CoreCivic Inc (CXW) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to Corrections Corporation of America's second 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 provisions of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today.

Factors that could cause operating and financial results to differ are described in the press release, as well as our Form 10-K and other documents filed with the SEC. This call may include a discussion of non-GAAP measures. The reconciliation of 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 occurrences of unanticipated events. Participating 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'd now like to turn the call over to Mr. Ferguson. Please go ahead, sir.

Thank you, Elizabeth, and welcome, everyone, to CCA's second quarter 2009 earnings call. In addition to the individuals that Elizabeth introduced you to, we have Dave Garfinkle, the Company Controller, and Bill Andrews, my predecessor as Chairman, with us in the room. We will begin with some comments from Todd.

Thank you, John. Good morning, everyone. Moving straight to a discussion of our financial results, in the second quarter of 2009, excluding the $3.8 million of refinancing expenses, we generated $0.30 of EPS, which compares to our May 2009 earnings guidance range of $0.26 to $0.28. We exceeded the earnings guidance provided in May as a result of slightly higher than anticipated heads and beds, combined with better than expected operating cost performance. Revenues were slightly ahead of our internal forecast, primarily as a result of California inmates ramping up sooner than anticipated. Total revenue for the first quarter was up 5.7% over last year, resulting from a 3.4% increase in average daily compensated populations and a 2.3% increase in average revenue per compensated man day. Regarding the 2.3% increase in average per diems, per diem performance has been consistent with what we had anticipated and discussed on our last call. We have seen year-over-year increases on average from both federal and State customer categories. We have not experienced any pricing pressure from federal customers as a result of the economic downturn.

On the State side, to date we've received requests from about a half-dozen of our State customers for assistance in reducing the per deems we charge, The same numbers we discussed in the May earnings call; and in the majority of those situations, we have been able to negotiate reductions in contracted levels of service that offset some or all of those revenue reductions. With the slight exception related to the quicker than anticipated ramp of California inmates during the second quarter, changes in inmate populations in Q2 were also in line with what we had anticipated. Year-over-year, we've experienced increases in compensated man days in both the federal and State customer categories. In general, I'd say the actions taken by our State customers to date as a result of the current economic downturn have been very consistent with the actions they took during the last economic downturn in 2001-2002, when we experienced a modest level of pricing pressure and a short-term slowing of the rate of growth in inmate populations.

I think it's interesting to note that this was followed by accelerated growth in inmate populations after the economy recovered, which led to a bed shortage. And that bed shortage coming out of '01-'02 recession resulted in significant growth for CCA through a combination of heads and beds growth and pricing leverage. And this is a sequence of events we believe will be repeated once again as the economy recovers. Average compensated occupancy for the quarter declined from 97% to 90.5%, which taken by itself appears negative. However, keep in mind that our average daily compensated populations actually increased 3.4%, with the decline in occupancy percentage coming as a result of placing 9,400 new beds into service during 2008 and 2009. As I mentioned earlier, the other reason we exceeded our earnings guidance was as a result of better than expected operating cost performance.

Operating expenses came in lower than anticipated partly due to timing and market conditions, but also due to the impact of the Company-wide initiative focused on improving operating efficiencies. This initiative began in 2008 and has been increasing in intensity during 2009 to the point where we have begun to see some measurable and meaningful results from our efforts. As a result, some of the favorable expense performance realized in Q2 should be recurring, while some is timing or one-time savings that may not recur. Now when you look at operating costs on a per man day basis, which were $40.42, that translates into a 2.8% increase over the prior year; and this doesn't seem to reflect the operating cost improvements I just referenced, but keep in mind that Q2 2009 cost per man day was negatively impacted by $2 million of start-up costs at Adams County, operating inefficiencies at La Palma and Tallahatchie, where we continued to ramp up California inmates during Q2, and operating carrying costs on the 9,400 vacant beds in inventory on which we incur property taxes, utilities, insurance, and other costs without the benefit of any heads in these beds.

So all of these items skew costs per man day higher; but when you adjust for these items, cost per man day increased only about 1%, which I think is more reflective of the true increase in operating costs we've experienced over the last 12 months. As a result of the 2.3% increase in average per diem, our ability to negotiate reductions in contracted service levels where we weren't able to obtain per diem increases, combined with the improvements in operating cost efficiency, we were able to deliver an increase in operating margins per man day in Q2 2009 over Q2 2008, even with the drag on margins from start-up costs and the vacant beds in inventory. Adjusted free cash flow for the quarter totaled only $,34.6 million or $0.30 per share which is very misleading. Keep in mind that we paid virtually no cash taxes in Q1, with all payments for cash taxes for the first half of the year being made in Q2. As a result, Q2 adjusted free cash flow is significantly lower than the quarterly average for the first half.

Therefore, adjusted free cash flow for the first half of 2009 is the more appropriate number to focus on, which totaled $108 million or $0.91 per share, which translates into a quarterly average of $0.45 per share, which is really the way you need to view cash flow per share for the first half of the years -- $0.45 on average for each of Qs 1 and 2. General and administrative expenses for the quarter increased $3.7 million over the prior year as a result of $4 million of consulting fees incurred in relation to the Company-wide initiative to improve operating efficiencies. We're utilizing outside consultants to supplement our internal staff, to bring in some proprietary methodologies and organizational expertise around improving operational efficiencies, and to ensure we accelerate the process as much as possible. Additional consulting fees could be incurred in the second half of the year related to this ongoing initiative.

