Q2 2023 CoreCivic Inc Earnings Call
Good morning, My name is Amber and I will be your conference operator as a reminder, this call is being recorded.
This time I would like to welcome you to course ethics second quarter 2023 earnings Conference call.
All the lines have been placed on mute to avoid any background noise.
After the Speakers' remarks, there will be a question and answer session.
I'd like to ask a question during this time simply press star one one on your telephone keypad.
Would like to withdraw your question Press Star one one again.
Thank you I would now like to turn the call over to Cameron Hopewell course ethics, 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 Hanger, 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 Hammonds.
On today's call, we will discuss our financial results for the second quarter of 2023 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 will include forward looking statements pursuant to the safe Harbor provisions of the <unk>.
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 second quarter 2023 earnings release issued after market yesterday and in our SEC 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 online 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 the quarterly supplemental financial data report posted on the investors page of our website <unk> dot com with that it's my pleasure.
Turn the call over to our president and CEO Damon hydrocarbon.
Thank you Tamara and good morning, everyone and thank you for joining us today for our second quarter 2023 earnings call.
Today's call I will provide you with details of our second quarter financial performance and our updated 2023 full year financial guidance.
I'll also discuss with you our latest operational developments.
Update you on our capital allocation strategy.
Scott the latest developments with our government partners.
Following my remarks, I will turn the call over to our CFO , Dave Garfinkle, who will review our second quarter 2023 for these results and our increased full year 2023 financial guidance in greater detail.
He will also provide a more detailed update on our ongoing capital structure initiatives.
I'll now provide a brief overview of our second quarter financial results and our updated 2023 financial guidance.
In the second quarter, we generated revenue of $463 7 million, which was a 2% increase compared to the prior year quarter.
This is inspite of the exploration of our final prison contract with the Federal Bureau of prisons at our previously owned Mcrae Correctional facility in November of 2022.
We generated normalized funds from operation or <unk> of $37 8 million or <unk> 33 per share compared to $40 7 million or <unk> 34 per share in the second quarter of 2000 2022.
The decline was driven by the sale of our Mcrae facility, which generated EBITDA of $2 4 million in the prior year quarter, and higher staffing levels, which we anticipated and communicated on our last quarter's earnings conference call in anticipation of increasing demand.
While our operating costs remained elevated compared with pre pandemic levels.
During the quarter, we experience a continuation of modest improvements in the employment market a trend that began to develop in the second half of 2022.
We believe the favorable operating expense trends will continue as the tight labor market continues to loosen.
However, the pace of operating expense reductions will largely depend on the condition of the labor market, which we believe will take some time to normalize.
As for our updated 2023 financial guidance, we are forecasting full year normalized <unk> per share in a range of $1 37 to $1 45, and adjusted funds from operation or <unk>.
<unk> per share in the range of $1 31 to $1 39.
These represent increases of four cents at the midpoint of our previously issued guidance.
Moving now to one of our federal customers immigration and customs enforcement or ice.
EMEA 11, titled 42, a temporary public health order issued by the CDC that has essentially closed our nations borders to asylum seeking individuals since the onset of COVID-19 pandemic came to an end.
It is also important to note at the same time occupancy restrictions implemented during the pandemic at our ice facilities also came to an end.
Without the ability to quickly remove individuals using the authority granted by title 42, there has been an increase in the number of people in the custody of the department of Homeland security or DHS.
Hi, This is one of the agencies within DHS that is response core enforcing immigration laws.
Pressing entertaining the individuals who have entered the country illegally.
As expected ice has experienced a significant increase in demand for detention capacity since title 42 was lifted.
In fact.
Occupancy has increased approximately 43% nationwide since the end of title 42, and we experienced a similar increase in our ice facilities.
Due to fixed payments under many of our federal contracts the <unk>.
<unk> in the residential population that does not result in a proportionate increase in our financial results.
Such facilities until calculations clear the fixed payment levels at a certain bed capacity utilization.
This gap has narrowed significantly and the majority of our facilities are now near or above the fixed payment levels.
The long term impact of the luxury that tie to 42 is still unclear and there are other factors that impacted kitchen utilization levels by ice.
The most significant factor has historically been funded levels approved through Congress.
While the outcome of the appropriations process for the upcoming fiscal year. Beginning October one is still unknown there appears to be growing appreciation for the need for additional funding to healthy and agents to address the challenges at our southern border.
The outcome of the appropriations process is expected to have a significant impact on the overall population levels and our ice facilities moving forward.
Now for an update on our other major federal partner, which is within the department of Justice, The United States Marshal service.
The U S. Marshals prisoner populations have remained consistent in recent years, so their need for capacity around the country remains unchanged and significant due to their reliance on contracted detention capacity.
The marshals are 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 Contra Department of Justice contracts directly with privately operated criminal detention facilities.
We have only two total remaining direct contracts with the Marcellus.
What are 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 facility capacity to the marshals that we believe will be very challenging to replace but as we've previously seen as previously stated we likely will not have resolution on potential contract extensions until we are closer to the existing contract expiration dates.
We continue to work closely with the marshals to ensure their capacity needs are being met in order to support their critical public safety mission.
At the state level, we continue to hear that state Correctional systems largest challenge remains the tight labor market.
We have had conversations with a handful of states to help address our challenges in the near to long term as the number of states, where we've had conversations about additional bed capacity has increased since the last quarter.
Now it wouldn't be appropriate to disclose all of the states that we are currently talking to but I will highlight one that recently has been reported publicly.
The state of Montana has appropriated funding into place a 120 individuals out of stage.
