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Corrections Corp. of America. (NYSE:CXW)

Q2 FY08 Earnings Call

August 7, 2008, 11:00 AM ET

Executives

John D. Ferguson - Chairman of the Board and CEO

Todd Mullenger - EVP and CFO

David Garfinkle - VP, Finance and Controller

Damon Hininger - President and COO

Analysts

Todd Van Fleet - First Analysis Corporation

Kevin Campbell - Avondale Partners

Barry Stouffer - BB&T Capital Markets

William Bill Gilchrist - Westfield Capital

Operator

Good morning, everyone, and welcome to Corrections Corporation of America's Second Quarter 2008 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.correctionscorp.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 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 measurement is provided in our corresponding earnings release or are posted on our website. We are under no obligation to update or revise any forward-looking statements that may be 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 Chairman of the Board and CEO, John Ferguson and Chief Financial Officer, Mr. Todd Mullenger.

I'd now like to turn the call over to Mr. Ferguson. Please go ahead, sir.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Thank you. And also welcome everyone to CCA's 2008 second quarter conference call. In the room with Todd and me is Dave Garfinkle, our Vice President of Finance and then also attending is Damon Hininger, originally appointed President and Chief Operating Officer.

So we will begin with Todd in the opening comments about our second quarter results.

Todd Mullenger - Executive Vice President and Chief Financial Officer

Thank you, John, and good morning, everyone. We are very pleased with our second quarter operating results. So let's move straight to summary of those results.

In the second quarter 2008, we generated $0.30 per diluted share, compared to EPS for last year's Q2 of $0.26 per diluted share, representing an increase in EPS of over 15%. EBITDA increased 14% to $96.7 million for the quarter.

Adjusted free cash flow for the quarter increased 33% to $56.4 million. The growth in adjusted free cash flow is significantly higher than EPS growth, due primarily to changes in depreciation expense and maintenance CapEx.

Depreciation expense increased 17% over 2007, while maintenance CapEx decreased 34%. The increase in depreciation expense obviously has a negative impact on EPS. However, Depreciation expense is added back in arriving at adjusted free cash flow, while maintenance CapEx is deducted.

As we have discussed on prior occasions, unlike other industries, our depreciation expense is not reflective of the maintenance CapEx that we will incur to maintain our facilities. For example, depreciation and amortization expense totaled $22 million for Q2 2008, versus just $7 million of facility maintenance and IT CapEx in Q2.

So as we have commented before, we believe adjusted free cash flow is in many ways a better measure than EPS of the return we are delivering to our shareholders.

Total revenue for this year's second quarter was up 10.2% over the last year, an increase of $36.8 million. Total compensated man-days in Q2 increased 5.8%, compared to the previous year. Revenue per compensated man-day in Q2 increased 4.8% to $56.69. Now while compensated man-days increased 5.8%, average compensated occupancy for the second quarter actually declined from 99% to 97%, as a result of placing approximately 7200 new beds in the service since the first quarter of 2007, 2600 of these beds were placed into service during the first half of 2008.

With regards to the 5.8% increase in revenue per compensated man-day, results in Q2 2008 reflect the impact from certain pricing leverage we enjoyed from renegotiating several contracts. The increase in populations under our state of California contract which pays an above average per diem, as well as routine per diem increases.

Moving next to discussion of operating costs, operating costs per man-day for Q2 2008 were $39.46, a 2.9% increase over Q2 2007. Our Q2 2008 operating costs per man-day reflect normal wage and other general inflationary increases, as well as operating inefficiencies associated with the ramp-up of new bed activations at facilities such as Tallahatchie, North Fork, Kit Carson, Bent County and Leavenworth.

As we have discussed previously, the operating costs per man-day on newly activated beds starts off higher, as we are ramping up fixed costs, particularly staffing costs, and then decline as we increased occupancy which allows us to leverage those fixed costs lower on a per compensated man-day basis.

Operating margins per man-day in Q2 2008 increased 9.5% or $17.23, with an operating margin percentage of 30.4%. As a result of the operating costs inefficiencies we just discussed, margins on inmates placed a newly-developed beds will be depressed during the facility ramp-up period. However, the margins per compensated man-day on new beds will improve over time as we approach full occupancy on those new beds. And we experienced some improvement in Q2 as we filled additional beds at facilities such and North Fork.

General and administrative expenses for the quarter were 5% of revenues. An increase in G&A compared to Q2 2007 was due primarily to the expansion of our real estate department as we added resources to assist in the development of new beds, increased focused at the corporate level on quality and efficiency of facility operations, and an increase in non-cash stock-based compensation expense related to the change in accounting rules. Our goal is to keep G&A at approximately 5% of revenues going forward.

GAAP income tax expense for the quarter was computed based upon the rate of approximately 38%, and we currently anticipate a rate of 38% for full year 2008.

So, in summary, we're very pleased with our second quarter operating results and with the progress we've made developing and activating new capacity to meet the demand for prison beds.

I will finish with the discussion of our guidance for 2008. As indicated in the press release, we have updated full year guidance to a range of a $1.21 to a $1.24, compared to previous guidance of a $1.21 to a $1.28. Guidance for Q3 is in a range of $0.29 to $0.31 and Q4 in a range of $0.33 to $0.35. We have revised guidance primarily as a result of delays we have experienced in the intake of inmates under our contract with the state of California.

These delays have been necessary to ensure that we are in compliance with certain medical requirement as set forth by the federal medical receiver appointed to over see healthcare delivery to the sate of California inmates.

Unfortunately, these delays have caused us to revise our occupancy and revenue forecast for the balance of 2008. However, it's important to note that a relationship with the customer remains strong and the state of California continues to express its intention to fully utilize all of the 8132 beds available to it under our contract.

As previously mentioned, margins on new inmates placed on new beds will be depressed during the facility ramp-up period, but will improve as the facility approaches full occupancy. Given the anticipated timing of these new bed activations, we expect to see accelerating year-over-year growth in margins, EBITDA and EPS, especially in Q4 of this year.

