CoreCivic Inc (CXW) 2009 Q1 法說會逐字稿

Good morning, everyone, and welcome to Corrections Corporation of America's first quarter 2009 earnings conference call. If you need a copy of our press release or supplemental financial data, both documents are available on the investor page of our website at www.correctionscorp.com.

Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the safe-harbor provision of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ-- excuse me, 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 filed with the SEC. This call may include discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release or 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.

Participated on today's call will be our Chairman of the Board and CEO, John Ferguson, President and Chief Operating Officer Damon Hininger, and Chief Financial Officer Todd Mullenger. I would now like to turn the call over to Mr. Ferguson. Please go ahead, sir.

Thank you, moderator, and welcome, everyone, to Correction Corporation's first quarter earnings conference call. In addition to those that the moderator said was in the room, we have David Garfinkle, our Vice President of Finance and Controller to assist us on some of the questions. We are very pleased with our results, and we will get started with Todd reviewing the financials.

Thank you, John, and good morning, everyone. Moving straight to a discussion of our financial results. In the first quarter of 2009, we generated $0.29 of EPS, compared to EPS for last years Q1 of $0.28. We exceeded the earnings guidance provided in February as a result of better-than-expected operating expense performance, combined with a slight acceleration of our share repurchase program over that assumed in February.

More on those in a minute. EBITDA in Q1 increased 9.6% to $99.6 million for the quarter, adjusted free cash flow for the quarter totaled $73 million, or $0.61 per share. Keep in mind that we pay no cash taxes in Q1, with two payments made in Q2. As a result, Q1 cash taxes are higher than average, with Q2 lower than average. Focusing on adjusted free cash flow, as we have mentioned in the past, 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 expense totaled nearly $25 million in Q1, versus only $10.3 million of facility maintenance in IT CapEx for the quarter. So, as we have commented before, we believe adjusted free cash flow is, in many ways, a better measure than EPS for the return we are delivering to our shareholders.

Total revenue for the first quarter was up 6.5% over last year, an increase of nearly $25 million. Average daily compensated populations for the quarter increased 4.2% compared to the prior year. Revenue per compensated mandate for the quarter increased 3.9% to $58.45. Average compensated occupancy for the quarter declined from 97% to 89.4% which, taken by itself, appears negative. However, keep in mind that our average daily compensated populations actually increased 4.2%, with the decline in occupancy percentage coming as a result of placing 9300 new beds into service during 2008 and 2009.

Revenues were very much in line with our internal forecast. As I mentioned earlier, we exceeded our earnings guidance primarily as a result of better-than-expected operating expense performance, combined with the slight acceleration of our share repurchases. In absolute dollars, operating expenses came in lower than anticipated, due to better-than-expected cost performance in areas such as utilities, inmate medical and miscellaneous supplies. Lower supplies, as a result of a concerted effort to manage inventories tighter and renegotiate prices lower, lower inmate medical is related to timing associated with large inmate hospital claims, and lower utilities is due to lower-than-anticipated energy costs and seasonality around usage.

As a result, some of this favorable expense performance may be recurring, while some is timing, and may not recur. That said, we continue to place strong emphasis on controlling operating costs. On a cost-per-mandate basis, operating costs for the quarter were $40.90, a 3.6% increase over the prior year. Our Q1 2009 operating cost per man day reflect normal wage and other general inflationary increases, as well as operating inefficiencies associated with the rampup of new bed activations at facilities such as La Palma and Tallahatchie, as well as operating costs related to our inventory of vacant beds.

During Q1, we averaged approximately 10,000 vacant beds in inventory, on which we incurred property taxes, utilities, insurance and other costs, without the benefit of any heads in these beds, which drives cost per man day higher. In general, the inflationary increases we experienced year-over-year were fairly modest, but the operating inefficiencies associated with the rampups in vacant beds resulted in a 3.6% increase in cost per man day across all beds and a 4.6% increase on owned beds. All of the rampup inefficiencies, and the vast majority of the vacant beds are owned beds.

Excluding the rampup facilities and the impact of the vacant beds, operating costs per man day on all beds was more in the range of 2%, while owned and managed beds saw an increase less than 3%. Despite those operating inefficiencies, operating margins per man day for the quarter increased 4.4%, to $17.55, with an operating margin rate of 30%.

G&A expenses for the quarter increased 1% over the prior year, and were 4.9% of revenues. GAAP income tax expenses were approximately 38% for the quarter.

With regards to our share repurchase program announced in November of last year, from November through March 31st, we have purchased approximately 10.7 million shares at a total cost of $125 million, with an average cost per share at $11.72. These numbers have remained unchanged through today, as we have not repurchased any additional shares since Q1. At March 31st, the diluted shares outstanding totaled approximately $115.5 million. That is the number at March 31st, it is not a weighted average for the quarter.

Share repurchases made in Q1 were at a slightly higher level than we originally assumed in developing guidance delivered in February. As we originally expected, some of the share repurchases would fall into Q2. We have $25 million remaining under the original $150 million authorized in total by the Board of Directors. As a reminder, we consider the share repurchase program another capital allocation alternative, with the decision to repurchase shares based upon a return on investment analysis driven by the repurchase price.

We are very pleased with our first-quarter operating results, having generated year-over-year growth in EBITDA, EPS, and adjusted free cash flow per share. We also secured three new contract awards for nearly 4000 inmates, all accomplished against a backdrop of a very challenging economic environment.

