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Corrections Corporation of America (NYSE:CXW)

Q1 2012 Earnings Call

May 3, 2012 11:00 am ET

Executives

Damon T. Hininger – President and Chief Executive Officer

Todd J. Mullenger – Executive Vice President and Chief Financial Officer

Analysts

Todd Van Fleet – First Analysis Corp.

Manav Patnaik – Barclays Capital

Kevin Mcveigh – Macquarie Research Equities

Kevin Campbell – Avondale Partners

Clint Fendley – Davenport & Company, LLC

Operator

Good morning everyone, and welcome to CCA’s first quarter 2012 earnings conference call. If you need a copy of our press release or supplemental financial data both documents are available on the investor page of our website at www.cca.com. Before we begin, let me remind today's listeners that this call contains forward-looking statements, pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made today. Factors that could cause operating and financial results to differ are described in the press release as well as our Form 10-K and other documents filed with the SEC.

This call may include discussions of non-GAAP measures. The reconciliation of the most comparable GAAP financial measurement is provided in our corresponding earnings release and included in the supplemental financial data on our website.

We are under no obligation to update or revise any forward-looking statements that maybe made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

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

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

Damon T. Hininger

Thank you, Peter. Good morning and thank you for joining our call today. With me today is our Chairman, John Ferguson, and our CFO, Todd Mullenger. Also joining us is our Chief Corrections Officer, Harley Lappin and VP of Finance, David Garfinkle.

In a few minutes, Todd will take you through the numbers for the quarter. Then I’ll discuss the marketplace and strategic alternatives, after which we look forward to taking your questions.

First though, I’d like to make a couple of comments on the past quarter. For the quarter, we had strong cash flow performance with FFO being north of $82 million, and also reported 3% for EPS for the quarter.

We also for the quarter had a very exciting announcement with our new dividend, which we announced in late February, and that announcement indicated that we intend to do on an annual basis about $0.80 per share and also $0.20 per quarter and we intend to declare our first dividend year later this month, and then have a very first payment to this new policy in next month in June.

We see this is a very good next step after successful share repurchase program, to create more shareholder value that is more predictable for investors. And with this feature we now see us as even a more attractive investment. We’ve demonstrated extremely durable cash flows over the last three years, with those buying over $500 million in shares and less than $18. But also during that period of time we had 6,400 new beds. We added no new debt to the balance sheet and we thought no top or bottom line deterioration.

And we’ve a very unique permanent feature in the business with the delta between our maintenance CapEx and depreciation amortization. And with such, we intend to allocate a third of our AFFO towards the dividend and two thirds or said in another way 100% of our net income towards new growth going forward. And we think that puts us in a very unique category for investment. Also for the quarter, we have some very exciting either start ups or transitions during quarter most notably in January, we transitioned to our new Lake Erie facility up in Ohio.

Later in the quarter, we started our new contract with Puerto Rico by ramping up their inmate population in our Cimarron, Okalahoma facility. And most recently, we opened our new Jenkins county facility in Georgia for the State of Georgia the house inmates there. We also for the quarter closed on our new bank facility in January and also very excited about the terms and conditions of this new facility. But also allowing us to have more flexibilities we think about our debts strategy going forward.

And the United States Marshals service we had challenges also with our population and that was the biggest factor as we thought about our guidance and forecast for the rest of the 2012. And really the headline here is that the BOP added capacity in California and Texas. But also a change in sensing for crack and powder cocaine. New capacity equaled about 4,000 beds and about 1,700 individuals were released early by the BOP in the fourth quarter of last year and the first quarter of this year due to this sensing change. These two events will allow the Marshals Service to achieve a lower average daily population nationwide and achieve a lower level in January than they forecasted in their 2012 projections. And in a few minutes, I will provide a little more detail around this event with the Marshals Service.

We continued our focus on cost and efficiencies as it is announced in the press release, we had some noise in the quarter with the activation of Jenkins, the ramp up of Puerto Rico and the transition of Lake Erie, but we also for the quarter had a announcement of the closure of two financially unproductive facilities totaling about 1,600 beds. And obviously this will affect the top line where it will be passed to the bottom line long term.

Later in the call, I will also comment on our work on the TRS or taxable REIT subsidiary structure and also our plan of action and I’ll turn the call over to Todd here in a minute. But before I do, I’d like to thank all of our fellow CCA colleagues for their achievements and efforts during the course of this year. And as always, I am eternally grateful for all of them.

So with that, I will turn the call over to Todd.

Todd J. Mullenger

Thank you, Damon, and good morning, everyone. In the first quarter 2012, we generated $0.33 of adjusted EPS, which excludes the cost associated with our recent debt refinancing. Funds from operations or FFO totaled $0.82 per share, while adjusted funds from operations or AFFO totaled $0.69 per share.

Year-over-year in the quarter we saw revenues increased by $10 million driven largely by the assumption of operations at our Lake Erie, Ohio facility and per diem increases. While revenues increased $10 million, we experienced a $14 million decline in operating income. The decline in operating income was largely the result of several items including $4 million of startup costs at Jenkins and Cimarron, a decline in EBITDA associated with the year-over-year reduction in U.S. Marshals populations at certain of our facilities. An increase in the employee medical and workers' compensation claims and an increase in depreciation and amortization expense.

Moving next to discussion of our guidance, as indicated in the press release, we have revised full-year EPS guidance to range of $1.53 to $1.61. Guidance for Q2 is in the range of $0.36 to $0.37. Full year FFO guidance per share is in the range of $2.82 to $2.91, while FFO guidance for the full year is in the range of $2.28 to $2.42.

Our guidance has been impacted by several key items, which I would like to outline. First, the primary driver of the guidance provision is related to changes in our forecasted U.S. Marshals populations. You may remember from the February earnings call, our discussion regarding the declining U.S. Marshals populations, we experienced beginning late Q4, 2011.

At that time, we were expecting a rebound in those populations by Q2, while we have seen some increases in those populations from the lows we experienced. We now believe they are not likely to increase as quickly as previously anticipated when preparing our February guidance.

