CoreCivic Inc (CXW) 2015 Q2 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome you to the Corrections Corporation of America second-quarter 2015 earnings conference call. (Operator Instructions).

I would now like to turn the conference over to Cameron Hopewell, CCA's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks, Kayla. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer, and David Garfinkle, Chief Financial Officer.

During today's call, our remarks will include forward-looking statements pursuant to the Safe Harbor provisions of the security and litigations reform act. Actual results or trends may differ materially as the result of a variety of factors, including those identified in our earnings release and with our various filings with the SEC. You are cautioned that any forward-looking statements reflect management's current views only and the Company undertakes no obligation to revise or update such statements in the future.

This call will include discussion of non-GAAP measures. A reconciliation of the most comparable GAAP measurements are provided in our corresponding earnings release and included in the supplemental financial data on the investors page of our website at www.CCA.com.

With that, it is my pleasure to turn the call over to Damon Hininger.

Thank you, Cameron. Good morning and thank you for joining our call today. Also joining us on today's call is Brian Hammonds, who is our Vice President of Finance, and also Tony Grande, who is our Chief Development Officer.

I will start off today by highlighting a few key financial results from the second quarter of 2015 before providing an update on recent business development and opportunities. Following my remarks, Dave will provide a more in-depth review of our second-quarter financial performance and will walk through the factors impacting our updated full-year 2015 guidance.

Highlights from our second-quarter 2015 financial performance include revenue of $459 million, representing an 11.8% increase from the comparable period of 2014; total net operating income of $141 million, an increase of approximately 15% over the prior year; and normalized funds from operations of $0.74 per share, an increase of 8.8%.

Both our EPS and FFO results exceeded the high end of our guidance for the second quarter as the result of populations from immigration and customs enforcement and the BOP trending higher than forecasted during the second quarter.

We also experienced favorable expense trends, which benefited our second-quarter results. Dave will provide additional color on the drivers of our financial performance following my remarks.

In June, our unsecured credit rating was upgraded to investment grade by Moody's, which we believe reflects the strength of the Company's balance sheet and our track record of consistently growing the business while responsibly managing leverage.

In July, we amended the terms of our revolving credit facility to extend the maturity and improve pricing. Again, Dave will touch on this in more detail, but it is very important to highlight our continued access to long-term capital for growth opportunities at very attractive rates.

As for growth opportunities, I will touch on three facilities under development during the second quarter of 2015, starting first with our South Texas Family Residential Center. With this facility, we have worked closely with ICE to create an environment that is open, safe, and appropriate for all residents.

On our last conference call, we indicated that on April 19 we officially opened Phase 2 of the facility with 960 beds coming online. By the end of May, construction on all 2,400 beds was complete and the facility is now operating at full utilization. This unprecedented project is an example of CCA's ability to respond quickly to the unique and challenging demands of our government partners, and completion of the construction and ramp-up phases were only possible thanks to the hard work and dedication of hundreds of CCA employees.

Our second facility under development is the Otay Mesa Detention Center outside of San Diego, California. As we have previously highlighted, this is a replacement to our 1,000-bed San Diego Correctional Facility, which ownership of that facility is set to revert to the County of San Diego at the end of this year.

In July, we received our certificate of occupancy for the facility and we're working with our partners at ICE and the United States Marshals Service to finalize a transition schedule to our new Otay Mesa facility beginning in the third quarter of 2015. We believe the additional capacity at our 1,500-bed Otay Mesa facility will be an attractive solution to our government partners, as we believe this market to be historically underserved in terms of available bed capacity.

As a result of activating this new facility, we expect to incur startup- and transition-related expenses in the third and fourth quarters of 2015.

Our Trousdale Turner Correctional Center, a 2,552-bed facility being built here in Tennessee, is our other facility under development in the second quarter. We remain on schedule to complete construction of the facility in the fourth quarter of this year and plan to begin ramping operations in anticipation of accepting offenders from the state of Tennessee at the facility beginning in the first quarter of 2016, which will help alleviate some overcrowding the state is facing.

