SP Plus Corporation

Thank you for standing by and welcome to the Q4 2022 SP Plus Corporation Earnings Conference Call. At this time, all participants are on listen-only mode. After the speaker's presentations, there'll be a question and answer session. To ask a question at that time, please press star one one on your telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Chris Roy, Chief Financial Officer. Please begin.

Thank you, Valerie. And good afternoon, everyone. As Valerie just said, I'm Chris Roy, Chief Financial Officer of SP Plus. Welcome to our conference call following the release of our fourth quarter 2022 earnings. During the call today, management will make remarks that may be considered forward-looking statements, including those statements as to the outlook and expectations for 2023 and statements regarding the company's strategies, plans, intentions, and 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, 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 Mark Baumann, our Chairman and Chief Executive Officer.

Thank you, Chris, and good afternoon, everybody. I'm pleased to share highlights from a strong finish to a year of substantial double-digit growth for SP Plus, and to discuss the business trends and initiatives that support our new growth targets. To begin, our performance in the fourth quarter demonstrated our industry leadership and kept a year of considerable year-on-year growth across all key financial metrics. We continued to effectively execute on our strategy by growing our existing contracts, improving our outstanding retention rate, and winning new business, while also accelerating the deployment of our award-winning Sphere and Errol Parker technology solutions. We saw robust gross profit growth in the fourth quarter and full year, and the strong performance was broad-based across our segments verticals, and geographies. In the commercial segment, adjusted gross profit growth of 11% in the quarter and 18% for the year was led by our commercial large venue and hospitality verticals, reflecting increased leisure activity and favorable return to office trends, and the ongoing rollout and successful adoption of SEER. In fact, 2022 results reflect a record level of adjusted gross profit in our commercial segment. In the aviation segment, 30% of adjusted gross profit growth in the fourth quarter and 34% for the year was a function of an increase in the number of airports served and a significant uptick in travel activity. And lastly, measures reflecting our scale and reach in both our segments hit new record levels in 2022. We processed $4 billion of gross parking revenues. This is combined from our lease facilities and on behalf of our clients if it's a management contract. We transported 51 million passengers on shuttle buses and handled over 6.5 million pieces of checked luggage last year. Our commercial segment is comprised of over 3,100 locations, which reflects 106 net new locations added over the last 12 months. In fact, we've achieved net location growth over the last seven consecutive quarters, further demonstrating our success in growing our market share. Gross profit from new business in the commercial segment was the second highest level ever achieved, and we approved our location retention rate to 93%. On the aviation side, we've expanded our presence to 158 global airports, adding 69 net new airports to our portfolio in 22, including 65 unique airports from the acquisition of Aeroparker. These are airports where we did not previously have a presence with either FP Plus airports or banks. And we're now providing our curbside concierge services for two airlines at 40 airports. If you haven't done so already, you might want to check out the updated investor presentation that we've just published on our investor relations website, where we've broken out some of these size metrics by vertical market. This positive momentum is continuing in 2023 and marks an inflection point in terms of our growth trajectory. Our work over the last several years has helped position SP Plus as a leader in the digital transformation of our industry, and now we're well positioned to capture the growth opportunities presented by our technology innovation. As we noted in our earnings release, we expect another strong year of growth in 2023 with adjusted gross profit growth of 11% at the midpoint, of which approximately 2 percentage points reflects the full year impact of the AeroParker acquisitions. and our expected adjusted EBITDA growth, which is also 11% in 2023 at the midpoint of our guidance range, anticipates additional investments in G&A that we believe will set the foundation for achieving accelerated gross profit growth. Over the last several years, we've been making investments to build the leading-edge technology solutions we have today. In addition to our internal development efforts, in 2022, we significantly enhanced our technology position with two strategic acquisitions. Aeroparker's industry-leading staff platform is poised to generate recurring technology revenues at 80 airports worldwide. This acquisition provides expanded opportunities to realize cross-selling synergies across our entire aviation portfolio as we leverage relationships and capabilities to grow our traditional parking and transportation business, as well as BAG's suite of services and now Aeroparker's technology. As part of the Aeroparker acquisition, we also acquired KMP Digitata, an award-winning digital marketing agency with an impressive client base both in and outside of the aviation space. With Divert, we acquired a partner whose technology solutions we've deployed since 2020 as part of Sphere's platform. Just as importantly, this acquisition laid the foundation for the establishment of the SP Plus Technology Innovation Lab based in India. which we believe will enable us to accelerate our progress along our technology roadmap. As we head into 2023, we're executing on our multifaceted growth strategy, which includes, one, strengthening our leadership position, two, expanding our addressable market and gaining revenue synergies from our recent acquisitions, and three, taking advantage of substantial opportunities to leverage and monetize our technology. With respect to our leadership position, SP Plus is uniquely positioned to blend innovative technology solutions and superior operational expertise to enable current and prospective clients to meet their varied objectives, whether those objectives are improving the bottom line, improving the consumer experience, or anything in between. Our technology solutions enable clients to upgrade their parking assets to align with consumer trends and preferences without making major capital expenditures, while also, in many cases, reducing operating costs. And if there is an existing technology infrastructure, we provide highly trained people and the know-how to operate and optimize the use of that infrastructure. This compelling value proposition has been a key element of our success in winning new business over the last two years. Additionally, the deployment of our technology across our existing footprint has increased the stickiness of our services, which we believe will continue to benefit our retention rate. In terms of expanding our addressable market and realizing revenue synergies, our suite of technology solutions include software-as-a-service or platform-as-a-service options that can be deployed whether or not SP Plus is the operator. Our solutions also enable an asset owner to optimize the value of their asset by converting traditionally free parking to paid parking or employing dynamic pricing techniques to maximize revenues. And the recent acquisition of AeroParker gives SP Plus a global presence. Together with SP Plus, AeroParker now has the support and resources to further expand its industry-leading position and will have opportunities to leverage their premier technology to drive cross-selling synergies. And finally, a key focus in 2023 and beyond will be accelerating the deployment of our comprehensive portfolio of technology offerings to take advantage of substantial opportunities to leverage and monetize our technology, which we believe is an important component of our future profit growth. We're currently processing a million digital transactions per month on SP Plus-enabled technology platforms deployed across airports, on and off street parking locations, event venues, retail and entertainment complexes, and the like. Unlike other one-size-fits-all options, our technology solutions are adaptable to a broad range of operating situations to meet both consumer and client needs. While technology solutions today contribute less than 2% of our gross profit, our objective is to grow that to at least 10% of our gross profit by 2025. We believe these three strategic initiatives support the guidance we've given for 2023 and position SP Plus to achieve high single-digit gross profit growth in subsequent years. And if we look further ahead, we see SP Plus playing an increasingly important role in the development of smart cities, as parking assets have the capability to become multi-use mobility hubs. While still in the very early stages, we believe that our industry-leading technology capabilities will enable us to work cohesively with our clients to increase the value of their parking assets as the roadmap for smart cities evolves. At this point, I'd like to turn the call back over to Chris for a financial review.

