CoreCivic Inc (CXW) 2007 Q4 法說會逐字稿

Good morning, everyone, and welcome to Corrections Corporation of America's fourth quarter 2007 earnings conference call. If you need a copy of our press release or supplemental financial data, both documents are available on the investor page of our website at www.correctionscorp.com. Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant of the Safe Harbor provisions of the Security and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today. Factors that could cause operating and financial results to differ are described in the press release, as well as our Form 10-K and other documents filed with the SEC.

The call may include discussions of non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release or are posted on our website. We are under no obligation to update or revise any 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 our Chairman of the board, William Andrews, President and Chief Executive Officer, John Ferguson, and Chief Financial Officer, Todd Mullenger.

I'd like to turn the call over to Mr. Andrews. Please go ahead, sir.

Well, good afternoon, everyone, and thank you for joining us for our fourth quarter and full-year 2007 results. Today I'm not at the headquarters. I'm actually in White Plains at another meeting on a separate line, but in the conference room at headquarters are John Ferguson and Todd Mullenger, and I believe David Garfinkle. So, I'm going to hand this over to Todd, and we'll be going back and forth to John and ultimately to me, so here we go. Todd, would you go through the results with our people? Thank you.

Surely, thank you, Bill. Good afternoon, everyone. We are very pleased with our fourth quarter operating results, so let's move straight to a summary of those results. Fourth quarter results for 2007, excluding the non-cash charge related to the write-off of goodwill, we generated $0.29 per diluted share compared to EPS for last year's Q4 of $0.22 per diluted share representing an increase in EPS of approximately 12%. For the full-year 2007, EPS, adjusted for special items, was $1.08 compared to $0.86 per share for 2006. This represents an increase of approximately 26%. Earnings for the quarter were positively impacted by increased compensated mandates from a number of customers, including ICE, U.S. Marshalls, California, Arizona, Washington and Colorado. EBITDA increased nearly 12% to $91.8 million for the quarter and was up approximately 19% for the year to $347 million.

Adjusted free cash flow for the quarter decreased slightly, 4.1%, to $47.1 million, primarily as result of a $13 million increase in cash tax payments. As we've mentioned before, the increase in cash tax payments is primarily the result of having utilized all of our federal net operating loss carry forwards in 2006. Adjusted free cash flow for the full-year 2007 totaled $206.1 million, which represents a 14.1% increase over 2006, even after taking into consideration a $37.6 million increase in cash taxes resulting primarily from the full utilization of our federal NOLs in 2006. Total revenue for this year's fourth quarter was up over 11% over last year, an increase of $38.6 million. Full-year 2007 revenues increased nearly 12%. Total compensated mandates in Q4 increased 7.3% compared to the previous year, while full-year compensated mandates increased nearly 8%. Revenue per compensated mandate in Q4 increased 3.7% to $55.43.

Average compensated occupancy for the fourth quarter of 97.9% compared to 96.6% last year. This increase in occupancy percentage was especially significant, in light of the fact that our average available beds increased by over 4,000 beds from Q4 2006 to Q4 2007. With regards to the 3.7% increase in revenue per compensated mandate, a couple of comments. Results in Q4 2007 reflect the impact from certain pricing leverage we enjoyed from renegotiating several contracts in the second half of 2007, as well as routine per diem increases. As we have said previously, we believe we have the potential to benefit from additional pricing leverage on a case-by-case basis as the contracts come up for rebid. In addition, mix is another item that will continue to create volatility around our average per diem calculated for the entire system. And then 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. As a reminder, managed-only contracts accounted for less than 11% of our facility EBITDA in Q4 2007.

Moving next to a discussion of operating costs, operating costs per mandate for Q4 2007 were $39.26. Our Q4 2007 operating cost per mandate reflects facility ramp-up costs as well as normal wage and other general inflationary increases. We have incurred significant ramp-up costs over the past 18 months, as we began activating new beds. We expect to continue to incur ramp-up costs moving forward, as we bring new beds on-line and hire staff in advance of receiving inmates. Operating margins per mandate in Q4 2007 increased to $16.17 and our margin percentage increased to 29.2%. Looking forward margins on new inmates placed in newly-developed beds will be depressed during the facility ramp-up period. However, the margins per compensated mandate on new beds will improve overtime as we approach full occupancy on those new beds. We also believe we have opportunities to improve our margins per mandate as we are able to take advantage of per diem pricing leverage opportunities on a case-by-case basis.

General and administrative expenses for the quarter were 5.2% of revenues with total year expenses right at 5%. The increase in G&A compared to Q4, 2006 was due primarily to the expansion of our real estate department, as we added resources to assist in the development of new beds, increased focus at the corporate level on quality and efficiency of the facility operations, and an increase in our noncash stock-based compensation expense related to the change of accounting rules. Our goal is to keep G&A at approximately 5% of revenues going forward. In the fourth quarter we recorded a $1.6 million noncash charge for the impairment of goodwill associated with two of our managed-only facilities. These two facilities have been underperforming for sometime. While we continue to negotiate with the customers on contract modifications that would raise operating results to an acceptable level, it is unclear we will be successful. This led to our recording the goodwill impairment charge. GAAP income tax expense for the quarter was computed based upon a rate of approximately 38%. We currently anticipate a rate of 38% for 2008. So in summary we were pleased with our fourth quarter operating results and our full-year 2007 results. The positive supply and demand environment resulted in higher prison populations and higher operating margins.

