SP Plus Corporation
Q4 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen, and welcome to the SP Plus Corporation's Fourth Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call maybe recorded. I would now like to introduce your host for today's conference Mr. Vance Johnston, Chief Financial Officer. Sir, you may begin.
- Vance Johnston:
- Thank you, Chanel, and good morning everybody. As Chanel just said, I am Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the fourth quarter and full year 2016. 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 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 2017 financial 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 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 it's 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 the 30 days from now. With that, I'll turn the call over to Marc.
- Marc Baumann:
- Thanks, Vance, and good morning everyone. I want to begin today by acknowledging and thanking our team for this significant progress we've made over the past couple of years in our key strategic priority. Namely, we've been able to significantly reduce costs and improve productivity by streamlining our organization, optimizing back-office processes and better managing discretionary spending. We've also been successful in implementing targeted safety and risk mitigation programs across the entire organization and reduced the total costs of risk over the last two years. We've accomplished all of this, while still maintaining focus on contract retention and achieving record new business. Successful execution on these initiatives helped us to achieve double-digit growth on our core financial measures in 2016, all of which met or exceeded the targets we've set at the beginning of the year. Most notably, I am very pleased that we are able to grow adjusted free cash flow by 26% in 2016. These excellent results for both the quarter and the year could not have been accomplished without the dedication and tireless effort of all of our employees, and for that I am profoundly grateful. Looking forward to 2017 and beyond, our primary focus will be on accelerating gross profit growth. We've recently conducted a strategic assessment of growth opportunity to identify key industry vertical with the most potential to accelerate growth. We are now quickly moving to realign our organization within industry vertical focus and expect to make strategic investments in certain key areas particularly in business development resources. We are also heavily focused on building up our revenue management and marketing services' capabilities to further drive gross profit growth. We believe these changes will position us well for long-term sustainable growth. Given the changes we are making in our business model and the associated investments, we expect 2017 will be somewhat of a transition year. Even with continued gross profit growth, we expect adjusted EBITDA growth will be somewhat less than 11% we achieved in 2016 and less than what we believe to be the long-term potential of the business, primarily due to the investments we are making this year. We remain committed to driving growth in EBITDA, earnings per share, free cash flow and return on invested capital as we believe these metrics correlate most highly with shareholder value creation. With this in mind, we will also continue to evaluate the best possible options for disciplined capital deployment, which may include additional stock repurchases, dividends and prudent acquisitions. Finally, before turning the call over to Vance, I want to briefly comments on a few financial and operating highlights, knowing that Vance will discuss the numbers in more detail in a few minutes. Location retention was 87% for the year, which includes the voluntary termination of one contract in New York that had over 200 locations and which we've talked about on prior calls. As we've now chosen to terminate this one contract, location retention would be a solid 93%. Full year 2016 same location gross profit increased 3% over 2015 with good growth across most industry verticals and geographies with some exceptions in the New York market in the hospitality vertical. I also want to highlight some of our notable wins. We continue to have strong relationship with MGM and were recently able to secure the National Harbor resort in Washington, DC. We were also rewarded a multi-year contract to operate the first ever electric shuttle bus program in the City of Chicago, which links the AON and Prudential office buildings to mass transit terminal. Finally, we recently began providing ground transportation management services at Seattle-Tacoma International Airport in Seattle, Washington. Our pipeline remains full and active, and we're looking forward to another great year for new business. With that, I'll turn the call over to Vance to lead us through a more detailed discussion of our fourth quarter and full year 2016 financial performance and our guidance for 2017.
