SP Plus' (SP) CEO Marc Baumann on Q2 2016 Results - Earnings Call Transcript

| About: SP Plus (SP)

SP Plus Corporation (NASDAQ:SP)

Q2 2016 Earnings Conference Call

August 04, 2016 11:00 AM ET

Executives

Vance Johnston - Executive Vice President, Chief Financial Officer and Treasurer

Marc Baumann - President and Chief Executive Officer

Analysts

Nate Brochmann - William Blair and Company

Robert Magic - CJS Securities

Marc Riddick - Sidoti and Company

Kevin Steinke - Barrington Research

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 SP Plus Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call may be recorded.

I would now like to introduce your host for today's conference Vance Johnston, Chief Financial Officer at SP Plus. Please go ahead.

Vance Johnston

Thank you, Charlotte, and good morning, everybody. As Charlotte just said, I'm Vance Johnston, Chief Financial Officer at SP Plus. Welcome to the conference call for the second quarter of 2016. I hope all of you had a chance to review our earnings announcement that was released last evening.

We'll begin our call today with a brief overview by Marc Baumann, our President and Chief Executive Officer; then I’ll discuss our financial performance in a little more detail. After that, we'll open up the call for a Q&A session.

During the call, we'll make some remarks that will be considered forward-looking statements, including statements as to our 2016 financial guidance; and statements regarding the company’s strategies, plans, intentions, future operations and expected financial performance.

Actual results, performance and achievements could differ materially from those expressed 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’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 wanted to mention that this call is being broadcast live over the Internet, and then a replay will be available on our SP Plus website for 30 days from now.

With that, I'll turn the call over to Marc.

Marc Baumann

Thanks, Vance, and good morning, everyone. I am Marc Baumann, I am the Chief Executive Officer of SP Plus and I’d like to welcome everyone to our call discussing the results of our second quarter and first half of 2016.

We are very pleased with our strong bottom line performance. We had continued execution on cost reduction initiatives; help you with 7% growth in adjusted EBITDA. And when couple with reduced interest expense, drove 17 growth in adjusted EPS in the second quarter. We saw a solid gross profit performance across most geographic market and verticals as evidenced by 4% gross profit growth at same operating locations. We’re able to achieve this same location growth despite the impact of some renewals where we are now operating at a lower level of gross profit under the renewal terms and some softening in the hospitality vertical in certain geographies, primarily from reduced parking utilization rates.

Overall gross profit growth was tempered however by a significant year-over-year increase in health benefit cost and to a lesser degree by the impact of some recent terminations particularly in the airport and off-airport verticals.

We’ve already taken some steps to address the rising cost of healthcare and we should see the impact of some of these changes benefit the second half of the year. There are other changes that will be implemented for 2017 which we anticipate with further reduced future healthcare costs.

In terms of location retention and our decreased location counts, we recently made decision to terminate one commercial contract in the New York market where we determine that the gross profit was in adequate for the level of resource investment. While the gross profit loss was marginal that contract was comprised over 200 locations. The loss of this contract is the primary reason for the drop in location counts as well as a decrease in the location retention rate 87% as of Q2 this year from 90% as of Q1.

Excluding the voluntary loss of this portfolio, our location retention in Q2 would have been a very strong 93%. We also recently ceased operations at a couple of off-airport locations in Los Angeles which are being redeveloped.

On the positive side, we’re continuing to write business at a steady rate and for the first six months of the year have exceeded last year’s record pace. Some of these wins which we also highlighted in the last night’s release, span across vertical and geographic markets and include a contract to provide facility management, maintenance, security and customer service support to the City of Vancouver, Washington at the Vancouver center garage. We’ve also won a consulting deal with Colorado State University in Colorado where we’ll work closely with the university to develop its parking management program.

We also added a retain several key properties to our hotel portfolio including the Hyatt Regency in downtown Minneapolis, the Westin Georgetown in the District of Columbia and the Ritz-Carlton in Denver.

I’d like to briefly comment on a few other important initiatives. First off, we continue to be very focused on ramping up our operations are the MGM Resorts Hotels in Las Vegas and are looking to further expand in that market. Secondly, we’ve remained committed to driving down the total cost of risk to safety and loss mitigation programs. Finally, I am pleased with the progress we’ve made in our cost improvement initiatives, I know that Vance will touch on this in more detail, but it’s great to see that we’re able to continue to identify and successfully execute cost reduction initiatives.

In summary, we’ve made good progress in our initiatives and remained focused on improving top and bottom line results, generating increased free cash flow and driving shareholder value. To that end, as we previously announced, our Board of Directors authorized a $30 million stock repurchase program and we began repurchasing share in the open market at the end of June.