I will finish with a discussion of our guidance for 2008. As indicated in the press release our guidance for Q1, 2008 is in the range of $0.26 to $0.28 and guidance for the full year in a range of $1.21 to $1.28. You will recall that Q1 is always seasonally weaker due to the payment of unemployment taxes and the quarter having one less day than Q4. It is important to keep in mind that as we continue to bring new beds on-line we will continue to incur ramp-up costs and could potentially see the disruption of EBITDA streams at 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 nearly 9,000 beds.

During 2008, we expect to activate over 7,000 of those beds. The activation of these new beds in 2008 will cause short-term operating inefficiencies at the affected facilities. As previously mentioned, margins on new inmates placed in new beds will be depressed during that facility ramp-up period, but will improve as the facility approaches full occupancy. Given the anticipated timing of these new bed activations we expect to see a high level of ramp-up costs during the first half of 2008, which will have an impact on Q1 and Q2 earnings. As a result, we will not see nice even increases in our EPS quarter over quarter, but rather more of a stairstep increase as EBITDA levels normalize on the new beds brought on-line. As we have stated previously, we believe those investors with a patient time horizon are more likely to be rewarded when investing with CCA.

One of the primary risks to our guidance, as always, is timing around the receipt of inmates. This particularly true in the state of California. Our guidance does anticipate the ongoing receipt of a number of California inmates throughout 2008. However, there continues to be some level of uncertainty around California's ability to continue to send inmates out of state. Also, 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 California or other inmates from what with currently expect, if we feel it's necessary to avoid any issues that could negatively impact our long-term relationship with a customer. However, should there be a shortfall in our expectations, we are still optimistic the demand from customers will ultimately fill our beds, albeit over a longer period of time. The guidance for CapEx is included in our press release and incorporates spending for maintenance CapEx, information technology investments, and expenditures related to announced construction projects. As we announced new projects during the course ever the year, CapEx guidance will be updated in the following quarter.

As we have talked about previously, now that we have begun developing a large number of beds through construction, this will obviously result in increased depreciation expense as the beds are brought on-line. A good rule of thumb to use in estimating the annualized increase in GAAP depreciation expense is to take the total investment cost in the project and divide by 37 years. This 37 represents the blended average depreciable lives of buildings and equipment for new development. We expect cash taxes in a range of $60 million to $65 million. Cash taxes in 2008 will be significantly lower than GAAP tax expense, primarily as a result of federal tax incentives related to the development of our Adams County, Mississippi, facility and use of several tax-planning strategies. As far as funding this new development, we believe that cash on hand, free cash flow from operations, and capacity available under our new revolver will allow us to fund all development projects announced to date.

In December of 2007, we closed on a new $450 million revolving bank credit facility with what we believe to be very attractive terms and conditions. We were particularly pleased with the transaction, as we were able to execute it during a period of significant turmoil within the credit markets. This transaction, as well as the discussions with our banks, has reenforced 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 the demand. Overall the outlook for our business remains quite favorable. The projected demand for additional prison beds, combined with our excellent balance sheet and outstanding operating and development capabilities, provides CCA with significant opportunities for growth, growth opportunities that will be available even during a general economic slowdown, which highlights more than CCA's positive investment characteristics, the fact we are not generally effected by economic downturns.

I'll turn it over to John for specifics on our new business prospects and bed development.

Okay, I will now comment on our two major market areas; the federal business, comprising of three federal agencies we do business with, plus our state customers, and we will comment on some of the specifics of the 20 customers we -- state customers we currently have. Since the last conference call, our U.S. congress did finally pass a budget for the fiscal year ending September 30, 2008. That bill was signed into law at the -- close to the end of December.

As we look at Immigration Custom Enforcement, we see that the budget supports detention population of 32,000 inmate bed -- or detainee beds. That's up from 27,500 the previous year and quite above where the President's original budget was, so we're pleased to see that the government is funding the adequate needs for Immigration Custom Enforcement. I think of note is that the conferees also directed the Department of Homeland Security to ensure future ICE budget requests support the operationally appropriate level for detention capacity and asked that ICE to provide weekly updates on the detainee population through fiscal year 2008. The President has recently released his fiscal year 2009 budget, and in that budget we see funding for increasing the detention population beds to 33,000. I'll point out that back in fiscal year 2005 the funding for detention beds was only 19,500.

There has been some discussion and questions by some investors about the reduction in border apprehensions and what effect that would have on our ICE population. so try to address where we -- the ICE detainees come from that we provide bed space to ICE for. First, if you look at border apprehensions from fiscal year '06 to fiscal year '07, you do see a decline of almost 54% from 1.9 million to 88 -- 880,000. But at the same time, the average ICE detainee population grew from 22,661 in fiscal year '06 to 28,729 in fiscal year '07, so 27% growth. We believe that there's not a direct correlation between ICE bed needs and the border patrol apprehensions, and let me speak to the different areas that Immigration Custom Enforcement has detainee bed needs.

