SP Plus Corp (SP) 2014 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the SP Plus second quarter 2014 earnings conference call. My name is Charlotte and I will be your operator for today's call.

(Operators Instructions)

I would now like to hand the conference over to Vance Johnston, Executive Vice President and Chief Financial Officer. Please proceed.

Thank you Charlotte and good morning everybody.

As Charlotte just said, I'm Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the second quarter of 2014. I hope all of you have had the 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 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 SP Plus website.

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 on our SP Plus website for 30 days from now.

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

Thank you, Vance, and good morning, everyone. And welcome to our call, I'm happy to report that we had a very strong second quarter. Marc and Vance will go into more detail later in the call but the key measures and statistics we regularly focus on were very good for the quarter.

Underlying gross profit was up 8% on a year over year basis for the second quarter. Although some of this increase may be from pent up demand from the first quarter, we did see improved performance on a consistent basis throughout the quarter across the majority of our operating divisions.

The strong second quarter performance helped to offset the results of the first quarter, which as you know, were impacted by severe weather. Our cumulative underlying gross profit growth for the first half of the year was 3%. We were also very pleased with the substantial free cash flow we generated during the second quarter.

On the integration front, the process of converting our locations onto one operating platform continues to move along on schedule thanks to the ongoing efforts of everyone at the company who has pitched in to make it happen, while maintaining their focus on their day to day duties. We completed the conversion of California in June, so through July we've now converted more than half of the central parking locations.

The largest conversion group, which includes New York and New Jersey, is scheduled to be completed by the end of this third quarter and we remain on track to completed the consolidation of all locations by the end of the years originally planned.

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

Thanks, Jim, and good morning, everybody. As Jim mentioned, we had a very strong quarter. Our underlying gross profit growth was 8% and it was driven by increases in same location gross profit, improved location retention in new business. Gross profits in same locations increase 5% year over year, which was primarily due to increased parking volumes and improved pricing at lease locations coupled with increased penetration of ancillary services and products.

We're also pleased that location retention is back up to 89% for the 12 months ended June 30, 2014. You may remember that our location-retention statistic had dipped a point or two over the last couple of years.

In terms of new business, we continue to have robust new business pipeline. Our earnings release identified various second-quarter quarter wins achieved by our SP Plus Municipal Services and SP Plus game day operating groups, and by our USA Parking System subsidiary in the hospitality industry.

In fact, our municipal team has continued on its nice streak, as it recently won deals to manage a number of city parking operations on the west coast in Oakland, California and Mountain View. As Jim mentioned, we generated strong free cash flow during the quarter. We made a concerted effort during the quarter to focus on collecting accounts receivable and bringing down our AR balances significantly from the higher than normal levels that we had for the past year.

This reduction in AR contributed to the quarter's strong free cash flow generation. While we still have some work to do on the AR front and always need to remain vigilant so balances don't start to creep back up, we're certainly pleased with the results this quarter.

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

Thanks, Marc, and hello everybody. I'd like to spend a few minutes reviewing our financial results in more detail.

As we've done in previous quarters, we will focus on the underlying performance of our business, which excludes certain items that are not comparable on a year over year basis, when comparing the second quarter and first half results. To that end we have adjusted our reported results, our merger and integration cost, net accretion on acquired lease contract rights, asset sales, and costs incurred for non routine structural and other repairs, where applicable.

Getting to the results for the quarter. Reported 2014 second quarter gross profit increased 4% over the same period of last year. On an underlying basis, gross profit increased 8% on a year over year basis. I want to note that we may have benefited from some pent up demand from the first quarter and the timing of certain items. So we expect to maintain this level of growth going forward. Never the less, the quarter's performance was strong on a year over year basis.

While second quarter of 2014 G&A expenses excluding merger and integration related cost increased 700,000 or 3% from the second quarter of 2013, it was relatively unchanged from the first quarter of 2014 and was aligned with the expectation I provided during our last call. We mentioned our previous calls that we expected G&A to increase in 2014 as compared to 2013, due to the need to backfill some key positions.

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

Earnings per share on a GAAP basis were $0.24 for the second quarter of 2014, compared to of $0.15 for the second quarter of 2013.

