CoreCivic Inc (CXW) 2010 Q4 法說會逐字稿

Good morning everyone and welcome to CCA's fourth-quarter 2010 earnings conference call. Today's call is being recorded. If you need a copy of our press release or supplemental financial data, both documents are available on the investor page of our website at www.cca.com. Before we begin let me remind today's listeners that this call contains forward looking statements pursuant to the Safe Harbor position 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 will as our form 10-K and other documents filed with the SEC.

This call may include discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measurement is provided in our corresponding Earnings Release and included in the supplemental financial data on our website. We are under no obligation to update or revise any forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

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

Thank you, Melissa and good morning everyone thank you for doing our call today. With me today is our Chairman, John Ferguson and our CFO, Todd Mullenger. And also joining us is our VP of Finance, David Garfinkle. In a few minutes Todd will take you through the numbers for the quarter and the year. And then I will discuss market opportunities. After which, we look forward to taking your questions. First though, I'd like to make some comments on the past quarter and the full year.

Let me start by saying I am very pleased with our fourth-quarter results, which capped off a successful year over all. I believe that our performance over the past year demonstrates clearly that we are executing on our strategy very well and that our strategy is delivering value to our shareholders. From a financial perspective our full year adjusted EPS was up 10.2% . This makes for 10 consecutive years of EPS growth for CCA and a compounded annual growth rate over the last three years of just under 10%.

Todd will take you through the financial details shortly but let me point to a few operational highlights. In terms of filling our existing inventory we have continued to make good progress under our recent contract with California and currently we are housing nearly 10,400 California inmates in our system. We're virtually at 99% occupancy under the current contract. That compares to having just fewer than 8,000 on January 1, 2010. Additionally with our recent expansions, our Georgia populations have grown by over 1800 inmates and our United States Marshal Service populations grew by almost 2500 prisoners.

We also surpassed 10,500 prisoners for the first time in the quarter for the Marshal Service and both our Cal City in Nevada Southern facilities ramped up more quickly than anticipated during the quarter under our new Marshals contracts. While we've continued to fill existing capacity we also have 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 1150 male inmates in the Jenkins Correctional Center. We broke ground right before Christmas and 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.

Let me give you a couple of examples of this, that have been reported recently in the industry. One of which is New Hampshire. New Hampshire has an RFI on the street looking at solutions for both in-state and out of state. Another one is the state of Kansas. Governor Brownback, in Kansas, has proposed in their upcoming budget money to secure contract beds to deal with their recent population growth. We think both existing capacity in state and out of state will be attractive to them.

Let me now say a few words about our focus on managing costs. As you know, we implemented a company wide initiative in 2009 aimed at driving greater efficiency and we continue to make significant progress with this initiative over the quarter. We had another good quarter of managing costs and we're continuing to focus intently on further opportunities to control expenses. Going forward we intend to continue to have laser focus on cost, and while it is unlikely, we'll be able to derive the same level of savings as we have done over the past year we have already identified areas where we can attain further efficiencies.

Let me also say a few words about the full year. As you know our strategic focus has been to one -- fill existing capacity by continuing to build relationships with existing and new customers, build new facilities where there is demand and finally aggressively manage cost. Over the past year we've made tremendous progress on all of these fronts. The highlights being, in addition to adjusted EPS being up 10.2% AFFO was up 16.2% for the year. Also, our average daily population grew full year and for the quarter, by meaningful amounts, with us surpassing the 80,000 inmate population level for the first time as a company. And for the quarter we averaged 80,777 inmates in our system.

So, overall I was very pleased with our performance in the fourth quarter and the full year. This success would not have been possible without the hard work and dedication of more than the 17,000 employees of CCA. I want to thank them for their leadership and congratulate them on their accomplishments. Now I would like to hand the call over to Todd to discuss the detailed financials, and after which, I'll discuss how we see the market in our opportunities going forward.

Thank you, Damon. Good morning everyone. We are very pleased with our fourth-quarter operating results which reflect the success of our continuing efforts to fill vacant bed capacity . In the fourth quarter of 2010, we generated $0.39 of EPS compared to $0.36 of EPS in Q4 2009. Full-year adjusted EPS, totaled $1.41 representing a 10% increase over $1.28 in 2009. The fourth quarter financial performance exceeded our forecast due primarily to the higher than anticipated US Marshal populations, favorable operating cost performance and lower income taxes.

We believe the higher than anticipated US Marshal populations have been largely driven by delay and transfers of detainees from US Marshal custody in 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. More on that later. The primary drivers of our year-over-year revenue in earnings growth include increases in compensated man days, favorable expense performance, as well as a favorable impact from our share repurchase program. Total revenue for the fourth quarter was up 3.5% over last year reflecting a 4.3% increase in average daily compensated man days, driven by increases in US Marshal, State of California, Georgia and Florida populations. The revenue for compensated man day in Q4 was down slightly against last year at $57.97, reflecting a change in mix 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 lower per diem.

Although average compensated man days increased 4.3% average compensated occupancy for the quarter was 89.7% compared to 91.7% last year, a decrease that reflects the increase in bed capacity resulting from the activation of Nevada Southern and the expansions in Coffee and Wheeler. Operating expenses per man day declined 1.6% compared to a year ago, which reflects our efforts to improve operating efficiencies, the low inflationary environment and increases of compensated man days at facilities operating near or in excess of rated capacity. The net result was that margin for man day rates increased against last year with Q4 2010 at 32.3% versus 31.7% last year. The GAAP income tax rate for the fourth-quarter was significantly lower at 36% versus 38% for the first 9 months of 2010. A favorable tax rate in Q4 was due primarily to certain tax credits taken in the quarter.