First of all, you do have the illegal border crossing, so that's going to continue. You have people here with visas who are over-staying those visas, and when they do that then they become illegal. We continue to have a very large population of illegals residing in the United States, which from time to time those illegals are identified and apprehended by Immigration Custom Enforcement. And then you have those individuals who are here illegally, or legally, who engage in criminal activity. And a good percentage of the population that CCA sees in the beds that we provide to Immigration Custom Enforcement come from jail and prison release. In fact, our best estimate is almost 78% of the detainees that CCA has responsibility for came from jail and prison releases as opposed to border crossings. One other item of note, ICE the middle of January announced plans to issue an RFP some time in February for the privatization of three service processing centers currently operated by ICE. These are located in Arizona and California and we estimate the capacity of all three facilities somewhere 1,100 beds.

Turning to the U.S. Marshal Service, in the fiscal year '08 budget that I just referred to we did not see any funding increase for the Office of Detention Trustee, but we feel that's because the Office of Detention Trustee actually did not spend all of their budget in fiscal year '07, and feeling is right now that the Detention Trustee has adequate budget to meet her demands for fiscal year '08. In the new budget for fiscal year '09, we do see an increase of some $38 million for additional immigration offenders that are part of the southwest border initiative. We mentioned last time the zero tolerance effort, or as it's called Operation Streamline, to just beginning. It's not something that we can point to and quantify at the moment, but we know it has started. And to remind everyone what that means is that, up until then if you were a Mexican national detained at the border, had no other criminal experience that, in most cases, they would just return you to the border. The intent now is to detain everyone that's apprehended at the border and charge them initially with something called entry without inspection. That will be a misdemeanor requiring somewhere between 15 and 30 days of detention.

So then purposes -- persons with previous deportation or minimal conviction, which means someone who's then committed the misdemeanor, will face a felony charge, which could lead to six month to two years of detention or incarceration. We are doing our best to estimate what this would mean in the Tucson district and we feel that once the Operation Streamline is fully implemented and the necessary law enforcement and attorney's are in place, that you're probably going to see somewhere like an additional 100 prosecutions today. So that leads us to, I think, what we've been talking about so previously is that the challenge of trying to both estimate this demand but seeing the high demand against the supply that we have in the Tucson district.

Our third federal customer is the Federal Bureau of Prisons. Not much has changed since our last conference call. We know that they will be releasing new population projections shortly, we don't know what those look like, and at that time we'll be able to identify what we believe will be continued shortfall between what they expect their inmate bed growth to be -- inmate growth to be as it relates to new bed capacity that they will be bringing on-line. The President's fiscal year '09 budget is not very clear as to net new contract beds. There is additional funding for contract beds. We know that some of that will go to the completion of the funding needed for Car 6, but the best we can tell is that there's a possibility of somewhere between 1,000 and 1,500 new contract beds going to be needed for fiscal year 2009.

So those are the highlights of Immigration Custom Enforcement, U.S. Marshal Servicing Bureau, Federal Bureau of Prisons. I'll now turn to our state book of business. Outlining again that, since the beginning of 2005, our 20 state customer populations under care have increased by over 10,000 inmates, or stated another way, that's an average of about 3,400 for each of those three years. As we look at the visibility and the line of sight for 2008, including California, we have a pretty good line of sight of substantially more than the average for the last three years, in 2008. There's been some media reports on several of our state customers. and I'll try to address some of those.

First of all, there was a, article about the state of Texas forecast for the next five years, reducing it from expected growth of some 17,000 inmates to 1,700, but I'd like to point out that the state of Texas is currently at their operational capacity. There's some 155,000 inmates in their system and 155,000 operational beds in their system. In addition to that, there's almost 2,000, what they refer to as temporary lease beds over and above that. The 10,000 or so beds that CCA manages for the state of Texas is included in what they consider their operational capacity. So as we look at the demand in Texas, we see that this forecast is really pretty much a nonevent for us. We don't -- we've not been planning on any substantial growth and we don't believe this new forecast would anyway diminish the capacity that we currently provide with them. And then we will remind you that all of the Texas contracts are managed-only.

It was reported that there has been legislation introduced in Arizona to place some restrictions on out-of-state state inmates. While we can't be sure how this will ultimately play out, we will point out this type of legislation has been introduced for the last several years, so it's not something that we've not been in discussions previously. And like previously, we believe that after the reasonable folks review our total safety record, focus on the 2,300 people we employ in Arizona with the payroll in excess of $100 million, focus on the $7 million in taxes that we pay and the $9 million plus in utilities we use, and the total economic impact of all this offers, that the outcome this year should be some similar to what we've seen in prior years. Make sure everyone understands that any of the federal inmates that we have in Arizona would not fall under the jurisdiction of this kind of legislation either.

Been reported and a lot of rhetoric around Colorado, and we believe that what's been reported so far does not tell the complete and true story. As we pointed out in previous calls and investor presentations that our expansion in Colorado will be the total current growth opportunities or options for Colorado. And then also Colorado is one of those states where we have to negotiate our per diem increases each year. When we open the two expansions that we currently have in Bend County and Kit Carson and return the Colorado inmates that are currently in our facility in Oklahoma, we will still have some 1,400 beds to meet Colorado's future growth. And so the discussion that we've been having with Colorado about what the per diem increase will be has been tied to the amount of these 1,400 beds that we will assure them that are available in the future. And we have said that without an adequate increase in per diem that we will want to market some of those beds -- roughly half -- to other jurisdictions and customers. And so that's what the discussion is about and while we are having the discussions about what the per diem increases will be this coming year and the future years. But we do plan to continue to provide all of the inmate beds that we have now, the beds that have inmates in them, and then some of their future bed needs.

