CoreCivic Inc (CXW) 2008 Q1 法說會逐字稿

Good morning, everyone, and welcome to Corrections Corporation of America's First Quarter 2008 Earnings Conference Call.

If you need a copy of our press release or supplemental financial data, both documents are available on the Investors' 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 to the Safe Harbor provisions of the Securities 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.

This 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, Bill Andrews, President and Chief Executive Officer, John Ferguson, and Chief Financial Officer, Todd Mullenger.

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

Well, good morning, everybody. We're in Nashville; it's a beautiful spring day, and we're here to announce our first quarter 2008 financial results.

In addition to John and Todd, we have David Garfinkle with us, who's our Vice President Finance and Controller, and with that, I'd like to start the meeting and turn it over to Todd who will review our press release and our results.

Thank you, Bill and good morning everyone.

We are very pleased with our first quarter operating results, so let's move straight to a summary of those results. First quarter results for 2008, we generated $0.28 per diluted share compared to EPS for last year's Q1 of $0.26 per diluted share, representing an increase in EPS of approximately 8%. Earnings for the quarter were positively impacted by increased compensated man days from a number of customers, including ICE, U.S. Marshals, California, Arizona, and Florida.

EBITDA increased nearly 9% to $91.4 million for the quarter. Adjusted free cash flow for the quarter increased approximately 18% to $72.7 million. The growth in adjusted free cash flow is significantly higher than EPS growth, due primarily to changes in depreciation expense and maintenance CapEx. Depreciation expense increased $17.5% over 2007, while maintenance CapEx decreased 22% in the quarter. The increase in depreciation expense, obviously, has a negative impact on EPS; however, it's added back and arriving at adjusted free cash flow, which maintenance CapEx is deducted.

As we have discussed on prior occasions, unlike other industries, our depreciation expense is not reflective of the ongoing maintenance CapEx that we will incur to maintain our facilities. For example, depreciation and amortization expenses totaled approximately $21 million for Q1 2008 versus approximately $9 million of facility maintenance and IT CapEx in Q1, so as we have commented before, we believe adjusted free cash flow is, in many ways, a better measure than EPS of the return we are delivering to our shareholders.

Turning to revenue, total revenue for this year's first quarter was up approximately 11% over last year, an increase of $37.8 million. Total compensated man days in Q1 increased 7.3% compared to the previous year. Revenue per compensated man day in Q1 increased 3.6% to $55.98 from $54.01. While compensated man days increased 7.3%, average compensated occupancy for the first quarter actually declined slightly from 98% to 97%, as a result of placing nearly 5,000 new beds into service in the first quarter of 2007; 2,500 of those beds were placed into service during Q4 2007 and Q1 2008.

With regards to the 3.6% increase in revenue per compensated man day a couple of comments; results in Q1 2008 reflect the impact from certain pricing leverage we enjoyed from renegotiating several contracts, 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. Finally, when you look at the per diem increases on just our own beds, where 90% of our operating margin is generated, per diems increased 3.8%.

Moving next to a discussion of operating costs; operating costs per man day for Q1 2008 were $39.58. Our Q1 2008 operating cost per man day reflects facility ramp-up costs, as well as normal wage and other general inflationary increases. We incurred significant ramp-up costs in Q1 2008 related to the activation of new beds. Ramp-up costs totaled approximately $2 million in Q1 2008, which is an increase of approximately $1.8 million over Q1 2007. Excluding ramp-up costs, operating costs per man day increased 3.5% over Q1 2007. We will continue to incur ramp-up costs moving forward, as we continue to bring new beds on-line and hire staff and incur expenses in advance of receiving inmates.

Operating margins per man day in Q1 2008 increased to $16.40, with a margin percentage increased to 29.3%. As we have discussed previously, margins on inmates placed in newly-developed beds will be depressed during the facility ramp-up period. However, those margins per compensated man day on new beds will improve over time as we approach full occupancy on those new beds.

General and administrative expenses for the quarter were approximately 5% of revenues. The increase in G&A compared to Q1 2007 was due primarily to the expansion of our real estate department, as we added resources to assist in the development of new beds; also, increased focus at the corporate level on quality and efficiency of the facility operations, and an increase in noncash stock-based compensation expense related to the change in accounting rules. Our goal is to keep G&A at approximately 5% of revenues going forward.

GAAP income tax expense for the quarter was computed based upon a rate of approximately 38%. We currently anticipate a rate of 38% for full-year 2008.

So in summary, we are pleased with our first quarter operating results, and with the progress we've made developing and activating new capacity to meet the demand for prison beds.

