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SP Plus Corp (NASDAQ:SP)

Q2 2014 Earnings Conference Call

Aug 7, 2014 11:00 AM ET

Executives

Vance C. Johnston – Executive Vice President, Chief Financial Officer and Treasurer

James A. Wilhelm – Chief Executive Officer

G Marc Baumann – President and Chief Operating Officer

Analysts

Daniel Moore – CJS Securities, Inc.

David Gold – Sidoti & Co., LLC

Nate J. Brochmann – William Blair & Co. LLC

Kevin M. Steinke – Barrington Research Associates, Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the SP Plus Second Quarter 2014 Earnings Conference Call. My name is Sharla, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

I would now like to hand the conference over to Vance Johnston, Executive Vice President and Chief Financial Officer. Please proceed.

Vance C. Johnston

Thank you, Sharla, and good morning, everybody. As Sharla just said, I am Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the second quarter of 2014. 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 Jim Wilhelm, our Chief Executive Officer; then Marc Baumann, our President and Chief Operating Officer will provide more color on the operations. And then I’ll discuss some of the financials in a little more detail. After that, we’ll open up the call for a Q&A session.

During the call, we’ll make some remarks that will be considered forward-looking statements, including statements as to our 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. Actual results, performance and achievements could differ materially from those expressed in or implied by these forward-looking statements due to a variety of risks, uncertainties or other factors, including those described in our earnings release issued yesterday, which is incorporated by reference for purposes of this call and is available on our SP Plus website.

I would also like to refer you to the risk factor disclosures made in the company’s filings with the Securities and Exchange Commission.

Finally, before we get started, I want to mention that this call is being broadcast live over the Internet, and that a replay of the call will be available on our SP Plus website for 30 days from now.

With that, I’ll turn the call over to Jim.

James A. Wilhelm

Thank you, Vance and good morning everyone, and welcome to our call. I’m happy to report that we had a very strong second quarter. Marc and Vance will go into more detail later in the call, but the key measures and statistics we regularly focus on were very good for the quarter.

Underlying gross profit was up 8% on a year-over-year basis for the second quarter, although some of this increase may be from pent-up demand from the first quarter, we did see improved performance on a consistent basis throughout the quarter across the majority of our operating division.

This strong second quarter performance helped to offset the results of the first quarter, which as you know, were impacted by severe weather. Our accumulative underlying gross profit growth for the first half of the year was 3%. We were also very pleased with the substantial free cash flow we generated during the second quarter.

On the integration front, the process of controlling our locations onto one operating platform continues to move along on schedule. Thanks to the ongoing efforts of everyone at the company was pitched in to make it happen, while maintaining their focus on their day-to-day duties. We completed the conversion of California in June. so through July, we’ve now converted more than half of the Central Parking location.

The largest conversion group, which includes New York and New Jersey is scheduled to be completed by the end of this third quarter and remain on track to complete the consolidation of all locations by the end of the years originally planned.

With that, I’ll turn the call over to Marc. so he can provide some additional color on the business itself.

G Marc Baumann

Thanks, Jim and good morning everybody. As Jim mentioned, we had a very strong quarter. our underlying gross profit growth was 8% and was driven by increases in same location gross profit, improved location retention in new business. Gross profit at same location has increased 5% year-over-year, which was primarily due to increased parking volumes and improved pricing at lease locations, coupled with increased penetration of ancillary services and products.

We’re also pleased that location retention is back up to 89% for the 12 months ended June 30, 2014. You may remember that our location retention statistic has dipped a point or two over the last couple of years. In terms of new business, we continue to have robust new business pipeline. Our earnings release identified various second quarter wins, achieved by our SP Plus Municipal Services and SP Plus Gameday operating groups, and by our USA Parking System subsidiary in the hospitality industry.

In fact, our municipal team has continued on its nice streak, as they recently won deals to manage a number of city’s parking operations on the West Coast in Oakland, California and in Mountain View. As Jim mentioned, we generated strong free cash flow during the quarter. We made a concerted effort during this quarter to focus on collecting accounts receivable and bringing down our AR balances significantly from the higher to normal levels that we hit for the past year.

This reduction in AR contributed to the quarter’s strong free cash flow generation. While we still have some work to do on the AR front, and always need to remain consistent with the balances don’t start to see back up. We’re certainly pleased with the results this quarter.

With that, I’ll turn the call over to Vance to lead you through a discussion of our financial performance.

