CoreCivic Inc (CXW) 2011 Q1 法說會逐字稿

Good morning, everyone, and welcome to CCA's first-quarter 2011 earnings conference call. Today's call is being recorded. If you need a copy of our press release or supplemental financial data, those 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 provisions of the Securities and Litigations Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today. Factors that could cause operating and financial results to differ are described in the press release as well as our Form 10-K and other documents filed with the SEC.

This call may include discussion of non-GAAP financial measures. A 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 President and Chief Executive Officer, Damon Hininger, and Chief Financial Officer Todd Mullenger.

I would now like to turn the call over to Mr. Hininger. Please go ahead, sir.

Thank you, Erin, and good morning. And thank you for joining our call today. With me today is our Chairman John Ferguson and our CFO Todd Mullenger. Also joining us is our VP of Finance, David Garfinkel. 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 first-quarter results, both operationally and financially. I believe that our performance over the quarter demonstrates again clearly that we are executing on our strategy very well, and that our strategy, which we've had in place for many years, is delivering value to our shareholders. Our core business, which is providing adult secure correctional and detention management services to our federal, state and local partners, remains very strong. Our earnings per share for the first quarter increased by 23.3%, our best quarter-over-quarter performance since the second quarter of 2007. AFFO was up for the quarter by 22.1%.

In terms of filling our existing inventory, we have continued to make good progress on our recent contract with the United States Marshal Service at our Cal City facility. WIth our population as of March 31 being 1,739. Our United States Marshal service populations have grown by almost 3,000 prisoners since January 1, 2010, with us surpassing 11,000 prisoners for the first time this past quarter. With our recent Georgia contract, our Georgia populations have grown by over 2,600 inmates since January 1, 2010. In addition to showing strong growth with existing partners, we have also maintained an ongoing dialogue with potential customers about helping to manage their current challenges with overcrowding and projected growth rates. Last quarter I mentioned that New Hampshire and Kansas were taking steps to use the private sector to meet their needs. Another state, Ohio, as reported in the media earlier this year, is also taking steps to expand their use of the private sector in a very meaningful way. And I'll provide some more details on that later.

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. We had another good quarter of managing costs with our operating margin increasing by 7.5% to 31.4%.

So overall I was very pleased with our performance in the first quarter. I would like to thank all of my fellow CCA colleagues for the distinguished performance they have been able to achieve for our Company. Let me also mention that this week is National Correctional Officer Employees week where we recognize the men and women who operate correctional, jail and detention of facilities here in the United States. I am eternally grateful not only for our fine employees, but everyone who is a correctional professional.

Now I'd like to hand the call over to Todd to discuss the detailed financials, after which I will discuss how we see the market and our opportunities going forward. Todd?

Thank you, Damon, and good morning, everyone. We are very pleased with our first-quarter operating results. In the first quarter of 2011, we generated $0.37 of EPS compared to $0.30 of EPS in Q1 2010, a 23% increase. The primary drivers of our year over year revenue and earnings growth include increases in compensated man days, favorable expense performance, as well as a favorable impact from our share repurchase program. The first-quarter financial performance exceeded our forecast due primarily to higher than anticipated US Marshal populations and favorable operating cost performance. We believe the higher than anticipated US Marshal populations have been largely driven by an increase in prosecutions, combined with delays and transfers of detainees from US Marshal custody to the custody of the BOP due to insufficient bed capacity within the BOP system.

Total revenue for the first quarter was up 5.5% over last year, reflecting a 5.8% increase in average daily compensated man days, driven by increases in US Marshal state of California Florida, and Georgia populations. Revenue per compensated man day in Q1 was down slightly against last year at $58.56, reflecting a change in mix with more managed-only populations. Although average daily populations increased 5.8% average compensated occupancy for the quarter was 89.9% compared to 90.5% last year, a decrease that reflects the increase in bed capacity resulting from the activation of Nevada Southern and the expansions at Coffee and Wheeler. Operating expenses per man day declined 3.3% compared to a year ago which reflects $4 million of bonuses in lieu of wage increases paid in 2010 but not in Q1 2011. It also reflect our efforts to improve operating efficiencies, the low inflationary environment, and increases in 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 Q1 2011 at 31.4% versus 29.2% last year.

