CoreCivic Inc (CXW) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to CCA's first-quarter 2013 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 the occurrence of unanticipated events.

Participating on today's call will be our President and CEO Damon Hininger and Chief Financial Officer Todd Mullenger.

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

Good morning, everyone, and thank you for joining our call. In addition to Todd and I, we also have on the line John Ferguson, who is our Chairman, and David Garfinkle, who is our Vice President of Finance.

I'm going to start our discussion today and give highlights of the quarter and give also a business update, and then I'm going to hand it off to Todd to talk about the quarter in more detail.

But let me start with a few highlights as it relates to the quarter, first of which is that we are very pleased with our performance of $0.50 in EPS and $0.70 in FFO. We also saw some nice growth during the first part of the year in the portfolio, some on the state side with some growth with the state of Oklahoma, and then also on the federal side with United States Marshals Service and ICE.

We're also very excited about what has been completed during the first part of the year and our steps to finalize when converted to a REIT. As you know, we completed the REIT activities early this year that gives us flexibility to operate as a REIT, and this was primarily done through our activities with the refinance. I'm very proud of the team as we have obtained the lowest interest rates ever achieved in our industry as part of this refinance.

And later this month, we will pay the special dividend that will distribute our pre-REIT accumulated E&P, and this is the last step in the REIT conversion process.

Now let me move from the quarter and just talk a little bit about the business and give an update on a couple of fronts, first of which is on the state side of the portfolio. And there's a few notable updates since we talked in February. The first of which is that we are still working hard at our Red Rock facility to make the retrofits and upgrades to get ready for our new Arizona contract, which as a reminder was awarded late last year. So the retrofits are underway. We're working on that through the summer into early fall and expect in Arizona to start using beds in January of next year. And this is the facility, as you may remember, has population from state of California. So they will be taking the capacity that California is currently utilizing with in the Red Rock facility.

I also want to note that the state of Oklahoma has shown a continued need for additional beds in state. We have been able to meet their needs by providing additional beds at our Cimarron facility.

Due to a recent change in governor and also changes within the legislature, the Commonwealth of Puerto Rico is reassessing their needs within their correction system and with that has drawn down their population within our facility and placed them back in our system -- in their system.

However, the contract is still active with Puerto Rico, and there is still interest on their part to use beds in our system in the future. The state of Oklahoma has requested the utilization of virtually all the beds that were vacated by Puerto Rico, and they are ramping up into those beds as we speak. So although we understand Puerto Rico's decision, we think Oklahoma is a great long-term solution for our Cimarron facility.

Now a couple of specific observations about the current landscape and how state partners will be looking at CCA to help them address their challenges, and the first item of note is that nine of our existing state customers have seen growth in the last 12 months at a combined total of approximately 3000 inmates.

An example of this is Oklahoma, which has increased by about 700 inmates this past year, and our contract with them has grown by nearly the same momentum.

Additionally, we now have 3010 beds under contract with the state, and that's an increase of about 32% since June of last year.

And looking forward, our 11 state customers where we provide both owned and managed solutions -- and this is excluding California -- we are expecting a bed shortfall from them of about 17,000 over the next five years.

We're pursuing six new state prospects, which show their projected overcrowding in the next five years to be about 8000 inmates.

Now there's a few updates on California which I'll discuss in a minute, but I did want to highlight a couple of near-term risks on the stateside that we're watching very closely. And this relates to our facilities both in Mineral Wells, Texas and then Wilkinson County Mississippi.

As it relates to Mineral Wells, this facility, along with the state as a whole, has recently experienced declines in their population, and some legislators are proposing the elimination of some bed capacity within the state of Texas, which included in their evaluation is our facility in Mineral Wells. We have incorporated into our guidance range the recent population deterioration at this facility for the rest of this year, and we are estimating the impact for the 2013 earnings to be in a range of about $0.06 to $0.07.

Now as it relates to our Wilkinson facility, our contract with the state of Mississippi is expiring on June 30, and the state of Mississippi has issued a procurement for the rebid of this contract, which is managed only. This procurement is extremely competitive, and the state of Mississippi has become a very challenging environment as relates to managed only business. Under this contract, we've also been experiencing that per diem increases have not kept up with inflation. So we still have this facility in our forecast, but the potential loss in operating earnings as it relates to 2013 would be not material.

Now as for state customer budgets, state economies continue to prove and many states are exceeding the revenue forecast for the last half of the fiscal year. With this, we are cautiously optimistic that this will manifest itself to pricing improvement going forward. But in the near term, we are also encouraged that this improved budget environment has led to recent actions taken by Idaho, Oklahoma and Arizona and moving forward in using the private sector to manage their very real challenges of growth and overcrowding.

