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The GEO Group, Inc. (NYSE:GEO)

Q4 2008 Earnings Call Transcript

February 12, 2009 11:00 am ET

Executives

Pablo Paez – Director, Corporate Relations

George Zoley – Chairman & CEO

Brian Evans – VP, Finance & Treasurer

Jerry O'Rourke – CFO

Wayne Calabrese – Vice Chairman, President & COO

Analysts

Todd Van Fleet – First Analysis

Kevin Campbell – Avondale Partners

Manav Patnaik – Barclays Capital

Jason Trujillo – Barclays Capital

Greg Williams – Sidoti and Company

Bill Gilchrist – Westfield Capital

Rod Hans [ph] – Keypoint Capital [ph]

David Schneider – Hoover Investment

Operator

Good day, ladies and gentlemen and welcome to the Q4 2008 GEO Group earnings conference call. My name is Becky and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions).

I would now like to turn the presentation over to your host for today's call, Mr. Pablo Paez, Director of Corporate Relations. Please proceed.

Pablo Paez

Thank you, operator. Good morning everyone and thank you for joining us for today's discussion of the GEO Group's fourth 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 and Treasurer.

This morning we will discuss our fourth quarter performance and current business development activities and we'll conclude the call with a question-and-answer session. This conference call is also being webcast live on our web site at www.geogroupinc.com.

Today we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results may be found in the press release we issued this morning.

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?

George Zoley

Thank you, Pablo and good morning to everyone. Thank you for joining us today. We are very pleased with our fourth quarter results which continue to show a strong performance from our core operations in the U.S. Corrections, GEO Care and International Services. During the quarter, we successfully activated approximately 2650 new beds which demonstrate the continued strong business demanding our industry and our company's ability to meet that demand.

Our quarterly pro forma EPS, increased 48% year-over-year to $0.37. And our GAAP EPS increased to $0.39 representing a year-over-year increase of 95%.

Our quarterly operating revenues increased to $256.5 million. Our fourth quarter revenues were approximately $11 million below our previously guided range. That is because we discontinued two contracts during the quarter for the Delaware County, Pennsylvania facility and for the housing of Idaho Inmates in Texas. These two contracts moved into discontinued operations, thus reducing our quarterly revenues by approximately $11 million.

Our quarterly adjusted EBITDA grew 38% to $49 million year-over-year. Our adjusted free cash flow for the quarter was $35.6 million. The primary drivers for the growth in revenues and earnings in the quarter were the opening of our 1,500 bed company-owned facility in Laredo, Texas for the U.S. Marshals service, and the activation of a 500 bed expansion to our East Mississippi facility.

Our quarterly companywide average for per diem rate, excluding constructions, slightly increased to $54.62 from $54.39 a year ago. Our quarterly companywide average per diem rate was impacted by foreign exchange rates. However, our U.S. corrections average per diem rate increased 9% to $49.90.

This morning we also issued our initial guidance for 2009. We expect our 2009 operating revenues to be between $1.01 billion and $1.03 billion. This revenue estimate doesn’t include pass-through revenue construction in dollars. Our 2009, revenue projection is impacted by the discontinuation of two managed-only contracts at the end of 2008.

They are located in Delaware County in Pennsylvania, and Venus, Texas, and had a combined value of approximately $50 million in annual operating revenues. This revenue loss is offset by the additive revenues from the projects we activated during 2008, as well as the 2009 opening of two expansion projects in the U.S. in Clayton County, Georgia and Graceville, Florida, and one new facility in the U.K.

We expect our 2009, earnings to be in a pro forma range of $1.30 to a $1.36 per share, excluding $0.04 in startup expenses and international proposal costs. We expect our GAAP earnings to be in a range of $1.26 to $1.32. Our earnings guidance for 2009 reflects $3.5 million annualized impact of unfavorable foreign exchange rates and $2 million increase in interest expense due to cancellation of our interest rate swap agreements. We expect our first quarter operating revenues to be between $243 million and $248 million. This revenue estimate doesn’t include pass-through construction revenues.

We expect our first quarter earnings to be in a pro forma range of $0.27 to $0.28 per share, excluding $0.03 in startup expenses and international proposal costs. Compared to the fourth quarter 2008 pro forma earnings per share of $0.37, our first quarter 2009 earnings per share estimate is lower by approximately $0.09, which reflects the following factors:

First, a higher projected effective tax rate approximately 39% compared to 37%, which represents $0.01 per share; higher payroll tax cost estimated to be between $0.2 to $0.3 per share which are front-loaded in the first quarter; normal seasonal population fluctuations which represent $0.02 to $ 0.03 per share; and the discontinuation related close out cost of our Venus, Texas managed-only contract, which represent $0.1 per share. And higher interest expense related to the cancellation of our swap agreements as well as other factors including the absence of contract award fees that we generally received in the second and the fourth quarters, which combined represent $0.01 per share.