During the second quarter, we executed a refinancing of our $450 million 7.5% senior notes due May 2011, replacing them with a $465 million issuance of 7.75% senior notes due June 2017. The transaction allowed us to significantly extend the maturities of our nearest term debt maturity and demonstrated the strength of CCA's financial position and business model, as we were able to access debt capital at attractive rates even in the most difficult credit market the country has seen in the last 75 years. The refinancing resulted in a $3.8 million pretax charge to earnings in Q2. With regards to our share repurchase program announced in November of last year, we did not repurchase any additional shares during the second quarter. So the total number of shares repurchased to date still totals approximately 10.7 million, at a total cost of $125 million, with an average cost per share at $11.72. As of June 30th, the diluted shares outstanding totaled approximately 116 million. That is the number as of June 30, and is not the weighted average for the quarter. That leaves with us $25 million remaining under the original $150 million authorized in total by the Board of Directors in November 2008.

Moving next to discussion of our guidance, as indicated in the press release, we have increased full year guidance to range of $1.21 to $1.26 excluding the refinancing charge incurred in Q2. This compares to previous guidance of $1.17 to $1.25. And guidance for Q3 is in the range of $0.30 to $0.32, and Q4 in the range of $0.32 to $0.35 The increasing sequential EPS is driven by the continuing ramp-up of Adams County, which generated net losses in Q2 associated with start-up costs, which in Q3 is expected to generate positive EBITDA followed by additional EBITDA increases in Q4 when we expect to be operating under the 90% occupancy guarantee of the related BOP contract. Likewise, the impact from the increase in populations from California and Arizona that occurred in Q2 will normalize and generate increased EBITDA at the related facilities in Qs 3 and 4.

With regards to the better than expected operating expense performance in Q2, the current guidance has been adjusted to reflect some continuation of that favorable performance in certain areas. However, other areas in which we saw favorable performance appeared to be primarily timing differences that are not likely to recur. Most states have completed their budget for the fiscal year that runs July 1, 2009 through June 30, 2010. Obviously, uncertainty remains related to general economy, which in turn creates uncertainty around State budgets. This is the primary uncertainty we face for the balance of 2009. In developing the $0.05 range within our full year EPS guidance, we have incorporated our best estimate of the range of potential outcomes related to risks associated with those State budget uncertainties and other variables. 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 June 30, our liquidity is provided by approximately $188 million of availability under our bank credit facility, approximately $73 million of cash on hand. But keep in mind that in early July we repaid the remaining $78 million of 7.5% senior notes still outstanding that were not tendered in June. As of today, we have received interest bearing warrants or IRUs from the State of California totaling $27.5 million related to man day billings from the months of April and May. Now that California has finalized their 2010, budget there has been some discussion that the State may cease issuing additional warrants. However, if they continue issuing warrants through the end of the period originally planned, CCA could see warrants received increasing to approximately $60 million in total by the end of Q3, with payment then expected in early October. As of today, our liquidity totals approximately $175 million, comprised of cash flow on hand and availability under our revolver.

In addition, we ended the quarter with a debt to EBITDA leverage ratio of a little over three times and interest coverage of over five times, with no pending debt maturities until December 2012. We believe that we have the ability to fund our working capital needs, including California warrants, and capital expenditure needs through a combination of free cash flow from operations, availability under our revolver, and cash on hand. 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 participating in our conference today. I would like to break my comments this morning into two topics. First, our short and long-term focus for the business; and second, market observations and opportunities. As it relates to our short term focus, our priorities remain as follows; First is to fill vacant capacity. We continue to have staff all over the organization actively engaged in existing and prospective customers to utilize our excess capacity. We think we've had a good amount of success this quarter, so let me give you the highlights. During last quarter, California accelerated the ramp of 1,237 inmates into our facilities. And at the end of the quarter CCA's total population with California was sitting at 7,884.

Second, we have seen good increases incrementally throughout the system with our United States Marshals Service populations. We have seen a growth of over 900 Marshals prisoners since January 1st into our system. Third, during the quarter, we ramped up our Huerfano County facility with the State of Arizona and their inmates, and currently are operating at approximately 90% occupancy at that facility, which is also our guaranteed minimum. And finally, you are aware of the awards earlier this year by the Bureau of Prisons for the placement of inmates at our Adams County facility and ICE for the placement of detainees at our North Georgia facility. Our staff have been working tirelessly since the awards on getting these two facilities ready for activation. I'm excited to report that we received the first inmates at Adams on Monday of this week, and we are close to ramping up the final details with ICE for North Georgia, which will open a little later in the quarter. The second item to mention that is high on our short-term priority list is it the continued emphasis on controlling operating costs. I think our results show good progress on this front; and as Todd reported, I think we have seen some encouraging signs from our Company-wide initiatives.

Now for our long-term focus. One of our key business strategies continues to be a thoughtful, disciplined building of 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 awards earlier this year by the Federal Bureau of Prisons and the State of Arizona. But with that, we continue to hold off on new bricks and mortar construction of speculative beds. As mentioned in our press release, CCA has nearly 9,400 beds available in inventory. As of today, with the beds spoken for at our Adams and North Georgia facilities, we have 6,600 beds left available in inventory. So obviously, we will continue to monitor closely the needs and timing of new bed development; but clearly, we would like to continue to see some more meaningful utilization of our remaining capacity before we add any additional capacity.

Finally, we will also continue to aggressively pursue build to suit opportunities. One final point on our long-term focus, and as is to point to another recent example that took place this past quarter that continues to show our competitive in the marketplace, not only in quality of services but also cost of services and cost per bed, and that is the Georgia contract awards at our Coffee and Wheeler facilities for 1,500 beds. We will deliver these expansions at $43,000 a bed and provide considerable value to the State of Georgia while exceeding our external ROI hurdle. Now for the market and industry observations and opportunities, and first a couple comments on State budgets. As Todd mentioned, our State customers are not out of the woods yet. All of our 19 State customers have passed their 2010 budgets, which would have begun on July of this year.

