CoreCivic Inc (CXW) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to CCA's first quarter 2010 earnings conference call. If you need a copy of our press release or supplemental financial data, those documents are available on the Investment Page of our website at www.correctionscorp.com.

Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor Provision of the Securities and Litigations 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 discussion of non-GAAP measures, the reconciliation of most comparable GAAP measures 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.

Thank you, operator, and welcome everyone to our first quarter 2010 earnings call. In addition to Todd and Damon, in the room is Dave Garfinkle, our VP of Finance, and the Controller of the Company. So with that, I'll turn it over to Todd.

Thank you, John and good morning every one. Moving straight to a discussion of our financial results. In the first quarter of 2010, we generated $0.30 of EPS, compared to $0.29 per share in Q1 2009. Total revenue for the first quarter was up 2.7% over last year, reflecting a 2.7% increase in average daily compensated populations. The primary drivers of our year-over-year revenue and earnings growth include increased compensated man-days under our BOP contract at Adams County, as well as increases in US Marshal populations. Revenues from our state partners were essentially flat against last year, while we experienced a slight decline in ICE revenues. Revenues for compensated man-day in Q1 2010 were essentially flat against last year, reflecting a decrease in per diem related to the replacement of family detainees at our T. Don Hutto facility, with an all-female adult population requiring a lower per diem. Excluding this impact, per diems increased by approximately 1.5% year-over-year in the quarter.

Average compensated occupancy for the quarter was 90.3%, compared to 89.4% last year. Operating expenses per man-day in Q1 were $41.61, compared to $40.90 a year ago. The increase in cost per man-day reflects the $4.1 million charge, or $0.58 per man-day for bonuses paid to non-management staff, in lieu of wage increases, as well as operating inefficiencies associated with the ramping up of California populations at our Red Rock and North Fort facilities, and ramping down of Arizona populations at our Huerfano facility.

As a result of the bonuses paid in lieu of wage increases, the operating inefficiencies at Red Rock and North Fork and the loss of Arizona inmates at Huerfano, operating margins per man-day declined to $16.91 in Q1 2010, from $17.55 in Q1 2009. However, excluding the bonuses paid in lieu of wage increases, margins per man-day were essentially flat year-over-year. Next, as a result of a comment we received from the SEC as part of a routine review of our filings, we are discontinuing the use of the term, "adjusted free cash flow." The SEC felt the term "adjusted free cash flow" could be confused as a measure of liquidity, rather then the intended use as a performance measure. We agreed with the comment, and thus are replacing "adjusted free cash flow" with a new term of "adjusted funds from operations," or AFFO. The numeric result of the calculation remains unchanged, only the title of the measure is changing.

Adjusted funds from operations for the quarter totaled $79.2 million, or $0.68 per share, compared to $73 million, or $0.61 per share in the prior year. The primary driver of the increase in AFFO was a significant decline in maintenance and technology CapEx in 2010 versus 2009. This decline was due to timing, rather than a permanent reduction in the expected levels of maintenance CapEx. For those investors new to CCA, 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 2009, less than half that amount at only $49 million. Therefore, we believe adjusted funds from operations per share, which adds back depreciation and amortization, and subtracts out maintenance CapEx is in many ways a better measure then EPS, of the returns we are delivering to our shareholders.

Also as a reminder, cash tax payments in the first quarter are very low, due to the timing of quarterly tax payments required by the IRS. Our first quarterly tax payment was not due until April, with the second payment due in June. As a result, Q1 cash tax payments are significantly below the quarterly average, and Q2 tax payments will be significantly above the quarterly average. As a result, AFFO per share in Q1 is above the quarterly average, while Q2 AFFO per share will be below the quarterly average.

With regards to our share repurchase program announced in February 2010, we repurchased 1.6 million shares during the first quarter, and have repurchased an additional 800,000 shares up through April 30th. So the number of shares repurchased through April 30th totals approximately 2.4 million at a total cost of $48.8 million, with the average cost per share at $20.31. As of April 30th, absolute shares outstanding, not the weighted average, but the absolute shares outstanding, totaled approximately 114 million.

Moving next to a discussion of our guidance, as indicated in the press release, full-year EPS guidance remains unchanged at a range of $1.16 to $1.26. And guidance for Q2 is in the range of $0.28 to $0.30. Adjusted funds from operations per share guidance for the full year has been increased slightly to a range of $1.85 to $2.01. Both EPS and AFFO per share guidance exclude the $1.3 million of charges expected in the second quarter, associated with the termination of our Management contracts at our Gadsden and Hernando county facilities.

Guidance was also developed under the assumption that no additional share repurchases are made during the balance of the year. A complete reconciliation of AFFO per share can be found in the Supplemental Financial Information section of our press release. Cash taxes paid are expected to approximate 31% in 2010, which was used in developing AFFO guidance, versus a 38% GAAP tax rate reflected in EPS guidance for 2010. For purposes of preparing long-term financial projections, we would recommend assuming cash tax and GAAP tax rates of 39%.

Next our guidance for Q2, and the full-year is impacted by a number of key factors, which I will spend a few minutes outlining. First, all 700 State of Arizona inmates at our Huerfano, Colorado facility were removed in March, and we assume that facility remains vacant for the balance of the year. We will also remove all 2,100 Arizona inmates at our Diamondback, Oklahoma facility, all to be removed during the month of May. And we will incur approximately $1.5 million in transportation costs, to return the inmates to Arizona. Next we have announced the loss of our BOP contract at California City, where we expect the removal of all 2600 BOP inmates to begin in July, and be completed by the end of September of this year. Next, we have the removal of the last 200 Washington and Minnesota inmates from our Prairie facility completed in January of this year. And then finally, we are projecting a $5 million increase in depreciation and amortization. As we mentioned previously, the cash operating carrying costs of vacant beds is approximately $1,000 per bed per year.

