SP Plus Corporation
Q1 2008 Earnings Call Transcript

Published: 27 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Standard Parking Earnings Call. My name is Jackie, and I will be your operator for today's conference. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session near the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Marc Baumann, Chief Financial Officer of Standard Parking. You may proceed, sir.

[Marc Baumann:]

Thanks, Jackie, and good morning everybody. I'm Marc Baumann, Chief Financial Officer of Standard Parking, and your primary investor relations contact. Welcome to our call for the first quarter of 2008. I hope all of you have had a chance to review our earnings announcement which was released after the market closed yesterday. We expect to file the 10-Q sometime tomorrow. We'll begin our call today with a brief overview of the quarter by Jim Wilhelm, our President and Chief Executive Officer, and then I will discuss some of the financials in a little more detail. After that, we'll open up the call for our question-and-answer session. During the call, we'll make some statements that will be considered forward-looking regarding the company's strategy, operations, and financial performance. These statements are subject to many uncertainties in the company's operations and business environment. I refer you to the complete forward-looking statement disclosure in our earnings release, which is incorporated by reference for purposes of this call. I'd also like to refer you to disclosures made in the company's quarterly and annual 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 can be accessed on our website at standard parking.com and also at earnings.com. There will be a replay available on either website for 30 days after the call. With that, I'll turn the call over to Jim.

[Jim Wilhelm:]

Thank you, Marc, and good morning, everyone. We are pleased to report that 2008 is off to a great start. Net income is up 23% over last year's same period and earnings per share is up 28% year-over-year. The company generated almost $3 million of free cash flow in the quarter, which is less than the $5.2 million generated in the first quarter of last year, due to normal working capital fluctuations. Free cash flow generally tends to be lower in the first quarter of each year relative to the other quarters because we make performance based compensation payouts of approximately $4 million in March of each year. Also parking activity at airports and hotels is generally slowest during the first calendar quarter, which affects our cash flow. And Marc will discuss cash flow in a little more detail later in our presentation. We deployed that free cash generated during the quarter, along with borrowings under our revolving credit facility, to complete the acquisition of GO Parking here in Chicago, which we previously announced, and continue our previously disclosed stock repurchase program. We continued to add new business to our portfolio while maintaining a 92% location retention rate and a 98% gross profit retention rate. Some notable activity in our business this last quarter includes the fact that we began operations at the newly constructed Trump International Hotel and Towers right here in Chicago, where we manage both the valet and self park operations. We were awarded an additional contract by Caruso Affiliated, the company that developed The Grove in Los Angeles. This new contract award is for the parking at Caruso's Americana at Brand development in Glendale, California, which is a large scale retail, entertainment, and residential complex. We also increased our New York portfolio with the award of the parking operations at five facilities in Queens by the Greater Jamaica Development Corporation. While not affecting first quarter earnings, I'm pleased to report that just last week we settled our claim for damages we experienced during Hurricane Katrina several years ago. Our insurance company and ourselves reached an agreement for the settlement of that claim, which includes all the property damage we incurred as well as the business interruption insurance. And I will discuss later in the presentation, and be available for questions-and-answers, how that settlement will affect this year's guidance. The general economic consensus seems to be that we are in a recession or are headed into a recession this year. We believe that our business model, which as you know is built on management contracts and low fixed rent leases with geographical and vertical diversity, should serve us well in the face of the business challenges stemming from an economic downturn. The underlying business growth is good and our acquisitions are adding to the overall growth of our business. The business continues to generate solid free cash flow, which we have been using to add value to our shareholders by repurchasing our stock, and acquiring businesses. With that, I'll turn the call back over to Marc, so that he can lead you through a more detailed discussion of the quarter's financial performance. Then I will wrap up with a guidance update for 2008.