Adjusted funds from operations per share for the quarter were $0.57 compared to $0.55 in the prior year, a 3.6% increase. AFFO for the full year totaled $2.37 a 16% increase over 2009. For those investors new to CCA unlike many other industries our depreciation expense is not reflective of the ongoing maintenance CapEx necessary to maintain our facilities. For example, depreciation and amortization expense totaled $104 million in 2010 versus maintenance CapEx for 2010 of only $43 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 decreased approximately $41 million from the third-quarter and stood at approximately $305 million as of December 31.

The primary driver of the decrease repayments from the State of California and the US Marshals were passed to receivables. As a result of additional payments received, shortly after the end of the year of the State of California is now current on its accounts receivables, having paid us for essentially all past due amounts previously outstanding. With regards to our share repurchase program announced in February 2010 we have repurchased 7.6 million shares through January 31, 2011 at a total cost of $156.3 million with the average cost per share at around $20.70. As of January 31, absolute shares outstanding, not weighted average shares but absolute shares, totaled approximately 109.3 million.

Moving next to a discussion of our guidance, as indicated in the press release full year EPS guidance is in the range of $1.37 to $1.45. Guidance for Q1 is in a range of $0.32 to $0.33. Adjusted funds from operations per share guidance for the full year is in the range of $2.27 to $2.41. Guidance was developed under the assumption that no additional share repurchases are made during the balance of the year.

Our first quarter and full-year guidance are impacted by number of key factors which I will spend a few minutes outlining. First, the sequential decline from $0.39 of EPS in Q4 to a range of $0.32 to $0.33 in Q1 can largely be explained by several items.

You may recall from prior years that Q1 has always seasonally weaker compared to Q4 due to a large increase in unemployment taxes. Generally speaking, we pay over two-thirds of our annual unemployment taxes in the first quarter because of how the taxes are calculated and when they are paid. That translates into a $0.02 negative impact on EPS versus Q4. Q1 also has 2 fewer days than Q4, which impacts EPS by around $0.015. Next we're expecting a $0.01 deterioration in EPS due to a GAAP tax rate of around 38% in Q1 versus the low 36% in Q4 last year.

GAAP taxes are expected to increase as we don't foresee the same level -- high level of tax credits we experienced in Q4. Finally, since the end of the year, we have experienced a decline in US Marshal populations at several facilities, which we believe is attributed to transfers of detainees from US Marshal custody to the custody of the BOP as new bed capacity has become available within the BOP system. The negative impact of margins per man day from these transfers will be material as populations are declining at facilities that are operating in very high occupancy rates.

We are forecasting a $0.015 to $0.02 impact on Q1 this year versus Q4 2010 a result of these declines. This is an item we discussed on previous Earnings calls. We had expected to see the impact of these transfers beginning in Q4, fortunately, we did not. Marshal populations are a key flex point for Q1 as well as the full-year guidance. If Marshall populations vary materially from the level forecasted it could have a material impact up or down on our operating results. So to recap the cross walk from Q4 EPS of $0.39 to the Q1 guidance range of $0.32 to $0.33, the total impact on the four items just outlined is around $0.06. $0.02 from unemployment taxes, $0.015 from 2 fewer days, $0.01 from the increased GAAP tax rate and $0.015 to $0.02 from declines in Marshal populations.

General and administrative expenses in Q1 and for the full year 2011 should approximate 5% of revenues. Depreciation and amortization expense is forecast in approximately $113 million for the full year, while Maintenance CapEx is forecast in the range of $50 million to $55 million. With regards to AFFO, cash taxes paid are expected to approximate 26.5%, a pre tax income in 2011 which was used in developing AFFO guidance versus a 38% GAAP tax rate reflected in EPS guidance for 2011.

Turning next to discussion of our liquidity, as of December 31, 2010, our liquidity is provided by approximately $228 million of availability under our bank credit facility. Plus, approximately $25 million of cash on hand. Our total debt leverage ratio was 2.5 times with interest in fixed charge coverage ratios at over 6 times since the end of last year.

Uncertainty remains related to the general economy and around government budget deficits. This is the primary uncertainty and risk we face for 2011. In developing our guidance we've incorporated our best estimates for 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.

Let me close by saying were very pleased with our operating results for 2010 as Damon pointed out, we've posted our tenth year of consecutive earnings growth, the last three of those years occurring during one of the worst economic recessions this country has experienced in the last 75 years. That said, this management team will continue to work diligently to maximize shareholder returns, while at the same time protecting the long-term value of the company franchise by continuing to meet or exceed our customers' quality expectations. I will now turn it over to Damon for specifics on our new business

Thanks so much, Todd. Now looking forward, as we look forward to 2011 I am very optimistic about the business. In terms of strategic priority for 2011 our focus is going to continue to be carrying beds and inventory to meet future demands. With a meaningful amount of new incremental bed demand in the market place today, targeting existing capacity from existing and prospective customers we continue to think this strategy is a sound one. However, here in the near term we will continue to hold off on new bricks and mortar construction of speculative beds.

As mentioned in the press release, we have approximately 11,600 unoccupied beds or about 9200 beds after California ramps. So, we will continue to monitor closely the needs and timing of new bed development but clearly we would like to continue to see some additional utilization of our remaining capacity and better visibility from our customers before we add additional capacity. Finally, we will also continue to build or pursue build-to-suit opportunities. And as demonstrated with our new Jenkins facility, we've had a 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 relates to their budgets, the Company's ROI hurdle on new construction will persist to be higher.

Now for the market industry observations and opportunities. As Todd described, our financial guidance is based on what our prospects are as we see them right now. Of course we are optimistic that, just like last year, we'll be able to seize additional opportunities that will deliver further growth. Let me take you through, now, how we're looking at the market and where we see the main opportunities for the next year.

First a couple of comments on state budgets. Clearly state budgets continue to be a concern for us here in the near term. However as mentioned last year, NCSL or the National Conference on State Legislatures, indicated that it appears that the fiscal year 2010 budget year was a trough for state revenues. Based on recent reports that appears still to be the case. Yet, the size of deficit states will have to close on their own in 2012 will be larger for them, since the majority of Federal stimulus funds were used in 2011.