I will finish with a discussion of our guidance for 2008. As indicated in the press release, our guidance for Q2, 2008 is in the range of $0.28 to $0.30, and guidance for the full year remains unchanged, in a range of $1.21 to $1.28.

During the first quarter of 2008, we activated 849 beds and expect to activate approximately 6,900 beds during the remainder of 2008. The activation of these new beds in 2008 will cause short-term operating inefficiencies at the affected facilities. In particular, we are planning to hire staff at our new La Palma, Arizona facility a little sooner than we typically do to ensure access to competent staff and ensure a smooth transition under our tight ramp-up schedule for inmate intake under our contract with California.

As previously mentioned, margins on new inmates placed in new beds will be depressed during the 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 accelerating year-over-year growth in margins, EBITDA, and EPS in Q3 and Q4 this year. As we have stated before, 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 is particularly true with the state of California. We are very pleased with our performance to date under the new California contract, as is the customer; however, 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 we currently expect if we feel it is necessary to avoid any issues that could negatively impact our long-term relationship with the customer.

However, should there be a shortfall in our expectations due to timing, we are still optimistic that demand from customers will ultimately fill our beds, albeit over a longer period of time. As discussed on prior calls, 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 bought online. A good rule of thumb rule 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.

As far as funding this new development, we believe that cash on hand, free cash flow from operations, and capacity available under our revolving line of credit will allow us to fund all development projects announced to date.

Overall, the outlook for our business remains quite favorable. The projected demand for additional prison beds, combined with our new beds under development and our ability to fund further development provides CCA with significant opportunities for growth.

I'll now turn it over to John for specifics on a new business prospect and bed development.

Okay, let me reinforce what Todd said; the outlook for our business remains quite favorable. Just to remind everyone of the dynamics of where we are, first of all, we continue to be the industry leader. We are looking at a substantial supply, demand and balance that really hasn't changed very much over the last couple of years. As always, we feel with our 20 state customers and three Federal Agency customers that we have a national platform, which gives us opportunity to grow. As Todd has pointed out, we have a strong balance sheet, we have significant cash flow, and we have increased acceptance of what we do. And then to support all that, we have good inventory and pretty good visibility.

So let me talk about our two major customer focus areas, as I have in the past; first of all, the Federal Bureau of Prisons. Their inmate populations at April 17 was 200,054 inmates. This is 37% over their rated bed capacity, and as we have talked previously, between the fiscal year 2008 and fiscal year 2011, they estimate to grow their inmate population by some 15,000 inmates, and have less than 8,000 new beds planned for development.

In the President's fiscal year 2009 budget, he does propose an additional $50 million to fund up to 4,000 beds under what's called "Contract Confinement", which, of course, led to in the last week the release of two RFPs, referred to a CAR 8 and CAR 9. It is the goal of the Federal Bureau of Prisons to acquire approximately 4,000 inmate beds with both of these Criminal Alien Requirement solicitations, with 3,000 as the max under either one of them, and the particulars on that has to do with the availability of beds prior to award, and the CAR 9 is to do with the availability of beds that can be expanded or constructed prior to the activation of the facility.

We continue to see the U.S. Marshal service grow; some 7.3% mean annual percentage growth between 2002 and 2007. We see nothing that would change that. The President's 2009 budget does propose some $1.3 billion of additional funding -- or funding, sorry -- in states that the trustee will continue to work with the state local governments and private service providers to maintain adequate detention capacities to house detained individuals charged with Federal offenses awaiting trial and sentences. Let me be clear, the $1.3 billion is for the Office of the Federal Detention Trustee, and I think everyone is aware they issued a solicitation several months back for a facility in the near Las Vegas, and we are expecting -- we the industry -- is expecting an award shortly on that.

There was an environmental impact statement released, which allowed folks to make comments. That comment period ended April 28, so that's one of the last hurdles, and of course, one of the sites we proposed was listed as the Agency's preferred alternatives. But as of yet today, we do not have, the Office of Detention Trustee has not made their announcement.

We continue to monitor Immigration Custom Enforcement. As we've mentioned in the past, we continue to see growth in the amount of funding for beds. The President's budget for 2009 does fund for an additional 1,000 beds. That also speaks very clearly to doing what it takes to secure the borders, and as I mentioned on the last call, many of our inmates that we detain for Immigration Custom Enforcement does not come from border apprehensions, but from the release of individuals who have been arrested and served time in a state or Federal Prison.

So we continue to see the needs of our Government customers grow, and we continue to try to anticipate that and be prepared to respond to the services that they need.

