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spk03: Good morning and welcome to the GEO Group second quarter 2022 earnings call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I now would like to turn the call over to Mr. Pablo Baez, Executive Vice President of Corporate Relations. Please go ahead.
spk06: Thank you, Operator. Good morning, everyone, and thank you for joining us for today's discussion of the GeoGroup's second quarter 2022 earnings results. With us today are George Oli, Executive Chairman of the Board, Jose Gordo, Chief Executive Officer, Brian Evans, Chief Financial Officer, James Black, President of GeoSecure Services, and Ange Lard, President of GeoCare. This morning, we will discuss our second quarter results and our outlook. We will conclude the call with a question and answer session. This conference call is also being webcast live on our investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning. Thank you. Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our securities and exchange commission filings including the Form 10-K, 10-Q, and 8-K reports. With that, please allow me to turn this call over to our Executive Chairman, George Zoli.
spk07: George? Thanks, Pablo, and good morning to everyone. Thank you for joining us on our second quarter 2022 earnings call. I'm pleased to be joined today by our senior management to review our financial results for the second quarter, the trends for our business segments, our increased guidance for 2022 and our recent announcement of proposed transactions to address our debt maturities and strengthen our capital structure. Our quarterly operating financial results continue to deliver better than expected performance, which we believe is underpinned by the strength of our diversified business units. As a result of our investment in business strategy over several years, we have been able to develop interest industry-leading solutions and programs across a diversified spectrum of government services. And we believe the unparalleled diversification and scope of our services have set GEO apart in our industry and has allowed us to achieve quality growth. This continued growth led us to achieve some of the best quarterly financial results in our company's history during the second quarter of 2022. Our quarterly revenues increased by 4 percent year-over-year to $588 million, which follows revenue declines over the last two years due to the COVID pandemic and policy changes that impacted several of our federal contracts. Our quarterly net income attributable to GEO increased by 28 percent year-over-year to approximately $54 million. For the trailing 12 months ending on June 30th, our net income attributable to GEO was $77 million. Our adjusted EBITDA increased 12% year-over-year to more than $132 million in the second quarter of this year. This quarterly run rate of adjusted EBITDA is the highest in our company's history and for the trailing 12 months ending in June 30th, our adjusted EBITDA totaled almost $500 million for the first time ever. We expect our diversified business units to continue to deliver strong financial performance for the balance of the year, and we have increased our financial guidance for the year. We expect our full year 2022 net income attributable to GEO to be in a range of $158 million to $166 million, and our full-year 2022 adjusted EBITDA to be in the range of approximately $515 million to $530 million. Looking at our current trends for each of our segments, our secure services owned and leased active facilities experience a year-over-year increase in compensated occupancy rates of three percentage points, ending the second quarter of this year at 87 percent of capacity. Our secure services owned and leased segment is comprised primarily of facilities under contract with our three federal government agency partners, the Federal Bureau of Prisons, the U.S. Marshals Service, and the U.S. Immigration and Customs Enforcement. As of the second quarter this year, we only have one company-owned correctional facility under direct contract with the Federal Bureau of Prisons located in Michigan. Our North Lake Correctional Facility in Michigan generates approximately $38 million in annualized revenues, and as we have previously disclosed, this contract is scheduled to expire at the end of September of this year. Our U.S. Marshals Service facilities are generally located near federal courthouses and provide needed detention bed space and services for pretrial federal defendants. Occupancy rates across our U.S. Marshal Service facilities have continued to be stable. Turning to our ICE facilities, while we saw a year-over-year increase in occupancy rates during the second quarter of 2022, detaining populations continue to remain below historic levels. Population levels at certain ICE facilities have been impacted by outstanding federal court orders related to COVID-19. pandemic, which continued to restrict ICE's ability to utilize full operational capacity of these facilities. In addition, COVID-related restrictions under Title 42, which were first enacted in March of 2020, continue to be in place today at the southwest border. The administration had announced that these Title 42 restrictions would be lifted in May of this year, but that That decision was stopped by the federal court and remains in litigation. While the timing