Q2 2022 Geo Group Inc Earnings Call
Good morning, and welcome.
Oh group second quarter 2022 earnings call.
All participants will be in listen only mode.
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After today's presentation there'll be opportunity now questions.
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Hi.
Turning the call over to Mr. Pablo Paez Executive Vice President of corporate Relations. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for today's discussion of the Geo group's second quarter 2022 earnings results.
With us today are George the only executive Chairman of the Board Jose Gordo, Chief Executive Officer, Brian Evans, Chief Financial Officer, James Black President of Geo secure services.
<unk> President of Geo care.
This morning, we will discuss our second quarter results and our outlook, we will conclude the call with a question and answer session.
This conference call is also being webcast live on our Investor website at investors <unk> Geo group Dotcom.
Today, we will discuss non-GAAP basis information a reconciliation from non-GAAP basis information to GAAP 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 answers we give in response to your questions may include forward looking statements regarding our beliefs and current expectations with respect to various matters. These forward looking statements are intended to fall within the safe Harbor provisions of the securities laws, our actual results may.
Differ materially from those in the forward looking statements.
Result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q, and 8-K reports with that please allow me to turn this call over to our executive Chairman George Zoellick, George Thanks, Pablo and good morning to everyone. Thank you for joining us on our second quarter 2000.
<unk> earnings call.
Pleased to be joined today by our senior management to review our financial results for the second quarter the trends for our business segments.
Our increased guidance for 2022, and our recent announcement of proposed transactions to address our debt maturities and strengthen our capital structure.
Our quarterly operating and financial results continued to deliver better than expected performance, which we believe is underpinned by the strength of our diversified business units.
As a result of our investment and business strategy over several years, we have been able to develop interest industry, leading solutions and program.
Across the diversified spectrum of government services.
And we believe the unparalleled diversification and scope of our services have set <unk> apart in our industry and it's allowed us to achieve quality growth there.
This continued growth led us to achieve some of the best quarterly financial results in our Companys history during the second quarter of 2022.
Our quarterly revenues increased by 4% year over year to $588 million, which follows revenue declines over the last two years due to the Covid pandemic and policy changes that impacted several of our federal contracts.
Our quarterly net income attributable to Geo increased by 28% year over year to approximately $54 million for the trailing 12 months ending on June 30.
Our net income attributable to Geo was $77 million.
Our adjusted EBITDA increased 12% year over year to more than $132 million in the second quarter of this year.
This quarterly run rate of adjusted EBITDA is the highest in our company's history and for the trailing 12 months ending in June 30.
<unk> adjusted EBITDA totaled almost $500 million for the first time ever.
We expect our diversified business units to continue to deliver strong financial performance for the balance of the year and we have increased our financial guidance for the year.
We expect our full year.
2022, net income attributable to geo to be in a range of.
$158 million to $166 million.
Our full year 2022, adjusted EBITDA to be in the range of approximately $515 million to $530 million.
Looking at our current trends for each of our segments are secure services owned and leased.
Active facilities experienced a year over year increase in competency that occupancy rates of three percentage points ending the second quarter of this year at 87% of capacity.
Our secured services owned and leased segment is comprised primarily of facilities under contract with our three federal Government Agency partners. The Federal Bureau of prisons U S Marshals service and the U S immigration and customs enforcement.
As of the second quarter. This year, we only have one company owned Correctional facility under a direct contract with the Federal Bureau of prisons located in Michigan.
Our North Lake Correctional facility in Michigan generates approximately $38 million in annualized revenues and as we have previously disclosed this contract is scheduled to expire at the end of September .
This year.
Our U S. Marshals service facilities are generally located near federal courthouses and provide needed detention bed space in services for pre trial federal defendants.
Occupancy rates across our U S. Marshal service facilities have continued to be stable.
Turning to our ice facilities, while we saw a year over year increase in occupancy rates during the second quarter of 2022 detainee populations continue to remain below historic levels.
Population levels at certain facilities have been impacted by outstanding Federal Court orders related to Covid pandemic, which continued to restrict ice's ability to utilize full operational capacity of these facilities.
In addition, COVID-19 related restrictions.
<unk> 42, which were first enacted in March of 2020 continued to place to be in place today at the southwest border.
The administration has announced that these titled 42 restrictions would be lifted in may of this year, but that that decision was stopped by the federal court and remains in litigation.
Yeah.
While the timing and impact of lifting entitled 42 restrictions remain difficult to predict we believe geo continues to be well positioned to help deliver diversified services and solutions to assist the U S Department of Homeland security in the future.
Our updated guidance for 2022 continues to assume only gradual improvements in utilization rates across our ice facilities.
While ice detainee populations remain below historical levels, we have Conversely, seeing continued increases in the department of Homeland security.
Alternatives to detention program called the intensive supervision and appearance program or <unk>.
Our <unk> subsidiary provides a full suite of monitoring and tech now.
Technology services under the <unk> contract to ensure compliance for individuals undergoing the immigration review process.
As the publicly available data shows the number of individuals enrolled in ISF continues to increase in the program currently has approximately 300000 participants.
Moving to our managed only business our occupancy rates remained stable at 97% of capacity during the second quarter 2022, our managed only business is primarily comprised of state level Correctional facilities and our focus in this segment has been on mitigating the.
Challenges Covid pandemic, which among other factors has contributed to a difficult labor market.
We are pleased to have worked closely with our government agency partners to address the staffing and wage challenges facing state correctional facilities across the country.
As a result of these efforts we've been able to provide wage increases for our employees across several states.
With respect to our reentry services facilities, while occupancy.
Rates remain below historic levels, we did experience a sequential increase of four percentage points in occupancy rates and ended.
The second quarter at 49% of capacity.
