SP Plus Corp (SP) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by.

Welcome to the First Quarter 2018 SP Plus Corporation Earnings Conference Call. (Operator Instructions)

At this time, I would like to turn the call over to Mr. Vance Johnston, our Chief Financial Officer of SP Plus. You may begin.

Thank you, Olivia, and good morning, everybody. As Olivia just said, I am Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the first quarter of 2018.

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. In addition to the extent we answer specific questions about 2018 guidance, involving non-GAAP financial measures, reconciliations may be found under the Regulation G tab in the Investor Relations section of the SP Plus website.

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 you saw in our press release that we issued last night, 2018 is off to a solid start as adjusted gross profit, adjusted G&A, adjusted EBITDA and adjusted net income all met or exceeded our expectations. This is despite of $1.7 million noncash write off of a lease contract right due to an unanticipated early termination of a long-term lease contract and the adverse weather we experienced in certain parts of the country. Our Airport operations are performing well overall as are the health and welfare and casualty insurance programs.

To give you a brief update on the status of our New York operations, we're continuing to see incremental improvement in performance as a result of the various revenue and expense optimization programs that we started to put in place. We also reorganized the New York leadership structure and expect to see additional improvements over the coming months.

In other key metrics, our location retention for the 12 months ended March 31, 2018, dipped to 91% from 94% at the end of the first quarter last year and 92% as of the end of 2017. The drop from the year-end was largely due to the loss of 1 contract, which comprised 31 operating locations.

We do have some contracts that represent a large number of locations and a loss of these contracts can cause location retention to fluctuate from time to time. We do not believe this is indicative of a permanent downward trend in location retention. Same operating location gross profit for the first quarter increased 1%, which we believe would have been higher if not for the more severe winter weather we experienced in the first quarter of 2018 as compared to a relatively mild winter in 2017.

In terms of new business, we won several hospitality contracts, including the Hotel Zachary near the recently renovated Wrigley Field in Chicago and the Kimpton Angler Hotel in the heart of South Beach, Miami. We have also expanded our relationship with Emory University in Atlanta and Grander Capital Partners in Baltimore.

As I laid out during the Q4 2017 call earlier this year, and as I reiterated to our management team last month when everyone was gathered together for our annual management meeting, we remain committed to executing on our core organic growth initiatives, which I will just review for you briefly.

We want to complete the implementation of our industry vertical market strategy. We've already made progress in the hospitality vertical, and we expect to more aggressively expand our focus into other key industry verticals, including municipal health care and universities. And we want to further expand our revenue management and marketing services capabilities. We've had positive learnings from the launch of our revenue management pilot program in Q1 and plan to expand the pilot in Q2 and Q3.

In addition, we've made good progress in deploying our digital marketing strategies to drive incremental revenue at our facilities. We're continuing to invest in digital tools and capabilities to drive additional growth.

And third, we want to further enhance our safety and risk management programs and culture.

And finally, expand and cross-sell ancillary service offerings. I'm excited about the opportunities that we have and our improved ability to capitalize them in 2018.

With that, I'll turn the call over to Vance to lead you through a more detailed discussion of our first quarter 2018 financial performance.

Thanks, Marc. I'd like to spend a few minutes reviewing our financial results in more detail. As in the past, my comments will focus on adjusted results. A full reconciliation of all non-GAAP measures to the 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. First quarter 2018 adjusted gross profit decreased $1.2 million or 3% from the same period of 2017. As Marc mentioned in his opening remarks, the first quarter 2018 included a $1.7 million noncash write off as a result of a long-term lease contract that was terminated early for redevelopment. Partially offsetting this was a $900,000 favorable settlement in connection with the expiration of unrelated lease contract.

In addition, the winter weather was most severe in many parts of the country in the first quarter of 2018 relative to the first quarter of 2017. While difficult to quantify the exact magnitude of the impact, we do know that weather presented a headwind to adjusted gross profit growth.