[Marc Baumann:]

Now that Jim has given you some commentary on the business, I'll give you some details on the quarter's results. Total revenue for the quarter, excluding reimbursed management contract expense increased by $10.2 million, or 16% to $73.6 million from $63.4 million in the same period last year, driven by solid growth organically as well as from our acquired businesses. Gross profit for the first quarter increased by 10% to $21.6 million from $19.7 million in '07. The first quarters of 2008 and 2007 each benefited from favorable $600,000 changes in insurance loss experience reserve estimate relating to prior years. So, obviously on a year-on-year basis did not have any impact on the strong growth that we reported in gross profit. General and administrative expenses increased by almost 6% to $11.4 million from $10.8 million in the first quarter of 2007. As we advised in our earnings release, we believe the first quarter 2008 G&A is not indicative of the run rate for the rest of the year, due to the timing of IT consulting engagements, the filling of open positions, as well as the amortization of the restricted stock unit grant that will begin in the third quarter of this year. We expect that the run rate for G&A will be closer to $12.5 million per quarter. Operating income grew 17% to $8.9 million from $7.6 million in the first quarter of '07. Resulting net income for the first quarter increased by 23% to $4.3 million compared with $3.5 million in the same period of '07. On a per share basis, reduced shares outstanding due to the stock repurchase program resulted in an increase of 28% in earnings per share from $0.18 a share in the first quarter of 2007 to $0.23 per share in this year's first quarter. As Jim mentioned, in terms of free cash flow, the company generated $2.9 million of free cash flow during the first quarter of this year, compared with $5.2 million during the first quarter of 2007, the variance being due, primarily, to normal fluctuations in working capital. And as we mentioned in the release, the trailing 12 months free cash flow was almost $30 million. Free cash flow generated in the first quarter of 2008, along with borrowings under the revolving facility was used to repurchase $7.8 million of common stock, make repayments of $5.5 million related to acquisitions, and make scheduled debt payments totaling $0.5 million. With that, I'll turn the call back over to Jim who will update our 2008 guidance.

[Jim Wilhelm:]

Thanks, Marc. We are raising our earnings per share expectation from $0.90 to $0.95 for 2008 to $0.95 to $1.05. This increase results primarily from our having reached the previously discussed definitive settlement on our insurance claim for business interruption losses resulting from Hurricane Katrina, which we expect will add $0.06 to earnings per share. We are pleased and we should be able to post the results of that settlement in our second quarter's earnings. We are pleased to have come to a fair settlement with our insurer and put that claim behind us as, we continue to focus our attention on growing the New Orleans market. We are maintaining our free cash flow expectation of between $27 million to $30 million this year. That concludes our formal comments. I'd like to turn the call back over to Jackie, the operator, to begin the Q&A session.

[Operator:]

Thank you, gentlemen. (Operator Instructions) And your first question will come from the line of Bob Labick from CJS. You may proceed, sir.

[Bob Labick:]

Good morning. Congratulations on another strong quarter.

[Jim Wilhelm:]

Hi, Bob.

[Marc Baumann:]

Good morning, Bob. Bob Labick - CJS Hi. First question I wanted to ask, you highlighted very strong new contract growth, 79 net new contracts with organic growth in excess of 50, which, if I'm looking back at '07 correctly, it looks like your organic growth in Q1 exceeded your organic growth of new contract wins for all of '07. Could you just talk about the drivers of the new wins and what you're seeing out there? And you highlighted in the release you expect to write more business like this. What should we be looking for, and what's driving this success?

[Jim Wilhelm:]

Well, I think certainly the maturity of the business development group. We put the sales force in place three, four years ago now, and its current leader, Marilyn Brooks, who runs that area for us, is now here a couple of years. And I think that they have a real fine fundamental understanding, Bob, of those opportunities in those core markets that we serve. Our pipeline information is extremely current. The relationships that those people have been able to develop over the past couple of years are solid. So, as decisions are made on whether to outsource municipal or institutional opportunities, or new construction, in those towns where we have a presence, where there is a parking opportunity. I talked a little bit this morning about Trump Towers here in Chicago, which is new construction. And economic cycles of new construction kind of go from residential condominiums in central business districts, now slowing down in that area, but revitalization of the office building market in some sectors. Just allows us ample opportunity out there to increase. And I think the people on the sales side of the business kind of supported by the folks that work on the operating side of the business everyday in contract renewals, have a much better fundamental understanding of those 19, 20 markets including airports. And we've talked about the expansion of the airport group over the last 12 months, where it's beginning to bear some fruit.

[Bob Labick:]

Okay, great. And just following up on that, in terms of -- are there any major contracts out there that you have up for re-bid or new bids that you might be bidding for? According to the Denver Post you may have won that airport, which would be obviously a very nice new win. I understand there is, a lot of other things going on, but just according to their writing, that you guys have bid there and could be the winner.