Next guidance reflects a full-year of EBITDA impact from the BOP contract at Adams County. We are very pleased with the ramp up of the facility, which was operating under the 90% occupancy guarantee until March, when the facility reached 100% occupancy. As such, we don't expect much increase in quarterly EBITDA from the Q1 level. Our guidance also includes increases in inmate populations in our state of California contract. Our California pops averaged approximately 8100 for Q1 2010, which is a little lower than originally anticipated. The ramp up of additional inmates assumed for the balance of the year is as follows -- 700 during Q2, 700 during Q3, and 500 during Q4, for a total population of 10,000 by year-end. Damon will address this in more detail, but we continue to be very optimistic around the long-term bed demand from the state of California.

Next at our North Georgia ICE facility, we currently house around 350 ICE detainees, with an increase of 100 detainees forecasted by June. Regarding the State of Georgia, demand for beds from the State of Georgia remains very strong. We expect ramp ups of the 1500 beds of expansions under the State of Georgia contracts at Coffee and Wheeler. As mentioned on the last call, we expect the expansions to be activated in July, with full occupancy reached by September. Next we expect to activate our new 1,000-bed Nevada Southern facility for the US Marshals during Q4 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 in start-up costs in Q3.

Turning next to a discussion of our liquidity. As of March 31, 2010, our liquidity is provided by approximately $236 million of availability under our bank credit facility, plus approximately $47 million of cash on hand. Our total debt leverage ratio is 2.9 times with interest and fixed-charge coverage ratios at around 5 .5 times. So, even after repurchasing 1.6 million share of our stock in Q1, our liquidity and balance sheet remain very strong. Uncertainty remains related to the general economy, and around government budget deficits. This is the primary uncertainty 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 filling our vacant beds, and growing EPS and AFFO per share remain attractive, as our customers are not building new bed capacity sufficient to meet their future needs. I will now turn it over to Damon specifics on new business prospects and bed development.

Thank you, Todd, and thank you so much, callers for participating in our conference today. Let me first say that our thoughts and prayers are with our family, friends and neighbors, here in Tennessee affected this week by the floods and tornadoes. This has been a very challenging week for many of our CCA family, but their positive actions in response to these challenges have been very inspiring. This morning I'd like to break my comments into two topics. First is to share our short-term and long-term focus for the business; and second, market observations and opportunities. So as it relates to our short-term focus, our priorities are as follows, as always, one of our main focal points remains on filling excess vacant capacity. I will give an update in a few minutes on potential near-term opportunities for our available capacity.

Second item to mention is that high on our short-term priority list is the continued emphasis of controlling operating costs. I think our results show good progress on keeping a lid on escalation of cost. And, as Todd reported, we continue to see encouraging signs from our Company-wide initiatives. 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. But with that, we continue to hold off on new bricks and mortar construction of speculative beds.

As mentioned in the press release, we had approximately 11,600 unoccupied beds, including beds expected to become vacant at our Diamondback facility later this month, and nearly 2600 additional beds under development. However, this inventory is reduced to approximately 10,200 beds, after taking into consideration the beds committed pursuant to new Management contracts. So obviously, we will monitor closely the needs and timing of new bed development. But clearly we will like to see some more meaningful utilization of our remaining capacity, and better visibility from our customers, before we add additional capacity. Additionally, as announced in February we have a new share repurchase program.

We continue to think that based on our current level of inventory in our system, it is still appropriate to repurchase shares at prices that would equal or exceed the ROI available from investing in new beds. As we have reported, we've had great success so far with the new program, and think it is the best alternative employing capital during this tough economic environment. Finally, we will also continue to pursue build-to-suit opportunities, and as demonstrated over the last two years, we've had good success with these types of procurements. However, it is fair to say that with the short-term uncertainty in the marketplace, and limited visibility from our customers as it relates to their budgets, the Company's ROI hurdle on new construction will continue to be higher.

Now for the market and industry observations and opportunities, and first a couple of comments on state budgets. As Todd mentioned, our state customers are not out of the woods yet. Ten of our 17 state customers have passed their 2011 budgets, which would begin in 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 into the new fiscal year. The National Council of State Legislatures, or NCSL, released an update on state budgets in March of this year. They reported that state finances are not expected to recover for at least two years.

Now history shows that state budgets continue to struggle long after a national recession ends, as high unemployment rates erode earnings, affecting personal income tax collections. Job losses also undermine consumers' willingness to spend money, which affects sales tax collections. Nationally, as you all know, these two revenue sources account for two-thirds of all state tax collections. However, the report indicates that 42 states project that fiscal year 2011 revenues will grow above current year levels. This is a very encouraging sign to us, as all of CCA's 17 states, project fiscal year 2011 revenues to be above fiscal year 2010 collections. With that, we have been approached this fiscal year by six states, and have conducted different levels of negotiations to either lower compensation, or forgo rate increases due to us. Three of the six did not approach us last fiscal year, so we were able to negotiate service reductions to help offset the adjustments. The other three also approached us last year, which has made it more challenging for us to cut additional services.

So although there is still continued 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 to report in March of this year, the Pew Center on the States reported that state populations declined for the first time in 38 years. However, if you include the Federal Bureau of Prison, and remove California from the total, the national total increased by over 5,000 inmates. This is similar slowing of growth in populations that occurred during the last recession in 2001. As it relates to our customers, the one-year change was an increase of 8600 inmates. That amount does not include the net decline of the State of California.

