SP Plus Corp (SP) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2016 SP Plus Corporation earnings conference call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Vance Johnston, Chief Financial Officer at SP Plus. Please go ahead.

Thank you, Charlotte, and good morning, everybody. As Charlotte just said, I am Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the second quarter of 2016. I hope all of you have had a chance to review our earnings announcement that was released last evening.

We will begin our call today with a brief overview by Marc Baumann, our President and Chief Executive Officer. Then I will discuss our financial performance in a little more detail. After that, we will open up the call for a Q&A session.

Doing the call, we will make some remarks that will be considered forward-looking statements, including statements as to our 2016 financial guidance and statements regarding the Company strategies, plans, intentions, future operations, 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 then a replay will be available on our SP Plus website for 30 days from now.

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

Thanks, Vance, and good morning, everyone. I am Marc Baumann, the Chief Executive Officer of SP Plus and I would like to welcome everyone to our call discussing the results of our second quarter and first half of 2016.

We are very pleased with our strong bottom-line performance, where continued execution on cost reduction initiatives helped fuel a 7% growth in adjusted EBITDA. And when coupled with reduced interest expense, drove 17% growth in adjusted EPS in the second quarter.

We saw solid gross profit performance across most geographic markets and verticals, as evidenced by 4% gross profit growth at same-operating locations. We were able to achieve this same-location growth despite the impact of some renewals where we are now operating at a lower level of gross profit under the renewal terms and some softening in the hospitality vertical in certain geographies, primarily from reduced parking utilization rates.

Overall gross profit growth was tempered, however, by a significant year-over-year increase in health benefit costs. And to a lesser degree by the impact of some recent terminations, particularly in the airport and off-airport verticals.

We have already taken some steps to address the rising cost of healthcare and we should see the impact of some of these changes benefit the second half of the year. There are other changes that will be implemented for 2017, which we anticipate would further reduce future healthcare costs.

In terms of location retention and our decreased location counts, we recently made a decision to terminate one commercial contract in the New York market, where we determined that the gross profit was inadequate for the level of resource investment. While the gross profit loss was marginal, that contract was comprised of over 200 locations.

The loss of this contract is the primary reason for the drop in location counts as well as a decrease in the location retention rate to 87% as of Q2 this year from 90% as of Q1. Excluding the voluntary loss of this portfolio, our location retention in Q2 would have been a very strong 93%. We also recently ceased operations at a couple of off-airport locations in Los Angeles, which are being redeveloped.

On the positive side, we are continuing to write new business at a steady rate. And for the first six months of the year, have exceeded last year's record pace. Some of these wins, which we also highlighted in last night's release, span across vertical and geographic markets and include a contract to provide facility management, maintenance, security, and customer service support to the city of Vancouver, Washington, at the Vancouver Center Garage.

We've also won a consulting deal with Colorado State University in Colorado, where we will work closely with the university to develop its parking management program. We also added or retained several marquee properties to our hotel portfolio, including the Hyatt Regency in Downtown Minneapolis, the Westin Georgetown in the District of Columbia, and the Ritz Carlton in Denver.

I would like to briefly comment on a few other important initiatives. First off, we continue to be very focused on ramping up our operations at the MGM Resorts' hotels in Las Vegas and are looking to further expand in that market. Secondly, we remain committed to driving down the total cost of risk through safety and loss mitigation programs.

Finally, I am pleased with the progress we've made in our cost improvement initiatives. I know that Vance will touch on this in more detail, but it's great to see that we are able to continue to identify and successfully execute cost reduction initiatives.

In summary, we've made good progress on our initiatives and remain focused on improving top- and bottom-line results, generating increased free cash flow, and driving shareholder value. To that end, as we previously announced, our Board of Directors authorized a $30 million stock repurchase program and we began repurchasing shares in the open market at the end of June.

With that, I will turn the call over to Vance to lead you through a more detailed discussion of our financial performance during the quarter.

Thanks, Marc, and hello, everybody, again. I would like to spend a few minutes reviewing our financial results in more detail. Second-quarter 2016 adjusted gross profit decreased by -- slightly by $400,000 or 1% over the same period of 2015. While gross profit at same operating locations increased by 4% in the second quarter, we saw a $500,000 increase in health benefit costs relative to last year and also felt the impact of some recent contract terminations, which Marc mentioned in his earlier comments.