Vance C. Johnston

Thanks, Marc, and hello everybody. I’d like to spend a few minutes reviewing our financial results in more detail. As we’ve done in previous quarters, we will focus on the underlying performance of our business, which excludes certain items that are not comparable on a year-over-year basis when comparing the second quarter and first half results.

To that end, we have adjusted our reported results merger and integration cost, net accretion on acquired leased contract rights, asset sales, and cost incurred for non-routine structural and other repairs were applicable. Getting to the results for the quarter, reported 2014 second quarter gross profit increased 4% over the same period of last year. On an underlying basis, gross profit increased 8% on a year-over-year basis.

I want to note that we may have benefit from some pent-up demand from the first quarter and the timing of certain items. So we expect to maintain this level of growth going forward. Nevertheless, the quarter’s performance was strong on a year-over-year basis; while second quarter 2014’s G&A expenses excluding merger and integration related cost increased $700,000, or 3% from the second quarter of 2013. It was relatively unchanged from the first quarter of 2014, and was in line with our expectation I provided during our last call.

We mentioned on our previous calls that we expect the G&A to increase in 2014 as compared to 2013 due to the need to backfill some key positions. Other factors contributing to the increase were fluctuations in the estimate of earn out obligations, as well as changes in compensation and benefit costs, including an increased healthcare enrollment and increased healthcare cost.

Earnings per share on a GAAP basis were $0.24 for the second quarter of 2014, compared to $0.15 for the second quarter of 2013. Earnings per share adjusted for merger and integration related expenses, as well as non-routine structural and other repaired costs were $0.27 per share for the second quarter of 2014, $0.03 higher than the second quarter of 2013 on the same adjusted basis.

The benefit from the net accretion on acquired lease contract rights reduced year-over-year by $0.03 per share. In terms of free cash flow, the company generated $26.6 million during the second quarter of 2014, and $12.8 million during the first half.

As Marc mentioned, we did a great job of beating accounts receivable balance down in the quarter and the underlying business performance contributed strong free cash flow generation. While cash used to pay for non-routine structural and other repairs has not been a material amount to the first half of the year. The cash requirement for this purpose is likely to increase during the rest of the year. So our free cash flow guidance continues to exclude any non-routine structural and other repairs at legacy Central Parking lease locations. On that basis, the company still expects 2014 free cash flow to be in the range of $35 million to $40 million at this time.

That concludes our formal comments. and I’ll turn it back over to Sharla to begin the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Daniel Moore from CJS Securities. your line is now open.

Daniel Moore – CJS Securities, Inc.

Good morning.

G Marc Baumann

Hi, Dan. Good morning.

Daniel Moore – CJS Securities, Inc.

On an adjusted basis, G&A about $24.5 million in Q3, is that a good run rate, think about for the remainder of the year, or should we expect some modest declines, we received some benefit, or incremental benefits from synergies, as we get into Q4, just trying to think about a good run rate?

G Marc Baumann

I think that’s a good run rate, Dan, to think about going forward for the next couple of quarters and really to the rest of the year, consistent with the guidance on G&A that we provided on the first quarter call.

Daniel Moore – CJS Securities, Inc.

Very good. And looking longer-term, you’ve talked about the past 45% of revenue as kind of a long-term goal, given the incremental expenses incurred, during the integration, is that realistic over the next couple of years, is it still a goal, or is it more of 2017 and beyond?

James A. Wilhelm

No, I think that, it’s Jim, Dan. I think it’s a more realistic goal in the short-term. As we’ve said from the inception of the integration transition period on absorbing the Central Parking in USA Parking locations that besides the synergies that we’ve previously announced and remain on track to achieve by virtue of putting the two companies together. we felt that we could, upon completion of the integration period.

So at the end of this fourth quarter, we begin to look at additional cost cutting measures that – or that we’ve recognized, or begun to recognize, as we’ve gotten through the integration. So whether it’s a potential capital investment and expanded technologies to make our processing platforms more efficient, or the methodology by which we dispatch our field organization and our sales organization. And looking at the – at the organization itself, if we continue to transition in change. We think that there are additional costs that can come out of the business. and as a matter of fact, we have an active initiative within the business now to begin to analyze, where those cost cutting opportunities are, and begin to document and twine ourselves in that direction.

So the 45% has always been a target, G&A is 45% of gross profit, and it is what we plan to achieve, but we don’t want to be satisfied with that hitting a percentage that can be based on gross profit, an expanded gross profit is the only measure. We are looking at picking real dollars out of the business after having now experienced, the 18 months of integration and being pretty confident that we’re going to be completed on time, realize the synergies that we announced at the beginning. And now we can go back to our normal job, but let’s look internally, let’s look at the business, and find out from the first nickel we spend, can we do that better, can we improve the cost side of the business again with that 45% goal being there. But why not expect to do better than that.

