CoreCivic Inc (CXW) 2007 Q1 法說會逐字稿

Good day, everyone and welcome to the Corrections Corporation of America Q1 2007 conference call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Karen Demler. Please go ahead.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Corrections Corporation of America's first quarter 2007 conference call.

Before we begin, let me remind today's listeners that this conference call contains statements that are forward-looking as defined in the Private Securities 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 though company's form 10-K, as well as 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 website. The company does not undertake any obligation to publicly release the results or any revisions to 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 Chief Financial Officer, Todd Mullenger. I would like to turn the call over to Mr. Andrews. Please go ahead, sir.

Good afternoon and welcome to our 2007 first quarter earnings release. I hope you'll be pleased with what you hear today, and I'll turn this over to John. We also have with us Dave Garfinkle, our Controller and Vice President. So, he's in the room, as well. John?

Actually we would like to introduce Todd Mullenger, who will have our opening comments, and then I'll follow Todd.

All right. Thank you, John and good afternoon, everyone. We are very pleased with our first quarter operating results. So let's move straight to a summary of those results.

First quarter results for 2007 generated $0.52 per diluted share, compared to adjusted EPS for last year's Q1 of $0.36 per diluted share, representing an increase in earnings per share of over 44%. Earnings for the quarter were positively impacted by increased populations at a number of facilities, including Red Rock, Stewart, T. Don Hutto, Eloy, Crowley and North Fork. Adjusted EBITDA increased nearly 29% to $84.5 million for the quarter. Same-store facility EBITDA for the first quarter 2007 increased approximately 20% over the prior year. Operating income for the first quarter 2007 was $66.2 million, representing an increase of $16.3 million or 32.5% over this first quarter of 2006.

Adjusted free cash flow for the quarter increased to 43% to $61.5 million. However, we should note that we made no payment of federal taxes during the first quarter of 2007. The first payment will be made in June of this year, and we are currently estimating full-year cash taxes in the range of $50 to $60 million. Also favorably impacting adjusted free cash flow in the quarter was a below-average spend in maintenance and IT CapEx in Q1. We are currently estimating maintenance and IT CapEx for the full year will total of approximately $55 million. Cash flow from operating activities for our cash flow statement for Q1 is approximately $69 million, with expenditures for facility development and expansions of $33.6 million and expenditures for other capital improves or maintenance and IT CapEx of $10.5 million.

Total revenue for this year's first quarter was up 11.5% over last year, amounting to $350.9 million. Total compensated man days increased 7.6% to 6.4 million from 6.0 million man days in the previous you year. Revenue per compensated man day increased 3.7% to $54.01 from $52.07. An average compensated occupancy for the first quarter increased to 98% from 93.7% last year. And this increase in occupancy percentage was especially significant in light of the fact that our average available beds increased from 70,589 in Q1 2006 to 72,643 in Q1 2007. The 3.7% increase in revenue per compensated man day for the quarter is substantially due to higher per diems obtained on new contracts.

As our press release does a good job of outlining the changes and fixed and variable costs, I'll add just a few general comments here. Operating costs per man day for the quarter decreased 1.3% to $38.04 from $38.56 in last year's Q1. Fixed expenses per man day decreased slightly primarily because we spread these cost over roughly 450,000 man additional man days versus the prior year. As a reminder, approximately 85% of our fixed costs are personnel related and once a facility reaches a certain occupancy level, say, 80% to 85%, we have substantially all of our fixed costs in place. At that point, our business model improves dramatically as we leverage these costs over larger numbers of inmates.

Variable expenses per man day were down 2.6% for a decrease of $0.25 per compensated man day. This decrease is due primarily to favorable performance within inmate medical expenses as a result of an increase in inmate populations under contracts that contain limited medical risk. The end result was that operating margins per man day increased $2.46, to $15.97 from $13.51 in the prior year, and our margin percentage increased to 29.6% from 25.9%. GAAP income tax expense for the quarter was computed based on a rate of approximately 38%. We currently anticipate a rate of 38% for the balance of 2007.

So in summary, we are very pleased with our first quarter operating results. Revenues per compensated man day increased nicely. We executed well in controlling operating costs, and a positive supply and demand environment results in higher prison populations, providing additional leveraging of fixed costs and, as a result, higher operating margins.

I will finish with an update of our guidance for 2007. As indicated in the press release, our guidance for Q2 is in the range of $0.48 to $0.52, and guidance for the full year is in the range of 1 $1.97 to $2.07. The guidance we provided does not incorporate any impact from the Governor of California's recent announcement to transfer up to 8000 inmates out of state. While we're optimistic that CCA will benefit from this decision, at this time we just don't have enough specific information regarding the number and timing of any incremental California inmates necessary to reasonably estimate the impact on our 2007 numbers.