and impact of lifting Title 42 restrictions remain difficult to predict, we believe GEO continues to be well positioned to help deliver diversified services and solutions to assist the U.S. Department of Homeland Security in the future. Our updated guidance for 2022 continues to assume only gradual improvements in utilization rates across our ICE facilities. While ICE detaining populations remain below historical levels, we have conversely seen continued increases in the Department of Homeland Security's Alternatives to Detention program called the Intensive Supervision and Appearance Program, or ISAP. Our BI subsidiary provides a full suite of monitoring and technology services under the ISAF contract to ensure compliance for individuals undergoing the immigration review process. As the publicly available data shows, the number of individuals enrolled in ISAF continues to increase, and the program currently has approximately 300,000 participants. Moving to our managed-only business, our occupancy rates remain stable at 97% of capacity during the second quarter of 2022. Our managed-only business is primarily comprised of state-level correctional facilities, and our focus in this segment has been on mitigating the challenges of COVID pandemic, which among other factors has contributed to a difficult labor market. We are pleased to have worked closely with our government agency partners to address the staffing and wage challenges facing state correctional facilities across the country. As a result of these efforts, we've been able to provide wage increases for our employees across several states. With respect to our reentry services facilities, while occupancy rates remain below historic levels, we did experience a sequential increase of four percentage points in occupancy rates and ended the second quarter at 49% of capacity. As a reminder, new intakes at residential reentry centers slowed down during the COVID pandemic as governmental agencies opted for non-residential alternatives, including furloughs home confinement, and day reporting programs. Despite these challenges, we successfully renewed 16 residential entry contracts during the second quarter of 2022. Additionally, our non-residential reentry business continued to grow in the second quarter of this year with compensated mandates increasing by approximately 26% year over year. And our electronic monitoring and supervision segment continued to deliver strong growth in the second quarter of this year as well. Our continued strong performance has allowed us to significantly reduce our net recourse debt and deleverage our balance sheet. Since the beginning of 2020, we have reduced our net recourse debt by approximately $375 million. including approximately $130 million during the first half of this year. As we continue to focus on reducing our net recourse debt, we are pleased to have recently announced several proposed transactions to comprehensively address the substantial majority of our outstanding debt maturities. The proposed transactions will stagger our debt maturities between 2023 and 2028, therefore significantly reducing the total recourse debt that is due between 2023 and 2024 from approximately $2 billion to approximately $600 million. The staggering of our debt maturities over a longer period of time will allow us to continue to allocate a significant amount of excess cash flows toward further reducing our net recourse debt. Based on our current projections, we expect to reduce our net recourse debt by approximately $200 million in 2022, ending the year at just under $2 billion in net recourse debt and total net leverage of approximately 3.8 times EBITDA. Assuming consistent performance across our business over the next two years, we would expect to be able to reduce net recourse debt by at least $200 to $250 million annually. Based on this level of debt reduction, our goal would be to decrease net leverage to below 3.5 times by the end of 2023 and to below three times by the end of 2024. The proposed transactions to address our debt maturities are expected to close in the next 30 to 90 days and require approval from 70 percent of our term loan lenders and a majority of the holders of our 23, 24, and 26 senior notes. Brian will discuss the current levels of participation and consent in more detail in his presentation. We believe these proposed transactions will place GEO in a materially stronger financial position. We look forward to using the substantial majority of our free cash flows to significantly deleverage our balance sheet for the foreseeable future. We also plan to continue to undertake comprehensive review of potential sales of company-owned assets and businesses, which we expect to enhance our debt reduction efforts. We are optimistic that the successful completion of these comprehensive proposed transactions in our continued focus on reducing net recourse debt will have the potential to unlock additional equity value for our shareholders. After obtaining our objective of net recourse debt reduction and deleveraging, we plan to evaluate the allocation portion of free cash flow to fund quality growth opportunities and potentially return capital to our shareholders in the future. At this time, I'll turn the call over to Brian Evans to address our proposed transactions in more detail and review our financial results and updated guidance.