One of the primary risks to our guidance continues to be timing around the receipt of inmates. This continues to be a risk with the state of California contract. It is important that the ramp-up of all new inmates occurs as smooth as possible. As such, the ramp-up of California or other inmates may be slowed from what we currently expect. However, should there be a shortfall in our expectations, we are still optimistic the demand from customers will ultimately fill our beds, albeit over a longer period of time.

As discussed on prior calls, now that we've begun developing a large number of beds through construction, this will obviously result in increased depreciation expense as the beds are bought online. A good rule of thumb to use in estimating the annualized increase in GAAP depreciation expense is to take the total investment costs in the project and divide by 37 years. As far as funding this new development, we believe the cash on hand, free cash flow from operations, and capacity available under our revolver will allow us to fund all development projects announced to-date.

Overall, the outlook for our business remains quite favorable. The projected demand for additional prison beds combined with our new beds underdevelopment and our ability to fund further development provides CCA with significant opportunities for growth.

I'll now turn it over to John for specifics on our new business prospects and bed development.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Thank you, Todd. I'd take a little bit from what we've done previously. I guess it's obvious that some investors have interpreted our guidances as negatives as demonstrated I think in some of the transactions already this morning. So I wanted to I guess remind everyone of the business case for Corrections Corp., what we do and what we think is not a silly outstanding environment and that we are strongly positioned to benefit from the environment.

Globally, we're still seeing some 40,000 to 60,000 net new inmates coming into the national corrections systems every year. We're seeing the government is spending money on things other than prisons and as I think many of you heard us express, don't know what changes that could have come about that would change the dynamics of continued need for new prison beds and the desire of government has been their money on things other than prisons.

As you have heard us expressed in the past, as you look at the 20-state customers that we currently do business with, we see that those 20 states are growing at a about average percent compared to the remaining states. Since the January 1 of 2005, we see over 16,000 new inmates into our system and as we look at this demand, we continue to see that the only endurance to our ability to continue to grow the company is to make sure the beds are available when our current customers and some prospective customers make the beds as we look at the 20-state customers and the 80,000 new inmates that are forecasted to be needed… new inmate beds to be needed between the end of 2007 and the end of 2011. We can only identify about 8200 beds general, what we call general populations beds coming on line and funded between now and 2011.

Specifically, there are couples of solicitations out there. Florida has a solicitation for 2000 new beds. They have a solicitation for about 500 work count [ph] beds. The state of Arizona recently reissued a 600 bed out-of-state solicitation and within the last week or so have increased that to 1200.

Of course, the state of Texas is rebidding some of their current bed needs contracts and the state of Hawaii has an active solicitation for female beds which would… we are offering the continuation of beds we provide them at our Otter Creek facility in Kentucky.

We see the forecast for the Federal Bureau of Prisons to be consistent with what we have been saying previously. We have a system that's running at 37% over its rated capacity as identified some 15,000 inmate bed needs between now and 2011 and the additional capacity they have secured is only 8500. And then of course, we refer to the recent solicitation about the Federal Bureau of Prisons for up to 4000 new beds in their CAR-8 and CAR-9 solicitation. And of course, we've responded to both of those solicitations to be able to provide all the 4000 bed capacity should they looked at CCA.

And of course, we continue to see the U.S. Marshals growth in the number of detainees under there responsibility, some 7% each year over the last five years. And of course, we announced last quarter that we've been awarded a contract for 1,070 beds for the Las Vegas district. And then we have announced that… and we have said that the ice needs are really limited to the funding and we say that some 1400 new beds will be funded in the '09, the difference being the Senate and the House.

So, again, we continue to see the same demand that United States has experienced over last five years continued, and so we believe that the opportunities for CCA to benefit from this continued need by our government customers and over we would feel as the meaningful public service is brought on by the fact that we today have some 14,500 beds either in our inventory or been developed through an expansion or Green Field or new facility.

And as I look at the visibility on those 14,500, I see that almost 6000 or under contract specifically for those beds, we have another 3800 or so in which we are building beds in a system in which we already have customer relationship and the opportunity for them to be able to make theory and make growth about the expansion of existing relationships in existing facilities. And then as I mentioned that we have did the our Adams County facility of some 2,232 beds and a CAR 8 don't have any assurance as that we would be prevailing, provider a bed till we feel pretty good about where that facility is and how it fits into new requirements of the Federal Bureau of Prisons.

Certainly its just about 2500 beds and that really have no strong visibility that of course we internally feel we had the visibility and then of course so that 2500-2000 of it is our trails that two state facility that we announced about six months ago that will not be completed and available toward the beginning of 2010.

So again strong demands we've see continued and they position that we fund CCA and with this national platform of customers both stayed in federal and pretty good visibility to utilize the beds that we are buying online.

In fact if those beds were to be completely utilized over some period of time, we estimate that if we just maintain the same margins so that both owned and managed that we did in the second quarter of 2008 that would generates some $118 million of net additional facility EBITDA and of course that's compares to the $97 million of EBITDA that we have just announced in the second quarter of performance.

I have said on many occasions that this 14,500 beds a good portion of it is future expansions and new development to be brought online in the next 18 to 24 months. But that, if we were to decide that we were not going to develop another bed that we could fund that growth out of our cash on hand, our free cash flow from future earnings or potential future earnings, if you will just match roughly the last 12 months were, that about mid 2009, we would finish the construction and would have been able to take our revolver back down to zero, except for the loss of credits that are managed there.

But as we have demonstrated some many times that what are the opportunities for this company to continue to meet the demand in 2010, 2011 and beyond and that if we were to leverage the balance sheet up to four which we feel is in a comfortable leverage and with the potential flows, adjusted free cash flows that we just match our last 12 months. That we could develop some 12,500 -- 12,400 additional beds to meet what we believe is going to be a continued demand by our state and federal customers.

So we feel pretty good about the macro environment so what we do. We see nothing that changes there. But as we've expressed we're in a business that we can't control the timing of receiving our inmates. That sometimes its not -- if it's about when and we do our best to try to understand the expectations that I think we've mentioned on many occasions that this is not a quarter-to-quarter business but one that, that should be looked on as a long-term. Now before I finish my comments I want to add a little bit to what Todd has mentioned on the Sate of California.