Let me also note here that 13 of our 15 state partners have released their proposed budgets for the coming fiscal year and in May we'll give an update and overview of these various proposals. Now let me point to a couple of additional positive things that we see with the states. CCA's current 15 state customers are projecting their growth at 17,000 inmates over the next 5 years. This is on top of the half a dozen states we have mentioned recently that currently are not doing business with CCA. We estimate that these states are approximately 13,000 inmates over capacity today and by 2015 are projected to be over capacity by more than 30,000. We think we could see several states use the private sector that don't have capacity to deal with overcrowding and or growth.

Which leads me to my second point. 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. Now a handful of states have authorized funding and construction in previous fiscal years but no one has proposed or authorized funding for this current fiscal year 2011. Now you have heard me report this before but what is new here is what we see for the next fiscal year.

It is very early in the budget process for the coming fiscal year starting July 1, but we are getting the sense there will not be any meaningful funding in the coming fiscal year, also, at the state level. 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 level service that we have demonstrated we can provide to our customers.

Unfunded pension liability is growing more and more to be a major concern for both state and local governments. More recent reports indicate that state public pensions are under funded by $1.8 trillion to $3.4 trillion, on top of that 50 major cities in the US are estimated at an unfunded total of over $0.5 trillion.

Our current and perspective customers now recognize this is part of our value proposition because we can help state government slow down of the rate of growth of their long-term obligations. So systems here in the United States that control 91% of the market place 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 makes our value proposition extremely attractive. Now, this is the point where I typically give updates on pending procurements but before I do that let me make a comment on the Federal budget for 2011 and the President's proposed budget for 2012.

The Federal government is currently operating under a Continued Resolution or CR which expires on March 4th. It probably will not be clear on what Congress and the President will do for the remainder of this year until we get closer to that March 4th date. As for next year's proposed budget the President plans to release it next Monday on the 14th. But we'll give an update during our May call on funding for our Federal partners.

So, now to significant pending procurement and there's a good amount of activity both on the state and the federal side. The first of which is Arizona and a requirement for 5000 new beds in-state. This procurement was canceled last year but was re-released in January and bids are due February 24th. We expect an award to be in the second or third quarter of 2011.

[Data card] 12 and this is the procurement for the re-bid of our BOP contract at our McRae, Georgia facility which expires in December, 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. The procurement has been released and proposals have been submitted and we expect an award to be in the third-quarter of 2011.

Now to the BOP procurement for 3,000 beds. This opportunity is for a contractor owned and operator facility for the housing of up to 3000 short term sentence inmates. The procurement only allows existing facilities to be proposed and 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 still expect the award to be in the first quarter of this year.

A comment on the other BOP procurement for 1,000 beds. This is an opportunity for a contractor owned and operated facility for the housing of up to 1,200 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. We still anticipate award to be in the first quarter of this year. Let me also make a brief comment about demand as we see it from a BOP going forward.

We reported last year that the BOP was at 137% of their capacity. The BOP has reported their population and capacity projections through 2016. With their projections they are estimating their system to grow by 28,000 inmates through 2016. As of right now, the BOP has only funded 10,000 new beds past 2011. And that projection assumes that the BOP still operates above 137% in 2016, which they have said publicly that percentage is too high. So, a very meaningful amount of activity within the industry for new beds, both through advertised requirements and new prospective states considering our solutions.

Before I make my final comments, let me give a brief update on a couple of topics relevant to California. First as it relates to their proposed budget for next year. I know that there were several analyst notes written back in January, about California Governor, Jerry Brown's proposed budget which is designed to address some of the state's deficit and I don't have much to add materially to what has been reported in the investment community. As most of you know the proposed budget attempts to reduce the deficit by reallocating responsibilities from the state to local governments. In addition to the requirement that the legislator weigh-in and approve the budget, the voters in California would have to agree, by vote, which might be held in the summer of this year to consider whether or not to extend tax increases for a period of five years.

Next the city and county governments to whom the responsibilities for housing inmates would be delegated would have to agree and demonstrate that they are capable of providing the level of services to the number of inmates contemplated. As mentioned in the January report the fundamentals in California remain regarding prison overcrowding and fiscal difficulties.

By all indications, the Brown Administration does not want to return inmates to a severely overcrowded environment or what has been referred to as bad beds or negatively impact the states standing in a Federal court case. We believe it is fair to assume that concern is shared by local jurisdictions as the majority of the jail capacity in operation, in California is overcrowded and under court-ordered population caps. It is very early in the process and in all ways we will keep our investor base updated on the latest.

As it relates to three judge panel there isn't meaningful update to revise beyond what I shared last year. As reported earlier last year, the Supreme Court has agreed to hear the states appeal. Our best guess is the decision on this appeal will be issued by July 1 of this year. Finally as it relates to our new award with the state, we don't believe will execute on our final agreement until the state finalizes the 2012 budget and or see the ruling by the Federal courts.

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 the market, that despite economic pressures faced by our customers, has tremendous opportunities. Indeed, it is because of these pressures which lead to severe capital constraints and a need to avoid increasing of pension liabilities that we believe our value proposition to customers remain strong. We don't see any change to the current position that we are able to meet their needs either through existing capacity or our ability to construct facilities faster and at a much lower cost. We believe the supply-demand imbalance will continue long-term and insufficient public sector capital investment is opening up significant possibilities with potential new customers. I note that these potential new customers are faced with overcrowding today of more than 13,000 inmates.

Financially our business is very strong. We have a strong balance sheet, good liquidity to fund new capacity developments, limited managed only operations and focused operations in a largely un-penetrated US marketplace. In summary, the business is performing well and we're taking actions in the short and long-term to make sure it continues to do so. We have significant opportunities ahead in a strong and stable cash flow to provide capital for future development. As mentioned earlier, I am very optimistic about the business and we believe we have the right strategy in place to capitalize on these opportunities and deliver significant value to shareholders over the long term. That concludes my prepared remarks. Thank you again for calling into today's conference and let me now turn it over to the Operator for Q and A.