Thank you, Mark. I will discuss our operating and financial performance for the fourth quarter in full year 2022 and our outlook for strong growth in 2023. We exited the year with 16% year-over-year growth in adjusted gross profit, for the fourth quarter of 2022. Several factors drove this performance. Our team executed effectively, growing our existing contracts, improving our already strong retention rates, and winning new business. Fourth quarter 2022 adjusted G&A expenses were up 20% year over year, largely due to the decision to make strategic investments in business development, technology, and other resources that we believe will enable us to capture and support accelerated growth in 2023 and beyond. Resulting adjusted EBITDA increased by 11% over the year-ago quarter, and Q4 2022 adjusted earnings per share were 56 cents, which was 10% higher year-over-year. Now summarizing our full-year 2022 performance, adjusted gross profit was up 22% year-over-year reflecting the improved business environment and our success in adding new contracts, including technology-only locations made possible by our Sphere technology. Full-year adjusted G&A expenses in 2022 increased 21% year-over-year, primarily reflecting our strategic decision to make early investments to cap future growth. Full-year 2022 adjusted EBITDA was 24% ahead of 2021, and adjusted earnings per share increased 44% year over year to $2.70. Switching to cash flow, full year 2022 cash flow increased 64% year over year. As a reminder, 2022 free cash flow benefited from a $20.5 million U.S. federal income tax refund, which offset higher capital expenditures compared to the prior year. At the end of December, we had over $200 million of availability under our senior credit facility. During 2022, we spent $49.3 million to repurchase one and a half million shares, leaving just over $10 million remaining under the May 2022 authorization as of December 31st, 2022. Last week, our board approved a new additional $60 million share repurchase authorization. Our free cash flow gives us the financial flexibility to pursue a capital allocation strategy that includes organic investments to support growth, acquisitions, and share repurchases while managing our debt levels, all with the goal of creating additional shareholder value. Our performance in 2022 and our significant investments in technology over the last several years have laid the foundation for our accelerated growth in 2023 and beyond. As a result, we expect full year 2023 adjusted gross profit to range from $240 million to $260 million, which at the midpoint represents year-over-year growth of approximately 11%. We expect adjusted EBITDA to be $125 million to $135 million, also 11% ahead of 2022 at the midpoint. And for adjusted EPS, we expect a range of $2.70 to $3.20 per share, approximately 6% above 2022 levels at the midpoint. We also anticipate free cash flow of $60 to $70 million, or approximately $3 to $3.50 per share. 2023 free cash flow at the midpoint is expected to be 35% above 2022 if you exclude the $20.5 million 2022 federal income tax refund. Additionally, I wanted to share some additional insights on other aspects of our business for modeling purposes. First, we continue to expect to see some seasonality with Q2 and Q3 typically being our strongest quarters of the year. On the G&A front, we've made significant investments in 2022, which is reflected in our fourth quarter 2022 2022 results. So Q4 of 2022 is a pretty good run rate if you also layer in some additional incremental investments in early 2023. In terms of interest rates and corresponding interest expense, our senior debt is currently priced at 175 basis points above SOFR. We anticipate to peak and maintain at 4.75% in 2023. resulting in an all-in interest rate of approximately 6.5% and full-year interest expense of $24 to $26 million. Additionally, given the levels of capital expenditures in 2022 and 2023, our DNA is expected to range from $34 million to $36 million, which includes the impact of purchase accounting related to the recent acquisitions. With that, I'll turn the call back over to Mark.

