CoreCivic Inc (CXW) 2009 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CCA's fourth 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 the 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 discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release, and included in the supplemental financial data on our website. We are under no obligation to update or revise any forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrences of unanticipated events. Participating on today's call will be our Chairman of the Board, John Ferguson, President and CEO, Damon Hininger and Chief Financial Officer, Todd Mullenger. I would now like to turn the conference over to Mr. Ferguson. Please go ahead, sir.

Welcome everyone to CCA's fourth quarter 2009 earnings call, as well as the discussion about our 2010 forward-looking guidance. In addition to the three that were mentioned, in the room with us is Bill Andrews, one of our Directors, and David Garfinkle, our Vice President of Finance and Controller. And with that, I will turn it over to Todd Mullenger.

Thank you, John, and good morning everyone. And moving straight to a discussion of our financial results. In the fourth quarter of 2009, we generated $0.36 of EPS, compared to $0.32 per share in Q4 of 2008, which represents a 13% increase. Full-year EPS, normalized for unusual items, totaled $1.28, representing a 7% increase over $1.20 in 2008. Total revenues for the fourth quarter were up 4% over last year, reflecting a 5% increase in average daily compensated populations.

The primary drivers of our year-over-year revenue and earnings growth includes increased compensated man-days from the states of California and Arizona, as well as the commencement of our new BOP contract at our Adams County facility. Revenues for compensated man-days decreased 0.6% in Q4 2009 versus Q4 2008. The decrease in average per diem was driven primarily by the replacement of family detainees at our T. Don Hutto facility with an all female adult population, requiring a lower per diem. Combined with year-over-year increases in US marshal populations under a contract that provides for a lower tiered per diem above a certain population level.

Excluding these impacts, per diems increased by approximately 1% year-over-year in the quarter. Average compensated occupancy for the quarter was 91.5%, compared to 92.8%. We continue to be pleased with operating expense performance. Operating expenses per man-day in Q4 2009 were $39.97, compared to $40.22 a year ago, which represents a decrease of approximately 1%. The decrease in cost per man-day reflects contract modifications from our customers, and the impact of our company-wide initiative focused on improving operating efficiencies.

In addition, during Q4 2009 we recognized a significant improvement in our workers compensation expense, as a result of adjustments coming from an updated actuarial estimates. These improvements in operating costs were offset by operating inefficiencies at several of our facilities, including North Georgia, which operated at 20% of capacity, our Red Rock facility due to the ramp down of the Alaska populations and our Prairie facility, resulting from Minnesota and Washington facilities ramping down. As a result of the operating inefficiencies in North Georgia, Prairie and Red Rock, operating margins per man-day declined slightly from $18.32 in Q4 of 2008, to $18.19 in Q4 2009, with operating margin rates remaining flat year-over-year.

Adjusted free cash flow for the quarter totaled $64 million or $0.55 per share, and $240 million or $2.04 per share for the full-year. Cash tax payments for the full-year totaled approximately $64 million, or approximately 27% of pretax income, which is much lower than the 34% GAAP tax rate reflected in the 2009 income statement. The lower cash tax rate was accomplished due to certain tax planning strategies. Although we will work diligently to minimize our cash taxes going forward, cash taxes are expected to approximate 31% in 2010, versus 27% in 2009, and as compared to 38.5% GAAP tax rate reflected in the EPS guidance for 2010.

With regards to our share repurchase program announced in November of 2008, we did not row purchase any shares during the fourth quarter. So the number of shares repurchased to date still totals approximately 10.7 million of a total cost of $125 million. That plan expired effective the 31st, December 2009.

Moving next to discussion of our guidance. As indicated in the press release, full-year guidance is in the range of $1.16 to $1.26 for EPS. Guidance for Q1 is in the range of $0.28 to $0.30. We are also initiating guidance on free cash flow per share. However, we are only providing full-year guidance, given the significant volatility in quarterly cash taxes.

As we have commented on previously, 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 $101 million in 2009, versus maintenance CapEx for the year of less than half that amount at only $49 million. So as we have discussed previously, we believe adjusted free cash flow per share is, in many ways, a better measure than EPS of the returns that we are delivering to the shareholders.

Full-year guidance for free cash flow per share is in a range of $1.83 to $1.99. A complete reconciliation of forecasted adjusted free cash flow per share can be found in the supplemental financial information section of our press release. Both EPS and free cash flow per share guidance were developed under the assumption that no share repurchases are made during the year. In comparing Q1 guidance of $0.28 to $0.30 to Q4 2009 actual of $0.36, a couple of items to note. First, going back to fourth quarter EPS of $0.36 as we just discussed, there was an unusually large one-time expense variance impacting Q4 earnings related to worker's comp expense.

Second, you will recall from prior years that Q1 is always seasonally weaker compared to Q4, due to the payment of unemployment taxes. Generally speaking, we pay unemployment taxes on the first $7,000 of wages per employee. So those taxes are heavily weighted towards Q1. And this year we are seeing significant increases in those unemployment tax rates compared to prior years. Unemployment insurance is a self funding program, so as unemployment claims increase, the tax rates are increased to fund the increases in claims. Finally, Q1 has two fewer days than Q4, and these three items combined account for nearly $0.04 of deterioration in EPS from Q4 to Q1. Next, our guidance for Q1 and the full-year is impacted by a number of key factors, which I will spend a few minutes outlining.

First, guidance reflects nearly a full-year of EBITDA impact from the BOP contract at Adams County, which began ramping in August of last year, and is now operating under the 90% occupancy guarantee. Also included are increases in inmate populations under our State of California contract. Our California pops averaged 8,000 for Q4 2009, with a ramp up of additional inmates beginning in Q1 of this year. Total increases expected from the ramp up are approximately 300 during Q1, and 600 during Q2, and 600 during Q3, and 500 during Q4, for a total increase of 2000 by year-end.