[Jim Wilhelm:]

Yes, I didn't mention Denver on purpose this morning because we have not yet completed our final negotiations with the airport authority and the government in Denver, although we were -- as you might have seen in those same press clippings, we did win final approval of the Denver City Council a couple of weeks ago that would enable us to start operations at DIA this October. We're ecstatic about that win, having another major airport in our folio is good for us. But I don't want to go too much further with that one until we've completed negotiations, although we've developed a very good relationship with the folks at the Denver airport, and we're excited for the startup. The Atlanta airport, which obviously is a sizable opportunity, is out on the street as we speak. And we're competing along with the usual competitors for that airport's parking opportunity. There are several other major airports that are up for bid as we speak. In terms of contracts that we operate, we don't have a whole lot of exposure right now on the airport side or in any of our larger contracts around the country. I know you've probably been reading about the potential sale of Midway Airport here in Chicago, that that RFQ has been put out on the street for entities wishing to purchase the entire airport and we'll see where that process takes us. We operate the parking facility there, but we have for many, many years. And I think have increased revenues to that airport by almost doubling them over the length of time we've been there. And we have a really solid handle on the day to day workings of that airport, so we'd certainly like to continue operating it. And I would expect that anybody that buys it would want to have our expertise as compared to others. Other than that, we don't have a whole lot of exposure in '08. We have sort of the normal cycle going through in '09, '10, '11, and '12 as we look forward. But again, the fact that we've increased our retention rate back up to 92% and while still growing, we're at 2,100 to 2,200 facilities now, at 92% retention rate is something I'm very, very proud of our operating people who are responsible for the retention side. And that's even further buoyed Bob, by the fact that of that 92%, those are location counts. We're retaining 98% of year-over-year gross profit as we speak. So again, a really fine job by our operating people in making sure that the products that we're putting out there for our clients is consistent with our business model and our culture, and superior to those we compete with. Sorry for the speech, but its all kind of interrelated.

[Bob Labick:]

Oh no, that's great. Very helpful. I'll ask one more question and get back in queue. You alluded to the general consensus of the slowing economy, recession, et cetera. Obviously I think your results speak to your strong business model. You do have some lease exposure, and it looks like on a per lease basis, per location basis on your lease side, your gross profits were down a little bit. Was there anything specific driving that? What should you expect from your lease locations for the remainder of the year?

[Jim Wilhelm:]

Right. I would think -- we went through those numbers on leases, we have leases that we refer to as UBIT leases, which are leases that are renegotiated on a year-over-year basis with new terms. And the foundation for that sort of a legal structure, and you've heard us talk about it, here several times, and then out on the road with you several times. Is it enables our clients with those holdings a tax consequence on passive versus active income and those leases are trued up on a year-over-year basis. And I would bet that we have maybe 30 or 40 of those left in our portfolio. Again, so we didn't see, other than leases that get re-traded on a year-over-year basis, and there's one in Boston that comes to mind, and one in San Jose, California that was re-traded that comes to mind, that is somewhat of a little bit of a rollercoaster. But again, because we're so invested, 90% invested now in management contracts and 10% in leases, that the overall company doesn't experience a whole lot of change when we go through those annual UBIT true-ups on lease terms. Again, that represents maybe 30, 40 of our locations. Most of them are usually consistent, but if one does very, very well one year, we re-trade the terms of those and pay a little higher rent the following year in order to keep the location. So, I think what you're seeing was just the effect of those couple leases, those UBIT leases that I was referring to earlier.

[Bob Labick:]

Oh, great. Thanks very much, and I will get back in the queue.

[Jim Wilhelm:]

Okay.

[Operator:]

Thank you, gentlemen. (Operator Instructions) And your next question will come from the line of David Gold from Sidoti. You may proceed, David.

[David Gold:]

Hi, Dave Gold with Sidoti. A couple of more questions. One was in the lines of what Rob was asking. On the management contracts during the quarter, it looked like we're seeing the same trend, or probably better, it looks like revenue up a little bit, but on a dollar basis, it seems like things are holding. Just thought there, I know you say not to look at margin, but looking at margin --

[Marc Baumann:]

Right. Well, I think we have to say, don't look at margin. But one comment that we can make is that, some of the acquired businesses have lower margin percentages or in our terms, make less per location than what we typically make. And that's part of the attraction of these acquired businesses, is that we feel that when we apply our business model to them and also begin to talk to these clients about the ancillary services that we offer, that we'll have the opportunity to increase those margin percentages. So, that has some impact on our overall margin percentage, but overall, it was totally expected by us as we went into these new business sectors this year.

