CoreCivic, Inc.

Good morning. My name is Amber, and I will be your conference operator. As a reminder, this call is being recorded. At this time, I would like to welcome you to CoreCivics' second quarter 2023 earnings conference call. All the lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 11 on your telephone keypad. If you would like to withdraw your question, press star 1-1 again. Thank you. I would now like to turn the call over to Cameron Hopewell, CoreCivics 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 calls are Damon Heiniger, President and Chief Executive Officer, and David Garfinkel, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammons. 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 provision 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 second quarter 2023 earnings release issued after market yesterday and in our SEC filings, including the form's 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-gap measures. A reconciliation of the most comparable gap 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, corecivic.com. With that, it's my pleasure to turn the call over to our President and CEO, Damon Heinegger.

Thank you, Cameron. Good morning, everyone, and thank you for joining us today for our second quarter 2023 earnings call. On today's call, I will provide you with details of our second quarter financial performance and our updated 2023 full-year financial guidance. I will also discuss with you our latest operational developments, update you on our capital allocation strategy, and discuss the latest developments with our government partners. Following my remarks, I will turn the call over to our CFO, Dave Garfinkel, who will review our second quarter 2023 financial 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 in spite of the expiration of our final prison contract with the Federal Bureau of Prisons at our previously owned McCray Correctional Facility in November of 2022. We generated normalized funds for operation or FFO of 37.8 million or 33 cents per share compared to 40.7 million or 34 cents per share in the second quarter of 2020-22. 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 experienced 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 SFO per share in the range of $1.37 to $1.45 and adjusted funds for operation, or ASFO, per share in the range of $1.31 to $1.39. These represent increases of 4 cents at the midpoint of our previously issued guidance. Moving now to one of our federal customers, Immigration and Customs Enforcement, or ICE. On May 11, Title 42, a temporary public health order issued by the CDC that has essentially closed our nation's 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. ICE is one of the agencies within DHS that is responsible for enforcing immigration laws, arresting, and detaining individuals who have entered a country illegally. As expected, ICE has experienced a significant increase in demand for detention capacity since Title 42 was lifted. In fact, ICE 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 increase in the residential populations does not result in a proportionate increase in our financial results at such facilities until populations 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 lifting of Title 42 is still unclear, as there are other factors that impact detention utilization levels by ICE. The most significant factor has historically been funding levels approved through Congress. While the outcome of the appropriations process for the upcoming fiscal year, beginning on October 1st, is still unknown, there appears to be growing appreciation for the need for additional funding to help the agency 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 in 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 Marshals 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 were impacted by the executive order signed by President Biden and issued in January of 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately operated criminal detention facilities. We have only two total remaining direct contracts with the marshals. One of those contracts is at our 4,128-bed Central Arizona Florence Correctional Complex in Arizona and has a contract expiration in September of 2023. Both facilities provide significant facility capacity to the marshals that we believe would be very challenging to replace, but as we've previously stated, we likely will not have a 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 their challenges in the near to long term, and the number of states with which we've had conversations about additional bed capacity has increased since the last quarter. Now, it wouldn't be appropriate to disclose all the states that we are currently talking to, but I will highlight one that recently has been reported on publicly. The state of Montana has appropriated funding to place 120 individuals out of state. 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 government partners. We recently renegotiated our contract with the state of Tennessee for the managed-only 1,676-bed South Central Correctional Center. Earlier this year, we notified the state of our intent to not renew the contract when it was scheduled to expire on June 30th. However, we successfully negotiated contractual terms that once again made the facility viable for continued operations over the long term, both in terms of an increase per diem 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 1,670-bed Davis Criminal Facility, effectively converting the facility to one of which we own and operate to one that we simply lease to the state, which will operate the facility with government employees effective October 1st of this year. We were pleased to reach a positive conclusion to this facility's 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 the transition operations to the state of Oklahoma effective October 1st. And finally, we agreed with the state of Idaho to increase the number of individuals we care for at our 1,896-bed Saguaro Correctional Facility in Arizona. Over the past year, Idaho