CoreCivic Inc (CXW) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to our Q3, 2007 Corrections Corporation of America conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to your host, Mr. Dave Garfinkle. Please go ahead sir.

Thank you. Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to Corrections Corporation of America's third 2007 quarter earnings call. Let me remind today's listeners that this call contains statements that are forward-looking statements, as defined within the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Factors that could cause operating and financial results to differ are described in the company's Form 10-K, as well as in other documents filed with the SEC, and these factors include, but are not limited to; changes in the private correction and detention industry. The company's ability to maintain facilities management contracts and general economic and 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 of any revisions to the forward-looking statements, that may be made to reflect events or circumstances after the date here of, 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.

Well, welcome once again everyone, to our third quarter 2007 financial review. And as Dave indicated, Todd is here, as our CFO, and John as our CEO, and they will take you through our current release, and answer any questions that you all may have. So with that, Todd, why don't you start with the financials, then John will move in with the operations.

Thank you, Bill. Good afternoon, everyone. We are very pleased with our third quarter operating results, so let's move straight to a summary of those results. Third quarter results for 2007, we generated $0.26 per diluted share, compared to EPS for last year's Q3 of $0.21 per diluted share, representing an increase in EPS of 24%. Earnings for the quarter were positively impacted by increased populations from a number of customers including the U.S. Marshal, ICE, California, and Arizona.

EBITDA increased over 17% to $86.8 million for the quarter, while operating income for the third quarter 2007 was $66.5 million, representing an increase of $10.1 million, or 18% over third quarter 2006. Adjusted free cash flow for the quarter increased 23.5% to $55.1 million, even after taking into consideration a $5.9 million increase in cash tax payments. The increase in cash tax payments is primarily the result of having utilized all of our federal net operating loss carry forwards in 2006. We are currently estimating total cash taxes for the full year at approximately $50 million to $55 million.

Cash flow from operating activities for our cash flow statement for Q3 is approximately $85 million, with expenditures for facilities development and expansions of $80 million. And expenditures for capital improvements, or maintenance and IT CapEx of $11 million.

Total revenue for this year's third quarter was up 12.4% over last year, an increase of $42 million. Total compensated man days increased 8.2% to 6.8 million, from 6.3 million man days in the previous year. Revenue per compensated man day increased 4.2% to $55.06 from $52.86. Average compensated occupancy for the third quarter increased to 98.1% from 94.6% last year. This increase was especially significant, in light of the fact that our average available beds increased from 72,259 in Q3 2006, to 75,328 in Q3 2007.

With regards to the 4.2% increase in revenue per compensated man day, a couple of comments. Results in Q3 2007 reflect the impact from certain pricing leverage we enjoyed from renegotiating several contracts. However, as we had said previously, our ability to benefit from additional pricing leverage, will come over time, on a case by case basis, as the contracts come up for rebid. Corrections is not like the hospitality industry, where one can immediately increase pricing based on supply and demand. In addition, mix is another item that will continue to impact increases in our average per diem calculated over our entire system As populations increase under contracts with per diems below the average, it can dilute the increase in average per diems, year over year systemwide. Finally as we've indicated before, competition in the managed only segment, will impact our ability to obtain per diem increases on these managed only contracts.

Let's move next to a discussion of operating costs. Operating costs per man day for the quarter increased 2.2% to $39.36, from $38.50 in last year's Q3. Fixed cost per man day increased 2.7% to $29.37. Our fixed operating costs per man day year-over-year were impacted by a couple of items, in addition to normal wage, and other general inflationary increases. First, our operating costs per man day were impacted by startup costs, at our Tallahatchie facility, as well as the inmate transitions occurring at our Tallahatchie facility, as we began relocating Hawaiian inmates to Saguaro to make room for new California inmates. Although the average in mate population dropped at Tallahatchie in Q3, we actually increased staffing level as we began the process of recruiting and training some of the additional staff that will be neccessary to operate the 720 bed expansion slated to open at Tallahatchie in Q4 2007. The reduction in average inmate populations, combined with transportation and other start up costs, incurred at Tallahatchie, resulted in $1.6 million deterioration in EBITDA at the facility, versus Q3 2006.

Fixed costs were also impacted by start up costs incurred, in advance of filling additional beds at several other facilities, including Saguaro, North Fork, Bay Correctional, and Gadsden. As we bring new beds online, we do not realize the full operating efficiencies at those facilities until such time as we reach near full occupancy. And that will impact our operating costs per day, especially our fixed operating costs per day, as start up costs, and operating inefficiencies will continue to impact our operating costs, as we bring on line more of the over 10,000 new beds we have in development.