- Vance Johnston:
- Thanks, Marc. I'd like to spend a few minutes reviewing our financial results in more detail. Fourth quarter 2016 adjusted gross profit increased $7.4 million or 19% over the same period of 2015. There were several key factors that helped drive this growth. We experienced lower healthcare costs in the fourth quarter of 2016 compared to the fourth quarter of 2015, as we began to see the benefits of changes we've implemented earlier in the year to control the rising cost of healthcare. We also saw a more significant reduction in casualty loss reserve estimates in the fourth quarter of 2016 that in the same period of 2015. Aside from these factors, we also saw growth from same locations and one new business that more than offset the impact from contract termination. Adjusted G&A for the fourth quarter increased by $800,000 or 4% over the fourth quarter of 2015, which was primarily due to a $2.7 million year-over-year increase in the Company's performance-based compensation accrual that was largely offset by lower other comp and benefit costs. New business, same location gross profit growth and strong cost management helped drive 2016 fourth quarter adjusted EBITDA up $27.3 million as compared to $20.7 million in the fourth quarter of 2015, a 32% increase. Adjusted EPS was $0.52 for the fourth quarter of 2016 as compared to $0.29 in the fourth quarter of 2015, an increase of 79%. In addition to significantly improved EBITDA performance, lower interest costs and depreciation and amortization expense also were primary drivers of the adjusted EPS increase. For the full year 2016, adjusted gross profit increased by $4 million or 2% over full year 2015. Contributing to the year-over-year increase was same location growth of 3%, lower casualty and health insurance costs and new business that offset the impact of contract terminations. As Marc mentioned earlier, we are starting to see some financial benefits from the safety and risk mitigation programs we put in place. Adjusted G&A for fiscal 2016 increased $5.4 million – I am sorry, adjusted G&A for fiscal 2016 decreased $5.4 million or 6% over fiscal 2015, due primarily to our cost reduction initiatives. A decrease that was achieved despite an increase of $1.1 million in our annual 2016 performance based compensation accrual. As I've mentioned on prior calls, we continue to be pleased with the progress we are making on cost reduction initiatives without negatively impacting the business. As a result, full year adjusted EBITDA increased by $9 million or 11% in 2016 as compared to full year 2015. Full year 2016 adjusted EPS was $1.32, an increase of $0.35 or 36% as compared to full year 2015 adjusted EPS of $0.97. Some of my comments for the quarter, higher adjusted gross profit and strong cost management coupled with reduced interest costs and depreciation and amortization expense drove the increase in EPS year-over-year. The company generated adjusted free cash flow of $46.4 million during 2016 as compared to $36.9 million in 2015, a 26% increase. Driving the year-over-year increase was higher EBITDA, favorable movements and working capital coupled with lower cash tax payments and lower interest expense. We are pleased with our efforts to grow free cash flow, which will remain a primary focus going forward. Finally, I want to cover our outlook and guidance for 2017. As Marc mentioned, the investments we're making in business development and resources as we align our operating model around industry verticals as well as other investments we're making to further develop revenue management capabilities will somewhat temper 2017 EBITDA and free cash flow growth. We believe this is the right time to make these changes in order to set ourselves up to capitalize on attractive industry vertical opportunities and position ourselves for accelerated future growth. With all that said, we expect 2017 reported and adjusted EBITDA to be in the range of $92 million to $97 million, an increase of 4% over 2016 adjusted EBITDA at the midpoint. I think it's important to again point out that we define EBITDA to be after-deducting from minority interest expense. Reported and adjusted EPS is expect to be in the range of $1.55 to $1.65, an increase of 55% over 2016 reported EPS and 21% over 2016 adjusted EPS at the midpoint. As stated in our earnings release, one important point to note is that amortization of intangibles related to all prior merger and acquisition activity, will decrease by $7.4 million in 2017 and represents a $0.19 increase in EPS. Our 2017 adjusted EPS outlook anticipates a normalized effective book tax rate of approximately 40%. However, the Company's tax rate could vary based on a number of factors. In addition, while our management-contract heavy portfolio provides us some major protection in economic downturns, our guidance does not contemplate material change in economic conditions. While we currently don't anticipate any significant adjustments to EBITDA and EPS other than the equity and losses or income from our investment in part mobile, which only affect EPS, non-routine items such as, but not limited to, integration, restructuring costs, assets or business sales or dispositions, acquisitions, non-routine settlements, non-routine income tax items and ongoing costs related to non-routine structural and other repairs will continue to be adjusted from reported results as they are recognized. We expect free cash flow to be in the range of $47 million to $52 million, an increase of 7% over 2016 adjusted free cash flow as a mid-point. The main driver of the more moderate growth and free cash flow is approximately $2.5 million of after-tax restructuring related severance and non-routine settlement payments, which if excluded, would result a 12% growth over 2016. We no longer anticipate reporting adjusted free cash flow. That concludes our formal comments. I'll turn the call back over Chanel to begin the Q&A.
