Geo Group Inc (GEO) 2004 Q1 法說會逐字稿

Good afternoon. My name is Amanda, and I will be your conference facilitator. At this time I would like to welcome everyone to the GEO Group first quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two. Thank you. I would now like to turn the conference over to Rosa Suarez. Please go ahead, ma'am.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us for today's discussion of the GEO Group's first quarter 2004 earnings results. With us today is George Zoley, Chairman and CEO; accompanied by Wayne Calabrese, Vice Chairman, President, and COO; Jerry O'Rourke, CFO; and Brian Evans, VP of Accounting and Chief Accounting Officer.

This afternoon we will discuss our first quarter performance, current business development activities, and conclude the call with a question-and-answer session. This conference is also being webcast live at the company's website at www.thegeogroupinc.com. A telephonic replay will be available through June 6. The replay telephone number is 1-800-642-1687.

Before I turn the call over to George, please let me remind you that much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statement as a result of various other factors contained in the company's Securities and Exchange Commission filings including the Forms 10-K, 10-Q, and 8-K reports.

With that, please allow me to turn this call over to George Zoley. George?

Thank you, Rosa, and good afternoon to everyone. Thank you for joining me today as I provide an overview of GEO's financial results for the first quarter 2004. When I conclude my prepared remarks, I'll open the call up for a question-and-answer session.

As announced in the press release we issued earlier today, our first quarter earnings were 25 cents per share, or $2.4m compared with 24 cents per share, or $5.2m for the first quarter of 2004. First quarter 2004 earnings include income from continuing operations of $2.2m, or 22 cents per share compared to $4.3m, or 20 cents per share for the same period in 2003. First quarter 2004 earnings also include income of $250,000, or 3 cents per share compared with $830,000, or 4 cents per share for the same period in 2003 from discontinued operations related to our contract with the Australian Department of Immigration. Our first quarter 2004 earnings reflect $9.7m diluted weighted average shares outstanding compared to $21.3m diluted weighted average shares outstanding for the same period of 2003.

The remainder of my discussion relates exclusively to results from our continuing operations and does not include results from discontinued operations in Australia.

Our first quarter revenue increased by 9% to $143m from $131m for the same period in 2003. Revenue in the first quarter of 2004 reflects a full quarter of operation of the Lawrenceville Correctional Center, which opened at the end of the first quarter 2003; a strengthening of the Australian dollar in the first quarter of 2004 as compared to the first quarter of last year; contractual adjustments for inflation; and the opening of the Sanders Estes Unit in Venus, Texas, in January of 2004. These factors offset the discontinuation of our management contracts for the McFarland facility in California, and the Willacy and John R. Lindsey state jails in Texas.

Our first quarter 2004 operating expenses increased by 10% to $121m from $110m for the same period in 2003. This increase is primarily attributable to the opening of the Lawrenceville Correctional Center in March of 2003 and the strengthening of the Australian dollar. This increase also reflects costs associated with winding down the contracts for the Willacy and John R. Lindsey state jails in Texas and the discontinuation of our contract for the McFarland, California, facility, as well as startup costs associated with our new contract to manage the Sanders Estes unit in Venus, Texas.

First quarter 2004 depreciation and amortization expense increased to $3.4m from $3.1m for the same period in 2003. Our first quarter 2004 general and administrative expenses increased to $11.2m, up from $8.9m for the same period a year ago. This increase reflects higher costs related to the implementation of Sarbanes Oxley including accounting, legal, and other professional fees as well as increased headcount at the corporate office attributable to additional personnel retained as a result of the assumption of additional corporate functions and services that were previously provided by the Wackenhut Corporation.

Our effective tax rate for the first quarter of 2004 was approximately 42%. We expect our effective tax rate to remain approximately 42% throughout 2004. Our equity income from affiliates decreased to $310,000 for the first quarter of 2004 compared to $620,000 for the first quarter of 2003. First quarter 2004 equity income from affiliates represents the results of our South African joint venture only and while first quarter 2003 included both our joint ventures in South Africa and the United Kingdom.