Next, at our North Georgia ICE facility, we currently house approximately 150 ICE detainees, projected to grow to 450 by May. As a result we will incur a loss on this facility in Q1 of approximately $2 million, due to the lower occupancy percentage and start up costs.

Regarding Georgia, we expect ramp ups of the 1500 beds of expansions under the State of Georgia contracts at our Coffee and Wheeler facilities, where we expect to receive 600 inmates per month, combined between the two facilities beginning in July. So that by September, we have received a total of 1500 incremental inmates to fill the expansion beds. Next, we expect to activate our new 1,000 bed, Nevada Southern facility for the U.S. Marshals during Q4 of 2010, with a gradual ramp up beginning in October. However, for the year, we expect the facility to generate a net loss, as a result of start up costs.

Nevada Southern will generate approximately $3 million of start up costs in Q3. These increases are offset by a number of items. First, the full-year impact of the loss of all Alaska inmates from our Red Rock Arizona facility. Alaska housed approximately 800 inmates at Red Rock at the end of September 2009, with the transfer out of essentially all inmates occurring during the month of December of last year. The Alaska population averaged 600 during Q4 2009.

Next, we are anticipating the loss of all 700 State of Arizona inmates, at our Huerfano, Colorado facility, all to be removed during the month of March. We also expect a loss of all 2100 Arizona inmates at our Diamondback, Oklahoma facility, all to be removed during the month of May. In addition, we are experiencing slight reductions in ICE populations at several of our facilities, and we've realized reductions in EBITDA at our T. Don Hutto facility, related to change in mission from housing families to adult females.

Next, we've announced the loss of the BOP contract at California City, where we expect the removal of all 2600 BOP inmates to begin in July, and to be completed by the end of September of this year. We also had the removal of the last 200 Washington and Minnesota inmates from our Prairie facility completed in January this year. And then finally, we are projecting a $7 million increase in depreciation and amortization expense. As we've mentioned previously, the cash operating carrying costs of vacant beds is approximately $1,000 per bed per year. So on a 1000 vacant beds, the cash operating carrying costs of those 1000 vacant beds would be $1 million per year.

With regards to adjusted free cash flow per share, adjusted free cash flow per share guidance of $1.83 to $1.99 for 2010 is lower versus 2009 of $2.04, due to the projected increase in the cash tax rate from 27% in 2009, to 31% in 2010, and a $4 million to $9 million increase in maintenance CapEx in 2010 versus 2009. Cash tax rate is increasing due to the one-time tax credits, and deduction taken in 2009 that will not be available in 2010. And the increase in maintenance CapEx reflects the larger number of beds we have in our portfolio. So just to recap taxes, assume a 38.5% GAAP tax rate in computing EPS, but a 31% cash tax rate in computing adjusted free cash flow per share in 2010. Now for longer term projections, we believe our cash tax rate will continue to increase towards the 38.5% GAAP tax rate.

With regards to our new share repurchase program, we have been authorized by the Board of Directors to repurchase up to $250 million of our common stock. That authorization remains in effect until the earlier of June 30, 2011, or the repurchase of a total of $250 million of our stock. We consider the share repurchase program another capital allocation alternative, with the decision to repurchase shares based upon a return on investment analysis.

In other words, if repurchasing shares delivers an acceptable ROI, and that ROI is equal to or higher than the other capital allocation alternatives, such as building new beds, everything else being equal, we would likely choose to allocate the capital towards a stock repurchase. Obviously, the share repurchase price is an important component of that ROI analysis. It is also important to note here that our decisions around the deployment of any capital will be made under the overarching objective of maintaining sufficient liquidity.

Turning next to discussion of our liquidity, as of December 31, 2009, our liquidity is provided by approximately $236 million of availability under our bank credit facility, plus approximately $46 million of cash on hand. Our total debt leverage ratio is 2.6 times, with interest and fixed charge ratios at around 6 times. There is the risk that the State of California issues warrants or IOUs later this year, a step that they took last year, which resulted in a delay in payment on about $40 million of accounts receivable. That, along with the risk that other customers delay payments, are issues we will continue to monitor in relation to our liquidity. Obviously, uncertainty remains related to the general economy, and around government budget deficits.

This is the primary uncertainty and risk we face for 2010. In developing our guidance, we've incorporated our best estimate of the range of potential outcomes related to the risks and opportunities associated with those government budget uncertainties, including the risk of population declines and the potential for pricing pressure, as well as the opportunities to secure new contracts. However, we believe the long term prospects for growing EPS and cash flow remain attractive.

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.

While we continue to face, like all companies in corporate America, a very challenging economy in the fourth quarter, I continue to be very proud of the 17,000 men and women of CCA, and the job they have done in these very difficult circumstances. I would like to break my comments this morning into three topics. First of which is, since we are giving our guidance today, I wanted to give some commentary around the state of the industry. Second is to share our short term and long term focus for the business. And finally, market observations and opportunities.

So our observations on the state of the industry. Let me first say, as we have often discussed during the course of 2009, the pressure our customers feel because of budget constraints has yet to subside as we enter 2010. Since late 2008, many of CCA's customers had to make difficult and controversial decisions that have affected their operations, as well as our operations. At the beginning of this fiscal year, at least 17 of CCA's state customers had a combined budget gap to fill of $72 billion. Seven months into this fiscal year, those same state customers have had another $17 billion budget gap open up, that they will need to close by June.

So it is clear that states are grappling on getting a good handle on their forecast. As mentioned by Todd, state budgets will continue to be a concern this year going into 2011. On the positive side, of our state customers, this is probably the first time in 25 plus years where we have seen so little, if any dollars being appropriated for new prison beds or new construction. We again feel that having inventory as we come out of the recession is going to be extremely attractive, and give us a significant competitive advantage.