- Operator:
- [Operator Instruction] And our first question comes from the line of Dan Moore of CJS Securities. Your line is now open.
- Larry Solow:
- Good morning. This is actually Larry Solow, calling in for Dan. Hope you guys are well this morning.
- Marc Baumann:
- Good morning.
- Larry Solow:
- A few questions, you mentioned some of the investments and steps you guys are taking to sort of realign your organization accelerate top line growth. It sounds like you're going to be making those investments throughout 2017. Do you expect that to be pretty much done as you enter 2017? And then, maybe you can start seeing some of the benefits ramp up as you go into 2018.
- Marc Baumann:
- Yeah, that's right. And I think, we're really talking about in terms of investment is really adding new people to our organization. We've obviously been writing record new business over the past several years and each year we set new records, but we think as we look forward, the opportunity for growth particularly in some of the verticals that we focus on which are hospitality, municipal, university, services and healthcare, you know those are sort of major verticals we talked about for a long time, where we think there is growth. What we're doing now is really putting more resources in place to enable faster growth into those verticals, and obviously there is a lag time between putting people in new roles and getting them geared up to go develop new business opportunities for us and when those the result of those are reflected in our financials from a point of view of faster growth.
- Larry Solow:
- Okay. And just in terms of your outlook for 2017. In terms of swing factor that can sort of drive you to the lower or higher end outside of underlying gross profit growth, other things that may contribute towards the lower or towards the higher end, any thoughts there?
- Marc Baumann:
- Well, I think, one thing you have to bear in mind, if you look at our 2016 results and while they were terrific, we are seeing improvement in both our casualty programs and our healthcare programs, and we got a nice end to the year on both of those programs. And I think, in both cases as Vance and I've indicated, that's reflective of our effort to either make changes to our healthcare program to control the cost better or in the case of casualty, all of the risk programs that we've implemented over the last two years to focus on safety and new training and even incentives to our field organization to mitigate claim incidents for us. So, we are seeing the benefit of that, but it's also a fairly – those were fairly large benefits in one quarter and it's very difficult to predict what's going to happen in a given quarter or even over a given four quarters. So, we continue to believe that we will see positive trajectory in our casualty programs in particular, but we don't know whether they'll be as large as that or potentially a significant in 2017 as it was in 2016. So, that's an important thing to bear in mind. I think the other thing is that, you know we've talked about our ability to win new business and we've now, I think this is our third year in a row with record new business. And there is obviously as you add records each year, you have more challenges to continue to get new records and to generate more new business. That's why we are making the investment we're making in more business development resources. How quickly those resources actually translate into more new business is certainly a question and we obviously are optimistic about our ability to set even more new record as we go forward. We don't know what the pace that's going to look like and that could be a variable. And finally, whole area of retention, we talked about our retention rate, both our reported rate of 87% and then our adjusted rate of 93% when we took out that one marginally profitable contract from New York. We talk for a while about our desire and our belief that we can have an ongoing sustainable location retention rate in the 92% to 93% range. So, we can repeat that in 2017, that's going to be a very, very good support to our ability to get higher in our guidance ranges if we are unable to repeat that, then obviously can go the other way.
- Larry Solow:
- And just lastly, you've mentioned, it sounds like certainly some operating investments. But on the capital expense side, you gave us free cash flow guidance, any thoughts on just capital expenditure outlook for 2017? Thanks.
- Vance Johnston:
- Yeah. As you may recall, we don't typically give specific guidance on CapEx. Having said that, we don't expect as Marc alluded to any significant additional incremental investments in CapEx related to some of the changes to our operating model that we're talking about, it's more going to be focused around investment in resources and new business development for example. So having said all that, we don't expect CapEx to be materially change for example from where it came in 2016.
- Larry Solow:
- Great. Thanks a lot guys. I appreciated.
- Operator:
- Thank you. And our next question comes from the line of Tim Mulrooney of William Blair. Your line is now open.
