CoreCivic Inc (CXW) 2006 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Corrections Corporation of America's second quarter 2006 conference call. Before we begin, let me reminded today's listeners that this conference call contains statements that are forward-looking as defined with the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that the 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 changes in the private corrections and detention industry, the Company's ability to obtain and maintain facility management contracts and general economic market conditions. This call may include the discussion of non-GAAP measures for which the reconciliation to the most comparable GAAP measurement is provided in the Company's corresponding earnings release or posted on the Company's Web site. The Company does not undertake any obligation to publicly release the results of any revisions for the forward-looking statements that may be made to reflect events or circumstances after the date hereof or to 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 the Chief Financial Officer, Irving Lingo. I'd now like to turn the conference over to Mr. Andrews. Please go ahead, sir.

Good afternoon, everyone, and welcome to our second quarter 2006 earnings release and financial results. As indicated, John and Irv are here to make comments and then to answer any questions that you may have. So with that, I will turn this happy meeting over to Irv.

Let me began with our earnings briefly. Second quarter results for 2006 amounted to $0.63 a share. That is compared to EPS for Q2 of last year of $0.37 a share, and that represents an increase in EPS of approximately 70%. For the six months, net income per diluted share amounted to $1.15 as compared to $0.72 a share last year, and that represents an increase in EPS of approximately 60% for the first six months of the year.

In addition to our earnings announcement today, we also announced a 3 for 2 stock split that was payable -- that will be payable, excuse me -- on September 13th, and all of the details of this split are covered in a separate press release that went out earlier today.

Our earnings for the quarter were positively impacted by an increase in federal populations in a number of our facilities, including northeast Ohio, where a large contract with the Federal Bureau of Prisons essentially commenced in the second half of last year as well as several other predominately federal facilities, including our central Arizona, Florence, T. Don Hutto, Houston and Leavenworth facilities, again, just stronger performance across the board in all of those facilities.

It's interesting -- I initially thought that the increase in populations at these facilities would have resulted in a significant increase in federal revenue as a percent of our total revenue. However, I our state and local business has also been robust with increases in our Colorado, Minnesota, Washington, Kentucky and Hawaii populations. As a result, federal revenues for the first six months of the year now constitute approximately 40% of total revenues, and that's only a slight increase from 39% from the same period last year with the point being that we're encouraged by the across-the-board increases in demand that we're seeing.

While our percentage of revenue derived from federal versus state and local customers remain for the most unchanged at 40 versus 39, we are seeing a shift in operating contribution between managed-only versus owned beds during the just completed quarter. Operating contribution from managed-only facilities made up roughly 15% of total facility contribution, while the owned facilities made up 85% of that total contribution. That was compared to what was closer to an 80%/20% split in the previous year.

Based on our assessment of bed demand, we expect that most of our new business for the foreseeable future will continue to be driven by inventory we own, and the percentage of contribution coming from the owned facilities, therefore, will continue to increase. And we will see a corresponding decrease I guess as a percentage of our managed-only business. Again, that's just where the opportunities seem to lie right now. And I will discuss the effects of this and what we're doing about it more in-depth when I touch upon our development activities.

Adjusted EBITDA for the quarter increased over 35% to 71.5 million while same-store facility EBITDA increased approximately 31% over the prior year. Operating income for the quarter was 55.1 million and that represents an increase of 16.9 million, or 44%, over the first quarter of 2005. Adjusted free cash flow increased to 44 million this quarter, and that's up from 27.4 million during the same period last year. The increase in adjusted free cash flow was primarily brought about by an increase in operating income as well as lower interest expense. Year-to-date, we have generated $87 million in adjusted free cash flow and expect that after expending an estimated 48 million in maintenance and IT capital expenditures this year, we will have roughly $160 million left to invest in expansion and development activities. This is a significant amount of internally generated cash which becomes increasingly important given the building schedule we expect to undertake over the next two to three years. Through June 30th, we have spent approximately 43.5 million on expansions and development.

Turning to operations, total revenue for this year’s first quarter was up 12.4% over last year, amounting to 326.2 million. Compensated man days increased 8.1% to 6.1 million from 5.7 million man days in the previous year. Revenue per compensated man day increased 4.4% to $52.51 from $50.31 last year, while average compensated occupancy for the first quarter increased to 94.8% from 90.1% last year. The 4.4% increase in revenue per man day is obviously significant which we attribute both to the aforementioned change in mix to federal business along with a generally better pricing environment due to improvements in state budgets.

I think the press release does a pretty good job of detailing the changes in fixed and variable costs, so I'll just add a few global comments here. First off, operating cost per man day for the quarter actually decreased to $38.10 from $38.38 in last year's second quarter. As can be seen in the press release, fixed expenses were down. This is primarily the result of spreading our salaries expense over a larger number of inmates. Offsetting a greater leveraging of our salaries cost was an increase in utilities. However as we've stated before, utilities continue to represent less than 6% of total expense. So the increase in energy prices experienced by so many companies is not as significant to our results.