Daniel Moore – CJS Securities, Inc.

Very helpful and one more, and I’ll jump back in queue. Vance, can you – if I missed that I apologize, but how much did you spend year-to-date on non-routine structural repairs at the central lease locations and you mentioned that’s likely to tick up any kind of the guidance range for the back half of the year?

Vance C. Johnston

Yes, if you – so I think, we did not comment on the exact amount what we gave kind of the underlying results which incorporates that in it. So if you’re talking about the impact earnings, Dan, I think what I heard from you. So it’s incorporated for the second quarter in our underlying results, we did not give a forecast of that going forward for the third and fourth quarter, and as we’ve talked about earlier guidance both from an earning standpoint and from a cash flow standpoint it continues to exclude the impact of that. Is that answers your question, Dan?

Daniel Moore – CJS Securities, Inc.

Yes, I mean I was trying to get sense of the magnitude what it might be, you know as you kind of think about a true free cash flow?

Vance C. Johnston

Yes, what I can tell you is that for – if you look at the release, Dan, and you look at four to three months ended June 30, 2014. You’ll see that we have free cash flow of $26.6 million reported in the second quarter, adjusted for effectively the cash flow that went out related to non-routine structural repairs would have been $27.1 million.

Daniel Moore – CJS Securities, Inc.

And that differential obviously increase to some degree in the back half of the year.

Vance C. Johnston

That’s correct.

Daniel Moore – CJS Securities, Inc.

All right, I’ll jump in the queue. Thanks.

Vance C. Johnston

Thank you, Dan.

Operator

Thank you. Our next question comes from the line of David Gold from Sidoti. Your line is now open.

David Gold – Sidoti & Co., LLC

Hey, good morning.

James A. Wilhelm

Good morning.

David Gold – Sidoti & Co., LLC

Just couple of things, first, I mean talk a little bit next up in basically getting, of course back of the control if you will I know this whether hope to be too big. Can you talk a little about what changes were made in the second quarter on the cost side that helped you so much?

Vance C. Johnston

David, this is Vance. I’ll comment a little bit on that. I think that it wasn’t necessarily as we talked about in the first quarter call, we expect that G&A to come in kind of around a $25 million per quarter – at a $25 million per quarter level throughout the rest of the year. And so as you saw kind of state wide alignment with that. I think that we started to put some measures together to start managing costs closely, accumulated to in his comments going forward after we get through the balance of 2014 and returned to 2015. The implementation or further cost reduction plans will become a much more significant part of what we are doing.

So that’s kind of yet to come, but I’d say that what we’ve done in 2014 so far is that, it’s really just been more focused on managing cost more diligent, getting through the integration. I think we’ll continue to be kind of right in the alignment with the guidance we’ve given around G&A on a quarterly basis, and then as we turn the page and move into 2015, we’ll see more significant cost reduction to that.

G Marc Baumann

And I just like to add a little bit to what Vance is saying and that is really the story of Q2 is the increasing growth. We had a terrific quarter in terms of our growth as we talked about both on real reported basis and in underlying basis David, and I think for us, you know the question mark is how much of that growth is a little – pent-up demand from Q1, we know we had a weather impact, but I think the fact that on an underlying basis we recovered $3 million weather impact from the first quarter and still show underlying growth of 3% I think bodes very well for our business going forward. And I think as we’ve talked about G&A cost and the plans to take cost out in absolute terms and getting down to target.

The best we can drive G&A down in our business as a percentage of gross profit is to have a lot more gross profit. So and delighted to see that we’ve had a lot of growth in the second quarter, and we are hopeful that we’ll continue to see strong growth for the rest of the year.

David Gold – Sidoti & Co., LLC

Perfect, thanks. And Marc, when you talk about pent-up demand in the parking business, what is that mean?

G Marc Baumann

It can be a lot of things; the weather clearly causes some people to delay trips and do things that they were going to do. We saw – with severe weather in the first quarter, our hotel business was very severely impacted, a lot of people make decisions to come down and do weekend trips whether it’s in New York or Chicago. We have a lot of hotels that are at leases. And we see that as the weather changes in terms and we now have a beautiful weather in both cities. People are coming back downtown and just talking to our guys. In both of these markets, we’re seeing very, very strong activity both in terms of transaction and our ability to put up rates in both of those markets.