- Tim Mulrooney:
- Good morning.
- Marc Baumann:
- Good morning, Tim.
- Tim Mulrooney:
- So, thinking about these contract wins, some of the major recent business wins that you've had whether it's MGM properties in Vegas and DC or at the Millennium properties in Chicago. Can you talk about the thing or things that really led you to win that contract over the competition? Is it your existing relationships with these clients or technology or ancillary services you provide, or part of your value proposition do you think is really helping drive this big contract win?
- Marc Baumann:
- I think, Tim, we've been able to do successfully as take advantage of our size and scale, and what that means is that we have experts in every area of parking management, whether its technology, operation, supervision, creative marketing program to drive volume, expertise in working with aggregators and people in digital space to drive volume and properties. And I think, when you put all of that together, it's very compelling story for a clients who has a large and complex operation. And that that's the kind of operations that we like the most, because obviously we can bring our expertise to bear and differentiate ourselves from other operators who don't have all those capabilities. I think in particular in Las Vegas, obviously MGM was a new client and they were making a decision to bring pay parking to Las Vegas for the first time and taking a leadership role in that decision. And clearly, they wanted to put their decision in the hands of somebody who had the experience to handle all the complexity of bringing that about. In particular, with the new T-Mobile arena that was built by MGM in the area there our expertise with SP Plus game day in running super bowl in other large event venues which I think a crucial factor in their decision to select us over some of the other operators.
- Tim Mulrooney:
- Got it. Thank you. And then, I am curious about the shifting gears a little bit, but the size of your opportunity in the municipal market. How many municipal contracts do you service today? And are these all on-street parking enforcement contracts? And then, thinking more broadly about your penetration opportunity, I am assuming that you'll only serve municipalities that are big enough to make it worth your while. So if this opportunity set, how much of this market is currently outsource verses in-source today?
- Marc Baumann:
- Yeah. A very little of it out-source. I mean we are one of the largest providers of outsource parking management services to the municipal space. And when we do talk about municipal, we obviously are talking about primarily around parking meters, although many of these operations also include off-street parking garages that we operate either as part of the same contract or separately. So, not exclusively meters, but I would say generally speaking I think there is 3,000 to 4,000 municipalities that have paid parking on-street and we have a couple of 100 contracts I think in that space. And like as I said, that makes us one of the largest providers, so it's a huge opportunity for growth. Now, and the opportunity for the municipality is also very, very large because of two reasons; one, they may not have examine their parking rates and looked at the potential for adjusting rates in certain peak demand times or bringing in new equipment that could bring that about and we have a technology integration group that advise these clients on how to do just that. And then of course, we bring our marketing programs and revenue management expertise to bear to help them make the right decisions around what rates to charge for parking on-street. So, there is a huge revenue upside that these places are seeing. The other is just with technology generally people are obviously paying for parking in new ways, looking to use smart phone apps, and they need somebody that has the expertise to advise them on how to do that, handle complex residential permitting situations. And so often, we see that we're selected over other operators because we have greater expertise in those areas. Finally, just the decision to outsource in and of itself is often a big one for the municipality if they've done it in house for many years. But again, once again we're able to bring a more effective management in place to bear on those kind of operations and generally can do the enforcement as well as collecting the money out of meters and do so at a lower cost to the municipality than if they were doing it themselves.
- Tim Mulrooney:
- Okay. Thanks for all that detail. One last question, there was a big step-down in amortization expense for 2017, I think about $7 million step down. So just to make sure I am modeling G&A correctly out the next several years. Can you share with us today how much you expect amortization to step down in 2018 and 2019 because that $0.19 was a pretty big delta and I want to make sure that we're all getting it right in this little out years?
- Vance Johnston:
- Yeah. We don't typically give kind of individual guidance on amortization as an item. And so it's also – to be quite honest, Tim, as we kind of look out, the things that are going to be that are intangible, going forward are going to be more related to contracts that we have. And so those contracts, the timing of when they fall off may vary based on kind of if there is an early termination or things of that nature as well. And so, it's not something that we have typically provided specific guidance on and there is some variability to as we look out into the future, given the nature of the intangibles, so I think we probably rather not do that at this point.