We expect our 2009 adjusted EBITDA to be in the range of $175 million to $180 million in our 2009 adjusted free cash flow to be in a range of $105 million to $110 million. Our guidance is based on a number of assumptions including the combined operation of our current contracts, projected occupancy levels and the activation of our announced projects under development as schedule. However, our guidance also doesn’t include any contribution or negative carrying cost associated with expansion of our North Lake Correctional facility and Michigan scheduled to be completed in the fourth quarter 2009.

Now I would like to discuss our 2009 and 2010 activations before I address our capital projects and financing, as well as our key market segments.

In January, we opened the 192-bed expansion at our Robert Dayton Federal Detention facility in Georgia which will add $4 million to our operating revenues. In the U.K. we are scheduled to assume operation of the 220-bed Harmondsworth Immigration Center in July 2009. This new facility will contribute $14 million in annual operating revenues.

We also expect to complete a 360-bed expansion of this facility by mid 2010. The 384-bed expansion of our Graceville, Florida facility has been delayed and now expected to open in the month of the July to coincide with the state’s new fiscal year. In Michigan, we expect to complete a 1,225-bed expansion of our 500-bed North Lake facility by October 2009. We expect to complete the 545-bed expansion of our Immigration Center in Tacoma by December 2009.

In Colorado we expect to complete the 1,100-bed expansion of the Aurora Immigration Detention facility in early 2010. In Florida, we expect to complete the 100-bed expansion of our Broward Immigration Transition Center in early 2010. Also in Florida, we expect to complete construction of the new 2,000-bed healthcare prison in Santa Rosa County by mid 2010. This new facility will be managed jointly by GEO and GEO Care, and will generate combined annual revenues of approximately $48 million.

Our growth pipeline requires the investment of company capital. Our current committed capital projects will require CapEx of approximately $155 million in 2009 and $10 million in 2010. As you may recall, last quarter we executed in accordion feature our credit facility and added $90 million in additional borrowing capacity to our revolver facility.

Our expanded revolver now has a total capacity of $240 million. At year end, we had $74 million of borrowings outstanding under the revolver along with $45 million set aside for letters of credit.

Our cash on hand was approximately $32 million. With this expanded borrowing capacity we have the necessary capital to support our previously committed capital, while retaining approximately $60 million in liquidity when these projects are completed.

We also have an additional accordion feature on our credit facility for another $150 million.

I would now like to address our market segments beginning with the state market. We are pleased that our 2009 financial guidance reflects an 8% increase in EBITDA performance to arrive from our ten correctional state clients over 2008. The state correctional EBITDA represents only approximately one third of our total company EBITDA while providing 40% of our revenues.

We presently don’t house any of the state prisoners and therefore don’t have the exposure to prisoners been returned home to their home states. But we are well aware that states are facing significant budget deficits which can create pressure on our per diem rates, but they also create more interest to privatize new prison projects.

Our state guidance assumes mostly flat per diem rates from our states clients, with three states required to give us increase. The EBITDA gross has made possible by the growth in additional facility and beds at four of our state clients, such as New Mexico, Mississippi, Florida, and Indiana. With the exception of our graceful Florida 384 bed expansion all of their expansion projects were already activated around to 2008.

We expect states will also receive additional help from the stimulus package being debated personally in Congress and expected to pass in next few days. As much as $150 billion will be provided for states and local municipalities. This additional funding will help states cover some of their budget shortfalls. That been said we believe that the opportunities at the state level out weigh the potential near term challenges.

Our 10 state clients continue to face significant correctional bed needs and in being population and will likely continue to increase. The states across the country face budgetary pressures; their ability to achieve cost savings becomes even more important priority which leads to the use of public private partnerships to develop the managed, major correctional infrastructure projects.

We believe the states of Oklahoma, Idaho, California, Georgia, Arizona, Virginia others have an aggregate need for approximately 15,000 new Correctional beds or more.

Idaho has recently indicated its desire to privatize an existing correctional facility to achieve operational cost savings. The State of Florida has issued two RFPs for private beds, one involving 15,000 expansion beds and another involving the development of the new 1000 beds facility.

In the Arizona the prior administration issued in RFP for 1,500 beds which is yet to be awarded. With the change in administration it's possible that additional RFPs maybe issued for private beds. Last year California issued a request for information regarding additional out of state beds, while no awards have been made yet. We continue to believe that California has a need for several thousands additional personal beds in the state and out of the state. In Virginia we're continuing to negotiate a proposal for 2,000 bed correctional facility.

Turning to the federal market, the primary driver for growth continues to be the detention of criminal aliens. We are pleased that our 2009 guidance reflects a 21% increase in EBITDA contribution from our federal clients over 2008. Federal client EBITDA now represents one half of our total company EBITDA, even though it represents only 37% of our revenues.

The added profitability is mostly derived from company-owned or controlled facilities. U.S. Marshals and the BOP, both house criminal aliens facing charges or serving time as a result of criminal conviction and ICE houses aliens' populations facing the deportation proceedings. ICE populations include both undocumented aliens and criminal aliens who have completed their federal or state sentences.

