Jun 2, 2008
Executives
Pablo Paez – Director of Corporate Relations George C. Zoley - Chairman, Chief Executive Officer and Founder John G.
O’Rourke – Senior Vice President and Chief Financial Officer
Analysts
Kevin Campbell - Avondale Unidentified Analyst – Lehman Brothers T.C. Robillard - Banc of America Securities Emily Shanks - Lehman Brothers
Operator
Welcome to the quarter one 2008 GEO Group earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Pablo Paez, Director of Corporate Relations.
Pablo Paez
Thank you for joining us for today’s discussion of The GEO Group’s first quarter 2008 earnings results. With us today is George Zoley, Chairman and Chief Executive Officer; Wayne Calabrese, Vice Chairman, President and Chief Operating Officer; Jerry O’Rourke, Chief Financial Officer; and Brian Evans, Vice President of Finance, Treasurer and Chief Accounting Officer.
This afternoon, we will discuss our first quarter performance and current business development activities and we will conclude the call with a question-and-answer session. This conference is also being webcast live on our website at www.thegeogroupinc.com.
A replay of the audio webcast will be available on the website for one year. A telephone replay will also be available through June 1 at 1-888-286-8010.
The passcode for the telephone replay is 89981286. During the call, we will discuss non-GAAP basis information.
Reconciliation from non-GAAP basis information to GAAP basis results may be found on the conference call section of our Investor Relations webpage. 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 statements as a result of various factors contained in our 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 C. Zoley
Thank you for joining us today, as I provide an overview of our financial results for the first quarter 2008 and update you on the projects currently under development in new business opportunities. When I conclude my prepared remarks I’ll open up the call to a question-and-answer session.
After reporting what was the best yearly results in our company’s history in 2007 I’m very pleased to announce that our first quarter of 2008 results continue to show strong performance from all three of our business units, of U.S. Corrections, GEO Care and International Services.
We believe that our first quarter performance validates the strong business demand and key growth drivers in our industry as well as the continued success of our company’s uniquely diversified growth platform. Our three growth business units delivered strong year-over-year financial growth driven primarily by the activation of seven new projects totaling 4,200-beds brought online in the last three quarters of 2007.
The activation of the 576-bed Robert Deyton Facility in Georgia for the U.S. Marshals Service in February of this year, and overall strong performance at a number of our correctional and residential treatment facilities both at the state and Federal levels.
Our first quarter pro forma earnings increased 51% to $13.6 million, or $0.26 per share based on 51.7 million shares, compared to $9 million or $0.21 per share based on 41.6 million shares for the first quarter of 2007. Our pro forma earnings for the first quarter exclude approximately $1 million, or $0.02 per share in after-tax startup expenses and approximately $150,000 in after-tax international bid and proposal costs.
On a GAAP basis, our first quarter 2008 income from continuing operations was $12.4 million or $0.24 per share, based on 51.7 million shares compared to $5.1 million, or $0.12 per share based on 41.6 million shares during the first quarter of 2007. Our revenue during the first quarter increased to $275 million from $237 million for the first quarter of 2007.
Our first quarter revenues reflect $29.6 million in pass-through construction revenues as compared to $21.7 million in pass-through construction revenues for the same period in 2007. Our top line growth has been driven by the factors I mentioned at the beginning of the call.
New contract activations in the past three quarters of 2007, which totaled seven new or expanded projects, with approximately 4,200-beds and $94 million in additional annualized operating revenues, the activation of the Robert A. Deyton Facility in Georgia for the U.S.
Marshals Service during the first quarter and strong performance from a number of our state and federal facilities. Looking ahead we believe that throughout 2008 we will continue to deliver strong results for GEO.
Over the next three quarters, we expect to activate seven new projects representing approximately 5,300 new beds and $92 million of additional annualized operating revenues. Our company-wide average per diem rate for the first quarter was $59.74 million compared to $53.80 for the same period in 2007.