The project has remained on budget and we currently expect to invest an additional $30 million to complete construction of the facility. Upon activation, the facility is scheduled to ramp up to full utilization after six months. We expect to begin incurring startup-related expenses in the fourth quarter of 2015, and as a reminder, the impact of startup-related expenses at both Trousdale Turner and Otay Mesa is approximately $0.04 EPS per share and is included in our full-year 2015 guidance.

We expect these three development projects to be meaningful contributors to growth of our business over the next few years.

We are currently pursuing additional opportunities across our federal, state, and local book of business. At the federal level, initial responses to the Federal Bureau of Prisons CAR-16 procurement, a procurement advertised for 10,800 beds, were submitted during the second quarter. This procurement is the renewal of existing contracts of facilities operating in Texas.

CCA is currently under contract for one of these facilities, our 1,400-bed Eden Detention Center, which the contract runs through April 2017.

The RFP stipulates that two of the eligible states of performance include Oklahoma and Mississippi, the states in which we currently have facilities housing California inmates. We believe these facilities would be attractive to the BOP and we expect an award announcement will be sometime during the calendar year of 2016.

On our conference call in May, we indicated that we expected Arizona to issue an RFP for up to 2,000 beds, based on the state's 2016 budget authorizing 1,000 additional contract beds to come online on July 1, 2016, with the potential for another 1,000 beds the following state fiscal year. As expected, the RFP was issued in the second quarter and we're in a process of responding to this procurement.

A disturbance at another contracted Arizona prison facility in early July displaced about 1,000 state inmates and has caused the state to extend the proposal due date and a contract commencement date by 60 days. Responses to the RFP are now due on September 22 of this year and its scheduled contract commencement date for the winning bidder has been extended to September 1, 2016.

Additionally, as a valuable partner to the state, we responded quickly to accept an additional 550 Arizona inmates at our Red Rock facility within two days following the disturbance. I believe this is another example of CCA's ability to react quickly to our customers' needs and deliver safe and secure bed capacity at a time of need.

We have entered into an emergency contract with the Arizona Department of Corrections to house these additional 550 inmates for up to six months at our Red Rock facility.

During the second quarter, the Oklahoma state budget was completed, with the Department of Corrections receiving an increase in their funding. It is our understanding the department is developing its bed capacity plan in light of the new budget and we're talking with them about ways CCA can provide solutions for additional capacity.

We continue to have discussions with a number of potential state partners that are evaluating their options and dealing with population increases and overcrowding in their systems. Those who have followed the industry for multiple years are well aware that many of our new business opportunities in the past have resulted from direct negotiations with new or existing government partners.

Moving next to discuss the current state of the federal government's fiscal-year 2016 budget negotiations. Congress is currently deliberating the appropriation bills for the government's fiscal-year 2016. All of the bills have moved through the Appropriations Committee process, but await final disposition later in this year. Remember that the President's budget proposal included moderate increases in funding levels for both the BOP and the United States Marshals Service and significant increases in funding for ICE, compared to fiscal-year 2015, while fully funding our contracts.

However, in recent years, the regular order of the federal budget process has stalled in Congress, forcing our customers to start off the new fiscal year under a continuing resolution based, in most cases, in the prior-year funding. While it is too early to tell whether a similar scenario will play out in fiscal-year 2016, funding for our contracts with our three federal partners have remained unaffected for the last few years.

One final note on ICE and on our South Texas Family Residential Center. On July 24, a federal district court judge in California indicated her intent to issue a final ruling that ICE and DHS current policies with respect to family detention violate the parameters of a 1997 legal settlement known as the Flores agreement, which governs the way DHS handles undocumented children.

The Flores agreement says that undocumented children should be kept in the least restrictive environment possible and that DHS should generally adopt a policy favoring release. The judge gave DHS and ICE until August 7 to file a brief detailing why the provisions described in her order should not be implemented within 90 days. The plaintiffs have until August 10 to respond to what DHS/ICE files.

At some point after August 10, the judge will deliver her final ruling, based on the information she receives from both parties. We are closely monitoring developments from the court and DHS and ICE. Given there is no final ruling, additional briefs are being filed by both parties, and there may be appeals following the ruling, we really can't speculate at this point on what the ultimate impact will be, if any, on our South Texas Family Residential Center.

