CoreCivic Inc (CXW) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Corrections Corporation of America 2006 first quarter financial results conference call. Before we begin, let me remind today's listeners that this conference call contains statements that are forward-looking and 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 the Securities and Exchange Commission, and these factors include, but are not limited to changes in 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 the forward-looking statements that may be made to reflect events or circumstances After the date, hereof, or reflect the occurrences of unanticipated events.

Participating on 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, Irving Lingo. I would like the turn the conference over to Mr. Andrews. Please go ahead, sir.

Good afternoon and welcome to our first quarter 2006 earnings release. We're happy to have you all today, and I'm going to have Irv lead off and give you our results.

Thanks, Bill. Obviously, we're quite pleased with the quarter. It's a quarter where we earned $0.54 a share, excluding the write-off of financing costs associated with our bank facility, and that compares to an apples-to-apples number of $0.35 per share last year. Last year included a comprehensive refinancing during the first quarter, and if you add back the write-off of financing cost there it was $0.35. So, that's a 19% pick up in earnings per share or about 54% gain. Earnings for the quarter were positively impacted by the management contract with the Federal Bureau of Prisons at our Northeast Ohio Correctional Center, which essentially commenced in the second half of last year, as well as increased inmate populations at our Prairie, Florence, Diamondback and Central Arizona facilities. You will recall that we saw a drop in federal inmate populations at the beginning of last year. We did not experience that this year, and we can only attribute that to an increased focus on border security resulting in a higher number of detentions.

Our Florence and Central Arizona facilities both performed appreciably better than in the prior year. In addition to our Phoenix area facilities, occupancy at our Prairie facility continued to increase, operating at just over 100% for the quarter. Major customers occupying Prairie are Washington and Minnesota. Our Diamondback facility also experienced a substantial increase in occupancy, operating at over 90% for the quarter versus 74.4% last year. As a result of the strong performance of these and a number of our other facilities, same-store facility EBITDA for the first quarter was up almost 21% over the prior year.

Operating income for the first quarter of 2006 was $49.9 million compared with $39.6 million for the first quarter of 2005, while adjusted EBITDA for the three months ended March 31 increased 22% to $65.1 million, and that's compared to $53 .7 million last year. Adjusted free cash flow increased to $43 million this quarter from $15.7 million last year. The increase in adjusted free cash flow is primarily brought about by the increase in operating income, as well as lower interest expense for the quarter. Additionally, the prior year quarter was negatively impacted by about $13.5 million in tax payments associated with excess refunds received by the Company in 2002 and 2003.

Turning to operations, total revenue for this year's first quarter was 12.5% higher than last year, amounting to $316 million. Compensated man days increased 8.2% to $6 million against $5.5million last year. Revenue per compensated man day increased to $52.03 versus $49.90 last year. That's an increase of 4.3%. Compensated occupancy for the quarter increase to do 93.7% compared to 89.6% last year. Operating costs increased $38.59 versus $37.85 last year. That's an increase of just 2%. Fixed expenses for the three months decreased $28.86 per compensated man day compared with $28.98 last year, a decrease of 12 per -- excuse me, $0.12 per compensated man day. The decrease in fixed expenses was primarily the result of a decrease in salaries and benefits of $0.38 of compensated man day, and that was offset some by an increase in utilities of $0.18 per man day resulting from increasing energy costs.

The decrease in salary and benefits was driven primarily from the fixed cost leverage we obtained by spreading salaries over a larger number of inmates this quarter. Personnel costs typically represent between 63% and 65% of our total cost, so while we're gratified with the fixed cost leverage we're achieving, we also remain committed to rationalizing the staffing levels in each of our facilities. And this is an area the leadership in each of our facilities focuses on every day. Energy costs currently make up only 5.9% of total facility costs. I always tell people just under six, so I guess it is. Therefore, the effects of rising energy prices are CCA are somewhat muted. Variable expenses increased from $8.87 per man day during the first quarter of 2005 to $9.73 per man day this year, and that's an increase of $0.86. The increase in variable expenses per man day includes an increase in legal expenses, as well as a modest increase in inmate medical. Legal expense in the prior year quarter was favorably impacted by the successful negotiation of a number of outstanding legal matters and so, the increase was really based on the fact that we were comparing to a very favorable situation last year. The end result was that operating margins per man day increased $1.39 to $13.44 from $12.05 in the prior year, and our margin percentage increase to do 25.8% from 24.1%.