Moving next to a discussion of our guidance. As indicated in the press release, our guidance for Q2 2009 is in a range of $0.26 to $0.28, and guidance for the full year is in the range of $1.17 to $1.25. Both are inclusive of startup costs, which were not included in previous guidance numbers, as these startup costs are primarily related to contract awards received after our February earnings call.

Q2 is negatively impacted by startup costs associated with the new contract awards from the BOP at Adams County, State of Arizona at Huerfano, and ICE at our North Georgia facility. We estimate approximately $0.02 of startup costs will be incurred in Q2. The combined EBITDA contribution from these three new contracts is expected to reach break-even in Q3 and turn positive in Q4. For the full year, we expect the impact of these new contract awards on EPS to be neutral to slightly positive. However, implicit in our guidance range, we expect to see sequential EPS growth from Q2 to Q3, accelerating into Q4. This is a result of improving contributions from these three new contract awards, combined with additional population growth, primarily from the California rampup.

The rampup of the State of California inmates is expected to take longer than previously anticipated back in February, when we last provided guidance. Delays by the State of California in processing inmates for out-of-state transfer are the main reason for revision in the rampup schedule. However, we remain very confident that California will, ultimately, fully utilize all 8100 beds available to it under our contract. Our guidance incorporates the revised rampup assumptions for California.

Next, with regards to the better-than-expected operating expense performance in Q1. The current guidance has been adjusted to reflect some continuation of that favorable performance in certain areas, primarily in utility rates, however, the other areas in which we saw favorable performance, inmate medical and miscellaneous supplies, appear to be timing differences that are not likely to recur.

Finally, many states are nearing completion of their budgets for the fiscal year that runs July 1, 2009, through June 30, 2010. The Federal fiscal stimulus bill passed during Q1 provides significant funds to the states over several years, which has allowed them to avoid making larger budget reductions than they would otherwise have to make without the benefit of those funds. Obviously, uncertainty remains related to the general economy, which in turn, creates uncertainty around the magnitude of state budget deficits and the steps those states may take to balance their budgets going forward.

However, in developing the $0.08 range within our full-year EPS guidance, we have incorporated our best estimate of the range of potential outcomes related to risks associated with state budget uncertainties, as well as rampups of populations from California, and under our other recent contract awards. If none of these risks are realized, we should perform at the high end of our guidance range. If all of these risks are realized, we should be at the low end of the guidance range.

Turning next to a discussion of our liquidity. As of March 31st, our liquidity is provided by approximately $119 million of availability on our bank credit facility, plus approximately $44 million of cash on hand. This is in addition to our very strong and reliable cash flow from operations. In addition, we ended the quarter with a debt-to-EBITDA leverage ratio of a little over 3 times, an interest coverage of approximately 6 times, with no pending debt maturities until May 2011.

Cash taxes are estimated at $80 million to $85 million for the full year of 2009, with $40 million to $45 million in Q2 alone. Keep in mind we paid virtually no cash taxes in Q1, as the first quarterly payment of cash income taxes was not made until April, with the second quarterly payment of cash taxes coming in June. As a result, as I mentioned earlier, adjusted free cash flow is always higher than average in Q1 and lower than average in Q2.

Let me close by saying we remain optimistic about our long-term growth prospects. Current government budget deficits will likely result in insufficient bed development by the public sector necessary to meet their future bed needs. Our development efforts have rewarded us with recent contract awards, and position us with an inventory of beds our customers will find attractive to meet 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 CC has experienced over the past five years. I will now turn it over to Damon for specifics on our new business prospects and bed development.

Thank you, Todd, and thank you so much, callers, for calling into the conference today. I would like to break my comments into two topics, the first of which is our business strategy, and our short-term and long-term focus, and second, our market observations and opportunities.

So, first, our business strategy and short-term and long-term focus. Our vision has been, and continues to be, the best full-service adult corrections system in the United States. We believe this mission continues to be relevant and appropriate, even in the current economic environment. As it relates to our business strategy, our plan continues to be to build capacity in front of demand. I will give some recent examples later in my comments on why this continues to be a sound strategy.

Let me first say that the US marketplace still looks very favorable for the Company and the industry. A couple of metrics that shows the long-term opportunities for the Company-- first, of the $65 billion US corrections marketplace, only approximately 7.8% is managed by the private sector. We think this still shows a largely unpenetrated market here in the US. Second, of the incremental inmate growth in 2007 among all 50 states, which was approximately 27,000, about 49% of that growth was captured and housed in private facilities. We think this shows the maturity of the market and companies like CCA to manage this type of population, but also shows the constraints that states are feeling on building new capacity.

And third and finally, the supply and demand imbalance. Of the 19 state customers that CCA does business with, we are currently estimating that those states will have an incremental growth that will be twice as much as their funded plan capacity by 2013.

As it relates to our short and long-term focus, let me start with our short-term focus, and the first one, quite simply, is to fill excess capacity. With the North Georgia and Huerfano, Arizona announcements in March, and the Adams CAR 8 announcement in April, this gives us good momentum as it relates to this priority, and as Todd outlined, these contracts as a whole will not have any meaningful impact on 2009 earnings, but clearly will have a very favorable impact on 2010 earnings.

As Todd mentioned, we have, and will continue to place, strong influence on controlling operating costs. Additionally, we will look at opportunities for consolidation. I think the reason award with Arizona in Huerfano County, Colorado, is a great example of this, where we saw an opportunity to consolidate our Colorado population to three of the four Colorado facilities and then offer Huerfano as a standalone facility for the State of Arizona. We see those opportunities, and will continue to monitor, as appropriate, those opportunities in the future.