We typically avoid detailing assumptions used in developing our guidance, but we would like to offer the following supplemental information. The guidance incorporates the start-up expenses related to the opening of our Saguaro facility in June. In addition to the traditional costs of hiring and training staff, these start-up costs will also include significant transportation costs associated with the transfer of Hawaiian inmates currently housed at our Diamondback and Tallahatchie facilities into the Saguaro facility. Our guidance also incorporates the disruption of the EBITDA streams at Diamondback and Tallahatchie caused by the transfer of the approximately 1500 Hawaiian inmates currently housed at these two facilities. Even under the best of circumstances, there will be a delay between the transfer out of the Hawaiian inmates and the transfer in of replacement inmates in to Diamondback and Tallahatchie, which will cause a temporary deterioration of the EBITDA streams at these two facilities until replacement inmates are backfilled. Our guidance also reflects annual merit increases, effective July 1st, for the majority of our roughly 16,000 employees. And then our guidance also incorporates our best estimate of the timing of the overall absorption of our existing inventory of beds.

As we have said many times before, it is difficult, if not impossible to time events with certainty, especially when dealing with our government customers. And John will talk more specifically about the demand, but overall the outlook for our business remains quite favorable. The combined beds of CCA and our private competitors are not sufficient to deal with the demand for prison beds that exist today. I'll now turn it over to John for specifics on our new business prospects and bed development.

Thank you, Todd. I would like to start out reviewing the status of our bed inventory and our development activity.

During the first quarter of 2007 we added 456 beds of new capacity through the completion of a 360-bed expansion at our Citrus jail and 96-bed expansion at our Crossroads facility in Montana. At April 30th, the company has approximately 2200 beds in its existing inventory, of which 1900 are owned. Also during the first quarter 2007, we announced a second 360-bed expansion at our Tallahatchie facility, and a 266-bed expansion at our Leavenworth facility. This will bring the Tallahatchie facility to a total of 1824 beds, and our Leavenworth facility the to a total of 1,033 beds. These beds will be delivered over the next 3 to 15 months. Roughly 2500 of these beds are being developed for specific customers, however, none have a guarantee of occupancy. The 960 development beds in North Fork and the 720 beds at Tallahatchie represent speculative development.

With respect to new capacity coming online, we expect to complete the 1896 bed Saguaro facility this June and begin the process of transferring the Hawaiian inmates from Diamondback and Tallahatchie, as Todd has just mentioned. Currently we will, again, as quickly as possible to backfill the Diamondback with the just-announced today new agreement with the State of Arizona to utilize all of the available beds at Diamondback, and also begin to work on backfilling the beds that will be vacated at our Tallahatchie facility. Obviously, given the indication of bed needs we're seeing, we're optimistic with respect to such backfill.

Over and above our current inventory in new expansion bed capacity, we have been actually working on identifying and permitting sites for new prison development, as well as assessing numerous new expansions. Based upon our progress today, we believe we should be underway at some point during 2007, with an additional 3400 to 5400 beds. Again, this is 3400 to 5400 beds over and above what we currently have under development. So, adding this all up, we have approximately 2200 beds in existing inventory, over 6000 beds currently under development and believe we can have another 3400 to 5400 under way during the 2007 for delivery in 2008 and 2009. This adds up to a potential of between 11,000 and 13,000 beds to meet existing and future demand and to drive the company's earnings growth over the next several years.

Let me try to clarify a little better the beds that this 8200, as well as talk about some of the specifics around our development. Of the 8200 beds that we just described, the 2200 current inventory and the 6,000 beds in expansion, half of them, or 4100 are for specific customer requirements. Of that, 2450 are expansion beds and 1650 are current inventory. So these will be absorbed by customers over some period of time. In fact, 1750 of the 4100 of customer-specific beds are for the State of Colorado. As we have announced, the expansion of two of their facilities which represents 1440 beds, so these are beds that we have all of the confidence in the world that will be absorbed or should be absorbed over some period of time, but will be strictly at the need of the growing need of our existing customers. In addition to those 4100, we have 700 beds-plus that will be utilized by Arizona under the contract we announced today. Addition to that, 400 or so beds that will be utilized by our additional capacity by the State of Hawaii.

If you take the 8200 minus the 4100 customer-specific, minus the 1100 for Arizona and Hawaii, that leaves roughly 3000 beds available for new and future customers. Obviously, that could be beds made available for the State of California, and we tried to be very clear in our press release that everything appears to be very favorable in moving toward the ability for the State of California to utilize out-of-state beds. In fact, we understand that at 1:00 PST that the governor will be signing the legislation that was passed last week, but we do know that there is one legal hurdle that needs to be cleared before they can continue with the movement of inmates out of state. But we feel very confident that even if California was not to utilize these beds, that they could be absorbed by future customers.

So let me try to describe the 3,000 beds. Of the 3,000 that are available, about 1300 represent current inventory in the beds that would be coming available as we ramp down our Tallahatchie facility. So these beds, by the end of December 2007, should be available. And then addition to that we have another 1700 beds that will be coming online -- again, at the end of this calendar year, but would be available in the first quarter of 2008. So of the 8200 beds, 3,000 beds are those that would be available by the first quarter of 2008.

Again, one of the things we wanted to caution everyone about on the -- as Todd described in his guidance, that if it should be California, that we have now had the experience with them, and they are very caution and deliberate in their ramping up. As everyone is aware, they are under federal court order as it relates to healthcare, and so we've learned it takes a reasonable amount of time for them to get themselves prepared to open a new facility to begin to transfer their inmates in to this new facility, and should California not be in a position to use these beds, then some new customer would also take some time. So we feel that the opportunities for this balance of this year are one that we would be caution, but we feel very bullish about these beds betting utilized in 2008.

