Q4 2022 CoreCivic Inc Earnings Call
Okay.
Good morning, My name is let's see if and I would be your conference operator.
As a reminder, this call is being recorded at this time I'd like to welcome you to core civics fourth quarter 2022 earnings conference call.
All lines have been placed on mute to avoid any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to raise your hand to ask a question. During this time simply press Star then the number is one one on your telephone keypad.
If you would like to lower your hand press the star one one again thank.
Thank you I would now like to turn the call over to Cameron Hopewell course, civics managing director of Investor Relations. Mr. Hopewell, you may begin your conference.
Thanks, operator, good morning, ladies and gentlemen, and thank you for joining us participating on today's call are Damon <unk>, President and Chief Executive Officer, and David Garfinkle, Chief Financial Officer. We're also joined here in the room by our Vice President of Finance Brian .
On today's call, we will discuss our financial results for the fourth quarter of 2022 developments with our government partners and provide you with other general business updates.
During today's call our remarks, including our answers to your questions.
Forward looking statements pursuant to the Safe Harbor provisions of the private Securities and Litigation Reform Act, our actual results or trends may differ materially as a result of a variety of factors, including those identified in our fourth quarter 2022 earnings release issued after market yesterday.
And in our Securities and Exchange Commission filings, including our forms 10-K, 10-Q and 8-K reports.
You are also cautioned that any forward looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future.
On this call. We will also discuss certain non-GAAP measures a reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in our supplemental financial data on the investors page.
Of our web site <unk> dot com with that it's my pleasure to turn the call over to our president and CEO Damon.
Thank you Cameron good morning, everyone and thank you for joining us today for our fourth quarter 2022 earnings call.
On today's call I will provide you with details on our fourth quarter financial performance and our newly issued 2023 full year financial guidance.
I'll also discuss with you our latest operational developments.
Date, you on our capital allocation strategy and discuss the latest developments with our government partners, including the completion of the transition of contracts at our La Palma facility.
A federal mesh into a new contract with the state of Arizona.
Following my remarks, I will turn the call over to our CFO , Dave Garfinkle, who will review our fourth quarter 2022 financial results and our newly issued full year 2023 guidance in greater detail.
He will also provide a more detailed update on our ongoing capital structure initiatives.
Okay.
Before I get started I would like to take a moment and highlight a significant milestone for the company.
Andrew 'twenty as we celebrated core civics 40th anniversary.
It brings me deep Fry to note that I got to celebrate this milestone alongside a team of some of the most dedicated people in the field of corrections.
And reentry services.
Over the years, we have expanded both in the number of government contracts and our capabilities through our partnerships with federal state and local governments.
As a result, our workforce has significantly grown in the scope of services, we provide has meaningfully expanded.
Most excitingly our reentry services has evolved to reflect a more robust rehabilitative approach to programming to further support the individuals in our care as they prepare to return home to their communities.
While 40 years of continuous 24 seven operations is that achievement. We're celebrating is important to call attention to the original reason the company was founded.
Back in 1983, the core themes at prisms and more than 40 states. We're in crisis due to overcrowding conditions challenging infrastructure and Correctional services provided area.
That conditions in many cases were deemed by the course to be unconstitutional.
Two of the company's founders <unk> and Tom Beasley saw the need for the private sector to bring solutions to the pressing issues facing these correctional systems.
From day, one the company's purpose has been rooted in service to our nation's criminal justice system.
Mr. Hider was also to go on to help establish the standards of Correctional care still upheld by the American Correctional Association and its members today.
The American Correctional Association is a leading organization that champions a cause of corrections and correctional effectiveness and has been in existence is 18 70.
These standards were rooted in core service operational approach since day one.
During 2020 to 15 at the facilities, we manage were newly credited rear credited by the HCA with an average score of 99, 5%, making it our portfolio averaged 99, 5%.
Our partnerships with local state and federal governments have helped to dramatically improve conditions are incarcerated individuals which is clearly something that we should also celebrate.
The correctly profession is not an easy field of work.
It takes commitment focus and a dedication to helping people even in what can be very difficult circumstances.
Through our four decades of dedicated service core civic has continued to be relied upon again and again as a solution to the needs of our government partners and the individuals in our care.
We have earned a reputation as a trusted partner because the entire course of Vic team shows up every day to help improve the lives of incarcerated individuals and keep our community safe.
I am deeply proud of the dedication of our team over the last 40 years and I am truly humbled for the opportunity to work alongside them.
I will now provide an overview of our fourth quarter financial results and our 2023 financial guidance.
In the fourth quarter, we generated revenue of $471 4 billion, which was a decline of only 1% compared to the prior year quarter. Despite the non renewal of a contract with United States Marshals service at our lab work to test center in 2021.
And the non renewal of a contract with Marion County, Indiana at the managed only Marion County jail effective January 31 2022.
Collectively these two facilities accounted for a $13 1 million or.
Or two 7% reduction in revenue in the fourth quarter of this year versus the prior year quarter.
In the fourth quarter of this past year, we generated normalized funds from operation or <unk> of $49 1 million or <unk> 42 per share compared to $57 8 million or <unk> 48 per share in the fourth quarter of 2021.
Now the decline was driven by our non renewal of the two contracts that I just mentioned.
The transition to populations at our La Palma Correctional Center pursuant to a new contract with the Arizona.
The expiration of our contract with the Federal Bureau of prisons or PLP at.
At our previously owned a Cray Curtis Center in November of 2022, and a challenging labor market.
Dave will provide more detail regarding the financial impact of these items.
But I would add that while we have spent considerable amount of incentives to recruit and retain valuable frontline staff. These investments are positioning us to take advantage of increased demand from our government partners that we believe will occur once occupancy restrictions imposed by our government partners. During COVID-19 pandemic are fully relaxed.
We're also poised to enter into new contracts and accept additional residential population from our government partners that are unable to manage their existing population levels because of staffing challenges in their own facilities.
