Smart Parking Limited (SPZ) Earnings Call Transcript & Summary

[Audio Gap] of today's call will be that Paul and Richard will present the results deck that we've released to ASX. And following the presentation, we'd be delighted to take any questions. [Operator Instructions] Thank you again for joining us. And on that, I'll hand over to Paul.

Thank you, Michael, and good morning, and thank you to everyone for joining Smart Parking's First Half FY '22 Results Presentation. I'm joined by our Group CFO, Richard Ludbrook, who's based in Auckland. Richard and I will take you through the deck and after that, we'll be very happy to take any questions you may have. Can you start with Slide 3, please? This slide shows our track record. It shows that we've methodically executed our growth strategy to build scale across the parking enforcement management sector. We've successfully grown the number of sites we manage, and we started to leverage our core proprietary technology and expertise to enter new territories. In short, despite macro challenges and distractions, we focused on controlling what we can control in order to get the job done. We've increased sites under management by 258% since FY '18. That's an increase of 451 sites as at December 31. Car count through our estate has risen over this period from 37 million to over 68 million, and this level of volume demonstrates the scalability of our technology today. The number of territories we now operate our parking management services in has risen to 4, that's the U.K., Australia, New Zealand and very recently, Germany, which I'll talk about later in this deck. For me, this slide shows that we have proven the model and value proposition to clients. We will continue to execute this strategy and expand our market opportunities in order to accelerate our growth well into the future. Let's move now to Page 4 on our results for the first half. I'm happy to report record results for H1, where we have also exceeded the guidance we gave at the AGM. Revenue increased by 70% to $17.3 million, with adjusted EBITDA of $5.1 million, that's a rise of 264%. Shareholders will remember that we delivered $2.2 million of adjusted EBITDA for the full year in FY '21. The adjusted EBITDA margin expanded by 1,580 basis points to a new high of 30%. It's encouraging to see the operating leverage clearly coming through, and we see scope for further margin expansion in the future. Adjusted net profit after tax was positive $2.1 million compared to a loss of $0.9 million last year. Our overheads increased by 37%, which is due to a number of factors, mainly the full reinstatement of temporary reductions in salaries, furlough scheme benefits in the U.K., increased sales activities and investment in new territories. Another way to look at this is to compare our performance to the pre COVID first half 2020 period 2 years ago. We now have 24% more revenues with 2% less costs. We are a fundamentally more efficient and profitable company. We generated $4.3 million of free cash flow in this half, that's an improvement of 209%. The closing cash on the balance sheet after the acquisition of EPS in August, which is performing well ahead of our expectations and the share buyback, increased the balance to $11.3 million. So you can see Smart Parking is a fast-growing, more profitable cash flow positive business with a strong balance sheet and high returns on capital. Finally, we've now passed the halfway stage in our progress to the upgraded guidance target for sites under management that we provided at the AGM. Back in November, we released an elevated midterm growth target of 1,500 sites under management by June 2025. This upgrade was a signal of our increased confidence and ambition. At the 18th of February, we had 772 sites under management. We've passed the halfway point and it demonstrates a strong start to the second half. I'll now hand over to Richard, who can take you through the financials.