While the difference in population is relatively small, the impact on EBITDA is material as these populations are largely at facilities that are operating at full capacity, where the incremental margins are very high. As a result of relatively small change in populations has a meaningful impact on earnings. And I would say U.S. Marshals populations are probably the key plug point in our guidance as a movement up or down from the range of populations assumed could have a meaningful impact on our actual earnings. We are also experiencing a small reduction in Georgia inmate populations at our Coffee and Wheeler facilities during the ramp of our new Jenkins County facility, which is also housing state of Georgia populations. So as Jenkins County population’s ramp up, we are experiencing some transitional impact and populations at Coffee and Wheeler, which we believe will be partially corrected once Jenkins is fully occupied.

Also during February and March, we experienced increases in claims under our self-insured employee medical and workers comp programs. As a result, we have incorporated an increase in these expenses for the balance of the year, but at a lower rate than we experienced in the first quarter.

The increase in EPS from $0.33 in Q1 to a range of $0.36 to $0.37 in Q2 is related to a $3.5 million reduction in unemployment taxes. Increases in earnings from the continued ramp of populations at Jenkins and Cimarron offset somewhat by the declines in Georgia populations at Coffee and Wheeler related to the ramp up of Jenkins.

Our guidance assumes no material changes in our state of California inmate populations. Additionally, our guidance does not incorporate any expenses that will be incurred to assess the feasibility of a re-conversion.

General and administrative expenses for 2012 should approximately 5% of our revenues, depreciation and amortization expenses forecast and approximately $115 million for the full year.

Finally, the adjustment to our guidance has not effected our decision to initiate an $0.80 annual dividend payable in quarterly installments beginning in June. The amount of the dividend we expect to pay is still roughly equal to one-third of our FFO. We anticipate a formal declaration of that dividend will be made at the upcoming Board meeting next week.

I will now turn it back to Damon

Damon T. Hininger

Thanks so much Todd. Now for our market assessment and strategic alternatives update. Now let me first just given update on the state book of business, first of which is best week intel, there is no new capacity be imperforated in respective state legislatures around the country except for maybe some activity in Arizona and California for the coming fiscal year starting on July 1. And this would be the third consecutive year where we’re not seeing any meaningful appropriations being done at the state level in any of the 50 states I should say, or additional bed capacity to deal with growth and/or overcrowding.

We’ve also seen a 11 of our existing state partners grow over the last 12 months a combined total of about 5,400 in mates, and we’re also pursuing eight undisclosed state prospects what they’ve projected overcrowding in the next five years to be about 15,000 inmates.

Now in a few minutes I’ll talk about California and provide some greater detail on what we see out there. But as for our remaining state partners and their budgets, 11 of our partners have completed and passed their respected budgets and we’re seeing about a half a dozen of those budgets include increases to CCA under our current tracks and we have not incurred or not experienced any request for pretty and reduction request this spring.

On the Federal side, the Federal budget was released by the President in February and as we reviewed the funding request for our three Federal partners, it appears that they are largely inline with the fiscal year 2012 enacted levels. But I think it’s safe to say that the final budget likely will not be completed until after the national election in November so we’ll also will be monitoring closely. But also to note that in the Federal budget under the BOP section, there is no funding request for new capacity or Federal capacity I should say, for the Bureau of Prisons. And the BOP is requesting a 1,000 beds in new contract, in our contract confinement account.

Now as it relates to funding for new prison capacity for the BOP, we think it’s likely going forward that no new capacity will be appropriated.

To put some context on this significant event, over the last 10 years, the BOP has received about $3.5 billion in appropriations to build new BOP capacity. Yet, we don’t foresee any funding for the next five to eight years for the BOP. Now just a reminder, this is the largest system in the country with about 218,000 inmates in their system and are growing at a rate of about 5,000 a year and a forecast of an unmet bed demand in the next five years of about 26,000.

Now it relates to the Marshal Service and their population and forecast for the rest of this year, as I mentioned earlier, new capacity in California and Texas plus the change in (inaudible) for PREC and powder cocaine drove the nationwide number for United States Marshals Service to hit a lower bottom than expected in January.

New capacity equaled about 4,000 beds and about 1,700 individuals were released by the BOP in the fourth quarter of last year and first quarter of this year due to the (inaudible) change. And talking to the Marshals Service, the rate of growth is expected to be the same in 2012 as initially forecasted. It is just the case that the Marshals Service is starting at a lower base number as it begun this year, which is approximately about 58,000 prisoners nationwide starting in January versus their forecast of about 60,000.

I would note though that Marshals Service growth within the CCA system has grown significantly since January of 2010 and that growth has equaled about 3,300 prisoners. I’d also note that in late 2010, we started the ramp of our new contract with the Marshals at Cal City and also have the ramp up of our beds in (inaudible) last summer. So we see meaningful growth over the last couple of years with the Marshals Service.

So now to any procurements and the first of which is Arizona and the requirement for 2,000 new beds owned and operated in state. Arizona relates to procurement last quarter for a contractor owned contractor operated up to 2,000 beds in state facility, proposals were due March 6 and we anticipate a third quarter award. We also anticipate a start date in early 2014.

New Hampshire released a series of procurements late last year the primary one being for a new 1,550 beds in state facility. Proposals were due February 24 and we anticipate an award no sooner than the third quarter of this year, and we also anticipate a start date in 2014.

Our exiting partner, the State of Idaho has recently released a procurement requesting up to 800 beds out of state with 250 beds at start at the beginning of the contract. Proposals are due June 7 and we think we could see an award in the third quarter of this year.

With ICE, in 2011 our locations were selected as preferred sites and we are working with Immigration and Customs Enforcement on new facilities in Florida and Illinois. Now we are still actively talking with ICE on agreements for both facilities. These new facilities were due part that we build approximately 1,500 beds in Florida and 750 beds in Illinois with an anticipated opening of these facilities in early 2014.

Finally, here at County Texas issued a RFP in June of last year under which the County is seeking proposals for the management of the entire Harris County Jail system, which is approximately 9,000 beds and this (inaudible) falls in Houston, Texas. We understand a currently cost the county more than $200 million a year to operate their jail system. We were asked to submit a best and final offer in April, and we think that County could act on this proposal sometime this summer.

For the total number of publicly announced new business opportunities in the owned and management segment is nearly 7,000 beds and about 9,000 beds in the managed-only segment.