The increase in our company-wide average per diem reflects improved pricing at a number of our correctional contracts as well as the change of mix of our contracts with a higher concentration of GEO Care contracts from a year ago. Our company-wide paid level of occupancy was approximately 97%, excluding our idle facilities in Baldwin, Michigan and Bronte, Texas.
Our adjusted EBITDA increased 22% to $36 million for the first quarter from $29.6 million for the same period in 2007. Our adjusted free cash flow for the first quarter increased 74% to $25.4 million from $14.6 million for the same period a year ago.
The significant year-over-year growth in our revenues, our net income, our adjusted EBITDA and our free cash flow in the first quarter of 2008 demonstrates the strong demand in our industry and validates our investment and diversified growth strategy. Now moving to our guidance for 2008, as announced in our press release, we are maintaining our earnings per share guidance for the full year 2008 in a pro forma range of $1.27 to $1.35, and our 2008 operating revenue guidance in a range of $1.01 billion to $1.03 billion, excluding pass-through construction revenues.
We expect second quarter 2008 revenues to be in the range of $245 to $250 million, excluding pass-through construction revenues, and earnings to be in the pro forma range of $0.30 to $0.32 per share. I would now like to discuss our announcement this morning as well as our projects currently under development.
This morning, we announced plans for moving forward with a 1,225-bed expansion of our 500-bed North Lake Correctional Facility in Baldwin, Michigan, which is currently idle. This 1,225-bed expansion is expected to cost approximately $60 million and we expect to complete the expansion by the second quarter of 2009.
We have determined that our North Lake, Michigan facility needs to be expanded in order to achieve the desired economics for the company and the economies of scale for our prospective clients. We believe that the expanded facility with 1,725-beds will help to meet the increased demand for correctional and detention bed space by state and Federal agencies.
At the Federal level, The Federal Bureau of Prisons recently issued two pre-solicitation notices for criminal alien requirements, CAR 8 and CAR 9, with a combined total of 4,000 new beds and a minimum of 900-beds per facility. Under both of these procurements, the BOP intends to award a firm fixed price contract with award fee incentives.
The contract awards will have a potential term of 10 years, consisting of one four-year base period and three two-year option periods. The official solicitation for CAR 8 was issued on April 29, and under this procurement the BOP is seeking contractors for the management and operation of the existing correctional facilities to house a primarily criminal alien population.
We expect the official solicitation for CAR 9 to be issued later this week or early next week. Under this procurement, operators will be allowed to provide existing facilities with expansion beds or new facilities.
For existing facilities the existing beds must be available within 120 days from contract award, and the expansion beds must be available within 300 days from contract award. For new facilities beds must be available within 425 days from contract award.
As a result of the expansion of our North Lake facility, we will restructure our credit facility to support our capital projects. Under our existing credit facility we have the ability to access an additional $150 million through the accordion features of $75 million under both our term loan and our revolver.
We expect to complete the restructuring of our credit facility by the end of the year. I’d like to now update you on our projects currently under development and beginning with our project activations in 2008.
As I mentioned earlier we have activated the 576-bed Robert Deyton facility for the U.S. Marshal Service in Clayton County, Georgia.
We are continuing with our announced expansion of the facility by an additional 192 beds. We expect to complete this expansion by year-end 2008.
In March, we successfully completed a 200-bed emergency bed expansion of our Central Arizona State Prison, increasing the capacity of the facility from 1000 to 2000 offenders through the use of existing dormitory space and additional bunk beds. In Louisiana, we are completing a 744-bed expansion to the 416-bed LaSalle Detention Facility for ICE.
We expect to complete the expansion this week and begin intake of additional detainees next week. In Clayton, New Mexico, we are completing the construction of the new 625-bed facility for the use of the New Mexico Corrections Department.
The facility is being financed with tax-exempt non-recourse revenue bond financing, issued by the Town of Clayton. Our current target opening date for this facility is August.
In Texas, we are working on three separate projects that are scheduled to open in late third quarter and early fourth quarter of this year. In Montgomery County, the county is completing the construction of an 1100-bed non-recourse bond financed detention facility, which we expect will be used by state or Federal agencies.