G&A expense for Q1 was roughly $1.8 million higher than in the previous year. Included in G&A was $600,000 in stock-based compensation, higher than last year. G&A expense was roughly 4.5% of total revenue. For the balance of the year, we expect that that will gravitate up to approximately 5% of revenues due to a variety of factors including higher stock compensation expense than we incurred in Q1, bonuses and some additional hiring in the second half of this year. Income taxes were computed based upon a 37% rate, which, at this time, is the rate we anticipating for the full year in 2006. With respect to payment of cash taxes, our expectation is that we will have substantially used our operating loss carry forwards and will begin being a cash taxpayer in Q2 of this year.

In summary, Q1 was a very strong quarter, particularly relative to last year. Revenues per man day increased 4.3%, while costs per man day were only up 2%, resulting in a year-over-year improvement in operating margin of over 11%. Occupancy improved at a number of our facilities, resulting in same -- strong same-store facility EBITDA growth. Margins improved not only because of increased populations, but also because cost increases were moderate. As a result of this performance, the Company is generating significant adjusted free cash flow, which amounted to over $1 a share in Q3 and Q4 of last year and, again, in Q1 of this year.

I want to take a moment to discuss just how meaningful this cash flow generation is to our business. First of all, when we use the term adjusted free cash flow, we're talking about cash generated by the Company after paying all of its operating expenses, income taxes, interest costs and maintenance CapEx. In other words, it's money we can commit to activities, such as the development of new prison inventory, debt reduction, dividends or share repurchases. Based upon the levels of adjusted free cash flow that we've generated for the last three quarters, we estimate that for 2006 adjusted free cash flow will exceed $150 million and we expect to generate at least that amount in 2007. For the past two years we have utilized this cash to build new prison facilities and to expand existing prison facilities. We expect to continue utilizing our cash in this manner for the foreseeable future.

Projects that we have completed or are currently working on include: Expansions of our Crossroads, Crowley, Florence, Houston, and Leavenworth facilities in 2004 by a total of over 1,600 beds; completion of our 1,500 bed Stewart facility last year; expansion of the Citrus County facility by 360 beds that's to be completed in Q1 of '07; development of 1,596 bed Red Rock facility to be completed in July of this year; and the 1,896 bed Saguaro facility to be completed in Q3 of '07. Finally, it also includes the extension of our Webb County facility by over 700 beds to be completed in early 2008. Webb County was a new announcement included in the press release today. The facilities I just mentioned are just the projects that CCA is financing. In addition to these projects, there have been a number of expansions of manage-only facilities undertaken by our customers including the Bay, Gaston, Lake City, Hernando and Silverdale facilities.

Our strategy to invest our cash in expanding our inventory of beds is based upon our belief that we face a very positive environment for our business, with the demand for prison beds exceeding supply, a lack of new supply in the pipeline and the fact that it will take years for a material increase in prison bed supply to occur. With over $100 million in cash on hand and cash and investments on our balance sheet, expected adjusted free cash flow of at least $150 million in each of 2006 and 2007. And with our debt levels continuing to drop as a multiple of adjusted EBITDA, falling below four times EBITDA, based on annualized -- on annualized Q1 adjusted EBITDA, we are clearly capitalized to undertake this new development and have the capacity to commit to several thousand additional prison beds should we find suitable situations that meet our return on investment criteria. At a minimum, based on our expectations of the near-term absorption of our remaining inventory, our shareholders should expect additional announcements of new development to be forth coming in the near future, including the potential of a speculative prison facility.

I will now turn to our outlook and, as you saw in the press release, our guidance for 2006 earnings per share for the second quarter is in the amount -- in the range of $0.55 to $0.59 and full year EPS guidance is now $2.20 to $2.27. The guidance incorporates an estimated effective tax rate for the year of 37%, as I said earlier. It also includes the estimated effect of the new agreement with ICE at our T. Don Hutto facility. It includes a reduction in EBITDA from our Lake City contract, which was recently renewed with the state of Florida at a reduced per diem. The guidance also includes start-up costs associated with our Red Rock facility; again, that's due to to come online July 1 of this year. We estimate that will impact Q2 by between $0.01 and $0.02 a share. The guidance also includes start-up costs for the opening of our Stewart facility, which we estimate should impact Q3 by approximately $0.02 a share. Finally, the guidance also includes $0.07 of stock compensation expense, which for the full year exceeds stock compensation amounts included in 2005 by $0.04 a share. During 2006, the Company expects to invest approximately $166.1 million in capital expenditures, and that is broken out by $117.5 million in new prison construction, and expansion, $31.6million in maintenance CapEx for our facilities, and approximately $17 million in information technology expenditures.

And with that I will turn it over to John to go over our business development and our pipeline.