Earnings per share adjusted for merger- and integration-related expenses, as well as non routine structural and other repair costs of $0.27 per share for the second quarter of 2014, $0.03 higher than the second quarter of 2013, on the same adjusted basis. The benefit from the net accretion on acquired lease contract rights reduced year over year earnings by $0.03 per share.

In terms of free cash flow, the company generated $26.6 million during the second quarter of 2014 and $12.8 million during the first half. As Marc mentioned, we did a great job of getting accounts receivable balances down during the quarter and the underlying business performance contributed to the strong free cash flow generation.

While cash used to pay for non routine structural and other repairs has not been a material amount to the first half of the year, the cash requirement for this purpose is likely to increase during the rest of the year. So our free cash flow guidance continues to exclude any non routine structural and other repairs at legacy Central Parking leased locations.

On that basis, the company still expects 2014 free cash flow to be in the range of $35 million to $40 million at this time.

That concludes our formal comments. And I'll turn it back over to Charlotte to begin the Q&A.

Thank you. (Operators Instructions)

Our first question comes from the line of, Daniel Moore of CJS Securities, your line is now open.

Good morning.

Hi Dan.

Morning.

On an adjusted basis SG&A about $24.5 million in Q3, is that a good run rate to think about for the remainder of the year or should we expect some modest declines? Or should we see some benefit or incremental benefit from synergies as we get into Q4? Just trying to think about a good run rate.

No, I think that's a good run rate, Dan, to think about going forward for the next couple of quarters and, you know, really through the rest of the year, consistent with the guidance on G&A that we provided on the first quarter call.

Very good. And, you know, looking longer term, you talk about the past 45% of revenue as, kind of, a long term goal. Given the incremental expense incurred, you know, during the integration, is it realistic over the next couple of years? Is it still a, you know, is it still a goal or is it more of a 17 and beyond?

No, I think that -- it's Jim, Dan, I think it's a more realistic goal in the short term, as we, you know, said from, you know, the inception of the integration transition period on absorbing, you know, the Central Parking and USA Parking locations, that besides the synergies that we've previously announced and remain on track to achieve by virtue of putting the two companies together.

We felt that we could, upon completion of the integration period so at the end of this fourth quarter -- begin to look at additional cost cutting measures that we recognized or begun to recognize as we've gotten through the integration.

So whether it's a potential capital investment in expanded technologies to make our processing platforms more efficient or the methodology by which we dispatch our field organization and our sales organization and looking at the -- at the organization itself as we continue to transition and change, we think that there are additional costs that can come out of the business. And, as a matter of fact, we have an active initiative within the business now to begin to analyze where those cost cutting opportunities are and begin to document and point ourselves in that direction.

So, you know, the 45% has always been a target, you know, G&A at 45% of gross profit and it is what we plan to achieve but we don't want to be satisfied at that hitting a percentage that can be based on growth profit, you know, and expanded gross profit is the only measure.

We're looking at taking real dollars out of the business after having now experienced, you know, the 18 months of integration and being pretty confident that we're going to be completed on time, realize the synergies that we announced at the beginning, and now we can go back to our normal job of, let's look internally, let's look at the business and find out from the first nickel we spend, can we do that better? Can we improve the cost side of the business -- again, with that 45% goal being there. But why not aspire to do better than that?

Very helpful. And one more and I'll jump back in queue. Vance, can you -- if I missed it, I apologize but -- how much did you spend year to date on non routine structural repairs at the Central lease locations? And you mentioned, that's likely to tick up, you know, any kind of guidance range for the (inaudible).

Yes, if you -- so I think we did not comment on the exact amount but we gave, kind of, the underlining results, which incorporates that in it.

So if you're talking about the impact to earnings Dan, which is, I think what I heard from you -- so we're, you know, it's incorporated for the second quarter in our underlying results we did not give a, you know, forecast of that going forward for the third and fourth quarter, and as we've talked about earlier, guidance both from an earning standpoint and from a cash flow standpoint continues to exclude the impact of that.

Does that answer your question Dan?

Yes. I mean, I was trying to get a sense of the magnitude of what it might be, you know, to kind of think about a true free cash flow, you know...

