate the impact of the increase in estimate of future earn-outs, how much that impacted the quarter year over year and whether that'll continue for the remainder of the year?

You know, Dan, you broke up a little bit, but I think I got (technical difficulty) describe that, is that I think that -- we think that (technical difficulty) quarter is a fairly good indication of the run rate for G&A going forward for 2014, with the exception that, as we kind of move through the year we are going to be focused on cost-reduction opportunities. We think those will be somewhat limited in 2014.

And then as we talked about on our last call, when we get into 2015, we think -- that's where we think there's going to be some more significant opportunities as we get into reengineering certain processes and dealing with certain opportunities on the systems side of the business, where more G&A -- there is an opportunity to reduce more G&A once we get into 2015.

I think that was the first part of your question. I think the second part is that -- you started to break up a little bit, but I think it was around the breakout of earn-outs. And that's not something we would typically give that level of detail.

Having said that, it's not a tremendously significant item, per se. But it can fluctuate from year to year and quarter to quarter, based on how those underlining -- you know, how those businesses are performing.

And we had a little bit more of an impact in the first quarter of 2014 versus the first quarter of 2013 because those businesses performed better quarter-on-quarter, and then the earn-outs that go out with those -- obviously, there's a bigger obligation.

Okay. I'll jump back in queue. Thank you.

Maybe -- and thanks for the question, Daniel -- but it might be a good opportunity with the question focused on G&A to talk a little bit -- with a little more specificity for color.

When we gave the original estimates of synergies to be attributable to the combination of Standard and Central Parking, those synergy estimates were based upon the completion of the integration, where we're -- you know, six or seven months away now from being completed. And as I said, we're on schedule and on budget for the achievements of those benefits.

Those benefits, though, when we gave out our guidance, did not assume additional efficiencies that the companies could gain once we are on the one platform.

It's important to recognize that the platform that we will have combined the companies on is primarily the platform that Standard Parking had when -- in a pre-merger environment.

And we will, for ease of reporting and head count and office space, etc, etc -- we will have achieved the benefit that we thought and announced for in bringing Central Parking locations onto that platform.

Central Parking had a couple pieces of software products that we've adapted for the use on our platform, which is helpful, and is allowing us to realize some of the benefits that we've had.

However, as we move into 2015 and we get into a more normalized back-office process, if you will, on the legacy Standard parking system, those of you that have been with us for a while remember that as we were in the early part -- or later part of this sort of decade, in 2008, 2009, and then into the pre-merger environment -- that we have been making significant investments in technology to support our back-office process.

And that had -- we had accounted for time and attendants and doing that more efficiently now -- at the time, for 13,000 employees, and a benefit for, ultimately, 24,000 employees. And it's certainly scalable. So as the company has 100,000 employees, we achieve the same benefits on time and attendants.

As you might suspect, that has increased -- you know, the benefit that we derive in the efficiency in the back office, just relating to processing payroll and the number of people that we need to manually support that.

We have made progress in terms of automated bank reconciliations, the automatic (technical difficulty) together in continuing that technology investment.

For instance (technical difficulty) our contract-management system and our general-ledger system have not yet been the beneficiaries of technologies that we know do exist, to streamline the amount of manual entries and manual participation in our month-end closing process for 4,400 or 4,500 locations.

So upon the re-creation of bandwidth within the organization to focus on the next step of process change, we think that there are additional synergies for us to derive -- you know, getting us down into the targeted percentage and lower of G&A as a percentage of gross profit, by virtue of making those process enhancements and making those investments in technology.

Okay. Thank you for the color. Again, I'll jump back in queue.

Thanks, Dan.

Kevin Steinke from Barrington Research.

Good morning. So I believe you said that March was actually -- outperformed your expectations. And Jim, I think you talked about last call that in the past, you've seen that delayed airport trips and delayed hotel visits -- sometimes you get some of that back on an annual basis. So I'm just wondering if there's anything you're seeing in your numbers that is saying that that's actually what's happening and that's kind of what's leading to the better margin, your comfort in the full-year number?

Well, we'll see as we look at the second quarter. But where that pent-up demand occurs is primarily in the travel area --were there business trips or vacation trips that were canceled as a result of the weather conditions. And as we've said, March was a little bit ahead of our expectation, so there would be some pent-up demand in that area.

However, Kevin, on the urban side -- people go to work every day. The people who are parking at the hospitals or the universities or the office buildings, or people that had intended on a shopping trip in one of the central-business districts -- you know, the regular commuter -- there's certainly no pent-up demand that we would see up and above that.