Adjusted funds from operations per share for the quarter was $0.83 compared to $0.68 in the prior-year, a 22% increase. As a reminder, cash tax payments in the first quarter are very low due to the timing of quarterly tax payments required by the IRS. Our first quarterly tax payment was not due until April, with a second payment due in June. As a result, Q1 cash tax payments are significantly below the quarterly average, and Q2 tax payments will be significantly above the quarterly average. 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.

With regards to our second share repurchase program announced in February 2010, which authorized up to $250 million in repurchases, we have repurchased 9.7 million shares through April 30, 2011 at a total cost of $207.5 million, with the average cost per share at around $21.42. Including the shares repurchased under our first share repurchase program announced in November 2008, we have repurchased a total of 20.4 million shares at an average cost per share of approximately $16.34. This represents approximately 16% of the shares outstanding at the beginning of November 2008. As of April 30, absolute shares outstanding, not weighted average or diluted shares but absolute shares, totaled approximately 107.4 million.

Moving next to a discussion of our guidance, as indicated in the press release, full year EPS guidance is in the range of $1.43 to $1.49,. And guidance for Q2 is in the range of $0.36 to $0.37. Adjusted funds from operations per share guidance for the full year is in the range of $2.32 to $2.44. Guidance was developed under the assumption that no additional share repurchases are made during the balance of the year. Our second quarter and full-year guidance is impacted by a couple of key assumptions, which I will outline. First, the second quarter will be impacted by a reduction in state of California inmates at our Florence Arizona facility in conjunction with the contract modifications announced on November 5, 2010. As a reminder, in November 2010 we announced that CCA was not renewing its contract with California to house inmates at our Florence, Arizona facility. As a result, we currently expect to remove approximately 900 state of California inmates during the months of May and June of this year. The beds vacated at our Florence, Arizona facility will be made available to the US Marshals under an existing contract.

Second, we have seen an increase in transfers in US Marshal custody to BOP custody over the last several of months. However, we have also seen an increase in prosecutions, sufficient enough to offset the reduction in Marshal populations related to the increased transfers into BOP custody. As a result, we are no longer anticipating a decline in US Marshal populations for the balance of the year.

With regards to AFFO, cash taxes paid are expected to approximate 28% of pretax income in 2011, which was used in developing AFFO guidance versus a 38% GAAP tax rate reflected in EPS guidance. We expected cash taxes to approximate $40 million in Q2, $20 million in Q3, and $11 million in Q4.

Turning next to a discussion of our liquidity. As of March 31, 2011, our liquidity is provided by approximately $290 million of availability under our bank credit facility plus approximately $38 million of cash on hand. Our totaled debt leverage ratio is 2.5 times, with interest in fixed coverage ratios at over 6 times at the end of the first quarter.

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

Thanks so much,Todd. Now looking forward. As we move through 2011 I am very optimistic about our business. In terms of our long-term strategic priorities, our focus is going to continue to be carrying some beds in inventory to meet future demand. With a meaningful amount of new meaningful bed demand in the marketplace today targeting existing capacity, we continue to think the strategy is a very appropriate one for the Company. However, we continue to hold off on new bricks-and-mortar construction of speculative beds. As mentioned in the press release, we have approximately 11,900 unoccupied beds, or about 8,700 beds after taking into consideration the beds committed pursuant to management contracts and the intent to award from California. With a nearly 6% increase in compensated man days, we have made good progress here but we are focused on achieving a higher occupancy rate before building more spec capacity. Finally, we will continue to pursue build-to-suit opportunities. And as demonstrated with our new Jenkins facility we've had good success with these type of procurements.