We believe these needs could manifest into new contracts in the near term.
While our year over year financial results decline, we did experience a sequential improvement in financial results.
There were three primary drivers of our improved results in the fourth quarter.
Before the end of the year, we completed the transition of contracts at our La Palma Correctional Center.
As a reminder in April of this past year, we commenced transitioning populations at our La Palma facility in Arizona from ice populations to Arizona state populations pursuant to a new contract. We were awarded by the Arizona Department of Corrections rehabilitation and reentry late in 2021.
While we didn't achieve normalized utilization until the final days of the past year, our average utilization of the facility in the fourth quarter was 66% compared to only 52% during the third quarter of 2022.
Although the Paloma facility currently support submission of the state of Arizona by carrying for approximately 2500 inmates.
We also experienced an increase in average still the utilization by our KOL partners, particularly from immigration and customs enforcement or ice.
Our third quarter earnings call in early November of last year, we mentioned that ice populations in our <unk> increased 26% in the month of October .
We attributed that increase to the start of the federal government fiscal year, which meant the AUC had more budget certainty with newer preparations to start the year.
Debit related oxy restrictions are gradually being lifted.
While the increase in utilization was noteworthy and had a modestly positive impact on the fourth quarter utilization levels were still below their pre pandemic levels and a cure occurred despite a reduction in utilization in the final days of December as I prepared for the termination of <unk> 42, which obviously.
Did not occur, which I'll discuss in greater detail shortly.
The third driver of our improved fourth quarter performance was a continuation of modest improvement in the employment market a trend we began to detect in the middle of 2022.
That trend has allowed us to reduce reliance on registry nursing and various forms of incentive compensation.
These costs still remain elevated from their pre pandemic levels, but with salaries and benefits representing approximately two thirds of the operating expenses.
Even modest improvements in the employment market can result in meaningful cost savings.
As for our newly issued 2020 financial guidance, we are forecasting full year <unk> per share in the range of $1 35 to $1 50, and adjusted funds from operations or <unk> per share in the range of $1 29 to $1 45.
Our guidance is reflective of our completed transition to at all or Palma facility.
Although the cost structure has yet to normalize as we work to fully staff the facilities through local employees.
And the expectation of utilization by our federal partners to remain below pre pandemic levels due to continued application of title 42.
Our guidance also reflects continued efforts to increase staff to position ourselves for increasing occupancy.
Dave will provide greater details about our fourth quarter financial results as well as the financial impact of the more significant assumptions included in our full year 2023 financial guidance. Following the remainder of my comments.
So this is a part of the topic of tower 42, I begin our discussion of developments with our government partners with immigration and customs enforcement.
<unk> is our largest federal partner and as it is within the department of Homeland Security.
Of any of our government partners their operations and capacity utilization needs were and continue to be the most significantly impacted by COVID-19.
Notably, it's implemented Oxford restrictions at ice facilities nationwide to improve the ability for resident populations to social distance.
These occupancy restrictions remain in place during the fourth quarter of this past year.
In the spring of 2020, the Trump administration enacted a 42 day closed the nations borders and port of entry to asylum seeking individuals.
Title forward it to you as it remained in place since that time. It has also had a significant impact on reduces ices demand for detention capacity.
As I mentioned earlier utilization by our federal partners, particularly ice across multiple facilities were up nearly 26% in the month of October alone.
Nationwide ice was to say any more than 30000 individuals by mid November of 2020 to a notable increase while still being beautifully below their pre pandemic levels as well as the number of beds for which they are funded.
We believe the increased utilization was a result of I slowly beginning to relax or pre pandemic oxy restrictions.
This increase also coincided with the federal government's fiscal year, beginning October one 2022.
In November a federal court case overturned to continue to use a titled 42, and a date of December 21, 2022 was set as the date title 42 would be terminated.
In anticipation of a significant increase in the need of contingent capacity ice began releasing individuals' from custody to free up additional capacity.
By late December is that relates to over 10000 individuals from custody.
Shortly before December 21, there was a successful challenge to the federal courts ruling, which is now waiting to be heard by the Supreme Court in March.
Titled 42 is now expected to remain in place until the court proceedings are finalized which likely will not occur until later this year.
Also in December Congress passed an omnibus spending bill that funded 34000 detention beds for the fiscal year ending September 32023.
Hi, this is yet to increase his detention utilization close to its funding level and we expect their utilization remained well below pre pandemic levels at least until the legal challenges to the title 42 are completed.
As mentioned previously we continue to increase staffing levels in order to be well positioned to accept additional residential populations.
<unk> related to oxy restrictions are removed and the legal proceedings reach a conclusion.
We also continue to pursue opportunities to provide ice with nonresidential alternatives to detention or ATV programs.
We remain engaged with is as we believe that we can provide unique solutions to provide additional HDD programs.
We also know we can provide case management services similar to the type of case management services, we already provide and our community segment.
The elevated rates of apprehensions, along the southwest border continues to create challenges, which are expected to increase the government demand for both residential detention capacity and nonresidential hdtvs.
Should these arise we believe we are well positioned to deliver solutions to ice.
Now for an update of our other two federal partners, which are within department of Justice, which is the federal Bureau of prisons or <unk>.
And the United States Marshal service.
<unk> experienced significant declines in their populations in the last decade.
In response to this long term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners.
Last August we completed the sale of our 90 to 178 bed Mcrae Correctional facility to the state of Georgia for $130 million.
Our last remaining further contract with the <unk> was at Mcrae facility and represented less than 2% of our total revenue.
We released them a credit facility from the state of Georgia from the sale day through November 2022, So we could fulfill our contractual obligations to the BFA through the exploration of the contracts.
Following the exploration of the contracted mccrea at the end of November 2022, we also expect to generate revenue from the <unk> through the provision of reentry residential reentry facility contracts.