It is meaningful relationship that we begin developing in the end of 2006 above the last half of 2007. We were able to expand our relationship with them because we had the beds available we could respond to their needs. I'd hope of trying to find beds for 8132 of their inmates to eliminate what they refer to as bad beds. So we are pleased that the State of California is work is develop this relationship with us, this partnership. But when we entered into it I think we need that there were some issues around the fact that their healthcare system was under receivership but so let me just wrap up my comments by saying that we as of the end of July we had 4609 California inmates in our care.

And this is in six different facilities. So its not like one its in six, and since the first of the 2008 we've averaged 365 inmates into the system per year and as Todd mentioned we believe our relationship with the California department for actions and rehabilitation remain strong and they continue to express their intent to utilize all of the contract beds that we have with them. But however the activation of the final expansion phase of our Tallahatchie facility has been suspended, while we work with CDCR and the Office of the Federal Receiver to ensure that the healthcare delivered that facility has consistent with the standards that are been said by the Office of the Federal Receiver.

We entered into this new relationship with the California, we were aware of the over side guidance of what is the California Prison Healthcare Receivership Corporation, which manages the medical care operations in the California prison system as a result of a class action law suit Plata is the name there, which is crucial to the operation of all the facilities, house in California inmates in state as well as inmates house out of State in the California system.

Before we recognize that the key aspect to our continued success with the partner to the State of California is our ability to function within the regulatory and legal environment, which is unique to the California Prison System. While the delayed intake of Tallahatchie facility has caused us to review that was our ramp up schedule for the reminder of the year. We believe that work currently been done to develop our healthcare delivery system, which is in keeping with the Plata standards will ultimately be beneficial to all CCA facilities out in California inmates.

And as a necessary step in the development, our overall management strategy for California population and we of course, appreciate the support and effort. On behalf of our partners the CDCR as well as the Officer of the Receiver as we continue to pursue this safe and secure activation bids under our contract.

Next thing I want to do is want make a comment or two about Bill Andrews. Obviously we announced some changes in the leadership of CCA and it can't say enough about the leadership of Bill Andrews as the Chairman of the Board since August of 2000, he has been a outstanding mentor to me and been very helpful in development and what I consider is a very strong independent board, which has led us to being in the top 100 companies as identified by the corporate responsibility at offshore magazine. So we think that's a quiet a statement about the government of this company. And of course Bill is going to stay-on as a Director and continue to assist me when I need.

I'm also proud to be able to acknowledge a new roll within CCA, President and Chief Operating Officer and proud to be able to recommend to the Nominating Committee and subsequently gave it to the board this new position for Damon. Damon has been with CCA for 16 years uniquely begin his career as a Correctional Officer at Leavenworth facility spent about half of his career in operations and then the other half of his career primarily in the business development area. So Damon has been around on almost all major decisions that have been made since I have been here since the August of 2000.

So to start it we would introduce Damon and maybe let him make a few comments and then with that we'll open it up for question and answers.

Damon Hininger - President and Chief Operating Officer

Thank you John and good morning everyone. Let me first say that I am honored and humbled by this opportunity, being with CCA for over 16 years the opportunity that has been forwarded to me to be a leader of this company's truly the captain of my career. As many of you've read, I started with the company about five months after graduating from Kansas State University. The company has offered me many opportunities over the years and I've obviously believed strongly in our mission and vision.

With that long-term, I don't want to be anywhere else. As long as I'm providing value to the company, our shareholders, and our customers I plan to stay with the company and raise my family here in Nashville for as long as you'll have me.

Finally, I seek to stay with the time and continue on CCA's current management path. John has gone about the businesses selecting and placing an extremely talented and passionate management team that is executing against our long-term plan.

One final comment if I can. Obviously my initial priorities are to complete seamless stand-off with our federal/local customers with our new leadership with them in business development, which is ongoing right now. Additionally, I'm working closely with our operations, business development and real-estate leadership in the coming days and weeks to better understand their important contributions to our company and how they can further contribute to faith, secure and just-in time solutions to our government partners and to increase the value to our shareholders by driving growth.

And with that, let me turn it back over to John.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Okay. Operator, we're ready for questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. And we'll take our first question from Todd Van Fleet of First Analysis.

Todd Van Fleet - First Analysis Corporation

Good morning, guys. I want to pursue a line of questioning on the issue of the morning which is California, and you had mentioned that the Tallahatchie facility is, I guess you singled out Tallahatchie as being a facility of dangerous issue. Is it just Tallahatchie, is it we should expect the slowdown of inmates in the facilities beyond Tallahatchie if you could adjust that first?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, we can't promise what that's going to be. We continued to receive inmates. We do not believe that it would go beyond Tallahatchie on any suspension. In fact, we are doing some doing moving [ph] around and may be even increase the availability in some of the others, then end may completely worked out. But we will say that one of the things that there is going to be an outcome of this effort in dealing with the expectations and the standards of the receiver is that it will probably drive some actions in some of our other facilities once we work through the issues at Tallahatchie. There appears to be some desire about the receiver to like modify the medical staffing, so that we have more RE and there is then LP and there is some processes that they feel are important.

So I say that we don't see at the moment that there would be any suspension of any of the other five facilities, but we do believe that we are going to probably be developing a little bit of roadmap of some of the requirements that we may have. And then again, we new when we entered into this transaction that it was going to be unique relationship because the California was, their healthcare system had been taken over by the federal court and they would have to do deal with it. But again to answer your specific question at the moment, we don't see the suspension of any of our other facilities.

Todd Van Fleet - First Analysis Corporation

Okay. So California has sent officials to Tallahatchie to review the healthcare environment there and they have indicated that they would like to see a change in the personnel or is there a PP&E that needs modifying here too with respect to Tallahatchie?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

PP&E?

Todd Van Fleet - First Analysis Corporation

Property, plant and equipment?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

No modifications on bricks and mortar now.

Todd Van Fleet - First Analysis Corporation

Okay. So, it's just the personnel that are available to the facility to provide care for the inmates?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Correct. And the policies and procedures and all those kinds of things that, certain expectation that that we will be making modifications delay.