Adjusted G&A for the first quarter 2018 was $2.1 million (sic) [$21.0 million] down slightly compared to the first quarter of 2017. We continue to fund investments to enhance our revenue management and vertical market capabilities and at the same time, remain disciplined on cost management. Resulting adjusted EBITDA for the first quarter of 2018 decreased $900,000 or 5% from the first quarter of 2017, primarily due to the previously discussed factors that have impacted year-over-year adjusted gross profit growth. Adjusted EPS was $0.39 for the first quarter of 2018 as compared to $0.28 for the first quarter of 2017. Certain acquisition-related intangible assets became fully amortized in the first quarter of 2017, which was the primary reason for the decrease in depreciation and amortization expense.

Interest expense decreased year-over-year as free cash flow generated by the business was used to pay down debt as were the net cash proceeds from the sale of the Parkmobile joint venture.

Finally, a lower effective income tax rate due to the U.S. Tax Cuts and Jobs Act of 2017 contributed to the year-over-year increase in adjusted EPS. First quarter 2018 free cash flow was a negative $5.6 million, which was lower than expected, largely due to temporary unfavorable working capital movements, which we believe will normalize by year-end.

As such, we remain confident that we will continue to generate free cash flow in line with previously provided guidance.

Based on the results for the first quarter, we're affirming the previously provided guidance on all measures.

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

(Operator Instructions) Our first question coming from the line of Daniel Moore with CJS Securities.

I wanted to touch first on New York market. Sounds like things are certainly stabilizing there. Maybe talk a little bit about your, kind of, revenue optimization, the new leadership, the steps you're taking and your outlook for that market as we move forward?

Sure. I'd be glad to do that, Dan. As we've talked about New York many times on these calls, starting about a year ago or so, we made -- started to make some changes in our digital strategy for New York and that enabled us to, I think -- contributed I should say rather, that wasn't the only cause, but that contributed to a leveling off of revenue, particularly at our lease locations.

We'd seen a period of decline at our lease locations, and so I think it's a combination of our expanded digital strategies in New York along with some real focus on our operational performance has really made a difference and started to make a difference about a year ago. That being said, New York remains a challenging market. And I think after -- having leadership in place there for many years, we felt it was time to bring in some new leadership. We brought in an individual who has been with the company for many years. So he understands and knows our ways of doing business. He's been very innovative and creative in some of the other markets that have been under his responsibility. And it's given us the chance to just take a fresh look at everything we're doing there and build on, I think, some good beginnings that have started about a year ago in that market.

So would you see New York being continued headwind modestly going forward? Or do we think have sort of neutral as the rest of the business grows?

Yes, it is hard to say. I think one of the challenges that all -- almost every city has now is a challenge with congestion. And New York has that challenge probably more than any other place. I think elected officials and planners and cities are now starting to see that congestion is a problem that needs to be solved. And I think we're going to start to see maybe some moderation in the growth of ride-sharing particularly in a market like New York. I don't know -- policy things are being discussed. But I think the rate of growth of ride-sharing is certainly slowing in New York compared to where it has been. I think that's a good thing for us.

But I think also, as a parking operator, we're part of the solution to the congestion problem. We are working with ride-sharing companies and with elected officials in places where we have those relationships to find ways to get cars off the street and get them into parking garages. And I think that's effort that we'll be continuing with not just in New York but in other markets. So I'd like to think that the worst is behind us in New York in terms of the real pressure from congestion and headwinds.

But it's still a challenging marketplace to do business in and our goal remains the same as it has been for some time. First, get to a position where we've stabilized. I think we reached that position now. And then look for ways to grow. And I do think in the New York market, there are number of ways that we can grow our business there. And we are actively pursuing those now.

Got it. And then shifting gears, the contract -- I'm assuming it's the Southern California contract where we had the write-down of the impairment. Just talk about who are your kind of key competitors for those large immunity contracts? And was it simply price or were there other factors that caused them to look elsewhere?