On the G&A side, we continued to do a very good job managing G&A costs in the second quarter. Adjusted G&A for the second quarter of 2016 decreased by $2 million or 8% over the second quarter of 2015. The decrease was largely due to comp and benefit decreases resulting from recent changes to our organization as well as a decrease in our 2016 performance-based compensation accrual in addition to overall tighter cost controls. We continue to make good progress on a number of cost reduction initiatives that we expect will continue to positively impact our results going forward.

Driven by strong cost controls, adjusted EBITDA for the second quarter of 2016 was $24.3 million, an increase of $1.6 million or 7% compared to the same period of 2015. Resulting adjusted EPS for the second quarter of 2016 was $0.34 as compared to $0.29 in the same period of last year, an increase of 17%, as G&A reductions and reduced net interest expense contributed to the year-over-year growth.

Touching briefly on the year-to-date results, adjusted gross profit for the first half of 2016 decreased $3.4 million or 4% over the same period of 2015. The year-over-year decline was primarily due to an increase in health benefit costs in 2016 as well as a smaller favorable adjustment for prior-year casualty loss reserve estimates in the first half of 2016 as compared to the first half of 2015. Certain contract terminations and renewals that Marc previously discussed also contributed to the year-over-year decrease.

Year-to-date 2016 adjusted G&A was $44.3 million, a decrease of $3.6 million or 8% from the same period of 2015. This was mostly driven by the same factors I discussed for the second quarter. Resulted adjusted EBITDA for the first half of 2016 was $39.4 million, unchanged from the same period of 2015. Adjusted EPS for the first half of 2016 was $0.44, $0.02 better than the same period of 2015, also on an adjusted basis.

The Company generated adjusted free cash flow of $14 million in the first half of 2016 as compared to $5.5 million in the first half of 2015. Continued focus on receivables and payables management, lower interest expense resulting from the Company's renegotiated credit agreement in 2015, as well as lower cash tax payments, along with a receipt of proceeds from an asset sale and a contract termination, benefited 2016 adjusted free cash flow.

We remain focused on driving higher free cash flow through improved operating performance and working capital management. Based on results of the first half of 2016 and our expectations for the remainder of the year, we remain comfortable with our full-year outlook of adjusted EBITDA to be in the range of $88 million to $93 million, adjusted earnings per share to be in the range of $1.16 to $1.26, and adjusted free cash flow to be in the range of $40 million to $46 million.

That concludes our formal comments. I will turn the call back over to Charlotte to begin the Q&A.

(Operator Instructions) Nate Brochmann, William Blair.

So I wanted to ask a little bit -- just in your press release, you talked about getting some renewal pressure. I wanted to ask a little bit further in terms of what does that mean in terms of whether that is pricing pressure or some different competitive dynamics.

Yes, I would be glad to answer that, Nate. I think it is primarily legacy deals that are coming up for renewal. So as you know, particularly in our world, where we merge central and standard together, we have quite a few legacy deals, particularly legacy leases. So a number of those come up all the time.

And in some cases, we can improve on the financial performance of those legacy leases. In other cases, they have to go the other way, because essentially, we're talking about rent resetting to market. That's the primary factor. I don't think the competitive set out there right now is causing any real change in our pricing picture.

Okay. So is that just more of every year having to offer a little bit more value for those customers or kind of bring that pricing down in terms of the value proposition? Or again, is there -- you talked about in terms of just something going on in the environment where you don't have that pricing strength?

Yes, this is really not about what the consumers are paying for pricing. We are seeing fairly strong economic conditions throughout North America. And I would say generally don't have any difficulty putting up pricing that consumers are paying for parking, whether it's for transient parking or monthly parking.

So I don't think that environment has changed at all. It is very similar in 2016 to 2015. What we're talking about here is really has to do with what we are paying in the case of leases and rent to the people who own properties -- lease properties.

And when those contracts come up for renewal, and sometimes they've had fixed rents for many, many years, they come up for renewal, they then have to reset to market. That can be a positive reset or a negative reset. In some cases, our legacy deals, we are paying over market rent, so they reset down to market and that's a good thing. In other cases, they reset up to market and that's not a good thing.