Todd Van Fleet - First Analysis Corporation

Okay. And Tallahatchie is… have California officials visited the other facilities the Florence, North Fork and the others? Do you anticipate that this issue, I know you'd said that you are making plans to make sure that these issues don't affect the other facilities and you don't foresee them affecting the other facilities. But I'm just wondering the California's due diligence in their exercise, have they visited these other facilities?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Yes. In fact, we… California cannot transfer any inmates to us without the approval of the receiver. So that's been a process, it's been in place since the very beginning. And we do know that, approximately we can't you say that they went there. So I believe that each of the facilities was reviewed about the receiver before we begin the ramping up again here on, whether you did it at every single one of the six, I can't say that for sure, but I believe that I'm correct there.

Todd Van Fleet - First Analysis Corporation

Okay. So if I look at Tallahatchie then the capacity of that facility after the final expansions are put on, I think is about 2700 or so. It appears today that they have about 1600, 1700 in that facility. So it appears that may be a thousand is kind of what the exposure here is, in terms of, if you expected 6,000 by the end of this year, may be going back a quarter or two quarters ago, is that number now 5500, is it 5000, can you help us to calibrate that?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

I'm sorry, Todd. I was looking for my numbers on Tallahatchie. Ask the question again?

Todd Van Fleet - First Analysis Corporation

So just to recap, the capacity following the expansion, I think it's a second expansion or so, get you [ph] about 27,000 of that facility. And California has about 1600, 1700 inmates in that facility today and so that would seem to be, we are going to put a hold on about a thousand of these inmates.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Let me… it would be… it's 848. We have a 720-bed expansion that came online close to the end of the… in the second quarter and then we had 128 beds which you can see in the press release that come online here in the next month or two. So that was the beds available. The facility is 2,544, but I believe we… this is correct, we continue to hold 80 beds for the Tallahatchie County Jail.

Todd Van Fleet - First Analysis Corporation

Okay.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

So that…

Todd Van Fleet - First Analysis Corporation

So, I'm just trying to calibrate John going back…

John D. Ferguson - Chairman of the Board and Chief Executive Officer

… that 800 is what the suspicion.. suspension mean current.

Todd Van Fleet - First Analysis Corporation

Yeah. But going back, it seems at the beginning of this year you had expected may be 6000 inmates to be sent out of states by the end of this year and I think that was the CDCR's expectation as well.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Somewhere in that range.

Todd Van Fleet - First Analysis Corporation

Right. So at this point, given what you know today and given that it's just Tallahatchie that appears to be impacted by this issue at this point. Is that number… it wouldn't seem though they are going to put a hold on the entire 1000 for the rest of this year, presumably because it's a personnel issue. It should be fairly, quickly rectified, I would imagine, before you can get back on track. Maybe no more than a month delay. Again I'm just trying… I'm just thinking out loud here about the types of delays that we're going to see and try to calibrate the magnitude. So, is it, now you are expecting may be 55, 5800 for the full year versus the 6,000 that you had expected previously?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Yeah, you can't be… part of our growth is going to come from the expansion of La Palma and we've now a received a first 400 or so, I believe, inmates since that was activated and we're opening up housing units every period of time. We believe that, that we should be able to have if things go like they should, and we anticipate a couple of thousand of the beds utilized within La Palma.

So that's another, I guess, 1600 or so we have there. So, I would say that I hated to lead you to a number, but that we do think that if there is a chance that we'll be able to begin to utilize some of Tallahatchie beds in the last part of the year, that again is an expectation that is going to be tied to some work by us.

Todd Van Fleet - First Analysis Corporation

So, at this point you don't want to stick to your 6000.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Yeah. This… if you go back and probably look at the first ramp-up schedule we did when we had a 5,000-bed contract and then it was expanded to 7800 and something and then we added the 360 of Red Rock and each we have done it, its probably it's been modified in some way and we also have done some things within some of our other facilities so that. We can stage the inmates in other words we stay with them before they go into their final designation. So I guess without, I'd be reluctant to try to give you an exact number.

Todd Mullenger - Executive Vice President and Chief Financial Officer

But if I could add to that Todd little more color on that we have accelerated intakes at a couple of our other facilities such as La Palma? The challenge is at La Palma we have to add additional staff for those additional intakes at Tallahatchie as we sit today we have essentially that facility is fully staff. So all of our fixed cost, were essentially in place at Tallahatchie which means incremental margins per man-day on additional I mean to Tallahatchie are very, very, very high. It's so high, the additional inmates to Tallahatchie are incurred additional variable cost so call it in average variable cost $10, $12 a day, which means you can take that revenue per day on those inmates to track out the variable cost that's my average margin per man-day at Tallahatchie. And then I got the drains – I've got the facility fully staffed, I've got the drain in my P&L all of those staffs there with all the inmates and supervise

Todd Van Fleet - First Analysis Corporation

Alright okay that's very helpful. I am sorry take up so much time but if I could just as the big picture question on California then. They have got the three judge panels trails starting in November, you've got the state still legislative party fighting amongst one another still can't get a budget out. Do you expect what do you hear on California is that your expectation that they might continue to try to move further ahead of this meeting in November, this trial recommencing in November to help alleviate what is presumably a growing problem with respect to their over capacity situation?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Yes. It'll be hard for us to make that call. I think that if you back to AB 900 the -- which was the authorization of allowing some other state inmates as well as I think sort out with 32,000 beds, it could growth to 53 and so forth. The only piece of that that's working is the piece that we are participating in. So if California is almost a year and half away from authorizing new beds and they really have to our knowledge have not really started on anything, it would seem to me, that's not a bad solution but I don't know how to call that.

Todd Van Fleet - First Analysis Corporation

Thanks.

Operator

We will go next to Kevin Campbell with Avondale Partners.

Kevin Campbell - Avondale Partners

Great. Just a couple quick questions on California, before I move on to something else. When was the -- one of you guys received words from the State that they were going to suspend sending inmates to Tallahatchie?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

No there is a lot of that can be over a fair amount of 10, I guess, we begin to realize what are your expectations were you know visited that we had out in the first part of July. And then at that time, I guess we were then beginning to say okay what is the effect that we would have on our guidance and I'd say we probably begin to have a well appreciation for what were the expectations in as we began to plan for this call and once we close our books on June 30th and again to do other things.