has utilized approximately 450 beds at the Saguaro facility. Based on recent conversations, we expect the state to increase their utilization of up to 600 beds over the next few months. We are also pleased with the overall success in achieving per diem increases under our state management contracts as our government partners recognize the challenging labor market and cost inflationary environment, which they, of course, are experiencing as well. Most of our state per diem adjustments occur effective July 1st, coinciding with the state fiscal year budgets, and we estimate annual incremental revenue from our state government partners of approximately $35 million resulting from these per diem 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 3.5% 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 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 be better prepared for successfully transitioning into our communities. So, to summarize, the macro environment is improving. ICE populations have increased with the listing of Title 42 Oxycaps 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 them needing additional services or capacity. Finally, we have had discussions with a few county governments, not historically an avenue of growth for us, struggling with jail overcrowding and challenges with staff. And while we can never say definitively when an agency may engage us for our services, some of the leading indicators are notable as we look to future demand. As a reminder, we were 82% occupancy in 2019 versus occupancy of 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 2.6 million shares at an aggregate purchase price of $25.6 million. In the second quarter, we purchased $21 million of our eight and one-fourth percent senior unsecured notes that are scheduled to mature in April of 2026, which is our next scheduled debt maturity. We use cash on hand and free cash flow to purchase bonds 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 and reduce our net debt to EBITDA to a range of two and a quarter to two and three quarter times. We have no debt maturities until April of 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 on 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 OCCI 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. I'll now turn the call over to Dave, who will provide a more detailed look at our financial results in the second quarter. He will also discuss in detail the increase of our full year 2023 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 13 cents per share compared with 9 cents per share in the prior year quarter and adjusted EPS of 12 cents compared with 13 cents per share in the prior year quarter. Normalized FFO per share was 33 cents during the second quarter of 2023 compared with 34 cents in the prior year quarter, and AFFO per share was 32 cents compared with 33 cents 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 at our previously owned and operated McCrae 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 have 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 11th through June 30th, ICE detention populations increased nationwide by 41%, and within our facilities by approximately 2,800 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, though we did incur variable expenses associated with the total increase in the number of residents under our care. Compensated occupancy in our safety and community facilities was 70.3% 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 20.6% 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 diem structure. Further, despite inflation and 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 from many of our government partners are expected to translate into increasing margins as they are applied to increasing occupancy levels and as labor-related expenses continue to normalize. Turning next to the balance sheet, our leverage measured by net debt to EBITDA was 3.1 times using the trailing 12 months ended June 30th, 2023. As of June 30th, 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 0.1 million shares of our common stock at an aggregate purchase price of $0.7 million, focusing our cash flows on paying down debt. After repurchasing 2.5 million shares of our common stock during the first quarter at an aggregate purchase price of $24.9 million. Since our board authorized the 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 2023 to $180.3 million, or $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 a $93.1 million term loan, which is about one-third of our forecast EBITDA for 2023. Moving lastly to a discussion of our 2023 financial guidance, for the full year, we expect to generate adjusted EPS of 52 to 59 cents, up from our previous guidance of 46 to 57 cents, and normalized FFO 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 1, 2023. We currently manage the Davis facility under a management contract recently extended through September 30th. Under the management contract, we incurred operating losses of $1.5 million through June 30, 2023, and $0.9 million during 2022. The new lease agreement will generate annual revenue of $7.5 million, and we expect 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 from many of our state partners effective July 1st, 2023, in 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 AFFO, 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 from $144 million to $157.5 million, or $1.25 to $1.37 per share in our previous guidance. We expect our normalized effective tax rate to be 26 to 28%, and 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. We expect to incur $68 to $71 million in capital expenditures during 2023, including $61 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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Joe Gomes at Noble Capital. Please go ahead.

Good morning. Congratulations on the quarter.

Hey, Joe. Good morning. Thank you.

So, I want to start up. Maybe you can give us, Damon, a little update on La Palma. How is that progressing and how do you see that working out for the rest of this year?