With that I’ll turn call over to Vance to leave you through a more detailed discussion of our financial performance during the quarter.

Vance Johnston

Thanks, Marc and hello everybody again. I’d like to spend a few minutes reviewing our financial results in more detail.

Second quarter 2016 adjusted gross decreased by slightly by 400,000 or 1% over the same period of 2015. While gross profit at same operating locations increased by 4% in the second quarter, we saw $500,000 increase in health benefit cost relative to last year and also felt the impact of some recent contract terminations, which Marc mentioned in his earlier comments.

On the G&A side, we continue to do a very good job managing G&A cost in the second quarter. Adjusted G&A for the second quarter of 2016 decreased by 2 million or 8% over the second quarter of 2015. The decrease was largely due to comp and benefit decreases resulting from recent changes to our organization as well as a decrease in our 2016 performance based compensation accrual, in additional to overall tighter cost controls.

We continue to make good progress in a number of cost reduction initiatives that we expect we’ll continue to positively impact our result going forward.

Driven by strong cost controls, adjusted EBITDA for the second quarter of 2016 was 24.3 million, an increase of 1.6 million or 7% compared to the same period of 2015. Result in adjusted EPS for the second quarter 2016 was $0.34 as compared to $0.29 in the same period of last year, an increase of 17% as G&A reductions and reduced net interest expense contributed to the year-over-year growth.

Touching briefly on the year-to-day results; adjusted gross profit for the first half of 2016 decreased 3.4 million or 4% over the same period of 2015. The year-over-year decline was primarily due to an increase in health benefit cost in 2016 as well as a smaller favorable adjustment for prior year casualty loss reserve estimates in the first half of 2016 as compared to the first half of 2015. Certain contract terminations and renewal that Marc previously discussed also contributed to the year-over-year decrease.

Year-to-date 2016 adjusted G&A was 44.3 million, a decrease of 3.6 million or 8% from the same period of 2015. This was mostly driven by the same factors I discussed for the second quarter.

Resulted adjusted EBITDA for the first half of 2016 was 39.4 million, unchanged from the same period of 2015. Adjusted EPS for the first half of 2016 was $0.44, $0.02 better than the same period of 2015 also on an adjusted basis.

The company generated adjusted free cash flow 14 million in the first half of 2016 as compared to 5.5 million in the first half of 2015. Continued focus on receivables and payables management, lower interest expense resulting from the company’s renegotiated credit agreement in 2015 as well as lower cash tax payments along with receded proceeds from an asset sales and a contract termination benefited 2016 adjusted free cash flow.

We remained focused on driving higher free cash flow through improved operating performance and working capital management. Based on results of the first half of 2016 and our exactions for the remainder of the year, we remained comfortable with our full year outlook of adjusted EBITDA to be in the range of $88 million to $93 million, adjusted earnings per share to be in the range of $1.16 to $1.26 and adjusted free cash flow to be in the range of $40 million to $46 million.

That concludes our formal comments. I’ll turn the call back over to Charlotte to begin the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Nate Brochmann from William Blair. Your line is now open.

Nate Brochmann

Yes, good morning, guys. How are you?

Vance Johnston

Good morning, Nate.

Marc Baumann

Good morning, Nate.

Nate Brochmann

I wanted to ask a little bit just in your press release you talked about getting some renewal pressure, I wanted to ask a little bit further in terms of what is that mean in terms of whether that’s pricing pressure or some different competitive dynamics?

Marc Baumann

Yeah, I’d be glad to answer that Nate. I think it’s primarily legacy deals that are coming up for renewal. So as you know, particularly in our world where we merge central and standard together, we have quite a few legacy deals particularly legacy leases. So a number of those come up all the time and in some cases, we can improve on the financial performance of those legacy leases in other cases go the other way, because essentially we are taking about rent resetting the market. And that’s the primary factor. I don’t think the competitive set out there is right now is causing any real change in our pricing picture.

Nate Brochmann

Okay. So is that just more of every year have offer a little bit more value for those customers or you know kind of bring that pricing down in terms of the value proposition or again is there as you talked about in terms of just something going on in the environment where you don’t have that pricing strength?

Marc Baumann

Yeah, this is really not about what the consumers are paying for pricing. We are seeing fairly strong economic condition throughout North American and I would say generally don’t have any difficulty putting up pricing that consumer are paying for parking whether it’s for transit parking or monthly parking. So I don’t think their environment has changed at all, it very similar in 2016 to 2015. But we are talking about here is really has to do with what we are paying in the case of leases and rent to the people who own properties, lease properties. When those contracts come up for renewal and sometimes they’ve had fixed rents for many, many years, they come up for renewals, they then have to reset to market. That can be positive reset or a negative reset. Some cases, our legacy deals were paying over market rents, so they reset down to market and that’s a good thing. In other cases, they reset up to market and that’s not a good thing.