We currently expect Montana to issue an RFP later this quarter and as a current government partner of ours. We believe we are in an excellent position to serve their growing needs.
We have already achieved several successful outcomes from.
Discussions with other state partners.
We recently renegotiated our contract with the state of Tennessee for the managed only 676 beds South Central Correctional Center.
Early this year, we notified the state of our intent to not renew the contract when it was scheduled to expire on June 30.
However, we successfully negotiated contractual terms at once again made it still a viable for continued operations over the long term both in terms of an increase per DM and investments in the facility infrastructure.
We are pleased to reach this positive outcome and continue operations at the South Central Correctional Center to serve the increasing demand for bed capacity from the state of Tennessee.
We also reached a new agreement with the state of Oklahoma to enter into a new lease agreement at our 600, <unk> hundred 70 bed Davis Correctional facility effectively converting our facilities to one in which we own and operate two one that we simply lease to the state which will operate the facility with <unk>.
<unk> employees.
<unk> October one of this year.
We were pleased to reach a positive conclusion to this as those contract renegotiation and we believe that a lease agreement is best for the long term outlook for the facility that also meets the long term needs of the state.
We have signed a 90 day extension under the current management contract and continue to work through the transition process expecting to transition operations to the state of Oklahoma effective October one.
And finally, we agreed with the state of Idaho to increase the number of individuals we care for at our <unk> thousand 896 beds the world Correctional facility in Arizona.
Over the past year, Idaho as utilized approximately 450 beds at the <unk> facility.
Based on our recent conversations we expect the state to increase their utilization of up to 600 beds over the next few months.
We're also pleased with the overall success in achieving a pretty increases under our state management contracts as our government partners recognize the challenging labor market in cost inflationary environment, which they of course are experiencing as well.
Most of our state <unk> adjustments occur effective July one.
Siding with the same fiscal year budgets, and we estimate annual incremental revenue from our state Golar partners of approximately $35 million, resulting from these tritium increases.
Which will help to offset the incremental labor costs, we are incurring.
I also wanted to note another component of our business and that is our community segment, which represents a vital part of our mission and is often critical to successful reentry of residents in our care.
Net operating income in this segment increased by 22% in the second quarter of 2023 from the prior year quarter as occupancy increased three 5% to a total of 62, 8% in the second quarter of 2023.
We expect these trends to continue in the community segment now that all pandemic related public health policies have come to an end.
Pre pandemic occupancy in this segment was closer to 75%.
So there is still a lot of a lot more opportunity to grow.
However, it appears that more of our government partners are once again choosing to use residential reentry programs to help individuals better prepared for successfully transitioning into our communities.
So to summarize the macro environment is improving our ice populations have increased with the lifting is titled 42, oxy caps and increasing demands on the southwest border.
Demand at the state level also appears to be increasing.
Courts nationwide were significantly hampered operationally during the pandemic and that has contributed to jail populations growing by 24% in the last 24 months.
As courts normalize operations and cases are adjudicated state correctional agencies will clearly be impacted.
Additionally, several states have recently passed legislation that could result in that leading additional services or capacity.
Finally, we have had discussions with a few county governments not historically, an avenue of growth for us struggling with Joe overcrowding and challenges with staff.
And while we can never say definitively when an AUC may engages for our services. Some of the leading indicators are notable as we look to future demand.
As a reminder, we were 82% of oxy in 2019 versus occupancy 70% today.
And our financial model is a high fixed cost model with significant operating leverage and earnings potential with increases in utilization.
I will close out my comments by discussing our continued progress with reducing our overall debt and returning capital to our shareholders.
First an update on our buyback plan year to date, we have repurchased two 6 million shares at an aggregate purchase price of $25 6 million.
In the second quarter, we purchased $21 million of our eight and one 4% senior unsecured notes that are scheduled to mature in April of 2026, which is our next scheduled debt maturity.
We used cash on hand, and free cash flow to purchased or through open market transactions.
Should opportunities continue to rise we could elect to use our free cash flow to purchase additional senior notes in open market transactions to further our capital allocation strategy of reducing overall debt levels.
It reduced our net debt to EBITDA to a range of two in a quarter to two to three quarter times.
We have no debt maturities until April 2026, which provides us flexibility in how we deploy free cash flow for the next three years.
We have made meaningful progress in reducing our overall leverage due to the strong cash flows the company generates reducing our overall debt balance by over $1 2 billion.
Since announcing our updated capital allocation strategy in the summer of 2020.
We expect our leverage to continue to decline as we prioritize our cash flows are reducing debt understanding that in recent quarters EBITDA has been negatively impacted by the short term transition of contracts at our La Palma facility in Arizona and ongoing pandemic related oxy restrictions with our federal partners, which have now largely come to an end.
And trends are reversing.
These issues mathematically slowed the rate of leverage decline, though we have continued to reduce our debt levels, even while purchasing our shares of common stock.
Now I'll turn the call over to Dave who will provide a more detailed look at our financial results in the second quarter.
We'll also discuss in detail the increase of our full year 2020 financial guidance, including the most significant factors behind the change in that guidance.
Dave.
Thank you Damon and good morning, everyone in the second quarter of 2023, we reported GAAP net income of <unk> 13 per share compared with <unk> <unk> per share in the prior year quarter and adjusted EPS of <unk> 12.
Compared with 13 cents per share in the prior year quarter.
Normalized <unk> per share was <unk> 33 during the second quarter of 2023, compared with 34 in the prior year quarter and <unk> <unk> per share was <unk> 32.
Compared with 33 in the prior year quarter.