So let me now move to new development. It's been our policy not to announce contracts or new construction until we're certain that it is firm, but we feel there's been much media attention around a couple of developments that we have currently ongoing that I thought it would be important to provide a status report. We have been in discussions with several communities in southwest Mississippi and have specifically in the last couple of weeks reached an agreement with Adams County, Mississippi, that is the county in which Natchez, Mississippi is part of. And we are moving toward a -- hopefully a ground-breaking in the next several months, but there's still some things that need to be dealt with before we will make a firm decision. There's significant utility infrastructure that has to be dealt with by the county and we need assurances from them that they can meet these utility infrastructure needs. We also have to have certain that our assumptions on our finish costs will be accurate, but at the moment we feel that in the next 60 or so days, that we will reach a conclusion on this Greenfield development, and it would be some 1700 beds.

Addition to that there's been a lot of media coverage around a new facility in the State of Tennessee. We're pretty much in the same position there. I think we feel that it is a good site for us. It also has infrastructure needs, and that need to be sorted through, so we'll know what our final cost is. So that would be a 1900 bed facility. Those are two Greenfields that we would normally would wait until we're ready to go to announce, but we feel that, based on the media coverage, that we needed to respond to it.

Todd mentioned some expansions that we are considering. In fact, there are eight different facilities that we currently have that we're considering expanding to somewhere in the neighborhood of 4,000 beds. And then our continued effort to identify new sites, that we have roughly 10 or so Greenfield sites that we are considering for future development for facilities anywhere from 1500 to 1900 beds. So that's kind of the status of where we are with our current and future development.

So now let me move to the business development front and talk about our two major business segments. First, states. During the first quarter of 2007, it was our ninth quarter in which we have experienced growth by our 20 current state customers. In fact since January 1 of 2005, we have added nearly 7,000 new inmates in these 20-state customers. I would like to point out where we see the demand continue to develop in these customers. I have mentioned in past conference calls of the many states that we continue to monitor that have either current or growing inmate bed needs, but we like to point to something that was published here recently and that is the highlights of the Pugh Foundation Report that funded some research on the prison population growth over the next five years. That report reported that from 2006 to 2011 that they expected to see 163,000 net new bed, or inmate growth at the state level, but what is interesting of the 20 state customers that we currently do business with, 66% of that growth, or roughly 98,000 beds, are inmates are expected to grow in the 20 states that we currently have relationships with. Obviously to point out some of the demand, California potentially up to 8,000.

We have -- there's an RFP out there from Arizona, which now is being completed, and we were pleased that we were able to enter into a new relationship starts July 1 for up to 2160 inmates. And then we have some 1500 inmate bed needs with some of our current customers that I would call immediate -- that we are working with them on and obviously that puts us in an allocation situation at the moment. If you just take away California and Arizona from the Pugh Report, they still anticipate a 70,000 inmate growth between 2006 and 2011 in the other 18 states that we currently have business with. Why I'm talking about the state opportunities, we'll point out again, as we highlighted in our press release that the State of Florida has a procurement process going on, and we understand that they actually will make their award tomorrow morning, So we have both an opportunity and a threat there, because we know it was competitive, and the State of Tennessee currently is in procurement for a new five-year contract for the South Central facility that we currently manage.

As I turn to the federal business segment, pretty much the same story that we told over the last many quarters. We have seen in the -- since January 1 of '05, almost approaching 4,000 inmates / detainee growth at the three medical customers we have, the BOP, the US Marshal Service, and ICE. We have seen new projections by the Federal Bureau of Prisons that says that although their population has slowed somewhat, that by 2011, they still have needs in excess of 16,000 beds over and above what their projections are, minus the bed capacity that they are bringing online, and this is without relieving its current operating at 34% over its total available bed capacity. The fiscal 2008 request for funding in the 2008 budget would expand the number of contract prison beds by more than 1100. We continue to see increased funding in the Marshals for the fiscal year '08 budget. We have seen between fiscal year '05 and '06 a 5% growth in their non-federal jail days, which is the type of inmate that we provide the services for, and that we have seen almost a 9.5% growth in the utilization of CCA bids over the last five quarters.

And then Immigration and Custom Enforcement, they currently are housing in excess of 29,000 beds, which actually exceeds the budgeted amount, and we have every reason to believe that as they continue to maintain the policy of catch and remove, as opposed to their policy of catch and release, that that inmate population should grow. And obviously we're watching the '08 budget very closely, because we feel that there could be need for additional beds. So that's a quick overview of the business development activity.

We'll now move in to Q&A, but if you would indulge me just a moment, while I have many of our meaningful shareholders on the phone, I would like to talk a little bit about the upcoming shareholders meeting that we have on the 10th of May. And would like to encourage those who have yet to vote to please do so. Specifically, I would like to address proposal No. 4. Our proposal to amend the company's charter that, if approved, would increase the number of authorized shares from 80 million to 300 million. Currently we have over 66 -- or right at 66 million shares, so almost 9 million shares left in the 80 million outstanding reserve for issuance under equity plans. So just to remind everyone that while amending the charter would give the company the ability to authorize the issuance of additional shares, we don't presently have any intention to do so. However, I would add that we don't have sufficient authorized shares to do a meaningful stock split if the Board determined that considering a split was advisable. I encourage you to consider this proposal set forth in the proxy statement and return your vote promptly. And if you've already voted and voted against Proposal 4, we would ask that you would reconsider it.