Our compensated man days increased to $2.6m for the first quarter of 2004 as compared to $2.5m for the first quarter of 2003. These figures exclude our South Africa joint venture. Our first quarter 2004 average occupancy rate was approximately 100% as compared to approximately 99% for the same period in 2003. Our average correctional per diem rate for the first quarter of 2004 was $51.49 compared to $48.85 for the first quarter of 2003. This increase is due to higher per diem rates generated from our existing and new correctional contracts.

Turning to our balance sheet, cash at the end of the first quarter 2004 was approximately $125m compared to approximately $114m at year-end 2003. At the end of the first quarter 2004, our balance sheet reflected approximately $250m in total debt. Our senior secured credit facility consists of $100m term loan bearing interest at LIBOR + 2.5% and $50m revolver bearing interest at LIBOR plus 2.25%. As of March 28, 2004, we had borrowings of $5m against the revolver and $28.8m has been set aside under the revolver for letters of credit.

This concludes my overview of our financial performance during the quarter, and I'd like to say that we are very pleased with these results. I would like now to update you on a number of events and outstanding issues.

As we have stated in previous calls on December 31, 2003, our contract for the management of the 224-bed McFarland, California, facility was discontinued by the California Department of Corrections, due to lack of legislative funding. We are continuing our efforts to find an alternative correctional use for this facility. We expect to expense the related facility lease costs as they occur. We estimate the annual costs related to the McFarland facility to be approximately $1m.

With regard to our bid for Global Solutions -- on March 4th we announced a proposal to purchase Global Solutions, a wholly owned UK-based subsidiary of Group 4 Falck for £200m. On March 5, Group 4 Falck confirmed receipt of our offer and stated it was not the only offer received, and they were considering the price in terms of all offers. On April 6, Group 4 Falck granted Bridgepoint, a private equity firm, exclusivity in negotiations for the sale of Global Solutions for a price of approximately £200m, but to our knowledge, at this time, a definitive sale agreement has not been announced.

Before turning to the topic of new business opportunities, I would like to give you a brief update on the activation of our newest contract. On March 10, we announced that Reeves County, Texas, had entered into an agreement with a second governmental agency to house up to 864 inmates in Phase 3 of the three-phase Reeves County Detention Complex with a minimum average daily population guarantee of 778 inmates following a population phase-in period of approximately 10 weeks. The initial intake of inmates began on March 19. The second agreement followed an earlier agreement entered into between Reeves County and another governmental agency for the housing of between 225 and 2,200 inmates in Phases 1 and 2 of the complex. We currently manage the entire 3,064-bed complex, which is the largest privately managed correctional institution in the world, under a 10-year agreement with Reeves County while the employees remain on the county payroll.

Moving to our business development activities, we are continuing our efforts to expand every area of our business including domestic and international correctional management services, management services for mental health and special needs population facilities, and other related management services. We believe there are significant growth opportunities at the local, state, and federal levels of government.

With respect to the U.S. corrections market, we are pursuing new opportunities for contracted correctional services and are excited about our potential for growth. We expect to see a number of project opportunities at the local, state, and federal levels over the next 12 to 18 months totaling approximately 2,300 beds, including the possible expansion of approximately 1,000 beds at a number of our existing facilities.

This domestic growth potential continues to be based on a growing need for bed space in selected state and local jurisdictions together with increasing needs of the federal government and the Department of Homeland Security and Justice. On the local front, we are working on number of projects in multiple locations totaling approximately 4,000 beds.

At the state level, as state departments of corrections continue to struggle with financial and budget difficulties, we believe our industry offers both short- and long-term solutions for their correctional needs and budget constraints. We are currently working in 10 states across the country with the expectation that we will expose to project opportunities for approximately 8,000 beds over the next 12 to 18 months. Just last week, the State of Florida approved a procurement for an adult male private prison of 1,268 beds with a contract to be awarded in the state 2005 fiscal year.