Kevin Campbell - Avondale Partners

Okay. And looking at California had previous talked about some expectations of having the transfers complete March of April of '09. Do you have any idea whether or not that's still their expectations do you think that's reasonable something that you could achieve or given these delays at Tallahatchie maybe its more likely to be second quarter or third of '09 type of a finish?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, save Tallahatchie we believe that the commitment to utilize all the other beds in the timeframe that we previously discussed has not really changed. And so the only thing that I think probably could effect that would be for some reason we didn't bring online the last beds in March of 2009.

Kevin Campbell - Avondale Partners

Okay. So and looking at Tallahatchie you guys did just completed the 720 bed expansion you said in the second quarter and there is another 128 that's still to come in the third quarter?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Yes.

Kevin Campbell - Avondale Partners

Okay. And you have it staff construction about 128 or anything like that?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

No no.

Kevin Campbell - Avondale Partners

Okay. Could you talk a little bit to looking at…

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Remember that there was one other expansion before the one I was with 720 online in the fourth quarter 2007 some…

Kevin Campbell - Avondale Partners

Right.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

But this is…

Kevin Campbell - Avondale Partners

Yeah I think that cause always little confusion from our part I know there was --I thought there was two 720.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

That's correct.

Kevin Campbell - Avondale Partners

Could you talk about state budgets obviously we are seeing at the couple of budgetary issues that had various states. What do you guys expect to see on a consolidated basis in terms of the rate increases for this next fiscal year for state budgets and then perhaps federal budgets as well.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, most of the action that's going to take place at the state for the funding for the fiscal year beginning July 1, 2008 has taken place. We still have California that's out there that has not done their budget. I would say that the answer without going to in past too much is that we did get an increase with the majority of our state customers and those increases range from 2% to 5%. So it was not a real bad year, but we did have a few states that, that did not give us an increase. But the majority of them, we did get the increases in.

Kevin Campbell - Avondale Partners

On a consolidated basis, even with taking into account those where you didn't get increase -- a typical sort of 3% wouldn't be unusual?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

You know I didn't try to average what it is -- just gave you the range.

Kevin Campbell - Avondale Partners

Okay.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

We got, the 4.25% percent which we've talked about several occasions at Colorado and some others. So I don't know what the average would be because we couldn't just average the percentage there, we had to add each of the dollar amounts and average that so.

Kevin Campbell - Avondale Partners

Okay, could you talk a little bit about what you are seeing on the cost side on the equation? Any inflationary pressures for food and utilities, healthcare costs, labour?

Todd Mullenger - Executive Vice President and Chief Financial Officer

I can address that. Trying to address that. Looking at wages, general inflation continuing at it's current level for an extended period of time, right so inflation is up nationwide if that continues for an extended period of time, that can put up a pressure on our wages nationwide for all employers. However, a recession could also provide some relief as the unemployment rate increases.

So its really too early to tell on wages, we just gave mere an [ph] increases to our 16,000 employees effective July 1st and they would collect the kind of 3.5% range. And then we are going to have some markets just like we do every year where on the labor markets little tighter and we have to adjust wages in order to that on a handful of solids but that's really been no different than its been in past years. Food service I think as I mentioned on the last call all of our food service is outsourced under our contract through December 2009.

And that contract is scheduled its annual escalator in Q4 of 2008 which will be the same percentage as we've seen over the last three years. It's a fixed escalator we set three years ago.

Kevin Campbell - Avondale Partners

Could you tell us what the escalator is?

Todd Mullenger - Executive Vice President and Chief Financial Officer

We have agreed with the vendor not to disclose that.

Kevin Campbell - Avondale Partners

Okay.

Todd Mullenger - Executive Vice President and Chief Financial Officer

And then fuel here another area we've seen some significant increases in fuel obviously, however excluding TransCor, gasoline [inaudible] fuel is less than 1% of our operating expenses.

Kevin Campbell - Avondale Partners

Okay I'll jump back in the queue. Thank you very much.

Operator

We will go next to Barry Stouffer of BB&T Capital Markets.

Barry Stouffer - BB&T Capital Markets

Good morning gentlemen.

Todd Mullenger - Executive Vice President and Chief Financial Officer

Good morning

Barry Stouffer - BB&T Capital Markets

Why [inaudible] California I apologize but I am not sure I understand one; why it will take so long if able to take inmates at Tallahatchie and then two; why the issues there don't apply to the other facilities where you have California inmates?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Well, as I said, we know eventually the things that we end up developing the process and polices around what would the expectations of the receiver could, in fact what we have to do and some modifications to the, to some of the other facility. I think I can use the word roadmap. But right now, we have not seen any concern about suspending any of the other facilities. Would it happen, I guess may be it could but at the moment the focus seems to be on sorting through the issues at Tallahatchie which again will lead us to what we need to do at the other facilities.

Barry Stouffer - BB&T Capital Markets

And why will it take so long before you can -- if its not a facilities issue it's the processes procedures why will it take so long to work through that before you can take inmates there?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, I don't know it is -- its going to happen when it happens. We have made significant progress in some of the things that we know that they would like to see us done already. There will be a review process on their part and that will have some time I guess that -- we'll be expecting our government partners and serious offers to be coming to Tallahatchie to review what we have done, that's the thing that we can't time very well. We can time the progress that we make and the things that we are committed to do to make sure that we have met the standards that we believe they would glide out.

Barry Stouffer - BB&T Capital Markets

And just to clarify they're not suspending the in take of inmates at other facilities just Tallahatchie?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

That's correct.

Barry Stouffer - BB&T Capital Markets

So that's -- that's something to make sense, but I guess government doesn't make sense often. Can you comment on business trends with ICE inmates during the quarter. Any meaningful changes in inmate numbers there?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

We did have an increase, since the first of the year we've increased about a thousand since -- would you attribute that to.

Barry Stouffer - BB&T Capital Markets

Okay. That's all I have. Thank you.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

I was asking Damon.

