CoreCivic Inc (CXW) 2004 Q4 法說會逐字稿

Welcome to the Corrections Corporation of America 2004 fourth quarter and year end conference call. Before we begin, 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, 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 faculty management contracts, and general -- excuse me -- 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 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. Please go ahead, sir.

Hi, this is Bill Andrews. I'm actually in California today, and John Ferguson and Irv Lingo are in Nashville at our corporate headquarters. So there may be some lag back and forth. John is going to kick off the meeting -- I mean, sorry, Irv is going to kick off the meeting with the financial results for our fourth quarter and year end. John will talk about operations. We will then open it up for full discussion. And I will try to summarize at the end. And I want to thank you all for attending today. With that, Irv, you want to kick this off?

Thanks, Bill -- excuse me. I think as everyone can see from the length of the press release there were a number of special items, both in the fourth quarter of this year as well as last; and as has been the case all year, we've had to estimate the effect of tax provision on last year's number in order to provide an apples-to-apples earnings comparison. Most of these items -- actually all of these items -- are thoroughly discussed in the press release, so I will only focus on the high points for this discussion.

For the three months ended December 31 of 2004, we reported net income available to common shareholders of 14.9 million, that's $0.38 a diluted share, and that's compared to 78.8 million or $2.01 per share last year. Results for the quarter of this year include $0.03 of special charges related to income taxes. The primary component of the $0.03 charge was approximately $0.04 in interest associated with the denial by the IRS of a portion of refunds that were claimed by the company in 2001 and 2002, with respect to operating loss carry-backs. Upon review of our refund documentation, the IRS claimed that there were limitations on the amount of losses we could actually carry back.

We expect to realize the effects of these denied losses by offsetting them against taxable income in 2005. So in essence, we will return the money to the IRS, which we did in January, and we will effectively get it back by virtue of not paying cash taxes in 2005. So we will actually get it back this year. Offsetting the $0.04 charge was a one-time tax benefit from a variety of items, but it netted to $0.01, and these items really relate to an implementation of a number of tax planning strategies which we expect will lower our effective rate going forward. As we've mentioned several times this year, results for last year's fourth quarter include that large one-time tax benefit related to re-establishing our deferred tax assets, as discussed in our press release.

In addition, the fourth quarter of 2003 did not include a provision for income taxes. We estimate that if you applied the tax provision to the fourth quarter of last year, and adjusting for special benefits, we would have had net income of 14.9 million or $0.38 a share. So cutting through all of this, in order to compare apples-to-apples, our fourth quarter earnings for 2004, excluding special items, represent a 7.9 percent increase over fourth quarter 2003 earnings, as adjusted and as taxed. Operating income for the fourth quarter increased to 45 million as compared to 44.7 million last year. Adjusted EBITDA for the quarter was 59.1 million, compared to 58.7 million for the same period. And same store facility EBITDA for the fourth quarter increased approximately 1 percent over the prior year.

For the year, the company generated net income available to common shareholders of 61.1 million, or $1.55 per share excluding special items. For 2003, we estimate that net income available to common stockholders, excluding special items and adjusting for an income tax provision, would have been 44.6 million or $1.23 per share. So again, apples-to-apples, earnings for 2004 -- for all of 2004 -- represented 26 percent increase over 2003 adjusted and as taxed. Operating income increased to 175 million -- that's compared with 169.4 million last year. Adjusted EBITDA increased to 228.6 million, as compared to 222.7 million in 2003.

In 2004, we saw significant growth in our federal customer base in the southwest, specifically in Arizona and San Diego. The inmate growth in these areas more than offset losses that we suffered, that we have discussed in previous calls, from the states of Wisconsin and Colorado. Adjusted free cash flow for 2004 increased to 112.6 million, compared to 111.3 million for 2003. Turning to operations, total revenue for the fourth quarter of 2004 increased 10 percent to 293.8 million, from 266.9 million in last year's fourth quarter. Total compensated mandates increased to 5.8 million from 5.1 million.

Our average compensated occupancy for the quarter decreased to 92.6 percent from 95.4 percent last year, primarily as a result of a number of new beds constructed and brought online during Q4, but also because inmate populations in several of our facilities began trending down in the second half of the quarter. And I will talk about that more in the guidance. Revenue for compensated mandate decreased from $51.09 in the fourth quarter of 2003 to 49.74 in the current quarter, and that reflects lower per diems associated with the Texas managed-only contract, which again we've discussed throughout 2004. Operating costs remained essentially unchanged, down slightly to $37.27 per mandate from $37.47 per mandate last year. Our fixed costs were down $0.01 to 27.67 from 27.68.