But as the past 18 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 through this year into the 2011 fiscal year. And as mentioned in the press release, we have seen some population reductions from Washington, Minnesota, and New Mexico, as they have had had new capacity come online. Additionally, the State of Hawaii has been considering a plan unrelated to their budget to return the 175 female inmates in our system back to the Island. As of July 31st, we have 523 Washington inmates, 350 Minnesota inmates, 169 Hawaiian female inmates in our system. We could see some further declines with these customers, which are built into our guidance. For New Mexico, we believe we will not see any further reductions. So although there is still continued uncertainty as it relates to our states' budgets, let me point to a couple positive things that we are seeing with the states.

The first item is some meaningful new legislation within the State of Florida. Florida has the third largest inmate system in the country, and they have the largest projected amount of growth in the next five years. Additionally, this is the first year in some time that they have not appropriated money for new prison construction. With that, the Department of Corrections was given new authority for the first time to send inmates out of State as needed. We think this shows a specific example of the coming supply/demand imbalance, but also points to our track record with other states in being a cost-effective solution for out of State placement. Second item of note is new Oklahoma legislation that gives us greater flexibility for housing out of State inmates within our facilities. With this new legislation, we can now house a larger variety of inmates from all custody levels, much like the flexibility we have in our Arizona facilities and our facilities in Oklahoma. This will make these beds much more attractive and marketable to existing and new customers. And third and finally, as I mentioned in May with the Arizona award, the Georgia award shows again that pressure can only be held back for so long, and we think this is another example that is indicative of what other states are going to have to do to relieve pressure within their respective systems long-term.

Now a couple of comments on some significant pending procurements. The State of Georgia, the 100,000 bed stand alone RFP was canceled this past week. Georgia reissued it on Monday of this week for 1,000 beds, which will allow for both existing construction and new construction, whereas the previous one only considered new construction. The Alaska RFP -- and this is the RFP for the rebid of our beds with the State of Alaska -- this RFP is still pending, and the RFP was advertised that the award date would be by August 14th. Now I will comment on CAR 10 and CAR 11. As a reminder, these procurements are for the rebid for our soon to expire BOP contracts at our Cal City, California and Cibola at 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 reported last quarter, CAR 11 was 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 RFP, and we believe the award on CAR 10 could come later this year.

One final note in this section is the notice that was sent out earlier this year by ICE where they are looking to release an RFP for 2,000 beds in Los Angeles, California. We understand that this procurement is still in development and should be released a little later this year. Let me now make some specific comments on our four largest individual customers, and the first up is the United States Marshals service. First note is just to say that we have broken ground, obviously, on our Nevada Southern facility. That one is progressing nicely and still on track to open third quarter of 2010. But let me also mention their proposed budget for this upcoming fiscal year. Details of the President's fiscal year 2010 budget request were released on May 7th this year. The President's budget request for the Office of Federal Detention Trustee which holds budget authority for United States Marshals service detention, included a total request of $1.4 billion for its agency, which is a $143 million increase over the previous fiscal year.

During the second quarter as well, the Office of Federal Detention Trustee received a $60 million supplemental funding request, which allows the Marshals service to meet their expected 2009 commitments for federal prison detention. With this proposed increase in funding, we continue to believe that the Marshals service will be a meaningful opportunity for our industry. Now I will comment about Immigration and Customs Enforcement. We have had had several meetings with new leadership within ICE and Homeland Security; and as reported previously, it appears that their focus will be on several fronts as it relates to detention needs. One is consolidation of populations from small regional jails to help gain efficiencies. Two, ensuring all detainees are housed at facilities that use and enforce ICE detention standards with increased federal oversight and have appropriate custodial conditions. And three, the housing of criminal aliens through the Secure Communities Program, and also non-detained illegal aliens.

Additionally, many of you have asked what sense are we getting relative to the new Administration's stance on recent enforcement and detention immigration policies that have been put in place in recent years. In some respects, there may not have been much of a change; for instance, the Washington Post did a couple of articles back in May that were titled "Little New in Obama's Immigration Policy", which reported that the new Administration is keeping, if not expanding, most of the policies and/or practices that were put in place over the last few years -- and I think a good example of this is the Secure Communities Program. On the other hand, one policy that we learned yesterday that ICE leadership is reevaluating is the policy of detaining families. We have been housing non-criminal families at our Hutto facility in Taylor, Texas since May of 2006. We just learned yesterday afternoon that ICE intends to ask to us renegotiate our agreement with the government to house a population other than families. The timetable to start those negotiations has not been set by CCA and ICE.

Additionally, we don't believe any potential renegotiation to the agreement would have any impact to 2009 guidance, but may have an impact on 2010 earnings. Finally, the President's fiscal year 2010 budget request for ICE, it is our understanding that a total of 33,400 detention beds could be supported under this request, which is consistent with fiscal year 2009 funding. We are getting a sense, though, that an additional 1,000 to 1,500 beds could be funded through the Secure Communities Program With ICE also looking at a proposed increase in funding, we continue to believe that ICE will be a meaningful opportunity for our industry. Now to the Federal Bureau of Prisons. The budget request for the Bureau of Prisons was for a total budget of 6.1 billion. In comparison, BOP received 5.9 billion in 2009.

