CoreCivic Inc (CXW) 2003 Q4 法說會逐字稿

Welcome, callers, to Corrections Corporation of America fourth-quarter and full-year 2003 earnings conference call. Let me remind today's listeners that this conference call contains statements that are forward-looking as defined within the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made.

Factors that could cause operating and financial results to differ are described in the company's form 10-K as well as in other documents filed with the Securities and Exchange Commission. These factors include, but are not limited to, the growth of the private corrections and detention industry, the company's ability to obtain and maintain facility management contracts, and general economic market conditions. The company does not undertake any obligation to publicly release the result of any revisions to forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Participating in today's call will be the company's Chairman of the Board, William Andrews; President and Chief Executive Officer John Ferguson; and its Chief Financial Officer, Irv Lingo. I would now like to turn the conference over to Mr. Andrews.

Good afternoon, everyone, and welcome to our earnings release call. We are going to report today on our fourth quarter of 2003 and our year-end results. And to do that, I am going to turn this over at this point to Irv Lingo, our Chief Financial Officer.

Thank you, Bill. We are clearly pleased with the financial results for the fourth quarter, which include EPS after special items increasing 58 percent, revenues are up 11 percent, operating income adjusted for special items was up 25 percent, and adjusted EBITDA increased 19 percent. In addition we continue to register improvement in a number of other areas such as occupancy, margins, and debt ratios.

Turning to earnings for the three months ended December 31, 2003, the company reported net income available to common shareholders of $78.8 million or $2.01 per diluted share. That is compared to net income of $37.9 million or $1.14 per diluted share in the prior year. There were several special items affecting both quarters, as indicated in our press release. In particular, the reversal of a tax valuation allowance that I will discuss shortly. Excluding the effects of these special items net income for the quarter amounted to $24.5 million or 63 cents per diluted share; and that was compared to $12.2 million or 40 cents per share for the same period last year. That again represents an increase of 58 percent.

Operating income for the fourth quarter of 2003 increased to $44.1 million as compared with $35.4 million after special items, again, for the fourth quarter of 2002. Excluding special items, EBITDA for the fourth quarter increased to 58.1 million, and that was compared with 48.8 million for the fourth quarter of last year. The higher EBITDA levels were the result of strong same-store performance, with same-store EBITDA increasing approximately 12 percent over the prior year. And also the effects of our McRae and Crowley facilities, which were new facilities in 2003, and were not in last year's numbers.

Adjusted free cash flow, which is scheduled out in the press release, amounted to $27.4 million as compared with $23.1 million for the year earlier period. Although operating income for the quarter was up over $8.7 million from the previous year, which clearly indicates higher cash flow, the amount of that increase was reduced by higher CAPEX charges for the quarter. Maintenance CAPEX for the quarter amounted to $13.2 million versus $3.4 million last year. And the split on that is about $8.9 million in IT and $4.3 million in maintenance CAPEX for our facilities.

As we discussed on a last call, IT expenditures relate to several major initiatives that the company is undertaking encompassing the automation of our inmate management and inmate medical systems, human resources including payroll, training, and benefits, and the revamping of our GL (ph) systems. I will provide additional information on future CAPEX spending levels in just a few moments.

Before turning to operations, I would like to address the reversal of our tax valuation allowances. As we discussed in several recent earnings calls, given the company's history of taxable losses, we were required to fully reserve the deferred tax assets that arose substantially from our net operating losses, until such time as we could demonstrate that we would realize this asset, primarily by proving that we could generate sufficient taxable income to ultimately realize the asset. As we are now consistently generating taxable income, we are required to remove this reserve, and that substantially gave rise to that non-cash credit to income in Q4 of 54.3 million.

Beginning in the first quarter of this year, of '04, we will begin accruing a GAAP tax provision, which we currently estimate be at a rate of approximately 40 percent. Our 2004 numbers therefore will be fully taxed. In order to aid comparisons between 2003 and 2004, we provided with the earnings release an illustration reflecting results for 2003 by quarter and for the full year on a fully-taxed basis. Based on this schedule, fully-taxed EPS for 2003 amounted to $1.23. Again this is strictly an illustration. It is not GAAP. But we do believe it will serve as a useful tool to investors over the course of 2004 when trying to compare apples-to-apples.

With respect to operations, consolidated revenues for the quarter totaled $268.9 million. That's up from $242 million last year. That is an 11.1 percent increase over last year's fourth quarter. There were 5.2 million compensated man-days in the fourth quarter of 2003 versus 4.7 million compensated man-days in 2002's fourth quarter. Average portfolio occupancy increased from 90.9 percent to 95.4 percent. Revenue per man-day increased to $51.07, and that is versus $50.13 last year.