Compared to the second quarter of 2022, a reduction in interest expense and the impact of our share repurchase program were offset by the expiration of our final prison contract with the Federal Bureau of prisons in November 2022.
Our previously owned and operated Mcrae Correctional facility.
This facility generated $2 4 million of EBITDA or a penny per share in the prior year quarter.
Further as we discussed last quarter, we've increased staffing levels in anticipation of increasing demand.
During the second quarter, we began to experience an increase in the number of residents detained by ice as a result of the termination of title 42 on May 11, 2023, a policy that denied entry at the U S border to asylum seekers and anyone crossing the border without proper documentation or authority in an effort to contain the spread of COVID-19.
From May 11 through June 30th ice detention populations increased nationwide by 41% and within our facilities by approximately 2800 residents or 49%.
Note, however that due to fixed payments at certain of our facilities only a portion of this increase resulted in incremental revenue and compensated occupancy because a substantial portion occurred at facilities, where population levels were already included in our compensated population, but we did incur variable expenses associated with the total increase in the number of residents under our.
Our care.
Compensated occupancy in our safety and community facilities was 73% in the second quarter of 2023, compared with 69, 5% in the prior year quarter.
The increases in staffing and variable expenses negatively impacted our margins in the safety and community facilities decreasing from 22, 2% in the second quarter of 2022% to 26% during the second quarter of 2023.
This decline was somewhat expected because of our staffing strategy.
Sustained population levels for a full quarter as well as further population increases would have a favorable impact on our margins as population levels clear the fixed payments and move into an incremental per DM structure.
Further despite inflation in the difficult labor market, which have required us to provide above historical wage increases we have been able to reduce certain labor related expenses, such as registry nursing temporary wage incentives and travel each of which moderated during the second quarter of 2023 compared with the prior year quarter.
We believe we can further reduce these expenses as the tight labor market continues to alleviate which we expect will take additional time.
Longer term, we expect operating margins 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 is labor related expenses continued to.
Normalized.
Turning next to the balance sheet, our leverage measured by net debt to EBITDA was three one times using the trailing 12 months ended June 32023.
As of June 30, we had $42 million of cash on hand, and an additional $233 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $275 million.
During the second quarter, we repurchased 1 million shares of our common stock at an aggregate purchase price of <unk> 7 million.
Focusing our cash flows on paying down debt after repurchasing two 5 million shares of our common stock during the first quarter at an aggregate purchase price of $24 9 million.
Since our board authorized a share repurchase program in May 2022, we have repurchased over 7% of our outstanding shares or a total of $9 2 million shares at a total purchase price of approximately $100 million and have remaining authorization for 125 million more of our shares.
During the second quarter of 2023, we purchased $21 million of our 8.25% senior notes in open market purchases using our free cash flow, reducing the outstanding balance of these notes to $593 1 million.
We reduced our total debt balance by $34 $1 million during the second quarter or by $24 $5 million net of the change in cash increasing the total outstanding principal balance of debt repaid in 2000 $23 million to $183 million or <unk> $72 $7 million net of the change in cash.
We have no debt maturities until 2026, and the only variable rate debt. We have outstanding is not is a $93 $1 million term loan which is about one third of our forecasted EBITDA for 2023.
Moving lastly to a discussion of our 2023 financial guidance for the full year, we expect to generate adjusted EPS of <unk> 52 to 59.
From our previous guidance of 46 to 57.
Normalized <unk> per share of $1 37 to $1 45 up from our previous guidance of $1 31 to $1 42.
We have updated our guidance to reflect the new lease agreement with the state of Oklahoma for our Davis Correctional facility effective October one 2023.
We currently manage the Davis facility under a management contract recently extended through September 30.
Under the management contract, we incurred operating losses of $1 $5 million through June 32023, and $9 million during 2022.
The new lease agreement will generate annual revenue of $7 5 million and we.
The facility to generate net operating income and margins consistent with the average margin in our property segment, which was 76% during the second quarter and year to date.
Our guidance also reflects sustained populations from ice per diem increases we were able to achieve for many of our state partners effective July one 2023, and a continued moderation of our expense structure.
Although the number of government agencies with which we are discussing additional bed capacity needs has increased since last quarter. Our guidance does not include any new contract awards, because the timing of government actions on new contracts is always difficult to predict.
While we could execute on one or more of these opportunities this year, which would be upside to our guidance they would likely be more impactful in 2024.
We expect <unk>, which we consider a proxy for our cash available for capital allocation decisions. After interest expense income taxes, and maintenance capital expenditures to range from $149 8 million to $159 3 million or $1 31 to $1 39 per share up.
$144 million to a $157 5 million.
Or $1 25 to $1 37 per share and our previous guidance.
We expect our normalized effective tax rate to be 26% to 28%.
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.
We expect to incur $68 million to $71 million in capital expenditures during 2023, including $61 million to $63 million of maintenance capital expenditures unchanged from our prior guidance.
And $7 million to $8 million for other capital investments up slightly from our prior guidance for capital items requested by one of our government partners that will be reimbursed over time.
We remain focused on managing to our leverage target of two and a quarter to two and three quarters times and have not included any additional share repurchases in our forecast. However, we will remain flexible and will continue to be opportunistic in repurchasing shares prioritizing our cash flows on debt reduction and shaping stock repurchase levels to EBITDA.
Performance.
I will now turn the call back to the operator to open up the lines for questions.
Thank you we will now conduct the question and answer session. As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Draw. Your question. Please press Star one one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from Joe Downes Noble capital. Please go ahead.
Good morning, congratulations on the quarter.
Hey, Joe Good morning, and thank you.