Thanks, Irv. Let me begin by reinforcing a statement that Irv made about how we see the environment for our industry right now, and that is that we do see demand for prison bed is exceeding supply. We see a lack of new supply in the pipeline, as well as no meaningful new capacity coming online and meaningful capacity would take quite a while to come online, and then lastly, as he said, CCA has definitely positioned itself so that we can anticipate where this demand will come in both the state and federal level, and we can anticipate it and deliver the beds just in time for our customers. I guess I can say we've never seen the wind at our back like it is today.

I want to talk about the state business and the federal business. To begin with at the states we have 17 states plus District of Columbia, all of which are current customers or have recently been customers with growing bed needs. As we look at the needs of these 17 states plus the District of Columbia, we see upwards of 4,000 beds that they need to deal with to expand their capacity over the next 12 to 18 months. We'll compare that 4,000 against 3,700, which was the bed growth from first quarter of '05 through first quarter of '06 and for this last year. I will point out 300 of those bed growth was with the state of Idaho, which we have recently announced that -- or has recently been announced that Idaho will be taking those out of our Prairie facility, of which will be quite timely because Minnesota will be utilizing those beds shortly.

Obviously some of this 4,000 or so bed growth will come in existing or new facilities with some of our existing new customers such as Colorado, Hawaii, Minnesota, Alaska, but we're also seeing much of this demand will need to be met in other availability other than what we have. Therefore as we stated in our press release, we have resumed operation of our North Fork facility located in Sayre, Oklahoma, to make beds available for our numerous state customers then try to meet their bed needs. Also, we simultaneously we provided notice to the Federal Bureau of Prisons that we are withdrawing North Fork from the CAR 5 solicitation they currently have. So we'll be able to see continued very strong need within our state customers, as well as the past customers, and we believe that with the utilization in North Fork that we -- as well as the beds that we're bringing online and currently have in our existing facilities, we can meet a fair percentage of that demand.

In talking about North Fork, let me move into the Federal Bureau of Prisons and their current environment. With the withdrawal of North Fork and, as we announced last time, the withdrawal of our Hutto facility from the CAR 5 solicitation, it still leaves our Stewart County, Georgia, facility in the proposed. Stewart County and North Fork proposals were very comparable. We think the Stewart County facility is a very attractive one. It is 100 miles from McCray, which is the identical facility which was awarded the CAR 3 contract a few years back. I would like to point out that should some other facility, other than CCA, be chosen for CAR 5 that we do expect that Stewart could be utilized by another customer before the end of the year.

The landscape of the Bureau of Prison really hasn't changed over the last several conference calls. Their demand -- their forecast estimated bed need over the next five to six years compared against the estimated bed capacity, both in the private sector, as well as the what the BOP is bringing online, is still a short fall of between 25 and 30,000 beds. The BOP is currently running in the 135% to 140% over capacity. They are in serious need of bed space. They recognize we have a war going on, that we have some hurricane issues that we had to deal with, but eventually the bed needs of the Federal Bureau of Prisons have to be met in a meaningful way, and we believe it will eventually be a combination of some new construction by them, as well as a larger use of the private sector. As we mentioned previously, the President's fiscal year 2000 budget does anticipate another private sector provider bringing on some 1,400 or so beds in the 2007 -- fiscal year 2007 budget -- '07/'08 budget.

Briefly we continue to see growing demand by the U.S. Marshal service. We have some 15 locations in which we provide services to the Marshal Service. They are affected by the secure border, just like immigration and custom enforcement is. We've seen increased funding in the fiscal year 2007 budget there, and feel that we will continue to see strong and continued demand from the Marshal Service.

And that leads me to what's going on with Immigration and Custom Enforcement. Last time we announced Phase I of the Secure Border Initiative and that was to end the practice of catch and release. And in so doing, the President's 2007 budget has increased funding for approximately 6,500 additional beds, and recently they announced Phase II, which is new interior enforcements to seek out some 600,000 illegal immigrants that have some criminal behavior and to start to capture them and remove them. Obviously the removal of them will bring them through some detention facility, as they are being deported.

So, as we look at our state business, as we look at the three agencies that we do business at the federal level, we couldn't be more bullish. We compare that against some 5,300 beds that we currently have available, but some 2,000 of those 5,300 beds are located in existing facilities that we feel very confident over the next 12 to 18 months will be absorbed by existing customers. As we said, we feel confident that we will see utilization by our numerous state customers in the -- with North Fork facility in Sayre, Oklahoma. And as we stated, we feel that in addition to CAR 5, we have other opportunities and customers who have an interest in our Stewart County, Georgia facility and once Red Rock is open, we will be moving Alaska in May 10 to Red Rock, freeing up beds that both the Marshalls and Immigration Custom Enforcement said they need in our Florence, Arizona, facility. So we couldn't feel more bullish with the landscape, the environment that we're operating in,

And so with tha,t I would entertain questions and answers.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from Jeff Kessler with Lehman Brothers.

