SP Plus Corp (SP) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2006 Standard Parking Earnings Conference call. My name is Tanya and I'll be your operator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Marc Baumann, Chief Financial Officer of Standard Parking. Please proceed sir.

Thank you, Tanya, and good morning everybody. As Tanya just said, I'm Marc Baumann, Chief Financial Officer of Standard Parking and I'm also your primary Investor Relations contact. Welcome to our call for the fourth quarter and fiscal 2006.

I hope you've had a chance to review our earnings release which went out after the market closed yesterday. Right now, we expect to file our 10-K sometime tomorrow.

We'll begin our call today with a brief overview of the year by Jim Wilhelm, our President and Chief Executive Officer. And then I'll give you some more details on the financials. After that, as Tanya mentioned, we'll open the call up for a Q&A session. During the call, we'll make some statements that will be considered forward-looking regarding the Company's strategy, operations, and financial performance.

These 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 earnings release, which is incorporated by reference for purposes of this call.

I would 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 Web site at standardparking.com and also at earnings.com. There will be a replay available on either Web sites for 30 days after the call.

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

Thanks, Marc. Good morning everyone and thank you for being with us this morning. The Company enjoyed a very, very solid fourth quarter and year-end result, and we will talk about all of the numbers that go along with that in a minute and some things I will talk about and certainly in the detail that Marc will provide, but before we do that I wanted to acknowledge our people.

We are in a business not about numbers, but we are in a business about people and relationships and executing the service product. And our results are very, very solid, but that would not be without the effort of the 12,000 people that make our mission happen everyday.

I am very, very fortunate to be surrounded by good people from the Board members that serve above me to the people that operate at our frontline with our Parking customers every day and for us to come in quarter after quarter and year after year and talk about our numbers and not acknowledge our people is a mistake and I want to make sure that we did that this time.

That being said, we did have a very solid year. We performed as a business and as a team to the business model that we have talked about and explained to the market over the last several years. You will hear us talk today at length about our tax situation and changes that were made in our tax situation in order to get the proper accruals in line for the NOLs that we haven't had in place.

So, you will also hear us talk today in apples to apples comparisons about pre-tax income. We think that that's a measure during this period that really highlights the growth and change we have had in the business on a quarter-to-quarter and year-over-year basis and we will spend some time on that today.

Our pre-tax income, which excludes the impact of the large income tax benefit I alluded to increased by 42% in 2006 to $20.9 million. Our earnings per share, which reflects that benefit, was $3.49 this year versus $1.39 a year ago.

Excluding the impact of the tax benefits in both years, earnings per share would have increased by 34% to $1.76 in 2006. The Company continues to generate significant free cash flow, as we announced last night, totaling almost $27 million in 2006 or roughly the same amount we generated in 2005.

We were the beneficiary in the fourth quarter of $300,000 of the first in net insurance payments related to Hurricane Katrina in 2006. Excluding the insurance proceeds received, the New Orleans operation is continuing its recovery and generated $500,000 in gross profit in 2006.

Our insurance claim is proceeding along. We anticipate making temporary settlements along the way, much like the first funds that flowed in at the end of 2006. A lot of those funds were for property-related losses, which are balance sheet items, but as I mentioned we had $300,000 in proceeds related to our business interruption insurance, which did impact our bottom line.

The claim -- the total amount of the claim in New Orleans for business interruption is around $3 million and we will proceed throughout the year working towards the ultimate settlement of that deal.

The numbers that Marc and I will talk about today regarding our projections for 2007, whether on a cash or earnings per share basis, do not reflect any additional settlement of the Katrina claim occurring this year. So, anything we would do would be over and above the base business that we are forecasting today. New Orleans does continue to recover.

Our contracts with the municipality of New Orleans to operate their parking meters continues to grow and is beginning to thrive somewhat. The one operation that I talk about almost every quarter that is holding down New Orleans reporting earnings in a pre-Katrina basis remains the Tulane Medical School in New Orleans where in that garage, where we have a lease that is not fully recovered and we do not expect it will anytime soon.

