SP Plus Corporation
Q4 2013 Earnings Call Transcript

Published: 6 Mar 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 SP Plus Conference Call. My name is Marcus, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Mr. Marc Baumann, Chief Financial Officer and President of Urban Operations. Please proceed, sir.

[G. Marc Baumann:]

Thank you, Marcus, and good morning, everybody. As Marcus just said, I'm Marc Baumann, Chief Financial Officer and President of Urban Operations at SP Plus Corporation. Welcome to the conference call for the fourth quarter of 2013. 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, as usual, with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and then I'll discuss some of the financials in 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 2014 financial guidance; statements regarding expectations for the integration of the Central Parking operations; and other statements regarding the company's strategies, plans, intentions, future operations and expected financial performance. The 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 website at www.spplus.com. I'd also like to refer you to the risk factor disclosures made in the company's filings with the Securities and Exchange Commission. Finally, before we get started, I want to mention that this call is being broadcast live over the Internet, and that a replay of the call will be available for 30 days from now. With that, I'll turn the call over to Jim.

[James A. Wilhelm:]

Thanks, Marc, and good morning, everyone. Welcome to our call. Before we begin our discussion of the results and 2014 plan, I'd like to briefly mention the management changes we announced last week. As you probably saw, once we officially close the books on 2013 and file our 10-K, our longtime CFO, Marc Baumann, will complete his transition from a primarily financial role into an operational role. This change began last year with the appointment as -- Marc's appointment as President of our Urban Operations. As you all know, Marc has led our finance team. He's been heavily involved in setting our strategic direction for more than 13 years. I'm delighted he has accepted the President and COO position and look forward to working with him to fulfill our significant potential. With Marc's transition, we needed to find a new CFO and I'm happy that Vance Johnston is joining us and will officially assume the CFO role, once the 10-K for 2013 is filed next week. Vance has a wealth of financial experience and is a great addition to our team. We welcome Vance, who will be joining us on the earnings call next quarter. Now turning to our results. I'm pleased to talk to you today about the company's continuing solid financial performance, which produced 2013 adjusted earnings per share at the top end of our adjusted guidance range. This was all accomplished while we continued the process of integrating the 2 businesses. That integration process has been very complex. Many of our team members are spending a significant amount of time on integration activities, while at the same time, performing their day jobs exceptionally well. This dedication helped us complete the conversion of operations in 16 states plus the District of Columbia by the end of 2013. We expect to have completed the integration of about 40% of the acquired locations by midyear. We purposely planned the integration with a slow ramp-up so we could take stock and review each of the early launches, which allowed us to adjust and improve the process as we go along. We expect to pick up the conversion pace now with the goal of being fully integrated by the end of this year. The location retention rate for Standard's legacy portfolio, excluding the impact of divestitures, dropped to 85% for the 12 months ended December 31, 2013, which includes the impact of losing a single portfolio comprised of 104 small locations. While the impact on our location count of that portfolio loss was significant, the impact on our business is not. Without the loss of that portfolio, Standard's retention rate would have been 90%. On the Central Parking side, again, excluding the impact of divestitures, the location retention rate for the year ended December 31, 2013, was 86%. In terms of new business, a sampling of our recent wins include a new parking management and curbside valet contract at the Fort Lauderdale International Airport. The parking operation encompasses 3 multilevel garages and an additional economy surface lot. The first-class valet parking service operates across 3 locations and offers an array of customer car care services. Brookfield Properties awarded Standard Parking of Canada, Ltd., a contract to manage the parking operations for its First Canadian Place office building. The company's operations will include the implementation of our Click and Park technology. This location represents the third premiere property that the company operates for Brookfield and downtown Toronto, comprising approximately 3,500 parking spaces. A private company hired us to manage 17 parking operations throughout several New York City boroughs. The multiyear deal, which began in October of 2013, also includes responsibility for general maintenance, painting, restriping, cleaning and snow removal. On the university front, 2 separate agreements to provide consulting services, one with Oregon State University and one with the University of Oregon, will involve our evaluation of various aspects of each university's existing parking and transportation system. In terms of entertainment value -- venues, in last year's fourth quarter, we provided our parking management services, our facility maintenance services and our Click and Park online reservation system for performances at the Port of Los Angeles for Cirque du Soleil's show, TOTEM. Finally, as you know, this last December, we changed our corporate name and officially rolled out our new SP Plus logo and website, consistent with the company's evolution into a provider of services that extend beyond parking. The rollout went smoothly, and we're pleased with the positive reaction we've received. Our SP Plus Transportation, facility maintenance and security service lines began their transition to the new look right away. But as we've mentioned previously, we're continuing to conduct the bulk of our parking operations under the Standard Parking, Central Parking and USA brands, while the association between these strong brands and SP Plus strengthens. With that, I'll turn the call back over to Marc to lead you through a detailed discussion of our financial performance for the fourth quarter and full year 2013.