In 2008, ICE launched a new $800 million initiative targeting criminal aliens throughout the country, funding for this secured communities initiative was subsequently increased to $1 billion by Congress. Current estimates showed that the federal, state and local prisons and jails hold between 300 and 450,000 criminal aliens who are deportable upon completing their sentences.

While we may see some changes in policy with a new administration, we believe that both the administration and Congress will continue to support the federal initiatives to target detained and deport criminal aliens throughout the country. My personal view is that U.S. Board of Security and the Detention Beds necessary to detain illegal aliens will increasingly be seen as a national imperative to protect U.S. workers and their jobs.

We house a population of approximately 10,000 aliens at our Federal facilities. Of their population, two thirds are criminal aliens with only one third non-criminal aliens. With regard to specific projects, the BOP has four RFPs outstanding related to the housing of criminal aliens, CARS 8 through 11. CARS 8 and 9 will result in awards with a combined total of 4,000 new beds. We now expect these procurements to be awarded in the next 90 days which will likely coincide with the final passage of a new federal budget under the new administration.

CARS 10 and CARS 11 will result in awards with a combined total of 3,800 beds which are currently provided at two existing private facilities. We expect these awards to be made in the second quarter. ICE has issued three pre-solicitation notes or sources sought notices.

Two of these opportunities relate to the expansion of GEO owned facilities bought 545 beds at our Tacoma, Washington facility and buy 100 beds at our Broward facility. The third opportunity relates to 2,200 new beds to be developed in managing the Southern California area. We expect the RFP for this project to be issued this quarter.

Finally, I’d like to update you on our international and GEO Care business development efforts in South Africa. We are responding to our fees that were issued in December for the construction management of 12,000 new beds. The bids are due on April 30th and the contract awards are expected in the fourth quarter of this year.

GEO Care has been involved with two separate RFPs in the state of Georgia which have been temporarily suspended but are expected to be reissued in the near future. The first opportunity relates to the renovation construction and operation of a state psychiatric hospital with a minimum of 600 beds. The second opportunity relates to the development in management of a 250-bed civil psychiatric hospital in the Atlanta area.

In closing, we are pleased with our fourth quarter results and we have issued our outlook for 2009 which reflects the continued growth of our company in a tough economic environment. The fundamentals of our industry remains strong but continued to be in our primary business segments at the federal and state levels, as evidenced by our project pipeline in the numerous RFPs.

We have expended our credit agreements to support our capital projects which will increase our long-term asset book value to approximately $1 billion by 2010. It continued to drive our future growth. We expect to compete for more then 20,000 beds in the U.S. and overseas in the next 12 months. We had hoped to win at least of our fair share.

In a separate press release we issued this morning, we announced the retirement of our CFO, Jerry O'Rourke effected August 2nd, after 18 years of service to GEO. Jerry has done a great job overseeing our financial management functions since 1991. His professionalism and dedication to our company are very much appreciated.

Our Vice President of Finance and Treasury, Brian Evans will succeed Jerry in August. And Jerry will remain available to our company on a part time consulting basis. Brian is uniquely qualified to lead our financial management team having been with our company since 2000 and serving in increasingly senior roles. Both Jerry and Brian are with us today on the call.

This concludes my presentation. I would now like to open the call to any questions.

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from the line of Todd Van Fleet of First Analysis. Please proceed.

Todd Van Fleet – First Analysis

Good morning, guys. Nice quarter. I wanted to I guess ask kind of a fairly involved to the questions on the revenue guidance for 2009 and to kind of couple that with your thoughts on the pricing environment. I mean if we look at your guidance for Q1, excuse me, revenue guidance, I believe is what $240 million to $245 million. And we consider, I guess the, I’m sorry, 243 to 248, but we consider the additions I guess throughout the course of the year, which at this point I think is the expansion at Georgia, right? And then you have the other expansion at Graceville, Florida, is that right?

George Zoley

Yes.

Todd Van Fleet – First Analysis

And those two expansions I guess combined on an annualized basis are maybe you know what, 10 million I guess in revenue? I’m just wondering given the pricing environment that’s out there, given that those are the only two additional pieces of business adding revenue kind of to the pie in 2009; if you take Q1, it’s a 245 million, you annualized that you get 980 million for the full year, may be you throw in you get some perhaps partial quarter benefit from the expansion in Georgia so may be you add another may be I don’t know 7 million to 8 million on to that probably less on that actually to account for the two expanded facilities coming on in 2009. So may be you are at 985 million but your guidance is to 1.01 billion to 1.03 billion, so you've got an additional anywhere from $25 million to $45 million of revenue included in the guidance so correct me if I am incorrect at any point along the way here but that’s kind of the way I see your outlook for the year at this point.

Now you couple that with what has what we see you play in the landscape now regarding pricing you've talked a little bit about the states you said that you expect may be some pricing improvement from three customers may be another 7 it could be, it sounded like you think that pricing at the state level is going to hold flat by and large is that right?

George Zoley

Per diems are holding flat but EBITDA is increasing.

Todd Van Fleet – First Analysis

Right EBITDA is increase, so I am just thinking about revenue here for the moment.