Variable expenses per man day increased .8% to $9.99 per compensated man day. The end result was that operating margins per man day increased $1.34 to $15.70, from $14.36 in the prior year, and our margin percentage increased to 28.5% from 27.2%. Although there will continue to be significant noise impacting our operating costs per day, related to start up costs as we bring new beds online, we believe that our margins per day and our margin rates on owned beds will continue to improve over the long term as we develop and fill new beds at attractive margins, and as we're able to take advantage of per diem pricing leverage opportunities, on a case-by-case basis.

GAAP income tax expense for the quarter was computed based upon 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 third quarter operating results. The positive supply and demand environment resulted in higher prison populations, and higher operating margins.

I will finish with an update of our guidance for 2007. As indicated in the press release, our guidance for Q4 is in a range of $0.26 to $0.28, and guidance for the full year, is in the range of $1.04 to $1.06. One of the primary risks to our guidance, as always, is timing around the receipt of inmates. This is particularly true with the State of California, which is a relatively new customer, and one that is receiving a great deal of scrutiny around transferring inmates out of state. It is important that the ramp-up of all new inmates occurs as smoothly as possible. As such, we may slow down the ramp-up of one or more of these populations, from what we currently expect, if we feel that it is neccessary to avoid any issues that could negatively impact our long term relationship with the customer.

It is also important to keep in mind, that as we continue to bring new beds on line, we will incur additional start up costs, and could potentially see the disruption of EBITDA streams at other facilities if we relocate existing inmate populations from one facility to another, for purposes of consolidation or optimization. Between now and Q2 2009 we expect to complete construction on 10,411 beds. In addition to these announced projects, CCA continues to evaluate additional development opportunities. The activation of the announced projects, and any new projects, will likely result in short term operating inefficiencies, along with EBIT and margin disruptions as capacity is brought on line.

As discussed on the previous call, now that we have begun developing a large number of beds through construction, this will obviously result in increasing depreciation expense as the beds are brought on line. As we've mentioned previously, a good rule of thumb to use in estimating the increase in GAAP depreciation expense, is to take the total investment costs in the project, and divide by 37 years. This 37 represents the blended average depreciable life of buildings and equipment, for new development.

As far as funding this new development we believe that cash and investments on hand, free cash flow from operations, and capacity available under our revolver will allow us to fund all development projects announced to date. And we have approximately $514 million left to spend between now and Q2 2009 on development projects that we've announced to date. In early September this year, we expanded our bank revolver capacity by $100 million to a total of $250 million without any other changes in existing terms. We were particularly pleased with this transaction, as we were able to execute it during a period of significant turmoil within the credit markets. This transaction, as well as discussions with our bank, has reinforced management's belief that CCA will be able to access additional debt capital, at attractive rates, to fund further bed development.

John will talk more specifically about demand, overall the outlook for our business remains quite favorable. The projected demand for additional beds combined with our excellent balance sheet, and outstanding capabilities, provides CCA with significant opportunities for growth. I'll now turn it over to John for specifics on our new business prospects, and bed development.

I will dispense with repeating myself, from the last two conference calls as it relates to, the demand at the state level. I think we went through that in some detail, which the bottom line is that between 2007 and 2011, the 20 state customers are expected to see their prison population grow by 98,000. We see nothing that would indicate that those forecasts have changed in any way.

Through the third quarter, we have seen our state populations grow by nearly 3,000 inmates, of which California represents 1,100 of it, so we continue to see growth from our other state customers in addition to California, and of course, we have announced what we think will happen with that population. We most recently announced the new contract with California, increasing the beds that they will acquire from us going from 5,670 to 7,772. I would point out that when we announced the 5,700-- 5,670 bed contract that it included the anticipation that California would use some 2,000 beds at our Diamondback facility in Oklahoma. Of course, we've since announced that those beds are being utilized by the state of Arizona. So we will provide net additional beds of the 7,700. The press release indicates that we have, at the moment 1700 California inmates, that we're down to the last 6,000 of inmates that we will make beds available.

The we announced, a recent award with the state of Idaho, where they are securing out of state beds, and we currently have received 120 of those.