Operating costs actually decreased from last year's fourth quarter, down to $37.68 a man-day from $38.04 a man-day last year. Fixed costs actually increased slightly to $27.74 per man-day versus $27.49 per man-day last year; that is an increase of 25 cents. Salaries and benefits, which make up 87 percent of fixed costs and about 64 or 65 percent of our total costs, were up 45 cents a man-day and that is only 2 percent. Like every company we experience increases in wage and benefit costs, but we're having some measure of success in controlling these costs, particularly in the area of turnover.

In addition as we raise our occupancy levels we are of course better able to leverage our fixed costs over a greater number of inmates. The increase in salaries was partially offset by decreases in other fixed costs, primarily utilities. So (inaudible) fixed-cost perspective we did pretty well in the quarter.

Variable costs actually declined to $9.94 per day from $10.55 last year. As in previous quarters we continue to show significant improvement in the inmate food and inmate medical areas, primarily from outsourcing our foodservice and renegotiating certain medical contracts. In addition we negotiated a more favorable pharmaceutical contract and continue to reduce our reliance on outsourced nursing. Again, many of the things we have talked about in previous quarters, but we are continuing to see good results with respect to variable costs also.

The end result was that margins actually increased $1.30 a day to $13.39. That is versus $12.09 last year. Our margin percentage was up over 26 percent, at 26.2 percent; that is up from 24.1 percent last year.

G&A expenses increased to $11.1 million from $9.2 million last year after special items. As I pointed out in the last several calls, the increases in G&A are the result of additional headquarters personnel we have added in the areas of operations, business development, and IT. The improvements that we're seeing in occupancy and the improvements that we're seeing in our margins result to a large degree from these investments. In 2004 we anticipate a G&A run rate of between 45 and $46 million.

So, overall another strong quarter operationally with operating margins exceeding 25 present and positive trends in most other areas of our business. With that, I will turn to our outlook. I will start by saying that I know I'm starting to sound a little bit like a broken record, but as in prior calls I want to emphasize the positive dynamics of our business, including significant prison overcrowding, ongoing increases in populations, and little in the way of new prison construction. John in just a minute here is going to give our business development report, which will clearly demonstrate the positive impact of this environment on our business.

I also believe all of our listeners here have heard me speak many times of the difficulty that we have in pinning down a precise timing of actions on the part of our customer. When will an RFP be issued? When there will be a reply to our response to an RFP? Etc. That environment continues to exist, which makes issuing guidance difficult.

Given this particular element of our business, and again looking at the very positive business environment, I have often said that looking out 24 months is in some ways easier than looking out 12 months. Investors with the patience to take a longer-term view should be rewarded. So with all those caveats, let me move to the outlook.

For the first quarter the company expects fully diluted earnings per share to be in the range of 33 to 35 cents, and full-year EPS to be in the range of $1.52 to $1.58. During 2004 we expect to invest approximately $124.7 million in capital expenditures, consisting of approximately 78.8 million in previously announced prison construction and expansions; $25.2 million in maintenance capital expenditures; and approximately 20.7 million in information technology. With that I will turn the call over to John, who will go over the business development outlook.

Okay, the first thing I want to do is to discuss some of the highlights of some activity of note that has taken place since our last conference call or since September 30. Of significance and an item that we reported in November 2003 was the award of six new contracts with the Texas Department of Criminal Justice. We were very pleased. That was a very competitive competition, and we ended up winning seven of nine bids.

In January we announced a new contract with the state of Vermont. This was the first time Vermont has partnered with private corrections and we were very pleased to have them as a customer. On January 9, we reported that we had a new contract with the U.S. Marshals Service for up to 800 beds at our Leavenworth Detention Center; and due to this contract we are expanding that facility by 256 beds.

Also at that same time we reported that we had decided to expand our Florence Correctional Center, which is located in Florence, Arizona, 216 beds. That takes that facility from 1,600 beds to 1,816. As we have continually reported, the customers that we have in that facility are two states, Hawaii and Alaska, as well as the Bureau of Immigration and Customs Enforcement and the United States Marshals Service.

Also in January we reported that we had been awarded a continuation of two contracts at our 2000-bed facility in Mineral Wells, Texas, and our 200-bed facility in Bridgeport, Texas. We also saw the beginning of the contracting that will evolve as we work with the state of Florida to expand our Lake City facility, a youthful offenders facility we manage for the state of Florida. We will be expanding that from 350 beds to right at 900, which should be opening some time in February of 2005.

Also of note was that we received notice from the state of Alabama that they were opening up or making available bed capacity within their state and would no longer need our Tallahatchie, Mississippi, facility and have begin to return inmates to Alabama. We expect them all to have left the facility by March 11.