As we look at our state customers, and the activity there, the -- as we mentioned last year, the expected growth in state inmate populations in our 20 state customers will be nearly 80,000 for the period ending '07 to the period ending 2011, and, which represents about 60% of all of the expected growth of all 50 states. And the best we can identify is some 9,400 beds of additional capacity that's been funded and expected to come online year end 2010. That does not include the activity that's going on in California, but everything we can assess, their construction projects are running behind schedule. In fact, none would be expected to come online between now and 2010.

As you look at the beds update that we gave in our press release, as you can see, the beds that we brought online in the fourth quarter of 2007, first quarter of 2008, and the things that we have under development and expand, you can see a substantial amount of that is for anticipated growth of our state customers, with a fair amount of that is the expected growth of another 3,500 or so inmates from the State of California between April 1 and December 31. As Todd mentioned that things seem to be going according to schedule, but we will be very sensitive to make sure we do it in a safe and secure manner.

So turning to the opportunity, the investment opportunity for this Company; as we talk about our Federal customers and our state customers, as we begin the second quarter of 2008, we have some 3,000 beds in inventory, some of which are the beds that we finished and brought online in the fourth quarter of 2007, the first quarter of 2008, and as we denote in the press release, we have some approaching 11,000 additional beds coming online with pretty good visibility as to the utilization of those beds and that inventory.

As we have on a continuing basis, if we were to utilize, or if our customers were to utilize all of the existing inventory and expansion beds, and we just maintained the margin that we experienced in the first quarter of 2008, or owned and managed, we're looking at almost $107 million of new incremental facility EBITDA from those facilities, and again, compare that to the some $90-plus million of inventory, of EBITDA we had in the first quarter of 2008.

We have continually said that we will monitor the supply, demand, and balance; we will monitor very closely our 20 state customers, our three Federal Agency customer, as to their needs, any prospective customers out there, and as we see the demand justifies it, we will made additional investments, and we have indicated that we feel that the balance sheet of the Company would support 4:1 leverage ratio EBITDA to our total debt, and if we just take the cash we had on hand at December 31, the expected cash flow, if we just match what the last 12 months' cash flow is for the balance of 2008 and 2009, 2010, as well as maintaining no more than 4:1 debt to adjusted EBITDA, taking into consideration the commitments we've made, and the money it will take to finish those, that we estimate that somewhere between 8,500 and 9,000 beds could be developed by the Company if the beds were no more than $70,000 per bed in the future.

So we think, in addition to having a good pipeline of inventory under development, good visibility on the usage of that, good visibility on the supply, demand, and balance, and having a strong balance sheet and significant cash flow to let us continue to develop another 8,000 to 9,00 beds if we needed to. And again, we believe that the dynamics of the marketplace will lead us to a future announcement.

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

(OPERATOR INSTRUCTIONS).

Manav Patnaik, Lehman Brothers.

Hi, thank you; first, congrats on a good quarter guys. Just a little more granularity, if you could, in terms of the own facilities and the managed with respect to your man day margins sequentially, let's start with the owned facilities first; would you expect to see that stay stable and rise through the next 3 or 4 quarters, or can that fluctuate quarter-over-quarter?

Are you talking about operating margins per man day?

Correct, the compensated man day margins.

Yes, we would expect those to accelerate.

And then how about, I guess with the managed-only, like would the margin sustain more pressure, or would your per diems just being with some pricing leverage help those move up sequentially as well?

Actually, the pricing leverage on managed only is nowhere near what it is if you own the facility because when the contracts were up for rebid, many correctional service providers can compete for that business, so we would not see the same acceleration in managed only as we do the owned facilities.

Okay, and then with respect to your full-year guidance, it seems like I guess everything is on track. What is holding you back from maybe narrowing that 121 to 128 guidance range; is it just California that you discussed, or is there maybe some more factors in there that you are being a bit cautious about?

Yes, I think it's the uncertainty around the timing of the receipt of the inmates. The macro environment is still very strong, but as we've mentioned on numerous occasions in the past, there's always uncertainty around the exact timing of the receipt of those inmates.

Okay, and finally could you just give us an update on Colorado and what's happening with the negotiations there?

Their budget bill passed a few weeks back, and it authorized a 4.25% per diem increase effective July1. And we are in discussions with Colorado and are working around the availability of future beds because we will have some 1,400-plus beds available in Colorado, some of which we would like to maybe find an interim customer prior to Colorado growing into those beds. But the net of it was that they authorized 4.25% per diem increase on July 1.

All right, great; all right thanks guys.

Emily Shanks, Lehman Brothers.

