CoreCivic Inc (CXW) 2010 Q3 法說會逐字稿

Good morning everyone. Welcome to CCA's third quarter 2010 Earnings conference call. If you need a copy our press release or supplement of our financial data, documents are available on our website at www.cca.com.

Before we begin let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor Provisions of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today. Factors that could cause operating and financial results to differ are described in the press release as well as our Form 10-K and our documents filed with the SEC.

This call may include discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measurements is provided in our corresponding earnings release and is included in the supplemental financial data on our website. We are under the 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 President and CEO, Damon Hininger, and Chief Financial Officer, Todd Mullenger. I would like to now turn the conference over to Mr. Hininger. Please go ahead, sir.

Thank you so much, Shannon. Thank you for joining our call. With me today is our Chairman, John Ferguson, and our CFO, Todd Mullenger. Also joining us is our VP of Finance, David Garfinkle. In a few minutes Todd will take you through the numbers for the quarter, then I will discuss market opportunities, after which we look forward to taking your questions. First though, I would like to make some comments on the past quarter.

Let me start by saying that I am very pleased with the third quarter results, which I believe clearly demonstrate that our strategy is working. As you know our strategic focus has been one, to fill existing inventory by continuing to build relationships with existing and new customers, to build new facilities where there is demand, and to aggressively manage costs. In the past quarter we have made exceptional progress in all of these areas, and as a result, EPS, revenue, operating income, AFFO, and EBITDA were all up by meaningful amounts.

Todd will take you through the financial details shortly. But let me point to a few operational highlights. First, during the month of October, we passed the milestone of 80,000 inmates for the first time ever. I note that we passed the 70,000-mark only a few years ago, which demonstrates the pace of progress we have made. We think this is the distinguished performance in the face of a difficult economic environment.

In terms of filling our existing inventory, we have continued to make good progress under our recent contract with California, and this month we are close to housing 10,000 California inmates in our system. That compares to having just fewer than 8,000 on January 1st. Additionally with our recent expansions, our Georgia populations have grown by 1,800 inmates year-to-date, and US Marshal Service populations have grown by over 2,000 prisoners year-to-date. We also surpassed 10,000 prisoners for the first time in October for the Marshal service, and both our Cal City and Nevada Southern facilities are ramping nicely under our new Marshal's contracts.

While we have continued to fill existing capacity, we have also been looking for build-to-suit opportunities where there is demand, such as the contract we announced with the Georgia Department of Corrections to manage up to 1,150 male inmates in our new Jenkins Correctional Center. Construction is expected to be completed during the first quarter of 2012, and CCA expects that the ramp-up from Georgia will begin shortly thereafter.

In addition to constantly engaging existing customers, we have also maintained an ongoing dialogue with potential customers about helping them manage their current challenges with overcrowding and projected growth rates. While we have no specifics to discuss today, I am very optimistic about how our conversations have been going in this area. Let me say a few words about our focus on managing costs. As you know, we implemented a company-wide initiative last year aimed at driving greater efficiency, and we continued to make significant progress with this initiative over the quarter. We had another good quarter of managing costs, and are continuing to focus intently on further opportunities to control expenses.

Overall, I was very pleased with our performance in the third quarter. This success would not have been possible without the hard work and dedication of the more than 17,000 employees at CCA. I want to thank them for their leadership and congratulate them on their accomplishments. Now I would like to hand it over to Todd to discuss the detailed financial, after which I will discuss how we see the market and our opportunities going forward. Todd?

Thank you, Damon. Good morning everyone. We are very pleased with our third quarter operating results, which reflect the success of our continuing efforts to fill vacant bed capacity. In the third quarter of 2010, we generated $0.38 of EPS, compared to $0.33 of adjusted EPS excluding special items in Q3 2009.

The third quarter financial performance reflects an increase in US Marshal populations and above-average operating performance in certain facilities. We believe the growth in US Marshal populations has been driven by increased demand, and the delay and transfers of detainees from the US Marshal custody to the custody of the BOP. This delay in transfers appears to be due to a temporary decline in available bed capacity within the BOP system.

Total revenue for the second quarter was up 2.8% over last year, reflecting increases 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, increases in US Marshal populations, and increases in state of California and Georgia populations. These increases were offset by declines in populations from the states of Arizona, Alaska, and Washington.

Revenues per compensated man day in Q3 2010 were essentially flat against last year at $58.48,reflecting the low inflationary environment and 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 much lower per diem. Excluding the impact from T. Don Hutto, per diems increased by approximately 0.6% year-over-year in the quarter.

Average compensated occupancy for the quarter was 90.7% compared to 91.2% last year. Operating expenses per man day declined to $39.67 compared to $40.76 a year ago, which reflects our efforts to improve operating efficiencies, the low inflationary environment, and the favorable impact from ramping down inmate populations at our California City facility, while we were continuing to be paid under the minimum occupancy provision of that contract. Excluding the BOP contract at California City, operating expenses per man day decreased by about 1.3%. The net result was margin per man day rates increased against last year with Q3 2010 at 32.2% versus 30.4% last year.

