CoreCivic Inc (CXW) 2011 Q2 法說會逐字稿

Good morning everyone, and welcome to CCA's second quarter 2011 earnings conference call. If you need a copy of our press release or supplemental financial data, both documents are available on the Investor page of our website at www.cca.com. Before we begin let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor Provisions of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today.

Factors that could cause operating and financial results to differ are described in the press release as well as our form 10-K and 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 our occurrences of unanticipated events. Participating on today's call will be our 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, Jessica. And good morning, and thank you for joining our call today.

With me today is our Chairman, John Ferguson and also board member, Bill Andrews, along with our CFO, Todd Mullenger. Also joining us is our VP of Finance, David Garfinkle. In a few minutes, Todd will take you through the numbers of the quarter, then I'll 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.

Let me start by saying that I am very pleased with the second quarter results, both operationally and financially. Our core business, which is providing adult secure correctional and detention management services to our federal, state and local partners, remains very strong. As for the business going forward, we think this is the most favorable new development environment the industry has ever seen. The macro-environment has never been more favorable.

For the second consecutive year, not one of the 50 states is appropriating money for new prisons which is going to further exacerbate the supply-demand balance. Additionally, we are actively pursuing nearly 40,000 new beds, and new incremental opportunity, that could be decided in the next six to twelve months. We estimate these new opportunities to be nearly $700 million in revenues.

Let me 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 believe we had another good quarter on managing our costs. However, we did give merit increases last month. This is the first merit increases we've given our employees since 2008, and we know this cost will obviously negatively impact our margin rate for the third quarter.

Though overall, I was very pleased with our performance in the second quarter. I would especially like to thank all of our fell low CCA colleagues for the distinguished performance they have been able to achieve for our company this year.

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, and our opportunities going forward. Todd.

Thank you, Damon, and good morning, everyone.

We are very pleased with our second quarter operating results. In the second quarter of 2011 we generated $0.39 adjusted EPS, compared to $0.34 of adjusted EPS in Q2 2010, a 14.7% increaseA second quarter financial performance exceeded our forecast, due primarily to favorable operating costs performance driven by lower than average employee medical expenses, and lower than average legal settlement expenses. You may recall from past quarters that these are two expense line items that can experience material variation from one quarter to the next.

Revenue per compensated man-day in Q2 was up slightly against last year at $58.40, reflecting increases in per diems from certain federal and state partners, offset by change in mix with more managed-only populations that carry a lower per diem. Although average daily populations increased 5.4%, average compensated occupancy for the quarter was 89.9%, compared to 90.1% last year, a decrease that reflects the addition of new capacity from the activation of our Nevada Southern facility in third quarter 2010.

Operating expenses per man-day declined 1.4% compared to a year ago, which reflects the lower than average employee benefits and legal expenses, our efforts to improve operating efficiencies, the low inflationary environment and increases in compensated man-days. The net result was at margin per man-day rates increased [against last] year with Q2 2011 at 32% versus 30.9% last year.

Regarding our current share repurchase program announced in February of 2010 and expanded in May 2011, which authorizes up to $350 million in repurchases, we have repurchased 10 million shares through July 31, 2011. Including the shares repurchased under our first repurchase program announced in 2008, we have repurchased a total of 20.7 million shares at an average cost per share of $16.45. This represent over 16 % of the shares outstanding at the beginning of November 2008. As of July, 31, 2011, we had approximately $134 million remaining under the share repurchase program.

Our debt agreements restrict certain types of payments, including share repurchases to an aggregate amount, or basket, that is recomputed each quarter. As of June 30, 2011, the total amount of basket available for restricted payments totaled $173 million. Generally speaking, this restrictive payment basket will change each quarter by an amount roughly equal to 50% of net income less repurchases made in the quarter.

Moving next to discussion of our guidance. As indicated in the press release, full year EPS guidance is in a range from $1.47 to $1.49. Guidance for Q3 is in a range of $0.35 to $0.36, and Q4 is in a range of $0.36 to $0.37. Our guidance is impacted by a couple of key assumptions which I would like to outline. First, the sequential decline in EPS from $0.39 in Q2, to $0.35 to $0.36 in Q3 is largely explained by wage increases implemented effective July this year, as well as increases and employee benefits and legal settlement expenses as we expect those line items to be more in line with historical averages.