I would attribute some of the pick-up in March to some of the pent-up demand that might have existed in the travel industry. But we won't feel a lot of what happened in January and February come back throughout the year. And I don't want to send that message, because it would be inaccurate.

Okay. That's fair. And thanks for giving a good insight on the impact on the sale of contract rights and also the net accretion of acquired contract rights. I'm just wondering as we move into the second and third quarters if you have any level of specificity as to how those items impacted the year-ago numbers, so for modeling purposes we can think about what the benefit was in the year-ago quarter. I think you called out nicely in the fourth-quarter release what the impact was there.

We don't have a breakout, Kevin, on a quarterly basis, but we did, I think, lay out last quarter what we thought the annual impact would be on 2014. You can now see the impact on the first quarter of 2014 that we just disclosed. It's not something that's terribly volatile.

The important thing to note is that the decrease that we're experiencing in 2014 relative to 2013 is a one-time decrease (technical difficulty) our expectation is -- on a year-on-year basis as we go to 2015, 2016, and (technical difficulty) we're in this one-year period, and we'll continue to call it out for you on the quarters as it happens, but I think it tends to be an item that is fairly smooth for us (technical difficulty) year, and I think for modeling purposes, you won't go too far off by using that as a broad assumption.

Okay. That's fair. You called out some higher healthcare costs in the G&A. Do you think that's just normal fluctuation, or are you seeing anything related to the federal reform legislation, in terms of higher enrollments, you think --?

Yes, Kevin -- and I'm sorry to step over you as you're finishing your question.

We had the same experience that many, many companies have had as we deal with the impacts of the Affordable Care Act. We for sure saw an increase in our enrollment take place this year. And of course, talking to our peers and other companies, we've seen they've had the same experience.

One of the things that remains to be seen is whether those people remain enrolled. There's a gigantic expense, even in an affordable policy, for someone who's an hourly worker. And so whether they will continue to participate in the program, we don't know.

I think the important thing to recognize is that outside of G&A, the bulk of the costs are obviously being passed on to our management clients, because we have a pass-through to them, our management clients, and that's 80% of our portfolio.

But it's an area that we will continue to watch, but I think the up-tick that we talked about in the quarter is definitely the result of increased enrollment beyond what we would have expected to see.

Okay.

And we'll certainly monitor it as the year goes by. And I don't think we're sitting here today now expecting a further surge to create further increases in future quarters, because there's an annual enrollment process on a calendar-year basis. And so we (technical difficulty)

One last question, if I might. So just this bigger picture -- the three elements of gross-profit growth -- if you can give us an update on how those are tracking, in terms of pricing, new business, and also cross selling of your additional services to clients.

Thanks, Kevin. We don't carve out with a whole lot of specificity those components. But I can tell you that, based on the results that we've seen so far -- again, the metrics that I talked about last quarter and those that I look at, we are most encouraged by.

In the normalized environment that Vance was describing and our look into March, we saw an increase of same-store sales. So again, the three components that make up organic growth in gross profit are same-store sales, achieved at somewhat of a level near inflation or higher.

And we saw that by virtue of the carve-out activities in the first quarter. So that was -- and that's an up-tick that we hadn't been seeing lately (technical difficulty).

The Company has rolled out, and has made available to some of our larger clients, a new pricing model via contract negotiation that begins to give us much more visibility into that activity in the future, based on a change in approach on our management fees, a change in our approach to managing their personnel -- healthcare costs, payroll taxes, etc, etc, etc, -- which give us even further guarantees year over year that if we do our job and that we raise revenue for the locations we manage on their behalf, that we're able to benefit along with them.

And for nine out of every ten years historically, revenues move ahead. So it's not with great -- you know, it's not a gamble for us to do that.

And clients seem to be taking to that approach as we renew, and it gives us some comfort that as we bring that pricing model across the breadth of our renewal (technical difficulty) -- unsolicited, and we're winning locations of considerable (technical difficulty)

When Marc talked about airports, airports are a significant contributor when it comes to gross profit per location, not only from the parking product that might be provided initially, but from our transportation product line, and on a much more robust basis now and into the future, our technology line and our Click and Park (technical difficulty) our other successes. So we're seeing a rather robust pipeline in those areas and having success.

The fact that the retention rate, which speaks to [loss] locations, is now stabilized and beginning to tick upward, completes the other half of that component of gross-profit contribution.

A must have up from 87% to 88% -- you know, 1% is, in my mind, indicative of the trend that we believe, based on our crystal ball into re-trading and expiring contracts, for where the Company out to be.