And then as we reported on almost every conference call that Wisconsin is opening up capacity within their state, and we have seen since September 30 a decline of our inmate population that we were taking care of for the state of Wisconsin by a little over 500 inmates.

So what we've seen since September 30 is our inmate population grow from 54,724 inmates to 62,177 at midnight on January 31, or a growth of 7,453. Of course a good percentage of those were the new inmates with the new contracts with the Texas Department of Criminal Justice. Of note in addition to that is that we have seen a population decline of some 700 Wisconsin inmates that I just reported; and by January 31 we had seen the Alabama population decline by 200. On the positive side we have seen almost a 1600-bed growth with the U.S. Marshals Service and the Immigration and Customs Enforcement.

If we take a snapshot of the available beds that CCA currently has for potential new contracts with state, federal customers, as we have historically reported with you, we have some 1,000 beds available in our diamondback facility in Oklahoma. That is where we housed a fair amount of Wisconsin inmates; and as we reported, those are returning to Wisconsin. We continue to still have beds available in our Northeast Ohio facility; that is 2,000. In North Fork, Oklahoma, a facility that we reported idling several months ago, it is 1,440. And currently we did see the decline of some county inmates in our T. Don Hutto facility in Texas, in Taylor, Texas, leaving an availability of 350 beds. So all told those represent a little over 4,800 beds.

And of course we have announced that we're bringing online hopefully sometime late summer 1,524 beds with our facility in Stewart County, Georgia. And as has been reported, if nothing should change by the end of March, Tallahatchie again will be available, which is another 1,000 beds. So all told the company is in a position where it has current bed availability to meet demands of a little over 7,000 beds.

So let's talk about what the business opportunity is that are out there. In the last two conference call I have expressed that the fundamentals and the dynamics that we're seeing in many states and at the federal corrections systems really are such that this inventory that I just described, this bed availability, I think puts us in a very strong and competitive situation.

I said that we're seeing a significant current bed need, most of which is predisposed to beds that are currently available or being made available very soon. In fact I described that there were six states that we were in discussions with that would be new to outsourcing their correctional management needs, and had some 6,000 to 7,000 beds. Of those six states that I was referring to then, one of them is Vermont, and of course we announced a contract that we completed with Vermont the first of January. One of the states was Connecticut, and I'm happy to report that Connecticut last week released an RFP for housing of up to 2,500 inmates in an out-of-state facility.

The state of Arizona just recently, just this past week released an RFP for the housing of 2,100 inmates outside of the state of Arizona. Just last week the state of New Hampshire issued an RFP for 1,000 beds for the housing of inmates out-of-state. And just yesterday the state of Minnesota was holding legislative hearings on their consideration of how to enable the private sector to provide services to the state of Minnesota.

So five of those six states are moving in the direction or have now made decisions to procure available bed space to meet their overcrowding condition. In addition to that, Kansas is also in legislative hearings on how to deal with their overcrowding condition. Of course Kansas has been a customer of ours in the past. And then I mentioned and it is still the current environment that 10 of our state customers who currently do business with us have either a current or developing bed need.

I mentioned that we were expanding the facility at Lake City, Florida, that we manage for the state of Florida. As we have discussed at the last call, there was a bid out for a new contract beginning June 30, 2004, for two of the facilities that we managed in Bay County and Gadsden County, as well as one that G.O. (ph) manages. Since then, the state of Florida has elected to cancel those bids due to some problems with the procurement process; and they are in discussions about reissuing them, but at this moment they have not moved forward. So we don't know when we would see the state of Florida initiate a procurement process again for continued management of those facilities.

We are currently in discussions with the state of Mississippi on reopening the Delta correctional facility, which is in Greenwood, Mississippi, a facility that we of course lost the contract because the prior governor of Mississippi decided that he did not need those beds. Well, right now it appears that the state of Mississippi is deciding that they feel that some of their Parchment state-run facility is not in the condition that it needs to be and are looking for other beds. So we feel that we should be able to work something out there.

Also of note, the legislature and the governor, the legislature passed and the governor signed a bill which expands the custody level of the inmates that can be housed at the Tallahatchie facility. This will expand our opportunities, and some of the out-of-state customers that we currently have who have beds needs, as well as some future customers. So we feel that the Tallahatchie facility, the opportunities to fill it fairly quickly after Alabama leaves, is pretty good.

Before I leave the states, I do want to make a comment of one rapidly developing situation that I think is of significant note to not only CCA but the industry. That is what it is taking place in the state of California. Two things. One is that Governor Schwarzenegger has promised reform and not business as usual in the state of California. Specifically he has called for a commission of experts to study the state prison system and recommend ways to reform it. That he has become gravely concerned about the internal operations of the California prison system. Simultaneously with his concern about the way the system operates, its performance, in his budget presentation he challenged officials and the private sector to show how outsourcing can save money and maintain increased quality of services within the state.