For the quarter, we were actually able to achieve a slight reduction in salaries and benefits, although the savings here was partially offset by increases in maintenance and repairs and utilities -- the rise of utility costs not being surprising, given rising energy costs that I think everybody is experiencing. Variable costs also declined to $9.60 per day from $9.79 per day last year. And that's a decrease of $0.19. The primary driver in the reduction of variable cost was in legal where expenses declined $0.40 per man day. Legal expense rose from quarter to quarter, and it's based on incidents in our experience in Q4, and this year was improved over last year's fourth quarter.

The end result was that operating margins per man day actually declined $1.15 from last year's fourth quarter to $12.47 per man day from $13.62, and our margin percentage declined to 25.1 from 26.7 percent. Again, the major reason for the reduction in our operating margin was the Texas manager-only contract award, which contained average per diems roughly half of the company's overall average. Offseting this per diem decline were decreases in both fixed and variable costs. G&A expense increased to 12.8 million from 11.1 million last year. Prior calls, I have discussed the higher levels of expenditure we are making in headquarters personnel n the areas of IT, business development and HR; and despite recent increases, G&A expenditures still only amount to 4.4 percent of total revenues, and that's a level that we feel is acceptable.

So in summary, I would say that overall we're please pleased both with the results for the quarter and for the full year. And with that, I will turn to our outlook. As stated in the press release, the company expects diluted earnings per share for the first quarter 2005 to be in the range of $0.32 to $0.34, and full-year EPS to be in the range of $1.75 to $1.85. During 2005, we expect to invest approximately $107 million in capital expenditures, consisting of approximately 64 million in prison construction and expansion, most of which relates to our recently announced Red Rock facility, 21 million in maintenance and capital expenditures and 21 million in information technology.

Let me add here that full year guidance does not include any impact from accounting rule changes related to stock-based compensation, including the expensing of stock options which the company will adopt July 1, 2005. We expect to provide guidance as to the impact of stock-based compensation during our first quarter earnings call. I'm going to anticipate some of the questions here, as to what does this guidance mean, and all that, but let me say a few things about it.

With respect to our guidance for the first quarter, I will begin by saying that the company's first quarter is always negatively impacted by the fact that we have fewer operating days -- generally two fewer operating days -- due to February; and because we pay substantially all of our unemployment taxes during the first quarter of the year, we have 16,000 employees out there. Looking back at last year, EBITDA was down 3.2 million from Q4 of '03 to Q1 of '04. Last year was a leap year, and so there was really only one day missing there. So that 3.2 million was light, if you were to compare apples-to-apples.

In addition to fewer days in unemployment taxes, the first quarter is often seasonally weak from the standpoint of inmate populations. Our inmate populations in certain facilitates, as I mentioned earlier, are definitely down from Q4 levels. Based on discussions that we have had with customers, however, we believe these declines are temporary. We have every reason to expect these populations will be restored, and the restoration of those populations is incorporated in our full-year guidance. Finally, with respect to Q1, I believe everyone is aware of the Bureau of Prisons contract we were awarded in December.

You are also aware of the fact that we expect to substantially complete our Stewart Georgia project during the first quarter, and also the fact that there were several expansion projects that were substantially completed in Q4, including Lake City in Florida, Houston, Texas, and Leavenworth, Kansas. Ultimately, all of these facilities should experience start-up costs. We are not going to comment during the call on the specific amount of start-up costs that are included in Q1 guidance; but clearly, we are expecting hiring to commencing for Q1 for a number of these opportunities.

With respect to full-year guidance, we've provided a range of $1.75 to $1.85. As you will hear from John, we are working on a number of exciting opportunities. All but one of these opportunities involves existing contracts -- or in other words, our estimates are not dependent in large measure -- in large measure on new contract wins. Although we're confident that most of these opportunities will materialize, timing -- as we always said to you, the timing is always uncertain.

So as was the case last year, as we gain greater clarity with respect to our customers intentions, we will fine tune our guidance in subsequent earnings calls. And with that, I will turn it over to John.

All right. I'm going to pick up with a couple of I think important points that Irv was just making. First of all, he talked about guidance for the year, as well as the quarter, and I think if you just took the midpoint of those two numbers, that you would see that the run rate for the balance of the year is a pretty good number.