[G. Marc Baumann:]

Thanks, Jim, and hello, again, everybody. The fourth quarter of 2013 marks the first quarter where we have comparable, meaning post-merger, year-over-year results. So we'll no longer provide sequential quarter comparisons. 2013 fourth quarter gross profit increased 14% over the same period of last year. On a normalized basis, gross profit grew 3%. The balance of the gross profit growth came from favorable changes in insurance reserves in the fourth quarter that offset adverse insurance reserve adjustments in the year's first 3 quarters, proceeds from the sale of some joint venture assets and a benefit from the net accretion of acquired lease contract rights. To explain this last item a little more, we had to adjust the rent expense for the acquired Central Parking leases to a market rent. And as said, it's set up for favorable leases and amortized to a rent expense over the life of the lease. Conversely, a liability was accrued for unfavorable leases and a net accretion is realized through a reduction in rent expense over the life of the lease. The net of this amortization accretion contributed 3% of our gross profit growth in the quarter. G&A expenses, excluding merchant integration and restatement related cost decreased $4.3 million from the fourth quarter of 2012 compared to the fourth quarter of 2013. This decrease was primarily due to synergy-related cost savings. Adjusted G&A, as a percentage of gross profit, was 46.1% in the fourth quarter of 2013. As I've just mentioned, 2013 fourth quarter gross profit benefited from favorable insurance reserve adjustments and some asset sales, which effectively reduced G&A as a percentage of gross profit to a level below our current run rate. For 2014, we expect G&A as a percentage of gross profit to be closer to 50% and that level is what we had been expecting when we did our long-term models for 2014, '15, '16. Our long-term goal for this metric remains at 45%. EBITDA, adjusted for merger and integration and restatement cost, was $24 million for the fourth quarter of 2013, a 71% increase compared to the fourth quarter of 2012 adjusted EBITDA, which also excludes merger and integration related cost. Earnings per share on a GAAP basis were $0.23 for the fourth quarter of 2013 as compared to a net loss per share of $0.30 for the fourth quarter of 2012. Earnings per share adjusted for merger and integration and restatement related expenses were $0.30 for the fourth quarter of 2013, which is double the $0.15 per share that we did in the fourth quarter of 2012. In terms of free cash flow, the company generated $22.3 million of free cash flow during the fourth quarter of 2013, due in part to significantly reduced outstanding AR balances at year end. For the full year, the company generated $18.2 million of cash flow, slightly less than the $20 million we predicted for the year, in part because we still have some work to do on the AR front over the next several months. Touching briefly on other full year results. Earnings per share on a GAAP basis was $0.54 per share for 2013 as compared to $0.08 per share for the full year of 2012. Our recorded guidance range of $0.60 to $0.70 per share did not include any costs incurred in connection with the Bradley restatement because we did not have this information when we gave guidance. Those restatement related costs totaled $0.02 per share. Therefore, relative to guidance, earnings per share adjusted for restatement-related cost but unadjusted for merger and integration-related costs was somewhat below the guidance range due to higher than anticipated merger and integration cost. On an adjusted basis that eliminates both merger and integration as well as restatement related costs, earnings per share for 2013 was $0.85 per share, which was at the top end of our adjusted guidance range. Due to purchase accounting, the Central Parking merger is not yet accretive to earnings. Looking forward to 2014. The company expects adjusted earnings per share in the range of $0.77 to $0.87, which excludes expected 2014 merger and integration costs, as well as any structural repair and maintenance costs at legacy Central Parking lease properties as we described in last night's press release. Our earnings release also mentioned 2 items that are expected to fluctuate significantly between 2013 and 2014. First, the company recognized $0.10 per share in 2013 from the sale of long-term contract rights and joint venture assets. The company regularly engages in such transactions and this was factored into our 2013 guidance. That same level of activity, however, is not expected to occur in 2014. In fact, our 2014 EPS expectation includes only $0.03 per share from such asset sales, a year-over-year decrease of $0.07 in earnings per share. Second, the net accretion of acquired lease contract rights contribute $0.11 to 2013 earnings per share. Due to the nature of the individual leases and their respective contract terms, however, the company expects the net accretion of acquired lease contract rights to contribute only $0.02 per share in 2014, that's a year-over-year decrease of $0.09 per share. Excluding those 2 items, as well as merger and integration and restatement costs from our 2013 actual results and our 2014 guidance, results in a 20% increase in our expected adjusted earnings per share at the midpoint of our 2014 guidance range. In terms of free cash flow, the company expects 2014 free cash flow in the range of $35 million to $40 million, excluding any structural repair and maintenance cost at legacy Central Parking leased locations. And I want to just comment on this briefly. Routine repairs and maintenance are included in our forecast; these would be extraordinary structural repair and maintenance costs if we incur those during 2014. That concludes our formal comments. I'll turn the call back over to Marcus to begin the Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Kevin Steinke.

[Kevin M. Steinke:]

On the G&A run rate going into 2014, should we expect that to remain relatively consistent with the fourth quarter merger adjusted G&A? Given, I think, you've commented in the past that G&A really won't have a significant step down until you get all the locations converted and so, that's not planned until the end of 2014. So is that the right way to think about G&A?

[G. Marc Baumann:]

Well, I think you're right in your premise and that is that G&A is not going to step down significantly until we complete the integration, and we still have quite a ways to go on that, as Jim indicated in his comments. We will, though, see an increase in the absolute G&A in 2014 relative to 2013 and part of that is the result of higher than expected turnover in some of our office functions, and we obviously didn't anticipate it being quite as much as it was. And so, we had to refill some of those jobs. So we have done that now, and I think that enables us to keep on track with our merger and integration. But we are expecting to see a modest increase in G&A in 2014 over 2013 levels.