Yes. What I can tell you is that for in the -- if you look at the release, Dan, and you look at for the three month ended June 13, 2014, you will see that we had free cash flow of $26.6 million reported in the second quarter. It adjusted for effectively -- the cash flow that went out related to non-routine structural repairs would have been $27.1 million.

Okay. And that differential will obviously increase to some degree in the back half of the year?

That's correct.

All right. I'll jump in queue, thanks.

Yes.

Thank you, Dan.

Thank you. Our next question comes from the line of David Gold, from Sidoti, your line is now open.

Hey, good morning.

Morning.

Hi, Dave.

A couple of things, first talk a little bit -- nice job at basically getting, you know, the costs back under control, if you will -- I know obviously weather helped too -- there -- too. But can you talk a little bit about what changes we made in the second quarter on the cost side that helped you so much?

You know -- David, this is Vance -- I'll comment a little bit on that -- I think that it wasn't necessarily -- as we talked about in the first quarter call -- we expected G&A to come in, kind of, around a $25 million dollar per quarter -- at a $25 million dollar per quarter level throughout the rest of the year. And so, as you saw we kind of stayed right in alignment with that.

I think that we started to put some measures together to start managing costs closely. As Jim alluded to in his comments, going forward after we get through the balance of 2014 and we turn to 2015, the implementation of further cost reduction plans will become a much more significant part of what we're doing.

So that's, kind of, yet to come, but I would say that, you know, what we've done in 2014 so far is that -- it's really just being more focused on managing cost more diligent, getting through the integration -- I think we'll continue to be right in alignment with the guidance we've given around G&A on a quarterly basis, and then as we turn the page and move into 2015 we'll see more significant cost reductions at that time.

And I'd just like to add a little bit to what Vance was saying. And that is really the story of Q2 was the increase in growth. You know, we had a terrific quarter, in terms of our growth, as we've talked about both on a real reported basis and an underlying basis, David.

And I think, you know, for us, you know, the question mark is, you know, how much of that growth is a -- kind of, demand from Q1? We know we had a weather impact, but I think the fact that on an underlying basis we recovered a $3 million dollar weather impact from the first quarter, and still show underlying growth of 3% I think bodes very well for our business going forward.

And I think that, as we've talked about G&A costs and the plans to take costs out in absolute terms and getting down to target, you know, the best way we can drive G&A down in our business as a percentage of gross profit is to have a lot more gross profit. So I'm delighted to see that we've had a lot of growth in the second quarter and we're hopeful that we'll continue to see strong growth for the rest of the year.

Perfect. And Marc, when you talk about pent up demand in the parking business, what does that mean?

Well it can be a lot of things, you know, the weather, you know, clearly causes some people to delay trips and not do things that they were going to do. We saw with the -- with the severe weather in the first quarter -- our hotel business was very severely impacted. A lot of people make decisions to come down and do weekend trips, whether it's in New York or Chicago where we have a lot of hotels that are leases and we see that as the weather changes, in turns, and we're now having beautiful weather in both cities, people are coming back downtown. And just talking to our guys in both of these markets, we're seeing very, very strong activity, both in terms of transactions and our ability to put up rates in both of those markets.

Got you. Got you. Okay. That's helpful. And then, second question that I'm sure you see coming -- similar to the cost control question, on the accounts receivable side -- nice job of moving that down as well -- but can you talk about some of the, you know, maybe changes that you made, if any, and sort of where that success came from?

Sure. I mean there's been two issues that have really been challenging us over the past year. And the one that we talked about many times on these calls -- and that's around some of our renewing municipal deals, have resulted in clients not paying us as promptly as we would like in accordance with the terms that they have agreed to.

Now we've had some breakthroughs with some of these clients, we've gotten clear on what the payment process needs to be like, what we need to do, what they need to do to get us paid, and so we've made some non recurring, you know, one time improvements that should bring AR down, you know, substantially on a permanent basis.

There's a little more work to do there and we continue to expect to see some further reduction in AR as we finish cleaning that stuff up. And I think we'll see the benefit of that during the remainder of this year and our belief is that, as we get through the end of '14 that, that will be cleaned up.