Thank you, the question and answer session will be conducted electronically.

(Operator Instructions)

Our first question will come from T.C. Robillard from Signal Hill Capital.

Thank you, good morning everyone. Damon, I just wanted to get your thoughts. I completely agree with the thought process about the state budget issues creating a much greater need for long-term demand in the private sector, especially with the lack of funding capabilities in this environment. What I'm trying to reconcile with is comments, and these are sporadic from DOCs, but the comments coming through that even though the overall budget gap is not as material as some had thought and as that starts to stabilize, the low hanging fruit's been picked. And DOCs can't just squeeze a little price or put a few more people in prisons or put a few more people out into the private sector there's been a lot more commentary around parole. And I think we all know what that actually will do to benefit the long-term trends but is that a risk that you're hearing from your initial discussions with your state customers? I'm just getting a sense as to where they feel the cuts may come, are -- do they have to really make some big adjustments this year round or can they get by with small adjustments?

Well, good morning T.C. Relative to your question, the discussion about DOCs and state governments doing early or, maybe, lowering the parole standards that is something that we've heard over the last, I guess, 24 months. We've heard some states specifically try to, aggressively, try to reduce their inmate population. Probably most notable is what you heard, I guess, 2 years ago from State of Colorado where they were looking to try to reduce their population by 4,000. So, it's not something new. It's something we've heard some say it's looking at over the last 24 months and it's really going back to the last recession something that states looked at. You know, the challenge is when you look at those types of solutions how aggressive can you really be once various stakeholders weigh in on those type of decisions, and does that really fix your problem long term. So, you may be able to do that for a little while. But obviously recidivism will cycle, it will go up and you may get those inmates back in the system. So, it's something we're monitoring, some states have publicly talked about it and tried to put some plans in place. Some other states have tried to do it not so publicly. But it's not something I'm hearing more about or hearing expressed more than I did, say, a year ago or two years ago.

Okay, and so what are you hearing then from your customers because now that they have got, at least, initial budgets, clearly they have got to go through the Legislative process, so what are you hearing from your customers -- is it more in terms -- the service cuts have happened to help lower per diem's. They're clearly going to have to squeeze. They don't have the Federal funding to come in and plug some gaps. Where are you getting the sense that they're going to be able to squeeze? Is it more inmates to you guys or are they going to actually come and look for deeper concessions from you?

The risks on deeper concessions is there. I will say, though, that we haven't had anyone yet, even though it's very early in the cycle, had anyone yet come back to us this fiscal year for the end of this fiscal year going to next fiscal looking at cuts but it's early in the legislative process, as you know, and we'll be able to give a better account of on, kind of, where we're landed on that in May. So that is still there. I would say also, what you're hearing probably a little more now than you heard maybe the last two years, is, are there opportunities maybe to close some of the older antiquated facilities that they are currently operating within the respective states. You've heard, probably most recently, Florida, Rick Scott is looking at maybe that option of trying to see if there's an opportunity to maximize the private facilities within the state, take advantage of our contracts and maybe look at some older facilities that are past their useful life cycle and maybe very inefficient to operate.

I think you're hearing that a little bit more but you've also got the issue where you had a lot of new Governors coming to office in January, whereas, a lot of previous Governors left office in December and those previous Governors had to, obviously, get through some very tough budget cycles. But also probably just kick the can down the road on making some hard decisions. I think these new Governors are coming in and seeing their systems that are very overcrowded, potentially risking the safety and security of the operations and often the communities they are located in, and are going to have to make some hard decisions on how to deal with that because it's not lost on these states what's going on in California. Which is, if you go too long by overcrowding your facilities, you're going to have the Federal courts in and they're going to probably propose a solution that's not very efficient or very cost effective. I think you've got some Governors coming in and saying we really are just going to have to figure out some creative ways to deal with this overcrowding issue and that could be some solutions in-state but I think also we got some great solutions providing capacity out of state to get them quick and immediate value.

So with the closing down older facility is that a function of-- I guess, where is that opportunity? I would assume states wouldn't want to bleed out a lot of tax revenue in-state. It's a trade-off obviously. Does that mean there's more managed only type of opportunities for you guys or would this be actually filling existing capacity where some of those opportunities can come from?

I think it's more of the latter. So, it could be a case where we could, if we've got some in-state facilities we could provide some additional capacity through some renovations or expansions but also if there is no issue about sending population out of state then obviously we can provide immediate capacity also. I think it's more the latter.

Okay I will jump back in the queue, thanks.

Thanks T.C.

Our next question will come from Manav Patnaik from Barclays Capital.

First question, on the state side just in the industry double up, you mentioned New Hampshire, Kansas there has been some articles out there on Maine. Can you maybe give a little more color, if you have any, that is in terms of the potential size of how many beds these states are looking for and also quickly on the state side anything drastically different than what you expected on the reissued [RFB] in Arizona?

Good Morning, Manav. So let me talk about your first question. Not prepared to talk more specifically than I did in my prepared remarks relative to new opportunities. I did put a little teaser, obviously, about the two states, Kansas and New Hampshire, that are looking at solutions both in state and out of state. But they're are other states and I think some media outlets have picked up where those opportunities are. So, really nothing more to add other than the states that we're talking to and targeting right now are overcrowded by about 13,000 inmates.

Relative to Arizona the procurement is, I would say obviously, the same size regarding the number of beds, so similar requirements from that perspective. And I think the design requirements are somewhat similar. But they have changed some of the policy and procedure requirements within the contract. And I think they also have changed a little bit on kinds of timing, not on the ward but on the ramping of beds. I think they're looking at a two-year ramp up of two increments. One 2,000 increment and one 3,000 increment, so that's probably the highlight and probably the significant changes from the previous version.