And we still feel that the US marketplace continues to look very favorable for the Company and the industry. And with that, we don't believe we have seen any shifts in policy long term, as it relates to the use of the private sector. Recent actions like Arizona, with their pulling of inmates back in state, are completely budgetary driven, and not a sign of softening of acceptance or operational concerns. Arizona is running at 113% of capacity, and this action of pulling back their out of state capacity will exacerbate that situation. Let me also share a couple metrics we have included in our shareholder presentation last year, that I believe shows long term opportunities for the company.

We shared last year that of the US corrections market place, only approximately 7.8% is managed by the private sector. Based on recent reports for 2008, that has grown to 8.35%. So it is still a largely unpenetrated market here in the US. We also shared last year that, of the incremental inmate growth in 2007 among all correctional agencies, about 49% of that growth was captured and housed in private facilities. Based on recent reports, that percent grew to 72% for 2008. So again, I think that shows a great track record for both the Company industry, and the acceptance within the state and federal level of use of the private sector. But also the constraint that many public agencies are feeling on building new capacity.

Now as it relates to our short term focus, our priorities remain as follows. First is quite simply to fill vacant capacity. We continue to have staff all over the organization actively engaging existing and prospective customers to utilize our excess capacity. Second item is to mention that high on our short term priority list is the continued emphasis on controlling operating cost. I think our results show good progress on keeping a lid on escalation of costs, and as Todd reported, we continue to see encouraging signs from our company-wide initiative. Let me also say that our team will continue to recalibrate our expense spend as quickly as possible, based on changes in customer demand and/or need for narrowed services.

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. I think the award in November from California again reaffirms our strategy as being a sound one. So 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 9600 beds available in inventory. As of today, with the beds spoken for by California at our Red Rock and North Fork facilities, we have 7300 beds left available in inventory. So obviously we will closely continue to monitor 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, and have better visibility from our customers before we add additional capacity.

Additionally, as announced in our earnings release, we have a new share repurchase program. We think that based on the current level of inventory in our system it would be appropriate to repurchase shares at prices that would be equal or exceed the ROI available from investing in new beds. We think we have great success with the last program, and think this is a great alternative to deploying capital during this tough economic environment.

Finally, we will continue to pursue build-to-suit opportunities. And with the Georgia award last summer, we had had good success with these type of procurements. However, I think it is fair to say that in the short term, with the uncertainty in the marketplace and also limited visibility from our customers as it relates to their budgets, the company's ROI hurdle on new construction will be higher.

Now for the market industry observations and opportunities -- and, first, a couple more additional comments on state budgets. As mentioned earlier, our state customers. As mentioned earlier, our state customers are still looking through a very challenging fiscal environment. As mentioned last quarter ,the ability to forecast accurate projections has been extremely difficult at the state level, so budget revisions are likely as we go through the last half of this fiscal year, into the 2011 fiscal year.

So, although there is considerable uncertainty as it relates to state budgets, let me point to a couple of positive things that we see with the states. First of which is I mentioned last year the new Oklahoma legislation that gives us greater flexibility for the housing of out-of-state inmates within our facilities in Oklahoma. 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, in our facilities in Oklahoma. We think this is what made the remaining beds at North Fork attractive to California, and if it is the case that Arizona does not extend our contract at Diamondback, this legislation will also make these beds extremely attractive, we believe, to several states.

Second is to report that we have people on the ground in half a dozen states that are not currently doing business with CCA. We estimate that these states are approximately 14,000 inmates over capacity. And like the last recession, we think we could see several states use the private sector after this recession, that don't have the capacity to deal with their overcrowding and/or growth.

Now let me talk about significant pending procurements, and a good amount of activity, both on the state and federal side, the first of which is the activity in Arizona. And there is two items of note. First is the concession agreements. As many of you may be aware, the RFI has been released. And instead of nine of the 10 complexes being up -- or being included, I should say, only two of 10 are included. This proposal is due on February 23rd.

Interestingly, Arizona still wants a $100 million up-front payment for an operating concession. So it is unclear to us at this point how viable a prospect this will be for the Company. As for a more traditional opportunity for the industry, we expect the RFP for 5,000 beds in state to be out shortly.

Now a comment about California. California issued an RFI for more beds out of state in December. Due date for responses was due December 28th. We submitted a proposal, and obviously we think we have viable solutions for their increased needs. Timing on acting on an award is yet to be determined, and in a minute, I will update you on other activities as it relates to California.

Now a comment about Florida. Florida Department of Management Services has issued ITNs for the operation and management at four correctional facilities. These are the rebid of the management only contracts that are currently held by CCA and GEO. We have two contracts. Our Bay and Gadsden facilities, while GEO operates the other two facilities. Proposals are due March 1st, and we anticipate an award around April 12th.

Now a comment about CAR 10. We reported several weeks ago on the outcome of this procurement, and as it relates to Cal City, as Todd mentioned, we understand that the BOP intends to ramp down their population by October 1st. CCA has already engaged other agencies on their interests at the facility. And obviously, we think it could be of interest to the state of California.

Now, a comment about CAR 12. This procurement is for the rebid of our BOP contract at our McRae, Georgia facility, which expires in December of 2012. The BOP anticipate that this requirement will be fulfilled through a single award. A proposed facility may be either an existing facility, a newly constructed facility, or an existing facility with expansion or renovation. We believe the procurement could be issued later this month.

Now, another comment about the ICE procurement for 2200 beds. ICE intends to issue a solicitation for a contractor owned and operated detention facility capable of housing and managing 2200 detainees in the Los Angeles area. We anticipate the RFP should be released later this quarter.