[Kevin M. Steinke:]

Okay. With regard to the selling of contract rights and JV assets, just trying to get a -- I think you've commented in the past that perhaps you'll look to get out of leases in certain markets where it might not be strategic for you to be there. Is that what was happening throughout 2013? And is that kind of a function of the fact that Central had more leases and now you're trying to exit some of those leases to get more towards your preferred model of management contracts, which are -- tend to be less risky?

[G. Marc Baumann:]

Well, I think as an overall premise, yes, we have more leases. And as we look at those leases, from our point of view, if a lease is not profitable and I think you know that we acquired a number of leases that aren't profitable, we clearly are looking for ways to improve the financial performance of those leases. And that can include exiting from the lease. But on the other side of it, we also have landlords who have termination provisions in some of their contracts, particularly, if their lease is for a surface lot and they may be holding that piece of land for redevelopment. So we can sometimes predict when we're going to have these types of sales and other times, they're a little bit hard to predict. Sometimes, they're going to be large and suddenly, it was a large number in 2013, relative to what we typically experience, but it's somewhat under our control, but it's somewhat under the control of our landlords. Now in the case of the sale that we talked about in the first quarter of '13, that was a situation, like I just described, where the landlord wanted the property back for development, and they had the right to terminate that lease and they had to pay us some money in order to be able to do that. With regard to the ones that came in the fourth quarter, those were pieces of real estate where we had money tied up in them. We didn't see the value in terms of our business model as having physical assets and land. And we had the opportunity to sell those at attractive prices and so that we took those. In one case, it wasn't even a parking facility and the other case, we will continue to operate the parking facility. So that's kind of our thought process. And as we look forward to '14, we can always be surprised if a landlord contacts us but based on what we know now, we think the level of that activity will be much less.

[James A. Wilhelm:]

A little more color, Kevin, on a couple of issues. One, with the latter issue, there were opportunities and positions in properties unrelated to parking that came over with the Central Parking merger and having a look at the returns that we were getting on those joint ventures and businesses that we didn't control and businesses that are outside of our sweet spot, we thought we could better redeploy the capital back into the company that we're building at SP Plus. So that, as Marc said, on north and a couple of the transactions in '13 that we had and a couple that we might be looking over the next couple of years to do. But I think we've given some guidance as to what we're looking at doing in '14 versus '13. So not as significant as unloading some of the stuff we didn't like in '13. Relative to the G&A, I think the best way to think about our G&A, '13 to '14, is that we accomplished 100% of what we wanted to do towards $26 million of synergies over the period of integration on the Central Parking purchase. But what remains of that $26 million are those costs that will come out of the business as a result, as Marc said and as you queried, the completion of the integration by the end of this year. So if you think about it, even though we're sort of hiring people out in and out of the business, which has a little bit of an impact on G&A, I think the best way to think about it is we're at personnel levels now that we need to maintain through the completion of the integration on both the operating and support process side of the business. And we're giving people raises this year in line with inflation to keep our people and our family here whole against prices. So I think that's the best way to think about G&A for '14. And then, obviously, the completion of the synergy targets by the time we get into 2015.

[Kevin M. Steinke:]

Okay. In terms of free cash flow guidance that implies a pretty significant growth over 2013, are you assuming continued better collection on the airport receivables? And will the primary use of free cash flow be debt paydown? Or are there significant capital expenditures out there? And I guess, like you said, the Central Parking maintenance cost could affect free cash flow, and do you have any idea how significant that could be?

[James A. Wilhelm:]

Well, in terms of the first 2 parts of the question, the answers are yes and yes. As you saw in the fourth quarter, we were able to work pretty hard to collect some legacy receivables that were out there. A lot of those were in the Airport division but not singular to the Airport division, and I think just better process within the business trying to get -- a year later, we're in a much better position in terms of AR invoicing and AR collection, both in the back office and in the field to support that. There are still a couple of banditos out there that don't want to get us paid on time, and we're working hard towards getting those done. And that, certainly, we're assuming that we do our job now that we're into a better record-keeping cycle and we have a level of engagement with those locations that think we're a bank and not a service provider. So some of that built into the number. Kevin, as you know, we'll deploy that free cash flow to bring the debt level down as we've always done in the past, unless something absolutely super crosses my desk, but I don't see that happening in '14, just given the bandwidth within the organization at the present time. I don't know, Marc, if you want to talk any more about the structural side of things, other than what you mentioned earlier?

[G. Marc Baumann:]

Yes. I think -- just to add to what Jim is saying, we anticipated in this merger that some of the Central leases had structural repair obligations, that was a legacy obligation in those contracts. And while we weren't able to quantify them in the pre-merger period, we made an estimate and that in part led to the reason why we set up a $27 million hold back from the purchase of Central. And as you know, our obligation is to pay that $27 million at the end of 3 years if we haven't used it to satisfy obligations of a legal nature or other claims, tax issues or structural repair obligations that are outside the normal course of business. And all we're really doing is highlighting now that as we're 1.5 years in, we're starting to look at some of the locations where we have those legacy obligations. We're starting to have contact from some of the landlords at some of those legacy locations and that's giving us an opportunity to think about the fact that there's going to be some actual structural repair activity taking place this year. But we're still at a preliminary stage. We're unable to estimate what the costs are going to be, but I think, in general, our expectation is that the $27 million indemnity basket that we held back should be adequate to cover this stuff off.