So I wanted to start off maybe you can give us a little update on la Palma.
How is that progressing and how do you see that working out for the rest of this year.
Yes, Thank you that Joe and I will tag team a little bit here with Dave on that so la Palma has.
Made it almost I guess just over a year I guess on the activation with the softening of the contract with ice that we had up until I guess early part of 2022.
So we're going through that process populations have been pretty steady around the 'twenty three 'twenty 400 here during the summer months, we've been working through our biggest challenge on the staffing front in the labor market has been pretty tied in Arizona, but we've seen really I think in the last probably 90 to 120 days.
Pretty favorable alternative events some of the.
Some of the competition I should say the labor market.
They have pulled back a little bit on recruiting and retaining employees and so that's been helpful from a labor perspective, and some of the incentives and adjustments we've done relative to.
Our compensation program. There has been helpful too. So we've gone through a pretty detailed review here in the last month or so to look at not only just the rest of this year, but going into next year, we feel like we're really on a good path.
Improve.
The performance there from a margin perspective, I guess, what would you add or amplify their data most of disruption within 'twenty. Two we actually you can pause the ramp during 'twenty two to make sure we could do it safely and securely.
Up to our customers' expectations.
Sure.
Labor markets has improved as Damon mentioned.
It gets progressively better every quarter, we're laser focused on it because it does not we really have not.
Stabilize the operations as quickly as we would have preferred but it's heading in the right direction and the labor market has really been the issue there.
And it is improving so we're confident that it's going to continue to improve in future quarters and it is one of the reasons our margins have not been as high as we would've expected.
Get there, yes, exactly and we went through actually just this week. We went through another review here for the last I guess four months for this year going into 2024 and again, we're getting really good Intel and the numbers bear out relative to the labor market. We're seeing good numbers on applications that people go through the Academy.
On posts within the facility. So we think the financial performance will continue to improve.
This quarter into the fourth quarter, but notably improved pretty nicely in 2024, as we continue to get more and more staffing and a little bit to Dave last point, we're actually we're going through a little bit of exercise last night, we've got.
Several facilities that are going through a process to get renegotiated pricing, which will be helpful. For remarks perspective, assuming these proposals get accepted later this year.
Along with the improvement we're seeing in south central that I noted in my script, but la Palma, obviously being a big one if we get La Palma Phoenix, which I know we will go into early part of next year, I mean that'll be a nice catalyst for improving the margin enterprise wide in 2024.
Okay. Thank you for that insight.
And also.
Land.
Seeking supplemental funding I think what I read was about $2 billion.
Supposedly a significant portion of that would go to ice for partly for detention.
Kind of if you could give us your insight into that and if they don't get the funding, which they are saying is they need to take them through September .
What could that possibly impact how could that possibly impact you guys.
They do get the funding what do you see as the potential positive impact.
Yes. Thank you for that so a couple of a couple of observations.
First touch on this year that was your question and then just give you a little bit of what we're seeing here and going into 2024. So so this year we did here.
I think it was in early May from the DHS Secretary that they were looking to do a reprogramming of funds within DHS to help support both border patrol and ice we've never heard a publicly reported number but he did give indications of how the remarks with the sector and state that they were going to do that and again that we.
They take money from another kind of within DHS any reprogram that money to again to ice order border patrol's. So we assume that has moved forward again, we have not heard of Republic reported number on what that dollar amount was we've also heard a little bit to your question that there was some discussion about maybe a supplemental which obviously that requires some support.
From leadership within the house and Senate and all will be acted on.
Within those two chambers.
I have nothing to report on that front and again, probably seen the CMC reports that you've seen.
<unk> talked about a little bit, but if that was going to be the case, then I think you probably would see populations today, where they are at.
The last report we saw I think it was on Friday of last week at the end of July they are at 30400 nationwide on <unk>. If they had additional funding then you may see that number go up higher you gave were only about 45 days from the end of the fiscal year. So.
Get that done.
And use that for additional capacity with the notable but again, it's only about 45 days until the end of the fiscal year. So then into next year, which obviously starts on October one.
Be hard for me to say definitively how this all works out obviously there has been talk.
National Press about.
The funding bills in the debt deal that was worked out in May and house and Senate leaders, how they come together and you think about the appropriation process for next fiscal year. So there is really nothing I can add to that other than just know that there has been.
A request from the house to look at a higher pretty are higher than.
Utilization rate through funding of around 41000, I think the Senate, maybe looking around 34000.
And that is that it's consistent or did you higher than this fiscal year. So.
As we get closer to the end of the fiscal year I mean, there is a chance a do a.
I think it can continue resolution would you have done historically and that pushes it out 30 or 60 days and then allows them more time to think about total funding for the federal government, but also for ice and DHS, but guess what would you add to that Dave that's pretty thorough I don't know that I have much to add it is obviously funding is a big factor in.
The number of people that they.
Attained at the border and they're really just cannot be enough funding to detain everybody that crosses the border. So that's why funding is so important.
Two to ice and border control.
But it is clear I guess I would just say also.
If you go back to May So if you look at the numbers.
And May I think the average for the month or pretty close to the average was around 21000 and they get their north. They are north of 30000, you got as high of 31000 in July So it's backed up a little bit.
But there is some some focus clearly on user detention capacity for all the needs and challenges they have from a policy perspective and southwest border.
Okay. Thank you for that one more for me and I'll jump back in line.
We talk quarter ended quarter at about the state opportunities.
Your clock today that youre engaging more states and the potential for Montana.
Matt.
Not a big big number here, but.
As you look at it in your Crystal ball.
What really.