Variable expenses increased to $9.52 per compensated man day during the second quarter, from $9.52 to $9.91 per compensated man day. That's an increase of $0.39 and the increase there was substantially the result of the increases in expenses related to legal proceedings in which we are involved.

The end result was that operating margins per man day increased a rather substantial $2.48 to $14.41 from $11.93 in the prior year, and our margin percentage increased to 27.4% from 23.7%. G&A expense for the quarter was roughly 2.4 million, higher than in the previous year. Included in that G&A was an additional 1.3 million in stock-based compensation over the previous year. G&A expense continues to be running at under 5% of total revenue, which continues to be a target level for us with respect to G&A.

Income taxes were computed based upon a 37% tax rate, which at this time is the rate we are anticipating for the full year. With respect to the payment of cash taxes, our expectation is that we will be required to pay approximately 13.5 million over the balance of 2006 as we have substantially utilized our operating loss carryforwards.

So in summary, Q2 was a very strong quarter coming on the heels of a strong first quarter. Revenues per man day increased 4.4% while cost per man day actually decreased both due to control of cost, but also due to our ongoing leveraging of fixed costs -- translation, people -- over an ever-increasing number of intimate. The end result was a 15.6% improvement in operating margin percentage over the prior year and a 7.2% sequential increase in our operating margin percentage.

Occupancy improved in a number of our facilities, resulting in strong same-store sales facility EBITDA growth, and as a result of this performance, the Company is generating significant adjusted free cash flow which has amounted to over $40 million in each of the last four quarters.

I want to spend a few moments now talking about our development activity. Ever since John and I started with CCA back in 2000, we have been focused on absorbing an inventory of beds which initially totaled more than 14,000. We have consistently delivered the message that we saw what John often referred to as a logjam on the horizon where a significant number of overcrowded prison systems wrestled with burgeoning inmate populations while the supply of beds remained relatively static. We're now seeing the results of this logjam beginning to break up. In other words, prison systems can no longer provide for the continually growing number of inmates. And thus, we're seeing our inventory of available beds being drawn down by a number of these systems, so much so that we have for the most part identified customers, and in some cases, multiple customers through our remaining inventory of beds. The bottom line is that planning and the delivery of new inventory is becoming a more critical part of our story and because of this, we've added a section to the earnings release detailing our development activity, both from the standpoint of expansions, as well as new development.

Before discussing development, I want to take a moment to discuss our existing inventory. What used to be a rather straightforward exercise has become rather complicated due to the acceleration of absorption on the part of our customers. In addition, because of some planned movements of inmates within our system over the next several months, perhaps the best way to present our inventory is to give you our best estimate of available beds as of October 1. At the time, we expect to have approximately 4200 beds in inventory with the largest blocks being -- and I'm giving you round numbers here -- North Fork at about -- a little over 700 beds, Red Rock should have around 300 beds, our Crowley facility at 450 beds, our Florence facility at 500 beds, our Stewart facility at a little over 1500 beds, and then one-off beds throughout our network totaling about 725 beds there. The beds at Stewart, the 1500 or so beds at Stewart, have been contracted to ICE, which we expect will substantially occupy the facility before the end of 2007. Regarding the remaining beds over and above Stewart, as I said earlier, we've identified customers, or in some cases multiple customers, to fill those beds in the near-term. John will cover the specifics related to customer demand here in just a moment.

Moving to expansions with the announcements today of our expansions of North Fork and Tallahatchie, we are currently working on over 3000 expansion beds. This by the way comes on top of 2700 expansion beds that we added in 2004 and 2005. With respect to new development, we're underway with our 1896 beds Saguaro facility expected to be completed mid next year.

We continue to add to our processes and infrastructure in the site acquisition and development area and are working on a number of additional new sites, as well as additional expansion opportunities. Specifically, we expect to announce an additional prison development before the end of the year which should consist of around 1500 beds.

In summary, we have in inventory -- between inventory expansions currently underway or our Saguaro facility, we have over 9000 beds that the company can make available to customers sometime on or before the end of next year. I want to remind our listeners that we do tend to get rather substantial returns on these developments, with the typical return on a greenfield development being somewhere in the -- and this is a pretax unlevered return -- being somewhere in the 13% to 15% range, and returns that we get on expansions running in the mid to high teens. Expansions are higher because the costs are typically less and we're able to leverage our fixed cost infrastructure. So again, the capital that we are investing in new development is generated at the (technical difficulty) return that we believe clearly exceeds our cost of that capital.

I will wrap up with a quick overview of our outlook for the remainder of the year. Our guidance for Q3 calls for earnings per diluted share in the range of $0.57 to $0.60, our guidance for Q4 calls for earnings per diluted share in the range of $0.59 to $0.64, resulting in full-year earnings guidance of $2.33 to $2.41. Our guidance incorporates an estimated effective tax for the year of 37%. It also includes the estimated effects of the opening and ramp-up of Red Rock and the associated relocation of Alaskan inmates from our Florence facility to Red Rock. It reflects the effect of the ongoing ramp-up of our North Fork facility and the start-up costs incurred, as well as the benefit derived from the initial receipt of ICE inmates at our Stewart, Georgia facility.