- Marc Baumann:
- I think, one thing, just to add to Vance's comment, when our 10-K is filed for the year, you'll be able to see the componentry of our intangible and tangible assets and what sort of lives are being used to amortize and depreciate those things, so that might help you as you think about your model.
- Vance Johnston:
- That's right.
- Tim Mulrooney:
- Okay. Helpful guys. Thank you very much.
- Marc Baumann:
- Yeah. Thank you.
- Vance Johnston:
- You're welcome.
- Operator:
- Thank you. And our next question comes from the line of Kevin Steinke of Barrington Research. Your line is now open.
- Kevin Steinke:
- Good morning, Marc and Vance.
- Marc Baumann:
- Good morning, Kevin.
- Vance Johnston:
- Good morning, Kevin.
- Kevin Steinke:
- So, I appreciate your plan to invest more in growing those key industry verticals that you talked about, and I believe you obviously already had a focus on trying to growing those vertical. So, is this investment just really applying more people to the same thing you were already doing or is there some sort of something new or a change in the way you're actually approaching the market?
- Marc Baumann:
- Yeah. There is actually a little bit of both. We're certainly going to be applying more people as we indicated in our earlier comments Kevin. But I think also our management structure for our operating business was really aligned more towards our traditional commercial business. And we had a focus on these verticals, it's not a new focus or not new that we've just identified opportunity, and the work that we did in our strategic review of our business, we began to determine how big the opportunity was in hospitality or municipal or university or healthcare. And by doing so, it gave us confidence to make some changes in our organizational structure both in terms of getting resources, but also lines of authority and responsibilities for thing, so that we could actually bring all of that together successfully and been able to grow in those verticals, maybe more rapidly than we have over the past couple of years.
- Kevin Steinke:
- Okay. That's helpful. And when you talk about adding new people, I think you traditionally – you know, you like to have experts in certain markets such as municipal, institutional, hospitality et cetera. So, how hard is it to fine those people that that you want to find to help drive that new business? Just wondering how that hiring process goes? Go ahead.
- Marc Baumann:
- Understood, I should say, we shouldn't maybe give the impression that all the "new people" all people going to new roles are necessarily coming from outside the Company. So, part of what we've done is to spend some time looking at the talent we have inside the business and maybe someone has shown the capability to go beyond of what they've been doing and take on new responsibilities, maybe somebody had shown a talent for selling in a different vertical and has had some success there, and so there is an opportunity to move them into a new role. So, some of this is about giving opportunities to people that are already in our organization to take on new roles and responsibilities, and obviously backfill them with others who maybe are also ready to step up and take more responsibility. But you're right in what you're saying, in order to sell successfully in any vertical, you need to have some expertise in that vertical, you can't just be a "salesman or saleswoman" you need to have selling skills and you need to know how to make presentations and proposals, but you also have to know the substance of what you're talking about. And so, we will and we do find that we can go outside and find people that are in those verticals, and they're eager sometimes to make a change in career and to come into our organization. So, I think, it's not like you flip the switch and they are all there, it's a process that involves recruiting and talking to people, and that's something that's under way now.
- Kevin Steinke:
- Okay. Great. Thank for that color. And then, as we look to 2017, how should we think about general and administrative expenses in light of some of the investments you're making as well as any other opportunities you have to further reduce cost?
- Vance Johnston:
- Hi, Kevin. This is Vance, and so a couple of things. One is that, we're going to continue to be very focused on managing G&A expenses and to executing key initiatives that we have to further reduce G&A as we move forward and we think there is additional opportunity there to do that. Having said that, you know we'll also be looking as we've alluded to on, in our prepared remarks and on the call. Some of that, as those savings will be reinvested back in the business in the form of, for example new business development resources in certain verticals and in certain markets. And then also, with any business, we'll also be somewhat constrained of our ability to kind of reduce G&A further going forward based on inflationary costs as well. But no doubt about it, it's definitely a continual effort of ours to drive down G&A cost.
- Kevin Steinke:
- Alright, alright. Fair enough. Can you just expand too on what you mean by – when you talk about building up revenue management capabilities and I think you also referenced marketing or marketing capabilities and resources as well?