Now a comment about a procure -- or a RFI, I should say, from the Office of the Federal Detention Trustee. OFDT is in search of an existing secured facility which has to be located within 35 miles of Adelanto, California, with a capacity of the 650 beds to house prisoners in custody of both the United States marshal Service, Bureau of Prisons, and JPATS. Responses are due February 11th of 2010, and our Cal City facility would be eligible for this requirement.

Now a comment about the BOP procurement for 3,000 beds. As a remainder, we submitted a response to this RFI last year. This opportunity as we understand it would be for a contractor owned and operated facility for the housing of 3000 short term sentenced inmates. We anticipate the RFP will be issued later this year. So really, a good amount of activity within the industry. If you pull out the beds currently managed by the industry, that are up for rebid, you have nearly 15,000 to 16,000 new beds coming out for bid this year.

Let me now make some specific comments on our four largest customers. And the first of which is the United States Marshal service. First comment is just to say our Vegas facility is still under construction and as Todd mentioned, late third quarter, early fourth quarter, this facility will be activated.

Let me also mention the President's fiscal year 2011 budget request for the Office of Federal Detention Trustee is $1.5 billion, which is about a $95 million increase over the fiscal 2010 enacted level. Just as reminder, the OFDT has the budget authority for the United States Marshal Service for the housing of Marshal Service prisoners. The budget proposes almost $95 million of program enhancements, including $92 million for the housing of marshal prisoners, and $3 million for transportation costs associated with the anticipated increase in their prisoner population.

Now for ICE. The President's 2011 budget request for ICE is $5.4 billion, which is an increase of $97 million from the estimated fiscal year 2010 level. Like last year, no new funding has been provided for the acquisition, construction, and maintenance of ICE facilities. One other note on ICE. We have seen a softening of their demand systemwide, as we understand ICE is dealing with fiscal constraints, nearly a $140 million short fall during this fiscal year. ICE was targeting a systemwide funded population number of 33,400 this fiscal year. But with their fiscal limitations, we understand that they are running 2000 to 3,000 short of that target.

Now for the Federal Bureau of Prisons. For the BOP, the President's fiscal year 2011 budget request for the BOP was $6.8 billion, which is a $618 million increase above the fiscal year 2010 enacted level. This appropriation supports an average daily population of 219,000 inmates, and assumes their systemwide population will be close to 222,000 by the end of the 2011 fiscal year.

As of February fourth, the BOP had 208,000 inmates in their system. There was funding for only one new facility, and that was for the Thomson facility in Illinois. Also, the BOP has continued their policy to not ask for funding for construction of new low security beds, and completely rely on the private sector for that the population.

Now, as it relates to that population, we reported last year that the BOP was at 137% of their capacity. Based on their funding for activation for new beds and projected growth for 2011, we are estimating that their systemwide occupancy could creep up to almost 140%, and have an unmet bed demand of nearly 4,000. With this projected increase in populations, and also the proposed funding request, we continue to believe that the BOP will be a meaningful opportunity for our industry.

Let me now talk about California. And let me first mention we have started the ramp on our new contract signed last November. California has sent two movements, one in January and one last week, as part of their planned ramp into our North Fork and Red Rock facilities. As mentioned in our announcement, the intake of inmates starts this quarter with a gradual ramp estimated to being completed in the first quarter of 2011.

Let me now give an update on the latest with the three-judge panel. As mentioned in August, 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 would require the reduction and or release of approximately 40,000 inmates over the next two years. The court did not order that any specific process be followed to effect a release, and gave the state 45 days to craft a plan.

Now the state' first plan was rejected by the three-judge panel in October. And they ordered the state to come up with a new plan within 21 days, which was due on November 12th. The state submitted a revised plan on November 12th, and it projected a reduction of the occupancy percentage by over 60%, or 53,000 beds. This would be accomplished by parole reforms, new CDCR construction, sentencing reforms, probation reforms, and expanded use of the private sector. Specifically, their proposal assumes 2400 new beds out of state, which in essence is our new contract from last November with the state of California.

Additionally, they proposed another 3600 beds out of state by 2013, elimination of the sunset, and also the private sector would design and build and manage 5000 beds in state. Finally, in talking about the out-of-state program, the state called the program, quote, tremendously successful to date, unquote. But it is important to note that even though they submitted this plan, the state is appealing the ruling to the Supreme Court.

So more to come out of California and CDCR over the coming weeks and months as they develop a plan to reduce overcrowding. But based on the recent expansion in the out-of-state program, and the actions taken by the court, it appears that the out-of-state program could possibly be expanded even further, to help them part of the solution for reducing overcrowding within their system.

So let me bring my comments to a close and make these final points. We are obviously very pleased with our fourth quarter earnings. We achieved positive EPS, revenue, and EBITDA growth and we think this is very significant in today's challenging economic environment. Our competitive advantages continue to be strong balance sheet, good liquidity to fund new capacity development, and our new share repurchase program, limited manage-only operations, and focused operations in a largely unpenetrated US market.

We believe the supply and demand imbalance will continue long term, and insufficient public sector capital investment ensures a shortage of beds for both existing and potential new customers. We are seeing healthy activity in the market for new business opportunities, with nearly 16 to 15,000 new incremental beds coming up for bid this year. But also half a dozen states considering to use CCA to deal with their overcrowding and/or growth. As mentioned earlier, the combined total of the overcrowding by these states is 14,000 inmates. And like the last recession in the early part of the last decade, we still have an inventory as we come out of this recession that's going to be extremely attractive, and give us a significant competitive advantage for this new business.

And finally, if we are successful in filling the nearly 12,000 beds I mentioned earlier, that we have in our system, along with the beds in development in Georgia and Nevada, that would translate into nearly $98 million in incremental EBITDA. That concludes my prepared comments.

Thank you, again, for calling in to today's conference. And let me now turn it over to the operator

(Operator Instructions)

We will go first to Jamie Sullivan with RBC Capital Markets.