So with a tough fiscal environment, and like previous recessions, our customers had a slower rate of growth, but as a whole had a net increase this past year. But I think what is even more noteworthy, none of CCA's 17 state customers are funding, or proposing funding for new prison capacity. Three states have authorized funding in previous fiscal years, but no one has proposed or authorized funding for this coming fiscal year of 2011. This we think is very significant, because as states deal with incremental growth and/or overcrowding, they clearly are not able to appropriate dollars in this fiscal environment to add capacity. But also shows the acceptance of the value and the level of service, that we have been able to demonstrate that we can provide to our customers.

Also of note is another report by the Pew Center on the states that was titled The Trillion Dollar Gap. I'm sure you've seen this in the media, the key points of this report, which indicates that the state retired system for the entire country combined are underfunded by nearly $1 trillion. We think this report is worth mentioning, and further shows the value we can provide our customers. And let me give you an example.

We know of one governor who was looking at this cost and obligation as it is adding nearly $30 per man-day in operating cost to their Department of Corrections. This is one example, but states will have to deal with the nearly impossible task of funding their pension obligations. So not only can we provide value to our customers in our cost of construction, lower operating cost, but also this is how we can save states money long-term by lowering their pension liability and growing legacy cost.

Finally, is to mention again that we have people on the ground in half a dozen states, that currently are not doing business with CCA. We estimate these states are approximately 14,000 inmates over capacity today, and by 2014 be over capacity by 28,000. As mentioned earlier, we think we could see several states use a private sector after this recession, that don't have the capacity to deal with their over crowding and/or growth. Now a report on significant pending procurements, a good amount of activity on the state and federal side. And the first one is State of Arizona. The RFP for 5,000 in-state beds has been released, and responses are due May 28th. Statutorily, the state is supposed to award by July 1st of this year

Now to California. California issued an RFI for more beds out of state in December. Due date for responses was on December 28th. We submitted a proposal, and obviously think we have some viable solutions for their increased needs. Our understanding is that the evaluation of the proposal is well underway, and the state is looking to secure another 5,000 beds out of state. Timing of the award could be either in the second or third quarter, and ramp up would likely begin in 2011.

Now, a comment on 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 anticipates 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 an expansion or renovation.

This procurement has been released, and proposals are due next week. Now, I'll comment on the ICE procurement for 2,200 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 year. Let me also mention another ICE procurement for beds in the northeast. We understand that ICE also intends to issue a solicitation for a contractor-owned and operated detention facility, capable of housing and managing detainees in the New Jersey, New York area. ICE is still working on the quantity, but we anticipate the RFP should be released later this year.

Now a comment on the BOP procurement for 3000 beds. As a reminder, we submitted a response to an RFI last year. This opportunity as we understand it would be for a contractor owned and operated facility for the housing of up to 3000 short-term citizen inmates. We expect the procurement to allow for only existing facilities, and to be able to begin accepting inmates within 120 days of award. Also, the procurement will only allow facilities to be proposed within the states of Arizona, New Mexico, Oklahoma and Texas. We anticipate the RFP will be issued later this month.

Now a comment on the Florida ITNs. We reported earlier this quarter the awards on the re-bid of four managed only contracts in Florida. We are excited about continuing the operations of our Bay facility, and assuming management of Moore Haven and Graceville. We are very disappointed in losing Gadsden, but these were extremely competitive procurements, and as always we exercise discipline in our pricing. But I would also say that Florida is third largest and fastest growing state prison system in the United States. With us now being the largest service provider to the state, we think this gives us a stronger foothold for future opportunities.

So even with a tough fiscal environment, a very meaningful amount of activity was in the industry for new beds. If you pull out the beds currently managed by the industry that are up for rebid, you have over 15,000 new beds coming out for bid this year. Let me now make some specific comments on our four largest individual customers. And actually, let me first say that in February I provided detail on the proposed budgets for our three federal customers. These budget proposals are still making their way through Congress. And when we talk in August, we should have a sense on if they will be enacted by the start of new fiscal year.

First comment is to talk about the United States Marshal service, and just to reinforce what Todd said, we are proceeding nicely on construction of our new facility in southern Nevada for the Marshal service and this should be opening up in fourth quarter of this year. Now, for ICE, and one item of note. As mentioned in February, we had seen a softening of their demand system-wide, as we understand that ICE is still dealing with fiscal constraints, nearly $140 million shortfall during this fiscal year. ICE was targeting a system-wide population number of 33,400 this fiscal year, but with their fiscal limitations, we understood earlier this year they were running 2,000 to 3,000 short of that target.

While ICE's fiscal challenges continue, we now understand their system-wide population is increasing, and we have seen a modest rise since February. Now, for the Federal Bureau of Prisons, which is the largest prison system in the United States, and let me give you an update on their population projections. We reported last year that the BOP was at a 137% of their rated capacity. Based on their funding for activation of new beds and the projected growth for 2011, we're estimating their system-wide occupancy could creep up to almost 140%, and have an unmet bed demand of nearly 4,000. But the BOP has also reported new population projections through 2016.

This past week the BOP reported their system wide population being just over 211,000. With their new projections, they are now estimating their system to grow to 245,000 by 2016, a growth of 34,000 inmates. As of right now, the BOP is only projecting 9500 new beds past 2012. So with this projected increase in populations, and significant unmet bed demand on top of a very overcrowded system, we continue to believe that the BOP will be a meaningful opportunity for the industry.