Yeah, thank you, Joe. And I'll 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 swap into the contract with ICE that we had until, I guess, early part of 2022. So we're going through that process. Populations have been pretty steady around 2,300, 2,400 here during the summer months. We've been working through our biggest challenge on the staffing front. The labor market has been pretty tight in Arizona, but we've seen really, I think in the last probably 90 to 120 days, a pretty favorable turn of events. Some of the Some of the competition, I should say, in 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. We've gone through a pretty detailed review here in the last month or so to look at, not just the rest of this year, but going to next year. We feel like we're really on a good path to improve the performance there from a margin perspective. I guess, what would you add or amplify there, Dave?

Yeah, most of the disruption was in 22. We actually even paused the ramp during 22 to make sure we could do it safely and securely and up to our customers' expectations. You know, labor market has improved there, as Damon mentioned. It gets progressively better every quarter. We're laser focused on it because it has not, you know, we really have not stabilized the operations as quickly as we would have preferred, but it's heading in the right direction. And the labor market's really been the issue there, and it is improving. 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 have expected. But we'll get there.

Yeah, 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, and people go through the academy and hopefully get on post within the facility. So we think the financial performance will continue to improve this quarter into the fourth quarter, but notably will improve pretty nicely in 2024 as we continue to get more and more staffing. And a little bit to Dave's last point, we actually were going through a little bit of exercise last night. You know, we've got several facilities that are going through a process to get renegotiated pricing, which will be helpful from a March perspective, assuming these proposals get accepted later this year. along with the improvement we're seeing at South Central that I noted in my script. But La Palma obviously being the big one, if we get La Palma fixed, which I know we will go in the 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, you know, Homeland is seeking supplemental funding. I think what I read was, you know, about $2 billion supposedly a significant portion of that would go to ICE for partly for detention you know kind of if you give us your insight into that and you know if they don't get the funding which they are saying is neat they need it to take them through September what could that possibly impact how could that possibly impact you guys and if they do get the funding what do you see is the potential positive impact

Yeah, thank you for that. So, a couple observations. I'm going to first touch on this year. That was your question, and then just give you a little bit of, you know, what we're seeing and hearing going into 2024. So, this year, we did hear, 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 indication in some public remarks with the Secretary of State that they were going to do that. And, again, you know how that works. They take money from another component within DHS and they reprogram that money to, again, to ICE or to Border Patrol. So we assume that has moved forward. Again, we have not heard a publicly 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 ultimately acted on within those two chambers. I have nothing reported on that front. Again, probably seen the same reports that you've seen where that's been 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're at, The last report we saw, I think, was on Friday last week. At the end of July, they were at 30,400 nationwide on ICE attention pops. If they had additional funding, then you may see that number go up higher. Again, we're only about 45 days from the end of the fiscal year, so if they get that done and use that for additional capacity, I mean, it would be 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 1st, it would be hard for me to say definitively how this all works out. Obviously, there's been talk in the national press about the funding bills and the debt deal that was worked out in May and House and Senate leaders, how they come together and they think about the procuration process for next fiscal year. So there's really nothing I can add to that other than to note that there's been – a request from the House to look at a higher pay utilization rate through funding of around $41,000. I think the Senate may be looking around $34,000. Again, that is consistent or potentially higher than this fiscal year. As we get closer to the end of the fiscal year, I mean, there's a chance they do a, I think, a continued resolution, which they've 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 detained at the border. And there really just cannot be enough funding to detain everybody that crosses the border. So that's why funding is so important to ICE and Border Patrol.

But it is clear, I guess I just say also, going back to May, so if you look at the numbers In May, I think the average for the month, or pretty close to the average, was around 21,000. Again, they're north of 30,000. It got us high of 31,000 into July, so it's backed up a little bit. But there is, you know, some focus clearly on using detention capacity for all the needs and challenges they have from a policy perspective on the southwest border.