The demand and funding that we've described the last couple of conference calls, for our federal agency customers have really not changed. We see nothing that has changed the forecast that we've talked about at the Federal Bureau of Prisons, and the funding requests in the presence budget for ICE and Marshal's hasn't changed, I think there is some uncertainty because of the continuing resolution, and how long that would last, and don't know what effect that would have, although I would say that although we saw some 2,600 inmate growth in our federal customers from the second quarter of '06 to the second quarter of '07, that here recently we have seen a little bit of softening, which we attribute almost specifically to some disruption in the U.S. Attorney's office, in Arizona, which we understand is being taken care of and fixed, which leads to, as the anticipation of the implementation of-- something that's been reported numerous-- the newspapers call "Operation Streamline", which is the code word for a policy of zero tolerance.

What they mean there is that, historically had-- even though the policy had removed what's called "catch and release", meaning that no one who was detained, would be released in the United States, they would be returned to their country of origin, that still, when immigrants came across into the United States if they were detained very close to the border, had no other records, that they would be returned immediately to the border, and never would be detained. That policy of zero tolerance means that, now everyone who is detained, regardless of the number of times, will be detained and held, anywhere from two weeks to six months. We understand that this Operation Streamline will begin in the Laredo, Texas area, and the Tucson, Arizona area around the first of the year. And we've done our best to try to assess what that looks like, but it's something that we cannot really provide any clarity other than, it should increase the needs for a bed space for some period of time.

We'd like to report today we signed a new agreement with the U.S. Marshals Service for the continued use of our Webb County facility. That's Laredo. With a new five year contract through 2012 with five, one year renewal options.

Now, going to the pipeline of beds available to meet the demand that we've described on the last couple of calls, today we have some 2,000 beds in inventory. 1,800 of them are owned beds. We can say that some two-thirds of those beds we have pretty good line of sight on their usage, or being absorbed, over the next six to nine months. And then as we pointed out in detail in the press release, we have currently under development 10,411 beds, and as we have described previously, except for the Adams County facility, we have pretty strong line of sight of who the customer would be to utilize the beds, and that existing customer relationships, existing contracts could be utilized to absorb that.

If you apply the same financial analysis that we have done on a periodic basis, that if all of those beds, inventory and beds development, were absorbed at the average margin that experienced in the third quarter of 2007 that we would be looking at a potential of, in excess of $95 million, of incremental facility EBITDA. So we feel very good about the pipeline that we currently have under development. Todd had mentioned the funding of those beds, and then as he indicated, and we continue to indicate, that we continue to look at future bed opportunities, bed development, because we believe that we'll continue to be demand. And as I just described, we feel the line of sight is pretty good on the beds that we have already committed to. And once again, if we were to apply a leverage ratio of four to one, with our last 12 months of EBITDA, then we would still have the capacity to build another 7,000-plus beds beyond the 10,400 that we currently are developing.

So with that, we'd be happy to open up for questions.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll take our first question from Jeff Kessler, with Lehman Brothers. Please go ahead sir.

Hi, this is actually Manav and Jeff. Quick question for you guys. In terms of the pricing trend that you alluded to in the beginning of the call, is that implying just sort of on a sequential basis that we shouldn't be stating any material changes in the average per diems for the total company? And also just quickly, with respect to that, you had mentioned in terms of the competition in the managed only side of the business. Are you seeing any new competitors, or is that just the regular course of business?

Well, on your first question, the point we're trying to make is, as we've elaborated on the last call, there's a lot of components that go into making up our average per diem increase. Mix could play a role, pricing leverage can play a role, and we're not giving any guidance on where that pricing is heading.

We do believe that we have pricing leverage going forward, but our ability to benefit from that additional pricing leverage will come over time as the contracts come up for rebid, as I mentioned earlier, corrections isn't like the airline industry. You can't just go in and reprice everything immediately. That pricing leverage will be influenced by a number of variables, including the option to negotiate additional adjustments that may allow to us take our operating costs down. That might be an option we pursue instead of a per diem increase. Our opportunities to find a replacement customer long-term, will impact our pricing leverage. And then our desire to maintain a long-term relationship with the existing customer. As I have mentioned, in addition, mix is another item that impacts increases in our average per diem calculated for the entire system.

With regards to the managed only business, we haven't seen any new competitors come to the market but as we have mentioned in the past, that segment of the market is subject to more competition since we don't own the beds and the customer can more easily replace the operator.

All right. And just one more question, I guess, on the occupancy. Clearly it seems like, you know, the absorption or the filling up of beds is pretty quick right now. Given that you have about, I guess, 1300 beds, based on your pipeline coming on line, are those firstly, already on line now? Are they going to be done by the end of the fourth quarter? What sort of reasonable occupancy rates on those new beds should we assume?

