Smart Parking Limited (SPZ) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the Smart Parking Results Presentation for the FY '21 Half Year Results. This morning, I have Paul Gillespie, CEO; and Richard Ludbrook, CFO, joining us. The format of today's presentation will be that Paul and Richard will present an overview. [Operator Instructions] And then following that presentation, we will be pleased to take questions. Thank you again for joining us. And on that, I'll hand over the call.

Thank you, Michael. Good morning, everybody, and thank you for joining me for Smart Parking's FY '21 First Half Results Call. I'm here in Melbourne. I'm joined by our group CFO, Richard Ludbrook, here in Auckland. Today, I'll take you through the H1 performance, business updates and provide you with our outlook for the second half and beyond. However, before we move forward, I want to take some 3 key points. The business is performing well in this environment. There are clearly challenges meeting today's climates. However, I'm not here to make COVID excuses for the business. I'm pleased to say we focus on controlling what we can control and maintaining a key focus on our recovery and growth strategy. I'm proud to say we've done that as the results reflect this positive approach. The second point I'd like to make: we're delivering key milestones in our growth strategy. We've added 27% of our installed portfolio with 576 sites under management at December 31. We continue to bring [ prolific ] customers like KFC and Gatwick Airport, and this demonstrates we're getting on with the job of executing our plan. And 3, we are significantly expanding our future earnings potential. We reaffirm our target of 1,000 sites under management by June 2023. We have line of sight on this number with a clear plan of execution. We are confident that this focus on delivery will continue to grow our earnings right into the future. If we turn next Slide 3. Clearly, there's a lot of negativity coming out of the U.K. with lockdowns and high transmission rates and large cases reported daily. Despite this, we're performing well. There's a lot of green areas on this slide, all pointing in the right direction, I'm pleased to say. As I mentioned a moment ago, we've grown our U.K. estate by a further 85% in the half, and adjusted EBITDA margin was up 210 basis points on PCP. PBNs are up 40% on COVID lows, with a cash of $9.3 million. Added to this, we've set up a long-running VAT dispute with HMRC, which means we get a further $2.9 million of cash refunded to us in the second half. Moving to Slide 4. We saw a strong recovery in the U.K. during the half, and we believe we're past the late point of this pandemic. We grew our managed services business in both installations and revenue from the COVID low points. We won new business across the group with a clear path to our long-term growth targets of 1,000 sites under management by June 2023, as I mentioned a moment ago. We have a strong pipeline for the second half, and we're on track to achieve our growth objectives. As well as services, we continue to bring new business projects in the technology business with a further 2,500 sensors being sold to new customers. And today in new technology, we've completed new development projects due to a new IP that will strengthen our technology offering, benefit new and existing customers and, of course, drives future earnings. In New Zealand, our newly established Services business is gaining momentum, and we're winning new contracts and installing new sites. This project is in the early stages of growth, but we're happy with the progress to date and excited with what we can achieve in this market. As I mentioned earlier, we resolved the long-running VAT dispute with HMRC. This has been frustrating for me, our team and, of course, shareholders. And we're pleased with this favorable outcome, meaning we write-back $6.9 million for the P&L, again, a cash refund of $2.9 million. This is a pleasing result. So after some challenges in the last year, we are expecting a strong Q4 performance, particularly as the U.K. vaccine rollout continues. We add new sites and customers, and we're gaining the positive impact of seasonalities in the spring and summer. And finally, before I hand over to Richard, as a signal to the Board's confidence and giving the settlement and proceeds from the resolution of the VAT dispute, we are announcing today an on-market share buyback. The program can commence in mid-March once the regulatory requirements are complete. We will be steady and disciplined in our purchases. And remember there are trading backout periods when we won't be active. We expect the buyback to be earnings accretive. But simply, we believe the share price is undervalued and are committing capital to enhancing earnings per share as a [ victim ] for all shareholders. I will now hand over to Richard, who will take you through the finance slides.