Second, talking about the opportunities, all but one involves existing contracts, and all of them involve existing customers. And then as Irv finished, timing is always an issue. But let me talk about what I think some of the opportunities that we believe will materialize over the near term, and that will help impact the full-year guidance. So first of all, we have in Northeast Ohio -- we recently got authorization from the Federal Bureau of Prisons that we plan to implement operation of that facility now on June 1.

That is a little bit earlier than what we had said previously -- it's an 1195 bed contract, but as you know, on all of the BOP contracts today, they allow for a percentage growth, and I think you can see from our supplemental that we run about 110 percent of beds available for -- with the Federal Bureau of Prisons. So that, we think somewhere between 12 and 1300 are ultimately there. We announced last April that we were opening the Northeast Ohio facility because we felt that there was the opportunity to serve a need by the U.S. Marshal Service.

We have over the last couple of months been averaging over 300, which we indicated was the short-term goal, and we feel that we will continue to see that number inch up. So we think that it's not unrealistic that the Northeast Ohio facilitate can be completely utilized sometime over the next year. Irv talked about the expansions that we completed in Houston, Florence and Leavenworth -- all of those are starting to be utilized, some almost completely. A of course, we will get the benefit of the full year on those.

One correction to Irv is the Lake City will not be available for inmates until the end of the first quarter, but we are anticipating working on the staffing in order to more than triple the size of that facility, I think starting somewhere around April. We had talked about, you know, our decline in the Wisconsin inmates, the last facility we saw that happen was in our Appleton, Minnesota facility at Prairie. We have some 1100 beds available there. And I think those who noted that the state of Minnesota has -- is working on a supplemental appropriation to begin to utilize some meaningful level of beds there. And then also as part of their budget for the July 1, '05 going forward, to utilize as much, if not all of that facility.

In our Diamondback facility, we have some 800 Arizona inmates. The -- we have some expectation, I believe, that Arizona will utilize more of those beds. I think we announced in March or April of last year, that they initially planned to use up to 1200 beds. Arizona has some 2,000 beds deficit instate and is growing at some 115 beds a month. So their needs are continuing to grow. We continue to hear that Colorado's forecasting that between now and 2007, that they will need all the available beds that we have as well as some other beds that probably come online sometime in the spring of 2006.

And then the last thing to talk about is that Irv mentioned the start-up expenses possibly at Stewart. We have entered into an agreement with the local government in Georgia, which should allow us to maybe utilize this facility sometime in the next several months for one of our federal customers. And then of course, we talked about the -- our new facility in Arizona, the Red Rock facility, which if you take into consideration all that I just mentioned, the impact that would have on the full year going forward in 2006, as well as the opportunity we think exists when we do put more beds online in Arizona. As I look at our existing customer base, in addition to the opportunities that we believe are available to the company, I see another 10 states that are current customers of ours, all of which are developing bed needs or have bed needs that we think we offer an affordable alternative; and I can identify some 4 customers who manage jails who are either expanding or are in discussions about expanding their facilities.

Neither of those issues are in the -- in our forecast. Let me also talk about what is not in the guidance that we have, and that's just the highlights and procurements that have been announced over the last year or so that are still active and no one has been chosen yet. Of course, I put out a presolicitation notice for a facility in Arizona for up to 1,000 inmate. The U.S. Marshal solicitation for 2800 beds in Texas is still ongoing, it has not been awarded. The solicitation for 1,000 beds for the state of Arizona in Arizona is still active and has not been awarded. Our proposals are due shortly for a 1284 bed facility in Graceville, Florida, for the state of Florida.

We've talked about previously an RFP that was issued several months ago by Shelby county, Tennessee, for up to 10,000 inmates for their jail population, as well as locally sentenced felons that they have responsibility for within the state of Tennessee. And then Smith county, Texas, which is Tyler, has a solicitation now for up to -- a little over 1,000 --1,200 beds. So those are programs that we're actively competing for, but have not anticipated that we would be awarded any of those in any of our guidance numbers. And then the last thing that I want to talk about, which I think is very encouraging, but also not included in any of the guidance, but we think has good benefits for the industry as well as CCA, and its current bed availability.