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

First a couple comments on state budgets. The fiscal situation at the state level looks and feels more encouraging than it has been in the last 2 years. The National Council of State Legislatures, or NCSL, said in their March report that many state officials were reporting that they are feeling better about the fiscal environment, indicating that the worst may be behind them. 38 states report personal income tax collections for this fiscal year were performing at or above estimates. Additionally, 37 states reported general sales tax collections are on target or above estimate. Finally, 18 states are projecting no budget gaps in fiscal year 2012. As for our states, 8 of our 15 state partners have enacted or have budgets awaiting the governor's signature. None of these states are proposing per diem cuts. And although our remaining 7 state partners have not finalized their budgets, outside of California, which I will talk about later, we have not received any meaningful per diem reduction requests from these state partners for the coming fiscal year. We view this as a very favorable development, because over the last 2 budget cycles we have encountered per diem reduction requests from roughly 6 of our state partners in each of those years.

Let me provide a couple of additional comments that we see with the states. CCA's current 15 state customers are projecting a growth of 13,000 inmates over the next 5 years. This is on top of the 6 states we have mentioned recently that are currently 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 21,000. We think we could see several states use the private sector that don't have capacity to deal with their overcrowding and/or growth.

You have heard me report that no one at the state level has funded new prison capacity during this current fiscal year ending June 30. A few states will still have to pass their respective budget for the coming fiscal year, but it also appears that no one is going to fund new prison capacity this coming fiscal year. You've also heard me report for many quarters the chronic problems states face in funding their pensions, and it is getting worse. Just this past week, Pew Center for the States reported that the gap from the promise the states have for public employee retirement benefits and the money they have set aside grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26% increase in 1 year. The report's figures are likely conservative estimates because they reflect the states' own assumptions about the average investment returns they will achieve. As you all know, this current legislative season has put this issue front and center for governors and legislative leadership. And as they think about ways to slow the rate of growth regarding this issue, our long-term value proposition is resonating more and more.

Now this is the point where I typically give an update 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. As you know, the federal government has passed a funding bill for the remainder of this fiscal year. A couple of highlights as it relates to our federal partners. As for ICE, they negotiated fiscal year 2011 appropriations bill contained $5.4 billion for ICE and language that directs ICE to use no less than 33,400 detention beds during the fiscal year. This is the same level as it was in fiscal year 2010. While just $2 million lower than the President's request, the final number would represent a roughly $95 million increase over the enacted fiscal year 2010 level.

For the BOP, the original fiscal year 2011 budget request was for $6.5 billion. The negotiated fiscal year 2001 appropriation bill contains $6.3 billion. While lower than the President's request, the final number would represent a roughly $250 million increase over enacted fiscal year 2010 levels. The original fiscal year 2011 budget request for OFDT was for $1.53 billion. As a reminder, OFDT controls the detention budget for the United States Marshal service. The negotiated fiscal year 2011 appropriation bill contains $1.51 billion for OFDT. While lower than the President's request, the final number would represent a roughly $80 million increase over the fiscal year 2010 level. So overall, we are encouraged by these funding amounts for our 3 federal partners.

As for next year's budget, the President released his proposed budget on February 14. I think we can all agree that it will be a while before there is clarity on the proposed budget for the coming fiscal year. However, the President's budget proposed a $400 million increase for the BOP over 2011 amounts, a $77 million increase for OFDT, and finally a $360 million increase for ICE. So we will give another update on this in August.

So now to significant pending procurements, a good amount of activity on the state and the federal side. The first of which is Arizona and their requirement for 5,000 new beds in-state. This procurement was canceled last year but was re-released in January and bids were due February 24. We expect award to be in second or third quarter of 2011. Just a reminder, this procurement is looking at 2 dates for the ramp of these 5,000 beds. The first 2,000 inmates would ramp no later than April of 2013, and the second 3,000 inmates would ramp no later than April of 2015.

Now to Ohio. As reported broadly in the industry, the state of Ohio has issued an RFP for the purchase and operation of 5 state facilities which totals approximately 6,500 beds. Responses are due June 15, and we are in the early stages of assessing this opportunity and also asking questions of the state to get clarity on key contract terms. We will provide more color on this opportunity in our August call.

Now I will comment about Hawaii and their pending RFP. This RFP is for the rebid of our current contract for the housing of offenders in our Saguaro, Arizona facility, which is due to expire on June 30. We submitted our response earlier this year and we expect the award this month. We believe we are well-positioned to provide the best proposal to meet Hawaii's needs.