We do know, however, that our government partner continues to highlight the high quality of services and the open, safe, and appropriate environment we provide at the facility, both directly to CCA and also in their court filings. In addition, our partner continues to express the need for family residential housing and specifically the need for the South Texas Family Residential Center.

Moving next to state-level trends, I will begin with an update on our out-of-state program with California. As we indicated during our call in May, we ended the first quarter of 2015 with 8,600 inmates in the out-of-state program, which decreased to 8,100 by the end of April.

At that time, we expected to see an additional reduction of 2,000 or 2,500 inmates through the end of 2015. The government -- the governor's budget revision was released the week after our first-quarter conference call and included specific goals for reducing the state's utilization of the out-of-state program that were in line with our expectations.

Specifically, it called for a reduction of the out-of-state populations by 2,700 inmates by the end of calendar-year 2015 and a further reduction of 1,300 by June 30, 2016, resulting in a stabilized population of approximately 5,000. Again, the state's plan was in line with our expectations.

Looking forward, though, the state's current long-term inmate population projections indicated expected increases in the next three years, and by fiscal-year 2018, their inmate population could once again exceed the benchmark occupancy goal of 137.5% of rated capacity, as established by the three-judge federal court panel.

At the end of June, California's in-state population continued to remain below the federally mandated cap by nearly 2,500 inmates. The impact of Prop 47 on populations continued to slow throughout the second quarter and with the latest data showing that it accounted for fewer than two releases per day for the 30-day period ended -- which ended July 15.

Our current contract with California is set to expire in June 2016 and we believe the solutions we provide will continue to be needed beyond the current expiration date through a multiyear contract extension that we hope to finalize soon.

CCA has been a strong partner in helping California achieve the court-ordered capacity level it needs to safely and effectively house inmates, and we have accomplished this through the availability of the out-of-state beds we provide, as well as the lease of the 2,500-bed Cal City Correctional Center. We look forward to continuing our partnership with the state.

Looking across our numerous state partners, the budget approval process for fiscal-year 2016 has been completed and, again, all of our state partners have fully funded our contracts. We consistently see improvements in the fiscal health of our state partners as local economies continue to improve and tax revenues expand.

As a result, we continue to see improvements in our ability to receive contract pricing escalators to offset increases in operating costs, such as salary and benefits to our employees that represent nearly two-thirds of our cost structure.

As I mentioned previously, many states are struggling with overcrowding in their corrections systems as offender populations for many are getting increasing. In fact, six of our state partners have seen increases over the last 12 months of a combined total of nearly 4,000 offenders. Our occupancy rates in our facilities housing inmates from Arizona and Colorado have gone up as a result of increases over the last 12 months.

Also, we currently have 10 state customers where we already provide owned and managed facility solutions that are expecting a significant bed shortfall over the next five years.

The outlook for investment in public sector capacity development continues to remain minimal as states are looking to allocate their capital investments to other public works projects. We believe CCA can deliver a significant value proposition to many potential government partners, which are seeking ways to more effectively manage their aging and often overcrowded systems, while bearing the burden of the capital investment needed to provide this capacity.

One final note on the state market, the state of Ohio is on the verge of selling its second prison, placing the privately operated North Central Correctional Institution in Marion, Ohio, for sale via a procurement process. As we understand it, the procurement will be out later this year and the current operator that has a management contract with the state of Ohio, which is MTC, would remain the operator.

We are also actively pursuing opportunities to allocate capital to acquire existing government-owned facilities, RRCs, develop real estate only solutions, and develop new facilities to either provide additional capacity or replace aging public facilities.

In closing, we are pleased with our performance through the first half of 2015. Although California has provided a bit of a headwind for 2015 and early 2016 earnings, we believe that we will achieve a new normal during 2016 with the extension of our contract with the state at a stabilized population level. From that base, we have visibility for growth with Otay Mesa and Trousdale Turner development projects in 2016 and 2017 without considering other pipeline opportunities that may generate growth beyond these known projects.

Now I will turn the call over to Dave to review our financial performance in more detail.

Thank you, Damon, and good morning, everyone.