Again, we've always targeted a rate over 90% as achievable, given the quality of the products that we offer to our clients, and calling out locations that may not be contributing. So again, we would look for gross profit per location as we endeavor in the future to increase, as well.

Maybe just (technical difficulty) back on airports. And I don't mean to go all over the place on you, Kevin, but there's relevance here.

When we talk about the amount of AR and the amount of accounts receivable that have picked up since the merger, Marc spoke specifically to those municipal and particularly those airport contracts that -- because government never pays on time. They just don't.

They're not very well organized. They generally require a dozen gray desks before you get the final gray desk to stamp approval on payment. And while we've worked with our clients to stream (technical difficulty) contracts, and then (technical difficulty) capital as an exercise against the performance of that (technical difficulty).

So, no -- and you know from our historic dispatch of cash and our rather high threshold for the return on invested cash that we are considering that.

If the Company gets larger, we don't expect the receivables to tick up; and we expect to go out and work with our airport clients to become more efficient in the payment process.

If you think back to the major components (technical difficulty) a third component of gross-profit generation is beginning to sell more products across a wider number of locations.

And one of the three or four key reasons why I bought Central Parking was to be able in the future to sell these additional products -- transportation; curb-side management at airports -- and central brought a rather large portfolio of airports with it; security opportunities at airports; and maintenance opportunities at airports -- the pipeline of opportunity for us to do cross-sale of those, coupled with our ability to deploy the technology that I referred to earlier -- which is our Click and Park technology for advanced reservation, and in the future, on-demand payment for members of a Standard Parking-associated system -- will ultimately (inaudible) the benefit of that cross selling.

So whether it is the government contracts that I'm talking about or the component [tree] of selling some of the additional products across the wider array of the markets we serve -- we're definitely seeing in our pipeline opportunity an up-tick in that cross selling.

Just getting the acquired operating team together and focused on the breadth of the products we have to sell and the breadth of the markets that we can now penetrate are just beginning to bear fruit.

And our shares of cross selling those products into existing locations, no less third-party opportunities where we don't even have contracts, is still in its infancy.

So it is unfortunate that we had a lot of cold weather and we had a lot of snow in January and February. I don't want to oversimplify that. Nobody's happy about the results in January and February.

But if the results weren't normalized, and if I didn't know what I know about our ability to generate organic gross-profit growth along the three methods that I've mentioned, as well as our significant ability to leverage our new size across an array of products, given some of the technology that I've talked about this morning or given the real estate that we manage on a much more [expansive] basis and our ability to leverage that real estate to do other things, certainly January and February were a distraction to us.

But all in all, given the opportunity that we have, and now getting clarity added to some of the long-term leverage-able products that we haven't spoken about that you'll see us make some announcements about, I hope, the rest of this spring and into the summer, it's, again, a pretty encouraging business model to be around at the moment.

All right, great. Well, thanks for all the color, as usual.

Nate Brochmann from William Blair.

Good morning there, everyone. Congratulations there, Vance, on being part of the team.

Thank you.

Just a couple things. This might be a little nitty-gritty, and if you don't want to quite go that far, I understand. But with all these puts and takes during the quarter, with weather and -- you just alluded to, Jim -- I totally understand that. It is what it is.

But is the right way to think about maybe normalized gross profit in terms just going forward as a base number, as somewhere around that 39, 40 range -- is that kind of where we should be thinking about going forward? Because clearly with the guidance, it suggests that we have pretty good follow-through for the rest of the year. But I just want to make sure that we're thinking about where the core number is right about now to base the future assumptions off of.

It's a good question, Nate. But I think the way to think about it is that -- when you take a look at our business model -- and I'm talking about organic now. Because you know, as we get into phase two and phase three of integrating the two companies together and a full roll-out of the SP Plus business model and product lines -- from a strictly organic basis, in a normalized environment, our business model allows for year-over-year growth -- take out the fair-market value of leases, take out assets and all the stuff that Marc and Vance are carving out on a year-over-year basis.

Once we're able to reach stabilized ground, as of January 2015, and we're on a platform the can only be improved from an SG&A perspective, gross profits should grow year over year anywhere between 5% and 7%, comprised of the base three modules that I just rolled out in Kevin's question.

So if you were thinking about how to think about gross profit (technical difficulty) -- in the future (technical difficulty)

So what I'm saying is (technical difficulty) achievement of that 5% to 7% growth might have been taxed by virtue of the inventory that we had to sell some of the new products in. So by gathering size and scalability, we're able to reconfirm and look (technical difficulty) somewhere by 5% and 7%.