Excluding New Orleans, same-store location revenue increased by almost 7% primarily due to increases in short-term and monthly parking revenue and additional fees from reverse management location and our ancillary services; excluding New Orleans, same-location gross profit increased by 5%.

At the Bradley Hartford Airport, we recorded $600,000 in net deficiency payments and $300,000 in premium and interest income during 2006 as compared with $1.5 million in deficiency repayments and the recording of $800,000 in premium and interest in 2005. However, approximately $500,000 of the 2005 settle up was actually received in early 2006.

What I am saying is, on a year-over-year basis, now that operation has stabilized somewhat and we are receiving net guarantor payments, deficiency payments, back to us on about the same basis. The 2005 number that I quoted was inflated by the fact that we had a one-time revenue gain on some advertising that was sold at the airport that flowed through our operation. But, generally, we are generating repayments somewhere in the neighborhood of $1 million or so and anticipate doing so.

Business at the airport is okay. Enplanements are off at Bradley Hartford, about 5 or 6% on a year-over-year basis and that's kind of across the board with all carriers, but certainly the parking operation is very, very busy. I don't know that we will be making any significant changes in parking rates, but again the operation is now sustaining itself and feeding back to us the guarantor payments that we made as the bottom line.

We have not anticipated bringing any of the profits that we are generating through our management contract and management fees in 2007. So, again, the numbers that we are forecasting do not include any revenue from Bradley for management fees that we accrued over the years until this deficiency payment situation begins to settle down and the receivable goes away.

We are proud to report that we maintained our 91% location retention rate during 2006. That is a key metric that I look at almost every week and our location count has increased to 1978 from 1906 at the same time in December of 2005.

That is a net gain of 72 net locations added during the year. Some highlights of contracts we added just in the fourth quarter were at the El Paso Airport where we will assume management of that facility to our air portfolio. We won several nice arenas, special event venues, one in Chicago at the Sears -- suburban Chicago at the Sears Center; in downtown Kansas City at Kansas City Live!, and the Centroplex in Orlando, in keeping with our marketing push and sales push in the area of special events and stadium venues.

On the health side, we added the MetroHealth System in Cleveland, Ohio, where we will operate four garages and two surface lots and a valet on top of our already very, very busy campus activity with the Cleveland Clinic and several Case Western University and others in Cleveland.

The gains that we have made in the fourth quarter and throughout the year were somewhat mitigated by the fact that the Company lost a long-standing operation we had here in Chicago for the Grant Park and Monroe Street underground garages. Those garages were in essence sold -- to be privatized and generating additional tax revenue and the ability for the city to spend dollars in other ways.

Morgan Stanley bought those parking garages from the city or leased them for a 99-year period and we were not part of the team that was successful. We were on some other bidder's teams, but not the bid that was ultimately successful. So, we lost those in the fourth quarter.

In summary for 2007, we will continue a very disciplined mindful approach to our business model, which goes really in three directions. One is the continued growth of our organic business, all of the growth that I have talked about in 2006 was on the organic side of our business model with the exception of the acquisition we did of Sound Parking in Seattle at the end of 2005, all of our growth in 2006 was organic.

We continue to want to grow on the organic side according to the models we have shared with you in the past by maximizing our retention rate, offering a superior product to our clients that maximizes those clients wanting to keep us on a contract to contract period.

We will continue to push same-store growth whether it is via the inflation of our leases or our management contracts or our ability to provide ancillary services to our existing client base, and we will also hope to continue to have a very positive plus, minus ratio on wins of business versus those we lose. So, we think that we will continue very solidly on the organic growth side of the business.

We will also -- I think you will see us be more aggressive in 2007 on the non-organic side. We want to find partners who would want to be part of our team and part of our story into the future and we are pursuing acquiring new partners and new companies on an active basis, kicking off 2007. And then the final piece of the triangle, I think you will see us continue to use our deployment of capital wisely and continue to build the technology systems that support our back office.