Now aside from that, as Vance has come into the business, he's introduced the new forecasting methodologies for our field organization so that they are making commitments in a more specific fashion to get AR balances to certain levels. And I think that's having an effect now, in terms of making sure our field organization is focused on AR balances more than they were in the past.

Got you. Okay. And one last -- if I can sneak it in -- any updating given -- the next progress to date on integration as to synergy plans and integration time line?

Well as we said on the release and on the call this morning, we're on time for a completion by the end of the fourth quarter, David, we're actually maybe a month ahead but, you know, we want to leave ourselves a little room.

But, you know, in terms of the targeting, as I said, we finished California last month -- where we have a rather large deployment of our people from both Chicago, and Nashville, and New York, and New Jersey -- this month, that's by far, you know, one of the larger regions for us to bring over onto the new platform.

And we're fairly confident with what we've seen so far that that transition remains on time -- obviously the -- our field people and our back office people in New York City are -- have had months and months to prepare and gear up for their transition. So from all the information we're getting from the east coast, that's going well.

That would put us on schedule to be completed by the end of November or sometime into December. And to have inured the full benefit of the synergies that we announced when we acquired Central Parking.

And just to add to what Jim is saying, David, you know, clearly we're always looking at opportunities to take additional costs out of the business and Jim commented on that earlier in his remarks around investments and technology.

Clearly at the moment we're running two complete IT systems to support the combined business and as we complete the integration there's going to be an opportunity to switch some of that off. And so, I think that you will see additional synergies inuring to the business in 2015, but they're really not going to impact 2014, as we still have to finish the integration and wrap up our year-end close.

Got you. But at this point we're staying on the synergy target that, you know, that we put out there -- I guess, a year and change ago -- or two years ago?

Yes. Yes, sir.

Perfect.

But I think we do know that there will be additional synergies beyond that. I think we've said that on a number of occasions. We're not quite ready to talk about what we think those are going to be, but as all of us have said on this call, we're looking at that continuously and expect either the next call or as we get into the later part of this year, we ought to be able to give some expectations about what we see for 2015.

Perfect. Thank you both.

You're welcome Dave.

Thank you. (Operators Instructions)

Our next question will be coming from the line of, Nate Brochmann, from William Blair, your line is now open.

Good morning everyone.

Morning.

Hello, Nate.

Good morning.

Hey, wanted to, kind of, follow up on that last point a little bit, Marc maybe or Jim, in terms of, you know, clearly this has been a big integration for you guys, a lot of distractions, there's been a lot of accounting noise behind it in the last couple of quarters and, you know, again to echo the comments -- it's good to see you getting past that this quarter.

But in terms of, you know, there's obviously been some distractions -- in terms of, what you can do -- in terms of improved profitability, you know, beyond the synergies -- which sounds like, you know, you'll get after -- at the end of this year and into next year as you get through that.

Can you talk a little bit about what distractions have done, maybe on the top line? And, you know, whether that's been an issue for the organization as a whole and maybe what we can look for, in terms of, maybe any acceleration there going forward as you get through, kind of, this whole integration?

Yes, that's a great question. I can tell you that the top line has been relatively unaffected by the integration itself. You know, certainly, you know having a great second quarter where we've made up most of the weather related stuff the first quarter, I mean that is additional noise.

So, you know, while it's great to be with you all this quarter talking about how great the second quarter was, you know, how I feel about quarter by quarter sort of analysis of business, because we're, kind of, pointed -- as Marc alluded to -- to the long term, in terms of, growth opportunities.

Specifically to the question, we haven't, you know, we haven't seen the integration interfere with the topline. We've rolled out a more efficient sales force, you know, we -- and a better equipped sales force, you know, given our ability to sell SP Plus products into, you know, an inventory of parking facilities that's double with the acquisition and that's underway.

You've seen us be able to introduce the brand change to SP Plus in the middle of doing all of this integration. We've seen as Marc -- it was either Marc or Vance earlier on the call -- we've seen our retention rate improve since we've done the deal with Central.