spk05: Thank you, George. Good morning, everyone. For the second quarter of 2022, we reported GAAP net income attributable to GEO of approximately $54 million. Adjusting for a gain on real estate assets, we reported adjusted net income of 42 cents per diluted share on revenues of approximately $588 million for the second quarter of 2022. We reported second quarter 2022 AFO of 69 cents per diluted share, and our adjusted EBITDA increased by 12% to more than $132 million, which represents the highest quarterly run rate in our history. Our quarterly financial results have exceeded our expectations over the trailing 12 months ended on June 30, 2022. And during this period, our adjusted EBITDA reached almost $500 million for the first time, surpassing any other 12-month period in our company's history. This strong financial performance has been underpinned by the continued growth in our electronic monitoring and supervision segment, increases in compensated mandates in our non-residential reentry business, and improvements in occupancy rates in our owned and leased facilities. Our better than expected performance has allowed us to significantly increase our unrestricted cash on hand to approximately $588 million as of the quarter ended on June 30, 2022, and reduce our net recourse debt. Since the beginning of 2020, we have reduced our net recourse debt by approximately $375 million, including approximately $130 million during the first half of 2022. Our strong financial performance also allowed us to proactively engage with our creditors to address our debt maturities, which led to the commencement of the proposed transactions we announced a couple of weeks ago. As previously announced on July 18, 2022, we entered into a transaction support agreement with certain lenders under our existing credit agreements, as well as certain holders of our 2023, 2024, and 2026 notes. Since July 18th, several additional creditors have become party to these transaction support agreements, thereby committing to support the proposed transactions. These proposed transactions will stagger our debt maturities over a longer period of time, significantly reducing our near-term debt maturities. Under our current debt maturities, we would have had to address approximately $2 billion in outstanding debt between 2023 and 2024 and approximately $580 million in outstanding debt in 2026. Under the proposed transactions and based on commitments as of July 18th and minimum participation requirements, our revised debt maturities are expected to be approximately $170 million in 2023. approximately $430 million in 2024, approximately $340 million in 2026, approximately $900 to $960 million in 2027, and approximately $440 million in 2028. These amounts are subject to final participation levels under the proposed transactions, and importantly, these amounts do not reflect a significant debt reduction we intend to continue to pursue going forward. we expect to reduce our net recourse debt by a total of approximately $200 million in 2022, which would allow us to end the year with less than $2 billion in net recourse debt and lower our net leverage to around 3.8 times. Assuming our financial performance remains consistent over the next two years, we expect to be able to further reduce net recourse debt by at least 200 to $250 million annually. As we continue to reduce our net recourse debt Our goal would be to decrease our net leverage to below three and a half times by the end of 2023 and to below three times by the end of 2024. These assumptions reflect only modest improvements in our projected adjusted EBITDA run rate in 23 and 24. If our adjusted EBITDA grows ahead of these expectations, our net recourse debt and net leverage would decline more rapidly. These projections are predicated on the closing of the proposed transactions to address our debt maturities, which is expected to take place in the next 30 to 90 days, subject to review by the SEC of our registration state. The proposed transactions are conditioned upon receipt of certain credit or participation in consent, including term loan lenders holding 70% of our term loan commitments and a majority of the holders of our 23, 24, and 26 senior notes. As of today, holders of approximately 42% of our 23 senior notes, 65% of our 24 notes, 68% of our 2026 senior notes, and 70% of our term loans have committed pursuant to the transaction support agreement to support the proposed transactions. Solicitation of additional participation and consent, including with respect to our 2023 senior notes, and term loans is underway. And as noted, we have received additional commitments of support towards the required thresholds since we executed the transaction support agreement. Upon closing of the proposed transactions, based on committed support as of July 18, 2022, and minimum participation requirements, we expect our interest expense to increase by approximately $27 million to $30 million pre-tax in 2022, and by an additional $37 million to $41 million pre-tax in 2023. We