We are significantly down line now with projects to improve everything we do from a support perspective, from the way we gather time and time and attendance materials from our field operations to the way we bill and manage and control our monthly parking invoicing process and matching new technologies of electronic fund transfer payment over our Web site and managing very, very complicated lease arrangements in some of our office buildings and applications by improving our product to make sure it is the number one product in our industry. And those initiatives, as I said, are well underway and will continue into 2007.

With that, I will turn the call back over to Marc, so that he can lead you through a more detailed discussion of the quarterly and full-year financial performance and then I will wrap up with reasserting our guidance for 2007 after that.

Thanks, Jim, and now that you have had an overview, I will give you some details on the fourth quarter. Total revenue in the fourth quarter, excluding reimbursement of management contract expenses, grew 6% to 65.7 million from 62 million a year ago, primarily due to increased fees from same location management contracts.

Gross profit in the fourth quarter was relatively flat compared with the prior year, but in the prior year, we recorded 1.6 million in favorable insurance loss experience adjustments relating to prior quarters of 2005. So, obviously, we got to the end of 2006, we trued up our insurance and that resulted in a big adjustment in the fourth quarter that did not recur in 2006.

Also affecting the year-over-year comparison is $200,000 from the acquisition of the Sound Parking portfolio in '06 as well as the recovery in New Orleans since the August 2005 hurricane. The underlying New Orleans operation recorded $700,000 more in gross profit in the fourth quarter of '06 compared to the fourth quarter of '05.

In addition, as Jim mentioned, we recognized $300,000 in net insurance proceeds from the initial payment on the Katrina claim. On the same location basis, excluding New Orleans, gross profit increased by 5% during the fourth quarter of '06, which was the same as the full-year number that Jim mentioned a few minutes ago.

G&A expenses for the fourth quarter of '06 decreased by almost $600,000 or 5.4% from the prior year. Affecting the year-over-year comparison, G&A expense in the fourth quarter of '05 included $0.5 million of due diligence cost for acquisitions, which obviously did not recur in the fourth quarter of '06.

However, the adoption of FAS 123R in 2006 resulted in $100,000 of non-cash stock compensation expense in the fourth quarter of '06, that obviously we didn't record in the fourth quarter of 2005.

Decreases in G&A expense and depreciation and amortization expense contributed to an increase in operating income of 18% over the fourth quarter of '05, which when coupled with the decrease in net interest expense of 7% produced pre-tax income of 6.1 million $0.60 a share for the fourth quarter of '06, an increase of 27% over the same period of the prior year.

In the fourth quarter of '06, as Jim mentioned, we reversed the valuation allowance for deferred tax assets and recognized a $17.8 million net income tax benefit during the quarter.

Going forward, as we said in the release, we are expecting to report effective tax rate of 40%, although our cash taxes are expected to remain at approximately 5% for 2007 as we continue to utilize our net operating loss carryforwards.

As a result of the $17.8 million net income tax benefit related to the reversal of the valuation allowance that I just mentioned, net income for the fourth quarter was $23.1 million or $2.28 per share versus $4.1 million or $0.39 a share a year ago. Excluding the tax benefit, earnings per share was $0.52 in the fourth quarter of '06, an increase of 33% on last year for the quarter.

In terms of free cash flow, the Company generated 6.3 million of free cash flow in the fourth quarter of '06 compared to 9.2 million in the fourth quarter of '05. Obviously, there is a drop here and it's really due to some unusual fluctuations we had in working capital in 2005 and obviously those did not recur. The Company generates positive working capital on an ongoing basis because of our business model, but now we have I think reverted to a more normal pattern.

Free cash flow, along with additional borrowings on the senior credit facility, was used to complete $14 million of stock repurchases during the fourth quarter of '06, where we repurchased approximately 370,000 shares at an average price of approximately $38. We purchased our shares in the open market and we also purchased on a pro rata basis from our majority shareholder at the same price as we paid in the open market transactions.

Touching briefly on full-year results, gross profit in 2006 increased by almost 9% over 2005 to 75.9 million from 69.8 million a year ago. The Sound Parking portfolio that was acquired at the beginning of '06 generated 800,000 in gross profit. Also contributing to the year-over-year increase was New Orleans operation reporting 700,000 more in gross profit in '06 than in '05.