[Kevin M. Steinke:]

Okay, that's helpful. Just throwing in one last one. Do you feel like the merger is on track to be accretive next year? I think that was the original target, anyway, for '15, is that correct?

[G. Marc Baumann:]

Yes, I think that's a tough one, Kevin. If we had, I think, 2 surprises during 2013, one was the difficulty in getting these AR balances down that we've talked about and that clearly led for us to have more interest expense in 2013 than we would have thought. And while we're expecting, as Jim said, to get that stuff cleaned up in '14, and I think we have good reason to believe that, it does mean that we're running interest expense levels at higher levels than we anticipated. And secondly, on the D&A front, when we originally went out with our free cash flow guidance for '13, we had gone out at $30 million, as you know, and when we reduced it to $20 million, we talked about the fact that we were spending more on merger and integration from a P&L point of view, but also that we spent $5 million more in CapEx. And so for the year, as you'll see in the numbers, we came in around $15 million on CapEx, which was around $5 million more than we expected. One of the challenges that we are facing now in terms of projecting long term is where are those receivable balances going to be, how much CapEx are we going to have to spend in 2015, and what is that going to do to D&A expense? So I'm giving you a lot of details because what I'm really saying is that we're not prepared now to say, "Yes. For sure we'll be accretive in 2015," but I will say that we do believe that this deal will be accretive. It's important for us to continue to drive cost out of our business and in particular, ultimately, reduce the level of CapEx back to a level that we think is appropriate, which is probably about $10 million a year on a maintenance basis.

[James A. Wilhelm:]

So the way to think about the business from a macro sense, Kevin, and the measures that I look at because of this -- and some of the accounting treatment begins to take care of itself. But are we on track to get into the 2015, 2016 timeframe, at EBITDA near $100 million, or in excess of $100 million? And the way we get there is by year-over-year growth in gross profit organically. And as we've talked about, we're pretty much on target with organic gross profit growth '13 -- I'm sorry, '14 over '13, at around or a little greater than 5%. That's the result of two things. One, in '13, we sold more new business than either Central or Standard had ever sold individually in the past. So the pipeline remains robust and the forecast that we gave you a little while ago assumes that we should write even more new business in '14 over '13, and we're off to a pretty good start, just being a couple of months in and knowing what we have in the bag. Second, we begin to look at, is that pipeline manageable and sustainable into '15, '16, '17? What are those leads that are out there that we have probability analyses completed for? And that seems to give us comfort around the total of 5% growth in gross profit. Same-store growth now seems to have settled down after years of retrading the business, and we'll be able to highlight same-store growth as we get into additional quarters this year, and paint that picture for you, and we know that the impact of security and maintenance and Click and Park and transportation are having impacts at same-store as well. So the prime contributors are performing at or above the metrics that we've set for them. So as we begin to look forward, the opportunity is there for us. It's a great time to be here, as a matter of fact, in terms of seeing that opportunity. On the G&A side, we've talked a little bit about moving towards our goal, ultimately, of 45% G&A to gross profit, and if we follow the analysis we provided today and we look at staying, as we've said, we'll be on track towards the $26 million in synergies that were forecasted at the beginning of the merger. Then, that metric remains achievable in our eye. So again, as we begin to forecast this year, for sure, and try to give you -- sort out all the noise and give you an idea of where we're at on an organic basis, '13 to '14, and ultimately, where we see the business going in '15 and '16, we kind of remain on track with the guidance that we've given before. Obviously, the free cash flow ramps up as the cost of the integration goes away. And we've talked about how that free cash flow would be deployed. Certainly, the CapEx that we'll need to deploy in the future will be along the historic lines of how we've deployed it at Standard Parking in the past, a continued investment in IT integration in order to provide processes to make our back office as efficient as it can be, in order to get us to 45% G&A. Almost all of our G&A, other than field related, is in support process. All of the things we've talked about in the past, payroll, client accounting, receivable and payable tracking, treasury, et cetera, et cetera and there are additional investments that we see ourselves making in technology that will make that accounting more efficient as the company grows. So if you sit -- in terms of the macro look at the business, we kind of remain on track towards those EBITDA numbers and then, obviously, accretion, and the free cash flow number will be able to take care of debt ratios and things like that. We are pretty comfortable that the business itself, the underlying business puts us in a position to succeed. Those numbers that I'm kind of bandying about this morning, in terms of '15 and '16, do not assume because I don't think that we're in a position yet to place a proper value on some of the top line growth that we can achieve by virtue of just our size and leverage. Some of the things that we're working on in terms of getting closer to the consumer in terms of transaction processing, that is an area that we continue to make investments in and that continue to grow within its current bandwidth at the company. But certainly, what we're looking forward to is rather a rapid expansion of that relationship with the consumer in the future. And then, how do we leverage company size in terms of its real estate? Whether it's advertising or a deployment of other national contracts to use the leases, the real estate that we lease or manage to our benefit on the top line, those sort of leverage exercises have not been factored into the 5% gross profit growth that is sort of the foundation of the organics that we're talking about. Sorry for the long-winded speech, but you gave me the opportunity to sort of explain, put a little more color on it, rather than just black and white numbers that we give out in the press release or support the conference call we're having this morning.