And for our long-term focus, this continues to be one, and, as mentioned earlier, one of our key business strategies is, in a thoughtful, methodical way, build capacity in front of demand. This strategy has fueled significant growth over the past five years, and we believe it was reaffirmed as a sound strategy with the recent awards by the Federal Bureau of Prisons and the State of Arizona. And second, even though we have temporarily taken our foot off the pedal on new bricks-and-mortar construction, we are taking advantage of a depressed real estate market so as to acquire property in key locations for future development, to help us execute against our business strategy.

As mentioned in our press release, CCA has nearly 10,900 beds available in inventory or under development. As of today, with the BOP-- BOP and Arizona awards, and the continuing of the California ramp, we have about 6700 beds of available inventory. So, obviously, we will continue to monitor closely the needs and timing of new bed development, but clearly, we would like to see some more meaningful utilization of our remaining capacity before we add additional capacity. Finally, we will also continue to aggressively pursue build-to-suit opportunities.

Third and finally, your management team is committed and focused on building sustainable and long-term value for shareholders. With that, we continue to drive value to our customers that continues to make us competitive in the marketplace, by doing the following. One, quality and safe and secure operations that is cost-effective to our customers, and two, also drive value in our construction of new expansions and/or green field sites.

Two recent examples that show our competitiveness in the marketplace, not only in quality of services, but also in quality of services and cost per bed. The first is our Vegas United States Marshals award out in Nevada, which was a build-to-suit competition. This was a full and open competition, with all the major contractors in the industry competing on price, quality of services, and track record of servicing the customer. Second was the CAR 8 Adams County contract. We mentioned this earlier, but it's worth repeating. We delivered this facility at $56,000 a bed, and provided considerable value to the BOP while providing significant ROI for the Company.

Let me now move on to the second portion of my comments and talk about the market and industry observations and opportunities. First, just some general opportunities and observations on our federal and state customers. Since the beginning of the year, we have had a total of four contract awards from the federal government, two with the Immigration and Customs Enforcement, one with the Bureau of Prisons, and one with the United States Marshal Service. We think this is noteworthy for several reasons. First, and again, it shows that we continue to provide value to our federal customers and, second, even with the new administration and a higher awareness of federal procurement guidelines and processes, as long as we're providing and delivering a comprehensive solution that is cost-effective to the government, we believe we will remain competitive in the federal marketplace, and there will be a need for our services.

Let me now make a couple comments about the 2009 federal budget and the 2010 federal budget. As you all know, the 2009 budget passed in March. There were no significant changes to funding as it relates to our book of business, and we do believe that this was the final hurdle on the CAR 8 award. Detail on the President's 2010 budget will be a lot clearer as early as today. The total proposed amounts were outlined earlier this year, and our initial read was that our three federal customers would be fully funded.

Now, a few comments on our state-- on state budgets. As Todd mentioned, our state customers are not out of the woods yet. 8 of our 19 state customers have passed their 2010 budgets, which would begin July of this year, but as the past 12 months have shown, the ability to forecast accurate projections has been extremely difficult at the state level, so budget revisions are possible as we go into the new fiscal year.

And, as we mentioned in February, we have been approached by half a dozen states, and have conducted different levels of negotiations to lower compensation to us. This number has not changed since February. On the whole, we have been successful on narrowing our scope and services to our customers to offset any reduction to compensation. Additionally, some of the offset in compensation has been managed by a reduction of populations and a narrowing of scope of services, so as to leave the per diem untouched.

And, as mentioned in the past, we have seen some population reductions from Washington, Minnesota and New Mexico as they have had new capacity come on-line. As of March 31st, we had 748 Washington inmates and 482 Minnesota inmates in our system. We could see some further declines, which are built into our guidance. For New Mexico, we believe we will not see any further reductions.

So, although there is some uncertainty, still, as it relates to our state budgets, let me point our several positive things that we see with the states. The first is just a timing issue. Most of-- most all of our states operate on a July 1st to June 30th fiscal year. We are hopeful that with less than 60 days left in the fiscal year, the risk of any additional pressure has subsided. As for the next fiscal year, if this year is any example, we think any pressure we feel from our customers won't be realized until first or second quarter 2010. Improvement in the economy and the use of the Federal stimulus funds helps evade that pressure even further.

Second, let me make a comment about the State of Arizona. Arizona has the largest deficit of any state as a percentage of their overall budget for this fiscal year and fiscal year 2010. Additionally, the Bureau of Adjusted Statistics just reported that the State of Arizona was number two in inmate growth this past reporting period. Now, why is this significant? Here you've got a state with a large deficit, increasing population with no capacity or relief in sight, and every dollar of their spending in this environment is being scrutinized. So, pressure can only be held back for so long, and we think this example is indicative of what other states are going to have to do to relieve pressure within their respective systems long-term.

Three, a significant portion of our state business is in owned and managed facilities, so this continues to give us flexibility to offer capacity as it's made available to other states. Fourth and finally, for many of our state customers, we do expect to receive per diem increases this year.

Let me now make a couple comments about significant pending procurements. The first is the State of Georgia. I think we've mentioned this in previous calls, but just a brief update to say that they have two procurements still on the street, one for 1500 beds total, through expansions of existing facilities with the State of Georgia, and then also a 1000 bed requirement for a new standalone facility. The State of Georgia, as we understand it, are still evaluating and analyzing these proposals, and a potential decision on one or both could be later this year.

Let me now talk about the Criminal Alien Requirement number 9, or CAR 9 procurement by the Federal Bureau of Prisons. We were notified last week that we were dropped for consideration, and based on the landscape of potential offerers, we knew we were not likely to be successful. It is our understanding that the BOP may act on this later this year, or early 2010.

