CoreCivic Inc (CXW) 2008 Q4 法說會逐字稿

Good morning everyone and welcome to the Correction Corporation of America's fourth quarter and year end 2008 earnings conference call. If you need a copy of our press release or supplemental financial data both documents are available on our 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 to 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 10K and other documents filled with the SEC. This call may include discussions of the non-GAAP measures, the reconciliation of the most comparable GAAP measurements is provided in the corresponding earnings release or posted on our web site. We are under no obligation to update or revise any forward-looking statements that will be made after the circumstances of the date herb of and reflect occurrences of anticipated events. We are under no obligation to update or revise any forward-looking statements that will be made to reflect events or circumstances after the date here of or to reflect occurrences of unanticipated events. Participating on today's call will be Chairman of the Board and CEO John Ferguson and Chief Financial Officer Todd Mullenger . I would now like to turn the call over to Mr. Ferguson. Please go ahead,

Thank you and welcome everyone to Corrections Corporations fourth-quarter earnings call as well as our full-year earnings call. In the room with me today is Todd Mullenger as previously described, Dave Garfinkle our Controller and Board member Bill Andrews. So we will get started with some opening comments by Todd.

Thank you, John. Good morning, everyone. Moving straight to the discussion of our financial results, in the fourth quarter of 2008, we generated $0.32 of EPS compared to EPS for last year's Q4 of $0.28, an increase in EPS of 14%. For the full year, we generated $1.20 of EPS compared to $1.06 in the prior year, an increase of 13%. EBITDA in Q4 increased 17% to $107 million for the quarter while full-year EBITDA increased 14% to $394 million. Adjusted free cash flow for the quarter increased 38% to $65 million. This brings adjust the free cash flow for the full year to $256 million or $2.03 per share, an increase of 24% over the same period last year. Part of the increase in free cash flow is due to the unusually low amount of cash taxes paid as a result of certain one-time tax benefits derived in 2008 and lower year-over-year maintenance Cap Ex.

Focusing on depreciation as we mentioned in the past, unlike other industries, our depreciation expense is not reflective of the maintenance Cap Ex that we will incur to maintain our facilities. For example, depreciation and amortization expense totaled $91 million for 2008 versus only $35 million of facility maintenance and IT Cap Ex for the year. So as we have commented before, we believe adjusted free cash flow is in many ways a better measure than EPS or the return we are delivering to our shareholders. Total revenue for this year's fourth quarter was up nearly 9% over last year an increase of $36.6 million. Total compensated man-days for the quarter increased 4.1%. The revenue per compensated man-day for the quarter increased to 5.2% to $58.21. For the full year, total revenues increased nearly 10% driven by a 4.5% increase in per diems and a 5.5% increase in average daily populations. Average compensated occupancy for the quarter declined from 98% to 92.9%, which taken by itself appears negative; however, keep in mind that compensating man-days actually increased 4.1% while a decline in occupancy percentage was a result of placing approximately 10,000 new beds into service since the end of the third-quarter 2007. With regard to the 5.2% increase in revenue per compensated man-day, results in Q4 2008 reflect the impact form certain pricing leverage we enjoyed from renegotiating several contracts. The increase in populations under our State of California contract, as well as routine per diem increases.

Moving next to a discussion of operating costs. Operating costs per man-day for the quarter was $40.09. A 2.8% increase over the prior year. For the full year, operating cost per man-day increased 3.1%. Our Q4 2008 operating cost per man-day reflects normal wage and generally inflationary increases as well as operating inefficiencies associated with the ramp-up of new bed at facilities such as La Palma, Tallahatchie and Davis. As we discussed previously the operating costs per man-day on newly activated beds started off higher as we were ramping up fixed costs, particularly staffing costs and then declined as we increased occupancy which allowing us to leverage those fixed costs lower on a compensated per man-day basis. Q4 operating expenses also reflect certain unusually large favorable expense variances, including a favorable adjustment to our self-insured workers compensation accruals resulting from updated actuarial studies and lower-than-average employee medical claims expense. These unusually large favorable items totaled approximately $3.5 million before taxes.

Operating margins per man-day for the quarter increased 11% to $18.12, with an operating margin rate of 31.1% compared to 29.5% last year. For the full year, operating margins per man-day increased 7.9% with an operating margin rate of 30.4%. General and administrative expenses for quarter increased 1% over the prior year and 4.8% of revenues. GAAP income tax expenses were approximately 38% for the quarter and the full year. With regards to our share repurchase program announced in November of last year, through Friday, February 6, we have repurchased approximately 2.5 million shares at a total cost of $38 million. We consider the share repurchase program another capital allocation alternative, with the decision to repurchase shares based upon a return on investment analysis. In other words, if repurchasing shares delivers an acceptable ROI and that ROI is higher than the other capital allocation alternative, such as building new beds, everything else being equal, we would choose to allocate the capital towards a stock repurchase. Obviously, the share repurchase price is an important component of that ROI analysis. And it is important to note here that our decisions are around the deployment of any capital will be made under the overarching objective of maintaining liquidity.