We think those two things are very profound when it comes to the opportunities that we now sense are starting to develop in the largest correctional system in the country. In fact Florida's correctional system houses over 163,000 inmates, but yet only has design capacity for under 90,000. So in fact in the non-community corrections it is running at 195 percent capacity and has one of the highest costs per day. So we feel that a state that has heretofore been fairly difficult for us to operate in, and one in which the public sector employees wielded a great deal of influence, that that is changing; and the opportunities are great. It's not something that is going to happen overnight. But we think it is good for California that they are beginning to consider that. And we think it gives us the opportunity to bring the competition, which is the number one benefit that the use of the private sector does.

Moving on to the federal side, as we have announced previously, the Federal Bureau of Prisons put out a presolicitation notice for up to 1,500 beds. That solicitation was on hold in moving forward until the 2004 budget was passed. That has now passed and we expect to see the Bureau to move forward on that.

Also we were very encouraged by some of the items in the President's '05 budget in which he places a moratorium on new prison construction while promoting more aggressive contracting with state, local, and private sector providers. In fact he provides partial funding for an additional 4,500 contract beds. If you look at the current inmate growth at the Federal Bureau of Prisons, and you compare it to the current construction, about the year 2010 there will be a need for an additional 25,000 beds over and above what they currently have constructed. As we have always said and have mentioned to many folks, elected officials in Washington, we believe the private sector definitely offers an affordable alternative to the current process of utilizing beds.

We also in the President's budget saw increased funding for both the detention-trustee (ph), the Immigration and Customs Enforcement Agency as well as the U.S. Marshals Service. All of those very good and long-standing customers with CCA. And of course as we have announced previously there is a solicitation out for 2,800 beds with the U.S. Marshals Service in the Laredo area.

So we feel very good about where we are. As we had tried to forecast with some circumspect that we saw a developing bed need in some states. They now have come true and they are beginning the procurement process. Again, an area of the business that we have seen steady growth over the last several years. This seems to be poised to seek an affordable alternative, and that being the federal government using private contractors.

So we are very pleased with results of our 2003, but we are also very encouraged and feel very bullish about the opportunities that lie ahead over the next couple of years. So with that I'll turn it over to our Chairman to make some closing comments. (multiple speakers) Q&A, sorry. I didn't think that we'd have any questions.

Operator, if we could go ahead and start the questions and answers.

(OPERATOR INSTRUCTIONS) Patrick Swindle, Avondale Corporation.

The business opportunities before you all are pretty substantial. Can you talk a little bit about what you're seeing on the pricing and margin front, in terms of the more recent pieces of business and what your expectations are, relative to your current book as you go into 2004?

I don't think we are seeing anything that would be any different than business as usual. We have some contracts that the margins are less than usual in; and then we have others in which they are more traditional. We have had in some instances over the last couple years, due to state budget constraints, some pressure in dealing with some of the escalators. We do sense that state government are to starting to feel a little bit of relief. Not where they have traditionally been prior to the last couple of years. But I guess I don't see anything to report that's different than we've been reporting for the last couple of years.

The only thing I would add to that is that when we're dealing with a managed contract, obviously, you're going to get a lower margin than you're going to get on a contract where we own the facility, because we are trying to obviously recapture some of our real estate cost. So if our business mix were to change in any way, toward for example the Texas contracts, that would result in a lower overall margin. But again, that business came with no capital outlay. So I think John is right, that we're not seen any degradation of margins per se contract by contract, but the business mix issues do come into play.

Sure, thank you.

Jim MacDonald of First Analysis.

Good quarter. I had a few housekeeping things first. Irv, you said on the call 33 to 35 cents in the first quarter; and the press release says 34 to 36 cents for guidance.

I'm sorry, it's 34 to 36 in the press release. I'm sorry.

Okay, just checking.

No, no, 34 to 36, sorry.

Also can you comment at all on OPEX and interest expense in the quarter? Both of which seemed a bit low. Was there any special items in the quarter?

Interest expense and what else?

Operating expense.

Not that I am aware of. In our supplemental that we release, we are going to be capitalizing interest going forward, to the extent that we are building. I believe that number was just under $900,000 for the quarter, so that would result in a somewhat lower interest expense number.

Let me ask the group here and make sure I have got my time right, Jim. But we did get the Bureau of Prisons awards in the fourth quarter, right? And that was about 1.2 million contract? We got awards for the four Bureau of Prisons that we manage. They have an award and penalty structure in which they monitor the performance; and if your performance exceeds a certain standard, they will give you awards. And of course we work very hard on that and very proud of it. But it was about 1,200,000 additional revenue within the fourth quarter. But it happens twice a year, so it is not necessarily a non-recurring event.