In the second quarter, we generated $0.55 of EPS, compared to our May guidance range of $0.49 to $0.51 and $0.05 ahead of the First Call consensus estimate. FFO totaled $0.74 per share, ahead of our May guidance range of $0.67 to $0.69, and AFFO totaled $0.73 per share, compared to our May guidance range of $0.65 to $0.67.

Our results exceeded previous estimates, due to generally higher-than-expected federal populations from the US Immigration and Customs Enforcement and the Federal Bureau of Prisons. As we mentioned on the last call, ICE population stabilized and subsequently increased following passage of a budget in March for the Department of Homeland Security.

Operating expenses also came in lower than our forecast.

Compared to the second quarter of the prior year, these second-quarter results represent increases in adjusted EPS, FFO per share, and AFFO per share of 12%, 9%, and 7%, respectively. These increases were attained through the continued ramp of new contracts with the state of Arizona at our Red Rock facility and ICE at our South Texas Family Residential Center, partially offset by a reduction in populations from the prior year from the state of California and ICE at facilities other than the South Texas facility.

So even though ICE populations were better than forecasted, they were still below the prior year.

Our balance sheet remains very strong, with leverage decreasing to 2.9 times, fixed-charge coverage increasing to 9.8 times, and solid liquidity. At June 30, we had $41 million of cash on hand and $323 million of availability on our $900 million bank credit facility.

The construction of our new Trousdale Turner Correctional Center and Otay Mesa Detention Center both continue on track for completion later this year. As of June 30, we had remaining construction costs of nearly $40 million on these two projects.

On June 11, since our last quarterly earnings call, Moody's Investors Service increased the rating on our unsecured debt to investment-grade Baa3, a significant milestone for our Company. Further, on July 22 we closed on an amendment to our bank credit facility, reducing the interest spread by 25 basis points for LIBOR and base rate loans, extending the maturity date from December 2017 to July 2020, incorporating a new net debt concept into our financial covenants, and increasing the accordion feature from $100 million to $350 million. We now have no debt maturities until 2020.

I would like to extend my appreciation for the support of the 10 banks in our bank group, which comprises blue-chip names in the financial services industry. We have enjoyed a long relationship with these banks and look forward to continued mutual success.

Moving next to a discussion of our guidance, as indicated in the press release, adjusted EPS for the full year is now a range of $1.91 to $1.97. That's up from $1.89 to $1.97, while Q3 2015 adjusted EPS guidance is a range of $0.43 to $0.45.

Full-year normalized FFO per share guidance is a range of $2.64 to $2.71, and that's up from $2.62 to $2.70, and full-year FFO per share guidance is $2.59 to $2.65, and that's up from $2.57 to $2.64.

Cross-walking Q2 to Q3 and the rest of the year at a high level, our guidance for the third quarter reflects the previously announced termination of the BOP contract at our Northeast Ohio Correctional Center effective May 31, which amounts to a decrease of approximately $0.03 per share from Q2 to Q3.

We also expect to incur about $0.01 per share to transition inmate populations from the San Diego Correctional Facility to the Otay Mesa Detention Center in Q3 and $0.05 to $0.06 per share for the expected decrease in California populations. These reductions are partially offset by the increase in Arizona populations at Red Rock pursuant to a short-term contract, as Damon discussed.

Additional commentary on California, during the last quarterly call we estimated California populations would decline to a little over 6,000 inmates by the end of calendar year -- by the end of the calendar year. The pace of the decline in California populations has been a bit more rapid than we projected and so we are now estimating calendar-year populations from California to be between 5,500 and 6,000 inmates, or a reduction of about 2,900 to 3,400 inmates from the first quarter of 2015.

The state of California budget, which was released and approved subsequent to our last quarterly call, reflects a reduction of 4,000 inmates by the state's fiscal year-end in June 2016. California's budget commentary states that further reductions below 4,000 in 2015 to 2016 could jeopardize ongoing compliance with the 137.5% population cap, as California inmate populations are projected to increase 2016, 2017, and beyond.

So our population forecast is generally consistent with the state's budget.

The contract with the state of California is currently scheduled to expire June 30, 2016. However, we believe we will enter into a new multiyear contract with the state of California in the near term.