This was primarily due to the receipt of the 300,000 in net insurance proceeds in '06 and also in '05, we reported a $500,000 insurance deductible expense. Excluding those items, the underlying New Orleans operation generated 200,000 less in gross profit in '06 as compared to '05, but it's clearly trending in the right direction with fourth quarter '06 reporting the best gross profit performance since the hurricane. So, clearly, we see that market continuing to move in a positive direction.

G&A expenses for 2006 increased 6% to 41.2 million from 38.9 million in '05. The increase in G&A is partially attributable to ongoing G&A associated with Sound Parking of $600,000 and non-cash stock compensation expense of $500,000 due to the adoption of FAS 123R in '06.

Excluding these items, G&A increased 3% year-over-year. G&A as a percent of gross profit decreased from 56% in '05 to 54% in '06. We expect this ratio to continue to improve toward our ultimate goal of achieving a G&A as a percentage of gross profit of 50% or less.

Operating income for 2006 increased almost 23% to 29 million from 23.6 million in '05. Last year, we had a $900,000 valuation allowance relating to a contract in Minnesota that's now terminated. Even taking that into account, operating income for '06 would have increased 18% over '05. Pre-tax income was 20.9 million in '06, an increase of 42% over the same period last year.

Due to the reversal of the valuation allowance for deferred tax assets that I previously mentioned, 2006's income tax was a benefit of 14.9 million compared with a benefit of $14,000 last year.

2006's income tax benefit included a 17.8 million [company corrected following the call] net benefit due to the reversal of the valuation allowance. In '05, the comparable net benefit was $900,000. Resulting net income for '06 was 35.8 million or 3.49 a share versus 14.7 million or $1.39 per share for the year earlier period.

Excluding the valuation allowance for deferred tax assets from both years' results, net income would have grown 30% to 18 million in '06 from 13.8 million in '05. But even taking into account the valuation allowance can be a bit confusing because we had a different effective rate in '06 versus '05 and that's why, as Jim mentioned, we really want you to focus on pre-tax income, which grew 42% in '06 versus '05.

In terms of free cash flow, the Company generated 26.6 million during '06, essentially the same amount as last year. 2006 free cash flow along with available cash was used to repay $9 million of outstanding debt during the year and complete 20 million of stock repurchases.

In 2006, the Company invested 2.2 million for capital expenditures compared with 4.8 million in '05, as certain planned '06 projects, will probably happen sometime in the early part of '07.

Over the last several years, the Company spent less than $5 million in year on capital expenditures and in most years, substantially less than that. As a result, depreciation and amortization expense has been steadily decreasing, as older assets are full depreciated. We expect that depreciation and amortization expense has probably gone about as low as it will go and do not expect to see D&A continue to decline at the rates that it has over the last few years.

With that, I will turn the call back over to Jim, who will provide some guidance details for '07.

Thanks, Marc. For 2007, we expect earnings per share in the range of $1.40 to $1.50. You will notice that that is significantly lower than 2006 EPS due to the tax valuation allowance we have been talking about this morning and its reversal that we recognized in 2006 and due to the fact that we will now report income taxes at the rate of approximately 40%.

On an apples-to-apples basis, this guidance represents at least 15% growth over 2006. Pre-tax income per share is expected to be in the range of $2.30 to $2.50, an increase of about 13% over 2006.

Our free cash flow is expected to remain in the range of 20 million to 25 million as we expect to increase our capital expenditures for the reasons Marc and I both alluded to earlier today by approximately $4 million compared to 2006. I should mention that the projections again that I am giving you this morning make no assumption for additional settling of the Hurricane Katrina business interruption claim.

It makes no provision for acquisitions that we might get done this year and as I said earlier, it does not allow for the bringing forward of any of the profitability that we have relative to the Hartford Bradley Airport. So, none of those three items are included in these projections.