Thanks, Paul. I'll start with Slide 7, where you will see the group adjusted EBITDA of $5.1 million was at record levels and up 264% on H1 FY '21. Just a reminder that last year's result included a one-off benefit from the settlement of the long-running VAT dispute. Total revenue of $17.3 million, was up 70% on H1 FY '21. This was the result of a 74% increase in U.K. parking bridge notices driven by a recovery from the pandemic. Growth in sites under management through both organic growth and the acquisition of enterprise parking solutions and the entry into new territories. Further detail on the revenue increase is included on the following slide. Overheads were up 37% compared to H1 FY '22 and down 2% compared to H1 FY '20, which was pre pandemic. Further detail on changes to cost is included on Slide 11. Slide 8 shows the breakdown of the 70% increase in revenue. Revenue was also up 24% against H1 FY '20, which was pre-pandemic. There's a couple of things to highlight here. Parking breach notice revenue for the U.K. was at $4.9 million following the recovery from the pandemic and from the net increase in sites under management. There was a $0.85 million revenue contribution from the acquisition of Enterprise Parking, which was completed in August and $0.4 million from the recently launched parking management businesses in Australia and New Zealand. H2 FY '22 will see a significant increase in technology revenue with $4.8 million of firm orders with the majority due for installation in H2. Slide 9 shows the revenue and adjusted EBITDA broken down by quarter. This highlights the strong revenue growth and also the operating leverage with EBITDA margin increasing to 30%. Slide 10 also highlights the increase in operating leverage due to the strong revenue growth and scale benefits with operating expenses to revenue falling from 55% pre-pandemic to 41% in H1 FY '22. Parking breach notices have a high incremental margin and U.K. parking breach notices were up 74% on the prior comparative period. Slide 11 shows the breakdown of the 37% increase in costs. Staff costs comprising 68% of total overheads were up 30%. And this reflects the increased activity with a 70% increase in revenue, end of the furlough scheme, reinstatement of temporary reductions to salaries and expansion into new markets. The monthly exit OpEx run rate is $1.2 million. There will be some OpEx increases in H2 as the company expands into Germany and grows its sales capability in other markets. Slide 12 shows the group's cash increased by $0.6 million to $11.3 million. Free cash flow of $4.3 million was up 209% on H1 FY '21. The group continues to invest heavily in growth with $2 million of capital investment related primarily to the deployment of camera technology in the U.K., New Zealand and Australia and $1.4 million on the acquisition of Enterprise Parking in the U.K. With the expected rollout, CapEx is expected to exceed $3 million for the full year. Moving to Slide 13. Revenue in the Parking Management division increased 79% to $15.5 million. The company had 737 sites under management, up 19% from June 2021. EBITDA of $5.8 million was up 109% compared to H1 FY '21 with revenue growth and operating leverage driving margin expansion. The EBITDA margin increased 550 basis points to 37.4%. We remain optimistic about the outlook for this division given the lack of U.K. restrictions and expansion into new markets, which Paul will speak to later in the deck. Slide 14 shows technology revenue of $3.5 million. The adjusted EBITDA of $0.4 million improved 264% on the prior comparative period. The company expects a strong second half and has firm orders for new installations of $4.8 million. This includes an order for $1.3 million from Gatwick Airport although the timing of recognition for this remains uncertain. Slide 15 shows the group maintains a strong balance sheet and is well placed to fund growth strategies. The group had $11.3 million in cash, up from $10.7 million at June 30. This is a fantastic result given the company spent $3.4 million on investing for future growth, including $2 million on growth CapEx and $1.4 million on the acquisition of Enterprise Parking. I'll now hand back to Paul to discuss the business update.