Good morning, everyone.

Good morning, Jamie.

Morning.

Wondering just on the state market side. If you could just comment on where you see some movement on population increases, and decreases. And whether -- where we stand this year versus last year, what seem to be more of a concern or a risk, whether it would be the policy changes or the budget, kind of per diem side of the equation.

Jamie, this is Damon. Let me - a couple of points you've asked there. Let me mention the policy. As I mentioned earlier, you have seen in some states, and we talked about this during the course of 2009, where they have done a little tinkering around the edges, but wholesale changes in policy, we haven't seen a lot of activity, and especially if you look at the state of California where they are severely overcrowded. Not a whole lot of interest on changing the policy, although they are part of the overcrowding plan. And back to the three-Judge panel, they are trying to some things with parole and probation. But not a lot of activity but that is always -- potentially could be a risk and something we'll monitor in the short term.

As it relates to populations, we are seeing some states still projecting increases in population, Georgia, Arizona come to mind as some of the bigger ones, Florida. We are seeing some states that are trying to take some short term steps to deal with their population. And that comes to Colorado, for example, where they are trying to do accelerated releases to try to somewhat affect their short term population, as they're dealing with this fiscal constraints.

And the risk on -- the pressure on the per diems. Obviously that was an issue that we had in 2009. I think we reported that we had about a half a dozen states, where we sat down with them and looked at ways to narrow our services to deal with that reduction in per diem. And so that is always a potential risk we have in 2010, and even going out in 2011. And I think that hit most of the points in your question.

Sure. And is it too early to know how many of your state customers are going to enter in those discussions with you again? You mentioned half a dozen last year. Will it be incremental, new ones, the same ones, any color you can provide there?

The short answer is, don't know. As you know, obviously, we are five weeks, six weeks into the New Year with a lot of legislatures just coming back into session. And so just now, just kind of rolling up their sleeves, and trying to determine how they are going to deal with some of these budget shortfalls that I mentioned earlier. And so, too early to tell which and how many.

And the -- you mentioned Colorado. And I noticed that there were some population declines in three of your facilities there. Wondering is that representative of some of their short term fixes and policy changes. Or is that normal seasonality?

No. They -- as you may remember, they reported last August, the intention of trying to reduce their systemwide population. And we were hearing, or at least what was reported in the media numbers as high as 2000 or 3000. And during the course of September or October, you had some of the articles coming out of the Denver Post reporting about some of the issues of not only trying to effect that type of program, but also some of the inmates they were planning to release early. And so it did create some controversy. Bottom line right now is that continues to be a risk. But the ability to execute on that on behalf of the State of Colorado has been a challenge for them. So we have seen some different populations, but it's not consistent with what I think they had envisioned last summer.

Okay. Just curious, is the guidance -- What does that contemplate in terms of the few of the contracts that are out for recompete this year? I know those Colorado facilities are, and a couple others, and just curious, what you are assuming there?

I'd say, as a general rule, I'd assume we keep all the contracts coming up for renewal.

Okay. Great, thanks. I will hop back into queue.

Thanks, Jamie.

We will take our next question with Todd Van Fleet from First Analyst.

Morning, guys. I just wanted to ask on the start up, Todd, was there any start up in Q4, and what are the assumptions on start up expense in each of the quarters in 2010. And then, Todd, I'll ask you to comment on G&A. And I apologize if you provided some commentary, but I didn't get a sense as to an outlook for G&A levels for 2010. Thanks.

Well, with regards to start up costs, about $2 million in Q4, $2 million in Q1, and call it $3 million in Q3, 2010. And with regards to G&A, G&A you can forecast flat to perhaps slightly down.

Great, thanks, guys.

Thanks, Todd.

We will take our next question from T.C. Robillard with Signal Hill Capital Group.

Great, thanks. Good morning, everyone. Todd, just to follow up on the heels of Todd's question there, when you said flat to slightly down, were you talking in terms of sequentially, and was that in absolute or percentage terms for G&A?.

Absolute full-year.

Absolute full-year. Perfect, thank you. Just wanted to, and first off, thanks for the great level of detail you put through in your prepared remarks. And I wanted to explore a little bit more in terms of the revenue per man-day and clearly, don't want to make a bigger issue out of this, because I know it is a multi-faceted calculation. But I am just trying to get my head around the drivers here, and you said some of it is due to the replacement within Hutto, and then others were around increases in population under a certain marshal contract. I am just trying to reconcile that. It just seems that those population numbers seem small, relative to the impact to the overall calculation, if you will. And I am just wondering if I can get some more granularity there, or if you can help me flesh that out.

Well, we can try to. So on T. Don Hutto, so migrating from a population of families, which includes small children, not juveniles, but small children. A much riskier population with families, greater staffing levels, much greater staffing levels and operating expenses, even given the small population, and just given the magnitude of the risk. So when you are housing small children with adults, significant risk.

So the staffing pattern is going to be much higher and need to be much higher to protect against that risk. And then on the U.S. Marshal population, it wasn't a small contract. It's a large contract, where we renegotiated higher population levels overall. But in return for a tiered per diem on the back end.

Okay. Okay, and then I guess this dovetails my next question, which is, as you're looking at the guidance, you had mentioned that [it takes into account a] kind of variety of scenarios, particularly around populations and pricing. And so how should we be thinking about revenue per man-day as we go through the first couple of quarters of 2010, and particularly as it relates to this large Marshal contract? I mean, should we be expecting kind of similar levels of change on a year-on-year basis?

Well, a lot of that is going to be dependent on the actions the states take, right?

Yes.