Well, if you will look at the press release, it highlights the beds that are coming on line and the anticipated completion date. And so you can see that some are coming on line in the next 30 days, and some will be out into 2009. And so the availability for the customer usage is going to be tied to the completion date.

Correct.

Todd, it's Jeff. Just piggybacking one question on Manav's There was some concern last quarter, that the turnover in old contracts you'd have to keep, would keep those per diems down, for a few at a time, the certain states that you were going to have to obviously keep the obligations to. I'm wondering how fast do you think some of those older contracts are turning over, if we can get some guidance on that?

Well, in the supplemental financial disclosure there's some schedules in the back, that list the-- by facility, the primary contracts we have at each facility. On that same schedule they list out the base term expiration, then any remaining renewals. As a general rule, we can expect our customers to exercise any remaining renewals they have, and most of those existing contracts, have escalators or terms in them that you would expect to see per diem increases more in the line with CPI. So as those contracts come up for rebid, that will provide us the opportunity to go in and potentially leverage those per diems higher.

Another opportunity we have is when the customer comes to us looking for additional changes in terms, primarily additional capacity. We can find ourselves in that situation, with an opportunity to leverage our pricing as well. So it's really hard to forecast how much pricing leverage we're going to have, and when that will present itself. We are going to have pricing leverage, but it's going to be on a case-by-case basis, primarily as those contracts come up for rebid.

Okay. Thank you very much.

And we'll take our next question with Emily Shanks, with Lehman Brothers as well.

Hello, good afternoon. Great quarter guys. Just a question or two. I wanted to see, as we think about potential green field facilities that are in the pipeline, and I know you typically like to keep it fairly generic, how should we think about the cadence of a revolver draw, in the event that you have new facilities coming on line? Would it happen all at once, or be more slowly?

It would be more slowly. The general construction time for a new green field is 15 to 18 months. Cash disbursements on that construction, I wouldn't say they'd come evenly over that 15 to 18 month period. They're a little smaller in the earlier months, then they grow to a little larger in the later months, but certainly not an immediate draw down. So if I have a $100 million investment on a green field, it's going to be spread out, not evenly over 15 to 18 months, but certainly would be spread out over the 15 to 18 month period as we pay our contractors, as they incur the expenses.

Great, thank you. Just a follow up on that, I see some new language from you on the release just around evaluating financial alternatives, around increasing the debt capital, and Todd I know you went in to it slightly in your prepared remarks. Can you just speak a little about what financing alternatives you're contemplating, and just reiterate for us, if indeed you are still abiding by the four times max leverage from an internal standpoint?

We have-- we are maintaining currently self-imposed leverage ratio of no greater than four times. I'm not going to say that couldn't change in the future if the opportunity presents itself, and it makes sense, but right now we're living with that self-imposed leverage ratio no greater than four times.

With regard to future plans for accessing the capital markets, we are continually evaluating our long-term capital needs, as part of our long-term planning process, and we routinely review the condition of the capital markets through discussions with our banks. If and when we decide to execute a capital markets transaction, we'll make a public announcement at that time.

Okay. Thanks so much.

We'll take our next question with TC Robillard, with Banc of America.

Great, thank you. Just a quick follow up on Emily's last question there. When you are evaluating your long-term capital needs, it sounds that this is just an ongoing process. Or is there new evaluation that's come to light for you guys?

It is an ongoing process.

Okay. Thanks for the clarification. Todd and John, just wanted to get some sense as we look at your fixed costs over the next several quarters, obviously you've done a great job highlighting to us everything that's going on, and all the moving parts with Tallahatchie, Diamondback, Saguaro, et cetera. Can you give us a sense as to how we should be thinking about-- and you can look at this in terms of an absolute fixed expense on a facility level, or if you want to break out the start up costs, but can we assume that those costs should be kind of flattish as we go into the fourth quarter, then you start to see those start up costs kind of ramp down slowly through early '08? I'm just looking for a little bit more granularity as to how we think about the fixed cost structure.

Well, yes, in terms of the start up costs, given that we've got over 10,000 new beds in development, we're going to continue to see a lot of noise around start up costs. So as those new beds come on line, fixed costs per day will continue to be impact by start up costs, and the lack of fixed cost leverage that we'll have as we ramp-up new beds. So as we bring new beds on line, and begin to ramp up our fixed costs per day at that facility will start out higher, then gradually decline as we fill those beds. As a result, our total company fixed costs per man day will be higher during the ramp, than they will be once occupancy for those new beds reaches more of a normalized level. And this will create some noise around fixed costs per day and margins per day on owned beds.