Got it and then coming back to some of the big picture, where you know like you said the states are looking to be more creative and trying to help the cost and obviously you wanted the solutions like you said, is the in-state or out of state bed capacity. But is there more referring to increasing the size of [Burley] population and using different technologies? Is there any plans or how do you look at the long-term picture in terms of maybe trying to dip your feet into different areas of the corrections market?

Good question. There is, obviously, a lot of different service lines that we've either been in or could get into going forward. I think this probably falls into the bucket of strategic alternatives and so as always management team and the Board is looking at what those opportunities are, what's the opportunity for growth within those service lines. And is that something that we could effectively get into and grow that business but also make sure that we don't distract or hurt the core business? Because we feel very optimistic that the core business with only 9% penetration in the US has meaningful opportunities. So, one thing we've tried to do is keep a laser focus on the core business, drive innovation, drive value, drive quality. Because we see meaningful opportunities to stay in that core business. But if the other opportunities, other service lines, something that we take a look at and see if its complementary or an opportunity we can get into that doesn't distract us from the core business.

Got it. Just one final one for, Todd. Just in terms of the fourth end be relative to the high end of your guidance range I'm presuming, and correct me if I'm wrong, most of that like you said is probably because of the delay in the transfers of USMS to the BOP facilities. What -- How long was that delay? Was it a month, two months, was it most of the quarter?

It was most of the quarter. We would've expected to see some movement of those populations earlier in the fourth quarter and some of the big capacity in the BOP was expected to come online earlier in the fourth quarter and for whatever reason it just didn't happen. We have begun to see decline in US Marshal populations. We don't know for sure what's driving that but we believe part of it's being driven by the BOP relieving the backlog they've built in the US Marshal populations.

Got it. So to the extent of the last transfers the first quarter guidance could be converted as well?

That's possible. So we'd love to see the BOP continue to delay those transfers but again we're into February and we've seen a decline in those US Marshal populations.

Got it, thanks a lot guys.

Thanks, Manav.

Our next question will come from Todd Van Fleet from First Analysis.

Hi, Good morning guys.

Good Morning.

Morning, Todd.

Nice quarter. First off some, it might be some, of the easy ones. Todd, what's the implied pricing improvement that you have in your guidance for 2011 organic, pricing improvement? And if you want to parse it between states and feds that's great.

Similar to the last couple of years flattish per diem increases.

So it's a low inflationary environment combined with the challenging budgets we would expect to see another year of challenges in terms of getting meaningful per diem increases. We continue to hope we'll be successful in offsetting that with cost-containment initiatives.

And that's at the state and federal level, Todd?

That would be, primarily at the state level.

Okay, so flattish at the state level but how about the feds? Just CPI and so maybe in the 1%?

Yes, yes, yes, CPI, yes.

Okay. On this issue of the Marshal service, I guess a couple of questions. I don't know how much more detail you can give but how is it -- can you just talk a little bit about the flow of inmates through the BOP that creates the bottleneck and then all of a sudden there isn't a bottleneck. They have a pretty large population so it will be helpful also if you could maybe give us an indication as to when the BOP turns open the relief valve, to some degree, on the US Marshals beds, the numbers that we're talking about of US Marshal inmates that are affected from your perspective?

In terms of the backlog they created it's just as simple as the BOP stopping to accept transfers into BOP facilities. And so, think of the Marshals as the federal jailer and the BOP is federal prison operator. So the Marshal houses the detainees after they're arrested and awaiting trial and or conviction. Once they're convicted they, technically, become the responsibility of the BOP but the BOP has some flexibility with regards to when they pick up those detainees and transfer them to a BOP facility. So if they've got an absence of available bed capacity they'll back those detainees up into the Marshals and allow the Marshals to continue to detain them for an extended period of time. And what we had was the California City facility coming off-line and then they are waiting for the D. Ray James facility to come online. And so there was a lag there that created a backlog in our Marshal facilities, and those Marshal facilities were operating at a very high occupancy levels to begin with. And so they generated some attractive margins during that temporary period. So the BOPs -- doesn't have great data that's available to us but the best data we have suggests that, that backlog is now being relieved as the D. Ray James facility and maybe a couple other -- one or two other facilities are accepting new transfers in.

Right, but I as I --

Sir, go ahead.

Sorry, I was just going to ask when the BOP, when they stop accepting Marshals inmates, is it for funding reasons that they just don't -- they can't accept any more folks coming in because they don't have the funds available to bring those in? I'm just trying to understand a little bit better what prompts the BOP to all of a sudden start moving inmates out of the system on one end so it can make room for new Marshal service inmates on the other end.

Yes, Todd this is Damon. One issue is that, so Todd's exactly right, he described D. Ray James but I also understand there's probably about 1,000 beds, maybe 800 to 1,000 beds that are being renovated in Texas that also affected their capacity, late last year. So, about 3,500 beds as a total, which that's a meaningful amount, especially in the southwest. But as we talked about the BOP is probably pretty close now to 139% almost 140% of a weighted capacity. So, it's just a point, and I don't know if they would say this publicly because of the high percentages, percentage. But I don't think they would have said or have said that we just can't take anymore. I get the sense that they're pretty close. Their base facility and their base system they're just maxed out unavailable bed capacity. So I think when you have a situation where you have some beds transition down and opening up like we did last year with both our California beds and then the Georgia beds but also some beds that they lost in Texas for a while. That can have a meaningful impact on what they can take and Todd correctly described it. The Marshals basically are the national Sheriff and they're the ones that works with the BOP on a daily basis saying we've got these many prisoners that are sentenced and convicted of crimes and ready to be housed in the BOP. They're coordinated on a daily basis saying Okay, where is your bed space, where do we need to move them, and when can we bring them over to the Federal pen. That's a coordination that takes on daily. If there's a case where they don't have the capacity, then the Marshals will just have to hold them for a period of time until the BOP can take them.

To the best of our knowledge it had nothing to do with funding.