As we announced and talked about this morning, the Board has approved the use of up to $20 million of our free cash flow to continue the stock repurchase program. We feel very confident that we are poised to achieve another real solid year in 2007.

That concludes our formal comments and presentation and I will turn the call back over to the operator to begin the question-and-answer session.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Tim McCue] with William Blair and Company. Please proceed.

Hi, it's Matt Litfin. Congratulations on a strong quarter.

Hi, Matt, good morning to you.

Yes, good morning.

Hi. So, I think you mentioned in the press release some level of disappointment about the number of acquisitions done in the year. And I wondered what are the main areas that you can improve on to -- to improve that percentage of successfully completed deals?

Well, I think that we -- there are a real active pipeline of deals that we are working on, Matt. I think what -- I was a little disappointed that we didn't pull the trigger on some of the those deals in '06, mostly due to the fact that we were focused on a couple of deals that were very, very involved and required almost all of the time of myself and the team of people here that works with me on acquisitions at the expense of doing some of the other ones.

And we didn't do -- did not pull the trigger for what I think is to be a bunch of good reasons on two of the major deals we looked at in '06 and therefore didn't close any, or work really, on many of the others that we are talking to now.

Yes, discipline is good. I wondered if you could comment on the pricing environment or asking price of sellers, was that a major impediment to getting some acquisitions done?

No, I think it was just time. I think that the market is beginning to value itself close to fair, with some activity with some recent transactions in the industry, and our valuation, there is recognition on pricing, which is a good starting point for negotiations.

So, no, I think that the environment is fair and most of the pricing that we are talking about or once we get into the negotiations are probably fair and along the lines of what we have been thinking will get deals done as we talk to you and others and the community and our business model.

Jim, you mentioned, changes in the industry and the obvious one would be a private equity owned Central Parking. Can you comment on whether that -- if that were to be completed, whether that's a potential positive for you? Is it a potential negative? Is it more of a neutral and just give us some color on why you believe that?

Yes. Given the fact that it was a financial buy rather than a strategic buy it appears, I can't anticipate any change. I don't know enough about the principles on the buy side to anticipate what their goals for the business might be.

I would assume that the -- the management team at Central for the most part would be retained and in place, and from Manny on down they are fierce competitors. And on the surface of things, I would expect no less in the form of competition for what we have seen lately from them. They are a real solid group and given the nature of the buyers, I would expect for the competition to remain just as fierce.

Yes, thanks for that candor. Last question is maybe for Marc. What gives you the confidence that you can achieve the goal of 50% G&A as a percent of gross profit in the long-term, what are some of the initiatives that you have driving this and is there something we could even see in '07 here?

Well, I don't think you will see us getting to it in '07. It is a long-term goal. Clearly, as Jim mentioned, we are investing in technology and I think that's going to be the key to moderating the growth or even getting reductions in the growth of our G&A. Clearly, we have talked over the last few years about adding in a business development team and other key folks to help our business grow and that's behind us now.

So, we would expect G&A to grow at a moderate rate and certainly below the rate that gross profit grows. But, we are actively investing in technology initiatives in the business to enable us to reengineer some of our support processes and hopefully, take cost out of the business while delivering a better product to the organization and to our clients.

If I might add a little flavor or color to that, Matt, also -- at the same time, we are preparing for a growth cycle whether it's the organic rate that we talked about for the last -- that we have enjoyed the last couple of years or the more acquisition-related growth side. We also need to be preparing our support systems to enable us for that growth.

So, we have spent a lot of human resources and capital resources over the last couple of years anticipating that growth, as Marc alluded to and we have to make sure that the systems that we are designing anticipate bringing on new location counts every year either organically or through the acquisition process. So, that's the thrust of the effort on the back office side.

Thanks and congratulations on another strong quarter.

Thanks, Matt.

Thanks for joining us.

Your next question comes from the line of David Gold with Sidoti and Company. Please proceed.

Hi, good morning.

Hi, David.

Good morning.