Other factors affecting annual guidance include $0.03 per share in startup costs in Q4 in preparation for the commencement of the new contract at the Trousdale facility, where we expect to begin receiving inmate populations from the state of Tennessee in the first quarter of 2016. The impact of the startup cost has been included in our prior guidance.

Last quarter, we also provided notice to Louisiana that we elected to exercise the termination provisions of the contract at the managed-only Winn Correctional Center and expected to transition that contract to a new operator by the end of the second quarter of 2015. We now expect the state to take the full 180-day notice period under the contract before the contract is terminated.

This facility is operating at a loss of $0.02 per quarter, particularly due to higher expense levels during the closure period. It doesn't necessarily impact the cross-walk from Q2 to Q3, but did have an impact on our prior guidance.

Our guidance does not include the impact of any new contracts, acquisitions, or the termination of any material contracts beyond the BOP contract at Northeast Ohio and the contract at the Winn Correctional Center.

As we move into a rising interest-rate environment and particularly following our credit rating upgrade from Moody's to investment grade, we continue to monitor the debt capital markets for opportunities to term out a portion of our revolving credit facility with longer-term debt. However, we have not included the dilutive impact of refinancing short-term debt with long-term debt in our earnings guidance because of the uncertainty of the precise timing, magnitude, and interest rate associated with the transaction, all of which will largely depend on the condition of debt capital markets, which have recently been volatile.

The magnitude will also depend on the timing and number of growth opportunities we identify that require capital deployment.

As a reminder for modeling purposes, as I have mentioned for a few quarters now, because of some very specific accounting rules the lease agreement with the third-party lessor at our South Texas Family Residential Center is treated similar to capital lease accounting. This results in a portion of the rental payments to the lessor being classified as depreciation and interest expense for GAAP accounting purposes, instead of rent expense.

We recognized $8.5 million of depreciation and $2.2 million of interest expense on this lease during the second quarter. We are projecting depreciation on this lease for the third quarter and full-year 2015 of approximately $10.8 million and $29.5 million, respectively. We are projecting interest on this lease for the third quarter and full-year 2015 of approximately $3.2 million and $8.2 million, respectively.

We are deducting such amounts in our calculation of adjusted EBITDA because we believe this presentation is more reflective of the cash flows associated with facilities operations and therefore cash available to service our debt and pay dividends to our shareholders.

We have again included in our press release the calculation of adjusted EBITDA so that you can see these adjustments reflected in our quarterly results, as well as in our guidance. For those of you following our supplemental disclosure report, which is posted on our website each quarter, we have included this depreciation and interest expense in our per-man day statistics and operating margins.

Likewise, for FFO and AFFO calculations, we are not adding back to net income this depreciation. Again, adding back this depreciation would imply that the expense is non-cash when we view this expense as a component of the rental payments made to the lessor.

By including EBITDA guidance in our press release, we have provided you with our estimate of the effective income tax rate, as well as our estimate of total depreciation and interest expense, for both the third quarter and full year. Neither has changed meaningfully from our prior guidance. We expect G&A expenses to be slightly more than 5.5% of total revenue.

I will now turn it back to Kayla to open the lines for questions.

(Operator Instructions). [Michael Curtis], Canaccord Genuity.

Nice quarter. I appreciate all the color and thanks for taking my questions. Just a little bit more on South Texas. I am sorry if I missed these before, but just confirmation, actually. You said in the second quarter that you had 960 beds in operation and then third quarter we would see full utilization? Is that correct?

That's correct, yes. So we basically during the quarter, the second quarter, I should say, Michael, we had the activation of the initial beds, but then during the remainder of the quarter got the full facility in operation as we went into the third quarter.

Got you, got you. Okay. Thanks (multiple speakers). Sorry?

So we had 960 in April and then that went up to the full 2,400 in May, so that will have a modest impact on revenues in Q3, so I think we said that will increase by about a few million dollars.

Okay, excellent, thanks. And so, actually that's my next question. That increase of $1 million, that's on top of the roughly $65.9 million recognized in the second quarter?