Damon Hininger - President and Chief Operating Officer

Yeah. We had a little bit of increase in ICE and I would say probably a big part of that is some of the growth that we've had in our facility in the Southeast or Stewart County.

Barry Stouffer - BB&T Capital Markets

Okay.

Operator

And we will go next to Todd Van Fleet of First Analysis.

Todd Van Fleet - First Analysis Corporation

Hi, didn't expect to be back so quick. Just a couple of maybe knit pick items on the financials Todd. If I look at your supplemental, I see 2.9 million in other expense in the quarter. Can you tell us what that is?

Todd Mullenger - Executive Vice President and Chief Financial Officer

That's going to be La Palma ramp up cost.

Todd Van Fleet - First Analysis Corporation

Okay. All right, so its ramp up I guess i.e. start up. So should we think that start up expenses in the quarter has been above the 2.9?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Yes.

Todd Van Fleet - First Analysis Corporation

Okay.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

We'll begin scabbing [ph] our facility probably in March to get ready for the July for the State of California in May.

Todd Van Fleet - First Analysis Corporation

Okay. Any comments on Arizona at this point, if kind of going back and forth with your RFP, what's your take on what they are thinking with respect to their future needs?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, we aren't really sure exactly why they withdrew the other one, but I guess now they have come back out and doubled it. I am happy they did that. They have I think that some of the capacity that they were bringing online instead, I don't believe has quite materialized and their system just continues to grow and I think they have some real needs. I won't try to forecast that for them. I think we internally will try to evaluate that, but we believe that they've recognized that, if they can't do something their system is once again getting in a little bit of a very overcrowded situation. Of course remember that they brought back about a little under 600, I believe, or right at 600 from Indiana.

So, they were thinking may be, so can we get about without doing anything then I think they quickly rollout as they -- they know they can't -- in fact they've got to do more. So, we're happy that they are looking to the private sector for -- to help them deal with your overcrowding and obviously we have availability of space that we think that they could use.

Todd Van Fleet - First Analysis Corporation

Okay. And just jumping around here a bit. On La Palma, I'm just looking at the bed count that you guys are looking to bring on for Q3 and then for Q4. The magnitude of the jump I guess and kind of the average bed count going from Q3 to Q4, and Q4 you are bringing on Adams County. In Mississippi, you've got an expansion, another expansion I think coming online. Then you've got some more California beds or at least the La Palma probably coming online. How many beds are you expecting at La Palma to be able to accommodate your inmates by the end of this year?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Our expectation is up to 2,000.

Todd Van Fleet - First Analysis Corporation

Up to 2,000?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Yeah.

Todd Van Fleet - First Analysis Corporation

Okay.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

And we currently have about 400 there today.

Todd Van Fleet - First Analysis Corporation

All right. And that's a 3,000 bed facility in total and so you would still expect perhaps to have that last phase complete by perhaps the end of the first quarter next year?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

That's the plan, right now, is to, those last 1000 beds will come on in the first quarter.

Todd Van Fleet - First Analysis Corporation

Okay. I think, that's it. Thanks.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Thank you, Todd.

Operator

We'll go next to Kevin Campbell of Avondale Partners.

Kevin Campbell - Avondale Partners

Hi, thanks. I had a couple more questions. Getting back to California, can you talk a little bit about… and I am sorry if I missed this earlier. What some of the differences are that you guys might have to have at your Tallahatchie compared to where you are now? How they differ? What potential impact that could be on cost? Is the state going to reimburse you more for… I know you talked about improving the nursing staffing, is the compensation that you are going to be paid increase for that or are you going to be eating the cost there. So if you could talk a little bit about that? That would be helpful.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

I can't answer that yet. There could be some cost differentials from the existing staffing pattern that we agreed to under our contract. I think those are discussions, the state of California is expecting us to get in with them, but to be able to forecast right now, I think it would be hard to do. I think there is real justification that there should be some understanding on that. So yes, there are some staffing costs that could go up.

In addition to that there is just some processes that need to put in place that the receiver fills are important. And then also in addition to that there some reporting mechanism that the receiver wants to have in place to be able to review activity that's a little bit beyond what we would have expected, don't know what real cost that would be as we put in place but it could be some. So I don't know how to answer what the… how to quantify what that would be and nor can I give an anticipation of the outcome that we will have with California about those additional modifications.

Kevin Campbell - Avondale Partners

Okay. You did say though that it might, you feel like it couldn't spread over to the other facilities and as much as if you are required perhaps to have a new processes in place or reporting mechanisms or staffing for nursing at Tallahatchie and that could then translate into other 4 or 5 facilities were you have California inmates as well?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

There is a possibility, yes.

Kevin Campbell - Avondale Partners

Okay. Got a couple other questions. Could you talk a little bit about immigration and any concerns you guys might have about a potential change in administration be it Obama versus versus McCain?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

When it comes to the two candidates I am not sure that to be a great deal of difference then go back to because if you member back in April a year ago when there was an attempt to try to have some kind of comprehensive plan. The plan that was structured and was being considered was in fact support by Bush. So I think Congress is probably going to have more to do with driving the public policy. Then whoever is the new President and as I remember, I think McCain was supported of the compromising some way. So, I don't know about Obama but I am sure he is supporting those some of the comprehensive approach.

They are saying, that we tried to evaluate, when then was what affect would it have and one of the interesting thing was that, compromise was going to benefit those who had not, entered the United States illegally after January 1, 2007. So, if you had entered the country illegally from January 1, 2007 going forward then you would not benefit from the compromise.

So, one of the first thing we do, was to check and see how many of the 6,000 did it take of inmates that we have that have done that and I think we identified 750 would have benefited from the legislation. So what happens, is that there are same who will continue to have the attempt to secure the borders, which means that, there will still be folks trying to enter the country illegally after, whatever compromises pass and those will need to be detained.

And then if you remember, we talk about that lots of different sources of illegals that would be dealt with, there was a to be the requirement of maybe returning to Mexico or other country. If that happened, then we would make… could make criminals or folks that are here in a different ways than just being here legally. Based on that there was… they are also numerous folks that are here with criminal records. A lot of the inmates that we receive in our Arizona facilities for example, I guess all of our facilities or people who are being released from either the state, federal or local corrections systems.

