SP Plus Corp (SP) 2005 Q2 法說會逐字稿

Excuse me, everyone. We will now begin the conference.

(OPERATOR INSTRUCTIONS)

There will be an opportunity for questions and answers. Instructions for asking a question will be provided at that time. I will now like to turn it over to Marc Baumann.

Thank you, Alicia, and good morning everybody. I'm Marc Baumann, Chief Financial Officer of Standard Parking and I'm your primary Investor Relations contact. Welcome to our conference call for the second quarter and first half of fiscal 2005.

I hope all of you had a chance to review our earnings announcement, which was released yesterday after the market closed. We expect to file a 10-Q tomorrow, August 12th. We will begin our call today with a brief overview by Jim Wilhelm, our President and Chief Executive Officer, and then I'll discuss some of the financials in a little more detail. After that, we'll open up the call for a Q&A session.

During this call, we'll make some statements that will be considered forward-looking regarding the Company's strategy, operations, and financial performance. Those statements are subject to many uncertainties in the Company's operations and business environment. I refer you to the complete forward-looking statement disclosure in our Second Quarter Release, which is incorporated by reference for purposes of this call.

I'd also like to refer you to disclosures made in the Company's quarterly and annual filings with the SEC. Finally, before we get started, I want to mention that this call is being broadcast live over the Internet and can be accessed on our website www.standardparking.com and also www.earnings.com, which I think you may know previously as fulldisclosure.com. There will be a replay available on either website for 30 days after the call.

With that, I'd like to turn the call over to Jim.

Thanks, Marc. Good morning, everyone. Because we started the call a little earlier this quarter, we issued the press release on the quarter's results last night. So, I'm sure everybody has had a copy of that and has been able to go through it. So, I think you'll find our comments to be today rather concise around those figures.

All in all, I thought we had a terrific second quarter - right in line with our business plan and business model, and real solid year-over-year growth in both revenue and, as all of you know, our key metric was gross profit. In leases, management, and in total, our leases on a year-over-year gross basis grew 6.7%, management contracts 9.5%, or a total gross profit year-over-year improvement of 8.8%.

I think we're comforted also by the fact that a lot of that growth, or there was growth in same-store, or same-location basis over the same year-over-year. Again, leases 7.7% year-over-year improvements from same-stores, and on the management side, 9.5% growth, which is right in line with what we'd like to be doing as a business and sort of the fundamentals of our business model, sort of bear those sorts of numbers.

We also were able to maintain or improve our margins at both the lease locations and the management contract locations. Maintained our, basically maintained our lease margins at 9.7%, improved management's from 58.2% a year ago to 58.9% now, and overall our total improvement from 27.5% to 28.1% on the margin side. We had net income in the second quarter of $4.3 million, or about $0.40 per diluted share, versus a loss of $800,000 last year for the same quarter.

I think one of the things I'm most proud of is that the base business during the quarter in delivering these numbers have really overcome the hit that we've taken for the contract that we're working our way through in St. Paul that we talked about last quarter. Higher than expected, or I guess, higher than budgeted costs for being Sarbanes-Oxley compliant as we continue to weave our way through regulation and testing, and work with several outside firms. And, hit that we'll be taking for rules and regulations as they apply to lease accounting on some of our leases, and primarily in office leases we have, and Marc can talk about that a little later if he likes.

On the new business side, we certainly continued to build on the momentum that we had from the first quarter in areas that we've been focusing new business on and talking about as we've come out and met with you all in the past.

Let me give you some highlights of some of the new additions during the quarter. We won a three-year contract to manage the parking operations at the Cincinnati Northern Kentucky International Airport and its 16,000 spaces.

We commenced our Sky Cap services to supplement our parking and transportation services at the Rapid City Regional Airport. We were also awarded a contract to operate Valley International Airport in Harlingen, Texas this past quarter and started those operations just a week ago.

And, we opened two new Park Air Express shuttles at airport. One at, that will serve the Dallas/Ft. Worth International Airport and one that will serve the Burbank Airport in southern California.

During the quarter, we were also awarded the parking management and enforcement contract from Boston University, encompassing 21 individual parking facilities, and 3,800 spaces.