Potential here for some of these discussions youre, having with some of these the state opportunities. Similarly, you mentioned today about county opportunities what could really be the potential there if some of that was to come to fruition.
Yes, good question and I appreciate that.
So let me let me go to the County first and then link it up to the state opportunity. So as I mentioned in my script.
The last 24 months county populations nationwide have grown by 24%, we think thats, probably the largest increase in that period of time, maybe in the last 20 or 30 years. If you look at just the total number it's about 130000 more people NGL today than there were two years ago.
And the reason we hear as we travel around the country. The reason we're here is that courts were virtually shut down or so.
Difficultly curtailed in our operations here last few years with the pandemic and so you have a lot of people that are waiting for.
Their core process play out when the cases, ultimately get adjudicated and as they make it through that process and ultimately they're going to be at the doorstep at the state level to go into a prison.
And utilized for its capacity within their respective states. So the discussion we've had here with stage here. The last couple of quarters have been significantly because states are seeing so youre seeing the numbers that we see at the local level I was just in the state last week.
That has.
About 15 to 20000 people within their department of corrections, but they indicated that 70000.
70000, pending filling the cases within that state so they're thinking okay. We're seeing the numbers in the jail, but we also know there's a lot of cases still working our way through the courts, and all and thats going to affect prison population. So long story short we are seeing a lot a lot of activity here in the last couple of quarters I noted, Montana, Idaho those are.
Notable numbers, because obviously theyre going to.
More fully utilize our <unk> facility at potentially in Arizona, but I mean.
We're here from states that you are thinking about and pretty big quantity both for capacity they need an in state, but also capacity. We can provide I'll say in places like Callahan Tallahatchie another facility.
Just under breakeven right now the reason, we're keeping that facility open is because we are having some pretty good conversations both with states and with county developed since you use capacity there and other facilities, where we have got vacant capacity and I would say from a utilization perspective Thats. Notable also a margin perspective that will be positive so either you'd add or amplify there.
Yes, just that.
David did mentioned in his script county governments are not normally an avenue of growth for US we don't do a lot of jail business. So just to back up and clarify GL population. Those are folks who have been charged with a crime, but their cases have been adjudicated yet we normally would get involved once their cases been adjudicated their sense too.
Facility is because thats, what we own and manage.
But it's interesting to see some of the county sheriffs needing bed capacity and we're having conversations with those county governments that's interesting.
Ultimately.
I said they end up in some percentage of them end up incarcerated and we're seeing potential there as some states have enacted legislation that could result in an increase in their populations like here in Tennessee, I think we're projecting 1000 additional people per year.
So states are really facing some increased demand in and Thats. One of the reasons, we were able to renew the managed only south central contract that we mentioned effective July one. So it was one where we had given notice to terminate but the state really needs to beds. So we were able to come to terms with the state.
Keep that facility viable for the long term, so we expect to see that expand into other states as well.
Great. Thanks, so much appreciate it.
The insight thank you.
Yes, Thanks, Joe.
Our next question.
Yes.
Yes.
Our next question comes from Kirk Ludtke.
At Imperial capital. Please go ahead.
Hello, everyone. Thank you. Thank you for the call.
Good morning, Kurt Good morning.
The.
The per Diem increase you mentioned $35 million of incremental revenue beginning.
July 1st I believe you said it.
Is that fair.
Is that $35 million of incremental EBITDA.
No.
A big chunk of that goes towards our salary increases. So we've had really good success. Both this year really I guess the last three years.
We've gone to our state partners and said in this challenging labor market, we need to.
Raise salaries and in turn.
<unk>, so a big chunk of that goes towards the salary increases that we've been able to get in place for employees nationwide.
But those have already been incurred right those are already in your cost base.
Some have some have also been put in place effective July 1st of this year. So we have had some increases last couple of years. So we try to time the ink.
Increases with the timing of the <unk> adjustment does that makes sense.
Okay got it.
That's very helpful. Thank you.
You mentioned.
130000 more people in county jails since the end of Covid did I get that correctly.
During the Covid. So basically if you go back the last 24 months that's been the net increase so very significant number.
We can't go back really long way, but we think the last 20 years, that's probably the most significant increase that we've seen here nationally.
That's interesting and would you expect with that kind of an increase would you expect the marshals population to increase.
Good question, but yes, let me, let me distinguish just a little bit.
Fully depart a little bit so the number I was referring to our county level jails. So these are people that are awaiting to go through courts for a local crime or state level crime that a federal crime that typically the Marshalls would handle so these are individuals that the city County city.
Sitting in a local facility ultimately if they are convicted incentive across the day likelihood circumstance the state prison, whereas the Marshal service are working with the U S. Attorney's for anybody that's going through the federal courts.
So the number I was referring to was just local crime not federal crimes.
Got it but it wouldn't wouldn't they wouldn't they have a similar wouldn't there be a similar trend.
At the federal level.
Not really I mean, we're tracking the numbers pretty closely on the Marshal service their pops have been pretty flat and I would say the courts at the federal level I think probably has had a little more leeway or able to be a little more kind of normal operations.
City or county jurisdictions.
Got it got it thank you.
Ice populations up has the mix changed would you expect more specifically would you expect the length of leg length of stay to change.
I don't see you can look at that number two I don't think the mix has changed that dramatically here the last cut.
A couple of months and I think the length of stay I think there maybe with a little bit of increase there but.
I mean, it's only been a couple of months. So it's probably too early to say there was a there was a trend.
Yes look at the numbers here, yes, I'd say the mix and the length is probably pretty consistent.
Got it. Thank you and then last question Central Arizona.