Now, a comment on California. Let me first mention that we are well underway with the ramp under our new contract signed last November. As of May 1st, we had 8,477 inmates in our system from the state of California. That compares to 7,970 inmates on January 1st. As it relates to the three judge panel, there isn't any meaningful update to provide, beyond than what I shared in February. As mentioned earlier, the state appears to be taking steps on increasing their placement of inmates out of state.

So let me bring to a close to my comments, and make these final points. We are obviously very pleased with our first quarter earnings. We achieved positive EPS, revenue, and AFFO growth, with adjusted funds from operations growing at 11.5%. Additionally, we have been very successful in bringing back in over 2% of our stock with our share repurchase program. We think accomplishing all of this, is very significant in today's challenging economic environment. Our competitive advantages continue to be, a strong balance sheet, good liquidity to fund new capacity development, and execute our share repurchase program, limited managed-only operation, 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, with both existing and potential new customers.

We are seeing very healthy activity in the market for new business opportunities with over 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 over 14,000 inmates. And like the last recession in the early part of last decade, we still have an inventory as we come out of recession that is going to be extremely attractive, and give us a significant competitive advantage for this new business.

But just as important, we think we have taken the appropriate steps in the short term, in managing our liquidity and balance sheet, to well position ourselves for future build-to-suit opportunities. And finally, if we're successful on filling the nearly 14,200 beds that I mentioned earlier that we have in our system, and with our beds in development in Georgia and Nevada, that would translate into nearly $110 million in incremental EBITDA. As a reminder, 4,000 of that 14,200 beds are already under contract. So that concludes my prepared comments. Thank you, again, for calling in today's conference. And let me now turn it over to the operator for Q&A.

+++ q-and-a

(Operator Instructions).

We'll take our first question from T. C. Robillard with Signal Hill Group.

Just a couple of quick questions. Todd or Damon, can you comment on renewals that you have between now and the end of July, I believe? If I was looking correctly, and my memory serves me, now granted it was late last night in a multicompany day, so I might have been a little off. It looked like you guys might have had 13 contracts at 13 facilities that were up for renewal, between kind of June/July timeline. I'm not sure if some of those have gotten done, and your supplemental wasn't updated. I just wanted to know if you guys could put a little more color around that.

Absolutely, T. C., and good morning. We have got so many obviously with a lot of our contracts coming up for renewal, basically at the same time during fiscal year changes with our state customers, we do have a lot coming up July 1. I would say on a whole, lot of those are already in negotiations or we've finalized negotiations. So I would say fairly low risk on any concerns on anything coming up July 1. Looking out a little further, obviously we've got the contract renewal coming up on McRae. We talked about that on the call. That is a 2012 event, that's not something this year. Also we've got the potential funding issues with Whiteville which is coming up later also. But outside of those, outside everything we've already disclosed earlier part of this year, everything else is kind of in the low risk category.

Okay. That's great. Thanks, Damon. If you can talk a little bit about your decision with the managed-only contracts in Florida, particularly to bid in facilities where you weren't looking for just renewals. Historically you always looked at yourselves as kind of more the owned and managed model. Obviously knowing your MO, you guys certainly are making money on these contracts. I was just surprised to see you bidding for additional managed-only business. And I'm wondering if there's something in the pipeline with Florida that's bigger than just some managed-only beds, hence your push to get a little bit deeper with that customer. I'm just wondering if you can kind of help explain that for me.

Absolutely. It's a great question. We are always very thoughtful and really take a lot of time and effort to make sure that as we think about a managed-only operation, what are the risks, the issues, the long term viability of that customer. And obviously as we've shown over the last 3 to 5 years, we have walked away from a lot of managed-only contracts because we feel we get appropriate price for those contracts or the long term prospect to grow with that customer were low to minimal. And so as we talk about Florida, Florida is the third largest system in the country, they're the fastest growing system in the country. As you may remember, they also authorized the Department of Corrections last year for the first time ever, to send inmates out of state.

I think I mentioned this in August or November, we thought that was noteworthy. We don't think that's something that's going to happen any time soon. But putting that tool in the tool box for the state of Florida to send population out of state, we think it is noteworthy, and allows us potentially to deal with over crowding in the future. And as I would say, as we look forward to the next three to five years we're anticipating some pretty meaningful growth from the state of Florida versus the rest of the country. So already have a presence there, already knowing that they're the fastest growing and looking to see some significant growth over the next three to five years, having a larger foothold in the state of Florida made a lot of sense for us. And in the day, even with all those considerations, we sat down and priced it in a way that we're comfortable with, and meets our minimum threshold.

Okay. That's very helpful. I appreciate the additional color there. Just last thing I'll jump back into the queue, any thoughts on California City facility? Obviously still a lot of moving pieces there, you've got to ramp that down with the BOP. Butt I'm sure you've already started to think about potential new customers. I was wondering if you can help us frame that, particularly with respect to the 2200 beds in LA. Does that facility qualify, could you use -- could California use that facility, whether leasing it, or could there be something changed where you could make that available with your personnel? Anything you can help us with as far as line of sight with that facility.

Absolutely, you framed it pretty well. We think the two customers that would be most interested in the capacity there, is ICE and State of California. We've made both customers well aware of our capabilities to meet their needs, both with the ICE procurement, and ICE needs out of Los Angeles, and also with the State of California. We think near term, both those customers will look closely at this facility on meeting their needs mid to long term. And I guess I'll add one more comment on the state of California.