The president released his budget the last few days, and talk about the three agencies that we do business with, and maybe some of the alternatives that the private sector might have in offering its services to the Federal Bureau of Prison, the U.S. Marshal Service and Immigration Custom Enforcement. I think we mentioned in prior conference calls that the Federal Bureau of Prisons had some funding to begin to look at outsourcing of some 4500 beds. In this year's budget, it just specifically deals with -- or as you know, 1400 beds have been procured per the award that we got in Northeast Ohio, and then it specifically add adds another $20 million for funding for 1600 new private contract beds.

And again, the budget continues a moratorium on additional new prison construction until the BOP completes an evaluation of its existing low and minimum security facilities for potential modification to house their higher security inmates. So we see specifically the intent, assuming that the president's budget is included in the final authorization; but would point out once again, which we have previously, that the Bureau is forecasting some 196 bed needs -- that would be up about 7,000-plus from our prior numbers, and continues to forecast the need of some 2,000 -- I'm sorry, 225,000 back by 2010, and if you look at what the Bureau currently has under construction that they could utilize, which of course is talked about in this budget, there is something close approaching a 30,000 bed need by the federal government that we, of course, feel that the private sector could offer an affordable alternative as well as significant flexibility.

Turning to the federal detention trustee, there is a request for $1.2 million -- $1.2 billion -- for the office of the detention trustee which would support an average daily detention population of somewhere around 60,000 beds. We estimate that to be an increase of about 4 to 5,000 beds from where they are now. And then we see the Department of Homeland Security increasing their budget by 176 million, 90 of which is to increase detention beds. We estimate this to be an additional 4 to 5,000 beds. So the continued needs by the federal government to deal with its growing population, the sentence population as well as dealing with the enforcement and security of our borders, I think, puts the private sector -- and specifically CCA -- in the position of being able to assist these agencies in their future needs. So that is the -- what we feel is the -- the opportunities that potentially are available to CCA.

I would point out a couple of threats that -- in addition to that, there is an RFP that was submitted by Tulsa county for the management of that jail, which is a current customer of ours, that is to -- for an award beginning July 1. We're obviously competing to have that renewed, but we can't say with any certainty, and so that is out there. And then the governor of -- the new governor of Indiana has indicated a sincere desire to house all Indiana inmates within the borders of Indiana, and we have of course some 650 inmates in our Otter Creek facility in Kentucky, and we of course continue to talk to them as to how that may play out.

And there's no way we can forecast right now the timing for sure on that. So with that, I would be happy to open up for questions and answers.

Thank you. 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 would like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection, and your questions will be polled in the order that they are received. If you are using speaker equipment, we do ask that you please lift the handset before pressing the numbers. Our first question comes from Jeff Kessler with Lehman Brothers. Please go ahead.

Good afternoon. It's Scott Scheinberger for Jeff Kessler. First, just a real quick question in the costs area. Sarbanes-Oxley, we've seen some of our companies have increased Sarbanes-Oxley in the fourth quarter. Can you talk a little bit about that? It sounds like your G&A is going to be steady, but just some elaboration there on timing, '05 versus '04.

Clearly, we're going to incur additional costs, as all companies are for Sarbanes-Oxley. My guess, Scott, is that somewhere on an order of magnitude of about a million to a million and a half dollars across the board on Sarbanes-Oxley. That -- some of that money was incurred in '04. Some of that money will be incurred in '05. I guess there will be a -- the first year is going to be more expensive as you go forward -- there are going to be ongoing costs, but not as much as the first year implementation. So it's a component of a number of things that affect G&A around here, so I guess I'm trying to give you an order of magnitude on that. It's not -- a 50-plus million dollar G&A budget is not that significant. But, you know, it is clearly there.

Okay. But that's -- the 1 to 1.5 is a per year?

Yes, but you know -- yes.

Okay.

And if it's level as we go forward, we'll talk about that.

All right. Great. That's helpful. Thanks. I want to talk a little bit about the IT. Cap Ex, the spending there. Just if you could give aus progress report on how that's going -- I think last call, you said that of the IT Cap Ex, about -- maybe a little more than half of it you could see a little -- or a little less than half was just maintenance, a little more than half was something you could see a return. Can you guys potentially quantify returns or give us a time line? Any color there would be helpful.