believe that the proposed transactions will reduce the risk that our near-term debt maturities pose to our ability to refinance our debt, pursue future growth opportunities, and enhance long-term value for our shareholders. Based on our historical and expected cash flows and assuming a reasonable future access to capital markets, we expect to be able to address the new staggered debt maturities in the ordinary course of business. To complement our debt reduction efforts, we have also been exploring opportunities to sell company-owned assets and businesses over the last two years. Through the end of July 2022, we have completed sales transactions involving facility assets, business segment contracts, and land totaling approximately $70 million in proceeds. we expect to continue to explore additional opportunities for asset sales to meet our previously articulated goal of generating between $100 million and $150 million in proceeds. Despite the expected increase in our interest expense, our strong financial performance, which we expect to continue for the balance of the year, has allowed us to increase our financial guidance for 2022. We now expect full-year 2022 net income attributable to GEO to be between $158 million and $166 million on annual revenues of approximately $2.35 billion. Adjusting for extraordinary items, we expect full-year 2022 adjusted net income to be in a range of $1.28 to $1.34 per diluted share. We expect full-year 2022 AFO to be in a range of $2.40 to $2.46 per diluted share. And we expect full-year 2022 adjusted EBITDA to be in a range of approximately $515 million to $530 million. We have also issued financial guidance for the third and fourth quarters of 2022. For the third quarter of 2022, we expect net income attributable to GEO to be between $39 million and $42 million on quarterly revenues of $603 million to $608 million. We expect third quarter 2022 AFO to be between $0.55 and $0.57 per diluted share, and third quarter 2022 adjusted EBITDA to be between $131 million and $138 million. For the fourth quarter of 2022, we expect net income attributable to GEO to be between 27 million and 32 million dollars on quarterly revenues of 600 million to 605 million dollars. We expect fourth quarter 2022 AFO to be between 52 cents and 56 cents per diluted share, and fourth quarter 2022 adjusted EBITDA to be between 127 million and 135 million dollars. Our 2022 guidance reflects the expected increase in our interest expense and the previously expected non-renewal of our contract with the BOP or North Lake facility in Michigan effective September 30th, 2022. We expect our effective tax rate for the full year 2022 to be between, to be approximately 28% exclusive of any discrete items. At this time, I'll turn the call over to James Flack, for a review of our GeoSecure Services segment.
spk00: Thank you, Brian. Good morning, everyone. It is my pleasure to provide an update on GeoSecure Services. During the second quarter of 2022, our employees and facilities achieved several important milestones. Our facilities successfully underwent 46 audits, including internal audits, government reviews, third-party accreditations, and certifications under the Prison Rape Elimination Eight of our secure services facilities are scheduled to receive accreditation from the American Correctional Association this month, with an average score of 99.4%. And two of those facilities achieved a perfect accreditation score of 100%. Additionally, two of our secure services facilities recently received U.S. Department of Justice certification under the Prison Rape Elimination Act, with both facilities exceeding standards in several areas. Our GTI Transportation Division safely completed approximately 4.3 million miles driven in the United States and overseas during the second quarter of 2022. Every quarter, our secure services facilities achieve several operational milestones in the delivery of our services, and we are grateful for the continued dedication of our employees in their commitment to operational excellence. Starting at the federal level, we currently have one remaining company-owned secure service facility under contract with the Federal Bureau of Prisons. As we previously disclosed, we expect our BOP contract for the 1,800-bed North Lake Correctional Facility in Michigan to not be renewed at the end of September 2022. We have enjoyed a decades-long partnership with the BOP and our facilities have provided high-quality support services. However, over the last 10 years, BOP populations have declined, and this trend was accelerated by the COVID pandemic. Following the deactivation of our North Lake Correctional Facility, we will have six EIDL secure services facilities that were previously under contract with the BOP. We are focused on marketing these facilities to other government agencies at the federal and state level, and we hope to be able to reactivate, lease, or sell these important assets in the future. Unlike the BOP, population levels at our U.S. Marshals Services facilities