With that, operator, we'll open up to questions and answers.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll go first with Ben Joseph with Rice Voelker.

Hi, good afternoon.

Hi there.

First question it relates to the new Arizona contract. That original RFP, I believe was out for 5700 beds and it looks like 2200 of those beds were awarded to you guys. Should we expect that RFP to continue as we move throughout the year? I know there were increments of when they wanted those beds and things. Has that since closed?

Yes, there could be continued -- let me say probably yes. There could be continued solicitation or procurement by the State of Arizona. Of course part of the 5700 will have been satisfied with the inter-governmental agreement that they currently have with the State of Indiana.

Right.

That's some 3300. How many additional beds they need, we don't know. But there could be a situation in which they continue to procure beds under that solicitation.

Okay. And then next, if you could talk a little bit about the environment in the State of Oklahoma? I recently read some press articles talking about the emergency state that they are in. And I know you guys have the 960-bed expansion at the North Fork facility. Would you expect it to be utilized by Oklahoma? Or is it still up in the air as far as various states?

At the moment, we would not rule out Oklahoma as a prospect for the North Fork expansion. But also at the moment, we believe that we have a call for those beds at the moment. We're very sensitive to Oklahoma's situation. They have had a growing population for a while. And then recently they had a contract terminated that was housing some 800 inmates. So we continue to have discussions with Oklahoma to try to work with them to help them meet their bed needs.

And then one more thing on the Arizona contract. I know you guys haven't historically given out, I guess per diems, or I guess total contract value, but could you elaborate a little bit on the -- maybe the price increase that you've potentially would have received from Arizona on this new contract.

I'll try to give some flavor on it. I wouldn't give the per diem around it. And just remember, all per diems aren't created equal. That one per diem at a price doesn't necessarily mean it's the same just because the price is the same. But we would say that based on the current environment of supply/demand, that we feel that we have entered into a very fair relationship for CCA as well as the customer.

Okay. Thank you very much. Good quarter.

Thank you.

We'll go next to Todd Van Fleet with First Analysis.

Good afternoon, guys. Good quarter. Todd, I would like to start by asking if you could help us kind of gauge or kind of quantify what the magnitude of the start-up costs and transfer costs that you have built into, if not the rest of the calendar year, but Q2?

Well historically we haven't given specific guidance on start-up costs, as there are a number of variables that can impact it. However, in 2006 you may recall, that we disclosed $1 million in start-up costs incurred in opening our Stewart facility. And then, again, at Saguaro, we're going to be incurring significant transportation cost, related to the transfer of the Hawaiian inmates, and those transportation costs you're going to incur in Qs3 and Qs4, depending on what the ramp-up schedule is at Saguaro. We're still working on that.

Okay.

But, the hiring and the training and the staff is going to occur primarily in Q2, maybe bleeding over a little bit into Q3. And then the other item I touched on, which is related to this, is that the operating margins will be negatively impacted by the interruption of the EBITDA streams at Diamondback and North Fork, as we transfer out the Hawaiians who are housed in Diamondback and North Fork into Saguaro. So, those are existing inmates we have in our system right now. They're not incremental to anything. We're going to free up capacity at Diamondback and Tallahatchie by consolidating those inmates from Diamondback and Tallahatchie in to Saguaro.

But both of those facilities are operating at capacity now, generating nice EBITDA streams, and as we transfer out the Hawaiian inmates, it will interrupt those EBITDA streams, deteriorate that EBITDA a little bit because even under the best of circumstances, there will be a delay between the transfer out of the Hawaiian inmates and transfer in of the replacement inmates. And there's a lot of moving parts right now and we just don't have a good sense on the timing on all of those issues.

One of the things we will have, we will have fixed costs on two prison beds and revenue only on one, and we don't know how long that will be, but that will be the case for a while.

Right. Just as you point out, there are a lot of different moving parts and pieces here. Just to help quantify, the number of inmates moving out of Diamondback, as well as the number of Hawaiian inmates moving out of Tallahatchie in to Arizona, you are going to be filling up that Arizona facility with exclusively Hawaiian inmates. Is that the way it's going to work at this point?

Yes.

The number coming out of the Oklahoma facility is how many?

Approximately 700.

And the number out of Tallahatchie is the balance the 1100.

Roughly 1500 Hawaiian inmates coming out of the two facilities in 2000 -- that are in 2007 right now.

Right. Right. Okay. Then as we look at the other facilities that are being brought on, in terms of being brought online before the end of this year, that is expansions of, I think there are four other facilities or so -- or three others. How good is your visibility in terms of repopulating or populating those expansions so the two in Florida, the one at Panama City, the one at Quincy, and then the Sayre, Oklahoma expansion I think you just alluded to, but do you feel like you have pretty good visibility on how those expansions are going to be populated?

Of course, the Florida will be populated by State of Florida inmates, and that will take place if we continue to manage those contracts. If we lose the contracts then --

Right.