Okay. Thank you for that. One more for me, and I'll then jump back in line. You know, we talked, you know, quarter in and quarter out about the state opportunities. And, you know, you talked today that you're engaging more states and the potential for Montana, although that's, you know, not a big number here. But, you know, as you look at it in your crystal ball, you know, what really is the potential here for some of these discussions you're having with some of these 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?

Yeah, good question. I appreciate that. So, let me go to the county first and then link it up to the state opportunities. So, as I mentioned in my script, You know, the last 24 months, county populations nationwide have grown by 24%. We think that's probably the largest increase in that period of time, maybe in the last 20 or 30 years. If you look at it just a total number, it's about 130,000 more people in jail today than there were two years ago. And the reason we hear, as we travel around the country, the reason we hear is that courts were virtually shut down or significantly curtailed in their operations here the last few years with the pandemic. And so you have a lot of people that are waiting for their court process to play out and 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 prison and utilize prison capacity within the respective states. So the discussion we've had here with states here the last couple quarters have been significant because states are seeing this. They're seeing the numbers, obviously, at the local level. I was just in a state last week that has about 15,000, 20,000 people within their Department of Corrections, but they indicated that 70,000 people. 70,000 pending felony cases within that state. So they're thinking, okay, we're seeing the numbers in the jails, but we also know there's a lot of cases still working our way through the courts and ultimately that's going to affect prison population. So long story short, we're seeing a lot, a lot of activity here in the last couple of quarters. Yeah, I noted Montana, Idaho, those are notable numbers because obviously they're going to more fully utilize our swirl facility out potentially in Arizona. But, I mean, we're hearing from states that they're thinking about in pretty big quantities, both for capacity they need in-state, but also capacity we can provide out-of-state in places like Tallahatchie. Tallahatchie is another facility that's just under break-even right now. The reason we're keeping that facility open is because we are having some pretty good conversations, both with states and with counties, about potentially using capacity there and other facilities where we've got vacant capacity. And I'll say from a utilization perspective, that's notable, but also a market perspective, that'll be positive. So anything you'd add or amplify there, Dave?

Yeah, just that, as Damon did mention in his script, county governments are not normally an avenue of growth for us. We don't do a lot of jail business there. So just to back up and clarify, jail population, those are folks who've been charged with a crime, but their case hasn't been adjudicated yet. We normally get involved once their case has been adjudicated, they're sentenced to a prison facility because that's what we own and manage. But it's interesting to see some of the county sheriffs needing bed capacity, and we're having conversations about with those county governments. So that's interesting. And ultimately, like I said, 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 1,000 additional people per year So states are really facing some increased demand, and that's one of the reasons we were able to renew the managed-only South Central contract that we mentioned effective July 1st. It was one where we had given notice to terminate, but the state really needs the beds, so we were able to come to terms with the state to keep that facility viable for the long term. So we expect to see that expand into other states as well.

Great. Thanks so much. I appreciate the insight. Thank you. Yes, sir. Thanks, Jo.

One moment for our next question. Our next question comes from Kirk Lukey at Imperial Capital. Please go ahead.

Hello, everyone. Thank you for the call.

Good morning, Kirk. Good morning.

The per diem increase you mentioned, $35 million of incremental revenue beginning July 1st, I believe you said. Is that $35 million of incremental EBITDA?

No, a big chunk of that goes towards salary increases. So we've had really good success both this year, really I guess the last three years, where we've gone to our state partners and said, you know, in this challenging labor market, we need to raise salaries and in turn seek per diem increases. So a big, big chunk of that goes towards salary increases that we've been able to get in place for our 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 increases with the timing of the per diem adjustments, if that makes sense.

Okay, got it. That's very helpful. Thank you. You mentioned 130,000 more people in county jails? since the end of COVID? Did I get that correctly?

During COVID. So basically, if you go back to last 24 months, that's been the net increase. So very significant number. Again, we can't go back really a long ways, 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 Marshalls population to increase?