Next, the guidance assumes no material changes for the balance of the year in the state of California inmate populations, which currently approximate 9,400. The forecast also assumes generally stable populations elsewhere, as we await decisions on outstanding RFPs from the state of Arizona, the state of Ohio, and the state of Florida, which Damon will address in more detail shortly.

Finally with -- with regards to our liquidity as of June 30, 2011, we had very ample liquidity, provided by approximately $295 million of availability under our bank credit facility, plus approximately $55 million of cash on hand. Our leverage is around 2.4 times debt to EBITDA, and we believe our strong liquidity and balance sheet are competitive advantages to position us well to capitalize on future growth opportunities.

I will now turn it back to Damon.

Thanks so much, Todd.

Now looking forward. As we move through 2011, as mentioned earlier, I'm very optimistic about the business in terms of our long-term strategic priorities. 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 marketplace today targeting existing capacity, we continue to think this strategy is very appropriate for the company. With a nearly 5.5% increase in compensated man-days, we've made good progress here, but we are focused on achieving a higher occupancy rate before building more [spec] capacity.

Finally, we will continue to aggressively pursue build-to-suit opportunities, and as demonstrated with our new Jenkins facility, we've had good success with these types of procurements.

Now for the market industry observations and opportunities. As Todd has described, our financial guidance is based on our prospects as we see them right now. Of course we're optimistic that, just like last year, in this past quarter, we'll be able to seize additional opportunities that will deliver additional growth. Let me take you through how we're looking at the market, 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 two years. Many states, including California, are reporting revenues coming in higher than their forecast. However, there is plenty of doubt and uncertainty out there right now, but we remain reluctant to pronounce that the states are in the clear. Furthermore, state revenues are still significantly below their highs of 2006 and 2007.

As for our states, all of our state partners have enacted budgeted effective July 1, and none of our states implemented and/or negotiated a per diem cut. We view this as a very favorable development, because over the last two budget cycles, we have encountered per diem reduction requests from roughly half a dozen of our state partners in each of those years. Which we were able, due largely -- to offset with service reductions. In a few minutes I will also provide a detailed update on California and their enacted budget. Let me provide a couple of additional comments that we see of the states.

CCA's current state customers are [projecting] a growth of 12,000 inmates over the next five years. This is, of course, without California. This is on top of the half a dozen states we have mention 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 19,000. We think we could see several states use the private sector that don't have the capacity to deal with overcrowding and/or incremental growth.

You have heard me report earlier that, for the second consecutive year, not one state is funding new prisons. But you have also heard me report for many quarters the chronic problem states face in funding their pensions. As you know, the recent 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. We think that this is key catalyst for many states like Ohio and Florida, that are providing these unprecedented opportunities we are seeing right now. And we think additional states are watching procurements closely, as they consider doing similar actions.

As another sign of improvement within the state business, let me also mention two states that we were monitoring closely over the last two years. Colorado and Tennessee are two states that were taking steps to cut funding and/or reduce our populations within our facilities, and we discussed this risk frequently on these calls over that period of time. As many of you know, our Whiteville facility here in Tennessee was fully funded this current fiscal year. And in Colorado, the state has cut funding to their Fort Lyon facility this fiscal year, which was one of their oldest and highest cost facilities within the state. We have been positively impacted by this action, as we've seen our count go up in Colorado since the beginning of this new fiscal year.

Now this is a point where I typically give updates on pending procurements, but before I do that, let me make a brief comment on the federal budget for 2012, in wake of this week's debt limit deal. We have been analyzing the details of this deal as they have emerged this week, and we do not believe that our federal partners will be significantly impacted in the near term. It is our understanding that the vast majority of discretionary spending cuts in the deal will not occur until after fiscal year 2013, and that the fundamental day-to-day operations of the federal government will be tilted downward only slightly during the next two fiscal years. We expect that the appropriations process for fiscal year 2012 will not change significantly, although as in previous years, there is a very good chance that it will not be completed before the start of the fiscal year, which is on October 1.