And so, they are being released because they have committed a crime in some cases beyond just being here illegally, and their sense to let's say the inmates that we house that any of our CAR facilities, once they serve their time, then they are not releasing out in state, they are turned over to ICE, ICE then detains them and then ICE, then they go to their deportation here and they get deported. So, fair amount of the ICE detainees that we have responsibility for any day or people who have been released from serving from being [inaudible] or even being detained in a jail, before they leave.

So, there are still just lots of folks and like I said, if it's 12 million, 20 million whatever the number, there are still going to be folks that are going to be defined as being, needed to be detained, whatever the compromise is. And then you will also continue to have folks, who will still try to enter the United States and they will not be getting any benefits from the new legislation. So, it is hard to forecast other than I would say that 32,000 or 33,000 or 33,400 whatever the funding ends up being, is still not funding for a lot of beds, when you look at the needs of the ICE and border patrol.

Kevin Campbell - Avondale Partners

Okay. I do want to comment on one thing, you actually said on Hawaii. You mentioned there was an RP out of Hawaii. Is that just a rebid of essentially your existing relationship with them or is that potentially incremental to the female prisoners you have currently?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

It is rebid but I don't know the quantity. So if it's been extended, I don't know, I can't answer that. But the quick answer would be yes, it's the rebid of the existing relationship.

Kevin Campbell - Avondale Partners

Okay. And then a modeling question. I think perhaps, we've heard from you previously about Adams County and it's a potential tax benefit associated with building the facility down there. And I think you recall that, perhaps those going be… the D&A was going to be accelerated, a little bit more quickly. Is that correct?

Todd Mullenger - Executive Vice President and Chief Financial Officer

A tax basis depreciation and amortization, not book basis.

Kevin Campbell - Avondale Partners

Okay

Todd Mullenger - Executive Vice President and Chief Financial Officer

And you've seen that in our cash taxes that we are paying on a quarterly basis.

Kevin Campbell - Avondale Partners

Okay. So we should still then on the income statement still, assume 37 years for that.

Todd Mullenger - Executive Vice President and Chief Financial Officer

Yes.

Kevin Campbell - Avondale Partners

Okay. And then lastly, could you talk a little bit more about Bent County and your decision to exist there. I am assuming it was driven by lack of profitability, but [inaudible] comment on that as well?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Well, that has a lot to deal with it. We were such 20 plus year relationship on, I guess we hated not to continue. But, we rebid that release, the county rebid it back in 2005 or '06, it was a while back and the bid was to construct a new facility and then they will tear down the one that we've been in, which has really not been fun. It's a 30 plus year old building and it's all kinds of problems.

Obviously, they have been reluctant to spend some of the money and we've had some things that have been very costly to us based on the condition of the facility and as you know we indemnified our government customers. So as we began to review some of the requirements for the existing facility as well as some of the requirements for to go into new facility, two things were happening. One, we realized that we actually did not adequately staff it in our bid and that we needed additional staffing. And we also began to experience some salary increases because of the salary say that are in the Florida System and part of that again is our Bay Correctional Facility and some of the salaries that we have there.

And so we began to realize that this was not going to be a comfortable financial, and we approached them about may be some change, they were reluctant to do that. And so when we did this new agreement back in '05, we specifically put in the contract that we would have the right to get notice in addition to as you know many of our contracts are unilateral on the government side. And so, we decided that this was just an uncomfortable situation and decided not to continue it after the 1st of October, I guess October 9th is actually the 150 day notice time.

Kevin Campbell - Avondale Partners

Okay. And you guys have experienced, I think prior to this quarter some compression of your margins on the managed only side, should we expect that to pick up with Bay County not being removed this or in October?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Well, yeah it's been losing money all year long being not a meaningful amount.

Kevin Campbell - Avondale Partners

Okay, thank you.

Operator

We'll go next Bill Gilchrist at Westfield Capital.

William Gilchrist - Westfield Capital

Hi, thanks for taking my questions. One question Todd could you give us the driver why the maintenance CapEx was down year-over-year so much?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Its just a function of what the facilities request to maintain the facilities year-over-year and in some years it'll go up and some years maybe you need a new room for the facility which is a big CapEx item and other years its routine replacements so you'll see some volatility and then some it's also timing the budget demands and spread the budget evenly throughout the year and then they struggle to spend it all in equal increments quarterly. So you can see in there go up later in the year. But we would expect it to be probably little bit lower than it was last year.

William Gilchrist - Westfield Capital

So on a go forward basis I mean there is going to be aberrations on up side and down side for that total amount but it is $350 per bed, per year, roughly about what number we should be thinking about.

Todd Mullenger - Executive Vice President and Chief Financial Officer

Yeah, that's probably not a bad estimate. Again you are going to see some volatility.

William Gilchrist - Westfield Capital

Yeah, okay.

Todd Mullenger - Executive Vice President and Chief Financial Officer

From year-to-year. But that's a reason last night estimate.

William Gilchrist - Westfield Capital

Okay.

Todd Mullenger - Executive Vice President and Chief Financial Officer

On a per bed basis.

William Gilchrist - Westfield Capital

And clarification, a 3.5% merit wage increase for how many employees?

Todd Mullenger - Executive Vice President and Chief Financial Officer

For most of the 16,000, not all of them, some of them operate under federal contracts which were governed by a different process. But the vast majority of those are roughly 16,000 employees received merit increases effective July 1st.