We expect to activate this managed only facility in September. In Maverick County, the county is constructing a 654-bed detention facility, which is being financed through the issuance of non-recourse project revenue bonds.
We anticipate that the project will be completed and ready for occupancy by the county or Federal detention agencies in September. In Laredo, we are building a 1,500-bed Rio Grande Detention Center for the U.S.
Marshals. This facility will cost approximately $86 million when completed and is being company financed.
We expect to activate the facility by October of this year. Finally, in Mississippi, the state is building a non-recourse bond financed 500-bed expansion to our East Mississippi Correctional Facility.
We expect to open the expansion in October. Moving to our project activations in 2009.
In Florida, we are expanding our recently completed 1,500-bed Graceville Correctional Facility by 384 beds. We expect the expansion to be completed by the end of the second quarter of 2009.
In Colorado, we are continuing the site plan review process for the approval to begin construction of an 1100-bed expansion of our company owned Aurora detention center. Assuming we obtain our planning and building permit approvals by this summer, we expect the expansion to be completed and ready for occupancy during the fourth quarter of 2009.
The expansion will cost approximately $72 million, which will be funded through company financing. All together, we have 10 new project activations, seven that are scheduled to open in 2008 and three that are scheduled for 2009.
These new activations total 9,100 beds. We believe this represents the largest and most diversified organic growth pipeline in our industry.
Now I’d like to discuss our capital expenditure requirements as well as our new business development activities. We are currently developing a number of projects using company financing, including expansion of our North Lake facility in Michigan.
We estimate that our current capital projects will cost approximately $294 million through 2009, of which approximately $88 million was completed in 2007. We estimate our development CapEx requirements for 2008 to be approximately $111 million.
This breaks down to approximately $33 million for the first quarter, $32 million for the second quarter, $19 million for the third quarter and $27 million for the fourth quarter. We currently have approximately $33 million in cash on hand to fund these projects and during 2008 we expect to generate approximately $90 million in adjusted free cash flow.
In addition, we have approximately $74 million available, after letters of credit and outstanding borrowings of $20 million at March 30, under our $115 million revolving credit facility, which bears interest at LIBOR plus 1.5%. As I mentioned earlier, we expect to restructure our credit facility by the end of the year in order to secure sufficient financing to complete our announced capital projects.
Moving to our pending proposals and new business development opportunities. We are competing for a number of opportunities at the state and Federal levels in the United States.
As I discussed earlier, the Bureau of Prisons recently issued two pre-solicitation notices for criminal alien requirements, CAR 8 and CAR 9, with a combined total of 4,000 new beds and minimum of 900 beds per facility. The official solicitation for CAR 8 was issued April 29 and we expect that the CAR 9 solicitation will be issued later this week or early next week.
Proposals under both procurements are due June 30. Under both of these procurements, the BOP intends to award firm fixed price contracts with award fee incentives.
The contract awards will have potential terms of 10 years, consisting of a four year base period with three two-year options. In addition, I mentioned on our last conference call, Congress has fully funded all three Federal Detention Agencies, and specifically approved funding that supports a 4,500-bed increase in immigration detention beds, to 32,000 beds from the prior year’s 27,500 beds.
We expect to see additional opportunities at the Federal level related to the continued demand for detention bed space by all three Federal agencies. At the state level in Virginia, we submitted an unsolicited proposal for a 1,500 to 2,000-bed medium security custody correctional facility, to be located in Charlotte County, Virginia under a state statute that allows companies to submit unsolicited proposals.
We are pleased that the House and Senate recently passed legislation providing for $8.7 million of planning money for this project. We hope the governor will sign this bill shortly.
The Virginia Department of Corrections is continuing to move forward with GEO with Phase II of this procurement, with the state expected to authorize the issuance of project revenue bonds to finance the new facility. We expect to sign an interim agreement shortly and to move forward with the initial design and engineering phases of the project, followed by the execution of the final contract in late 2008 or early 2009.