This is Mona for Jeff. A couple of quick questions. First on the 600 detainees that you were supposed to get in February from ICE, could you give a little more color on why they were delayed and also just elaborate a bit more on what you mean by indefinite term and if you could quantify what the six monthly payment is?

Okay. Before the activation of the facility in February, we were approached by immigration custom enforcements to change the utilization of the facility to modify the agreement. We've announce that we have completed that early or at least they have completed that modification with Williamson County in a governmental agreement, and we will be activating that facility on Monday. ICE has asked that we allow them to communicate to the marketplace what the planned use of that facility is, which I understand they will do shortly.

Then in the North Fork correction facility center, the 1,440 bed, how many people have you housed in there from the state of Vermont to date?

We currently have 48 in there, with the anticipation of some more coming very shortly.

Can you give us roughly how much more you're expecting or --

No. We currently house some 400 plus inmates with the state of Vermont. They continue to have crowding issues within their state, and that is something that is developing right now. We would be looking -- Vermont would be in the end one of the smaller state customers we would have in that facility. We believe that there's some other states that will use a much more meaningful level of beds eventually.

With respect to the states, can you give us the names of a couple of states? Is California in the pipeline you're looking at?

I would not want to get say the states that we are in discussions with that might utilize the facility.

Okay. That's all. Thanks, guys.

Thank you. Our next question is coming from T. C. Rabold with Banc of America Securities.

Thank you. A couple questions. Actually just wanted to follow up on the announcement with the Hutto facility. The fixed monthly payment that you guys referred to in your earnings release, does that mean you guys are getting guaranteed occupancy at that facility or does that mean something else?

Well, you could say guaranteed occupancy. It actually is a guaranteed payment, regardless of the occupancy.

Okay. And is that something when ICE makes commentary that that will come out or can you talk about that amount? Or maybe could you talk about it in terms of an occupancy rate, if you don't want to give the actual dollar amount?

I think we still run into the same difficulty. I think that ICE, as I understand it, is planning to making an announcement the first part of next week or maybe even the end of this week. And so we would -- other than acknowledge that we're going to be housing inmates for the Immigration Custom Enforcement, we really would leave it up to them to clarify that.

T C, just we don -- first off, we never disclose facility EBITDA. Two things. We disclose everything except customer per diems and facility EBITDA, which everybody would like to know, but, for competitive and other reasons, we don't disclose that. With respect to the use, again as John said, we're going to let ICE take the lead on that. I would say, as John also said, it does essentially work as a guarantee because it is a fixed payment.

Okay. Fair enough. Can you clarify also -- you made some commentary about Hawaii prisoners in your press release going to the Red Rock facility when that opened. Will those prisoners then be moved to the Saguaro facility when that opens? I know last call you guys had made the comment that, long-term, you felt the Saguaro facility would consolidate all the Hawaii prisoners. I'm just trying to figure out, is there incremental demand here from Hawaii or is this just going to be the prisoners moved into that region and then switched into Saguaro when it finally opens?

Of course we will be -- the situation will have to be addressed in a year from now when we open Saguaro, but right now we do anticipate that Hawaiian inmates would utilize all of Saguaro, as well as additional beds in Red Rock.

Okay. Wanted to just talk about the New Mexico facility that you guys look like you're going to be taking over; I think it was a little under 200 beds on a managed-only basis. Is this a trend you're expecting to see from New Mexico, because they historically have been the highest percent of prisoners outsourced of all the 50 states, and I am just wondering, are they now looking to actually move their own facilities into a managed situation?

Don't know what they plan to do in the future. This facility really made sense since it is exclusively for females, and we currently run the only female facility within New Mexico. So in some ways it's just an extension of the female population growth in New Mexico, and we would be continuing to manage all of the female population in New Mexico.

Okay. And then one last question and I will jump back into the queue. Last week or it might have been two weeks ago, there was some information that came out about an RFP that California was thinking about putting out. I think it was for a handful of kind of 500 bed facilities. I know a few people actually seen the summary of the RFP. Was just wondering if you can comment on that for as many information you have? I know it's obviously very, very early. Is this something they're serious about doing or is this kind of a -- they're just kind of requesting some information at this stage? I am trying to get a sense as to where they stand.

Well, they believe they're serious. It's up to eight facilities each with about 500-bed capacity. It is similar to facilities they currently outsource to the private sector. It is for inmates that are within their last two years of sentence, and so it's prerelease type programs. The RFP is quite elaborate. In fact, it's going to be quite tedious to get through that. There are some things about it that we think is a little more onerous than it should be if they really are serious, but they have required these kind of beds in the private sector in the past, so we believe they intend to do that, and we, We are as a Company are giving serious consideration to whether we will respond.