Let me now talk about CAR 10 and CAR 11 with the Bureau of Prisons. As a reminder, these procurements are for the rebid of our soon-to-expire BOP contract at our California City, California, and Cibola, New Mexico, facilities. CAR 10 and CAR 11 were companion solicitations for the same requirement. CAR 10 only considered existing facilities, and CAR 11 only considered new construction. As I think was reported a couple of weeks ago in the marketplace, CAR 11 has been canceled, so only existing facilities submitted under CAR 10 will be considered for this requirement. We think this obviously narrows the competition dramatically for this requirement.

One other brief comment on pending procurements. It's not really a procurement, it's more just a source of (inaudible), but you may remember earlier this year, ICE did put out a notice for a potential requirement of 2000 beds in Los Angeles, California. It's our understanding they are still working on the procurement, and it could be released potentially later this year.

Let me now make some specific comments on our four largest individual customers. First, let me make a couple of comments about the United States Marshal Service. First of which, we announced earlier this year that we did get the notice to proceed from the Office of Federal Detention Trustee to move forward on this project and, as mentioned, we anticipate this facility opened up in third quarter of 2010. Second, we continue to meet the needs regionally as appropriate, and as a reminder, they are the only customer we have where they rely 100% on other providers for bed capacity.

And third, let me just make a brief comment on Operation Streamline. John has mentioned this in previous calls, but as a reminder, the Border Patrol in Tucson commenced Operation Streamline in January of 2008. Before this initiative was put in place, only a small percentage of illegal persons crossing the US-Mexico border were prosecuted. Operation Streamline uses criminal charges to deter illegal border crossings. Border patrol has consistently indicated, from the planning stage of the initiative to the present, that Operation Streamline will require additional detainee beds, due to increased prosecution and lengthened stay anticipated by the initiative. Although we did not see the expected influx of prisoners in early 2008, we are now experiencing significant numbers of prisoners being placed in custody as a result of Operation Streamline.

Now, a couple of comments on Immigrations and Customer Enforcement. Our early read on the new leadership within Homeland Security and ICE is that their focus will be on several fronts as it relates to detention needs. One, consolidation of populations from small, regional jails to help gain efficiencies, two, ensuring that all detainees are housed in facilities that use and enforce ICE detention standards and have appropriate conditions of confinement, and three, the housing of criminal aliens through the Secure Communities program and also non-detained illegal aliens.

John has mentioned the Secure Communities program on prior calls, and as mentioned earlier, it appears to be a priority for the new leadership. Just as a reminder, a couple key points about Secure Communities. It was described in March of 2008 in an ICE press release as a multi-year initiative to more effectively identify, detain and return removable criminal aliens incarcerated in federal, state and local prisons and jails. ICE's plan is to use expanded immigration technology and build upon relationships with state and local law enforcement to ensure that incarcerated criminal aliens are removed from the country instead of being released into our communities after their time in custody.

ICE currently conducts screening for these criminal aliens at all federal and state prisons, and at only 10% of the approximately 3100 local jails in the United States. ICE estimates that approximately 300,000 to 450,000 convicted criminal aliens who are removable are detained each year at federal, state and local prisons and jails, and based on recent activity, ICE is only removing approximately 20% to 30% of those totals. We believe this suggests that ICE will continue to provide a meaningful opportunity for the industry for the foreseeable future.

Just a brief comment, also, on immigration reform. We, like many of you on the phone, have been watching the media reports where we think that there potentially could be some discussion nationally about some meaningful changes on immigration and, of course, we will continue to monitor and advise the market as appropriate as details get clearer and any potential impact to the industry and to the Company.

Now, a couple of comments on the Federal Bureau of Prisons. I mentioned the activity on CAR 10 and 11, so I won't repeat that, but I will say for-- as for new demand, based on recent estimates and capacities they are bringing on-line, plus the beds they secured through CAR 8 and CAR 9, it appears that they will still need several thousand beds by 2011. Finally, with the recent award of CAR 8, we believe that the Federal Bureau of Prisons continues to see value in using the private sector to meet their overall capacity needs, and will continue to provide a meaningful opportunity for the industry for the foreseeable future.

The last customer I want to talk about is the State of California, so just a couple of comments. Let me first reinforce Todd's comments that the ramp of California inmates into our system. While the ramp of California was slower than we would have liked to see, due to delays in processing, we have seen additional transfers in Q2 and expect more in the quarter. As of yesterday, California's total population in our system was 6887. We have been, and will continue to, work very closely with CDCR on a continued ramp of inmates into our system, but it is very clear to us that one, overall, our relationship with the State of California remains very strong. Two, CDCR remains very committed to the total allotment of 8100 beds in our system, and they have given us a very clear roadmap to ramp us to the 8100, and any misses on schedule transports in the past was not a result of funding constraints or lack of need and fourth and finally, we also believe that there will be a need for additional out-of-state beds in the future.

Now, I will comment on California's budget situation. The state passed a budget in February. They closed a $40 billion general fund shortfall for fiscal year 2009 and fiscal year 2010. The passage of the budget fixed-- stopped the threat of IOUs being issued to state contractors due to cash flow problems associated with revenue declines. Again, we also think that federal stimulus has helped relieve pressure on California.

Next, as part of that package, CDCR's budget included a $400 million unallocated cut through-- thought to be related to parole reforms expected to be implemented later on in the legislative session. CDCR has proposed reducing the inmate population by 8000 through parole changes, raising the dollar limit on grand theft, and giving inmates more time off for good behavior as a way in which to achieve a portion of the $400 million reduction. Just as a reminder, CDCR's total population today is 167,821, and even with an 8000 inmate reduction, they would still be at 177% of their rated capacity.