We are very pleased with our fourth quarter and full-year operating results. For the full year we delivered 13% in EPS growth, generated $256 million of adjusted free cash flow or $2.03 per share, a 24% increase over the last year. Completed construction on 8300 new beds and entered 2009 with a very solid balance sheet and liquidity. All accomplished against a backdrop of one of the worst economic and financial markets in the last 50 years. Moving next to the discussion of our guidance for 2009. As indicated in the press release, our guidance for Q1 2009 is in the range of $0.24 to $0.26, and guidance for the full year is in the range of $1.10 to $1.20. There are a number items impacting Q1 and full-year guidance that I would like to spend some time reviewing. First, going back to fourth-quarter EPS of $0.32. As we just discussed, there were certain unusually large favorable expense variances positively impacting Q4 earnings. Actual adjustments to worker's coverage expense, below average employee medical claims expense, which combined total say $3.5 million are almost $0.02 in EPS. So before comparing earnings guidance for Q1 2009 to Q4 2008, we should normalize Q4 EPS by removing those unusual variances, and when we do that what we have then is an adjusted EPS for Q4 of $0.30. So we really need to think about Q4 as a $0.30 quarter normalized.

Second, you will recall from prior years that Q1 is always seemingly weaker compared to Q4 due to the payment of unemployment taxes. Employers play unemployment taxes on the first $7,000 of wages, so those taxes are always higher in the first quarter of the year. Also, the first quarter has two fewer calendar days compared to Q4. In addition we will see significant increases in depreciation and interest expense during 2009 beginning in Q1. Depreciation and amortization expenses increasing as a result of placing new beds into service during 2008 at an aggregated cost of nearly $600 million. Interest expense will increase as a result of higher debt balances and a decline in capitalized interest associated with reduced bed construction Cap Ex. The full-year impact on 2009 EPS associated with increased depreciation and interest expense is estimated at $0.10 to $0.12 full year. While our guidance anticipates a full-year EBITDA at levels comparable to 2008, the increase in interest and depreciation expense result in a decline in 2009 EPS compared to 2008.

Also, keep in mind as we mentioned earlier depreciation expense a noncash accounting charge is significantly higher than the cash we will invest for capital repairs and maintenance. Finally, we have the uncertainty and lack of visibility associated with government budgets and future spending by our government customers, especially our state customers as they work to cut spending to balance their budgets. State administrations, along with state legislatures that have now come back into session, continue to study and debate what actions they will take to balance their budgets, including actions that could impact corrections budgets. It is a very fluid and dynamic situation. For example, many states are hopeful that the Federal Fiscal Stimulus Bill will include funds that assist them in balancing their budgets. We have received communication from several of our state customers indicating some of the steps they may take which could impact CCA. For example, several state customers have communicated intentions to reduce our per diems. We are currently in discussions with those customers regarding the opportunity for CCA to reduce service levels under those contracts so as to eliminate operating costs to offset some or all of the impact from our reduced per diem.

We can also see states take actions that negatively impact our populations, such as loosening parole standards. We have also received an an expression of interest from potential new customers to use our beds as cost-saving mechanisms to help balance their budgets. Needless to say, given the level of uncertainty and limited visibility, at this point in time, it is extremely difficult to look out into 2009 and forecast the impact these issues will have on CCA, a risk we highlighted on the last earnings call; however, we have done our best to factor these items into our guidance. At the end of the day, our guidance reflect our best estimate based upon the information currently available to us, and while trying to build in some consideration for the general economic uncertainty and lack of visibility especially with regards to government budgets and future government spending. The general economic uncertainty and lack of visibility are really the primary risk to our guidance. Having said all that, nothing has occurred that has changed this management team's bullishness on the long-term growth opportunities for our industry and this Company.

Turning next to a discussion of our liquidity. Our liquidity is provided by approximately $190 million of availability under our bank credit facility plus approximately $34 million of cash on hand. This is in addition to our very strong cash flow from operations. Again for the full year 2008, we generated $256 million in adjusted free cash flow or $2.03 per share. In addition, we ended the year with a debt-to-EBITDA leverage ratio of approximately three times, an interest coverage of approximately six times, with no pending debt maturities until May 2011. At the end of December, we had approximately $75 million left to spend to complete all of the development projects announced to date that we are moving forward with. We believe our strong liquidity position, balance sheet, and free cash flow provides us with a competitive advantage especially given the uncertainty in the financial markets. Regarding Cap Ex, we are slowing the pace of investment in new beds planned for 2009 compared to 2008 until we have greater clarity around the timing of future bed absorption by our customers. Toward that end, we have temporarily suspended construction of the 2,040-bed Correctional Facility planned for Trousdale County Tennessee. While we have sufficient liquidity to complete the facility, again, we are slowing the pace of new bed development until we have greater clarity around the timing of new bed procurements and bed utilization from our customers. We currently have approximately 11,000 beds in inventory or under development which positions us well for future growth.