So there's a certain amount of uncertainty there. But if we're fortunate enough to hold the line like we did last year, you're going to be looking at flat to slightly down on the per diems. Our ultimate goal would be to hold the line on margin per man-day, which we did a pretty effective job of this year. So even though we saw some anemic per diem growth, through a combination of internal cost containment, contract modifications from our customers and some other changes, we were able to hold the line on margins per man-day,. That would be our goal for this year. However, given the uncertainty around the state budgets it's hard to pin that down exactly; but I'd say, anemic per diem growth, similar to last year, with flattish margins.

Okay, in terms of the margin side, I know there's still a lot of unanswereds because the states are still in the early parts of scrubbing through their own budgets, but what are your initial thoughts around the ability to hold margins flat? I mean there's a thought process out there, that last year was all of the low hanging fruit, if you will, in terms of contract modifications. And therefore, is there enough left for you to continue to modify?

I'm just trying to balance that with kind of an apples-to-apples, meaning states that you already did some modification versus states that hadn't and again, how this all wraps into the blended number that you guys report? Simply asking, how comfortable are you that you guys can hold the margins flat with going into year-2 here of a real challenging budget environment?

To reinforce what Todd said, is that overall we feel in 2009 we were overall successful with the six customers that came back to us. Your question about is there additional low hanging fruit, it really depends on state by state, what their pressure is and how far they want to go on narrowing the services that we provide in our facilities. Part of it is obviously a safety and security question that we've obviously got to get comfortable with but they've also, too.

So, it's really going to be a kind of a case by case on looking at what their constraints are, how much pressure they're feeling from the governor and the legislature. We have seen some states being somewhat successful on getting some supplemental funding from the legislature because the DOCs have made a good case, saying that they've done all they can on reducing their operating expenses. So, we've had good success in 2009, obviously we're going to use a lot of same playbook as we go into 2010 and even 2011.

Thanks, I will hop back in the queue.

Your next question comes from Toby Summer with SunTrust Robinson Humphrey.

Thank you. I wanted to get a sense for what kind of outcomes could lead towards the lower end of guidance and what kind of outcomes might lead towards the higher end of guidance if you could give us a little bit of color on your thoughts there?

Sure, I think it would be less pricing pressure and less population pressure from the states as a result of their budgetary pressures could lead us towards the higher end of the guidance maybe combined with some flex points around the ramp ups of some of our facilities. So a slower ramp up on the California population leads us towards the lower end of the guidance range, a quicker ramp up towards the higher. Similarly, on some of the other contracts, Nevada Southern, if that were to ramp up more quickly or more slowly or the ramp ups of some of our expansions in Georgia, in Coffee and Wheeler. If they ramp up more slowly we're towards the lower end, more quickly towards the higher end.

One follow up question on California. You gave some good color there on opportunities, and I just wanted to get your sense of what the customer is thinking. You are already a very big provider to the State of California and I wanted to see if you thought that at some point, the customers themselves may want to have an additional provider in the mix or whether you feel like you can continue to take advantage of all the opportunities that California has to offer you?

Well, we're very proud of the fact, I said in my prepared remarks, the revised plans they gave to three-judge panel, they called the out of state program (inaudible). Obviously, being the exclusive provider right now to the State of California, we take great pride that they felt good about the program. Really, to answer to your question, I really can't speak on behalf, obviously, of the state and what they're thinking about the expanded use of beds out of state. And as I mentioned, they do the RFI in December; that was available to everybody in the industry to provide proposals. So it really probably wouldn't be appropriate for me to comment or speculate on what they're thinking about how they want to increase the program versus one vendor versus several vendors.

I think in your prepared remarks you talked about an OFDT facility and that your Cal City facility may kind of fit the criteria there. Are there any other existing facilities that fit that criteria or is it a fairly limited pool of facilities that match the criteria?

You know, I think RFI just came out last week or so, so I think we're still getting our hands around it a little bit. I know it's due here in the next day or two. So I don't know. I don't know exactly what would else be in that location I guess if you just think globally about the State of California and the overcrowding, I guess it would lend you to think, especially on the local side there are limited capacity, if any excess capacity.

Thanks.

Your next question comes from Kevin Campbell with Avondale Partners.

I have a couple. Damon, I was hoping maybe -- I missed your comments about the RFI in California, is there any additional detail you can provide about it or just that they issued one in December and you responded on the 28th?

That's -- yes, that's about it, so if you think back, Kevin, I guess, to the last RFI I think our sense is that kind of the fit and feel of the actual document and what they were requesting were very similar. So it came out in December. We submitted a response on 28th of December and then obviously I think we've got some pretty attractive options that would be worthy of consideration.

You know, was there anything specific in the RFI in terms of maybe numbers of beds or the types of beds they were looking for, cell versus dorm, that some of your facilities would be better suited for or anything like that?

I don't think there was a number or quantity on the document, and I think that's consistent with the last RFI they did. I can find out; I don't know, Kevin, on some of the details relative to dorm and cell and then maybe some security features. I think it's pretty consistent to the previous one.

A different issue, we have been getting quite a few questions over the last three or four months, obviously, about you guys potentially converting during the Opco/Propco sort of situation where you do a sale/lease back. Is that something that you guys would consider in the near term? And if not, what sort of would have to happen for that to be of interest to you?

Well, I guess before I address your question, I guess let me make, I guess, a couple of observations. First, our Board and the management team continually review our capital structure and try to deploy our available resources to create the best possible value for shareholders. I think hopefully we have demonstrated and I think it's great evidence again that we reported in our earnings release last night that we take a look at our allocated capital over the last year and a half and determine is it appropriate to use that for new bed development or share repurchase.

So, the share repurchase, we again, obviously, announced a new program last night I think is another great example of that decision making process that we are always doing on a regular basis with management and the Board of Directors. I guess, the other thing, Kevin, I'd say is that, kind of a general observation, is that there is a real element of truth to the idea that our real estate assets are very viable and we believe an example of this is that lives that we expect to utilize our assets is significantly a longer or going to exceed the depreciable lives. So I guess, with all of that being said, the idea of splitting the company into an operating company and a REIT proposes some real significant, what we think, challenges. Some of those are financial like the potential significant tax [like] at the time of establishing a structure like that.