Lastly, we continue to believe that OMB, Department of Justice, and DHS understand the relatively inflexible nature of bed space requirements for federal prisoners and detainees, and we expect they will continue to ensure our federal partners have sufficient funding to meet their requirements. So, now to significant pending procurements. We believe the largest amount of opportunities we have seen at one time as an industry, the first of which is Arizona, and the requirements of 5,000 new beds owned and operated in state. This procurement, as a reminder, was cancelled last year, but was rereleased in January and bids were due February 24. We expect the award to be in the third quarter of this year. Just as a reminder, this procurement is looking at two dates for the ramp of these 5,000 beds. The first 2,000 inmates would ramp no later than 2013, and the next 3,000 inmates would ramp no later than April 2015.

Now to Ohio. The state of Ohio has issued an RFP for the purchase and operation of five state facilities, which totals approximately 6,500 beds. Responses were due July 1, and we think the award could be this quarter or in the fourth quarter, and it's anticipated that the successful offers will start performance in the first quarter of 2012.

In Florida, a procurement was issued this past week for the management and operation of the South Florida region or region four. This will include 29 facilities housing over 16,000 inmates. Bids are due September 23, and the award to one vendor is anticipated in November of this year. CCA is extremely well positioned to compete, since we have the largest market share in doing business with Florida DOC and DMS. We also have a strong history operating in Florida, which includes management of the largest private female facility, and the only private youthful offender facility. We are aggressively pursuing this opportunity, the state -- we are also aggressively pursuing the opportunity the state is undertaking to optimize the operation of existing private [Florida] facilities, by up to 1,200 inmates, which we think could be decided later this year.

Harris County, Texas, which is a county that surrounds Houston, issued a request for proposal on June 10, 2011, under which the county is seeking proposals for the management of the entire Harrison County jail system of just under 10,000 beds. We're actively looking at this opportunity, but more importantly I think it just shows how meaningful the opportunities are, not only at the federal and state level, but potentially at the local level.

As for renewals, as mentioned in the press release, we're very excited about renewing through recent [competitive] procurements with the states of Hawaii and Vermont for their housing of their populations out of state.

And finally to [card] 12. This procurement is the rebid 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, and we expect the award to be in the third or fourth quarter of this year. As mentioned earlier, the most meaningful amount of activity ever within the industry with nearly 40,000 new beds out for bid.

Now, before I make my final comments, let me give a brief update on a couple of topics relative to California. We have seen, over the last 60-plus days, two very significant events in the state of California. The first of which is California enacted their budget on June 30th and it fully funds all of CCA's contract beds. The budget also includes language that protects CCA from losing its population to any other provider. As part of the budget the governor was able to approve, and fund, his realignment plan. The plan will transfer parole violators and non-violent, non-sex offenders serving one to three years to county government facilities. The plan is said to begin on October 1, 2011.

Realignment would apply prospectively, and not apply to any existing population. And this would be funded through a temporary tax swap with California officials still seeking a ballot initiative for permanent funding which we believe will be sometime in 2012. The impact on the state's inmate population is not known at this time, and probably will not be clear until some time has passed, once the plan is in place. One thing to point out is that CCA does not house this type of lower custody offender within our facilities.

The second significant event that happened earlier this summer is the ruling by the Supreme Court in which the state lost its appeal. Most observers were not surprised to learn that the state lost their appeal, but I think most observers were surprised that the Court upheld the lower court's ruling, which requires reductions that must be achieved within two years. The state has approximately 143,500 inmates as of June, and they have to reduce the population within their 33 adult facilities by 33,500 inmates by May of 2013. It is important to note in all the public comments today, by both the state and CDCR, they have set forth targeted reductions that comply with the ruling that do not include the approximately 96,000 inmates that are currently housed out of state.

Now, tying these two events together, the hope on the state's part is the realignment plan will effect a reduction within state facilities that helps them achieve the required reductions set forth in the federal case. Again, it will be a while before the state will know if realignment will help them be successful in complying completely with the federal court case, and of course we stand ready to help further, if appropriate, both the state but also the counties.