I'd also note that last year we closed the first of its kind transaction within our industry by buying a government-owned prison. This type of solution, which is monetized in a government-owned asset with a fixed income stream provided through a long-term management contract, we know in this budget environment is very attractive to other states and local governments.

Now, as it relates to state budgets and proposed appropriations for new capacity, we're observing very minimal and new appropriations for construction of new government owned capacity to address overcrowding and population growth.

And finally on the state budget front, all of our 17 state partners have released their initial budget proposals for the upcoming fiscal year, which is on July 1. However, only a couple have completed their respective budgets, so we believe in the next few weeks we will see many of these budgets being finalized, and we will have a better assessment as we get closer to July 1.

Now moving over to the federal book of business, let me just note that the current fiscal year budget was passed in late March. Congress passed what they call a full-year continued resolution or CR to fund the federal government through the end of the fiscal year, which expires on September 30 of this year.

As it relates to the Bureau of Prisons and the United States Marshals Service, the funding bill provides a full appropriation for all of our contracts with those two respective agencies. And as mentioned earlier, we've also seen a modest increase in our Marshals populations earlier this year.

For ICE, the impact of sequestration and not having a full year appropriation in place affected our operations very briefly earlier this year. As reported widely in the media, ICE lowered their detention population nationally in early March because of sequestration, and we were impacted by this for about three weeks. However, the CR that passed fully funds our contracts, and our populations have not only completely recovered, but we've also seen a modest increase this spring.

Now, as it relates to the President's proposed budget in 2014, he released his budget on April 10 so just last month. Our review of the budget proposal shows appropriate funding levels for the United States Marshal service and the Bureau of Prisons as it relates to our contracts, but also increased funding for the BOP for an additional 1000 contract confinement beds.

As for ICE, we believe ICE's budget will be in flux until efforts on achieving immigration reform are completed.

Let me also just give an update on the BOP's procurement, and just as a reminder, in August of last year, the BOP released a procurement for a contractor owned and operated facility up to 1600 beds that must be ready to accept inmates within 150 days of award or no later than September 1, 2013. So this is purely focused on an already built facility.

Proposals were due in September of last year, and based on their timeline, we believe an award will be sometime later this year.

Now let me give the update on California and just a couple of items of note, first of which is on April 11, the three-judge panel upheld its previous mandate, which was affirmed by the US Supreme Court two years earlier requiring that the state operate its 33 public facilities at 137.5% of design capacity.

Currently, the state is operating at approximate 150%. The three-judge panel denied the state's claim to vacate its capacity order and has ordered compliance by December of 2013 and ordered California to submit a plan showing how they would do so.

Last Thursday night, the state filed a new plan in response to the three-judge panel. Their plan does not meet the court order capped in the required timeline and consists of many components. Most notably, as it relates to us, it would delay the return of the out-of-state inmates under our contract.

So the obvious question is, what is next?

Well, the plaintiffs now have the opportunity to file a response to the state submittal to the court and have to submit it to the court by May 20. Then the court will rule on the state's plan.

Now, as mentioned in February, our forecast anticipates us ramping down the population at our Red Rock facility in the last half of the year, and the population would be returning to California. We are keeping this assumption in place until we receive more definitive action by the state and/or the court.

The final comment on California is just to say that this is the time of year where we expect a revised budget from the governor, and we expect that to be out either in the next few days or in the next week or two. So an update on that front later.

So now let me turn the call over to Todd.

Thank you, Damon, and good morning, everyone. In the first quarter of 2013, we generated $0.50 of adjusted EPS compared to our February guidance range of $0.47 to $0.48 and the First Call consensus estimates of $0.48 for the quarter.

Normalized FFO totaled $0.70 per share as did AFFO. Revenues for the quarter were in line with our forecast, but we exceeded our earnings guidance due primarily to lower than anticipated operating expense.

You will also note that the statement of operations presents a $134 million income tax benefit, which reflects $138 million of special REIT items, including the reversal of deferred tax liabilities associated with our REIT conversion.

Moving next to discussion of our guidance, as indicated in the press release, we have increased full-year guidance with adjusted EPS for the full year now in the range of $2.08 to $2.16, while Q2 2013 adjusted EPS guidance is a range of $0.52 to $0.53.

Full-year FFO guidance is a range of $2.83 to $2.91 with Q2 FFO guidance in a range of $0.70 to $0.72. The guidance excludes reconversion of special items, debt refinancing costs, as well as the impact of any shares to be issued as part of the E&P dividend.