Finally, the guidance also includes $0.08 of stock compensation expense, which for the full year exceeds stock compensation amounts included in 2005 by $0.05 a share. These amounts have not been adjusted for -- all of the guidance dollars have not been adjusted for the impending stock split. The guidance for CapEx is included in the press release and did not change dramatically from what we provided the last quarter.

Before turning it over to John, I would like to comment on our outlook beyond 2006 for just a moment. Although we don't typically look out beyond the current year with respect to earnings growth forecast, I would like to add that the activity that we have witnessed thus far in 2006 bodes very well for the Company as we look out to 2007. Our Hutto contract, our Stewart agreement and the opening of North Fork all took place at varying times during 2006 and we expect to get a substantially higher benefit from these contracts during a full year in 2007. In other words, we feel increasingly good about our visibility going forward and believe our investors can look forward to a year of robust double-digit earnings growth in 2007.

With that, I will now turn it over to John to review our business prospects.

Thanks, Irv. I think the storyline for this quarter is just a confirmation of or a validation of what we've tried to express in prior quarters that what we saw developing. I think back in the February call, we said that we were starting to see strong demand developing in our state customers, as well as some additional prospects. We started talking about the secure border initiative that was being formulated at the time. We talked about that it was a new initiative with new funding, new infrastructure, new leadership and that we felt that it would bring about some demand but we weren't sure when. Then in May, again, reinforced what I saw as a very positive environment for our business, that demand was exceeding supply. Continued to point out that we were seeing our state business grow or talked about the percentage of federal versus state not really changing. That's because from first quarter of '05 to first quarter of '06, we saw some 3700 state bed growth and of course we then were beginning to hear about the secure border initiative phase II at that time, which was securing the interior of the country in addition to securing the border.

So let me start out by saying that Irv just identified some 9100 beds that should be available before the end of next year. We have an environment that is just a positive as we described last quarter and we do have line of sight on demand by both our state and federal customers and some prospects that we think each of these beds could eventually be absorbed.

Just again to highlight the segments of our business and what we are seeing. It really is, again, reinforcing a lot of what we have already said. We continue to see the demand with our state customers and prospects grow. In fact, the states have grown to -- we're in over 20 states, plus the District of Columbia, are having current or growing demand. And as we have described, we just don't see them preparing -- they have not prepared what the infrastructure needs. And so we of course have said that we opened North Fork for that, but we're also expanding North Fork because we now see that that demand probably will not subside without meaningful development by our government customers. And right now, we just don't see them being willing to put forth the resources.

The situation at the Bureau of Prisons really hasn't changed. They did announce their CAR 5 award. Of course, we didn't get it, but as we tried to point out in our conference call that we submitted three facilities originally. We withdrew one which was Hutto to meet an ICE demand. We withdrew the other one at the conference call because of the state demand and we indicated that if we were not awarded CAR 5 that we felt that we had a pretty good chance of a prospect for the Stewart facility. And of course, we announced that transaction not long after the award by the DOP. Their shortfall has not changed. They're still looking at some 25 to 30,000 bed shortfall between now and 2010. There are two active solicitations, CAR 6 and CAR 7, but neither one of those really add any new beds to their system. So they're not going to be able to relieve their logjam with either one of these.

We pointed out that the president's budget continues to request additional funding for the U.S. Marshal Service. We have seen some 7%-plus compounded rate of growth by the marshals. This is a combination of the same issues that the states are dealing with and just growth in crime as well as the secure border initiative that generates bed need for them. And then as I think is now starting to really be visible, that is the secure border initiative and the need for beds. And one of the things that was announced in September was the supplemental -- I'm sorry -- in June, the middle of June, was the supplemental for an additional 4000 beds and we have seen ICE get fairly active in trying to procure those beds. And then at the middle of July, they announced something called Operation Reservation Guaranteed in which they were going to have a centralized control so that if an area of the country had detainees and no bed space that they would locate them bed space somewhere else in the country. And it would be interesting to see how that develops. So, again, we are seeing across the board needs, demands developing, requirements by both our federal and state customers as well as some state prospects.

9100 beds coming online between now and the end of 2007, pretty good visibility for each of those beds. But also, it is our estimation that the line of sight of this demand is going to require beds over and beyond those 91. And as Irv said that we are looking at sites throughout the country where we feel that it would be attractive for either our customers who are needing to meet bed demand and cannot do it in their state and are willing to allow their inmates to be housed out of state, as well as the continued need of our federal customers.