[Operator:]

Our next question comes from the line of Daniel Moore from CJS Securities.

[Daniel Moore:]

Marc, I think you mentioned that the normalized gross profit growth in Q4 was somewhere around 3%? And Jim, obviously, you talked about long-term goals, the 5% still being intact. What is embedded in terms of "normalized" gross profit growth in your Q4 guidance range -- excuse me, for your 2014 guidance range?

[G. Marc Baumann:]

Right. So all we're doing, Dan, is taking out those 2 items that we really called out. So the asset sales, we know what the impact was on gross profit in 2013. We know what we expect it to be in 2014, and we also have this lease contract right accretion, which, unfortunately, is very volatile between '13 and '14. It's dropping from $4.3 million to under $1 million in '14 before it starts to grow again. And again, as I said in the release, it's really that is just a function of the timing of when contracts end. And it's a little bit hard to predict from a longer-term point of view because contracts might not end at the time that they are expected to end. So if we take out those 2 items and we just say, "What gross profit growth are we expecting full year 2014?" And of course, we're also excluding anything relating to the mergers from our numbers, that's where Jim is coming back to the 5% underlying growth. So I think on a reported basis, we're talking about gross profit growth of about 1%, but on an adjusted basis, taking out those items, we're looking at, in terms of the guidance numbers we've given you, gross profit growth of 5% in 2014, which is exactly on track with the numbers that we've been seeking to gain on an organic basis, which is a 5% top line growth. Ultimately, 3% or less G&A growth and that's how we get the double-digit bottom line growth, that's our business model. And that basis that I just described you, the same basis that we're comparing 2013 Q4 to 2012 Q4, where we had a 3% underlying growth. So we had good growth in the fourth quarter of '13 relative to 2012. The full-year comparisons don't mean anything, because we have the pre-merger periods in there, but then, as we look at '14, on the back of the stronger business that we wrote in 2013, the new business expectations for '14 and all the other stuff that we're doing, we think that we're going to grow at a little faster clip in '14 than we did in '13.

[James A. Wilhelm:]

Let me just expand, because you asked the right question and gave us again the right opportunity to maybe be a little bit redundant in terms of that. But given the fact that this is the year end and we're talking about the year looking forward and we're talking about even periods that are a little more forward than that, the issue is, is that 5% fairly easily sustainable. What are the key components of getting 5% year-over-year growth in gross profit? And as we've said, there are 3 major components that are interrelated to that given what we've been working on for the last, well, now, 7 or 8 years. And that is can we grow same-store -- an increase in year-over-year profit by CPI, which has been running anywhere between 2% and 3%? So whether it is our ability to raise prices at the leases by at least the CPI, and for the 30 years that I've been doing this, lease pricing tends to move at a higher clip than inflation, can we move pricing at leases at CPI or better? Can the income from management contracts be sustained at CPI or greater? And that has to do, again, with making sure that our contracts have the correct amount of year-over-year build in that we've gotten. We've recently introduced new pricing model that we're putting across the organization in terms of, when we have opportunities for retrades or business development opportunities that suit themselves. We have been doing some work towards formulaic management fees, which enable us to -- when we do our job and increase revenue at our clients' facilities that we automatically share in that uptick as opposed to having to negotiate CPI inflators on top of a $1,000 a month management fee. So we're getting some traction with that, and I think the pricing model that we're using enables that sort of opportunity. And we're pretty satisfied that we can continue to move the profitability of management contracts at least by CPI in the future. And then, the remaining 2 products that contribute to gross profit are how much new business do we write and how does that annualize into the year that follows? So we get an automatic bump from that. What's the business that we lose and how does that annualize year-over-year? And as I've said, that trend has now moved in a very -- in a positive way. We're writing a lot of new business. The new business that we write in -- that we wrote in '13 annualizes itself in a multiplier in '14 and the same for lost business. That's a positive number for us, that's a contributor to the 5% as well as any new business that we write in '14 that Marc talked about in terms of our active pipeline and then any business that we lose this year. All of that activity is forecasted into this year's gross profit, which has us growing at a little better than 5% and we feel is sustainable. The last component or product is our ability to sell additional services, the additional product lines into same stores or stores that we don't control today. We've seen maintenance -- we're doing maintenance and snow removal for lots we don't manage. We're doing security at locations we don't manage. So are those products contributing at least 100 basis points at present, and hopefully, more than that in the future, to a 5% growth in the top line. So that's where we feel pretty comfortable about the sustainability of the 5%.

[Daniel Moore:]

That's helpful. And then, just -- obviously, you remain comfortable around the $26 million in long-term cost synergies. How much of that is, will have been fully embedded in your '14 guidance and how much of that is left for potential additional accretion in '15 and beyond?