I think what we've said in the past is that -- well, first of all, let me start with the dollar amount. I think that ratio is still pretty good. Something a little over half of that -- I think it was $21 million is probably -- it will have a return associated with it, and the balance would be -- you could stay in business kind of stuff but you just have to spend. The implementation of IMS-2 is going very well. I want to say that we're moving along to 6 or 7 facilities right now. Like any implementation like this, it's going to have its fits and starts; but overall, we have been exceedingly pleased with it. And we still are on track to try to roll this out to as many as -- to substantially all of our facilities over a three-year period. The returns that we expect to get on that investment exceed the returns that we would get from a prison build. You know, so we tell people on a prison build that we would be looking for somewhere on the 12 to 15 percent kind of range of returns on a new -- on new prison construction. We expect this return to be higher than that.

Great. Thanks. One final quick thing. Tax rate for '05, any guidance there?

We've been telling people 40 percent. We are still working with it. What I would tell you right now is you might be able to push it back down to about 38.5 or something like that for now. And I will let you know it if there's any other progress made.

Okay. That's all for now. Thanks.

Okay.

Thank you. And our next question comes from Jim MacDonald with First Analysis. Please go ahead.

Hi, good afternoon, guys.

Hi, Jim.

Hi. Could we talk about some of these specific sites in a little more detail? Like Stewart, you put some of the beds on the books this quarter. When will you put the rest of the beds on -- and was that the end of the quarter? And then when, you know, during this quarter maybe will you put the rest of the beds on the books, and when is it possible, you know, based on what John said to possibly look for inmates, which assume is some kind of inter-government agreement?

We have an inter-governmental agreement. I believe we put something on the order of 280 beds on the books. Is that right?

273. 273 on the books at the end of the fourth quarter. So today, we can take on 273 inmates and we would endeavor to do that if we could do it. There is some additional work that needs to be done. We're actually doing some work for the City, I guess of Lumpkin, Georgia, and that work involves an environmental permit that we think -- we hope is any day now kind of a thing -- again, I always caution, dealing with government, you never know. Once we get that permit, Jim, it's going to take about 80 days to do the work. We're hoping that sometime around April 1 -- it's probably beyond that now, we're beyond April 1 -- but we were targeting sometime around April 1 to have the rest of those beds. It may run a little bit longer than that. It's just -- we know what we need to do. We've got the contractor on that, we just need to get a permit.

We won't see the depreciation in interest from [INAUDIBLE] bed until Q2?

That's correct.

And we will see that for the 273 beds in Q1?

That is correct.

Okay. And on Youngstown, you mentioned June 1. Could you talk a little bit what that means? I know there is the 50 percent and the 95 percent, I believe, when those kick in?

I think that's correct. I think it's 50 percent for 90 days and then I think it goes to 90 percent on this one.

Okay, 90 percent. Does that kick in -- the 50 percent kick in June 1?

Yes. I think we've -- we're going to confirm that, but I believe that is the entrance.

And of course, we will -- Jim, the rule is always to have the guards there first, so there will be some start-up costs but we're not -- I just don't want to get into parsing that up. I will let you go through that.

In terms of start-up costs for Youngstown, I mean, most of that would presumably been in the second quarter then, right?

It will likely be in a little bit in both.

You know, the start-up with the Federal Bureau of Prisons can be a little longer than most, just because they have certain requirements that -- as it relates to background checks and other things, so it could start a little earlier, but --

So again, there are several projects. And just -- if I said for example, that [INAUDIBLE] City was going to completed -- and John's right on the completion date; but again, even if were going to be completed at the end of the first quarter, you might start staffing that, for example, during the first quarter. So what I'm really getting at is there are a number of facilities for which we can have startup costs. Clearly, Northeast Ohio is one of them that would flop over into both quarters. And again, we work with the agencies, and I know it's difficult for you and it's difficult for us, too. That's why we create ranges in this guidance.

And then the last one of these, on Crowley, you talked about the occupancy was -- the size of the facility is up, and that's before you had some problems. Can you kind of give us an update on that one? And 2007, that's kind of a long way off, so maybe what about the intermediate term?

Well, we think the intermediate term that their growth has been somewhere in the 50 to 70 bed per month average. They do have some inmates in local jails at a little bit higher capacity than they like. We've just kind of been working with them on what is the right mix, because it -- and what they expect that the inmate growth is -- so it's kind of hard to forecast, but we have about 1100 beds that are currently available in the 4 facilities. And all of them, I guess, are in Crowley right now. And we might look at some -- some combination in the interim, but we haven't completely decided on it yet.

Thanks very much. I'll come back.

Thanks, Jim.

Thank you. Our next question comes from Barry Stouffer with BB&T Capital Markets. Please es go ahead.