We think this is a great solution obviously to provide some capacity in-state to relieve overcrowding. But also as you know, it's been a real challenge to develop any capacity in state. So we think this is a great opportunity to put points on the board, on getting some bed space in the state, that's already there and available, and we think will be very easy to meet their needs, and meet their service requirements. So just to say, again, California, I'm well aware of our capabilities there. We've made them understand all the things we can do there to meet their needs for those different admissions and different populations.

Would that be economical for California to use that facility, I mean, obviously if you ran it, it would be, given your cost differential, however, given the beds that are available out of state and the large differential between the out of state cost and the in-state cost, is it economical, just given their budget crisis right now? Is it economical, or feasible for them to actually procure budget dollars to use that facility?

Well, it depends on the population. Obviously they will not be able to send all their population out of state, it just won't be realistic. But if they've got some special needs for inmates that have medical issues, it just doesn't make sense for that population to go out of state. We think for California City could be a good solution for that. We've told both customers, we could be extremely flexible, and develop a proposal that meet their needs as they think about a specific population they want to put there.

Okay. That's great. I'll jump back in the queue. Thanks, guys.

We'll go next to Kevin Campbell with Avondale Partners.

Good morning, thanks for taking my questions. I wanted to talk first about the proposed merger between GO and Cornell, and maybe some thoughts that you had on that, the impact on the industry, what you see the impact specifically on your firm. If you can just give us your general thoughts on that.

Good morning, Kevin this is Damon. Obviously we've been following closely the proposed acquisition of Cornell by GO. It probably wouldn't be appropriate for me to comment. With both companies still having to conduct shareholder votes for the transaction, I would hate for any of my comments today to be misinterpreted by any of the shareholders of the respective companies. Obviously we're following it very closely. If the transaction does get completed, we would provide commentary as appropriate. But probably here in the short term, since there's a lot of things and moving parts relative to not only shareholder votes, but also regulatory approval, it probably would not be appropriate for me to opine, in a very substantive way on the transaction.

Fair enough. Perhaps we can talk about something a little bit different. Use of capital, I think you mentioned that you felt the best use of capital was share repurchase. Have you considered other things, like acquisitions? Obviously development doesn't make sense given the supply of beds that you have. But what are the other alternatives that you have considered, and why do you think share repurchase at this point is the best?

Great question. We are always -- the board and management team are always challenging ourselves in obviously ways to create shareholder value. And so in this environment where we're seeing a lot of pressure put on the states because of tight fiscal issues, looking at ways to increase shareholder value is top of our list here in the short term. So we think a share repurchase update is a great tool, we've had great success. And we've been able to execute both on previous plan and the current plan.

But we are always looking at strategic alternatives. If it's an acquisition, if it's a development of a new service line, if it's growing into a new area, it's something always on our list, something that we are always discussing as a management team, as a Board, and making sure if we do consider, what's the investment, what's the risk versus the reward, and is it a good fit with our core business here in the US.

Okay. And today your thoughts are the repurchase is the best place, but again that could change tomorrow, depending on what you're considering, I suppose?

Absolutely.

Okay. Great. I wanted to ask a couple of quick modeling questions about the bonus payments, and the G&A. Obviously you had this $4.1 million bonus payment. Should we assume it reverts back, and that was sort of a one time, and you don't have higher wages going forward? And if that's the case, should maybe we think about another potential bonus, in say first quarter of next year in our numbers? Secondly G&A, was 4.5% of revenues, and typically you guys have guided to that being roughly 5%. So is this 4.5% just an abnormally low quarter, and we'll bump back up to 5%, or is it the new norm?

First on the G&A, you can assume G&A for the year in the range of around $80 million plus or minus, which is more in line with the 5%. On the bonus in lieu of wage increases, we would anticipate that would be a one time event for this year, and then we'll reassess next year, what the appropriate decision is based on the labor market at that point in time.

Did that go to mainly correctional officers? Was it wardens, what sort of --

Non-management staff, so it will be primarily correctional officers, core personnel.

Great. And maybe an update on Whiteville. What sort of is the latest there? I know you mentioned that was a potential risk, we know the governor has proposed closing that. But has there been any update in the Tennessee budget, that perhaps is a little bit different?

No, this is Damon again, it's feels a lot like it felt last year, still working its way through the legislature. I guess one thing I would point to though, is that State of Tennessee was anticipating that they would see a reduction in their system-wide population, based on some efforts to either early release or from lowering parole standards, maybe some other things they could do here in the short term. But sitting here today, and I should say end of March, they are basically just over capacity system-wide, so both in their facilities, our facilities and local facilities, they're at 101% of their system-wide capacity.

So I think that points to, if they are not able to see a meaningful reduction in their population -- and also you look out the next three to five years, from our perspective looks like they'll need Whitevillle plus additional beds, over the next three to five years to meet their needs. So the legislature still has to finalize with the governor on the budget, but based on really no success on reducing their system-wide population over the last six to 12 months, it looks like they'll need those beds at least over the next three to five years.

Last question, populations from state of Colorado, at the Kit Carson facility in particular were down. What -- what do you see that's driving that? Should we assume that that continues to trend down, is their early release program sort of gaining momentum, and they're pulling them particularly out of that facility? Any thoughts on Colorado?

Good question. Colorado I think we shared both in August and November, that we did see that as potential risk in our state business. They did, in a very public way last August, talk about a plan to try to reduce the system-wide population. You may remember additionally, they were talking maybe a couple thousand.

Sitting here today, their system wide total population is down only just about 295 inmates. And actually compared to us from August of last year to today, we're only down by 180 inmates. So we did see a little bit of dip right at the first of the year. So it's a little larger delta. But we have seen actually a modest rise since February. We're monitoring it very closely. Sitting here today based on what they were trying to do last August, it looks like the impact has been pretty minimal.