But I think a more critical issue with respect to our business and one that which might not be really apparent to the extent of forming a structure like that, might be the case where this may require some type of customer approval or some type of consent from our customers if we had to move the contract or assign the contracts to another entity, and that requirement would pose its own risk, whether it's a particular customer that might not prove the proposed transaction or it might result in price renegotiation or it may even require them putting the contract out for bid.

So there are some other issues with respect to forming a REIT which gives us pause also. Unlike the old days, an affiliated REIT or inter-locking REIT really didn't work. So that would obviously cause us some concern about the control of these sensitive assets. And then also, once a REIT is up and running, it could serve as, in essence, a financing vehicle for our operating company's competitors; and that's in advance, obviously, we don't necessarily want to construct for them. So again, finally we'd like -- we said this, I think, several times during the course of 2009, we liked the flexibility that's inherent in the ability to evaluate our liquidity and cash flows and determine the best return for new bed development or share repurchases. And a structure which mandates a regular payout, whether it's a REIT or a current corporate structure, I guess would -- said another way, obviously would diminish out flexibility.

So we continue to believe that deploying capital and having the right capital structure are some of the most important decisions we make both from the management team and board of directors, especially given the capital-intensive nature of our business. But as always, the board of directors and the management team will continue to focus on what's the right level of deployment for those type of opportunities and always take the best course of action on delivering additional value to shareholders.

Thank you, that's very helpful. One more question, can you comment on the facilities that you have in Arizona that house out-of-state inmates from Hawaii and California? What is the likelihood that those customers would allow you to - or would transfer their inmates in those facilities to help fill some of your other inventory and then allow you to make those Arizona beds available for the 500-bed RFP that's moving forward there? Do you see that as likely? Have you talked to the other states about that at this point, and what's the push back you may be getting?

Good question. I think that what we've demonstrated in the last few years as we think about those new opportunities is that that is definitely part of analysis and discussion and our strategy for those new business opportunities. So probably it wouldn't be appropriate for me to talk about what potentially customers in Arizona would or wouldn't be willing to do in moving out of those beds, but again I think if you see some of our actions we did in 2009 and even further back, it's clear that's going to be part of our discussion and our strategy as we think about these new business opportunities.

And then one last question, your inventory, I think you guys said would be 7,300 at the end of - with the new construction being taken up by Georgia and the US Marshals. After you factor in Arizona and the withdrawal of their inmates and with the CAR 10 as well, what does that take you to, roughly? Is it - I'm getting a little bit above 12,000, is that right?

That's right. So, Cal City, Huerfano and Diamondback, those three - obviously we've gotten the notice on Huerfano, we have not got the notice on Arizona at Diamondback or - obviously know the timing on the BOP at Cal City, but those three facilities combined is 5,200 beds. So it would be, obviously, north of that, if it's the case where we're not successful in finding a customer for one or all three of those facilities.

That's it, thank you.

We will take our next question from Manav Patnaik with Barclays Capital.

I would also personally like to thank you guys for the level of detail you've provided in your guidance and, as always, on the industry commentary. It was very helpful.

I just have a few questions. The first one is, just trying to figure out as a follow up to one of the questions before, if you take, for example, the six state customers that approached you guys last year in terms of per diem reductions, and you had mentioned that you managed to work with them in terms of cutting costs as well and keeping margins relatively the same. Specific to those customers, if they come back again looking for per diems, how much more room is there for you guys to work with them in terms of keeping your margins roughly the same?

That's a good question. The short answer is, don't know. It's going to be really a case by case by customer. And, as I mentioned earlier, we have seen some states, especially the heads of Corrections, convey back to the executive or to the legislature that they have made some cuts, that potentially they've done their system and also maybe in our contracts and there is a point where they can't go any further. And, like I said, we have seen some activity, a little bit, where some states have been successful in getting some supplemental funding just because they can't do anymore. So it's really going to be a case-by-case where we are going to. if we get approached, sit down with them, look at the contract again, see what the opportunities are relative to the services.

And also, there is always a potential chance where you've got a situation where a state is severely overcrowded and so they're trying to maybe get a little relief in their system. And so maybe we can offset a little bit of a reduction with a higher quantity. Those are always options that we've been somewhat successful in broaching with different states.

And then, there have also been a few states, and probably Georgia is most noticeable one, where there also is an opportunity maybe to close some of their smaller, less efficient facilities and so see the savings that way. So it's not always going to be just narrowing of services, it could be a case where we could either look at the additional quantity or them moving the populations out of costly, inefficient facilities.

And then, just on your comment on obviously, given the existing inventory that you guys have, the ROI that you would look at on new builds would obviously be higher. I was wondering if you could provide maybe a little more color. Obviously, you guys have stated in your presentations the 13% to 15% pre tax returns [that you look] generally speaking. Like how much higher do your raise the ROI for in the new builds, given your extensive inventory right now?

It would be somewhere North of 13% to 15%, obviously. And it really would be a case of the customer, some of the issues surrounding the customer for their short-term and long-term, not operational needs, but physical environment. So it won't be a stock answer for all of our customers, it's really going to be a case-by-case that we'll sit down and think about the risk, some of the issues facing the customer as we think about our proposals.

And then quick questions. Of the various half dozen new customers that you said, or new states that you were in discussions about, you had people on the ground, how many of those that just to -- trying to get a sense are currently not out-sourcing or not using private prisons?

You know, I couldn't give you an exact number because what I said in my remarks is they are currently not doing business with CCA. There could be a couple of states there like I couldn't give an exact number that maybe one of our competitors has got a juvenile or community corrections within state, so couldn't give you exact number there, Manav.