Just a point of clarification. It's not the same contract, it's a different contract. But -- and we have had those situations before. We point them out when they're large like they were in this first quarter but from time to time, we'll have a contract terminate early. The contract that did terminate early, in and of itself was not a hugely profitable contract for us. So that's not significant to us. But obviously we had to take a noncash charge in the quarter. I think the immunity contract that we lost in Southern California it's like most immunity contracts, these things come out to bid on a regular schedule. They come to the end of their term and we're -- it's always a challenge and sometimes we don't hang on to them. I don't think the competitive space is any different than it always has been. Obviously, with immunity contracting there's public disclosure of the current contract, the current fees, the current profitability, all of that is known to competitors. And so once in a while, a competitor comes along and is grabbing the contract on the basis of undercutting the incumbent on price, that happens.

And I think that's really all that really is the story there. I think we did a great job in that city for many, many years. Who knows, maybe, the new operator won't do a good job, and we'll have a chance to go back in the future. But it does happen.

And, Dan, just 1 thing to add real quick as it relates to the non-California one, the one where we had a 1 more -- a $1.7 million noncash write off of. The reason that we lost that lease contract, it was a long-term lease contract, was due to redevelopment. So this happens from time to time. It really had nothing to do with our ability to operate it or anything of that nature. It was more just because the landlord had the auction and signed a redevelopment.

Perfect. Lastly, Vance, just working capital, some of the puts and takes on the quarter and your confidence in sort of getting back to your prior full year of use there.

Yes. As I mentioned in my remarks, we just view those fluctuations in the working capital as temporary in nature. And so as we did, we reaffirmed our guidance for free cash flow for the whole year.

So with that, we feel comfortable that those changes in the temporary fluctuations in working capital will normalize by the end of the year.

(Operator Instructions) Our next question coming from the line of Tim Mulrooney with William Blair.

Can you guys hear me?

We can now. Now we don't hear you, Tim, I don't know if you're still there.

Yes, I'm here. Can you hear me now?

Yes we can.

Yes, we can hear you a little bit better now, yes.

Yes, sorry. I got bad reception. I'm on the road today. Could you guys quantify how much weather impacted your first quarter results?

Yes. Tim, as we mentioned in our comments, we -- it's really difficult to quantify the exact magnitude. And the reason for that is because it impacts the company in a variety of ways. So you have, obviously, where we had nor'easters on the east coast, a lot more than normal, certainly way more than we had in 2017. You also had weather impacts kind of down the East Coast into the southeastern part of the United States in places like Nashville and places like that. So obviously, you're going to have a reduced number of parkers. That's going to primarily impact us at lease locations. And then in addition to that, you're going to have things, potentially things, like flips, trips and falls as well that will take place. So it's difficult to quantify the exact magnitude. We would say, it would be hundreds of thousands of dollars for sure. But difficult to get really specific.

Yes, no, that's helpful. Switching gears to the free cash flow. I mean, free cash flow's forecasted to grow significantly this year. Curious if you guys have given any more thought as to what you're going to do with all that cash building up on the balance sheet that as we move through the year? Can you also remind us what your target leverage ratio is? I'm trying to think about the balance between paying down debt and then what you might be using towards share repurchases or potential M&A?