With regard to our stock repurchase plan, management has been authorized by the Board to repurchase stock up to $150 million in the aggregate. As mentioned earlier, we have repurchased 2.5 million shares at a total cost of $38 million through last Friday, which leaves us with $112 million of additional capacity under the plan. Again, the plan is not a systematic plan but rather one based on a ROI analysis with the decision to make any additional purchases to be made under the overarching objective of maintaining liquidity. Let me close by noting like the rest of the market, we are experiencing uncertainty caused by the current economic conditions. However, we are very optimistic about our long-term growth prospects. Current budget deficits will likely result in insufficient bed development by the public sector necessary to meet their future bed needs. Our development efforts have positioned us with an inventory of beds our customers will find attractive to meet those future bed needs. This combined with our strong financial position and cash flow position us well to capitalize on the long-term growth prospects offered by a continuation of the supply and demand imbalance that has been the primary driver of the tremendous growth CCA has experienced over the past five years. I will now turn it over to John for specifics on our new business prospects and bed development.

Thank you, Todd. I hope that helped many of you with our first-quarter and full-year guidance for 2009. I will briefly touch on our two major market areas as I typically do. First addressing the Federal market. We saw a net growth of 1726 net new inmates and detainees for 2009. Actually it is a decline of about 273 in the fourth quarter that we have had a growth of over 280 in January. So we are pretty much recaptures the fourth-quarter growth. We are like everyone, watching the economic stimulus package, trying to get updates several times a day as to what's happening. So it is impossible to provide any clarity of what possible impact it will be to our federal customers. And I might just go ahead and mention our state customers. The one thing that Todd alluded to, the -- I think most states are waiting anxiously to see what the stimulus might do for them, and many governors are postponing their final budgets until they have clarity around there. So consequently, even though there have been four major solicitations by the Federal Bureau of Prisons, two of which are for up to 4,000 new beds, as well as 4,000 beds for the two contracts we currently have that expire in the last quarter of 2010, we are seeing no movement.

As we have mentioned on the last several calls, it is our assessment that nothing will happen as it relates to any probable award until the Federal Bureau of Prisons has a permanent budget. The projections that we have given historically of the difference between their demand over the next three years as it -- against the beds that they are bringing online or have planned through acquisitions still leaves them 6,000 short of what they need. And that's against a system that is running at 137% of their weighted capacity. With the US Marshal service, we have talked about over the last almost year about the implementation of Operation Streamline. We can report that here recently we have seen some growth as the results of that. But it is still too early to assess the long-term demand of changes that might bring about that. Also, just to report that we entered into a direct contract with the office of the Federal Detention Trustee for approximately 600 beds at our northeast Ohio facility in Youngstown. This is just -- just replaces an replacing intergovernmental agreement we had there previously. We see status quo on detainee activity in immigration and custom enforcement, and obviously we are watching very closely what Secretary Napolitano's interest will be as she becomes more -- as her tenure increases at the immigration -- at the Department of Homeland Security.

At the state level, we still have the same procurements that we talked about last time as we have said before, we are finding many of our customers are sitting on their hands until something -- there is some clarity around their budgets just as I described the Federal Bureau of Prisons. Arizona had a solicitation of up to 1200 beds to be housed out of state. They have reduced that to 750, but it is still active. The RSI for the State of California is still out there, but obviously a great deal of uncertainty that they are dealing with right now. Our current population is about 6500, and it is California's plan to complete the ramp-up up to 8132 by May. Obviously we all saw the announcement this morning of the outcome of the three judge panel and their desire to see population limits put on the state of California's system in state to reach whatever that level is ultimately agreed to over a two to three year period. Although we have seen nothing recently, every indication that we heard over the last period of time is that the out-of-state inmate populations would be over and above what ever cap was established by the three-judge panel or whatever cap was settled in some negotiations with the state and plaintiff. Of course the Attorney General and Governor have both said that any final order will appeal to the US Supreme Court. And we -- there is still the solicitation with the state of Georgia for up to 1500 expansion beds and another 1,000 stand-alone beds. So the activity that we reported on last time and this time is pretty similar, which is not unexpected in light of the uncertainties that our customers are dealing with with their budgets.

So let me just talk a moment about what I think continues to create the bullishness that Todd related to because we think for all of the turmoil and with our customers in the Capital Markets that we feel that CCA is in a very good position to benefit from once the state budgets become a little more clear, once they improve and be able to meet what we would expect would be continued bed needs because of continued inmate and detainee growth over the next three to five years. We currently have some 11,000 beds in inventory or under development, most of which is now in inventory. We have 1072 under development to provide the beds for the US Marshal Service in southern Nevada, the 10,000-plus beds we currently have available, almost 1600 of them are designated to meet the remaining ramp-up schedule for the State of California. So we think that is a pretty good inventory to have at this point in time. We also -- Todd had mentioned that we have decided to postpone the completion of Trousdale but we feel we have made great progress to a point that we could activate the completion of that facility in a much shorter time frame than a normal construction. So those beds could be brought online fairly quickly. But with that availability of the beds that we have in inventory and developed, we are looking in excess of $90 million of potential EBITDA. And I think what is really attractive, except for the 1072 beds, in our 2009 guidance, and outlook, the interest cost and the depreciation for those beds now are baked in.