But in the long term, we would continue to expect to see improvements in margins per day and our margin rates on owned beds. And I believe that's where the primary focus should be on our margins over the long term. And as I stated earlier, we believe we will continue to see improvements at our owned facilities in our margin per day and margin rates over the long term. For those facilities operating at or near 100% of rated capacity, our ability to further leverage fixed cost is dependent upon either an expansion of capacity, at that existing facility that would allow us to further leverage fixed costs, or the customer's willingness to take that facility occupancy higher, and taking the facility occupancy higher is a possibility, as we have seen several of our customers do, as their capacity shortage worsened, customers such as Idaho and Georgia, but it's dependent upon their willingness to increase occupancy above 95% to 100%.

Then I guess just a follow-on then. Given that there's going to be obviously a lot of moving parts, beds coming on line each quarter, but then obviously facilities filling up behind them, should we expect the same level of start up type expenses and transportation expenses that you guys had this quarter as a rule of thumb going forward? So obviously Tallahatchie will ramp up over the next couple quarters, but then you've got several new expansions that will be coming on mid and late '08 that will also have higher ramp costs. I'm just looking at an absolute dollar amount. The couple million a quarter the right way to think about it, or do we see a little higher level near term, over the next quarter or two, before that starts to come down and the fixed cost on an absolute basis start to level out and decline, and then you get, as you mentioned, the leverage?

I'm not sure you're going to see -- there will be a lot of volatility from quarter to quarter in terms of the level of start up costs, potentially, but I don't think, with 10,000 new beds in the pipeline, and under development, I don't think you're going to see a decline in start up costs, a meaningful decline in start up costs for the foreseeable future. Hopefully that's the case, because that means we're continuing to build and develop new beds.

Isn't fair to think that we wouldn't see a significant spike in start up costs, either?

To be honest with you, I haven't taken a close look at that. A lot will be dependent upon the ramp-up of those new beds. You could see a spike in one quarter versus another, though.

Okay. And then as, you know, for those of us kind of looking a little further ahead in terms of on a quarterly basis, I know you guys haven't given specific guidance, but I'm just trying to get a sense as to how we should be thinking about the Palma facility, because part of that is going to start coming on line, as you mentioned in our release, in the third quarter of '08, with it it being completed in the second quarter of '09. How should we think about that if we're looking to model out, absolute bed count on a quarterly basis?

You know, we're still working on developing our guidance for 2008. I'm not sure we're in a situation right now, where we'd be comfortable giving any clear guidance around that.

I guess just thinking about it on the style of facility that that's going to be, is that a sense where you could see kind of, if I take the 3,000 beds you could see somewhat equal ramp-up, or are these types of facilities where two-thirds of it can come on line at once, because of the way construction has to work?

I think if anything it would be more of an equal ramp-up, rather than more heavily weighted towards the front end. Again, California-- the sensitive nature of the California customer, there's always a risk that we slow that ramp-up down, to protect the long-term relationship with the customer, and avoid any risks of incidence at the facility as we ramp it up.

Understood. That's helpful. John, can you give us a sense on the demand side, now that you-- that California is certainly real, they've been on a pretty steady pace transferring inmates to you guys, they've up-sized their contract a couple times with you over the last year, what are you seeing from other states, as California ramps? Are you seeing states come off the fence a little bit more? Are you seeing some more active negotiations from states now that California is in the market?

Well, we continue to see activity, a lot of the states-- 13 of our 20 states have more inmates with us today than they did the first of the year. And then as I described, we added some 3,000 new state inmates since the first of the year, and only 1,100 of them through September 30, were California. So you can see the other states are utilizing it.

I think one of the issues that we have now, if you look at our pipeline, the-- it's easy to identify who the customer might be, and so one of the dilemmas we have is that some of these customers are going to have demands where we might find ourselves, unfortunately, having to allocate a little bit. But, any day of the week, we're going to have conversations with some state customer that has-- is starting to recognize their need, and it varies, by customers. So I don't know how to tell you what the-- expect going forward other than, I think it's pretty good. Since January 1 of 2005, we've added almost 10,000 new state inmates through September 30, and only 1400 of those have been state of California.

Okay. Great. Thanks so much.

We'll take our next question from Kevin Campbell with Avondale Partners. Please go ahead.

Thanks. I wanted to ask you guys real quickly, you had mentioned the U.S. Marshals signed a contract with you on the Webb County. What sort of-- can you give us any idea of the sort of price increase you might have gotten from the prior contract?

We will say we got a price increase, but we won't say that kind of increase it was.