William Gilchrist - Westfield Capital

Okay, and John a question for you in the, or anybody there, renegotiations with these customers -- can you just give us a general sense of when you're talking to these states and the Federal customers. What's their viewpoint of over the long term of the relationship with the private industry as i.e. are they saying fees, budgets are tight. We understand that, but you know we are going to need you even more so over the next few years or any other comments about how the renegotiation season will be helpful?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, many of the increases that we talked about were in the contracts. We do have some in which we have to negotiate and so as far as the legacy contracts that were in place on June 30, that we would continue, it really was a little bit of back and forth on those areas that we had to negotiate in addition to it the one has to do with what their net need is and I think we tried to express that our ability to effect the pricing really comes about when a customer are all sensitive I need additional beds how can you help me that one we -- that's when we have the opportunity to say that some of the historically numbers or not what we can then use also what we always try to continue to do is to make sure our customers understand what their next thousand beds would cost them. Not what their historically cost had been because. What we are, our growth pretty much going to, not pretty much its almost always going to come from growth, their growth that we are not going to go in and take over an existing system where we are going to meet their demand just in time, it'll be their new bed needs and we are helping them not have to go prison.

So it well its all alike and it a lot of the new is about the availability and when its about the availability that's when we have the opportunity to I think – what we consider a good and fair relationship.

William Gilchrist - Westfield Capital

The 8200 beds that you talked at the 20 sates customers you have that are funded or may be in some of states hope they funded. How secure are those.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

When you

William Gilchrist - Westfield Capital

How secure is the funding for those in?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Oh about the state?

William Gilchrist - Westfield Capital

Yeah.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

We would put it on the list if we felt that they had actually funded it now whether it could follow though or sometimes you do have that, but I would say that we've listed it and when we feel that there is pretty good possibility that they are going to do it now. 4000 is, those beds are in the state of Arizona, which I think we found that they might be running a little bit behind schedule on that which is driving some of there needs. But I would say that right now that we feel fairly… in most cases fairly started and those beds will be developed.

William Gilchrist - Westfield Capital

And in general, how many beds are being considered to be built?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Well, if you take California out which is a big number…

William Gilchrist - Westfield Capital

Yes.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

That means we've gotten started it would not be a whole lot of different than that. It just… when you have tough budget years, you just hardly even talk about it, unless you just get set and not utilizing what we have and you know you got to do that. But due to lot of deferment on those discussions and one thing that we would try to point out when we look at macro issues here is that, we saw similar situations back in 2001-2002 in which the states are going to tough budgets and infrastructure of prisons was one of the last things I want to spend money on. And so that's where we are benefitting from that lack of infrastructure expansion and we think will continue to benefit from that if we have the beds available when we need them.

William Gilchrist - Westfield Capital

Great, thanks a lot.

Todd Mullenger - Executive Vice President and Chief Financial Officer

One point of clarification on the maintenance CapEx, the $350 per bed for maintenance CapEx, that's a good number for facility maintenance CapEx, then you also have to include IT CapEx, so call IT CapEx a $150 to $200 a bed and facility maintenance CapEx $350 to $400 a bed. This is the point of clarification.

Operator

We will go next to Todd Van Fleet of First Analysis.

Todd Van Fleet - First Analysis Corporation

Yeah, thanks. I just want a follow up, trying to calibrate again this healthcare cost potentially related to this California issue. I think healthcare is may be 10% of the total operating expenses. Is that right, Todd?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Yeah, 10% of, let's say, revenues probably better.

Todd Van Fleet - First Analysis Corporation

10% of revenue and then the people cost unless, I guess what we are hearing today is that this is really kind of a personnel-related issue as opposed to requiring additional investments in the facilities. The personnel cost associated with that healthcare component, I would imagine is the small minority of that 10%.

Todd Mullenger - Executive Vice President and Chief Financial Officer

No, actually personnel including contract employees is going to be a significant component of that 10%.

Todd Van Fleet - First Analysis Corporation

I would have thought that the actual cost of, I guess I am thinking of… okay I guess I have to re-calibrate my thinking on that, I was putting in the different buckets. Let me ask a couple, just circling back Todd, the 2.9 million of start-up for La Palma. Can you help us understand what we might expect next quarter?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Well, moving forward what you're going to see is we really reached a phase where we are going to have continued ramp-up activity, I mean compared to kind of on a year-over-year basis. I think last year we were activating 4,000 to 5,000 beds. This year we are activating 4,000 to 5,000 beds. So from a year-over-year basis, you're going to see start to normalize a little bit and really the major impact is going to be on our fixed cost per day and our margin per day, due to the operating of inefficiencies.

And the challenge we have, we have talked about this before, the challenge we have in identifying what start-up costs are. The way we defined start-up costs is that generally those costs you incur are in advance of receiving any inmates. Once you start to receive inmates, and start to operate the facility with inmates in the facility, it's hard to isolate what costs associated with operating inefficiencies due to the ramp-up versus normal operating costs. So it's really hard to… once now that we have got Tallahatchie and operation with inmates, the expansions there and La Palma, I mean it's really hard to isolate what those fewer "start-up costs are going to be." I know that's not the answer you are looking for.

Todd Van Fleet - First Analysis Corporation

If that what it is.

Todd Mullenger - Executive Vice President and Chief Financial Officer

I am glad you are used to it.

Todd Van Fleet - First Analysis Corporation

Interest expense that was, I guess amortized in the period, what was that?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Oh, the capitalized?

Todd Van Fleet - First Analysis Corporation

Or capitalized rather interest?

John D. Ferguson - Chairman of the Board and Chief Executive Officer

For the quarter $4.1 million.

Todd Mullenger - Executive Vice President and Chief Financial Officer

$4.1 million.

Todd Van Fleet - First Analysis Corporation

$4.1 million, presumably that will come down moving forward then?

Todd Mullenger - Executive Vice President and Chief Financial Officer

Well, it depends on the timing, the level of capital expenditures.

Todd Van Fleet - First Analysis Corporation

Yes, thank you.

Todd Mullenger - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

We'll go next to Kevin Campbell of Avondale Partners.

Kevin Campbell - Avondale Partners

My questions have been answered. Thank you.

Todd Mullenger - Executive Vice President and Chief Financial Officer

You're welcome.

Operator

And at this time, I'll turn the conference back to management for any additional remarks.

John D. Ferguson - Chairman of the Board and Chief Executive Officer

Okay. Thank you everyone. I hope we were able to shed some light on few things, happy to be able to introduce Damon. And as always if anyone has any further questions, we'd be happy to try to make ourselves available, but thank you and good day.

Operator

And that does conclude today's conference call. We thank you for your participation. You may disconnect at this time.

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