We won an award to operate 12,000 parking spaces in two garages and 15 surface lots and on-screen meters at George Mason University, and really replaced an incumbent operator that has been there for many, many years through a bid process. We won Foothills Hospital in Calgary, Alberta, serving about half a million patients a year, and about 1,500 parking spaces. We expanded our relationship with Google to include valet parking and valet-assist and transportation services for them at their East Bay Campus.

We won the contract to operate the Bank of America plaza in Dallas, Texas, which is the tallest office building in Dallas, and certainly right in our niche in terms of Class A prestigious office space.

And, an interesting contract in Houston, Texas where we'll be operating the parking and transportation movement for Lakewood Church, the largest church in the United States, which had 57,000 people attend on their opening weekend.

So, we're very pleased that the types of businesses that we're adding into the mix, and sort of echoing our focus in the university, hospital, and ancillary services for airports niche, which we think are good ones for us.

We continue to have positive net added locations in 2004. Currently, we're remain at about 16 new locations since the end of 2004 this year. The breakdown of those are 1,615 of those being management contracts and 289 of those being leases, which also continue our, sort of the working formula that we had in the past.

In the, also during the quarter we continued to buy back some of our shares with the free cash flow the business is flowing off, or flowing to us, and that resulted in us buying back around 90,000 shares, 89,000 shares, for a total of $1.5 million.

Based on this activity, we were, we have raised our earnings guidance slightly for the year, as the underlying business is performing at or above the expectation in most of our operating divisions.

So we are increasing EPS guidance to $1.40 to $1.50 per share, an increase of $0.05, and from $1.02 to $1.12 pro forma for income taxes, which is an increase from $0.02 over the last time we spoke to you. We are also increasing our free cash flow estimate from $15 million, from the $15 million level we've been talking about earlier, to approximately $17 million now.

In summary, before I hand it back to Marc, I just would like to re-echo that the, while the quarter was good for us, it is consistent in our minds with what we've been trying to execute from a modeling and strategy-mapping perspective.

And, given the year we've been into being a public company and settling down some now and trying to cast aside the distraction of going public and settling back into the business of parking cars, we're very pleased that we are beginning to get the results of that focus.

With that, I'll turn it back over to Marc, who can lead us to a more detailed financial presentation.

Okay. Thanks Jim. Jim's obviously given you a bit of a review of what's going on with the business. So, I'll turn now to some of the financial details.

Net income for the second quarter was $4.3 million, or $0.40 per diluted share, versus a loss of $800,000 a year ago. Last year's report net loss included $3 million of accrued dividends on preferred stock issues that we retired in conjunction with last year's second quarter IPO, as well as certain gains and charges related to the IPO.

Parking services revenue for the second quarter of '05, excluding reimbursement of management contract expenses, increased by over 6% during the quarter compared to the prior year. And, as Jim mentioned, this has really been led by same-location revenue growth at both leased and managed locations.

Gross profit for the second quarter increased almost 9% from a year ago due to continuing improvement in performance at same locations. Gross margin picked up, as Jim highlighted, the overall business margin increased from 27.5% in the second quarter of '04 to 28% for the quarter just ended. Revenue growth at the same locations really outpaced cost increases at both leased and reverse-management locations.

G&A expenses increased by 6% for 2005 second quarter compared with the second quarter of last year, and this was an expected increase, and really is the result of additional costs of being a public equity company - such as expenses incurred with meeting Sarbanes-Oxley compliance requirements and expanding our Board of Directors to include independent directors.

G&A expenses for the second quarter of '05 were flat compared to the first quarter of this year and that reflects what we've said before, that these are relatively fixed type expenses and don't fluctuate that much from quarter to quarter.

Depreciation and amortization expenses down by $100,000 for the quarter compared to the same period last year, primarily the result of the fact that we are no longer amortizing a non-compete agreement with the Company's former owner that was terminated due to his passing last year in the fourth quarter. And, we talked about that in past calls and releases.

As a result of all these items, operating income was $6.8 million for the second quarter of this year, compared with $2.8 million for the second quarter last year.

There are a lot of things going on though last year in the second quarter with the IPO, so to make a meaningful comparison year-over-year looking at the underlying business growth, if you take out of the '04 numbers the management fee that was discontinued at the time of the IPO and the non-cash stock compensation expense that was also booked in conjunction with the IPO, remove those from the '04 numbers and compare the operating income this year to, let's call it "adjusted operating income" for last year, we had an increase of 17% in operating income this year compared to last year.