Good afternoon, gentlemen. The extra 1500 beds that are going to be in your figures for total beds available, is that actually extra capacity based on a reconfiguration, or is that just the definition of --

The question is, of the 1500 beds, is that just reconfiguring beds that already exist or was that really counted for [INAUDIBLE] the 1500 reconfigured beds.

I'm sorry, I couldn't tell if you were answering my question or trying to --

I was trying to clarify it for John. I think, Barry, that some of these beds --

I would say that in most cases, it is actually acknowledging that have -- some cases have already been utilized. So it's not like we're going to -- all of a sudden be able to take 1500 more inmates. In most cases, they are already being utilized.

Okay. That's what I was thinking. Irv, can you talk about what the capitalized interest figure was in the fourth quarter and what kind of level it would be in the next several quarters?

I can. Give me one second. Fourth quarter was about a 1.4 million. I don't -- I would say -- I just don't have the number. Really the only major project we have going right now is Red Rock, and it's going to depend on draw schedules and I don't have that in front of me right now. I would say for the next quarter, it might be down a little bit, but then as Red Rock gets going, that that number would increase. It's really just applying various -- it is going to be applying our effective interest rate to the construction draws as they happen on Red Rock, but it's not something that we disclosed. 35 million -- $35 million project.

Okay, and can you comment for both depreciation and G&A expense, what kind of outlook you have for the full year '05?

We don't really -- I guess I've never given anything specifically. Let me just -- you know, Barry, I would say somewhere between 56 and $58 million is my guess right now. I'll -- if that helps people, I'll try to incorporate that into our guidance.

And as far as depreciation, what about G&A expense? You mentioned the 50 million-plus budget. Is that 50 million-plus 52, 53?

I would say right now, Barry, somewhere between 53 and 55 on G&A.

Okay. Thank you.

Uh-huh.

Thank you. And our next question comes from Patrick Swindle with Avondale Partners. Please go ahead.

Good afternoon, gentlemen.

Hi, Patrick.

My first question is on the inmate populations, as you came out of the fourth quarter, did you see continued deterioration during the early part of the first quarter in those populations? And then were there any concentration issues as far as there being declines from specific customers, or was it pretty much across the board?

I think we -- [INAUDIBLE] I think that the January numbers were pretty much mostly flat, but it was kind of [INAUDIBLE] flat from a low form which is [INAUDIBLE] Patrick, I guess we probably need to try to get that answer for you offline.

Okay. That's fine. I can call back. Then my next question relates to the guidance, the $1.75 to $1.85, you indicated that the specific items -- I believe it was Northeast Ohio -- and you assumed that you bring those inmates off from the federal contract and then additional inmates in Houston, Florence and Leavenworth; and then you have Lake City and then Prairie inmates from Minnesota.

Minnesota, right.

Is the range a function of timing? Given that there are no additional contract wins driving that guidance, would the range be driven by timing and in magnitude, obviously, of the new contracts or the new inmates coming into the system?

Yes, that's about it.

And those would be the -- those would be the contracts specifically driving that guidance, and no additional new contracts are in that guidance?

Well, part of it is the restoration; and when that happens, of the populations, it did decline. Part of it was what's going to happen with Minnesota, what's going to happen with Colorado? What's going to happen with the federal government? So it's a little bit of getting the -- excuse me -- the populations that went down back to the levels that we hear they're going to come back to. And then moving forward with some of these other items. And then of course, the -- when do we begin the startup cost process on some of these facilities.

All right. And then my last question, and then I will go back in the queue, relates to the federal bed needs, I think you had mentioned, John, anticipated bed needs of 4 to 5,000 beds for the detention trustee, 4 to 5,000 from Homeland Security. Are there any timing constraints that you see in the budget or in terms of your discussions with the vendors? Would you expect it to be during the fiscal '06 budget year, the federal budget year, or can you get any more specific on timing?

No, I cannot. Because, you know, this is the beginning of the budget process. This would be a budget period for October 1, 2005 and beyond, so it is -- you know, it is not way off, but it's a good, you know, over 6 months. Our assessment is that in some cases they may be already, you know, beginning to spend some of that money and will need supplementals, actually, to meet the current demand. So in some way, there have been additional beds already funded through appropriations that aren't there, that have have to come through supplemental, and then we see this over and beyond that. But the timing on this, the safest timing is, you know, in the last quarter of this year.