Thank you, Chris. To sum up, we're pleased with our strong performance in 2022 and even more encouraged by our growth prospects for 2023 and beyond. We've made strategic investments to support our accelerated growth, and we expect to leverage them beginning in 2024 as G&A growth moderates. In my 22 years at SP+, I've never seen the breadth of growth opportunities that we have in front of us today. Now it's all about execution, as we seek to make every moment matter for a world on the go. We're confident that our new presidents of commercial and aviation will successfully lead their teams in building on the momentum from 2022 to achieve sustainable, accelerated growth in 2023 and beyond. Valerie, I'd now like to open the call to questions.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. Our first question comes from Tim Mulroney of William Blair. Your line is open.

Mark and Chris, good afternoon. Thanks for taking my questions and congrats on a nice quarter and a pretty healthy outlook, which is where I, I want to start. I mean, you know, you've taken up your growth outlook for gross profit pretty dramatically here. We typically think about SP plus in that three to 4% range. But a long-term target in the high single-digit range essentially implies a doubling in that target growth rate. Can you walk us through how you get to that step up in your outlook? And, Mark, I know you discussed technology as one component, but curious what the other primary factors are. And maybe you could also talk about your confidence level around the sustainability of that target.

Sure. No, I'd be glad to, Tim. And, of course, we've talked about our growth rates for quite a long time. And as you recall, pre-pandemic, we put that target out of three to 4% gross profit growth rate. And yet in 2019, we achieved over 5% growth. Uh, and, and that was a record for the company in terms of the performance of 2019. And of course the pandemic has created lots of fog and coming out of it, we've experienced faster growth as we've recovered. But as we look at 2022 and evaluate what it means going forward, you know, I think it's worth drilling in a little bit on some of the details. As I mentioned in my prepared remarks for our commercial segment, 2022 represented our second-best new business year ever. And that was really a reflection, I think, of the fact that we are offering up an array of capabilities. A lot of those are fundamental operating capabilities. They're not just technology to a client base who are looking at what we are bringing to the marketplace and saying, I'm going to choose SP Plus over one of its competitors. And we have a very, very strong pipeline of opportunities as we look forward. And we believe that we can continue to bring on new additional business as we look forward. The other thing is that as we do talk about technology, it's often part of the conversation in a client making a decision. And we might bring technology only as an offering. We might bring technology along with our operating expertise. or we might talk about doing something with technology down the road. And technology has a couple of opportunities for us. One is we're offering something to the client to help them capture more revenue, to reduce their costs. In many cases, clients have aging existing technology that needs to be replaced. And we're saying to them, you know, instead of going the traditional route and spending an awful lot of capital up front, we can bring technology solutions that are going to be more cost effective or might not cost you anything to sort of replace your aging infrastructure. And I think technology also offers us, as I indicated in my remarks, the opportunity to bring paid parking to places that had free parking. So we're really expanding the addressable market. And in product calls, we've talked a little about that, where retail shopping center, hotels, and other places often have no charge for parking, but there are some great locations near the door that people are willing to pay a premium to park at. So I could go on and on within the commercial segment, but I think, honestly, there's lots of opportunities to deploy technology to capture more transactions and to really show clients that we have the cutting-edge solutions that are going to reduce friction for the people utilizing their services. When you flip over to aviation, I think there's a couple of things that are worth commenting on. One is, prior to the pandemic, as you know, we acquired bags. And as we turned the corner into 2019, we started introducing the bags technology and operating capabilities to the SP Plus Airports client base. And we had a lot of really great interest in that, And then, of course, just as we were about to start to deploy some of these new solutions to our clients, the pandemic came along and it put a hold on all of that. And so as we recovered from the pandemic, our clients have recovered from the pandemic, it gives us an opportunity to reintroduce the bags capabilities to the airport clients. And, of course, with the recent acquisition with AeroParker, we can bring that into the equation as well. And so, for example, you know, in North America, you know, SP+, Legacy SP+, meaning without AeroParker and bags, you know, provides services at 93 airports. And there are seven of those airports AeroParker is providing services. So what that really means is that there are 86 airports where SP Plus, through its own airport operations or through bags, have relationships with those airport clients, and we can be talking to them about the capabilities of Aeroparker. On the flip side, because AeroParker is based in the U.K. and has numerous, almost 60 airports outside of North America, they're now in a position to bundle in their conversations the capabilities of bags or maybe some of the other SP Plus technologies in their discussions with their client base, too. So I think for us, as we look at the cross-selling growth synergy between bags, AeroParker, and the traditional SV Plus business, we see lots of opportunity for growth. And I'll just finally say, you know, what we are also seeing is in the competitive space for operations within North America in aviation, we have some clients who have not made, or competitors, I should say, who have not made the investments in technology who are perceived to be lagging the cutting edge in the minds of airport clients or prospective airport clients, and they're receptive to someone coming in both with technology solutions, operating expertise, but at the same time, marketing strategies for them to drive revenue into those airports. So I think all of those things really give us the confidence to expect our business to grow at a faster clip, you know, as we look into the future.

