SP Plus Corp (SP) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter SP Plus earnings call. At this time, all participants are in listen-only mode. Later, we will conduct a Question-and-Answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Vance Johnston, Chief Financial Officer. You may begin.

Thank you, Gracia, and good morning, everybody. As Gracie has just said, I am Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the third 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'll discuss our financial performance in a little more detail. After that, we will 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 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.

In addition, we will discuss non-GAAP financial measures on this call, and you can find the comparable GAAP measures and reconciliations in our earnings release which is incorporated by reference for purposes of this call, and is available under the Press Releases tab in the Investor Relation section 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 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. As Vance said, I'm Marc Baumann, Chief Executive Officer, and I'd like to welcome everyone to our call discussing the results of the third quarter and our year-to-date performance.

We're, once again, very pleased with our strong bottom-line performance in the third quarter where continued execution on cost reduction initiatives drove an increase of $2.6 million, or 12%, in adjusted EBITDA. Reduced G&A as well as lowered interest costs and D&A expense also contributed to a 42% growth in adjusted earnings per share year-over-year.

While our overall adjusted gross profit was flat in the third quarter, we saw solid growth in the same operating locations of 2% despite some continuing softness in certain hospitality vertical markets.

We continue to be successful at driving new business and won a number of new contracts across industry verticals in geographical markets.

Gross profit continues to be effected by the cumulative impact of some contract terminations from the first half of 2016, particularly in the airport and off-airport markets, as we previously mentioned.

Our third quarter location retention rate was 88%, up slightly from 87% in the second quarter, both periods being impacted by the voluntary termination of one commercial contract with over 200 locations that we terminated in the second quarter of 2016. If you'll recall from our call last quarter, we determined that the gross profit from this contract was inadequate for the level of resource investment, the loss of this contract to Winpak, the retention statistic through the end of Q1, 2017. Excluding the voluntary termination of this portfolio, which had marginal gross profit, our location retention rate would have remained a very strong 93%.

As previously mentioned, we're writing new business at a steady rate and for the first nine months of the year, had exceeded last year's record pace. Some of our more notable recent wins include two new airport contracts at Austin-Bergstrom International Airport in Austin, Texas, and Kona International Airport, which is the primary airport serving the island of Hawaii; new municipal contracts with the city of Aurora, Colorado and the city of Dallas, Texas; a contract to manage the Millenium garages in Chicago, which is the nation's largest underground parking garage system; and an expansion of our relationship with Hines, a global real estate firm with new awards in multiple Northern California markets.

As I previously mentioned, terminations have impacted our gross profit growth in the third quarter and year-to-date. Part of the financial impact of terminations is a cumulative effect they have for multiple quarters until they no longer factor into the year-over-year comparison.

I'd like to very briefly comment on a few important Company initiatives. First off, I'm very pleased with the continued progress we are making on our cost improvement initiatives. We've made significant strides in a number of areas and remain focused on executing cost improvement initiatives and controlling costs.

Secondly, we're very focused on driving our revenue management in digital strategy. To that end, we recently brought onboard a new Senior Executive, Jeff Eckerling, to oversee these important areas. Jeff brings a wealth of experience with him and will be focused on developing and further enhancing our capability in these important areas.

Thirdly, we continue to emphasize and make progress in implementing safety programs and believe these programs will reduce claim costs further in the future.

Lastly, we continue to evaluate our capital allocation strategy, one facet of which we are executing now with our previously announced share repurchase program. We've repurchased over $5 million through the end of the third quarter. We remain focused on long-term strategic initiatives to further drive growth and create shareholder value.

Finally, and you may have seen in our release, we've reached a non-binding agreement with Central's former stockholders to settle all outstanding matters related to the Central merger. We are currently drafting and negotiating a binding settlement agreement and look forward to final resolution of this matter in the fourth quarter.

With that, I'll 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. Third-quarter 2016 adjusted gross profit was flat over the same period of 2015. As Marc mentioned earlier in his comments, we saw a 2% increase at the same operating locations, but also felt the accumulative impact of some contract terminations and a smaller favorable casualty loss reserve adjustment than the adjustment from the same quarter last year.

On the G&A side, we are very pleased with the continued progress we're making managing costs as adjusted G&A for the third quarter decreased by $2.5 million, or 11%, over the third quarter of 2015, which was largely due to reductions in compensation-related costs. We remain focused on executing key initiatives in areas such as strategic sourcing and back-office process improvements and continue to be disciplined about overall spending.

As previously mentioned, strong cost management drove an increase of $2.6 million, or 12%, in adjusted EBITDA, compared to the same period of 2015. As a result of our strong cost management, along with lower net interest expense and D&A expense, adjusted EPS for the third quarter of 2016 was $0.37, as compared to $0.26, in the same period of last year, an increase of 42%.