Right. And I guess to that end, do you all have any -- I guess beyond the new facility build that you announced recently you've begun, do you expect to be adding any additional beds over the course of the remainder of '05 in terms of starting new facility builds?

It's possible that something like that could happen, but it's not built into any guidance that we are giving right now.

Okay. Thank you.

Let me -- I want to go back and correct something I said earlier. Barry was asking about depreciation guidance for the year, and what I was not locking into is that Stewart is still off the books. So that number, I think I said something around 58 million, I think that number needs to be more like 61 and 63, and Stewart comes online on some of these other -- we start getting a real hit for some of these other expansion projects. Okay. So if there is any -- I just wanted to get that in. If we could take the next question.

I have no further questions.

Okay, thanks, Patrick.

Thank you. And our next question comes from Bob Bartholomew with PMI. Please go ahead.

Yes, hi Irv, hi John. How are you today?

Fine, thank you.

Good. I have a question regarding -- I mean, when you fellas talk about the -- you know, the potential backlog of business, it's a pretty stunning number in terms of total number of beds needed. And I have a -- really a 2-part question relating to that. One is, can you give us any idea on the RFPs that are out there that actually require a provider with existing beds in inventory versus, let's say, a new build?

And then the second part of the question has to do with the BOP, because I know the company talked last year about 4500 beds being needed by the BOP, and presumably the 1200 beds that you recently won was a part of that. But as I looked at the new budget for the Department of Justice, it talks about a moratorium on new build and promoting aggressive BOP contracting, with state, local and private sector prison providers, and then they talk about partial funding for an additional 4500 beds, but that the budget also provides up to $150 million that they use to contract out housing for low, medium security inmates. I'm just a little confused about the 4500 beds that you talked about before. Is that part of this budget, or was that there any funding that took place in the prior budget that might include, for example, the1200 beds that were you recently awarded?

Okay, well the -- and one of the dilemmas I think we're having is our ability to drill down into the budget, and so we're looking at trying to catch some at a high level; but as I understand it, the 4500 beds was articulated in the current budget, and there was some lended funding to begin the initiation of that. I think it was 9.4 million. In this budget, it does not refer to the 4500 beds again, but it -- you know, it talks about the -- I mean, it obviously has funding for 1400 beds or so, because of the Northeast Ohio. And then it specifically speaks to $20 million for 1600 new beds.

So I think our interpretation is that of the 4500 that's been discussed in some need, that they are now specifically pointing to, say, 3,000 of those being the one that's already been awarded, and the new funding for 1600 new private contract beds. So it doesn't -- we don't see that it speaks to say between the 3,000 and the 4500 that was referred to previously.

So we don't have it by line item, then?

No, we don't have it by line item, so that's -- it's just a little disadvantage.

But first -- and the first part of the question is with regards to these RFPs; is there a requirement that a provider actually have existing beds in their inventory?

The ones that I listed do not have a requirement. In fact, the -- in every one of the ones that are out there right now that I listed, there would be a construction requirement in order to meet the needs. You know, it could allow for someone who had beds already in the procurement area to expand their facility; which of course should aid the bidder if they could do that in some of the costs. But none of these speak to using existing beds.

Okay.

Still, quite a stunning number of bed needs over the future?

Yes. Do you have any further question, sir?

No, I don't. Thank you.

Thank you. Ladies and gentlemen, if you have an additional question, please press the star followed by the one. And if you are using speaker equipment, you will need to lift the handset before pressing the numbers. And our next question comes from Daniel Sullivan with Capital Partners. Please go ahead.

Yes, good afternoon. Thanks for taking my call. Just one quick question. Can you give us a sense of what you're seeing in the market for per diem rates increases compared to the last few years?

Actually, it hadn't changed. I mean, we have some situations in which it's pretty standard operating procedure, as far as a predetermined in the contract. We have, of course, numerous contracts with the federal government in which there are adjustments based on wage adjustments in the area. And then there are -- you know, there would be a few states, which I think we've mentioned previously, in which there is an effort to participate in -- in their budget making process in order to get it. So there really is not a general -- a general statement that can be made other than let's say our guidance pretty much anticipates, you know, the historical experience that we had. And we actually do, with guidance, contract by contract, not --

Okay, is there -- 2 or 3 percent; that a safe assumption?

Yes, I think that is probably a pretty good assumption.

Great. Thanks a lot.

sWe're still seeing those, yeah.

Okay. Thank you.

Thank you. And our next question is a follow-up question from Jim Mac Donald. Please go ahead.