Great. Could you give us a general update on what's going on in California from the three-judge panel, and also, the potential legal challenge from the unions, towards the transfer of inmates out of state?

On the union litigation, the state has filed a brief, CCA and GO side have done an amicus brief. As we understand it, as of today, there's still some other briefs, so it's just moving as most court action does.

On the federal side, the next event is going to be a trial in February, and specifically that trial will just deal with whether the release order that the three-judge panel issued back in August, whether it's actually appropriate. I guess September. If that's the case, then they would then have another trial to talk about what that ruling means. What does a release order mean. And so it appears it's just playing out slowly, but nothing that we've heard that would indicate that the administration has a desire to change it. In fact, part of what they wanted to do in putting together the agreement is to go back to the federal court and say, listen, we're going to free up 8,000 beds in the next year and a half, you know. We're making progress. We don't need federal intervention to assist us.

Could you-- I notice from your-- what you guys have spent year to date on the maintenance, and IT CapEx, looks like you're going to need a decent jump-up in the fourth quarter to reach what you sort of guided for in your press release. What's the big-- what's causing that big increase in the fourth quarter?

Well, on maintenance CapEx, to be honest with you, it's just everyone's pushed forward their budgeted spend. To be honest with you, I would expect not to meet that target on maintenance CapEx, but it's a possibility. Then on the rest of the CapEx, it's the costs associated with our new bed development.

Okay. Lastly, real quick on the managed only side of the business, the margins came down for the quarter to 13.5%. We had a similar contraction in the third quarter last year. Is there something about the third quarter where it's usually seasonally weak, or was this-- the 13.5% we saw this quarter, maybe something we should look for going forward because there's increased competition?

Nothing seasonal. It's more of a reflection of the two Florida contracts, Bay Correctional and Gadsden, where the capacity was expanded. The state paid for the expansion. As a result, the per diems came down in adjustment to that. As we've mentioned before we're seeing-- we'll probably continue to see some competitive pressures in the managed only sector as many of our smaller competitors don't have access to capital necessary to go through new bed development. However, the vast majority of the-- of our managed only contracts are not scheduled for rebid until after 2008. Many of them will after 2008.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS). And we'll take our next question from Todd Van Fleet with First Analysis. Please go ahead.

Good afternoon, guys. Nice quarter. I think I would be delinquent if I didn't point out the nice pull-back in G&A expense on a sequential basis in Q3. Is this a bit of a head fake you're giving us, or was there something significant that caused that sequential decline, or can you help us understand where we're at on that?

Sure. The decrease from Q2, 2007, was due to forfeitures of stock options, and other one time items. I must say that was a one-time reduction in G&A expenses.

And what was the amount of that one-time? How much is attributed to the one-time elements there, Todd?

I couldn't tell-- well, I would say most of the reduction from Q2 to Q3 was one time.

Okay. So but that would suggest, I guess, maybe there's a new base level upon which to kind of begin building. Would that be fair to say?

You can expect to see an increase in G&A expenses as we move forward, as we continue to focus our efforts on controlling the spend at the facilities as we have-- as you see an annualization of the incremental investment we've made in our real estate department to assist us in developing new beds, and in some other areas. But we'll be able to get more color on that when we provide guidance for 2008.

All right. On the start up expenses, you gave a couple of expense items in the press release earlier today, kind of highlighting a few things for us in the quarter, but what would you consider to be kind of the true start up related expenses in the quarter?

That's a difficult question to answer. Historically, we've been reluctant to provide start up costs, as there's really no generally accepted definition of start up costs, and given the difficulty of separating out start up costs from normal operating costs. It's a little easier when you've got a new green field facility coming on line, (inaudible) but when you're expanding a facility, it's difficult to distinguish between what are start up costs, and maybe operating inefficiencies. So that's where our reluctance comes in in trying to quantify start up costs, especially on facilities where we've expanded capacity.

No question you see a-- an impact on your fixed costs per day, due to operating inefficiencies until those expansions ramp up closer to full occupancy, but we just feel a little uncomfortable trying to quantify that since there's no generally accepted definition, and it becomes a little bit more of an art.

Part of the reason is, I'm trying to-- I'm struggling with how to think about that $1.2 million in transportation expense that you outlined. When you report your facility margin, your operating margin, that 28.5%, in the quarter, that excludes your transportation business just, by and large, right, the $4.1 million in revenue, then the related expense of $7.2 million in the quarter?

Yes, if you're looking at variable costs per day, or fixed cost per day, the transportation costs are excluded as they're picked up in the transportation expense line item associated with our transportation sub trance core.