Hi, good morning; just a couple of follow-up questions. Todd, in terms of that rule of thumb, in calculating additional DNA, that applies to both new and expansion beds, correct?

Yes.

Okay, and then can you guys just give us a little bit color around the DC facility. I know in the press release -- forgive me if I missed this in your opening comments -- but it did mention that there were lower populations; could you just give us a little color on that?

Sure, our facility is an overflow for the main District of Columbia jail, and so they have a population in which they maintain that, and if their overall populations are down, we will be the positive and negative beneficiary of that, and they have been down lately.

We have been in discussions with the District of Columbia, as well as the Office of the Federal Detention Trustee to utilize some of those beds for detention needs that they have in the Washington DC area, and so we are hopeful that we will be able to work something out, and the U.S. Marshall service will utilize the beds that DC Government is not utilizing right now.

Great, that's very helpful, and then just my final question; Todd could you just give us an update on any thoughts around refinancing your existing bond?

Well, the 7.5, which are probably the ones you're talking about in the current credit market, new high yield issuance replaced those bonds would not make it an attractive proposal at this point in time.

Would not?

Would not.

Okay great, thank you.

Kevin Campbell, Avondale Partners.

Thanks, Todd could you go over again your part in your discussion about the G&A; I missed some of the details of that, and specifically what you thought it was going to be going forward and maybe why it was down sequentially?

In terms of why it's down sequentially, it's not unusual to see that level fluctuation from quarter to quarter. You've got professional fees, travel and entertainment, and some other expenses that can cause those types of fluctuations.

In terms of what we expect going forward, we're targeting G&A at a 5% of revenue, plus or minus a tenth or two.

Okay, and could you also, could you guys comment, we heard from one of your competitors last week about the State of Texas having, putting some contracts our for rebid. I think John, last conference call you had said maybe there were two managed-only contracts that were out for rebid this year. Has Texas changed that on you, or is there more now, or were none of your contracts put out for rebid for Texas?

It's the same as we mentioned last time, but there are 5 for rebid; 2 of them we manage and 3 of them a competitor manages. So our B.M. Moore and Diebold facilities that we currently manage will be up for rebid, and then there are 3 others, Cleveland, Estes, and Lockhart, which we do not, and will, of course, be deciding whether to compete for all 5 or not once we -- those are due the first part of June.

Okay, and so you have 2 facilities; what were the number of beds at those facilities?

I think it's --

I can look it up, don't worry.

I think it's 500 on each, but don't -- maybe I can look real quick like on our supplemental and --.

Okay, I can look it up on the supplemental. And if you look at, you've some Kit Carson come online; you've got another Bent County I guess coming online in Colorado. You had talked about maybe potentially having, finding an interim customer in the meantime. If you don't, how long would you expect it to take for those 2 facilities to ramp with just Colorado?

Well, that's a tough call, because if you go back the last 5 years, they've had some years in which they were flat, and they've had some years in which they've added as many as 700. So if you take -- I think the last several average has probably been in the 400 range. So if that was the same, you're probably looking at 3 years to 4 years. They have had a little growth here recently, and then, of course, we're moving the 480 out of North Fork to make room for other customers, and they would utilize some of these new beds. So I'd say 3 years is not an unreasonable timeframe if we were to firm to utilize all of them, and of course, we won't activate some of the housing units and some of the expansions until they can be fully utilized, so we won't incur as much expense in the new beds until they're utilized.

Okay, and if we look at Oklahoma, you've got the 2 facilities coming online there, or the 2 expansions, sorry, what -- have you heard anything from the state there? Have they passed their budget that calls for utilization of some or all of those beds?

They have not passed their budget yet as I understand. If I'm incorrect, we'll get back to you, but right now I think they have not passed their budget, and there's still a lot of jockeying going on as to, on the choices that they have with other things. So I'm not in a position, I think, to call what I think is going to happen there.

Okay, all right, thank you very much.

Todd Van Fleet, First Analysis Investments.

Good morning guys; Todd, did you say earlier that it was $2 million of startup included in the quarter?

Yes, approximately $2 million, yes.

Okay; let me ask you on pricing, if you look at where the aggregate per diem went on a sequential basis, Todd, you went to about $56 up from about $55.50; relatively a small move, about 1% or so. At the same time, capacity utilitzation ticked down, so it wouldn't seem that -- well, I just wanted to ask you I guess, in terms of thinking about sequential pricing moves here for the Company, you're going to have a couple things that could impact that; you're going to have the utilization potentially because the higher utilization, the lower perhaps incremental per diem associated with each inmate, you're going to have mix, customer mix, that sort of thing.