My final California comment is about the three-judge panel. The three-judge panel issued a tentative ruling indicating that prison overcrowding is the primary cause of unconstitutional health care, and recommended that CDCR's population be capped somewhere between 120% and 145% of designed capacity, or approximately 58,000 inmates. The state is expected to appeal the ruling to the Supreme Court, and it is our understanding that the out-of-state program would not be counted towards the cap.

That concludes my prepared comments, so let me again thank you for calling in today and also turn it over to John, who will wrap up our prepared remarks.

Okay. As we finish up our remarks, I just want to take a minute and highlight what I think are the important takeaways from our earnings announcement, our press release and the comments by Todd and Damon. First, I think it is obvious we're pleased with our first quarter results. We think growth and earnings per share, growth in revenue, growth in EBITDA, growth in free cash flow, is a significant accomplishment in today's challenging economic environment. We believe that this puts us in a pretty select class of businesses in America today, and helps demonstrate that the Company has a resistance to the current recession.

I will also point out, once again, as we mentioned last time, that 2009's performance includes somewhere between $0.10 and $0.12 a share of additional depreciation in interest costs. We believe the supply-demand imbalance continues, and that there will be insufficient public sector capital investments, that will ensure that the shortage of beds in the public sector will continue. We think that the recent CAR 8 and the State of Arizona awards validates this demand and, of course, our business strategy. We-- I'm sure you recognized the benefit from the repurchase of nearly 8.5% of our outstanding shares, and even in-- even with the purchase of these shares, as well as placing over 9300 beds into service in the last 15 months, we continue to have strong balance sheet, good liquidity, and strong cash flow, and then, if you-- as we pointed out, there were some 10,900 vacant beds in our system on May the 1st, in addition to 1000 beds that we now have under development in Nevada, and if you put the pencil to that, we would estimate that the potential annual incremental facility EBITDA for those beds is well in excess of $90 million, and well north of $0.40 a share. And, of course, as we have pointed out, some 5200 of those beds are under contract.

Before we enter into the questions and answer sessions, I do want to ask the shareholders on the line today, those of you who have not voted for the annual meeting coming up next Thursday, there is a shareholder proposal that requires certain disclosure which we think would put CCA in a unique position, one that's unfavorable, one that if the proposal is good public policy, should be one that requires all companies to do, as opposed to just selecting a few, so that we would ask each of you who have not voted yet, or even if you voted, to change your vote to vote against the shareholder proposal. So, with that, moderator, we will be happy to open the lines up to answer any questions.

Thank you, Mr. Ferguson. (Operator Instructions). We go first to Kevin Campbell with Avondale Partners.

Good morning. Thanks for taking my question here. I hope you could start out by discussing the outlook for filling the remaining 6700 beds. I mean, what would be your expectations as to not specifically who might fill them, but over what time frame, perhaps, you might look to fill those beds?

Well, we've got several states, both existing customers and new customers that would be potential prospects. It would be difficult to say with any, obviously, clarity today, on the actual timing and utilization of those beds, but as I mentioned earlier, our short-term focus is all about trying to get the excess capacity utilized.

And are there any-- it doesn't sound like it, but are any of the existing RFPs opportunities for those beds?

Well, we've got-- as I mentioned, we have got the Georgia procurements that are still pending, so that's all within the State of Georgia, and that would all be new construction, and then obviously the BOP requirements are one for our existing capacity, our existing population, and then, obviously, we're not involved in CAR 9, so the procurements I outlined, that would not be-- those would not be candidates.

Okay, and could you talk a little bit more about the opportunities for consolidation? You mentioned, I think, that it's a good opportunity. What-- is there anything out there sort of percolating that's more near term?

No. I mean, I think that something we're always looking at and always talking to both existing or future customers, but obviously nothing I could specify on today.

Okay, and then looking at some of the states, as we've talked about before, Washington and Minnesota have brought on new capacity and drew down populations. Should we be looking at or expecting any states, Wyoming, for instance, that are bringing on beds, that might be then drawing down populations in the back half of the year? Can you give us some clarity there?

Well, I think we've outlined in the press release the states that we think we've got some drawdown populations. Obviously, I mentioned specifically the numbers on Minnesota and Washington, so one of the things we do, obviously, ever day is talk to all of our states to understand their capacity needs, long-term and short-term, and they may be in fluctuation, so we think we've adequately discussed, and have a fair understanding of what their needs are for the rest of the year and built that in accordingly into our guidance.

Okay, and last question before I jump back in the queue, can you give some color as to what your expectations are for California, and-- I know you don't like to be specific, but at this point, it looks like you have around 1300 inmates. They were doing, prior to the slowdown, 300 to 400 a month. Are you more conservative than, say, 300 to 400 a month from this point, or, if you could just give us some clarity so we have some expectations there?

Yes, Kevin, this is Todd. Really, I don't want to parse guidance on customer-by-customer basis. One reason for that unique to California is what we've learned from past experience. Any number we put out there is compared to data presented on the State of California's website related to out-of-state transfers, and that data has been very inaccurate and inconsistent in the past, which can create unwarranted concerns. That said, California has committed to using the beds. Those beds are fully funded in their budget, and we're optimistic they will eventually get to 8100 beds, heads in beds.

Okay, thank you.

Thanks, Kevin.

Our next question will come from Emily Shanks with Barclays Capital.