Okay. All right. That's -- I guess that gives me the clarification I was looking for on that then. John, if I could ask one of you, with respect to the developments that you've been witness to at ICE, I guess regarding zero tolerance, and so forth, is there any movement at all legislatively with that Senate bill that's kind of snaking its way through, regarding the beds funded?

You're talking about the emergency that would take it up to 45,000 beds?

Exactly.

I think what we've observed, it was put into the Department of Defense bill and didn't make it, but as we understand it, it is still in the Department of Homeland Security legislation. But it's hard to know when, and what, right now.

How are they reconciling that? They've got the zero tolerance policy going into effect. You've got-- so you're going to have bed needs. You know you're going to have bed needs right, because you're putting into place this policy that precipitates beds, or bed requirements. What are your people hearing and can you just give us the general read of the landscape? Is something going to make crack one way or the other, or are they just going to revert from the zero tolerance policy? Seems like something would have to give.

I don't know how to answer that, other than the zero tolerance we understand, is really going to kick off after the first of the year. So you still have some time to see if something, funding-wise, and then if everybody, I guess is on board, that this is what needs to be done, everybody being legislative and executive branch, then everybody would have the understanding that eventually they will fund the money that's needed, because they'll use money from somewhere to do it, and then when they finally get around to appropriations they'll deal with shoring it up. So that's the best I can give you right now.

Okay. Let me just add one on California, then. Is there-- what's the likelihood, in your view, or let me ask this maybe a little different way. Is California even close to resolving its issue with just 8,000 inmates being sent out of state?

I would say that based on the circumstances there, unless they build something shortly, that no, that 8,000 probably would not solve their problem. But I think the out-of-state inmate is attractive because it lets them solve 8,000 beds pretty quickly, whereas any building will take a lot longer. But it's still a long ways away from coming close to fixing their overcrowding.

Can you tell us then, John, has CCA had any dialogue with California regarding helping them with their overcrowding problem beyond the out-of-state bed solution that you've already worked with them on?

I don't believe I can comment on that.

Thanks.

And we'll take our next question from Dana Walker with Kalmar Investments. Please go ahead.

Good afternoon, everybody.

Good afternoon.

Could you comment, I notice in going through your supplement, that in the most recent quarter you had 17 owned and managed facilities where you were being compensated for 100% occupancy or higher, whereas that number was 13 in the March quarter. Undoubtedly that's an expression of strong demand. What are the possibilities? And is that positive going from 13 to 17? Is that directionally likely to continue?

Taking the facility occupancy higher is a possibility. As you just pointed out we've seen several of our customers do this as their capacity shortage worsened, but it is dependent on their willingness to increase occupancy above 95% to 100%, and historically most of our state customers have been unwilling to do that. You've seen some changes in their attitude towards this as their capacity shortage worsened. And as of September 30, 2007 of, our 65 facilities, there were 23 operating at or above 100% of capacity, owned and managed, and there were 27 between 95% and 100% and 15 below 95%. So there is a possibility, but it would change a-- would require a change in thinking upon the customer's part. But that is a possibility.

You've described how the economics of going from mostly full, to fully full are pleasant to you. Do the economics become less attractive as you go from being full to more full?

Well, it depends on the particular situation. As a general rule, the margin per day is roughly equivalent to the per diem. You're receiving less of the variable costs per day.

With some fixed costs sometimes.

There can be some-- it depends on the level of increase. If you're going --

How the increase comes about.

If you're going from 100% to 102%, you're probably not seeing increase in fixed costs. You can see some additional fixed cost leverage, primarily in staff in order to accommodate a much larger increase, say 105 to plus. It just depends on the particular situation.

There might be a difference between design capacity and legitimate operating capacity, but are you more vigilant in the facilities that appear to be operating at or above capacity in that the-- having more people might present more security issues and possibilities for unrest?

We're no more or less vigilant at any one of our facilities as a general rule. As a rule. We've demonstrated, and it varies from facility to facility, but we've demonstrated that operating above 100% isn't a significant issue, but before we make that decision, we evaluate the safety and security issues, and make sure we're appropriately staffed, and can handle any additional inmates.

One last question, John. You've commented in the past how, which of your state customers and or possible customers appear to be engaging in construction commitments to serve their own needs, that would compete with your ability to serve that customer's needs. How has that view changed, given that we're looking at a softening economic environment which might create less unlimited state funds, to fund prison construction?