Do you have a sense for what the pricing movement was comprised of, kind of going from the December to the March quarter, and I know it's a relatively small move, but you didn't have any pricing movements, rather in terms of just pricing adjustments on the contracts impacting your March quarter, did you?

March quarter is not usually a quarter we see a lot of routine per diem increases. A lot of increases are heavily weighted towards July 1. There's a mix, the increase in the California population and some other mix, but no significant repricing opportunities in Q1.

Okay, so mostly a mix issue then?

Mix, yes.

Okay, let me ask you a couple different questions if I could on the facility level, looking at the supplemental; it looks like there was basically a tradeoff perhaps in populations between your facilities in Eloy, Red Rock, and Saguaro. Could you tell us a little bit more about what's going on there?

Well, there was a tradeoff in Saguaro and Red Rock because we were, I think finishing up a movement of the Hawaiian inmates from Red Rock into Saguaro. And then California is going to backfield some of those beds, and I couldn't tell you exactly where we are on the California inmates moving into Red Rock, but that's probably a little bit of moving around, and -- hold on one quick second, let me take a look at what's happening with this --.

I just noticed that Red Rock had declined a couple of quarters in a row, meaningful decline, so I figured --.

Well, that has a lot to do with we had moved a substantial amount of Hawaiian inmates into Red Rock before Saguaro opened, and then we were, we were ramping Saguaro up with Hawaii. In fact, it looks like we still have a few Hawaiians, and without some earlier population sheets, I couldn't tell you, but that has a little bit to do. And we've had some movement of some Washington state inmates that I think we had at Florence that we moved over there. So some of that is moving around to position so that we can fully utilize the facility.

So the expectation is that California will backfill Red Rock?

Yes, but it does appear that we had about half of what we were going to get in, 180 I think we announced 360 was what we expanded the contract, and it looks like the beginning of the month, we were about 180 and at the end of the months, we're just about at 360.

Okay, and let me ask, on Colorado then, first the per diem increases that you're getting in the state, does that apply to out-of-state inmates as well, out-of-state transfers?

Well, actually it won't because by July 1 I think we will have moved all of their inmates in-state.

Okay, so that leads into my next observation, which is the populations at North Fork have been declining, so apparently, you're bringing back Colorado inmates in-state from North Fork?

Yes.

Okay, and then the 2 facilities that you're expanding, Kit Carson and Bent County, population declines there. Is that related to the facility expansions then?

Well, are you talking percentages, because I think on absolute, we have not here recently had -- I'll have to --.

So if you see the percentages decline, that would be as the new capacity comes into play.

All right, that's helpful, thank you.

T. C. Robillard, Banc of America Securities.

Thanks, that's a good attempt.

You just need to go by Rocky or something.

John, just a quick question for you on California; maybe I'm reading a little too much in here, but I noticed at your Tallahatchie facility, you've now got that contract term expanded out a few years; it's now at a term to June 2011, I think it was an '08 or an '09 contract. Is there anything to read into that? I mean, is that expectation for continued growth out of California, or is that facility specific? I'm just trying to reconcile --.

I'm sorry, say that again T.C. I'm not sure I completely follow the question.

When I look at your supplemental on the Tallahatchie facility, the term, the column where you give the terms, it now states that it's through June of 2011, and if I recall, I think at the end of the year, that term was some time in either '08 or in '09. So it looks like you got an extension of the contract there by a couple of years. So I'm just trying to get any color around that.

I'm surprised that we may have had the earlier date, but maybe it was when we were, we did an early contract, and then we modified it to take it up to the 7,772 which, of course, was then modified again. But the legislation right now says June 30, 2011, and I think we were probably just lining everything up to that.

So the expectation right now is that all 8,000 or so inmates would be in our system at least to June 30, 2011.

Okay, and is the 8,000 beds that California has got contracted for you, those are fully funded, correct?

As we understand -- you're talking about if California has fully funded them?

For the beds that they're planning to add to go out or state with.

It is definitely funded through June 30, 2008, and the Governor's bill, budget bill completely funded it for fiscal year 2009.

Okay, and they haven't signed off on their budget yet, correct?

No they have not; as I understand it, the Governor submits his revised budget some time in the next week or two.

Okay, and then just on the Las Vegas, I know that there's nothing official yet, but let's say for argument sake you guys did win that contract; is that a new facility build for you that's not been announced yet? So if you were to win that, would we expect to see another new facility being announced?

Yes.

And how big, can you remind me how big that contract, was it 1,000 or 1,500 bed contract?

I think it was just a tad over 1,000.

Okay perfect, that's all I had. Thanks guys.