George Zoley

And revenues are increasing because, Todd you are aware that we open several facilities last year which will provide added to a normalized revenue this year.

Todd Van Fleet – First Analysis

Of course, and then what's coming on incrementally throughout 2009 because as I said with the exception of the Florida expansion and the Georgia expansion. Q1 and perhaps may be the seasonality impact of the Senate [ph]. Q1 should look pretty much as the same as the rest of the quarter. Is that fair?

Brian Evans

Well I think, Todd, its Brian, you have the normalization going in to Q2 of the cyclicality that George mentioned previously that we said.

Todd Van Fleet – First Analysis

Okay. So –

Brian Evans

And you also have the some facilities normalizing through Q1 like the Maverick County facility coming online this quarter and its population is ramping up during the quarter.

Todd Van Fleet – First Analysis

Maverick County was 10 million a year, right? So you didn’t really get much of a contribution from Maverick County in Q4 then.

George Zoley

No.

Todd Van Fleet – First Analysis

Okay. Alright, so I am just trying to reconcile kind of that $25 million to $45 million delta I guess in my own mind. So that can be accounted for through Maverick County –

George Zoley

And then Todd, we also have the Harmondsworth project coming online in the second half of the year in the U.K.

Todd Van Fleet – First Analysis

Okay, okay. And then seasonality from the Fed is probably another portion of that, then kin do of fill that up.

George Zoley

That’s right.

Todd Van Fleet – First Analysis

Okay. And then with respect to pricing at the Federal level. What's your expectation there?

George Zoley

We really don’t see any changes there.

Todd Van Fleet – First Analysis

And when – by saying you don’t see any changes. Do you mean that you don’t see any changes from 2004 meaning prices will be flat or do you expect that changes from historical patterns which is you'll be able to get some degree of increase?

George Zoley

In the Federal contracts it's not really a pricing issue, pricing is already establish for the terms of the agreements which are very lengthy as you know. It really becomes an occupancy issue whether the fluctuations in occupancy impact your financial performance which is for the most part of function of whether you have a guarantee. Two thirds of our contract having minimum guarantee, only one third having slowly per diem of our total company revenues.

Todd Van Fleet – First Analysis

Right, right.

George Zoley

We are fortunate that, with the growth of that’s occurred primarily in the federal sector that those contracts have brought with them these minimum guarantees which provide the stability certainly on the pricing side and although there maybe occupancy fluctuations where there is a minimum guarantee, they are kind of neutral or irrelevant, where there is not, then they are meaningful. But in two-thirds of the cases we have minimum guarantee.

Todd Van Fleet – First Analysis

Okay. And on that U.K. contract that starts mid-year, then do you get the full annualized benefit of that revenue, day one, I would imagine you do because it's management only.

Brian Evans

And it's an existing facility where the detainees are already there.

Todd Van Fleet – First Analysis

Okay. Thank you very much.

Operator

And your next question comes from the line of Kevin Campbell of Avondale Partners. Please proceed.

Kevin Campbell – Avondale Partners

Thanks. Just another question about pricing as it relates to states. And you had said that you have that essential in your models or in your guidance as flat. Is that just flat starting in the back half of the year because state budgets are already set through in the first half of '09 or are you assuming flat for the first and second quarter as well from the state in general?

George Zoley

I said they are mostly flat with three of the ten will result in increases.

Kevin Campbell – Avondale Partners

Right. But the other seven then you are assuming flat year-over-year in the first and second quarters as well?

George Zoley

Yes.

Kevin Campbell – Avondale Partners

Okay. And could you mention to as it relates to your liquidity, you commented on having I think $60 million left after your committed projects, which I think was a similar number that you used last quarter. Does that include the Comanche County development that you have in the works or is that still as it was last quarter just for the purchase price of the land and some of the preliminary costs?

George Zoley

Just the latter. We've only committed ourselves to the purchase of the land in to totally, the planning cost of the facility.

Kevin Campbell – Avondale Partners

Okay. And what are your thoughts on that facility right now? Are you planning to move forward with construction, when you gave your CapEx guidance, it doesn’t sound like it based on the numbers that you use.

George Zoley

We are not planning to move forward construction until we have more visibility as to who the client is and what the contract terms are.

Kevin Campbell – Avondale Partners

Okay.

George Zoley

And the sizing of the project.

Kevin Campbell – Avondale Partners

Okay. Thank you very much.

Operator

And your next question comes from the line of Manav Patnaik of Barclays Capital. Please proceed.

Manav Patnaik – Barclays Capital

Hi guys. I guess, we've already talked about per diems. Can you give us a feel for with your discussions with customers, you mentioned a few of the different RFIs, RFPs felicitations out there? What are you hearing with them? Clearly they are all holding back and are delaying these contracts coming out, but around what timeframe do you expect these state awards just sort of be awarded or at least starts moving ahead.

George Zoley

I would expect that some of the things we are following in this. I guess I'm thinking about Georgia or California. I would think there will be some decisions by the end of the second quarter, beginning of the third.