David Gold – Sidoti & Co., LLC

Gotcha, gotcha. Okay, that’s helpful. And then, second question that I’m – coming similar to the cost control question. On the accounts receivable side, you’re moving that down as well, but can you talk about some of the even maybe changes that you made if any sort of where that success came from?

G Marc Baumann

Sure. I mean there has been two issues that have really been challenging us over the past year. And the one that we talked about many times on these calls and around some of our renewing municipal deals have resulted in – clients not paying us as properly as we would like in accordance with the terms that they have agreed to. Now, we’ve had some breakthroughs with some of these clients, we’ve gotten clear, and what the payment process needs to be like, what we need to do, what they need to do to get us paid. And so, we’ve made some non-recurring one-time improvements that should bring AR down substantially on a permanent basis.

There is a little more work to do there. And we continue to expect to see some further reduction in AR as we finished cleaning next above. And I think we’ll see the benefit of that during the remainder of this year, and our belief is that as we get through the end of 2014 that will be cleaned up.

Now aside from that advances come into the business, introduces the new forecasting methodologies for our field organizations, so that they are making commitments in a more specific fashion to get their balances to certain levels and I think that’s having an affect now in terms of making sure our field organization is focused on AR balances more than they were in the past.

David Gold – Sidoti & Co., LLC

Gotcha, okay. And one last if I can speak in. Any updating – given nice progress to date on integration as to synergy plans in integration timeline?

James A. Wilhelm

Well, as we said in the release and on the call this morning, we are on time for a completion by the end of the fourth quarter. David, we’re actually maybe a month ahead, but we want to leave ourselves a little room. But in terms of the targeting as I said, we finished California last month were we’ve a rather large deployment of our people from both Chicago, and Nashville, and New York, and New Jersey. This month that’s by far one of the larger regions for us to bring over on to the new platform. And we are fairly confident of what we’ve seen so far that that transition remains on time, obviously our field people and our back office people in New York city have had months and months to prepare and gear up for their transition.

So from all the information we’re getting form the East Coast that’s going well. So that would put us on schedule, we completed by the end of November or sometime in the December. And to have a north of full benefit of the synergies that we announced when we acquired Central Parking.

G Marc Baumann

And I think just add to what Jim is saying David, clearly we are always looking at opportunities to take additional cost out of the business, and Jim commented on that earlier in his remarks around investments and technology. Clearly, at the moment we’re running two complete IT systems to support the combined business and as we complete the integration there is going to be the opportunity to switch some of that off. And so, I think you’ll see additional synergies inuring to the business in 2015. But they are really not going to impact 2014 as we still have to finish the integration and wrap up our year-end growth.

David Gold – Sidoti & Co., LLC

Gotcha. But at this point, we’re seeing the synergy target that we put out there I guess year end changed a two years ago.

G Marc Baumann

Yes.

David Gold – Sidoti & Co., LLC

Perfect.

James A. Wilhelm

But I think we do know there will be additional synergies beyond I think we said that on a number of occasions, we’re not quite ready to talk about what we think those are going to be, but as all of us have said on this call we’re looking at there continuously and expect either on the next call or as we get into the later part of this year, we got to be able to give some expectations about what we see for 2015.

David Gold – Sidoti & Co., LLC

Perfect. Thank you, both.

G Marc Baumann

You are welcome, Dave.

Operator

Thank you. (Operator Instructions) Our next question will be coming from the line of Nate Brochmann from William Blair. Your line is now open.

Nate J. Brochmann – William Blair & Co. LLC

Good morning, everyone.

G Marc Baumann

Good morning, Nate.

James A. Wilhelm

Good morning.

Nate J. Brochmann – William Blair & Co. LLC

I wanted to kind of follow-up on that last point little bit, Marc maybe or Jim in terms of clearly this has been a big integration for you guys, lot of distractions, there has been a lot of accounting noise behind it in the last couple of quarters, again that echo the comments good to see getting passed this quarter. But in terms of obviously there has probably been some distractions in terms of what you can do in terms of your improved profitability beyond the synergies, which sounds like you will get after at the end of this year and in the next year as you get through that. Can you talk a little bit about what this distraction have done maybe on the top line and whether that’s been an issue for the organization as a whole and maybe what we can look for in terms of maybe any accelerations there going forward as you get through kind of this whole integration?

