CoreCivic Inc (CXW) 2004 Q1 法說會逐字稿

Welcome to the Corrections Corporation of America 2004 First Quarter Conference Call. Before we begin, let me remind everyone that this conference call contains statements that are forward looking and 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 or described in the company's Form 10-K, as well as in other documents filed with the Securities and Exchange Commission. And 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 results of any revisions to forward-looking statements that may be made to reflect an event or circumstances after the date hereof or to reflect the occurrences of any anticipated in advance.

As a reminder this conference is being recorded to date, Wednesday, May 5th, 2004. 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 call over to Mr. Andrews. Please go ahead, sir.

Good afternoon, and welcome, everyone, to our first quarter conference call to discuss our first quarters earnings. As the moderator said, I'm here with John Ferguson and Irv Lingo and also David Garfinkle our Controller and Vice President of Finance on a beautiful spring day in Nashville and we're ready to begin and I will turn it over to Irv.

Thank you, Bill.

Let me start by saying we are pleased with the results of our first quarter 2004. It's a quarter in which we completed the integration of the six new Texas contracts we began operating in January. We reopened the northeast Ohio facility in Youngstown, Ohio and the Delta Correctional Facility in Mississippi and we signed a significant new contract with the state of Arizona.

Moving straight to the numbers, for the three months ended March 31st, we reported net income available to common shareholders of $14.4 million. And that's 37 cents of diluted share, and that's compared to net income of $17.4 million or 56 cents per diluted share in the prior year.

The results for the first quarter of 2003 did not include a provision for income taxes. I think everyone is aware of that and we provided with the earnings release an illustration reflecting the results for the first quarter of 2003 on a fully taxed basis. Based on the scheduled fully taxed EPS for Q1 of 2003 amounted to $8.2 million or 26 cents a share. So you make at sums of a tax provision in last year's results, our earnings per share actually increased 42%.

The results for 2004 for the first quarter include approximately $1.7 million of start-up expenses incurred in connection with the openings of Ohio and Mississippi facilities. Also included in our first quarter numbers are the operating results from the six new Texas contracts, again, which were awarded January 15th. As the Texas facilities are managed only, they are at margins that are less than the company's average operating margins, and given the size of the award, represent a somewhat meaningful change in our business mix. I refer to the start-up costs and the Texas start-up costs at this point because as you can see in a few moments it combines to impact our operating statistics for the first quarter.

Operating income for the first quarter of '04 increased to $42.5 million, compared to $42.3 million for the first quarter 2003. Adjusted EBITDA for the first quarter increased $55.3 million compared to $55.1 million last year. Operating income and adjusted EBITDA were both negatively mentioned by the aforementioned $1.7 million in start-up costs, as well as the loss of approximately 1500 Wisconsin inmates from the first quarter of last year. Both of which were anticipated, and both of which were discussed in our last earnings call.

Adjusted free cash flow declined slightly to $27.1 million during the three-month period ended March 31 '04 compared with $30.5 million over the tame period last year. Adjusted free cash flow for our first quarter of this year was lower because of higher cap ex expenditures in the areas of technology and facility improvements compared with the same period last year. As we discussed in the last call, the IT expenditures relate to several major initiatives that committee happen as undertaken and they encompass the automation of our inmate management system and medical systems, and human resources which include payroll, training and benefits, and a revamping of our general ledger systems.

Turning to operations, consolidated revenues for the quarter was $278.8 up from $253.3 million and that's an 11.4% increase over last year's first quarter. There were 5.6 million compensated days in the first quarter versus 4.8 million compensated man days in last year's first quarter. Our portfolio occupancy increased from 91.6 to 95.6% for this year.

Revenue per man day decreased slightly to $48.82 a day, and that's from $50.78 in the prior year. The decline in revenue per man day is almost entirely due to the change in our business mix, resulting from the addition of the aforementioned Texas contracts. Without the Texas contract award, and the recently terminated Alabama contract, at the company's Tallahatchie Correctional Facility, the revenue per nan day would have been higher, than both the first quarter of last year and the fourth quarter of last year.