At the federal level, we expect to see several potential project opportunities totaling approximately 11,000 beds over the next 12- to 18-month period. President Bush's 2005 budget places a moratorium on new prison construction while promoting more aggressive Bureau of Prisons contracting the state and local private sector prison providers. The president's 2005 budget provides partial funding for an additional to 4,500 contract beds. In addition, the budget provides the Department of Justice will examine the use of up to $150m in prior-year balances to contract out housing for low and minimum security inmates, allowing upgrades to existing Bureau of Prison facilities to accommodate higher-security inmates. We feel this funding will provide new business opportunities for the private sector and our company.

For 2005 the Office of Detention and Trustee will continue to work with state governments, local governments, and private sector service providers to contract for adequate detention capacity to house detaining individuals charged with federal offenses who are awaiting hearing on their immigration status or deportation. The number of detainees in state, local, and private prisons during 2004-2005 is expected to represent approximately 77% of the federal detention population. These state, local, and private contract relationships allow the federal agencies to carry out the function of federal detention in a cost-effective manner. We believe that these increasing federal detention needs will serve to expand our business base over the next 12 to 18 months.

There are two potential pilot projects to be undertaken by the Office of Federal Detention and Trustee -- one located in the Chicago-Northern Illinois region and the second in El Paso, Texas, region, totaling approximately 2,700 beds. We believe that the solicitations for these projects will possibly be issued in late 2004 or the first half of 2005.

As we noted in our last conference call in January 2004, bidders for a 1,750-bed project in the Baltimore-Washington, D.C. area were notified by the Office of Federal Detention Trustee, or OFDT, that a solicitation would not be issued at this time. We believe that the OFDT is working with Congress to find an alternative location to those sites that were submitted by us and our competitors. We expect this procurement to proceed but on a delayed basis.

On April 13, the U.S. Marshal Service issued a solicitation for up to 2,800 beds in the Laredo, Texas, area. We have submitted two sites for consideration for the project in Laredo, and we are currently working on a proposal that is due June 14th. We expect the award in the project to be made sometime in the fourth quarter of 2004.

Turning to the international area, we continue to see new opportunities for us to partner with government agencies around the globe. We expect to see a number of project opportunities over the next 12 to 18 months totaling approximately 17,000 beds. We submitted a proposal in December 2003 to a procurement issued by the New Zealand Department of Corrections for the provision of court escort services in New Zealand. We expect that a contract will be awarded sometime in the second quarter of 2004. In Australia, the New South Wales government is still planning on the outsourcing of non-custodial services in the new 128-bed forensic hospital under its public/private partnership program. We are monitoring this opportunity closely and will be prepared to submit a proposal in response to a formal solicitation.

We also continue to monitor business opportunities in the Republic of South Africa, where we are hopeful that the government will begin procurement of several medium-security prisons.

In addition, we expect that several business opportunities will develop in the United Kingdom and elsewhere in continental Europe within the next 12 to 18 months. We remain committed to re-establishing our presence in the UK market.

We continue to market very aggressively our diversified service offerings, which include providing mental health, substance abuse and sex offender services, special needs management services, and home detention electronic monitoring and offender transport. We are monitoring several states that have begun to introduce legislation to develop public/private partnerships similar to our landmark South Florida State Hospital project. The state legislature in Florida recently authorized the privatization of another of its state hospitals. The procurement for the 200-bed facility is expected to be issued by July 1, 2004, with a contract commencement date of January 1, 2005. Two other states currently have legislation pending for similar projects.

Due to the success of our South Florida State Hospital project and the national recognition it has received, we expect to be a strong competitor when selection procurements for new projects emerge during the upcoming year.

That concludes my presentation. I would be glad to address any questions from our audience. Operator?

[operator instructions]

The first question is from Jim MacDonald with First Analysis.

Good quarter, guys.

Thank you, Jim.

You went through a lot there. Any way you could kind of condense it down and any focus on what to expect in the next three to six months as possible decisions?

Well, I think we've given earnings guidance at the revenue and earnings level for the succeeding quarters, Jim. That has not as yet changes.