Sometimes that cuts the other way, so it is definitely not non-recurring. It can go either way. It's just something that we absorb, good or bad, when it happens. So I don't think that there's anything unusual that I can think of other than that, if you call that unusual, from the standpoint of operations.

Again on the interest expense side we capitalized just under $900,000 of interest. Going forward with that, for every contract that we announce -- excuse me, every new build that we announce we put in there an estimated completion date and how much money that we're spending. We also put an average cost of borrowing in our supplemental. So you can reasonably get back to what that would be quarter-to-quarter.

The one thing that is a little bit tricky there is on Stewart. The way that we are required to do it for GAAP, we're capitalizing interest on the entire facility while it is under construction, not just on the 19 million that we're spending there. So that is the only tricky part. Everything else we try to provide what we're spending, when we're spending it, and we do give you an average cost of borrowing. Okay?

Right. Just couple of facility-related questions. On Florida, was your Lake County facility, that one you are expanding, was that extended to a certain date?

Yes, it will be extended to June 30, 2005.

Okay; and secondly do you think at Tallahatchie there's been some comments around potential inmates there. Do you think you'll be able to make a seamless transition at this point? Or does it look like it's going to close and then have to reopen before you can bring in the new inmates?

It is one that we cannot call with certainty. There is the chance that it could be seamless, but with the timeframe we have left it will be a chance.

Okay, well good luck on that. Thank you.

Scott Schneeberger, Lehman Brothers.

Just following up on Tallahatchie, any thoughts on basically the relationship with Alabama, and the potential for retaining or reobtaining inmates from that state?

We don't see any likelihood of retaining. I don't know if you would have noted, but Alabama had a referendum in September that was about increasing some taxes within their state in order to fund their budget problems. That referendum failed, which means that the voters said that they want spending to come down.

One of the actions to Governor took was to increase the size of his parole board, therefore to increase the number of folks that could be paroled on a quick basis. That freed up some beds within the state, and so that is how they are returning them to the state. I don't see that that is going to reverse, although Alabama still will have two inmates for every designed bed they have in their system. And they will still have a fairly aged system.

So we feel like this whole transaction from beginning to end has been one in which the state of Alabama and CCA worked very closely together. I think everybody acknowledges that one day Alabama has got to deal with their bed capacity.

Great, thanks so much. Going to some of the more recent opportunities, I think you mentioned last week Connecticut and Arizona. Opportunity in Connecticut was 2,500 RFP; and Arizona 2,100. You also mentioned New Hampshire 1,000 beds. Was that RFP'd yet or not? I just didn't catch that. I'm sorry.

All three of those have RFPs that have been released to vendors.

Okay, great. Thanks. A general question from President Bush's state of the union, you have already obviously covered a little bit of that. One of the things he mentioned was counseling services following release of prisoners, and a lot of follow-up to preventative measures from reoccurrence. Do you have any thoughts on how that relates or impacts you and your business potentially?

No, we don't yet. You could leap to the conclusion that that is referring more to community corrections than it is adult secure. Although we have re-entry programs as part of the programming that we provide. We don't in any of the federal facilities that we have, except we have a large Hispanic population, a large Mexican national population in some of our facilities, and we do in fact have some programs that we work with them, so that they can be better suited to find jobs within Mexico. So that is not what the President was probably talking about. But it is I think too soon for us to know the exact impact it would have on our company.

Thanks, and congratulations on a great quarter.

Barry Stouffer, BB&T Capital Markets.

Irv, could you review the CAPEX breakdown for 2004 again? You went a little bit fast for my --

(technical difficulty) and it is in the press release also, Barry, at the very back there.

I will look at it there. Could you talk about the IT project in a little bit more detail and highlight how you expect to get some return on those investment dollars?

Sure, what I like to say about the systems in the prison business, and I don't mean just the private sector, but all of it, it is still kind of Flintstones technology. It's one of the last great businesses that has not been automated yet.

We are going through and what we essentially did was try to design the perfect document flow, if you will, through a prison that t takes care from when the inmate walks in the door to when he leaves the prison. Taking care of everything that you have to deal with, with that inmate.

There are a number of things. You have to check the inmate in. He has property when he has to come in, you have to inventory. He has a bank account while he is there. He deals in the Commissary. There are a number of things that have to take place at a prison every day. Historically it has been a very, very paper-intensive business.