Let me now provide a brief update on a couple of topics relative to California and most notable the states and CCR released their report titled The Future of California Corrections last week. This is a proposal that will have many stakeholders that are way in. The legislature, the Plaintiff (inaudible) on the federal court case, the court appointed federal medical receiver and of course the Federal Court. As like previous proposals in California what actually get implemented is likely to be very different than what is proposed. There are favorable key provisions in the plan. The state’s realignment plan secures long-term funding for the counties and it works long-term.

Second, inmate population projections declined during the period a time as outlined in the plan, which is through 2016. Third, the state (inaudible) built nearly 5,000 new beds and finally, but I’d say most notable, the assumption that the state is successful on convincing the federal court to raise the capacity limits of their 33 facilities from a 137.5% to 145%. This is a cap that just 12 short months ago was affirmed by the U.S. Supreme Court as been in appropriate cap for the California prison system.

The plan noted that if the court did not raise the cap that flowed alternative such as continue to house inmate out state will have to be considered. So obviously the key question is what’s next? Well, the key milestone that we see in progress obviously needed to be monitored closely. The first one of which is the governors May revised budget, which we think will be out in the next couple of weeks.

Now I think this will likely be consistent with what the recent plan set for the coming year. But obviously this is only a document that provides a 12 month view. So after that obviously is the Enacted Budget, so this has got to work its way to the legislature and ultimately get enacted and get signed by the governor.

There is a chance to get done by June, which they did last year, but many of you may know that two years ago, and three years ago, they didn’t pass the budget until third quarter of those respected year. So it could be later, but obviously it’s got to work its way through the process and get enacted. The third item to watch is action from the courts. Now the court may not do any action on their own, but we suspect that the plaintiffs, who represent the inmates in this long time case, may push the court for some type of action.

Timing of that is uncertain, could be this summer, could be later this year. But we suspect that plaintiffs will take some type of action with the court to have them waiting on this plan.

Finally the schools and Local Public Safety Act of 2012 tax increase, that will be on a ballot in November, this is the long-term funding vehicle for realignment it is currently polling with just over 50% support state wide. Now the counties are obviously watching us very closely not only for funding, but also for the security of the funding will be their long-term. So they could possibly do jail expansions to deal with realignment.

Now, I would say this. I think that is now clear with this plan that the state are saying publicly that it will not meet the court order cap by May of 2013. The LAO or the Legislative Analyst’s Office also said this in a report in late February, saying that the state likely is not going to reach the cap that they have to achieve into the Federal Court case in May of 2013, and I really think that’s the headline of this plan. And short of an adjustment of the cap funding of new state capacity and also funding for a local realignment and a reductions of state populations by 4,000 in May which this plan proposes that all these must be executed on. So they really have the (inaudible) on all these different steps. And if not they outlined in their plan the (inaudible) program will be needed.

One final piece of data on California, our average California population for the month of April was 9,539, our average daily population, highest average daily population, since first quarter of 2011, then clearly we monitor very closely and give updates to the investment community as appropriate as it relates to California.

Now as announced this morning, we are searching a feasibility of a real estate investment trust or re-conversion, the board and management of CCA evaluate on an ongoing basis, help us to allocate the company’s resources to deliver long-term value to our company stock holders. Our commitment to doing this is demonstrated by recent actions such as our share repurchase program and intended quarterly dividend.

In the fourth quarter of 2011, following the review with the board and various review I should say with the board and various REIT structures, we initiated a project to do a deeper dive into one such structure that we thought could be most appropriate for CCA and that is a conversion to a taxable REIT subsidiary or TRS structure. And our potential benefit for this type of structure included obviously increased shareholder value and an access to a larger base investors that are attracted to companies. Like CCA that have a heavy real estate component. This also will provide a more tax efficient structure and also potential or a lower cost of capital, but also being able to do this without the need to divide the company into an independent REIT and an independent operating company. Therefore avoiding and minimizing the potential pit falls of alternative REIT structures such as tax leakage associated with the division and distribution of company assets. The ability to maintain strategic alignment of our key operating divisions avoiding the needs that we can figure our management contracts and providing greater flexibility to pursue growth opportunities following conversion.

This is very complex project obviously with issues in tax, legal, financial and business, and we want to make sure that it doesn’t affect our ability to grow long-term. The way we mange the business proceed any competitive advantages. Now recognizing the complexities of the project, we have assembled the best team in the reach from to support the company in this assessment. And there you are (inaudible), Ernst & Young and JPMorgan in addition to our Corporate Council of Asbury.

Now we’re not in a position to recently assess the feasibility of the TRS structure at this time. And we are not able today to recently estimate the date by which we will finalize our assessment. However, we will likely need a Private Letter Ruling or PLR from the IRS and I can tell you that we have requested one at this stage in the project.

But clearly, we understand the benefits – the project in a timely manner. But we also want to make sure that we get it right and we think our approach in the quality of our team speak to that point. So I know that you’ll have many questions about this issue and with that try to have us provide additional details. That is going to be difficult to do today for many reasons.

Additionally, we do not anticipate to give another update on this topic to our shareholder community till our second earnings call, which will be in early August.

Now with regards to our near-term capital strategy as you know, the company in the past that supply cash primarily on the speculative capacity build-to-suite opportunities, facility acquisitions and the share repurchase program. We are still holding off our new spec capacity and aggressively pursuing build-to-suit and facility acquisition opportunities like New Hampshire and Ohio. But now it’s the dividend and termination of the share repurchase program as mentioned earlier, we will now allocate a third of our FFO towards a dividend and the remaining towards organic growth.

But let me make my closing comments here, and pick a couple of final points. One of which is the new business opportunities in the global dynamics, we think is very favorable for the company and for the industry both the State portfolio and also on the federal book-of-business. We’re very excited about the steps we have taken to create more shareholder value most recently initiating a dividend, which will be declared this month and the first payment in June of this year. And finally, we are also taking another step of evaluating how we create even more shareholder value with this product to assess the TRS structure.

This now concludes my prepared remarks, thank you again for calling today’s conference. And let me now turn it over to the operator for Q&A.

Question-and-Answer-Session

Operator

Ladies and gentlemen, our question and answer will be conducted electronically. (Operator Instructions) Our first question today comes from Todd Van Fleet with First Analysis.

Todd Van Fleet – First Analysis Corp.

Well, I didn’t think I’d be first. Good morning, guys.