I was talking more about some of these -- what project decisions you might expect in the next three to six months.

What are the next contract awards?

Right.

Sequentially? I'll turn that question over to our esteemed Vice Chairman, Wayne Calabrese.

Thank you. There is certainly an award pending at the Texas facility in Kyle for the substance abuse program. It's a relatively small matter. As George outlined, there are a number of projects, the largest being Laredo, that are due for submission midyear '04, but the actual decisions and awards will probably take -- I'm guessing, because they are federal, another three to six months at the longest.

There are a few county projects, Jim, that we haven't named, where we are actively pursuing opportunities, and I really couldn't go into those in any detail at this point. The Florida projects, if you follow the state legislature in Florida, you'd know that the legislature effectively transferred responsibility over the private prisons -- all five of them -- to the Department of Management Services effective July 1st of '04, and there will be some decisions made there probably just after they take over -- necessarily just after they take over, because of the expiration or renewal dates on the options for the existing contracts. I'm trying to think if there's anything else that comes to mind. I guess I'll get back in if I think of something. George?

Well, the Florida Hospital procurement will be accomplished before the end of the year.

That's right, the new Florida --

Either third or fourth quarter.

You mentioned the new Florida state project -- 1,268-bed prison -- that's to be located in the Gravesville, Florida, area, and I think the procurement on that one might be later in the year.

Okay, let me circle to some of the other projects. You mentioned a little bit about California. Any more on California would be helpful, given all the news out there. Also Jena [ph] and your award and siting in Colorado?

Let's take the last one first -- it's Wayne again, Jim -- the Colorado project in Pueblo remains active with the department's consistent support. We have had to go through a court case where a summary judgment was awarded against some folks who had questioned the validity of the -- it was either the zoning or the open records -- I forget which. They challenged on both. The summary judgment was granted in favor of us on one of them -- or the city, I should say. The other is being briefed.

It looks like we will be successful on all fronts there. We've got a great site, a good support of community, and we're continuing to work closely with the Department of Corrections to get that moving as soon as the dust clears on this litigation that arose.

What were the other two?

Jena [ph], and any more on California, in general, and McFarland, in particular.

In Jena, we're continuing to work closely with both the parish as well as federal and state agencies to reactivate the facility perhaps on a mixed-use basis, nothing definite to report at this time but a lot of continued effort being made. With respect to California, George mentioned the McFarland facility. We continue to work very hard to see that facility reopened. The state, as you know, has declared an emergency with respect to overcrowdedness -- worse than usual, and it's usually been pretty bad, and we think that we've got an excellent facility there that is worthy of reopening. We can give them a good price, and I have met with them recently to discuss a couple of different alternatives for that use.

Otherwise, in California, we think that the ground is shifting somewhat in favor of some correction in their corrections system, and we hope that not only our company, but the industry, will be able to play a meaningful part as the new governor and the legislature come to terms with what has, by all accounts, been a pretty dismal record.

Okay, thanks, I'll circle back.

Thank you.

Your next question is from Andrew May with Jefferies & Company.

Hi, good afternoon, a couple of things -- could you guys talk about how the economics of the Reeves County, Texas, facility work -- how it enters your P&L in detail, because I really don't understand that at all. Second, could you walk through how the DIMIA -- completion of the DIMIA contract is going to happen exactly when you stop booking any revenue in discontinued operations for that?

On the first question of Reeves, we have a management services contract, meaning that the employees are still on the country's payroll, so we don't have all the labor costs flowing through our P&Ls. We merely have a management fee that's adjusted to population levels, and we get reimbursed for certain items on a cost-reimbursement basis that are of fairly small monetary value.

The profitability -- overall profitability of the contract is not yet been finally calculated, because we are in a transition stage at this time with the phasing-in of prisoners in the Phase 3 portion of the facility, and transitioning some of the procurement policies and realignment of staffing. So we've not altered any of our guidance on revenues or earnings at this time.