G Marc Baumann

Yes, that’s a great question. I can tell you that the top line has been relatively unaffected by the integration itself. Certainly, having a great second quarter, where we made up most of the weather related stuff for the first quarter I mean that there is additional noise. So, well it’s great to be with you all this quarter talking about how great the second quarter was. How I feel about quarter-by-quarter sort of analysis of the business because what Hannah pointed, as Marc alluded to – to the long-term in terms of growth opportunities. Specifically the question we haven’t seen the integration interfere with the top line, we’ve rolled out more efficient sales force, we’ve better equipped.

Sales force given our ability to sell SP Plus products into – on inventory of parking facilities that stubbled with the acquisitions and that underway. You’ve seen us be able to introduce the brand change to SP Plus in the middle of doing all of this integration. That we’ve seen as Marc, the Marc have answered earlier on the call. We’ve seen our retention rate improved since we’ve done the deal with central. We have the impact obviously of having to divest facilities and some other noise around the business early on in the acquisition, but now we’ve taken the entirety of company twice the size back to kind of our historic retention rate and that obviously drives the top line and the amount of new businesses.

I’ve said on the last few calls, we’ve written more business both in 2013 and what we’re projecting to write in 2014, then either company wrote separately and collectively in the past. So I wouldn’t say Nate, that there has been any distraction caused for the field organization, the sales organization, and the top line of our statement.

At the same time, we continue not just to focus, we’ve talked a lot on this call so far about plus and taking cost out, and obviously, measuring that cost against the organic growth of our business on the top line. But we’ve also had time and because we’ve not been distracted in terms of vision, and strategy, and execution from additional revenue sources that will be announcing and talking about for the remainder of 2014 in the area of leveraging our size, whether it’s consumer facing opportunities and things for instance like advertising or other fields, we’ve been able to focus.

The distraction if you will and caused by integration is almost purely related to our back office people, those people who are doing two jobs everyday. Their normal job processing payroll, or payables, or receivables et cetera, et cetera, et cetera, for a company twice the size. And then having to – if you will perform their night job, which is the focus on that particular region of the country that’s been integrated that month.

The only time the field organization, who are responsible for sales and really the top line of our statement are distracted, is when their individual region gets integrated in any particular month. And there is a much more diligent process in terms of getting clients statements out accurately once on the new platform, and on time, and those caused the field organization for that month or maybe the follow-on 15, 20 days after the month end. A little more distraction then they would have in a normal month end close profits, but then following that integration periods closer that are on to the next thing.

So I hope we’ve been able to communicate, and we talk about where the noises around integration and where the impact are.

Nate J. Brochmann – William Blair & Co. LLC

That’s really helpful. I appreciate that. And on those lines with the retention rate obviously again nice pickup with that, is that more of a function of just a fact that we kind of called a little bit less at this point and how we kind of called what we wanted to, how does some of those contracts. so that some fall off, or was that just doing a better, just overall execution job in terms of showing that up a little bit.

James A. Wilhelm

Well. I think there’s a number of things going on as you might imagine, Nate. we have focused heavily on execution; it’s much easier to keep declines you have and to get new ones. and so we’re very, very focused on getting in front of our clients continuously. making sure that they understand, if the integration impact on them, if anything just in terms of format applying statements to rather changes in process, but also to get in front of them, you talk about the additional services that we can put in front of them and one of the opportunities that this merger gave to us was the ability to go to the legacy Central Parking management clients and offer up an array of services that Standard Parking had developed over the past two years, whether that’s facility maintenance or security services.

So we’re into discussions with those clients, the use of Click and Park to allow people to do online reservation, a lot of the growth in penetration of those within our existing base has come from the central legacy location. So that has been a major, a major focus for us.

On the lease side, though if you look at our location numbers, you will see that this number of lease locations has dropped and I think you are aware of that as part of the merger, we did acquire a number of very; very excellent successful leases and we also acquired some leases that weren’t making money. And our focus this year has been heavily on trying to not renew obviously any lease that doesn’t make money, but more importantly, to take losers and turn them into leases that can make money for us, and where we don’t believe we can do that to let them go. So some of our drop in our lease location count has really been the allowing of these leases have terminated, not so easy to call them, before their termination date unfortunately, but we have seen some of our location counts come down, because of that.

Nate J. Brochmann – William Blair & Co. LLC

Okay. And then in terms of just along with those lease locations and some of this repair activity and maybe, this question for you Vance, but is this something that you’ve talked about it’s going to may be a accelerator, a little bit the rest of this year is, I mean do we kind of through the big impacts of that, or is that going to be with us that something that we should think about for the next couple of years as kind of we worked through some of those things.