Thank you, Richard. Okay. And I'll turn to Page 17 and the business update. The first half of the year was a busy and productive period. We drove improved performance in the core and accelerate our expansion offshore. As I mentioned, we closed the half with 737 sites under management in total across the group, which is a net increase of 118 since June 30. Gross additions to the estate in the half were 176, this includes organic growth of 93 sites in the U.K. and the contribution of 68 sites from the EPS acquisition, and we also had 58 removals in the half. This is not a typical level of removals. As highlighted previously, we're continually optimizing and improving the portfolio in order to maximize return. In the half, we removed a number of sites that were not profitable, and we also lost 1 customer with multiple sites, taking us to a larger-than-normal removal number for the half. On Slide 18, you can see here the U.K. parking services is experiencing rapid growth, seeing revenue increase by 75% compared to PCP. The rebound in the fourth quarter of FY '21 has continued in the U.K. through the first half of FY '22. U.K. PBNs were up 74% versus PCP. So driving revenue, we had more sites under management generating more PBNs. It's worth noting that January PBNs were 31,000 for 1 month versus 36,500 in all of Q3 last year, which obviously demonstrates a good start to 2H. We've expanded our sales team and they're focused on delivering 200 new organic sites per annum. As I mentioned earlier in the deck, the acquisition of EPS is performing well and ahead of our expectations. We acquired EPS $1.4 million in August and for the 4.5 months that we've owned it in the first half, it added revenue of $850,000. This has clearly been a good buy, and we're continuing to look at similar accretive acquisitions like EPS across the U.K. and Europe. Staying with the U.K. and looking now at Slide 19. Shareholders will be aware that the U.K. government has proposed some changes to the way in which private parking enforcement companies operate. They're doing this through a new code of practice that was announced 2 weeks ago. Whilst the consultation for these changes have been ongoing for some time, this is the first draft of the code that has been put before parliament. Key changes are the introduction of an oversight board, a single appeals service and the introduction of a range of new charges that will cover geography and breach type, raising the maximum charge from GBP 100 to GBP 130 to some breaches and also ensuring the breach value matches the contravention. We view most of the changes as positive for the industry. And given the recent update to the code, we are working through the interpretation with our advisers to ensure we adopt proposals in the correct manner. However, one of the key changes we can see in the future in the U.K. market is consolidation. With the fragmented nature of the U.K. industry, we believe that many of the smaller operations will struggle to adopt the changes, which will provide opportunity for SPZ. I will, of course, keep shareholders up to date with the changes to the code as the interpretation of policy information becomes available. However, the new bill will not be implemented until December 31, 2023. So we have a good amount of time to prepare for any changes coming. Moving me away from the U.K. now on to Slide 20. The ability to expand its new territories and quickly deliver profitable growth is a pleasing feature of this results deck. APAC added 15 sites in the half with revenues of $365,000. We had some delays in new installations in the region due to the pandemic, so I'm pleased to see that growth is now resuming. At the 18th of February, we had 21 sites installed and operating. You can see the recovery come through in the quarters. APAC issued 5,500 PBNs in the first quarter of this financial year and over 7,000 in Q2 as restrictions started to lift. Now let's briefly reflect on the progress we've made in APAC, given it's our first overseas parking management expansion. The opportunity we saw in these new markets was a competitive landscape dominated by legacy solutions that are not meeting the needs of today's customers. We acquired our first customer in New Zealand in March '21, although our initial growth has been impacted by the pandemic, the New Zealand business is already profitable and operating cash flow positive. Sites under management are performing above expectations and are delivering a strong payback on modest CapEx. We've seen attractive growth opportunity here and have added 4 new salespeople over the last 7 months. As with New Zealand, we have the ability to leverage our proprietary ANPR technology to enter a market with the advantage of first mover differentiation. This is what we're doing in Australia and now Germany. In Australia, we acquired our first customer in July '21, and we already expect this business to be profitable in the second half of this year. We've hired 2 salespeople and plan to expand with another 2 sales heads in the second half. Moving on to Germany. In the [Technical Difficulty] days since we started to build our new German business, we've already built foundations for growth. We've established an impressive leadership team, and we're actively developing relationships with key customers. We've put in place our legal framework and infrastructure with a regional office in Dusseldorf, new hires include a Managing Director, Head of Sales, Project Delivery Manager and Processing administration. Growth in the sales team is planned for the second half. Supply chain partnerships have been established for installation and debt recovery, meaning we can facilitate PBNs and commence revenue generation in the second half. With the largest population in Europe of around 82 million people, Germany has twice the addressable market in the U.K. It presents a large and timely opportunity for SPZ and I look forward to updating you as we make further progress. On Slide 22, I won't dwell on this page, but I feel it's important we highlight the progress made in the last 12 months. This will be the continued focus for us going forward in looking for new territories to expand into as well as looking for accretive M&A opportunities across all of our operating locations. Looking now at technology on Slide 23. We've successfully increased the order book in this business to $4.8 million of contracted orders. The business has delivered a second consecutive half of profitability. We generated $3.5 million of revenue and $445,000 of adjusted EBITDA, an increase of 267%. We've restructured our cost base, improved our go-to-market plan and signed significant new orders. We're delighted to have won new contracts in the U.K., New Zealand and across multiple sites in Australia. There is much more room for growth and improvement. In the second half, we'll deliver our full tech stack across key orders, including in ground sensors, overhead guidance solutions, enforcement applications, payment apps and compliance management through our platform, SmartCloud. We've done a lot of work to strengthen and rejuvenate this business, and we're on the right track. Looking now at the final slide on Slide 24. I'll close this presentation with our priorities for the future and the 3 key points from this page. First, it's clear that our strategy of winning, installing and maintaining customers parking sites is a good one and is driving our growth. It's this successful strategy that has led us to raise our growth target of sites under management to 1,500 by June 30, 2025. This target is reaffirmed, and we are well on track to achieve it. Second, we're focused on finding and entering new markets that operate our technology-driven managed service offering. With the successful entry into APAC, our proprietary technology and our extensive experience, we believe there is significant growth for our business in new markets. We're focused on making these new territories a success today and are busy looking for new areas for expansion into the future. And the final point, we've worked hard to grow revenue and manage our costs carefully through a difficult period over the last 2 years. The result of this effort is a strong balance sheet that allows us to look for more strategic M&A opportunities that will add scale and accelerate the growth of SPZ well into the future. That now concludes our presentation. Thank you for listening. We can now open the line for any questions you may have.