Hi, good afternoon. This is actually Jason Trujillo in for Emily. First-- good afternoon. First, you actually touched on this briefly in some sense, but outside of your current CapEx guidance you've given us, are there any new green field facilities that you're contemplating for 2009? Perhaps if occupancy were to ramp up?

Yes, nothing we're contemplating. We suspended construction on Trousdale, I think why we said publicly is we wanted to see some additional utilization of existing bed capacity before we re-initiated any speculative building, which is what Trousdale is, so absent a build-to-suit award for Trousdale or another facility, don't anticipate any new cream-filled initiation in 2009.

Alright, great. That's helpful. And then, just lastly, I was hoping you could qualify for us the supply-demand imbalance. As we look at the industry broadly over the next couple of years, and how does this demand for new beds stack up both to public supply, but also to private supply? Just in the states that you cover, as well as the federal government.

Well, it's a very fluid and dynamic couple of numbers, both on the population demand and also potential funded capacity. Obviously, there are a lot of things that can drive the population, and then also, we think also, in this environment, especially on the state side, with every dollar getting scrutinized and resources very scarce in this environment, even some planned capacity may not ultimately be funded, so it's very much a moving number, but what was really clear to us is that if you look at through 2012, 2013, just the known planned capacity that's out there versus the incremental growth, the growth is twice as much as the planned capacity, so we think that's going to continue to be the case here in the kind of short to mid-term.

Alright, great. That's very helpful. Thank you very much.

And we'll go next to ManAv Patnaik with Barclays Capital.

Hi, good afternoon, guys. First, congrats on the good quarter, and, I guess, welcome, Damon, to the call, and thank you for providing all that color, both Todd and Damon on the industry and the guidance. Definitely helpful. Just a few add-on questions. You mentioned 8 of the 19 state customers have already passed their budgets and there were 6 status quo from last time who sort of had come up looking for negotiating terms. I was just curious if you could give a little more color on if there's any overlap there, like, any of those 6 customers looking for negotiations part of those 8 that passed the budgets, and also, somewhere along the line, you mentioned that you are expecting increases from some of your state customers. Are those also within those 8 that you mentioned, or just a little more clarity around those?

Well, a couple of-- good morning, and I guess a couple of comments there, let me just talk about this current fiscal year. Like I said, we're within 60 days at the end of the year. So, we don't think, like I said, but we are hopeful that we are kind of not going to see additional pressure this fiscal year. Don't know that for sure, but we just think with 60 days left we're pretty close.

Going into the next fiscal year, obviously, if the economy and the recession continues to worsen, we could see some of the same level of engagement from our customers in another level of negotiation, but going into a new fiscal year, that pressure probably won't be filled until the last half of the fiscal year, which would be first or second quarter of 2010.

Relative to your question about the 8 of the 19 customers to pass a budget, I couldn't tell you exactly which ones are allowing pretty increases or not, and won't be able to parse that out in that great detail, but we should have a little more clarity here in the next month or so once these remaining states pass their budget, and any pressure from additional-- on the per diems, more compensation to us.

Todd's comment about the range is trying to take all that into consideration.

Sorry, but, I mean, just, is there any overlap between the 6 and the 8-- I'm sorry, I'm not looking for state customers, just curious if there was any overlap between the 6 that came for negotiations and the 8 that passed the budget.

Yes, I don't have that in front of me, so I couldn't say definitively. There may be a case of a couple there, but I couldn't tell you, definitively.

Alright, fair enough. And then, I guess, a question, maybe for Todd, on the managed-only side, could you give us a little more color on what-- how we should model the margins there going forward, and maybe some clarity around just how per diems might work out on that aspect, too?

In the managed-only side, we've said, historically, that's where all the competition comes from. Fortunately for us, it's about 10% of our facility-level EBITDA. We've obviously seen some pressure. Historically, we're becoming more and more disciplined in our pricing, there, in terms of the minimum level of EBITDA we're willing to accept. So, we will probably see some continued pressure going forward. That said, don't have a whole lot of managed-only contracts coming up for renegotiation that would encourage a lot of competition. There's one or two, so, but, in terms of specifics around margins, I'm not sure I'm prepared to give you any guidance on long-term margins in the managed-only side.

Got it. But, I guess, could you just, then, point out what-- the reason for the drop from the 16.5 in fourth quarter down to 13 this quarter?

Some of that's going to be seasonality on some of the populations, perhaps, and mix on some of it. You're also going to have items such as unemployment taxes that impact Q1 versus Q4, so there are some items like that.

Okay, and, I guess, just a final sort of housekeeping item, what was your total construction CapEx this morning?

Total construction CapEx for the quarter, let me flip over to that, including new builds, $10.3 million. That's maintenance-- he's asking on new construction. $15.5 million on the new construction.

Alright, got it. Thank you, guys.

Thank you.

(Operator Instructions). We go next to Todd Van Fleet with First Analysis.

Good morning, guys. Nice quarter. Am I coming through okay, here?

You are.

You are. Good morning.

Wanted to ask you, Todd, on the pricing-- to the extent that you can help us kind of flesh this out, the business that you had a year ago, I mean, is there any way to parse out business mix in terms of revenue per compensated man day which I think you reported as, what $58.45 this quarter? Is there any way to segment the upward drift here, so if I take a look at revenue per comp man day a year ago, it was about $56, today it's $58.45. How much of that increase is due to a shift in business mix, and how much is due to pricing kind of year-over-year? Can you-- is there a way to-- I know that there's a way, but do you have that information there available for us?