James A. Wilhelm

Yes. So it is going to have a little bit longer-term related to, but I’ll Marc speak to software repairs, and he has been a little bit closer to that part of my arrival.

G Marc Baumann

Yes. So, as you guys know when we entered into this merger, we identified some concerns we had around legacy Central Parking locations in terms of structural repair obligations, and that’s why as part of the merger agreement, we held back $27 million as a purchase price to enable us to cover off any costs that we might face relating to those type of activities.

So we generated a very, very thorough list of locations just a finite list, it’s not that many, it’s probably at most a dozen or two, and we have done tremendous amount of diligence around this pre-merger. so as I said, there is a small number of locations, 12, 13 locations, they have required remedial, structural work. And our focus up to now has been to get engineering studies done on these locations to understand the scope and nature of what we need to be done to get contracting this, and be in a position, so that we could actually get this work done.

So we’re now in the beginning phases, where we’re actually doing some of this work. and clearly, although we are making great progress and getting work off to ground. We’re – that the bulk of it should get down between now and the end of 2015. I mean that it’s something that could drag, some of them could go a little bit longer, but our emphasis now was on getting these done, where we can.

and of course, 80% of the costs of the structural repairs with that against that indemnity, 20% goes to us, and that’s $0.5 million or so number that Vance was talking about earlier in the call.

Nate J. Brochmann – William Blair & Co. LLC

Okay, that’s great. I appreciate all that and I’ll turn the line over.

G Marc Baumann

Thanks, Nate.

Operator

Thank you. Our next question will be coming from the line of Kevin Steinke from Barrington Research. your line is now open.

Kevin M. Steinke – Barrington Research Associates, Inc.

Good morning.

G Marc Baumann

Good morning.

Kevin M. Steinke – Barrington Research Associates, Inc.

Good morning, hey Marc I think, your referenced in your prepared comments that part of the good growth in same location, gross profit was increased penetration of ancillary services, and just wondering how meaningful of an uptick you see in there, and I guess you kind of referred to it and a question that Nate just asked that is that being driven by being able to go the central locations with your services?

G Marc Baumann

Yes, it is, Kevin. and I think as I made in my remarks, in response to what Nate was asking, we definitely saw it coming into the merger of the opportunities do this, and we’ve been out there in a big way, opening up and expanding what we do is facility maintenance (indiscernible) Click and Park, we stuck commenced doing facility maintenance, I think in three or four new markets this year where we had not done them before, and the foundation of that we acquired Central Parking portfolio. so that is going to be a continuing focus for us.

We think there is more room to grow with facility maintenance than where we are today. And of course, the same is true with securities. the business that we have done, we’ve operated historically out of Southern California, but we’re now licensed to provide security in seven states.

We’re looking for opportunities to expand that business as well right now in an organic basis. And of course, with the Click and Park, that’s a tool that it has been available for standard for the next five years and again, a lot of traction around our locations. we run a giant of airport business around LAS Airport that business was almost exclusively central legacy business and we built an aggregator site for off-airport locations and are generating tremendous volumes through that both – benefiting both in terms of the Click and Park piece themselves that are near to us, but also where those locations are lease location, the revenue from people parking that is also moving to our benefit.

So I think those are the examples, and then of course, the one other area both Central and Standard had begun the truck down, remotely monitoring and managing parking facilities, Standard had added more locations in the pre-merger period, we had I think about 100 locations that we were monitoring remotely, and Central had acquired a small business that had an excellent technology platform, but only had a small number of locations.

We’ve since consolidated the standard parking remote management operation into the central parking remote monitoring location in Texas. and we are now aggressively pushing the growth of remote monitoring throughout the business, and more and more of our management clients are seeing that there is a tremendous upside to them and particularly in hours of low volume in the night, at times, when they run a lot of people around to let our remote monitoring facility, manage the operation.

They save a lot of money on labor costs and other costs around, labor and benefit costs and of course, pay us something for that remote monitoring service. And our experience today has been we’re able to obtain our normal management piece for running locations and when we add in remote monitoring, we’re adding in additional revenue to us.

So these are – these will continue to be major, major growth focuses for us, I think as we look to the future in addition to our focus on the institutional and municipal market space, and we talked about some of our wins, growing our hotel portfolio. these ancillary services are going to be significant growth there is for us over the next couple of years.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay, that sounds great. And I think in the past, you mentioned that ancillary services are contributing about 1% to gross profit growth. have you seen any – is that correct and have you seen anything – any meaningful change from that percentage contribution?

