SP Plus Corp (SP) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 SP Plus Corporation Earnings Conference Call. (Operator Instructions) Also as a reminder, this conference call is being recorded.

I would now like to turn the call over to your host to Mr. Vance Johnston. Sir, you may begin.

Thank you, Dylan, and good morning, everybody. As Dylan just said, I'm Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the fourth quarter of 2017. I hope all of you have had a chance to review our earnings announcement that was released last evening. We'll begin our call today with a brief overview by Marc Baumann, our President and Chief Executive Officer, then I'll discuss our financial performance in a little 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 2018 outlook and guidance and statements regarding the company's strategies, plans, intentions, future operations and expected financial performance. Actual results, performance and achievements could differ materially from those expressed in or implied by these forward-looking statements due to a variety of risks, uncertainties or other factors, including those described in our earnings release issued yesterday, which is incorporated by reference for purposes of this call and is available on our 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.

Hey. Thanks, Vance, and good morning, everyone. I first want to start by reiterating how proud I am of the SP Plus team and their contributions to advancing our key strategies and initiatives in 2017.

Let me go over some key operational highlights of the year. First of all, we made significant progress toward implementing our vertical market strategy. Secondly, we've built up our hospitality, new business development and revenue management capabilities and are starting to see some positive momentum. We continue to drive our safety and risk management programs and have successfully lowered claims and our total cost of risk.

Once again, in 2017, we made good progress implementing cost reduction initiatives in areas such as procurement, back-office support functions, and we're disciplined with controlling overall G&A costs. And finally, new business activity was strong all year with many new contracts, particularly in the hospitality and municipal markets. In addition, our pipeline remains full, which bodes well for 2018 new business.

Despite the progress we made in 2017, we had some challenges in the fourth quarter. As we mentioned throughout fiscal 2017 and on our call to review Q3 results late last year, we indicated that the fourth quarter year-over-year comparison would be challenging due to the fact that the fourth quarter of 2016 saw a substantial reduction in prior year casualty loss reserve estimates, which we did not expect would reoccur in the fourth quarter of 2017.

As expected, the change in prior year loss reserve estimates in the fourth quarter of 2017 was very small and, therefore, resulted in a large unfavorable year-over-year comparison on this measure.

In addition, we entered into a legal settlement at the end of 2017 that was not anticipated. There was a $2.8 million year-over-year impact on fourth quarter gross profit from the smaller casualty loss reserve adjustment, combined with the unanticipated legal settlement. Additionally, the New York market proved more challenging than we expected in the fourth quarter of 2017 and also weaker than the fourth quarter of 2016.

Improving performance in New York remains one of our key areas of focus. We fully engage our revenue management team to identify and deploy revenue optimization strategies to maximize revenue at our lease locations. We started to see some stabilization and improvement in revenues at our same location leases over the last several months.

We're also aggressively evaluating all facets of the cost structure to improve operating efficiencies and lower cost where applicable. In other areas of the business, our Airport division continued to perform well in the fourth quarter, but performance in the Commercial division excluding New York was mixed, particularly due to some contracts that terminated earlier in 2017.

In other key metrics specifically for the fourth quarter, we're pleased to have maintained our high level of location retention at 92%. We believe this is one indicator of the value delivered to our clients and overall client satisfaction. Same operating location gross profit for the fourth quarter of 2017 was down 1% overall and flat if you exclude New York.

At the beginning of 2018, we sold our 30% interest in Parkmobile, LLC for a significant book and cash gains. To give you some history, we acquired the Click and Park technology as part of the Gameday acquisition in 2009 and made additional investments to further develop that technology. Overall, we estimate that we invested approximately $5 million to acquire and develop the Click and Park technology. In 2014, we contributed our proprietary Click and Park asset to establish the Parkmobile, LLC joint venture. In January 2018, we sold our 30% interest in that joint venture for $19 million in gross proceeds. We not only generated a significant return for our shareholders, but we also now have increased flexibility to work with a variety of players in the digital marketplace, including Parkmobile.

Looking forward to the remainder of 2018, we remain committed to executing on our core organic growth initiatives, which are to complete the implementation of our industry vertical market strategy. We've made good progress in hospitality, and we expect to aggressively pursue additional markets in this vertical. We also expect to more aggressively expand our focus into other key industry verticals, including municipal, health care and universities in 2018.

We also plan to further expand our revenue management and marketing services capabilities, and further enhance our safety and risk management programs and culture; and finally, expand and cross-sell ancillary service offerings.

Vance will give more details regarding our 2018 guidance, but we expect to see a nice boost in earnings per share and free cash flow as we benefit from lower book and cash taxes due to the recent tax reforms enacted by Congress at the end of 2017.

With continued successful execution of our growth initiatives and strong cash flow generation, we will continue to assess opportunities to deploy capital in a disciplined manner to further drive shareholder value.