Well, we -- I'll make a couple of comments and then Vance may want to add to it. We've said for a long, long time that, maybe an ideal leverage range is sort of 2 to 3x as the target. And we said that long ago back at a time when the company was more highly leveraged. I think it just indicates directionally that we would like to see the leverage come down. It's not a business that we like to run along at 4x, 5x leverage, because we have so many government contracts and other clients who want to make sure they are doing business with somebody who is financially sound. Obviously, we have generated a massive amount of free cash flow over the past few years and have brought our leverage down really I think below the bottom of that range. So I wouldn't say that it's a concern in and of itself. But our allocation strategy remains what we've talked about many times. First and foremost, does the business needs capital in order to accelerate its growth? And we want to ensure that, whether it's investing in new technologies to support our digital strategy or making investments that can secure us term client contracts, that we have funds available to do that. Fortunately, this is a business that doesn't require significant capital investments in order to be able to do that. But that remains a priority and we don't limit ourselves from making investments that have excellent returns in that way. Obviously, in the short run, if we have excess cash flow and we don't need it for the business, we're just going to either pay down our debt or it may accumulate temporarily on the balance sheet. In a bigger picture, though, we do have our stock buyback program in place. While we haven't bought back any stock in the past 12 months, we definitely continue to look for opportunities to buy our stock at good value. And that can happen from time to time. We have many discussions with our Board of Directors about the best use of capital. And I think we have strong support to look outside our own business and look for opportunities to add to our organic growth. And so we have, I think, done a nice job of building a pipeline of opportunities, both within our own parking industry and also looking at other things that we do. We talk a lot about ancillary services, so it doesn't have to just to be parking management, but can be things closely related to what we do. And we're pursuing many opportunities right now. And hopefully, there'll be an opportunity for us to get some completed. That being said, just because we have the capacity to do deals, doesn't mean we will do them. And at the end, we have to maintain discipline and ensure that we are paying the right amount to buy a company. And then once we get it, we have the ability to make it grow. I mean, there's no advantage to just being a larger version of ourselves. It can't grow. So we will keep our discipline over price. That means we'll turn away from a number of things and some things won't get done. But we are actively looking at things all the time and expect to continue to do that. In the absence of that, I think, at some point, we'll continue our discussions around buyback and dividends and that'll be a decision for our Board of Directors.

Okay, great. On that point on the ancillary service offerings. Could you expand a little bit more on what you mean by cross-selling. These ancillary services, I noticed, you highlighted that in your prepared remarks. What services in particular are you looking at to cross sell? Is it shuttle or street parking? Or are you more talking about revenue generation, maintenance and security add-ons that you could provide within your current footprint?

Okay. I mean I think you probably answered your own question. Clearly, on an ongoing basis, we're always looking at client relationships and saying what things does the client need that are maybe not provided by us that we also provide to other clients? So you mentioned shuttle services. So we have many clients that we provide both parking management and shuttle operations for. We also have clients, where we provide parking management and somebody else provides the shuttle operations. And so it should be, I think, relatively straightforward to go to one of those clients and say, we have this capability, here is some examples of where we do this with other clients and we can generally save you money and create a more efficient relationship, you don't have to manage multiple vendors across an array of services. So that's probably the most obvious example. But clearly, it could be in a smaller scale where at an airport, we run the parking and someone else is managing the taxi and limousine dispatch at the airport. Or there may be other services that are -- people sometimes move around in wheelchairs, sometimes there is the opportunity to clean a facility. So we obviously have a maintenance capability both inside the parking facility and also inside buildings. And so as we're -- our goal of our business development folks and also our operating leadership is always to be pursuing those kind of opportunities with our clients. Then I would say, beyond that, we're always looking for -- the question I ask myself all the time is, are there things that clients buy that we don't do currently? And there are some things like that. And we're thinking about those and we're looking at companies who maybe provide those services. And that might give us an opportunity to do something different. For example, you have -- at stadiums where we have SP Plus Gameday running the parking and the ground transportation and logistics for big events like the Super Bowl. Somebody else's inside that stadium cleaning up after the event. So I just throw that out as an example where we're trying to exercise our minds around situations where our clients are buying an array of services. Those services involve people who -- someone who can hire, manage, recruit, train and supervise hourly workers in outdoor and indoor environments. And I think there's some opportunity there for us both to add some organic opportunity, but also potentially as acquisition candidates down the road.

And our next question coming from the line of Marc Riddick with Sidoti.

Marc, I was wondering if you could spend a little bit of time discussing one of the things you mentioned in the press release around the management meeting and some of the insides there. It seems like from the commentary that you came away fairly positive about the opportunities and some of these things that you're pursuing. But I was wondering if you could, sort of, maybe, take a moment and sort of -- just give us, sort of, little bit of a broader view? Maybe there is, maybe, top 2 or 3 takeaways from that? If there are any surprises or any particular things that we should focus on that you would want to highlight from that meeting?