-- then it will be a different issue. But we do know that Florida will fill those available beds fairly quickly once they come on line in the third quarter. We have pretty good visibility with other than California, for the North Fork beds if California was not to materialize. If California was to materialize, I think we have pretty good visibility for all of them. If California was not to materialize, then the Tallahatchie beds -- we don't have quite as much visibility today as we do on North Fork.

Okay. Let me ask you one more before I jump off. With respect to pricing, most of your increases, contractual increases happen kind of around midyear; is that right?

Typically around the state fiscal year, which is July 1 of each year.

Okay. And could you help us gauge what the extent is of the pricing increases that you expect, just kind of system-wide, I guess, this year.

Well, I think we typically assumed about a 2.5% average on that. As certain contracts have come up for renewal, then we anticipate that we maybe have the opportunity to do a little better than that. Although in some states, it is all about negotiating with the state on -- and the appropriators. So as we experienced in fourth quarter and here again in first quarter, when we had 4% increase in fourth quarter and 3.7%, I would tell you that it's probably inching up, but I don't know what to tell you to go beyond 2.5% to 3% right now.

Okay. Thanks.

We'll go next to Jeff Kessler with Lehman Brothers.

Thank you. Firstly, obviously, I want to add my "Good quarter" to everybody. It was obviously very good. Getting to the questions. Can you keep up with demand as it materializes? As you laid it out, John, you've given us kind of the schedule of what is out there, and we have some idea of what demand is going to be, and some idea of the timing. Is there going to be a pinch point, however, that you see over the next 12 to 18 months, in which you may have to scramble for beds or scramble for capacity? Particularly if California comes on?

Yes. The -- when you say--

And how will you deal with it if it comes to that?

I think if we look at the available beds we'll have as of the first quarter of 2008, some other improvements in some contracts we have, we feel that 2008 could be another attractive year. So our goal right now is to start developing capacity for 2009 and beyond. However, if California was to materialize and based on the beds that we have available, we do believe that there's some opportunities within our system in which we might be able to bring some beds on much quicker than -- so we could help benefit the State of California.

Okay. So internally there's opportunities to develop beds more quickly than what you gave out today.

Yes.

All right. The financing of this expansion. I know that Irv in the past has gone through some of the metrics by which you can use both projected EBITDA, as well as your free cash flow to be able to generate a certain amount of debt financing against your EBITDA and still be within the range. What-- can you just go over, again, what your and what your rating agency's comfort level is with you at the current rating?

I'm happy to walk you through that you may remember a schedule that we have in your investor presentation that is available on our website, which goes through the math in more detail. But in summary, through a combination of cash and short-term investments on hand, free cash flow in 2007, 2008 and 2009, and levering our debt up to four times EBITDA, which we have come communicated with the rating agencies and they seem to be comfortable with that metric, we can deliver over 12,000 new beds without issuing equity. And we go through that math in a little more detail in our investor presentation that's available on our website. And that math assumes -- When you look at that schedule, keep in mind It assumes no incremental EBITDA generated by the beds we bring online. We're using 2006 free cash flow and computing those numbers.

All right.

And it assumes 4 times, and we lever up to 4 times EBITDA. Right now we're at 3 times EBITDA.

Your investment, your maintenance and IT investments have increased substantially over the last couple of years. One of the reasons for that was HR and compensation -- I mean workman's comp, keeping just better tabs on your corporate cost and some of your fixed cost. Is the revenue to SG&A ratio -- has that changed for the better in the past quarter year-over-year due to this or are there other factors going on here?

Let me say revenue--

SG&A as a percentage of revenue, I just said it backwards.

Okay. (Inaudible)

I'm not sure I understand the connection between maintenance CapEx -- investment in maintenance CapEx and IT we expect to see that benefit in our operating costs rather than G&A.

Rather than G&A? I mean, it shows up in your fixed cost?

What I'm saying the investments we're making in IT, our (Inaudible) and our information technology and even a little bit in the maintenance CapEx, we expect to see lower operating costs as a result of that, lower salaries in the field, not so much in G&A.

Higher gross margins.

Okay. Finally, can you just go through -- I know you went through in bits and pieces, but can you go through a list of the contracts that are up in 2007, which are owned, which are managed?

I think if you go to the supplemental that we provide, you will see those. The ones that are up that are -- would be deemed a threat, I think the rest of them we feel will be renewed as they traditionally are each year, because they have multiple extensions would be the two facilities in Florida, which is Bay correctional and Gadsden correctional, and South Central in Tennessee, are the three that are up that have some threat. Everything else that we have that shows a 6/30 of this year termination, we would be renewed under some negotiated renewal.

Okay. Very good. Thank you very much, guys.

We'll go next to -- excuse me T.C. Robillard with Banc of America Securities.

Great. Thank you. Can you just clarify, on the Arizona contract, where you give the ability to go up to roughly 2200 beds, is that including renegotiating the 1400 or so, Arizona inmates you currently have or is that incremental?

It's a brand new contract beginning July 1, 2007 for all of the inmates that are in Diamondback.

Okay. And then could you talk -- can you give us-- I'm sorry I know you gave this in the beginning, just missed it -- can you give cash flow from ops in the quarter and the total CapEx in the breakdown.