Got it. Okay, thank you for explaining that. And then in terms of just -- again, I think this is something that I kind of asked on a lot -- several calls here over the last year or so. But in terms of getting through those quote unquote unprofitable contracts and kind of still weeding those out, do you feel that you are getting into the later innings on all those?

And I know that some of those last long term, so it's not like they're ever going to go away anytime soon. But do you feel like you are nearing the end of the road on that at all?

I would say we are probably in the middle of the game now, if we were using baseball is an analogy. There's a couple of big ones that have another year or two to go. But certainly if you were to take a three- or four-year view, I would say we would be through the bulk of them, if not almost all of them at that point.

But what we're seeing is not surprising us at all. And bearing in mind, too, many of the legacy deals that -- while there are many legacy deals with above-market rents, there are many legacy deals with below-market rents. And so these things go both ways. We are right now experiencing a couple of large ones, and it doesn't take very many that are resetting to market and that is having the impact that we described.

Okay. And then just one last quick question just in terms of the pipeline of opportunities. Obviously, you guys are always doing a nice job of winning a few new deals.

How does some of the bigger opportunities look like, either in the municipality world or some of the other various end markets? It still seems like there's a lot, a lot of potential there, and just wondering what the trajectory looks like of some of those opportunities.

Yes, I think a number of the verticals that we've identified for the last few years with potential continue to show that potential. So first and foremost is hospitality. And while we touched on the fact in our comments that some hotels in some parts of the country are experiencing a little softness in activity, and that could be the Uber effect or just localized conditions, we still see lots of receptivity by hospitality owners and management companies to outsource hospitality to people like us. So we think there's plenty of growth opportunity there.

Turning to the municipal space, I think the pent-up pressures that we've talked about is the reason for them to want to outsource. Namely, pension liabilities and other budget pressures are there. If anything, they have increased and accelerated over the past few years. So I think you will still continue to see us be very, very active in trying to capture municipal clients.

We announced this last quarter and not in the current quarter: we took over the city of Annapolis, Maryland. We operate in many, many other municipalities. And I think they are very, very receptive both to somebody coming in and being able to maximize revenue through strong controls and advising them on pricing, through better cost control and managing labor, but also bringing new technology in.

Not just new meter technology, but technology so that residents can buy permits online or people can find parking through their mobile apps. And so we are very active in that space and I think that remains a fairly compelling reason for any municipality to consider outsourcing to us.

Okay, great. I appreciate all the time. I'll turn it over.

Dan Moore, CJS Securities.

Good morning. This is actually Robert Majek filling in for Dan today. The retention rate declined 87% this quarter. What drove the decision to part ways with that one large client? And how profitable is that contract and where do you expect the retention rate to trend over the next several quarters?

Sure. It was a marginally profitable client. So I think we used the word minimal, but we're talking about a significant amount of money. And as we looked at what it took to support this client relationship, including our back-office and support resources, we just said, you know, for what we're making on that contract, the cost benefit just does not work for us as a Company.

Unfortunately, it was a lot of locations and we weren't actually managing any parking operations. We were really managing billing for monthly parking. So it was a lot of locations in our system and so it catches our attention obviously when we have a termination like that.

But we're not into building market share for its own sake. We are -- our goal is to have profitable contracts where we can bring our array of services, grow those services at a given location, and we just didn't see that as a kind of forward picture for this contract.

Obviously, as I said in my remarks, excluding that, our retention rate was 93%, which has actually ticked up a bit from where we been over the last couple years. I would say our goal remains the same, and that's to be in the sort of 92%, 93% range for location retention on an ongoing basis. I think that's a very realistic goal for our Company.

Thank you. And secondly for me, you called out increased claims expense for self-insured in Q2. What are the implications of that trend for the second half of the year? And what steps are you taking to address that trend?

Yes, I think in terms -- if you are talking about healthcare as opposed to casualty. I think on casualty, the story was actually a positive one. It's just that on a year-on-year basis, it was more positive last year. So we always expected casualty to over time be a positive contributor to our gross profit.

But on the healthcare front, we are only in our second year now of self-insured health care. And so we're still, what I would say, tweaking our ability to manage healthcare costs well. We noticed that in last year, we had -- there was some opportunities for us to improve for 2016.