Right, that's right. Since the revenue is calculated -- it is a little bit complex the way the accounting works because the payments from ICE are a fixed payment, but the revenues have to be recognized under a multiple element arrangement.

Most of the revenue is based on when the beds come online, so the full 2,400 beds were not online for the full second quarter, but will be for the full third quarter, so that will be a few million dollars of additional revenue.

Excellent, thanks. And then, so on the expense side of that, is there anything that we should be modeling in that is in excess of the depreciation and interest? Like how should we think about the expense side of it?

No, I don't think so. I think staffing levels normalized in the second quarter as well, so I would expect that to be consistent going forward, and rent expense with the third-party lessor. The only unusual part of that lease, as I mentioned, was the depreciation and interest, so nothing else should really impact Q3 or Q4 going forward.

A big driver of our expenses on our own side or a big part, I should say, of our own side is medical, but in this case medical is operated by the government, so we don't have that variation.

Excellent. That's all for me. Thanks, again, and nice quarter.

Kevin McVeigh, Macquarie.

Damon or David, can you give us a sense of -- and it just might be a little too far, but what a new California contract could potentially look like? Is the one that comes up at the end of 2016, and then are there any goal posts you'd look at in terms of being able to get a sense of how that progresses?

Kevin, this is Damon. Let me answer that. I would say the scope and the general terms and conditions are going to be, I would say, fairly consistent and similar to what we have today.

So quite simply, we think it will just be a multiyear extension of the current contract, and we have had discussions with the state of California. There really, to your question about mileposts or milestones, the passage of the budget was key on their side, so then they have the certainty of what the budget environment is going to look like for the coming fiscal year.

And so, once they got past that point, then they really started the conversation with us on a contract extension. So those are progressing. We are hopeful to have that wrapped up fairly soon.

Got it. And then, Damon, with Ohio coming up -- obviously, you have been successful with Ohio in the past. If I heard you right, it sounds like MTC is managing it now. What would be the optionality around that, to the extent you were able to secure that from an M&A perspective and ultimately be able to go in and take over the management as well? How would that work?

We understand that the procurement won't necessarily prohibit, but it really won't envision. Whoever is successful through the procurement process would take over operation.

We understand it is just going to be a procurement to basically just sell the asset, so an opportunity for us to come in. If we were successful, we would be the landlord and do a long-term lease agreement or some type of a lease agreement with the state.

So that's how we understand it. MTC has got a multiyear contract and so we understand the state doesn't really want to disrupt that management contract.

Got it. And then, just, you provided a little bit on CAR-16, but any other kind of thoughts in terms of when we should get final numbers in terms of how that sets?

Yes, all the facilities are in Texas today, 10,800. The states for performance are Nevada, Arizona, New Mexico, Texas, Oklahoma, Louisiana, and Mississippi, I believe, and so a really pretty confined geographical requirement for this procurement. And, of course, we have got capacity in Mississippi and Oklahoma we think would be attractive.

So, the procurement is progressing. We submitted our proposals. We understand here in the next couple months they're going to start going out and doing site inspections of all the proposed facilities. That will take us into the fall. They will probably do a little bit of back and forth, like they typically do for clarifications, maybe try to make sure they understand all the kind of points and all the offer proposals, and then I think they typically also have to do public hearings once they get close to award, which will probably take us into spring.

So we think probably summer, maybe late summer of 2016 is when they act on it, and then whoever is successful on the award, which we think will be multi-awards since the quantity is well over 10,000, performance will start in early to mid 2017.

Super, thank you.

(Operator Instructions). Tobey Sommer, SunTrust.

Following up on the last question, how do the facilities that you currently house California inmates in Oklahoma and Mississippi compare to Texas-based facilities across the most important dimensions, including price?

I would say -- well, I can't answer the last one or last part of it, but I would say the facilities, I would say, compare very favorably.

Housing California inmates, which have -- California has a lot of, I would say, unique requirements, both through the operation, but also some of it a little bit related to physical plant. We think these facilities would be very attractive to the bureau, just knowing them as a partner. I've been working with them for many years, so we think these will be attractive solutions and, again, they are in the geographical requirement, which was a key consideration for the bureau as they put this procurement together.