So that any potential EBITDA from the beds other than the southern Nevada facility, a good portion of that would go straight to pretax income and then eventually to earnings per share. So we think that -- that is a good earnings potential for the Company beyond this very uncertain year that we are all experiencing. And in addition to that, as Todd described, and we have described in some detail, over the last year or so,about what our liquidity means in terms of beds that we can develop. As we said, we are now becoming a little more circumspect on what we will do, but we are in great shape that once the visibility for what we believe is significant bed needs does become a little more clear, that we are in a great position to be able to need -- to address what we believe is going to be needs in the future and we also believe that once the capital market stabilizes, we are in great shape to be able to utilize them for what we believe is a strong future in the end for prison beds. So although we know that there are folks that are concerned with the guidance that we provided for this year, the uncertainty leads us to try to be as realistic as we can.

As you might imagine, we had a great deal of struggle like many companies today whether you give guidance. And we felt that we could provide some clarity around what we think the outcome of 2009 would be in light of the many unknowns and uncertainties in both our customer base, as well as the Capital Markets. But our attitude about the long-term opportunities for this industry and specifically But our attitude about the long-term opportunities for this industry and specifically CCA as it relates to our inventory, our liquidity, our position in the marketplace, our 20 state customers. Our three Federal customers that we will be in great shape once the -- this fog of uncertainty that is brought on, which may last beyond 2009, but gives us, I think a great position to benefit from that. With that I will turn over to the moderator for questions. as it relates to our inventory, our liquidity, our position in the marketplace, our 20 state customers. Our three Federal customers that we will be in great shape once the -- this fog of uncertainty that is brought on, which may last beyond 2009, but gives us, I think a great position to benefit from that. With that I will turn over to the moderator for questions.

Thank you. (Operator instructions) We have our first question from Manay Patnaik . Please go

Hey guys. First question you talked about discussions with several of the states with respect to them looking to maybe reduce per diem. Firstly, can you give us an idea what type of declines, what percentage reductions are they looking for, and with relation to that, you also mentioned you have a lot of new customers and I guess existing ones too, looking for more bed space. Just what are your thoughts around -- you know obviously some states, you know, give higher per diems than some of your existing states that might be looking for, you know, a pricing decrease. What are your thoughts on balancing -- maybe taking a higher customer -- I mean a higher per diem customer over a existing low per diem customer already.

First to the first part of your question. We have received communications from about half a dozen states around actions they may be taking to balance their budgets. We would prefer not to identify them as we are in the middle of discussions and negotiations with those states on things we can do to offset any per diem reductions for example, through the reduction of service levels to offset some or all of those costs and that is part of the discussions we are having right now and so that is part of the uncertainty around estimating the impact those changes could have on our forecast for 2009. With your question around trying to manage populations toward higher per diems. We may have that opportunity. As we have said in the past though, we have 20 state customers. Those relationships are long term in nature. Don't have 10,000 customers standing behind those current 20 customers to take those beds. So it is a balancing act. And we are looking at the long-term growth prospects for each one of those customers. While a current state customer might be experiencing difficulty and might be reaching out to us for assistance to help us manage their budget deficits, we want to be mindful not to damage the long-term relationship. But it will be a balancing act. Not to say we won't make some decisions to provide beds currently available to an existing customer to a new or competing customer, but it is a balancing act.

I guess in another way, can you give us a breakout of what percentage of your contracts right now are, you know, take pay which is per diem and which is CPI baked into the contract.

We have a relatively small percentage of take or pay contracts. I don't have the exact percentage but it is a relatively small percentage. Those are mostly our federal contracts. And I am sorry, what was the second part of your question?

Just how many of your contracts sort of have CPI baked in or is it, you know, regularly just need to go to the legislatures to request price increases.

Yeah. It is a mixed bag. Some of the contracts specify a percentage. Some are tied loosely to CPI. Some specify a specific dollar amount in next year's per diem but they are all ultimately at the end of the day subject to negotiation as our customers have the ability to in theory cancel a contract due to lack of appropriation of funds. So that provides them some leverage in that area. So most -- the vast majority of our contracts have some sort of escalator incorporated into them. The question is, what situation will the states find themselves in budget-wise, and will they reach out for us, trying to renegotiate those per diems lower or foregoing a per diem increase or an outright reduction and that is the uncertainty we are dealing with now, a lack of visibility in that area.

Got it. With respect to your guidance, I guess -- you know you mentioned that California has told you guys they expect a ramp-up through the 8100 beds by May. Should we assume that should be baked into your assumptions or are you going to haircut that for them coming sooner than expected for FY '08. And also, with relations to the ramp-up, one other, like, states, are you sort of expecting ramp-up on for the first half of the year?

Well, in relation to California, as you might imagine, we did hedge a little bit assuming that they might not hit their schedules perfectly. Again, as we have tried to say over and over and over again, we really can't time it. We do our best to manage around it. So we would -- we have prepared ourselves that the ramp-up may not come quite as -- at the scheduled day they are giving us although we are working very hard to do it. As it relates to other customers that we are bringing online. I don't think that we have

I think we have probably prefer not to provide guidance at that level of detail especially given the uncertainty we are dealing with in the current environment.