I'd be happy to, Marc. I mean, at the Annual Management Meeting, it represents opportunity for all of our top leadership throughout the organization to get together. And I think, in and of itself that's valuable because we can make sure that everyone is crystal clear on the vision, the priorities and the things that they can be doing as individuals to try to accelerate our growth. Obviously, the number 1 challenge for any business is how to get growth, and we think we have all the right tools and the toolkit to do that. But it doesn't matter whether I think that, what matters is do those 175 people all think that and do they know how to use those tools. And do they know how to prioritize the opportunities. And so we use this annual get together to really ensure that they understand what the opportunities are for the business in aggregate. But also how to look at their local markets or their local areas of responsibility to try to take advantage of growth opportunities. So that's really the focus. And I think, I'm always feeling -- probably if I have a concern it's always that people walk away from that feeling positive and energized and motivated to go back and do something different. It's very easy in any company for people to get into a groove and just stay there. And what I always tell people is that if you want to have faster growth, if you want to create more opportunity for yourself as an individual, you're going to have to take some chances, try new things, learn new skills. And we're focusing a lot on the quality of our presentations and how we explain our capabilities to our clients. When we analyze competitive situations that we win and competitive situations that we don't win, some of the feedback we get is that we're offer up an outstanding management team, a great proposal, really creative ideas to help client grow their business, but maybe in the presentation we weren't as effective as some of our competition in some cases. And so that's been an area that we've recognized and we've made some -- kind of continue to make some significant change to try to help us be more effective in communicating what our capabilities are. So if there is 1 thing out of the conference, that was probably the number 1 topic. But more than anything else, in a business as large as ours, we depend on individuals around the business to create relationships with clients to be creative. And if we can enable them to do that, then we're going to have more success as we go forward.

Okay, great. I was wondering if you could touch a little bit on, sort of, where you just on the broader sense of where you see your labor positioning at the moment? And needs and maybe, some -- are there any key areas of leadership that you need to enhance?

Okay, well, sure. I think for those who have been following what we've said over the past couple of years, we clearly have made some changes in our organization and our leadership over the past couple of years. And I really look at 2018 as the year where for the most part, people are in the roles now that they should be in and are going to be effective and be successful in. And obviously, just making change all the time is not a good thing either because it's a distraction. So I think we pretty much now have the organization in place that we want to have, given our current size and scale and priorities. That being said, we're always looking to bring in additional resources to support growth initiatives. And so over the past year we have brought on more business development resources, and the ones we brought on are gaining traction and starting to win new deals for us. And I think that encourages us to look at opportunity to bring on more of those kind of resources. We've talked about the vertical market focus for our business. And it's another area where we say if we can have subject matter experts that can help us differentiate ourselves in hospitality space and the healthcare space, in the municipal space, we think there's value in bringing on resources that can help us develop business opportunities and grow in those spaces as well. And then of course, we've talked about our digital strategy, our interest in developing capability to bring revenue management techniques to the parking industry, but also manage all the various channels that we get customers from, which is a lot different from the past, where we just waited for people to drive by the parking facility. Now we need to work with aggregators and other business partners. And look for opportunities to get awareness and build relationships with customers and to get them to our facilities. So we have been investing in people that have those kind of skill sets. Again, as we start to gain the benefits from those investments, we'll continue to add resources in those areas as long as we think it's productive to do so. So I think overall message, we have our organization in place now. I'm very excited about the team that we have here. And I think we have the ability to now accelerate our growth. We continue to add resources where we think it can help us do that.

At this time, I'm showing no further questions. I would like to turn the call back over to our President and CEO, Mr. Marc Baumann. You may begin.

Okay, thanks, Olivia, and I'll be brief here at the end. We really appreciate you joining us today. I hope we have been effective in letting you know our plans for 2018. We're looking forward to an exciting year. And talk to you next time. Thanks, and have a great day.

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