Manav Patnaik – Barclays Capital

Okay. And I guess, once they are awarded, are most of them, with respect to at least your pipeline, going to be pretty much a question of ramp up or would there be a lag which you might need to expand some other facilities, what’s your thoughts on that?

George Zoley

Well, in the case of the GEO Care, GEO Care is able to move faster than corrections because it usually takes over existing facilities whilst developing new one. So it will be a faster lead time to get to generation of revenues which could be this year. And as we've said in our conference call that our present guidance does not reflect the award of any new contracts in our guidance. So we are hopeful that we win some new contracts either through GEO Care or through U.S. Corrections, and that would be added to the guidance we've given.

Manav Patnaik – Barclays Capital

Got it. And I guess also on the GNA line, you did a good job I think sort of keeping those in the range. What level should we assume going forward for '09?

George Zoley

Probably about 6% to 6.2% of revenue.

Manav Patnaik – Barclays Capital

Okay. And I guess that’s about it. Finally I guess just congratulations and thank you Jerry, and congrats to Brian as well.

Jerry O’Rourke

Thank you.

Brian Evans

Thank you.

Operator

And your next question comes from the line of Emily Shanks of Barclays Capital. Please proceed.

Jason Trujillo – Barclays Capital

Hi, good morning. This is actually Jason Trujillo in for Emily. Just to come back to pricing at the state level, are you currently seeing any states come to you to try to renegotiate some of the contract pricing lower?

George Zoley

Yes. Out of our 10, we've had couple discussions with states who are looking to revise scope of services. What can we do to help them reduce cost? And we had opportunities of this nature in the past where we've been cooperative in finding a mutually agreeable solution to reduce scope of services while giving a reduction in cost.

Jason Trujillo – Barclays Capital

Alright, great. That’s very helpful. And so given your guidance then, do you assume that you’re going to see any reduction in state price in general whether it’s a cut back in services or do you think for the year for most part, pricing is pretty stable at what you are baking in right now for your guidance?

George Zoley

If the outcome is as I just described that is a discussion of how to reduce scope of services, it is really neutral to our EBITDA. In that, our modeling a sense based on what we know at this time.

Jason Trujillo – Barclays Capital

Yes, that’s very helpful. I was just trying to get it and then just lastly as of the 4Q and, generally who are your three largest customers and what percent of sales do they represent, if you can give that?

George Zoley

Our three largest customers?

Jason Trujillo – Barclays Capital

Yes.

George Zoley

Would be the three Federal agencies.

Jason Trujillo – Barclays Capital

And how much of revenues they represent?

George Zoley

They represent let's say, I think 37% of our revenues and 50% of our EBITDA.

Jason Trujillo – Barclays Capital

Alright, great. Thank you very much.

Operator

And your next question is a follow-up question from Todd Van Fleet of First Analysis. Please proceed.

Todd Van Fleet – First Analysis

I think the outlook on the pricing that you guys are kind of describing is little bit different than perhaps what we heard earlier. This week where there was a little bit I think more pessimism that was assumed. I’m just wondering, I’m assuming we get the stimulus bill sometime in the near future here. Do you think that, I know you had said that with respect to maybe California and Georgia you thought maybe at the end of Q2, beginning in Q3 but…

Unidentified Speaker

For states.

Todd Van Fleet – First Analysis

For states right, but so do you think the states by and large, your state customers; your 10 state customers will have a better picture and be giving you a better understanding and better visibility on what your per diem is going to be with them by the end of Q2 beginning of Q3 or will it be a little bit sooner than that?

George Zoley

Well, we think we have some idea right now, but most of these states official budgets start July 1. So the decisions will likely be made in the next 60 days to 90 days officially. So we think we have some idea of what they are thinking about right now, because they are not waiting for the next 60 days to 90 days they are in discussions regarding their budgets with all their vendors and their agencies.

Todd Van Fleet – First Analysis

So in –

George Zoley

Let me add that our situation is different and may be other companies in our industry that we are not materially dependent on the out-of-state prisoner business. And that’s possibly under more pressure than the instate business. Often people have to justify why are you sending people out of state. Presently we don’t have any prisoners out of state. So we're not worried about that kind of exposure and we have only ten state clients and we know them well and we've had done business with them 10 years, 15 years, 20 years.

Todd Van Fleet – First Analysis

I guess what I'm wondering is then by the time your next earnings call comes around for Q1 and early, what I guess is probably early May if there is any material change in your thinking regarding pricing for state customers, you'd be able to have that incorporated into your thinking at that point in time. Or do you think you would come even after that?

George Zoley

I'd hope so.

Todd Van Fleet – First Analysis

Okay, and now let me ask about Baldwin the construction is going to be ending I guess our pretty much complete by October right.

George Zoley

Yes.

Todd Van Fleet – First Analysis

And, try to assume then that the caring cost associated with that the deprecation in such you are going to have to start the recording in Q4?

George Zoley

Yes.

Todd Van Fleet – First Analysis

Or fully completed kind of maintained to a certain agreed facility, in Q4?