Almost 4000 detainees there as.
As you pointed out it's a lot of people.
When would you expect them to engage.
I would guess so.
Almost.
I'm sorry.
<unk> started arranging capacity elsewhere I mean, when would you start to get a sense that.
This isn't going to be renewed.
Oh gosh.
Indications here almost 45 days away from the exploration all the discussions have been very positive I know that the Marshal service and other stakeholders that have toured the facility here in the last year. So our expectation is going to get it's going to get extended.
Begin with only 45 days left in to your point there is no other alternatives in the state or even close proximity in that region of the country. So my guess would be as again here mid mid August I guess would be probably <unk>.
Maybe before labor day, but would be my guess, maybe right. After labor day, we will have.
Administrative steps with the contracting officer to do the extension or anything you'd add to that there is a 3700 people. There if they were going to be moving all of them out I think we would have seen some indications by now.
Damon mentioned, we've been told that there's really no alternative capacity in the area even outside the state. So we feel pretty good providing a very valuable service to 3700 people at that facility. It's a large large facility.
Our largest facility so.
Yes, we feel we feel pretty good about it right now.
Fantastic Thats it from me a lot of tailwind. Thank you guys.
Thank you Kirk Thank you Sir.
One moment for our next question.
The next question comes from Brian BLA now at Wedbush. Please go ahead.
Hi, Thanks for taking my questions.
Thanks, Brian .
Good morning on the ice populations, so clearly a nice rise plus $10 42.
Just wondering have you had any sort of incremental discussions with ice as it relates to idled facilities reopening and I guess could you also remind us of what the ramp up time any associated costs would be with reopening an idled facility.
Yes, Great question, and let me tag team here, a little bit of Dave So, yes, we've had.
<unk> with ice about yet bacon facilities are idled facilities.
Those conversations have been really good and productive. So we think there are some pretty strong interest on at least one of our facilities within the portfolio where they could.
Expand our footprint primarily in the South Florida.
The Midwest.
But we've also had some pretty productive discussions with them to about just incremental capacity. We've got currently operating facilities, notably and you know this already I mean, notably we've got facilities, where maybe the Marshal service already have a contract and we currently provide services that's a natural partner for them.
Pardon me and ice so I'd say, both both idle facilities are also pockets, where it got baking capacity or has been some pretty strong interest from MISO, both for us, but what would you add to that Dave.
On the activation part of your question and activation probably in this environment is a six month process to hire train and get people through the Academy.
Post training to accept detainees, so probably six months.
But likewise, we are having those conversations.
With ice and then.
On existing facilities. We are currently staffed to accept additional populations thats really part of the reason you saw margins come down in Q2, as we talked about last quarter, our staffing in anticipation of increasing demand. So we are prepared to accept additional populations in facilities, where we already have contracts with ice so could accommodate that at a more expeditious.
Basis.
Great. That's helpful and then one more for me.
A couple of outstanding Federal Appeals cases from the fallout of title 42 relating to the transit band and there is also the accrual plus conditions cases, Florida, obviously the outcomes very much up in the air but just wondering if you had any commentary.
What kind of impact depending on which way those rules.
Have a nice population going forward.
Okay.
Yes, you are probably as well versus I am on the core cases, there to your point. There are several cases that has been working our way through the through the federal courts. A couple of them have been reported on here. The last I guess, probably a week or two.
To your question.
Pretty much impossible for us to say exactly ish.
If there was an outcome that is a little different than what's in place today, either program pulled back or policy pulled back.
What impact would be up on population. So it would be probably difficult for me to speculate on an impacts we're obviously watching closely and trying to understand.
If there is an outcome or a couple of different outcomes potentially how you're thinking about that and what their needs are.
Again, I, probably would be inappropriate for me to say or speculate I should say on what the impact would be of populations, but anything I guess you add to that that you have no sir.
Understood. Thanks, a lot.
Thank you Sir.
One moment for our next question.
Okay.
Okay.
Our next question comes from and Lauren Zach. Please go ahead.
Thank you.
A lot of information that a lot of tailwind I think someone else earlier said.
Want to get my arms around some of the potential here in terms of where the future.
Revenue growth might come from.
You see.
<unk>.
Kris NGL population with do you see that as potentially being another.
Sustainable revenue channel going forward.
Yes, so I would I guess, maybe break it into a couple of buckets here. So first federal side like I said in my script I think the marshals service populations are going to be stable as we look into 'twenty four.
And kind of what the policies are from a prosecution perspective with this administration I think 24, maybe you can go into 25, I think March service populations will be pretty pretty stable. So I think maybe some incremental demand here and there in different parts of the country, but overall I'd say.
Pretty stable so then ice.
The other federal partner that we work with that'll be driven by preparations and so you have seen obviously the increase of about 10000 in detention capacity here since Todd 42 goes away the numbers again, they got up as high as 31000. There are about 3500 today. So I would say they are pretty stable at the moment.
As I look at again, the rest of the fiscal year next 45 days I think that's probably the case unless they get some emergency supplemental funding next fiscal year again, all eyes will be on Congress and won't be what they work out again, you've got pretty significant.
Delta a pretty significant delta right now between the house and Senate relative to 34000, I think out of the Senate proposal proposal 41000 out of the house proposal, so that will obviously.
Ultimately determine what the demand is going into 'twenty four so they can go back to the state side like I said, we are seeing a significant increase in jail populations nationwide again, I think that the leading indicator.
Prison populations nationwide and we're hearing that in our discussions with various states either states, where we currently work with.