Finally, as it relates to our award with the state for 3,200 beds, the state has not withdrawn the intent to award. We believe no action will be taken on this until the state finalizes the reduction plan, and also until they see the impact of realignment.

But let me bring to a close my comments, and make these final points. We continue to believe that we are very well positioned in a market that, despite the economic pressures faced by our customers, has provided healthy financial performance. Indeed, it is because of these pressures which lead to severe capital constraints, and a need to avoid increasing their pension liabilities, that we believe our value proposition to customers is getting stronger. Actions underway in Florida and Ohio prove this. We don't see any change to the current position that we're meet their needs, either through existing capacity, or our ability to construct facilities faster and at a much lower cost. We believe the supply and balance will develop further, long term and insufficient public sector capital investment is opening up significant possibilities for potential new customers.

Financially, our business is very sound. We have a strong balance sheet, good liquidity to find new capacity development and focus operations in a largely unpenetrated U.S. market.

In summary, the business is performing well, and we've taken action in both the short- and long-term to make sure it continues to do so. As mentioned earlier I'm very optimistic about the business. We have been very deliberate in how we manage expenses and capital, in order to deliver healthy financial performance, but also position our company for long-term growth, and we will continue this strategy well into the future.

That concludes my prepared remarks. Thank you again for calling today's conference, and let me now turn it back over to Jessica for Q&A.

Thank you. (Operator Instructions). And we'll take our first question from Todd Van Fleet from First Analysis.

Hi, good morning, guys, nice quarter. I wanted to ask you about the pricing environment. So, you said that the fiscal situation with the states is more encouraging than it has been in the past couple of years. What does that mean in terms of pricing at the state level and federal level and then in aggregate?

Good morning, Todd, this is Damon. A couple of answers there, relative to existing contracts and our annual rates renegotiates from year-to-year. Again, we didn't see any pressure to reduce those rates. Going forward -- [I'd say] here in the near term in going forward, I think the ability to increase pricing is going to be slow, I think partly because we've got some vacant capacity within the industry. So if we get some tightening of some of that capacity or tightening of the market, then I think we'd tend to see movement on pricing, but I'd say right now any meaningful movement on pricing is probably going to be -- take some time.

Okay, so would that be at the state level or federal level, Damon?

Well, yes, I would say primarily at the state level. The federal level will be a little different just because if we have federal opportunities that are very focused on certain geographical locations, then that potentially has an impact on pricing. So I would say my comments are more focused on the state side.

Okay, so -- but mid-year is when you typically get your price escalators, is that right?

That's right. Yep.

Okay, so you should see probably some of that -- is that across-the-board, or is it mainly at the state or federal level?

Our state contracts are typically tied to their fiscal year, which would be July 1, so we would get most of the increases on July 1 and then on our federal contract, I'd say the majority of them are tied to their fiscal year, which is usually October 1.

Okay.

Which is October 1, I should say.

Right, right. Okay, very good. Todd, a lot of -- well, there's a lot of uncertainty in the markets in general right now, and you guys have--

We noticed that.

You guys have potentially a lot of ways to spend money, I guess, look looking forward over the next couple, two to three years. And I'm wondering about how you're thinking of the tiered debt structure that you have in place. Is now the time to thinking about going back to the market and looking at what is possible in the way of debt issues?

Well, we do have the 2013's that are callable at par now, and mature in first quarter 2013. We've also got a bank credit facility that turns current first of next year, so we're monitoring credit markets, a lot of volatility in the credit markets right now. You've seen a significant decline in treasuries, but still a lot of uncertainty in the credit market surrounding the situation in Europe and general economic conditions. So -- but it's something that we continue to monitor. We're thinking about more options for refinancing both the bank credit facilities and the 2013's, and we would like to see some additional stability in the credit markets before we did anything, so we've got a little bit of runway in front of us before we have to do anything.

Right. How much runway do you think you have?

You know, we don't have any particular problem going current on either one of those. Either that the credit markets have always been opened up, with maybe the exception of when they melted down a couple of years ago. The credit markets like our paper, our bonds are trading very well right now. A lot of interest in the -- from the bank community around a replacement revolver for us. So we don't have any concerns, even given some of the uncertainty in the credit markets around our ability to refinance our debt at attractive terms and conditions. Though I think we can afford to be a little opportunistic in trying to do that.