Unidentified Company Representative

Good morning, Todd.

Todd Van Fleet – First Analysis Corp.

I think you’re doing the right thing on the disclosure here with the REIT conversion and all the work you’re doing, I think that’s the right thing to do, so I pledge on that. I have a pretty limited knowledge of REIT (inaudible) and I’m just hoping you can tell me what you found, given it sounds like you started a lot of your research in the fourth quarter of 2011.

The one issue surrounding the reconversion that I am having difficulty with an understanding how this feasible is, maybe you can help us understand and the work that you’ve done, the background work, why is it possible for the company to have the taxing authorities look at the REIT structure excluding the management revenue to comes in? So you take a look at the totality of the revenue stream for the company, my understanding is that in order for the REIT structure to work, the taxing authorities have to view the kind of rental income, kind of standalone and separate from the management income. And I’m just wondering how you guys have gotten comfortable that’s a possibility given the fact that you’re going to be pursuing this I guess in spending probably a reasonable amount of money on this. You must have at least gotten comfortable with that is possible and I’m just hoping you can tell us how you’ve gotten comfortable?

Damon T. Hininger

Todd, this is Damon. I would say that we’re still well underway on the analysis and review, and the feasibility of this type of structure. But as I mentioned earlier as we looked at this, what we want to do is make sure that it doesn’t affecting as a kind of day-to-day ability to manage the business or affect our ability to provide services on our existing contracts, but also ability to grow and seeing any competitive advantages. And as such, we’re looking at is there a way to do this where the management contracts don’t have to be adjusted or changed or reconfigured to a little bit to your question of the analysis.

So it’s still underway, I can’t provide any commentary of kind of listing of kind of evolved in various issues and what can and cannot be done. But as we’ve expressed not only today, but I think previously is there a way to do this where you don’t have that the adjustments are changed to management contract. That could be a potential benefit for this type of structure.

Todd Van Fleet – First Analysis Corp.

Okay, let me ask Damon, so currently the work began in the fourth quarter of last year’s according to release following a review of various REIT structures. What was that the prompted the company to take a look at and evaluate the REIT structures that were, what prompted the review I guess back in the fourth quarter of 2011, that’s what I’m wondering?

Damon T. Hininger

Yes, good question, one thing that I think we’ve demonstrated pretty good track record and is always looking at alternatives to create shareholder value, and obviously those fall in different categories, obviously was restructuring with dividend and with share repurchase, with M&A, with new business lines, with carve outs provided expertise to an area that we think we’re really good at like the without even operating correctional facilities.

So that is a constant process, it’s a very robust process with the management team and the board and so this is just one of those things that we’re going to lift that we evaluated and really just started, what was going out and into kind of the larger investment universe with tax REIT subsidiaries and again just undertook a step that they okay, what’s going on out there, and then with the boards okay then put some resources to do a deeper dive in this type of structure. So I think it is just part of our usual analysis I’m looking alternative to create more shareholder value.

Todd Van Fleet – First Analysis Corp.

Okay, I will just ask one more along these lines and so since you’re not going to share with us I guess your expectations in terms of how quickly you think this process is going to run. Do you feel like you and the folks who are really pushing for the, for the change in the conversion, I’m assuming you’ve had your meetings with them and you’ve had your discussions about, the general approach kind of leading into this news release today, so I’m wondering do you feel comfortable and good about the, the timeline is going to matching up from a company side versus the shareholder side.

Damon T. Hininger

Well I can’t speak for the shareholder side, but I would say that, the quality of our team, it’s little bit question the quality of team I think speaks to our efforts are do really thorough analysis on this type of structures, I guess, I make that point, but the other is that we see that the analysis again kind of be an offshoot, just kind of a bigger analysis and creating more shareholder value, so I think, I can’t speak from a shareholder perspective one kind of the timeline, but we obviously want to make sure that we’re doing a thorough analysis, we think we got the right team that are doing this quality review, but we also appreciate that we want to make sure that we get it right and we don’t miss anything in that we move forward at a prudent pace, but also making sure we’ve got high quality in our review.

Todd Van Fleet – First Analysis Corp.

All right, thanks guys.

Todd J. Mullenger

Thanks, Todd.

Operator

Moving on to Manav Patnaik with Barclays.

Manav Patnaik – Barclays Capital

Hey good morning guys.

Damon T. Hininger

Good morning Manav.

Manav Patnaik – Barclays Capital

Good morning, so couple of quick operational questions, first so on the – on the owner manage side the fixed costs for competitive mandates that have jumped up from the 32 levels that has been added for long time into the 34 inch, is that going to just trying to see sequentially that again sort of come back to the 32 levels or what’s going on there.

Todd J. Mullenger

Hi Manav this is Todd, on the cost per day increase you saw, first we had start-up cost around $4 million.

Manav Patnaik – Barclays Capital

Okay

Todd J. Mullenger

Impacting the quarter about $2 million of that was variable, $2 million of that was fixed; and the variable expenses include a transportation for the Puerto Rico inmates.

Manav Patnaik – Barclays Capital

Okay.

Damon T. Hininger

Then we have the merit increase we implemented in July last year, and then finally we have increase in employee medical and workers’ compensation cost. I would say on the employee medical and workers compensation costs, there are some indication that some of that might be timing, so we saw an increase in the severity of the claims.

Manav Patnaik – Barclays Capital

Okay.

Damon T. Hininger

Not a great deal of clarity, exactly what’s driving that increase? We saw an increase in February and March kind of – in March. Again, another indication that might be temporary, but not knowing whether it’s temporary as part of our revised guidance, we’ve increased some of those costs for the balance of the year.

Manav Patnaik – Barclays Capital

Okay, that’s fair enough.

Damon T. Hininger

Those are the primary drivers of the costs per day increase as you saw.

Manav Patnaik – Barclays Capital

Okay, that’s what I thought. And then I guess similarly on the managed only side I am guessing, the margin drop was mainly because of maybe some timing on the Mississippi cancellation like how strongly should that rebound next quarter?

Damon T. Hininger

Yeah. So on the managed only margins, it’s a combination of flattish per diem, the merit increases, the increases in the benefits and then you also saw a concentration of our legal settlement expenses primarily in the managed-only facilities.