And then just the final question is, you guys didn't address or mention just sort of the situation in Tennessee itself and the Governor's new budget on your Whiteville facility, I was just wondering if you could give your read as of today in terms of what's going to happen there?

It's 2009, all over again. Obviously, it's the same thing that happened last year. So as you know, obviously there's going to be a new Governor in the Governor's mansion in January of next year. There is a new DOC Director, so I suspect probably there will be a similar exercise as last year where the legislator will take this up. The DOC did say, I think several times during the course of late last year, that they did see some incremental growth and did need those beds. So I think it's just going to probably go the same exercises as last year where the legislature will take it up and determine if that's appropriate to not fund those beds.

Got it, thanks a lot.

Thank you, Manav.

Your next question comes from Chuck Ruff with Insight Management.

A lot of states have been examining their sentencing and parole regulations, et cetera, in an attempt to reduce inmate populations. Can you help me understand why you seem comfortable that that the country's inmate population is going to continue to grow over a long-term, over the next three to five years?

Well, it's -- some states have had some success, most notably, I guess, Kansas, New York and even somewhat in Texas on doing some structural changes on their both sentencing and then the threshold that inmates become eligible for parole. Obviously, Kansas and New York I said I think those are the most notable ones that have gotten media attention. Those are not currently customers of CCA. But as we think about Arizona, Florida, Georgia, states that we're doing business with, we haven't seen really the interest or the ability of different stakeholders within the state to try to get some type of meaningful change.

So that is always something we are going to monitor very closely and obviously affecting our decision making as we think about new state business, and this ties a little bit to Manav's question earlier about ROI. That is one factor we'll think about in thinking about what a state may do in the short to long term to affect their population. So every state is going to be a little different and it's definitely going to be a part of our decision making process.

Thank you.

Your next question comes from Jamie Sullivan with RBC Capital Markets.

I guess, a quick question. In the Federal market, you talked about some of the budget pressures on the ICE front and I was just wondering with the RFI's and potential RFP's out there, what needs to happen, or what the budget impact is on the ability of those to move forward?

That's a great question; and that, I think, ties again to Manav's question earlier about how we think about new construction. So as we think about new opportunities on the Federal side, especially on the ICE side where we are seeing a little bit of softening in their population, that will be definitely part of our decision making process in thinking about the risk versus reward on those type of opportunities.

But I guess you don't see them. Does that delay? Do they need additional budget for them to move forward on the decision, not necessarily your strategy for the proposals?

I understand, yes I'm sorry. So no, we understand that especially this one up in California, that is a solution for populations they already have primarily, as we understand, in the LA county jail system. So I guess the current thinking is that a lot of that funding is already kind of built into their base, this is an opportunity to essentially get some consolidation, some cost savings but also some of the commitment that they've got those beds long-term in that part of the country.

One other follow-on to the new stage you're talking with. I'm just wondering what's the status of their systems are they currently experiencing severe capacity pressure or they more planning for population growth that they won't be able to absorb.

It's all of the above and so we are seeing some states that are overcapacity but it's like all of our existing customers dealing with the toughest environment. So having similar challenge, do anything her in the short-term and then you've got some state that, potentially talk about building the capacity in state and they just don't have the bandwidth to do any new bricks and mortar. So they are doing similar planning to think about what their needs are both for growth and also relieving overcrowding.

On the sate construction, either any of your customers currently underway with capacity expansion or building right now?

We saw a little bit of spend incrementally in fairly small quantities from existing state customers to deal with their growth. And so in essence what we saw of some states, and this is kind of part of their overall kind of short term strategy to deal with the tough fiscal environment is to add a few beds here and there throughout their system to deal with incremental growth and not do a formal expansion with their system or with CCA. So we have seen some of that and probably we'll still see some of that during this year going to next year.

And then we also see Washington, Minnesota we mentioned and obviously Arizona has got the capacity to come in on line, both public and private over the next 12 months, but even that capacity coming on line, you have to ask the state, they still have a significant overcrowding problem and also a growth problem over the 3 years to 5 years.

So the activity this year has been fairly limited on dollars being appropriated for new prison construction in like this tough fiscal environment, where you've got prioritize and determine how you're going to spend your money on new capital projects that relates to not only prisons but road, bridges, and schools and universities; prisons appears to be getting down the priority list.

Thanks a lot for all the time.

(Operator Instructions)

Your next question comes from Todd Van Fleet with First Analysis.

Guys, what's the latest in Tennessee, I guess specifically with respect to Whitefield in terms of funding and then Todd if you could provide us with the capitalized interest in the fourth quarter?

Todd, I'll address the Whitefield, that's again feels a lot like 2009. It's almost kind of the same as what happened last year. So, we think it's going to be a very similar exercise as 2009, which is that the legislature will take this up. The previous DOC director, and I think Todd, you're aware that there is a new director within the State of Tennessee, previous director, right before he left late last year, had indicated to some of the legislative committees that they were going to see incremental growth and that these were obviously cost effective beds and how they need these beds.

So, I think we'll go through a similar exercise where the legislature will take this up and think about potentially funding these beds through this fiscal year and potentially long-term. And, obviously a new Governor, there will be a new Governor in place in January of next year.

With regards to capitalized interest ,Todd, the fourth quarter was called at $800,000. Our full year 2009 was $1.6 million.

Thanks guys.

Thanks, Todd.

There are no further questions in queue. I will turn the conference back over to the speakers for any additional or closing remarks.

Okay, as always, we appreciate everyone taking the time to visit with us and hear our report. Appreciate the compliments on the thoroughness of it. We try to do that as best we can and we look forward to visiting with you next quarter.

So we will see everyone then. Goodbye.

That does conclude today's conference. We thank you for your participation.