We're now focusing more attention on evaluating acquisition opportunities, which may include opportunities in parking or other ancillary services. We will diligently evaluate opportunities to ensure that we can successfully integrate them, drive growth and generate strong shareholder returns.

We also continue to explore other opportunities to deploy capital, including share repurchases and dividends, all with an idea toward maximizing shareholder returns.

I'm very excited about what our team can accomplish in the coming year, and we look forward to a successful 2018.

With that, I'll turn the call over to Vance, and he'll lead you through a more detailed discussion of our 2017 fourth quarter and full year financial performance.

Thanks, Marc. I'd like to spend a few minutes reviewing our financial results in more detail. As we have before, my comments will focus on adjusted results. A full reconciliation of all non-GAAP measures to their nearest GAAP measures were presented in the tables accompanying last night's earnings release, which is incorporated by reference for purposes of this call and is available on our SP Plus website.

Fourth quarter 2017 adjusted gross profit decreased $6 million or 13% from the same period of 2016. As Marc mentioned in his opening remarks, the main factors that contributed to this decrease were a smaller favorable casualty loss reserve adjustment in the fourth quarter of 2017 as compared to the fourth quarter of 2016 and an unanticipated legal settlement, which combined contributed $2.8 million of the year-over-year decrease. In addition, we experienced continued performance challenges in New York.

Adjusted G&A for the fourth quarter of 2017 was $19.5 million, flat on a year-over-year and sequential quarter basis. While we've made investments to boost our revenue management and hospitality capabilities, they've been offset by continued disciplined cost management as well as lower accruals for performance-based compensation and long-term incentive plan compensation.

Resulting adjusted EBITDA for the fourth quarter of 2017 decreased $6 million or 22% over the fourth quarter of 2016, with the decrease in adjusted gross profit representing the totality of the decrease in adjusted EBITDA.

Adjusted EPS was $0.40 for the fourth quarter of 2017 as compared to $0.52 in the fourth quarter of 2016. Lower adjusted EBITDA and a slightly higher income tax rate in the fourth quarter of 2017 were only partially offset by lower D&A and interest expense. $1.9 million of the decrease in D&A expense as compared to the fourth quarter of 2016 is due to the burn-off of certain acquisition-related intangible assets.

Next, I would like to briefly touch on our full year results. Adjusted gross profit for fiscal 2017 decreased $300,000 as compared to fiscal 2016. The unanticipated legal settlement we entered into at the end of 2017 as well as impact from the hurricanes totaled $1.9 million. The New York market continued to underperform, but that was offset by solid performance in our Airport division as well as lower health care claim cost in fiscal 2017.

Adjusted G&A for fiscal 2017 decreased by $1.4 million or 2% from fiscal 2016. Again, lower performance-based compensation and long-term incentive plan compensation cost as well as the benefit from previous cost reduction initiatives and continued cost management discipline more than offset the additional resource investments we made to support our various growth initiatives. Resulting adjusted EBITDA for fiscal 2017 increased 1% or $800,000 over fiscal year 2016.

Adjusted EPS was $1.70 for fiscal 2017, an increase of $0.38 per share or 29% over fiscal 2016.

D&A expenses on a comparable basis were $10.3 million or approximately $0.27 lower in 2017 as compared to 2016 due both to the burn-off of certain acquisition-related intangible assets, representing $7.4 million of the year-over-year decrease, as well as lower capital spending.

We generated free cash flow of $39.7 million in fiscal 2017, which was lower than expected, largely due to unfavorable movements in working capital, primarily resulting from higher-than-expected levels of pass-through receivables and a lower level of cash collected from operating facilities at the end of the year. We believe some of these working capital impacts were timing related and are expected to benefit 2018 free cash flow.

As you saw in our press release, we are providing full year 2018 guidance. For GAAP measures, reported net income attributable to SP Plus is to be in the range of $56 million to $59 million, a $16.3 million or 40% increase compared to 2017 at the midpoint. Reported EPS is expected to be in the range of $2.48 to $2.58 per share, a $0.70 per share or 38% increase over 2017 at the midpoint. And net cash provided by operating activities is expected to be in the range of $80 million to $85 million, a $37.3 million or 83% increase over 2017 at the midpoint.

For non-GAAP measures, adjusted net income attributable to SP Plus is expected to be in the range of $48 million to $51 million, $11.3 million or 30% increase compared to 2017 at the midpoint. Adjusted EPS is expected to be in the range of $2.16 to $2.26 per share, a $0.51 per share or 30% increase over 2017 at the midpoint. Reported and adjusted EBITDA are expected to be in the range of $94 million to $99 million, a $2.7 million or 3% decrease compared to 2017 reported EBITDA and a $4.4 million or 5% increase compared to 2017 adjusted EBITDA, both at the midpoint. And finally, free cash flow is expected to be in the range of $65 million to $70 million, a $27.8 million or 70% increase over 2017 at the midpoint.