have remained stable over the last several years. The U.S. Marshals have custody responsibility for pretrial detainees facing federal criminal proceedings, and our facilities provided needed bed space and services near federal courthouses. We are pleased that our 770-bed San Diego facility for the U.S. Marshals was not closed following a contract extension through September 30th, 2023. Additionally, we have two other facilities under direct contract with the U.S. Marshals with current option periods that run through February 2023 and September 2023, respectively. With respect to U.S. Immigration and Customs Enforcement, ICE facilities continue to face operational restrictions that limit capacity due to the COVID pandemic. As a result, ICE detainee populations continue to be below historical levels. In addition to these operational limits, COVID-related restrictions remain in place at the Southwest border. These restrictions were implemented in March of 2020 under Title 42. Earlier this year, the administration announced that Title 42 restrictions would be lifted in May of this year. However, that decision was stopped by a federal court and remains in litigation. While the timing and eventual impact of lifting Title 42 restrictions is hard to predict, the U.S. Department of Homeland Security released a plan for the southwest border security and preparedness in April of this year. This proposed plan would increase resources, including personnel, transportation, medical care, and facilities to support border enforcement. ICE is currently funded for 34,000 detention beds under the Appropriations Act that funds the federal government through September 30, 2022. This level of funding is consistent with funding levels that were in place during most of President Obama's administration. The appropriations bill that will fund the federal government for 2023 fiscal year, which begins on October 1, 2022, are currently being considered by the U.S. House of Representatives and the U.S. Senate. While we continue to monitor the congressional appropriations process, as a longstanding service provider to ICE and DHS, our focus remains on providing high-quality sports services and being prepared to respond to their needs. The ICE Processing Centers, where we provide support services, offers 24-7 access to quality health care, access to legal counsel, culturally sensitive meals approved by registered dieticians, access to faith-based and religious opportunities, and enhanced amenities including artificial turf soccer fields, covered pavilions, exercise equipment, multipurpose rooms, legal and leisure libraries, et cetera. Moving now to our state government agency partners, we continue to focus on addressing the challenges we are facing as a result of a difficult labor market. We have been working closely with our state government agency partners and state legislative and executive branch leaders to address the staffing and wage challenges facing state correctional facilities across the country. As a result of these efforts, we have been able to provide wage increases for our employees across several states. Additionally, we are continuing to explore other initiatives to improve the recruitment and retention of staff. With respect to recent contract activity in Arizona, we have been awarded a new five-year contract under a competitive procurement for the continued management of the Phoenix West Correctional and Rehabilitation Facility. We are also in discussion with the State of Arizona, which recently indicated a desire to enter into a five-year extension of our Kingman Correctional and Rehabilitation Facility Contract, which would be effective in February of 2023. Additionally, the Arizona Department of Corrections has issued a competitive procurement for the rebid of Florence West Correctional and Rehabilitation Facility Contract, which GEO currently manages. During the second quarter of 2022, We also completed the sale of our Idle Perry County Correctional Facility to the state of Alabama for $15 million. We are continuing to monitor opportunities at the state level as several of our state government agency partners are considering initiatives which could involve the use or purchase of contractor-owned facilities to address challenges posed by older state prison infrastructure and correctional staff shortage. Finally, I'd like to briefly address our ongoing efforts to mitigate the impact of the COVID pandemic. While we are currently experiencing relatively low levels of COVID cases, we remain vigilant in the implementation of our mitigation strategy. The steps we have taken from the start of the pandemic are consistent with guidance issued by the Centers for Disease Control and Prevention and focus on testing, vaccination, and making face masks and cleaning supplies available. We will continue to evaluate our mitigation steps and will make adjustments based on updated guidance by the CDC and other best practices. At this time, I will turn the call over to Dr. Anschlar for a review of GeoCare.