Thanks very much.

We'll go next with Manav Patnaik with Barclay's.

Good morning guys. I had a question around, I guess the pricing, you mentioned the ex T. Don Hutto the pricing was up 1.5% year-over-year. And then you went to six state customers who again have approached you with, I guess pricing concessions. Now, maybe I missed it. But I remember you saying three of them were the same as last year's. I wanted a little more color in terms of what extra sort of concessions could you or did you provide them, and how about the other three states.

Absolutely. Good morning, Manav. How are you doing?

Good.

So we did six states. We had three like I said that were new this year, they did approach us last year, three did approach us last year. So the three new ones, it was a very kind of similar process we went through last year, which is we opened up the contract, we looked at all the service levels we're providing throughout the facility. Focused primarily at programs, educational, vocational, so those were pretty straightforward discussions like I said based on efforts we did last year, we had a pretty good play book on how to move those forward. The three that had come to us I guess both years we looked at if there was any additional service reduction, again, that was a little challenging since we went through that process last year, and were pretty limited on additional areas we can reduce, based on our concerns about the safety and security and also the state's concerns.

But also looked at other things as these were opportunities to renegotiate quantities, potentially increase quantity a little bit, to try to get a lower per day rate. So basically, just put everything in the play book on the table and look at those opportunities to meet the needs of -- meet the needs of our customers. Sitting here today, first week of May, so we're less than 60 days before the end of the fiscal year, is there a chance that another one comes to us? Don't know. But being so close to the end of the fiscal year, and obviously have a pretty good sense of where everybody is at for next fiscal year, feels about the same as it did last year, relative to the amount of customers, and the amount of changes we'd have to make.

So just a follow up to that, so previously you mentioned that 10 of your 17 customers have signed their budgets, are, I guess just trying to figure out the overlap, of the 6 that are in discussions with you to negotiate pricing, are those then like -- the part of the remaining 7 that haven't signed their budgets yet?

I can't tell you for sure. We'll follow up on that. I think there is. I think there's a few that have approached us, that have approved the budgets. But I can follow up, and give you precise answer on that.

Okay, and then the second part, I guess so based on these negotiations then, going into the third quarter, when the new fiscal year begins, like what sort of pricing assumptions have you taken into account for your full-year guidance?

Sure what we said in the past is what holds true, and the current guidance is expect kind of flattish per diems. And then with regards to margins, as a result of a combination of operating inefficiencies related to carrying costs of some of the empty beds at facilities such as Prairie and Huerfano, Diamondback, Cal City any operating inefficiencies with the ramp down of Arizona inmates, and start up costs at Nevada southern, that we would expect to see a slight decline in margins per man-day, and in operating margins. So year-over-year margin rates could be off by half to three quarter percentage points because of all of those moving parts.

Okay. Got it. Final question is, I guess, just in terms of your discussions with the customers, and what you see in your evaluation of the industry, what sort of time lag -- how long do you see utilization at existing facilities, by your existing customers sort of pick back up?

Yes, great question. Hard to give a precise answer, but I guess, I'd point to couple of my earlier points. One is like I said we're very encouraged that all of our state customers are showing projections in revenue next year, above the actual collections this current fiscal year. So you would hope that means that they have hit the bottom, and hopefully are going to see a little bit of recovery next year, albeit probably a slow and modest recovery. So I think that we'll continue to obviously to monitor through the rest of this year, going into next year, but like I said if the report from NCSL is any indicator hopefully, we'll see a little bit improvement going into next fiscal year and next couple of years.

Got it. Thanks a lot guys.

We'll take our next question from Todd Van Fleet with First Analysis.

Good morning, guys. Wanted to talk a little bit about the sequential movement here from Q1 to Q2 on the expense front. Todd, the start up expense in Q1, did you give that number earlier, I don't recall?

I did not, and great question. Start up cost in Q1, a little lower than anticipated around a $1 million dollars I think. In February, we estimated about $2 million, and it came in around a $1 million.

For the June quarter start up, is there anything start up relating.

Not really anything in Q the. We're going to be ramping up the expansions at Coffee and Wheeler, there could be some operating inefficiencies related to those ramp ups, but in terms of really what we call start up costs, probably won't see anything. But in Q3, what we said is about $3 million in start up costs associated with the activation of Nevada Southern.

Right, and you mentioned the $3.1 million figure earlier.

Right.

What was that related to.

That's good will, write off of good will and some un-amortized fixed asset costs associated with the termination of the Gadsden and the Huerfano county facility.

Are you going to show that below the line, then? Where are you going to show that.

I'm sorry, Hernando. Actually Gadsden and Hernando. The 3.1 will be below the line, Dave?

It will be in D&A then?

Yes, the accelerated depreciation would.

But we will break that down and disclose that.

Okay. And then the $4.1 million of the bonus payments in Q1, you said that will be non-recurring heading into Q2, if you could also remind us what the payroll tax impact is going from Q1 to Q2?

Well, unemployment taxes, is that what you're talking about unemployment taxes.

Yes.

Unemployment taxes in Q1, you saw an increase of about $3 million in Q4, it will decline from Q1 into Q2. Don't have the number off the top of my head. It's probably not a huge decrease from Q1 going into Q2. We'll see. Most impact in Q3 and Q4.

Okay. So really looking to maybe nonrecurring from Q1 to Q2. So you're looking at maybe $5 million, and then no start up in Q2. But then you have the $3.1 million of write off. Okay. Damon, if I could get you to talk about the 3,000 bed short term sentencing procurement from the BOP, you've got the four states out there, that they've said they're willing to look at, do you have a sense as to what the public capacity is available in those four states to accommodate the?