As a reminder, new intakes are residential reentry centers slowed down during the Covid pandemic as governmental agencies opted for nonresidential alternatives, including furloughs home confinement and data reporting programs.
Despite these challenges we successfully renewed 16 residential entry contracts.
During the second quarter of 2022.
Additionally, our non residential reentry business continued to grow in the second quarter of this year with compensated mandates increasing by approximately 26% year over year.
And our electronic monitoring and supervision segment continued to deliver strong growth.
In the second quarter of this year as well our continued strong performance has allowed us to significantly reduce our net recourse debt and deleverage our balance sheet.
Since the beginning of 2020, we have reduced our net recourse debt by approximately $375 million, including approximately $130 million during the first half of this year.
As we continue to focus on reducing our net recourse debt. We are pleased to have recently announced several proposed transactions to comprehensively address the substantial majority of our outstanding debt maturities.
The proposed transactions will stagger, our debt maturities between 2023 and 2028.
Therefore significantly reducing the total recourse debt that is due between 2023 and 2024 from approximately $2 billion to approximately $600 million.
The staggering of our debt maturities over a longer period of time will allow us to continue to allocate a significant amount of excess cash flows toward further reducing our net recourse debt.
Based on our current projections, we expect to reduce our net recourse debt by approximately $200 million in 2022.
Ending the year at just under $2 billion in net recourse debt and total net leverage of approximately three eight times.
EBITDA, assuming consistent performance across our business over the next two years, we would expect to be able to reduce net recourse debt by at least $200 million to $250 million annually.
Based on this level of debt reduction our goal would be to decrease net leverage to below three five.
Five times by the end of 2023 and two below three times by the end of 2024.
The proposed transactions to address our debt maturities are expected to close in the next 30 to 90 days and require approval from 70% of our term loan lenders and a majority of the holders of our 'twenty three 'twenty four and 2006 senior notes Brad.
Ian will discuss the current levels of participation.
And consent in more detail in his presentation.
We believe these proposed transactions will place deal in materially stronger financial position.
We look forward to using the substantial majority of our free cash flows to significantly deleverage our balance sheet for the foreseeable future. We also plan to continue to undertake comprehensive review of potential sales of company owned assets and businesses, which we expect to enhance our <unk>.
Debt reduction efforts.
We are optimistic that the successful completion of these comprehensive proposed transactions and our continued focus on reducing net recourse debt will have the potential to unlock additional equity value for our shareholders.
After obtaining our objective of net recourse debt reduction and deleveraging we plan to evaluate the allocation portion of free cash flow to fund quality growth opportunities and potentially return capital to our shareholders in the future.
At this time I'll turn the call over to Brian Evans to address our proposed transactions in more detail and review our financial results.
Updated guidance.
Thank you George Good morning, everyone for the second quarter of 2022, we reported GAAP net income attributable to geo of approximately $54 million.
Adjusting for a gain on real estate assets.
We reported adjusted net income of 42 per diluted share on revenues of approximately $588 million for the second quarter of 2022.
We reported second quarter 2022, Apple of 69 per diluted share and our adjusted EBITDA increased by 12% to more than $132 million, which represents the highest quarterly run rate in our history.
Our quarterly financial results have exceeded our expectations over the trailing 12 months ended on June 32022.
During this period, our adjusted EBITDA reached almost $500 million for the first time, surpassing any other 12 month period in our company's history.
This strong financial performance has been underpinned by the continued growth in our electronic monitoring and supervision segment, increasing compensated mandates in our nonresidential reentry business and improvements in occupancy rates in our owned and leased facilities.
Our better than expected performance has allowed us to significantly increase our unrestricted cash on hand to approximately $588 million as of the quarter ended on June 32022, and reduce our net recourse debt.
Since the beginning of 2020, we have reduced our net recourse debt by approximately $375 million, including approximately $130 million during the first half of 2022.
Our strong financial performance also allowed us to proactively engage with our creditors to address our debt maturities, which led to the commencement of the proposed transactions, we announced a couple of weeks ago.
As previously announced on July 18, 2022, we entered into a transaction support agreement with certain lenders under our existing credit agreements as well as certain holders of our 2023 2024 and 2026 notes since July 18th several additional creditors have become party to these.
<unk> support agreement, thereby committing to support the proposed transactions.
These proposed transactions will stagger, our debt maturities over a longer period of time significantly reducing our near term debt maturities.
Under our current debt maturities, we would have had to address approximately $2 billion and outstanding debt between 2023, and 2024 and approximately $580 million in outstanding debt in 2026.
Under the proposed transactions and based on commitments as of July 18, and minimum participation requirements.
Our revised debt maturities are expected to be approximately $170 million in 2023.
Approximately $430 million in 2020 for approximately $340 million in 2026.
$900 million to $960 million in 2027, and approximately $440 million in 2028.
These amounts are subject to final participation levels under the proposed transactions and importantly, these amounts do not reflect a significant debt reduction. We continue we intend to continue to pursue going forward, we expect to reduce our net recourse debt by a total of approximately $200 million in 2020, Q, which would allow us to enter.
With less than $2 billion in net recourse debt and lower our net leverage to around three eight times.
Assuming our financial performance remains consistent over the next two years, we expect to be able to further reduce net recourse debt by at least $200 million to $250 million annually.
As we continue to reduce our net recourse debt our goal would be to decrease our net leverage to below three five times by the end of 2023 and to below three times by the end of 2024.
These assumptions reflect only modest improvements in our projected adjusted EBITDA run rate in 'twenty, three and 'twenty four.
If our adjusted EBIT growth EBITDA growth ahead of these expectations are net recourse debt and net leverage would decline more rapidly.
These projections are predicated on the closing of the proposed transactions to address our debt maturities, which is expected to take place in the next 30 to 90 days subject to review by the SEC of a registration statement.