Okay, alright. Let me just ask one more before I jump off. At the federal level, and I apologize if I missed some comments in your prepared remarks, but the situation with ICE, and I know you're looking at an opportunity in the southeast. Could you just talk about what developments you see happening within ICE, and perhaps the US Marshals Service, over the past quarter in terms of their increased appetite for continuing the consolidation play, and I guess both agencies are kind of undergoing here nationally over the past couple of quarters.

Absolutely. So let me talk about ICE first. We have been monitoring some activity with ICE on consolidations that they're trying to accomplish in different parts of the country. They've been pretty well reported within the industry that they're looking at Florida, Illinois, and northern California. We've been monitoring and participating in those opportunities as appropriate. It's been reported about our selection on the proposal we've given on location we've got in South Florida for the opportunity there, and so we're participating as appropriate.

We have been selected to sit down with them and negotiate a contract, so we think over the coming days and weeks we'll get more clarity on that opportunity, and then (inaudible) appropriate if we get a successful resolution on our new contract. And as you know, that activity has been good we think, from our perspective, for ICE (inaudible),because as you know, Todd, we've had some pretty good success stories in our current systems, specifically our facility in Georgia where we've done a similar play where we've consolidated, putting the population in one location and creating efficiency, both from transportation but also from staff [and] perspective. So we're monitoring and participating in those opportunities as appropriate, and again I think we have a good tracker -- track record and a good value proposition to lever to ICE.

On the Marshal side, it's been a -- obviously a very interesting 12 months. We saw a dramatic increase, as you know third quarter of last year with our Marshal populations. And we were seeing that population going up because there was a backlog of people building up in our facilities and other facilities around the country that needed to go over to the BOP.

I think the market is pretty well aware that that has been dramatic over the last probably six to eight months where 7,000 prisoners from Marshals have moved over to the BOP during that period of time. So they've really moved a lot of folks from Marshals to the BOP. But we actually have been pretty stable in our populations. I reported, I think in May, that we've got close to 11,000 prisoners system-wide, and we're -- we've been in that range really over the last three or four months. We've been in that [10.8 to 11.2] range during that period of time. So we're monitoring that very closely. BOP now is at 142% to 143% of capacity.

I think the question is that -- will that be sustainable, to have that many prisoners going out of Marshals Services to the BOP. So it is a little bit of a wait and see. It's been a real challenge, as we've talked about (inaudible) last twelve months, projected Marshals population. But again, we've been pretty stable in the near term and continue to monitor going forward.

Thanks, guys.

Thank you, Todd.

Our next question comes from Tobey Sommer from SunTrust.

Thanks. I wanted to ask you a question about two significant opportunities on the marketplace that maybe hint at potential for a whole new ballgame of market share gains. The Florida and Ohio initiatives to take existing beds and convert them to private partnership, in general do you think that the RFPs from both are well thought out enough and address most of your concerns so that we won't have to go through a start and stall type process, where they need to come out with another iteration of the RFPs and somehow draw it out?

That's a good question. And let me talk about both states individually. So Florida, the (inaudible) just came out, we're still going through the details. I think the pre-bid conference was yesterday, so I haven't got a real full report on that, and we're also going through a Q&A process. So we've got a lot of questions still to be answered, and it's not due until the end of September. But I would say, you know, Florida they've got a meaningful amount of beds already managed by the private sector. It's been our experience that they have refined that process over the year. They've been doing privatization since the early 90s. So my sense is that it's a pretty well thought out plan. We may have a couple of iterations where we're trying to refine a little bit on just make sure we've got [clarity] in the contract terms and make sure it's a viable opportunity. but I'd say, overall, Florida has been through this many times in the past, and I think they've got a pretty well thought out procurement out on the street.

Ohio is very unique perspective from the perspective this is their first time doing something this large, but also first time that really anyone is looking to sell a facility that's owned by the state. So one thing we got a pretty good sense of though is when the procurement came out, up until when it was due on July 1, is that they were very open to a lot of questions from potential vendors on getting clarity on some of the key terms, have them rethink about maybe some of the key contract terms, and also some of the length of terms of contracts. I think the initial procurement, when it came out, they were looking at a two-year term of contract for the management contract [when we] bought the facility, [we've been talking through] the risk and obviously making sure that we're there for the long term, they've increased that amount through the procurement process up to 20 years.