There's been a news article report about the state of Washington not sending any more inmates out of state and to begin returning the current out-of-state inmates to Washington upon the opening of the 2,048 bed expansion at the Coyote Ridge facility in Washington. We have known about this new in-state capacity for some time, probably two years. We'll point out that when we contracted for the initial 300 inmates to -- with Washington it was to relieve their overcrowding, and they felt that was all they would need until they completed this facility, and I will note that today we have a little over 1,200 Washington state inmates. As we've mentioned in the past and mentioned already in this call is that our bed need is such that we have sometime had to allocate beds, so we believe that if Washington's growth is such that they are able to return all of their beds -- inmates to Washington that we will work that in nicely with the other growth that we have in other jurisdictions that we are doing business with.

But again, our challenge has been coming up with the adequate supply to meet the demand that we have pretty good visibility on. And I think one of the things that I'd like to point out as part of this is that as our business model is such so that our dependence on managed-only business decreases and we continue to add capacity to that, if we loss a managed-only contract, it is pretty much lost forever. If we have a change in inmate populations in our own facility, we believe it's only a matter of time until someone else will use those beds.

And then lastly turning to California, I know everyone is interested in that. At December 31, 2007, we had received and were housing 2,059 California inmates. If the current ramp-up schedule is executed as the state of California and CCA agreed to, we will receive over 4,000 new inmates into our system by 12-31-2008. Todd mentioned that timing is an issue. We have had some months so far in which we have not received all of the inmates scheduled and we have some months in which we received more inmates than were scheduled. We do believe that there's been improvements in this and that, as mentioned before, the trains are running on time fairly well. And we believe that we've properly projected the construction timeframes for the beds that we will be bringing on-line to meet these new inmates that come in to our system.

We don't have anything to report on the -- any court actions. We've not heard anything on the state action, which was in court of appeals, nor have we heard anything on any of the federal actions or three judge panel. What we have read about is that the governor submitted his fiscal year 2009 budget so that would be fiscal year beginning July 1, 2008. We did note that budget funded contract beds for over 8,000 inmates by April of 2009, so we're very encouraged by that. But we did note that there is a call to release some 22,000 inmates of low security into the system to relieve their overcrowding. We -- one of the things is no one knows will that actually take place, whether the legislation will allow it, there's lots of debate. If, in fact, that is discussed and is going to be authorized we can't say what affect it might have on some of the out-of-state inmates, so it is something that we will watch closely and can't say for sure that we couldn't -- we could be affected in some way. But again, we are encouraged that the budget does address full funding for the 8,000 by April of 2009. So it's really too early to know whether that legislation is going to have any possibility of passing and what effect it could have on our relationship.

So that's some comments about our state and federal customers. Now let me turn to our bed availability and some of the visibility that we've had there. We have opened some 4,000 expansion beds in 2007, which is increased our inventory from where we had previously, but much of that expansions we have line of sight on. We have some 3,219 owned beds in facilities with 100 more beds available and some 722 managed-only beds. Of the 3,219 owned, 1,906 are beds that are allocated to the state of California, so that's right at 4,000 beds available. Then in our press release, we continue to disclose the current expansion and new development beds of 8,731. So if you take our current inventory, these expansion beds, the new facilities under development and the inventory of managed-only beds, we have some 12,672 beds available to sell to our existing customers. I have gone through the line of sight that we have on the 8,731 in the past and I think everyone is fairly up to date on that. But if we apply our same approach of the average margin for the fourth quarter to these available owned and managed-only bed, we were looking at some $98 million of potential annual incremental facility EBITDA.

And to confirm one more time, as we look at our existing cash on hand at December 31, and we look at our adjusted free cash flow, if we were just to match the free cash flow of 2007 over the next three years, it would give us -- and we were to maintain a debt to adjusted EBITDA of no more than four, it actually would give us an additional $700 million to invest in new beds at an estimate of $70,000 a bed. That's almost 10,000 beds over and above what we currently have. And then, as I've said previously, if we were to stop construction today and felt that for some reason that the inventory we have is the inventory we want to maintain, that by the end of the fiscal year 2009, we will have funded all of our growth and have no additional debt over and above our senior unsecured of $975 million.

So with that, operator, we will open up for questions and answers.

Operator?

Are we connected?

Yes, I'm so sorry, my mic was turned off. My apologies.

All right, well, we're ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Emily Shanks from Lehman Brothers.

Hi, good afternoon. Very nice quarter.

Thank you.

Just two questions. My first one is around the impairment charge and this is very simple, but I want to be clear. It has to do with the pricing of the existing managed contract, is that fair assumption?

It's -- we have two facilities, as I mentioned, that are underperforming for sometime. They have been underperforming for sometime. It's a situation where we've negotiating with the customer for sometime on contract modifications that would improve their financial performance, and while we continue to negotiate with those customers, there's uncertainty about our act to achieve some success there. So that led us to record the charges and it's really a function of the future cash flows being sufficient to recover that goodwill, if you will.

Okay, that's helpful. Can you give us a sense of if there are any more potential ones of these in the pipeline in your managed bucket?

No.

Okay. If I could just my final question is around what the potential is for new greenfield projects? Obviously expanded the real estate team, I'm assuming that you have some sites that you're looking at and I want to get confirmation from you on that? And then secondly understand is there anyway that you think that your CapEx guidance could change for fiscal year '07 to an extent is there the potential for new greenfield's to get put on-line?