Our outlook for 2018 reflects our current interpretation of the provisions of the U.S. Tax Cuts and Jobs Act of 2017, which we expect will lower our 2018 effective book and cash tax rates to approximately 26% and 17%, respectively. The guidance does not contemplate any acquisitions, business dispositions or asset sales outside of our normal course of business, other than the previously disclosed sale of our interest in the Parkmobile joint venture.

That concludes our formal comments. And with that, I'll turn the call back over to the operator to begin the Q&A.

(Operator Instructions) Our first question comes from Dan Moore of CJS Securities.

This is Larry Solow on for Dan. Just a couple of quick questions for you guys. Can you elaborate a little more on the weakness in New York that you referred to? And are you seeing similar dynamics in other markets and steps you're taking to address them?

Absolutely. This is Marc. I think we've talked about the New York situation for many months now. And as we've talked about in previous calls, our description of it has been that we see an increase in congestion in Manhattan. Certainly, ride-sharing is playing a role in that, and that's had an impact in certain verticals. Because our New York market has a substantial number of leases that have relatively set fixed cost, if we have any fluctuation in revenue, then that can have a big impact on us. The other thing that's going on in New York right now is that there's a progressive increase in the minimum wage that's been going on. And so our cost of operating in New York have gone up and we'll expect to continue to go up as we come into 2018. I think it's the last increase in the minimum wage. So I think -- that's the backdrop. What we have done and as we've described in our remarks is a number of things to expand our revenue management capabilities, our marketing programs, to look at our operational effectiveness and make changes in our organization to control and operate more efficiently than we have before. And I think what we're seeing, at this point, is that over the past couple of months, our same-store lease revenue has stabilized, whereas prior to that, it was declining over time. So I think that bodes well as we look forward. We think we've at least reached a plateau in terms of revenue and it gives us a foundation for further initiatives to try to drive growth in revenue over the coming months. And then, of course, we'll continue to focus on driving efficiency in our operations there to try to control our cost and over time in other things that can impact our profitability.

And Larry, just to add to Marc's commentary, I think part of your question, too, is whether or not we're seeing this in other markets. And at this point, we're really not. And as Marc mentioned in his comments in the prepared remarks, New York is a bit different of a market for us and others to that degree because of the significant nature and number of fixed lease contracts that are in that market. And so other markets, you don't typically and we certainly don't see the proportion of kind of fixed lease contracts nor are we seeing the same type of things, whether it be congestion or whether it be other things that we're seeing in New York.

Great. And just a question on -- 2 questions on the cash flow. One was, is there some timing shift from 2017 to '18 that's benefiting that a little bit? And then given your guidance, it seems like you'll end the year with debt leverage below 1x. [Does that mean that you could be] debt free? Given that, any reason why you wouldn't consider dividend sooner rather than later?

Yes. So let me -- this is Vance, Larry. Let me -- there's a little bit of noise in the background when you're speaking. I think I've gotten most of what you're asking. So on the first thing, as it relates to the timing difference, there was -- as we kind of alluded to in our prepared remarks, as it relates to free cash flow, one of the reasons why free cash flow was less than what we expected for 2017 was that we had some things that happened with kind of just in the amount of cash received that we ended kind of close to the end of the year and some -- and receivables as well. And we would expect those to -- some of that to benefit 2018 free cash flows. But I think in terms of timing differences, that's really the only thing, it's really related to free cash flow. So hopefully, that answers your question. I think the other piece of your question was around capital allocation. And as Marc alluded to in his prepared remarks and we can both comment on, in that case, you're right, we're getting that certainly below the lower level end of our kind of leverage range that we feel comfortable with. We've generated a lot of free cash flow to pay down debt. We have both through the sale of the Parkmobile -- our interest in Parkmobile as well as tax reform, in addition to just the pent-up free cash flow that we're generating in the business, we expect to have good free cash flow going into 2018 and beyond. And what we're going to be doing is obviously evaluating the best use of that free cash flow, whether that is to invest back in the business, which is somewhat limited in our case, or whether that is to kind of potentially make good acquisitions for the company or if that would be to -- we'll continue to evaluate share repurchases and dividends as well.

(Operator Instructions) Our next question comes from Tim Mulrooney of William Blair.

So it looks like your guidance implies about 4% EBITDA growth at the midpoint. And it looks like the year-over-year comparisons get easier as the year progresses. So for modeling purposes, is it safe to assume that the cadence of EBITDA growth kind of improves as we move through the year?