The sale of our credit facility with a great opportunity to sell an asset at value far exceeding the valuation of our publicly traded debt and equity securities and accelerate our capital allocation strategy of reducing debt and executing on our share repurchase authorization.
While we do not expect the sale of our correctional or detention facilities to government entities to become a growing trend. We view this as an excellent opportunity to finalize our diversification away from prison contracts with the BOP.
Recycle capital and create value due to the dislocation of the pricing of our public securities and our assets true market values.
The Mcrae facility was converted to a facility owned and operated by the state of Georgia. Upon the termination of our lease with the state of Georgia in November of 2022.
After the U S marshals their prison populations have remained very consistent in recent years, so their need for capacity around the country remains unchanged and significant due to their reliance on contracted detention capacity.
But marshals were impacted by the executive order signed by President Biden and issued in January of 2021 that directly to the attorney general to not renew department of Justice contracts directly with privately operated criminal detention facilities.
Hi.
And 2022, we had no direct contract with the marshals that were set for exploration and now we have only two remaining direct contracts with the marshals.
One of those contracts is that our 4128 beds central Arizona, Florence Correctional complex in Arizona and have a contract expiration in September of 2023.
Both facilities provides significant path to the marshals that we believe would be very challenging to replace but we likely will not have resolution on potential contract extensions until we are closer to the existing contracts expiration dates.
We continue to work closely with the marshals to ensure the capacity needs are being met in order to support their critical public safety mission.
At the state level, we continue to hear the employment market is the most substantial and ongoing challenge Correctional systems are facing.
We have certainly faced the same challenges.
But we are able to meaningfully increase staffing across the company during 2022 and these efforts will extend into 2023.
There are multiple states that are dealing with such significant staffing challenges that they have had to reduce facility capacities and shutter housing units as a result.
We are in conversations with a number of states to help address our challenges in the near to long term and we look forward to providing you updates as these discussions evolve.
Okay.
I will close out my comments by highlighting the great accomplishments, we had in 2022 that continued to strengthen our balance sheet.
On the capital structure side, we began the year with entering into a new bank credit facility.
This process involves bringing together several new banks that are supportive of our company's mission.
And that allowed us to extend the maturity of the facility to May of 2026, and we reduced our exposure to variable rate debt to just under $100 million.
Throughout 2022, we reduced our total debt by $287 million and just last week, we repaid the remaining $154 million on a 465% senior unsecured notes, which were scheduled to mature in may of 2023.
Since announcing our updated capital allocation strategy in the summer of 2020, we have cut our overall debt in half by over $1 billion.
We now have no debt maturities until April of 2026, which will provide us with a great deal of flexibility in how we deploy our free cash flow.
We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range up to two five times to 275 times.
We have made meaningful progress in reducing our overall leverage due to the strong cash flows the company generates and we expect our leverage to continue to decline over time understanding that recently, our EBITDA has been negatively impacted by the short term transition of contracts at our La Palma facility in Arizona and an ongoing.
Pandemic related oxy restrictions with our federal partners mathematically increased leverage though debt levels have declined.
As these headwinds near completion, we expect our leverage to naturally decline.
We continue to execute our stock repurchase program of $225 million stock repurchase authorization authorized by the board of directors last year.
During 2022, we repurchased six 6 million shares of our common stock at an aggregate purchase price of $74 5 million or approximately 5% of our total shares outstanding.
In January of this year, we repurchased an additional $10 million of our common stock. So we have $145 million remaining on our share repurchase authorization.
This would allow us to repurchase an additional 12% of our outstanding shares based on our recent trading price of our equity.
Our capital allocation strategy has enabled us to remain flexible and in future quarters is expected to include a combination of share repurchases and debt repayments taken into consideration factors such as the price of our securities liquidity progress towards achieving our targeted leverage ratio.
And potential returns on other opportunities to deploy capital.
We continue to believe our capital allocation strategy has been prudent for the positioning the company to generate long term value through a stable capital structure and continue to cost effectively meet the needs of our government customers with less reliance on outside sources of capital.
I'll now turn the call over to Dave to provide a more detailed look at our financial results in the fourth quarter discuss in detail our full year 2020 through financial guidance.
And provide additional financial updates Dave.
Thank you Damon and good morning, everyone in the fourth quarter of 2022, we reported net income of 21 per share or <unk> 22 of adjusted earnings per share normalized <unk> per share of <unk> 42.
And <unk> per share of <unk> 38 cents.
Adjusted or normalized per share results were <unk> <unk> above average analyst estimates, primarily due to lower operating expenses stemming from moderated staffing incentives NFL credit as further described later.
Adjusted or normalized per share amounts exclude a gain on sale of real estate assets asset impairments and expenses associated with debt repayments as detailed in the reconciliations to non-GAAP metrics included in the press release.
The decline in normalized <unk> per share of <unk> <unk> per share compared with the prior year quarter included an EBIT decline of $9 1 million or six pence per share due to the earnings disruption and our 3060 bed La Palma Correctional Center, the second largest festival in our portfolio as we continue the transition to populations from the state of Aaron's.
Donna pursuant to the new management contract that commenced in April for up to 2700 <unk> inmates.
We previously had a contract with ice at that facility and during the prior year quarter and through the beginning of this year, we cared for an average daily population of our <unk> thousand 800 ice detainees at the La Palma facility, which when fully transitioned out by the end of September .
The intake process for Arizona residents were substantially complete by the end of December and we currently care for approximately 2500 inmates from Arizona facility.
Although occupancy at the La Palma facility during the fourth quarter of 2022 surpassed the occupancy level in the fourth quarter of 2021, we incurred substantial transition expenses in the fourth quarter, which we will which we expect will normalize around the middle of 2023.
Fourth quarter results were also impacted by the exploration on November 30 of the final present contracts, we have with the Federal Bureau of prisons at our Mcrae Correctional facility, which contributed to a decline of <unk> <unk> per share from the fourth quarter of 2021.