Nate Brochmann

Got it, okay. Thank you for explaining that. And then in terms of just again I think this is something that I kind of asked on a lot of several calls here over the last year or so, but in terms of getting through those quote unquote unprofitable contracts and kind of still weeding those out, I mean do you feel that you are getting into the later innings on all those, and I know that some of those last long term so it’s not like they ever going to go away anytime soon, but do you feel like you are hear in kind of end of the road on that at all?

Marc Baumann

I’d say we are probably in the middle of the game now for releasing baseball, there is a couple of big ones that we have another year or two to do. But certainly if you were to take it three or four year view, I would say we would be through the bulk of them if not almost all of them at that point. But what we are seeing is not surprising us at all and bearing in mind to many of the legacy deals while they remain like see deals with above market rents, there are many legacy deals with full of market rents. And so these things go both way. We are right now experiences a couple of large ones and it doesn’t take any - they are resetting the market and they are saving it that we described.

Nate Brochmann

Okay. And then just one last quick question just in terms of kind of pipeline of opportunities obviously you guys always doing a nice job of kind of winning a few new deals. How just on the bigger opportunities look like either in the municipality or all there some of the other various end markets, it’s still seems like there is a lot of lot of potential there, and just wondering kind of the trajectory looks like if some of those opportunities?

Marc Baumann

Yeah, think a number of the verticals that we’ve identified for the last few years with potential, continue to show that potential. So first and foremost this hospitality and while we touched on this fact in our comments that some hotels and some parts of the country are experience a little softness in activity and that could be the lubber effect or just localized condition. We still see lots of receptivity by hospitality owners and management companies to outsource hospitality to people like us. So we think there is plenty of growth opportunity there.

Turning to the municipal space, I think the pent-up pressure is that we’ve talked about it’s the reasons for them to want to outsource namely pension liabilities and other budget pressures are there if anything they’ve increased and accelerated over the past few years. So I think you will still continue to see us be very, very active and trying to capture municipal clients. We announced this last quarter not in the current quarter you know we took over the City of Annapolis, Maryland. We operate many, many other municipalities. And I think they are very, very receptive both to somebody coming in and be able to maximize revenue through strong controls and advising them on pricing through a better cost control and managing labor, but also brining new technology and not just new meter technology but technology so that residence can buy permits online or people can find parking through their mobile apps.

And so we are very active in that space and I think that remains a fairly compelling reason for any municipalities consider outsourcing to us.

Nate Brochmann

Okay, great. I appreciate all the time. I’ll turn it over.

Marc Baumann

Thank Nate.

Operator

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

Robert Magic

Good morning. This is actually Robert Magic filling in for Dan today.

Marc Baumann

Robert, hello, good morning.

Robert Magic

The retention rate declined 87% this quarter, what drove the decision to part ways with that one large client and how probable is that contract and what do you expect the retention rate to trend over the next several quarters?

Marc Baumann

Sure. I mean it was marginally profitable client. I think we used the work minimal but we’re talking about an insignificant amount of money. And as we looked at, what it took to support this client relationship including our back office and support resources, we just said you know for what we are making on that contract the cost benefit just doesn’t work for as a company. Unfortunately, there was lot of location and we weren’t actually managing any parking operations, we were really managing billing for monthly parking. So there was lot of locations in our system and so it touches our retention obviously when we have a termination like that. But we are not into building market share for its own sake, we are - our goal is to have profitable contracts where we can bring our rate of services, grow those services at a given location and we just didn’t see that as a kind of forward picture for this contract.

Obviously as I said in my remarks, excluding that our retention rate was 93% which is actually picked up a bit from where we’ve been over the last couple of years. I would say our goal remains the same and they has to be in the sort of 92%-93% range for location retention on an ongoing basis. And I think that’s a very realistic goal for our company.

Robert Magic

Thank you. And secondly from me, you called out increase claims expense for self-insured in Q2, what are the implications of that trend for the second half of the year and what steps are you taking to kind of address that trend?

Marc Baumann

Yeah, I think in terms of - if you are talking about healthcare as opposed to casualty, I think on casualty the story was actually a positive one which is on a year-on-year basis it was more positive last year. So we always expect a casualty to overtime be a positive contribute to our gross profit. But on the healthcare front, we ‘re only in our second year now of self-insured healthcare and so we still what I would say tweaking our ability to manage healthcare costs well. We noticed that in last year, we had there was some opportunities for us to improve for a 2016, we put some stuffs in place to guide people to appropriate plans where we felt like the cost benefit while providing that healthcare coverage made sense. We have been surprised in a number of large claims that we’ve had to content with in 2016, but we’ve taken some steps already that we’ve already implemented which we think has been move that curve in the second half.