In mid-June, the House passed its version of the fiscal year 2010 Appropriation Bill for BOP, which was similar to the President's request. The House version of the bill also included the following report language that we think is note worthy, which says, quote, "Between 2010 and 2014, BOP estimates it will experience a net growth of 22,500 prisoners, while planning to add only an additional 13,000 beds in new prisons during the same time period. With the Bureau of Prison population currently exceeding the rate of capacity in its facilities by 37%, the federal prison system is on an unsustainable path," end quote. I am sure you probably also noticed that BOP's Director, [Harley Lampad] testified last month in front of the House Judiciary Committee. The Director's testimony was focused on the significant security issues faced by the BOP with the overcrowding situation within their facilities, and he said that a proposed solution is increased reliance on the private sector to help with this critical problem.

So with this projected increase in populations and this proposed funding increase, we continue to believe that the Bureau of Prisons will be a meaningful opportunity for our industry. Let me finally wrap up this section and talk about California, and first a few comments on California's budget situation. The Governor has signed the budget and the Department of Finance has recently released its budget summary. The summary does go into detail how CDCR can achieve approximately 555 million of its projected $1.2 billion cut. These items will include four areas. One, the selected commutation and deportation of undocumented immigrants. Second, inmate program reductions. Third, operational savings. And fourth, contract medical rate reductions. The remaining 630 million will be achieved through various reforms intended to reduce prison and parole populations.

We have indications that these changes could equal 27,300 projected inmate releases, and these reforms will require some type of action from the legislature, which won't reconvene until after the August recess. Now, this all may change, as the three-judge panel issued their final ruling late Tuesday night. The three-judge panel issued a 184-page final ruling which proposed a cap to California's inmate population at 137% of designed capacity of their prisons, which will require the reduction and/or release of approximately 40,000 inmates over the next two years. The Court did not order any specific process to be followed to affect the release, giving the State 45 days to craft a plan. Now, the State is still reacted to the order; but both CDCR and the AG's office has made some comments in the last 48 hours in response to the action taken by the panel, which include CDCR held a press release after the release of the final order addressing several issues included in the order.

At that conference, they voiced their support for the out-of-state program, and said they are focused on three possible areas for addressing overcrowding. One, the legislature's passing of Governor's population reforms. Two, in-state construction. And three, expanding the out-of-state program. Attorney General Jerry Brown indicated Tuesday night also that the State would be appealing the order and thought the case would ultimately end up in the Supreme Court. Additionally, he has indicated that some type of settlement may be negotiated. So clearly, a lot more to come out of the State of California and CDCR over the coming weeks as they sort through their budget reduction and the development of a plan of action that they must submit to the Court.

But based on the comments made by CDCR, it appears that the out of State program could possibly be expanded to help them achieve part of the solution reducing overcrowding within their system. So that concludes my prepared remarks. But let me also mention and acknowledge the dedication and commitment of our men and women throughout the organization that have contributed to CCA's ability to weather this economic storm. Thank you again for calling in today's conference. And also I'll turn it over to John, who will wrap up our prepared remarks.

Yes, I just want to hit, I guess, what I would consider some of the significant highlights of the report that we issued last night, as well as our comments this morning. First of all, our earnings were ahead of our expectations and your expectations; and, of course, we increased our guidance from our our prior announcement. I think what's noteworthy is since February, when we issued our first guidance for the year -- and, of course, were talking quite a bit about the uncertainty -- that we've raised the low end of our guidance by $0.11, which then puts the low end of our guidance exceeding what our 2008 earnings were. And I think this is quite remarkable when you consider the economic environment and the challenges that is giving our customer base. We've seen our adjusted EBITDA for the first six months grow by 7%. We've seen our free cash flow for the first half of the year at $0.91, and that compares to an earnings per share of $0.59, as we try to point out every time that depreciation expense for this Company is substantially lower than our maintenance capital expenditures.

We believe the supply/demand imbalance continues, and insufficient public sector capital investment ensures the shortage of beds will continue. And of significant note is today, we have 12,000 beds in inventory or under development, which if utilized at our current average margin per bed, have the estimated potential of annual incremental facility EBITDA of $97 million. This would generate approximately $0.49 of additional earnings per share. Of the 12,000 beds, 5,400 of them are under contract, and 9,400 already have depreciation and interest expense baked into our current financial numbers. And then last but not least, I would like to point out that today is my 9th anniversary with CCA, by coincidence, and so I was doing a little reflecting. On August 7th, 2000, the Company had 12,000 beds in inventory, and I think everybody knows what the history of that experience has been.

And as I was looking at CCA's occupancy, had 46,000 inmates in their system; and today, the second quarter of '09, we had an average occupancy of 77,400. So quite remarkable growth, and we believe that based on the experience of the 2001-2002 downturn that the opportunities to see something similar is definitely there. So with that, operator, we will open for questions.

(Operator Instructions). And we'll go first to Kevin Campbell with Avondale Partners.

Good morning, thanks for taking my questions. Was hoping could you start with some additional commentary as it relates to ICE and the news yesterday about potential changes coming from the White House on immigration enforcement standards -- not necessarily enforcement, but the detention standards. And any additional detail you can provide around the T. Don Hutto facility would be appreciated. I think you said, Damon, in your comments, that you didn't expect it to the impact 2009 but could impact 2010. If you could just maybe give us some additional clarity there, that would be helpful.

Absolutely. Good morning, Kevin. First part of your question related to the detention standards and enforcement of those standards throughout the facilities that hold ICE detainees. This has been consistent what we've been hearing from Homeland Security and ICE officials over -- I guess since January, since the new Administration was put unplace. They have had concerns and been focused on specifically detainees housed in local jails that may not, not only operate, but also have conditions of confinement that are consistent with the standards. So we think the announcement yesterday is just kind of more formalized and putting in place not only a way to make sure that those detainees are put in places that are more humane and meet all the appropriate standards, but also see some potential cost savings by consolidating. So I think it's consistent from what we've been hearing since the first part of the year; and as we like to say, especially with all of our ICE facilities, we think this is a great solution of a lot of our facilities that they could use as a model as they go forward with this plan.