These declines were partially offset by employee retention credits, we are entitled to under the cares Act for retaining employees, who can perform their job duties at 100% capacity as a result of COVID-19 restrictions during 2020 and a portion of 2021.
These credits were reflected in the fourth quarter of 2022 as a reduction to operating expenses amounted to <unk> <unk> per share net of related expenses, resulting from the credits.
We produced notable improvement in sequential financial performance.
Paired with the third quarter of 2022, our adjusted EPS increased 14.
From <unk> <unk> per share in Q3 to <unk> 22 per share in Q4 and normalized <unk> per share increased 13 from.
<unk> from <unk> 29 per share in Q3 to <unk> 42 per share in Q4.
These per share increases were attributable to a reduction in expenses associated with a very tight labor market as we were able to reduce temporary staffing incentives and registered nursing expenses, we incurred during the third quarter.
Although these expenses were still higher than the fourth quarter of 2021, we are pleased with the sequential decline.
As the labor market continues to improve which will take some additional time, we expect to further reduce reliance on these expenses.
The fourth quarter comparison to the third quarter includes the same to benefit from the aforementioned employee retention credits stronger federal populations and subtle several facilities and lower interest expense.
Likewise margins at our safety and community facilities increased from 19, 2% in the third quarter of 2022 from 24, 1% during the fourth quarter of 2022.
Excluding the benefit of the employee retention credits our operating margin was 22, 6% in the fourth quarter of 2022, a notable improvement from the third quarter, primarily resulting from the favorable trend in operating expenses.
Longer term, we expect operating margin percentages to trend toward those we experienced pre pandemic of approximately 25% as higher per diem rates. We have been successful in obtaining for many of our government partners are expected to translate into increasing margins as they are applied to increasing occupancy levels and as expenses continued to know.
<unk>.
Despite the improvement in sequential financial performance, our financial results continued to be impacted by occupancy restrictions implemented during the COVID-19 pandemic that largely remain in place during the fourth quarter for most federal facilities.
Occupancy in our safety and community facilities was 71, 1% in the fourth quarter of 2022, compared with 72, 5% in the prior year quarter.
The slight decline from the prior year was attributable to the expiration of a contract with the U S. Marshals service at our 1033 bad <unk> worth detention center.
31 2021.
Our overall ice detainee populations remained well below historical levels as the southwest border has effectively remain closed to many asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 on our policy known as title 42.
On November 19th 2022, a federal judge ruled that the process by which the federal government began expulsions under title 42 with a violation of the administrative procedure act requiring the federal government to process, Paul asylum seekers under applicable law in effect prior to the implementation of title 42.
Therefore, titled 42 was set to terminate near the end of the year How's.
However on December 27, 2022, the Supreme Court granted a temporary stay on a cessation of title 42, while it considers an appeal by a group of states to continue title 42.
Oral arguments are scheduled for next month whenever title 42 is terminated such actions May result in an increase in the number of undocumented people permitted to enter the United States, claiming asylum and could result in an increase in the number of people apprehended entertained by ice.
With depressed occupancy levels, we will be positioned to significantly grow earnings whenever the impact of COVID-19, and title 42 restrictions subside.
During 2022, we reduced our debt balance by $287 $4 million or by $137 2 million.
Net of the change in cash.
During the fourth quarter of 2022, we purchased $12 8 million.
Our four and five 8% senior notes in open market purchases, reducing the outstanding balance of these notes to $153 8 million.
These notes were scheduled to mature in May one 2023.
In keeping with our debt reduction strategy, we repaid in full the outstanding principal balance of these notes on February one 2023, using cash on hand, and a $35 million draw under our revolving credit facility.
During the fourth quarter. We also purchased 27 $4 million of our eight in a quarter percent senior notes in open market purchases, reducing the outstanding balance of these notes to $614 1 million.
We now have no maturities until the eight in a quarter percent senior notes mature in 2026.
Leverage measured by net debt to EBITDA was three two times using the trailing 12 months ended December 31, 2022 and.
In order to help ensure we progressed towards our leverage target we made no share repurchases during the fourth quarter. However, we will continue to be opportunistic in repurchasing shares without materially increasing leverage and have repurchased $10 million I'm sure. So far in 2023.
Since our board authorized the repurchase program in May we have repurchased over 6% of our outstanding shares or a total of seven 5 million shares at a cost of $84 $5 million and have remaining authorization for over $140 million more of our shares.
Going forward, we expect to continue to use our liquidity as well as cash flow from operations to repurchase a combination of our stock and bonds taking into consideration a number of factors, including the amount authorized under our repurchase plan liquidity share price.
<unk> toward achieving our targeted leverage of two and a quarter times to two and three quarters times at.
Potential returns on other opportunities to deploy capital.
Moving lastly to a discussion of our 2023 financial guidance for the full year 2023, we expect to generate adjusted EPS of <unk> 50 to 65.
Normalized <unk> per share of $1 35 to $1 50 and <unk>.
<unk> per share of $1 29 to $1 45.
Our guidance contemplates the continuation of a tight, albeit improving labor market with less reliance on temporary incentives, but offset by higher staffing levels.
The lead time necessary to hire and train staff and because we anticipate an eventual end of occupancy restrictions, including title 42, we continued efforts to hire staff in order to prepare for increases in occupancy, resulting in sequentially improving performance throughout the year.
Although we expect to be prepared for an increase in occupancy our guidance does not contemplate a surge of ice detainees in the second half of the year, but a more measured increase.
Our guidance reflects an increase in EBITDA at our La Palma Correctional Center, and Eloy detention center by a total of nearly $18 million as a result of the transition of populations during 2022 from ice to Arizona at the La Palma facility and our expected higher average occupancy.
At the nearby Eloy facility in 2023.
Although we are in discussions with a number of states for new opportunities. Our guidance does not include any new contract awards, because the timing of government actions on new contracts is always difficult to predict which would be upside to our guidance. If we are successful.