Yes. I think we have begin speaking of that at the end of 2006 that we believe that the supply/demand imbalance would bring about the need for additional bed capacity. We think -- have said even previously the last time we announced La Palma and Adam County that we thought we would looking at new bed capacity. We're not announcing any today, but we have a fairly sophisticated effort that goes on within the Company to measure demand of our many customers, demand of prospective customers against the supply and opportunities. So although we can't say for sure, I think it would be highly likely that we would announce some new beds -- could be some more expansions., but some new beds in 2008.

Great. That was it. Thank you.

And that's one of the points I was making that if we just maintain our balance sheet leverage of no more than four, we actually have the capability of probably doing another 10,000 beds if the beds were averaged around $70,000 a bed.

Over and above what we've announced today.

Right.

Okay. Understood. Thank you.

Our next question comes from the Kevin Campbell with Avondale Partners.

Great. Thanks for taking my questions. I wanted to talk just real quickly on the expense lines. You guys mentioned, I think, in your press release that there were some expense anomalies in the quarter. Could you just discuss that in a little greater detail about how much they were, what they were involving?

They're relatively minor expense anomalies, timing as much as anything. One example we're self-insured on our employee healthcare. In Q4 2007 we saw above average claims expense compared to below average claims expense in Q4 2006, and this is one of the areas where you can see material differences quarter to quarter, based on frequency or severity of claims. Also incurred a one-time -- some one-time consulting fees associated with reducing utilities and a couple other smaller items.

Can you give us a general sense for the overall magnitude of what they might have been on a combined basis?

It's -- call it a couple million dollars.

Okay. Great. And also your transportation expenses were down sequentially $3 million, and I know it's -- or I assume that's because I know you had a lot going on transportation-wise in the third quarter. Can you give us a sense of what we might expect going forward on a quarterly basis? Should it be -- I think it was around $4 million this quarter. Should it be around there? Should it go up in the first half of the year because you've got a lot of new projects ramping?

I think we'd prefer not to parse our guidance to that level of detail. Understand the question but I think we'd prefer not to parse our guidance.

Okay. One more question then. On your -- just in general from a macro-economic standpoint, is this the type of environment that you guys would prefer long term, where you've got states that are maybe faced with tough budget choices, or would you maybe like to see them flush with cash so you can get your -- it's easier to get the rate increases. Could you comment on that?

You know, that's an interesting question. I guess the answer is yes. (LAUGHTER) I'd say that the current environment we're in today is a direct outcome of the budget problems of 2001 and 2002 when many states were having budget problems and the last thing they were interested in was building a prison bed space when they had other things. I'd say it may be -- may feel a little different today because I believe the customer acceptance of what we do is a lot better than it was in that same time period, so it probably would be good to have a little better flush with cash because I believe they would do business with us. But it'llalso bring on some opportunities. And then we don't -- sorry for people's hardships, but [some of what goes on] will probably assist us in some of our employment issues and pricing issues that we have in some of our rural facilities.

Okay, but actually, if I could ask just one last question on the CapEx. I think your guidance for this year for development was around $371 million. Could you give us a sense of how much remaining CapEx you will have left on those -- I guess it would be La Palma at that point for 2008?

It depends on the actual timing of cash dispersement, that fluctuate a little bit, but probably somewhere around $70 million in 2009. Was that your question? What was left for 2009?

That's right, that's right. All right. Thank you very much.

Sure, you're welcome.

Next we will go to Banc of America Securities and the office of T.C. Robillard

Hello, T.C.

John, just a couple quick clarifications on your remarks. In Colorado, the increases that you guys are trying to negotiate for per diems, did I hear you correct, is that just for the future beds that are coming on-line, or is that for all of the beds that Colorado's occupying for you?

All of the beds that they'er occupying with us.

Okay. And then on California, was there -- the 4,000 inmates that you talked about at year end, was that 4,000 additional inmates in '08, or was that 4,000 total at the end of '08?

No, it would be over 4,000 additional inmates during calendar year '08.

Perfect. Thanks. And then, Todd, can you give us a sense as to the magnitude of start-up costs in the quarter?

That's obviously a question we get asked on every quarter and historically we avoided providing that background, primarily because it's difficult to estimate with any reasonable level of accuracy what those start-up costs are. Especially on facilities we're expanding new beds it's hard to distinguish between what are start-up costs and what are operating costs on the original base beds, so as a result of that we've never felt comfortable trying to estimate and disclose those numbers publicly.

Okay, maybe asked another way, were they any greater in the fourth quarter sequentially, or are we expecting -- and I think I know the answer to this, but are we expecting those to be more material in the first half of '08? I'm just trying to get a sense maybe more as we progress over the next couple of quarters, are those getting incrementally bigger, or have they spiked up to a level and plateau before they then drop off into the second half of '08?

Based on the timing and the activation we're looking at currently, we would expect them to be higher in first half of 2007 relative to Q4 2000 -- first of 2008 relative to Q4, 2007. As we're activating -- we will activate 7,000 new beds in 2008. That's probably one of the largest single activations we've had in recent history.

If you just look at Tallahatchie, for example, we had some beds we brought on at the end of '07, we got additional beds we're bringing on between now and the summer time, we're bringing inmates in, we're staffing, so it's hard to say what is truly a ramp-up that versus what is just kind of an inefficiency until we get at the right leverage on using all of the capacity. That's the reason we have such a struggle.