spk04: Thank you, James, and good morning, everyone. I'm pleased to provide an update on our GeoCare business unit, which includes our reentry services and electronic monitoring and supervision segments, as well as our geocontinuum of care programs. Each of our geocare divisions had an active operational quarter. Our residential reentry services facilities experienced a sequential increase in occupancy rates. However, residential reentry populations continue to be below historical levels. Our residential reentry facilities have been impacted significantly by the COVID pandemic as government agencies have prioritized placement of individuals into non-residential alternatives, including furloughs, home confinement, day reporting, and electronic monitoring programs. However, we are encouraged that residential reentry census levels have begun to increase, and despite this challenging environment, we continue to successfully renew our existing contracts. During the second quarter of 2022, we renewed 16 residential reentry contracts, including five contracts with the Federal Bureau of Prisons. Additionally, four of our residential reentry centers are scheduled to receive accreditation from the American Correctional Association this month, and we're very proud that all four centers received perfect accreditation scores of 100%. And two of our residential reentry centers recently received U.S. Department of Justice certification under the Prison Rape Elimination Act, both exceeding standards in several areas. The impact of the COVID pandemic has conversely resulted in the increased use of our non-residential programs and services, which have continued to deliver strong growth. Compensated mandates for our non-residential reentry business increased by 26% year over year, with quarterly revenues increasing to more than $23 million. Our electronic monitoring and supervision segment also continued to deliver strong revenue growth during the second quarter of 2022. Our BI subsidiary provides a full suite of electronic monitoring and supervision solutions, products, and technologies on behalf of federal, state, and local agencies across the country. At the federal level, VI provides technology solutions, holistic case management, supervision, monitoring, and compliance services under the Intensive Supervision Appearance Program, called ISAP, which is a key component of the Department of Homeland Security's alternatives to detention. VI has provided these services for approximately 18 years and is currently operating under a five-year contract that is effective through July of 2025. Over the years, the ISAC program has grown steadily, and in the last 18 months, this growth has accelerated. As the publicly available data shows, the number of individuals enrolled in the program currently stands at approximately 300,000 participants. Under BI's tenure, the ISAT program has achieved high levels of compliance for participants going through the immigration review process. For instance, the most recently available data shows that between August of 2021 and May of 2022, 99.6 percent of ISAT participants attended required meetings with their case specialists, and 99.3 percent of ISAT participants attended all the required immigration court hearings. Earlier this year, ICE issued a competitive procurement for a new alternative to detention program, which is intended to be incremental to ISAP and would involve approximately 16,000 young adults. We have submitted our bid for this new program, and we are awaiting additional direction from ICE. We believe that we are well positioned for this procurement given BI's unparalleled capabilities, scope, and experience. Turning to our Geo Continuum of Care division, our employees have continued to deliver enhanced in-custody rehabilitation, reentry programming, and post-release support services to an average daily population of approximately 31,500 participants. Our Geo Continuum of Care integrates enhanced in-custody rehabilitation including cognitive behavioral treatment with post-release support services that address community needs of released individuals. This includes housing, food, clothing, transportation, and employment assistance. During the second quarter of 2022, our post-release support services allocated over $200,000 to support individuals released from geo-facilities as they return to their communities. This funding brings the total spending on post-release expenses to more than $7.1 million since we began providing support grants for released individuals in 2016 to assist them with their community needs. We continue to believe that the scope and substance of our award-winning geocontinuum care program is unparalleled. We believe it provides a proven successful model on how the 2.2 million people in the U.S. criminal justice system can be better served in changing their lives. Finally, I'd like to briefly touch on our ongoing efforts to mitigate the impact of the COVID pandemic. Our geo care facilities and programs have implemented mitigation steps that are consistent with the guidance issued by the CDC focusing on increased sanitation, testing, deploying face masks, and entry screening measures. We will continue to evaluate these steps and make adjustments based on updated guidance by the CDC and other best practices. We are grateful for the continued dedication and commitment of our employees who have delivered high-quality programs and services to those in our care during the pandemic. At this time, I'll turn the call over to Jose Gordo for closing remarks.