Marc Balcer, Bluefin Investments.

Good morning; thanks John and Todd. I wondered, I'm just looking at the supplemental disclosure, and maybe just to understand the Colorado, the Kit Carson and North Fork, the occupancy percentage you guys list for Kit Carson at 78%; is that an average throughout the quarter such that -- essentially I'm asking have you transferred any real prisoners to Colorado?

Well, hold on one second, I'll try to answer that. The Colorado was, Kit Carson was almost completely full all the way until we added the 720 beds, and so that changed that percentage, so that's an average percentage, right?

So basically, it reflects half the quarter being 100% full and half the quarter being like half full.

Yes because of the new capacity.

Great, is there any way to quantify maybe did it move very few prisoners from one facility to another in the quarter, and do you reflect several hundred in your Q2 guidance in terms of transport?

Hold on a second, maybe I can give you again April. Actually, during the month of April, we only transferred 7 out of the 480 out of North Fork. So the quarter would have no, would have all of the Colorado inmates still in North Fork, so there would be none of the 480 that were in North Fork had transferred prior to March 31, 2008.

Great, and do you expect to have most of those, or were you saying that that's the 2 to 3-year process to move them?

No, no, the movement from North Fork back into the expansion beds will probably take place over the next couple of months.

Great, great, and then just with respect to the ramp-up costs, can you remind us what that reflects. Is it mostly staffing and maybe I don't know, depreciation before you have any revenues?

It's primarily salaries and benefits for the staff we hire to train in advance of receiving the inmates, as well as some other supplies and other variable costs that we purchase in advance of receiving those inmates. So no depreciation expense is included in that number.

Great, so when you're describing accelerated earnings growth as you go up through the year into Q3 and Q4, particularly thinking about La Palma, basically, you'll have costs in the second quarter with no revenues as you go through Q3 and Q4, you will have revenues to go along with those costs; is that the right way to look at it?

That's right, that's right, so on a new facility, the margins actually start off negative, right, as you're hiring and training staff in advance of receiving the inmates, the margins can actually start off negative, and then as you ramp up occupancy, and start to cover your fixed costs, as margins turn positive to the point where after the, most of your fixed costs are in place at about 70% to 80% of occupancy. After that, you're not adding much in the way of fixed costs, and so then the margins on that let's call it 20% of occupancy, 15% or 20% of occupancy or pretty close to equal to revenue minus variable costs per day.

Sure, so because La Palma is the biggest, at least in total beds. I know they're coming on over time, but does that make third quarter the worst quarter for ramp costs for that type of facility, or is it really second quarter because you're almost fully, you've almost got all the salaries in, but --?

Yes, there's several variables going on there, but what's going to happen is on beds at Tallahatchie, for example, and North Fork and some other beds that we've been wrapping up, and we're reaching that 70% to 80% occupancy, those margins per man day turn very positive, and that has an impact, and it's offset somewhat by the startup costs on La Palma as we start to ramp that up, so what you're looking at is an acceleration primarily in Q3 and Q4.

Great, thanks for your time.

Surely.

Dana Walker, Kalmar Investments.

Good morning; can you talk about what the issue are in the Colorado authorities allowing those beds to be used by other state customers?

Well, they do have some say-so as to the inmates that come into the state. They have indicated they would be reasonable in what we do, this one of the issues is they would like to know the beds are available as they grow into them over the next 3 years out. But we have had out-of-state inmates in Colorado in the past. So we've had a little bit of experience with that.

John would you expect whatever arranging that might need to take place to be resolved in the next 3 months?

I think it's a high probability it would not be resolved in the next 3 months. I don't know, based on some -- it's hard to call Dana. I mean we have some opportunities that are current; some could be quicker than inside of 3 months, but that's -- I don't know how to give you a percentage call on that one. We think they should be attractive to somebody for the short term.

As investors, we've tended to focus on your specific state pricing updates; how about a comment on your Federal pricing updates and how they work.

Well, the per diems on, mainly the Federal contracts, are adjusted for a couple of items; one, many of the Federal contracts operate on what we call Federal Wage Termination. We're obligated to pay a rate set by the Department of Labor, and those Federal contracts that operate under Federal Wage Termination we get per diem increases to offset the majority of those increases as they occur due to changes set by the Department of Labor. So that's the first adjustment.

And the second adjustment, many of the contracts have contractual escalators built into those, into the contracts; others may have requirements for increases subject to negotiation.

To the degree that your -- I hesitate to use the word "leverage" -- but to the degree that your ability to influence price and benefit from a tighter capacity environment that has been helped by the states, does that same equilibrium help you with Federal customers, or -- it sounds like it's more fluid, and perhaps less step function change driven?