We have the impact obviously of having to, you know, divest facilities and some of the noise around the business early on and the acquisition. But now we've taken the entirety of a company twice the size back to, kind of, our historic retention rate. And that obviously drives the top line and the amount of new businesses.

I've said on the last few calls, we've written more business both in '13 -- and what we're projecting to write in '14 -- than either company wrote separately and collectively in the past. So I wouldn't say, Nate, that there's been any distraction caused for the field organization or the sales organization on the top line of our statement.

You know, at the same time we continue not just to focus, you know, we've talked a lot on this call so far about costs and taking cost out and obviously measuring that cost against the organic growth of our business on the top line.

But we've also had time and because we have not been distracted in terms of vision, and strategy, and execution, you know, from additional revenue sources that we'll be announcing and talking about through the remainder of 2014, in the area of leveraging our size, whether it's consumer, facing opportunities in things -- for instance, like advertising or other fields.

You know, we've been able to focus, you know, the distraction, if you will, caused by integration is almost purely related to our back office people. Those people who are doing two jobs every day. Their normal job processing payroll, or playable, receivables, et cetera, et cetera, et cetera, you know, for a company twice the size. And then having to -- if you will -- if you will perform their night job, which is to focus on that particular region of the country that's being integrated that month.

The only time the field organization, who are responsible for sales and really the topline of our statement are distracted, is when their individual region gets integrated in any particular month. And there's a much more diligent process in terms of getting client statements out accurately once on the new platform and on time.

And that does cost the field organization for that month or maybe the follow on 15, 20 days after the month end, a little more distraction than they would have -- than they would have in a normal month end close process. But then following that integration period closure, they're onto the next thing.

So I hope we have been able to communicate, you know, when we talk about where the noise is around integration and where the impacts are.

No, that's really helpful. I appreciate that. And along those lines with the retention rate -- obviously you got a nice pick up with that -- is that more of a function of just the fact that we've kind of called a little bit less at this point? And had we kind of called what we wanted to out of some of those contracts or let some fall off, or was that just doing a better, overall, execution job in terms of shoring that up a little bit?

Well I think there is a number of things going on, as you might imagine Nate. You know, we have focused heavily on execution, you know, it's much easier to keep the clients you have than to get new ones. So we're very, very focused on getting in front of our clients continuously, making sure that they understand that the integration impact on them, if anything -- just in terms of, format or client statements or other changes in process.

But also to get in front of them and talk about the additional services that we can put in front of them. And one of the opportunities that this merger gave to us, was the ability to go to the legacy Central front management client and offer up an array of services that Standard Parking had developed over the past few years, whether that's facility maintenance or security services. So we're into discussions with those clients -- the use of click and park to allow people to do online reservations.

A lot of the growth and penetration of those within our existing (inaudible) has come from the Central legacy location. So that's been a major, major focus for us. On the leap side though -- and if you look at our location numbers you will see that the number of lease locations has dropped and I think you're aware that as part of the merger, we did acquire a number of very, very excellent successful leases. And we also acquired some leases that weren't making money.

And our focus this year has been heavily on trying to not renew obviously any lease that doesn't make money but more importantly to take losers and turn them into leases that can make money for us. And where we don't believe we can do that -- to let them go.

So some of our drop in our lease location count has really been, you know, the allowing of these leases to terminate. It's not so easy to cull them before their termination date unfortunately but, you know, we have seen some of our location count come down because of that.

Okay. And then, in terms of -- just along with those lease locations and some of this repair activity and maybe this question for you Vance -- but is this something that's, you know, you've talked about, you know, it's going to maybe accelerate a little bit the rest of this year is -- I mean, do we get -- kind of -- through the big impacts of that?

Or is that going to be with us -- that's something that we should think about for the next couple of years as, you know, we kind of work through some of those things?

Yes. So it is going to have a little bit of a longer term related to -- but I'll let Marc speak to structural repairs since he's been a little closer to that prior to my arrival.

As you guys know, when we entered into this merger, we identified some concerns we had around legacy Central Parking locations in terms of structure repair obligations. And that's why as part of that merger agreement we held back $27 million dollars of the purchase price to enable us to, you know, cover any cost that we might face relating to those type of activities.