Thanks, Paul. I'll start with Slide 6, where you will see revenue of $10.2 million, which is down [ 20% ] on H1 FY '20 due to the impact of COVID-19. However, the company saw a strong recovery with revenue in H1 FY '21 up 35% compared to H2 FY '20 as the volume of activity rebounded. Despite the fall in revenue, the group adjusted EBITDA profit of $1.4 million was down $0.2 million as a result of cost-saving initiatives in FY '22 and up $3.6 million on H2 FY '20. More detail on the cost reductions is included on Slide 8. As Paul said, the company settled its long-running VAT dispute with HMRC, resulting in a one-off benefit of $6.9 million in the first half. The VAT settlement will also result in increased profitability in future periods given the lower input VAT restriction related to assuring parking bridge notices. The pretax profitability in FY '20 would have been $1.7 million higher pending [ liquidology ] agreed in the settlement applied during FY '20. Moving to Slide 7. Revenue in the Parking Management division decreased 25% to $8.7 million on the back of reduced parking bridge notices. While parking bridge notices were down 28% for H1 FY '21, they were up 40% compared to H2 FY '20 as the division experienced a strong recovery. Sites under management increased by 27% compared to a year ago. A restructure of the U.K. management team and field-based staff in December 2019, combined with the changes made in H2 FY '20, resulted in a 28% reduction in personnel costs compared to the prior comparative period. EBITDA of $2.8 million was up from a loss of $400,000 in H2 FY '20, with the recovery in activity levels and cost-saving initiatives. We will see growth accelerating as the U.K. restrictions are raised, the impact of sites that have been suspended during the pandemic come online and from the 226 new sites that have been installed during the last 18 months. Paul will talk to a recovery later in more detail. Technology revenue of $2.3 million was down $1.1 million due to projects being delayed. The company implemented a cost reduction program with personnel costs reducing 39% compared to the prior comparative period, and this resulted in a 61% reduction in the EBITDA loss compared with the prior comparative period. The outlook for this division is for revenue to recover and the company has firm orders for installations of $3.9 million, where the timing of recognition for us is uncertain given the evolving situation. Slide 8 shows the 29% reduction in costs. Staff cost comprising 70% of total overheads were down [ 27% ] following a reduction in the group's headcount in the last 12 months. The services headcount reduced by 24%, and the technology and R&D headcount was down 36% combined. Other costs, including travel and motor vehicle costs, were down as a result of lower activity and due to the restrictions in place. Moving on to Slide 9. This shows the group maintained a strong balance sheet and is well placed to fund growth strategies. The group has $9.3 million of cash. And as Paul said, we'll receive another $2.9 million in H2 from HMRC as part of the VAT settlement. The company drew down a U.K. Coronavirus Business Interruption loan for $2.7 million, assuming the lines 4 years and its interest rate for the first year. Principal and interest repayments commence in September. And as Paul already mentioned, the group has announced a share buyback today of $5 million. Slide 10 shows the group has free cash flow of $1.4 million, up 136% on the prior comparative period. The group incurred $800,000 of capital investment, primarily related to the deployment of camera technology in the U.K., which will contribute to future earnings growth. Just a reminder on how the business model for the U.K. Parking management division works. Each site costs approximately GBP 8,000 to install. On a pre-COVID basis, each site generates 18 in parking bridge notices per month, generating revenue of GBP 2,300 per month per site, and an incremental EBITDA margin of 65%. We give a payback of 5 to 6 months, and this has increased to 7 to 9 months with COVID. Contracts are typically for 3 years. I will now hand back to Paul to provide a business update.

Thank you, Richard. Okay. So if we look now to Slide 12, please. As I referenced at the top of the deck, we're bullish in our recovery. This chart shows the impact of COVID and how a drop in car counts and PBNs impacted the business in March, April and May last year. However, you also see the recovery that took place from April to July, with PBNs issued increasing sixfold. This period of time is also impacted by positive seasonality, which we expect to see in the second half and particularly in Q4 as restrictions begin to ease. Added to this, as the vaccinations continue to be rolled out, we're up to and over 18 million people now. The positive impact of seasonality and the great number of sites under management, we are confident we'll see a stronger recovery than that of last year. Looking on Slide #13, you'll see our site reconciliation. This is data we update for the market on a regular basis, given the importance of new sites to our business. On this slide, you can see how we are growing estates, but it's just important we're reaffirming our long-term growth target of 1,000 sites under management by 2023. We are on track to meet this number. We also continue to diversify our portfolio as we operate across many sectors, in particular, retail, transportation, health care, leisure, land agents and residential markets. I also need to remind you that the total addressable market in the U.K. is a potential 45,000 off-street parking sites. We believe we have great people, best-of-breed technology, excellent customer service and a focused team. It is this mix that allow us to beat the competition and grow market share and take us to the 1,000 sites and beyond. On Slide 14, you'll see here, we have multiple drivers for growth as U.K. returns to pre-COVID world as retail, leisure and hospitality opened up again. And with positive impacts of seasonality, we believe we will see a return to higher numbers of cars listing on sites and see a return to average stay times across the estate, which is very important. As this occurs, we will see growth in PBNs issued. Our current average PBNs issued per site per month is 54. Pre-COVID, as Richard pointed out, this was over 80. As sites come back online and life returns to normal, we'll have an additional 100 sites under management, and this will translate to revenue. Added to this, we've worked incredibly hard on our cost base. We have $3 million of annualized savings. When you put this together with positive seasonality, vaccine rollout and greater sites under management, it's clear to see why we're positive on Q4. On Slide 15. While COVID dominates the headlines, the structural move to smart cities has continued. We're well placed to benefit from this trend. We're also leveraging our technology into new customer groups to expand our addressable market, with many of our customers still being local authorities and relying more and more in infrastructure, transportation and retail. So winning new business produces best-of-breed technology and customers seeing the true value of the information our technology can generate, and also how they can use this to manage their business. We have over $3.5 million of booked orders, and we have delivered new innovative products to market, particularly our new enforcement and compliance management system that is gaining market momentum. You can see more detail on these products on Slide 16. Moving to Slide 17. And in conclusion, we're encouraged by the first half results to deliver growth and improved margins through a period of operational challenges highlights the strength of SPZ. We have multiple drivers of growth and have a bullish outlook for Q4. Vaccine programs will generate more activity, and our earnings power is also greatly enhanced by the growth in sites under management. And we have resources, both in terms of capital and capability to execute. I believe our results show that. I'd like to thank the whole team in SPZ for their dedication and commitment and look forward to keeping you all up to speed as you make more progress. That now concludes my presentation. Now I'd like to open the lines for Q&A.