I'd say where we have the opportunities on new contract proposals, that's where we have the opportunity to leverage price, based on where the market is. On an existing contract, less so.

As we might look at a CAR 8 or CAR 9, that would fill the definition of new circumstance?

Yes.

Okay; the, how about a thought or two on your healthcare expense and your healthcare performance in Q1.

Are you talking about employee healthcare, or inmate healthcare?

Inmate healthcare.

Inmate healthcare; our performance on inmate healthcare over the last several years has been fairly good. We've got a fantastic healthcare department here at the facility support center focused on controlling those costs, and unlike employee healthcare, we have a lot more control over where those inmates go and the level of service and healthcare they receive. And so that's allowed us significant control, but say over the last 2 or 3 years, average inflation on healthcare costs have been 5% or less on a cost per man day basis.

And let me reinforce that we provide quality healthcare to our inmates at all times.

Yes, the point I was making is they can't go out and if they've got a runny nose, they don't run out to the emergency room to seek healthcare, unlike the employee healthcare, we've got that issue.

And have either the Obama campaign or the Clinton campaign approached you on the privatization and the offering of care to all those who are uninsured since you do it so well?

No they have not.

They haven't.

Well you might want to get on top of that. Final question is you've talked and we've noticed that the Federal system tends to operate in excess of capacity. To what degree do you believe that there's a push to bring that closer to parity, if any?

I don't know how, I mean we don't -- it just varies per location and per contract, so and has a lot to do with the availability of beds.

You're not -- there's no mandate though that within the Bureau of Prisons to drive more towards operating prisons than their stated nameplate than in excess of their nameplate?

Well, I think I mentioned that the BOP had their druthers, they'd operate at 115%; that's their desire, and of course, they've operated at 137%, and it's because they've got to make do with the appropriations that they have. So all those kinds of things would drive it.

That's all I have, thank you.

Todd Van Fleet.

I wanted to ask you a kind of big picture item, as well. The food costs, have you guys seen any pressures there; have you taken steps to kind of mitigate any exposure that you might have on that?

Yes Todd, all of our food service is outsourced, and we're operating under a contract that goes through December of 2009. That contract got an annual escalator, which will go into effect this year in the fourth quarter, and that escalator effective the fourth quarter of this year will be equal, will be the same escalator they've received for the past 3 years.

Okay; let me switch gears a little bit then and ask you back on, I'm trying to get my arms around all the different moving parts and pieces and shifting inmate populations to find out where you guys might possibly have any sort of capacity to take on a customer such as Arizona. Have you guys responded to that RFP?

Yes we have.

Can you tell us which facility or facilities you put in the mix there?

We'd prefer not to.

But you do have capacity then to accommodate Arizona?

We would, yes.

And in the event -- let me ask you something different then -- in the event that California is a little bit slower on the draw here on some of these beds, not necessarily referring to Arizona, but would CCA consider allocating some of that previously earmarked bed space for customers that are a little bit quicker on the draw?

I would say that as it relates to California, no because we're not talking about long periods of time; we're just, we're saying that if California was supposed to get, planned to be at 6,800 inmates by the end of the calendar year, there could be something that means they're only at 6,000 but unless we knew the other 800 were never coming, we would be reluctant to utilize any of the beds we have planned for them for somebody else.

Okay, so at North Fork then, where you have 2,400 bed capacity and 63% utilization at this stage, so it looks like about 900 empty beds or so, a portion of those are earmarked for California, but it sounds like you're going to be losing 480 Colorado inmates there?

Yes.

Over the course of the next several months; and if you can remind me how many inmates from California do you, have you kind of earmarked for California, I guess in North Fork?

I think we're looking right at 1,100 once we get --.

Okay.

So there will be some available beds in North Fork after Colorado leaves and California utilizes all the beds there.

All right, thanks guys.

Kevin Campbell.

Thanks, just a quick question on the margins per man day, and actually the expenses on the owned and managed side. How should we think about those going forward? You had a nice say sequential decline in your variable expense from 17.2% to 16.1%. Should we expect that to a) what drove that; and b) should we expect that to pick back up or stay down around that 16.1% level?

And then on the flip side, on the fixed expense, it was an increase of about 80 basis points; how should we expect that to play out going forward? And obviously, I know you're talking about it accelerating in the back half of the year, but anyway just some additional color on that would be great.

Are you looking at all facilities?

No, just the managed only is what I was referencing there.