- Marc Baumann:
- Sure, absolutely. Well I think one of the things that we have been doing for a while is advising clients on how to – what's the right pricing to put to use, charge for parking, whether it's for monthly parking or transient parking or might be flex to based on special events or other things that are happening around the property. But one of the things that we haven't fully taken advantage of in the past is all of the data that's generated by the parking equipment. And we are now moving forward to capturing that data and using that to develop algorithms and have a more informed decision making around what's the optimal pricing to put at a parking facility, whether were advising a client or whether we're advising ourselves if you will for our lease location. So that's really the reason. We announced early in the year that we brought on a fellow named Jeff Eckerling, who's got a revenue management expertise. He came out of Orbitz and other organizations where, they maybe ahead of our industry in terms of using data to make better decisions. There is also as I indicated to an earlier question, people are changing the way that they make decisions about not only how to pay for parking, but also to choose where to park. Historically, people have driven around near where their ultimate destination was. They've looked around, they saw a parking facility, and they said, okay, I guess I'll go in there. Increasingly people are either being routed to a facility through a computer program and their phone or their car or they're making a decision before their journey. And we obviously want to be active both in advising our clients on how to take advantage of those changing consumer behaviors and how to make sure that they're making money appropriately off of all that and pricing it correctly and marketing and promoting themselves to consumers who might be interested in using an alternative way through the digital space to make decisions about where to pay or where to park rather and want to pay a new way. So I think for us investing resources in revenue management and also continue to invest in marketing services allow us to have a differentiated offering that we can present the client to help them optimize the performance of their facility, and at the same time use that expertise to help us optimize the performance of our lease locations. So, we see that as an area that we'll be investing in both in terms of adding more people. I know Jeff is starting to build out his team and also we'll be looking and using outside resources to help us move down the track in terms of developing that capability. I think realistically, our expectations that as we move through 2017, we are going to have learned a lot and develop our expertise and we'll probably see more of the benefit from these moves as we move into 2018 and beyond.
- Kevin Steinke:
- Alright, alright. That's very helpful. And then, in terms of how you're thinking about gross profit growth in 2017, I know you talked about a lot of the puts and takes there in terms of new business win rates and retention, and how casualty loss reserve estimates trend in all that. But I mean is it reasonable you think to expect some level of gross profit growth as we kind of think about the midpoint of the range or just wondering if you have anything specific baked into those expectations you have out there?
- Marc Baumann:
- Sure. And of course as you know we don't give guidance on gross profit per se. But, we are expecting additional gross profit growth as we go through 2017 compared to 2016, and we would be expecting that in the absence of making these changes in our organization that we are talking about. So, we have a lot of good people doing great things every day, so I am not concerned about getting growth. I think the stuff that we've been talking about in terms of the investments we're making, which as Vance said are going to take some of the savings from additional G&A saving that we're making and reinvesting those in these additional G&A resources to help us grow faster. I mean our goal here, if we look back over the past few years, our gross profit growth has not been at the rate that I think this business is capable of. And so, our expectation is that we will have nice growth in 2016, but we're really primarily focused on making these investments in people and talent so that we can accelerate that growth and get the higher levels of gross profit growth than we've experienced over the past couple of years. But that will mostly start to show itself as we move into 2018 and beyond.
- Kevin Steinke:
- Okay. Make sense. Just one last one for me, as you think, about the same location gross profit growth that you had in 2016 that 3%. Is there any way you can attribute that to, say the market versus maybe your own internal efforts in terms of cross-selling additional services? Or I don't know if there is any way you could parse that out and what perhaps drove that same location growth last year?
- Marc Baumann:
- Yeah. I mean, like anything we do. It's difficult to generalize, because obviously in certain markets we have had no difficulty putting up parking rates and that's contributing to gross profit growth. At certain locations on certain clients, we'll be able to sell an additional ancillary services and that's driving up those profits. We obviously also have the situation you know where we're unable to do that and so we're not getting as much growth as we would like at certain location. So, and of course, one of the big things is that, the focus we've put on driving down our total cost of risk, the safety programs and the things that we've talked about on the prior call, that's obviously reducing one of our cost and reducing the cost of our casualty program, you know that's benefiting our gross profit as well. So, I mean all of those things kind of contribute together. What I will say is that, it's been a good market for parking. You know there's been a lot of development and so that for the most part had the effect of giving support to higher parking rate in places where a lot of development is taking place, because some inventory is being taken off. So we think that economic conditions are generally good and we'll pull on all those levers in all those places to try to continue to get gross profit growth.