Our proposed transactions are conditioned upon receipt of certain credit or participation in content.
<unk> term loan lenders holding 70% of our term loan commitments and a majority of the holders of our 'twenty three 'twenty four and 2016 year notes.
As of today holders of approximately 42% of our 23 senior notes, 65% of our 24 notes.
68% of our 2016 year notes and 70% of our term loans have committed pursuant to the proposed pursuant to the transaction support agreement to support the proposed transactions.
Solicitation of additional participation in content, including with respect to our 2023 senior notes and term loans is underway and as noted we have received additional commitments of support towards the required thresholds since we executed the transaction support agreement.
Upon closing of the proposed transactions based on committed support as of July 18, 2022, and minimum participation requirements. We expect our interest expense to increase by approximately 27 million to $30 million pre tax in 2022 and by an additional 37 million to 41 million.
Pre tax in 2023.
We believe that the proposed transactions will reduce the risks that our near term debt maturities posed to our ability to refinance our debt pursue future growth opportunities and enhance long term value for our shareholders.
Based on our historical and expected cash flows and assuming a reasonable future access to capital markets, we expect to be able to address the new staggered debt maturities in the ordinary course of business to.
To complement our debt reduction efforts, we have also been exploring opportunities to sell company owned assets and businesses over the last two years through the end of July 2022, we have completed sales transactions involving facility assets.
Segment contracts in land totaling approximately $70 million and proceeds.
We expect to continue to explore additional opportunities for asset sales to meet our previously articulated goal of generating between $100 million and $150 million in proceeds.
Despite the expected increase in our interest expense or.
Our strong financial performance, which we expect to continue for the balance of the year has allowed us to increase our financial guidance for 2022.
We now expect full year 2022, net income attributable to geo to be between $158 million and $166 million on annual revenues of approximately $2 35 billion.
Adjusting for extraordinary items, we expect full year 2022, adjusted net income to be in a range of $1 28.
To $1 34 per diluted share we.
We expect full year 2022 ammo to be in a range of $2 40.
To $2 46 per diluted share.
And we expect full year 2022, adjusted EBITDA to be in a range of approximately $515 million to $530 million.
We have also issued financial guidance for the third and fourth quarters of 2022.
For the third quarter of 2022, we expect net income attributable to geo to be between $39 million and $42 million on quarterly revenues of 603 million to $608 million we.
<unk> third quarter 2020 to Apple to be between 50 557 per diluted share in third quarter 2022, adjusted EBITDA to be between $131 million and $138 million.
For the fourth quarter of 2022, we expect net income attributable to geo to be between $27 million and $32 million on quarterly revenues of 600 million to $605 million.
We expect fourth quarter 2020 to Apple to be between 52.
<unk> 56 per diluted share and.
In fourth quarter, 2022, adjusted EBITDA to be between $127 million and $135 million.
Our 2022 guidance reflects the expected increase in our interest expense and the previously expected non renewal of our contract with the BOP for our North Lake facility in Michigan effective September 32022.
We expect our effective tax rate for the full year 2022 to be between to be approximately 28% exclusive of any discrete items. At this time I will turn the call over to James Slack for a review of our Geo secure services segment.
Thank you Brian Good morning, everyone. It is my pleasure to provide an update on Geo secure services.
During the second quarter of 2020 to our employees and facilities achieved several important milestones.
Our facility successfully underway at 46 audits, including internal audits government reviews third party accreditations and certifications under the prison rape elimination.
Eight of our secure services facilities are scheduled to receive accreditation from the American Correctional Association. This month with an average score of 99, 4% and two of those facilities achieved a perfect accreditation score of 100%.
Additionally, two of our secure services facilities recently received U S Department of Justice certification under the prison rape elimination act with both facilities exceeding standards in several areas.
Our GTI transportation Division safely completed approximately $4 3 million miles driven in the United States and overseas during the second quarter of 2022.
Every quarter, our secure services facilities achieved several operational milestones and the delivery of our services and we are grateful for the continued dedication of our employees and their commitment to operational excellence.
Turning now to trends impacting our government agency partners starting at the federal level. We currently have one remaining company owned secure service facility under contract with the Federal Bureau of prisons.
As we previously disclosed we expect our contract for the 800 bed North Lake Correctional facility in Michigan to not be renewed at the end of September 2022.
We have enjoyed a decade's loan partnership with <unk> and our facilities have provided high quality support services. However over the last 10 years.
Populations have declined and this trend was accelerated by the Covid pandemic.
Following the activation of our North Lake Correctional facility, we will have six idle secure services facilities that were previously under contract with the DLP.
We are focused on marketing these facilities to other government agencies at the federal and state level, and we hope to be able to reactivate lease or sell of these important assets in the future.
Unlike the popular.
Population levels at our U S. Marshal services facilities have remained stable over the last several years.
The U S marshals have custody responsibility from pre trial detainees.
<unk> federal criminal proceedings, and our facilities provided needed bed space and services near federal courthouses.
We are pleased that our 770 beds San Diego facility for the U S. Marshals was not closed following a contract extension through September 32023.
Additionally, we have two other facilities under direct contract with the U S. Marshals with current option periods that run through February 2023, and September 2023, respectively.
With respect to U S immigration and customs enforcement ice facilities continue to face operational restrictions that limit capacity due to the COVID-19 pandemic.
As a result ice detainee populations continued to be below historical levels.
In addition to these operational limits COVID-19 related restrictions remain in place at the southwest border.
These restrictions were implemented in March of 2020 under title 42.
Earlier this year the administration announced that title 42 restrictions would be lifted in may of this year.
However that decision was stopped by a federal court and remains in litigation.
While the timing and eventual impact of lifting titled 42 restrictions is hard to predict the U S Department of Homeland Security released a plan for the southwest border security and preparedness in April of this year.