Okay. In another way then, I guess, with the number beds you have, like, outstanding, up to 8700 that you brought on line. For example, how many of those are contracted to a ramp-up over time?

Well, again, most of the beds that we are bringing on line have some tie to an existing customer relationship, but we are, again, not going to be, I guess, trying to forecast or try to express what we think the utilization of those beds would be over time.

Okay. Fair enough. One last question and I will jump back. Can you just remind us firstly if there are any other renewals or EBITS coming on in '09. And also what is the restriction period in terms of you being able to go back and buy back shares?

Oh, we have the authority to repurchase up to $150 million in the aggregate through December 31, 2009.

I meant like -- after earnings, how many days do you have to wait before you can --

Yeah. That is probably a level of detail we probably don't want to get into. We do have some windows, but you can work around those windows by implementing a planned sale.

Okay.

So that's probably all the detailing we want to give you around the share repurchase.

Okay.

And your question on renewals.

Yes.

As reminder, in our supplemental, we list out in the back of our supplemental disclosure which you can find on our web site a list by facility of the major contracts for each one of those facilities and the base term and the number of renewals the windows expire.

Fair enough. Thank you, guys.

Thank you. We will take our next question from Kevin Campbell. Please go ahead.

Thanks. I was hoping you guys could talk a little bit more about your guidance. Help us understand a couple of assumptions. I recognize you don't want to get into any of the details on specific customers, but can you help us understand, perhaps, what your -- your pricing and volume assumptions are for -- in general, just to start.

That's a pretty broad question, Kevin. I am not sure how I would address that in a concise way.

What -- I mean maybe more specifically, are you guys expecting per diems or pricing to contract year-over-year in your guidance? And specifically the same question on volumes.

Yeah, well, I think as we have indicated, we are cautious on our outlook for 2009. The general economic uncertainty and lack of visibility around government budgets and future spending by government customers makes it difficult to forecast through 2009. It is very difficult to assess the actions our customers may take to balance their budgets. And estimate the impact that their actions may have on our existing contracts. There is the potential for impact from reduced per diems or our customers are managing their populations lower; however, we have a little clarity around the likelihood at this point around the times of those changes and the magnitude of the impact on -- for any those changes. So, again, it makes it difficult to forecast revenues and EBITDA, but what I would say is we have made our best estimates of the potential actions states may take in these areas and built that into our guidance.

Is it fair to say that to some extend on the low end you might be assuming pricing cuts from some customers. And on the high end, you know, no cuts and same thing for volumes. Perhaps on the low end you are assuming volume pressures or removal of inmates and on the high end you are not? Would it be safe to say that you would be looking at it from that perspective?

Well, again, I think we have factored in the best we can some risk around impacts on per diems and volumes both in the high and low end of the range.

Okay. You know, looking at the fourth-quarter EBITDA that you guys reported, and I guess if you back out the -- the $3.5 million or so in incremental savings on the workers comp and the health care expenses, you did around $104 million. Why should we assume that -- it seems like in your guidance, that obviously you can't annualize that figure because that would be sort of a 416 number versus your guidance of flat EBITDA of around 390. So why should we assume that it is going to deteriorate from the fourth-quarter levels, particularly when you saw pretty strong pricing and volume growth in the fourth quarter. Additionally with pretty good cost control.

Well, let me make sure I am clear back to the nature of your question. Are you comparing Q4 to Q1?

To 2009 in general and I recognize Q1 has some of those issues with the taxes. But just in general, it seems like there is pressure on EBITDA, and if given the -- the results that you have seen, particularly in Q4, when you saw good pricing and good volume growth and you were able to contain costs to I think roughly 3% growth, it seems like your guidance then is assuming deterioration of EBITDA from the fourth quart-quarter level which doesn't seem -- doesn't seem to jive with what you have seen in your actual results.

Let's talk about that for a minute. That is a good question. First, we were pretty general in our comment around EBITDA by stating it would be comparable to 2008, so we haven't put a firm number out there in terms of guidance, all right. Next is we just talked about -- we have indicated we are cautious on our outlook for 2009. The general economic uncertainty, the lack of visibility around government budgets, future spending by our government customers makes it very difficult to forecast EBITDA and very difficult to assess the actions our customers may take to balance their budgets. The potential for impact of reduced per diems and populations with little clarity and any likelihood of any changes and magnitude of changes makes it difficult to forecast revenues and there by EBITDA. But we have made our best estimates of the potential actions states may take in these areas. Also, as we mentioned on the last call, and in our current press release, we have seen some reductions in inmate populations from Minnesota, Washington and Wyoming. We also have the negative impact of operating carrying costs on the beds that we have completed that remain vacant. So we got property taxes, insurance, utilities. We have got skeleton crew at vacant facility like Adams County. And we are incurring expenses on those vacant beds. For example, on our new Adams County facility we will incur approximately $2 million of operating carrying costs on an annual basis until that facility is occupied. And then while there are a number RFPs out on the street for new beds, you have Arizona with an active RFP. State of California with their RFI. The bureau of prisons in the state of Georgia, no one is likely to move forward on any procurement of beds as such time their budget issues are resolved and they know what actions may be taken that impact their individual corrections department budgets. And as we have already discussed, it is very difficult to assess which steps will be taken and when which in turn makes it challenging to forecast new contracting awards. In summary having made the decision to provide guidance even in the light of economic uncertainty and lack of visibility, we have provided the best estimate possible based on the information available to us today while trying to factor in some considerations for the unknown.