So they've been pretty open and pretty flexible on some of the key issues that we've pointed out to them that either [has raised] concerns for us, from a risk perspective, but also making viability opportunity. But I would say that one's probably a little behind Florida from that perspective, since it is a very new opportunity from the perspective of selling a piece of real estate owned by the state to the private sector. But again, they've -- they appear to be moving forward on it and trying to find out a solution, they've been open to comments and it appears they're been leaning far forward on trying to make this work and execute a transaction.

Thank you. Just ask one follow up and I'll get back in the queue. For both of those opportunities, could you comment on the number of competitors that you might expect to buy for those, given that they're a little bit different? One larger in scope, but the other requires capital. Thanks.

It's too early to tell on Florida since it's not due until the end of September, but I think the media has reported -- I take it as what the media's reporting on and not necessarily being verified fact -- I think there's been three vendors proposed in Ohio. Us and GEO and MTC.

Thank you very much.

Thank you.

We'll now go to Kevin McVeigh with Macquarie.

Great, thank you. I Wonder if you could talk about -- and nice job with the guidance. As we think about recovering the wage increases, does that come vis--vis productivity, and just thoughts on, ultimately I know there hadn't been one in a while, is that just more confidence in the near term outlook that drove you to that? Thanks.

This is Damon. A lot of different factors. One of which is obviously monitoring the labor market. We've had good tailwind, and it looks like we can still enjoy a little bit of a tailwind in the near term relative to the labor market and unemployment. But take that into account, and take into account our turn over metrics, retention metrics, taken into account that we haven't done one for three years, but also take into account what the organizational needs are going to be in the next 12, 24, 36 months alot of meaningful opportunity. Obviously, we want to have a good workforce that's well prepared, well motivated to expand and be prepared for some of the potential promotion opportunities with these opportunities. So taking all these different factors in account leads to that decision. The other thing, to your -- I guess the first part of your question, it is a merit increase, and we do tie it to individual performance.

Super. And then, just as you think about obviously a lot of opportunity out there, how should we think about that relative to the uncertainty that California constantly just brings to the equation, and what I mean by that, do you position some other states to try to take some uncertainty away from California, or how should we think about that?

Yeah, great question. It is something we think about all the time. We think about optimization, we think about our capacity availability, but we also think about demand of either current and existing partners. And probably the best example I could point you to when we talk about those types of issues and it leads to the decision on the company's part, was the decision we did late last year on not renewing California at our Florence, Arizona facility. That is, in the central part of the state, it was partially utilized by the Marshals Service and ICE, and we saw an opportunity to divest a little bit with California and that location, because we saw increasing demand from the Marshals Service.

In fact, the Marshals Service has basically fully utilized the beds that California vacated here about in the last 60 days. So that is part of the play book all the time, is that we're thinking about those risks, thinking about those opportunities, thinking about potential growth opportunities existing over new partners and then making some of those decisions along the way.

That's helpful. And then I know the California facility that -- the 3,200 beds or so. It's not in the guidance, any thoughts on just approach around that? Or you're in a holding pattern until -- any benchmarks we could focus on from a market perspective?

Yes, it's going to be -- we really think it's going to be a couple of (inaudible). It's going be the actual implementation of realignment, and then also how that is successful relative to the targeted reduction they've got to achieve at the federal case. The challenge will be that that won't be clear for quite some time. The plans (inaudible) until October 1, and they've got to achieve these reductions with the federal case within two years. So, I think it's going to be, and we'll continue to give updates on these calls -- it'll be months, probably a couple of quarters, until we get clarity on the timing of all that, how that all shakes out, and also how close are they? Does the realignment get them close to the reductions they need to achieve for the federal case, or is there a Delta. And if there is a Delta, how can they close that relative to use of space either in states or out of state.

Great, thank you.

You bet.

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

Morning, thank you for taking my questions. Damon, perhaps you could talk about --

Kevin.