So we generated a very, very thorough list of locations -- it's a finite list -- it's not that many, you know, it's probably, at most, a dozen or two. And we have done a tremendous amount of diligence around this pre merger. So, as I said, there's a small number of locations -- a dozen -- 15 locations that require remedial structural work.

And our focus up until now has been to get engineering studies done on these locations to understand the scope and nature of what would need to be done to get contracting bids. And to be in a position so that we could actually get this work done.

So, you know, we're now in a beginning phase of where we're actually doing some of this work and clearly, you know, although we're making great progress in getting work off the ground, you know, we're -- we know that the bulk of it should get done between now and the end of 2015. I mean that's something that could drag. Some of them could go a little bit longer but, you know, our emphasis now is on getting these done where we -- where we can.

And of course 80% of the cost of the structural repairs will go against that indemnity, the 20% goes to us, then that's the half a million or so number that Vance was talking about earlier in the call.

Okay. That's great. I appreciate all that and I'll turn it on over.

Thanks Nate.

Thank you. Our next question will be coming from the line of Kevin Steinke, from Barrington Research, your line is now open.

Good morning.

Hey.

Morning.

Morning. Hey, Marc, I think you referenced in your prepared comments that part of the good growth and same location growth profit was increased penetration of ancillary services and just, you know, wondering how meaningful of an uptake you've seen there? And I guess, you kind of referred to it -- and you know, a question that Nate just asked -- is that being driven by being able to go to the, you know, the Central locations with your services?

It is Kevin. I think as I -- as I made in my remarks, you know, in response to, you know, what Nate was asking, you know, we definitely saw coming into the merger, the opportunity to do this and we've been out there in a big way, you know, opening up and expanding what we do at facility maintenance (inaudible) click and park. We've stuck commenced doing facility maintenance in I think three or four new markets just this year, where we had not done them before. And the foundation of that, we acquired Central Parking Portfolio.

So that is going to be a continuing focus for us, we think there's more room to grow at facility maintenance than where we are today and of course the same is true with security, it's a business that we have done, we've operated, you know, historically out of southern California, but we're now licensed to provide security in seven states. We're looking for opportunities to expand that business as well, right now on an organic basis.

And of course with Click and Park, you know, that's a tool that has been available to Standard for the last five years and we gained a lot of traction around our locations.

We run a giant off airport business around LAX airport and that business was almost exclusively Central legacy business and we built an aggregator site for these off airport locations and are generating tremendous volumes through that, you know, both -- benefiting both in terms of the Click and Park fees themselves that inure to us, but also where those locations are lease locations, the revenue from people parking there is also inuring to our benefit, so I think those are examples.

And then of course, the one other area, both Central and Standard had begun to track down -- remotely monitoring and managing parking facilities -- Standard had added more locations in the pre-merger period we had, I think, about 100 locations that we were mentioning remotely. Central had acquired a small business that had an excellent technology platform but only had a small number of locations.

We've since consolidated the Standard Parking remote management operation into the Central Parking remote monitoring location in Texas and we are now aggressively pushing the growth in remote monitoring throughout the business.

And more and more of our management clients are seeing that there's a tremendous upside to them in particularly in hours of low volume in the nights at times when there aren't a lot of people around to let our remote monitoring facility manage the operation, they save a lot of money on labor costs and other costs around, you know, labor and benefit costs -- and of course pay us something for that remote monitoring service.

And our experience to date has been that we're able to obtain our normal management fees for running locations and when we add in remote monitoring, we're adding in additional revenue to us. So these will continue to be major, major growth focuses for us.

I think as we look to the future in addition to our focus on the institutional municipal market space and we talked about some of our win -- growing our hotel portfolio. These ancillary services are going to be, you know, significant growth areas for us over the next couple of years.

Okay. That sounds great and I think in the past you've mentioned that ancillary services are contributing about, you know, 1% to gross profit growth, have you seen any -- is that correct and have you seen anything -- any meaningful change from that percentage contribution?