Our guidance reflects the previously mentioned exploration on November 30th of the Federal Bureau of prisons contracts from our credit facility, which generated $6 $4 million of EBITDA in 2022.
Our guidance also contemplates retention of the lease with California at our California City facility through March 2024, the date indicated in the previously disclosed termination notice we received in December 2022.
There are a few things to remember when cross walking in the fourth quarter of 2022 to the first quarter of 2023.
Impaired to the fourth quarter Q1 is seasonally weaker because of two fewer days in the quarter and because we incur approximately 75% of our unemployment taxes during the first quarter, resulting in a cohort of <unk> <unk> per share decline from Q4 to Q1.
The benefit of the employee retention credits in Q4 resulted in an additional two decline to Q1 is.
As Damian discussed in the final days of December ice reduced its utilization to create capacity in anticipation of the termination of title 40 to the.
The decline in extended through January and although those populations have been steadily recovering as expected to contribute to a reduction of approximately two to three per share when compared with Q4.
We expect our normalized effective tax rate to be 26% to 28% in the 2023 full year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense.
We expect G&A expenses in 2023 to be comparable to 2022.
During 2023, we expect to incur $61 million to $63 million of maintenance capital expenditures roughly in line with 2022 and $3 million to $4 million of other capital investments, which is substantially lower than 2022, when we were completing several renovation projects.
We remain focused on managing to our leverage target and well sculpt stock repurchase levels to EBITDA performance. However to reiterate we will remain flexible and we will continue to be opportunistic in repurchasing shares without materially increasing leverage.
I will now turn the call back to the operator to open up the lines for questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone SaaS question. Please standby, while we compile the Q&A roster.
Our first question comes from the line.
<unk> guns.
<unk> capital markets. Your line is open Joe.
Sure.
Thank you.
Good morning, David and David Congrats on the quarter.
Good morning.
So wanted to start maybe diving a little bit more into the <unk>.
The so called guaranteed minimum contracts with ice I know you.
As mentioned previously <unk> been in discussions with them.
On some of the facilities that you have do not have those types.
Contracts, just maybe the idea.
Progress on those.
Yes.
Is there a.
It kind of a timeframe in your mind, if you don't receive.
But call it relief.
What do you do with those facilities.
And I don't know if you can get.
Kind of give us ballpark figure if you work in B C.
Some really what could that mean.
On the financials.
Yes, thank you for that question.
You didn't talk about it in our script, but I guess I will say here in the near term and keep me honest here, Dave for the last probably 90 to 120 days, we've had some pretty meaningful discussions with ice.
About.
How they see the world after title 42, and I'll see the need from a population perspective, so that part of this worry but also we have a couple of facilities that to your point, maybe it doesn't have a.
Fixed monthly payment or other provisions in the contract and interestingly they have been pretty receptive on these conversations. So we've had some pretty good renegotiation of contracts either with that provision changed or tweaked or maybe some improvement on the on the pricing or maybe a combination of both so don't necessary.
To parse it out and go kind of facility by facility, but I will say that we've been pretty encouraged by the conversation and we again, we think that behavior is pretty indicative of as they look out in the next 612 months and the likely pulling back of title 40, do that theyre going to need us needless beds that need that capacity, but anything you'd add to that Dave.
Ed couple of things our guidance does reflect some of those negotiations come into fruition, but I'd also say as we mentioned previously our ice populations in particular are.
Slower than historically.
Historic levels.
So we have a lot of conversations with ice about individual facilities. When those occupancy levels are so low about their mission what do they want to do they want to consolidate populations into fewer facilities and so far they have been reluctant to do that they want to maintain that capacity, which I think is an indication of future need.
So based on that there are good partners, we try to work with them.
And.
And just expect that they will eventually have those needs or we'll continue those conversations about consolidations into fewer facilities.
I would add Joe.
We've been saying this for a couple of quarters that we've been leaning forward on staffing facilities in anticipation for increased occupancy and then also the pulling back of titled 42.
And so we've estimated that if we were kind of staffing to what oxy was today versus kind of lean forward, we probably would be pretty close from a guidance perspective to what the street estimates are for 2023. So I think thats pretty notable again that gives us hopefully it gets a little indication again from the kind of feedback that we're getting for ice.
Kind of what their needs are today's point about.
The conversation of consolidating within facilities or within a facility closing of various units.
We're keeping those facilities open and again lean forward a little bit on a staffing perspective. So again, we know that I'll see that impact a little bit guidance. This year.
And then come close to what the analysts' estimates are but again, if we would kind of calibrate staffing appropriately with current populations and we actually probably be pretty darn close to guidance or two analyst estimates.
Thanks for that insight is much appreciated.
Yes.
Occupancy restrictions.
Much flexibility that you've seen lately in wood.
Yes.
At the latest be part of.
The administrations may 11.
And all Covid.
Health.
Striction arm to be removed or would that be part those occupancy restrict can be part of that.
Yes.
We think that's the case.
And this in this environment you can never make any definitive statements because again theres a lot of moving parts here.
With the pandemic emerged.
Interpreting that may 11th and I'll say, the ongoing kind of court.
Activity with though with title 42, so we think Thats the case, but let me I guess, maybe back up just a tad bit because I know, it's been a little confusing for all of us.
Out of 42, the court case, and then also the proclamation that the pandemic emergency will be terminated on may 11th. So let me give lease up maybe a little more color on that again in this environment can they were making a definitive statements, but let me go ahead.
I'll take a shot at it so.
As you just noted administration plans to allow the pandemic emergency to expire on May 11th So again, while they reported in the press.
The administration has suggested that there would also be.
That would also be the end of title 42 border restrictions. It is correct that the title 42 orders says on its face that it will end when the pandemic emergency is whether that happens automatically or with another termination order from CDC is unclear at the moment.
But the administration has also.
