Q3 2019 Earnings Call
Good day and welcome to the Geo Group third quarter 2019 earnings call in webcast, all participants will be any listen only mode.
[noise] assistance, please take only conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask your question. You May Press Star then one oneq touchtone phone to withdraw your question. Please press Star then too. Please note. This event is.
Being recorded.
Now I'd like to turn the conference over to Mr., Pablo Paez Executive Vice President Corporate Relations. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for today's discussion of the Geo groups third quarter 2019 earnings results.
With us today, or George Zoley, Chairman and Chief Executive Officer, Brian Evans, Chief Financial Officer, <unk>, President of Geo care, David Donahue President of Geo secure services.
This morning, we will discuss our third quarter results and outlook for the balance of the year.
We will conclude the called into question answer session.
This conference call is also being webcast live on our Investor website at investors Dog Geo group Dotcom.
Today, we will discuss non-GAAP basis information a reconciliation from non-GAAP basis affirmation checked out basis results is included in the press release and supplemental disclosure we issued this morning.
Additionally, much of the information we will discuss today, including the answer is we gave in response to your questions may include forward looking statements regarding our beliefs and current expectations with respect to various matters.
These forward looking statements or send it to fall within the Safe Harbor provisions the securities laws.
Our actual results may differ materially from those are forward looking statements as a result to various factors contained in our Securities Exchange Commission filings, including the Form 10-K , 10-Q, <unk> 8-K reports.
Now please allow me to turn this call over to our chairman and CEO George Zoley George.
Thank you Pablo and good morning to everyone.
We are very pleased with our strong third quarter financial results, which were driven by continued positive trends across our diversified business units.
While we expect continued growth we are keeping our financial guidance for the fourth quarter on changed at this time.
During the third quarter, we had a significant level of startup activity, which we expect will drive future cash flow growth.
Importantly, the startup projects involve the reactivation of previously idle facilities totaling 4600 beds.
In September we completed the reactivation of our company owned 1000 beds, South Louisiana Ice processing Center.
In October 1st we activated our company owned 1800 bed North Lake, Michigan Correctional facility.
And the county own 1800 bed Reeves County, Texas detention complex want into.
Both of these facilities are fixed price for the full tenure contract terms with the Federal Bureau prisons.
Internationally, we are in the process of completing negotiations <unk> construction, respectively on two expansion project in Australia.
And at our Ravenhall in Germany Correctional centers totaling approximately 800 combined beds.
In the UK. We are pleased to have been awarded a 10 year contract for the continued delivery of secure transportation services under our Geo Amy joint venture known as the text contract.
We have provided secure transportation services under the Pemex contract through our Geo Amy joint venture since 2011.
We are proud to have been awarded this new tenure contract to deliver a high quality services involving 1400 professional staff 250 specialist vehicles and 10 transportation hubs.
With respect to recent procurement activity.
In the U.S., both ice in the U.S. Marshals service have issued solicitations in California.
The U.S. marshals expects to award a management contract for the government owned 512 that El Centro, California facility before the end of the year.
And I'll direct procurement issued last month ice expects to award a minimum of approximately 6750 beds in the Los Angeles, San Diego in San Francisco areas at existing facilities.
This procurement is expected to result in new long term contracts starting in mid December of this year.
It involves a rebid of existing contracts at our adelanto and Mesa Verde ice processing centers as well as others contractor operated facilities in California.
It also allows for other existing facilities to be proposed in those three areas of the state.
As has been widely reported in the media at the state of California recently enacted legislation aimed at phase he now.
Public private partnership contracts for the operation of state Correctional facilities and federal facilities.
As we've previously announced our contract for our Central Valley facility was already discontinued by the California Department of Corrections and rehabilitation at the end of September .
And we expect that our California corrections contract for the Desert view facility to be discontinued discontinued by April one 2020, followed by the Golden State facility contract being discontinued by July one.
2020.
All of our eyes proposals have been submitted and we are now awaiting ice is review and award decisions.