No, understood. And then just lastly, in the environment now we've obviously seen construction slowdown happening across the U.S. Have you guys benefited from that in terms of your construction -- in terms of your general contractors being able to construct the expansions or the greenfields at a slightly faster pace? I know you guys are obviously very efficient to begin with, especially relative to the state and federal government, but I'm just wondering if you -- if you're in an environment now where you're actually starting to get a little bit of a benefit on that, whether it's in cost of materials or on just labor availability?

*'d say we're -- there is a couple of projects in which we probably are seeing that. The one thing that affects the outcome, the ultimate cost, has a lot to do with the infrastructure, the site preparation and those kinds of things. And those'll vary from facility to facility, and so that has (inaudible). But we, I think, have seen some minor improvement that we hope maybe that going forward we'd see more because -- and it really depends on where we are.

But I think everybody realizes we've significant cost increases in steel and concrete over the last several years, so these costs for constructing prisons have increased significantly.

Okay, great. Thanks, guys. Keep up the good work.

Thank you.

Todd Van Fleet with First Analysis, your line's open.

Afternoon, guys. Wanted to see what you could share with us regarding your guidance for 2008 in terms of assumptions surrounding Colorado. I'm going to assume -- maybe I shouldn't -- that there's probably no incremental per diem increase for Colorado built into your guidance, but if you want to clarify on that that'd be great? And then secondly, Todd, as you point out, 7,000 beds coming on stream in 2008, we have to try to work the math and see how it's going to impact utilization from quarter to quarter. So how do you guys think about utilization as you proceed throughout 2008, as you bring on, for example, two 660 bed expansions in Oklahoma, do you have better visibility on certain expansions versus others and -- or is it generally worked into your guidance some assumption regarding a three-month or four-month ramp-up for any one particular expansion? If you can help us understand how you think about that. Thanks.

The Colorado question, I guess I'm probably not allowed to get into that. We are in delicate negotiations right now and we'd like to keep it between our customers until we get through that. We have gotten per diem increases out of Colorado, but it's just during the 2001 and 2002 downturns there was fairly dramatic reductions, and so we just have not built the per diems back to where we think are acceptable levels today, so that's a little bit about what's going on there.

I think we have some decent visibility on the Oklahoma. I think we've talked about it and it's been reported that -- I think the word crisis has been used more than once in what they are doing. As I understand the governor didn't propose any capital in his budget for new prison construction, so we would hope that we could find some common ground to be able to help Oklahoma meet some of theirs. And I guess we -- the other -- the Tallahatchie and La Palma are all California. And then as we described if -- we might be able to have some beds available in Colorado for another jurisdiction.

Let me ask you about the federal side of things for a moment on the budget that was introduced this week. I think going back a year or so when Bush introduced the budget for 2008, I don't know that there was any accommodation in this proposed budget for any new beds for ICE. And as you point out, ultimately what became funded was an additional 4,200 or 4,500 beds throughout the course of the year. And this year with the new budget introduction release, the proposed budget, there is now an accommodation for an additional 1,000 beds. Does that type of trend leave you optimistic that -- or pessimistic -- again, just comment on it, but -- of the possibility of additional ICE beds above and beyond the 1,000 being funded at some point throughout the year?

Well, go to the conferee line, which as I referred to in my comments about them that it now is apparent -- and you're right, the president presented a budget with less than 1,000 bed growth in 2008 and it was the senate and the house that took it -- insisted on it being at least above 31,500, and the ultimate I think was 32,000. So, yes, it is encouraging a little more, but I think it's going to -- what I think and I'm encouraged about is everything we're hearing is 33,000 is still not enough. If you are going to try to do everything that is needed to do in light of all of the fire hoses that are going on -- I just described the five different places that are coming. If you think about 32,000 average population with the amount that are out there, 32,000 on an average day is not a lot. Now the Operation Streamline will be a U.S -- an Office of Detention Trustee expense, as we understand, because now they're being charged with a federal misdemeanor or felony. But I'm encouraged that congress is now attuned to what does it take in order to say that we have actually -- are dealing with the illegal immigrant population of the United States.

I guess as a follow on to that, John, given that we're in an election year and the uncertainty surrounding things at the federal level, have you heard from the various agencies, be it ICE or ODT, is there any sense of increasing -- or at least with not uncertainty, a sense of -- well certain decisions might just be getting delayed until there's resolution in November if you have any thoughts on that, that'd be great. Thanks.

No. I don't think I heard anything that -- other than delays or -- comes with the territory when you're dealing with governments. You never know which is because the policy of the executive or just part of the way the process works. But I don't think I've heard anything note worthy that would be driven by the election.

Thanks.

Other than the stimulus package.

Our next question comes from Jeffrey Kessler with Lehman Brothers.

Thank you. And good quarter, particularly in light of some the hand wringing on investors' parts that was going on before you reported..

Well, I haven't noticed. (LAUGHTER)

I noticed in doing some research on the Texas situation we came up with the fact that you guys do actually own two facilities in Texas that happened to be in rehab prerelease programs, preparole types of area. Given there may be other -- there may be other situations like this where the states are trying to shrink prisoners out of regular adult corrections into, what we'll call rehab or prerelease types of programs, do you have any other plans for these types of facilities out there in any other states?