Operating costs per man day actually decreased from last year's first quarter, to $36.83 a day, from $37.50 a day last year. Fixed costs decreased to $27.67 a man day, that's versus $27.91 last year. That's a decrease of 24 cents. Salaries and benefits which make up 86% of our fixed costs were down 14 cents per man day. Part of this decline was due to lower salary levels in our new Texas contracts as compared to the overall company wage averages. Secondly, as we drive occupancy levels higher, of course we are achieving greater leverage of our fixed costs. And finally, as we discussed in previous calls we continue having some measure of success in controlling labor costs particularly in the area of turnover.

Variable costs also declined to $9.16 a man day, versus $9.59 per day last year and that a decrease of 43 cents. The primary reason for the decline in variable costs was a 31 cent per man day define and inmate medical expenses. The Texas contracts we assume do not require us to provide medical which is the primary reduction in medical expense per man day. However, we did achieve additional medical expense reductions for many of the same reasons we have have discussed in previous calls, including reduced reliance on registry nursing and lower costs for our pharmaceutical supplies due to national purchasing contracts. The end result was that margins per man day actually declined $1.29 from last year's first quarter. To $11.99 per man day.

Several factors need to be considered when analyzing this change. First of all as we reported last year, and I believe it was last year's first quarter, margins in the first quarter of last year benefited from the take or pay contract at the McCray facility. During that period we were being paid for 95% occupancy on a take or pay contract while we were at only average occupancy for the quarter, it was 29.3%. Secondly the Texas contract awards resulted in the addition of significant new managed only business for the company, yet the per diem on the Texas contracts is half of our normal. So the size of the award again result in a meaningful change in our business mix, which of course impacts our operating statistics. Third our current quarter did include the aforementioned $1.7 million in start-up expenses and there were no start-up expenses in Q1 of last year. Finally what I would say is the fixed and variable expenses were down from last year. So there is -- I think we're still exercising the tight controls over our operating expenses. So the degradation is due to the other -- in the margin is due to the other issues not any losses but controls over expenses.

General and administrative expense increased to $11 million from $9.5 million last year, and as I pointed out in the last several calls the increases in G&A is as a result after additional headquarters personnel we added in the area of operations, business development and IT. And we continue to see improvements in the company's operations, and in our business development area, as a result of these investments. For 2004 we anticipated a G&A run rate of $45 to $46 million.

So overall, we're very pleased with our first quarter, the results of which were very much in line with our expectations. And with that, I will -- before turning it over to John, I'll go to our outlook.

And when I turn call over to John, I think he will provide an upbeat review of our business environment and some of the specific opportunities that we are pursuing, but I would say as we have discussed many times in the past, the issue is oftentimes not whether an event or an award will occur -- whether it will occur but when it will occur. So in providing the guidance, timing again -- the timing on the part of our customers or potential customers is, of course, very difficult to pin down.

So with that said, I will move to our outlook and for the second quarter the company expects fully diluted shares to be the range of 35 to 37 cents. Guidance for full year EPS remains unchanged from the last quarter and's a range of $1.52 to $1.58. Updating our cap ex guidance from the previous quarter for the full year the company expects to invest approximately $130.9 million capital expenditures. Consisting of approximately -- and, again this is the full year, $81 million previously announced prison construction and expansions, $30 million in maintenance cap ex and approximately 19.9 million information technology.

And with that, I will turn the call over to John.

Thank you, Irv.

To begin with, I would like to highlight once again the significant events that took place in the first quarter of 2004. We announced, you know, March 4th that we did enter into a contract with the state of Arizona to manage up to 1200 Arizona inmates at our Diamondback Correctional Facility in Oklahoma. As of April the 27th, we had received all 1200 inmates, which is the current population. We announced on March 23rd that we had entered into a contract with the Delta Correctional Authority In Greenwood, Mississippi to resume the operation of our -- of the Delta correctional facility which we had managed previously. And we began to receive inmates from the state of Mississippi on April the 1st.

We also announced April the 7th the -- that we resumed operation of the -- of our northeast Ohio correctional facility in Youngstown, Ohio. We expect to manage an estimated population of some 300 U.S. Marshal federal inmates from throughout the northeastern United States and we begin to receive inmates in that facility on April the 6th.