Of course, at the moment, I can't quantify what that is. When we issue our third quarter investor analysis we'll have that number in there, the number of beds that we've identified that come on line. In the second quarter we identified like 7500 that were funded, and expected to come on line between now and 2010. I don't know how that would affect it.

I think our ability to have the beds just in time for our customers I think is-- also influences some of the decisions they make. But I think we've always said that one of the things that we've noticed is that given the choices between where you spend your capital, the last thing you want to spend your capital on is prison.

Final question. You have described how over the last -- or you've described with a forward view, going back three months ago, that you would be busy moving Hawaiian inmates in one direction, to make room for California inmates in a different location, and perhaps as well affecting your Arizona relationship. How would you describe, at a high level, how that's going, vis-a-vis how you thought it might go?

Well, all of the Hawaiian inmates are now in Arizona, and all of the Arizona inmates are now in Oklahoma, give or take a handful. And so at the moment we are now providing the additional beds for California, which will come about with the expansions at North Fork and Tallahatchie. So that movement would be strictly from California to the facilities where we were moving them around. That's pretty much been done, and I think we feel pretty good about how we accomplished, what we accomplished there.

So your Saguaro facility, which was 39% occupied for the quarter, which is going to be the home for Hawaii inmates, is that-- would you expect that to be full of Hawaiian inmates by-- in what time frame?

Well, the-- we have Hawaiian inmates that we had moved into Red Rock before we finished Saguaro. And so the first move we did was to move all the Hawaiian inmates that were in Oklahoma and Mississippi to Saguaro, and now we're moving the Hawaiian inmates out of Red Rock, across the yard, to Saguaro, and we would feel that it would be pretty close to being utilized by the first quarter of 2009. I haven't seen the exact movement schedule there. Then we have some other opportunities to utilize those beds at Red Rock once the Hawaiians are moved.

Thank you. Keep up the good work.

Thank you.

We'll take our next question from Kevin Campbell, from Avondale Partners.

One quick follow-up. One of your competitors in a press release earlier this week had noted that because the Federal Government hasn't passed a budget that they weren't able to see an increase in the usage at a facility that they had previously contracted for. Have you guys seen a similar result at any of your facilities or for any of your contracts?

Well, on the Car Six award, which I think is what they're referring to, our delivery of the beds doesn't come until the first quarter, so we don't know whether we will get a similar response until then. But other than that, the bureau has not given us any kind of response. And we have not been watching the total national ICE capacity here recently. You might from time to time see ICE maybe do a few things there, but, no, nothing that's been overt to us. Great. Thank you.

And we'll take a follow-up question from Todd Van Fleet, with First Analysis. Please go ahead.

Curious to see if there were any new service offerings you guys are contemplating, of course, within the context of your existing adult secure business, types of services you provide inmates, anything you're looking at branching into, or starting to emphasize more and more.

I think if we were-- I don't think we could answer that, Todd, without saying that we've made a decision to do something. So I guess we've been pretty clear that we're an adult secure company. Do we from time to time give some thought to, are there other services we do that we're not in a position where we're willing to talk about anything. Thanks.

(OPERATOR INSTRUCTIONS). And we have no further questions at this time. I would like to turn the conference back over to management for any additional or closing remarks.

Okay. I want to thank Todd and John for their comments, and for all of your questions, and as I usually do, I'll try to go through a quick wrap-up in a minute. I think this has been one of our better quarters. Earnings per share was $0.26 compared to $0.21 from '06, up 23.8%, EBITDA up 17.1%, free cash flow up 23.5%, for the nine months earnings per share $0.79 compared to $0.60 for '06, up 31.7%. EBITDA up 21.2%, and free cash flow up 20.8%. Our occupancy for this quarter is at 98.1% compared to '06 occupancy of 94.6%, and our operating margins continue to improve. They're at 28.5% compared to 27.2% in '06. Todd gave you the guidance, $0.26 to $0.28 for the fourth quarter. $1.04 to $1.06 for the full year.

I think the significant things to look at, are that we will have 10,411 new beds coming on by the second quarter 2009. We've given you the complete information in our press release so you can look at it. That's all done with our current cash. Our existing debt facilities and our cash flow from operations going forward. The pipeline of these 10,411 beds plus our inventory of 2,000 beds will give us $95 million of new EBITDA in the future, which is significant.

And beyond that, there are future bed opportunities, and staying within our model of capital structure and leverage of four to one, we have financing capacity to build another 7,000 more beds beyond the 10,411 in the pipeline. So that should all give you something to chew on, and we'll look forward to talking to you again at the end of the fourth quarter. Thank you, very much.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.