With regard to DIMIA, we are showing that as a discontinued operation, and we are separating out the revenues and profits of that operation, but we have transitioned all the facilities during the last quarter. There are no more facilities under -- in operation under our management at DIMIA. So you won't see anymore DIMIA financials coming through on a contemporary news basis.

Right, so it's -- there will be no more -- it will not be reflected -- there will be no more discontinued operations activity regarding -- reflecting DIMIA after Q1?

Well, you have to do, I think, a comparison to prior quarters, but there will be no new financial activity related to DIMIA.

Okay, good. And then on Reeves County, my understanding originally was that until you made progress in filling Phase 3, the project wouldn't be materially profitable to GEO Group. But now that you have made pretty good progress on filling up Phase 3, it does, in fact, get better? I mean to say, you haven't changed your guidance or anything like that, but it is -- I'm not wrong in thinking that it begins to make a positive contribution here in second quarter of '04?

That's correct, but we haven't completed the phase-in as yet, and the turnaround of some of these policies regarding procurement and employment. So we think that will all be completed during the second quarter and so the second half of the year will be on more normalized --

Right, and when you finish -- you identify two new customers, I think, that were going to contribute prisoners to Reeves. When those two have put in the prisoners they are going to put in, will it be substantially full?

There are not two. One is an existing customer, and there is one new customer for a total of two governmental agencies using the facility. And will it be full? Essentially full, yes.

Good. You talked about the amount you have drawn on your revolver and your term loan. Could you just finish that schedule for me and remind us what the balance of your high-yield offering -- what the number is there? And then the non-recourse debt so we can just total-- get our total debt number?

Yes, we've got the high yields at $150m. We've got the Term B at just under $97m. And then our non-recourse debt in Australia should be in the $42m range.

With the revolver?

And the revolver, I think we're just sitting at $5m on it with LOCs committing to a little over $28m.

Right. And then that's offset by, I think you said $125m in cash?

That's pretty close.

OK. Good. Thank you very much.

Thank you, Andy.

The next question is from Patrick Swindle with Avondale Partners.

Good afternoon, gentlemen.

Good afternoon.

In looking at the opportunity in the State of Florida for the 200-bed mental health facility, who do you see as being your primary competitors for that, given your success at Atlantic Shores?

It's a little hard to say, because in the prior procurement for the existing state hospital facility we were the only bidder.

So it's kind of reasonable to think that might be the case here, as well?

We don't know. If there are any other bidders, it will be a few in number, but there may not be any other bidders. It's a complicated business. It's not just the operation, but it's the design and development of a new state psychiatric hospital. That's part of the procurement, take over the existing hospital and operate it while you're developing, designing and financing, building a new replacement facility.

And then there's no change to the prior guidance that you've provided for either the second quarter or the full year. Is that correct?

Not at this time.

Thank you very much.

Your next question is from Jim MacDonald with First Analysis.

Hi, again. On the acquisition of the GSL business, assuming that doesn't happen, what are your thoughts and also where are the banks in terms of allowing you to keep the cash that they would otherwise have to pay down some of these debt lines?

We are looking at other opportunities while we are awaiting the finalization of that one, the one involving GSL. As I said, to date there has been no announced definitive- signed definitive agreement. The banks-- the banks have given us until June 28th to reach some kind of written agreement with any party to give them a level of assurance that we will be using those funds for an acquisition. So we don't have to actually complete an acquisition by June 28th, we will have had to enter into some kind of written, definitive agreement by that date.

So they're not anxious to get the money back. They want to us see in making an acquisition and we are looking at multiple acquisition opportunities simultaneously.

OK. If I can, I want to just go through a couple little housekeeping items.

Sure.

The interest income and interest expense seem both a bit high, especially the interest income. Is that-- it seems higher than you'd expect on $100m, $125m balance and I'm just wondering if there's any, you know, anomaly there.

Jim, it's Jerry. I think one of the things that folks may not be aware of is that we do have some debt in the United Kingdom that is-- there is a 13% coupon on that. It's a $5m piece of debt that we have, associated with our old entity PCG. So that may help reconcile that for you.