Virginia’s DOC has projected that these new beds will need to come on line by early 2011. We continue to see a very strong market at the state and Federal level.
A number of states around the country are going through their legislative sessions, and are likely to consider additional correctional bed capacity through privatization to meet their ongoing needs. We believe the states of Florida, Oklahoma, Idaho, California, Georgia and others have an aggregate need for at least 15,000 new beds.
For instance, in the State of Florida, the legislature has recently approved budget language that provides for the privatization of one new 2,000-bed managed-only prison. With regard to upcoming bids, the State of Texas recently issued solicitations for the re-bid of several existing and managed-only facilities, including four GEO managed facilities totaling approximately 3,000-beds.
We expect to submit our proposals by June for the continued management of the four managed-only facilities, and hope to be successful. Contract awards for these facilities are expected in the fourth quarter of the year, with contract commencement in the first quarter of 2009.
Now turning to our international business unit, we continue to work with our GEO U.K. subsidiary as we pursue new business opportunities in the U.K.
market. In England, the Ministry of Justice has issued RFPs for two new 600-bed prison projects.
We responded to both RFPs but unfortunately our company was not selected by the U.K. government for these particular projects.
We continue to believe the U.K. market offers significant new business opportunities.
The Ministry of Justice has announced plans to increase prison capacity with a development between 10 and 20,000 new beds over the next several years. We believe the next round of RFPs will include up to three large prisons, or super jails, housing around 2,500 offenders each, which will allow our GEO U.K.
subsidiary to be more competitive given GEO’s prior experience in managing large-scale detention and correctional facilities. We expect at least one of these 2,500-bed procurements to be issued by years end.
In South Africa, we have responded to requests for pre-qualification for the design, construction, financing, and operation of five new 3,000-bed prisons last quarter. We are waiting to be short listed for these projects totaling 15,000-beds.
Based on the successful development and operation of our South African 3,000-bed prison, we believe we are very well positioned to capitalize on these new opportunities in South Africa. In Australia, we have received notice from the State of Victoria of their intention to extend our existing contract, with the provision of healthcare services, for nine of the state’s adult prisons for an additional 12-month period commencing July 2008.
Annual revenues from this contract exceed $12 million. We are also in discussions with the State of Victoria to extend our contract for the 785-bed Fulham Correctional Centre for an additional three years beginning June 2009.
Annual revenues from this contract exceed $33 million. Additionally, we are currently participating a re-bid process for a prison transportation contract currently held by one of our competitors with the Victoria Corrections Department.
The contract would begin in June 2009 with anticipated annual revenues of appropriately $7.5 million. With regards to mental health and residential treatment opportunities, our GEO Care team has been marketing to several states around the country, and we expect to compete for seven new projects in the near term.
In the Commonwealth of Pennsylvania, they’ve decided to cancel their RFP for the management of two forensic centers. We believe this decision may have been influenced by the increased political focus on Pennsylvania due to the Democratic presidential primary election.
While we had including a half-year contribution of $10 million in revenues from this RFP in our guidance, we don’t expect the cancellation to have a material impact on our guidance. Although this was a disappointing outcome, we continue to be very optimistic about GEO Care’s new business opportunities.
We have recently submitted a proposal in response to an RFP for the provision of mental health care services for the entire state prison system in Pennsylvania. Further, we are currently in discussions with several states around the country, and we are hopeful that GEO Care will be successful in winning one or two new contracts in 2008, as it has done for the last two years.
With regards to new replacement facility openings, GEO Care recently activated the new 238-bed South Florida Evaluation & Treatment Center in Florida City, which replaced the old center located in downtown Miami. Following the opening of the new South Florida Evaluation & Treatment Center the Florida legislature has proposed budget language that provides for the closure of the 100-bed South Florida Evaluation & Treatment Center Annex effective September 30.