So I would say our expectation for the second half is that we are not going to experience the same magnitude of negative variances that we saw in the first half. That should get better based on the steps that we’ve taken already. And as we look forward at our plan designs for 2017, we are going to make some further changes in our plan designs for 2017 that we think will also help us bring our cost down. One of the challenges that every company has right now is that the full impact of the affordable rent are finally working their way through. And so that influence is the behavior of each employee and the decisions they make about where to obtain coverage, we’ve seen a lot of these government sponsored exchanges and so that’s changing people decision dynamic.

So it’s been remain a little bit of volatile I would say over the next year or two, but we - this is a major focused areas for us and I think we are confident that we can bring down the cost of healthcares we go forward.

Robert Magic

That was very helpful. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line Marc Riddick from Sidoti. Your line is now open.

Marc Riddick

Good morning.

Marc Baumann

Good morning.

Marc Riddick

I wanted you - you touched on it a little bit but I wanted to follow-up with the progress on the MGM Resort assignment and maybe if you could sort of share some of your initial views on not just the execution of that specific opportunity but also the Las Vegas market in general maybe some of the things that you’ve seen there that you can may be share some of your first impressions? Thank you.

Marc Baumann

Well, I’d be glad to answer that and it’s very timely since I was just in Las Vegas last week, 115 degree temperature, I am glad to be back to Chicago where it’s only 90. But so far so good as how I would describe it. We obviously commenced operations with MGM, all of their properties in Las Vegas, we advise them and bringing in brand new automation for all of their stuff part and also for their valet operation. They have implemented paid parking both self-paid parking and also at their valet. And of course the T-Mobile arena there has done underway with a lot of large events and we are assisting them in managing that in some of our as people have been advising them and us on what’s the best way to manage large events at the arena.

So for us a good start but there is a lot to do to build an organization from scratch when you come into a market where you don’t have any base of operations, you have to create all of that. But we really like the opportunities in Las Vegas. We recently made a decision to base a Senior Vice President of Operations in Las Vegas permanently because we see that that market can grow for us very nicely way beyond the MGM relationship. And quite frankly I would surprise that Las Vegas that the permanent population there it makes it like the fourth or fifth largest city in the United States. So it’s not just the tourist destination anymore. And of course they have got their new hockey team coming and we’ll become - continue to be a very vibrant market for the long haul.

So clearly now that MGM has made the decision to introduce pay parking, other operators of hotels and casinos and properties are now kind of thinking along the same lines and it will surprise me over the next 12 months to see more and more convert to pay parking. I think ultimately that will be the model there just like it is everywhere else.

We also thing and it goes beyond the casinos there is other things going on in Las Vegas. We have some other clients that we’ve already cultivated relationships with that are not casino clients and we think there is an opportunity grow there to. So if we were to fast-forward two, three years, I think we’ll be looking at a situation where this will be a very nice core market for SP Plus.

Marc Riddick

Okay, excellent. Thank you for the color there.

Marc Baumann

You’re welcome.

Operator

Thank you. Our next question comes from the line of Kevin Steinke from Barrington Research. Your line is now open.

Kevin Steinke

Good morning.

Marc Baumann

Good morning, Kevin.

Kevin Steinke

So the 4% same location growth that was a pretty solid number, can you dig in all into what’s driving that, is that just increased parking activity across the country or any success and cross selling your ancillary services, any more comment would be helpful on that?

Marc Baumann

Yeah, I mean I’ll take it and then Vance maybe able to add some more color. As I said to one of the earlier questions, we are clearly seeing opportunity to put prices up for parking and so to the extent that the market support that, we are doing that, that’s a factor. We have our operational excellence group focused very much on our most important property and they are out there all the time looking for opportunities to optimize revenue. We’ve seen an expansion of online selling of parking, you know it’s small, but growing very rapidly on a year-over-year basis and that hopefully is bringing some people to the parking facility they might have not parked there before.

So our marketing, interactive marketing efforts are very, very active right now. We think that’s contributing to it. Certainly we are always in front of clients with proposals to add in ancillary service whether it’s ground transportation, facility maintenance and alike and we are certainly seeing strong receptivity from clients to do. They want to simplify their own lives and not have to manage multiple external relationship. So going with somebody like us you know I think is a good thing to do.