And, I think, really, that reflects the leverage that our business generates when gross profit grows at a faster rate than G&A costs. We see the leverage coming through there in the operating income line.

For the first half of this year, net income was $6.4 million, or $0.60 per diluted share, as compared to a loss last year for the same period. Parking services revenue, excluding reimbursement of management contract expenses, increased by over 7% in the first half of '05 compared to '04. Again, driven primarily by growth in same-location revenue, although as Jim mentioned, we did add 16 net locations during that time period, and that contributed as well.

Gross profit for the first half of '05 increased over 6% to $33.5 million from $31.6 million a year ago. G&A expenses were up 7% for the first half compared to the first half of last year. And, of course, last year's first half really didn't have those additional costs associated with being a public equity company. Operating income for the first half of 2005 was $11.4 million compared with $7.5 million for the first half of '04.

However, making those same two adjustments, the pre-IPO management fees, and the non-cash stock expense that I mentioned earlier, the first half of this year's virtually flat compared with '04. The underlying business is growing as Jim has described but obviously, in the first quarter, we had a $900,000 valuation allowance that reduced our results for the first half of 2005.

As we discussed last quarter, free cash flow for the first quarter of '05 was greater than expected due to fluctuations in accounts receivable and, particularly, accounts payable that were expected to normalize during the second quarter. And, we did see that happen this quarter, and so as a result, we generated only $2.8 million of free cash flow in the second quarter but $8.7 million for the first half.

And, I think, that's more indicative of what we would expect for the first half of the year. As a result, as Jim mentioned, we're raising our expectation of free cash flow for the full year to $17 million or greater. Free cash flow is used to make debt repayments totaling $700,000 during the second quarter and $5.9 million during the first half of 2005.

The use of free cash flow to reduce debt, along with the impact of 2004's IPO and refinancing of the Company's senior credit agreement, resulted in a $1.7 million reduction in interest expense for the quarter and a $3.7 million reduction for the first six months of '05 compared to the same periods in '04.

During the quarter, we also used free cash flow to continue the stock repurchase program approved by the board of directors earlier this year. And, during the quarter, we purchased 77,000 shares on the open market and from our majority shareholder.

Due to the timing of some open market purchases, we also purchased 12,000 shares relating to the pro rata purchase from our majority shareholder in early July. So, that's the 89,000 shares that Jim mentioned. The total value of the second quarter transaction was $1.3 million.

The July transaction was $200,000, and that brings us up to the $1.5 million. And, of course, we mentioned previously that we bought back $3 million in the first quarter, so that brings us to $4.5 million against the $6 million that was authorized earlier in the year.

On the balance sheet, cash and cash equivalents increased to $8.7 million, which is a small increase for us of about $800,000 over the first quarter. As we've mentioned before, cash balances are generally the result of cash deposited into our bank accounts that has not cleared and is not available to the company to pay down revolving debt. So, it can fluctuate around like that, and this is the normal type fluctuation.

At the Bradley International Airport, we received reimbursement of deficiency payments totaling $600,000 during the second quarter, and so for the first six months of '05 we've received net repayments of $80,000 as compared to making $1.4 million of deficiency payments during the first half of 2004. And our expectation right now is that this repayment trend will continue.

Capital expenditures for the first half of 2005 totaled $400,000 compared to approximately $600,000 last year. In addition to capital expenditures, the Company entered into $1.4 million of new capital leases during the first half of '05 as compared to $1 million for the same period last year. And, we continue to expect to spend up to 4 or $5 million for capital expenditures in fiscal 2005, excluding capital leases.

In terms of earnings per share expectations, as Jim mentioned, we're raising our outlook by $0.05 on a reportable basis, $0.02 on a pro forma for income tax basis, and just to reiterate the revised range is $1.40 to $1.50 per share on a reportable basis and a $1.02 to $1.12 per share pro forma for income tax basis.

For pro forma guidance purposes, the statutory tax rate of 39% has been reduced to 30% based on the Company's assumed ability to use its substantial net operating loss carry forward to shield income for a period beyond five years. This cash tax rate, although potentially useful for comparison purposes on a longer-term basis, is substantially higher than the cash tax rate we expect to be effective for 2005. That rate should be less than 5%.

Also, please note that the Company's book tax provision may be affected by adjustments to its valuation allowance for its deferred tax assets. Right now, we're unsure about the timing of any adjustment, but that timing could result in significant fluctuations in reported net results, and that may happen this year, it may not. So, that we’ll obviously advise you of that unfolds.