Manav Patnaik – Barclays Capital

Okay. Okay, fair enough. And then, I have a couple of question on the recent stuff. So firstly just to clarify, you said you won’t give an update until the next quarter early August. And two the current process that you are doing with all the advices, is that the 482 test that you have to do or is that something more than that?

Damon T. Hininger

We’re not going to disclose any great detail of the analysis that we’re undertaking Manav, but yeah, that's our anticipation to your first part of your equation is that the next update would be the during the year second quarter earnings call.

Manav Patnaik – Barclays Capital

Okay. And then inside the bigger question there is no doubt you’ve guys have done an amazing job trying to look for shareholder value and disclosing what you’re doing now is also a great thing and I applaud you for that as well. My question is you began this in the fourth quarter of last year and throughout the course I guess of the year, the question I guess when it’s been asked in terms of the REIT conversion, you guys had typically being more along the side of the – it looks increasingly challenging. Just trying to understand some of the thought process around, why at that point you just hadn’t disclosed that you were going through this.

Damon T. Hininger

Well, so couple of answers there. When we looked at and reviewed alternatives with the REIT structure in the past. Again some of the challenges and issues where as I mentioned earlier the separation of the company is moving into an operating company move into a company that owns the assets and the challenges with that was a separate board, separate management team and maybe not being aligned well that’s a strategic vision as an organization or two separate organization. But also maybe after reconfigure the contract, restructured contracts, renegotiated contracts. There was several different issues that I think was outlined in the past with looking those structures.

Manav Patnaik – Barclays Capital

Good.

Damon T. Hininger

But as we think about the taxable REIT subsidiary as we started this review and analysis. The question was as can you clear some of those hurdles. Can you do this in a way where you have strategic alignment to all the important divisions, which would be like operations and our government relations folks and the real estate folks. And can you also doing underway where you have basically non-event for our customers where there would be no adjustments or changes or renegotiated contracts expected from our customers. So that is as we kind of review this, the questions you’re asking and doing the analysis to see if we conclude those hurdles that are somewhat there with different REIT structures.

Manav Patnaik – Barclays Capital

So I guess another way to put it, is it fair to say that you guys hadn’t really look to the TRS structure until now and the REIT project that have looked at most of the other structures before that?

Damon T. Hininger

I will say, it’s a little bit all of the above, I would say in the last couple of years, obviously there has been, other things going on and become the larger investment community with TRS structure, so I think there is other companies that are have undertaken or have completed similar structure, so obviously there is some precedence that are out there that are relatively recent, and so I think that is helpful too and that’s again something we’re always looking at. I think our way of create shareholder value at a lower level, what are those alternatives in the lower level, is there an opportunity to restructure the company again that part of the analysis is we’re looking at any kind of recent history, recent events, with other companies of either similar nature or may be in other industries.

Todd J. Mullenger

Yeah, I would also add to that Manav, whenever we initiate a project like this, our plan would always to be remain quiet until the times we determined the feasibility of project of this nature, and if its in the best in shareholders, customers, employees, et cetera, but didn’t make sense, it never make sense creating a big store, a big (Inaudible) answers to allow these questions and can provide some clarity around the feasibility of a project like this. However, we now find ourselves in a situation where there is a great deal of interest and the idea; it’s generated a great deal of speculation around the idea, so made a lot of sense disclosing what we’re doing.

Manav Patnaik – Barclays Capital

Okay and one last question, will be advisors hired in the fourth quarter of ‘11 or they more recent as part of the REIT project?

Todd J. Mullenger

The advisors have been advising us on these REIT structures for some period of time.

Manav Patnaik – Barclays Capital

Okay, all right. Thanks a lot guys.

Operator

Moving on to Kevin Mcveigh with Macquarie.

Kevin Mcveigh – Macquarie Research Equities

Great, thank you. Damon, I wanted you to give us a sense of the growth prospects of the business as you think about it over the next three to five years and how that kind of lease in with the thought process around the REIT and just also on CapEx levels around that as well?

Damon T. Hininger

Good morning, Kevin. This is Damon. So let me answer, I think the first couple parts of your question. So as we look at the marketplace, which is right now we and the competitors in the industry have about 9% of total – private marketplace in total, let’s just say facilities in the U.S. marketplace and we see the dynamics playing out on the safe side where no one is taken step because of the challenging fiscal environment, but also it’s getting traction on providing good solution and no one is appropriate (inaudible). We think that’s a fair dynamic as more and more states do with growth and (inaudible) that still be working with us to provide those solutions.

And then on the federal side, with the Marshals Service continue to rely more and more on the private sector, obviously, we’re the biggest search provider for the Marshals Service. We continue to see demand from them going forward and has been there to provide a solutions. And then with the Bureau of Prisons as I mentioned earlier largest system in the country, nearly 220,000 inmates in their system, they are running at about 140% capacity right now. And growing at a rate where they will have the unmet demand about 26,000 in a next five years, we see an opportunities to provide solutions for them as they grow and deal with overcrowding. So we don’t see any changes in the marketplace as it relates to first part of your question. Last part of your question, you were asking about kind of CapEx needs going forward?

Kevin Mcveigh – Macquarie Research Equities

Yes.

Damon T. Hininger

So, in the near term, as I mentioned earlier, also we’ve got the dividend policy we’ve disclosed kind of our maintenance CapEx and growth CapEx for the year, which I think is close to $90 million for rest of this year, but as it relates to outgoing years, obviously that will be driven by the demand and timing of project.

So as one thing I said earlier, it relates to speculative capacity, we’re taking our foot of the paddle on any new beds, until we get some meaningful absorption from either existing our new partners that we’re pursing right now. But we will continue to be very, very aggressive on the build-to-suite, and our opportunities for facility acquisitions like Ohio, going forward.

So it’s a little hard to give any definitive guidance going forward, but obviously we will continue to be very aggressive on those two fronts in addition to closing the dividend policy.

Kevin Mcveigh – Macquarie Research Equities

It’s helpful. And then Damon, I know it’s probably hard to kind of quantify, but California, it seems like every year, they kind of create some noise out there in the market. In terms of probability that they don’t fund this year, as you think about kind of 2016, how do you think about that process this year versus last year, and the ultimate resolution of it?