This proposed plan will increase resources, including personnel transportation medical care and facilities to support border enforcement.
Ice is currently funded through 34000 detention beds under the Appropriations Act that funds the federal government through September 32022.
This level of funding is consistent with funding levels that were in place during most of President Obama's administration.
The appropriations Bill that will fund the federal government for 2023 fiscal year, which begins on October . One 2022 are currently being considered by the U S House of Representatives and the U S Senate.
While we continue to monitor the congressional appropriations process as a long standing service provider to ice and DHS, our focus remains on providing high quality support services and being prepared to respond to their needs.
The ice processing centers, where we provide support services offers $24 seven access to quality healthcare access to legal counsel culturally sensitive meals approved by registered dietitians access to face base face excuse me faith based and religious opportunities and enhanced amenities include.
Artificial turf soccer fields covered pavilions exercise equipment, multipurpose rooms, legal and leisure libraries et cetera.
Moving now to our state Government Agency partners, we continue to focus on addressing the challenges we are facing as a result of a difficult labor market.
We have been working closely with our state government Agency partners and state Legislative and executive branch leaders to address the staffing and wage challenges facing state correctional facilities across the country.
As a result of these efforts we have been able to provide wage increases for our employees across several states. Additionally.
Additionally, we are continuing to explore other initiatives to improve the recruitment and retention of staff.
With respect to recent contract activity in Arizona, we have been awarded a new five year contract under a competitive procurement for the continued management of the Phoenix with Correctional and rehabilitation facility.
We are also in discussion with the state of Arizona, which recently indicated a desire to enter into a five year extension of our Kingman Correctional and rehabilitated rehabilitation facility contracts, which would be which would be effective in February of 2023.
Additionally, the Arizona Department of Corrections has issued a competitive procurement.
For the rebid of Florence with Correctional and rehabilitation facility contract with Geo currently manages.
During the second quarter of 2022, we also completed the sale of our idle very counting correctional facility to the state of Alabama for $15 million.
We are continuing to monitor opportunities at the state level as several of our state government agency partners are considering initiatives, which could involve the use or purchase of contractor owned facilities to address challenges posed by older State prison infrastructure and Correctional staff shortage.
Finally, I'd like to briefly address our ongoing efforts to mitigate the impact of the Covid pandemic.
While we are currently experiencing relatively low levels of Covid cases, we remain vigilant and the implementation of our mitigation strategies.
We have taken from the start of the pandemic are consistent with guidance issued by the centers for disease control and prevention and focus on testing vaccination, and making face masks and cleaning supplies available.
We will continue to evaluate our mitigation steps and we'll make adjustments based on updated guidance by the CDC and other best practices at.
At this time I will turn the call over to Dr. Ann Schlarb for a review of Geo care.
Thank you Jane and good morning, everyone. I am pleased to provide an update on our Geo care business unit, which includes our reentry services and electronic monitoring and supervision segments as well as our Geo continuum of care programs.
Each of our Geo care Division had an active operational quarter, our residential reentry services facilities experienced a sequential increase in occupancy rates. However, residential reentry populations continued to be below historical levels are.
Our residential reentry facilities have been impacted significantly by the Covid pandemic as government agencies at prioritize placement of individuals' into nonresidential alternatives, including Furloughs home confinement day reporting and electronic monitoring programs.
However, we are encouraged that residential reentry census levels have begun to increase and despite this challenging environment. We continue to successfully renew our existing contracts.
During the second quarter of 2022, we renewed 16 residential reentry contracts, including five contracts with the Federal Bureau of prisons.
Additionally, four of our residential reentry centers are scheduled to receive accreditation from the American Correctional Association. This month and we're very proud that all four centers received perfect accreditation scores of 100%.
And two of our residential reentry centers recently received U S Department of Justice certification under the prison rape elimination act both exceeding standards in several areas.
The impact of the Covid pandemic has Conversely resulted in the increased use of our nonresidential programs and services, which have continued to deliver strong growth.
<unk> stated mandates for our non residential reentry business increased by 26% year over year with quarterly revenues increasing to more than $23 million.
Our electronic monitoring and supervision segment also continued to deliver strong revenue growth during the second quarter of 2022.
Our bi subsidiary provides a full suite of electronic monitoring and supervision solutions products and technologies on behalf of federal state and local agencies across the country.
At the federal level <unk> provides technology solutions holistic case management supervision monitoring and compliance services under the intensive supervision appearance program called ice App, which is a key component of the department of Homeland Security's alternatives to detention.
<unk> has provided these services for approximately 18 years and is currently operating under a five year contract that is effective through July of 2025.
Over the years the ice that program has grown steadily and in the last 18 months. This growth has accelerated as the publicly available data shows the number of individuals enrolled in the program currently stands at approximately 300000 participants.
Under <unk> tenure, the ice that program has achieved high levels of compliance participant participants going through the immigration review process.
For instance, the most recently available data shows that between August of 2021 and May of 2022, 99, 6% of ice that participants attended required meetings with their case specialists and 99, 3% of ice that participants attended all their required image.
<unk> Court hearings.
Earlier this year <unk> issued a competitive procurement for a new alternatives to detention program, which is intended to be incremental to ice app and will involve approximately 16000 young adults.
We estimated our bid for this new program and we are awaiting additional direction from ice. We believe that we are well positioned for this procurement given <unk> unparalleled capabilities scale and experience.
Turning to our Geo continuum of care Division, our employees have continued to deliver enhanced in custody rehabilitation and reentry programming and post release support services to an average daily population of approximately 31500 participants.
Our geo continuum of care integrates enhanced in custody rehabilitation, including cognitive behavioral treatment with post release support services that address community needs of released individuals. This includes housing food clothing transportation and employment assistance.