We haven't -- and Tim, obviously, we don't give kind of guidance by quarter. So we give guidance for the full year. I would say that there's things that -- and we feel good about the guidance, obviously, that we're providing for EBITDA and other metrics for the full year. There are a variety of things that can impact our performance on a quarter-to-quarter basis, including true-ups and cash reserve adjustments, health care and then just kind of the normal course of our business as well. So I think that having said that, one way to think about it, historically, the patterns have been is that the first quarter as it relates to our business is a little bit light relative to some of the other quarters. So I think the way I would think about it more is understanding that we have fluctuations that I just mentioned that can take place is just kind of more historically kind of how the seasonality of our businesses has performed.

Yes. No. That's fair. You can't blame a guy for trying. On the -- okay. Shifting gears to the Parkmobile, and I know you touched on this in your press release a little bit. But Marc, can you just talk a little bit about what drove the decision to divest your stake in Parkmobile? And can you talk about how you envision your relationship evolving with these parking mobile aggregators over the next several years?

Yes. I'd be glad to do that. I think at the time, our company entered into the arrangement with Parkmobile to form the joint venture back in 2014. The landscape was a little different in the marketplace. Aggregators were starting to emerge and other digital players that are entering to do things to facilitate parking were maybe just talking about it or thinking about it. And so when we entered into the relationship with them, we really looked at the Parkmobile platform as being a good transaction processing platform to bring together both payment for reservations or payment for parking off-street along with the platform that they had, which is a platform for on-street. And we thought that bringing those together into one platform for processing made a lot of sense. And I think it still does as a concept, and it's something that they have done successfully. But I think as we look forward, because of the joint venture relationship, we were in a -- it wasn't an exclusive relationship with them, but we had to work with them on a number of things, and that's been very successful. But I think as we look at all the new players emerging and things changing in the digital space, we want the ability to work with the people that make the most sense to us in a given situation and that won't be one company in particular. It will be many companies. And so as we look at our clients and our ability and desire to serve them successfully, as we look for ways to drive revenue and performance at our lease locations, we want the ability to pick the best solution in every case. And in many cases, that will be Parkmobile. And we expect to work with them for many, many years to come. But in other cases, it might be somebody else. And so I think, for us, having that flexibility is a good thing. Now, of course, we also looked at it in -- and there were other investors in Parkmobile along with us. And fortunately, for us, they also had an interest in expanding their investment in Parkmobile. At the same time, we were looking at trying to obtain greater flexibility for our business. So we were able to reach, I think, a very good deal for everybody all around. And as I've said, look forward to continue to use Parkmobile services into the foreseeable future.

Okay. Maybe one more kind of along these lines but bigger picture, longer term. If I think about all these mobile parking aggregators and the connected car and everything that's coming along with that, I assume we're going to see more price transparency in the industry over the next 3 to 5 years. So first of all, do you agree with that? And second, in your opinion, what might the implications of increased price transparency have on this industry as a whole and on your company in particular?

Yes. No. It's a great question, Tim. And I think it's inevitable in any industry where the data that the consumer has before them to make decisions becomes available. You will have increased price transparency. We've seen this in many, many other industries, whether it's people buying things on Amazon and/or in the hotel business or in the airline business. I think that's an inevitability, and that's a trend that will apply to every industry where data is available and where that data will be made available and I'm sure will be available to consumers. So that's just the trend that's going to happen. And of course, it will give the consumer the opportunity to do price comparisons in our industry in ways that they maybe couldn't as easily do before. People did it the old way. They got to their -- near their destination, they drove around and they looked at signs. That was how they did their price comparing. With technology, you'll be able to do that either on the fly, in your car or before you enter in on your trip. So I think that's going to happen. I think for us, one of the reasons why we've built a business model around management contracts and providing value-added services to clients is that we didn't really want to be exposed to the day-to-day fluctuations of utilization of the parking facility, what rates are charged for parking, whether those go up or down at a certain level. And so I think we have a business model -- we're trying to optimize the revenue for client and we're trying to drive revenue growth for them. I think the aggregators in general and other people that are making parking available either on your mobile device or in your car have the advantage of actually driving incremental volume to places that are visible in that space. And so while it may be that price transparency can reduce the revenue at a given facility for some customers that are coming in, not everybody is going to be on a mobile device, not everybody's going to be planning ahead of their trip; but for those who do, they're now going to be routed to places that they might not have gone to before. So I think -- I don't think it's all negative, but I think we're positioned well to advise clients and help them with revenue management strategies, marketing programs, advising them on what aggregators to put in their facilities and what inventory to sell to those aggregators and at what price. I mean, that's the expertise we have as a company, and that's how we differentiate ourselves from our competition and how we can be successful in that future world.

I show no further questions in queue at this time. I would now like to turn the call over to the President and CEO, Marc Baumann, for closing remarks.

Thanks, Dylan, and thank you, everybody, for joining us today. We really appreciate your interest in our company. And as I indicated in my remarks, we're very excited about 2018 as we look forward to drive growth and success in our business. We're looking forward to talking to you next quarter. Thank you, and have a great day.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.