Sure the cash flow from operating activities off of the cash flow statement for Q1, approximately $69 million. And then expenditures for facility development and expansions -- or expansion CapEx, if you will, 33.6 $33.6 million. And then expenditures for other capital improvements, which is maintenance and IT CapEx, $10.5 million.

Great. And then can you give a sense -- I know you were very clear on the issue with transferring inmates -- Hawaiian inmates -- out of a couple of existing facilities into the Saguaro facility, and what that's going to do in terms of pressuring EBITDA at those specific facilities. I'm just curious how much flexibility you have to offset that in terms of the fact that obviously a vast majority of your costs are personnel and headcount related, how much you can kind of offset that EBITDA pinch with some near-term headcount reductions, or at least limited payroll with some of the guards as you wait for new contracts to come in to those facilities.

Unless we thought there was going to be an extended period of time of vacant or idle facility, we would not be making any adjustments on the fixed costs that would let us mitigate some of what you just described.

You've got a fairly significant investment in training on those employees. If you let them go, you run the risk of not getting them back and then have to put somebody new through four- to six-weeks of training.

So it would seem to me then you expect to fill these in a fairly short order, meaning a couple of months, as opposed to a couple of quarters. Or do you view a couple of quarters as a normal time line where you would not want to lay some people off to then have to try to rehire and retrain?

Even if you used a couple of quarters, we would not want to lay people off and rehire them, if we knew for certain that it was -- I think one of the dilemmas is it's going to be kind of in the middle. We will have a facility that will be completely staffed, and we will have a slow ramp-up, so that we will still be carrying the cost of an empty bed, even though some of the beds will be producing revenue. And as I was trying to describe, should California be in a position to begin to send further inmates out of state, we do know, based on our experience with them at our West Tennessee facility and our Florence facility, they are going to be very deliberate and very caution. We are, too. This is a relationship that has to be done right. We don't need anything to go wrong, because there are a lot of folks watching it. Therefore, it could just take a lot longer than it may, typically, if we were just adding inmates to an existing customer's facility.

Okay. Great. That's real helpful. Thank you.

We'll go next to Kevin Campbell with Avondale Partners.

Good afternoon. Thanks for taking my call. I just wanted to ask a question on pricing for management contracts. We saw one of your competitors lose a contract last week, and it looks largely due to pricing. I'm wondering if you are seeing any pricing pressures there that are perhaps more than normal or what you wouldn't have expected?

A managed-only rebid is going to be competitive and will have some pricing pressure. When a company does not have to deliver the real estate, and they don't currently have an agreement, they will typically try very hard to get a new contract. And we have to take that in to consideration and, yes. One of the things we've tried to point out that we think is-- we like, we want as much manage-only business as we can, but we have seen the EBITDA from managed-only move from a high of over 25% to 13% as we become more and more committed to owning our facilities. But, yes, in some competitive situations there could be some pricing pressure.

But it's not particularly worse now than say six months ago, or 12 months ago, it's just business as usual there?

No, I don't think it's changed.

And I think you said this, but in your guidance, what sort of pricing increases are you assuming? I believe you said it, I just missed it.

2.5% to 3%, absent the contract coming up for renegotiation either through expiration of the contract or the customer comes to us, asking to open it up for some other reason.

Okay. And did you say the number of contracts or perhaps the number of beds that there are some new repricing opportunities that are more significant than just the 2.5 to 3%? I assumed that the Arizona contract was originally -- the original contract is two-years old now, so I assume you had a decent increase here. Are there a number of other opportunities in front of you similar to that?

I think the answer to that is we work to have those opportunities every day, and it really -- but none that I think we could forecast beyond what is in our guidance.

Okay. Last question. On the adjusted EBITDA. It was stronger than we had expected it. There was nothing, I assume, sort of one-time in nature that made that a little bit stronger? And generally, it seems to gradually improve sequentially, and should we assume a continued sequential improvement?

No, not necessarily. One of the primary reasons we exceeded our guidance from February -- that we gave in February -- was favorable operating cost performance: benefits, utilities, repairs, maintenance, miscellaneous supplies, all lower than we originally forecasted. Some of those items we feel good about going forward, benefit. An example, utilities, energy costs, lot of volatility still in the energy cost sectors. Repair, maintenance and miscellaneous supplies -- those could turn around on us in the next quarter. So I wouldn't necessarily take that operating cost performance and carry it forward into the next quarters.

Great. Thank you.

We'll go next to Barry Stouffer with BB&T Capital Markets.

Good afternoon. I have just two questions. What was the level of capitalized interest in the first quarter?

Give us a second. We'll get it.

$1.4 million, I believe it was.

Okay. And second question, your full-year guidance was only raised -- or the range was raised by $0.02, first quarter obviously exceeded that number. Was there any change in your thinking for the balance of the year from February to now?

Well California--

Yes, California. I think as we disclosed in the February earnings call, the guidance we gave in February of $1.95 to $2.05 assumed some reasonable level of growth in our California inmate population. The guidance we have given currently, $1.97 to 2.07 assumes no incremental California growth.

Okay. Thank you.

You're welcome.

We go next to Emily Shanks with Lehman Brothers.