Now a comment on Florida. In Florida, procurement has not been issued yet but the legislature has taken a very significant step towards the federal budget by releasing a joint Senate House plan that would expand the use of the private sector in a very meaningful way. Highlights include being one being optimization, and this would authorize the Department of Corrections to use up to an additional 1,200 beds at existing private facilities. For new privatization, it requires the Department of Corrections to issue one or more RFPs for currently state-operated facilities in the South region. Which is referred to as Region 4. Contract is for the management and operation to commence on January 1 of 2012. In our research we are estimating this would bring 17,400 beds out for private management and up to $350 million in revenues. It is too early to tell when procurements would be released, but we will keep the market updated on this very meaningful opportunity.

Now for CAR 12. And this procurement is for the rebid of our existing BOP contract of 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 an expansion and/or renovation. Procurement has been released and proposals have been submitted, and we are expecting the award to be in third quarter of 2011.

Now to the BOP procurement for 3,000 beds. This opportunity is for a contractor owned and operated facility for the housing of 3,000 short term sentence inmates. The procurement only allows existing facilities to be proposed, and to be able to begin accepting inmates within 120 days of award. Also as a reminder, this procurement only allows facilities to be proposed within the states of Arizona, New Mexico, Oklahoma, and Texas. There has been a preferred location identified in the recently released environmental assessment to a competitor facility. We still expect the award to be later this quarter. So, a very meaningful amount of activity within the industry for new beds.

Before I make my final comments, let me give a brief update on a couple of topics relative to California. First, as it relates to their proposed budget for the next year. There's been extensive media coverage of California Governor Jerry Brown's proposed budget which is designed to address some of the state's deficits. And I don't have much to add materially to what has been reported in the media. 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 legislature weigh in and approve the budget, the voters of California would have to agree, by a vote which might be held in November of this year, to consider whether or not to extend tax increases for a period of 5 years. So far, the legislature has not approved placement of this tax decrease on the ballot which was initially projected to be in front of the voters in June.

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 media, the fundamentals in California remain regarding prison overcrowding and fiscal difficulties. And by all indications, the Brown administration does not want to return inmates to a severely over-crowded environment, or what has been referred to as bad beds, or negatively impact the state's standing in the federal court case. We believe it's fair to assume that concern is shared by local jurisdictions, as the majority of jail capacity and operation in California is over-crowded, and under court-ordered population counts. We will continue to keep our investor base updated on the latest.

As it relates to the 3-judge panel, there isn't any meaningful update to provide beyond what I shared last year and also in February. As reported, the Supreme Court has agreed to hear the state's appeal, and our best guess is a decision on the appeal would be issued by July 1, 2011. Finally, as it relates to our new award with the state, as mentioned earlier this year, we believe any agreement will not be finalized until the state passes their 2012 budget and/or sees a ruling from the federal courts.

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 provided healthy financial performance. Indeed, it's because these pressures, which lead to severe capital constraints and a need to avoid increase in their pension liabilities, that we believe our value proposition to customers is getting stronger. We don't see any change to the current position that we will be able to meet their needs either through existing capacity or our ability to construct facilities faster and at a much lower cost. We believe a supply/demand imbalance will develop long-term, and insufficient public sector capital investment is opening up significant possibilities with potential new customers.

Financially, our business is very strong. 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 market place. One key thing also to remember is that we could see meaningful growth from our existing partners on existing contracts which has produced a lot of our success in the last 12 months.

In summary, the business is performing well and we are taking actions in the short and long-term to make sure it continues to do so. As mentioned earlier, I am very optimistic about the business. We have been very deliberate in how we manage expenses and capital in order to deliver healthy financial performance and position our Company for long-term growth. And we will continue with this strategy well into the future.

That concludes my prepared remarks. Thank you again for calling in to today's conference. And let me now turn it over to the Operator for Q&A.

(Operator Instructions) Kevin Campbell of Avondale Partners.

Good morning, thanks for taking my question. Damon, I wanted to follow up with something I think I heard you say. Did you mentioned in your prepared remarks that you have a per diem request cut from the state of California? And if so, do you expect to be able to offset that with reduction in services and see limited impact to EBITDA as we've seen in the past?