All of our facilities do meet the ICE detention standards. We do have a rigorous both QA process internal, but also very much welcome external reviews from both ICE and other agencies. So I think it is going to be more of the same as it relates to our populations in ICE facilities. The Hutto facility, we do know obviously that the housing of families has been a controversial policy issue for many years. Obviously, it's not appropriate for us to have an opinion on it either way; but we feel very strongly that we have been meeting their needs over the last few years and have been very responsive to all of their issues. So it was indicated to us yesterday, and then actually I think ICE posted a fact sheet this morning, that their intent to sit down with us, look at changing the population from a mix -- right now we have a mix of families and females -- to a mix -- or to a population of all females. So we do have a small population of females already in there today. It's our understanding they want to sit down at the appropriate time to talk about changing that mission to an all ICE female facility.

And it appears that if you guys have an occupancy guarantee at that facility based on your compensated occupancy rate in the supplemental -- I haven't looked at it specifically for this quarter, but I know in prior periods it's always been 100%. So do you expect that that occupancy guarantee would change with any negotiations, or is it really just a change of the inmate or detainee mix?

Yes, it's really too early to tell. Like I said, we got the word yesterday afternoon, so we really haven't sat down and gone through the details yet and really understand what they are looking for with this change in mission. But they have clearly indicated that they would continue to want to use services there at that facility.

Okay, thanks. And if you could, talk a little bit more about the consulting fees. I know, clearly, it seems like that helps on the operational expense side, keeping those low with implementing some of your changes there; but $4 million does seem like quite a bit in one quarter, so maybe if you could just give us some sense of what that $4 million bought in the quarter, and how much you expect to spend going forward, just so we have some general idea of what a good run rate would be.

Yes, Kevin. In terms of what it bought, it basically bought personnel resources and some proprietary methodologies around identifying opportunities, organizational efficiency to ensure we maximize the potential benefits from the initiative, and to ensure we accelerate that process as much as possible. In terms of how much more in consulting fees we can expect going forward, we're not really in a position to provide an estimate. Future fees are really dependent upon the additional initiatives we identify and implement, and the level of involvement of the consultants. But it is possible we incur additional fees going forward.

And does your guidance assume any different level of fees? Is it comparable to, say, second quarter, or could you give us some color there, perhaps?

We'd prefer not to parse out guidance at that level of detail, but the guidance does incorporate a range of potential outcomes around consulting fees. So those consulting fees would be built into the guidance.

Okay. Last question, then I'll jump back in the queue. I was hoping maybe you could talk a little bit about Arizona. I know there's been some proposals in the State there, the Assembly and the Senate that I think were vetoed by the Governor but could ultimately come back up about increased privatization. And I was just hoping maybe you could give us some additional color on what's happening in Arizona.

Yes, Kevin, this is Damon. I didn't have that in my prepared remarks, just because it's still kind of influx. Obviously, there has been a lot of discussion about doing some additional in-state beds, and obviously with our presence there and obviously our relationship with Arizona, we would obviously be very interested and be very competitive for those procurements, but I think it it's still a little bit influx and not completely clear exactly what their intention would be.

Okay. Thank you very much.

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

Hi, good afternoon, guys. Congratulations on the quarter. A quick question on the -- with all your State customers, like you said, pretty much signed their budgets, obviously there's risk of forecasts coming up; would you say, though, given, I guess, what you said with respect to the same trends you observed during the last recession, that the primary risk now going forward from the State budgets is not per deems or pricing, but maybe more along the lines of how many inmates or what level of population they would draw from facilities to ease some of their financial burden?

Yes, I think it would be -- potentially could be a combination of all of the above. I think this past 12 months what has shown, and even in the previous recession, they will look at both alternatives -- both a reduction in per diems or population, or a combination of both.

And from the states where you mentioned the withdrawals this quarter and the remaining number of beds, do you have a sense of where those states -- I mean, are they looking to definitely remove those by the end of a certain time line? Or are they still just playing it by year, and will you find out quarter by quarter?

It's a little bit influx. I mean, obviously we talk to them on a regular basis. Minnesota, Washington, those states, have got some capacity within their respective systems; but I think what's creating the timing issues there from their perspective is the budget issues that they may have with respect to states -- can they staff those facilities, do they have the money to staff those facilities? So it's really driven by their timetable, but obviously we're talking to them on a regular basis and trying to forecast as appropriate.

Okay. And then back to these, I guess, the consulting fees, I mean, could you give us a few examples of maybe what sort of initiatives these personnel that you hired and these consultants are making in the Company, just so we get an idea of what the operating efficiencies are?

I'll address that. We see the initiative as a bit of a competitive advantage. I'm sure our competitors are addressing their costs as well. But we'd prefer not to peel back the onion and open our play book. I think the primary point is that we're having some success in the initiative. We don't want to thump our chest too much here, because these are steps we're supposed to be taking. But as the numbers indicate, we're taking those steps and having some success.

Okay. And one more question then I'll jump back in the queue. You had mentioned last quarter and a couple of times before sort of potential efforts to consolidate your empty beds so that you can market more of them together to potential or existing customers. Do you have sort of the status on where those plans are heading, what you might do in the future to address maybe larger awards from single customers?