Through the first nine months of 2016, adjusted gross profit was $129.9 million, a decrease of $3.4 million, or 3%, over the same period of 2015. The main drivers of the year-over-year decline was a cumulative impact of some contract terminations, as Marc mentioned previously, along with some unfavorable renewals, which we mentioned on prior calls, higher health benefit costs, as well as a smaller favorable adjustment for prior-year casualty loss reserve estimates compared to the same timeframe of 2015.

Year-to-date 2016 adjusted G&A was $63.6 million, a decrease of $6.1 million, or 9%, from the same period of 2015. The favorable results were primarily driven by the same strong cost management efforts mentioned previously, along with lower compensation expense related to the Company's 2016 performance-based compensation program. Adjusted EBITDA through the first nine months of 2016 was $64.1 million, an increase of $2.5 million, or 4% over the same period last year, driven by lower G&A costs. Year-to-date adjusted EPS has increased by $0.13, or 19%, over the same period in 2015, and was also driven largely by the aforementioned G&A reductions and lower interest expense.

We generated $19.4 million of adjusted free cash flow in the first nine months of 2016, as compared to $16.8 million in the same time period of 2015, which is a 15% increase. This increase is mainly a result of our operating performance and continual focus on working capital management in combination with lower cash tax payments and lower interest payments year-over-year.

Looking forward to the fourth quarter, I'd like to remind everyone that our Q4 2015 gross profit was lower than anticipated due to higher-than-expected health care costs and the fact that performance in the New York market was significantly impacted by elevator repair work and fewer events than normal, both of which we do not expect to repeat in Q4 2016.

With all that said, we are confirming full-year adjusted EBITDA in the range of $88 million to $93 million, adjusted EPS in the range of $1.16 to $1.26, and adjusted free cash flow in the range of $40 million to $46 million.

We also look forward to providing you more information on 2017 during our fourth quarter call which will include our full-year outlook and guidance for 2017.

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

(Operator Instructions) Dan Moore; CJS Securities.

Good morning. This is actually Robert Majek. I'm filling in for Dan this morning. G&A continues to tick lower, now down below $20 million quarterly on an adjusted basis. Can you continue to drive it lower from these levels? Can you just talk a little about the puts and takes for G&A expenses as we look on to 2017?

One is that we're obviously continuing to focus on G&A cost reduction initiatives and feel very pleased with the results that we've seen so far. We don't give specific guidance on G&A, as you're well aware, but overall, as we move forward into 2017, our hopes are that we continue to execute additional cost reduction initiatives. You may not see the same impact that we've seen over the last couple of years. Our hopes are to continue to make improvements in those areas.

As it relates to 2017, we'll be providing an updated view on that in guidance, as we discussed earlier in our prepared remarks, on the fourth quarter call. So I think we'll be able to give you some information at that point.

Thank you. I'm looking forward to that. Looking at 2017, how should we think about the impact of casualty reserves, as well as healthcare claims relative to 2016?

As always, we're constantly looking at initiatives we can take to drive down our total cost of risk for our casualty programs and, obviously, our health care costs. So we'll, once again, look to refresh our efforts in those areas.

In the casualty area, we expanded quite a lot of efforts to improve safety, to drive new programs out in the field to increase training to get a greater awareness of all levels of management of the impact of safety and claims. I think, generally speaking, in the casualty space, our track record has been very, very good over a long period of time.

It is normal in our business for us to get some quarterly fluctuation. We're certainly experiencing a few of those now, but we certainly don't think that those are a trend or indicative of a trend in a negative direction going forward.

I think, over the long haul, we'll see casualty reserve adjustments will tend be positive rather than negative on the long-term view, as they have been for many, many years, but in a given quarter or a given year, it can go the other way.

On the health front, that's a little different because the tail for health claims is much shorter. As we talked on previous calls, there's always the uncertainty around the Affordable Care Act as people continue to make new decisions when they find out that the exchange prices have gone up a lot. It causes them to rethink where they're going to buy their insurance. So there's still a bit of a moving target for us.

That being said, I think we talked last time about some changes that we've already implemented that we think are going to help us on a perspective-basis to our plan design, and we're looking at some more plan design changes for 2017 that we think will continue to help us control our healthcare costs for the Company.

All in all, I'm still very optimistic that that's a scenario that we can see improvement in as we move into 2017.

Thank you. That was helpful. Lastly from me; regarding the impact of contract termination, is the rate dissipating, accelerating, or generally the same as you've experienced over the past few quarters, and how should we think about that going forward?

Well, I think there's a couple of things to think about, Robert. One is that our retention rate, when you exclude that one large contract portfolio termination, is 93%; that's our location retention rate and that's the same as the second quarter. That represents an improvement from where the Company has been over the last couple of years. It's nice to see our location retention rate picking up.