Good morning, Kevin. No, I'm sorry, I didn't mean to confuse you there. We do not have a request from the state of California for a per diem cut.

Was there a state? What exactly were your comments there? That you had seen no per diem cuts? I thought I heard you say -- except for 1.

Not, I'm sorry, nothing material. I think it probably was reported, and you may have actually done a note on this, Texas proposed a budget for this coming year on potentially reducing compensation to the contracts out there on the managed only. We did have some conversations with them this current fiscal year on some service changes but it didn't have any material impact on the contract or the margin.

Okay great, thank you. And then, Todd, you mentioned Florence beds becoming available to the Marshals. Does your guidance assumes that they use those or are you assuming that the California inmates go away and there's no backfill?

It assumes some level of usage by the Marshals on those beds.

Okay. And you mentioned, too, that you are no longer anticipating a decline in Marshal populations. Should we assume that they are roughly flat or a modest increase? Or what are your thoughts there in general?

I have given up trying to forecast Marshal populations long term. It's always the most difficult population to forecast. They don't control a lot of the decision-making that impacts their populations. Our forecast assumes pretty much, call it, flat-ish Marshal populations going forward. Versus a decline in populations we were anticipating previously.

Okay. And then I wanted to ask about something in your 10-K that you filed. You announced a contract with ICE. It had Cal City in there. Could you give us some color on that? Are they using beds there yet? What was the driver of that? Do you think there will be even any beds left if Marshals, they continue to pick those up at a nice pace? Maybe some more color on that contract you signed there.

Absolutely. And this is Damon again. When we renegotiated that contract with OFDT and the Marshal Service, that contract was structured similar to really all of our other federal contracts which allows other federal partners to piggyback on agreements. In that agreement, we looked at the Marshals being the anchor tenant of that contract but it does ICE and also BOP to use beds there. ICE has started to use a few beds. It's a pretty small amount. We continue to talk to them, both in that geographical area but also in Southern California, about potentially more bed usage. But it's a pretty modest amount right now, but it's an opportunity where if they grow with having additional needs there, I should say, we've got capacity to meet their needs. Again, Marshals are considered the anchor customer so they will have, in essence, first preference of the beds. But we think we've got enough capacity to accommodate both of them.

Great. And last question. I'm curious about your thoughts long-term for capital deployment, the buyback, you're nearly approaching the end of that. It seems like most of your pipeline, excluding, say, Ohio, will allow you to fund any new development with your free cash flow. And you guys have historically stated that you're comfortable at much higher debt levels, call it 4 times EBITDA. You're at 2.5 times now. So why not lever up a little bit more from where you are now, get to that 4 times level, buy back stock, and then use your free cash flow for any new opportunities?

Yes, I think you described pretty well everything we look at relative to what's the new capital deployment needs. You talked about Ohio. Obviously we've got some other states potentially that would require some capital needs, but too early to tell exactly what those would look like and the timing on that. And you are right, we still are looking at our ratio, on having a high end at 4 times. So that will all be taken into consideration Obviously we do have the current plan expiring end of June. We've got a board meeting actually coming up, and that will be a conversation we have with the board about looking at the future and taking all those other factors into consideration. And thinking about what's the right approach going forward.

Is there a plan though? I think you have been at these lower debt levels for a while, even with the buybacks you've had in the last 2 years. Obviously it has to go to the board but any thought about taking it up to that 4 times level? What are the objections to doing that?

Kevin, this is Todd. We still have around $40 million of capacity outstanding under the current program. If we decide to expand the program, we will issue a press release announcing that decision.

Todd Van Fleet with First Analysis.

Good morning, guys, nice quarter. Wanted to run through what is getting to be my usual exercises. The inmate puts and takes in this current quarter. So, have we gotten the ramp that we expected in the Nevada facility? I know with the Marshal Service that's a take-or-pay type of relationship there. But as far as the inmates, do you expect to receive incremental inmates in the current quarter versus the March quarter?