Good question. But, yeah, let me distinguish this a little bit or pull these apart a little bit. So the number I was referring to are county-level jails. So these are people that are awaiting to go through courts for a local crime or a state-level crime, not a federal crime that typically the marshals would handle. So these are individuals at the city, county, sitting in a local facility. Ultimately, if they're convicted and sentenced to a crime, then they likely would certainly sentence themselves. Whereas the Marshal Service are working with the U.S. attorneys or anybody that's going through the federal courts. So the number I was referring to was just local crimes, not federal crimes.

Got it. But wouldn't they have a similar – wouldn't there be a similar trend at the federal level?

Uh, not really. I mean, we're, we're tracking the numbers pretty closely on the Marshall service. Their, their pops have been pretty, uh, flattened. And I would say the courts at the federal level, I think probably have had a little more leeway or able to be a little more kind of normal operations, uh, than, uh, city or county, uh, jurisdictions.

Got it. Got it. Thank you. Um, ice populations up. Has the mix changed? Would you expect more specifically, would you expect the length of length of stay to change?

I don't think, looking at numbers here, I don't think the mix has changed that dramatically here in the last couple months. And I think the length of stay, I think there maybe was a little bit of increase there. But, I mean, it's only been a couple months, so it's probably too early to say there was a trend. Yeah, looking at numbers here, yeah, I'd say the mix and the length has probably been pretty consistent.

Got it. Thank you. And then last question. Central Arizona? Almost 4,000 detainees there. I mean, as you point out, it's a lot of people. When would you expect them to engage?

I would guess, I mean, here we are almost, I'm sorry.

Or start arranging capacity elsewhere. I mean, when would you start to get a sense that this isn't going to be renewed?

Oh, gosh, yeah. I mean, all indications, I mean, here we are almost 45 days away from the expiration. All the discussions have been very positive. I know that the March of Service and other stakeholders have toured the facility in the last year. So, our expectation is going to get extended, again, with only 45 days left. And to your point, there's no other alternatives in the state or even close proximity in that region of the country. So, my guess would be is, again, here mid-August, my guess would be probably Maybe before Labor Day, but my guess may be right after Labor Day, we'll have the administrative steps with the contracting officer to do the extension. Anything to add to that?

Yeah, there's 3,700 people there. If they were going to be moving all of them out, I think we would have seen some indications by now. And as Damon mentioned, we've been told that there's really not alternative capacity in the area, even outside the state. So, We feel pretty good providing a really valuable service to 3,700 people. That facility is a large facility, our largest facility. So, yeah, we feel pretty good about it right now.

Fantastic. That's it for me. A lot of tailwinds. Thank you, guys.

Thank you, Kirk. Thank you, sir.

One moment for our next question. The next question comes from Brian Violino at Wed Bush. Please go ahead.

Hi, thanks for taking my questions.

Good morning, Brian.

Good morning. On the ice population, so clearly an ice rise post Title 42. Just wondering, have you had any sort of incremental discussions with ice as it relates to idle facilities reopening? And I guess, could you also remind us of what the ramp up time and the associated costs would be with reopening an idle facility.

Yeah, great question, and let me tag team here a little bit with Dave. So, yeah, we've had conversations with ICE about, yeah, vacant facilities or idle facilities. Those conversations have been really good and productive, so we think there's some pretty strong interest on at least one of our facilities within the portfolio where they could expand a kind of footprint primarily in the south or in the Midwest. But we've also had some pretty productive discussions with them, too, about just incremental capacity we've got in currently operating facilities. Notably, and you know this already, I mean, notably we've got facilities where maybe the Marshall Service already has a contract and we currently provide services. That's a natural partner for them, partner being ICE. So I'd say both, both idle facilities and also pockets where we've got vacant capacity or spend some pretty strong interest from ICE on both fronts. But what would you add to that, Dave?

Yeah, an activation to part of your question, an activation probably in this environment is a six-month process to hire, train, get people through the academy on a post ready to accept detainees, so probably six months. But likewise, and we are having those conversations today. with ICE. And then on existing facilities, we are currently staffed to accept additional populations. That's really part of the reason you saw margins come down in Q2. As we talked about last quarter, we're staffing in anticipation of increasing demand. So we are prepared to accept additional populations and facilities where we already have contracts with ICE. So it could accommodate that on a more expeditious basis.