General and administrative expenses were higher than Q3 2009 and Q2 2010,as a result of increased rules for incentive compensation plans, related to the increase in our earnings forecast, as well as the increase of certain advisory fees and timing differences. Adjusted funds from operations for the quarter totaled $70 million, or $0.63 per share, compared to $0.59 per share in the prior year, a 6.8% increase.

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 $100 million in 2009, versus maintenance CapEx for 2009 of less than half of 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 than EPS, of the value we are delivering to our shareholders.

Accounts Receivable balances increased by approximately $83 million from the second quarter instead of the approximately $346 million as of September 30th. The primary driver of the increase were delays in payments from the state of California, caused by delays in the passage of their state budget for the new fiscal year which began on July 1st. As of September 30th, Receivables outstanding from California totaled approximately $96 million. Now that California has recently passed their budget, we expect to begin receiving payment for the past two receivables in the fourth quarter of this year.

With regards to our share repurchase program announced in February, we have repurchased 6.4 million shares this year through the end of the third quarter, at a total cost of $128.4 million with the average cost per share at around $20. We have repurchased no additional shares subsequent to the end of the quarter. As of September 30th, absolute shares outstanding, not weighted average shares but absolute shares outstanding, totaled approximately 110.1 million.

Moving next to a discussion of our guidance, as indicated in the press release, full year EPS guidance is in the range of $1.35 to $1.37, excluding goodwill charges. Guidance for Q4 is in a range of $0.33 to $0.35. Adjusted funds from operation per share guidance for the full year is in the range of $2.26 and $2.32. Guidance was developed under the assumption that no additional share repurchases are made during the balance of the year.

Our guidance is impacted by a number of key factors, which I will had spend a few minutes outlining. First we have announced the loss of the BOP contract at California City where the removal of all inmates was completed at the end of September this year. In addition our managed-only contract at Gadsden, Florida terminated effective August 1st. Next our guidance also includes increases in the inmate populations under our state of California contract, our California pops averaged 9,300 for Q3 2010, and were approximately 9,700 at the end of September. We expect to receive approximately 300 additional inmates during Q4, for a total population of 10,000 by year-end.

Regarding the state of Georgia, demand for beds from the state of Georgia remains strong, the ramp-up of the 1,500 beds of expansions under the state of Georgia contracts at Coffee and Wheeler was completed during Q3. Next we have activated our new 1,072 bed Nevada Southern facility for the US Marshals, and began ramping-up populations in October. However for the year, we expect the facility to generate a net loss as a result of startup costs, Nevada Southern incurred around $3 million of startup costs in Q3. For the fourth quarter our populations in Nevada Southern are expected to average 750, which is the occupancy guarantee provided under that contract.

Finally, we have the new US Marshal contract at California City, where we expect a gradual ramp-up of populations reaching 1,200, or around 50% occupancy by the third quarter of 2011. Once it reaches 50% occupancy in Q3 2011, we expect the facility will generate a modest level of EBITDA. However the facility is expected to incur a loss in Q4 2010. So trying to understand the sequential decline from $0.38 in Q3 to the range of $0.33 to $0.35 in Q4, can largely be explained by several items.

First, current US Marshal populations at certain facilities are expected to decline as detainees are transferred from these facilities to our new Nevada Southern facility and to our California City facility, which began in October. Margins per man day will be negatively impacted by these transfers, as populations are removed from facilities that were operating at very high occupancy rates, and moved into facilities that will operate initially at lower occupancy rates, such at California City and Nevada Southern. Current US Marshal populations are also expected to be negatively impacted, as certain of the US Marshall detainees housed at CCA facilities in Q3, are transferred to the custody of the BOP, as bed capacity becomes available within the BOP system.

In addition, as previously discussed, our California City facility was operating under a BOP contract, with a 95% occupancy guarantee which expired on September 30th of this year. The end of this contract will negatively impact earnings in the fourth quarter, and will negatively impact our system-wide occupancy percentage, which is expected to sequentially decline from Q3 to Q4. These items are partially offset by increasing state of California populations. The timing and level of US Marshal population transfers is uncertain, as is the projected level of US Marshal populations going forward. In developing our earnings guidance we have incorporated our best estimate in the range of potential outcomes related to these uncertainties.

General and administrative expenses in Q4 should approximate 5% of revenues. With regard to AFFO, cash taxes paid are expected to approximate 25% of pretax income in 2010 versus a 38% GAAP tax rate reflected in the EPS guidance for 2010. For purposes of preparing long-term financial projections, we would recommend assuming cash tax and GAAP tax rates of around 39%.