- Kevin Steinke:
- Great. Thanks for taking the questions.
- Marc Baumann:
- You are welcome Kevin. Thank you.
- Vance Johnston:
- Thanks Kevin.
- Operator:
- [Operator Instructions] Our next question comes from the line of Mark Riddick of Sidoti & Company. You line is now open.
- Mark Riddick:
- Hi good morning, gentlemen.
- Marc Baumann:
- Good morning.
- Vance Johnston:
- Good morning, Mark.
- Mark Riddick:
- So, I was wondering, you've answered a lot of the questions I already had about the results of the process and the results of the focus on the capabilities that you are looking at. I was wondering if you could spend a little time going into the process of the analysis and sort of maybe what precipitated it and how you went about it and then I have a couple of follow-ups on that?
- Marc Baumann:
- Well, I'll start and maybe Vance will have some additional thoughts. I think realistically as I was just saying to Kevin's question, you know as we look at our business, we feel that this is a business that can generate faster growth, profit growth than the 2% to 3% that we've had over the past few years. So, as we look forward, how do we not just sustain the growth rate that we've had on gross profit, but how do we actually increase that and get above 3% or get to 4% to 5% if we can. So, I mean I think that's always in our mind. And I think what we found is that, as I said to an earlier question, you know we primarily kept the same organizational structure for some time really since, Standard Parting and Central Parking merged four years ago, and I think it was time for us to just take a fresh look at both, what's the growth opportunity in the various verticals and we didn't just look at those ones that I mentioned, we look at all the verticals in which we operate, and we said, how do we grow in this vertical, how do we grow in that one? How much of a market share do we have? What's the potential to add new business? Where should we add more resources? Are we aligned? And we did have some outside help we brought into help us with it, we felt that was good to have fresh pair of eyes looking at us and our data and giving us some thoughts and suggestions. But what came out of it was very, very encouraging, because number one, it reinforced these newer verticals that we've had some focus on for a few years, and so that was the good news. It also reinforced the fact that we have the right set of services and products that we can offer to clients, and so it wasn't like we have to generate a whole bunch of new things and new expertise to one area where we are investing to do that, obviously as I said is revenue management, but beyond that we have the right skills and expertise to be able to grow. And so a lot of the let's call it the obstacle to be overcome if you will be to be able to take advantage of these terrific opportunities is really aligning our organization a little differently internally and adding some additional resources to help us get out there increase the bandwidth of our organization to be talking to people about new business opportunities. So, I wouldn't say it's easy, because it never is, but it isn't like we had to fundamentally re-think our business. We just really had to make sure that we were – our operating model was aligned to enable us to be able to grow faster.
- Vance Johnston:
- I would just, Kevin I would just add to what Marc was saying, agree the thing Marc said and then the one other thing I would just add is that, not only did we look at the potential size of opportunity in detail, in through detail kind of by vertical industry vertical if you will, but we also cross that by market. So, kind of, we understand some of this before, but now on a much more detailed way, so we could kind of think about how we're going to allocate resources by vertical, by market. Right, I mean geographic market, and so that was helpful as well as we thought about, where the opportunities are to deploy resources more effectively to grow certain verticals and markets better.
- Mark Riddick:
- Okay great. That's helpful. And I was wondering, I guess that maybe on the flipside of that, I mean are there, so, I would imagine there are certain areas that maybe would be a little bit less – little bit more deemphasize that if I was going forward, I was wondering if you could share what we might say is taking a bit of a backseat to some of the things that you are more bullish on?