I have just a couple of follow-up questions for you. One is, Jim, you spoke a little bit about retention [inaudible - audio gap] 91%. Curious, one if you can let us know that the 91% was about right for the fourth quarter, and two, if you can talk even it's just broadly on sort of targets as we go out, say 2007, 2008, obviously, higher but how much progress you think you can make there?

Well, to answer the first part of the question, the retention rate that we report is always a running LTM. So, it's our last 12 months. We don't break it down by quarter. Obviously, there are some movements within the quarters that might fluctuate positively or negatively to the LTM number, but that -- the number we do report, Dave, is on a LTM basis. And I didn't hear your second question.

Just part two, as far as sort of targets for let's say '07, '08 for where -- how quickly you think that retention can move up a little bit?

I think that we are -- we are kind of on track for what we have talked about the last few years, getting it from the mid-80s to the high-80s and now into the low-90s. I would like to think that we can get that -- continue to move that rate up to 92%, 93%, maybe 94%. Some of our my ops people will grab me by the head and shake me when I kind of push the organization to that level.

But, I think we can do better. I think that we are bringing additional products out to the market, whether those are technology based products or operating applications to the stores that will hopefully further enamor our clients with us over the next couple of years, and we will continue to push the organization. So, that gives, as you know now in studying us, one of the key metrics to our organic growth side.

Perfect, thanks a lot.

Okay. Thanks, David.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Bob Labick with CJS Securities. Please proceed.

Hi, it's actually Arnie Ursaner backing up Bob. Good morning.

Hey, Arnie, how are you?

I'm pretty good. How are you?

Good, thanks.

I guess you must get tired of hearing it, but congratulations on a very good quarter because it really was. A couple of questions I have is, obviously some of these have been addressed in some ways. You mentioned that you looked at two sizable deals last year that didn't get completed. Did they -- did they get completed with someone else, were they sold to someone else, or are they still out there perhaps in the "marketplace"?

Yes, I can't talk about it, Arnie. Obviously, when you get into that sort of -- that end of the business, there are a lots of confidentiality agreements in place, and I will leave it at that.

Okay. Again, it's a follow-up regarding Central Parking. Do you -- were you involved in that bidding process, and to the extent there are -- do you see opportunities for you to buy select locations?

Yes, sorry, I'm dodging you a little bit, but any comment I would make about any specific opportunity, obviously, could be found to be violative of some agreements we might have signed. So, I can't talk about them one by one.

Okay. We will give you something, maybe, a little easy to talk about. You have had a lot of creative thoughts, emerging technologies in the actual management of the parking garage. Perhaps you could freshen up a few things you are doing there and how that may differentiate you from of your competition?

Yes, there is lots of change going on out in the field as it relates to our business. Certainly, the migration first of all to pay-on-foot technologies where our customers are paying machines now, more robotic transactions than historically were in our business.

A large migration over to pay-on-foot or pay in the lane technologies, credit card in, credit card out, even being able to use your cell phone to beam e-commerce transactions in and out of our facility. Certainly, the rise of toll tags in a lot of the urban settings that we operate in, you would be familiar with it as EasyPass on the East Coast. We have iPass here in the Midwest and similar technologies around the country. We will be adapting those technologies so that they will be accepted form of payments in our garages as well. I think the whole area of e-commerce will radically change our business over the next several years.

And I have talked in the past, we have a subsidiary business within our Company, Advanced Parking Technologies, that enable our clients to convert what might be older technology to the new technologies where they get a significant return on their investment or ours if we decide to invest in it for the client by that automation, bringing in a more automated product.

Certainly, I think we will see things like the evolution of satellite radio and the traffic counting and control systems that come with satellite media will enable our customers more knowledge while they might be driving into the central business district. And hooking those sort of systems up with our billing systems in our individual facilities will enable our clients to derive benefit from satellite searches that they might not get if they are managing their own facilities or working with one of our competitors.

So, I could go on and on, because it's certainly the fun stuff that's happening, but certainly a radical change in the area of payment applications in the field and the use of e-commerce to drive our customer base.

Do you find having these technologies helps you win business?

