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Edited Transcript of SP.OQ earnings conference call or presentation 5-Nov-20 10:00pm GMT

·43 min read

Q3 2020 SP Plus Corp Earnings Call CHICAGO Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of SP Plus Corp earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * G. Marc Baumann SP Plus Corporation - CEO, President & Director * Kristopher H. Roy SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer ================================================================================ Conference Call Participants ================================================================================ * Daniel Joseph Moore CJS Securities, Inc. - MD of Research * Kevin Mark Steinke Barrington Research Associates, Inc., Research Division - MD * Marc Frye Riddick Sidoti & Company, LLC - Business and Consumer Services Analyst * Timothy Michael Mulrooney William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 SP Plus Corporation Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Kris Roy, Chief Financial Officer. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [2] -------------------------------------------------------------------------------- Thank you, Theresa, and good afternoon, everyone. As Theresa just said, I'm Kris Roy, Chief Financial Officer of SP Plus. Welcome to our conference call following the release of our third quarter 2020 earnings. During the call today, management will make remarks that may be considered forward-looking statements, including statements as to the impact of COVID-19, outlook for 2020 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 or implied due to a variety of risks, uncertainties or other factors, including those described in the company's earnings release issued earlier this afternoon, which is incorporated by reference for purposes of this call and available on the SP Plus website and the risk factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q and other filings with the SEC. In addition, management will discuss non-GAAP financial information during the call. Management believes the presentation of non-GAAP results provides investors with useful supplemental information concerning the company's ongoing operations and is an appropriate way to evaluate the company's performance. They are provided for informational purposes only. A full reconciliation of non-GAAP financial measures to comparable GAAP financial measures were presented in the tables accompanying the earnings release. To the extent other non-GAAP financial measures are discussed on the call, reconciliations to comparable GAAP measure will be posted under the Regulation G tab in the Investor Relations section of the SP Plus website. Please note, this call is being broadcast live over the Internet and is being recorded. A replay will be available on the SP Plus website shortly after the end of the call, and will be available for 30 days from today. I will now turn the call over to Marc Baumann, our Chief Executive Officer. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Kris, and thank you all for joining us today to review our third quarter results and discuss our business outlook. There are 4 key takeaways from our third quarter performance that I'd like to highlight. First, our business substantially recovered from the low point of Q2 when pandemic-related lockdowns caused businesses to implement work-from-home protocols and travel came to a virtual standstill. Second, the actions we took to mitigate these challenging business conditions are working and have resulted in structural changes that have benefited us already and will continue to benefit SP Plus in the long term. Third, our investments in technology are increasingly differentiating us in the marketplace. And finally, our scale, reputation and leadership position are winning us new business at a stronger pace than what we would have expected during such uncertain times. We're pleased to report adjusted gross profit of $42.4 million for the third quarter, which was a significant improvement over Q2 levels, and which reflected a strong showing within a difficult business environment. The sequential pickup in gross profit was driven by the performance of our commercial and aviation businesses. Transient parking volumes at our locations in major cities have steadily increased over the last several months, and at some urban commuter-centric locations, are even up compared to last year. This is due to the fact that mass transit and other shared mobility options have become less attractive modes of transportation in today's COVID-19 environment. And we believe that this situation is likely to persist for some time. With more than 3,000 managed and leased locations in our commercial business and operations at 74 airports within our aviation business, SP Plus is one of the industry leaders, and we believe that our scale has played an important role in enabling us to recover as quickly as we have and to be on the receiving end of many new business requests. We're getting a higher inbound number of requests from new clients as well as from existing clients for whom we already are providing services. So in fact, scale matters, as does operational excellence. Ultimately, our clients rate our performance by how well our field employees deliver our services, and this gives me the perfect opportunity to commend our entire staff for their dedication to supporting our clients and going above and beyond expectations during this difficult time. Our ability to successfully deliver has been a key advantage in the current market climate, where some competitors are having difficulty providing a level of service clients require. Early in the pandemic, we developed a comprehensive COVID playbook, emphasizing social distancing, personal protective equipment and health screenings, effective signage and enhanced cleaning protocols at our facilities for the safety of our staff, our clients and their customers. This playbook has been extremely well received by our clients and has been a contributing factor in some of our recent new business wins. The sequential recovery in our gross profit and EBITDA demonstrates what we believe is the increased importance of our wide array services, a more predictable and favorable business mix within our operating portfolio and our efforts to optimize our overall cost structure. In the third quarter, demand for our