Or or potentially prospective states, where maybe you have that you would perhaps they should have passed but they clearly youre going to see a pretty significant impact with these with these.
Relations that are coming from the local level more favorable reside in either a gel already proven bad with that state or need maybe capacity is it relief out of state. So as I look next couple of years.
I think we will see stable Marshalls will see potentially some increased demand from ice, but I think we potentially could see some pretty strong demand from states that are going to again deal with the after effects of the pandemic and a lot of people at the local level that haven't had their cases adjudicated that are now going to be.
Tissue convicted in sense of a crime and going to need that capacity with that state system. So I can say anything you'd add to that level as.
As we mentioned we've already completed some restructurings of some contracts and kind of right sized somewhere we were struggling or wanted to exit but didn't end up exiting.
So there is probably two or three contracts that we've kind of reversed from losses to our now profitable.
And in the state per diem increases.
Another tailwind I'm, hoping the labor market is a tailwind as the labor market continues to.
Come up with or the labor pool grows I should say at least for our business.
So those things are already in place we're working on a couple of other contracts, where we think we can improve the terms having.
Having discussions with government partners and those are always.
Difficult negotiations, but we've been quite successful.
Getting some of them down.
Two points, so heading into the second half of the year with those things behind us.
So there's definitely some tailwind and then whether the jail populations are.
Translate into direct contracts with the.
The county governments or longer term as those cases get adjudicated to move over to state populations I think that could be a tailwind.
On an opportunity going forward as well one thing I would add too guys staying on our state book of business as I mentioned in my remarks, I mean, we are at about 82% occupancy in 2019 and into 2019, I'll say pre Covid, we were seeing a very.
Pretty intense engagement from state partners, either new state customers or existing state partners that we're expanding so that that kind of momentum and feel that we have back in 19 is starting to feel like we're seeing that again here this summer and going into 2024, but also being at 70% Oxy I mean with little if any cap.
<unk> investment I mean, we could see ourselves getting back up to that level now.
As always the uncertain, we never know exactly when a government partner is going to make a decision to contractors for services.
I do feel like that we're starting to see some of the engagement and some interest from our state partners like we did 19, we're starting to see that now going into 2004.
Okay. Thank you. Thank you for that and then one housekeeping question, which is as you shift to the lease agreement.
Homer.
Steph.
Presumably does any like small group of people group of staff on site too.
Hi.
To be the interaction with the company.
Yeah, Great question. So a couple of answers there, yes, we do expect.
A big amount of our staff that currently work at the facility and maybe living reside with their families locally that we want to stay there past October 1st and work for state, Oklahoma. So we're working with Oklahoma and that that's a very natural process and we do appreciate people will have that desire to stay within the local community and continue to work at Davis.
And then as we get closer with the transition I wouldn't be surprised we have some some probably just leadership probably provide some support past October one to help with a smooth transition to Oklahoma.
They also will follow Oklahoma's lead on what they request and desire.
But also we stand ready to help them with them again, ensuring a very smooth transition.
Okay. Thank you.
One moment for our next question.
Our next question comes from Edwin gross Shang at Compass point research and trading LLC. Please go ahead.
Good afternoon, and thank you for taking my question.
I know you don't want talk about the court cases, so I'm not going to ask directly about the court cases.
I think it is unusual that the.
Judge.
But.
Preliminary injunction on one of the Florida cases.
And it does seem that.
That coincided with increased attention in your discussions with ice.
Debate discuss the impact of those cases and changes in what theyre doing with detainees or is that all driven by title eight moving from titled <unk> 42 to title eight.
Yes, I would say.
At the leadership level.
I would say they kind of take it all into account.
They look at.
What needs to be done after tired of 42 in a way. It may 11th. They also are determining the impact on these core cases and what.
What thats going to directly from a prosecution of the potential perspective.
And then obviously the other key variable is the budget and funding and do they have funding come near term or are they going to require a re program or supplemental and or if they get one or both and how that impacts potential populations. So I would say at a high level. It's all taken into account is not.
It's not a.
Core case or this change in certain part of southwest border from a policy perspective.
I think it's all taken into challenge and Thats kind of instructed us when we're having conversations is from Alicia perspective say, okay. Here's what we're here's where we're taking into account. This is what we think we need nationally and then also then we break it out regionally on what capacity or I guess anything you'd add or and why they're doing.
It's hard to say, it's really hard to say what the impact of any of these.
Cases, and Theres, probably four cases that are related directly to ice populations, but it's just really really difficult to determine at 81 case, what the impact would be and how that would translate into increases or decreases in ice populations.
So.
It's a factor that we think about as we prepare our forecast but.
Down on the down on the list in terms of what we think the impact could be just because it's so unpredictable to determine what the impact would be.
And I go back to I think funding levels are much more important than that.
Given the number of people on the border.
That's really going to drive.
The detention beds and more than that.
Individual court cases.
Gas.
Okay Fantastic and I appreciate that.
I guess then.
I guess the news was out in CVP put out their data and they showed that crossings were down significantly in June it looks like they might be up again in July .
But if we look at crossings that were close to or over 200000 per month to dropping to anywhere from 100 to 130000 per month and then we look at the the level of detainees jumping from $21030 to 31000.
Is that really.
Do you have.
It seems incongruous right that those two diverging like that.
So is it really just the change in occupancy occupancy restrictions that is driving increased attention or or.
Is there something else going on.
Nice and CBP thats, resulting in those tensions because crossings don't seem to support the increase.
Just from the outside.
Well I guess I guess, Jim Tag team with you hear Dave I guess, if you look historically I'm going back to.
It looks like the summer 19.