During the second quarter of 2022 hour post release support services allocated over $200000 to support individuals released from Geo facilities as they return to their community.
This funding brings the total spending on post release expenses to more than $7 $1 million. Since we began providing support brands for released individuals in 2016 to assist them with the community needs.
We continue to believe that the scope and substance of our award winning Geo continuum of care program is unparalleled.
We believe it provides a proven successful model and how the $2 2 million people in the U S. Criminal Justice system can be better served and changing their lives.
Finally, I'd like to briefly touch on our ongoing efforts to mitigate the impact of the Covid pandemic.
Our geo care facilities and programs have implemented mitigation steps that are consistent with the guidance issued by the CDC focusing on increased sanitation testing deploying face masks and entry screening measures.
We will continue to evaluate these steps and make adjustments based on updated guidance by the CDC and other best practices.
We are grateful for the continued dedication and commitment of our employees, who have delivered high quality programs and services to those in our care during the pandemic.
At this time I will turn the call over to Jose Gordo for closing remarks.
Thanks, Dan we're pleased with our continued strong financial performance and the operational milestones achieved by our diversified business units. Our management team remains focused on achieving operational excellence across all of our service lines. We.
We recognize the staffing shortages and wage inflation are posing a difficult challenge for companies across diverse industries and we have worked closely with our government agency partners to tackle this challenge.
As we have continued to deliver robust quarterly results over the last two years. We have also been focused on maximizing our allocation of capital towards reducing net recourse debt.
We have been able to reduce net recourse debt by approximately $375 million since the beginning of 2020.
Based on our current performance and expectations. We believe we will be able to significantly further reduce our net leverage over the next two to three years.
We are pleased to have commenced several proposed transactions to stagger our debt maturities over a longer period of time. These.
These proposed transactions, which are conditioned upon receipt of certain percentages of credits are participations or consent were the result of months of discussions and negotiations with several of our creditor groups.
We believe that the proposed transactions are in the best interest of all of our stakeholders. They provide the best path forward for our company and they will strengthen our capital structure.
Importantly, we are optimistic that the proposed transactions can potentially unlock additional equity value for our shareholders.
After a changing our objective of net recourse debt reduction we plan to evaluate the allocation of a portion of free cash flow to fund quality growth opportunities and potentially return capital to our shareholders in the future.
We are we believe that our continued strong financial performance, which is underpinned by our diversified business units set us apart in our industry.
Our cash flows are supported by a valuable company owned real estate assets and diversified contracts and tailing essential government services.
<unk> from secure residential care to community based and technology solutions.
We believe that the unique diversification of our services will continue to allow us to pursue quality growth opportunities that would otherwise not be available to companies in our industry.
That completes our remarks, and we are glad to take questions.
Thank you well now begin the question I asked was awful.
Ask a question you May press Star then one on your pumps homegrown.
Speakerphone, please pick up your handset before pressing the keys.
Your question. Please press star two.
This time, we'll pause momentarily to assemble our roster.
First question comes from John volumes Mobile capital. Please go ahead.
Great.
Thank you good morning, and congrats on the nice quarter.
Thank you.
But I wanted to ask on on <unk>. You said there was I think 300000 people under the ISR program.
How does that compare to the number that was under this program at the beginning of the year and are you still seeing growth in that program here into the third quarter, where do you think that ends at year end.
Hello. This is Anne and thank you for your question and yes, we have seen significant growth through this year and it's continued to accelerate.
Never totally certain what it might look like.
Forward because ice makes all the decisions about who comes in.
Our program. However, we do believe that.
It'll it'll continue at about where it is for the time being and that's what we're looking at for the forecast is maintaining and around the 300000 level.
We started the year I think we started the year about 160 to 170 thousands of them right.
Okay.
Thank you for that insight.
And on ice.
You mentioned that you know for the fifth Corp government fiscal year ending in September .
Yes.
Funding for 34000.
In negotiations right now.
Or on.
On the budget.
For the fiscal year, beginning October 1st.
Kind of what is your insight as to if you have any as to where the negotiations are going is it going to be flat funding for beds decreased funding for beds.
You were to look at that where do you think that ends up.
Well in both the house and Senate versions Theres, a reduction in beds from 34.
Approximately 25000.
Yeah.
25000 is.
Approximately the current number of contracted beds to my understanding.
And there is three reasons why.
There has been a reduction in the number of beds.
Actually used our people in those beds.
That is residents.
The first reason is COVID-19, which is called the <unk>.
CDC to issue guidelines in concert with ice to.
Permit only 75% occupancy of the facilities.
So we're not at full occupancies were significantly reduce occupancy because of Covid secondarily. There has been a change in administration policy regarding.
Hum.
<unk> enforcement and the priorities within that enforcement program.
And third there has been a reduction in.
In.
Public.
Of facilities that have supported ice populations.
As states like New York, New Jersey, Maryland, and Illinois have.
Past legal restrictions.
Fab prohibiting ice facilities within those states as a consequence the public <unk>.
A portion of.
Ice detention facilities has significantly.
Decrease and presently by our own estimates, we believe that 90% of the detention capacity.
At ice processing centers is provided by the private sector.
90%.
As we look to what happens in October .
We really don't know.
We don't know if there will be.
A compromise on the number of beds.
At at the existing levels or higher levels or will there be another continuing resolution, which would preserve the funding and the bed capacities at 34000.
That level.
So we are.
Waiting to see the outcome.
And having said.
No if it was to drop from 34% to 25, how does that impact.
G O and the contracts that have the minimum guarantees if it impacts them at all.
Yes from what we know right now it doesn't seem to be have any impact that were aware off.
We are we haven't lost any ice contracts and where our cube and where our facilities are occupied at far significantly lower occupancy levels than historical averages. So if if the funding was at just 25000.