I would say the Marshal populations, we look at the Marshal populations over the entire Southwest. So we've got bed capacity for the Marshals in Arizona, we've got bed capacity in Nevada, we've got some bed capacity in New Mexico, and then we've got bed capacity in California City. I think we've done a very effective job of making all of that bed capacity available to the districts in the Southwest. So I don't think you can just focus on one facility. And so you'll see puts and takes from all those facilities based on the Marshals' desire and their needs related to a number of different issues. So you can see the population drop in Nevada Southern but go up in Florence or Torrance or Cal City. So I don't think you can focus on one facility. The Marshals have been good customers over the past year. We've got some additional bed capacity we made available to them at Florence. Trying to predict when they'll use that bed capacity is pretty difficult to do on a short-term basis. We think long-term they will use every bed we make available to them. But for the balance of 2011, we've incorporated our best estimate into our earnings guidance.

Okay. Todd, you opened yourself up to the follow-up then. We are going to lose 900 inmates from California. And that's probably, I'm assuming it's probably over the course of the quarter an average of maybe 600 or 700 inmates on a per man day basis. Now, if you think about the Marshals population across multiple facilities and not just 1, would you say that there is an opportunity to have that loss of California inmates completely offset by what you see happening with the US Marshals populations?

At some point in time, yes. The question is when. Also keep in mind, if you look at the occupancy levels at Central Arizona, for example, very high occupancy levels. So it's possible in the short-term they relieve some of that overcrowding, if you will, by utilizing those beds in the short-term at Florence until additional populations present themselves. Again, very difficult population to forecast, especially on a short-term basis. We are very optimistic that the Marshals are going to continue to be good long-term customers are need additional bed capacity going forward. Trying to forecast in the next quarter or 2 quarters or 3 quarters what their actual bed need is, they have difficulty doing that. But we've provided them a solution to their bed need. Hopefully it'll meet their bed need into, potentially, 2012.

Are there any other customers I'm missing at the state level that either are adding, you expect to receive population or additional inmates in the June quarter? I think you said Georgia is pretty much done at the moment being ramped up?

Right. So Georgia. And think that would be about it for the second quarter.

Let me ask one more on the BOP procurement, the short-term sentencing inmate swap off. Is there anything unique, from your perspective, about the RFP that came out? It seems like we're getting pretty close to getting an award announcement here. As you considered that RFP in retrospect, given the way that RFP process has gone and the environment reviews and such, was there anything unique about that short-term sentencing population, from your perspective, relative to other procurements like it from the BOP in the past?

It was a very transient population, so high turnover. Traditionally, our other contracts with the BOP are called low security criminal alien population. And I think the threshold there, Todd, is typically have a sentence of, say, 6 years, maybe 7 years left in a total federal sentence. Whereas on this facility, or this contract I should say, they were looking at a sentence of about 12 months. So a much more transient population. And so that would then require a scope of services that was a little different from the perspective of vocational trade programs, other programs, what-not. Not as programmatic since they truly are towards the end of their sentence.

And it's generally a lower security population. When you've got somebody who is 12 months away from being released, they're not as inclined to create problems in the facility. And so a lower security population than our typical minimum security population that we're housing for the BOP.

Lower security than minimum security, you're saying.

Yes, if you can believe it, yes.

And so they could be covering new ground here potentially. I imagine that they've never gone outside of a cell-based environment with you in the past. Maybe you can correct me if I'm wrong there. But they could be charting new territory here in terms of how they're looking to manage that lower level security population then potentially.

Right. And the other thing I would say is, the intent of this procurement, what we understand from the Bureau of Prisons, was this was a population that I think has been pretty stable relative to quantity for several years. And so part of it was you had this population spread among many different local jail facilities, so you're trying to get it under one roof. But relative to the quantity, which is a 3,000 number, our sense was that was a pretty stable number. So it's not necessarily growing, it wasn't decreasing, they were just looking at opportunity to take an existing population that was spread among existing facilities. It is a low security, as Todd described. And try to get them into one location.

Let me follow-on to that then. What kind of capacity -- I could probably look at your supplemental here, but I'm trying to think about the capacity that you have in any Texas facilities at the moment. You have maybe -- there's Laredo. That's about it, I guess, in Texas, in terms of facilities where there's significant capacity utilization potential.