So it has been a great two quarters. Watching all of the preparation that this company has gone through to be prepared for when we knew that the demand was going to materialize, and also to be positioned to where we can not only meet some 9000-bed demand here in the next 18 months, but also position ourselves so that we can meet the demand beyond that.

So with that, we would be happy to open up for questions and answers.

(OPERATOR INSTRUCTIONS). Emily Shanks, Lehman Brothers.

Thank you for taking the question. I just have two quick ones. The first one is -- how should we think about the timing of the expansion CapEx for the North Fork and Tallahatchie facilities?

Right now, the CapEx, both of those are expected to be completed between now and the fourth quarter of 2007. I would expect that the bulk of the construction outlays for both of those in the amounts that are listed in the press release, 55 million for North Fork and 20.5 for Tallahatchie would probably start occurring late this year and in the first half of next year.

That's helpful, thank you. And then any sense of the number of beds that you think in the Stewart facility that will be filled under the ICE contract starting at the beginning of October, just for the sort what we should think about for the fourth quarter?

If I understand your question, I think we anticipate that ICE will utilize the entire facility between now and the end of 2007, between October 1 and the end of 2007.

I think she is asking more what might happen in the fourth quarter of this year.

Exactly.

I think we have assumed that it would be a ramp-up that would not utilize a large percentage of it. We do know that in some locations, ICE is asking us could we move a little quicker, so it could change. But right now I would assume, let me see, Irv?

What I was going to say is, it's tough because we really try not to parse what's in the guidance and what specific headcounts and everything, and I know people love to have that kind of information for their modeling. I think that what we're looking for is a modest receipt of inmates during the fourth quarter, but we really, we're always cautious here about trying to be too ,specific just because we're dealing with a government customer.

Gotcha, fair enough. Thank you very much, great quarter.

Jeff Kessler, Lehman Brothers.

Thank you. And it's interesting that you put our debt analyst first ahead of me. (MULTIPLE SPEAKERS). The man day margin obviously was a big deal. And I'm just wondering, you've had a series of step-up functions over the years and then the man day margin would settle that for awhile as you expand it, or as you expanded your cost structure into existing facilities. And I'm wondering, as you expand into these 9100 new beds, and if you do even add come on with a greenfield, are we going to be able to sustain a man day margin at $27, or is that going to have to come down a little bit? Obviously, this was a great quarter, I just want to make sure that we don't get too excited going forward that the man day margin like this -- if it can be maintained, that's one thing. The question is, with the expansions that you're doing, can you maintain that type of margin?

Out that it was 27%, but I would love for it to be $27. You know, Jeff, a couple of ways to answer that, and the way I look at margins, clearly, the overall margin, I think it was around $14 a day, $14.41. We've become more and more focused on what we're getting on our owned facilities, and that was up to about $19.44 on those.

Two things are going to start happening. You're going to bring a new facility online that's going to be empty like a Red Rock, and that creates something of a drag on your margins because you have to have a certain complement of correctional officers to start it. On the other hand, as this demand continues to increase, we're seeing customers willing in some cases now to go over 100%, and then you're starting to see our occupancies rise. What happens there is, again, some numbers. Our revenue per man day was just under $61, but our variable costs were only $11, and I'm rounding. So you are looking at $50 a day conceivably when you start to get over into that 90% category and higher. So it's very difficult to say. It's going to be dependent -- generally speaking, I'd say that they're going to be going higher. But as we do ramp up these developments, there could be some drag associated with that. But if we do it right and we have customers identified, that's temporary and I think it's all good news at the end of the day.

One more comment. I think as we move forward and are seeing construction costs rise a little bit, we typically had said it's about $55,000 a bed to build a facility. That number is going higher, and it's impossible to be specific with different geography and indifferent customer requirements. But we are going to see our pricing need to increase some I think, and that will result in that $19 being higher also -- higher real estate recapture. Long answer to your question, but it's a soup. There's all sorts of stuff going on here.

Okay. As you grow the business and as we see 2007, 2008 coming on, the question will be, with the demand that you see coming, are you going to be able to hold your discipline in terms of the numbers of realizing that ICE and the Marshals generally use per diems. Are you going to be able to walk away from some contracts if in fact the per diem [looked] bids look like they are below what you are willing to take?

I would tell you that we have return on invested capital thresholds that our Board expects us to achieve. And as the number of beds out there gets squeezed, which it has -- I mean, the inventories are going down everywhere I guess -- I think it's just going to be easier to push the price a little bit and not have to do that. The bottom line is, we have invested capital in these beds, we know what that capital costs and we have to exceed it, and we will.

Great.

Patrick Swindle, Avondale Partners.

In looking at the ICE and U.S. Marshal Service demand, one of the things you mentioned on the last call was that you expected you would get a decent amount of that coming through existing contracts and/or through intergovernmental agreements, as opposed to RFPs. Is that still the case as you look out to the rest of this year as you see the supplemental funding being deployed and then potentially looking at next year's Homeland Security Budget and see those beds deployed?