That completes the formal comments. I'll turn the call back over to Alicia for the Q&A session.

Thank you.

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Our first question comes from Bob Labick of CJS Securities. Please proceed.

Good morning. Congratulations on a great quarter.

Hi Bob.

Hi Bob. Good morning. Thank you.

First question I just wanted to ask regarding the competitive environment, particularly as it relates to two of the larger competitors that each have their own distractions going on. How is the environment impacted your ability to make new, win new contracts, and how is the acquisition environment look out there right now?

Take one at a time. In terms of the competitive environment, although there may be some distraction out there for, for companies that we typically compete with, they certainly haven't, they haven't diminished their turning up at all of our RFP meetings and certainly a lot of the contracts that I mentioned we were successful winning in the quarter, were in competition with those firms.

So while there may be a headquarter issues with those companies, certainly their field organizations are still performing as always. And, I would define the environment as remaining competitive, seeing the same people showing up at the same RFP meetings doing the same good jobs for their firms. So, I don't know that there's been any change in the field organizations of the firms that might be having some turmoil.

On the acquisition basis, I think with the stability of our firm and some recent work being done by AMPCO in that area, certainly companies that have had pent up demand for to be sold have been calling us and talking to us. But again, we're trying to remain very, very disciplined in terms of the companies that might appeal to us in those markets with those structures that fit our business model.

So, while we’re talking to people all the time lately, still with the same eye towards finding the right one that fits our strategy for core markets and the types of contracts that we feel we're more successful with.

Okay, great. Then, just in terms of other, you know, growth drivers, could you update or remind us how things are going in terms of on-street parking in various locations, and other ancillary businesses you may be looking into putting traffic direction those kinds of things.

Well, I think I'll speak specifically to two of those Bob. One, as we've been saying, almost a month does not pass now with one municipality or another putting out a request for proposal for some form of on-street parking management services, whether they are parking meters, or writing parking tickets, or collecting the revenue from parking tickets, or the more stricter enforcement end of towing or booting, I think that many, many municipalities are putting out those sorts of RFPs.

And, we've been responding to those and winning our share. We've brought in resources over the last couple of years into the Company that focus specifically on improving the knowledge base for our field organization in the area of on-street parking. So, whether it is, technologies available for metering or pay-on-foot locations, or software and firmware product types for ticket writing, we've been a little bit ahead of that curve and finding that we have a fairly decent competitive product in that realm and we're winning our share.

The second one that I wanted to talk about is kind of in our highlights this month, and that is beginning to offer ancillary services at airports. You know, we've traditionally been airports have been a niche since we've put up APCOA and Standard Parking together and the, sort of, traditional parking facilities we've been doing since the 50's.

I think what we've been moving along is leveraging those relationships with airport managers and airport directors and boards for airports that have liked the job we've done for them on the parking side and are looking more for one-stop shopping as it relates to land-side management.

So, we've seen an uptick in our ability to work with airports, sometimes as an amendment to our existing parking agreement to perform services like transportation, employee shuttles, consolidated car rental shuttles, remote parking customer shuttles that we've highlighted for you the last few quarters, and then, traffic direction, ground transportation management, adding in Skycap and wheelchair assist programs this quarter at one of the airports we managed. So, I think, in terms of growth opportunities outside the core niche, there's plenty of us to be, plenty for us to be working on right now.

Terrific. I look forward to seeing you at our conference next week. Thank you.

Yeah. We're glad to be there.

Thanks.

The next question comes from Matt Litfin of William Blair & Company.

Hello. Good morning. What can you tell us about customer retention rates, or turnover, concerning the second quarter?

Matt, our retention rate, really, is virtually unchanged from the first quarter - still around 88%. And, I think, one thing that we, you will have noticed in the quarter, is that we didn't add any net locations, and I think that is really the result of the timing of a couple of contracts that terminated that had a number of locations associated with them, not necessarily a big loss to us financially.

But, I think as we look forward during the year, our expectation is that we will continue to see improvement in addition of net locations and I think you'll see our retention rate notch upwards as well.

Okay. And then, another for you, Marc, I guess. Last year, SG&A was lower in the second half than it was in the first, in terms of on a dollar basis, and I wondered is that seasonality and thus do you, are you expecting that to occur again this year as well?