The increase in full-year guidance reflects lower interest expense compared to our February guidance as a result of our recent debt financing, partially offset by a reduction in earnings associated with reduced inmate population assumptions at our Mineral Wells facility.

In April, the Company closed on two new issuances of eight- and 10-year senior notes totaling $675 million with coupons of 4 1/8% and 4 5/8%. Concurrent with that refinancing, S&P upgraded our credit ratings from BB flat to BB plus, consistent with existing ratings for Moody's and Fitch.

Keep in mind that the impact on interest expense savings from the refinancing will not be fully realized until Q3 as we will carry higher average debt levels in Q2 related to $150 million of the 2017 notes, which were not submitted for purchase under our tender offer and will, therefore, remain outstanding until June 1 when they will be redeemed under a call.

As mentioned in the press release, our guidance continues to assume all of the approximately 1500 inmates in our Red Rock facility. I will return to the custody of California between July and December 2013 in order to make space available for the state of Arizona.

We have left this assumption in place, even though the plan California recently submitted to the federal court lists a measure that could result in an increase of the average daily California populations above those currently assumed in our earnings guidance. We have left this assumption in place as California continues to work through the issues associated with its proposed plan, which includes obtaining approval of the plan from the court.

However, we do have beds in our system we can make available to California to replace some or all of the capacity they are losing at Red Rock or to otherwise assist them with their needs.

As Damon mentioned in his remarks, our Wilkinson County facility contract is expiring on June 30, and the state of Mississippi has issued a procurement for the rebate of this contract.

This is a managed only facility that is operating at breakeven. So if we did happen to lose the contract, it would not impact recurring earnings, but there would be some one-time costs incurred with the loss of the contract, which we have not included in our guidance.

General and administrative expenses for 2013 should approximate 5.25% of revenues. While we continue to work diligently to maximize our income tax efficiency, guidance continues to assume a consolidated GAAP income tax rate of 8.5% to 9% for Q2 through Q4.

With regards to our next recurring quarterly cash dividend to be paid in July, obviously the amount of the per-share dividend currently set at $0.53 a quarter or $2.12 annually will need to be adjusted as a function of the additional shares that will be issued as part of the special E&P dividend to be distributed later this month.

As a result, the declaration of the next quarterly dividend to be paid in July will be announced sometime later this month after we finalize the number of shares that will be issued in conjunction with the special E&P dividend.

Finally, we believe that we've met all requirements necessary to be considered for addition to the FTSE all REIT and equity REIT indices during their next rebalancing in June.

And with that, I'll turn it back over to Damon.

Thank you, Todd. So let me wrap up our prepared remarks and just make these final comments, first of which is, again, we're very excited about all the steps that we've been able to complete during the spring as it relates to our REIT conversion, both with the refinance and also the declaration of the E&P payment. We've also seen some nice modest increases in the portfolio as it relates to populations both on the stateside increasing with Oklahoma and then also on the federal side with Marshal Service and ICE. We are encouraged by the improved budget environment we're seeing also on the state side, but also looking on the state budgets, we're seeing very, very limited investment for new public sector capacity. And so as states have to deal with growth overcrowding, we will be well-positioned to meet those needs, and Oklahoma, again, is a great example of this.

And finally, further updates in California are very likely, but it is noteworthy that in our latest plan to the three-judge panel, they delay the return of inmates from out of state.

So that concludes our prepared remarks. Thank you, again, for calling into today's conference, and let me now turn it back over to Farrah for questions and answers.

(Operator Instructions). Manav Patnaik, Barclays.

The first question is on the Texas population reductions, I guess you mentioned in your commentary that your guidance factors a negative 67 hits from that. Does that $0.06 to $0.07 incorporate sort of just current population levels, or are we talking about further reductions?

It assumes where we're at today, but also takes into account that there is maybe some additional deterioration we have factored that into it also. So can't give you -- much more detail than that. But we have taken into kind of a range of potential outcomes with that contract and with that facility.

Okay. And can you maybe tell us what that population level is today?

We have been sitting, I think, in the last probably 30 days in a range of about 1000 to, I think, about 1300.

1300. Okay. Fair enough. In California, I missed this sort of -- I think you mentioned something about a May 20 deadline? Could you just repeat that?

Absolutely. So the plaintiffs in this long-standing case now have the opportunity to file a response to the states filing from last Thursday. So don't know exactly what they will file. They could file their kind of opinions or thoughts on the state's plan, they could submit their own plan, or it could be a combination of both. But they've got until to May 20 to file that to the court. And then the assumption is that after that date, the court then does a response in ruling to the state's plan they submitted last Thursday.