services increased as businesses reopened and consumers returned to offices, if only on a limited basis. Our technology solutions that enable touch-free transactions and mitigate congestion as well as support social distancing have become increasingly relevant to clients and consumers in this environment. Also through a combination of natural expirations and renegotiations that took place in the second and third quarters, we have now essentially reconfigured our operating portfolio. It is now comprised of fewer leases with lower fixed rent obligations, and we've also been able to convert some leases to management contracts, which tend to have greater visibility and predictability. On the expense side, our adjusted G&A decreased 19% sequentially and 40% year-over-year. Some of the factors that contributed to this sizable reduction were temporary in nature, including base salary reductions that we've reinstated effective October 1. Also, as business conditions improve, we expect to appropriately scale our workforce and resume certain expenses, but there have definitely been cost reductions that are permanent. And we see additional potential to further reduce our cost structure as we pursue process improvement initiatives. What I believe is clear from our performance during COVID-19 is the flexibility of our business model, which has enabled us to adjust and scale our costs quickly. In the face of the rapid slowdown in our business in March and April, we made difficult business decisions but ultimately reduced our costs dramatically, and we're able to achieve positive free cash flow. Through all of this, our commitment to lead in the digital transformation of our industry has remained consistent. Technology is a key differentiator for us in the marketplace that we continue to invest in after the onset of the pandemic. We believe it will be a major driver of our long-term growth. In the third quarter, we continued to see increased demand for our Sphere technology offerings, which include contactless reservation and payment options that are aligned with pandemic-related safety measures. We expect to have more than 300 locations on our gateless on-demand solution by year-end, which we believe is significantly more than any other parking operator. Our technology solutions are contributing to our success in winning new business. Specifically, our touchless technology offerings were key to winning several airport contracts this year, where new business activity was stronger than in recent memory. On the commercial side, we added 64 new locations during the third quarter, some of which were previously managed by smaller competitors who perhaps were not able to pivot to maintain service levels under the challenging business conditions brought on by this pandemic. As you saw in our earnings release, we took large impairment charges in the third quarter for certain intangibles and goodwill in our aviation business. This was the result of the reduction in business activity experienced by our travel and hospitality clients due to COVID-19 restrictions and concerns. That being said, we believe that our aviation business has unique service offerings, specifically Bags' value proposition and technology have become increasingly important in a world where social distancing and reduced congestion matter. We're in discussions with existing and potential clients around using Bags service offerings post pandemic, and we continue to see this unique service as a long-term business driver. With that, I'll turn the call back to Kris Roy, our CFO, who will provide a financial review of the third quarter. -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [4] -------------------------------------------------------------------------------- Thank you, Marc. As always, I will talk to our adjusted financials. Please refer to our earnings release issued today after the market closed for a full reconciliation of all non-GAAP measures to their nearest GAAP measures. For the 2020 third quarter, we reported $42.4 million in adjusted gross profit compared to $58.7 million in the year ago quarter, mainly due to reduced business activity as a result of the pandemic, partially offset by $5.6 million from an early contract termination fee related to certain aviation contracts. This year's number excluded $100,000 for restructuring as well as $300,000 noncash lease impairment charge. On a sequential basis, which, we think, is a better way to look at our overall financial results and to judge how we are adjusting to this challenging environment, adjusted gross profit increased $38.5 million due to improving business activity as states and communities began to reopen. Sequentially, in addition to the early contract termination fee, third quarter gross profit also benefited from lease terminations and lease conversions into management contracts. Excluding $1.6 million in restructuring costs as well as a $1.3 million noncash lease impairment charge, third quarter 2020 adjusted G&A decreased by 40% to $15.5 million. This year-over-year comparison reflects lower compensation and related costs as well as a reduction in discretionary spending in light of COVID-19. Sequentially, adjusted G&A was down 19%, which was largely in line with our expectations and reflects our efforts to closely manage our overall costs. Please note that going forward, some G&A expenses will return as we have reinstated base salaries to prepandemic levels for those employees affected by the pay reductions enacted in April, as Marc mentioned. However, as a result of our cost management efforts, a significant portion of our G&A expense was permanently eliminated, setting the stage for us to operate with an overall lower cost basis. Adjusted earnings per share were $0.62 compared to $0.77 for the third quarter 2019. Adjusted earnings this quarter excludes $1.7 million of restructuring costs as well as $133.2 million noncash impairment charge. The impairments were related to our aviation business and primarily from our Bags acquisition. Again, although we reported a year-over-year decline, we are pleased that we returned to profitability on an adjusted basis sequentially. Among other factors, we benefited in the third quarter from several leases that came to their natural contractual expiration, many of which were unprofitable. Considering the current business environment, we are very pleased to report positive cash from operations