Good question. And pretty straightforward answer, you've got four states, Arizona, New Mexico,Texas Oklahoma, Oklahoma actually is I think at capacity in their system, and actually seen a little bit of growth since the first of the year. Texas I think is right at capacity. Actually I think they have taken some of their older facilities off line. And so probably will not be suitable for the BOP. I am not aware of any excess capacity in New Mexico, and as we all know Arizona is actually trying to increase capacity. So very limited if any capacity available state sites.

No counties, though, no counties would be able to step up?

No, not at that quantity. Part of the challenge, I should say part of the opportunity, the bureau sees by doing this procurement is to get them out of county facilities. We understand there's about 25 to 30 county facilities where this population is sitting today, where there would be an opportunity to consolidate, and put them all under one roof, and see some efficiencies not only for man-days, but also efficiency for transportation.

Okay. And from your perspective on the private side, private operators, in terms of the number of facilities that are available, I guess I can think of 3 including yours. What's the number you attach to that in terms of private availability?

Yes, hard to say. I mean, that will be something we'll look at very, very closely, but obviously, we know what our capabilities are. It's real hard to estimate what our competitors do, but that will be a key part of our analysis.

Okay. And I guess I want to circle back on Florida and the decision to bid, I guess or at least, but pursue that business as aggressively as you did. I know you talked about the longer term possibility of doing business with Florida. I guess first you guys were not certainly not an unknown quantity to the state. You've been doing business with them for years. Is there something different about the way you think the state is going to approach their longer term needs, apart from just doing managed-only business, or giving manage-only contracts to private sector moving forward, that made you be a little more aggressive here. Because I will tell you, from my perspective, the risk return trade off, at least my perception it's not that great. So I take your comments regarding wanting to develop a longer term relationship with Florida, to be something that was really driving decision making here. So I guess I'm wondering if you can kind of give us some thoughts on how you see the relationship between the state of Florida in the private sector changing, or evolving over the next few years?

Yes. Very detailed question there, Todd. Obviously I guess I will reinforce what I said in my comments. State of Florida, third largest in the country. We've had a long relationship in the state of Florida, as you've mentioned than great success they want losing Gadsden. They had the largest incremental growth last year, projecting the largest incremental growth over the next three, five years of all 50 states. At the end of the day -- and I guess I'll say again and I guess our track record speaks for this, obviously we've lost a few facilities, Texas last 12 to 18 months. We'd love to give notice in Florida on Orlando county jail. We terminated. So we're always going to stick to origins make sure that we're being thoughtful and making sure it makes sense for us operational perspective, but making sure we're getting reasonable return. Nothing has changed from that perspective.

I guess what I'm wondering, is there anything you see developing in Florida, that would indicate that that state might be moving more toward an owned and managed approach with the private sector, as opposed to managed-only.

I guess I would point of two things, one is, as I mentioned, I think a couple times last year, that the state now has given the Department of Correction the authority to go out of state. So that is, I think, a meaningful change. Like I said, I don't think that's going to be acted on any time soon, but given that option to state of Florida Department of Corrections, I think is meaningful. And obviously we think we are the best provider in the industry, and provide solutions out of state bed placement. But the other thing is that I mentioned earlier also the state of Florida did not appropriate any dollars of this fiscal year, going into next fiscal year for new prison construction. Now you're well aware obviously they've appropriated beds in previous years fiscal year, and they got the capacity coming on line in the next couple of years. But for the first time I can remember, not appropriating any dollars for new prison construction to meet their long term needs, we also think that's a meaningful development. So taking that all into account, as we thought about our strategy and desire to grow relationship with state of Florida, but at the end of the day not compromising our approach on pricing ,and being disciplined on our returns led to the decision. I will also say obviously we were not the lowest price on two of those contracts that were awarded by the state of Florida. Again, I think that shows our discipline on the pricing.

Okay. Let me ask one more then before I hop off. Are there any other state customers, and I asked this of GO yesterday, but I give you guys a shot at it. Are there state customers out there that are looking at replacing aging capacity, and having discussions with the private sector along those lines, that either haven't worked with the private operators in the past at all, or have only worked with them in just some very modest way being out of state transfers. And you don't need to name names, But I think -- the investment community is looking for some indication, that the sustained level of fiscal pain that's being incurred by states is resulting in some change in the way legislative bodies are looking at solving their longer term problems, as opposed to kicking the can down the road. So I ask the question, because I think that's what folks are interested in hearing?

It's a great question and the answer is yes, to kind of all of the above. We have existing states, Georgia is probably the most notable, where they have looked at opportunities to either consolidate or close high cost per day facilities within their system. And there are some states that currently that are not doing business with the Company or the industry asking those same questions. So I think what we're seeing is, not only looking at that, but I think I'd like to reinforce what I said in my comments too, is the pension liabilities that states are dealing with here, in the short to to long term. We've got some states that are questioning out loud, that they're adding to liable building new facilities, or they're adding employees to their rolls, and their long term pension cost are growing and growing, and obviously seeing a huge challenge on meeting their required liability. So I think both looking at old inefficient operations, but also the long term legacy costs states have to deal with the retirement systems within the respective states, I think are getting more and more visibility, and get state more thinking about is this most deal short term long term with both overcrowding and growth.

Great, thanks guys.

We'll go next to Jamie Sullivan with RBC Capital Market.

Good morning it's Mike Salinsky filling in for Jamie.

Good morning.