In our March 3rd announcement of the Delta correctional -- March 23rd announcement of the Delta correctional operations, resumption of operations we talked about that we had made plans to cease operations of our T Don Hutto facility in Taylor, Texas, due to decline in inmate populations. Since then, we have worked out an agreement with the U.S. Marshal's service to transfer some of the inmates, freeing up available beds in our Florence, Arizona facilities and so this past Monday, we transported 239 inmates into the T Don Hutto facility. So at this time, we are withdrawing our plans to cease operations. Of course we will be monitoring the inmate populations on that facility as we go forward.

And then to highlight the event that has been taking place for over the last year and a half, and that is the return of some Wisconsin inmates to the state of Wisconsin, and in the first quarter of 2000 -- or since December 31, 2003, we have seen 587 Wisconsin inmates leave our system to return to Wisconsin. And, of course, in the middle of March, we did, in fact, terminate our contract with the state of Alabama and returned 1420 inmates back to them.

So we'll then take a snapshot of what our occupancy looks like. Irv gave you the percentages, but on December 31st, we had 55,987 inmates in our facilities. We've previously talked about that on January the 16th we assumed responsibility for some 6,000 plus net Texas inmates, but as -- if we look at our population on April the 30th, just prior to this call we had grown to 63,593. To get a snapshot of the inmate population growth, exclusive of Texas, we have seen over that four-month period a growth of 1,452 inmates.

If you add back or take into effect the decline in Wisconsin and Alabama inmates during that, we actually -- exclusive of the Texas facilities and all other facilities within the system, we have actually seen a gross growth of almost 3500 inmates. That's coming from both -- from each of our state, federal and local customers, some 2000 inmate growth at our state customers, obviously 1200 of those are from the state Arizona. Some 700 plus at our local county facilities, and some 7,000 -- I mean 700 plus at our federal -- under our federal contracts. If we then reassess where we are as it relates to available bed space, as of the end of April, we have roughly 6,000 plus beds. The most -- most of that is in the three facilities, which we have continued to highlight. That's the northeast Ohio correctional facility in Youngstown, our Stewart County Georgia facility, our Tallahatchie, Mississippi facility and our North Fork, Oklahoma facility and I will talk about each of these in a moment. And then last conference call we highlighted the announcements that we had made about the expansion to Crowley, our Colorado facility of roughly 600 beds. Expansion of Houston being brought on by an award with immigration, custom enforcement, an increase in beds at our Leavenworth, Kansas facility brought on by a new contract with the U.S. Marshal's office, and then an expansion of beds at our Florence, Arizona facility to meet the continuing bed need of our federal customers there in Arizona.

Last thing I want to talk about is the activity the company has going at the moment and how it addresses both the current bed availability we have, as well as other activity.

First of all, we'll have some 800 beds in Colorado once the Crowley expansion is completed in late summer, and we feel very confident that both Colorado's next year bed needs, as well as some other western states that we're having conversations with, that those beds will be utilized over the next 12 months.

We pointed out that we did have a contract with the U.S. Marshal service for up to 300 inmates at our facilities in northeast Ohio. We're just beginning to receive those inmates, and we expect that we'll take a little bit of time to ramp up, but one that we feel very confident based on our experience with the Marshals throughout the country.

But in addition to that, we have submitted and it has been received, our response to the 2500 bed need by the state of Connecticut, as well as 1,000 bed need for the state of New Hampshire. And there is a bid to the federal bureau of prisons in June for 1,000 beds this facility, would quite naturally meet all the requirements of those -- or any of the parameters of those limited, of course to the bed availability. The -- we point out that the Federal Bureau of Prison Contract, which is due in June as a requirement that the beds have to be available within 120 -- 180 days of the contract, which we think fits this facility and others in a very competitive situation.