I would say right now, based on the way the demand is materializing with those customers, they need to move quicker than some of the procurement processes allow them.

Perfect. It looks like some of the recent press has indicated you've had some nice pricing power with a couple of your existing customers. That has not really been a part of the story, other than your annual CPI increases over the last few years. Is that a function of the scarcity of beds currently? And do you see that sustaining over your customer base as you go through the renewal cycle over the next two years?

It's a combination of having beds, but also it's -- a lot of our site customers who were very stingy when they were having struggles with their budget have recognized that we were pretty good partners during that period of time and have been willing to acknowledge our costs increase and have been able to give us to some per diem increases that we just were not getting a few years back.

Right. And when you look out into next year's federal budget, there's quite a bit, at least at this point, looking at U.S. Marshal Service, looking at ICE and looking at the Bureau, there looks to be -- a pretty substantial amount of in theory could come to the private sector. To the extent that you all have to accelerate your development pace materially from where you are right, how would you view your funding capacity currently?

I went through this on the last call, Patrick, and it's probably improved since that call. But our EBITDA is increasing. You saw what the EBITDA was for this quarter. As we fill this inventory, and I did say that we have customers identified to fill what remains, pretty much identified near-term; that EBITDA number we have said it starts to get over the [ZIP code] of $300 million, and you think about -- you look at the leverage level currently, we're now below 3.5 times. And at some point, you could be underleveraging a company like this. So between the cash flow that we're generating, and I went through what we were generating as far as adjusted free cash flow, $40 million -- over $40 million in each of the last four quarters. If you look at how the Company has essentially delevered by growing its EBITDA where we're now below 3.5 times, our interest coverage is 4.2 times, these are all on a run rate basis, we have the capacity as I have said over two years probably to put in the area of $600 million into new bed development. And that's somewhere between 9000 and 11,000 beds, depending on what it costs. So we're very well funded to grow this business.

Last question. In looking at the CAR 7 procurement, the presolicitation, it looks like that's a situation where you're going to be -- there are going to be minimum security inmates currently housed in a federally owned prison moving to the private sector. I guess, given the federal bureau operating at 140% of capacity, it would seem that there would be other opportunities within the federal system where they might convert a minimum security prison into a medium security and then transition those inmates out to the private sector. Is that something that you all see happening over the next few years?

We do. It is moving slowly because we have talked about this shortfall for I guess a couple of years. I think the Bureau is satisfied with the private sector's ability to deliver that service to them and would love to do more of it. Theirs is a budget constraint. They're just not getting the increased funding that they have asked for in order to do that. But yes, they have spoken that they would love to give the private sector more low security criminal aliens, which is what the CARs are, so that they could then utilize their government-owned space for medium and higher custody levels. And you know, the CAR 7 is a [tab] facility in California that is currently being managed by [Geo] that will be put out for bid.

Thank you. Solid quarter.

Jim McDonald, First Analysis.

Great quarter, guys. A couple of big picture of questions on just how you look at things. What do you think, if there is a way to think about this, the ratio between new beds and expansion beds will be as you kind of go forward during this next couple of year period?

Jim, I don't know precisely [how] that will unfold. I would tell you, it's interesting, this all comes back now, but we used to say the first -- job one was to absorb an existing bed, job two was to expand it and job three was to build a greenfield development. We're looking at all of the above and I don't know -- I just couldn't give you percentages as to how they're going to fall out. A number of our facilities have expansion potential. Some of those were actually talked about in the press. We actually went out and got a permit to expand northeast Ohio. Again, that was in the news up there. Just again, trying to get ourselves in position should something like that ever -- should the demand materialize for something like that. I can tell you that we're looking for additional greenfield sites around the country in places that we think would be opportune. I don't how they're going to fall, but I can tell you that there are numerous opportunities to do both.

Since you mentioned it, it seems like the greenfield site that you kind of hinted at last quarter seems to be delayed. Was that due to zoning issues?

No. What we're learning is that, when you go into some of these communities, it's just better to have everything completely tied up before you enter. It's just a better negotiating strategy. So I think what we are saying is, we still have a few I's to dot and T's to cross one the one we're talking about, but we do expect that we'll get there. We're just not going to announce and put any community into a position where we're out there ahead of ourselves. It just doesn't make business sense. In other words, I would rather have the investors wait to find out specifically and get the community on board completely.

I think as you said before, you tried to absorb the beds, and I think you basically might have said before, you always want to have empty capacity. But it looks like you might get to a very high occupancy rate. So how should we think about that? Is this temporary? Are you going to build to try to get ahead of demand again? Or it seems like you're going to fall behind at this point?