[G. Marc Baumann:]

Yes, I think it's a challenging one because we've moved people around on our platforms and are doing our very best to track it. So we have some rough approximations, Dan. What I would say is that we think there's about $11 million to go in 2015 and some of that will be a full year effect of things that have happened in '14 and beyond. 1 year ago, we told you that we thought that '14 and '15 would generate about $17 million of our $26 million of estimated total synergies. And I think we're on track with that, although, there's probably going to be a little more in '15 than we first thought and maybe a little less in '14 than we first thought.

[James A. Wilhelm:]

Obviously, completing the integration gets us to a basis of normalized operations into '15 because the merger and integration costs that we're talking about go away. The realization of the synergy targets should be in place, if not for the full year of '15, very -- early on in '15. So all of this noise that we're having to spend a lot of time on, on these calls will have gone away, and hopefully, we just talk about the metrics for gross profit and G&A and retention rate and won versus lost and the penetration of maintenance and security and Click and Park and transportation as we get into a more normalized operation of the business. And then, obviously, free cash flow has the 2000 -- this year's effect, the '15 effect and onwards, which ultimately affect our debt level as well.

[Daniel Moore:]

Great. And then lastly, just my last question, Jim. The retention rates at Central, obviously, impacted by that one portfolio. Would you expect them to trend back toward 90% as we look out to '14?

[James A. Wilhelm:]

No, it was us. Central's been around 86 -- 85%, 86%, that's where they're at. A rather large financial institution, where we were really putting guards out in the lots, decided not to do that anymore. As part of their own national cost-cutting basis. We weren't making a lot of money on it; there were a lot of locations that went away, kind of 8 hours of a guy standing out in a financial institution parking lot, chalking cars or moving people along, and that financial -- well, I said why, I don't think that the impact of a loss of those 104 lots, which dropped our normalized retention rate, which is 90%, 91% down to the number I quoted, had a whole lot of movement on the needle, if you look at same-store retention gross profit, because we didn't generate a whole lot of money from those lots. Certainly, nowhere near the average that we would generate from the 4,500 locations.

[Operator:]

[Operator Instructions] Our next question comes from Nate Brochmann from William Blair.

[Diana Rashkow:]

It's Diana Rashkow calling in for Nate today. Just first, I wanted to go back to a comment, Marc, that you made a little bit earlier in terms of the dynamic of the net accretion causing some pressure on gross profit next year but then coming back later. Can you elaborate a little bit on what drives that back up over the longer term?

[G. Marc Baumann:]

Sure, and I don't want to go too accounting technical on a call like this. But there is a footnote that will be in the 10-K, when you see the 10-K next week that will help you because it lays out for the next 5 years what's the expected movement of the numbers are. But I think that the important thing to remember here is that this is a noncash item. The $4.3 million that was in gross profit in 2013 did not generate any cash for the business, it's just an accounting entry and the purpose of these entries is to try to take above and below market rent on acquired leases and approximate what market rent would be. And it's a math exercise. It wasn't even done based on doing surveys of rents or anything else, it's just a math exercise. And it's required under the accounting rules so we did that math exercise, and the result of that was that on a net basis, we were adding a little over $4 million to gross profit in 2013. In 2014, assuming that none of the leases that lose money and have above market rents and none of the leases that have below market rents terminate early, we expect that number to be around $1 million. And then, as you look forward in 2015, '16, '17, and I think there's about 5 years that's going to be in the 10-K, the number grows to like $1,300,000, $1,600,000, $1,700,000, it never gets back to the $4.3 million. And eventually, it goes away. At a point in the future, all of this stuff is amortized out and we're just back to normal rents flowing through. And of course, if a contract is unprofitable because it has too high a rent, when that contract comes up for renewal, we aren't going to do that contract or renew that contract at a level that would make it unprofitable, and likewise, if a contract comes up and it has below market rent, the landlord is going to be seeking some kind of a rent increase and it's probable that, that contract would be less profitable in the future. These adjustments are really an attempt by the accounting rules to try and normalize all of that out and say, "What's the ongoing situation?" But of course, because the unprofitable leases all have unique terms and have different provisions in them, and the same with the leases that have -- are very profitable and maybe have, in some cases, below market rents, you can't really predict completely accurately how this is going to move. But I think that's the best we can do. That's about a $3.5 million swing year-on-year in gross profit. And again, as I said at the beginning, it's a noncash item.

[Diana Rashkow:]

Okay, that's helpful. And then changing gears, just wanted to ask a question on weather, which is our favorite topic now in Chicago. In Jim's comments in the press release that had mentioned you're obviously mindful of the weather impacts, I was wondering how much of that is a positive in terms of driving some more demand because people might elect to drive into work instead of taking public transportation. Obviously, some snow removal, revenue associated with it, but obviously, some extra costs, too, so I just wanted to understand a little bit better where weather falls out in terms of the benefits and the costs associated with it?