Turning next to a discussion of our liquidity, as of September 30th our liquidity is provided by approximately $149 million of availability under our bank credit facility, plus approximately $34 million of cash on hand. While we continue to fill existing capacity, we have also been looking for build-to-suit opportunities where there is demand, at around 6 times. We are looking for build-to-suit opportunities where there is demand, this is related to the general economy and around government budget deficits. This is the primary uncertainty and risk we face for the balance of 2010 and into 2011.

In developing our guidance, we have 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 AFFO per share remain attractive as our customers are not building new bed capacity efficient to meet their future needs, which should continue to provide opportunities to fill our vacant bed inventory.

I will now turn it over to Damon for specifics on our new business prospects and bed development.

Thanks so much, Todd. Now looking forward, overall 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 using CCA to deal with their overcrowding and/or growth. One of our key business strategies continues to be carrying beds in inventory that meet future of demand, with over 9,000 in new incremental bed demand in the marketplace today, targeting existing capacity, we continue to think this strategy is 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 have approximately 10,000 unoccupied beds. But we will continue to monitor closely the needs and timing of new bed development, but clearly we would like to continue to see more additional utilization of our remaining capacity and better visibility from our customers before we add additional capacity.

Finally, we will also continue to aggressively pursue built-to-suit opportunities. As demonstrated with our new Jenkins facility, we have had good success with these type of procurements. However, with the continued short-term uncertainty in the market place and limited visibility from our customers as it relates to their budgets, the Company's ROI hurdle on new construction will persist to be higher. Now for the market and industry observations and opportunities.

First a couple of comments on state budgets. Clearly state budgets continue to be a concern for us here in the near term. However, NCSL, or the National Conference of State Legislatures, reported in late September that it appears that their fiscal year 2010 was a trough for state revenues. They go on to report that 40 states expect total tax collections in fiscal year 2011 to be higher than they were in fiscal year 2010. This is a significant departure from one year ago, when nearly 40 states expected fiscal year 2010 collections to be lower than fiscal year 2009.

Now let me point to a couple of additional positive things that we see with the states. I cited this in August but it is worth pointing out again. None of CCA's 15-state customers are funding or have proposed funding for new prison capacity. Additionally, our research indicates that none of the 50 states are funding or have proposed funding for new prison capacity. A handful of states have authorized funding in previous fiscal years, but no one has proposed or authorized funding for this current fiscal year 2011. This 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 to them with many of our customers.

Unfunded pension liabilities is growing more and more to be a concern for both state and local governments. More recent reports indicate that state public pensions are underfunded by $1.8 trillionto $3.4 trillion. On top of that, 50 major cities in the US are estimating an unfunded total of over $0.5 trillion. Our value propositions increases dramatically when pension costs are factored into the equation, but also how we can help state governments slow down the rate of growth and their long-term obligations.

Finally, it is worth mentioning again that we have activity in half a dozen states, that currently are not doing business with CCA. We estimate that these states are approximately 12,000 inmates over capacity today, and by 2014 be over capacity by 30,000. We think we can see several states use the private sector after this recession, that don't have the capacity to deal with their overcrowding and/or incremental growth. So systems that control 91% of the marketplace today are not building capacity to meet their overcrowding and/or incremental growth, are looking for creative ways to save money, and are forced to slow the rate of growth of pension obligations. These are dynamics that are going on nationally that allow us to propose an extremely attractive value proposition.

Now to significant pending procurements, we are seeing a good amount of activity both on the state and the federal side. The first of which is Arizona and their requirement for 5,000 beds in state. This procurement was cancelled during the third quarter, but we think it may be re-released as early as this quarter. California. California issued the RFI for more beds out of state last December. We submitted a proposal and obviously think that we have some very viable solutions for their increased needs. Our understanding is that the evaluation of proposals is well under way, and the state is looking to secure 5,000 more beds. The timing of awards could be as early as this quarter.

CAR 12, this procurement is for the re-bid 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 expansion and/or renovation. This procurement has been released and proposals have been submitted. And we expect the award to be in the second quarter of 2011.

The BOP procurement for 3,000 beds. This opportunity is for our contractor owned and operated facility for the housing of up to 3,000 short term sentenced inmates. The procurement only allows existing facilities to be proposed, and to be able to begin accepting inmates within 120 days of award. Also the procurement only allows facilities to be proposed within the states of Arizona, New Mexico, Oklahoma, and Texas. We expect award to be made in the first quarter of 2011.

And also another procurement from the BOP for 1,000 beds. This opportunity is for a contractor-owned and operated facility for the housing of 1,200 to 1,000 low-security inmates. This procurement also is allowing only existing facilities to be proposed, and the successful offer must begin accepting inmates within 120 days of award. It is also worthy to note that there is no restriction on location for this procurement. Proposals were due on September 14th, and we anticipate the award to be in the first quarter of 2011.