We have a 1500 bed facility in Stewart county, Georgia. We announced that we were going to go ahead and complete that. It will be completed sometime this summer. The state of Georgia general assembly adjourned the first part of April. They submitted a budget to the governor for his signature. Within that budget was funding to begin the utilization of the Stewart facility September 1 of this year. The governor has not signed budgets yet and, in fact has called the general assembly back into a special session. As I understand it, they are dealing with one exclusive issue and this budget item should not be affected but, again, we can't promise that that couldn't happen. But should the general assembly finish their business by the end of this week which is is what we understand and this budget item remains in there, then we are prepared to begin negotiations with the state of Georgia for the utilization of our Stewart County, Georgia facility.

We have 1,024 beds in our Tallahatchie County, Mississippi, facility. As is the practice, this company not to announce an agreement before it's happened, I will say that I am highly confident that by the end of this week, we will have an agreement with the state of Hawaii and an agreement by the Tallahatchie Correctional Authority to allow us to house a little over 600 Hawaiian inmates in that facility. We will be transferring most of those from our Florence, Arizona facility, as well as getting net new additional inmates from the state of Hawaii. This is a meaningful transaction, because as I have stated earlier, we continue to have a need for both of our -- at both of our Arizona facilities in Florence by our federal customers. In addition to that, I had indicated at the last conference call that state of Mississippi has passed legislation allowing us to have a little higher custody level than we had prior to the legislation, and we have several discussions going on with other states to house their inmates. So we feel that the Tallahatchie, Mississippi facility will be one to be utilized definitely within the next six months or so.

And then the Norfolk facilities 1440 beds, it's currently idle. The same activity that I described in -- with northeast Ohio. The state of Connecticut, the state of New Hampshire, the Federal Bureau of Prisons, as well as some other activity that would -- I would not want to identify by name, help us feel comfortable that our Norfolk facility has an opportunity to be utilized.

In addition to those facilities, which we currently own and have available, there is solicitation going on at this moment in the state of Arizona for 1,000 bed design and build, and we are in competition to hopefully win that award. Also the county in Tennessee, Dixon County, recently submitted an RFP in which CCA was deemed the best evaluated bidder in and the County Commission has voted to begin negotiations with CCA and that would be a 624-bed facility that would be designed and build.

In addition to that we own -- on the last several conference calls, we talked about the U.S. Marshal service having a solicitation for up to 2800 beds in south Texas within 50 miles of Loredo. They have now released that RFP and, of course, we will respond to that. In the budget that was just passed in Florida, there was authorization for, and funding for a new 1200 bed facility to be designed -- I mean, to be managed by a private provider and, of course we announced last time that we had been given a contract to expand our Lake City Facility by 543 beds and we have signed that that contract and are beginning the process of making that expansion.

We continue to monitor very closely the President's budget which highlighted the desire to contract out to 4500 beds by the Federal Bureau of Prisons. We talked about California in the last conference call. We continue to monitor that. It, I think, continues to move in the right direction. It will be, you know, I think a while before something meaningful happens there, but we still are encouraged that the state of California will begin to realize that the private sector offers a meaningful and significant cost alternative to the way they handle their correctional needs right now.

So to kind of sum it up, there are currently procurements that are in process to meet either federal, state government needs that would utilize all of the available beds that we currently have of so meaningful quantity. In addition to that, I just listed some 10,000 bed needs that should be either in the procurement process or should be coming shortly that would require the private sector to meet those needs. And I would point out that almost every one of those 10,000 beds will require the private provider to deliver the beds, which means it could be some 400 to $500 million capital requirement to meet this demand and I think as we have pointed out over the last several conference calls company is in a superior position to be able to access the capital market in a way that doesn't affect our shareholders in order to meet this demand.

So thats the summary of the activity. Like I said, I think it is -- you know, how encouraging it is that as I point out some 6,000 beds we currently have available, that there is, in fact, active procurements by folks who need the beds, that exceeds the amount of available beds that we currently have. So with that, I think we will by happy to open it up to questions and answers.

Thank you, sir. Ladies and gentlemen at this time, we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your push button phone. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for the first question. Our first question comes from Mr. Andrew May from Jeffrey & Co.

A couple of small things. First, once you completed this year's major IT spending initiatives what should we regard as a sensible longer term run rate for IT spending?

I would say for the next couple of years, you know, for '04, '05, and '06 that we're probably running somewhere around the $17-20 million level.