We recognize that immediate.
Coverage of overcrowded border patrol facilities and the announcement by a handful of our financial institutions discontinued future financing has caused volatility in our equity and debt markets.
Unfortunately, this volatility has been driven by a false narrative and deliberate mischaracterization of our longstanding role as a quality service provider to ice.
As we have said repeatedly we do not manage any facilities that how it's on the company miners nor any border patrol holding facilities. The residential centers, we manage on behalf of ice are highly rated by national accreditation organizations. They provide.
Hi quality culturally response, it services in safe Humane environment.
Geos typical ice processing center amenities include flat screen Tvs in the housing area is comprised of either dormitory or a combination of cellular gileads with multi purpose rooms outdoor covered pavilions it artificial turf soccer feels.
The residents are provided with hot meals clothing, 24, seven access to health care services in full access to telephones and legal services.
Healthcare staffing at our ice processing centers is approximately 100% more than that of our state correctional facilities.
The additional healthcare staffing is needed to provide appropriate treatment for individuals who have numerous health and mental health needs due to a wrapping from countries with limited access to health care services.
We have been successful in providing these professional services for 30 years under the Democratic and Republican administrations.
We provide the same exact services at or facilities today that we provided for eight years under President Obama administration.
We are proud to published our first ever human rights and U.S.G. report at the end of September .
The report builds on our global human rights policy adopted by our board in 2013.
It provides disclosures on how we inform our employees our long standing commitment to respecting human rights.
The criteria, we used to assess human rights performance.
And our contract compliance program remedies and third party verification of our performance.
The 77 page report also addresses criteria based on recognized U.S.G. reporting standards related to the development of our diverse workforce.
Our efforts to advance environmental sustainability in our facilities and ethical governance practices.
Our SG report further highlights the continued expansion of our Geo continuum of care or see you'll see program, which was first piloted in 2015.
Our CLC program integrates offender rehabilitation, including cognitive behavioral treatment.
Post release support services to address basic community needs of released individuals.
This year. The CLC program has been implemented at 18 stay correctional facilities and to federal facilities managed by Geo.
We are proud to have taken our place as a world leader in offender rehabilitation and of our company's $10 million funding commitment to the so you'll see program, representing 7% of our company's net income.
The Geo continuum of care is our company's contribution to criminal Justice reform in assisting some of the 2.2 million people still incarcerated.
We are expanding our role as a vocal advocates for increased funding and improved rehabilitation programs that will help individuals re enter society is productive said is.
We applaud the new efforts in prison sentencing reform.
Made possible by the first step back resulting in approximately 6000 people release.
But we want to draw People's attention to the 2.2 million individuals who still remain incarcerated they have little or no access to rebuilds tissue programs.
We hope we are setting an example, as to how more can and should be done.
There's been a significant amount of misinformation regarding our banking partners and access to capital.
We are pleased to have successfully extended the maturity on our senior revolving credit facility to may.
2000.
24 without any change in terms, our shareholders should take comfort in knowing that we continue to have strong banking relationships with several dozens of lenders and financial institutions in our senior credit facility.
Additionally, we continue to talk to new lenders, who have expressed interest in establishing a lending relationship with us.
And we do not have any debt maturities due until 2022.
And as we discussed during our last earnings call, we expect to apply our excess cash flow to paying down debt.
During the quarter, we repurchased approximately $34 million of art 2022 senior notes in the open market. We also closed on 44 million dollar 15 year real estate loan bear an interest rate of 4.2% annually.
We believe that are growing earnings and cash flows will allow us to de leverage while providing support for our annual dividend payments, which we expect to remain unchanged.
We believe that are strong quarterly financial results several new project openings and new procurement activity are indicative of the stability of our cash flows in the sustainability of our dividend payments.
Ill now ask Brian evidence to review, our revised financial results outlook and liquidity position.
Thank you George good morning, everyone.
Today, we reported third quarter revenues of approximately $632 million and net income attributable to Geos 39 cents per diluted share.