The closure of the Annex will result in a loss of approximately $3.3 million in revenues for GEO Care in 2008. But simultaneously, the Florida legislature has also proposed an increase of the capacity of the new South Florida Evaluation Treatment Center and the Treasure Coast Forensic Treatment Center for a total of 73 beds.
The increased capacity at both centers will result in an increase of approximately $2 million in revenue for GEO Care in 2008, largely offsetting the closure of the Annex. We don’t expect the closure of the Annex to have any material impact on our previously issued guidance for 2008.
Additionally, GEO Care and GEO expect to open the new 720-bed Florida Civil Commitment Center in April 2009. The new facility will replace the old center in Arcadia, Florida.
In summary, we are very pleased with the financial performance of all three of our business units in the first quarter, and we remain optimistic about our outlook for 2008 in our business development efforts. We have what we believe is the largest organic pipeline in our industry, with 9100 beds under development for 2008 and 2009.
We expect to compete for more than 20,000 beds in the U.S. and overseas over the next 12 months, and we hope to win at least our market share.
Additionally, we are continuing to evaluate a number of facilities that can be expanded for our existing clients. This concludes my presentation and now I would like to open the call for any questions.
Operator
(Operator Instructions) Your first question comes from Kevin Campbell - Avondale.
Kevin Campbell - Avondale
George could you give us some greater clarity or detail on this Texas rebid? I know you gave us the size of the facilities, but was there a revenue amount that was at risk?
George C. Zoley
I really can’t give you much specifics on the situation which we are in active rebid status. So I know we’ve given you the revenues.
Kevin Campbell - Avondale
Yes, that might give away what maybe you might bid I suppose.
George C. Zoley
Part of that, its four or five facilities totaling 3,000 beds and we’ve had them for a number of years and we are going to compete aggressively and we hope to retain them. But they are managed only facilities so you know.
You know the margins in the managed only business.
Kevin Campbell - Avondale
And if you look at the expansion costs for the facility in Michigan I think the costs are pretty low per bed, does your $60 million estimate include FF&E and capitalized interest, or is it just the construction costs by themselves?
George C. Zoley
That’s another competitive situation I really can’t go into the specifics of. But we have an existing facility; basically we’re building only housing units.
That’s about as much as I can say.
Kevin Campbell - Avondale
Typically you don’t build on speculation; you generally have very good visibility. And I think you pride yourself on not doing that.
And is it safe to assume that you’ve got fairly good visibility as to who might use these beds?
George C. Zoley
Well, I think I’ve mentioned in my conference call script, a number of opportunities that would put these facilities to good use at either the Federal or the state level.
Kevin Campbell - Avondale
Could you talk about Coke County, I didn’t hear that mentioned in your script, what’s going on there?
George C. Zoley
Well, we own it now and we are looking at different possible uses, so it’s still under review and research but there’s no new announcement at this time. We do now own it outright.
Operator
Your next question comes from [inaudible] – Lehman Brothers.
Unidentified Analyst – Lehman Brothers
On the GEO Care opportunity in Pennsylvania, could you give us a little more color on at least on what you feel, you mentioned the political issues as to why they took back or canceled the contracts there. Could you maybe give a little more color as to what was going on there?
And do you foresee any similar risks to maybe other contract bids, or to any other part of your division?
George C. Zoley
We really don’t have much to add other than that we received a nice letter thanking us for our submittals and notifying us of the cancellation of RFP, and a statement that they hoped that we would be bidding on future opportunities. So we don’t know of there is finality to this decision or if there is a possibility it could be reviewed at a later date.
Unidentified Analyst – Lehman Brothers
On the international side, could you give us a little more color as to you mentioned the two U.K. RFPs where you were not selected.
Could you maybe give us a little color on what the competitive situation is there like was there a particular reason or something that you lacked with respect to not being selected for those two opportunities?
George C. Zoley
I think, I’ve said in the past that when the competition involves the smaller facilities, like 500-beds or a little bit more, that there’s a lot more competition and just about anybody can be selected on any particular day. That’s why we believe there is greater hope for success when the procurements for the super jails, involving 2,500-bed facilities, will be coming out as I said, by the end of the year.