The staffing patterns that we carry, we have to have enough people to move all of that paper. What we're trying to do is automate. To redesign that process, make it more efficient and then automate that, what we call our perfect process. By doing that, what we hope we do is eliminate in some cases -- with the turnover that we have, I don't think any of our employees are too concerned about this. It is a pretty high turnover business.

But at the end of the day you are going to gain efficiencies with respect to staffing, in that people that have been moving paper don't need to move as much paper going forward. And the people that are working are actually doing things they enjoy far more. So the reception that we are getting in the facilities, and we're getting ready to go forward with a pilot, a test project on this very shortly, the reception that we're getting is very very positive.

The people are excited about it. It is going to make their jobs a lot better. They're going to able to deal with the process of corrections and not paperwork. So we just think it's going to bring any number of efficiencies.

Then there are other things that are harder to quantify, but still that they are benefits. For example just better medical recordkeeping that we will have; and it eliminates any potential problem with respect to medical and dispensing of drugs and problems of nature.

So it is rather involved. It's not inexpensive. But we're still spending pretty much what a normal company would spend with respect to percentage of revenues in the area of IT. We are excited about it. We think it is really going to improve the quality of life around here and make us more competitive.

Okay, thank you.

Thomas Haynes (ph), Georgetown Management.

Congratulations, nice quarter. If you could, could you give us an update on your Ohio facility? Specifically, are you looking any of the RFPs out there as possibilities for that? And are you beginning to ready that facility so that when you do get an award it will be ready to go?

Let me answer the latter question. Yes, we are readying that facility so that it can go. In fact we have enough staffing for some earlier housing units to be opened. One of the things that you have in corrections is a training requirement within each jurisdiction in which you operate, which in some cases can be many weeks long. So we wanted to make sure that we had an acceptable staffing level that was trained and ready to go for these procurements that are out there. Because at least two of them are in proximity to this facility.

And then we are in discussion with some other potential customers or current customers who could utilize this facility. So yes, we are spending some money in anticipation that we will receive inmates in the latter part of the third quarter.

Okay, and on the RFPs that are out there now, do you consider those to be good candidates for this facility? Or would you be looking at another provider?

We think that the New Hampshire RFP and the Connecticut RFP would be great candidates, because proximity to the state is one of the criterion in the RFPs.

Okay, great. Thank you. Congratulations.

Jason Stankowski (ph), Clayton Capital.

I had question for you. You guys are doing a great job, by the way. I had question for you, a couple of them, with regard to the transportation business. I know you've been busy doing a lot of stuff. It looks like the numbers are starting to come together. I just wondered what the plans are for that, and really what the growth we should expect to see here over the next two years from that business is? And the profitability?

That falls in the category, like a lot of things we do around here. There are some potential contracts that are out there that, should they occur, I think could be meaningful to the transportation business. This was a business where you either don't do it or you have to put sufficient infrastructure in place ahead of the (inaudible).

It is kind of like what John was saying with Northeast Ohio. We put a hub and spoke network in place here. We've put some computer systems and done some things and made some investments in this company ahead of the revenue stream. Because you couldn't have a revenue stream without these investments. So that is kind of what you're seeing right now.

It is just something we're going to continue to monitor. There are opportunities out there. There are opportunities with state customers and federal customers. We are believers today that this business can be a contributor to CCA, and it is just something that we need to monitor. And trying to speculate on when these contracts happen is just like, with our core business, just very difficult.

Maybe you can give a flavor of the overall -- how big is the size of the market for this, and how fragmented? It seems to be an extraordinarily fragmented market. But how big is the opportunity? And what share of it do you have right now, by your best guess?

I don't have the overall size. It's a very large market and it is predominantly done by local sheriffs. And the question is how much of that can you penetrate? It's not that we are really competing with mom-and-pops; although the private competition that we have is indeed fragmented and it is like mom-and-pop type companies.

What you are really competing with, again, this is a matter of government doing it versus us doing it. And you are trying to penetrate and show these people that they can -- if you go from county to county to county in this country you're going to see hundreds and thousands of unserved warrants. These people, instead of transporting criminals, we believe we could do that and they could be out there doing more productive things.

So again I don't have the overall size of the opportunity. Transport today is around a $20 million business. We think it can be considerably higher than that. A lot of that depends on, again, some of these contract situations that we're chasing.

With regard to the new projects that you're building out, obviously you did a great job in restructuring a lot of the debt. But it is still not mixed, if you will, or staged with the duration of your really long-lived assets. Are there any thoughts in trying to stretch out the maturities, given where we are at with rates right now?

Jim MacDonald is somewhere smiling right now because he asks me this question all the time. I agree with you that traditionally you would see longer-term debt. You have to keep in mind that when we started this process we were down at low single B; at one point I think we were even in the Cs. We've been trying to move this ball forward.