Well, the managed only, I think as we've said in the past, we'll probably continue to see some pressure on pricing on the managed only, so the margins there not looking for any --

I'm sorry, I meant -- I misspoke -- the managed and owned side of the business, the variable expense came down from 17.2% to 16.1%; should we expect that to stay down; is it going to pick back up? You had a similar 16.4% number in the first quarter of last year, but then it picked back up to the 17%, 18% level for the rest of the year.

Yes, and there will be some volatility there related to startup costs at facilities, and related to geographical differences in operating costs based on where the inmates are going. So you could see some variability there. So you're probably getting down to a level of detail we're probably not interested in getting to.

Okay thank you.

Dana Walker.

One question, relates to with the economy appearing to be more troubled with demographics supporting a rise in crime, and with the economy possibly pressuring state receipts and how that affect either build or the desire to incarcerate, maybe you could update us on what you're hearing from your customers on those topics and whether you're likely to see more either new states work their way into your customer list in a way that would be material?

Well, having been through this experience about 6 years ago when there were some pretty tough budgets and observing that correctional budgets were not being increased to deal with any infrastructure future growth, we think we'll see a similar kind of experience now that many of our customers will not be preparing for, for future bed growth. It might mean that they do nothing for longer than they would otherwise, which really builds some pent-up demand. It is our job to try to identify that so that we can do what we refer to many times as develop just-in-time beds. We've learned that governments will put off spending additional money on things like correctional beds as long as they can, and then all of a sudden, they need them, and if they need them, they need them pretty quickly because they're now getting themselves in an overcrowding situation.

So we would assume that continued infrastructure expenditures by state governments will continue to be hampered by the current budgets that they are dealing with.

John do you see any indication though, that your list of 20 privatized states expands to 21 or greater?

Wouldn't to mentioned any by name, but we do have a handful of prospective states that we continue to work with.

Would you say the drive behind their need is different today than it would be in some different times?

Yes, or it would look like it did with some of our current state customers that were not customers 5 years ago.

Thank you.

Todd Van Fleet.

Sorry, the, how many Colorado inmates are you going to be managing after everyone is back in state?

Can we get to on that later? I'm not sure --

Sure that's find.

I mean if you take I guess the percentages we're showing are not -- I tell you, if you took the percentages that were in the fourth quarter, it probably hasn't changed dramatically on the count, and add 480, that would be a pretty close number. But we'll try to get you the exact --.

Okay, and then Todd, can you tell us what's baked in your guidance with respect to your debt load by the end of the year?

Wouldn't be interested in getting down to that level of detail.

Okay thanks.

And gentlemen, that appears that is all the questions we have at this time. Mr. Andrews, I'd like to turn the conference back over to you for any additional or closing remarks.

Okay, I'll try to sum this up pretty quickly. Our revenues were up 11%; earnings per share were up 8%; and our adjusted cash flow was up 18% for the quarter. Our occupancy slipped about 1% from 98% to 97%, and that's basically because we added 5,000 new beds since the first quarter of '07. Our operating margins were down 0.3%; I think Todd indicated we have higher ramp-up costs in the first quarter of about $2 million, which caused the slightly lower margins. And we're projecting that we try to keep SG&A at 5% of revenue; we're projecting that in the forecast going forward, that we'll do between $0.28 and $0.30 in the second quarter, and $1.21 to $1.28 for the full year.

In this forecast, we're planning on 6,900 more beds coming on stream in the balance of this year, and this again causes us higher ramp-up costs in the short term, probably the second quarter, but higher future margins in the third and fourth quarter.

I think John gave you a very favorable outlook with the market. In the Federal area, the BOP looks like they're going out for 4,000 new beds in their RFPs in the future for CAR 8 and 9.

The Marshall Service has grown at 7% in the past, and we believe will continue to grow at this rate. And Immigration Custom Enforcement has received funding for additional 1,000 beds.

In the states, John indicated over a period of time going forward to 2011, we see a growth of 80,000 more beds needed by these 20 states that we operate in. In the first quarter of 2008, and in 2007, we did add 5,500 beds. Under expansion for the rest of 2008 and 2009, we plan to add another 10,486 beds, and this brings us to about 16,000 new beds that we are bringing on stream in 2007, 2008, and 2009.

Fortunately, our balance sheet can support this growth, and somebody mentioned that what's going to happen with us going forward because of a potential downturn in the economy and maybe more pressure of states needing more beds, and our balance sheet could support a further growth of 8,000 or 9,000 beds.

So we continue to see progress in our business, and we thank you all for your interest, and good afternoon.

This does conclude our conference call. We thank you for your participation, and everyone have a great day.