Hi. GOod afternoon. Very nice quarter. I have two quick questions. The first one, maybe for John, is I know on the call discussing Irv's departure you had mentioned that you may look for somebody to help support you on the real estate front. And I wanted to see if you added anyone to the team?

We have added -- just a second --by Monday -- this coming Monday, we will have added four individuals within the real estate department. We are still in the recruitment mode for a real estate department leader.

Great. Thank you. And then the second question, perhaps for you, Todd, is around the cash balance, as we think about over the next year or so you start building more of these beds, new construction expansion, what is the appropriate cash balance that corrections can have to continue operations on a day-to-day basis?

Well, what's-- well, it depends upon how quickly we bring the beds up out of the ground. But I think once we reach a point where we have taken that cash balance down a normal run rate for liquidity purposes would be around $25 million.

Perfect. Thank you very much.

We'll go next to Ben Joseph with Rice Voelker.

I had a follow-up, just regarding the populations during the quarter versus fourth quarter. Not to be too detailed, but I noticed that the U.S. Marshal Service, that population that's housed, it looked like it picked up about 430 or so inmates, based on the statistics that you guys provide, and it looks like ICE was basically flat. And I know Q1 is typically a seasonally-weaker quarter as far as populations. Wondering if you could comment on that? What drove that strength? Or if there's anything abnormal in first quarter that would have allowed you guys to keep that strong demand from those populations?

There wasn't anything abnormal in Q1, either positively or negatively.

Right. I guess what I'm touching on is that typically the first quarter seems to be a seasonally-weaker quarter, as far as the populations go, and it didn't seem like that was the case this time. Just wanted some general comments regarding that.

Yes, I-- of course you know if you go from where we were at the beginning of '06 to where we were at the beginning of '07, it was a dramatic increase.

Right.

And so-- it could have been, with -- it really fluctuates dramatically every day. I mean, we can have 200 come in today and 300 out tomorrow and 100 in today and 50 out -- it's just -- Part of the catch and remove is rapid removal, and the intent is to try to get them deported quicker than they have in the past, and so I think what probably happened is we opened some facilities. We got it to a certain level, and then, just based on the timing of when we report the numbers, we could have been down just a little bit, and didn't reflect that. So-- I would say that it's -- we have had-- the population, based on Stewart and Eloy and Hutto and the ones that we opened in '06 are probably at the point of stabilizing and it's now about up and down every day based on the movements. And then on the Marshals, which we have a little bit of that, it's probably just a continued little steady growth by the Marshals.

Okay. Thank you.

We'll go next to Greg Klein with BNP.

Hi guys-- good afternoon, guys. I just had two quick questions for you. I was just wondering if you had considered perhaps starting construction of any new facilities in California, perhaps on spec? And then, also, with your 7.5% notes currently callable, if you were thinking of refinancing that issue? Thank you.

I'll speak to the California. I mean, we give some thought to whether it would make sense to do something there. At the moment, I think we are more focused on trying to provide bed capacity for California out of state. There are lots of statutory issues by doing something in California, so all I can say is that we talk about it, but no plans to announce today. And then, Todd, I'll let you answer --

All right. With regards to the 7.5% of senior unsecured notes, if you take a look at the net present-value economics of the call and it just doesn't make sense at this time.

Great. Thank you.

We'll go next to Todd Van Fleet with First Analysis.

Yes, John, was just hoping you could add qualitative comments surrounding what happened on the business development front after California passed that piece of legislation. Did your customers nationwide just kind of increase the dialogue, or could you add anything qualitatively to that?

Well, it's actually only been a few days, and I have not polled the sales force, but it does not hurt that all of our customers begin to recognize the difference between the supply and demand.

Thanks.

We'll go next to Dana Walker with Kalmar Investments.

Good afternoon.

Hi there.

Could you describe how the California scenario has possibly weakened, based on developments rather than not strengthened, given that you seem to have taken California, or some incremental contribution from California, out of your plan?

Weakened -- I'm not sure I follow the question.

In the way you have addressed guidance, you claim you have taken further help from California out of your '07 plan. And yet the compromise legislation would appear to make it more likely that there will be incremental inmate flows, timing, of course, unknown. But how would at that not strengthen the likelihood there would be more inmates from California this year, and thus the step that you took towards guidance, which seemed to go the other way.

I think there's two issues as it relates to the California situation. We are bullish and in hoping that (Inaudible) that it probably will work out, but we felt that it was very difficult to properly forecast right now, and then we thought it was more prudent to describe what we thought the guidance was without California. The other issue is, even if California gets in the position -- the court issues resolved-- we don't see that it would be dramatic in the second half, because we do know they will take their time to bring the inmates online. So, we just felt that it was -- we didn't know how to forecast, even if they are allowed to bring the inmates on, we still don't know the timing in which they would begin to transfer them. We do know the timing that they will take to make sure that everything is proper when they do decide to transfer them, and so we just felt it was more prudent to establish our guidance the way we did.

Well, the way you framed that, I can't see why anybody wouldn't respect that thinking. When you talk about having the finance-ability of as many as 12,000 beds, can you correlate that to what you have in your present build plan? And whether that's 12,000 compared to the 6000 that you have going now, plus another 3400 to 5400 that you presently plan to add, which would be, let's say, an average of 10.