Okay. Got it. That's helpful. And then Todd, I mean your guidance on G&A off of 5.25%, I guess that implies then that the $23 million ex the one-time REIT costs that you recorded this quarter goes down for the rest of the year. Is that right?

We've historically seen some variability quarter to quarter in G&A expenses. There are some timing issues in the first quarter, but on average for the balance of the year or for the full year of 5.25%. So you continue to go down, go back up, and that's not unusual from a historical perspective. But so on average, full year of 5.25%.

Got it. I will get back in the queue. Thanks, guys.

Tobey Sommer, SunTrust.

Thank you. I wanted to see if you could give us a little bit more color on the general tone of new business opportunities. Does it feel like it's better here in early 2013 than it might've been at the end of 2012?

This is Damon. I would say yes. I would say as it relates to the state side, the environment we've seen in this legislative session, as I mentioned earlier, not all the budget proposals were completed, but the proposals that have been released to the legislatures and the pricing and the CPI increases proposed under those agreements or those proposals as it relates to our contracts, I would say is modestly better than it was last year, and last year it was better than two years ago.

So I'd agree with you on that point. The other point I would say that I'm encouraged by and I alluded to this a little bit earlier is that we're starting to see some actions by states moving forward on usance and capacity within our system. So Idaho and Oklahoma I think are great examples of that to where we're seeing them feel a little more comfortable that the budget environment may be a stabilized in the respective states. They have been growing, they are dealing with overcrowding, and they're going ahead and using some beds in the private sector. And I also contribute the action by Arizona last call fall to go ahead and move forward on a 20-year contract as a very positive development. Arizona, as you know, in that procurement was ongoing for about two to three years. So I think by then we will go ahead and awarding that contract again gives them -- it lends a belief that the environment is going to be a little better from a budget perspective, and they're feeling comfortable to go ahead and secure beds in the private sector.

So yes, I would say it is modest. It's not dramatic but seeing improved revenues, and then also these actions by states, both in the existing portfolio but also of new customers like Arizona I think is encouraging.

One other comment, just to follow-on, the proposal that is being considered in the legislature around an Internet sales tax bill, we could generate somewhere between I think high teens to low 20s and billions of dollars of additional tax revenues for the state, which could be helpful as well if it's passed.

Thanks, Todd. You anticipated the follow-up.

And regarding your conversations with states that are not in the middle of publicly announced and organized procurements, has the tone or pace of those conversations changed in recent months compared to last year?

This is Damon. I wouldn't say the pace has changed, but I would say the tone is improved. And it's back to your earlier question, which is I think states are feeling like they have reached the bottom on deficits they had to close in their budgets, and now that they've stabilized and now are seeing some increases in revenues, which I think if you talk to any CFOs at the state level, they would say they have still got -- they still want to see more growth to get completely comfortable. But they have seen some growth, and they feel comfortable moving forward on some of these decisions.

So yes, I would say the tone has modestly improved.

Thank you very much.

(Operator Instructions) Clara Houin, Avondale Partners.

Hi, guys. This is Clara in for Kevin Campbell this morning. Thanks for taking my question.

So first off, just a big picture question really. Have you seen an increasing interest in your customers selling properties or having you develop and own the properties, but then you manage it? I mean if you have seen any interest on that, could you explain maybe what's caused that change in demand?

Well, as you know, and as I mentioned last -- or during my prepared remarks, we closed in our transaction where we bought a government-owned property early last year, first of its kind in the industry, and we've noted the action taken by GEO within buying a facility at the local level in Montgomery County, Texas.

I think having a couple of transactions that have now been completed by the industry has been helpful as we talked to other kind of local and state jurisdictions to say here is how we think we can provide some immediate value to you, especially in this challenging fiscal environment, and now we've got real live examples that we can point to that have been done in the last 12 to 18 months.

So I think getting a few first done within the industry is always helpful, and now it can be used as a template and as a model as we propose these type of solutions at the state level and at the local level.

Great. Thanks. Then moving onto Mineral Wells, any reason why do you think they are reducing the inmate counts there before they finalize the actual decision about whether or not to keep the facility open?

I can't really say on that point, but I would say that the state of Texas as a whole has seen a reduction in their overall system population. And so I don't think -- I don't know this for sure, but I don't think we've necessarily been singled out. But I think they have -- since they've seen this reduction, they have seen some deterioration in their own facilities. I'd say probably some other private sectors have probably seen a little reduction, and I know they have also taken the step here and I think in the last 12 or 18 months where they actually closed one of their facilities.