I don't feel that way. Again, we have 3000 expansion beds, we have Saguaro at 1900 beds and we have 4000 or so beds existing in inventory today. I mean a year or so ago, people would say, what in the world are you going to do with all of those beds? And so that just really -- your question, and it's a good question -- it really I think is reflective of what has happened all of a sudden. Everybody sees this demand, and I think you're seeing it and everybody's seeing it. So I think we can stay ahead of it. We're going to do our very best to do it. And as I said earlier, we're putting infrastructure in place to try to do just that. But if we do announce another 1500 beds, we put that on top of the hopper too. And so we're looking at additional expansion opportunities. I'm glad you said that, because I do think it reflects a much more robust environment and it does underscore our need to continue to get the beds out there and to have the inventory available, and I think we can.

One other technical question. Can you give us some thoughts on start-up costs at Stewart for the next couple of quarters?

Jim, what I would just tell is, it was in the guidance. I don't not have that specific number. Typically, our startup costs are not something that we get too terribly focused about as we've gotten bigger. So I just don't know that number.

Okay, thanks.

[T.C. Willard], Banc of America Securities.

Great, thank you. Irv, I just wanted to make sure I have my number counts here correct. On the 9100 beds that you guys keep referring to, does that include or exclude the commentary you made in the press release about the expansion in Colorado?

That does not include Colorado. We have not signed an agreement yet with Colorado. That was announced by Colorado and we felt that we needed to get that out there so we could talk about it a little bit more. We're working with the state of Colorado to try to come to some arrangement. John, you might want to add to that.

We are in negotiations with them to make sure that we have a contract that is acceptable going forward.

Okay, great.

That was not in the inventory we talked about.

No, perfect. I just wanted to make sure I was clear on that. And then if -- I wanted to take a look at the expense side of the equation, particularly the fixed expenses on the owned and managed facilities. As we are trying to model out going forward, obviously, we don't want to get into too much detail from your standpoint, but is it fair to assume that the numbers that you look to quote with respect to the ramp-up costs at kind of a North Fork, are those typical as we look at facilities like -- particularly like Stewart that seems to be kind of on a -- I don't want to call it a slow ramp, but obviously not an accelerated ramp? So how should we think about the cost structure at these facilities ramp up? I know we have your earnings guidance, but I'm trying to look at it a little more detailed on the modeling side?

I need to give that more thought. You're right behind Jim I guess on that question. We have been pretty much able to absorb these costs. We point them out on occasion, and I think we did point them out in the press release, there's some numbers in there. I think -- didn't we quote (MULTIPLE SPEAKERS) 300,000, for -- was it Red Rock, and about 1.1 million on North Fork? So we try to do is put those out there to the extent that they impact the quarter, we don't try to back them out as specials items, particularly in a development mode as we're bringing on this inventory. I don't think you can call that a special item. And I don't -- it's just going to relate to the deliveries and everything else. I don't have a precise answer for you right now, T.C., and let me think about how we might better disclose that as we go forward, because as we ramp up this development process, that might be something that could become more meaningful.

Okay. And then in terms of -- I guess if I wanted to look at the fixed costs, again, for owned and managed facilities, it looked like it ticked down actually a couple of hundred thousand sequentially with obviously a 9 million or so revenue improvement. What resulted in that ticking down? I mean, I understand (MULTIPLE SPEAKERS).

Repeat that question -- I didn't understand it.

Sure. If you look at the fixed expenses for your owned and managed facilities in the quarter, it was about 117.6 million reported.

We kicked out about 108,000 or so?

Yes, it was actually 118.3 the prior quarter. You were able to layer on revenue of sequentially about 8 or 9 million while ticking down your costs. I understand the ability to bring on more prisoners without needing to hire more guards, but was there something else in there that allowed you to get the leverage?

I actually thought of this ahead of my Controller, I think. I had never done that. If you look at it, salaries and benefits were down a good chunk, and a lot of that was employment taxes that we incurred in the first quarter. I don't think you should be looking for sequential declines from a gross dollar perspective, typically in fixed costs. There may be some seasonality with respect to energy on the fixed cost side. There's the seasonality with respect to we pay a whole lot of employment taxes, it's a big load in the first quarter. We've talked about that from a seasonality perspective. But other than that, we should be looking at what I would say right now are inflationary type increases are what we've been seeing. On a per man day basis, of course that's not been the case because of the added inmate populations and the leveraging of those costs. But that's what happened there, T.C.

I just wanted to make sure there wasn't something that we might have been missing, make sure we're modeling correctly. And then just my last question. With respect to ICE, who obviously had a really good quarter with you guys, we saw a big jump-up in terms of percent of revenue. Is it possible to see ICE become your number-one customer in the next 12 months, just given they seem to be the one that are the most aggressive out there in trying to procure beds.

You know, I probably -- I have not tried to put a pencil to that. ICE is limited in the funding for 25,000 or so inmates. So it is not like it's going to be until there's more funding to see [substantial] growth. But I would say that it will probably start to nose up to the U.S. Marshals, but I don't see them become our biggest customer. It would be good if they did, because that would (MULTIPLE SPEAKERS).

They're all good problems.

We'd have many more beds.

Absolutely. Well, great quarter and thanks for taking my call.