Okay. And I guess, John, in tying kind of what has been put out by California to your commentary on last quarter's earnings call, would you say that this is some evidence to they're looking more serious into outsourcing more beds, or is this something a little different, relative to what your comments were last quarter?

I could probably say all of the above. I think it is an indication that the state of California is going to continue to figure out how to deal with their over-crowding situation. They have some experience with the prerelease programs already, so maybe if it seems a natural one -- a way for them to stick their toe further in the water because if they can take inmates in the last two years of sentencing and move them out of the other facilities, that will, obviously, free up beds for them. So we're encouraged that they will continue to try to expand the utilization in the private sector and maybe, as they get more experience. they in fact can expand it and, yes, they need what we have to offer.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Patrick Swindle with Avondale.

Good afternoon. First question, Irv, you mention that you're going to incur some start up costs in the first quarter related to Red Rock and related to Stewart. Also, you mentioned in the press release that you're going to be transferring lots of inmates in the second half of the year as you open Red Rock, and the likely impact of that would be a delivering of some of your already full facilities. Is that also contemplated in the guidance?

Yes, it is.

And next, in terms of the new build opportunities out there, we know that there is an RFP currently in process in Colorado for 2,250 beds. Does your decision of whether or not to add speculative capacity depend on your success in the short run in some those opportunities, or because these are customer specific, would you be able to go out and add speculative capacity on top of that?

Would not be contingent on Colorado. That's a customer specific requirement. We expect overtime that North Fork is going to be absorbed. As John said, we expect that Stewart will be absorbed by one customer or another. I want to throw in one thing here on that while I have an opportunity. People focus too much on one contract or another. What we have shown this quarter -- I think what we've seen in a number of previous quarters and what we hope to continue to show is that it's really about bed absorption, not which contractor or whatever, so we do expect Stewart will be absorbed, and we have two empty facilities left right now, as it stands now, and that's Stewart and North Fork.

hen we consolidate Hawaii next year, our Tallahatchie facility will be substantially empty, but we've always said 3,000 to 5,000 beds in inventory, contiguous inventory, we think is important. So a long answer to your question. It is not contingent on Colorado, at all. We are trying to determine what would be a suitable site for a speculative facility. It would all need to be approved by our directors and go to the chain here, but I think strategically we're committed to that.

Based on the EBITDA run rate that it looks like it's implied by the guidance coming out of the year, it would that you would, in theory, be able to add some additional leverage on top of your current balance sheet, which I guess [inaudible] says that you have capacity to build at least another 5,000 beds beyond what you already announced. Is that a fair assumption?

Yes, I think so, Patrick. What I've tried to explain on people is, if you took a two-year horizon and you looked at the cash we have, roughly $150 million each year during the two years in cash flow generation, and if you can see your way clear to $3 million of EBITDA somehow, four times debt to EBITDA, that would provide $225 million of borrowing capacity on top of the cash. The cash flow that we either have or are generating. So you're probably talking more like 9,000 or 10,000 beds that you would have capacity to build without stressing your capital structure, without violating four times debt to EBITDA, without selling any stock. So, we're capitalized to do, and I want to make sure everybody's clear about that. We have this cash and it is a great at tribute that this Company generates so much cash, and I think it is management's job to try to find those places where we can put this inventory in place and take advantage of it and position ourselves for growth.

John, you mentioned that, if you were not successful in CAR 5, that there was a potential customer that could potentially fill the Stewart facility by the end of the year, outside of that contract. Is there an opportunity, when you begin moving Hawaii inmates out of the Mississippi facility to potentially have beds available for that same customer and do those have to be mutually exclusive events?

I am not sure I -- Ask your question again if you would, Patrick, about the customer?

I guess what I am really asking, you said if CAR 5 were not to happen, that there is a customer that would potentially fill Stewart County by the end of the year if you were not successful winning CAR 5?

That's correct.

My question is, is there an opportunity, assuming you do win CAR 5, to place those same inmates from that customer in another facility, and I mention Mississippi as being an opportunity, given that you'll be moving Hawaii inmates out of that facility when Red Rock opens?

If Stewart County was to be utilized by CAR 5, the expectations that we have for Stewart would not be easily moved to Mississippi.

Okay. Perfect. Thank you, John. Thank you, Irv.

Thank you. Our next question is from Jim Macdonald from First Analysis.

Good quarter, guys.

Thank you.

Could you talk about when you expect CAR 5 to be announced -- it's kind of a little late here -- and what your current expectations are?