Our third quarter results reflects $6.1 million in startup expenses pretax.
A $1.2 million loss on real estate assets and a 600000 dollar gain on extinguishment of debt related to the repurchase.
Of $34 million of our 2022 senior notes.
Excluding these items, we reported third quarter adjusted net income of 44 cents per diluted share ahead of our guidance range of 37 to 39 cents per diluted share.
We reported third quarter assets all of 72 cents per diluted share also ahead of our guidance range of 66 to 68 cents per diluted share.
Our strong quarterly financial results were driven by better than expected performance and favorable trends across our diversified business segments.
Turning to our outlook, while we expect favorable trends to continue we have maintained our adjusted net income and Apple guidance for the fourth quarter.
We expect fourth quarter 2019, net income attributable to geo to be in a range of 37 to 39 cents per diluted share and adjusted net income to be in a range of 39 to 41 cents per diluted share on quarterly revenues of 629 million to 634 million.
We expect fourth quarter 2019, apples to be between 66, and 68 cents per diluted share.
For the full year, we expect net income attributable to geo to be in a range of $1.45 to $1.47 cents per diluted share and adjusted net income to be in a range.
Of $1.60 to $1.62 cents per diluted share an annual revenues of approximately $2.49 billion.
We have increased our full year Apple guidance to a range of $2.75 to $2.77 per diluted share.
Moving to our capital structure during the third quarter, we repurchased approximately $34 million of our senior notes due 2022.
Representing approximately 14% of the outstanding amount for that trend tranche of our senior notes, which have the nearest maturity.
Additionally, during the third quarter, we closed on a 44 million dollar.
15 year real estate loan bearing interest at 4.22% annually.
At the ended the quarter, we had approximately $395 million in available capacity under our revolving credit facility. In addition to an accordion feature a $450 million under our senior credit facility.
As George mentioned in early June .
We extended the maturity of our 900 million dollar revolving credit facility to May 2024.
Contractually obligated all banks in the facility for approximately five years.
We were able to complete this extension without any changes to the Rob revolver size for pricing.
We continue to have ample capacity under our revolver to take out the remaining amount.
Outstanding of our 2022 senior notes, if we want to do so.
We recognize it since the execution of the revolvers extension news stories regarding our banking partners have created significant volatility in our debt and equity markets.
This volatility is directly tied to heighten political rhetoric that as George mentioned.
It's based on a mischaracterization.
Of our role as a service provider and our overall company record.
There has been also been a significant amount of mis information regarding our banking partners in our access to capital, including a recent online opinion opinion editorial on Forbes, which provided misleading in false information.
Contrary to this these misleading claims.
We continue to enjoy access the capital with several dozens of lenders and financial institutions currently in our senior credit facility.
Well, a handful of banks have announced plans to not extend future financing arrangements to our industry. All of those banks are contractually obligated under our senior credit facility through May 2024.
And those banks only represent approximately 25% of Geos total borrowing capacity.
Further the handful of bank announcements have not impacted our operations or financial flexibility.
And the credit agencies have not changed our ratings for over 30 months.
Our quarterly financial results reflect growing cash flows and we completed the startup phase for 4600 beds across three facilities during the third quarter.
Additionally, as we previously disclose the payment under operating lease agreement for the idle 1250 bed Hudson, Colorado facility will conclude at the end of 2019.
The expiration of this operating lease obligation Ics is expected to result in annual cash flow savings of $10 million beginning in January 2020.
The team continued growth in our cash flows will allow us to naturally de leverage.
While providing support for our annual dividend payment.
We also expect our cap capex requirements to significantly decreased going forward.
Aside from our maintenance Capex needs, which we currently estimated approximately $25 million to $30 million annually, we only expect minimal growth of capex requirements, mostly in connection with our electronic monitoring segment.
As we have noted previously.
We expect to add between 50 million and $75 million in excess cash flow annually to apply towards paying down debt, while maintaining our current dividend payments.