For example, we wouldn't expect any impact to our current contracts.
Okay.
Okay, Thanks for that and so.
Switching gears, a little bit here on the debt.
On restructuring.
So you need approvals.
And you mentioned.
The initial <unk>.
<unk> came out some of the approval rates.
You provided an update today.
For the term loan and what's gone from 56% to 70%, but the 23 notes only went from 41 to 42 is there.
Something that you are hearing on pushback as to why that has not increased above the the goal rate of 50%.
This is Brian no I think.
Two different processes with the <unk>.
Term loan there is fewer institutions in their large larger holders and so we've been able to work that side of the ledger more quickly on the.
2023 notes there.
There is more outreach.
The holders are smaller we're going through that process I would say that we have.
Reached out to most of the other larger institutional holders.
That would easily compromised or get us over the 50% we have indications from some of them nothing in writing yet but.
We have indications of either that Dell consent or that they will participate in some way that puts us closer to 46% to 47%.
And we're going to continue that outreach and we expect to get over the 50%.
Thresholds and I think on the term loan side. There is no again no guarantees, but we've reached out to many of the.
Institutions, there and we have indications based on our discussions of additional support from those.
Creditors as well that will probably put us somewhere between 75 and 80% participation level.
Those are subject to change, but so we're having very positive.
Discussions with both creditor groups and we expect to.
Close.
Within the 20 days or end to end process within the 20 days as we've discussed.
Subject to SEC review, Okay, great thanks for that and Brian .
Right right.
To kind of.
Numbers types of questions here Bryan one on the interest increased interest expense, you mentioned that totaled <unk> $27 million to $30 million between the third and fourth quarters.
Can you kind of break that out as to what percent of that you think will be in a thorough what amount will be in a third versus what amount will be in the fourth quarter and then when you look at your financials on the EPS calculation. So maybe you could just briefly walk us through you know.
How do you get the 37, I know thats something to do with the as converted share amount.
To get to 37, even though it's a higher net income number than the 42 cents.
Adjusted calculation.
Well, let me start with the.
Interest expense, so I think our forecast assumes a close of.
Mid August to September one. So you are looking at really only about one month of additional interest expense a month and a half or so so.
Third two of <unk>.
Half of quarter end.
Third quarter, and then the fourth quarter.
As a full run rate of the additional interest expense that we would expect.
Coming out of the box and that also.
<unk>, our assumptions on what the underlying.
So for rates will be during the fourth quarter.
<unk>.
On the I'm not sure I followed your question on the net income the interest expense is.
Tax deductible so the net impact to income as is post tax was there something else to your question.
Yes.
Yeah, I'm, sorry that wasn't I wasn't clear enough.
Go through you're looking at your.
Net income.
Statement.
Net income attributable to Geo was $53 7 million, which gives you that.
Net income of 37 a share.
But when you look at adjusted net income.
Hold on one second here I think its 50 something million.
$50.9 million, which is 42, a share and I know, it's something to do with the EPA.
EPS calculation.
Wondering if.
We can do this offline if necessary.
You get to that calculation.
Yes.
I don't know what Youre talking about now that that's related to the convert the convertible and that's always been there I think it's just as the as the incomes changing that amount is changing or that difference is changing but there is a reconciliation.
There will be in the 10-Q and I think it's even in the Jose pointed out it's even in the press release that you can look at that reconciles that but.
That's related to the convert and it will be reconciled in the in the 10-Q, but I can also walk you through that separately, if you need to if you want to.
I'll take a look at the queue. Thank you I'll hand them off to somebody else.
Okay.
Thank you. Our next question will come from withdraw them Gopal all of Sidoti. Please go ahead.
Yes, hi, good morning, Thanks for taking the questions first just wanted to touch on the labor market a lot of company is having difficulty.
In terms of recruiting and retaining Lee.
Labor on just curious in terms of I know youre getting some help from states and government agencies and how reliant are you on that.
The ability to just convince people to come to the correctional industry versus elsewhere in this environment.
I think we've had excellent cooperation with our state clients, where this is more of a problem at our federal agencies.
<unk> are.
Generally higher.
Because of department of labor wage determination for those wages.
At our state institutions.
There has been pressure on wages, but.
At the same pressure exists in the public sector as well so as the states have face their own staffing shortages they've been increasing wages.
And when they do so they typically provide the same.
Additional level of funding for us to increase our wages. So we've had wage increases.
In.
Georgia, Florida, Oklahoma, Arizona, New Mexico to name a few states.
Okay. Thanks.
And clearly depend that make it continues to have an impact as you mentioned in terms of occupancy.
Yes.
Covid related costs youre experiencing but as you look out to 2023 and again not looking for any specifics of our guidance related.
What's your best sense in terms of how much of.
Sort of a tailwind you might get from.
The adding of the pandemic.
Well I think.
The biggest change would.
Possibly occur in our ice facilities, where we would return to closer to normal historical levels of occupancy are state facilities or even at this time.
During the.
The pandemic are.
In excess of I believe 90% of their.
Allow the occupancy so.
The only change.
Probably be ice facilities I think the marshals facilities are fairly consistent with their occupancy in the <unk> or <unk>.
So again it would be the ice.
Facilities that could see an increase in their occupancies because of.
Declining COVID-19 issues.
Okay. Thanks.
And again I.
I guess, it's still up in the year or so.
Weather.
We head into a recession over the next year or so.
Assuming that's the case I was wondering if you could remind us historically.
How you fared.
In an environment.
But there is a recession.
Historically, we've fared fairly well because in a recession. There is usually more plentiful labor supply and we're a labor intensive organization.
60% of our costs are more are attributable to labor costs. So is the unemployment rate would be expected to increase that would provide additional labor applicants for our positions in.