Damon T. Hininger

It’s a great question, Kevin, and I wish I can give definitive answer. One thing that we’ve learned on working with California, since 2006, as you got to have a little strong stomach to work with them, because obviously got a lot of different issues, a lot of the stakeholders that affect their forecast, and their plan and also the physical environments laid on top of that.

So the only clarity I can give is that we have seen plans in the past, from California, somewhat similar to what they put out recently, obviously we saw what they propose last year during the spring, legislative session for funding of debts for the coming year, which was going to be a reduction, ultimately got enacted was the full funding for us for the coming year, and then also obviously the Supreme Court wait in and said that they had to reduce their system capacity by 33,000 inmates within two years. And so as we look at this plan, obviously a lot of moving parts, a lot of different stakeholders have to wait and as I said earlier the core is going to have to wait in. And with in just affirming last June, I mean, just less than a year ago being at 137.5 was the right capacity level for the State of California prison system. That is just going to have to be very interesting to see how that kind of plays out. So the best I can do is kind of go through the different milestones, obviously paying a little bit of a picture of what those milestones look like in a time and it such but it also going back to the history which is they have been challenged on trying to achieve some success on some of these other fronts that that reliable and that really a good solution that we have been able to provide that really been a relief valve has been the outstay program. And we continue to see that as a good solution. That in this fiscal environment is providing great value.

Kevin Mcveigh – Macquarie Research Equities

Super, thank you.

Damon T. Hininger

Thank you, Kevin.

Operator

Now on to Kevin Campbell, Avondale Partners.

Kevin Campbell – Avondale Partners

Good morning thanks for taking my questions. I just want to be clear, have you guys looked at a TRS structure before?

Damon T. Hininger

We’ve looked at REIT structures in the past, again as part of our analysis and as we look into the review of these different structures with the board, TRS has been one of those alternatives. But recently, recently last couple of years there has been some activity with other companies and other industries where they have set some presidents and later we’ve gone to learn a little bit, let’s kind of look those restructurings have done or what they’ve undertaken. So it has been part of the analysis and again its part of our bigger strategy of looking at alternatives to create shareholder value.

Kevin Campbell – Avondale Partners

And is there anything at that time, if you recall back at when you looked at it before, what was sort of the reason for not moving forward or along the line with the TRS back then and it’s the only thing that has materially changed with the interpretations of laws that helps you overcome the prior reasons why you didn’t necessarily move forward with it before?

Todd J. Mullenger

Yes Kevin, this is Todd. Just to clarify, we’ve looked at other REIT structures in the past, we’ve not taken it serious look at the TRS structure in the past. The effort here is to really just to do a deeper dive and try to understand it was more clarity and try to just understand it. And it’s been out there, but we’re now taking steps with our team to do a deeper dive in this corporate structure.

Kevin Campbell – Avondale Partners

Okay, that’s very helpful. And then just sort of moving on to other things. Damon, I just want to make sure I heard you say correctly when you’re talking about the state, did you say there are eight state project, undisclosed state projects and that – was that the right number?

Damon T. Hininger

Yes.

Kevin Campbell – Avondale Partners

Okay. And those are none of the existing RFPs presumably that you mean by undisclosed and does that include the ICE opportunities that are not formal RFPs or is this just state, so its eight new opportunities?

Damon T. Hininger

Yes, it’s just state and it does not include ICE.

Kevin Campbell – Avondale Partners

Can you give us a sense, I know you can’t disclose the state, but can you give us a sense of number of beds that are in total owned and managed versus managed only whether or not these existing or new customers, if we should see these come in the forms of formal RFPs or if its more likely to be something like Puerto Rico or its just a state award?

Damon T. Hininger

They are non-existing partners and it could be a combination of procurements or direct negotiation. And I’d say, a good example of this, this is – this recent contract with Puerto Rico is kind of in that category that we had mentioned in the last year or so where we’re pursuing a opportunity for partner to use existing capacity within the CCA system. So the kind of Puerto Rico contract which was a direct negotiation with the commonwealth that was started earlier this year would be kind of the same category. So it could be some where in the Puerto Rico to do a direct negotiation or it could be the result of open bid.

Kevin Campbell – Avondale Partners

Okay. Can you give us a sense in terms of the number of beds owned and managed versus managed-only in…?

Damon T. Hininger

I would say that what we are pursuing is more on the owned side and obviously we have very high priority to use existing CCA capacity, to try and provide solutions to these respective states utilizing the existing CCA capacity. And the only number I can give you right now is just to give you a forecast that these combined 8 states are looking to be all (inaudible) by about 15,000 inmates by 2015.

Kevin Campbell – Avondale Partners

Great, that’s helpful. And Todd, I just wonder if you can give us a sense back on the managed-only margin. What a more normalized rate should be going forward. Last two quarters it’s been a little bit lower than prior rates. Also just 10% the number or is it going to come back up to the 12% type of range?

Todd J. Mullenger

Kevin, as you know we don’t provide guidance on margin rates.

Kevin Campbell – Avondale Partners

You don’t? Okay, anything on Colorado then sort of last question there. Obviously the populations have been coming down, is that insisting with your guidance that they will continue to come down or do you think they’ll at stable levels. Can you give us a sense for those populations?

Damon T. Hininger

We’re giving indication that the population is going to stabilize. It’s obviously something we’ve been monitored very closely. I guess probably going back 36 months. So, we’ve had some fluctuations, but they have been as you mentioned earlier down late last year going to this year. So we’re monitoring very closely. One thing that we’re always working on especially in this case of Colorado is always to optimize our facilities are appropriate . I mean, we have these fluctuations, and feel that the continued part of our dialog are also a part of our execution plan with our operations, folks in Colorado. So we’re looking at stabilization right now, but also keep a close eye on them.

Kevin Campbell – Avondale Partners

Okay, great. Thanks. And next question?

Damon T. Hininger

Sure, Kevin. As a follow-up to your question on margin rate, we’re not giving specifics on managed only or owned and managed or what the rates specifically will be. We should see improvement in the rates more as they were in the first quarter due to the following reduction in unemployment taxes, seasonal reduction in unemployment taxes and then from continued ramp of Jenkins and Puerto Rico, a start up cost or losses turning into positive contribution margin.