And we would expect our total net leverage to decreased to approximately four and a half times by the end of 2020.
At this time I'll turn the call over today Donahue for a review of Geo secure services [noise].
Thanks, Brian Good morning, everyone I'd like to provide you an update on our Geo secure services business unit.
Starting with our federal segment as has been noted today, we completed the reactivation of several previously idled facilities during the third quarter.
In Louisiana, we activated our company owned 1000 beds, South, Louisiana Ice processing center in Brazil, Louisiana under an existing inter governmental agreement with us.
South Louisiana Center is expected to generate annualized revenues of approximately $25 million.
In Michigan, we commenced operations on October Onest under a 10 year contract with the Bureau of prisons for the reactivation of our company owned 1800 bed Northlake Correctional facility.
The new contract is projected to generate approximately $37 million in annualized revenues.
And then Texas also under a 10 year contract with the VLP, we worked with Reeves County to reactivate the county owned 1800 bed Reeves County detention center wanting to.
[noise] Geo provides management consulting and support surfaces to Reeves County in relation to this facility while the county holds the contract with the VLP for the operations of the facility.
Turning to procurement activity at the federal level. The VLP has canceled the car 18 solicitation for the management contract or the government owned to 2355 bit tasks facility in California.
This decision was made as a result of damage sustained by the facility during seismic activity in California earlier this year.
Got it remains possible that a portion of the task facility may remain in operation.
The solicitation has been canceled.
Also in California, both ice on the U.S Marshal service have issued recent procurements for bed space. The U.S. marshals has issued a solicitation for the management and operation of the 512 bed El Centro facility, which is owned by the government.
We expect the decision on this procurement to be made before the end of the year with a contract effective date of January one 2020.
With respect to is the agency has issued a solicitation for a minimum of approximately 6750 beds at existing facilities in Los Angeles, San Diego and San Francisco areas.
The procurement encompasses a rebid of existing contracts for for contractor operated facilities, including our 1940 bed Adelanto and 400 bed Mesa Verde ice processing centers.
The solicitation also allows for other existing facilities to be proposed.
As we noted last quarter our contract for our 700 bed Central Valley facility was discontinued by the California Department of Corrections and rehabilitation at the end of September .
And as George discussed earlier, our 700 bed Desert view and 700 bed Golden State, California Corrections contracts will also be discontinued by April and July of 2020, respectively.
Moving to our state segment, we believe our remaining stay correctional customers have stable budgets and we've been able to provide high quality services without being impacted by budgetary constraints.
We are also currently in discussions with a number of states regarding their current needs and challenges.
Several states continue to face capacity constraints and many of our state customers are facing challenges related to older prisons and the states, where we operate the average age of state prisons ranged from approximately 30 to 60 years.
In Alabama, the state's expected to move forward with a solicitation process to build several thousand beds to replace their existing facilities, which are currently overcrowded and costly.
We are monitoring the opportunity, which May result in contract awards in the first half of 2020.
Finally, as we have previously announced we discontinued the managed only contracts at the 625 bed northeast, New Mexico detention facility, which had been financially underperforming for several years.
Moving to our international markets. We're currently undertaking a number of expansion projects in Australia.
The state of Victoria, we are engaged the negotiations for a 300 bed expansion at our 1300 bed Ravenhall Correctional Center, which is expected to result in additional annual revenues of $19 million.
And new South Wales, we're completing the development of a 489 bed expansion at the Junichi Correctional Center, bringing the total capacity to 1000 270000 beds.
This expansion is expected to be completed between the end of this year and the beginning of next year with a projected annual revenues of $12 million.
Also in Victoria, we're constructing a 137 bed expansion to the form Correctional Center, which will bring the total capacity at the center to 955 beds with expected completion during 2020.
Finally in the United Kingdom, our Geo Amy Joint venture was awarded the tenure contract last week by the UK home office for the continued delivery of secure transportation services under the Pecs program.