I think that would be a preannouncement that would be unwise for us to talk about anything that we're doing even if it's fully disclosed to everybody. I will say thank you for correcting the statement I made earlier that I'd forgotten about Mineral Wells and Bridgeport that are our own facilities that we've had for sometime. But we as a Company are continually looking at is there something that we want to change our current business model and that's to be senior -- secure or unsec -- secure adult correctional facilities, but nothing that we would feel is at the time to talk about.

Okay. Well, I can always ask and I may ask again. (LAUGHTER) You mentioned you -- you mentioned briefly about your managed-bed situation, and I'm wondering, given the competitive pressures, which are different in managed-only, obviously, relative to owned, can you talk, number one, about the timing of some rebids you have been managed? What types of pricing are you looking at? And is there an emphasis -- do you want to -- are you going to want to phase out of managed at some point in time, or keep it at the same level?

Well, we would like to protect the business we have and we've done that. I think there are only two up this year and that's -- and they've not been put out yet that would be potential and is that Metro-Davidson County, which is a Nashville facility, and Winn Correctional, which is in Louisiana, and so I don't know what the timing's going to be. I do know that I think that Metro-Davidson County is like a July 31 or it's somewhere in August. So really that's the threat that we would have. We are not opposed to continuing to grow the managed-only. It is just not something that happens very often, and when it does happen, as you can imagine, a lot of vendors who can't compete when it comes to owning will -- can compete.

It's been written about that Florida will probably authorize the funding for a decent amount of additional beds when they come out of this legislative session. Don't know exactly what the number will be and how it will be done. They historically have done it with -- when it's design, build and manage and they own, and if that's the case, we will compete. We have three facilities in Florida right now and I think we're looked upon at a pretty good vendor and I think that helps, but we will compete for that. But we will set some standards, which maybe can affect how competitive we will be. But it's just not that many managed-only situations that come up. That's one of the reasons. If there was a lot, we'd be responding to a lot.

Okay. If you could give us maybe some guidance -- a little bit of guidance on interest expense. You've got some moving parts here. Cash balances were a little bit down. The debt was increasing. Obviously this is the result of, obviously, the movement around of physical assets and some of the cash tax payments you were making. Can you give us some idea of what is going on, perhaps, with guidance on interest expense for 2008?

Yes, we'd probably prefer not to get into any specifics on the level of interest expense. You're earlier comment, our cash balances are down. Cash and investment balances are down as we have funded the new construction. We, at this point, have not incurred any additional debt, but as we continue to move forward with our bed development needs, we most likely will have to draw on our revolver to fund that development. And my interest expense will be a function of those new borrowings, the rate at which I borrow. And today on that revolver it's leverage base grid and in today's leverage ratio I'm borrowing at LIBOR plus 75 basis points. Last time I checked LIBOR was around 315, so we'd be borrowing it a little under 4%. Also be a function of the capitalized interest., so as we build some of those beds, the interest costs we incur, especially with that construction, we capitalize as part of the construction cost, which will have a minimizing effect on the increase in interest expense, as well.

Okay. I believe all my other questions had been answered by others, but thank you very much and again, a good quarter, guys.

Thank you.

Thanks, Jeff.

Our next question comes from Marc Balcer with Bluefin.

Thank you for your time. I was wondering if you could tell me -- you've talked in the past about most of the states providing about 7,500 beds under construction. What's your best understanding of where that is now and where, perhaps, the whole industry is relative to the 8,000 or so beds you're constructing and others are?

I don't know what that is today. I apologize. We're not -- I wasn't prepared for that question. If you'll give us a call, we'll try to see what we can say. We do put together an investment presentation after every quarter, which we're currently do, and we'll probably have that statistic in the presentation.

That'd probably be the best way for us to communicate it to the public.

Sure. Then a quick question on per diems, you mentioned typical annual escalations and also some negotiations that maybe cover more than a year. Do you see that being any larger in the second half of '07 than it has been in other periods or it will be in 2008?

Haven't provided any on that and at this point we'd be inclined not to.

Fair enough. And then just my last question, perhaps relates to Operation Streamline. Given the relatively high utilizations you have in your Arizona and Texas facilities, how can you address any increase in prison populations at ICE? Just in general, I think it's no different than any new prisoner that comes onto ICE system.

Well, we do -- if Operation Streamline was significant increases in the bed needs in Arizona, then we would probably find ourselves having to maybe rearrange some of our inmate populations in other facilities we have.

Great. Thank you.

You're welcome.

And we have a follow up from Todd Van Fleet with First Analysis.

Two quick ones, if I could, guys. With respect to the $38 million that was cited as being in the proposed budget for the Detention Trustees Office, is that related to the RFP out there around Las Vegas, or is that for something else in your view? And then I have a question on G&A. Thanks.

I can't say with absolute certainty it is not, but I think it is not part of the RFP for Las Vegas. I believe that is additional funding, but you now raise a question and we probably ought to do some quick research and make sure that there's not a correlation. But I think it is our understanding that would not because this would be -- well, I guess it would be in fiscal year '09 before this would be.

Because resolution on that RFP is expected at some point over the next few months, is it not?

That is our understanding that probably in the second quarter it should be awarded.

But it is -- you are looking at a 15-month construction time cycle, so it'd be 15 months from mid 2008 before the beds would be available.