No. I mean, I think each year has its own fluctuations - things got booked, I think, to G&A in the first half last year. But, I would say as you look at our G&A, I think the expectation we feel then is that it should be relatively stable across this year. It shouldn't fluctuate too much.

Okay. Jim, one for you, if I might. You know, like, you talked a little bit about some of the competition and I thought more specifically I'd like to get your thoughts on last week's announcement by Central Parking of a pretty significant change in their strategy that to me sounds like, a lot like, the one that you guys laid out a few years ago. So, I wondered if you had any additional thoughts on that?

Not a lot, Matt. You know, we kind of leave blinders on, and sort of work our strategy map and our business model for what we think we can be successful at. I would only say we're very flattered that Central would choose to adopt our business model on a move-forward basis, and, but they are certainly a formidable competitor with great people. You know, whether you can change the culture of an organization towards a culture like ours where we're very sensitive to client and customer issues, from being a lease and owned facility will yet to been seen.

But again, from top to bottom, they have some great people at that company and certainly, I know, they'll put a great effort in. I think the one benefit that we would hope to see as a result of that announcement is improved discipline within the industry in terms of pricing. You know, making sure that we are earning fair fees and lease income when we get into a competitive situation.

And, I think, that there has been a lack of discipline in some cases, and I think Central and others, and us, in some of the deals we've talked about have not shown the best discipline in maintaining price integrity over the last couple of years.

So, I'm hopeful that with this new, another new business plan, that there can be some more discipline in terms of pricing throughout the industry. And, we see the growth that we think we're entitled to in terms of offering value to our clients.

Thanks, Jim. Very helpful.

Thanks, Matt.

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The next question comes from Kevin Monroe of Thomas Weisel Partners.

Good morning.

Good morning Kevin.

Hi Kevin.

Bradley Airport's starting to turn around. Could you guys give a little more color what's going on there and, specifically, can you kind of quantify the drag on cash it was last year and the potential addition it could be cash going forward?

Well, let me answer the first part and then I'll let Marc deal with the second part of your question. We've been able with the uptick in air travel in and out of Hartford, Southwest has finally become aggressive in trying to move people in and out of that airport and a lot of the issues, in terms of getting air carriers moved over into the new terminal from the old terminal have gone away, which has enabled us to save what was unplanned for at the time this deal was designed, in terms of having to shuttle people from the new garage to the old terminal - where American and Delta, I think American's still in there, but everybody else is moved - so that our operating costs have gone down.

With American finally moving into the new terminal some point next year, the need to shuttle to that terminal at all will go away, so our operating costs will continue to go down, in concert with our ability to move pricing according to the market. The new garage is performing at capacity, at many points during the week, and we're able to move pricing accordingly with it.

We've made a couple of price changes in the last three quarters. I think we've made two with an eye towards continuing to focus on what pricing could be at that airport. We also have some opportunities to move employee parking out of the main parking garage at Hartford and onto surface lots and bring more flying customers into the garage, which should help us.

So, three years later, four years later, we're finally settling into the plan that was designed for that garage and for the airport when it was constructed. You know, we've talked, maybe ad nauseam with you guys about the problem in terms of getting the terminal opened on time, getting carriers moved, the fact that we'd opened the garage one year earlier than the construction plan. I think all of those things have gone away and the airport is finally operating according to pro forma.

To address the second part, Kevin, in terms of the financial drag, I think we've said in the presentation that there was about $1.4 million in the first half of last year, and, obviously, was a positive $80,000 this year. Last year, I think in total it was about 1.8 or $2 million, and I think based on the comments that we've made, we're really saying that we expect it to be positive on a net basis. It could be from one month to the next it might go up or down, but looking forward now for the rest of this year we expect to continue to see net repayments on this contract.

Great. Next question, Marc, I guess, on your capex guidance. You're saying 4 to $5 million, but you've only done, I think, less than a million year-to-date. So, why such the big ramp up in the second half of the year?

Well, I think there's two things at work, Kevin. When we established our guidance for the year, particularly the free cash flow guidance, we indicated to everyone that we thought we had more opportunities to expend capex this year at levels that would meet our hurdle rates.

And, we still believe that very strongly. There's a lot of timing issues involved with these projects. From the time that we approve something here, looking at whether it meets our criteria, to when the client approves it and a deal actually gets done, there can be quite a substantial lag. So, it is possible that the cash flow capital expenditure that we'll book in '05 will not reach the 4 to $5 million level.