I think what we're hearing is by Memorial Day is the latest we've heard.

Okay. And could you talk about, given the better situation you're in right now, whether you were able to have better price increases when you went back to customers this year and could you talk about those levels, Irv?

Jim, what I tell people is when you're looking at a pure price increase, you're probably looking at something that's CPI oriented. We were over that with the 4.5% or so percent that we had. A lot of that had to be with customer mix. When you bring on Northeast Ohio and then you look at the populations in our federal facilities, like Florence and Central Arizona, clearly we're getting a higher rate on those. We got -- I think it was an increase of over 4% in Texas this year for those facilities as managed-only facilities but by and large, you're looking at an inflationary type of increase. One of the things we're always having to deal with -- and it's kind of a ceiling on what we can do -- is a lot of places you have to be statutorily under what the government's doing at Adams, so we don't have total flexibility in setting the prices.

Jim, I would say that the government at the state level is much more favorable than it's been several years back. It's easier.

Just one quick question. You show investments on your balance sheet as starting to become more significant. Could you just explain what that is?

Those are -- I can never -- what are they called? Option rate certificates. It is kind of a money market investment. You're required to show them as investments. What's happening, Jim, is we're just generating a lot of cash, and that's why we went into a lot of detail in the press release about where we're planning on spending it.

Okay. You mentioned uses of cash and seems like it was mostly facility oriented. Are there any thoughts of buying back shares or dividends or other uses of cash at this point?

Not right now, Jim. It is kind of interesting. We really do think we have a good environment. I think that CCA has proven that, by having inventory out there, it is very, very helpful to our success in getting new business. It really gives us an advantage as, John calls them, just in time beds. We see an opportunity over the next two years to spend the money on developing this inventory and putting it in place. We are excited about the Secure Border Initiative, and what it might mean for our business, and we all need to continue to monitor that and try to position ourselves for that. It is very, very important.

Interestingly, our debt agreements do have limitations on our ability to buy back shares, but those limitations are increased every year as we generate net income. It's called a restricted payment basket and it's a relatively common feature on a unsecured debt agreement, given our rating. So overtime, that basket -- that basket will increase and if there is a time that comes when development doesn't make sense, then maybe we look at a share buyback. I don't think there is any opposition to it. I just don't think, strategically, right now it's in the cards.

Debt repayment's out of the question because we're fix and had locked out for five years. And a dividend is something that, too, I think that we don't have a problem with, but today, I think the board and management are all locked together on the fact that there's a lot of bed demand -- and we keep trying to say that -- there's a lot of bed demand out there, and we need to get the inventory up to position ourselves for it. And this can all be validated. You don't have to listen to us. There is a lot of ways our investors can see that there's just not a lot in the way of pipeline of inventory being built out there, so we're excited.

Thanks very much.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is from Dana Walker with Kalmar Investments.

Good afternoon. Could you talked about how the maturation of your IT spending is changing the way you manage your business?

We are still involved in our IT project, where we're rolling out [what we believe to be a] state of the art package to all of our facilities, where we've actually combined a security program and a medical package together, and it's integrated. We are roughly one-third of the way through and we are accelerating that roll out. That will help us on the medical side. Ultimately, we believe it will help us on the staffing side. I think there is [NOISE ON LINE] and we will be able to [NOISE ON LINE] on these facilities, good or bad I guess, a good bit of turnover and so you can reposition people. You don't necessarily have to layoff people. It does enable you to achieve staffing reductions [NOISE ON LINE] medical and other and help us with scheduling our staffing in other areas where we can continue to try to get a handle on that 65% net that we have [NOISE ON LINE] benefits. It's going very well, [NOISE ON LINE] better than I would have expected. Maybe a tad slower, but it is accelerating now, as we've worked out any bugs [NOISE ON LINE].

And we might point out that all of the IT dollars that are not just for [MM] management system, in today's environment redundancy of systems is important, disaster recovery is important, and I think we position ourselves so that our communications and networks are pretty secure, which they were not several years ago.

So as we look at your reported metrics on expenses per man day, where would you expect to see evidence of these IT systems being implemented most evident?

You're asking a good question, but maybe a little misdirected. I think the area you will see improvement in metrics will be in the area of salaries and benefits. It is hard to tell where it is coming from because if we add inmates, we're getting this fixed cost leverage [NOISE ON LINE] mandate basis it drops. That's great. That's how it should happen and we're happy about that, but it is not just IT that we're working on here as far as handling head counts in our facilities. We're working on something we like to call a franchise approach. There are certain facilities [NOISE ON LINE] areas like intake and discharge, they staff is more [NOISE ON LINE] than maybe another one does. What we're trying to do, look through our facilities, find out what are the best practices, implement those practices in all of our other facilities. It doesn't necessarily need an IT system to do that.