[David Gold:]

And what's the general timing on the opportunity to maybe increase margin there at the acquired locations?

[Jim Wilhelm:]

Usually we need a couple budget cycles, the budgets that we would propose to clients on the management fee side or on the UBIT leases that I was discussing earlier generally happen in the fall of the year. And we need to get usually through one or two of those cycles proposing changes to the operating methodology of a location for things like adding a transportation component. If it's a hotel that we're running, can we run the shuttle to the airport for them, which we just did in a couple cases for some of the hotels that we got in one of the acquisitions. Can we clean the facility for the client? Can we offer security on the West Coast to the office building client? And usually those reviews and those decisions get made in the fall budget cycle for the following fiscal year. And again, we generally need to get through one or two of those before we can take advantage of selling ancillary in services or taking the exposure for risk on the insurance side of the business into the fold as well. Again, all of those decisions get made -- so in essence, it would be in the fall of this year with some sort of application in the 2009 fiscal period.

[David Gold:]

So it's more a function of selling more profitable services than it is taking cost out.

[Jim Wilhelm:]

Yes. It works both ways, because we also propose automation to our clients. And if we can see an opportunity to automate a parking facility with technology solutions and reduce the labor required onsite. There might be a capital investment required and we're happy to do that if the cost of capital meets our hurdle or go out and get the equipment for the client at favorable terms because we have relationships with the equipment providers. Again, that is also an opportunity to cut the client's cost, but also to cut our cost as it applies to maintaining the labor, providing the labor at those facilities. So it kind of works both ways, David.

[David Gold:]

Got it, and then just one other. Jim, I'm impressed by the take up in retention rate. But curious, in your experience over the years, how high could that go? Presumably you can't see 100%, but could we see upper 90's?

[Jim Wilhelm:]

Why not 100%? I would be very disappointed. No, --

[David Gold:]

Have you ever experienced 100%?

[Jim Wilhelm:]

No. You've heard me over the last couple of years talk about the company's overall goal to bring our G&A as a percentage of gross profit down under 50%. One of the other goals that we have as a steering committee within the business is to try to move the retention rate to 94% or 95%. Now, how realistic is that given the fact that our portfolio has grown, that we're sort of inching on, having more locations than anybody in the world? And just pure location count would make getting up to, certainly to 100% or the high 90's very, very difficult to do. However, I think as we continue to enhance the product, and maturity and integration of the acquired businesses takes hold because as you've sort of watched us, every time we go through an integration cycle on the acquisition front, we'll just tend to lose locations here and there because the relationship that might have been with the acquired business went away, and that relationship takes the contract with it. So, we'll kind of see as we get through '08. Again, I'm pleased that we're at 92% and we've integrated most of the acquisitions now. GO, who was in our guidance earlier, when we closed out '07, is now being integrated into the company. And I think we've managed to retain all of those contracts but one so far. But we have an overall goal in the 94%, 95% range. Now, that was always driven by my experience here, dating back to being at Standard Parking for the last, almost 25 years, and before APCOA acquired us. And we are operating under a business model for management contracts with a high quality product, very similar to the business model that we operated at Standard Parking through the '80s and '90s. And we had retention rates in those days at 94% or 95%, but again, based on a portfolio size of 300 to 400. So, while I'm used to that, and know its possible, and I'm certainly driving the organization with that sort of expectation, I'm very pleased at 92%, and I would love to push us to get up to the 94, 95 percentile.

[David Gold:]

Got it. Thank you.

[Marc Baumann:]

Thanks David.

[Operator:]

Thank you, gentlemen. And at this time, there are no further questions, so I'd like to turn the call back over to Jim for closing remarks.

[Jim Wilhelm:]

We just want to thank everybody for joining us on the call today. And, again, its very nice to be managing a business right now in these sorts of economic conditions and reading the papers every day and seeing what's going on and having a team around me that is sort of making this business model, which we've built very, very hard around trying to prepare for these times, succeed where others are having their challenges. So, I couldn't be prouder of my team at this time, and I want to thank everybody for being on the call this morning. Thanks.

[Marc Baumann:]

Thank you, goodbye.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's presentation. You may now disconnect and have a wonderful day.