But, I think to give people an indication of what's going on in the business, we want to continue to let people to have an expectation that it could be that high. The other thing is that we do have a couple of deals, one in particular that I'm aware of where we know the deal is now going to happen fairly soon and that will represent a significant expenditure within that total. So, we definitely will see the number grow as the year goes on but it may well come below the 4 to $5 million.

Okay. And last question - you're working capital in the quarter turned a bit negative. Is there anything going on within the working capital line on the cash flow statement?

No. Second quarter is a quarter where we don't have the interest payment on the 9-1/4 debt, but we do pay annual performance based compensation. So, that's a use of working capital during the quarter.

As we talked last time, and I mentioned earlier in my comments, accounts payable was very high at the end of the first quarter, has come back down to more normal levels this quarter. If you look at the balance sheet, you'll see that accounts payable and accounts receivable at June 30th are virtually the same numbers they were at December. So, they've really...

Right.

returned to normal levels. And, I think, I wouldn't say that 2.8 is the right free cash flow for this quarter, just like the 5 point whatever it was in quarter one was too high. But, if you look at the sort of 8.8 or 8.7 of free cash flow we had for the first half, I think that's indicative of the type of free cash flow that we're generating now.

Okay. Thank you.

Mm-hmm.

The next question is from Rob Ammon of RK Capital Management.

Yes, just a follow up on that seasonality question - what sort of revenue seasonality do you expect with on the parking services revenue side as you look into September and December, I guess? Historically, it looks like it's been down anywhere from two points to, I don't know, seven or eight points into the September quarter.

I think that the only noticeable seasonality that we tend to experience that we understand is really a first quarter seasonality. I think the rest of the year you can get some fluctuations, maybe the summer travel season was particularly good or not, or maybe business travel picks up.

And, those things can drive revenue, particularly because at airports, we tend to have a few more leases than we do on our overall portfolio. But, I don't think we expect to have any meaningful seasonality effects going on at the gross profit line throughout the rest of the year. It should be typically looking like what we saw in the second quarter.

Okay. Okay. Great. Can you give us any sense in terms of location mix, of the percentage of locations that are under reverse management now within your management contract business?

You know, Rob, we really haven't updated that in a while. I think in our presentation that we talk to people about, we say that it's around 67% of our fixed fee management and around 18% of total contracts are reversed management contracts. It's not something that we track closely, and so therefore, we haven't really revised it from what we've put in our presentation that's out on our website.

Okay, and I apologize, but I didn't quite catch the net location number. It was, was it down this quarter.

It was down about four locations, I think, but we've added 16 net locations in the year-to-date period.

Okay. And at the outlook, it sounds like it was more timing than some business that you culled out, and as we look forward from here, a Q1 type net add location would be a reasonable target? Or, would that be pretty aggressive?

Well, I think that - a couple of things. One - and we talked about this in a couple of calls - the way we report location varies for the number of contracts we have.

So, we get into the situation every now and then, and the second quarter was one, where we lost or traded, retraded, three contracts that represented almost 30 locations. And, from time to time it happens depending on the contracts we trade back, or we lose, or we choose to exit. Why the contracts, the contract mix itself might be increased.

So, in order to obviously maintain a consistent reporting metric, we'll continue to use location, but we'll try to highlight those periods where we have an abnormal number of locations assigned to a contract.

In terms of the look forward, we don't do a whole lot of crystal ball work in terms of what we think will happen in the next couple of quarters, in terms of specific locations. But, I think we've talked in our investor meetings and through the calls that our pipeline is rather busy right now, and our business development people are working hard every single day.

The Central Parking's going to transition in their business plans have a follow up to an earlier question - create a window of opportunity for you to go in and go after some of those customers?

I don't think there's any change in the types of customers or the number of customers that we'll be chasing as a result of their discussion. We're, fortunately, we've again spoken through the IPO process, and part of laying out our business model for you, and follow up calls, that we've created - although we cut G&A over the last five years rather severely in order to get us in a position for the Company to succeed - during that time, we were also building a business development network.

And, we're now fully staffed with our business development team across the country, where the business development people are working side by side with our senior vice president to maximize the penetration of each of the markets we've chosen to trade in. So, if anything, we're ratcheting up our ability to make contact and create synthesis for those markets that we consider core.