Unidentified Analyst – Lehman Brothers
In the state section you mentioned in California, amongst other states, the need for 15,000 beds. Could you maybe give us a quick read on what you’re seeing is the situation in California today and what the possible timeline there could be for maybe a few more beds coming out of there?
George C. Zoley
Well, there is a number of states that are just concluding their legislative sessions or still in session. I think California is still in session.
Florida recently, I think they’re adjourning their session this week, and they approved 2,000 beds to be privately developed and managed. California I believe is still in session.
I think they’re still looking at the alternatives of how to expand their capacity. With respect to the Governors’ budget proposal to release 22,000 prisoners, we’re not aware of any movement in that direction to do that.
And if that does not occur, we believe the only logical alternative to releasing prisoners is to add capacity. We think that’s under active review through a number of different initiatives that would be done, primarily in state and possibly some out of state.
Operator
Your next question comes from T.C. Robillard - Banc of America Securities.
T.C. Robillard - Banc of America Securities
What was, do you have at your fingertips cash from operations in the quarter? Can you give us an update on the New Castle facility in terms of, have you started to replace the Arizona inmates with the Indiana inmates, just trying to get a sense as to how smoothly that transition’s going?
George C. Zoley
There has been a steady back filling of the beds by Indiana prisoners regarding those prisoners that are from Arizona and returning back to Arizona. And we expect that process to be completed by the middle or end of next month.
T.C. Robillard - Banc of America Securities
I know that there’s been a little bit of local business opposition to the expansion of your Aurora facility, which I’m sure is probably standard operating procedure when it comes to dealing on a local level. Is this something that’s normal, it’s just a normal little hiccup or does this run the risk of pushing your ability to break ground on that in the summer?
George C. Zoley
Well it’s not surprising that somebody would be in opposition to a prison or a detention expansion project. But we did get a unanimous vote from the planning commission and it’ll go to the city council in about a month for final approval.
T.C. Robillard - Banc of America Securities
And does this opposition, is there any, do they have any teeth to it? Or is this a situation where if you get the next round of approvals you are all set to go forward with the expansion?
George C. Zoley
No, we think we have a well-designed facility. We have made a number of concessions that were requested regarding water flow on the property and exit routes as well as entrances into the facility.
So we think we are well under control as to the site planning criteria that’s required to be mapped.
T.C. Robillard - Banc of America Securities
Jerry, the cash from ops number?
John G. O’Rourke
It’s about $2 million for the first quarter.
Operator
Your next question comes from Emily Shanks - Lehman Brothers.
Emily Shanks - Lehman Brothers
Around the accordion feature have you been in discussions with any banks about potential backups for that?
John G. O’Rourke
At this time last year we had redone our complete senior debt facility to the tune of about $365 million. And then we subsequently de-levered with the proceeds of $200, taking $200 million of the equity offering and bringing that down.
We have a very strong relationship with both BNP Paribas as our lead banker and the syndicate of banks; we’ll continue to have talks with them. And embedded in our current agreement is this accordion feature, which allows us to go back and get $150 million of that which we previously paid down a year ago.
So we believe that that is very doable. We’ll do it on our own time lines to give us the liquidity we need to continue to have dry powder.
Emily Shanks - Lehman Brothers
But that, just be clear it’s a traditional accordion in that it’s not committed yet?
John G. O’Rourke
That is correct.
Emily Shanks - Lehman Brothers
And then could you just let me know what tax rate you’re estimating for you EPS guidance?
George C. Zoley
38% to 39% for the year.
Emily Shanks - Lehman Brothers
And then is it possible to break out the non-recourse debt that’s under the current portion on the balance sheet?
George C. Zoley
We haven’t done that in past, we can look at that.
Operator
We have no further question in queue.
George C. Zoley
Well we thank everyone for joining us on this call and look forward to addressing you on our next call. Thank you.