George Zoley

Yes.

Todd Van Fleet – First Analysis

Okay. And –

Brian Evans

That into the number.

George Zoley

That would be $0.01 per quarter.

Todd Van Fleet – First Analysis

That would be –

George Zoley

We’ve taken what we think is a conservative or neutral position that we have been assumed an award on that facility and the revenues that would be derived from such an award on an own facility and we haven't assumed the carrying cost of $0.01.

Todd Van Fleet – First Analysis

Okay. So but in 130 to 136, that penny and just to understand it’s a penny of cost associated with Baldwin incrementally after it’s done?

George Zoley

Yes.

Todd Van Fleet – First Analysis

Attributed to interest expense and you are not capitalizing interest anymore you are depreciating that’s one penny per quarter?

George Zoley

Right, it’s really just the depreciation and the amortization the property taxes, interest expense is already factor in because we know we are going to have that borrowing in place. So…

Todd Van Fleet – First Analysis

Okay. So that but that one penny per quarter, is not in the 130 to 136?

George Zoley

Right. That one penny is not factored in there.

Todd Van Fleet – First Analysis

Okay. And so I think you guys have been based on kind of the targeted customer there, and based on who you are targeted customer is at this stage. How long would it be between the time you would expect an RSP for that procurement, so if it’s one of the corporate hearings let’s say. We get an RSP, the RSP process takes X amount of time. They award the contract, that facility is up and ready to go and pretty short order then?

George Zoley

Yes.

Todd Van Fleet – First Analysis

Okay. One more, you guys impacted at all but what’s going on there in Victoria and Australia in terms of the fires any issues at your facilities.

George Zoley

Wayne?

Wayne Calabrese

No, we are not. Todd, its Wayne. They are not affecting our facility in Victoria or even in New South Wales, nothing's been affected by those buyers.

Todd Van Fleet – First Analysis

Okay. Good to hear. Thanks.

Operator

And your next question come the line of Greg Williams of Sidoti and Company. Please proceed.

Greg Williams – Sidoti and Company

Good morning and thanks for taking my call. I just had a quick question on your CapEx needs and your borrowing capacity. The CapEx first off, I think I heard 155 million needed that does not include the maintenance CapEx, is it all true?

George Zoley

That’s correct.

Greg Williams – Sidoti and Company

Okay, and add so maybe another 15 million to that?

Brian Evans

10 million to 15 million.

Greg Williams – Sidoti and Company

10 million to 15 million. Okay. And you borrowed 75 million on your 240 million (inaudible) facility.

Brian Evans

At the end of the year, outstanding borrows was $74 million.

Greg Williams – Sidoti and Company

Okay. And then, the letters of credit for 45 million, I guess just looking at –

Brian Evans

I would say on the liquidity number of 60 million, we have factored in the maintains CapEx. So I think what George has discussed is what our project CapEx is. But from our liquidity perspective we have factored that 10 million to 15 million. And so, the 60 million is net of all CapEx, including maintenance CapEx.

Greg Williams – Sidoti and Company

Okay, great. That clears it up. And if that new projects come along, Idaho or some of the other RFP’s start ramping up, can you talk about the accordion feature, how quickly can you get the $150 million in light of what goes on there?

George Zoley

Ask that again please.

Brian Evans

Repeat that one more time.

Greg Williams – Sidoti and Company

Just the $150 million accordion feature, are the banks already lined up. How quickly can you get that capital (inaudible)?

Brian Evans

Well, it's a feature in the credit facility that allows us to go to exciting lenders, but it would be a new money raise. So, it will take to a normal process that you'd have to go through with a bank deal at probably two to four week, maybe six of the outset.

Greg Williams – Sidoti and Company

Okay. Sort of six weeks. Thank you.

Brian Evans

Yes, I think we want to clarify just make sure you understand on the Michigan facility, when we said it was a penny, negative in caring cost potentially in the fourth quarter of 2009, that’s a penny per quarter. So, it'd be $0.04 annualized.

George Zoley

But it's only $0.01 in 2009.

Brian Evans

In 2009. That’s right.

Operator

And your next question comes from the line of Bill Gilchrist of Westfield Capital. Please proceed.

Bill Gilchrist – Westfield Capital

Hi, thanks for taking my questions. The first one I had was, can you guys talk about what the outlook is for labor, obviously it's a big component of your cost for operating the facilities. What kind of inflationary outlook should we be thinking about and then, what you seeing in terms of candidate pool, quantity, quality and how does this potentially benefit you guys.

George Zoley

From our past discussions that labor represents almost 60% of our cost and it fluctuates from facility to facility, whether there is a wage determination. But it's always the majority of our operating cost and with an economy which the unemployment rate continues to rise. That creates a larger available labor pool to us for future applications helps us reduce our overtime and stabilize our labor cost actually. So, it's actually a positive impact to our business, which is a labor intensive business.

Bill Gilchrist – Westfield Capital

In their sense, have you guys run to the numbers on how much overtime and turnover cost in a typical year you have to pay?