Right, okay. Just two more questions along this line then I'll jump out. So, can you give us an understanding as to the number of US Marshal service inmates that we're talking about? So you've identified, okay $0.015 to $0.02 decline or impact from a decline in US Marshal service populations on a sequential basis, can you give us an understanding of how many inmates we're talking about there?

We prefer not to.

Okay, I guess the other point would be that given the BOP's over-capacity situation and given the fact that they took inmates out of Cal City and they moved them to a facility in Georgia they essentially didn't -- the BOP on that transaction didn't increase their capacity in any way. We've seen the Marshal service on the other hand increasing its capacity through contracts with you at Cal City and also contract in Nevada. But what I'm wondering is to the extent that the spigot kind of remains partially or mostly closed here on the BOP in terms of relieving the US Marshal service populations, shouldn't we in fact see an increase in Marshal service populations in your facilities in Cal City and in Nevada and perhaps else where as a result of an ongoing effect, or the result of an ongoing effect of what we see happening at the BOP?

I think that's probably a reasonable assumption so if you go back to what I said earlier in my prepared remarks relative to the BOP's capacity number of beds they have coming online after 2011, which is 10,000 but they've got 28,000 in projected growth for 2016. That obviously indicates that you're going to have the tighter system to accept new inmates but also have a bed shortage. I think that's probably a fair assumption that something we'll evaluate in the quarters and years to come. And I think as that does come more apparent then it will be a case where if the BOP is not going to have enough beds to meet that demand then will they have the ability to contract for more beds so I think there is an opportunity there. And then the Marshal service, if they think now the new normal is to have a little higher average daily population then they may do more procurements like they did with us in Nevada. I think that's probably a fair assumption.

So the question went around timing though. When did those increased populations present themselves if they present themselves? Is that this year, is it next year and that will also be a function of a level of crime in the Southwest. And a number of prosecutions and flow. So, we're optimistic long term, the question is when, around timing?

That is exactly right.

Thanks guys.

Thanks, Todd.

We will now go to Tobey Sommer. Tobey Sommer with SunTrust.

Hi this is Frank, in for Tobey. Kind of a high-level strategy question going back to some of the prior questions about additional services. Are you hearing anything from clients requesting either bundled services or hey you guys do a good job would you be interested in X or any type of request from clients for additional services?

We really are not. We have had some experience in providing services with juvenile facilities, you may remember we did some here in Tennessee and a couple of other states back in the '90's. And as it was then and is now, those contracts and the customers in those types of agreements were different agencies than the Department of Corrections. So, it's been our experience and I think most states are still -- you have maybe needs and services under different agencies. You've got Department of Corrections, you may have a Department of Public Safety, you may have Department of Children and Family Services, you may have a part Parole's Board that manage their alternative detention by electronic monitoring. All those agencies sometimes need to do it in-house or maybe have a separate arm that does a procurement activity. So, we're not getting the sense that anyone is talking about or trying to bundle or consolidate all of those different components of the criminal justice system under one roof. I think some states will look at doing a few merges here and there, but I don't get a sense that there's going to be any huge wholesale changes where they are trying to bundle it all together.

Okay great and on --This year you've done a good amount of repurchasing of shares can you give us your thoughts going forward and kind of remind us how much is left on that program?

Well, we've repurchased 156 million out of 250 million authorized. That authorization is in place until June 30, 2011. It's an opportunistic plan. We've never outlined the price level at which we're willing to repurchase shares. Don't have any interest in doing that now, but it's still an arrow in our quiver of capital deployment alternatives.

Okay, great. Could you talk a little bit about the collections environment? Are you seeing any issues from other states or Federal collections at this point?

No, at this point everyone is essentially current.

Okay, great. And finally, you've done a great job managing expenses per man day. As you look forward are there additional components of variable or fixed costs there that you could continue to work on or how do you see that going forward?

We will continue to focus on improving operating efficiencies without sacrificing quality. I think as Damon mentioned that most of the large home run opportunities have probably run their course but there are still incremental opportunities. And we will begin to focus on taking advantage of those opportunities. With regard to cost inflation generally, we're seeing generally stable cost environment. We're starting to see some increases in some commodity prices such as food and of course energy has always been volatile. On the food side we have a fixed price contract, all of our food services is outsourced to a third party. We have a fixed price contract and a built-in escalator was around 2.5% that took effect January 1, 2011. There is a provision in there if food cost escalates significantly they have the opportunity to come back and request an additional increase, but that has to be mutually agreed to right now we haven't received that request. And then looking forward into 2011, we'll obviously be monitoring the labor markets to evaluate what we may need to do regarding wage rates to remain competitive. Having an engaged, motivated group of corrections professionals is obviously very important to the long-term success of the company. We've gone two years, our employees have gone two years without a merit increase. So that will be a key focus for management to ensure that we have an engaged and highly motivated workforce. We'll probably make a final decision on that here in the next one or two months around potential merit increases.

All right, great. Thank you very much.

And we'll now go to Kevin Campbell with Avondale Partners.

Good morning. I was hoping you could first start by talking about some cost in the fourth quarter related to the ramps at Cal City and Nevada Southern. Were there any one-time start up costs we should be thinking about in the fourth quarter?

No there were not.

Okay, great. In the DNA was up about $1 million sequentially. Was that all related to Nevada Southern or is there any one time comps that might come back a little bit?

Primarily Nevada Southern.

Perfect. There's been a lot of press around Hawaii and the Governor apparently has pulled back several hundred inmates or a hundred -- few hundred inmates. Could you talk a little bit more about that situation, where you think that will play out? Should we be expecting those inmates to be drawn down over time or do you think they will be fairly stable from where they are presently?