Okay. Looking at guidance as well, I am assuming that doesn't include -- you are not assuming you are going to win any new contracts, you know to CAR-8 or CAR-9 in your numbers, correct?

Well, you know, CAR-8 -- CAR-8, they haven't made an award yet and when the BOP makes an award they give a notice to proceed and this is 120 days of notice to proceed before we start wrapping up. Even if they were to award a contract, that could actually have a negative drag on earnings for 2009 if they awarded it late in the year and you had to start ramping up in advance of receiving inmates. Other than that I am not sure we want to comment on the particular assumptions we made around new contract awards or bed populations from specifics customers.

Okay. Last question on guidance. Is it assumed any level of share repurchases? Or does it assume you stay level with where you are today?

Yeah, I guess what I would say around share repurchases. The potential to repurchase shares was one of the variables we considered when developing guidance; however, since our repurchase plan is not a systematic plan but rather one based on a ROI analysis and will be executed over an overarching objective of maintaining liquidity. It is difficult to forecast which number sales we will repurchase between now and the end of the year but again it was one of the variables we considered when developing guidance.

Okay. I'll jump back in the queue. Thank you.

Thank you. We will take our next question from Emily Shanks. Please go ahead.

Hi, good morning.

Good morning. Good morning.

I just wanted to ask, Todd, if you can just refresh for us, are you guys still utilizing four times as your maximum threshold for leverage for internal operating purposes? Yeah, we haven't changed that threshold. So still a maximum debt EBIT leverage of no greater than four times. And right now we are sitting at three times with six times interest coverage. So very fortunate in that regard.

Yes, you are. And then also as you look at this coming year, I appreciate that visibility is quite limited, but should your Cap Ex levels remain per your guidance, what is your priority with free cash flow as you look at other repurchasing debt, paying down debt, buying back shares and so forth? How are you looking at it?

Well, again, I will only answer that by commenting. I don't think we are over levered at three times depth for EBITDA. We like the current cost of capital we have in place on our existing high-yield debt outstanding so an average weighted cost of 7%. The revolver we are borrowing at LIBOR plus 75 so call it at three-month LIBOR, 1.25%, 2% The idea around paying down debt isn't particularly attractive given our current leverage ratios and current cost of capital. And on top of that, the next -- one of our primary priorities would be maintaining liquidity. And then after that, we've got an ROI-based capital allocation process will follow, whether it is repurchasing shares or invests in new beds.

Great. Thank you. And then one -- one last one. As you look across at your state customers, do you do any type of credit screening work? Or how do you monitor sort of their financial viability?

Yeah, we're -- obviously monitoring that, you know. 12 months ago, we weren't monitoring as closely as they are today. With that said, it is very difficult to envision a scenario where the Federal Government will allow a state to go into bankruptcy. If they weren't willing to let Bear Stearns go into bankruptcy, they are probably not willing to let one of the states go into bankruptcy, but we do monitor it.

Okay. They did let Lehman go.

They built the firewall behind Lehman, yes, they did.

All right, thanks, Todd

Thank you, we will take our next question from Mark Balser. Please go ahead.

Good morning. Thanks. I wonder if you could comment on Federal populations and just kind of remind us how the dynamics are different, if they are, between US Marshalls ICE and DOT. seems like the US Marshal was the biggest decline piece in the quarter.

well, let's take them separately. The BOP, the growth potential for CCA in the industry is going to be through procurements to meet their needs. They have continued to see the deterioration in their rated inmate population to rated capacity. They are now -- we have seen it in the last year and a half go from 134% to 137%. They do desire to meet a fair amount of their population growth through contracts. Their limitation has been budgeting. And as I mentioned in my opening comments that they are waiting on a permit budget before they commit to these beds. So we think we will continue to see over the next -- over summarizing several years a continued need for contract beds, but it will come in every year or two. They have talked that their desire would be anywhere from 1500 to 3,000 a year. It is just the budgets doesn't let them do that in a systematic way. Immigration and custom enforcement, the funding is for 33,400 beds. It is -- so that -- that's what is going to be at most in their system at any point in time on the average. They can be above that as long as the average, so that's their funding. What we have seen in some of the growth that we have had over the last several years is actually been where they are consolidating so they don't need funds for new beds for growth, but what they have found is that if they have 30 detainees and 50 different county jails, the logistics on that is very difficult. And so their desire is that they can find a location that is convenient to them so that they can have all the inmates and detainees in one location. Also the inmate -- the detainee growth in ICE will come from several -- lots of sources. We have mentioned previously that border crossing is really a small percentage most of the detainees we receive and hold for ICE as they do take them for deportation or some other asylum or whatever, typically coming from local jails, state jails, federal and state prisons, federal prisons so that once they have served their time, they are given to ICE. We then detain them for ICE while they decide to deport them. We also talked about the last couple of calls about the community effort that was put in place in which congress actually increase the funding here recently and that is to work with local communities to try to identify illegal immigrants that have -- that are in the country and to be able to identify them and then deport them. Many illegal immigrants commit a crime, get held for some misdemeanor and get released back in their community because no one knows they are here illegally and the government -- the FEDERAL government is trying to increase that so no one has committed a crime that is here illegally has a chance to be released in the community. And then the US Marshalls, we have seen not a significant growth in our population over the last year and a half other than, as I mentioned, Operation Streamline. I think it is starting to kick in, and that is where everyone who crosses the border is going to be detained and charged with a misdemeanor and then subsequent felony. Where up until operation Streamline, and they call it zero tolerance, you had to cross the border many times before they would detain you and charge you with a crime. And, of course, we have a contract that we were awarded this past year for 1072 beds, 750 of it guaranteed for the US Marshal Service in Las Vegas. So there is no reason to believe that those populations won't just creep up over over time.