We have been providing these services since 2011 and this contract award is a testament to the high quality partnership of our Geo Amy joint venture with the UK home office the contract will encompass secure transportation for approximately 250000 individuals across the criminal Justice system in England.
In Wales with 1400 transportation step 250 special purchase secure vehicles and Tim vehicle depots.
At this time I'll turn the call over to an for a review of our Geo care. So again, thank you Dave and good morning, everyone I'd like to provide you an update on our Geo care business unit, starting with our Geo reentry services Division during the third quarter, we were awarded a new 60 bed contract expansion in Alabama for Alabama.
There are pubic education facility.
Additionally, in Louisiana, we were awarded a new contract for a non residential day reporting center.
We continue to pursue areas, where we can assist individuals' was successfully re entering the community, including residential nonresidential and in custody treatment and rehabilitation services.
Moving to our youth services Division our programs continue to provide important rehabilitation and treatment alternative for used across several state and local jurisdictions with stable utilization rate across our residential facilities.
Our VI electronic monitoring division was awarded a contract during the third quarter for the continued delivery of electronic monitoring solution to the administrative office of the U.S. courts.
Additionally, we are waiting a contract award decision by the end of year for the rebate of the alternative to the tension contract with ice.
This program has allowed the federal government to effectively used community alternative for several tens of thousands of individual going through the immigration review process.
I just held this important contracted ice first piloted the program in 2004.
Finally, we continue to expand our geo continuum of care program across the country, our continuum of care programs integrate enhanced in custody rehabilitation, including cognitive behavioral treatment with post release support services, such as transitional housing transportation clothing food and.
Josh placement assistance.
The continuum of care program to supervise and assisted at the corporate level with the division that has expanded to over 50 staff with subject matter experts in education cognitive behavioral treatment substance abuse treatment post release services continuum of care training and quality assurance.
As highlighted in our recently published yesterday report on any typical day there were approximately 30000 participants enrolled Ngls offender rehabilitation programs.
Our continuum of care programs deliberate 6.7 million program hours 9000, vocational certificates and nearly 3000 high school equivalency Depalma's in 2018, and we're on pace to surpass these metrics in 2019.
At this time I'll turn the call back to George for his closing remarks.
Thank you and the fundamentals of our business remains strong in our financial operational results are driven by our company's quality services.
<unk>.
We have always been committed to treating everyone in our care with respect and dignity and we acknowledge our unique responsibility to respect and protect their human rights.
We are proud to have published our first ever acumen rights and Eschew report in September of this year, we hope to continue to engage with our diverse.
Stakeholders as we refine our yes, she reporting going forward and work to dispel the political rhetoric rhetoric and faults narratives that have regrettably creative volatility in our company and in the capital markets. We are proud of the dedication and professionalism of our diverse workforce.
Over the last 30 years.
Helped establish geo as a leading professional service provider to federal state and local government agencies, we remain focused on the effective allocation of capital and believe our growing cash flows will allow us to de leverage while providing support to our annual dividend payments.
As we did this quarter, we expect to continue to apply our increasing cash flow on paying down debt in the coming quarters that completes our presentation will be glad to address any questions.
Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone. If you are using the speakerphone. Please pick up your handset before pressing the keys.
At any time. Your question has been addressed or you would like to withdraw. Your question. Please press Star then queue. At this time, we will pause momentarily to assemble our roster.
First question today comes from gain dollar of second market capital. Please go ahead.
Hey, guys, good quarter, well being and provide a little bit more color on the $44 million loans.
With the counterparty and what properties and securing alone.
Hi, This is several banks, we havent disclosed publicly who the banks. We're in it was on Oh, we have a few assets that are not included in the collateral pool on our senior credit facility. So that that's where we were able to do it.
Do you have any additional capacity to do that on other property.
You know, maybe some of one or two other smaller sized assets. So we're continuing to look at that or some other alternative.
Financing vehicles, so we'll look at that.
Alright, thank you.
The next question comes from David Napster of ARIA Capital Management. Please go ahead.
Hi.