Good morning, Kevin. This is Damon. And I'll make a couple comments on Hawaii. We've had, as you know, a set of Hawaii inmates going back to the 90's actually, I think it was '97 or '98 when we started to hold those inmates in. One global comment I will make is that there has been discussion now over two or three Governors about is there a need or desire to build additional capacity on the island. Obviously, we're providing great value to the state of Hawaii of holding that population in Arizona, from a cost per day but also capital perspective. So, I think that is not something that we haven't heard in the past over the last 12 or 13 years. I think that will continue and as appropriate we will talk with the state as they think about those type of decisions. As it relates to the population if I looked over the last six or seven years we've been as high as 2,000 -- 2,100 inmates to 1,700. So, we've had some fluctuation over the years where Hawaii based on timing of demand, based on maybe capacity got opened up on the community corrections level. We'll see some fluctuation, say relatively minor fluctuation in our population. But one great thing about this facility being part of our complex out there in Arizona is that with a large portfolio of customers out there both federal and state, what we've always taken advantage of is the opportunity to fill any incremental beds that opened up from one customer and provide that capacity to another customer. So, it's something we're keeping an eye on. It's great that this facility where it's located that we have several other customers that could take advantage of capacity. Because those beds out in Arizona, as we said before, are some of our most viable and most attractive to both federal and state partners.

Great, that color is very helpful. Can you address, Damon, maybe the budget proposal in Florida. The Governor proposed maybe $200 million for private prisons. How much of that do you believe is for the existing private prison operations and how much do you think could be new?

It's too early to say. Our folks are going through that. It was just released this week but our folks are going through that and trying to understand better. But we're very encouraged by the proposal, we do think as I mentioned earlier -- I don't think I said Florida as a specific place, but we do think there's an opportunity to maximize some capacity within our existing facilities but also to provide some solutions in other locations. So, we're trying to understand that a little bit better but encouraged by at least the headlines that they're looking to make more investment in what we do.

Do you think that will come, I know it's early so maybe it's just speculation, but from adding new beds to your existing Florida facilities managed only? Or is it possible that, you know Florida we know passed the law allowing them to send inmates out of state a year or two ago, Is it possible that perhaps the additional funding would go towards building existing inventory?

It would be too early to tell and speculate but I think that Florida, just like a lot of states, are probably looking at all alternatives and we'll talk them through that and tell them the pros and cons of driven needs. So, I would say it's too early to tell what the final outcome will be but I'd say that everything will be on the table.

Okay, and then ICE, Southern California again, you didn't mention that in your opening remarks. How do you feel about that opportunity? Where do you think that stands?

You know, I think it's the same of what we said last quarter. Our sense is that ICE is still looking at opportunities for consolidation, kind of nation wide but also, in Southern California. So, I didn't put it in my prepared remarks because it's just not completely crystal clear on what they'll do throughout the state of California. Specifically, in the Southern California areas. So something we're monitoring very closely. Obviously, ICE is a large and important partner of ours. And we're always communicating with them on solutions we can provide for them. It's not completely crystal clear on how that will all play out still.

A couple more questions. You mentioned that there's no appropriation for new construction, is there any existing construction from your existing customers happening right now?

Yes, so there is, as you know here in Tennessee, I guess it was probably two years ago they authorized construction of a facility in Bledsoe County. There is some capacity in Florida that is being finished, I think over the next couple of years that they authorized and funded a couple years back. There's some capacity really still coming online in Arizona and then I think that Pennsylvania has some authorization of some beds in the last few years. So those are probably the most notable ones where you've got one of them is obviously is not an existing customer. I guess Arizona is not existing customer either. Those are probably the most notable of authorization of capacity over the last few years.

Okay. The California contract -- obviously it's got some time before it starts to ramp. [Gia's] got the guarantee that I think that they'll get their inmates first. Is there any chance that you can sell those beds to someone else either in the interim or sell them away from California?

That is hearsay. You know that we're always looking at opportunities especially when we've got a long fuse on a contract like we did in California. Always looking at opportunities here in the near term to utilize existing capacity. At the end of the day we've always been able to accommodate both existing customers and new customers' needs. So I think if there's an opportunity like that, as appropriate, we think we've got plenty of capacity and a lot of flexibility, we could meet all the needs.

Great that's it for me. Thank you very much.

Thanks, Kevin.

And we do have a follow-up from T.C. Robillard.

Thank you. I just want to get some more clarifications. Circling back onto some of Todd's questions earlier. With the Marshal populations if they were to -- do they have the budget to continue to remain in your facilities as opposed to getting transferred to the BOP? I'm trying to get a sense as to from a budget standpoint in continuing resolution, where your per diem stacks up with them in full custody of the BOP?

T.C. actually let me try to tackle that question, this is Damon. The Marshal service is a pretty unique customer for us from the perspective of they don't control the size and the amount of population they get. So to say it more specifically, they basically serve as the federal jailer to the federal courts. So, specific in Arizona, in Arizona you've got a Chief Justice, a Chief Judge and the Judge is there and US Attorney. Those folks are the ones that are driving prosecutions and arrests and convictions of prisoners. So, if Arizona, the Judges in Arizona and the US Attorneys are convicting more people that are brought to them from the Federal law enforcement agencies like ATF and FBI, the Marshals have to accept them. So, it's unique about them if there's a case where they are seeing a little higher population than what they budgeted, then they'll have to go back to main justice and talk to them about a supplemental funding or maybe some type of reprogramming of funds from other agencies within the Department of Justice to help them meet that short fall. So, the bottom line is that they don't control the prisoner population. It's driven purely by the US Federal courts and the US Attorney's office.

Okay, so what happens when the -- So, then does the budget dollar switch over to BOP budget dollars once they go into custody -- BOP -- these inmates?

Could be, that's not completely a public process. But it's a case where if the Marshall service go back to the main justice, Department of Justice I should say, if they were going to see a potential budget short fall by the end of the year because were seeing more prosecution in the Southwest border, it'll be the budget folks with the Department of Justice working with OMB. It will say, okay, how do we meet that short fall? Do we need to go back to Congress and get a supplemental? Or is there an opportunity maybe because a program wasn't fully utilized somewhere else in the Department of Justice they can reprogram that money. Sometimes, they can do that on their own, sometimes it might take some type of authorization from Congress. But that will be basically a process they'll do among themselves.