Our SG&A in a normalized environment should only grow by the raises we give and the number of offices that -- the square feet that we lease for our offices. And that generally, under our management, stays somewhere in the neighborhood of inflation, or maybe slightly a tick above inflation because we like to reward our people, but not significantly.

Fluctuations, then, in our SG&A are caused by how efficiently we process the information that's generated by the gross profit of the business. And again without regurgitating it, there is still rather significant opportunity for this Company to invest in that process enhancement following the stabilization of the workforce upon the completion of the Central Parking integration.

So again, sorry for the speech, but this is -- the quarter gives me the opportunity to provide a little more depth than we normally would.

I think that makes sense, and I appreciate that. Because just to summarize -- I mean, at the end of the day, we have one more year, here, with some issues, in terms of the puts and takes and some of the previous accounting things, in terms of the year-over-year comp.

But going forward, we should be a lot cleaner, hopefully. And then particularly going into next year, we don't have that comp, so we can see the true benefit of this combined model, along with the synergies that we'll still get from combining the IT platform. So I think that's encouraging.

Well, that's the key, Nate. And if you've listened to me for the last three or four quarters -- and I know you have -- all of these caveats that we're having to apply to try to get to the real change in the performance of the Company on an organic basis year over year, is confusing.

The amount of time that we've got to spend saying (technical difficulty) it's noisy. And it's noisy to the point of distraction.

So you would look at impact of fair-market value of leases, or weather, or some of the change in asset purchases year over year, or the fact that we did some acquisitions that are performing better than we thought (technical difficulty) anything to crystallize, in terms of the size of the Company and some of the additional bit we can roll out in order to take advantage of that size in the future, which we have not guided to.

So just to get a more normalized and a more sensible story out there without apostrophe after apostrophe after apostrophe in our written materials, or in our verbal presentation, is -- you know, obviously something we have to do every quarter, but hopefully doesn't distract from the message.

Because the worst thing is for shareholders to be judging a quarter of snow removal and a quarter of snow in January and February and not really understanding where we think the Company is going as we get into 2015, 2016, and 2017.

So thanks for giving me the opportunity to talk about that.

I think that that's really vital to put in that perspective, so thanks for that. I just have one more question, and then I'll turn it over -- and I appreciate all the additional color, Jim.

But as we look a little bit more -- and you talked about the Click and Park and some of those other opportunities -- I personally have seen a little bit more of some of the SpotHero-type things that are out there, and ParkWhiz -- I know we have that in our garage now -- how do you guys envision -- as this seems to be catching a little bit of steam, either working with some of these companies or doing it on your own, or where's the opportunity and the revenue model going forward? Because certainly that seems to be one of the embedded opportunities that you're alluding to.

And I know before it was probably a little bit too early to talk about, but it seems like the adoption is getting a little greater at this point. And I'm just wondering where the opportunity is for SP? And thanks, and I'll leave it there, thank you.

Thanks. And again, thanks for giving me the opportunity.

For purposes of confidentiality and for the requirement of confidentiality around what we're working on, I can't speak to where we're at on those initiatives, other than to say, Nate, that we've studied all of them. And there were a variety of options available to the Company to understand and a variety of directions (technical difficulty) by which we -- I think I'll be able to be more specific as we get into the time frame.

And I think you'll see us talking about that in the public much more than we've been able to talk about it today. And it just adds to the excitement level around the business at the moment.

Great. Well, thanks for all that, Jim.

(operator instructions) David Gold from Sidoti.

Hi, good morning. Just a couple of small points of followup.

First, when we look at the guidance, the changing guidance, aside from the $0.07 that you referenced, were there any other changes to what you were looking for internally this year? Or it really just that $0.07 that you (technical difficulty)? Hello?

Your line is still connected, sir.

They seem to have gone silent.

David (technical difficulty)

Sorry. I don't know if you know this, but your conference call has been very spotty today. I thought it was just me, but when I logged into it online, there's the same issue. Probably 20% of what you've said has not been -- we haven't been able to hear. Just so you know.

Thanks, David. That's unfortunate, obviously, as we're going deeper than we normally go, in terms of trying to tell a story. But please go ahead with your question.

Sorry. So the question was, aside from the $0.07 that you called out for the change -- for the winter, was there anything else that changed when you look at the guidance on an internal basis? What I'm trying to do is bridge to where the street was and curious if it was more the street was sort of off base with what you guys were looking for internally, or if there's anything else that maybe has made it more back-end loaded than it was before.

Well, I think our business historically has been one where we -- Q1 is a weakest quarter. We've talked about the reasons for that in the pre-merger period for the legacy Standard business. The weather impacts travel, and seasonality of things that go on. And so Q1 has always been the weakest quarter.