Kevin Campbell – Avondale Partners

Okay, and actually remind me, on Puerto Rico is that really on at this point, in fact I remember when you showed the press release, it was going to start in February, and then maybe expect it will be fully done by the end of the first quarter or early second, so is Puerto Rico fully ramped at this point?

Damon T. Hininger

Pretty close, I think we’ve got one more transport, we’re very close.

Todd J. Mullenger

I think we’re at around 380 today, and we’re expecting another chance around 100 this month.

Kevin Campbell – Avondale Partners

It’s a nice story.

Damon T. Hininger

You’re welcome.

Operator

Next we’ll go to [Frank Atkins].

Unidentified Analyst

Thanks for taking my question. I wanted to really ask about upcoming contract renewals anything major on the horizon, and I guess have you talked to states at this point in terms of their views of a restructure or do you think that would impact any thing or at this time is it mostly just internal work that you’re doing?

Damon T. Hininger

It’s – and to your last part of question (inaudible) it’s mostly internal work right now. Again the one thing that we’re undertaking further feasibility is to see, basically this would be a non-event to customer who wouldn’t requiring a reconfiguration of the management contract so it’s one thing we’re investigating, so it’s too early to tell, we’re still going through the feasibility study right now. But the first part of your question is related to contract at risk, as we look out through the rest of this year, also we have lot of state contracts that are tied to their fiscal year versus July 1.

so we feel good about our prospects on the renewals that we’ve got coming this summer on state of book. And then on the federal book of business, no notable renewals, we do have typically anniversary based on our federal contracts and it’s typically just administrative function between us and the customer, but no notable renewals on our federal side.

Unidentified Analyst

Okay, great. And you gave some good color in your prepared remarks on the state budget cycle. in terms of what you're seeing there, can you give us any more color in terms of the increase of pricing or incremental services being requested, just how are things going there?

Todd J. Mullenger

Well, let me just pick a global comment on state budgets, that is, if you look at revenues and some of the kind of key indicators that we look out relative to tax license. I mean we’re seeing some improvement, but I’d say very, very modest improvement with our state partners. and as I think, we talked about really kind of early last year, while the federal funds that they’re receiving through stimulus and other things coming out of Washington, it’s basically dried out.

So they’ve had some improvement. but they also had to fill some holes from federal funding that were helping embrace the gap over the last couple of years. so I wouldn't say the state budgets are out of woods yet, but we are seeing some focus outside – obviously some states that have mineral and oil and gas, obviously see a little better maybe improvement versus other states, monitoring very closely.

but I would say, as I mentioned earlier, our pricing per day and our funding request for increases in contracts are a little better this year than it was say, two years ago or three years ago. but again, it’s been very, very modest. And I think more state would tell you that, as they look at their forecast obviously a lot of serene of hands and still trying to understand kind of what the future holds, but are encouraged a little bit of improvement, but it maybe several years until they get back to levels kind of pre-recession.

Unidentified Analyst

Okay, great. And finally three quick numbers question. What is the share count and tax rate in your year guidance? And I don’t know if you can, but if could quantify any of the impact from the (inaudible) and workers comp increase.

Damon T. Hininger

So the short count little over $100 million the $100.5 million I think on the tax rate assume a GAAP tax rate around 38% and the cash tax rate very close to that. And then the impact of the employee medical benefit is that the last part of your question. And we sold about a $3 million increase year-over-year in the quarter, on employee medical and workers compensation claims. And we are assuming an additional increase over and above what we’d previously forecast in for the balance of the year the remaining three quarters of around $5 million.

Unidentified Analyst

Great, thank you very much.

Damon T. Hininger

You are welcome.

Operator

Let’s go to (inaudible) with MetLife.

Unidentified Analyst

Hi, at the beginning of the call you referenced your debt strategy and I was wondering if you could just reiterate what that strategy is in terms of a target that leverage ratio and whether the TRS structure would change that strategy at all?

Damon T. Hininger

Yeah, good question. So the ratio right now that you’ve about 2.7 times. And we’ve been kind of hovering around that number for a little while I think we’ve said publicly that we are comfortable up to four times of the long way from that. And we’ll continue to monitor that obviously if we have a lot of new business opportunities we’ll require just to deploy capital and obviously will revisit that, but we think we’ve got plenty of dry powder accommodate a lot of new growth, both of the current cash flow, but also going out to that markets and get payable rates. The other part of your question on our strategy, obviously with the new bank facility and what we have undertaken during the course of the year is obviously to retire a little bit of the debt that we had out there that we were high raised to get a little bit of favorable impact on interest expense that is going to continue to be the art of the play book as we look at kind of the business need and business opportunities, but also if we have maybe a little bandwidth and take out down some of that higher cost debt. So that will be something that we continue to look at and buy weight on top of the kind of overall goal of (inaudible) business needs. And so it’s – to your last part of your question, as we think about the business ability to grow, the (inaudible) provide services making sure we don’t give up any competitive advantages that the making sure that we have a very comparable leverage ratio and other kind of financial metrics (inaudible) would be definitely something as we take this feasibility, our business feasibility to make sure that obviously we can continue to kind of perform and operate at a level lot of consistent today and don’t cede any competitive advantages and don’t make it an advent to allow us to provide high quality service to our customers.

Unidentified Company Representative

And one follow on comment to the leverage ratio. So we’re around 3 times or less than three times debt-to-EBITDA leverage ratio. To get the four times leverage we draw a tremendous amount of free cash flow that’s available in addition to funding the dividend available to fund new growth. But we need explosive growth before we then have to get any close to four times debt-to-EBITDA leverage.

Unidentified Analyst

Okay, thank you very much.

Operator

The next question is (inaudible) please go ahead.

Unidentified Analyst

Good morning. I want to approach, well do you plan to (inaudible) the expenses related to the REIT effort and I guess in particular I am just saying, I am asking you maybe not to mix the laundry between current legal accruals and then anything associated with essentially to me it look sounds more like a banking expense. Are you going to break those out or are you going to throw more land?

Todd J. Mullenger

We’ll evaluate that based on the magnitude of those expenses.

Unidentified Analyst

But wouldn’t the benefit of that information beyond our side to decide rather than I mean these could be real numbers that…

Todd J. Mullenger

It will extent their material, we would plan on breaking them out.