Have a very specific question I'd like to answer you did say general way.
Before you, it's obviously, a big problem I just need to Nevada after 59 years there.
And that seems to be those difficult state specific question is the two facilities.
We are contracts around April and May of next year do you have risk wanted or they just management contracts or do you have some of the property and from that if you just expand how much property risk you have in specifically, California, but in general if you have another answer thank you.
Well they are both owned facilities.
But we have submitted proposals for new contracts for those facilities.
For desert.
Okay. So for the state to take over the property or.
No no.
As I indicated earlier, there's a.
An ice procurement asking for a new contracts in.
And a three basic locations San Diego, Los Angeles in the San Francisco area.
We have to existing facilities that serve the San Francisco and Los Angeles area. They are the respectively. The Mesa Verde facility and the adelanto facility and they.
That.
We have definitely submitted those facilities for new long term contracts.
Great. Thank you.
Again, if you have a question. Please press Star then one.
The next question comes from Matthew Larson of National Securities.
Hi, Thanks for taking my call.
Back to California, you know they passed a.
Some resolution that they wouldn't be working with any private.
And turman centers or prisons, but and trying to assess the downside of.
Political rhetoric.
For some reason.
No one of these candidates who has.
You know tried to diminish the value of private prisons, and perhaps put up misleading.
What are the things would be.
There is overcrowding entered to build a new facility, it's difficult for cash strapped for municipalities and states, but it for some reason.
They couldn't work with.
For profit.
Folks like yourself.
And you owned facilities I mean.
<unk> is is a.
Possibility that if you are the most or Tony in sense that they would just by your facilities that some reasonable value. So that even though you lose the contract it's not as if you have to write off.
You know that facilities is plenty of other states, which you outlined whether its Alabama, Texas Somebody's other places that have aging facilities that have or kind of a difference.
That's on the whole thing.
So.
That's kind of the plan B if a if the worst comes and you got to <unk>. Your customers just won't work with you because it's a political season.
And the wrong people.
Might get elected.
Would it be an option just to sell the facility to the state let them manage it but still a recover you know.
The bulk of when your investment.
Well those are.
Clearly alternatives that we are not contemplating at this time.
Alternatives Oh, the leasing of a property the sale of property, but.
I think we have considerable flexibility at this particular time.
Okay, I mean, I tend to agree I Miss upset on the campaign trail or what have you.
Awesome doesn't.
Show up in reality.
I think Guantanamo still open, but that's just a comment alright.
Try and.
Personally as an investor.
I'm trying to gauge the downside and the upside is pretty evident.
So thanks for that answer.
Yeah, It's I referenced the the I solicitation is in progress as we speak all proposals have been submitted there there are undergoing a review and according to the solicitation.
New contracts are contemplated in mid December of next month.
Can I just touch on that because I I got to admit I haven't drilled down totally on what was passed in California. I think you do have a new Sims.
The group basically past <unk>.
Beginning in two does some some sort of initiatives beginning next year that they just would not renew contracts as a state.
For private president prisons are detention centers.
And yet you're you're now, saying that you have a lot of contract bid a bit.
Request for bids out there by ice and what have you or do they work outside of maybe this state.
HM memo because they are ice and it's a federal.
Issue and so they might be domiciled in California, but since its federal.
It's apart from whatever California wants to do.
You made a lot of complicated statements. There, let me see fucking untangle them first of all the statute is AB 32, and it does not go into effect till January one of next year.
But it does restrict.
Any state or federal facilities.
To their.
Contract terms.
Effective January one of this year. So yes, if you have.
A contract that's in place before the end of this year. It can go full length of its contract term.
Got it.
Okay I mean, that's.
That's a good piece of.
Information. Thank you appreciate it.
Your next question today comes from Miami, Florida of Wells Fargo Asset management. Please go ahead.
Amit I My question was actually already answered.
Okay.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. George is only for any closing remarks.
Oh. Thank you all for listening today, we look forward to address new on the next quarterly conference call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.