Great. That's helpful. And then one more from me. There's a couple of outstanding federal appeals cases from the fallout of Title 42 relating to the transit ban, and there's also the parole plus conditions case in Florida. Obviously, the outcome is still very much up in the air, but just wondering if you had any commentary, what kind of impact, depending on which way those are ruled, those could have a nice population going forward.

Yeah, you're probably as well versed as I am on the court cases there. To your point, there are several cases that have been working their way through the federal courts. A couple of them have been reported on here in the last, I guess, probably week or two. To your question, it's pretty much impossible for us to say exactly if there was an outcome that's a little different than what's in place today, either a program pulled back or a policy pulled back. What impact would be on population? So it'd be probably difficult for me to speculate on on impacts. We're also watching closely and trying to understand, you know, if there is an outcome or a couple of different outcomes, you know, potentially how high it's thinking about that and what their needs are. But again, it probably would be inappropriate for me to say or speculate. I should say on what that impact we have populations. But anything I guess you add to that that you know, sir.

Understood. Thanks a lot.

Thank you, sir.

1 moment for our next question. Our next question comes from M. Maran at Zax. Please go ahead. Thank you.

So, a lot of information and a lot of tailwinds, as I think someone else earlier said, I want to get my arms around some of the potential here in terms of where the future revenue growth might come from. Do you see The increase in jail populations, do you see that as potentially being another, you know, sustainable revenue channel for you going forward?

Yeah, so I would, I guess, maybe break it into a couple of buckets here. So for federal side, like I said in my script, I think the martial service populations are going to be stable. As we look into 24 and kind of what the policies are from a prosecution perspective with this administration, I think 24, maybe going to 25, I think martial service populations will be pretty stable. So I think made some incremental demand here and there uh different parts of the country but overall it's a uh pretty stable so then ice uh the other federal partner that we work with uh that'll be driven by appropriations and so you have seen us a increase of about 10 000 in detention capacity here since title 42 goes away the numbers again they got up as high as 31 000 they're about 30 500 a day so i'd say they're 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 ultimately what they work out. Again, you've got pretty significant a pretty significant delta right now between the House and Senate. It rolled up to 34,000, I think, out of the Senate proposal, 41,000 out of the House proposal. So that will obviously ultimately determine what the demand is going into 24. So then going back to the state side, like I said, we are seeing a significant increase in jail populations nationwide. Again, I think that's a leading indicator on prison populations nationwide. And we're hearing that in our discussions with various states, either states that we currently work with or potentially prospective states where they maybe have not used privatization in the past, but they clearly are going to see a pretty significant impact with these populations that are coming from the local level and ultimately will reside in either a jail or in a prison bed within that state or need maybe capacity as a relief valve out of state. So as I look next couple of years, I think we'll see stable marshals. We'll 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 aftereffects of the pandemic and a lot of people at the local level that haven't had their cases adjudicated that are now going to potentially be convicted of sensitive crime and going to need that capacity within that state system. So, you know, I guess anything you'd add to that?

Yeah, I mean, as we mentioned, we've already, you know, completed some restructurings of some contracts and kind of right-sized them where we were struggling or wanted to exit but didn't end up exiting. And so there's probably two or three contracts that we've kind of reversed from losses to are now profitable. We mentioned the state per diem increases. Other tailwinds, I'm hoping the labor market is a tailwind as the labor market continues to come up with more. 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 other contracts where we think we can improve the terms, having discussions with government partners, and those are always difficult negotiations. But we've been quite successful in getting some of them done to point. So heading into the second half of the year with those things behind us. So there's definitely some tailwinds. And then whether the jail populations translate into direct contracts with the county governments or longer term as those cases get adjudicated and move over to state populations, I think that could be a tailwind and an opportunity going forward as well.