I got you. I guess, Damon, where I was going with this, I'm trying to get a sense as to how much budget plays into the ability for Marshals to maintain populations within your facility. If it's a situation where their budget is tight, are they going back to Justice basically turning the screws on the BOP to take these inmates and creating room for them, in which case, that allows their budget dollars to -- that allows basically, that cost to transfer over to the BOP's P&L. So, I'm just trying to get a sense, are there any real Governors on the budget that would force Marshals to push into the BOP or am I oversimplifying?

No, I think it would be possible that if the Marshal service did attempt -- from the budget folks in Department of Justice that there just really is no way to maybe achieve more funding sources either through a supplemental or reprogramming, the Marshal service may -- I shouldn't say may -- they're talking to each other on a daily basis saying, we're just not going to be able to hold this size of population maybe in a certain geographical area. Tell us what we need to do. If you've got capacity say in the Northeast or in the southwest or in the southern states how do we get them to the facilities, so we don't have them on our dime? It's a combination of all of the above. It's a direct communication between the two agencies on trying to move that population from Marshals' custody to BOP custody but also, if it's a case where the number is too much and the BOP is just saying to the Marshal service and the Department of Justice, we just don't have that capacity. Then, it's going to be the case where they sit down and say Okay how do we deal with that budget shortfall?

Okay, that's helpful, thank you. Todd, can you, just give us a -- you'd mentioned flattish was your assumption for kind of revenue per man day as we look through the year. Can you give us -- what would drive high-end versus low-end of your guidance? What are some of the main levers there?

One of the key flex points we just touched on US Marshal populations. Up per diem's, you know, up or down, versus the assumptions we have built in and then operating costs up or down. So, as a reminder $1 million of net income is $0.01 a share so it doesn't take a whole lot up or down to impact that range.

And, so the low-end of your guidance are you looking for a contraction in per diem's?

I'd say at the low-end flattish to maybe slightly lower than flattish on the high-end flattish to slightly higher than flattish, I mean it's --

Okay, so there's not a lot of variability there?

You know, it's an $0.08 range in the year.

Yes. And what about -- what's baked in and can you give us a sense in terms of low-end, high-end in terms of the Marshal population? Are you looking for that population to be flat on the low-end and kind of increasing to hit the high-end? Or are you looking for a contraction on the low-end and kind of stable for the high-end?

We'd prefer not to parse guidance on that level of detail.

Okay, well then maybe, I think I'm going to know the answer to this when I ask but I'm going to try anyway. How should we think about California then for your guidance in terms of, are you baking in -- I know the contract doesn't sound -- but are you baking in some -- do you still have baked into your guidance the population ramp down and some cost ramp up for you guys?

You're referring to Florence?

Yes, exactly. So, are you assuming that basically California -- the contract executed so you do have that because it will be a little bit of a drag for you guys into the back half of the year. Do you -- Is that in the guidance of this stance?

Yes. So, we're assuming that our population at Florence ramped down, but ramped down very gradually. As we've got a little experience with inmate moving to the state of California. It's a complex process so our anticipation would be that, that ramp up occurs, it begins in a May, June time frame. But it occurs very gradually so that on the California population averages around, call it 10,000 for the full year.

Got you, okay.

And it may be, one of the -- kind of assumes the transfer out of Florence isn't completed until early 2012 calendar year.

Okay, perfect, helpful, thank you so much. That was all I had.

If that changes, we'll update our guidance accordingly.

We do have another follow-up from Todd Van Fleet.

Todd I'm shocked you're not going to parse guidance for us.

I think we do a pretty good job of parsing it already. (laughter)

I wanted to try to understand the moving parts and pieces here in Q4. If you could tell me, or if you could tell us the number of facilities or which facilities were ramping down during Q4? I'm not sure there was anything outside of maybe Florida? Which facilities were ramping down in Q4?

Okay, ramping down?

Yes, you were losing populations and you were exiting contracts, that sort of thing. Cal City was done in Q3, right?

That's right.

Okay and so the [Flegadson] facility, that was in Q3 as well?

That's right.

Okay. So we were in ramp up mode in at least two facilities, I guess, so Cal City and Nevada in Q4, is that right?

Yes.

Any others that I'm missing that were in ramp up mode, so to speak? You were intaking --

A little bit of California.

Yes, a little bit of California, I think, that's going to be about it.

Okay and so then in Q1 then apart from the Marshal service and apart from what we might see happen in California over the course of maybe a multi-quarter period, are there any other facilities where we expect to see a decline in population due to the contract expiring or due to some other reasons?

No.

Okay. And we should see, I think you had talked about Georgia ramping up maybe in the Q2 time frame?

Our current expansions, they came on Q3 of last year, virtually ramped up.

Right.

But our new facility won't ramp up until 2012.

Okay, that's a 2012 event. Okay.

Right.

2012.

So, really apart from -- as we sit here today and we look across 2011, we've got 2 customers where population flexes are somewhat uncertain but maybe we think the trend is down over the course of 2011, relative to the end of 2010, that being California and the Marshal service. Is that right?

Yes.

Okay. Alright, that's it for me, thanks.

Thanks, Todd.

And we do have another follow-up question from Kevin Campbell.

Last question. The removal of the California inmates, do you assume or should we assume, anybody comes in and backfills those beds?

I would assume no backfill.

Okay, great, thank you.

And we have no further questions in the queue at this time and I'll turn it back over to our speakers for any additional or closing remarks.

Thank you, Melissa, and let me just say thank you to all of you that participated on our call today for your time and attention. But more importantly to our investors, thank you for your investment in CCA. I want to make sure it's very clear your management team is focused on executing on another good year and we look forward to reporting our progress throughout the year. So, have a great day and thanks for joining us.

That does conclude our conference for today. Thank you for your participation.