All right. That's really helpful. Thanks, Mark. I mean, it's technology, cross-selling and aviation, and maybe some market share gains on the competitive side. Understood and appreciate all the color there. Switching gears, Chris, the guide you said implies SG&A expense of $50 million higher, but some of that was placed in 2022. Appreciate your commentary you gave during your prepared remarks. So I'm just curious, you know, how much of that $15 million was in 2022 and how much do you actually expect to layer in during 2023? Yeah.

Yeah, if you look at the investments we started to make, I'd say we started to make those in late Q3. And certainly in the Q4, we made some of those additional investments. I think if you look at that run rate in Q4, certainly that's a pretty good run rate. We're going to make some additional investments in early 2023. And so I would see that, you know, if you look at Q4, it'd be slightly above that as it relates to, let's say, a first quarter. And then you'll probably see a little bit of a bump in in terms of G&A on top of that and kind of Q2, Q3, and Q4. So I think in the earnings release, there was some commentary that, you know, if you look at our total G&A spend in 2022, it was about 105 million. And we kind of mentioned that we think we're going to bring in approximately an additional 15 million into 2023. So that gives you about 120 million in terms of G&A for 2023. And I think what we are trying to do is just give you a little color

uh in terms of how we're looking at the cadence of that gna yep perfect and then last last one for me and i'll hop back in the queue um lots of questions here but you know how much did um acquisitions how much did they contribute to gross profit in the fourth quarter and then what is your expectation for contribution from acquisitions to gross profit in 2023

Yeah, I would say if you look at Q4, you know, given that the acquisitions were a little later in the year, I wouldn't say it was a meaningful amount that contributed into Q4. What I would say is I think what we're really excited about is the opportunities that these acquisitions present in terms of both sphere, but also in K and P in terms of the revenue synergies that Mark mentioned. If you kind of look at what it might mean from a 2023 perspective in terms of growth, You know, you might look at, let's say, I'd say about 2% of gross profit would be related to our acquisitions in terms of inorganic. And I would say it's kind of two percentage points in terms of that gross profit. So I think it's not necessarily what it is in 23. I think it's what it can become in these outer years as we continue to look at KMP and the opportunities that are there.

Yeah, I think Chris has said it well. And I mean, if you look back to the remarks that both of us made, you know, we're guiding to 11% gross profit growth at the midpoint in 23. But then we're saying beyond that, it's the sort of high single digits. So clearly in 23, we get a little blip from the full year effect of those acquisitions.

Yeah, but that makes sense because that's consistent on basically high single digit organic gross profit growth right in line with your long-term outlook. So it all lines up. That's right. Um, well, that's great. Thanks for, thanks for all the color. I'll hop back in the queue.

Thanks, Tim. Thanks, Tim.

Thank you. One moment, please. Our next question comes from the line of Daniel Moore of CJS securities. Your line is open.

Uh, hi. Uh, this is, oh, sorry. Hi, this is in place for Dan Moore. I was just wondering, you know, SP has always fared well in recessions, and, you know, you aggressively renegotiated your contract in 2020 and in 2021. How would you say SP is positioned to, you know, weather an economic storm? There have been a lot of, you know, mixed signals from the, you know, overall macroeconomic view. And how would you say that kind of, you know, affects your end markets and your customers and contracts?

Sure, and I'd be glad to touch on that. I mean, if you look back at past recessions, and I don't think the pandemic is really what you would call a recession. That was one of those very unusual events. But in a typical recessionary period, the number of miles driven by people only varies about 5%. So people, even in a recessionary time, are driving places. Clearly, some of those miles driven are going to vary because of a recession. Maybe there will be a few discretionary trips people don't take. But I think because our business is broad-based across geography and broad-based across verticals, we haven't generally seen the kind of impact that other businesses do if there's a little slowdown in activity. The other thing I'd like to remind you of is that the bulk of our portfolio are management contracts within the commercial segment. And consequently, we're not directly tied to the utilization of the parking facilities. We're generally getting our management fees. Now, clearly within aviation, there is a travel and leisure component that's present there. And if a recession were to impact travel and leisure, you know, we'll definitely see some slowdown in our services. The thing I think we talk about internally with our team is, despite our size, we really have a very small market share in any vertical or for any service. And so one of the ways that we can get growth and do get growth, even in a recessionary environment, is we either increase the penetration of the array of services that we provide at the locations we already operate, or we go out and get additional clients. And a lot of times in a recession, clients are feeling their own financial pressures or prospective clients, and that's when they're often receptive to new ideas, new innovation, using technology to create efficiency or drive demand or reduce costs. So while we would all prefer not to have a recession, I think we have a nice business model that performs well in recessionary environments.