We have said that, although we've said it with a few caveats because one of the challenges in our business is defining specifically what is ancillary and another growth area for us is ground transportation services, which where we are now carrying, I think, something like 30 million passengers on 1000 buses around the country -- in some of our contracts adding in ground transportation or shuttle busing is an ancillary service and in other contracts ground transportation, shuttle busing is the service.

So we kind of, put that to the side -- so I'm not really including ground transportation -- but these other ancillary services have been a small percentage of gross profit but they certainly, as we go forward, are going to grow faster than our underlying growth and as we said, our target is to grow underlying or real gross profit, forget underlying -- our target is to grow our real gross profit 5% or more per year. I mean that's really our focal point and we see these other ancillary services as contributing to that.

Right now I can't doing any better in terms of quantifying what they're doing but all I can say is that our business development teams and our field organizations are very energized around trying to sell these services into clients.

Okay. Do you include Click and Park as an ancillary offering or how would categorize that?

Yes.

Okay.

And after -- and, I mean , we -- and I think one of the things about Click and Park, you know, when we acquired it five years ago, it was essentially a tool for large one day sporting events or for multiple day sporting events where people would go and park, and pay for parking, it would be a set rate, it would have routing capabilities, it was an excellent tool for managing a Super Bowl or another large event.

But we in our business recognized that this tool, you know, if it had some enhanced capabilities could be used in almost any location that we operate, whether it's a, you know, hotel, or an airport, or really there's no -- there's no limit to the type of places where somebody might want to plan ahead, be able to pay for their parking, have a credential that would enable them to be able to get in and out of the facility.

And so, we've invested now, over the past two years, several million dollars really to enhance the capability of this tool to be able to work in any type of facility and any type of situation. And that was really a precursor to our ability to really grow the use of Click and Park by our client. And that capability has really been in place now for the last 12 months or so.

So we are out there aggressively pushing to expand the use of the tool and I think you'll see quite bit of growth coming for that over the next couple of years.

Yes. Great. And related to that I noticed that in your press release you talked about the PGA Tour event where you had 15,000 of the 50,000 partners use Click and Park.

You know, I don't think I've ever seen you disclose a number like that, I mean, is that something that you really wanted to highlight as increased penetration of the product and, you know, I know that is a large event like you said -- traditionally for in the past -- but is there anything notable or meaningful about that number?

I think that -- I think what's notable is that it's really reflecting a broad underlying trend that's changing the way people do things. In the past people would turn up at a place that they are going to park and they would hope that there was parking available.

They might drive around looking, they might be surprised and find out that the parking is sold out, or they have to park the long way away. People today really want to plan ahead and so, they're using tools, they're going to websites. A lot of our clients are putting links to Click and Park on their website so that their clients who are buying tickets to the event can now go and arrange their parking in advance as well.

People want to know where they are going to be parking, they want to know how to get to that parking facility, and really want to have had made payment arrangements in fast -- in advance -- so that they can get in and out without any delay. So I think that's what we're starting to see, you know, its -- we get -- Click and Park has always been able to help people at a PGA event or other large sporting events, but now I think what we are seeing is that the behavior of actual people is changing.

And this is occurring all around our business as we see people not wanting to do what they did before, which is just to drive around looking for parking. They want to plan ahead and by our size with the scale that we have, you know, we're about to offer up a broad array of parking facilities for people to park at and of course use the Click and Park tool in many cases to facilitate those transactions.

Great. Last question from me, looks like you used your strong free cash flow to pay down debt this quarter -- so a nice sequential down tick in debt -- aside from the structural repairs that you have, does that continue to be the primary use of free cash flow? And how do you feel about -- I think you put out a target in the past of getting to 2.5 times debt to EBITDA. Do you feel like you're on track with reaching that goal?

Yes. Hi, this is Vance, Kevin, and so just to answer your question, a couple of things, one, I think the way you alluded to it is correct so, you know, really over the short medium term our plan would be to generate free cash flow -- have a significant focus on that -- and then be able to use that free cash flow to pay down debt. So that's really the primary focus of where we're at.

I think, as it relates to getting to a leverage ratio that we're comfortable with, I think that we've alluded, you know, at times about 2.5, as you put it -- I think that, you know, is not necessarily distinct and direct goal but rather the idea is that we're going to use free cash flow to pay down debt, I think we would certainly feel comfortable -- we feel comfortable now with the leverage that we have. And I think that we feel, you know, obviously we'd feel more comfortable even when we get down to that level.