Hi, just a couple of minor things. I notice there was a transportation revenue falloff in the quarter. Anything happening there?

Transport -- you know, again, part of it what it does is extradition, and a lot of what it does is moving inmates for all the requirements that we have for the company. You know, Jim, right now, absent some type of large opportunity, what we're endeavoring to do is to try to operate that somewhere around break-even. It's really not -- you know, at some point, as I've said before, that might represent an opportunity to us, but it's just not something that we are focused on.

And that just -- I missed the number of inmates -- Indiana inmates you had in Kentucky.

About 650.

Okay. And then you mentioned a legal gain, if you will, in the quarter, or less legal costs. What are you seeing in general with legal and insurance costs at this point?

Legal just depends on the number of incidents, how they settle out and what happens there. And then that's really what drives that. With respect to insurance costs right now, it is actually been a pretty good year. We're expecting our workers comp to be, knock on wood, flat to down. And our property and casualty has not increased very much at all. Our D&O, I think, was actually flat to down. So we've had a very good year from an insurance perspective here.

Thanks very much.

Uh-huh.

Thank you. And our next question comes from James Adams. Please state your company name followed by your question.

Scotia Capital. The customers that have seen draw-downs over the last couple of months, have they given you any color on, you know, what's been driving that and why they are so sure that it's going to come back?

Just -- it's been a number of our -- predominantly I would say -- well,, part of it was Wisconsin, which we expected, that is just going to happen. That's the one that's not coming back, but we think Minnesota will at some point fill that void. The other has been just federal customers, particularly in the southwest, and that just seems to be a matter of how much funding that they had available -- that they typically have available to them at the end of the year.

And then seasonality of --

Of arrests.

Of people, taking arrests, because they're taking vacations.

Exactly. And you know, last year, there was a specific program, I guess, in place -- they called it Ice Storm -- where they were on a mission to arrest a lot of people. We did have a fall-off last year, but it wasn't as noticeable as this year, because there was no program. And so again, we -- everything that we're hearing leads us to believe it's seasonal, and that will be restored, but I yet think the full year comp reflects that.

Okay.

Thank you, and at this time, I show no further questions.

Okay. Well thank you all for your questions. I will try to wrap this up and we will end the conversation. In summary, we had a 7.9 percent increase in the fourth quarter. It included a number of adjustments, both up and down. But it was an increase after we adjusted all these apples for apples '04 over '03. For the year, we a 26 percent increase apples-to-apples, one year over the other. For the year, our free cash flow was 112.6 million. Our occupancy was down in the fourth quarter from 95.4 to 92.6. But that's a lot of new beds coming online, and the reductions that we said we took place in late November and December. Our operating costs are slightly down again from '03 to '04 -- 37.47 to 37.27. Our guidance for next year, they gave you is $1.75 to $1.85.

That's a range of 13 percent up to 19 percent up. It doesn't include stock option expenses. It does include an assumption for lower tax rates due to our tax planning. And one of the reasons for this spread is, as John said, we got all these opportunities built in, but we don't know the timing in Northeast Ohio, Houston, Florence, Leavenworth, Lake City, Prairie, Diamondback, Colorado, and Stewart. All these have opportunities coming in in the coming year, but we don't know exactly what dates when they will come in, so it is -- whether they're early or late.

And finally, the outlook for the future looks extremely good. John mentioned we have 10 states in our existing customer base that need additional beds. We've got 4 jails in our existing customer base that need expansion. We have 17,000 beds out on request for quotations. The president's budget is very favorable towards privatization, with the Federal Bureau of Prisons, the Marshal Service and Ice. The detention trustee's budget is up for more beds. Homeland Security is up for more beds. And the only threats we have in our existing line of business is Tulsa county, which needs to be requoted, and the possibility of Indiana moving inmates back to Indiana.

So overall, the outlook for privatization and for Corrections Corporation looks quite promising for the future, and we thank you for being with us today. And we look forward to sharing information with you again at the end of our first quarter. And that wraps up today's meeting. Thank you.

Thank you. And ladies and gentlemen, thank you for participating in the Corrections Corporation of America fourth quarter 2004 earnings conference call. If you'd like to listen to the replay of today's conference, you may dial 303-590-3000, or 1-800-405-2236, and you will need to enter the access code of 11022568 followed by the pound sign. Once again, thank you for participating in today's conference. At this time, you may now disconnect.