In Federal Court litigation about his prior efforts and terminate title 42, and it's in litigation in the Supreme Court about <unk> 42 as well.
No way to know, obviously, but I'd be afraid to rule out efforts by the court or various border states to keep out of orders.
42 restrictions in place longer.
So I think you know Joe that the Supreme Court will hear arguments on March one.
But probably won't issue decision until probably June or July .
So again plenty of uncertainty, but our goal as I said earlier, our goal is to be ready whether title 42 goes away it may or in June or July or possibly some later in Dayton again based on the conversations we've had with ice and some activity you had some contracts with amendments on pricing and fixed monthly payment.
Again, it appears that they are continuing to kind of March forward on getting themselves prepared for the likely outcome of kind of 42 being rescinded.
Okay. Thanks.
Switching gears, the California facility, where you've got the lease termination notice, which.
I think it is.
As in 2024, although currently it's only funded I think through what the first half of this year.
It sounds I'm reading your press release of all the improvements that you've made the ageing of other California facilities that you might have some hope that that decision has reversed I mean could you comment on that and then also you mentioned that facility generates about $34 million in.
Revenue.
Annually, what kind of EBITDA does that facility to produce.
Well I'll tag team with David on this one Joe This is David again.
First to say it.
When we got the communication from the state late in 2002.
They indicated again they wanted to give plenty of runway for not just to us in the facility, but also for the operations with CDC are and also the community and I've had some actually direct conversations with leadership within the state.
That was reaffirmed here glass 30 days, so that gives us comfort and confidence that that facility, even though we're not in the next fiscal year as you noted with July 1st coming around.
That'll be in place through the rest of this year through March of next year. So I cant say thats in Italy, but based on communication Sakai directly with state officials, we feel like that the likely case. So on a parallel path. We're working obviously with the state, but also assessing kind of the long term kind of opportunities or needs that could.
Fulfilled with that facility so nothing to disclose today.
But those conversations are ongoing on several different fronts and it's not just with one what agency so that I'll just kind of leave it there.
The second part of your question I'll, let Dave tackle that one yes. So in our supplemental disclosure report, we do disclose the margins of each of our segments and Cal City as you could sell.
The amount of revenue, it's a significant component of the properties segment. So its margin is very comparable to the <unk>.
Margins that we disclose in the property segment, which is which is around 70% to 75%.
Okay, great. Thanks, So let me, let me step aside and let someone else ask a couple of questions. Thank you.
Thank you, Jeff Yes, Sir.
Thank you.
Our next question.
Comes from the line of Merit.
Your line is open.
Yes.
Thank you.
So I have a couple of questions.
Could dig a little deeper on what.
During your prepared remarks and again at this.
The recent question on <unk>.
42.
Yes.
As you know we've expected titled 42 to.
Terminated.
In the past.
There has been litigation.
Have that has impacted that the times are good timeline there so.
Now.
How should we view.
Hydro <unk> and <unk>.
2023 of May 11th really is.
Going to Seabee and have a lot of these COVID-19.
Is this really at.
From what <unk>.
Well this is Damon.
A lot of really smart legal mines that are on cable will talk shows every night are trying to answer those questions. I don't know if ive got anything more interesting than they have been able to provide.
What I just said again, a very definitive action by the administration on.
Terminated in a pandemic emergency EMEA, 11th so again very very definitive lease on that piece and I know the administration is trying to make the argument that that should obviously.
<unk> title 42 since they are linked.
Ford is linked to the pandemic emergency but.
It's hard to say.
It's hard to say with these kind of court actions at the lower courts and the one that is also proceeding through the Supreme Court.
How that impacts timing, so what I shared earlier.
<unk> estimate, but also to truck provide additional clarity on that on that front I don't have anything to add to that Dave in terms of timing as Damien answered. The timing question in terms of the actual impact I think if you go back to the end of December it could be an indication when I took down detention capacity by about 30% the last couple of weeks.
Remember that was nationwide.
Our populations correlated with that reduction.
That obviously didn't happen at the end of the year I think it does give us a playbook for what could happen when.
The termination of title 42 is imminent, which I would think it would be imminent.
Whether it's may whether it's June July or some other day, that's really a lot of crystal ball difficult to predict.
But I will tell you as I mentioned in my prepared remarks, our guidance does not anticipate a surge that could happen.
But more of a measured increase in the second half of the year. So we wouldn't expect anything to happen early in the year certainly nothing before May 11, So I think that would be the earliest date something could happen, but given how.
How many lawsuits have.
Arisen around the timing that would just be very difficult for us to kind of pinpoint that use points, a really important one because in our guidance.
As conservative from the perspective of stages, Dave just noted relative to increasing occupancy.
We've looked at what the portfolio is today.
As always we always assess by customer by customer and build that into guidance.
We're not anticipating leases from a guidance perspective again, a huge surge.
But on the other side, we are being served on the staff front as I said earlier. So if we were not staffing up as I said earlier like we are today in anticipation for increased needs again, our guidance would probably pretty close to consensus.
So that at least gives you a little sense of how to look at the rest of the year that we've got the expenses built in not necessarily the <unk>.
Kris and oxy.
So obviously, we'll give more on that as we get closer to the spring and summer months.
Okay. Thank you.
Yes for sure.
We all understand that nobody really knows.
Do you have a sense of over time.
This time the real time. So then one other question and it's about.
Model, which you had.
Introduced in one of your facilities, you know about a year ago.
The Ohio.
Correctional facility.
We're operating that under two different contract with the state.
And mom with a penalty.
As you continue to have discussions.
With different antibody.
Now.
Near term discussion are there any.
Other facilities, where you might think that would be.
Be beneficial to introduce that same kind of.
Duo contract model.
Yes, Great question and short answer is absolutely I mean, we are always looking at if we've got a facility that's either underutilized or affiliated Bacon.
What are the prospects either with existing or new partners, where we could.