and free cash flow. Year-to-date, the company generated $27.9 million in net cash from operations compared to $54.8 million in the year ago period, and the year-to-date free cash flow of $18.9 million versus $44.3 million in the same period of 2019. Now I would like to share some of our thinking with respect to how the fourth quarter is shaping up. We expect to see incremental gross profit from improving business trends compared to this year's third quarter, excluding the benefit of a $5.6 million early contract termination fee. Additionally, potential expiration of some rent abatements will likely further reduce our fourth quarter results. Therefore, gross profit in the fourth quarter is unlikely to exceed the third quarter. In addition, we will have sequentially higher G&A costs in the fourth quarter for a number of reasons, including the reinstatement of approximately $1.5 million in base salary reductions that were implemented earlier this year and at the onset of the COVID-19 crisis. And finally, at the end of October, we had $170 million of capacity under our senior credit facility. Based on our current visibility, we continue to expect to generate positive free cash flow for the remainder of this year and into 2021, and remain confident that we have ample financial flexibility to manage through these uncertain times. With that, I'll turn the call back over to Marc for some closing thoughts. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- Thanks, Kris. While the last few months have been challenging, as you can see from our numbers, we have emerged as a leaner, stronger company. Adding this to our business advantages of size, scale and technology, we think we're well positioned to thrive and win additional profitable business in 2021 and beyond. We've shown that we are nimble and can manage through the worst of times, which we believe are behind us, and we expect our business to continue to move forward from here. We work hard every day to grow our business while adding value for our clients, and we look forward to reporting on our continued progress over the next few months and years. Theresa, let's open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Daniel Moore with CJS Securities. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [2] -------------------------------------------------------------------------------- I appreciate the incremental visibility into Q4. It's extremely helpful. Maybe just talk about the cadence of revenue -- are really more helpful to gross profit, kind of July, August, September and into October on a sequential basis, how -- any sense for the cadence of how gross profit recovered through those periods? -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [3] -------------------------------------------------------------------------------- Yes. Well, I think the good news is that what we saw and anticipated was that April would be the low month. And essentially, every month, subsequent has been better than the one before. So it was a nice slow, steady recovery through those months. And as we've gone into early October, we're seeing more of the same. Obviously, there's been a spike in COVID as we see reported in the press. And so we don't know whether that is going to change that pattern that we've observed. But at least, based on the information we have to date, we're seeing a strong October relative to September. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [4] -------------------------------------------------------------------------------- Extremely helpful. And I just want to level set. You did a great job of it. But if we take Q3 as a baseline, back out the $5.6 million termination fees and adjust for the higher G&A that will likely have it on a run rate basis, I come out with sort of an adjusted gross profit on a run rate of $37 million and EBITDA in the $20 million range. Is that the right way to think of it? Or are there any other nonrecurring items? -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [5] -------------------------------------------------------------------------------- I think you're on the right track there, Dan, in terms of kind of how you're thinking about the puts and the takes there, in terms of what we've been able to give you in terms of expectations for Q4. I think, as we mentioned, it's unlikely we're going to kind of continue with what we had in Q3. So I think way you're thinking about it in terms of backing out the termination fee and add back additional G&A from an EBITDA perspective is kind of the right way to think about it. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [6] -------------------------------------------------------------------------------- Very helpful. And then -- so if we start somewhere around that as a base and adjust for seasonality, et cetera, as the world emerges from COVID and travel recovers, the economy recovers, gross profit improves, how do we think about operating from here? In other words, for every incremental dollar of gross profit, how do we think -- how much incremental EBITDA would you expect to generate now that we've got the revised portfolio and the restructuring activities, et cetera? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [7] -------------------------------------------------------------------------------- I think the thing we can say probably with certainty is that incremental growth in gross profit is going to generate more operating leverage than it did in 2019 because we brought our cost base down, in some ways permanently, from 2019. But we've also brought our cost base down this year in some ways that are temporary. We've talked about cuts to compensation and the like. And so we don't have enough visibility into what 2021 gross profit curve is going to look like. And so I think it's premature for us to sort of get too precise about what G&A might require. Clearly, as gross profit grows, we're going to need to bring some G&A back. But since we're good at controlling costs, we're going to do that very, very carefully and judiciously. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [8] -------------------------------------------------------------------------------- Very helpful. Last for me, and I'll hand it over. But you're on pace for 300 gateless on-demand locations by year-end. Where do we see that going as a percentage of the overall portfolio in '21 and beyond? And what's the revenue and gross profit differential for gateless facility versus an attended facility, all else equal? Just trying to get a sense of if there's a revenue differential and/or gross profit differential. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [9] -------------------------------------------------------------------------------- Yes. Glad to take that on. The gateless technology capability that we're talking about there is going to be primarily deployed in places that do not have gates now. And what that means are surface lots and other places like that. And what this technology does, of course, is it facilitates more efficient payment options. You'll be able to use your device to pay. So people don't have to go to a pay station to pay. It reduces some of their processing costs because you don't need a pay station. You don't need someone to go there and turn to it. But you still do have an enforcement activity. It needs to be mostly unattended lots, and you got to sense -- going to save a huge amount of labor from what you had before, but you're going to have better capture, I think, than you're doing and certainly more efficiency and I think potentially are going to draw parkers who make prefer to go to a much easier transaction environment than what they have to do in other places. The other technology that we're deploying as part of Sphere commerce is for gated locations. And that's really the preponderance of parking facilities out there where you do have access control, where you don't want to send someone around individually to do enforcement, where you have staff on hand to be able to operate a lot of the park's equipment and other things that go on there, do reconciliations and the like. And what the gated solution offers is really the opportunity to become more efficient in the operation of those type of facilities. And just to give you a little update, we're deploying our gated solutions right now at a number of facilities. And while we haven't put it on full deploy yet, we expect to do so by year-end. And I would imagine we'll have -- be talking about 100 or more locations on that solution during the first half of next year. And that we'll start to drive a meaningful reduction in costs. Now if we deploy those at leases, that meaningful reduction in cost of the north to our benefit. If we deploy that in management locations, this benefits our management clients. And particularly, if they combine it with Sphere Remote where we can remotely monitor the facility, you could go to a much different staffing level or maybe no staffing level compared to the traditional parking facility. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- And your next question comes from the line of Tim Mulrooney with William Blair. -------------------------------------------------------------------------------- Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst [11] -------------------------------------------------------------------------------- Just a few questions for me. So first, can you talk a little bit more about your cost reductions in the quarter? How much of the $10 million reduction in SG&A would you consider to be, I guess, temporary until business activity comes back? And how much would you consider to be more structural, kind of what we would think of as being annualized cost savings as we move into 2021? -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [12] -------------------------------------------------------------------------------- I think it's probably a little bit difficult, Tim, as you kind of look at kind of the overall cost structure. Certainly, some of those were temporary in terms of what we saw for Q3. As we mentioned on the call, I think a lot of this depends on kind of what we think the curve is really going to look like as we kind of move through Q4 and into early 2021. Depending on how that curve is, we'll have to make the necessary investments into the business in terms of additional G&A. Now certainly, as we look at our overall G&A structure, we mentioned a lot of this is going to be permanent. There's some additional opportunities as we kind of go through Q4 and as we kind of think about 2021 about some additional initiatives in terms of driving down our cost. It's challenging to kind of say, this percentage is kind of permanent in nature because as we look at the business and what we need to invest in the business, that can change over time. -------------------------------------------------------------------------------- Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst [13] -------------------------------------------------------------------------------- Okay. All right. I'll leave that there. Moving to your location count. You've reduced leased locations, I think, by about 80 in the second quarter and maybe close to 60 more in the third quarter. Do you feel that you're well positioned now with the remaining leased contract location that you have? Or is this still a pretty fluid situation? And maybe we might expect another step down in the facility location count in the fourth quarter. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [14] -------------------------------------------------------------------------------- Well, I think we have 2 sets of changes going in opposite direction. We -- as we talked, we added 64 new management locations in the quarter, and we added -- I can't remember the exact number now, but at least 50 in the second quarter. So we're adding management locations. Those aren't conversions from leases. Those are new locations. So we're getting quite a bit of growth in our management contract portfolio and probably more growth in terms of new locations than we have in recent times. But at the same time, we've talked to it last quarter, and that continues. We're looking at leases as they either come up for expiration in the normal course, or whether we have terms and conditions in those leases that enable us to renegotiate the terms or change their rent. We're doing all those things. And certainly, COVID has provided a trigger on some of those firms that have enabled us to reduce our lease commitments. And so that's happened. We have another, I don't know, 45 leases that expire by their terms next year. And I think the only thing you can say for sure is that we'll follow our good disciplines of only renewing those leases that makes sense for us to renew and doing so on terms that can generate