George Zoley

I don’t think we have that as a percentage, but it is significant. Its millions of dollars.

Bill Gilchrist – Westfield Capital

Okay. Second question I had, George, can you talk a little bit about the circumstances around, George your GEO Care RFP situation. What I’m going to hear is just, they pulled it now but do you guys expect it to come back out at some point who knows when? But, why would they put it back out there if they just took it off?

George Zoley

I’m hesitant to try to characterize the view of a governmental agency but I guess I will try to take that risk in this case. They issued a very complicated RFP in which apparently only company responded to. I believe it was us… I think there is a desire to have a bit more competition, and I think we'll see some technical revisions to the RFP that will make it less complicated and will attract more competition.

Bill Gilchrist – Westfield Capital

Okay, great. Thanks. And Jerry thanks a lot for all your hard work.

Jerry O’Rourke

Thanks, Bill.

Operator

And your next question comes from the line of Rod Hans [ph] of Keypoint Capital [ph]. Please proceed.

Rod Hans – Keypoint Capital

Thanks for taking my question. On the 8,000 beds you have scheduled for development in '09 and 2010, can you just outline that whether those are assigned or speculative and how that differs from your competitors, and then also if you could just walk through the split between U.S. International and GEO Care?

George Zoley

Well the 8,000 beds are several projects, I can go through them one at a time, I guess. Clayton County expansion in Georgia, that is open and that has a client which is the U.S. Marshall Service. Graceville expansion we had announced that we are expecting that facility to open July 1, and that has a client in State of Florida. That’s 384 beds. Harmondsworth Immigration Center, 260 beds, that’s in the U.K. There is an existing client there. North Lake expansion which will total 1,725 beds, that is a speculative project. There is not a signed client at this time. To come with that expansion of 545 beds, we have a facility in Tacoma presently, that’s 1,000 beds. It’s with ICE. There is a solicitation or pre-solicitation to asking for another 500 beds in that area. So we are responding to that solicitation with our expansion of 545 beds. In Delaware County, we are operating a 600-bed facility as a pre-solicitation or a natural solicitation asking for at least 100 more beds in that area. We are responding to that solicitation and actually expanding that facility by 294 beds.

Aurora Processing Center at Colorado, that is presently a 400-bed facility for ICE. We are expanding it by 1,100 beds and there is not a signed up client yet for those 1,100 beds. We are hopeful that it will be under federal usage among the any of the three federal agencies. Harmondsworth expansion in the U.K., once again another 360 beds expansion. There is an existing client in the U.K. for those 360 beds. Santa Rosa prison, that's a 200 bed facility that we'll begin construction very shortly, it's being designed presently and the client there is in the State of Florida. We have identified a state type project in Oklahoma and acquired land for that project, it could be for approximately 1500 beds we are just in the planning stages on that project, we do not have a signed up state client as yet. That completes the 8360 beds of pipeline. What was your second question?

Rod Hans – Keypoint Capital

The second question is how that differs from you competitors in terms of having, spec that of project.

George Zoley

I think in general people see us as being more conservative in this speculative business. We have said that, we prefer to expand facilities and to have a shorter window as far as when we believe a client would need these beds, we don’t have is a company philosophy to have a certain amount of beds in inventory. We don’t have that kind of aggressive philosophy, we try to target any kind of speculative or quasi-speculative project based on a probable client that will need beds in the near future.

Rod Hans – Keypoint Capital

Okay thank you.

Operator

And your next question comes from the line of Kevin Campbell of Avondale Partners. Please proceed.

Kevin Campbell – Avondale Partners

Hi. Thanks. Just a quick follow-up as it relates to Baldwin and depreciation and amortization annual expenses you expect in the fourth quarter, why would you not include that in your guidance if you expect that to come online?

George Zoley

Well, if we expect it to come online then we would likely have to model the revenues as well. We thought this isn’t affecting neutral treatment of the probable outcome. So if we won the contract as we hope we would have a beneficial impact to our guidance.

Kevin Campbell – Avondale Partners

Right, but either way I mean if you don’t win the contract, then you'll still have those costs, is that correct?

George Zoley

We will have the additive $0.01.

Kevin Campbell – Avondale Partners

Right.

George Zoley

Fourth quarter. But if we won a contract it would be much more material in a beneficial sense than that.

Kevin Campbell – Avondale Partners

Okay, thank you.

Operator

And your next question comes from the line of David Schneider of Hoover Investment. Please proceed.

David Schneider – Hoover Investment

Hi, there. Maybe you can correct if I am wrong but. I've been reading things about potential changes and how criminal aliens are treated. Currently a lot are deported after they serve their sentences. It seems that there is a movement towards not deporting them and I am asking them to swear that they won't be turned to gang life and then all of a sudden they are made a citizen and I guess giving free housing, food and a college education on the tax payer's dime. So are you aware of any those kinds of provisions and what's floating around in Congress and if that were to occur how big of a positive would it be for the industry?