So it will stay high for a while?

It will stay high for a while.

Fair enough. I understand that the --

And maybe if we're successful on some of these business development activities, it will stay higher longer.

Then it's a high-class problem.

Right.

What do you see as the rate of pre-opening costs? I mean you have given us earnings guidance. 'm sure that assumes the pre-opening cost but do you have an explicit thought about where preopening costs should run for the balance of the year.

I can say this, in the second quarter we will continue to have start-up expenses a little bit more at Delta and probably a decent number at northeast Ohio. You say probably the same number? Yeah I would say right now I would go with the somewhere. Somewhere between $1.5 million and $2 million for Q2. Andy, it's tough and the run I'm kind of stumbling here a little bit is it just demands how far the Marshal's load and the other things that happen around northeast Ohio. Obviously the slower, the more start-up costs we're going to have, the faster, the better.

One final question. It is my understanding in the state in Florida the privatization commission that's governed the activities around private prisons is expiring, disappearing and that you will have a different regulatory authority there. Do I have that right? And if so, do you think it matters?

The current state of affairs is that the budget that's been passed by the general assembly moves the contracts that have been with the Privatization Commission to the Department of Management Services, which is exclusively an executive branch department. That happens on July 1, 2004 and then there's funding for a wind-down period through 2005, and no, we don't think it makes any difference.

Thank you very much.

Thank you. Our next question comes from Mr. Jim MacDonald from First Analysis. Please go ahead with your question.

Yes, good quarter, guys.

Thank you.

Could you go over a little bit what was in discontinued ops and then also a little bit on the transport business which seems to be still losing money?

On the discontinued operations and I'm going to try to increase the volume here without cutting off. Discontinued operations there was some money that we were still due from our Puerto Rico operations that was up in the air. We actually did receive that and so that was the results of that collection, less the tax effect of that tax collection and that's entirely what the discontinued ops were in this quarter.

On the transportation side, one thing I would say about that, because people try to pluck out of our financial statements how much we're making in transportation, that really can't be done because a lot of our transports are done -- and I don't want spend too much time on this this. A lot of our transports are done for our own customers on behalf of our operations department. If that happens, the expenses we occur in the transport, the transportation expenses are included here. The revenues are sometimes included in the per diem in some fashion. So there's an inter-company charge for that but you don't see that in revenues, so it looks like transportation rev news are considerably less than transportation expenses, not necessarily the case.

Transport is still not quite break even yet. We're moving in that direction. Again, the whole concept of transport is to get ourselves a company that has the infrastructure and the assets so that if something big comes along and there's something big that comes along, we'll be in a position to do that. And should that happen, we'll certainly report that.

And switching to kind of the -- from the small picture to the big picture, you mentioned some large federal procurements. What about more speculative of what could come down from Homeland Security, and some of these alien pilot projects in think any thoughts on some more speculative, longer term initiatives?

Not that I -- we could state to -- you know, we have spoken to the President's budget. We continue to encourage the immigration custom enforcement to utilize the private sector completely but there's nothing that would be -- that we feel very comfortable talking about. With much clarity.

Thanks very much. thank you, Jim.

Thank you. Our next question comes from Patrick Swindle from Avondale Partners. Please go ahead with your question.

Good afternoon, gentlemen.

Hi, Patrick.

Looking at the Hawaii inmates that could potentially be transferred to the facility in Tallahatchie what is your current state of population wide census. I suppose that 600 only represents a portion of that amount. Are the other inmates going to stay in the other facilities?

Yes and we currently have a little under 1400 at the moment.

Any plans to move more of those to Mississippi potentially or is 600 really the number.

Not at this moment but as this demand firms up and some other demand that we haven't even talked about that has the potential, that it may require us to once again kind of reassess where is the best location for each of the populations that we have responsibility for.

All right. And then next question, looking at the potential for filling in the North Fork facility, I believe you had mentioned the state of New Hampshire in your comments. I had been looking at the state of -- the Youngstown, Ohio facility, as a higher probability for the New Hampshire inmates. Would there be an aversion on the part of New Hampshire to place their inmates in North Fork?