[James A. Wilhelm:]

For being in the parking business, it doesn't help at all, the -- at least during the reporting period. We all know about January's weather and we obviously, have had a look at January, and I can't talk about it with a whole lot of details other than to tell you that we sort of look at the seasonality of the business and January wasn't -- it wasn't horrible because while we had areas of the Northeast and Chicago that were impacted by this year's -- I don't know what everybody's calling it, Disney will sue me if I call it the wrong thing and I can't remember what they insisted upon, but whatever this vortex is, has kept -- it keeps people away. And those -- we think that after kind of years of analysis, there's some pent-up demand for trips that might have not been taken. But all in all, Diana, if you didn't go to work because it was snowing or cold, you might have taken the train, there's not a lot of that vice versa so the weather itself doesn't help us, except the fact that we're in the snow removal business. So SP Plus Maintenance did great. And fortunately, that offsets -- has offset for several years now some of the volatility that gets created when we get a lot of snow. In terms of the Airport side of the business, we do see weather having an impact. Mostly negative, but again, those trips then get pent up, so the business guy who didn't travel in January because his flight got canceled, is going to go sometime, whether it was the following week or he put it off for a month, so on an annualized basis, we don't think the trips get hurt as much on the Hotel and the Airport side, the Travel side of the business where we saw impacts in January, but we also operate hotels in Florida, and those places had a particularly good month. So I would say weather's a negative in the parking business but we've done what we can to take the volatility out by investing regionally and investing in SP Plus Maintenance.

[Operator:]

And our next question comes from the line of David Gold from Sidoti.

[David Gold:]

A couple of questions for you. So first, one of the things that you mentioned in the release there are some stepped-up costs for repairs or maybe bringing up to speed Central facilities. Wanted to get a sense there as to essentially what brings that on to be done now and how much more of that there could be in the future?

[G. Marc Baumann:]

Sure, I'd be happy to explain that a little more. As I said earlier in my remarks, David, when we came -- went into this merger, we knew that we were acquiring leases that had structural repair obligations. Not all of the 800 leases we acquired had those obligations but some did. On the Standard side, we had a couple in our portfolio that had that obligation but it's typically not something that we have had in our portfolio. And because we were unable to estimate what the exposure might be for deferred maintenance, if any, at these locations, we held back a portion of the purchase price. And that's the $27 million that I've talked about that we have due, that we owe at the end of 3 years if we haven't used it to satisfy indemnified items, and this is really the biggest one. Now one of the things, the requirements of the merger agreement is twofold. One is that if we do have structural repairs, and these are repairs that are outside the normal routine stuff, that the selling shareholders are responsible for 80% of the cost and we are responsible for 20% of the costs, that's what we negotiated at the time that we did the merger. So the 20% of the cost is going to affect our financial statements, and will either become fixed assets that get depreciated or will be charged off to P&L, depending on what the nature of the repair item is and whether it qualifies for being capitalized. The 80% that is the responsibility of the selling shareholders is going to go against this $27 million liability. But from a cash point of view, of course, we're going to be laying out all the cash. It's just -- and then if we charge the 80% against the liability during 2014 then that's going to represent a portion of the cash that we ultimately expected to disperse over the 3 years, which is the $27 million. Now the other important provision of the merger agreement is that we can only charge the indemnity bucket for repairs that actually take place within 3 years of the consummation of the merger. And so clearly, now we're sitting here, getting close to a 1.5 years in, and while, as I indicated earlier, we have some landlords who are contacting us and some other, our own observations about some of these facilities that need some work, it's also important that we don't defer these things into the future. If there are repairs that should've been done prior to the time of the merger and there are repairs that need to be done now, we want to get those done so that we have the ability to charge the 80% off to the indemnity. So there's an important timing element there. The challenge that we have, of course, is that if you look at the kind of things that might need repair, it could be concrete repairs, it could be elevator -- major elevator repairs or replacement, things of that nature and you don't just call up the local guy and you have them come out and give you an estimate. You have to hire engineering firms, they have to go through studies. Sometimes, they have to do core samples in the concrete to determine the extent of any repairs required. They have to make estimates. And then, obviously, we'll have a period of negotiating with landlords over whether or not the repairs are truly our responsibility or not. So that's why, at this stage, we're unable to quantify what it is, but I think we wanted to call it out and make you aware of it because it's clearly our expectation that we're going to be doing some of this type of work in 2014, and it will affect both our reported results and our cash flow in the way that I described.

[David Gold:]

Got you. But then on a go-forward basis, once we're past that, is it something that we should think about as could be some stepped-up cost but not as dramatically because you'll be doing that as necessary? Or do you really view this as more onetime?

[G. Marc Baumann:]

Well, I think we're hoping that our $27 million basket, which covers some other things besides structural repairs, is adequate to cover the remedial stuff. I mean, that was the idea behind setting the level at that level and that as we go forward, we would do things that are required on an ongoing basis and that would become part of our regular repair and maintenance. The company spends millions of dollars on an annual basis on routine repair and maintenance now. And so, I think our expectation is that once we get past this kind of large chunk that we won't have large amounts hitting us down the road, but I think we need to put a slight caveat in there and say, "We don't -- there's 800 locations, we don't want to spend the money to go do engineering studies at 800 locations, just in case we might have the need to do something." We rely a little bit on visually inspecting these facilities and also what goes on, on a day-to-day bases there. Right now, it's premature to say this will cover all of it and there will never be anything else, but I think our hope is that we will do -- try to do maintenance on a more planned basis. And hopefully, it becomes just part of the regular stuff that we do as opposed to being hit with large remedial requirements.