And then I think longer term, as we continue to generate free cash flow and pay down debt, then we can think about other capital structure initiatives, if you will.

Great. Thanks for taking my questions.

You're welcome.

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

Thank you again. Just wondering if you could provide a little color around margin profile of the opportunities like the one you announced for Qatar for the World Cup, you know, kind of relative to the overall average margins and the risk profile associated with bidding for those types of opportunities?

Yes. Happy to do that Dan. You know, I think that as a generalization the larger and more complex and the more comprehensive array of things that we do for a client, the more opportunity there is for us to make (inaudible).

And so that's why you've seen our focus -- we've talked about it repeatedly being the institutional municipal space and also large venues and large events like the one you mentioned with Qatar or like Olympics and other things of that nature. You know, when a client is operating a -- or he has a commercial office building that's fully automated, there's limited opportunity for us to bring our full array of services there.

So we're focusing our business on, you know, stadiums, special events, universities, hospitals, medical centers and government where they can benefit from everything that we can do.

And so whether that is managing a parking operation, bringing in automation and new technology, doing facility maintenance at the facility, writing tickets and collecting on violations for people that aren't parking, you know, booting cars that aren't paying, you know, we have an array of services that we've talked about many, many times.

And so our business development focus is on that kind of stuff. And so yes, the opportunity there is for greater, you know, greater margin if you will. And when I say margin, I mean, absolute gross profit dollars as opposed to margin percentage, you know? Some of these very, very large venues that -- or events that occur -- infrequent basis whether it's World Cups or Super Bowls, you know, how those come out for us, you know, depends on a lot of variables, you know?

It's very hard for us to know in advance what we're going to make, but they at least offer up the opportunity for us to provide our broad array of services. Now when you get outside the United States our -- the nature of our work tends to be more of a consultative activity as opposed to we're going to be performing, we're going to be driving buses, we're going to be doing maintenance facilities ourselves.

So part of our work with the World Cup or with -- when we were in London at the Olympics is really consulting with them on planning, the transportation and parking arrangements for their events. And so therefore it doesn't utilize our full array of services, but generally speaking in the United States, we're looking for opportunities where we can use the full array and we make more money.

But nor do those -- does the cost side factor in because we don't have support costs on that side of the business. So if the question's around margins...

Yes.

... You know, those sorts of deals carry very, very high margins for us.

Yes, absolutely.

Great (inaudible). Appreciate it. One final one. Just in terms of the guidance in the back half of the year, is there any notable, you know, net accretion from acquired lease contracts? Any other accounting driven gains or losses that you are at least contemplating for the next two quarters?

No, Dan, not really. The -- in addition to kind of the, you know, what we've kind of outlined, so our guidance on an earnings per share basis continues to exclude things like mergers and integration costs and structural repairs I think as it relates to lease accretion, which would be incorporated within that guidance that we previously provided.

We kind of expect that to have, you know, a somewhat minimal impact certainly relative to what we would be, you know, the impact that would be happened in the same quarters on a prior year basis.

So I -- there's nothing outside of that that we foresee at this point in time. And I -- and obviously, we also alluded to the fact that any costs that run through our P&L related to structural repairs are excluded from guidance as well.

Yes, absolutely. Thank you again.

Thanks, Dan.

Thanks, Dan.

You are welcome, Dan.

Thank you. And at this time, I am not showing any further questions. I would now like to turn the call back over to Jim Wilhelm for any closing remarks.

Thank you, Charlotte. And I want to thank everybody for taking their time out of their day to be on our call and be interested in our company. We very much appreciate your support -- standing and recognize that all of you do a great job.

We look forward to talking to you next quarter. I'm sure you can sense that we're terribly excited around here for getting -- our having the ability to wind down the integration period, remove a lot of, you know, the noise and the terms adjusted and adjusted from our earnings and getting through our '14 results and we're very, very excited about prospects for 2015 and beyond so, thanks again everybody for taking the time to dial into us. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.