Barry Stouffer, BB&T Capital Markets.

Good afternoon, gentlemen. With state budgets in better shape now, are you seeing any signs that the states are thinking about building their own facilities?

Yes, in some places they are. I don't see it at a significant increase. And then as we observed, it will -- we can have one built and running by the time they get through their design and review once they decide to appropriate it. So, it is a little bit of a threat, but I'd say as we've started to call out, it is much less than the growing demand that we see throughout the country. And then it really gets into the selected states. As I indicated, there are 20-plus states that we see demand. Our (indiscernible) what we're focused on is those 20 or so states. So the other 30 that are doing things, we really don't care.

Irv, can you just update us on your IT initiative?

IT initiative is going very well, Barry. We should wrap that up at the end of next year, might bleed into the first quarter of '08. It's going well, we're getting our ROI on it and that's becoming less of a focus here. I think the more significant initiative that we're looking at is trying to control turnover. It's a business that has very, very high turnover and I think that the next initiative you'll hear us talking about more and more over time as how we work here and a number of departments would be involved in this in trying to get the amount of turnover down. I think we could save a lot of money if we could do that.

And on the IT initiative, what would you say has been your biggest positive and biggest negative surprise with what you've done so far?

The biggest positive surprise is it has really worked technically without a glitch. I guess there were a few bumps early, but it's really going in well and we haven't had, like you would in a lot of IT conversions, something that kind of blew up on you. It never really did that. I think that the disappointing part sometimes is, it's just, it doesn't go as quickly as you want. You're dealing with human beings and you're trying to institute change. And we had originally tried to -- wanted to have it done sometime around the first quarter of '07, and now it looks like it could be as late as the first quarter of '08. And we will, and that's fine, as long as our people adopt it the right way and we don't have any mistakes with it. So we are pleased. The cost has stayed where wanted it to stay, even with the extended period of time. The other thing that's happening, which is extending that period of time, is just all of these other facilities that we're developing and bringing online, our guys get distracted and they have to go somewhere else and put it into a new place. But it's going very well.

The relationships with some of our customers have been a little more tedious than we thought there would be. Eventually, everyone seems to understand the value that is there. But if you have people that are kind of accustomed to one way, then it takes a little bit longer to find the middle ground that we need in order to implement it.

One thing I will say is I commend our people that are installing that. They're spending a lot of time on the road and we do appreciate all of the work they're putting in.

Thanks, that's all I had.

[Chris Blackmon], [Empire] Capital.

Congratulations guys. I'm just kind of curious on the -- considering your current cash flow and your existing debt and your current covenants, how many additional beds could you build without hitting any debt constraints?

A lot. The debt constraint that I'm most concerned about is staying under four times debt to EBITDA, and that is an internal, not an external threshold. We have a great relationship with our bond investors and we have been -- and we have been able at our rating to borrow at premium rates versus similarly rated companies. I think people like the nature of our customer, they like the nature -- the consistency of our cash flows, and maybe even they like the management team, at least John. But we've developed very good relationships with the credit markets and it's because I think they understand we're not going to do something crazy. So the boundary for us is four times debt to EBITDA. And what I have pointed out on several occasions is that if you look over a two-year period and you look at the cash flow you can reasonably expect us to generate, and if you look at a reasonable assumption on bed fill, between cash flow and additional borrowing, you have over a two-year period about $600 million, and you could invest that in new development. And when that new development starts to cash flow and EBITDA starts to come, then you could actually leverage that cash flow. So we could go quite a ways before we would have to sell stock.

The other thing I would point is before we'd even sell stock, that there's a lot of value in these assets. I hear people talking to be about regional malls selling at six cap rates or parking garages selling at five cap rates or 20 times cash flow and you think about -- or highways selling at 50 times cash flow, you think about prisons as infrastructure or some type of real estate asset, I think these could be even sold and harvested in some fashion to avoid selling stock in the future. So there are a number of things that we could do to finance our growth, but just with respect to cash flow and leverage, we could go quite a ways.

Perfect. Thank you.

Jim McDonald, First Analysis.

Anything else in California, and is -- anything on CAR 6?

California, we do know that there seems to be some activity to identify beds that are in other parts of the country. They in fact even sent a letter out to governments as well as to us in some of our facilities asking about the availability of beds. So I think we could call that a logjam that has given some indication it might break. They did put out another RFP for 4500 female beds. This is in addition to the male bed solicitation that's been out there for some time. But it's just hard to call when it's all going to happen.

And on CAR 6, was that coming down to --?

Oh, CAR 6? Our best assessment is that everyone is going to probably keep their relationship at their facility. We cannot say for sure. There is a limitation on, you can only build 20% increase in the square footage within (technical difficulty) 70 days. So we feel that based on what we know, that everybody is reasonable in their pricing, that each of these locations probably ought to enter into direct contracts with the Bureau, but we won't now.

Thank you very much.

Patrick Swindle, Avondale Partners.