And, very nice performance with G&A as a percentage of gross profit - continue to march towards that long term target of 50% over time?

That's our goal. I mean, we're not giving specific guidance, Rob, on when we expect to get there. But, clearly, what you saw in this quarter, which is gross profit growing faster than G&A, that's our goal. So, obviously, even without taking G&A cost out of the business, if we can moderate the rate of growth of G&A, we're going to get to that goal eventually.

And should we see that same leverage in the second half of the year?

: I think that's our overall business model. So, we're expecting it be sort of the way things are. Yes.

Okay. Excellent quarter. Thank you.

: Thank you.

The next question comes from Matt Litfin from William Blair & Company.

Yeah. Hi - a few cleanup questions, financial questions.

Hey, you get to ask us questions more than once?

I'm coming back around. Okay, so Marc, really this is, you can actually go to sleep Jim, because these are mostly for Marc. Interest expense was just a little bit over our expectation, and I thought maybe you could update us on the rate caps that you have and the time to expiration.

And, then, on which debt tranche are you paying down debt here? And, I guess, one of my key questions here is what are we really looking at in terms of the back half interest expense? Are we, is it safe to assume, we can kind of flatten out from here, or does it, do you see a creeping up?

Well, you've asked me a lot of questions there. Just to recap on the rate caps, we have two rate caps in place. And, one is for $30 million and that one goes out 18 months from January 12th of this year. And, the other is for $15 million and that goes out nine months from January 12th of this year.

So, I guess we're in the last quarter of that cap right now. And, the effect of those two caps is really to cap our interest rate. I think at 5 3/4, in total? So, on the, let's call it $45 million of variable rate, senior facility borrowings that we have out there, they're capped at around 5 3/4% for that time period.

Obviously, since the underlying - Federal Reserve keeps increasing interest rates - the underlying interest rates are going up. They will continue to go up. And, clearly in the second half, or really in the fourth quarter, we will be a little more exposed to interest rate movement in the marketplace than we have been in the first half of this year or the first three quarters of this year. So, I think that's really the situation.

Now, in terms of income tax expense, I mean, our interest expense rather, we're generating a lot of free cash flow. We're using it in the way we described. I think from my own point of view, I look at interest expense in Q1 of $2.3 million and Q2 of $2.4 million - it's a fairly stable number. I don't expect it to fluctuate too much because we're obviously paying down debt.

On the other hand, when we buy back stock that doesn't reduce our debt levels. So, it's a fairly stable number like a lot of other things in the business.

I knew you could handle all those questions. Okay, when would be the earliest that you might recognize the valuation allowance for your deferred tax assets? I know you said it's uncertain, but what would be the earliest point at which you would, could possibly do that?

The earliest point would be the third quarter of this year. And, I would say, right now, it's something that is on the radar screen for us and outside auditors were looking at it very closely. And, that would be the earliest.

And that would put you at a GAAP tax rate closer to a high-30's statutory rate at that point?

No. It's the other way around. We would be booking a credit to the taxes.

Oh. Yes.

Yeah. So, we would end up with many millions of dollars credit income tax provisions. So, it would cause our reported earnings per share to skyrocket. And, obviously, we'll have to explain that very carefully so that people understand what's going on there.

I didn't hear anything that you broke up. All I heard was earnings per share and skyrocket.

Yeah.

Last question - do you still feel that you took the proper allowance against the long-term receivable in Minnesota last quarter as you kind of look back at that?

Yeah. I can answer that Matt. I think it's real close. We have not yet concluded our negotiation with that facility and the Port Authority up in St. Paul. We're continuing to operate the facility. We had the opportunity to walk away from it if we wanted to, but because we operate there are other facilities in that mix.

We're negotiating long-term extensions of those deals against our staying at this one location through the end of our stated term, which is next spring. Depending on how those negotiations go on the extensions of the others, we may take a rather slight additional valuation allowance to operate that facility through May, but only if the extension of the other facility is enabling to us on a net profit basis.

Okay. Thanks. And, congratulations on the quarter.

Thank you.

Thanks Matt.

And there are no further questions at this time. I would like to turn it back to Mr. Wilhelm for any closing comments.

Thanks Alicia. No real closing comments other than thank you for taking the time to listen to our call today, and thank you for your continued interest in our company. And, we'll talk to you next quarter.

Bye now.