It would.
Possibly improve our financial position.
Okay.
And.
I was wondering on the idled facilities.
<unk>, if you sort of if youre getting any.
Interest in terms of using them or even potential asset sales.
Yes, we have been in discussions with the state as well as federal agencies about the potential use of our Idaho facilities will continue to show them and market them.
To all perspective.
Clients.
Okay. Thanks, and then finally just on the asset.
Debt transactions.
And the.
Plan to reduce the net recourse debt.
I read it.
Approximately 80% of the cash flow will have to be used for debt reduction.
Is that great. So under the under the terms of the new agreements when we closed 80% of excess cash flow.
As calculated in accordance with the terms of the agreement will.
It will be applied to the senior secured debt so against any remaining.
Term loan from our current credit agreement that doesn't participate in rolls over and we'll still maturing 2020 for.
Some portion of that 80% will get applied to that and then the balance will be applied.
Pro rata or offered on a pro rata basis to the.
Tranche, one and tranche two term lenders in the new new agreements.
And then the other 20% is available for the company to use to satisfy.
Debt obligations on the unsecured notes that don't participate in the transaction also referred as stub 'twenty three and 'twenty four notes so.
As George said Jose said, I think I've said.
We intend to unexpected to us.
The substantial majority of our free cash flow to reduce debt.
Importantly, the.
The cash flow excess cash flow is calculated after our maintenance capex and our growth capex.
So it doesn't.
Unnecessarily restrict our ability to make investments in the business there are.
Some constraints within the credit agreements that didn't exist that don't exist today, but we still have.
A fair amount of flexibility to make appropriate investments as necessary to maintain the business as well as to grow the business.
Hey, Thanks for taking the questions and congrats on a nice quarter.
Thank you.
Thank you our next call comes from Kirk.
Imperial capital. Please go ahead Sir.
Hello, guys.
Good afternoon.
Just a couple of follow ups on the on the guidance the $200 million to $250 million of net debt reduction that you.
Or are looking for in both 2000.
23, and 2024 is that all from free cash flow or have you included.
Proceeds from some asset sales.
No that would be our expectation based on.
Our cash flows as we described maintaining sort of current levels of performance.
Assuming no new.
Contracts or reactivation of idle facilities and assuming our current contracts remain in place.
So pretty much I would say the status quo.
Got it including the three.
Marshall direct marshal contracts.
Correct Okay.
Okay. Thank you.
And then with respect to monitoring.
You mentioned that you expect the population at least under the ICF program term to remain at current levels, how much lead time do they give you.
For the day before they would ramp.
Up to another level.
Well there is constant.
Dialog, but.
In the current.
Program, it's been changing it changes every day.
The constant back and forth there are dozens of sites, where our staff work with in partnership with the government and there is people that are added to the program and people that are removed from the program. So.
It's a very.
Volatile and dynamic.
Graham, but it's been increasing.
Increasing over the last year and a half or so.
Got it I was just curious if maybe you.
You would need to.
Our range for some additional equipment if they wanted to take the number higher so.
That would be may be a limiting factor to that going higher.
Not at all the way. It works. This is Ann is if there is for example, organic growth new offices that type of thing we get contract modifications and so many days to get the new site going.
Work everyday with shipments that are going to the border and the technology Thats needed. We also have a nice diverse continuum of technology. So we can we can meet their needs one way or the other so we have a lot of solutions available to them under the current contract and the inventory available to take care of that so we're able to handle.
The growth that they bring us and I think just to add to that too.
And and her team has done a really good job.
Entering into the long lead items, and making sure that they've got supply for those to continue to ramp up production as necessary. So.
We're fully able to support whatever direction the government continues to move.
Got it great. Thank you you mentioned the young adult program.
I was curious if is monitoring.
Catching on it at the state level or any other.
Parts of the.
The business.
So to clarify that.
The young adult program that we mentioned would be a federal program.
Another ATT program, so with that.
What was your question I'm, sorry, I'm just curious if.
Maybe the states are looking at monitoring if youre seeing if youre, having any success.
Growing.
For myself.
Well the EAM business like we have literally thousands of customers at the state and local level I think we do business in every state through the <unk> program and they are there.
There continues to be.
Expansion in the number of customers.
Customers the sizes of the contracts in the industry, but clearly this contract is unique and us.
Stands apart from the size of the other typical.
State and local contracts.
Got it thank you and I do appreciate the the compliance that you relayed and.
I missed the percentage who attended all the court hearings to could you repeat that.
It was 99.6 do I have that right gentlemen.
Okay.
And that means all of the hearings that they have to attend and there are several different types of the hearings I'm sorry, it's $99. Three attended all their immigration court hearing so that could be from their masters hearings to their individual hearings to their hearings the final decision and thats, while they're in the <unk> program so wide.
We're working with them to make sure that they are attending their court hearings.
Wow that's impressive.
And then lastly, and I'll hand, it off with respect to the exchange you mentioned I think that you are at 46% to 47% on the 'twenty threes.
With respect to people consenting.
Do you are you sharing what percentage of <unk>.
The bonds have agreed to exchange.
Well that that was to some degree accounted for in our.
Our.
Estimate at closing of the amount of debt that would be outstanding in 2023, Let me just go back and look at.
We said $170 I think is that right.
So that that number indicates about $80 million worth of the or I guess $2 60 about $90 million of the debt has he has agreed at this point to rollover either in the cash debt option or in the.
All that option and obviously once we close we will update all of those numbers it based on final participation levels.
And that's the 20 threes on.
On the 20 threes and then similarly on the 24th.
I don't have it what pages.
What 89 430 million is the number we put out for 2024 total but that includes also the stub term loan from 2024 and some sub bank. So again that will be affected by final participation levels it could be less than that.