One thing I would add too, guys, you know, staying on our state book of business, you know, as I mentioned in my remarks, I mean, we were at about 82% oxy in 2019. And end of 2019, obviously, pre-COVID, I mean, we were seeing a very pretty intense engagement from state partners, either new state customers or existing state partners that were expanding. So, that kind of momentum and feel that we had back in 19, it's starting to feel like we're seeing that again here this summer going into 2024. But also, being at 70% oxy, I mean, with little, if any, capital investment, I mean, we could see ourselves getting back up to that level. Now, Timing is always the uncertain. We never know exactly when a government partner is going to make a decision to contract us for services. But I do feel like that we're starting to see some of the engagement and some interest from our state partners like we did in 19. We're starting to see that now going into 24.

Okay, thank you. Thank you for that. And then one housekeeping question, which is as you shift to the lease agreement in Oklahoma, Do you move staff out, presumably? Does any small group of people, group of staff, stay on site to be the interaction with the company?

Yeah, great question. So, a couple answers there. Yeah, we do expect a big amount of our staff that currently work at the facility and maybe live and reside with their families locally that will want to stay there past October 1st and work for State of Oklahoma. So, we're working with Oklahoma on that. That's a very natural process, and we do appreciate people 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 if we have some, probably just leadership, probably provide some support, you know, past October 1st to help with the smooth transition with Oklahoma. The idea is they also will follow Oklahoma's lead on what they request and desire, but also we stand ready to help them with, again, ensuring a very smooth and safe transition.

Okay, thank you. One moment for our next question. Our next question comes from Edwin Groshan 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 to talk about the court cases, so I'm not going to ask directly about the court cases. But I think it's unusual that the judge put a preliminary injunction on one of the Florida cases And it does seem that that coincided with increased detentions. In your discussions with ICE, do they discuss the impact of those cases and changes in what they're doing with detainees, or is that all driven by Title VIII, moving from Title 42 to Title VIII?

Yeah, I would say at the leadership level, I would say they kind of take it all into account. So they look at what needs to be done after Title 42 went away on May 11th. They also are determining the impact. these court cases and what that's going to direct them from a prosecution and detention 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 reprogram or supplemental and or if they get one or both and how that impacts the detention population. So I'd say at a high level it's all taken into account. It's not It's not a, you know, this court case or this change in a certain part of the southwest border from a policy perspective. I think it's all taken into account, and that's kind of instructed us when we're having conversations with ICE from a leadership perspective, saying, okay, here's what we're taking into account. This is what we think we need nationally, and then also then we break it down regionally on what capacities are, I guess, anything you'd add or...

It's really hard to say what the impact of any of these cases, and there's probably four cases that are related directly to ice populations, but it's just really, really difficult to determine on any one case what the impact would be and how that would translate into increases or decreases in ice populations. It's a factor that we think about as we prepare our forecast, but it's you know, 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, and given the number of people on the border, that's really going to drive the detention beds more than the individual court cases, I would guess.

Fantastic, and I appreciate that. I guess the news was out and CBB 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 200,000 per month to dropping to anywhere from 100,000 to 130,000 per month, and then we look at the level of detainees jumping from 21,000 to 30,000 to 31,000, I mean, is that really, do you, it seems incongruent, right, that those two divergent like that. So is it really just the change in occupancy restrictions that is driving increased detentions, or is there something else going on between ICE and CBP that's resulting in those detentions? Because crossings don't seem to support the increase, just from the outside.

uh well i guess i guess again tag team with you here dave i guess if you look historically i'm going back to um looks like the summer of 19. um you know total account orders by custom board patrol i think was in the 40 000 range on average by month and so so yeah you've seen some pretty wild swings here in the last six months but historically you know looking at today's numbers versus uh historically what the numbers are They're really, really elevated. I mean, still very elevated. So even though you've seen a drop, to your point, saw a 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're still very elevated. So I think part of the answer is, yeah, I think it does give them – Flexibility, I mean, with the OxyCaps going away from our facilities in May and, again, Title 42 going away, too, obviously that's a notable policy change. Then that probably has been part of the driver on capacity utilization going up. But I guess in the United States.