So we have been fortunate clearly that there has been a very generous high-yield market out there and we have been borrowing at some pretty low rates. I don't disagree with you theoretically. What we did was we took advantage of what we could take advantage of, given our credit ratings. We continue to push those credit ratings, move the ball forward on those credit ratings.

The market would say that we are underrated right now if you look at where we trade versus our rating. So we can improve our situation, just continue to look at the market. Again philosophically I agree with you that taking it longer is better. We will just have to -- right now we have the debt that we have. We're kind of blocked out on prepayment.

Seventy percent of it is fixed; so even if rates rise I think we're in pretty good shape here. It is tranched well. There is nothing coming that is maturing that would give us any pause. As we go forward and improve our credit ratings and we reassess the environment, that is something we should consider.

Okay, great. That's the answer. Obviously you have done a great job. I wasn't questioning that, just the idea that you want to eventually match the duration of your assets would be nice given this environment. So I appreciate that.

What do you intend to do with the little pieces of preferreds that are sticking out there? I would have thought those would have been cleaned up by now. What are your plans?

Our plans are to clean them up. What I would say on that is that sometime in the first nine months of this year we hope to try to get both of them taken care of. There are issues, small clearly manageable issues, around each of them that are too long to get into on the call. But it (inaudible) our intention to take them out this year.

Great; and last but not least, is there any inclination to expand the shareholder base by providing even a nominal dividend?

I would say right now if you look at the business opportunities that are available to this company, and the types of returns we can get on that, I think is a time that we should be taking our capital and plowing it into new business opportunities.

There are times when you should look at share buybacks. They are times you should look at dividends. And there are times you should be expanding your business. Right now, we're just big believers.

We've been saying this and I think you're seeing it in our numbers, that this is a time to be in -- the states don't have the money, and the federal government is talking about not spending the money and investing in new prison construction. That leaves us. And that's what we should be doing right now.

Great, thanks a lot.

Richard Nelson, Morgan Joseph.

John, you commented and it was very interesting about Governor Schwarzenegger's ordering a review of the prison system in California. And you gave some indication of the undercapacity there. Have you given any further detailed thought to how you would approach in opening up the door in that state? What opportunities you see in a more specific fashion? What the real market might be in the first three years of the door opening up?

It would be very difficult to forecast that. We're trying to engage ourselves to make sure that we are part of the process and the solution when they do that. It is not going to be without its battles. There are obviously many, many problems that this Governor is having to deal with.

So like I said it's almost impossible to forecast. But it could not be riper to be done. And having been in an industry in which people like the correctional office union are shameless in some of the things they would say, it is enjoyable to at least see the spotlight be put on their correctional system. And we think when that happens that it is going to create a lot of great opportunities for this industry and this company.

Thank you very much and congratulations on a very good quarter.

James Adams (ph), Cobalt Capital.

A couple of quick questions. Discontinued operations, what is in that number and how long it is going to keep showing up?

It is a small number, 900 or something, 920. That is a long story. When we unwound Puerto Rico last year there were a few issues that were remaining, and that is just the cleanup of the Puerto Rico from a year or so ago.

Okay, and touching on the CAPEX budget for a minute, of the $25.2 million in maintenance CAPEX for next year, I assume that includes some IT component that is recurring; and then you differentiate that from the special projects?

No. That number is higher than what we've talked about before. The 25.2 relates entirely to facilities; 20.7 relates to IT. There are couple of situations in the maintenance CAPEX for 2004 that are unusual. There's a requirement to build out a kitchen facility at one of our prisons on the part of a customer.

The Texas facilities that we're taking over have some deferred maintenance issues that we're going to have to deal with. And what I have told people, typically 15 to 20 million covers our facilities. This year because of these special situations it's running a little bit higher.

And then of the $13 million in maintenance CAPEX for Q4, was that all facilities as well or did that include -- ?

No, that was about $8.9 million in IT and the balance of that was in facilities.

Last question, looking at the variable expenses on the managed only facility, that's the only thing that ticked up this quarter. Anything in particular going on there?

I looked at them overall and I did not look at where we actually broke them out. I can't think in this quarter -- if it were the first quarter of '04 I might attribute some changes to Texas, but I'd have to look at it. I don't know.

I appreciate it.

A follow-up from Jim MacDonald.

I like the previous callers. They're thinking along the right terms. Could you talk a little bit about startup cost impact in 2004 with Texas and some of these other contracts? Is that holding back earnings a bit this year?

Yes.

Any magnitude you can give us?