So you would say that you guys could be a technology heavy alternative that uses their new capabilities to create efficiencies for customers. So in many cases, you're the cheaper alternative.

We could well be. And I mean, I think, as you might imagine, You know, there's lots of components to technology. One of the things that we expanded a lot, we did this before the pandemic, we expanded it more, and that's remotely managing parking facilities. And so there's probably around 600 facilities where we are remotely monitoring or managing at some point in the day part. And so one option during a recessionary period for clients is to say, let's reduce the staffing levels, let's do more remote management, more with technology, with our mobile point of sale and other technologies. You don't necessarily need the staffing levels that you might have needed in the past. And so I think the utilization of technology and the acceleration of the deployment of it is a way for our clients to mitigate the effects of recession on their business, but also enables us to get that growth from deploying those technologies.

you help your clients mitigate labor costs, at least in that situation. That makes a lot of sense. Absolutely. And I guess pulling on that thread, would you say there's any kind of technology offering you guys have made, a plethora of acquisitions over the last couple of years that your clients are really excited about that are excited to have rolled out in their businesses or is really gaining penetration really quickly and making you guys attractive to new clients?

Sure. Well, I think there's a couple of things I could comment on there, Rob. One is that clients, their objectives are often directly financial in nature, but they are also interested in providing a certain experience for their customers. For the most part, the client cares about the consumer experience, is looking to reduce friction and hassle and problems and complaints. And so by deploying our mobile app, you know, on the cell phone or some of the technologies that we're now using where you don't have to actually download our mobile app and create a credential. You can simply scan a QR code or text to pay from your smartphone. We're really reducing the friction in a transaction. And we're making it easy for somebody to conduct a transaction with us. And that's a very, very inexpensive thing to deploy. And so I think that makes some of these offerings very, very attractive. We know that a high proportion of our clients operate older equipment, and this might be investments that they've made sometime five, six, seven, sometimes ten years ago or more. And a lot of this equipment requires a lot of maintenance costs, a lot of support costs. Skilled technicians sometimes have to come out to fix it and address problems. And part of our technology offering that's coming from us just really in the last 12 months is our ability to bring our own hardware and software solution to replace that aging technology And in many cases, we're able to offer that at low or no cost to the client. So as opposed to their traditional, I've got a problem, it's costing me a lot of money, I don't really have the capital funds to make that upgrade, it's a recessionary environment, I'm looking for every penny, we can come in and say, let us deploy our solutions, and we're going to avoid your having to make that outlay. And at the same time, we're going to capture more of the revenue and drive lower operating costs for your facility.

Got it. That makes a lot of sense. So I guess the key takeaways are that you can help customers reduce labor costs and also minimize maintenance and refurbishment costs by rolling out your guys' new seamlessly deployed technologies. God, I really appreciate the color there. I'm going to hop back on the queue. Thank you. Okay, Rob. Thank you.

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone. Again, to ask a question, please press star 1-1. Our next question comes from the line of Kevin Steinke of Barrington, your line is open.

Hey, good afternoon, Chris. Good afternoon to you. I wanted to focus on one key phrase you had in your press release and prepared remarks when you said in 2023, a key focus will be accelerating the deployment of our comprehensive portfolio of technology offerings to capitalize on industry and consumer trends and realize revenue synergies from Errol Parker. Can you just give a little more detail or color on exactly the steps you'll be taking there to accelerate deployment of your technology offerings and capitalize on the revenue synergies and maybe then any sort of, you know, detail on the investments behind those efforts to accomplish those objectives.