And you ran through a lot of numbers relative to California, and I appreciate it, but my pen doesn't work all that fast, so if you could go over a couple of them. I think you had said that your expectation at year-end had been for 6,000 inmates at the end of the first-quarter call and now you have a slightly lower range. Could you give me that number again, please?

Sure, yes, this is Dave. We had last quarter projected the populations would decline to a little over 6,000 inmates by the end of the calendar year, and we are now projecting them to decline to around 5,500 to 6,000.

One other key thing. In addition to that is we were expecting when we went into the call in May that 2,500/2,000 end of the year, get to 4,000 reduction by July 1 of next year, and that is consistent. So the budget came out and that's consistent with what we expected.

So even though we will have a little volatility and up and down a little bit on the ramp down from now until July 1, the new base has been set at 5,000, so that is consistent with what we thought going into the call and it was consistent once we saw the actual budget from the governor.

Right, so the endpoint hasn't changed, just the arc of the curve to get there?

(multiple speakers). That's exactly right.

Okay, and if I think about California, you mentioned that their forecast is for inmate population growth, but in recent years, the Company has been innovative -- excuse me, the state has been innovative in trying to offset those population forecast increases. Is there anything that you are hearing from them of new moves, new actions that they may implement to further reduce the prospects of inmate population growth?

We are not hearing anything additional, so we have got folks in Sacramento that are in constant discussions with all the appropriate stakeholders within the state government, and the two big things, as you know, is realignment and also Prop 47, which is the most recent development, obviously had an impact on their populations. But we are not getting a sense of anything additional the state is looking at or considering.

We also know that there is very limited additional capacity within the state of California, and so even if there was, that would be a multiyear investment to get those beds online. So, we don't hear anything more or additional the state is considering, so as they do see an increase over the next couple of years, then it could be the case where they're looking at the private sector either in state or out of state to help deal with that growth.

And just a reminder, they do publish their populations on their website every week and obviously we watch that very closely. And the past few have actually been increased -- increases.

Right, right. Along the same lines, how do -- how should we think about the discussions at the federal level and in Congress about changes to sentencing that may influence longer-term trends? How would you frame that for us?

Absolutely, Tobey. So, a couple things I would point to. First, with ICE, they're a very unique partner because their capacity needs nationwide are driven by the budget, so that's a pretty straightforward process. Once they see the number out of Congress for the funding for the coming fiscal year, then they manage their detention capacity and needs nationwide based on the number. So I put that one aside because it is kind of unique.

The Marshals Service, as you know, they are -- their populations, I should say, are driven purely by the number of prosecutions coming out of US Attorneys offices around the country, and a leading indicator that we would look at on a regular basis is the amount of US Attorneys that are hired and in place around the country. And in late 2013, the total nationwide number of deputy US Attorneys around the country were at about 2004 levels. That was the result of, we think, a couple things, one of which is sequestration, but also the Department of Justice did have some hiring freezes for certain agencies during that period of time.

But we have now seen the Marshals Service -- or, excuse me, we have now seen now the US Attorneys offices around the country, they have hired in the last 18 months and getting back to, I would say, levels closer to maybe 2006, 2007 levels. And it is early to tell, but three of the last five months, we have seen month-over-month increases in marshal populations nationwide and that is following about 18 months of decline.

So my view on the Marshals Service is a little bit of a wait and see. As we get later into 2015 and early 2016, is that a trend where there is now more attorneys around the country doing prosecutions and in turn that is impacting marshals populations. So that will be a little bit of a wait and see.

And then, as you know, the next link in the chain is the Bureau of Prisons. So if the Marshals Service populations go up or go down, then that does have obviously an impact with the Bureau of Prisons. The Marshals -- or, excuse me, the Bureau of Prisons populations have been down, as you know, the last 18 months, driven again by lower or slowing of prosecutions of the Marshals Service.

Now I would also highlight, too, we are seeing things that have already been done and implemented with the sentencing commission on trying to narrowing the delta between crack and powder cocaine. We're expecting the bureau will see a reduction later this year going to 2016 because of these sentencing commission changes and those were, I think, impact -- or put in place, I think, almost 12 or 24 months ago, so they are starting to now have an impact on Marshall -- or, excuse me, Bureau of Prisons populations as we go into the later part of this year.