Thank you. There has been some press recently about what I would probably describe as a nontraditional facility down in Texas for the housing of ICE inmates. To the extent that you all see demand ramp more quickly than you can bring under a traditional facility, are there opportunities for you to bring on some I guess nontraditional type structures that would allow you on an interim basis to meet that demand need?

Well, that's possible. We have gotten a little familiar with the structures there. We're watching it closely. They will be taking their first inmates I guess this week. We have spent some time trying to figure out what it would be -- what it would look like if we could do it and what kind of security issues that would be required if you had a facility that pretty much had a membrane on it that with a kitchen fork could break through it. But it is something that we're giving some thought to, that maybe we could meet, satisfy some interim demand while we finish up a hard facility.

I guess to your point on the security of that facility, that's probably not the best long-term option for ICE?

Well, I don't know, and I don't think they know. And of course, that one's going to be interesting because we have observed it is what -- this is a specific facility for a specific population which is El Salvadoran (technical difficulty) because it's a 20-year court consent decree. And if the El Salvadorans move up the coast or up the state line, the border, it will be interesting to see what [they] need. But I would say that we have been sensitive to having facilities that can adjust and satisfy numerous customer demands. And I don't think we'll ever see any of our state customers be willing to do that, and we don't think we'll ever see the bureau be willing to do that and I don't think the Marshals would be willing to do it long-term because a Marshal inmate can be low security to maximum security, all in the same facility. So ICE is probably the thing in the short term, but again, I don't not see it long-term either.

Thank you very much.

Andrew Berg, Post Advisory Group.

Just going back to your costs real quickly, can you put a number on how much of your increased expenses were legal? And then what should we be thinking about on a go-forward basis?

Legal fluctuates. I couldn't give you a pattern for what it will do. We're like any other business. We have a number of suits at any time that we're dealing with and they end up settling or -- let's just use the word settling it -- various amounts based on previous estimates. And so we just have to deal with that. Sometimes we have had positive outcomes from the legal side, and sometimes we have negative outcomes from the legal side. And I think what we're saying here is, an assessment of the cases right now would just -- we had a little bit more expense this quarter than normal. I wouldn't get too concerned about it. The last several 10-Qs or filings, 10-Ks and 10-Qs that we have issued did not -- no single case rose to disclosures level. So it's just a basket of things and it's just very difficult to predict how it will [fall] out.

Okay, but being conservative then, it's probably best to assume, we're sort of at the same level at least for now?

I don't think you would be hurt by doing that, based on what I know right now.

Great, thank you.

There appear to be no further questions at this time, Sir.

As I usually do, I will try to wrap this up with the high points of what we've discussed in case any of you have missed them. Our second quarter earnings were $0.63 a share for '06, compared to $0.37 for '05, up 70%. The first six months, $1.15 for '06 compared to [72] for '05, up 60%, and we have announced this 3-for-2 stock split, which is in essence a 50% stock dividend.

From operations, all of our indicators are positive. We have good performance both at the Fed level and the state level in our incoming business. Our occupancy rate is up to 94.8% in '06 compared to 90.1% in the second quarter of '05. And I heard a couple of questions that at operating margin occupancy I would believe is always the best indicator of an improvement in operating margin. You could have some things that would go astray, but the higher your occupancy, the better your operating margins. And our operating margin were 27.4% for '06 versus 23.7% for '05. Now having said that, our occupancy rates will fluctuate based upon the new beds that we bring on and the timing of them. So I don't think you can straight-line out what we have now done in occupancy. We may even get better, but then as we build new beds and bring them on, this will fluctuate, which means our operating margins would fluctuate as occupancy fluctuates.

EBITDA is up 35% for the quarter. Our adjusted free cash flow, adjusted for these tax issues that we had in '05, is up 49.7%. We actually had $87 million of free cash flow. And as a further indicator that everything is positive, our operating expenses are down slightly, 38.10 in '06 versus 38.38 in '05.

I think we have talked about the existing inventory of beds. We have 4200 beds on hand at the present time mostly with customers identified. We have seven facilities with new expansion for another 3000 and we have one new development for beds at 1896. That leads us to our forecast $0.57 to $0.60 for the third quarter, $0.59 to $0.64 for the fourth quarter, and for the year, $2.33 to $2.41 per share for the entire year of '06.

Our future looks bright for '07. As we have talked about these beds, this will give us approximately 9000 available beds by the end of '07 -- by the end of '07, and we see a need for these beds in '07 and '08 because the federal budget includes funding for more Marshals' services, ICE requirements continue to increase and the states are peaking out in their capacities and they are seeking additional beds and are willing to now send prisoners out-of-state.

So this quarter was absolutely positive in every indication or every indicator and we look for a good third and fourth quarter and a very good year for '06. And thank you for being with us today.

Thank you. This concludes today's Corrections Corporation of America conference call. You may now disconnect your lines at this time and have a wonderful day.