Total account orders by cuts in worker trial, I think was under 40000 range on average by a month and so so yes, you've seen some pretty wild swings here in the last six months, but historically looking at today's numbers versus historically, where the numbers are they are really really elevated I mean still very elevated.
Even though <unk> seen a drop to your points I'll drop I guess in May June you saw a little bit of increase in July .
Again based on the historical numbers going back several years they are still very elevated.
So I think part of the answer is yes, I think it does give them flexibility I mean with oxy caps going away from our facilities in may.
And then you get tired of 42 going away do you all see that's notable policy change.
And that probably has been part of the driver on capacity utilization going up I guess anything you'd add.
Stay the same because I think with respect to elevated levels I mean, everything's relative right we can see.
A decrease from 200000 to $140000 a month, let's say, that's a big reduction, but that's still compares to 45.
In 2019 2020 so.
I do think yes to your direct question I think I think the occupant removal of the occupancy restrictions and the removal of title 42.
I would say definitely had an impact on that number.
Detention populations post title 42.
I think the big question that is very difficult for us to answer is what does that look like for those populations sustain themselves going forward does that go up as it go down.
I think that's a harder question to answer, but I mean, and then one other point I would say we are in the peak summer months. So it is not surprising that they went down in June probably July as well.
Really really hot temperatures, particularly in the southern border.
Does influence the migration patterns from Central America, so far so.
I expect.
To say, but I would think that they go up again as the fall arrives and you get more temperate temperatures.
But I do think ending title 42 with occupancy restrictions was the main driver for the increases in detention beds. Okay.
Thank you for that as well because I'm, sorry, I've been scratching my head on that so thats helpful.
So I do have one more question this one John and.
How you can if you will.
<unk> been talking about the states you said staffing costs have gone up we're in an inflationary period or have been.
And so you see increases in some of your per diem contracts. There how does that work. When you are discussing it with ice right because because ice may say, yes, you're right, we probably should pay you more but if congress doesn't cut them to check then theres not much more they can do so you could just walk us through like I guess the the potential.
For your discussions with ice to also result in either higher fixed payments because of inflation or.
Higher per diem, if those fixed payments are exceeded.
Yes, great Great question, So let me let.
Let me back up just a tad and I'm going to answer your question first on ice, but then give you a little commentary around state contracts and how that affects wages.
Both ice and Marshal service them for direct contracts, they've got with us require us to pay wage termination and these are set by the department of labor.
The wage rates are instructed by data they get from.
However, farmer labor throughout the country and Theyre looking at wages in regional areas all of that is.
Taking into account, especially if there's increases in wages certain area because of inflation, that's published by department labor wage termination and Thats incorporated to our contract. So if a salary in a certain region under a federal contract goes up from X to y.
We have to pay that wage that's required in our contract, but we're also get reimbursed dollar for dollar from the federal government through at actual adjustment with the with the contract so wages go up which they do especially in an inflationary environment.
Terminations, incorporating our contract were contractually required to increase wages, but with that we're also allow to get reimbursed dollar for dollar for those wages that we have to increase so thats a good feature of our federal contracts.
That really doesn't require a conversation it's really just administrative that if our wages go up we told the contract and after our wages are going up by.
But by $1 billion on an annual basis.
Get reimbursed for that for dollar for dollar.
So put that aside on a steady contracts what we do is we try to educate.
Primarily folks within the legislature, where we're operating in that state to say.
We're seeing an inflationary environment, we're seeing competition for labor by the way. The department of Corrections has also seen the same thing with interpublic facilities.
And we go through the educational process to say that we think salaries seem to go from X to Y and work with the appropriate appropriators within the legislature to get funding support ultimately.
It gets signed by the Governor hopefully and then with that we get a per diem increase by X amount and with that during that process. We're determined okay exactly what we would need to wait to raise salaries. So that is really a conversations ongoing during the spring as legislative sessions are going on around the country.
And again, we're trying to educate people what we think we just need to do and then with that we're looking for offsets with <unk>, it's not always perfect.
Always a little bit of give and take but I'd say the last 24 36 months, we can be really really successful.
With all of these potential challenges, we've got a labor perspective.
We need to we need to support for funding increases and again, it's always helpful. When the DSC is kind of seeing the same issues within their facilities. So they're kind of working arm and arm with us with the appropriators within legislature and then also if we do get a pretty increase that we tried it.
The increase was the timing of wages going up within our within our facilities.
The other thing I'd, just say is that I mean, it's been hopeful that.
The physical environments, they will almost be a pretty favorable.
There is still some wringing, our hands about potential recession, and how that affects revenues and stay a little bit that's been a little bit of a tailwind for us as we've been working through some of these discussions with.
With the various states.
Add to that Dave going back to the federal side on is.
Some of our contracts have those fixed payments that we talked about so that's one of the benefits that we provide they have that flexibility to increase capacity that doesn't require conversation either because they are not required to have additional funding.
If they are under those populations under those occupancy guarantees if you will then.
They can increase the capacity without having to appropriate new funds, it's not additional funding already pay net fixed monthly payment. It is only when they are above those fixed monthly payments when they get into a per diem tiered structure, where they would have to have funds available to increase occupancy further and so that's where you could get the system wide.
At the 34000 level that they are currently funding funded four and they have to go higher that's when they're going to have to go back to Congress to get additional funding. So most of what they do on a day to day operations does not require a conversation with us it doesn't require a conversation with the appropriators, they've got that capacity that flexible capacity available to them to use.
That is very helpful. Thank you very much.
Nice quarter.
Yes, Sir thank you.
Thank you I'm showing no further questions at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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