George Zoley

No, I am not really aware of any policy changes of that nature. I would remind you that, we hold approximately 10,000 aliens, one third of them are undocumented aliens, two-thirds are criminal aliens, and that’s where a lot of the new funding is going is to provide detention that’s based to house criminal aliens that have been identified and either existing in these corrections system at the federal, state, and local levels having almost served or having served their time and need to be sent to one of the centers for deportation. I think that policy is intact and I don’t believe it's going to be modified. I think there is by parts and support to properly detain criminal aliens, identify them, detain them and deport them.

David Schneider – Hoover Investment

Okay. From what I've read, the change in that would be in the final stage in deportation. The reason I brought it up is that after they serve their time, if their let out in the community and then it's quite probable they are going to not become good citizens, but crime would increase as result of these policy changes. So, we all have to wait and see.

George Zoley

Yes. I find it hard to believe that they would make such a change. As you may recall from my discussions that the funding for this program was increased from $800 million to $1 billion, because of the strong support for the identification of these criminal aliens and their deportation. This is a part of the secured community's initiative.

David Schneider – Hoover Investment

Okay.

George Zoley

Okay. Any other questions?

Operator

Your final question comes from line of Todd Van Fleet of First Analysis please proceed.

Todd Van Fleet – First Analysis

I'm trying to quantify the impact of seasonality on the federal front. Is there way that you can help us out there in terms of the numbers inmates or the decline of the numbers inmates processed in December? How much of that is come back in March. You think it’s going to escalate in June, September quarters. I'm just trying to understand that flow a little bit better seeing how it seems to be a meaningful part of the revenue outlook?

Brian Evans

One other thing that we want to bring up in Q4, you recall our 52-53 week calendar year. So this year is a 53 week year, and in Q4 there is an extra week. So that probably helps you bridge some of that revenue that you are trying to get to for the year-to-date number. And then, I think on the granularity that you are looking for on the population, we are probably not willing to give that, but it’s several million of dollars or more relative to that cyclicality that we experienced in the first quarter.

Todd Van Fleet – First Analysis

Okay. So instead of 12 weeks, it's 13 weeks this year in Q4?

Brian Evans

In Q4.

Todd Van Fleet – First Analysis

That’s another maybe $20 million in revenue then. Okay. And then, so the with the population as it waned in December, have you seen it come back then in the March quarter to this point? And is the funding there, and there's no funding related issues I guess that are holding up processing of illegal immigrants and such.

George Zoley

No, not that we are aware of, also part of it is judges take vacations, and in the months of December and even in early January and it takes a while to get the judicial system back in swing in detaining these people and putting them into the system. So, we are seeing all the numbers come up, we receive daily census reports, and they are coming up. And we expect by I would think by the end of this month, they get back to normal.

Todd Van Fleet – First Analysis

And George, for that type of effect then or the judges take vacation, you see the swelling perhaps not that nobody stop enforcing the laws, but you would see kind of a bulging in local jails and populations. And then once the process starts working again, case flows start getting processed. You would see those individuals transferred to other facilities outside of jails, is that accurate?

George Zoley

I am not sure. Some of these jails are only 40 beds, 70 beds. You are talking about world locations along the southern boarder, very small communities which have very small jails, which is incongruent with the numbers coming across the border. But that’s who is fighting this battle and securing the borders. It’s really small world communities along the southern border with very limited capabilities.

Todd Van Fleet – First Analysis

Right. But just the understanding and the seasonality and what seasonality is in this business at federal level when it comes to federal prisoners, and affecting your population. Well we know, flows across the border tend to wane because of the holidays and so forth. You say that there are vacations, so the process works a little bit more slowly. But I would think that the folks that are out there collecting illegal immigrants, criminals, they still keep on doing what they are supposed to be doing. So I’m just trying to understand, when we talk about seasonality, is it related to the flow of inmates or flow of illegals across the border? Is it crime in general tends to wane around the holidays? And so when you talk about seasonality, just so there is no misunderstanding, what are you referring to when you refer to see seasonality? Its sounds like there is case flow for judges. It's slower across the border. What else?

George Zoley

Well, it's certainly those two dimensions. So it is a multi-dimensional issue. One to mention is the flow; less people coming across the borders, staying in Mexico or other places of origin. The second dimension is the judges take holidays, and nobody is sent and they are not processed. And I guess the third dimension is what I had said about the capacity of the facilities. And the capacity of the jurisdictions that are involved in this Secure Border Detention Initiative are very small world communities with limited capacity. The numbers of people just don’t build up in the facility. If you only have 40 beds, you have 40 beds. You can never have more than that number of detaining.

Todd Van Fleet – First Analysis

So, once they are full they just don’t pursue anymore.

George Zoley

That’s correct.

Todd Van Fleet – First Analysis

Okay. Very good. Thank you.

George Zoley

Yes.

Operator

And there are no further questions. I would now like to turn the call back over to George Zoley for closing remarks.

George Zoley

Well, thank you everyone for joining us on this call. We look forward to addressing you in the next one. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: The GEO Group, Inc. Q4 2008 Earnings Call Transcript
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