Sure. I'd be glad to, Kevin. You know, again, I think it's probably useful to distinguish between our commercial business and our aviation business. You know, in the commercial business, you know, we have a large footprint. As we talked about, we operate over 3,100 locations now. And so one way for us to Deployer technology is what I was just explaining to Rob on the last question, and that's really replacing aging equipment with our technology offerings. And in some cases, that means bringing hardware and software. In other cases, we would just bring hardware and plug that in, if you will, to the existing parking equipment there. but all with the idea that we will allow consumers to transact in a lower friction, more efficient way, and we are in many cases able to capture a consumer fee off of that transaction, and that's the way that we would get paid off of some of those transactions. So we see ourselves as being able to drive growth in the commercial segment by bringing those capabilities in. We also, as we talked earlier, as I commented on the call in my prepared remarks and earlier question, you know, we're expanding our addressable market. There's lots of places that don't have technology now where it's free parking and where we can bring our solutions at low or no cost to the client and and we can generate revenue for the client and revenue for ourselves, again, primarily through these consumer fees. So I think we see a lot of growth opportunity within our established footprint within commercial of 3,100 locations. Now, likewise, we have the potential to go get new clients. And as I indicated, it was our second-best year ever in the commercial segment for new business, and we have a very robust pipeline of opportunities out there And clearly, we're seeing that a combination of our operating expertise, our technology offerings are really resonating with clients who are looking to improve the experience of their customers, gain better control over revenue, and to have a better environment in general from the point of view of the services being offered. So I think all of those are ways that we see ourselves getting growth within that segment. I think in aviation... It's a lot of the same story, but the additive is that because we have Aeroparker now, we have an additional service line that we can bring to clients. And we had some recently where we've gone to some of our established airport clients and we said, you know, we'd like to tell you about Aeroparker. And look what it can do. It can provide reservation functionality for people who want to make those arrangements in advance. It can provide other convenience for e-commerce and other solutions that clients are looking to provide. Again, for people traveling to an airport, to reduce friction, make the travel experience better for them. And I think there's been a lot of receptivity to that. Aeroparker is out selling its services on its own. It's done very, very well prior to joining forces with us. But I think as we look at those 86 airports in North America where we operate either SP Plus airports or bags, we can now be planning to introduce Aeroparker to all of those clients and vice versa in Europe. So I think within aviation, we have the same thing. It's go sell additional services. It's also acquiring and winning on new deals. And at the same time, the cross-sell synergy that comes from having these three different platforms, if you will, as capabilities that we can bring to clients.

Okay, great. And if you also could just touch on, you know, maybe some of the investments you're making to either accomplish those objectives you were just discussing or, you know, just other investments in 2023 that you think are going to help set you up for that faster rate of growth in 2023 and beyond? You know, maybe, you know, what's contributing to that 15 million increase in G&A?

Yeah, I mean, Kevin, as you look at it, I think what we really want to focus on in terms of bringing costs into the businesses, can we accelerate the growth in our business? And I think everything that we're doing as it relates to our GNA and our GNA costs is really looking to say, what's the ROI on that, and how can we deploy those costs so that we can accelerate the pace of our growth? So I think you would look at it on a technology side, bringing individuals into the organization that can help support the deployment of our technology solutions both across the commercial segment as well as the aviation segment. I think bringing in new business development individuals that can further allow us to get maybe a little bit deeper into clients maybe we haven't had a relationship with before or maybe not, we haven't had the relationship at the same level that we've had before. And then bringing in new individuals that can help us continue to grow the business and then lastly, um, support functions that can allow us to grow, uh, in terms of the gross profit growth and support that gross profit growth.

I mean, the only thing I would add to what Chris is saying is that from the point of view of the development of the sphere platform, um, AeroParker and bags, uh, the peak development is sort of behind us now. You know, you've seen us ramp up over the past few years once we started on this strategy. And while we'll need to continue investing to develop to make sure that these products are at the cutting edge, that's how we win new businesses by demonstrating that we have capabilities that others don't have. You know, our main focus in 2023, and you'll see even more of this as we move into 2024, is to leverage the investments we've made already in technology and in GNA and try to accelerate our growth by the deployment of those capabilities. That's really kind of our focus. And during the pandemic and before the pandemic, a lot of our focus was on developing the capabilities. And while we've done a lot of deployment, you know, 2023 is really key focuses on execution. And we see that being the way that we get that single-digit gross profit growth on an ongoing basis is the continued deployment. I think one thing that's important, you know, we've introduced a new metric, you know, which is really to let you know that our scale and reach around our airport footprint, as well as some other data that's in our investor presentation. But the thing to bear in mind, we're providing some kind of a service or another at almost 160 global airports. But in a lot of cases, it's one service. In some cases, it's several services. So we have growth opportunities within aviation by simply deploying technology where we're only operating or additional operating services or additional technology where we may only be providing one or two services. So even without going and getting additional airports to provide our services, you know, we see opportunities to create sustained growth within the portfolio of clients that we already know and who know us.

Okay, great. That's helpful color. And I also wanted to ask in terms of, uh, you know, leverage, I guess you reference in your press release in the future, you think the high single-digit growth, gross profit growth beyond 2023 will lead to significant operating leverage and accelerated rate of growth in EBITDA and EPS. So, you know, I know you're not providing guidance beyond 2023, but just kind of as you think about it strategically, do you feel like 2023 is more of an investment year where, you know, like you guided to EBITDA grows in line with gross profit. And then beyond that, you start to see more of that operating leverage in 2024 and beyond.