How do we do it the very best way and how do we roll that out so we have a standard system throughout all of our facilities, putting in monitoring systems to monitor our FTE's on an every two-week basis. We can see what's happening there, how the wardens and how the facilities are handling this. We're looking at turnover. Turn over is a huge issue in all prisons, public and private, and we've got a lot of work under way [NOISE ON LINE] lower our facility turnover. And if we lower turnover [NOISE ON LINE] we lower the number of people that are in training. So, it's not just IT. It is a whole lot of things the we are doing to improve efficiency.

The same question you're asking the board has asked on numerous occasions. I just want to assure you that, for the IT investment, we looked at returns the same way we looked at returns for building new construction. And we measure those returns over the period of time of that investment to see that we're making those returns, and we still are measuring them, and we still are intending to go get those returns.

Thank you for offering those thoughts. Irv, on your last comment, was that to suggest you're not going to implement the IT system in certain facilities, or the benefits aren't reliant on implementing it?

They're not totally reliant on implementing it. We're going to implement it in just about all of our facilities.

Okay. Second question, would you remind us what you thought Red Rock would cost versus what it is now costing? And if we all agree that the construction environment is active, which likely means that the cost of building anything are higher than one would have contemplated a year ago, to what degree are you able to correlate your pricing so that your returns don't diminish, given that invested capital costs are likely to be higher per inmate?

Great questions. I don't recall the initial estimate right now that we put out for Red Rock, but I can tell you it has been in this $82 million range, I want to say for at least a year. That was locked down some time ago, and the contractors are committed to that price, and just because of labor increases or anything at this point, it's not going to go up because of that. We're under contract. We would intend to do that on future projects.

Now, to the extent we are undertaking a project and we price it and we are subject to the effective price increases, whether it is concrete, steel or labor that have already taken place, then the per diem that we get from the customer is going to have to reflect that, so we can get our return [NOISE ON LINE] capital. Dana, I'm not concerned about the prices getting away [NOISE ON LINE] with a contractor. We're okay there. It's just what happens before we get under way with a project. But our business development people will have to do overtime is start to educate our customers that there's a reality that some of these costs have increased.

John, you talked about the number of states as well as the District of Columbia that you've engaged with in the not too distant past or presently. Are there new states, aside from California, that appear to be on the verge of embracing privatization?

There are. I couldn't sit here and tell you where we have got real active marketing efforts going on. I know that Kansas, for example, appears to be on the verge of legislation which would private sector to operate in there, but I am not in a position to tell you who those states are.

Final question relates to ICE. Aside from Hutto, when appears to be committed to ICE requirements, can you talk about the types of scenarios you're dealing with to meet the possible needs of your clients should this catch and release become catch and detain?

We have an ongoing effort within the Company that's constantly evaluating where we think that the -- where we see the demand, where we think it is coming to and where we might be able to anticipate that demand with prison beds.

And that's as definitive as you can be?

Yes.

Thank you.

One thing we don't know is what the interior enforcement is going to be. That is a little -- that's new. That was a phase of the secure board initiative has just announced in the middle of April, and that will be an interesting one to watch, because that could affect facilities that are not on the border.

I suppose the message investors ought to take, though, is this ongoing bed absorption seems to be unrelated to some meaningful change in policy coming out of the border protection process?

I think there are parts of it that are unrelated and I think there are parts of it that have very much related. I think a lot of our new building will be in the area of -- well, they'll be in both areas. The state demand is not necessarily related to the border initiative, but we think there is going to be significant [NOISE ON LINE] border initiative.

Thank you very much.

Thank you. Our next question is a follow-up from T. C. Rabold with Banc of America Securities.

Thank you. Irv, can you talk a little bit about the energy costs? I know obviously they're relatively a small amount, but just given the environment, certainly seems to be a topic of interest, at least, for some of the investors that I have talked to. Could you kind of give a sense as to how you guys are expecting those to trend and then maybe kind of talk about where the off sets are for -- if energy continues to kind of creep up?

All of our facilities, substantially all of them -- maybe there's one that's not -- are air conditioned. That's important from a safety perspective. We think that's very important. We're going to be running energy costs both summer and winter, so that's just something I need to throw out there. Most of our facilities, as I have said before, are in the sun belt ,so the heating costs in the weren't are not as heavy for us as maybe some other companies that have-- what their operations might be spread throughout the U.S. We are expanding our real estate area here to include -- it has but I guess we're going to emphasize it more, facilities management and we're going to work with the operations department, and have been working with the operations department to try to find ways to mitigate energy as much as possible. It is something that a number of people, both in our real estate and operations area, are working on. It is mitigated as far as total cost. It is less than 6%. Not something that we are ignoring. It is something we are going to to be spending a lot move time on, utilities management, and overall maintenance of the facilities, for that matter. It is really all I can tell you right now.