Yes, I don't have that here with us. Some of it is mix, some of it is pricing leverage, but I think at the end of the day, when you look at our operating margins, an increase of 4.4% in operating margins year-over-year, I think that's reflective of whether it's mix or pricing leverage, that it's a fair amount of that is dropping to the bottom line.

Sure, sure. I guess I'm just trying to get a sense for kind of reading what you're saying regarding-- you are getting the pricing requests from some customers, but other customers, you're going to get a pricing increase, so, ignoring the mix issue, would you say that on balance, you would expect pricing to be a positive influence for you this year, or a negative influence?

Positive.

Okay. But you don't want to say at this point how much? Whether it's 1%, 2%, 3%, what-have-you?

Yes, I don't want to parse guidance at that level of detail.

Alright. Maybe I should stop leading the question. Maybe I should just let you answer. On operating expenses, great job in the quarter, you-- in a quarter that you would have expected-- you have two more days in the December quarter, right? And-- but you also have higher payroll taxes in Q1, so were there new contract negotiations that kicked in at the beginning of this year that we're seeing impact the March result relative to the December result? I'm just trying to understand why we would have seen a sequential decline in operating expense apart from just a fewer number of days.

Yes, I think it's a combination of things. One, a doubling of our efforts-- a redoubling of our efforts on controlling operating expenses, so in an environment where there's limitations on our ability to grow the topline, we focused more and more attention on controlling expenses, and historically, we've done a good job of that in the past, but in this economic environment, you're supposed to focus even more attention on doing that, and so some of the results on supplies, even on utilities, and a couple of smaller areas, are a result of kind of a redoubling of our efforts, if you will, on controlling operating expenses, and that's going to be a focus moving forward in the balance of the year, as it is for many companies in Corporate America.

Was it the result of any renegotiated, or contacts, or agreements with your customers such that the ones that did want a little bit of pricing concession, that we're seeing the impact of a lower cost base as well because of those contract renegotiations?

No, not really.

So, and I guess, lastly, on balance, then, is it fair to describe your take on-- you look across the landscape, obviously the situation is what it is from a fiscal point of view, and populations are still increasing, and the pressure continues to build and so on, but would it be fair to describe on balance, and you can carve it state versus federal if you would like, but on balance, we're still in a bit of a holding pattern here with respect to procurements and new business activity for, say, another three to six months?

I would say there's going to be continued pressure of a result of-- certainly on the budget, with most states around-- on initiating new bed procurements. That said, the State of Arizona, significant budget deficit and they decided to move forward with the new bed procurement there, so a lot will be dependent on the individual state's situation, but yes, I would say on balance, the uncertainty around state budgets will limit their ability to initiate new bid procurements.

Okay, thank you.

And our next question will come from [Mark Balser] with [Blueson Investment Management].

Thank you. I apologize, I missed the middle portion of the call, so I'm going to do my best not to repeat questions. Can you talk about the remaining cash spent for the two development facilities, the North Georgia and Nevada?

Yes, as we've outlined in the press release, we've got-- we've broken out the detail there in terms of CapEx for the remainder of the year, so we've got about $60 million in prison construction for 2009, in total, and then we'll have about $30 million to $40 million to spend-- to complete those projects we've initiated in 2009 left to spend in 2010.

Great, and were you to win Georgia Expansion, can I use a historical expansion construction cost, or is there anything unusual about how that would come through?

No, you can use the average historical.

Great. And then one of the states that you contract with has put out a solicitation and mentioned that some of the public state systems have gotten back to them. Do you have any particular feel of state systems that might have more than 300, 500 bed capacity in a place? Most of those wouldn't be your customers, but maybe in the Northeast or somewhere, that might be able to be competitive with your own bed capacity at this point?

Good morning, Mark. This is Damon. I don't have a definitive list in front of me, but there are some states that do have capacity from time to time, and obviously, we monitor that very closely as it relates to them marking those beds to other states. One thing I think that's challenging for one state to buy beds from another state is that a lot of times, that is not a long-term commitment, so as a state's population kind of fluctuates, they're maybe only willing to make a six-month to twelve-month commitment of making those beds available, so even though those pockets may be out there, they may not be attractive to states that are especially trying to figure out a solution for several years.

Okay, so it's more about the commitment than the critical mass of having a large number of beds in a single facility.

Right.

Great. My last question, just mathematically, and I'm looking at it against EBITDA, the conversations that you've had regarding the buyback being kind of above the development hurdle rate, you're still, I think, nicely above a 20% return on the buyback rate at $16, $17. Is there a point at which development is a better idea, even if the point return doesn't look quite as good?

There are a number of issues we factor in to the decision-making around repurchasing shares. Part of it is liquidity, part of it is return, there are some risks associated with new bed development that you don't have with a share buyback, so that with a share buyback, you don't have construction risk, you don't have operating risk, so all those things kind of go in the hop around our decision. That said, we've just got $25 million left authorized under the current repurchase plan, and while we don't want to take any of our options for deploying capital off of the table, including a share repurchase program, we're hoping the stock price increases to a level that doesn't meet our ROI hurdle rates for (inaudible).

Sure. Is it fair to say that the current return is-- basically, I'm just thinking you could buy $4 million or $5 million worth of EBITDA for 1 million shares, which at this point would be 20%?

Yes, we've never gotten into specifics on what the ROI is on repurchasing stock at certain repurchase prices, and don't want to do that, I think, for obvious reasons. Don't want to tip our hand, there.

Fair enough. Thanks for your time.

And we take a question now from Clint Fendley with Davenport.