Kevin, this is Chris. I would say the answer, the short answer is yes. I think as we look at 2023, certainly there's some, it's a little bit of an investment year in terms of bringing additional resources into the organization. that can support and generate faster growth. I think if you were to look at kind of that GNA ratio to GP ratio, or GP to GNA ratio that we've kind of historically had, if you look at, and this gives a little bit of a sense just in terms of where it's at relative to where we've been, if you look at the midpoint of gross profit of $250 million and you If you look at G&A in terms of $120 million, which is kind of what we've said in the earnings releases, we're at $105 million and we expect about $15 million of additional costs. That gives you a 48% G&A to GP ratio. Now, if you go back to kind of that 2019 year on a pre-COVID basis, we're kind of right at that same level. We're right around 48%, 49%. I think while we've made a lot of investments in our GMA, I don't think it's been kind of outsized to where we've been historically.

Right. Okay. I'll get one more question in here. You know, you talked about the goal of 10% of your gross profit coming from technology solutions by 2025, and it's only about 2% now. Can you just define exactly what you mean by technology solutions? I know technology is infused into a lot of your services and your solutions, but are you specifically referring just to those recurring transaction fees? Is that kind of where the 10% number comes from?

Yes. I mean, I think in a nutshell, we're talking about trying to capture fees from monetizing our technology. And that might be software, it might be hardware, it might be hardware and software. And as you say, Kevin, technology and our operating business are very intertwined. But we also see that the consumer is prepared to pay a fee, you can call it a convenience fee, a processing fee, some sort of a modest fee, for the benefit of convenience or a service. And so we see we're getting these fees now. We see others in the marketplace charging fees like that. So we know that consumers readily accept that. And we see that as an area where we can grow. And that growth really comes on the back of deploying the technology that we have already developed. And so that's what I meant about executing against the plan. We have the technology that can do those things. We don't need to do significant additional developments so that we can capture those kind of fees. Now the job is really to get it out there into the marketplace as much as possible and to be in a position to capture those fees as we go forward.

All right, great. Thank you for taking the questions. I'll turn it over. Okay, thanks, Kevin. Thanks, Kevin.

Thank you. One moment, please. Our next question comes from the line of Mark Riddick of Sedoti. Your line is open.

Good afternoon, Mark. Hello. Good evening, everyone. So I know you've covered quite a bit, first of all, and I want to thank you for all the detail that you provided, both in prepared remarks as well as the slides. I was wondering if you could talk a little bit, maybe more big picture, and specifically around maybe what you're seeing with the return to office trends and maybe how that is working through your expectations and working through into the 2023 guidance commentary.

Okay, sure. I'd be glad to, Mark. And of course, if my commute to the office is any indicator, everybody must be back at work because the actual commute time, at least in the Chicago area, are every bit as significant as they were back pre-pandemic. But we do know, because there's a lot of data out there, that most companies have settled into a hybrid model for office. And clearly, hybrid models, in order to optimize the revenue for our client base, requires people that have cutting-edge technology can offer unique solutions to what consumers are looking for, because a lot of people aren't prepared to buy monthly parking if they're only coming in two, three, or even four days a week. And so our technology platforms can enable those sorts of transactions. And, of course, our digital marketing and other marketing services can enable us to attract parkers to the client locations that we serve. So we actually feel very good about the office environment and don't really expect to see a significant additional return to office beyond what we are seeing now. You know, it's like 50%, 60%, you know, in most major cities. And certainly on certain peak days like Wednesday, Thursday, it might even be more than that, and it's pretty dead on Monday and Friday. But in terms of our growth, and we saw this in our new location growth, we brought on almost as many offices in terms of new clients in 2022 as we did any vertical within commercial. And I think that just indicates to us that the owners and property managers of office properties look at our operating capabilities and our technology capabilities and say, These are going to help me optimize the value of my asset.

All right. That makes perfect sense. And then I was wondering if you could talk a little bit around the – because it certainly seems as though you kind of have this under control, but maybe we could sort of talk a little bit more about the you know, the concept of labor inflation and maybe what we're seeing there, because it certainly seems as though you've been able to manage that, you know, from the, you know, throughout the entire post-pandemic environment, but certainly it seems as though you're feeling fairly comfortable about what you expect to see, you know, despite the inflationary environment going into and through 23. So maybe you could talk a little bit about maybe what you're seeing there from a labor area that sort of gives that level of comfort.

Yeah. Mark, this is Chris. I think, you know, if you go back, and I know we talked about this kind of a couple quarters ago, but we really did take a look at our kind of labor. As you look at the workforce, we really looked at it on a more market-by-market approach in terms of what is that market, what is the demand on that market, and how do we try and help our operational folks get people into the organization in terms of workforce. I think as you look at some of the inflationary pressures that have happened either through individuals feeling a little bit of pinch in their pocketbooks or becoming more comfortable with kind of return to work given the pandemic is behind us, I think you're seeing folks get back into the labor force. And I think that's certainly opening up more opportunities to bring in folks into the organization. as well as tamped down kind of that inflationary pressure that we saw kind of earlier in the year in terms of labor rates. So I think all in all, things seem to be going pretty well. I think they've gone well historically for us, but I think we're in a pretty good spot from the labor participation.