Great. Thanks so much.

Thank you. Our next question is a follow-up from Patrick Swindle.

In looking at the Secure Border Initiative, I guess if we ultimately see funding appropriated for the 6,500 beds out of the Bush budget, that's about a 30% increase in ICE beds. Those would be expected, I assume, to come online during the '07 year. If that's the case, do you all expect a protracted RFP process for the award of contracts or can you participate through more open-ended contracts that are already in place in intergovernmental agreements?

I think what you would probably see is both. Based on the timing of the need, and the availability of the beds, I think they recognize that an RFP process can take some time. They have needed the beds for some time. Getting the funding means they'll probably move more quickly, so I would think we would probably see most of utilization through intergovernmental agreements.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a follow-up from Jim Macdonald. Jim, your line is now live.

Sorry, I was on mute. Do you expect G&A costs in 2007 to start to leverage down below 5% again or will those costs keep going up?

If I have my way. [LAUGHTER] Jim, I don't know. I think so. I came in in 2001, essentially, and I expanded the finance department, because I saw things we needed to do, and we've had to expand our HR efforts. The turnover alone is very, very expensive, so a little money that we spend in HR, the home office could yield big benefits. Rick Seiter has come in. He's doing a great job and he's seen things he's needed here and Mr. Ferguson, sitting across from me, gives us a little rope to do these things. I think most of our key leadership is substantially in place. I would think we're going to start seeing -- I hope we do -- slow down. But you know what, if we do see is increase slightly, our job is to make that you're seeing margin improvement in the field and that the money we're spending here is translating. The answer is I think so but I am not sure. Okay?

Just one more modeling question. At Sayre, I assume you're losing more money now that it's open than before. Is that true and kind of when do you expect that to reverse itself?

We are losing more money because we do have some minimum staff there we didn't have previously. It is hard to forecast, as I described earlier. We have numerous opportunities. We felt those opportunities could turn into business if we have a facility that was running as opposed to one that's anticipated, but as far as calling, if it is going to be next month or next quarter, it is something that we can't forecast right now.

Okay. Thanks very much.

Thank you. There appear to be no further questions at this time. I would like the turn the floor over to management for any final closing remarks.

Let me just make one quick follow-up. As I look at stumbling through some of the federal budget issues to make sure that I am clear. The President's budget, which I referred to on numerous occasions, is the federal budget that would begin on October 1, 2006 going through September 30, 2007.

And it's a proposed budget that requires a great deal of voting by congress, so it's just a proposal. Go ahead, Bill, I am sorry.

Okay. I have tried to make some notes to wrap up as succinctly as I can what's been discussed today, so here it goes. Our normalized EPS is up 54% for the quarter from the 2005 quarter. Our EBITDA is up 22%. Our revenue is up 12%. The reason for that is that we've had increases at Northeast Ohio, Prairie, Florence and Central Arizona, and our federal inmate population did not decrease in the first quarter of 2006 like it did in the first quarter of 2005. Our occupancy in 2006 is up to 93.7% compared to 89.6% in 2005, and this is one of our key drivers of profitability. Our operating margins are at 25.8 in 2006 compared to 24.1 in 2005, and this is an indication that we have controlled our costs, which are obviously another driver of profitability. Our adjusted free cash flow is now at $150 million rate and that will allow us to use this, as well as our financing capability, for continued profitable future growth, and this is a competitive advantage.

John went into our industry environment and we all feel here that we're in a more favorable state at both -- not state, a more favorable condition in the industry environment for both our state and federal customers. CCA has 5,300 available beds, 2,000 are in existing facilities, which we feel will be utilized by the demand from the state, and we currently have two vacant facilities, North Fork, being opened in 2006 for state customers, and Stewart, which we believe will be open in 2006 for a federal customer. It costs us something to open these facilities, but again remember that occupancy is our ultimate driver of the profitability, and that should result in more favorable results in the future. Once we fill these beds, our cash flow and our finances capability will allow us to build another 5,000 or more beds over the next two years, and Irv has given you guidance for the second quarter of $0.55 to $0.59 and for the full year $2.20 to $2.27, so we feel good about this quarter, and we feel good about the year.

We are pleased that you're all in attendance today, and thank you for being here. If you have any further questions, you can call Irv. Thank you very much. Bye.

Thank you. This does conclude today's conference call. You may now disconnect.