Good morning, guys. I've seen plenty of talk, recently, about prison reform from Senator Webb and others. What kind of timeline do you think we're looking at before we see any action here?

Good morning. This is Damon. The short answer is, don't know. I know that Senator Webb put forth his panel to look at a kind of broad and sweeping analysis on the criminal justice system and potential reforms, and I think he has outlined not only areas of focus, but potential timelines, but I think it's very early in the process, so the results or recommendations, conclusions of that, is probably going to be, I would say, over several years, so I think it's probably too early to say what it looks like in timing and impact.

And just given his areas of focus, any idea of the impact on the private sector here?

You know, we're right now looking at it on a very broad level, and that's all that has been really disseminated out both in the media and in some of his remarks up on the Hill, but as of now, it does not look like specifically our book of business, and I should say our book of business, but the private corrections area is going to be an area of focus, but it's-- like I said, too early to tell.

Thanks guys. Nice quarter.

And we have follow-up questions from Kevin Campbell with Avondale Partners.

Thanks. Can you just confirm for us whether or not you kept all of those Colorado inmates in your other three facilities? I just want to make sure that they didn't get distributed to other Colorado facilities run by the State?

So, the inmates coming out of Huerfano, we have retained all of those inmates.

Okay, and looking at some of those proposals, I think Mark was talking about Alaska having issues an RFP, Tennessee has a proposal in their budget potentially for closing one of your facilities, so, is that incorporated in, say, the low end of your guidance, if something were to happen to one of those two or even some other facilities-- is that, again, if those were to happen, are you accounting for that at this point in your guidance?

Well, Kevin, let me-- this is Damon-- let me kind of address both of those separately. As relates to Alaska, we mentioned-- I mentioned in my prepared remarks that we're always looking for opportunities for movement of inmates in our system to take advantage of excess capacity. Obviously, I mentioned the Arizona award at Huerfano as a solution-- as an example of this, so we have discussed with Alaska the prospect of moving their population out of the state of Arizona to another CCA facility, and there appears to be genuine interest to do that, so this would make capacity available in Arizona for, potentially, other customers, which we think would be very attractive to several states.

So, we've done business with the State of Alaska 15 years, they set the bar very high relative to services they expect out of the contractor, so we think, obviously, being the incumbent, we're well suited to meet their needs going forward, but it is an open procurement, and if they do get potential offers, we think that the worst case, the risk would be in 2010 versus 2009. As relates to Whiteville, that is a budget proposal from the Governor here in the state of Tennessee for this upcoming fiscal year, and it's obviously very early, kind of, in the process, on finalizing-- I shouldn't say early, but it's probably going to be some time until they finalize the budget for 2010, and it makes it-- as it makes its way through the legislature. So, to use a baseball analogy, it's probably in early innings, probably going to be several more innings before we see a final outcome on this, and again, I would say, that any outcome-- a potential worst-case outcome on Whiteville would be a 2010 event, versus 2009.

Okay. And looking at Alaska, real quickly, if you were to compete with some of these public states, I mean, historically, the states themselves can't compete on a-- as well on the labor front, and so do you-- is there any reason why, in this instance, competing for other states' inmates, that they would be better suited to go up against you on a labor cost front?

Yes, I think there are going to be several challenges if they consider another state. One is what I mentioned earlier, is it has been our experience, and it's pretty well communicated out into the industry that if a state has capacity available and they're offering it to another state, there is a very narrow window relative to their willingness and commitment to allow that capacity to be made available, so maybe six to twelve months. So, with the State of Alaska, that is potentially looking at a three-year horizon, only having a six to twelve-month commitment may not be very closely aligned to their interest.

The second thing is that a state may not be willing to make an investment, both from a staffing, and also a CapEx perspective, especially if it requires significant programs, to accommodate another state. So, from both a financial perspective, but also a timing perspective, it may not be advantageous for Alaska to consider those options.

And then, last question on Alaska, is there any thoughts-- what's the status of them and their prison that they're going to build in, I guess, (inaudible). Is that moving forward? Is that being put on hold because of budgetary concerns?

It is-- I think it's nicked in debate within the legislature. I think the last report I read was that they were hoping to get around $20 million appropriated this upcoming year, but I think the last estimate, and I think it's still in flux, might have been pared down to $6 million, so that probably is subject for continued debate, but based on timing, I think they're still kind of looking at that 2012, 2013 window, for this facility to come on-line. That is, like I said, if they are successful in getting funding based on the current timelines.

And then, last question, as it relates to your labor costs, so, obviously, your fixed costs were a little bit higher, or you had the issue with startup expenses, I think, and if you were to back out those facilities where you had the cost and the startup expenses, would you have seen better leverage on your labor expenses or your fixed costs than you might have otherwise expected?

Than we otherwise might have expected? Didn't drill down into that level of detail for the purposes of discussion today. Let me say we have seen some improvement in turnover. With the economic downturn, as the unemployment rate has gone from 4% to 8%, possibly on its way to 10%, and that may have a favorable impact on operating expenses going forward, but it's a little too early to quantify at this point.

Okay, so, really, on the operating expense line, there probably was little related to sort of labor costs being lower because of the economy, and more those other items that you mentioned that were fixed-- that were variable costs.

Yes.

Okay, thank you.

Mr. Ferguson, there are no questions in the queue, sir. I would like to turn the call back over to you for any additional or closing remarks.

Okay. Thank you, moderator, and thank everyone for taking the time to hear our comments. As I said earlier, we are very pleased with the performance for this quarter, and we continue to hope that we can provide value to you as shareholders, and we will see you in about 90 days. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.