That's something -- we have talked about that in the past. It's -- obviously, the Huerfano facility with the award, State of Arizona consolidating from four to three facilities is a perfect example. And so those are opportunities we'll continue to evaluate as we discuss with our customers based on timing and potential needs, so that's definitely high on our priority list to the look at those type opportunities.

Sir, did you have any further questions?

No, that's fine.

Okay, thank you. We'll move next --

Thank you.

We'll move next to Jamie Sullivan with RBC Capital Markets.

Hi, good morning, everyone.

Good morning.

Question on -- with the states and the budget situation and how they try to manage their populations lower. Just wondering if you could comment on maybe the experience through the last downturn of whether -- how they do that? Is it through early releases? Looking at probation versus incarceration? Overcrowding their own systems? Can you just talk about how that kind of played out the last cycle?

Yes, I think you described it pretty well. It's basically a look at all the levers and knobs and seeing what they could do to affect population, so I think you hit them pretty well. The potential overcrowding of their own facilities, the backup populations into local jails versus having them sit in State prisons; looking at parole, looking at probation, looking at diversion on the front end relative to law enforcement initiatives. So I think they'll look at all the different areas that they could affect that could have a -- help them affect a lowering of their population.

Okay, but there was no -- there was kind of an even balance across all of those levers? There wasn't any one that the states leaned on a little bit more?

No, I mean, it's -- really depends kind of state by state and kind of what they think they can actually affect relative to those different areas. Politics obviously play a part of it. And obviously, they're in the going to draw a lot of attention publicly if they do get, say, lax on releasing people early or parole standards or what not. So you're not going to get a clear message of what they're doing; but they'll probably look at everything they can affect, and then will make those adjustments accordingly.

Okay, and then Todd, you mentioned some of the cost savings will and won't recur. Can you talk a little bit more about some of the one-times that won't and some of the savings that is will recur?

Sure. Some of the one-time savings are impacts in Q2 that were beneficial -- legal services and legal settlements, which we think is more of a timing. Those have a tendency to be somewhat variable and volatile from quarter to quarter. And the expenses we incurred there were below average in the quarter. Similarly, Workers' Compensation expense, you can see some variability there. And we saw lower than average expenses in Workers' Comp in Q2 that may it not recur going forward.

Okay. And then any detail on some of the recurring benefits that you have?

Yes, again, as we talked about previously, we'd prefer not to open up the play book. We're looking at all cost categories up and down and across the organization. We're leaving no stone unturned. But again, don't want to get into too much detail there.

Okay, but do you feel like there's a fair amount of opportunity on the cost side throughout the business?

We're optimistic about our ability to generate benefits going forward.

Okay. Great. And then just a question on turnover levels. How have those trended, where are they today versus historical? And if there is any way to quantify the impact on margins or costs, it would be helpful.

Well, I"ll -- this is Damon. I'll mention that we have seen improvement in turnover. I mean, I think obviously the economy and the recession has made a big part of that. We think obviously we've also done a lot of good things over the last few years to make us an attractive employer in helping to retin our employees in the system. But, yes, a lot of anecdotal stuff I could share with you. But we have seen, especially in kind of the Midwest, Oklahoma, where you've got refineries laying people off, we are seeing a good amount of not only people interested in employment with the Company, but also a good lowering of our turnover system-wide.

To put some numbers to it, turnover has declined from about -- call it 35% to around 25%. So pretty significant decline. It does have have a favorable impact on our operating costs, but it is one of the improvements we projected to see at the beginning of the year, and what we have experienced is pretty much in line with what we forecasted.

Okay. Great, that's helpful. Thanks a lot.

And we'll go next to Todd Van Fleet with First Analysis.

Morning, guys. Todd, let me take one more run at the consulting expenses.

You go right ahead. (Laughter).

So 4 million in the quarter, so is that the high watermark? Is that -- is this a one-year agreement? Is it kind of got an evergreen provision? Is it -- if could you just kind of help us understand where we can expect these costs to drift. I would imagine that the 4 million is probably related to work that's been done over a period of time, and then the bill came due in the June quarter. But just if you could help us understand kind of the time frame and if we have seen the high watermark and that sort of thing, it would be helpful.

Probably not in a position to say whether we've seen the high watermark or not. Again, it's dependent upon the level of involvement of consultants going forward, both on the initial identification of opportunities and on implementation. So some of the initiatives we identify will require some sort of implementation phase, and I could see a situation where we utilize consultants on the implementation side, if it's a large enough, complex enough project that could benefit from the utilization of consultants to accelerate the implementation.

Okay, alright. Then on some other expenses in the quarter, the start-up, I think you had said for Adams County, was 2 million. What was the total start up in the quarter?

Total start up in the quarter is $3 million.

3 million?

Yes, about $1 million on North Georgia.

Okay, okay. And so you could have -- I mean, did you accrue in the quarter, but yet you are going to incur the expense in Q3? Or just trying to understand the timing here. Did you buy yourself a little bit of cushion here in Q3 related to that 2 million for Adams County?

No accruals. Those are actually costs incurred on staff hired in advance of receiving the inmates. I'd say on North Georgia, we're probably a little behind on the receipt of inmates over what we had originally anticipated, and so incurred some start-up cost, maybe a little sooner than we would have liked to otherwise had we known the exact timing, but that's kind of within the range of tolerances.

Okay. And to come back to the Hutto facility again then, so the articles that was in the Times this morning, they identified a population at Hutto as about 127, down from 450. You are housing both female and families, I guess, at that facility. It's a take-or-pay situation at Hutto, is that right?

This is Damon, Todd. Yes, that is correct.