And of course some of our efforts we talked about this in the comments around risk management and total cost of risk I think are starting to bear fruit. We are focused very hard and trying to have an accident free workplace for our employees, for our customers and that’s the right things to do, but it also is beneficial from a financial point of view and that will be contributing as well.

Kevin Steinke

Alright, that’s interesting. So I guess a number other things you outlines are still in the fairly early innings to use the analogy again, in terms of the cost of risk, cross selling ancillary, so I guess there should be a fair amount of room to run here in terms of growing gross profit at same location, is that fair to say?

Marc Baumann

Well, I would say there is room to run. Yes, I think it’s kind of like the 93% retention rate in the quarter. I would love to believe that it’s going to be 4% every quarter from now on and I’d love to believe that it’s 93%. But this is one quarter’s performance. And so we’ve remained very focused on creating meaningful same store growth, at the same time driving up our retention rate into those levels that I was talking about and of course continuing to write more new business every year than the prior year.

And as I commented in my remarks, we are ahead of last year’s record pace on new business for the first half of this year. So it’s very, very important that we kind of take more than a one quarter view and just recognize the fact that we had a great quarter in terms of same location growth. We had a great quarter in terms of location retention when you exclude that contract that we voluntarily terminate. But our goals remain the same, but I wouldn’t want to create the expectation that it will now be 4% every quarter and 93% every quarter.

Kevin Steinke

Right, right, fair enough. So the turnover in the off-airport location or location, is that just related to what you talked about last quarter in terms of some increased competition in a specific market particularly LA?

Marc Baumann

Yes, I mean I think couple of things have affected us on a year-over-year basis. We talked about a couple of large airports that we weren’t able to renew last year and so we are seeing the full year effect of those kind of flush through our results namely the two ground transportation operations at Dallas last year and also the Nashville Airport. But - and we also have exited from LAX airport as the on-airport operator. But the big issues in terms of off-airport is really around LAX. You know SP Plus is business, it’s not heavily focused on off-airport. We have some nice off-airport operations but we get a very unusual situation around LAX where we had several off-airport operations there, we still have some today. But two things have happened, one the LA Airport authority has actually purchased a lot of the land that these off-airport operations operate on because they want to use that land for other purposes either redevelopment or taxi holding areas and the like. So some of these being converted away from off-airport operations and that’s affected us.

And it’s also some new off-airport operations have also opened around LAX so it’s been very, very price competitive there. And our business at SP Plus quite frankly is more focused with the on-airport contract. We believe that we can deliver exceptional value to airport authorities around the country and that becomes are focused. And the off-airport business we pick it up when we can, but there is kind an unusual situation for us at LAX to be both on and off-airport.

Kevin Steinke

Right, okay. And you mentioned that one of the reasons that G&A was down year-over-year in addition to your good progress on cost reduction initiatives. Is that there was a reduction in the 2016 performance based compensation accrual. So just wondering what the driver was behind then?

Marc Baumann

But we are always looking at our expected performance for the year Kevin and what I would say clearly we are targeting higher gross profit growth in what we’ve achieved in the first half of the year and I think our forecast for the year will support that. But clearly year-to-date, we’ve had the performance that we had and when we have our performance be what it is and maybe it’s not exactly what we expected, we adjust our accruals to be appropriate for that level of performance.

Kevin Steinke

So and - go ahead.

Vance Johnston

Yeah, so I would just add that basically what it is that we’re saying is that we saw fairly significant reductions in G&A both on the quarter and year-to-date and kind of continue in along that path. Some portion of that not the majority was related to adjustments and performance based compensation accruals for the reason that Marc outlined.

Kevin Steinke

Okay, although you - I think you noted again that you would expect growth to - your gross profit to kind of pick up in the second half here is we continue to roll out some of this new business. So I guess that kind of your expectations as we look forward to the second half of the year?

Marc Baumann

Yes, it is and I would say just to be clear on our performance based compensation accruals, we look at our expectation for whole year when we are making adjustment, so it’s like well we made adjustment in the first half and that’s brought it down and then we achieved the things that we are talking about in the second half it’s not going to spike their cup. We’ve made the termination of what we think is an appropriate accrual for the year based in our expectations f or growth in the second half.

Kevin Steinke

Alright. Well, thanks for taking the question. That’s all I had.

Marc Baumann

Thank you, Kevin.

Operator

Thank you. And at this time, I am not showing any further questions. I would now like to turn the call back over to Marc Baumann for any closing remarks.

Marc Baumann

Thank you, Charlotte, and thank you everyone for joining us today. We really appreciate your interest in SP Plus and we look forward sharing a bunch of exciting developments when we meet again in three months. Thank you.

Operator

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

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