[Operator Instructions]

Since everyone's being so shy, I'll ask one. So the buyback, just go through the kind of -- what's the real logic of putting that? We can obviously the share price is where it is. But are there other factors that's nearing the element that the business was approached a little while ago about being acquired? Is there a reason why we need to get the share price up? That would be one sort of question. And then the second one is, let's talk about the ability to accelerate site business because I'm assuming just like in -- hold on a second. Sorry, I'm in an office. I'm assuming that certain sectors will have seen competition diminish aggressively because of COVID factors, and maybe that's happened in your end market. Maybe you could give us a sense of your relative ability to go away and acquire sites to grow compared to your competition? So those are my 2 questions.

I think I'll handle that one first, if that's all right. I mean what we've seen -- what we see after sort of lockdown 1.0, we're calling it in the U.K., back in March, April, May last year, we took an aggressive decision, obviously, worked very hard on our cost base, as we've talked about in some detail. But we brought the sales team back quite early from furlough, right? Because I believe that given some first mover advantage. And also, I was able to understand what was happening with our competition. A lot of our competition didn't want to mobilize as quickly, so I saw that as an opportunity for us to get out there and essentially knock more doors and win business, okay? Now of course, through this period, lockdowns in November is slight different. But this period of lockdown has been as harsh, if you like, as the original one from an activity perspective, and we have a lot of people up there for the right reasons. But we have maintained the number of sales heads. And we're still seeing -- whilst the level of installations haven't been as -- the pace hasn't been as high as I would like, certainly, so in this period of lockdown, but it's significantly higher than what we had in April and May last year, where we had no installations happening. So from that perspective, I feel like we've got a good feel for where we're at with our competition. We -- whilst we're still signing contracts or winning contracts, the pace of installations for obvious reasons. We've getting on to site and access to sites and restrictions in place, but you have to work around that and just do what we can. So there's still a lot of competition out there, Gary. I think we, as I said a moment ago in my sort of closing piece, we agree to help people. We spent money on beefing up our sales team, and we're going to continue to do that and growing our sales team. So from that perspective, we're in good shape. Competition is what it is. I mean today, some are better than others. We can definitely see a weak -- a few weak links, and we're trying to do what we can to capitalize on that. And in terms of the buyback, as I mentioned a moment ago, we've obviously got some good momentum in U.K. in terms of sites going in. We're very positive about what's going to happen when things open up and certainly, the vaccine rollout, and we're already seeing that now in terms of our car counts through January through to where we are today, it's significantly growing. As people get lockdown fatigue, and also vaccines kick in and also some positive news that came out of the government last week -- early this week, I should say. So from that perspective, the VAT, a few other positive things going our way, we believe it's a good use of capital. And it's -- I believe it's good for the share price, good for all shareholders. So that's -- it's a good use of cash.

I'll ask another one. Technology business. First out on its journey to, I guess, being A, profitable; and B, developing itself into sort of like a business that you wanted to be a growth business and all that kind of stuff. So talk to us about what the position of that thing is now.