Good morning. Thanks for, again, for taking my questions. Perhaps you could talk about the opportunities, besides the opportunities you mentioned Harris County, Texas, what is the revenue opportunity there, and Damon, you mentioned northern California and ICE. I think we all knew about them looking in South California and awarding beds to GEO. So is this northern California one a new opportunity, and maybe the potential magnitude of that, either in terms of the number of beds, or potential revenues.

Yes, so in Harris county, Kevin, too early to tell. The procurement just got out recently. We asked for a lot of information relative to their current costs, and so that's --we're still in a due diligence period, but I'd say with rates in Texas in the [40 to 50] range, maybe a little lower, little higher, depending on if it's a (inaudible) area, that may be a ballpark, but it's to early to give a precise number. As it relates to California, I would say that's not a new opportunity, that's just an opportunity that's been out there. And I said northern California, I it could be central California or even near Southern California, so it's not a new opportunity, it's just the one that's been there quite some time.

Do you think there is more of an opportunity beyond the beds that were recently awarded to GEO?

Oh, I'm sorry, yeah the opportunity for the -- that GEO got at Adelanto?

Yes, the northern. Yes, that's right, so the 1,300 -- do you think ICE has more demand beyond those 1,300?

Yes, it's a possibility. I would say it's--our sense as they prioritize those solutions, Florida and Illinois are a little higher on the list than California. It may be the case where they're taking a little bit of a wait and see with the beds they've got from GEO. Obviously, we're housing ICE populations both at San Diego and also our Cal city facility. So we think an opportunity is still there, but I'd say it's alittle lower on our priority list relative to Illinois and Florida.

And -- Arizona procurement. I think you've talked before about part of the opportunity would be to potentially move some existing customers that are out of state customers to other facilities and then fill existing capacity with Arizona. Is that still a possibility, and have those customers agreed to that or would you still have to get their approval regardless?

We, yes, that's still a possibility. Yeah, that's just part of our plan. When we're looking at those opportunities, we're in constant communication with the existing customer partner -- customer base. We'll talk about what those opportunities are and also providing alternate solutions for them. That's very similar to what we did last year with California moving out of Florence. Those were discussions both with California Marshals Service during that period of time that led to that decision. So that's just part of the play book, just to make sure that we're communicating with the customer and then provide alternative solutions.

But you haven't necessarily at this point gotten approval from any one customer? Yes, we would be willing to move our inmates from X facility to the one in Minnesota, for instance.

Well, I won't say we've gotten approval. It's just a case, like last year, this conversation with California Marshals Service telling them the plan, make sure they (inaudible) get their feedback on it, and then if we do need to execute on it, they're well briefed and feel comfortable with the plan.

And then the ICE opportunity in South Florida, you mentioned, of course, that you've been discussing the [press] -- it hasn't been selected or at least the preferred bidder there. Any thoughts on time frame, when they might make a final decision, and how long it might take to build, and when you might actually be up and running?

On the timetable I would say, probably, 30 to 60 days on the timetable. That may be -- may take a little longer with everything else going on with ICE, and they're also getting into the fiscal year and also dealing with other priorities, but I'd say 30 to 60 days is an estimate right now. Building-wise, I would say probably 12, 15, maybe 18 months on the building side. Again, we haven't sat down to look at what the total amount would look like. So that might dictate a little bit on the timing on how long it takes us to build. We do have a site, and it's got a lot of the regulatory issues worked out. And then -- so that would obviously push it into a 2013 ramp. That all happens with that timetable.

Okay, Georgia, in your new contract that starts next year, remind me, you do have a 90% occupancy guarantee, is that right? And when does that kick in? Does that kick in within 90 days, or once you hit 90%, what are the mechanisms there?

It is a 90% guarantee, and I think it is day one. (Unidentified Speaker) Todd or Damon, I don't recall the specific (inaudible) date. We can double check on that, Kevin, but I think it is day one.

And that's supposed to be January 1 of next year.

No, I think it's going to be later in the quarter, probably more February, March.

Okay. Okay, and sorry, a couple of smaller (inaudible) questions, capitalized interest in the quarter was [1.1]. I'm assuming that's all coming from the facility in Georgia, so that should trend up until that actually comes online, is that right?