Okay, so that's -- I mean, can you comment specifically on the population? Has the population been reduced over the course of the past month or so? Because, again, I know that on your stats that you put out in your supplemental, it's based on contracted capacity. So if it's a take-or-pay situation, but yet they're running below the take-or-pay level, we wouldn't necessarily see that reflected in the supplemental, is that right?

Correct.

Okay, so the population at T. Don Hutto right now, is it less than the take-or-pay level?

Yes, it is.

Okay. And thinking about the population mix there moving forward then, so if we move to a population that's all female, the contract would have to be renegotiated probably from a variety of standpoints. Would you expect the operating -- I don't know, I guess profile of that facility to change meaningfully and the margin profile of that facility -- well, ignore that. Ignore the margin. Are the -- would the operations of the facility have to change meaningfully if you went to an all-female as opposed to a family?

It's really too hard to say right now. I mean, the facility has been used for females in the past, and I think part of the reason we have females there is because they like the environment, they like the operating conditions, they like the process we have in place to serve not only the families but the females. So I think they thought that environment with the changes we had made over the years for the families was very conducive for females, so I think that's part of the attraction, and also our level performance there. So what their expectations would be relative to the population and the service and the programs and the quality is really too early to tell.

Let me ask it a little bit differently then, Damon. Would the utilization, in terms of the number of individuals that that facility could be used to accommodate, would that increase as a result of a change in mix from a combination of female and family to female?

I think that's possible.

You could see a change in expenses, you could see a change in guarantee to a change in per diem. It's too early to tell. We don't think it's going to have an impact on 2009 EBITDA outside the range contemplate in the guidance, but it could have an impact on 2010.

Okay. Let me ask you then on Arizona, and then one more in California, if I could. On Arizona, the competition today indicates that Arizona pulling back a little bit because of budgetary reasons. You indicated that as well, so you said that they kind of pulled back to their -- kind of the take-or-pay amount, correct?

Yes, they're at the 90% guarantee right now. 90% at Huerfano and 95% at (Inaudible).

Okay, and given everything that's at play in Arizona right now -- I know you had said you don't want to comment on the budget outcome and so forth, but -- and there are proposals out there to of course repatriate and build in-state or not, I guess -- is the -- I guess the take-or-pay level has been the primary determinant in terms of the amount that they've decided to pull back, is that right? So they haven't taken back 300 or 400 inmates because of the fact that they're paying for the inmates anyway. They're paying at the take-or-pay level, but that's kind of the primary reason that the populations have only been pulled back maybe 200-plus inmates or so from July to August. Or from June to August.

I'm not sure I understand the nature of your question there.

Well, I guess I'm trying to understand, is this -- could we see more inmates being pulled out, irrespective of the take-or-pay, or is this a temporary situation and you expect to receive more Arizona inmates moving forward? I'm trying to -- that's the direct question. Where is this going? Where is the Arizona action today on the budget? Where is it going to? Is it going to just kind of status quo where it is today for next year? Is it you expect this to be a temporary blip, and then the population is to return? Is it, this is the beginning of a trend and the only thing -- what we have working for us today, and moving forward is the take-or-pay aspect of the contract?

Yes, it's really a lot of questions in there. It's really hard to say definitively what would be the rate going forward or what would would be the population going forward. We are at both the guaranteed levels at both Diamondback and Huerfano, and I don't think we get a sense from Arizona that there's any discomfort running at those levels. So what could happen in any coming weeks, coming months, it's a little hard to say.

Alright, let me try on California, then I'll jump off. In reading the Court order that was -- that came out earlier this week, one of the things that struck us was the federal receiver -- the healthcare receiver -- talking -- I guess it was cited in the Court order about the receiver saying how many additional man hours were committed to the issue that arose, I guess, in your facilities earlier last year when California -- they stopped the out of state transfer process because the federal healthcare receiver stepped in, and you guys took care of those issues and to the State's satisfaction, and they started sending is inmates your way again. That was in the Court order as being one of the reasons why perhaps maybe out of state transfers might not be the best -- additional out-of-state transfers might not be the best option for the State. In your view at this point, if you were to receive or propose additional facilities within your system above and beyond those facilities that are already being utilized, would there be substantial man hours required from the folks in the federal receivers department to manage the healthcare issue or situation in those facilities such that you kind of had to bring them all up to speed on par with Tallahatchie and La Palma and so forth? I'm wondering how much of a hurdle the federal healthcare receiver could be in terms of receiving additional out of state business in California? That's the more direct question, I guess.

Good question, Todd. Let me address a couple of your points there, I guess. One is that, as you know, the three-judge panel, their view and their focus was to say, "Is there any other alternatives that the state could do short term to lower their population short of them actually doing a final release order?" So that the panel was -- said their last alternative was to require the state to release inmates. But it was their responsibility to look at any opportunity that the state could do to take care of -- relative, I should say -- or any other alternatives that the state could do to reduce their population. And so I think the commentary and finding relative to the out of state program, I think our view is that they said the out of state program is been in use -- obviously it's taken some hours from the receiver's office in deploying that program, but it's not the silver bullet. It's not the one solution that the State could use to deal with their overcrowding, which both CDCR and us have both said that we just want to be a tool in the toolbox to help them with their overcrowding.