Not really. Jim, it is hard to give you a magnitude. Take Northeast Ohio for example. Clearly we're putting some guards in place. It gets back into trying to assess the timing of when the prisoners show up. It's just very, very difficult. I could run five or six models on it. It is there. It's real, and it is holding us back a little bit this year. I'm sorry, I just really don't have --

One of the big problems the previous company got into was forecasting ramp ups and not really having proper data on when some of the prisoners would arrive to and having spent money. We don't want to get into the same situation, because we are ramping up but we don't know when the prisoners are going to arrive.

So again I really -- the problem like everything is I kind of know how many guards I am hiring but I don't know when the inmates show up. And so that is all a startup cost prior to that. So my range of numbers that I gave for guidance, I guess take that into account and that's the answer, which is why we have a range.

Okay, thanks very much.

Jeffrey Kessler of Lehman Brothers.

I just got on the call and I apologize, but you know what my situation was, Irv. In any event, I am sure my colleague Scott asked all the right questions. I just need to know have you given out D&A numbers for 2004?

We have not.

Can I ask what your assessment is for 2004 D&A so we can start maybe calculating EBIT and EBITDA?

It's not really terribly different from this year. As we put these facilities online it's going to ramp up slowly. Again I don't have that sitting in front of me right now. But again you're talking about $78 million of expenditures this year, most of which come on late in the year. So you're probably not talking about -- we do have some (indiscernible) the IT stuff is not going to roll out that fast. I would say it's pretty darn close to last year's number, maybe a little bit higher.

I am sure you have been congratulated on this quarter already, Irv, but I will just add my voice, obviously, to those. This was a really good quarter. And that's my only question.

We have no further questions at this time. I would like to the conference back over for any concluding comments.

Well, in my summation, I guess I can say very quickly that it was a good quarter and it only looks like it's getting better. But in quick summary, Irv said the fourth-quarter revenues are up 11 percent; EPS up 58; operating income up 25; EBITDA up 19 percent. And with all trends positive, available beds up, compensated man-days up, revenue per man-day up, occupancy up, and operating expense down. So all those things led to this very fine quarter.

Irv explained the reversal of the income tax valuation; and we have given you a pro forma which will show the fully taxed basis going forward in 2004 compared to a fully taxed basis in 2003, which should clarify our earnings increases on a regular basis.

Irv has giving you the expectation for 2004 on what we believe, from what we see today. There are a lot of positive things out there that could occur. We are not sure they will occur or not, and so therefore I think we are being conservative in what we're estimating for the year. But we don't want to overestimate.

We had 7,453 new inmates in 2003, and that is with the ups and downs. Too many people emphasize when we're losing prisoners, moving Wisconsin out or having a loss somewhere, but we net out with all the gains. And our gains in 2003 -- I'm sorry, by January 31 instead (ph) of 2003 are the 7,453 new inmates when you add the pluses and minuses.

I think as you look at this business, one of the most significant factors is that we still have 7,000 available beds in our system in Diamondback, Northeast Ohio, North Fork, T. Don Hutto, Stewart County, and Tallahatchie. Therefore we are one of the few companies out there that can meet this demand that appears to be out on the street. There is nobody else out there with this many available beds.

John has reported to you Vermont is coming on-stream. We've got Connecticut RFPs, Arizona RFPs. So do our competitors. New Hampshire RFPs. Minnesota and Kansas are having discussions in their legislature about what to do about privatization. Florida is moving to expand. Mississippi is in negotiations to allow us to take in out-of-state inmates, which helps us with Tallahatchie. California is now finally opening up to privatization. The feds are looking at solicitation for beds. The Marshals Service is looking at solicitation for beds. So you have to ask yourself who is going to supply these beds? We have got 7,000 of them, so we are in hopes that we will be successful.

As I heard some of the questions, I thought I would respond. Somebody asked about this IT investment, and 65 percent of our costs here are in staffing. If we are going to make any meaningful headway in managing these prisons at any lower cost, not alone the quality of managing them, this IT investment hopefully will reduce our staffing; but should definitely reduce our turnover by not having the frustrations that many of these people have, clerical, of having to handle tons of paperwork. In addition the IT will get into the area of monitoring medical cost and procurement cost, which should allow us to get a better handle on those two operations, which are our other two higher costs.

Finally, somebody talked about TransCor; and this is a definite adjunct to our business. Prisoners are moved every day in this country, back and forth between prisons. We have been giving more attention to our incarceration business than we have been giving to this business. But there is definitely available opportunities there. It definitely is part of this business. And we are focusing on TransCor more than we have in the future.

As I said, it has been a great year. And it looks like it going to be even better. So thank you all for attending today and we appreciate your questions.

Thank you, gentlemen. Ladies and gentlemen, thank you for participating in the Corrections Corporation of America fourth-quarter and full-year 2003 earnings conference call. At this time you may now disconnect.