Okay, great. And then another big picture kind of question I was sort of thinking about, and I was wondering if there's something that you're seeing as of yet, or if it's part of your current forecasting, Are there any thoughts as to maybe what you're seeing with municipalities and any benefit you may or may not see eventually from them spending more from infrastructure funding or other funding availabilities? Are you beginning to see more of that type of activity or do you forecast that being something that could be a benefit down the road?

Well, municipalities definitely have financial pressures on them, as we all know, including in the cities we live in. And a lot of those are just the demand for services, you know, pension obligations and the like. And so clearly I think municipal leaders are looking for options to improve and to generate more revenue and to do so in an effective way. And so at the approximately 90 municipalities where we provide services on street, you know, and that would be cities like Los Angeles or New Orleans or Atlanta, Georgia, we're bringing, again, the same cutting-edge technology, the low-friction solutions, text-to-pay, scan-to-pay, using your mobile device to facilitate a transaction. And when we bring those things to bear, what the clients experience is a higher capture rate of the revenue because people make it so easy to pay, it's almost like, well, I might as well do it. And so your compliance levels are very high. And so There's definitely renewed interest in what can we do there, and many, many cities throughout the country still have the traditional single-head parking meters that accept coins. And if they do, and there's about 3,000 cities out there that have on-street parking, there's huge opportunities for them. to simply outsource their operation to somebody like us. And we can do it all. We can bring the technology. We can write parking tickets. We can do enforcement. Our whole array of services are there. But you mentioned financing or other options. And we're seeing this. It hasn't resumed in the municipality space yet, but universities are really looking at some of these same issues. And we partner with some financial backers for, in effect, a P3 privatization at the University of Toledo last year, which has gone exceptionally well, and where the university was getting both upfront cash flow from investors, but also sharing in an increased revenue stream that's been brought about by us bringing in our technology, capturing more of the revenue, And so they have an ongoing higher revenue stream than they had previously, plus this upfront payment. And I think once you get a couple of these success stories being known out there in the world, if you will, there's going to be others clamoring to do the same thing. And so we're actively working with this same financial partner, to talk to other prospective universities who now can see the value. It's almost a little bit like having your cake and eat it too. I can get needed upfront funds that maybe help me with something that I need, but I can also have a higher revenue stream than I had before when I was doing it myself.

Great. And then the last one for me, I promise, because I know we've been going, we're up against it now. I was wondering if you could talk a little bit about the pricing dynamic that you're seeing both with the existing customers, new customers, and then, you know, maybe some how those thoughts into maybe what the consumer price increases may sort of play out as to how that sort of played into the setting of your 23 guys. Thanks.

Sure. Well, I think, I mean, when you're talking, we'd like to talk about the people who own the assets or manage the assets that we operate as clients and those people are Clearly, if you can demonstrate value to them, if you can show them that bringing operating expertise, marketing strategies, digital strategies, digital solutions in the form of hardware and software that create both a better experience for their consumers and also more money to their bottom line, they're prepared to pay a fair fee for that. And we have never saw it as a business to say, to try to be the low-cost solution. And we've always thought to be the people that provide solutions that create the most value for asset owners. And if we do that, then we find that we're able to be paid fairly for those services. With respect to the public itself, I think there's been a lot of inflationary increases in parking rates in most cities. And a lot of that has been driven by the fact that a lot of folks are not comfortable yet riding on mass transit. They often in the past also had monthly passes on for mass transit. And so they've gotten used to maybe being in their car. And so there is a lot more travel and commuting to work and to other places by car than there was before. Uber and Lyft rates have gone higher or often waiting times are higher. And so as a consequence, there is definitely the ability to raise parking rates, but at the same time, convert more of the parking facilities for daily parking as opposed to monthly parking. And of course, monthly parking is discounted parking. So from the vantage point of clients, from the vantage point of ourselves where we're operating lease locations, if we can bring in more daily parkers and fewer monthly parkers, we can actually generate more bottom line profit for those facilities. So those dynamics are still going on, but like inflation, Generally in our economy, there were big increases coming out of the pandemic that's leveling off now. But we have web tools that we've developed where we are scraping competitive parking rates around the facilities we operate. And that enables us to recommend changes to pricing to our clients or for ourselves at our lease locations. So we're monitoring it very carefully and constantly for opportunities to increase parking rates and generate more profit for clients. and more bottom line for ourselves. Excellent. Thank you very much.

Thanks, Mark. Thanks, Mark.

You too.

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Mark Bauman for any closing remarks.

Great. Well, thank you. And thanks to all of you for joining us today. We are excited about the prospects for our future. We've tried to lay out some new metrics and targets so that you can get a better idea of what we're working on and how we see things panning out. And we look forward to bringing you another update after Q1 in early May. Take care and have a good evening.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

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