Finally, the state of Indiana has issued an RFP for the management of a state-owned prison housing up to 1,500 male inmates. Proposals were due in August, and we expect the award to be in this quarter. So a very meaningful amount of activity within the industry for new beds. If you pull up the beds currently managed by the industry that are up for re-bid, you have over 15,000 new beds coming out to bid this year.

So let me bring to a close, my comments and make these final points. We continue to believe that we are very well-positioned in a market that has tremendous opportunities. Our value proposition to customers remains very strong. They are faced with severe capital constraints, and a need to avoid increasing their pension liabilities. We are able to meet these needs, either through existing capacity or our ability to construct facilities faster and at a much lower cost. We believe the supply, demand and balance will continue long-term, and insufficient public sector capital investment is opening up significant possibilities with potential new customers. And I note these potential new customers are faced with overcrowding of more than 12,000 inmates today.

I would also reiterate that based upon our experience from the last recession, we believe we will see continued growth, and we feel having a solid level of inventory coming out of this recession is going to be extremely valuable, particularly as we look at new opportunities. Just to reinforce how valuable our inventory is right now, you have the two largest correctional systems in the United States looking for 9,000 in new incremental beds at existing facilities. With CCA being the sole provider to the state of California, and a large service provider to the BOP, we think our proposals and existing capacity will be extremely attractive to these customers.

Financially our business is very sound, we have a strong balance sheet, good liquidity to fund new capacity development, limited managed-only operations, and focused operations in a largely unpenetrated US marketplace. In summary, the business is performing well, and we are taking actions in the short to long-term to make sure it continues to do so. Our strategy is working. We have significant opportunities ahead and strong and stable cash flows to provide capital for future deployment. We believe we have the right strategy in place to capitalize on these opportunities, and to continue to deliver significant value to shareholders going forward.

That concludes my prepared remarks. Thank you again for calling into today's conference. Let me now turn it over to the operator for Q&A.

(Operator Instructions). Our first question comes from T.C. Robillard with Signal Hill Capital Group.

Thank you. Good morning everyone. Todd, first of all, thank you for breaking down the moves quarter to quarter in terms of the puts and takes on the earnings side. I am wondering if you could make flush that out a little bit more?Really what I am looking at is on the operating margin side. I am just trying to get a sense, I get the quarter-to-quarter move. What I am trying to get a sense for is as we look obviously based upon where your guidance is, you will be down from year-on-year with your operating margin. I am assuming most of that is from the shift at the California City facility, and probably a little bit of bleed-over from Hutto mix. I want to get a sense as we look out beyond the fourth quarter, are we going to expect a similar type of year-on-year drag until we normalize the California City facility?

Well, there will be an impact as cost per man day, I guess more importantly margins per man day, as we transfer those Marshal populations out of facilities that were operating at or above right at capacity into California City and Nevada Southern,that we will be operating at least initially at below-rated capacity. The margin per man day as you know is operating at or above capacity is much higher than the facility that is operating at 50% of capacity. So you see an impact on cost per man day as you lose the leverage on the fixed costs coming from a facility operating in excess of capacity, to one that is operating at 50% of capacity or less, initially at Cal City. So you lose the cost leverage. So you see an increase in cost per man day, but more importantly, the margins per man day decline as well. The margins that result from that leverage at a facility operating at or above rated capacity is much higher, than is a facility operating at below rate of capacity. So you will see an impact in the fourth quarter.

Now that should improve in Nevada Southern over time as those populations increase. Right now with California City, what we are forecasting is a ramp of the US Marshal populations at California City reaching to about 1,200 by third quarter 2011, that gets you to about 50% occupancy, and what we are projecting there at 50% occupancy is kind of a modest EBITDA level, but the margins per man day at 50% occupancy much lower than they would be at a facility operating at or above rate of capacity. We are obviously going to work hard to drive those populations higher at California City. We have got excess capacity there to sell. The question is, when will we be successful in doing that? Our forecast is 1,200 heads and beds at California City by Q3 2011.

Thank you. So can you remind me, what is the timetable as it stands right now for occupancy at Nevada Southern?

Nevada Southern what we are forecasting for the fourth quarter is an average heads and beds population of around 750, which is the occupancy guarantee. Beyond 2010, we haven't provided guidance on population assumptions.

Okay. That is good. And then I guess taking a look at if from the cost side, because you guys with your initiative obviously continue to deliver each quarter over the last few quarters here on managing costs very well, and the lack of inflation, even though that is hurting your revenue per man day it is certainly helping on your costs as well. A big chunk of your costs being salaries, and things like that. Can you give us a sense of what other levers you could be pulling here, or how else we should be thinking about continued cost management as we are looking out over the next couple of quarters?