Great. Thank you. Another question. I understand the commentary about the headwind from interest expense and depreciation of facilities you brought online, but presumably you are generating revenue from that as well. Do those new facilities that are associated with that presumably come on as positive EBITDA or what kind of contribution will those facilities have to '09 just with who is in those facilities now?

Well, I think in answer to an earlier question, we kind of touched on that, that some of the beds that we are bringing online, and we specifically mentioned our Adams County facility. We do not have a customer for it at the moment. So we started depreciating it at the end of 2008. We have the interest carry. We backed a press release we brought 8,000 beds online in 2008. So those now are all being fully depreciated. And as I mentioned in my comments, there were about a little over 10,000 beds currently available and about 1500 of them are spoken for with the California. So the balance of them there is nothing -- no Major, none of them that are spoken for. That is going to be. Bring on some of the $0.12 a share, $0.10 to $0.12 a share depreciation on interest and at the moment, a fair amount of that will not have anticipated EBITDA.

Sure. I guess I understand that, but the La Palma is part of the -- at least expansion there is part of the increase in DNA at the very least. Is there a way to quantify that $0.10-to-$0.12 presumably gets lower when you consider the facility EBITDA from folks that are in those beds that you have expanded.

Not that we could speak to specifically other than to say it has been identified in the $1.10 to $1.20.

Couple other comments there. As we mentioned on our last call and our current press release, we've seen some reductions in inmate population in Minnesota, Washington and Wyoming and we have the negative impact to the operating carrying costs on the beds that we completed that remained vacant and may remain vacant. Adams County $2 Million operating carrying cost on an annual basis until occupied. We try to factor in a number uncertainties into our guidance based on the current economic environment and lack of visibility including the potential for per diem reductions and further inmate reductions due to cost-cutting measures states may take. However if you take the information we provided -- all right, Q4, EPS, normalized at $0.30, and you annualize that, you get $1.20. Then subtract the $0.10 on earnings from increased interest and depreciation, that gets you $1.10. Everything else being equal. To get to $1.20. There must be some improvement.

Great. And last question and I will let you go. Beating the guidance horse again. Do you make the assumptions -- clear you are making some assumptions that you give some rate concessions. Are you also assuming that you get to take out some of those -- assuming that you get to take out some of those costs or you get rate reductions without necessarily the commensurate or partial rate reduction by reducing programs.

Don't want to get into specifics primarily because of the lack of visibility, but we are in discussions with the customer to negotiate reductions in the service levels that would allow us to reduce operating costs to offset some or all of those per diem productions.

Thank you.

You are welcome.

We will take our next question from Dana Walker. Please go ahead.

Good morning.

Good morning.

Can you talk about the effects that your customers are seeing the economy play on prime and possible flow of future inmates?

I think the conventional wisdom is a -- a recession and increasing unemployment puts pressure on crime rates. There is no definitive studies out there that support that, and it is too early in the process for our customers to draw any conclusions around what they are seeing in their own inmate populations or crime rate.

On the topic of per diem it seems to me that. I think that all of us have heard your argument how you want to maintain civility with your customers and that you and they are making long-term commitments, and yet the view on our end is what choice do your customers have. You have made a significant commitment to a long-lived capital project on which you need to earn a return, and you've -- you've committed that project, in its capacity to these customers. If you break price, then what's to force all of them coming back saying you have done that, and now you've -- we've agreed on what the topic is, just how much are you going to bend. How do you respond to that?

Well, it is a balance that Todd mentioned. I think we always have to remember that we do do business with a customer who makes laws, and that they can always put themselves -- or put us in a very uncompetitive situation by authorizing to build capacity just to get out from under the relationship. So we -- it is our desire that our customers never feel the need to build another prison bed. And that sometimes means that we cannot exert the leverage that in the short term that we would have.

Final question from me relates to what you didn't say about guidance, but what I think a lot of us would like to hear you say about compensated man days, particularly owned and managed compensated man days with the prospect that California maintains the spread -- or closes the spread between 6500 and 8132. Should there not be some growth in compensated man days in '09?