It could -- yes, it'd be almost in the fiscal year '10 budget.

Okay. And then, Todd, you had said expect G&A to continue to track 5% of revenue. Why aren't you seeing better operating leverage off the G&A line, particularly as you grow the top line, 10% per year. Are you just being conservative there? Why don't we see better operating leverage?

You saying operating leverage on my operating expenses?

Yes, better leverage off of your G&A, so if the top line's going to grow at 10% and bottom line's going to grow at something more than that, well, G&A certainly shouldn't grow at same rate as your revenue, should it?

That would be one of our objectives,although with the -- you've the seen the significant increase in our investment in real estate development -- in our real estate resources over the past 12 months. The other we've seen an increase, for example, in 2007 because of the change in accounting rules around stock compensation we've had an increase in G&A in 2007 about $1.6 million. And so a portion of it gets focused on new bed development, which you're not going to see necessarily in terms of improved operating efficiencies. Stock comp obviously isn't going to wo't have any impact on operating efficiency. But then the remainder of it, I think we have seen improvement in our operating efficiencies, in containing growth. For example, employee healthcare, it's a big line item in our -- with 16,000 employees we've maintained the growth in our employee healthcare costs to mid single digits, whereas the rest of corporate America is looking at high single digits to low teens.

Right. Maybe it's fair to say that beyond 2008 we should see after we've overcome the -- or annualized, if you will, the stock-based compensation and maybe some of the real estate expenses -- or the real estate staffing, presumably that'll be at a critical mass at some point and you can start building off of that and you won't need to increase that much. Beyond '08 is that appropriate time frame for that sort of thing?

Yes, that could be. In 2008, we're going to have about $2.5 million of incremental stock comp -- noncash stock-comp expense associated with the change in accounting rules. After 2008 we'll see -- we'll stop seeing any significant increase associated with that change in accounting rules.

One of the things that does take place since I've been here is a continued effort to figure out we can leverage our G&A cost to have our significant impact on $1 billion plus operating expenses we have. And we do go through a return on investment a lot with things we've spent money that are G&A because we think they will make a significant impact in operating expense at the facility level. And one of the other areas that we've had a decent increase in the last 18 months is in our human resource area. We -- I made the decision couple years ago to raise the level of that responsibility in Company reporting directly and being part of the executive management team. And as you know, turnover is a big issue in correctional business. be it public or private, and we're constantly trying to figure out how to do a better job of dealing with turnover. So those are the kinds of investments we make in the G&A that hopefully will have an impact on reducing our operating expense.

John has made a good point. You can't just look at G&A in isolation. You have to look at the gross margins and our gross margins have continued to improve over the last five years. A lot of that is due to work that we do with our information technology people and human resources and all of those are G&A expenses. I don't want any of you to feel we don't look at our operating expenses as carefully as we look at growing the business. We look at both.

Thank you. And we do have a question from Kevin Campbell with Avondale Partners.

Thanks. Just wanted to follow-up on -- in the central Arizona region, last quarter you buys had talked about seeing some softness in populations there, but if you look at the supplemental, the occupancies didn't change all that much at the two facilities from where the U.S. Marshall's are. Is it safe to assume that you guys might have some protections in your contracts from population fluctuations such that you don't necessarily -- you're compensated occupancy remains high even though the actual occupancy might remain low. Is that a good assumption?

I think we'd probably do not want to get into some of the details of our contracts right now.

Okay. Thank you very much.

And gentlemen, there are no further questions in the queue. I'd like to turn the call back to you for additional or closing remarks.

Okay, this is Bill Andrews once again. I want to thank you all for your attendance today and thank those of you that congratulated us on the quarter. I personally want to congratulate the management on a great year. I focus more on the year. Our revenues are up 12% for the year. We're up to $1.478 billion. Our earning per share adjusted are up 26%, our actual earnings per share are up 23.3% and we finished the year $1.06. Our EBITDA is up 19%. Our free cash flow's up 14.1% with $206 million for the year. Our occupancy for the fourth quarter is at 79.9%, still improving. Our operating margins, that I mentioned before, continue to improve. They're 29.2% for the fourth quarter. John mentioned the budgets, which tend to -- the federal budgets, which tend to let the business increase or decrease, and the budgets look favorable. ICE was up for 2008 and [SWZ] up for 2009, the Marshal Services are flat but they're up for 2009, and the Bureau of Prisons continues to have a shortfall in their new beds versus inmates, so we should expect to see something from them.

The states still show an upward trend of inmate populations without the available beds, and our challenge is to provide an adequate supply to meet those needs in the future. John mentioned that in '07 we created 4,600 new beds and we have in the pipeline another 8,731 beds for 2008, so this'll be over 12,000 new beds that will be available. And I think John gave you the number, that provides another $98 million of additional EBITDA. And all of this is being financed through our existing balance sheet ratios, which I think is significant. As we look forward to the projections for 2008, Todd mentioned $0.26 to $0.28 for the first quarter and $1.21 to $1.28 for the full year. Again, we have these ramp-up costs because of all of the new beds coming on, so it's difficult for quarter to quarter to have an even progression, and therefore that's another reason I look at the whole year, but we are looking for a nice increase again for the whole year of 2008.

So thank you all for your support and thank you for being here today, and that concludes my remarks and concludes the meeting.

Ladies and gentlemen, thank you for participating. Your participation is appreciated.