That's right.

This is Brian. There's another piece, too, if you're looking at both interest income and interest expense. If you'll recall on the balance sheet, we have the non-recourse debt and the long-term receivables. So there results a gross-up in the interest income and the interest expense related to those two activities on the balance sheet.

OK. That's what I thought, there's some English stuff and others. Yeah. On the G&A, even with the explanation it seemed particularly high in the quarter. Do you expect-- you know, were there any other unusual G&A expenses or do you expect that level of G&A to continue?

Well, there are some extraordinary professional services costs related to acquisition activity that are included in our G&A.

So you expensed a lot of your acquisition cost during the quarter. Can you give us a kind round number for that?

No, I can't.

Can we expect the G&A to down next quarter?

Not necessarily.

OK. Could you give us your receivables at the end of the quarter?

Yes. We're sitting at just under $85m.

And also, any estimate of the start-up costs in the quarter, given some of the business transitions?

I'll have to get back to you on that one, Jim.

Thanks very much.

Your next question is from Jeff Kessler with Lehman Brothers.

Thank you. A couple questions. First, you mentioned that you've been looking at re-establishing a presence in the UK market after the sale of your assets there. Can you just give some color around the types of things you're looking at?

Well, it's either making an acquisition of starting a new entity, ground-up. You know, those are the two basic options.

And does it have to be limited to the prison industry?

No. I mean, it'll be an entity that will be able to achieve diversified services.

OK. You don't give out specifically anything, any information around [inaudible] margins, but can you give some-- give us some idea of what direction they are headed currently during the year. Was there any reason for them to be under pressure because of some of the management contracts?

I think in general they've remained fairly normalized. I mean in some places maybe we've had a little bit of erosion. Other places we've had improvement. You know, so it really varies on a state-by-state basis.

All right. Finally, in Texas there is-- is there a reason historically that, particularly over the course of the last nine months, there's been so much activity in Texas, both the state essentially putting up its facilities, managed facilities, for bid again and now all of this other activity going on? Has there been something to-- a catalyst that's generated a lot of this activity in Texas that can be traced to anything?

Well, there's different dynamics taking place. At the state level, the state decided it wanted to re-bid all of its facilities and it did so and that was separate from the activities taking place by the federal agencies. You know, the Texas border is very important with regard to illegal immigration and there's a lot of activity going on down there involving the Bureau of Prisons, Department of Immigration, as well as the trustee. U.S. Marshal Service, also.

All right. OK. Thank you very much.

Thank you.

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question is from Patrick Swindle with Avondale Partners.

A quick follow-up on the acquisition front. In looking beyond GSL, if that's not successful, where should we look or where are you most active in terms of discussions? Is it-- should we anticipate that an acquisition will be made internationally or are you looking at domestic targets, as well?

We're looking at both international and U.S. acquisition targets.

Any comments that you can give in terms of either magnitude and/or multiples that you're seeing in the markets, as well as the competition that you might be seeing for those acquisitions, maybe, on the domestic in particular?

No. We think there are opportunities out there and we think we are probably uniquely positioned of any other company in our industry to be successful in making the acquisitions.

Thank you.

The next question is from Gerald Finney [ph] with Comerica Bank.

Yes, Jerry, when I look at the operating performance, the operating margins have slipped some. I know there was professional fees running through the G&A, which Dr. Zoley mentioned, but on the operating line there also appears to be some margin erosion. Can you comment on--? Just kind of-- it would seem to me that with your per diem being up, that your margins should be getting better.

Well, the DIMIA contract is winding down and it was a fairly profitable contract so you see a little bit of erosion, probably, related to that. And that's also reflected in the reduced company-wide average per diem rate.

OK. Thanks.

At this time there are no further questions. Mr. Zoley, do you have any closing remarks?

Just to thank everybody for joining us today. I hope we'll see you at our next quarter conference call. Thank you. Goodbye.

This concludes the GEO Group first quarter 2004 earnings conference call. You may now disconnect.