We put some steps in place to guide people to the appropriate plans where we felt like the cost benefit we are providing that healthcare coverage made sense. We have been surprised at a number of large claims that we've had to contend with in 2016. But we've taken some steps already that we've already implemented, which we think is going to move that curve in the second half.

So I would say our expectation for the second half is that we're not going to experience the same magnitude of negative variances that we saw in the first half. That should get better based on the steps that we've taken already.

And as we look forward in our plan designs for 2017, we're going to make some further changes in our plan designs for 2017 that we think will also help us bring our costs down.

One of the challenges that every company has right now is that the full impacts of the Affordable Care Act are finally working their way through. And so that influences the behavior of each employee and the decisions they make about where to obtain coverage, which a lot of these government-sponsored exchanges go bust. And so that is changing people's decision dynamic.

So it's going to remain a little bit of -- volatile, I would say, over the next year or two, but we -- this is a major focus area for us. And I think we are confident that we can bring down the cost of healthcare as we go forward.

That was very helpful, thank you.

(Operator Instructions) Mark Riddick, Sidoti.

I wanted to -- you touched on it a little bit, but I wanted to follow-up with the progress on the MGM Resort assignment. And maybe if you could share some of your initial views on not just the execution of that specific opportunity, but also the Las Vegas market in general. Maybe some of the things that you've seen there that you can maybe share some of your first impressions. Thank you.

Well, I'll be glad to answer that and it's very timely since I was just in Las Vegas last week. 115 degree temperature, so I'm glad to be back to Chicago, where it's only 90.

But so far, so good is how I would describe it. We obviously commenced operations with MGM at all of their properties in Las Vegas. We advised them on bringing in brand-new automation for all of their self-park and also for their Valley operation. They have implemented paid parking, both self-paid parking and also at their valet.

And of course the T-Mobile Arena there has gotten underway with a lot of large events and we're assisting them in managing that. And some of our SP Plus game day folks have been advising them and us on what's the best way to manage large events at that arena.

So we are off to a good start, but there's a lot to do to build an organization from scratch when you come into a market where you don't have any base of operations. You have to create all of that.

But we really like the opportunities from Las Vegas. We recently made a decision to base the Senior Vice President of Operations in Las Vegas permanently because we see that that market can grow for us very nicely way beyond the MGM relationship.

And quite frankly, I was surprised that Las Vegas, that the permanent population there makes it the fourth- or fifth-largest city in the United States. So it's not just the tourist destination anymore. And of course, they have got their new hockey team coming and we will become a -- continue to be a very vibrant market for the long haul.

So clearly now that MGM has made the decision to introduce paid parking, other operators of hotels and casinos and properties are now kind of thinking along the same lines. And it wouldn't surprise me over the next 12 months to see more and more convert to pay parking. I think that -- I think the -- ultimately that will be the model there just like it is everywhere else.

We also think -- and it goes beyond the casinos. There's other things going on in Las Vegas. We have some other clients that we've already cultivated relationships with that are not casino clients. And we think there's an opportunity to grow there, too. So if we were to fast forward two, three years, I think we will be looking at a situation where this will be a very nice core market for SP Plus.

Okay, excellent. Thank you for the color there.

Kevin Steinke, Barrington Research.

The 4% same-location growth -- that was a pretty solid number. Can you dig it all into what's driving that? Is that just increased parking activity across the country or any success in cross-selling your ancillary services? Anymore comment would be helpful on that.

Yes, I'll take a stab at it, and then Vance may be able to answer more color. As I said to one of the earlier questions, we are clearly seeing opportunity to put prices up for parking. And so to the extent that the market supports that, we're doing that. That is a factor.

We have our operational excellence group focused very much on our most important properties. And they are out there all the time looking for opportunities to optimize revenue.

We've seen an expansion of online selling of parking. It's still small, but growing very rapidly on a year-over-year basis. And that hopefully is bringing some people to the parking facility that might have not parked there before. So our marketing and interactive marketing efforts are very, very active right now. We think that is contributing to it.

Certainly, we are always in front of clients with proposals to add in ancillary services, whether it's ground transportation, facility maintenance, and the like. And we're certainly seeing strong receptivity from clients to do that. They want to simplify their own lives and not have to manage multiple external relationships, so going with somebody like us I think is a good thing to do.