Yes, I think because we were the first parking Company in America 20 years ago with the garage at Post Office Square in Boston to introduce pay-on-foot that we like to think that our product nears or might even be a little bit ahead of technology changes. And to the degree that we can bring those to our clients, I think is a differentiator for us, and certainly a value add.

Certainly, those forms of payment, automating facilities, might change the scope of the services that we offer our clients. But they still need to be maintained, they need to be secured, revenue needs to be accounted for, leases need to be interpreted and then billed appropriately, transportation services need to be provided on our campus activities, and still lots of people need to be provided in our special event and our wider-based venue opportunities.

So, we see technology in our ability to manage and predict emerging technologies as a value add that we bring to our clients.

Quick question for Jim, if I may, total NOL -- for Marc, I'm sorry, total NOLs remaining please?

It's about 16 -- I would say about $16 million.

Okay. Two more real quick ones, for Jim if I can, Jim, can you comment, or maybe Marc, on your desired capital structure? Obviously, you have tremendous flexibility, you have great business with recurring revenue, what is your desired capital structure, if you will?

Well, that's a good question, Arnie, and we have talked about that a few times now last few quarters. We worked real hard as a Board last year to begin to answer that for us. Given estimates of free cash flow, what are the Company's ambitions, certainly we are ambitious to return value to our shareholders and trying to find a way to do that with that free cash flow, either by growing the Company or returning it directly is at the top of the chart.

So, we spent last summer having a look and getting some help at having a look with what is our true beta, what is our cost of capital, now that we have restructured our bank agreements or our debt from expensive bond capital down to the bank level, what is the cost of our debt, what's a comfortable level of debt for us. And I think in our last several releases, we have alluded to the fact that we think we have our debt level where they would like to be in a non-acquisition realm.

So, to the degree now that we have debt at about two times, we think that's a very, very comfortable level for us. And so keeping it there is a good idea and then trying to get the additional cash flow either back to the shareholders as we have been doing it with repurchases or at some point, other medium for delivery of value back to the shareholders could be an opportunity.

But, we have -- we think we have adequate room that, if we got into a sizable acquisition, because some -- most of the acquisitions that we are looking at are probably -- can be done within either our existing agreements or from our existing cash flows.

But, if there was an opportunity for us from a much larger deal, we think we could ratchet up debt on sort of the -- a rollercoaster basis, we would ratchet up through the acquisition and then enjoy the earnings and get it back down again, that we have enough room to enable us almost any size deal that we would contemplate. So, it was a rather long-winded answer to your question, but I think we have our capital structure at the moment where we want it for the environment that we are in.

If I can ask one final question, Equity Office Properties is going through a merger process, can you briefly comment on how exposed you are to them and to the extent it does go to someone else, how it might change your business, either positive or negative in your view?

Yes, it doesn't change a whole lot. The amount of facilities we have with Equity is not significant, a couple of here and there on both coasts. Blackstone is buying but they are selling just as fast. So, we are kind of waiting for the smoke to clear on which assets Blackstone will retain from the EOP portfolio and which they'll hold on to.

Certainly, we are working with their due diligence people that are coming on site to these properties to help them understand the parking situation, and hopefully they will recognize our product as superior to our competitors and will retain us at the facilities we have or add new facilities to our portfolio as they are -- as they begin their transition.

So, obviously, we have been talking to their advance people already and we enjoy a good relationship with those existing EOP people on the ground in those cities where we serve.

Thank you very much.

Surely.

Thanks, Arnie.

And your final question comes from the line Rob Amman with RK Capital. Please proceed.

Good morning and congratulations.

Thanks, Rob.

Good morning. Hi, Rob.

A little color on the CapEx spending over the course of '07, should we expect that $6 million plus to be a little more front-end loaded?

Not necessarily, Rob. Mostly, our CapEx goes for our own infrastructure and investments in technology. We have got a number of ongoing projects. And so, I think it's very likely that it will be something you will see happen over the course of '07, rather than being front loaded.

Okay. Any kind of color you can give us on the types of CapEx spending projects that originally were planned in '06, that are kind of moving into '07 and --?