We continue to focus on improving operating efficiencies without sacrificing quality. I would say most of the large home run opportunities have kind of run their course, but there are still incremental opportunities, and we continue to focus on taking advantage of those opportunities. With regards to cost inflation generally, we are seeing a very stable cost environment right now which is reflective of the general economy. Looking forward into 2011, we will continue to monitor the labor markets, to evaluate what we may need to do regarding wage rates to remain competitive in those labor markets. But again, generally speaking we are not seeing any signs of significant inflationary pressure on costs as we look out into 2011.

Any chance you could flush out some of those incremental opportunities that you have highlighted?

I would prefer not to do that. We are continuing to make sure we are competitively bidding our contracts for goods and services, improving efficiency of utilities and conservation facilities, maybe installing new light fixtures as energy costs. The rates continue to increase. You want to be mindful around things you can do to reduce your energy consumption, and just a lot of kind of individual projects that would be singles here and there, versus home run opportunities. Most of the large home run opportunities we have taken advantage of. That is not to say we won't find something in the future. Right now it is just kind of singles here and there.

Got it. Kind of typical blocking and tackling type of stuff?

Yes. But still a very concerted company-wide initiative focused on managing and improving operating efficiencies without sacrificing quality.

Understood. Okay. Thanks. I will jump back in the queue.

Thanks T.C.

Our next question comes from Manav Patnaik, Barclays Capital.

Hey guys. Good job on the quarter. A few questions. First in your remarks you mentioned in terms of the shift of the USNF inmates moving to the BOP system as capacity opens up, in the context of the overcrowding situation at the BOP, can you maybe shed a little more color as to where this bed capacity in the BOP system is coming from, and how much, what sort of size are we talking about here?

What you had with the loss of our BOP contract at California City. The BOP understands they are going to lose that capacity, and replace that capacity with capacity primarily in Georgia at the D. Ray James facility. The BOP stopped accepting new transfers into the California City facility. And backed those populations up in the US Marshal facilities. So think of the US Marshals as the jailer, and the BOP as the prison operator.

So given that timing differential between the ramp down of California City and the ramp-up of the D. Ray James facility, stopped accepting new inmate transfers into California City from the Southwest. California City was a primary destination point for transfers coming out of Marshal populations into California City. So they stopped accepting transfers for several months. That backed up populations slightly in our facilities, and maybe backed up populations maybe nationwide potentially.

We saw a little bit of an increase in populations as a result of that, now that the D. Ray James facility is coming online, it is going to allow them to deal with some of that backlog of populations. They also accepted some of those populations into their existing facilities on an overcrowded basis even more. So the impact on our populations won't be 2,600 as D. Ray James comes online. It will be much less than that. But that was one of the key drivers, in terms of the temporary increase in US Marshal populations at some of our facilities in the southwest.

Got it. So the two BOP initiatives that are out there for 4,000 beds, would that in some way have a similar impact once those are awarded as well, or would that be a totally different set of inmate populations?

Yes, Manav, this is Damon. I don't think so. I know definitely it wouldn't be an impact relative to 3,000 beds. I don't know if we have described it very well on these calls. But it is our understanding on that procurement, it basically is an opportunity to consolidate the population that they have got today, to spread out to really I think in Texas into one facility. So we don't see that impacting populations in the Southwest. It is really an opportunity to consolidate population, spread out among many different jails, get to an efficiently, and have it in one location. The 1,000 bed is focused on criminal alien population, so that would have potentially a little impact on the Southwest, but not a meaningful one. I would say it is coming from the same category as the Georgia facility.

And Manav, the vast majority of our Marshal populations that we hold, are waiting trial, or some other processing. They are not awaiting transfer to the BOP. They are being held until they are processed and either convicted, in which case then they are transferred to the BOP to serve their sentence, or found innocent and released, or processed in some other way. So the vast majority of our populations have not been created by a backlog at the BOP. It has really been a temporary increase in the third quarter.

Okay. Fair enough. I guess just one big picture to the extent you can comment on, just on your initial reactions to the midterm elections, I guess from the gubernatorial races we saw a little more Republican representation, but maybe to the extent you guys have done the analysis on the legislative side in the states, is there anything that sort of surprised you guys, or any comments around that?

Yes. I don't think, nothing surprised us. You have obviously got a lot of new governors coming into office in January, that are going to have to make some tough decisions, and are walking into situations where you have got existing governors and have just not been able to maybe make some hard decisions. Or just not the ability to make any hard decisions relative to overcrowding, or the ability to affect costs within current systems.

I think with a lot of new governors coming in that not necessarily reform-minded, but I think focused in on trying to work through some of these issues, and have to make some tough decisions, we think the solutions that we provide and have provided are going to be very compelling, and go back to what I also said in my comments. With 91% of the market place, which is basically mostly state agencies, managing the corrections system here in the US, that haven't taken steps right now to build to prison capacity, and it takes up to seven years to get a new prison out of the ground, if it is being constructed by the public sector, again we think that not having that capacity coming online, dealing with overcrowding and incremental growth, again we think we are going to be able to provide a lot of compelling value solutions. A lot of work to do obviously after the first of the year when you have these new administrations coming into office, and legislatures coming into new office. But a lot of challenges the states are going to face. I think our solutions will provide not only good value but also high quality.