So that will have an impact just because of that action by the sentencing commission, but the Marshals Service again will be impacted by the amount of prosecutions from US Attorneys offices and so that will be, again, a wait and see as we go later in this year.

Thank you very much, Damon, very helpful. Just two final questions for me. Could you update us on the quantity and intensity of direct negotiations you are having with customers, because not all of your sales wins have come as a result of publicly known procurements? And then, secondly, could you just comment on what the M&A pipeline looks like? Thank you.

Absolutely. So on the first part, I would say several partners, most notably on the stateside, and part of it is a negotiation. Part of it is just increased utilization of existing contracts.

So we have got contracts in place that don't have necessarily a cap, so it's just a matter of the Department of Corrections calling us in a certain locale and saying if we have got capacity at a certain location, could they increase it by a certain amount?

So part of it maybe is a negotiation, but part of it also is just a continued utilization of an existing contract that doesn't have to be renegotiated.

On the last part, we are seeing continued activity on the M&A side. As we have said before, with our acquisition in 2013 with CAI in San Diego, we think there is some other companies out there similarly sized that could be attractive as we continue to build our presence in the reentry market, so we're seeing good activity on that front also.

Thank you very much.

(Operator Instructions). Barry Klein, Macquarie.

Thanks for taking my question. A couple of smaller questions. You were talking about the status of some of the RFPs, Arizona on the federal level and then a few on the federal level. You have talked about Oklahoma in the past. I didn't hear anything about Oklahoma. Is that still in process of potentially of an RFP and just wondering what the status is on that one?

Yes, we think that is still an opportunity. So I mentioned in my remarks that the trigger there was, like Arizona and some of these other locations, the passage of their respective budget, and so Governor Fallon did get that enacted by July 1. They, being the DOC, did get increased funding, and so we are closely monitoring how we could be a solution for them in that respective state.

Okay, but no RFP has been announced and no date or anything like that?

That's correct, yes.

Okay. That would go through an RFP process or would that be a private agreement bypassing the RFP? What is your expectation on that?

I think that really depends on the Department of Corrections and they have oversight from the Board of Corrections, so I think what they're doing is now that they have got the budget in hand, they are having a conversation with the Board of Corrections on the appropriate way to secure additional beds.

Okay, got you. And then, the Arizona, the inmates that were accepted into Red Rock, the 500 inmates for the six months, just curious if any cash flow from that is included in guidance.

Yes, I will cover that one. So, just cross-walking our prior guidance beat in the second quarter, so the changes to prior guidance are really due to an acceleration of the decline in California, as we had mentioned. That was about $0.05.

Louisiana extending the date on which they are going to terminate that contract. They are taking the full 180 days is impacting our prior guidance by about $0.02 to the negative since it is operating at a loss.

A one-month delay in the transition from Otay Mesa -- from San Diego, sorry, to Otay Mesa is about another $0.01, but that is offset by some additional populations in Arizona, as you were referring to, and that is about a $0.02 impact from our prior guidance.

Okay, got you. Okay, so everything -- all that is included in the updated guidance that you put out.

That's correct.

Okay. And then, finally, you mentioned something on the effective tax rate. I didn't -- did you provide the guidance on the effective tax rate?

Yes, I didn't say it specifically. It is around 5.5%, but if you look at the calculations in our press release, you can calculate what our guidance is for the effective tax rate and it's around 5.5%.

Okay, and that's the rate -- in that ballpark is what we should expect in the coming years?

It's hard to tell the coming years, but sitting here today, at least looking out for the rest of this year, I would say yes.

Okay. All right, thanks for the time.

There are no further questions in queue. I would like to turn it back to Damon Hininger for any closing remarks.

Thanks, Kayla. Thank you again for your time and participation on today's conference call.

I would also like to take a moment to thank the thousands of CCA professionals here in Nashville and nationwide for the work they do every day within our facilities. Our management team remains focused on executing our plans for long-term value creation and we look forward to reporting on our progress in the second half of this year. Thanks again for calling in.

That concludes today's conference. We thank you for your participation.