[Operator Instructions] Paul, I might ask the first question as we wait for the queue to form. Could you talk a little more about the competitive landscape in Germany? What are the current solutions? And what sort of initial responses are you getting from potential customers in those first round talks?

Sure. I mean the German market, in some ways very similar to the likes of Australia and New Zealand, very manual, manually operated, manual-based. There are -- obviously, with the change in legislation that will allow access to keep the details or accessing people's data so we can send PBNs in the post like we do in other markets. That we have seen more established players start to use it, which is a good thing, but it's nowhere near as popular as it is in the U.K. In the U.K., there's something like 130 parking operators that are registered with the British Parking Association today, not all of them using ANPR, but a good number of them are. We're obviously in the top 3 operators the largest there. But Germany is very, very different. There are some larger, more established operators, like I say, more manually operated using people to issue tickets rather than technology. So what was the second half of your question, Michael?

And what initial responses are you getting from the customer discussions?

Very good. Very positive so far. I mean, -- like I said, we've only been operating we opened the office on the 1st of January, so it's just over 50 days in. But what I would say from the feedback and the people we've got on board the new Managing Director, the sales head we've hired and also our project delivery manager all come from a parking management background from other German companies, which is a good thing because they bring experience, also bringing relationships, prior relationships. So we're talking to other customers they used to work with, again, all through a manual operation. So the offer of a CapEx free offer, where we provide the solution, the technology and the service and they can take advantage of that service from us and so far has been very good.

So Paul, there are some questions that are coming through, a question that's come in through the chat from [ Nick Hardey ] some comments and questions. So great result, guys. Love to see under promising and over delivering. Could you give us a bit more there of the financial impact of the proposed U.K. legit changes if adopted as proposed? And secondly, also, could you give us an idea of the gross margin on technology sales?

Sure. So let's start with the parking build. I mean, as I said a moment ago, it's the -- there's a number of changes coming in that are, I think, good for the industry, particularly the single appeal service. I think that's a very good thing. I think the oversight board is great because it means there's a number of our competitors, smaller players don't. We believe, operate in the right way, and that's what's giving parking companies, some parking companies a negative press. In terms of financial impacts, there's a there's a good number of different charges that are now going to be levied. So ranging from GBP 50 to GBP 130, like I said. The bid is slightly unclear is the -- they've also changed how a car park is registered, if you like. So they've got -- the number of sections. If you read the code, they put them as invited parking and uninvited parking. And there's a small bit of -- just some interpretation we need to get clear on what that really means, uninvited versus invited. On first glance, the majority of our sites would be the uninvited section. That's the way we're looking at where we're really interpretate code today, which means we levy some of the higher charges, okay? I said remember that whilst some of the charges that we may issue under the U.K. code may be lower, we believe that the deterrent is -- is also lower before we think we're going to issue more. We also believe that because of [ deterrents ] lower, then there'll be a higher payment ratio. So there's a number of these things to work out. Whilst we can model this to the nth degree until we get the right interpretation of the code back from our advisers and help with that. So we do think it properly, it's going to be some time before we get that information really clear. But what I would say is always difficult. It's always challenging. There's a good number of challenges to come from this in terms of we have to update signage and lots of operational things we're going to have to go through. But I also think it's going to really help us with consolidation. Like I said, I think a number of our smaller competitors from this additional red tape is going to be too hard. For us, we understand we listed company in this space. So we used to rad tape, we used the government all those good things. So whilst the financial impact right now is still working through for whatever that may be, it's still lots of positives to come from it. So I'm optimistic about the future.