I was going to say the same exact thing with respect to elevated levels. I mean, everything's relative, right? And we see a decrease from 200,000 to 140,000 in a month and say that's a big reduction, but that still, you know, compares to 45,000 back in 2019, 2020. So I do think, yes, to your direct question, I think the removal of the occupancy restrictions and the removal of Title 42 I would say definitely had an impact on the number of detention populations post-Title 42. You know, I think the big question that's very difficult for us to answer is, what does that look like? You know, do those populations sustain themselves going forward? Does it go up? Does it go down? I think that's a harder question to answer. And then one other point I'd say, you know, we are in the peak summer months, so it's not surprising that they went down. In June, probably July as well, really, really hot temperatures, particularly on the southern border. But that does influence the migration patterns from Central America and so forth. So I expect, you know, hard to say, but I would think that they'd go up again as the fall arrives and to get more temperate temperatures. But, yeah, I do think ending Title 42 and 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 that's helpful. So I do have one more question. This one, answer how you can, if you will. You've been talking about the state. You said, you know, staffing costs have gone up. We're in an inflationary period or have been. And so you see increases in some of your PDM contracts there. How does that work when you're discussing it with ICE? Because ICE may say, yes, you're right, we probably should pay you more. But if Congress doesn't cut them the check, then there's not much more they can do. So you could just walk us through, I guess, 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.

Yeah, great question. So, 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. So, both ICE and Marshal Service, direct contracts they've got with us, require us to pay wage determination, and these are set by the Department of Labor and and the wage rates are instructed by data they get from Department of Labor throughout the country, and they're looking at wages in regional areas. All that is taken into account, especially if there's increases in wages in a certain area because of inflation, then that's published by the Department of Labor as a wage determination, and then that's 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 getting reimbursed dollar for dollar from the federal government through an equitable adjustment with the contract. So, wages go up, which they do, especially in an inflationary environment. Wage terminations incorporated in our contract were contractually required to increase wages. But with that, we're also allowed to get reimbursed dollar for dollar for those wages that we have to increase. So that's a good feature of our federal contracts. So that really doesn't require a conversation. It's really just administrative that if our wages go up, we tell the contracting officer our wages are going up, say, by a million dollars on an annual basis, and we get reimbursed for that for dollar for dollar. So, put that aside. On the state 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 inflationary environment. We're seeing competition for labor. By the way, the Department of Corrections is also seeing the same thing within their public facilities. And we go through the educational process to say that we think salaries need to go from X to Y and work with the appropriate appropriators within the legislature to get funding support ultimately that 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 raise salaries. So that's really a conversation is ongoing during the spring as let's say sessions are going on around the country. And again, we're trying to educate people what we think wages need to do. And then with that, we're looking for offsets with per diems. It's not always perfect. There's always a little bit of give and take. But I'd say the last 24, 36 months, we've been really, really successful on saying with all these challenges, we've got a labor perspective. We need to support for some funding increases. And, again, it's always helpful when the DOC is kind of seeing the same issues within their facilities. So they're kind of working arm-in-arm with us, with the appropriators, with the legislature. And then, ultimately, if we do get a pretty increase, then we try to time that increase with the timing of wages going up within our facilities. So another thing I'll just say is that, I mean, it's been helpful that – The fiscal environment at state level has been pretty favorable. I know there's still some ringing of hands about potential recession and how that affects revenues at state level, but that's been a little bit of a tailwind for us as we've been working through some of these discussions with various states. I don't think you need to add to that, Dave.

Yeah, going back to the federal side on ICE, you know, 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're not required to have additional funding if they're under those, you know, if the populations are under those conditions. occupancy guarantees, if you will, then they can increase the capacity without having to appropriate new funds. It's not additional funding. They're already paying that fixed monthly payment. It's only when they're 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, you know, the system-wide, they're at the $34,000 level that they're currently funded for, 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 doesn't 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. Yes, sir. Nice quarter. Thank you.

Yes, sir. Thank you.

Thank you. I am showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.