Either activate ability or hire or increase occupancy so absolutely so and I think we've shown over the last couple of decades that not only can we.
Manage the complexity when you have multiple customers, but also especially if there <unk>.
Different level. So we've got facilities that have a federal contract as you noted with northeast, Ohio and also as a state partner so.
A very different missions ones that very short term population. The other ones are longer term for population that has unique medical and mental health and program needs. So short answer is absolutely we're always looking at those opportunities.
Okay. Thank you very much.
Thank you Adam.
Thank you. Our next question comes from the line.
Jay Mccanless Wedbush Your question please Jay.
Hey, Thanks for taking my questions.
If we think about the facilities that might not be affected by title 42.
Type of trends and occupancy are you embedding in the guidance for fiscal 'twenty three.
Yes, great Great question.
And I will tag team with Dave on this a little bit but.
Outside the immigration customs enforcement only other federal partner as Marshal service and I think feel like we're pretty stable through the course of the year. We may see some increases from from various contracts around the country, but nothing notable to draw attention to so really then the other opportunities on the state side and actually we're seeing some pretty robust engage.
From state partners, either existing state partners or new.
New State partners as you know with the election this past November .
It's a fair amount of new governors.
Office around that around the country and have been encouraged to see that equivalent Justice reform and also improving the conditions of people within their correctional systems not only just from a housing perspective in residential perspective also from a program perspective is a high priority for them as they come into office and so we've had a few states already reached out to us.
Would be new states for us.
Answering questions relative to how we can maybe meet their needs short term and long term.
I will just say is that it.
Kind of a growing.
Kind of a growing trend that's been very troubling, but also a solution that we think we are uniquely positioned to provide for and that is that.
The dealing with addiction, especially with opioids in the fentanyl crisis.
Encouraged by the President earlier this year or early this week in the state of the Union talking about this being a big issue and a big priority.
For his administration going forward and I'm hearing the same thing from governors around the country. So we're we're looking actually this year.
Do a program in prison and also do a program that's community base.
That would help with addiction and these are called map programs are medically assisted treatment programs and so.
That could be an interesting solution to help these individuals that are dealing with addiction, both in prison and community base.
And again, what we're hearing from governor, especially a new governor. So just gone sworn in and this is something of a real interested them as they deal with the challenges the addiction not only just an accrual adjustment system, but also in the general community, but anything you'd add to that Dave just with respect to the guidance, which we don't have any of that in our guidance. So if we were to implement some map programs, which we are.
A couple of pilot programs, there could be some startup expenses and I'm not talking Nichols.
ZIP that and start up expenses to activate a program like that.
Revenue for that would probably be backend loaded in the year.
Likewise as I mentioned in my prepared remarks, we're not contemplating any new state contracts in our guidance, though we continue to have conversations that David just described so that could be upside to the guidance. If we're able to get one or more of those contracts across the finish line, but generally speaking I would say that marshals populations are relatively stable and our guy.
And throughout the rest of the year and state populations have been fairly stable even towards the tail end of the pandemic here second half of 2022, so we're forecasting those to be pretty stable in that 'twenty three guidance as well.
Okay, Great and then my thank you for all that.
My second question.
I think you may have addressed this earlier, but there has been some uptick in per diem rates.
How should we think about additional increases for 'twenty three at both the state and federal level.
Yes, good question.
As alluded to earlier question around.
Baking capacity at facilities, where we've got ice contracts again, we've had some pretty good.
Engagement with our partner on that front again with maybe changes to the fixed monthly payment, but also the per diem rates. So that I think is potentially and we've as Dave alluded to earlier, we built.
Some of that into the guidance for this year.
The state side as you know as always.
There's a flurry of activity in the spring. So most if not all state legislators legislatures are back in session.
We're actively engaging with all the appropriate stakeholders in states, where we currently operate.
And looking at not only the needs that we have got form a staffing perspective, and then give some salary increases but also may be pretty <unk> adjustments. So.
Too early to tell but I will tell you. We are encouraged by the amount of engagement and support that we're feeling from our state partners. We had a record year last year on premium increases with with our state partners. So I feel like I don't know if I can say this year is going to be the same but it does feel very encouraging.
I would just say.
Just generally.
Lot of economic information out there relative to recession in the labor market and how it's impacting employers in various industries.
We are somewhat encouraged.
State budgets may not be impacted dramatically like they were a decade ago with the great recession. So.
State budgets, if they get dramatically impacted the net potentially put some pressure on pricing.
At the moment, we're not feeling that are seeing that again with the states I think relatively speaking I know, it's not exactly the same case in every 50 state every statement country, but I'd say relatively speaking I think most things feel pretty good about their economic environment their revenues and have built up some pretty nice rainy day funds in your last couple of years.
Okay.
Okay, great and that actually dovetails into my last question.
How should we think about net operating margins trending through 2023 given.
Given the strength that you guys put up in the fiscal fourth quarter.
Quarter 'twenty two.
Yes, Dave I'd say.
We did have the employee retention credit.
In the fourth quarter.
That inflated the fourth quarter margins a bit I gave.
The margins excluding those credits would be 22, 6%, that's probably the number to compare going forward from Q4, 'twenty two I'd say fairly stable.
It's a leveraged model, though as occupancy goes up margins go up we are optimistic we will get back to our pre pandemic margins of around 25% don't expect that to be in 'twenty, three though as we don't forecast our occupancies get into pre pandemic levels in 'twenty, three but I would say stable right around the number in Q.
Four.
Certainly during the first two quarters of 2023.
The possibility of increasing higher in Q3, and Q4 as we would expect occupancy levels to sequentially increase.
Okay. That's great. Thanks for taking my questions.
Thank you. Thank you.
Thank you. Our next question comes from the line.
Ben Briggs Stone ex financial question. Please Ben.
Hey, guys. Thank you for taking the questions.
Most of mine on the scripted portion or in the previous Q&A.
A couple left so.