Now, I think part of the challenge has been with California and the receivers office is that when we first entered this contract with the State of California, I think there was a lot of challenges, as there always is when you create a program like this, to work through all the operational issues, the screening processes, the flow of inmates from their facilities to our facilities. And so I think that created a lot of challenges, just because it's new process for both CDCR and the receiver's office. But I guess I would look at when these reports were filed, which was last year -- and actually these were filed from the receiver's office from previous leadership within the receiver's office -- since June 30th last year we've had had 3,500 inmates entered into our system; and we obviously talked a little about the success we've had this previous quarter with the State of California. And the receiver's office has to approve every single inmate that goes out of California to our facility. So I think part of the challenge has been to develop a process between CDCR and the receiver's office for screening, for evaluating, for determining the appropriate pool of inmates who come to our facilities. I think since this was a brand-new process, everybody was kind of learning along the way, and obviously there was the urgency to move forward as quickly as possible. But I think looking back now, they've worked through a lot of those issues and we've had good success in the last 12 months in increasing our population.

That's good. So there shouldn't be any -- or any significant, I guess, incremental effort on the part of the receiver, or CDCR, with respect to the maintenance of the healthcare and out of state facilities?

Especially if they stay with the same vendor.

That's a good point. Thanks, John. Thanks, guys.

We'll now go to Clint Fendley well Davenport.

Good morning, everyone. On the -- question on the Hawaiian inmates held in Kentucky, I wonder if this reflected a change in the State's view toward all out of state inmates, or just the higher risk female populations?

Clint, good morning. This is Damon. This last legislative session they actually -- some folks, I think both in the House and Senate, introduced bills which requested and required DOC bring back the females. And this has been kind of an ongoing issue for several years. I think there's just a general sensitivity of housing females off the Island. So I think this has just been perculating out there for awhile, and this has been an issue where they wanted to bring them back to the Island.

And we don't see a change in the policy.

No. Yes. I'm sorry, yes. To answer your question more directly, we do not see a change in the policy as it relates to privatization and the users of the private sector.

And any expectation on the time line, then, for the resolution or transfer?

No, we're working closely with them on that throughout the course of the year. And like I said, I think we've built appropriately any changes into our guidance.

Okay. And then switching to California, and recognizing that the situation there is very fluid, but on the State's intent to build new prisons, I mean, given what has historically been a multi-year construction cycle for most states, has the CDCR indicated how they might build these prisons in order to meet this two-year reduction requirement?

Actually, I think they've acknowledged that building isn't the solution within two years.

Okay, you stated that the population reform -- obviously the expanding the use of the out of state and building new prisons, so I guess the building new prisons goes much beyond the two-year time frame then?

Yes, I think based on our experience in California, I think it would be really hard if not impossible for them to do it in two years.

Not surprising. Okay, thank you, guys.

Next we'll go to T.C. Robillard with Signal Hill Capital Group.

Hi, good morning -- or actually good afternoon.

T.C. who? (Laughter).

I know, it's been awhile.

Welcome back to the call.

Thank you. Just -- I know it's running long here. I actually -- just a couple of quick questions. First, Damon or Todd, or even John, can you just give me a sense of where you guys look to kind of have your sweet spot for kind of inventory on hand as you are going forward? I mean, I know we're in kind of a brave new world here with state budgets, and it's probably unlikely to change for at least the next couple of years. So where -- I know historically it was kind of -- a ballpark of 5,000 beds in inventory was what you guys always really wanted to kind of have on hand. You had 6,600 or so now. What does that number look like in this new environment?

I think we're still trying to assess that. As Damon said in his comments, we've -- we don't have any projects of a speculative nature that we're going to move forward with. We announced, I guess nine months ago, that we had decided to delay the construction on the Trousdale, County in Tennessee facility. But every day, we are evaluating our customer needs and trying to see things that most people wouldn't see so that we know. If you look at the 6,600 available beds we have right now, about 2,500 are beds in facilities that have a customer relationship. So it's not like -- some of them were beds we could sell to other people, but a large percentage of those beds are beds that we can only sell to the customer, and those beds will probably be utilized when these states start to realize that they need the additional capacity.

In fact, we really have no single facility now that would be available. All of our beds that are available are parts of facilities. So at the moment, we're going to watch, monitor before we take our next step. We still believe in the supply/demand imbalance; but with the uncertainty, you're right. We'll probably want to -- we'll be watching probably the budget year 2011 to really see what's going to happen before we decide that we want to get back to where we are ready to speculate in any new beds.

And so I guess fast-forward to kind of the scenario where I think we all feel is going to play out at some point, which is you turn the corner, you start to see an acceleration in terms of using the private sector again, and you start to see a quick drawdown on your inventory. How quickly could you guys get Trousdale up and running? I know you've done some -- I'm sure you've gotten a lot of the complicated stuff out of the way where now it's probably actually just the physical construction. How quickly could that be built?

12 months.

Okay, perfect. And then not to feel left out, on the consulting fee -- Todd, can you just -- looking at it another way, as you guys are -- you sat down with these consultants, you kind of laid out the plan to what you wanted to realize and kind of where your fee structure was. Can you give me a sense as to kind of what type of an ROI you were looking for to realize with respect to this? I know this number is going to fluctuate, but I'm assuming there is -- like everything you guys do, there's got to be some sort of an ROI target to this.

On the consulting fees?

Yes, I mean -- because I'm assuming there's obviously -- with some of the proprietary stuff that you are going to be putting into place, there's going to be some significant kind of efficiencies and cost savings down the road. So just kind of looking at from the that standpoint, you could put some numbers around it if you want to, as far as hard dollars; but knowing that it's influx, I'm just curious, is this 15 to 20% ROI, or is this going to be something that's even more significant -- without you having to open up the kimono here and kind of reveal?

It will be in excess of 15 to 20%.

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

(Operator Instructions). And gentlemen, we have he no questions remaining.

Okay. Thanks, everyone. Appreciate you all participating, and hopefully we shared some color on our second quarter and our guidance going forward. Thank you. Good day.

Once again, that does conclude today's conference call, and we thank you for your participation.