G Marc Baumann

We have said that, although we said it was a few caveats, because a one of the challenges in our business is, defining specifically, what is the ancillary and another growth area for us is ground transportation services, which – where we are now carrying, I think something like $30 million passengers on 1,000 buses around the country, in some of our contracts adding in ground transportation or shuttle busing is in ancillary service and in other contracts, ground transportation shuttle busing is the service.

So we kind of put that to the sites are not really including ground transportation, but these other ancillary services have been a small percentage of the gross profit, but certainly, as we go forward, we’re going to go faster than our underlying growth, and as we said, our target is to grow underlying – real gross profit to get underlying.

Our target is to grow our real gross profit 5% or more per year. I mean that’s really our focal point, and we see these other ancillary services contributing to that. Right now, I can’t do any better in terms of quantifying what they’re doing. But I can say is that, our business development teams and our field organization are very energized, around trying to sell these services in the clients.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay. Do you include Click and Park is an ancillary offering, or how would you categorize that?

G Marc Baumann

Yes, yes.

Kevin M. Steinke – Barrington Research Associates, Inc.

Okay.

G Marc Baumann

Any after, and I mean we – and I think one of the things about Click and Park, when we acquired it five years ago is essentially a tool for large one day sporting events, or multiple day sporting events where people would go in park and pay for parking, it would be a set rate, it would have routing capabilities, it was excellent tool for managing the Super Bowl or other large events.

But we, in our business recognized that this tool is to hit some enhanced capabilities, could be used in almost any location that we operate, whether it’s a hotel, or an airport, or really there is no limit for the type of places where somebody might want to plan ahead, be able to pay for their parking have a credential that would enable them to get in and out of the facility.

And so we’ve invested now over the past two years several million dollars, really to enhance the capability of this tool, to be able to work in any type of facility in any type of situation and that was a really a precursor to our ability to really grow the use of Click and Park by our clients, and that capability has really been in place now for the last 12 months or so. so we are out there aggressively pushing to expand the use of that tool. and I think they will see quite a bit of growth coming for that over the next couple of years.

Kevin M. Steinke – Barrington Research Associates, Inc.

Yeah, great. and related to that, I noticed that in your press release, you talked about the PGA Tour event, where you had 15,000 of – 50,000 parkers use Click and Park, I don’t think I’ve ever seen you disclose a number like that. I mean is that something that you really wanted to highlight is increased penetration of the product and I know that is a large event like you used it for traditionally in the past, but is there anything notable or meaningful about that number?

G Marc Baumann

I think, I think what’s notable is that it’s really reflecting a broad underlying trend; it’s changing the way people do things. In the past, people would turn off at a place that they are going to park and they would hope that there was parking available, they might driver around looking, they might be surprised and found out that the parking is sold out and they yet to park along way away. People today really want to plan ahead, and so they are using tools, they are going to websites, and a lot of our clients are putting links to certain part on their website that their clients who are buying tickets to the event now, go and arrange their parking in advance as well.

People want to know where they are going to be parking; they want to know how to get to that parking facility. And they really want to have made payment arrangements in past – in advance so that they can get in and out without any delay. So I think that’s what we are starting to see.

Click and Park, it always enables to help people at PGA event or other large sporting event, but now I think what we’re seeing is that the behavior of actual people is changing. And this is occurring all around our business as we see people not wanting to do what they did before, which is – just drive around looking for parking. They want to plan ahead and by our size with the scale of that we’re able to offer up a broad array of parking facilities for people to park at, and of course, use the Click and Park in many cases to facilitate those transition.

Kevin M. Steinke – Barrington Research Associates, Inc.

Great. Last question from me, it looks like strong free cash flow to pay down debt this quarter, so a nice sequential downtick in debt aside from the structural repairs that you have, does that continue to be the primary used to free cash flow. And how do you feel about I think you put out a target in the past of getting the 2.5 times debt to EBITDA, do you feel like you are on track with reaching that goal?

Vance C. Johnston

So yes, this is Vance. Kevin and so just to answer your question – a couple of things, one I think the way you alluded to, it is correct. So really over the short medium term our plan would be to generate free cash flow and have a significant focus on that and then be able to you that free cash flow to pay down debt. So that’s really the primary focus of what we are at. I think as it relates to getting to a leverage ratio that we’re comfortable with I think that we’ve alluded times about 2.5 as you put it.

I think that is not necessarily distinct in direct goal, but rather the ideas that we’re going to use free cash flow to pay down debt. I think we’d certainly feel comfortable, we feel comfortable now with the leverage that we have and I think we feel, obviously we feel more comfortable even when we get down to that level. And then, I think longer-term, as we continue to generate free cash flow and pay down debt then we can think about other capital structure initiatives if you will.