Of course, what matters is what contracts are you retaining, and what ones are you losing. We've talked about the loss of a few airport contracts, and a few other contracts have been lost or we traded on new terms as they renewed. In those cases, we're losing maybe a disproportionate amount of gross profit, so that's moderating our rate of growth over the past few quarters.

But I think in terms of our ability to maintain the portfolio that we have to retain contracts in general and, of course, to continue, hopefully, to write record new business, I think should give us faster growth in the future.

Thank you.

Kevin Steinke; Barrington Research. It appears that Mr. Steinke has released himself.

Kyle Dicke; William Blair & Company.

Yes, this is Kyle Dicke on for Nate Brochmann, and thanks for the time. Just a couple quick ones for me; are the initiatives that are driving the G&A improvement via strategic sourcing, back office functions, etc., are those more recent programs, or are you starting to get more recent benefits from those, or those have really just been doting over time?

The way I would explain is, is that most of the cost reduction success that we've had and what we've seen, up until this point, has been largely due to realignment of our organizational structure; has been due to, generally, just tighter cost controls on things like how much space we need for operating back office functions; general tighter cost controls on travel and entertainment, and things of that nature, where there was opportunity there and not in a detrimental way, but to put in place better policies and processes. Some cost reductions have been achieved through the consolidation of certain back office processes, or reducing or taking out redundant systems, things of that nature.

But I think as we look forward, more of the focus is going to be on continuing on with back office processes. In addition to that, strategic sourcing, where we've gotten some benefits to date, but really we're in the earlier innings of that, so we'd expect that to contribute more as we go forward.

Okay, great. Secondly, I know the D&A was a little lower this quarter. Is that a good run rate going forward, or how should we think about that?

The way you should think about that is one, in the first two quarters of the current year, we had higher D&A that was due to the fact, and I think we spoke about this the last couple of quarters, we had some systems that we had that we retired as part of our cost reduction initiatives, and we had to accelerate the depreciation related to those systems. That was the reason why, the last couple of quarters, it may have been a little higher.

But as you think about going forward, I think it's a reasonable run rate. However, we would also expect that certain tangibles would come to the end of their life in terms of what we have on our balance sheet, so we'd no longer be amortizing those intangibles. So we'll see a little bit of a fall off in amortization going forward as well.

Okay, great. That's it for me. Thanks.

Marc Riddick; Sidoti & Company.

Good morning. I wanted to touch on -- maybe if you could shed a little bit more light on some of the new business wins and the contribution of some of the, either technology efforts or maybe some of the marketing opportunities that you see, what role those played in some of the newer business wins. And going forward, what you're maybe -- what you might highlight as something that would drive a future new business win in revenue growth? Thank you.

All right, Mark, I'll be glad to talk about that. I think if you look at a number of the wins, and some of them, in particular, that are not in the airports, a key variable now is can you bring cutting-edge technology to a client in order to optimize revenue? So, if you look at whether it's the Millenium garages in Chicago or some of the other operations that are more traditional, a parking operation, that's clearly a major focal point for us.

One of the reasons that we've created it, I found a new individual that I talked about, Jeff Eckerling, to drive our revenue management and marketing services activities, is that while we've been doing a number of things in the marketing services area for the last several years, we feel there's a real opportunity here to further differentiate ourselves from our competition by advising clients on how to optimize revenue.

That includes things like getting optimal pricing at parking facilities; helping to advise clients around what channels of client they should use in order to optimize the value they're getting from people that are coming in and parking at the facilities; on what marketing services should they use to promote. So those are just a general array of things that are going to be applicable to a number of locations.

In the on-street municipal space or in the airport space, they are also looking for technology, but not necessarily driving demand using -- for marketing or revenue management techniques, they're looking for people to bring cutting edge payment technology; advising them on how to more efficiently operate their facility; in some cases, cities are outsourcing for the first time, and so they're looking for someone who is going to be more effective in managing people and getting good controls in place to ensure that all the revenue is getting into the proper places.

A lot of our focus in those areas is not so much around driving demand, although that can be a factor. It's more about efficiency of payment and cost control, and making sure all of the revenue is accounted for. So our focus in those areas is maybe a little different than it is for say, a commercial parking structure.

Then, of course, in the hotel space, we've talked before about how vertical being a nice one for growth for our business, there it's about delivering superior service because, ultimately, the people are driving up, their first impression of the hotel is what happens when they get to the front door, and whether it's being greeted by name or their car is being handled in an efficient manner.

Those are the number one priorities for a hotel and hospitality client, and one of the reasons we have more four and five diamond properties than anybody else is that we're very, very good at selecting people, training and supervising them in that environment.

Okay, great. As a national follow-up then, just to piggy-back on that, maybe if you could give us a bit of an update on what you're seeing in Las Vegas with that opportunity. Thank you.