So I think it's really driven at a kind of a high level where they are seeing a deterioration or a reduction in their total systemwide population, and then they're taking appropriate steps both in the public sector and private sector to adjust populations accordingly.

And on California, is there any interest there about using any of their in-state capacity? How do you think they would handle that with their existing customers, ICE and USMS?

I'm not sure I follow your question.

So I mean really for the inmates they have, they are bringing back in, are there any thoughts there about using their in-state capacity that they get?

They don't have any -- the state doesn't have any additional capacity. So they are sitting today, as I mentioned earlier, got 150% capacity in their 33 facilities. So by our estimate, they have to reduce their population within those facilities by about 10,000 inmates. And they've had this for over effort over the last two years with realignment where they've shifted certain offenders with certain categories of sentences down to the local level. And I think by most accounts, that has pretty much run its course. It has been successful, but I think it's pretty much run its course.

So I think they are limited on what they can do at the local level, and again, they're still 10,000 short within their 33 facilities. So as it relates to other capacity in state, there is some capacity in the private sector, and I think as they think about a plan to try to achieve compliance with the courts, I think they will consider potential options in the private sector to use beds to help them get to that level.

Okay. Great. Thanks. That answers that question. Just another quick couple on population. Oklahoma was up 200 in April. Is this something we should expect further growth from from this customer, or is this a one-time increase and that's the current run rate we should expect going forward?

So we have grown by about 700 under our contract with the state of Oklahoma since the spring of last year. So, as I mentioned earlier, we're going to have a contract now with about 3000 beds versus about 2200, 2300 middle of last year.

And we are ramping down population at Cimarron that's currently used by Puerto Rico, but Oklahoma has indicated they wanted to use virtually all those beds that are being vacated by Puerto Rico. So we should see some still continued growth of Oklahoma, a modest amount, but they are -- like I said, they are ramping those beds now that were being vacated by Puerto Rico.

Okay. Perfect. Thanks. Similarly the BOP increased their utilization of the McRae facility in April by about (technical difficulty). Is this just them using the expansion beds of the facility? I mean are these inmates coming in above the guaranteed occupancy rate, and therefore, is there incremental revenue there associated with them, or is that minimal?

No, this is under the new contract for the expansion. So these were beds that were anticipated to be used by the BOP. We did a I guess it was about a 400 bed, 500 bed expansion at McRae as part of the new contract that was awarded here in the last 12 months.

Okay. Thanks, guys.

Clint Fendley, Davenport.

Thank you. Good morning, gentlemen. Most of my questions have been answered, but one quick one on California here. I wondered if California's prison realignment plan worth to be repealed as one of Jerry Brown's critics has suggested it should be. What do you think the impact would be on their populations as they stand currently?

Make sure I understand your question, Clint. If the court rejects the latest plans submitted by the state?

No, I guess I'm basically saying if the prison realignment were basically undone, one of his potential Republican challengers I think for next year's election has suggested that it's been sort of a bad plan for California. And if he were successful and they did repeal it, how do you think that that might affect their prison population, or is it too hard to know?

It's probably the latter, too hard to know. But if there was an effort to unwind realignment, which I think at the end of the day it was about 20,000 inmates that were shifted from state facilities to local facilities and the court continued to require the state to be compliant at the 137.5%, then that would make their need for additional capacity even greater. But that's too hard to tell.

I would say there's been a lot of discussion about realignment, and I think overall many of the stakeholders from the local and from the cities have been somewhat concerned about the shift. But overall I think they've worked pretty collaboratively with the state. And like I said, the state has seen some success on reducing their population by this program being in place.

So, that's a long way of saying probably hard to tell. We'll see if it gets any traction, I guess, as we go into election year next year, but it would be hard to forecast that and say what the potential outcomes could be.

No, the 20,000 was what I was looking for. And really isn't -- am I correct they are at 150% now to get to the 137%? That's about 10,000 or so inmates correct?

That's exactly right.

Okay. Thanks, guys.

And with that, we have no further questions. Gentlemen, I'll turn the call back to you for any additional or closing remarks.

All right. Thanks, Farrah, and thank you so much for your time and participating in our call this morning. More importantly, let me just say to our investors very much appreciate your investment in CCA, and me and the management team continue to be focused on another good quarter and a strong year for 2013, and we look forward to reporting on additional progress on our call in August of this year. So thank you, again, for your time this morning.

Ladies and gentlemen, again, that does conclude today's conference. We do thank you all for joining us.