Perfect. Thanks a lot, guys.

Thank you.

Our next question comes from Todd VanFleet of First Analysis.

Good morning guys. Todd, I missed the number that you had given the pro forma per diem figure in the quarter, excluding California City?

Excluding California City I didn't give an absolute number, excluding Cal City our per diems increased year-over-year in the quarter by 0.6%.

By 0.6. Okay. So it is still up sequentially then, it looks like at least $0.30, the aggregate per diem?

Yes, and I think that is reflective of the low inflationary environment. Per diem increases are kind of tied to CPI, and that is the general range of CPI in the last year.

No, that is fine. It was more than I had anyway, more than I modeled. I am just thinking about Q4 at the moment. I am just trying to think the mix of the business, if anything is probably what is going to drive it down sequentially I guess? Is that fair?

The mix of the business --

You got more management only, less --

Yes. Okay. I understand what you are saying, yes. That could be the case, defending upon how the mix or how the mix plays out elsewhere in the system, yes.

Bigger picture, then, thinking about 2011 and beyond, Damon, we just went through an election cycle here. When do you think you guys might start to get a sense that activity, whatever the activity might be, either with states that you are currently doing business or states that you are not or that you are just talking to, I think a half-dozen you said. How long does it take for things to start percolating a little bit, in terms of activity? Is it several months? Is it more near term?

Yes. You have got probably the next seven days, starting on Tuesday, Governor-elects starting to think about their transition, the transition teams, the cabinet secretaries, et cetera. So that will all happen if it hasn't already here in the next couple of weeks, they will put the team together and start thinking about their leadership for all of the different agencies.

We have had discussions as I mentioned with half a dozen states during the course of the year, I think a few of those state are going to have some leadership changes. I think you will continue to have those discussions into this year, and then after these folks get sworn-in in January, you could see some more meaningful discussions on not only what we can propose, but also to start talking about some solutions, relative to in-state, out of state, how it will look, and how they can procure those solutions. So I think it will just gain some momentum as we get into the first of the next year.

So for the half-dozen that you are talking to now that don't currently do business with you, can you talk about the steps that would have to occur prior to those states actually doing business with the private sector? Will states have to change their laws to allow for the sending of inmates out of state? If it is an in-state sort of situation, would they have to change legislation or enact laws, or make legislative changes to allow for a private prison operator to come in to manage a facility? Can you talk to that a little bit?

I think the states we are talking to I think there are probably a couple where they are going to have to do some legislative action, relative to either in-state and out of state. That may take a little time. You could have a state like California where the Governor comes in and signs an emergency proclamation that we have got to do something pretty dramatic to reduce overcrowding and/or get some immediate savings in this current fiscal year, and that would trump anything that is on the books legislatively, so I think it is a mix, you have got a few states that will probably have to take a couple of steps legislatively, and you have got a few states that either because there is nothing on the books or the Governor and the administration feels strongly enough that they have got to take some immediate actions that they may be through emergency procurement or some type of emergency action to try to get some relief, like I say, get some savings in the fiscal year.

So those emergency actions, then, Damon, I imagine those would be more along the lines of maybe taking over the management of an existing facility?

No, not necessarily. Georgia with the Jenkins contract, that wasn't under any emergency proclamation. That was well within the rights of the Governor to go ahead and move forward on that type of contract without a formal procurement. You are well aware of what California did relative to sending inmates out of state. It is not necessarily taking over an existing facility.

Okay. Because I think just generally speaking, management contracts for existing publicly-owned facilities isn't anything that folks are getting too jazzed about. I think what brings excitement is for states to realize savings and probably pretty meaningful savings with the prospect of the private sector building facilities, perhaps in the states that require the assistance on their own dime, managing those facilities once they come online, and having populations kind of migrate over, and then you realize a savings by perhaps adding more efficient capacity up and running and less expensive capacity up and running, and so of the half a dozen states or so that you are speaking with, do any of the states have that type of framework in mind?

No. You are exactly right. Our focus is to provide solutions for either existing capacity, or provide solutions in state to manage either overcrowding and/or maybe take some old antiquated facilities offline so they can realize budget savings. I think we have described, especially most recently when Arizona was looking for us and other vendors who come in to essentially take over state-run facilities. That is something we will take a look at, but the devil is in the details on how really a viable solution that is for the state from a value savings perspective, but also how meaningful an opportunity that is for the Company or for the industry.

You are exactly right. I think the six states we are thinking about is in-state solutions or out of state solutions, and I would say that the out of state solutions is getting a lot of good traction, everybody knows and sees what is going on with California, sending inmates out of state, and if we have got the flexibility on where we can build a facility and provide capacity, so we can take advantage of low construction costs, and low operational costs, if we have got that flexibility, then we obviously provide tremendous value back to the state. That is getting more traction, if states can get over the hurdle of getting comfortable with sending population out of state, then that is tremendous value we can provide back to the agency.