When do you guys anticipate that facility being fully staffed and helping its cost structure reached a normalized level.
Yes. This is Damon again, I'll tag team with Dave on this to your question about staffing.
Probably normalizes here first maybe second quarter.
Keep me out of your day, probably mid mid year.
Again, we've been encouraged by the labor market.
Globally kind of turn it to our favorite here in the last six to eight months in Arizona is no exception to that but I guess, maybe to the second part of your question yes.
And I'd say the ramp we're in really good shape. So it's substantially completed at up now so I think as we mentioned in our prepared.
Remarks, we have about 2500 people there today.
Staffing is.
<unk> been supplemented with staff from other parts of our of our systems. So that's really what's driving the incremental expenses at the La Palma facility. We've got travel expenses, we've got shipped premiums for people to work away from their home facilities and work in Arizona.
Registry nursing continues to be a challenge in Arizona. So those are the types of expenses that we continue to incur and don't expect those to really go away until the middle part of the year, but as far as the ramp goes.
Really good shape and staffing were in good shape. It's just we're incurring outside the expenses because we don't have the permanent local staff there.
Okay got it got it.
And then the next one was I just wanted to make sure that I've got my math right here. So I know you guys paid down and you discussed in the scripted portion.
Hey, down four and five eights notes due in 2023 were about $154 million of those outstanding when you pay them down.
You said that.
Did that using cash and revolver draw that was a $35 million revolver draw and a $119 million of costs to have that right.
That would be correct, yes.
Okay, Great just wanted to I wanted to make sure that I was getting at there right.
For me.
Great Yes.
It's going to be it for me.
Congratulations on the quarter and thank you for taking the questions.
Yes, Sir thank you.
Sure.
Thank you.
Next question.
Come from the line.
Kurt Ludtke of Imperial capital Your line is open David hurt.
Hi, Hello, Dan and David Cameron Hi, Good morning, Good morning, good morning, congratulations on the quarter.
I just have a couple.
Follow ups here.
I think the <unk>.
Fourth quarter, if you annualized adjusted EBITDA, you get to mid three hundreds $350 million of EBITDA. So the guidance as.
Is below what the annualized number would apply.
What are the what are the.
And almost everything we've talked about directionally.
Year over year as a tailwind right no pom population pricing what are the other than macrae what are the headwinds.
In the guidance.
Yes. This is Dave I appreciate that question I guess, the only thing I would say and I will tag team again, one day, but just talking about staffing. So again as we kind of continue ramping up staffing in anticipation of increased needs.
Throughout the portfolio doesn't agree with ice that is going to be.
Going to be significant.
You can try to provide a little bit of clarity on that.
If we if we were not ramping up staffing both late last year and going into this year.
We would easily be with.
Within range of the consensus for this year without that increase labor labor cost, but do you think you'd add to that Dave Yes, I mean, it's definitely labor thats driving it and again, we're not where we want to be yet so we are increasing staffing levels.
Throughout 2023, that's included in our guidance and Thats a bit of a drag even though.
We continue to incur the shift incentives and retention referral relocation bonuses and registry nursing, we hope those normalize so there.
We did see the decline from Q3 to Q4.
In Q4 I'd say.
We did have the employee retention credits.
So thats you got to take that out of <unk>.
Run rate basis for 2023.
That's not going to be recurring in 2003, it might be good to know why don't know if we've talked about this in a while but for us to item higher employee from the time they are higher to the time, they actually don't work on a post <unk> facility I mean, it could almost be.
Probably two to three months.
And so part of the again anticipation as we want to make sure we get them through the training academies as appropriate.
All of our contracts have.
Very comprehensive background screening process and those could take weeks not days.
So that's again that's part of it is just do we want to make sure that if there is demand manifesting during the spring summer fall.
We've got the staff and not have to wait three months to meet that demand.
Got it that's helpful.
Is it is the pricing mechanisms such that you only get one shot.
In the spring when the budget set and then you have to wait a whole year.
To get another.
Yes, typically typically I mean, most of our state contracts are tied to the fiscal year, which the vast majority states are July one to June 30th.
So you are making the case within the legislature and then ultimately what we negotiated with the department of corrections, it's usually in the spring.
But we do have had the last couple of years, we have had some what I call all cycle adjustments.
Notably if conditions of change within the facilities, where they have a unique need of services and programs and we can negotiate that in real time, and then also the labor market, which has been fluid.
The good news about our business the state business is that many of our states if not all of them operate their own facilities.
So they know what theyre doing some challenges are nervous and their facilities, we're likely going to feel the same changes. So that we could do maybe some adjustments can off cycle, but anything you'd add to that.
Glad you asked that card because I was going to say.
From a prior question last year, there were a couple of off cycle.
<unk> increases that we received because we were providing off cycle wage increases here, we are getting towards the middle of February I don't see that happening in the first half of this year. So we haven't baked that into <unk> into the first half of the year, we would time them with the middle part of the year.
State budgets.
As the states get through their budgets and implement their new budgets effective July one.
And I guess I'd say, one other thing Kirk on the annual at least Q4 going back to employee retention credits, if we net the cost associated with.
With those credits, that's probably a $10 $4 million annual amount that you had to back out of 'twenty three.
Just taking Q4 and multiplying it by four.
Oh interesting okay.
Pretty big number then got it I appreciate it and then.
But just to just to clarify.
I'm guessing that the.
Guidance assumes the renewal of central Arizona.
Absolutely absolutely.
Got it and then lastly, I don't I don't ever want to ask you to comment on rumors but.
There has been some press coverage of a potential deal between the buyer and administration in Mexico, which.
Im not sure how to interpret but is that something that you can elaborate on or comment on.
Unfortunately, we cannot.
Okay got it.
Is it for me I really appreciate it thank you.
Yes, Sir.
Thank you.
That does conclude today's conference call. Thank you for participating please disconnect your lines at this time.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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