That would be much more likely that they would find northeast Ohio an acceptable. So it really is going to come down to a little bit of bed availability, but any of the Northeastern states, given their choice, would rather have the Youngstown, Ohio. It's just that at the moment, the demand for those beds definitely -- or the potential demand for those beds definitely exceed what we have available in the North Fork beds would be, you know as an alternative once that happens.

Right. And then to follow up, one quick follow-up on that question. And looking at the Stewart County, Georgia facility to the extent that the Federal RFP does come out that requires beds to be available in 180 days would that not also be a good facility for those federal inmates?

It would be but we think are going continually evaluate the options we have available to us and in this situation, if Georgia does in fact, approve their budget, we will begin to negotiate with them. But in that negotiation, we will be conscious of the fact that there may be an alternative if we can't reach an acceptable agreement.

Thank you.

Thank you. Our next question comes from Mr. Jeff Kessler from Lehman Brothers. Please go ahead with your question.

Thank you. And good quarter. Can you give a little bit more detail around the Mississippi Dell, correctional authority? Can you tell us how long it will take to prisoners and give us an idea so we can -- model this a little more easily.

You know, Jeff I have heard those numbers. I think we will have up to the 950 by the end of June and I will -- when we get off the call, I will go confirm that that's exactly correct, but I believe that based on the amount of inmates they are bringing in, on a periodic basis -- and, of course these are just coming from another part of Mississippi, that we should have the 950 beds utilized by June, but if that's not the case we'll get back to you.

Right. And in northeast Ohio all they're talking about right now is 300?

Yes. The only agreement that we have is with the Marshal's for up to 300 and we don't have the 300 there yet.

Okay. Now with regard to the man day margin, and I know you went through this a bit, given the -- you know, looking at the mix factor going forward, and looking at the types of contracts that you are getting, you just had a lot of managed contracts come in in Texas, knock down the man day margin a little bit and I realize you don't model your business plan purely on whether you are going to take a managed or a -- or an owned building contract, but bottom line is is, do you see that man day margin mix shifting as some of these other prisons that you own that are, you know, only semi-filled or not filled at all, start getting filled again?

Yeah, I mean, Jeff, it is the $64,000 question kind of thing. And there's no sound byte answer to the margin question. The Texas opportunity was rather unique to be able to pick up that much managed business in one act like that. And that clearly had an impact on our business mix, but, again, when there's no capital outlay, we're pretty positive about that. And as we look forward to the extent that some of our facilities start to get up to around 100%, or over 100%, that's clearly an enhancement of our margins. If Stewart -- if the state of Georgia were to pass the budget, and Stewart starts to fill up, the guards have to go in for the inmates, that's kind of a cardinal rule. And we have to do that and then you're going to have more start-up costs. And then you get into how fast the northeast state Ohio goes.

What I'm trying to say to people is I'm not uncomfortable with margins ultimately. We just don't know yet but I don't think I'm too uncomfortable in that 25% range. I'm just saying that as we're filling these beds and as we're growing the company that those margins are subject fluctuation and the best we can do is try to do this quarter and explain to you what's going on. It doesn't help anybody modeling and I understand that but I think if you are running margins on the modeling I think between 24 and 26% and listen to what we're saying about the start-up activities for the quarter, you are probably okay for now. And we'll learn like you learn. I mean I think we have good controls over our expenses. We continue to do that but all of these extraneous factors can affect our margins in any quarter and it's very difficult.

One final question. Historically, you know your competitors have been saying that essentially, their feel is that 100 to 105%, maybe a little bit above that is the sweet spot for margins. Of course, there's the down side to that have you to start building at some point. Is is that what you are -- what your target is for occupancy at this point in time? Probably more on a state-by-state basis that you want to get toward a little over 100% for each state that you are?

I would love to be at over 100% for every state that I'm in. And this thing with Hawaii shows some creativity what is the best way to try to maximize your existing space. We're actually looking at ways to try to maximize our existing space. It's obvious, I mean it's a no-brainer that if you start to get up to and over 100%, you will start maximizing your margins. Everything varies depending on the customer, what the customer requirements are, the levels of security.