And of course, some of our efforts -- we've talked about this in the comments around risk management and total cost of risk -- I think are starting to bear fruit. We are focused very hard on trying to have an accident-free workplace for our employees, for our customers. And that's the right thing to do, but it also is beneficial from a financial point of view and that will be contributing as well.

All right, that's interesting. So I guess a number of the things you outlined are still in the fairly early innings, to use that analogy again, in terms of the cost of risk, cross-selling, ancillary. So I guess there should be a fair amount of room to run here in terms of growing gross profit at same locations. Is that fair to say?

Well, I would say there's room to run, yes. I think it's kind of like the 93% retention rate in the quarter. I would love to believe that it's going to be 4% every quarter from now on and I would love to believe that it is 93%, but this is one quarter's performance.

And so we remain very focused on creating meaningful same-store growth. At the same time, driving up our retention rate into those levels that I was talking about. And of course, continuing to write more new business every year than the prior year. And as I commented in my remarks, we are ahead of last year's record pace on new business for the first half of this year.

So it's very, very important that we take more than a one-quarter view and just recognize the fact that we had a great quarter in terms of same-location growth. We had a great quarter in terms of location retention when you exclude that one contract that we voluntarily terminated, but our goals remain the same. But I wouldn't want to create the expectation that it will now be 4% every quarter and 93% every quarter.

Right, right. Fair enough. So the turnover in the off-airport location or locations, is that just related to what you talked about last quarter in terms of some increased competition in a specific market, particularly LA?

Yes. I think a couple of things have affected us on a year-over-year basis. We talked about a couple of large airports that we weren't able to renew last year. And so we are seeing the full-year effect of those flush through our results, namely on the two ground transportation operations at Reagan and Dulles last year and also the Nashville airport. But -- and we also have exited from LAX airport as the on-airport operator.

But the big issue in terms of off-airport is really around LAX. SP Plus's business is not heavily focused on off-airport. We have some nice off-airport operations, but we had a very unusual situation around LAX where we had several off-airport operations there. We still have some today.

But two things have happened. One: the LA airport's authority has actually purchased a lot of the land that these off airport operations operate on because they want to use that land for other purposes, either redevelopment or taxi holding areas and the like. So some of these are being converted away from off-airport operations. And that has affected us.

And it's also -- some new off-airport operations have also opened around LAX, and so it's been very, very price competitive there. And our business at SP Plus, quite frankly, is more focused with the on-airport contract. We believe that we can deliver exceptional value to airport authorities around the country and that becomes our focus. And the off-airport business, we pick it up when we can, but it was kind of an unusual situation for us at LAX to be both on- and off-airport.

Right. Okay. And you mentioned that one of the reasons that G&A was down year over year in addition to your good progress on cost reduction initiatives is that there was a reduction in the 2016 performance-based compensation accrual. So just wondering what the driver was behind that.

Well, we are always looking at our expected performance for the year, Kevin. And what I would say clearly, we are targeting higher gross profit growth than what we have achieved in the first half of the year. And I think our forecast for the year will support that.

But clearly year to date, we have had the performance that we had. And when we have our performance be what it is and maybe it's not exactly what we expected, we adjust our accruals to be appropriate for that level of performance.

Sure. And -- yes, go ahead.

Yes, I would just add that basically what it is is that we are saying is that we saw fairly significant reductions in G&A, both on the quarter and year to date, continuing along that path. Some portion of that, not the majority, was related to adjustments and performance-based compensation accruals for the reasons that Marc outlined.

Okay. Although you -- I think you noted again that you would expect growth to -- or gross profit to pick up in the second half here as we continue to roll out some of this new business. So I guess is that kind of the expectation as we look forward to the second half of the year?

Yes, it is. And I would say, just to be clear on our performance-based compensation accruals, we look at our expectation for the whole year when we are making adjustments. So it's not like well, we made an adjustment in the first half and that's brought it down, and then when we achieve the things that we're talking about in the second half, it is now going to spike back up. We've made a determination of what we think is an appropriate accrual for the year based on our expectations for growth in the second half.

All right. Well, thanks for taking the questions. That's all I had.

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

Thank you, Charlotte, and thank you, everyone, for joining us today. We really appreciate your interest in SP Plus and we look forward to sharing a bunch of exciting developments when we meet again in three months. Thank you.

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.