Mostly, it's really on the technology front. The two big projects we have now are beginning a long-term migration to Oracle as our technology platform, and in that we have the first phases of that project underway and as those come online -- start to come online in '07, we will begin to move on to further phases and that's something that we expect to happen over several years.

As Jim mentioned, another key area of focus for us is time and attendance, capturing that data and getting it into our systems in a more efficient manner than we have historically. That we have a project going on that's in a pilot stage and we are hopeful that that project can get green-lighted and go to a rollout stage during 2007. So, those are our two major technology investments.

Obviously, with 88% of our contracts being management contracts, the capital requirements at the parking facility are typically the client's. Occasionally, we will arrange operating leases for them to help them finance (equipment) acquisitions or capital leases. But, by and large, we aren't putting capital out there. So, our capital spend is really on our own business to try to get us positioned to grow, as Jim discussed.

Okay. Can you talk a little bit about the trend within the management fee revenues from those management contracts? Are those increasing in proportion?

No, they are not. I mean, if anything, I think it's going the other way. Certain of our clients are beginning to determine that they don't need that structure and so, that's changing. We are also seeing some clients who had lease structures determine that that structure isn't what they want and so, I think you will continue to see a trend toward regular management contracts.

Okay, great. And then, just want to -- try to get a sense for how much of the growth in '07 is a function of leveraging costs versus gross profit dollar growth? I mean, should we expect a similar same-store gross profit growth of 5% as kind of a baseline to think of for '07?

We don't really guide on those lines, but I think, Rob, you have to look back at our long-term trend. And if you take the last five years, you will see gross profit grow at around 8% on a compounded basis. G&A grows at a slower rate. And so, the bottom line, whatever that is, operating income or pretax income obviously has been in the double digits. That's the business model that we have.

Obviously, from our point of view, we would like to keep going down that track and continue to have those things happen for us. Our business model is not changing for '07 from '06. But, obviously, various things can influence how fast a particular line might grow like gross profit or G&A and that's why we give guidance on the bottom line.

Okay, great. And then, if you -- can you talk a little bit about, maybe for Jim, just the seasonality of profitability throughout the course of a typical year, whatever typical year is, but is the December quarter typically a significantly stronger quarter with respect to profitability?

I think, that measuring profitability obviously by the bottom line, now that we have eliminated the semi-annual payments we had to make on our bonds and our debt repayment structures more flattened, we have seen that the business itself on a quarter-to-quarter basis is relatively flat.

If there is any seasonality to the business at all, it's usually down first quarter compared to the other three. That's primarily driven by the transportation side of our industry, hotel and airport traffic is down right after the holiday season through about this time of the year.

And so, when we look at ourselves internally for projection purposes, usually the first quarter and if you look at our track in terms of our reporting, the first quarter plus and minus any sort of non-recurring one-time item, our first quarter is usually the lowest and then pretty average or pretty flat for the remaining three.

Okay. That makes sense. And pretax earnings per share this year was -- in the fourth quarter was $0.60 roughly, so you annualize it that basically gets you to midpoint in your full year '07 guidance.

That's an interesting observation. The way we develop our guidance is to do our own bottom up budget facility by facility. So, we form our own view about how each facility that we have in our portfolio is going to perform, what are our G&A costs, and that's our total. And once we see what our own forecast is for the year, then we derive our guidance based on that.

And I wouldn't be surprised if that's the case, Rob. I mean, it's usually the fourth quarter for a variety of reasons is the best one. So, again, if you are using then just the fourth quarter as the average for the -- our calendar fiscal, that would make sense to me.

Okay, great. Congratulations, thank you.

Thanks.

Thank you.

And there are no further questions in the queue at this time. I would like to turn the call back over to Mr. Jim Wilhelm for closing remarks.

Thank you, Tanya. I just want to thank everybody for your interest in our Company and joining us on the call this morning, and bid you all a good day. Thank you.

Thank you.

This concludes the presentation. You may now disconnect and have a great day.