That would be hard to do without some work, wouldn't it?

Yes.

Is that 12,000 and the 10, are they comparable or not comparable.

The 12,000 would include some of the spend on the development we've announced today.

Would that mean you only have another finance-ability of 2,000, though, beyond what you seem to be describing as committing to before the end of this year?

If you assume we don't generate any incremental EBITDA from those new beds we bring on line, potentially.

Which of course is fallacious.

Hopefully that's very conservative, yes.

How do you look in a capacity-add sense when California seems to only be committing to four years of outside-the-state confinement? Does that change the way that you think about the way California would affect what you're planning to do?

Well one of the things I think we have some confidence in is that even if California, in fact, was to return all of the inmates by June 30th, 2011, that there would be other demand to fill those beds. In fact, when I arrived here, we had 4800 Wisconsin inmates in our system, and all of those have returned to Wisconsin, and yet we have utilized those beds. So, it seems for a reasonable period of time, the supply and demand will be such that if California has developed capacity within their state that would allow them to return, then we would probably have a disruption for a period of time, but we don't see that that would be a threat that we would have bed capacity that somebody wouldn't need.

Two last questions. I try to ask this question every call. Do you see any new states, even if the present supply environment would be challenged to service them, that might be new to considering privatization?

We didn't hear the question. Would you repeat the question?

Do you see any states today that are newly considering privatizing some of their correction needs?

That are needed? Yes.

Are you in a position to describe who they might be?

I would prefer not to.

But these are relatively new developments?

Yes.

And we're not talking-- this would be incremental to California.

We're not talking about California. This would be incremental to California.

I also thought I would direct you, even though Delaware is a very small state, that in today's paper, the state is planning to spend, or considering spending hundreds of millions of dollars on new capacity add, both to old inmates and to build out medical clinics, which is just a mind-boggling number, and never once in the article was the topic of privatization mentioned. To my knowledge.

I will make sure that that article is made known to the right people around here.

Thank you, gentlemen.

They may already know about it. Knowing my sales team, they probably do.

Okay. Thanks.

Thank you.

Our last question in the queue will be from Ben Joseph with Rice Voelker.

Sorry, guys. Last one. Just to touch on Dana's point, as far as new states that are looking to privatize, I did recently read an article about the State of Idaho, I believe, that was looking to maybe increase their privatization efforts, and I believe there was maybe an RFP or something that was out there. Wondering if you could tell us about where that RFP stands and I'm not certain of the number of beds that the RFP was looking for?

There is a current solicitation by Idaho for up to 700 beds. Only 200 of them are in the next six to nine months. The balance of them would be beds they would hope that they could secure that would be available out in, I think as late as 2009 or 10, but they are out of capacity within the State of Idaho and looking to -- in fact, they have some inmates out of state currently with one of our competitors and this would add to that.

All right. Thank you.

And it's just a current solicitation, and I'm not exactly sure when it is supposed to be completed.

Okay. Thank you.

No further questions at this time.

Well, as usual I'll try to very quickly summarize all that has been discussed today, so you leave with a summary in your mind. The first quarter earnings were $0.52, compared to $0.36 in 2006, up 44%. The free cash flow for the quarter was $61.5 million, up 43% from the previous quarter, but as Todd indicated, we did not have a tax payment in that $61.5 million, and we will have tax payments in the future quarters. The revenue was up 11.5% to $351 million. The occupancy was up to 98% -- This is a high point since the company kind of reorganized since 2000 -- up from 93.7%, and that includes additional beds. We add 2.9% additional beds, so we now have 72,643 beds.

Our fixed costs were down approximately 1%. Our variable costs were down approximately 2.6%. Our total costs were down 1.3%. This caused our operating margins to increase. They are up 14.3%, and our operating margins is now 29.6%. Therefore, if you look at, this all of our operating statistics are favorable, which is very good.

Todd's forecasted for the second quarter a range of $0.48 to $0.52 for the full year. $1.97 to 2.07 and once again, we've said that does not include anything that we might get from California. This also includes start-up expenses at Saguaro, and transportation expenses and the disruption costs for transferring prisoners back and forth. It also includes salary increases, which will take place during the year, and we attempt to offset those salary increases with the price increases, which in many cases are contractual.

The bed inventory John talked about. We have 2200 at present. We're adding 6,000 more. That takes us to 8200 by the second quarter of '08. Many of these are committed, but we have 3,000 of this 8,200 available at the present time for new customers, which would include California. We're also planning to add another 3400 to 5400 by the end of 2008, and Todd's indicated we can do all of this without issuing new new stock, at the same time keeping our ratios relatively constant.

John talked about our very strong demands from our customers, the states -- California, Arizona leading the way -- but with our other 20 states, we see a demand from those states in addition to California and Arizona for another 70,000 beds. The BOP is indicating they will need another 16,000 new beds probably from outside. The Marshals have been growing at 5% a year and expect to continue to grow, and the Immigrations and Customs Enforcement, we believe, will continue to grow.

So at this point, everything looks favorable with the company. The wind's at our back. And we thank you for your continued interest in your company. And good day.

Ladies and gentlemen, this concludes today's teleconference. We appreciate your participation. You may disconnect your phone lines.