Most of my questions have been answered, just wanted to circle back with you on some of the larger occupancy movements in some of your facilities. Just wanted to give a little more color on Colorado. I was wondering why was Kit Carson the one facility that had the drop off, was that due to a choice by you, or by the state to kind of, if this happens in just one facility, as opposed to have spread across all facilities. And then just also I just noted a small tick in Coffee and Wheeler even further above 100%, in the first quarter. And also west Tennessee as well, any color you can give on any of those can be very helpful?

We usually are a little thoughtful on parsing out population by facilities. I guess I would say on Colorado, and just reinforce what I said earlier. I said they did have an initiative to try to reduce their system wide population that did impact both their system wide pop, and our facility. But as always, and I don't think I made this point earlier. But I think we said it on previous calls, we're always looking at when we have those situations where customers are moving populations either up or down, how do we maximize our occupancy within our system. So having three facilities within the state of Colorado servicing the state of Colorado, we looked at Kit Carson, Crowley and Bent, and thought about okay,what's the most efficient way to deal with both increases and decreases in population. So that's why you see more kind of singled out on one facility, versus all three. Because we really want to make sure we're maximizing our system wide occupancy. West Tennessee and Georgia really condition provide any additional color there, Obviously we've got the expansions coming online in third quarter, and we'll give an update on that in August.

Sure, thanks. Just question also on the potential OFDT procurement in or around Atlanta or California. I was wondering if you can give us your opinion, perhaps tell us if you would consider proposing California contract, even though the bed count would be small relative to the size of the facility. And if you'll be able to house more than one contract in that facility if you were to win that contract plus the one with state or ICE, and also if that facility is expandable to house more than one contract?

Absolutely. Good question. You know, I did not cover that in my prepared remarks. I think I did mention it in February. I think what the OFDT did in February, is they went out to market and did a RFI. We sent in a response. And Cal City would have been eligible for that requirement. We're not getting a sense that is going to move any time soon, so I didn't make note of it in my prepared remarks. If they did move forward on it, Cal City would be eligible, we think it would be a great fit. And obviously would meet the need for the Marshall service. To answer your question about mixing populations, or having two different or three different customers under one roof. The answer is yes, we absolutely can do that. We've been very successful on places like San Diego and other facilities, where we've been able to manage both ICE and Marshall service under the same roof. And even have been successful managing both federal and state populations under one roof. So the short answer is yes, we can do those type of solutions and have facility with multiple customers.

And if you were to have that at Cal City would you have happen to do any additional CapEx to close off different areas of the facility, or also in that same facility are you able to expand the capacity with any additional construction if you need to?

Don't expect we would have to deal with any capital improvements, but again there's no procurement has been released, so without appreciating if there's any specific requirements they have in a procurement, can't say that definitively. But knowing the Marshal service and being the largest service provider to them, I can't envision any meaningful CapEx, except for if there was say male to females in that requirement, we probably would have to do some mod. The second part of your question, is yes, yes that facility, if there was an expanded number above the capacity of 2304, we could expand that capacity.

Great. Thanks. Great quarter.

Thank you, very much.

We'll go next to Tobey Sommer with SunTrust.

Hi. This is Frank in for Tobey. I have two quick questions. Can you give us any color or update in terms of timing or potential for car 12. And also is the 100,000 share repurchase as occurred in April is that in guidance?

Let me tackle the first part of your question, and I'll let Todd do the second. The car 12, we have not got any indications from the Bureau of Prison on the timing of the award. The proposal is due next week. So probably in August, when we meet again probably will be able to give you a sense of timing of the award.

With regards to the purchase the 2.4 million shares we purchased through April 30th have been incorporated into our guidance.

Thanks, very much.

We'll take a follow up from T. C. Robillard with Signal Hill Capital group.

Great. Thanks. Just two quick ones. I know we're running a little long here. Damon just to circle back on California city, would that facility qualify to satisfy what's gone on with the federal receiver on the medical beds. Would that qualify? I'm sure there would have to be some improvements made. But would that qualify for medical beds.

Yes, I can't say definitively. But I think knowing what we know about the state of California and their needs, and their ability to yield some of the medical issues, I think that facility probably would meet it, and if not we could do some retrofitting and meet those needs.

Okay. And then Todd, don't want you to think I was ignoring you today. Could you give me cash for Ops and total CapEx for the quarter?

Sure from cash from operations for the quarter, 72.1.

Okay.

Cap EX on prison construction, 36.6, maintenance CapEx, 6.5.

Perfect. Thanks a lot.

Thanks, T.C.

And we'll take a follow up from Kevin Campbell with Avondale Partners.

Great, just one quick question, similar to what Kevin asked on Cal City. I wanted to check on the ICE opportunity there. Previously I think they had some geographic maps that show sort of what's qualified, and what doesn't. And under the prior one, I don't think Cal City fell within the geographic region, so, a, has that changed? And if not, do you think that in your conversations with ICE, that it seems like they will change that when they do issue that RFP?

Great question. They have gone through several advertisements for this requirement over I guess the last six to eight months. And I think they have at least twice, if not more, indicated different location requirements. And those changes I think several of those changes, if not all of them happen decisions by the Bureau of Prisons on car 10, but we have answer to second part of your question, we have made them well aware, obviously of the location, and how we can service their needs in Los Angeles. So they're well aware of facilities, and availability and how we can work through all the important issues related to transportation, video conference, et cetera.

Thank you very much.

And at this time I would like to turn the conference back to John Ferguson for any additional or closing remarks.

Okay. Thank you. Thanks everyone for participating. Some great questions. Hopefully we've enlightened you on some of the things. We once again appreciate everybody's involvement. So everyone have a good day. Good-bye.

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