Unidentified Analyst

Okay, okay. I appreciate it. I have legal accruals, I don’t see it in the press release, I might have missed it, but I was just wondering how legal accruals have trended?

Todd J. Mullenger

Legal accruals relating to…

Unidentified Analyst

Life, I mean I asked on the last conference call and they said it’s steady, it’s flat. You’ve got – you explained that this is part of your business you get sued on reading it by tape, then I see people throwing stuffs at you, so I’m just wondering if this is causing any extra time at $500 an hour (inaudible) late in case?

Todd J. Mullenger

I’d say our legal settlement expenses and legal services expenses have been pretty consistent with the past two or three years. It varies from quarter-to-quarter, but we haven’t seen any material change in a full-year basis.

Unidentified Analyst

That’s what I was asking, I appreciate that. Thanks.

Todd J. Mullenger

You’re welcome.

Damon T. Hininger

Thank you.

Operator

(Inaudible) Cumberland Associates.

Unidentified Analyst

Hi, thanks for taking my call. Can you hear me?

Damon T. Hininger

Yeah.

Todd J. Mullenger

Sure.

Unidentified Analyst

Can I clarify please the amount of maintenance CapEx versus total CapEx, you say maintenance was $90 million?

Todd J. Mullenger

Our total CapEx of full-year from a forecasted standpoint is around $80 million to $90 million, $30 million to $35 million of that is construction CapEx and then $50 million to $55 million is maintenance and IT CapEx.

Unidentified Analyst

Great, looking at last year, and it was about 143?

Todd J. Mullenger

On a prior year basis for full year?

Unidentified Analyst

Full year 2010?

Todd J. Mullenger

2010 or 2011?

Unidentified Analyst

2011, I’m seeing what Bloomberg is showing 173 for total capital expenditures?

Todd J. Mullenger

I will run down that number.

Damon T. Hininger

Yeah, we will…

Todd J. Mullenger

Yeah, well we see each of that number, I don’t…

Unidentified Analyst

My concern is, when is filled pro forma P&L and cash flow statement for a REIT structure (inaudible) tax or the TRS, because that would be a would be a tax payer, and the requirement under the dividend, and maintenance CapEx is very little free cash left for either gross capital or if you debt amortization as time goes because the REIT structure requires so much cash dividend. So I’m just trying to figure out how you’re going to do growth and build a company when the REIT and the tax required on the TRS is so high?

Todd J. Mullenger

Well, I’d say that’s one of the remaining factors we are going to be evaluating in our assessment.

Unidentified Analyst

Okay. So can we – I guess we can talk off line about what the CapEx numbers were putting back to December 2011?

Todd J. Mullenger

The maintenance CapEx last year was around $50 million, construction CapEx, again I don’t recall at the top of my head.

Unidentified Analyst

Yeah.

Todd J. Mullenger

But the maintenance CapEx has been around $50 million a year for the past several years.

Damon T. Hininger

I think we can run down the number, it was probably was north of 100 because we had the acquisition of Ohio and then…

Todd J. Mullenger

And that would be construction CapEx.

Damon T. Hininger

Right.

Unidentified Analyst

Right. Okay, okay. I just have to do some more work on the pro forma REIT structure. Thank you for your time, I appreciate the color.

Todd J. Mullenger

Thank you.

Damon T. Hininger

I appreciate your question.

Operator

We now have a follow-up from Todd Van Fleet.

Todd Van Fleet – First Analysis Corp.

Hi, guys. Sorry, I might have missed this, but the guide down on EPS $0.07 to $0.09, I think. Todd, it seems like $0.03 of that is related to the healthcare claims, and then how should we think about in Jenkins and the Marshals Service populations for the residual?

Todd J. Mullenger

Well, we haven’t provided a crosswalk for the full year, I did provide a little bit of a crosswalk from Q2, I’m sorry Q1 to Q2. And so you’ve got the unemployment taxes of $3.5 million reduction in unemployment taxes from Q1 to Q2, increases in earnings and continued ramp of populations at Jenkins and Cimarron offset by a reduction of the population, we’re going to relate to the ramp up. Q2 and Q3 haven’t quantified it, but the improvement from Q2 to Q3 and really Q4 would be improving from Jenkins and Cimarron, and an improvement from an increase in U.S. Marshal Populations.

Todd Van Fleet – First Analysis Corp.

All right. I was thinking of the composition of a guide down there, so in terms of thinking why the guidance has reduced, $0.07 to $0.09, it sounds as though $0.03 is from the healthcare and then can we just kind of split the difference I guess between what’s going on in Georgia and the U.S. Marshals for the residual $0.04 to $0.06 or is that a right way to think about it?

Todd J. Mullenger

Yeah, that’s probably the reason why we look at it.

Todd Van Fleet – First Analysis Corp.

Okay, thanks.

Todd J. Mullenger

Thanks, Todd.

Operator

A question now from Clint Fendley with Davenport.

Clint Fendley – Davenport & Company, LLC

Good morning, thanks for taking my question guys. I know you’re clear that your guidance doesn’t assume any major changes to the California population. I wondered if you could just remind us what your overall exposure is to the state, and how if any, the longer term plans from the state might affect your TRS analysis here?

Todd J. Mullenger

We won’t be able to provide any real clarity on the last part of your question, again that will be just part of the feasibility review of the tax – REIT subsidiary tax structure. On the first part, we have about 95% inmates in our system. And then the plan that was released last week anticipated ramp down of the program to 2016. And again that was just one line item of other components of the plan, which assumed reduction of their top line population 5,000 new beds in states, and a increase of the cap from 137.5 to 145, so lot of moving parts of the plan. Again our component the [outside] program, which is more than several components that they’re forecasting and trying to execute on.

Clint Fendley – Davenport & Company, LLC

Okay, thank you that’s helpful.

Operator

And with that we have no additional questions, I’d like to turn the conference back over to the company for any additional or closing remarks.

Damon T. Hininger

All right, Peter. Thank you very much and thank you so much for – everyone calling in today and your attention to our quarterly call, but also update on strategic alternatives. So more importantly to our investors, thank you so much for your investment in CCA; and also we’re focused very much on not only executing another good quarter and another good year, but also looking at our strategic alternatives. And we look forward to reporting our progress during the course of the year. So thank you so much.

Operator

And once again we conclude today’s conference call. Thank you again for your participation.

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