[James A. Wilhelm:]

And David, it's kind of important to think about this in terms of the context of the business models because these are, I think, 100% -- what Marc is talking about is 100% legacy Central Parking locations, and obviously, the diligence resulted in the indemnity that Marc has discussed. So as we get through the identification, we'll take care of this in the timing that we're talking about. On a renewal basis or looking at leases in the future, I think there'll be a little more discipline in terms of the facilities that we take triple net leases on, on a move-forward basis while a lot of this stuff is profitable. So you have a more accurate forward-looking view. We'll begin to imply -- apply the discipline that we've had here forever. I don't mind looking at -- doing leases, but I think there needs to be a -- maybe a little more prudent and thoughtful approach to exposures than might have been done on some of the leases that we have assumed.

[David Gold:]

Got you. Okay, that's fair. And then just one other following up on the G&A piece, on the one hand, you made good progress; on the other hand, we expect some growth, we don't hold -- expect it to hold, say, a fourth quarter level. But the long-term target sort of remains, call it, 500 basis points below or so below where we're running. What do we need to do to get there? Is it just pure revenue growth from here, a. And b, is it the type of thing that we'll see gradually? Or is it something that things are just going to click? Because it sounds like embedded in the guidance, there isn't much improvement.

[G. Marc Baumann:]

Well, there is definitely synergies taking place in 2014, so we shouldn't give you the impression that we're just in a steady-state mode now while we finish the integration. I'm aware of -- and I'm trying to remember the number now, but it's probably $5 million to $6 million of synergies that we're taking out in 2014. What we were saying though is that in terms of our overall G&A level for '14, we're going to be picking up a bit, in part because we had much lower G&A in '13. Some of that was the result of open positions that we really needed to fill. So as far as your question about how we get to the 45%, it really is a combination. We stated that our belief is that we can grow gross profit on an organic basis of around 5% and that remains our goal. As we've told you, our expectation for '14 is that we're going to do just that when we exclude the asset sales and this noncash contract rights accretion. And that, on its own, will start to bring that number down, as you know. I mean, simple math. But we also need to finish the integration and while this integration is going on, we're running our business on 2 platforms and there's a lot of support that goes into making that happen. And there's a lot of inefficiency in the business from a G&A point of view, although all throughout the business, because we have to do that. And as we've said, our timing is to try to complete that integration by the end of '14. We were on track to do that and so I think you will start to see a significant impact in '15 on G&A levels. It's not going to be a gradual stepping down, so you'll see that percentage come down as gross profit grows at the 5%. You'll see in '15, I think, a significant drop in G&A that will start to move that number down closer to where we are targeting.

[James A. Wilhelm:]

And the last component of that, David, is I alluded to it earlier on the call, but maybe not as well as I might have. If you recall, those of you who have been with us for a while, remember that during the early 2000s or middle 2000s, I guess, we were investing annually in process -- technology that enabled process change within the support side of the organization, so that we bit off things like payroll and getting away from timecards and time sheets, and all of the manual entries around having now 25,000 -- 23,000 employees. We also streamlined and put in technology changes as it related to treasury bank reconciliation, client statements to some degree, monthly billing, accounts payable with some of the iPay systems that we have within the business now that have streamlined the process and avoided the need for manual entry. Even things as you might think of simple as travel and entertainment expenses no longer require manual sort of work, they're all automated. But when we did the Central deal, we stopped for a period of time. So we still had some client reporting areas, our general ledger, bringing Central Parking over enabled us to put some better systems in for strategic analysis for the business but it added another layer of monthly parking that has to be -- monthly parking process that has to be put into one bucket at some period of time. Part of the strength that Vance has, Vance Johnston, who we've spoken of, and brings to the business, is enabling that sort of change. So as we complete the integration, it's not like we've completed the integration to a platform that we're completely comfortable enables the amount of technology that we need to process more efficiently. Additional investment, that continued investment that we began in the 5 or 6 years ago, will be the next assignment that we have when the integration's over. And I think it is the completion of that platform that'll give us the couple of hundred basis points towards getting us to the target of G&A at 45% at gross profit. So that work still has to get done. It's not just with the completion of the integration that we get there. Marc spoke to what we ought to expect in '15, but there's still additional opportunity, particularly in the area of general ledger where we're just -- we're still making way too many manual entries that require too many hands each month.

[Operator:]

And there are no more questions at this time. I would now like to turn the presentation back over to Jim Wilhelm for closing remarks.

[James A. Wilhelm:]

Thanks, Marcus. I want to thank everyone for participating in the call today. Sort of as we talked about a year ago, trying to sort through all of the noise and the fair market valuations of leases and restatement and Bradley Airport and this and that, we know that, that is more burdensome for you to sort through than need be, but we didn't promise you a rose garden when we did this deal that we know is pretty exciting and keeps me, obviously, very excited to take the company directionally where I think we can, based on the call today. But thanks for taking a deeper dive with us this morning and taking the time to ask us the right questions, which you always do. And we look forward to talking to you at the end of the first quarter. Thanks, everybody.

[G. Marc Baumann:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for attending today's program. This does conclude today's conference. You may all disconnect. Everyone, have a fantastic day.