Capitalized interest is smaller than that for the six months, it's around less than $400,000, for the quarters around $300,000. It'll trend up a little bit, so call it probably $500,000 for Q3 and a little less than $1 million in Q4.

I must have misread that in the supplemental. G&A you always talked about 5% in revenues, is that expected to change at all here with this increase in wages, or is that still the number to use for G&A.

Still 5% for G&A for the full year.

And then lastly, can you give us a sense of the difference in wages from 2Q to 3Q as we think about, just dollar-wise, sort of the magnitude of the increase.

On the wages, including the impact from benefits associated with increase in wages about $4 million in a quarter. A little over $4 million in a quarter from Q2 to Q3.

Great. Thank you very much.

(Operator Instructions). We'll now go to Scott Grossman with Magnetar Capital.

Hey guys, how are you?

(Multiple Speakers) Good morning, Scott.

Thanks for the time. Grats on the quarter. I just had a few quick follow-up questions. First on the management-only side, you touched on it a little bit, but it looks to be a pretty healthy margin, maybe the best in five years. Can you do me a favor and try to break out how much that margin lift was from leveraging the fixed cost base, some of the cost initiatives you've taken, or simply just better mix on higher per diems.

Great question, the management margins are up largely to the below-average benefits and legal expenses that I mentioned in my prepared remarks being concentrated in the management-only facilities. So you will he see a decline in those margin rates next quarter. That is an anomaly, it's not sustainable. As employee benefits, expenses and legal settlement expenses are forecasted to return to their recent averages. So that is kind of an in-quarter anomaly, you can expect to see those margin rates to decline next quarter.

Understood, got it. Second, on the pipeline, specifically in Arizona, just a follow up. Can you clarify whether you guys are marketing existing facilities, or do you contemplate a potential new build?

No, we're contemplating existing facilities.

Okay, and just to confirm, is the right way to think about it these new -- I'm sorry, the existing facilities, is that still -- are you still thinking about it being a $1,000 per bed per year cash drag, so filling those beds would effectively allow you to double dip, i.e. getting rid of the carry costs but having the beds produce cash flow?

Well, the cash operating carrying costs per vacant bed do average $1,000 per bed per year. So if we're filling existing vacant capacity, there is benefit there and it all comes down what the margins are in the new bed.

Got it, got it. And my last question is on the debt capacity, you guys have delevered down to 2.3 times, some through paydown, some through EBITDA growth. Just given some of the new types of opportunities which seem to require more capital, i.e., buying prisons from Ohio and the Florida procurement, which I think requires assurity bonds, how have you guys changed, if at all, your capital deployment methodology, given your AFFO targets, which is now on a balance sheet that seems underutilized relative to your history.

Well, I'd say from a capital structure balancing perspective, we're still comfortable with leverage up to four times, debt to EBITDA. As you mentioned, we're now at 2.4 times. We've been utilizing some of that free cash flow to buy back stock that's still an arrow in our quiver of capital deployment alternatives. Our first preference would be to develop new facilities or acquire facilities. As Damon outlined, we had some opportunities in front of us, Ohio, ICE, we've talked about, I think, New Hampshire in the past. There may be other opportunities, so we're waiting to see what happens with some of those near-term opportunities and see if there's other opportunities that present themselves in the near to intermediate term. But again, we haven't changed our thinking around maximum leverage if that's your question.

Got it. And do you think the balance sheet is more of a [competitive advantage] today than ever, especially where you sit?

Yes, absolutely. Yes, I'd say definitely where you've got especially these opportunities where we're going into Ohio and buying facilities, yes we think we definitely have got an advantage.

Got it. Thank you, guys.

Thank you, Scott.

And it appears there are no further questions, so I will turn the conference back over to our presenters for any additional or closing remarks.

Alright, Jessica, thank you very much. And thank you all for calling in today, and participating in the second quarter earnings call. More importantly, to our investors, thank you for your investment in the CCA. I can't tell you enough that your management team is focused on executing on another good year, and good quarter, and we look forward to reporting our progress a little later this year. Thanks so much.