Kevin M. Steinke – Barrington Research Associates, Inc.

Great. Thanks for taking my questions.

Vance C. Johnston

You are welcome.

Kevin M. Steinke – Barrington Research Associates, Inc.

Thanks, guys.

Operator

Thank you. Our next question comes from the line of Daniel Moore from CJS Securities. Your line is now open.

Daniel J. Moore – CJS Securities, Inc.

Thank you, again. Just wondering, if you could provide a little color on margin profile of the opportunities like when you announced Cutter for the World Cup kind of relative to the overall average margins in the risk profile associated with getting to those types of opportunity?

James A. Wilhelm

Yes, happy to do that, Dan. I think it’s a generalization. The larger and more complex and the more comprehensive array of things that we do for a client, the more opportunity there is for us to make money and so that’s why you’re seeing our focus we’ve talked about repeatedly in the institutional municipals pay and also large venues and large events like when you mentioned with Cutter or like Olympics and other things of that nature. When a client is operating – or he has a commercial office building, that’s fully automated. There is limited opportunity for us to bring our full array of services there.

So we’re focusing our business on stadiums, special events, universities, hospitals, medical centers, and government where they can benefit from everything that we can do. And so whether that is managing a parking operation, bringing in automation, and new technology, doing facility maintenance at the facility, writing tickets, and parking on violations for people that are parking, booting cars that aren’t paying. We have an array of services that we talked about many, many times, and so, our business development focus is on that kind of stuff. And so yes, the opportunity there is for greater margin if you will and when I say margin I mean that absolute gross profit dollars is opposed to margin percentage.

Some of these very, very large revenues that or events that occurs in frequent basis whether it’s a World Cups or Super Bowls. How those come out for us, depends a lot and a lot of variables. It’s very hard for us to know in advance what we’re going to make, but they at least offer up the opportunity for us to provide our broad array of services.

Now, when you get outside the United States or the nature of our work tends to be more of a consultative activity as opposed to – we‘re going to be performing, we are going to be driving buses, we are going to be doing maintenance facility with ourselves. So despite of our work with on the World Cup or with when we were in London at the Olympic is really consulting with them and planning the transportation and parking arrangements for their events. And so therefore, it doesn’t utilize our full array of services, but generally speaking in the United States, we’re looking for opportunities, where we can use the full array and we made more money.

James A. Wilhelm

But in order to do those, there is a cost side factor in because we don’t have support costs on that side of the business, so if the questions around margins…

Vance C. Johnston

Yes.

James A. Wilhelm

Those shorts of deals carry very, very high margins.

Vance C. Johnston

Yes, absolutely.

Daniel J. Moore – CJS Securities, Inc.

Great, color, I appreciate it. One final one, just in terms of the guidance for the back half of the year, is there any notable net accretion from acquired leas contracts, any other accounting driven gains or losses that you are at least contemplating for the next two quarters.

Vance C. Johnston

No Dan, not really in addition to kind of the – what we kind of outlined. So, our guidance on an earnings per share basis continues to exclude things like mergers and integration costs and structural repairs. I think it relates to lease accretion which would incorporated within that guidance that we’ve previously provided. We kind of expect that to have some what minimal impact certainly relative to what we were, the impact that would have happened in the same quarters on a prior year basis. So, there is nothing outside of that that we see at this point in time. And obviously we’ve also alluded to the fact that any cost that runs in are related to the structural repairs or excluded from guidance as well.

Daniel J. Moore – CJS Securities, Inc.

Yes, absolutely. Thank you again.

Vance C. Johnston

Thanks, Dan.

James A. Wilhelm

Thanks, Dan.

G Marc Baumann

You’re welcome, Dan.

Operator

Thank you. And at this time I’m not showing any further questions. I’d now like to turn the call back over to Jim Wilhelm for any closing remarks.

James A. Wilhelm

Thanks, Sharla, and I want to thank everybody for taking their time of out of their date on our call and be interested in our company. We very much appreciate your support, standing, and recognize that all of you do a great job. We look forward to talking to you next quarter in short consents that we’re terribly excited around here, getting – having the ability to wind down the integration period. We move a lot of the noise and the terms adjusted, and adjusted, and listen from our earnings, and we are not getting through our 2014 results and very, very excited about our prospects for 2015 to be on. So thanks again everybody for taking the time to dial in to us. Have a great day.

Operator

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

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