But we'll give those specific.
Amounts I'm really proud of with some detail as to which tranche has what amount of debt outstanding as at term loan is at 24.
So there'll be more clarity in the next.
Call. It two to four weeks when we finally close the transaction, but we've already reached the required threshold for consent and participation in the <unk> for us in the 20 fours 'twenty all other series all other short term and we are.
We're at 40, just to clarify we're at 41 or 42% in legal firm commitments on the 'twenty threes and we have indications.
Based on discussions preliminary discussions of another 4% or so and then we have.
A substantial number of other investors that we're having discussions with that we believe will get us over 50% through either content or participation.
Got it well congratulations on the quarter good luck with the exchange.
Thank you very much.
Thank you. Our next question will be from Jay Mccanless from Wedbush. Please go ahead.
Thanks, Good afternoon, thanks for taking our questions. The first question I had electronic monitoring really really good growth there plus 45% in the first quarter and nearly doubling this quarter.
And so it's $121 million kind of a good run rate to use going forward or are you guys expecting further growth in this in this segment.
So what we've said for the balance of the year we've assumed.
The same sort of participate level of participant count that we're currently at today.
So the quarter obviously.
Hi.
Was it.
Was growing throughout the quarter. So it's an average of less than.
The current participant count, but for the balance of the year, we're assuming more of a maintenance level right around this level of 300000, it could grow some more but we're.
That's what we're using for the forecast.
Got it Okay and then our second question and thank you for the outlook in terms of the <unk>.
The levels you want to get too for the debt, but I guess, what maybe is kind of a stretch goal in terms of your net debt, where you are comfortable starting to return money to shareholders or whether it's dividends et cetera. If you could maybe talk about what the longer term goal is we would appreciate it.
Sure so.
That's going to be obviously, a function of our ability to get back into the market and get more reasonable.
Covenants that allow us to return capital to shareholders, we're going to test the markets as soon as we think that we've got to a number that's supportable. So if it's three times, we'll get into the market at three times, if its three and a half we'll do it at three to three and a half but I think.
We're fairly comfortable and confident that once we get below three times, we will have access to.
Better economic rates as well as covenants that will allow us to return capital to shareholders, either through additional dividends and or <unk>.
Stock buybacks.
Okay, great. Thanks again.
Thank you next question will be from Jordan Sherman Ranger Global. Please go ahead.
Thank you.
Just a quickly I apologize if I missed this what happens to the holders of the debt who don't agree.
Or don't consent.
To the exchange.
So on the on.
On the 'twenty three 'twenty four is in the 26 is anyone who doesn't participate whether they they don't content consent or they don't participate in a rollover they'll remain in their current agreements.
<unk>.
We will satisfy that debt obligation when it comes due we'll continue to pay the current interest rates on those instruments and then when the debt comes due we will.
We will pay it off as we said that.
That's one of the significant benefits of the transaction, we're reducing that maturity wall from two.
$2 billion of between 23, and 'twenty, four down to $600 million and potentially lower depending on the participant level. So we believe.
That through at least related to the 'twenty, three and 'twenty four maturities through cash on hand, and cash flow and liquidity that the company has that we can satisfy those obligations and then going forward. The 2006 is in those other maturities will satisfy through a combination of cash flow cash on hand as well as.
Refinancing is appropriate.
In your guidance for the rest of 2022, what participant because this is you are expecting this to happen.
Relatively soon what's your what's your.
Estimated participation levels.
It's what we put in.
Press release, and the earnings call today for the different years, if the numbers move around a little we'll have a nice job wherever they stand Tonight you are saying.
Yes, what we've disclosed publicly what our estimates are so for 2023, we're estimating around $170 million.
An outstanding stub 23, and the 20 fours et cetera.
Perfect, Okay, I apologize I missed that.
Secondly can you.
Just wanted to be clear I understand.
Some of the moving parts that led to the.
Earnings increase obviously, we got the offset of the.
I mean, the guidance increase obviously, we got the negative from the interest rates, but what was it what were the moving parts that led to the upside.
So the on the upside it's the better performance in a number of our facilities as well as the improved.
Performance under the ICF contract with ISO the <unk> Division.
And.
We had a facility that reactivated that was idle. So we had the full impact of that in the in the <unk>.
Quarter are the most Shannon Valley facility that was idled last year, so a number of different things.
That led to that improvement, okay, so better run rates that we're experiencing.
As you know I'm sure you're aware we have been.
Performing better than our guidance and our expectations for the last year and a half or so and I think on situations San Diego continuation of San Diego Thats. Good point, George pointed out our guidance and our forecast assumed at the San Diego contract ended at the end of.
June we've as we discussed extended that through September of next year. So we have.
Our six month horizon has a positive impact from that in there as well.
Got it.
Yeah.
The facility Thats going.
Marshall direct contract that's going to roll.
Expire at the end of September .
So those are ongoing conversations with them at the moment.
Yes, that's the only contract it's.
Jordan the only contract that is left to expire as the facility in northlake in Michigan.
That contra.
Contract ends at the end of September .
We don't have any other federal contracts at our.
Subject to the Guy myself.
Yes.
Okay.
Yes.
Any potential reuse of that facility.
Yes, we are marketing that facility as we speak.
Okay.
Prospects look prospects look at cash and so on.
We have prospects.
I said earlier at the state level as well as the federal level.
Okay. So I apologize I missed that comment as well okay. Great. Thank you, Mike obviously, a great quarter. Thank you guys.
Yes.
Okay.
Okay.
Thank you that concludes our question and answer session now I'll turn the call back over to towards only for closing remarks.
Well, we thank you for having joined US on this conference call. We look forward to addressing you into the future. Thank you.
But we're just not concluded. Thank you for attending today's presentation you may now disconnect.