I'll answer on the second part of the question, if you like, Paul. So typically, on a -- on a technology sale, the gross margin for the install is anywhere between 45% and 55%, depending on the type of job and the size of the installation.

Okay. Any other questions we have?

Nothing on the chat.

Paul, it's [ Nick Kelly ], can I ask a question?

Absolutely.

Just -- can you just talk about in terms of the U.K. business now in the management services, the concentration risk to the client? Like what would the biggest client now representing any of the site or revenue terms?

In terms of site numbers, I suppose, KFC is getting up there now with 25 to 30 sites. 1 or 2 managing agents who have a good number of sites with this. But I guess the difference with that particular customer base is something like Savills, for example, every single [indiscernible] we have with them is an individual contract that are under 1 umbrella contract. So it might be 20 sites, 22 sites of Savills. But like I said, their individual have different end dates and what have you and they're renewed independently. So the sort of biggest customer, like I said, the biggest in terms of the site concentration will be KFC.

But nothing like the old metal and [indiscernible]?

No, no, no. Nothing like that. We actually -- I mean, I think you would remember over the years where we've worked pretty hard to dilute our risk. I mean the contract that we removed, obviously, to represent the higher removals for the half was with London and Cambridge Properties. And really, it was -- it wasn't the greatest of contracts for us, to be fair, and they came back in 1 of the much higher revenue share, which we really couldn't meet and where our capacity side given 70%, and we're not going to get that low. So yes, we felt those are the right thing to not to play another game. We did that, we [indiscernible] past as you note and we've been much stronger for it. So we'll stick with the principles.

And can you just comment briefly on the customer demands you might be starting to see in terms of EV charging?

Yes. It's interesting. Good point, Nick. So obviously, EV charging will continue to grow. I mean, U.K. is a difficult market for that given high population density, the vast majority of people live in properties without a garage or access to be able to plug their car. So they have to go and put their cars somewhere for EV base. We're talking to a number of our customers who want to provide EV charging as part of our [indiscernible] provided it's part of the service. And we're currently looking at 2 or 3 sites right now to install. And -- of course, it's slightly different to just going and putting in cameras in the pay and display machine because there's an ongoing cost to it. Obviously, people are plugging in a car and they're taking electricity and changing their cars. So there is the opportunity for us to install these -- some of these points, charging points for customers -- and rather than just free of charge, we extend contracts, we take some of the revenue, those sorts of things. So it's still very much a work in progress, Nick, but it's becoming more popular. And we're very happy to oblige our customers and work with them to actually provide that -- provide the business model stacks up for us, which each customer is slightly different, but we will make it work. Do we have any other questions? Any online, Richard?

There's no questions in the chat, Paul. So if there's no other questions, then we'll hand back to you, Paul, for closing remarks.

Okay. I mean I guess thank you. I mean, again, thank you for everybody for joining. But I really would reiterate the last 3 points I made on the last slide, which is around our strategy. I mean for me, first point, it is clear that our strategy of winning and sorting in maintaining our customer sites is working and is driving our growth. It's the successful strategy that is leading us to drive our midterm target up from 1,000 to 1,500 by June 30, 2025. And like I said, that target is reaffirmed, and we are on track to achieve it. We're also focused on looking for new markets to operate our technology-driven managed service offering. The success we've had in APAC and other areas, our proprietary technology, extensive experience, we believe there's significant growth for us in this business. We're focused on making these new territories a success today. And of course, we're busy looking for new areas that we can expand into. And the final point I would make is like I say that we've put a huge amount of work, hard work going to growing the revenue that we have today in these results. We've managed our costs very carefully through a very difficult period over the last 2 years and that's resulted in a very strong balance sheet that allows us to look at more M&A opportunities, which we're actively doing in order to grow our business and add scale well into the future. I guess if there are no more questions, I'm very happy to take some if people want to e-mail me or call me. I'm very happy to take any more one-on-one questions. If not, we may call it there, unless there's any other questions coming Richard?

No, nothing. Thanks, Paul.

Okay. Thank you very much, everyone.

Bye-bye. Thank you.

Thank you very much.