So what we try to do here is is look at our customers, look at where they are located, look at the nature of our facilities, and I think Hawaii is a classic example what is the best way we can maximize things and get the margins as high as we can? I don't know that, you know, we're -- it's just -- it's just going to depend on the facility, the security level and the nature of the customer. I can tell you we pay a lot of attention to it. We would much rather fill an existing facility -- we would much rather fill an existing facility or fill an empty bed. But number two, of course, we've said this before. We want to expand. That's the next best way for us to accomplish our goal. The last thing we will do is build.

Okay. You wrung out some surprising operating efficiencies, partly by hiring somebody who is an expert in it, partially by getting your operating costs down. Only the first part of 2003, and I'm just wondering, are there other areas outside of HR/IT that you can get some more cost cuts and still be -- remain efficient and yet -- and still help your margin.

Understand that 65% of our costs are people. Okay? And so when you're trying to get more efficient, the first thing you have to look at is your staffing patterns. How many people you are carrying. So I really do think that the HR initiatives and the IT initiatives in order to make our people more efficient in the field and goat our staffing levels to the appropriate level -- to get our staffing levels to the appropriate level will be the primary way we maximize our costs. We are looking at ways contain medical, we're always looking at ways to contain food and Jim has lots of ideas in other areas but we have to keep circling back to the fact that 65% of our costs are people related and that's primarily where it will be.

John, Irv, thank you very much.

Thank you Jeff.

Our next question comes from miss Susan Johnson of Lehman Brothers. Please go ahead with your question. Good afternoon, all and congratulations on another fine quarter.

Jeff has just done a nice job talking about how well you have controlled your fixed and variable expenses so I won't go there. But let me try sort of the capacity question a different way if I might. As you see sort of procurement needs rise across the nation, are you seeing any other developments in terms of new build of facilities even beyond what you've got open?

Yes.

I'm not sure -- Susan, could you maybe restate the question.

Yeah, John, are you seeing anybody else build facilities? Are you seeing any state facilities being built? Are you seeing any authorized? I know, you know there's a couple of facilities being built by competitors out there, but are you seeing any leanings that way, as just the general population grows out there?

We do not see any meaningful expansion or constructions by the -- by the state governments, with some exceptions. Obviously, Wisconsin has brought on some capacity there, or a few states that are getting close to maybe completing some space or trying to decide what to do with it. But I think the statements we made previously about the fact that building bed capacity by state governments is one of the last things they want to do and I think that, from a -- from a global perspective, is still an accurate statement.

Susan, one of the things I looked at here recently, last year, I think it's called the American Council State Legislators or something, it's a group that tracks these things. 46 states were running deficits in '03/04 fiscal year. Some of those have closed the gap. A lot of it through cost cutting. Next year they are forecasting 33 states running deficits and the ones that aren't are right on the margin. So so we don't see the situation right now at the state level improving sufficiently enough to start building again.

That's terrific for you. And then my final question is, if I followed you right, John, it sounds like you are moving at least two groups out of the Florence facility. If you have other inmates you are going to move into Florence or is there demand for those beds that are being vacated.

Yes.

Okay. Thank you very much.

Thank you. Our next question comes from Mr. James Adams from Cobalt Capital. Please go ahead with your question.

A few questions to follow up on Jeff's questions about costs. As I look at just the owned facilities and I adjust for the start-up expenses, it still looks like fixed expenses went up sequentially. Anything special going on there?

The only thing I can think of, again, is -- what did you adjust for again?

Basically, I mean I looked at just the owned facilities, and took the $1.7 million out of the fixed expenses. Is that the right way to look at that?

Well, if you took that out, you know, that's going to have an effect but then the change in the business mix also affects the fixed expenses. In the margins or -- Just on owned and managed you're talking about?

Right.

Okay. The only thing I can think of off the top of my head right now is in the first quarter we do have very high unemployment taxes. They are based on a percentage of payroll so the first quarter has a disproportioned amount of unemployment taxes

And then, again only on the owned facilities. Revenue per man day were up, sequentially. I thought we would see some downward pressure because of Alabama but is that just standard price increases or --

Yeah, again, what I've said before about that and John might want to weigh in on it also, we -- in this environment, I mean, obviously the states are struggling, but we've only seen isolated cases of any type of pushback on rates and we tried to disclose that to people as best we can. Overall, I would say on an overall basis we continue to get our rate increases.