We don't know. It would seem to me that as we have said with the original 8,000 that we are part of the solution. That we believe every inmate that we receive is in a constitutionally cared for environment as relates to all aspects, overcrowding, health care, and that if they -- that California would have a difficult time identifying where the 58,000 would come from so they can reduce the need for 58,000 to be released by letting someone else take care of them in a Constitutional environment. I don't know if that is how that is going to play out.

Very well. Thank you.

We will take our next question from David Schneider. Please go ahead.

Hello.

Hello.

Can you hear me?

Yes.

Oh, good. When you authorize the stock buyback that was in November of '08, and the stock is currently below the average price that you bought back stock. So in November, we already knew that the economy was really nasty and so as far as specific to you, is there some change from when you decide to buy back stock until now? Because obviously it is not fun for you to buy back stock and then see the stock below what you guys pay paid for it.

I don't think we have changed our approach to making a decision around repurchasing shares. Again, it is a ROI-base analysis. It is not a systematic plan. We won't have a fixed amount of shares regardless of the price, the price goes into the ROI analysis and if the ROI is appropriate and it is the highest and best use of the funds that will drive our decision making around our capital allocation process.

Okay. Excuse me. So as far as the -- the '09 guidelines. You are assuming no new contracts or nothing that is as -- nothing that's not yet announced.

I don't think we parsed the guidance at that level of detail. We said there are a number RFPs out on street but a tremendous amount of uncertainty and visibility around whether or not those customers will move forward with those contracts and when. But I don't think we specifically addressed whether we made the assumption around any new contracts or not. And historically have not parsed our guidance around that level of detail.

Okay. I guess that's all from me right now.

Thank you.

We will take a follow-up question from Kevin Campbell. Please go ahead.

Thank you. I was hoping you guys could comment real quickly on California and, you know, the prospect of them paying their bills or not paying them in cash and issuing IOUs. Is that something in your discussions with the date that they indicated may be likely for you?

That is -- that is a possibility. To date, we haven't seen any significant variance in our days sales outstanding from the State of California, but that can change. And again, I think they are one of the states that are hopeful that the Federal Fiscal Stimulus Bill will provide some discretionary funds that allow them to meet some of their budget deficit issues.

Do you -- I am assuming there is no impact of that on the income statement and really it is just felt in the cash flow statement on the balance sheet?

Yeah. The extent my accounts receivable receipts significantly and there is a working capital draw on the revolver there would be some incremental interest expense but at L plus 75, call it current borrowing rate of 2% but would have to be significantly significant to have a material impact.

Okay.

We are hoping that is not what we have to use our cash for.

Yes. You guys saw some improved margin in your managed only segment sequentially that is, was that driven by the exit of the Bay County contract, more related to the lower health care expenses or workers comp or all in the G&A. Can you comment on that on the managed only segment.

The employee and workers comp will be over own and managed only. And the Bay jail facility was -- I will call it the break-even contract. And that was exited at the beginning of the quarter. So that would have had a positive impact as well.

Okay. Last question. Any cost pressures you guys are seeing? It doesn't sound like this, but I wanted to get confirmation.

Not seeing any cost pressures from inflationary standpoint, actually potentially just the opposite. For example, the -- the reduction in the -- or the below-average employee medical claims, for example, there is some speculation that is being driven by decision-making by our employees around managing their cash flow. So they are not run together doctor with every cold and flu. They are avoiding physicals, that sort of thing, Our health care plans are very consumer driven oriented--In other words, high deductible, high co-pays, high co-insurance. There is also some early indications, it is hard to tell for sure that the increase in unemployment rate we are seeing increases in the applicant flow for jobs at our facilities, both in quantity and quality, and early indications that suggest -- suggest possibly we may see some benefit from that through reductions in turnover and, there by, decreases in overtime. But it is really too early to tell at this point.

Okay. All right. Thank you very much.

Thank you. It appears we have no further questions at this time.

Okay. Thank you. Thank everyone for taking time to let us respond to I know many questions. As we said, the provided guidance this year was a tough challenge. It is very apparent we are not by ourselves. Many companies are giving significantly wide guidance or no guidance at all. So we wanted to do our best to try to be as realistic as we can in light of the very uncertain times in dealing with the customer base that is also dealing with an uncertain time. But as I said in my comments and Todd said in his, we are really bullish as it relates to the long-term future for this company. We know that 2009 is going to be tough. It could be 2010, but we are highly confident that the inmate population growth and our customers and our prospective customers will continue, and we know that the money that our customers are spending is on things other than infrastructure for their correctional systems and a lot of the success that we had starting in 2003 up until now I think we will attribute to a very similar circumstance with a lot of our state customers not building their infrastructure. And we were asked what we were going to do with the cash. I think we are trying to position ourselves so that when things do clear up, that we are in a great position to be able to be of a meaningful public service to our customers who will need to deal with their overcrowding and that we will be there just in time for them. So thank everyone for joining us. Good day.

Thank you. That does conclude today's teleconference. You may disconnect your lines and have a wonderful day.