And the beauty of our situation, is right now we are sitting with a large number of vacant beds in inventory that doesn't require new construction that we can make available immediately, to help them achieve those savings and/or avoid large capital deployments in-state.

Right. Just to get this more finely then, so the six opportunities, can you quantify for us the number of opportunities that are looking exclusively at an out-of-state solution?

I cannot. I cannot. We are offering them a suite of alternatives.

Okay. Thanks guys.

Our next caller is Kevin Campbell of Avondale Partners.

Good morning. Thanks for taking my questions. I have a variety of them this morning, so I will try to be quick. I was hoping you could start with California. First of all, have they payed their Receivable at this point, or do you just expect that at some point in the fourth quarter, and then also you obviously have your existing contract with them that expires in June of next year. Maybe you can give some color as to where you stand on that?

On your first question, around the Receivables, we have not received payment on the Receivables today. We are being told they will begin making payments in the fourth quarter. They have got a large backlog not just of our Receivables, but of all the payables outstanding to other vendors.

Just real quick, did they give IOUs like they did last year where they had a decent interest income associated with that? Or not this year.

They did not issue IOUs that bear interest. They are just delinquent in payment.

And then the existing contract?

Kevin, good morning. This is Damon, the existing contracts you are right, obviously expire June 30th. Existing contracts did envision options to help extend the base contracts. So I think there is a good chance that California would extend the contract under the extensions provided to them under the existing agreement.

And did the budget that passed include an extension of the sunset provision that expires in June of next year as well?

It did not. It did not include an extension of the sunset. So the legislature with the jobs that have come back into session with a new Governor the first of the year, then they could potentially take it up then, and as you know, also the Governor issued an emergency order for the sending of inmates out of state. So that still stands, and it would stand with the new administration coming in. So that is a standing order that does not expire with the change of administration.

Okay. Perhaps you could talk with discontinued ops in the quarter, I guess that is related to the managed-only contract that you exited. What was the revenue impact of those?

Let me take a look at that, Kevin.

We will research that if you want to go on to your next question, we will get back to you in a minute on that.

The Texas contract that you renewed during the quarter, was there any change in pricing or profitability of those contracts? Or is it pretty much business as usual with them?

Our approach really has solidified over the last few years as we think about managed-only. As we went into those procurements, and our pricing strategy, and the windows are extremely competitive, we have really held firm like we have in the past, and really like we did in Florida on pricing and minimal margins.

So I would say use that as a template and really like we kind of put in place with the Florida re-bids, that gave us the exception of those Texas contracts. So we have had, obviously we are very pleased to renew this contract for seven more years. We have obviously had some challenges in the past two years by losing four managed-only facilities, but we are disciplined in our approach, likes times past where we feel good that we are able to continue for seven more years.

No real change to per diems or profitability there?

I would say it is pretty consistent with in the past. Like I said we have been I think over the years more and more disciplined on pricing and on the margin. It is consistent like I said with what we did in Florida.

Okay. Colorado, I know that the population I guess at Kit Carson continues to trend down there. Any thoughts as to where that might stabilize if it continues to come down, do you try to transition those inmates over to the Huerfano facility, so you have that at least at full occupancy and then re-market Kit Carson? What are your thoughts there?

Good question. We are monitoring that very closely. Our person that interacts with the state of Colorado is talking with them almost on a daily basis about what they see in the near term. Right now we are probably within 200 to 300 of where we were about a year ago, and actually here in November our actual population is higher than it was in October or September. I can't say definitively that we have reached a bottom but it has trended up a little bit even to what we saw in the last 60 to 90 days. To answer your question more specifically, it is something that we will monitor closely, and if there is a need for us to think about further consolidation, then we will absolutely do that.

Okay. Sorry for all of the questions. The Marshals population, obviously you have guided that they should come back down, we are six weeks into the quarter here, maybe five, have they come back down or are they basically sort of in line with where they were in the third quarter, or coming out of the third quarter perhaps in September?

I think we would prefer not to parse our guidance to that level of detail.

Okay. Two more questions. ICE, I don't think you mentioned in your remarks. Is there a reason for that? The Southern California and northeast opportunities? You might have mentioned that Damon, but I missed it if you did. Any thoughts there? And on these new customers that you are talking to, do you expect them to go through a formal RFP process, or it can be more of a direct negotiation, if you could just let me know that would be great?

ICE first, I did not say that in the prepared remarks because it is just a little unclear on how they would potentially procure those beds. The indication is that the need is still there both in Southern California and in the Northeast, and we have heard in both locations, up where from 2,000 to 2,500 beds, is the need there. Both of them are somewhat focused in on a consolidation opportunity,so to take the base population and put them in one facility in a central location.