Okay. And then is northeast Ohio at 300 inmates? Is that break even or profitable? Or is that still kind of below --

In northeast Ohio?

Right.

Northeast Ohio is still a little below water and we're saying it will be below water probably through the second quarter

I think he's asking at 300.

300 is the break even.

It would be just slightly profitable.

Okay.

It won't be at 300, you know, again through the second quarter we won't be at that level.

Right. And then other than the pressure from start-up expenses in and the mix shift, is there anything else that's pressuring margins or that you could foresee pressuring margins over the next year.

Keep in mind when you are looking at the margins on the comp basis, last year the margins got a boost from that McCray issue, that was a pretty good boost.

Right.

I'm not aware of anything else that's really pressuring our margins right now. I think what we are trying to say is we're not aware of anything negative going on in our business. We're in pretty good shape from a cost control and everything else standpoint. What's affecting the number thar you're seeing right now are the Texas contracts and that's good situation from a cost control and everything else standpoint.

And then depreciation was down this quarter. Anything unusual going on.

I can't think of a reason for that, I'm sorry. That I don't think there's any unusual there.

Okay. Thank you, appreciate it.

Thank you. Ladies and gentlemen as a reminder if you do have a question, please press the star followed by the one on on your bush button phone. If you are using speaker equipment you will need to lift the hand set before pressing the numbers. Our next question comes from Mr. Thomas Haynes from Empirical Capital. Please go ahead with your question.

Nice quarter. Just a couple of quick follow-up questions. Could you give a cap ex breakout for the quarter between construction maintenance and IT?

I want to say it was about $5 million. It was $11 million in total. It was about -- okay, it was about $5 million in IT and about $6 million in facility maintenance.

Okay. Let's see, and then cash from operations for the quarter.

I think that was about $27 million, $27.1 million. Again, what we defined as adjusted free cash flow.

Right.

Which would be net of that $11 million.

Okay. Great. That's all I needed.

Okay.

Management, at this time, there are no further questions.

Well, thank you all for those questions. I will just try to sum up, again, quickly this quarter.

Our revenues were up 11% over 2003. That's due to Texas and Mississippi, Arizona, and northeast Ohio to a small extent, and not losing T Don Hutto. Our occupancies are up to 95.6% and we have lowering operating expenses again, both fixed and variable.

As you know, we lost inmates in Wisconsin and Alabama, as expected, but we still maintain good relationships with both of those states, and it doesn't mean that we won't get inmates back from them in the future.

Our operating income was flat, mainly because of our start-up expenses at northeast Ohio and Mississippi. Our margins are lower as Irv and all of you have discussed because of the Texas managed only business, but if you compare the after tax '03 and '04 on the same tax basis we were up 42%.

I guess the best news is what we look at going forward and John has mentioned activity in Hawaii, Connecticut, New Hampshire, Georgia, Colorado, Arizona, Florida, Dixon County, Marshal's Service, the Bureau of Prisons and believe it or not California, which is discussing the possibility of privatization because of their budget problems and the new governor. So that would use all the current beds that we have, the 6,000 beds that we have and that, obviously, we've already paid for those beds that we'd get a very good return on that business.

And then John has indicated that there's additional need for 10,000 more beds and I believe that we have the capability of the funding those beds better than our competitors do. So I think that puts us in a good position going forward, and unfortunately, you know we don't know what the timing will be for any of these contracts, but this is a longer term good news story.

So thank you again for attending today, and we look forward to speaking to you again at the end of the second quarter, or if during the quarter we have something released, we certainly will do so. Good-bye.

Ladies and gentlemen, this concludes the Corrections Corporation of America 2004 First Quarter Earnings Conference Call. We appreciate your participation on today's teleconference. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 and enter the access number of 577489. Again, that number is 1-800-405-2236. And enter the access number of 577489. We appreciate your participation. You may now disconnect.