It's pretty limited. So, yes, I'd say we've got 2 facilities in Laredo, Texas. Our Laredo facility and our Webb County facility. And I would say probably a couple hundred beds between the 2 of them But our Texas jail facilities are fully utilized, and then our ICE facilities are fully utilized, so pretty limited capacity.

Kevin Mcveigh, Macquarie.

Damon, could you just clarify, I know it’s early, but the 2012 increases from the federal, are they off of the actual or off of what the initial numbers were for 2011? What was approved or what was ultimately submitted?

Good question. Yes, they were off of what was approved. So what was actually enacted for this fiscal year.

Manav Patnaik, Barclays Capital.

Good afternoon. Good job in the quarter. Just one quick question. Maybe I missed it but construction CapEx for this quarter and the guidance that you typically give.

Yes, Manav, that's outlined in the press release.

Okay, I'll bring that up. With the pipeline pretty healthy and growing, like we thought, I just have one macro picture question for you guys in terms of clearly Florida, and some other states out there, as well, are trying to get more proactive, if you want to call it, in terms of finding cost saving initiatives by outsourcing different services within the corrections spectrum, as well. So I was just curious on how you guys look at potentially diversifying into other areas of the business. And feedback you're getting from the states, especially such as Florida, in terms of looking into other avenues in the services umbrella?

Good morning, Manav, this is Damon. We have seen, I think, a pretty amazing legislative environment, on a lot of discussion about ways that states can save money, both short term and long term. And obviously you've seen that played out throughout the country as they talk about some of the long-term issues relative to pension liabilities. And, of course, we've been talking about that with our investor base. But as it relates to the idea of consolidating or putting together different services lines together, we still have not really seen that play out in different states that we're doing business with. And also states that we're actively marketing to. Florida, as we understand the plan that's coming out from the senate and house conference committee, is looking, really, just targeted at the correctional adult services component, and trying to drive some savings there. And so we're not seeing, at least in Florida, like other states where they're trying to bundle other things together. So it's something we'll keep an eye on. Obviously we've got folks on the ground in all of our respective states, and some new states, to get a sense if there's any kind of a change there. But not seeing any real significant steps to think about bundling of those services together in a real meaningful way.

Got it And just one quick question on Florida. Obviously 17,500 beds, that's a pretty huge opportunity. I'm curious, I don't think I've ever seen such a big initiative by a state before. Just your thoughts on how realistic that size is from what you're preliminarily hearing there, just what your take is. Is that really something possible to get Florida to house those 18,000 beds?

It looks like it's got some momentum. So it looks like you've got, obviously, the support there in the house and senate, which is critical. And I think the governor has talked about ways to increase the usage of the private sector to derive savings, both short term and long term. So it looks like it's got the momentum. Obviously, it's got to be finalized by the legislature and signed by the governor, but it looks like it's going in the right direction. We're not hearing or seeing any significant hurdles being put up to stop it. So, yes, I think it's a very realistic opportunity. And to your first comment, yes, it is a very large size. It is probably the largest that we've seen here in recent history where you've seen a state take a step for that type of quantity.

Tobey Sommer, SunTrust.

I wanted to ask you a question about the opportunity in Ohio. I know there are lots of nuances in negotiating a purchase of an existing asset with someone who would ultimately be your customer with that asset. So I'm wondering if you could give us your early read on the viability of some sort of transaction taking place in that market? Thanks.

Yes, Tobey, this Damon. I would say it's too early to tell, unfortunately. The proposals are due June 15, and we're right in the thick of going through the tours of the facility, inspecting the properties, the Q&A process. And when you have a state like Ohio going through a transaction like this for the very first time, I think it takes a little bit of work on their side and our side to really educate each other on what a viable opportunity would look like. So I think probably, definitely this summer as we get closer to the due date, but also in the August call we'll be able to give you greater clarity on what that looks like. But right now I think it's too early to tell.

Unfortunately, there aren't a whole lot of blueprints for successful transactions that either that potential customer or you guys can point to, is that right?