I think as we went into the merger, we were (technical difficulty) unclear what the patterns at Central would be like. And I think we've learned that, if anything, it's probably more pronounced, particularly as we have a concentration of leases in New York, which performed very, very well in the fall quarter and the run-up to that Christmas and New Year's holiday. And then in January, activity -- and February-March activity tends to be much lower.

So I think you will see a fairly strong seasonal aspect to our business in the first quarter on a prospective basis. I think that didn't show itself last year because we had the $2.7 million from the sale of that contract right in our results in Q1 of 2013.

And so I think -- as we thought about and noticed kind of where the street consensus was for 2014 Q1 relative to our own internal expectations, that is our understanding and thoughts about why that would have had happened.

But I think we can say that when you take out the weather impact in Q1, you obviously take out the lease sale from last year and this lease accretion that we're talking about -- we actually performed very, very strongly in Q1.

And back to Jim's comment about our gross-profit growth target and our expectation that our business model can grow 5% to 7% -- our underlying gross profit grew 4% in the first quarter. I think that's (technical difficulty)

Sorry?

You are still connected, sir. Their audio has cut out again.

-- probably our best quarter (technical difficulty)

Do you think -- I'm wondering whether -- can the operator come back on?

You're back alive.

Okay. I'm just toying with whether we should drop the call and dial back in and whether that will clear the line.

I'm not sure. All right.

(technical difficulty) David.

(technical difficulty) couple more, but given the ins and outs, I'm missing a bit. Maybe I'll take them offline with you after.

Thank you, David.

Thanks.

Thank you. Would you like to try and re-establish the line, sir?

Are there any more people in the queue waiting for questions, Karen?

We do have one final question.

I mean, we can drop -- we'll drop and just dial the call. Is that -- does everyone have to re-dial in, or just we have to re-dial in?

Just you.

All right. Let us drop the call, and we'll re-dial.

Thank you. Ladies and gentlemen, the conference will resume momentarily.

(technical difficulty) thanks.

And again, ladies and gentlemen, please stand by. The conference call will resume momentarily. Thank you.

Well, we're back on SP. So -- David, I don't know if you wanted to ask you questions now or whether you want to move on, but we're happy to take any other questions that you or the other analysts have.

(operator instructions) Daniel Moore from CJS.

Thank you, again. I'll give it a shot, as I've been frantically plugging and unplugging the phone, here.

As you mentioned, your free cash flow and your EPS guidance excludes potential capital spends needed for maintenance at some of the Central leased facilities. I know you said that they're not estimable, and I do recognize that 80% of that spend will be credited against the earn-out.

But it is relevant for your cash generation for the next year or two. Can you give us any range of what is a reasonable thought process of what you might have to spend this year and next?

Well, I think as we went into the merger, Dan, we held back $27 million from (technical difficulty) our own expectation is that we're going to have $27 million going out of the business over -- between now and three years from the merger being completed, which is October of next year.

Just to add to that, Dan, I think that the way also to think about it is that this is a somewhat discrete population of leases. It's not -- this is not something that the population grows and grows over time. So it's somewhat discrete.

And then just to reiterate, the other piece of information is that we're still going through and looking at all the engineering studies and doing the appropriate analysis to get an understanding of what that would be.

And we're in the middle of that process, and that's why we don't have anything that's estimate-able. But it's not like the population of leases grows as we go through that process.

And that's helpful. Unfortunately, you cut out probably 20 seconds in the middle of that, as well. So this may be moot, as far as the call is concerned.

I think all we're really trying to say is that the $27 million in cash, some of which has gone out already since the merger was completed to satisfy indemnified items, will go out over a three-year period. That's been something we've talked about since before we -- when we actually announced the merger originally.

So that is going to happen. The only part that is a question mark is, what does the accounting look like for us? And whether these are predominantly capitalized items that affect G&A or whether some of these items hit [P&L], because we don't have a lot of lease term left.

But that's really the issue. But there will be a cash-flow impact of $27 million over the entire three-year period, some of which has happened already.

Presuming that what -- any of that does hit the P&L, you'll call out and exclude from your adjusted results?

Yes.

Okay, thank you.

Thank you. And now I'd like to turn the conference back to Jim Wilhelm for any concluding comments.

Again, if your questions weren't answered and you had some specific issues that we were cut out through, please give Vance a call. He's certainly well-equipped now to provide you (technical difficulty) cut-out.

So again, not sure what the problem is, but -- I talked about the fact that we don't like noise at all, and we don't like this additional noise, certainly, that the phone lines caused this morning.

Thank you, sir. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.