Our sense is that the need is still there, we just don't have a clear indication on how they intend to procure those beds. That is something we are monitoring very closely. If it comes to a process where it is an advertised procurement process, then obviously we will make light of it and make sure that investors are aware of it. It is a little unclear as to how they are moving forward on that.

As it relates to your questions on states, the six states we are targeting to potential solutions, it could be either/or. It could be a case where they go through a process where they advertise and request proposals, or it could be as I described earlier for Todd, the Governor feels concerned enough and the Department of Corrections feels concerned enough that they need to take immediate action where it is under an emergency order from the Governor to do some type of direct negotiation with a company. So it could be either/or.

Great. Thank you, that's it.

Thank you, Kevin.

Kevin with regards to your question on discontinued operations, when the 10-Q comes out, footnote five has a detailed table, in the interim, the total revenues for the nine months ended September 30, $22.9 million in revenues,and the EBITDA for the same nine month period through September 30, $3.2 million of EBITDA for those discontinued operations.

Thank you very much.

Our next question will come from Dana Walker of Kalmar Investments.

Good morning. I have two questions. One follows in the line of what Todd and Kevin were in pursuit of. The six states that you have been talking to, why have they not privatized before now?

It could be either they didn't have significant overcrowding. Didn't have budget issues, or maybe just had maybe a policy in place that maybe wasn't allowing them to consider a solution like we provide.

Would it be a fair statement, though, that you have been in conversation for a while? Because I believe you have been alluding to states that you haven't been doing business with being in your pipeline for some time, and that you described an increasing disconnect between capacity, present census, and further disconnect several years hence. That would appear to be the primary driver, that the relationship between their name plate and their census is just getting further out of whack.

Right. So yes, I think we have talked about a little bit about what the projected need would be over the next few years for those six states. So it has increased so it is creating increased pressure to where they have to do something, they haven't taken steps to build capacity and they have to deal with that overcrowding. So that pressure is mounting. Also, dealing with the environment where they have got a large unfunded pension liability. I think all of those pressures are getting to a point on some of these states where they have to get to a tipping point, and they have to make somedecisions.

--Colorado, that have elected new governors, any concerns about the steps taken at the state level?

No. If we look at the US at some of the large systems, especially ones that haven't done anything here in near term to deal with overcrowding, some have huge pension liabilities, maybe have some old antiquated facilities that have been too hard to close in the past. I think you will have a lot of folks coming in January that they will have to make some hard decisions, and our solutions will be received not only from a valuable perspective, but also a very high level of quality.

But in particular to Colorado and California, neither gentlemen is on the record as viewing the present nature of what they are doing with you and the privatized sector as being antithetical to their principles?

So yes, let's talk about those two states. Colorado we have been there for many years, different governors, different administrations, both Republican and Democrat. We continue to do a good job, provide great value, and provide a high level of operations, then I am confident and comfortable that we will be able to continue there in a meaningful way in providing solutions.

What is unique about California, with Governor Elect Jerry Brown coming into office, he obviously is sitting in the role of Attorney General, but he has been in the this of the state case with the federal courts and the field Supreme Court on dealing with the overcrowding, so we are very eager to work with his administration, because he is uniquely qualified from a perspective, he has been in weeds on corrections issues for many years, and has had to defend the state on what they are doing to relieve their overcrowding. So he is extremely familiar with all of the issues, the challenges, and the problems that they have had on effecting their overcrowding. He obviously is well aware of what we have done here in a near term with the out of state program. So having someone come in that is uniquely qualified from the perspective of knowing what the issues are, and has been in the weeds on these issues, gives I think kind of a unique situation for us in California.

Damon, one final question, as you have further grappled with what you might be able to do with Arizona is there a scenario where you can be responsive to their needs, and not have to build additional beds?

It is a possibility. I don't know if we described that very well in previous quarters. As needs come out for both in-state solutions like in Arizona, we are always looking at our base capacity to see if there is a possibility for that capacity in state at existing facilities.

So would it be possible as a for instance to move other peoples, other states or jurisdiction's inmates around in a way that could keep Arizona inmates in Arizona?

Possibly. We have got, as you know, large contracts with the Federal Government. So it would be hard to move some of that population, especially for the Marshal Service. As you know our steps that we took last year with Alaska, on looking to do drive solutions out of state, even though we lost that business. Obviously asked them to take steps to allow us to provide solutions out of state. That is part of the tool kit that we look at when we are thinking about alternative proposals.

Thank you very much.

Thank you for your questions.

There are no further questions at this time. Gentlemen, I will turn the call back over to you for any additional or closing comments.

Thank you very much Shannon. Thank you so much for calling today. Appreciate everyone's interest and investment in the Company, and we look forward to talking to you early next year in February, for the fourth quarter results and outlook for 2011. So thank you again.

That does conclude today's teleconference. Thank you all today for your participation.