- Marc Baumann:
- I think as we've talked and I even indicated this earlier on the call Mark, our great expertise as a large organization is that we are able to bring together a diverse set of skills whether its revenue management and marketing services, technology, operations management, financial expertise in terms of modeling and projecting and creating reports. We're able to bring these together, and obviously the kind of client that are interested in that are people that have large complex challenges in their own business. And that's not a new thing, but that's clearly out there and so, if we are looking to compete against our other larger operators that are out there or even against local operators, the kind of clients we want to go for, are the kind of people that have these kind of needs. And obviously, we operate a lot of surface parking lots with automated pay stations and we operate you know automated self-parking garages and we will continue to look for opportunities to add those into the portfolio, but our main focus is going to be on these larger and more complex opportunities, where clients are able to take advantage of our expertise and we're able to bring that expertise to bear not only for their benefit, but we're also able to be paid appropriately for what we do.
- Mark Riddick:
- Okay great. And I guess my last question will be around the implementation of the safety and risk programs, which I wanted to get a sense of that because new leadership had been brought in to head that and I guess, it seemed as though you've gotten benefits of that faster than I was expecting and I was wondering if you could sort of maybe touch on that a little bit, as to how comfortable you are as to the process of the programs not just from the results that have been produced, because that obviously can be, it can vary from quarter-to-quarter. But as far as the implementation as to the behavior modification if you will and sort of your comfort level as to where you are to see how effective those programs can be going forward?
- Marc Baumann:
- Great question, and you are right, I mean we did bring in Steve Bruner to head up that area couple of years back and he had tremendous expertize in the area of safety culture. He told me the story when we were bringing in him about how in his prior company, every meeting started with a discussion of safety and that's what you have to do in order to really get people to change their beliefs and their behaviors about what is possible and you have to attack limiting beliefs for example there will always be accidents is a limiting beliefs, and if you by end of that thinking, then you are going to become complacent and not take all the actions that you could take. And so he's really I think helped us reenergize our own business, a focus on safety. We always had one , but I think we've brought in a number of new initiative, some of which we've talked about in the past, and a lot of it is about education and getting people to recognize that they can do something to create a safer environment for their employees, themselves and for our client. And for the general public who is using our parking facility, so it's one of those kind of things where you can kind of, it's inspirational, because you can actually create a safer place for lots and lots of people, millions of people who use our facilities and that's a good thing in and of itself. It also happens to be a good thing to do if you operate the kind of insurance programs we do, where lower claim cost and expenses you know are beneficial to the Company. But we've also kind of one of the key things we've done is actually put incentives out there into the organization, so we're not just having a conversation with people and saying take these important, while you are doing your safety reviews of your facilities, you have all of your safety materials there, are your people properly trained, et cetera, but you actually have a financial incentive to engage in safe practices and it will ensue you ream is engaging in safe practices. So, we – that's been another kind of key hallmark to it, and finally we've done a lot more auditing, we've looked at our locations that generate disproportionate number of incidents and we go out there, we send people that we've added to our team here in Chicago. They go out there and they look at those and do audits of those facilities and look for opportunities to work with the local management to effectuate change that will reduce claims. So, it's a long-term multi-faceted kind of exercise. We're not done, we're trying and rolling out new things all the time, so I would view this as we're at the early stages of what I believe will be a long-term kind of permanent focus on safety which will generate, continue to generate positive benefits for our employees and customers and also obviously for the bottom-line.
- Mark Riddick:
- I appreciate the color there, thank you.
- Marc Baumann:
- You are welcome.
- Operator:
- Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Marc Baumann for closing remarks.
- Marc Baumann:
- Thank you Chanel and I just want to thank all of you for joining us today and for your support and interest in our business and we're looking forward to terrific 2017. We'll see you next time. Thank you.
- Operator:
- Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.
Other SP Plus Corporation earnings call transcripts:
- Q2 (2023) SP earnings call transcript
- Q1 (2023) SP earnings call transcript
- Q4 (2022) SP earnings call transcript
- Q2 (2022) SP earnings call transcript
- Q1 (2022) SP earnings call transcript
- Q4 (2021) SP earnings call transcript
- Q3 (2021) SP earnings call transcript
- Q2 (2021) SP earnings call transcript
- Q1 (2021) SP earnings call transcript
- Q4 (2020) SP earnings call transcript