Yes, that's probably right. There's not been a lot of opportunities. We've bought a couple facilities over the last 10, 15 years that were owned by local governments or local development authorities, but not a lot of those type of transactions at the state level. So, yes, I think that's part of the point I was trying to make earlier, is that since there's not a lot of blueprints, as you called it, it takes a little bit of a learning process to well-define what an agreement would look like that would be advantageous to the state but also attractive to the private sector.

Kevin Campbell, Avondale Partners.

I wanted to follow up with you a little bit on Florida. First of all, what's been talked about, at least proposed in the legislation, was a start date of January 2012. Do you feel like that's realistic? We know how states move. This is a huge opportunity. So given the size of it do you really think January '12 is realistic or not?

That's a very fair question, and I'll try to give my best answer. It does look to be very aggressive. Here we are sitting on May 5, and so we're talking only 7 months away to transition management of 17,000 beds. So that does sound very aggressive. I will say, thought, that it's been our experience in Florida that they are very efficient and have good infrastructure for doing these type of procurements and these type of requirements. So I think they've got the bandwidth to be able to get these procurements done in a meaningful way. But if you start thinking about not just the process but also allowing time for the vendors to go out and tour the facilities and get a good understanding of the physical plant, that all takes time. So I think that's a long answer to say I think it will take time. I think 7 months is aggressive but we'll just have to see.

And when you mentioned the $350 million revenue opportunity there earlier on the call, is that just from, in your opinion, the 17,500 inmates? Or is there other services that will be provided -- community corrections, juvenile, things like that, that will supplement to get to that $350 million?

In that Region 4, it's primarily adult male custody. But there is a couple facilities in there that have female. I think female custody and also I think there is one reception center. So there is a couple of unique facilities that have unique missions. But the majority is adult male custody beds. And that is, backing out -- as you know, there's 2 facilities in that region, our Moore Haven facility and then also GEO's South Bay facility -- those are backing out those 2 facilities from the total.

And do you think it will be a winner-take-all procurement, or do you think they'll do it facility by facility?

It's too early to tell. If you just read the language from what was released from the conference committee, it looked like they're giving the DOC a lot of latitude on potentially multiple RFPs. It's too early to tell. I think that will be better defined as the DOC takes this and then starts building a procurement process around the requirements. So, it sounds like they're giving the DOC a lot of latitude on how to approach this.

And other than traditional adult male and female and the reception center beds, there's no other services, in your mind? I think they pulled out probation services. But any other community corrections that is included within that opportunity? Or that you see it just as the traditional corrections that we all know?

Yes, I'm seeing it as the traditional corrections. Yes, the probation requirement, or potential requirement, has gotten pulled out, as we understand it, from the language that we've seen in the last 48 hours. So it's really a traditional adult secure opportunity.

(Operator Instructions) Todd Van Vleet of First Analysis.

Todd, could you help us understand what the payroll tax impact is in moving from Q1 to Q2?

It is approximately, call it, a $2.5 million reduction from Q1 to Q2.

On the new business front, actually I was looking at your Washington, DC facility that's been running about 50%, 60% full. Is it possible, or would it be possible to put a separate customer in that facility apart from the District of Columbia?

Yes, and actually we're doing that today. We've actually held Marshals' prisoners there for, I think, a couple years. We've got a good relationship with the District and the Department of Corrections and have talked to them in the past about other partners that maybe use beds. The same kind of dialogue I had earlier about Cal City. Obviously DC looks at themselves as the anchor tenant, but they are very agreeable to allow us to use beds with other partners they've got. They don't have a need for all the bed space.

Is it a significant number of US Marshal Service inmates you have there?

No, it's, I think, a pretty modest amount, maybe about 100, 150.

At this point there are no further questions. I'll turn it back over to our presenters for closing remarks

All right, Erin, thank you so much. And investors and analysts, thank you so much for calling in. We're very appreciative of your time and attention. More importantly, we're very thankful for your investment in CCA. I can't tell you enough, your management team is very focused on executing on another good quarter and a year. And we really look forward to talking to you in August and reporting on our progress. So have a great rest of your day. Thanks for calling in.

Once again, ladies and gentlemen, that concludes our conference. Thank you all for your participation.