profit at the level of business activity that we have. And if we can't, then we're going to let them go. So you could see a continued decline in our lease count. I think, year-to-date, we're down about 25% in our leases from where we were at year-end. That may well go down further. But, for us, it's not about how many leases do we have. It's whether their leases are generating enough profit for us to justify the risk that goes with those sort of commitments. -------------------------------------------------------------------------------- Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst [15] -------------------------------------------------------------------------------- Yes. No, absolutely. And that makes sense. I want to touch on the comment you just made a second ago, Marc, about some of the new wins that you've had recently because we've seen some bankruptcy announcements in the industry this year. And obviously, everyone in the parking management industry is just trying to figure their way through these tough times. But I'm wondering if a company like yours, with a larger balance sheet, is seeing opportunities to gain market share in, I guess, certain regions where your competitors are struggling? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [16] -------------------------------------------------------------------------------- I think that's definitely the case. I mean if you look at -- if we were to run down the details in our commercial group of like what have we won, they're all being taken away from somebody else. And I think the fact that we've added more new locations in the past couple of quarters than probably any 2 quarters in the last couple of years, I think it's a sign that some clients are, let's just say, migrating to safety. They look at us. They look at our strong balance sheet. But they also look at our technology capabilities. When we are able to get out and explain to them what we can do with -- under our Sphere umbrella with contactless payments and Sphere IQ and our data analytics and Sphere Remote, where we can remotely manage your facility and take costs out. I just saw a note today from one of our operating guys, where the client is -- the prospective client is actually still being served by one of our competitors, but he's very excited about the possibility of working with a technology company that focuses on parking. And that's how they are viewing us. And so I think, potentially some of the smaller competitors that haven't made the investments in technology that we are able to make, are going to struggle to retain clients in a world where technology is really going to drive the future. -------------------------------------------------------------------------------- Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst [17] -------------------------------------------------------------------------------- I like that. You're not a parking management company. You're a tech company that does parking. So just maybe 1 or 2 more for me. So of your managed contracts, I know they can be structured in many different ways. And I was hoping you could share roughly or even directionally, what percent of your managed contracts are fixed fee versus revenue share versus management reimbursement? I think this would be really helpful for investors in understanding how your business might respond in the coming quarters to the various macroeconomic scenarios. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [18] -------------------------------------------------------------------------------- We can try to help you, although I don't think the needle moves all that much. We've said for some time that roughly half of our management contract portfolio are fixed fee. But I'll give you an example of something that isn't a fixed fee, but it just shows the dynamics of what we're able to do. So within the hospitality industry, our contracts are typically rev share deals, which means that the revenue is collected by the hotel, and a percentage of that is kept by the hotel and a percentage is given to us to cover the cost of operating the parking and also for us to make a profit. Well, as you can imagine, as the hospitality industry has suffered a bit of a drop in travel, there has been a drop in revenue. And so immediately, when that happens back in March and April and May, we see a big drop in revenue. We scaled our expenses down as much as we can, but some of these contracts now become unprofitable to us, even though they're management contracts. And so we immediately go back to our clients and say, we have a trade-off to make. We can cut our costs further, and that's going to affect the service levels to your guests. And if you test how you'd like to do it, we're happy to work with you on that. Or alternatively, we need to adjust the revenue share percentage between us and you to enable us to make money. And so we spent the summer doing it in our entire portfolio of hospitality clients. And we had a very, very strong September as a result. The other thing that's helping September, and I think it's carrying on in October is that, while actual overnight room stays are down, and in many places, you're seeing occupancy now in the sort of 50% to 60% of prior year level, whereas in normal times, they might be at 90% of capacity. More and more people are driving. And so we're seeing people bring in a car sometimes half the time or even 60% or 70% of the time where, in a normal period, they're going to be maybe 20% of the people are bringing a car. And so that's an important sort of mitigator of the downward room stays that are taking place, is that there's more cars being handled. And so in many of our hotels, we're actually not down all that much in the number of cars that were parking overnight compared to pre-COVID times. -------------------------------------------------------------------------------- Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst [19] -------------------------------------------------------------------------------- So that's a great example, Marc. So that's fewer people staying at the hotel, but driving to the hotel more often, what happens when everyone starts going back to hotel, but they're all continuing to drive? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [20] -------------------------------------------------------------------------------- Well, that will be great. It'll be a nice problem to have. We'll have to park even more cars. So I think -- look, we don't know when everybody is going to feel comfortable traveling at 2019 levels. But what we try to do with all of our clients and more and more of our hotel clients are reopening and seeing increases in volume. We're trying to work with them to have a flexible arrangement that generates the service deliveries that they're looking for. We bring the latest technology to those hotels and all of our dashboards and everything else to manage efficiently our valet operations. And I think both they and we are pleased to see more people driving in because it's a revenue source that benefits the hotel as well as us. -------------------------------------------------------------------------------- Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Group Head of Global Services & Analyst [21] -------------------------------------------------------------------------------- Yes. All right. Last one for me, and I apologize because I jumped on late. But did you give your retention rate for the quarter? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [22] -------------------------------------------------------------------------------- We didn't. I think we're -- if my memory serves, I think it was probably 89% or 90%. So down a little bit from last quarter, but still very strong in an environment like this. And that includes, of course, our lease locations that we're actively looking to work on and maybe call some of. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Kevin Steinke with Barrington Research. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [24] -------------------------------------------------------------------------------- So you talked again about higher inbound calls from prospective and existing customers given your strong position in the market. I was just wondering if there was any noticeable trend in terms of the industry verticals that the clients are in or the potential clients are in that are coming to you? Or is it kind of across the board? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [25] -------------------------------------------------------------------------------- There's definitely a lot of inbound calls coming from health care and university space because these are verticals where there's a lot of people moving, they're active. Obviously, people are at hospitals. People are -- students are back in universities. And of course, there are sporting events taking place. And even though there may not be fans or there may be fans on a reduced basis, there needs to be planning and logistics for staff and other activities. So we're getting a lot of calls in those verticals. But quite frankly, everybody is trying to figure out, how do I safely reopen? How do I reassure my customers that it's safe and a good place to be? And this comes back to what I talked about in my prepared remarks, we developed the COVID playbook early on that covers all of those protocols. And that playbook, along with our technology that enables touchless or no-contact transactions, is a perfect combination to really address the needs that any client might have, whether it's an office building or mixed use property, what have you, these are concerns that everybody has right now. And so we're getting a lot of inbound interest from across the vertical marketplace. But I would say, as it relates to sort of where is it very strong, it's in health care. And I think also where we do see a regional competitor struggling a little bit, some of their clients are reaching out to us, and those clients may have freestanding parking garages or other properties. And while a lease client is not necessarily concerned about COVID protocols, they are concerned about somebody having a strong balance sheet and the ability to pay the rent. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [26] -------------------------------------------------------------------------------- That's interesting. I mean, this perhaps potentially could lead to some sort of acceleration in your ability to penetrate those institutional markets that you've been targeting, I guess. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [27] -------------------------------------------------------------------------------- That's what we're hoping. And of course, one of the things we haven't talked about today, but I find somewhat interesting is that, in the government sphere, so I'm talking about airports now, for the most part, they have continued on with their normal processes. So if contracts are up for renewal, there's renewal processes going on. And that's given us the opportunity to bid on new contracts. And so far this year, in terms of either new deals that have started or new deals that are going to start later this year, we'll have added more new airports than really any year for several years. I think we have 6 airports that have either started year-to-date or are going to be starting before the year is up. And we've also had major renewals at Miami Airport, and we're providing janitorial services at Fort Myers. That contract was rebid this year, and we were able to retain it. We're also, just started up a couple of weeks ago, driving shuttle buses on the air side at Salt Lake City. So it's an extension of our parking contract there. We're now driving on the airfield side to move passengers and staff around the airfield, which is something that we see as a growth opportunity and an additional thing that we can talk to other of our 74 airport clients. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [28] -------------------------------------------------------------------------------- Well, that's an interesting trend, too. I mean, so when these renewals are coming up or these opportunities are coming up, are you seeing any kind of meaningful pushback on fee structure or pricing? Or has that not really materialized as of yet? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [29] -------------------------------------------------------------------------------- Well, in the airport space, because government contracting is a public process, there's always sort of a fierce competition between people who are qualified bidders, and there's a lot of transparency about the incumbent's deal. So you can have the potential to, what we call, retrade those deals when they come up for renewal, that can happen. And that's not a new feature because of COVID. That's just part and parcel of it. But on the commercial side, the answer is no. I think the main concern that our clients have is, what I talked about, how do I ensure a safe operation where the public are prepared to come in and use my facilities, whether they're working or they're just parking. So there's a bigger focus on what your COVID playbook is and what technology can you deploy. And can you drive costs out, because as we've talked before, our fees are a small percentage of the revenue handled. So it's really the cost of the operation that matters most of the clients. And when you can come up with technology solutions like Sphere Remote and other technologies that enable efficiency in the operation, that's a more compelling argument than, gee, could you reduce your fees. So no, we're not seeing it. But time and time again as we have won new deals, and we asked the client for a little feedback on like "What is it that has been sort of decisive for you?" We keep hearing 1 or 2 things. It's either your Sphere technology capabilities or the COVID playbook or both. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [30] -------------------------------------------------------------------------------- Okay. That's great. What about any progress on the national account relationships, I guess, in terms of just the existing ones you already have in place in the health care space, commercial space and their ability to drive location growth for you? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [31] -------------------------------------------------------------------------------- I think that continues to be an important focus, Kevin. And one of the things that we've been rolling out, and you'll see some of this on social media now are some of our Sphere capabilities are out on LinkedIn and other places in social media. And rather than just rely on our national account clients to beyond LinkedIn and follow us, we're sending that -- we're sending links out to them, and it becomes a very easy way to talk about our expanded capabilities. So I think it's safe to say that for all of our national clients, our main focus over the past 90 days since we launched Sphere is really to talk about our technology capabilities, what we can do to enhance their operations by rolling these out into existing. With Sphere IQ, which is our data analytics package, the more locations they give us, the more analysis they can have, and of course, the more visibility they have because they can look on the dashboard and see a roll-up of all their locations or individual properties. And so I think there's some potential momentum building. And once again, everybody's decision-making process runs along a track. But I just -- the thing I can control is not what they decide, but do we have the right array of tools and capabilities? Are we communicating those effectively to our national account -- existing national accounts base? And are we effective at delivering for them? And I think we're well positioned for all of that as we look forward. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [32] -------------------------------------------------------------------------------- Okay. Yes, great. I guess lastly for me, just what are you seeing on the aviation side in terms of a recovery? Has that kind of stalled out, just say, at a lower level? Or did you kind of see any improvement as the quarter progressed or into October? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [33] -------------------------------------------------------------------------------- Yes. Well, I think we're seeing modest improvements in travel volumes. If you look at the data that the TSA puts out, back in April, screens passengers were down 90% from 2019. And now the screen passengers just went over 1 million a day, which is maybe -- it's maybe down 60% to 70%. And so it's still below 50% of pre-COVID. So as travel continues to come back, we're seeing our airport clients experiencing that. Many of our airport clients are either beginning to embark or have already started embarking on major facility upgrade programs. And so there are needs for our services to either move passengers around on shuttle buses or use remote airline check-in from our Bags portfolio to enable people to check in outside the lobby or construction maybe going on. We're having a lot of discussions about that because COVID really didn't put a stop to that. These are multi-year plans, and they're kind of going forward with those. I think as far as the Bags business is concerned, we're starting to see some green shoots in terms of activity. The government has lifted the no-sale order on cruise lines. And so I think the cruise companies are expecting to be sailing sometime in 2021 and are making plans to do so. So we're having conversations with them about restarting some of the baggage handling and remote check-in activities there. I think with our airline clients, once again, because volumes are starting to move up a bit, we're seeing an uptick in either restarting wheelchair or skycap services and the like. So whether -- what that recovery curve looks like, I don't know. But I think you can say that it's going to track along at a level that's sort of tracks with the number of passengers being screened. That's going to be what the curve looks like. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [34] -------------------------------------------------------------------------------- Okay. And congratulations on the nice rebound in results here. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [35] -------------------------------------------------------------------------------- Thanks a lot, Kevin. Appreciate it. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- And your next question comes from the line of Marc Riddick with Sidoti. -------------------------------------------------------------------------------- Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [37] -------------------------------------------------------------------------------- So I wanted to -- you've covered quite a bit and I really appreciate all the detail and color around it. I was wondering if you could give an update on the progress on preferred vendor programs and sort of how we're pacing there, and maybe their commentary has been around the technology offerings. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [38] -------------------------------------------------------------------------------- Yes. I mean, I think, especially as it relates to health care, we're seeing a lot of activity. So we're probably busier than we have ever been in terms of putting together responses for request for proposals. But the decision-making process can be long. So I don't have a list of new wins that I can just rattle off the top of my head for you. But I think we're very, very encouraged by the level of activity that's taken place, the number of discussions and the number of proposals that we're making into the health care space. As I indicated a few minutes ago, we're probably getting more interest from health care than any other vertical right now. And I'm sure a lot of that is on the back of these group purchasing organizations where they're -- they have an incentive to steer their health care partners to look at us if they have a need for our type of services. -------------------------------------------------------------------------------- Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [39] -------------------------------------------------------------------------------- Okay. Great. And then last one for me. I was sort of curious as to whether or not there was much of a differentiation between what you're experiencing as far as traffic and activity of major cities versus smaller markets, particularly in New York, Chicago, that kind of thing? And maybe what that -- and what that mix of business might look like going forward versus maybe what it was a couple of years ago? -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [40] -------------------------------------------------------------------------------- Sure. Yes. I mean I have probably more visibility on our lease portfolio, which, once again, we have leases in all the major markets. So it gives us a bit of a barometer on what's going on. And what we have seen is a very positive amount of revenue growth on leases in the quarter. Just to give you an idea, same location, lease revenue is up 25% in the third quarter over the second quarter. For our lease portfolio, same leases. But the range -- that ranges from 100% plus increases in some markets to negative numbers in other markets. So there's definitely wide variation around the country. Fortunately, the markets where we have more leases are trying to be up. And so that's been very beneficial. And we've seen, in some places in New York, for example, that people coming in on early birds in the morning, the volumes are actually above prior year. And we attribute that to the fact that in the past, many, many people were coming into work in either shared mobility or mass transit, and now they're choosing to drive. So there -- in some markets, there's also opportunities for rate increases, both for monthly parking and transient parking because demand is that strong. In other markets, it's the other way. And so there's a bit of softness going on. So I think we'll continue to see that. There was a nice rebound in revenue at leased locations in the third quarter. We're hoping to see that maintain itself. As I indicated earlier in the call, we expect October to look pretty good relative to September, whether that upward trajectory month-to-month at whatever rate that might be, continues will depend a lot on how COVID plays out here. But we're seeing definite improvement across most of the major markets, but there are a few words going the other way. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- And you have a follow-up question from Daniel Moore with CJS Securities. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [42] -------------------------------------------------------------------------------- Just a technical 1 or 2. The impairment, was that entirely Bags or combination of Bags and other aviation assets? -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [43] -------------------------------------------------------------------------------- I think, Dan, it's hard because we look at that business collectively to kind of break out exactly what's kind of Bags and OpEx. But I think as you look at that business, certainly, Bags was our latest acquisition. And so there's certainly a large amount of goodwill that went into there. I think as we start to look at kind of the shift that's happened as it relates to the travel and leisure and just kind of air travel and generalize, you start to see some of that shift out from a market perspective that put some pressure around that particular segment of our business. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [44] -------------------------------------------------------------------------------- Perfect. And the early termination, early lease termination benefit in the quarter, $5.6 million, was that cash benefit? -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [45] -------------------------------------------------------------------------------- I wouldn't -- no, not all of that was cash. I'd probably say about a little less than half of that would have been cash that was received during the quarter, and then we'll have a little bit of that come through here in the fourth quarter. -------------------------------------------------------------------------------- Daniel Joseph Moore, CJS Securities, Inc. - MD of Research [46] -------------------------------------------------------------------------------- Right. The full amount is the cash benefit, but it wasn't all received in Q3. Is that the right way to think about it? -------------------------------------------------------------------------------- Kristopher H. Roy, SP Plus Corporation - CFO, Treasurer & Principal Accounting Officer [47] -------------------------------------------------------------------------------- That's the right way to think about it. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- And there are no further questions. I will now turn the call back to Marc Baumann. -------------------------------------------------------------------------------- G. Marc Baumann, SP Plus Corporation - CEO, President & Director [49] -------------------------------------------------------------------------------- Thanks, Theresa, and thank you all for joining us today. We really appreciate your taking the time to hear us talk about our business and the quarter, and we look forward to speaking with you next time. Be well. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.