Thank you, Mark. We're really delighted that we have the opportunity to serve MGM and help them bring paid parking to Las Vegas. It's a very, very challenging environment. For any of you who have been out there, you know that these are very, very, unusually large and complex operations that run with 95% occupancy all year round. So it would be an understatement to say that this is an easy kind of a situation to get into.

But we deployed a leadership team in Vegas, and supporting him with a number of people that will ensure that not only we're delivering the services that MGM expects of us, but also sets the foundation for us to, hopefully, win other casino business in that market.

I think that's a good thing because, ultimately, it is a 24/7 hands-on, high-service environment where you need to be on your game all the time. I think MGM has selected us to operate another property that's not in Las Vegas, and we're in the process of getting that one ready to go. I think for the future, see opportunities for us to expand in the casino space, not only in Las Vegas, but in other markets. But most of the big casino operators operate properties in other parts of the country, and they have the same exact expectations; high-service levels for their guests; rigorous control; working with cutting edge technology to try to ensure that the best possible decisions are made around which guests are handled in which way, and how to optimize revenue as well, because that's an important consideration for them in their businesses.

Okay, great. Thank you very much.

Kevin Steinke; Barrington Research.

Good morning. I had a few technical difficulties with the call, so if these questions were already asked, I apologize. I think you talked about last quarter that you were taking some steps to contain your healthcare costs. I'm just wondering what sort of progress you've seen with those initiatives, if your, indeed, seeing your healthcare costs contained as you would have hoped?

Kevin, I did touch on this a little bit when you were having your technical difficulties. I think, in general, the answer is that we are constantly looking at our plan design as we cope with people making changing decisions in the marketplace for healthcare. The Affordable Care Act continues to cause people to make changes on an annual basis as they see increases from the online exchanges or other employers making decisions about how much the employee should contribute to the cost of healthcare.

So it's still an unsettled environment, but I think we feel confident that we understand what's driving our healthcare costs, and we're making plan designs again for 2017. We made some this year, some of which are starting to benefit us now. I think, realistically, our expectation is that this will become less volatile as we go forward, but recognizing that we're still in an environment where, I think, there's a lot of questions about what will happen to the future of the Affordable Care Act, and whether or not it will remain in its current form in the future.

Okay. I don't know if you touched at all on progress on your safety initiatives. You mentioned in the earnings release that you're making good progress in terms of improving safety. I'm just wondering if you're seeing a benefit in terms of reduced claims, and how much more room is there to go on that initiative.

I did comment on that a bit, but what I didn't say is that we are bringing down our total cost of risk. That's our major focus, and we're continuing to see progress on the end of 2016 relative to 2015. So I think we're expecting our total cost of risk will be lower.

And the initiatives that we're doing now, I would say still have a way to go. In other words, we're not getting all the benefits yet, because a lot of this is a day-in-day-out process. You have to have facility managers walking their facility and looking for safety issues that require correction. You have to have safety meetings with employees and talk about how their behaviors can impact safety, both for themselves and for our clients, and our customers, as they come into the parking facility.

There's always more to do there, and one of the things that we're trying hard to do is identify situations that if something bad happens, we can learn some lessons that are applicable across other facilities. It's not just a case of making an improvement at one facility. We've had a couple of more significant, not a lot, but a couple of significant accidents that affected our insurance reserves this year, but there's additional work that we're doing to try to ensure that we have safety number one in everybody's head all the time.

As we talked before, it can be volatile a little bit from quarter to quarter, but on a long-term basis, I'm confident that the safety programs that we're implementing will bring our total cost of risk down, and really, I think, are unrivaled in our industry. As far as we can determine, nobody else has put the focus on safety in the way that we have, and that's a selling point for us when we go to our clients because they're sharing in the cost of some of these claims with us. Being able to demonstrate that we can bring the total cost of risk down for them is an important differentiator for SP Plus relative to others.

Okay. Lastly, I don't know, Vance, did you call out on G&A, if there was a performance comp benefit to that at all like there was last quarter?

I did not touch on that, but I'm happy to do so. In the third quarter, there was really no impact related to performance-based compensation. The way to think about -- for the third quarter of 2016 relative to the third quarter of 15, reduction in G&A was really driven by pure reductions coming through and not impacted in any significant way by the change to our performance-based compensation accruals.

Okay. I'll leave it at that. Thanks for taking my questions.

I am showing no further questions. I would like now to turn the call back Marc Baumann, Chief Executive Officer, for any further remarks.

Thank you, Gracia. As always, we really appreciate your interest in our business. We're excited about finishing up our year on a strong note, so we're actively working to make that happen. I do remiss if I didn't mention the fact that all of America is cheering for the World Champion Chicago Cubs, so congratulations to the Cubs players and their organization on a great baseball season.

We'll look forward to speaking with you next time. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You many all disconnect. Everyone, have a great day.