spk11: Thank you, Anne. We are pleased with our continued strong financial performance and the operational milestones achieved by our diversified business unit. Our management team remains focused on achieving operational excellence across all of our service lines. We recognize that staffing shortages and wage inflation are posing a difficult challenge for companies across diverse industries, and we have worked closely with our government agency partners to tackle this challenge. As we have continued to deliver robust quarterly results over the last two years, we have also been focused on maximizing our allocation of capital towards reducing net recourse debt. We have been able to reduce net recourse debt by approximately $375 million since the beginning of 2020. Based on our current performance and expectations, we believe we will be able to significantly further reduce our net leverage over the next two to three years. We are pleased to have commenced several proposed transactions to stagger our debt maturities over a longer period of time. These proposed transactions, which are conditioned upon receipt of certain percentages of creditor participation or consent, were the result of months of discussions and negotiations with several of our creditor groups. We believe that the proposed transactions are in the best interest of all of our stakeholders. They provide the best path forward for our company, and they will strengthen our capital structure. Importantly, We are optimistic that the proposed transactions can potentially unlock additional equity value for our shareholders. After attaining our objective of net recourse debt reduction, we plan to evaluate the allocation of a portion of free cash flow to fund quality growth opportunities and potentially return capital to our shareholders in the future. We believe that our continued strong financial performance, which is underpinned by our diversified business units, sets GEO apart in our industry. Our cash flows are supported by valuable company-owned real estate assets and diversified contracts entailing essential government services, ranging from secure residential care to community-based and technology solutions. We believe that the unique diversification of our services will continue to allow us to pursue quality growth opportunities that would otherwise not be available to companies in our industry. That completes our remarks, and we are glad to take questions.
spk03: Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your Pupstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time, we'll pause momentarily to assemble a roster. First question comes from John Donans, Noble Capital. Please go ahead.
spk10: Thank you. Good morning. Congrats on the nice quarter. Thank you. I wanted to ask on BI. You said there was, I think, 300,000 people under the ISAT program. How does that compare to the number that was under this program at the beginning of the year? And, you know, are you still seeing growth in that program here into the third quarter? Where do you think that ends at year end?
spk04: Hello, this is Ann, and thank you for your question. And, yes, we've seen significant growth through this year, and it's continued to accelerate. We're never totally certain what it might look like going forward because ICE makes all the decisions about who comes in to our program. However, we do believe that it'll continue at about where it is for the time being, and that's what we're looking at for the forecast is maintaining it around the 300,000 level. I think we started the year about 160,000 to 170,000.
spk05: Yeah, that's about right.
spk10: Okay. Thank you for that insight. On ICE, you mentioned that for the government fiscal year ending in September, there's funding for $34,000. They're in negotiations right now on the budget for the fiscal year beginning October 1st. kind of what is your insight as to, if you have any, as to where the negotiations are going? Is it going to be flat funding for beds, decreased funding for beds? I mean, if you were to look at that, where do you think that ends up?
spk07: Well, in both the House and the Senate versions, there's a reduction in beds from 34,000 to approximately 25,000. 25,000 is approximately the current number of contracted beds to my understanding. And there's three reasons why there's been a reduction in the number of beds actually used or people in those beds, that is residents. The first reason is COVID which has caused the CDC to issue guidelines in concert with ICE to permit only 75% occupancy of the facilities. So we're not at full occupancies. We're at significantly reduced occupancy because of COVID. Secondarily, there's been a change in administration policy regarding immigration enforcement and the priorities within that enforcement program. And third, there's been a reduction in public facilities that have supported ICE populations. States like New York, New Jersey, Maryland, and Illinois have passed legal restrictions in effect prohibiting ICE facilities within those states. As a consequence, the public sector portion of ICE detention facilities has significantly decreased. And presently, by our own estimates, we believe that 90% of the detention capacity at ICE processing centers is provided by the private sector. That is 90%. As we look to what happens in October, you know, we really don't know if there will be a compromise on the number of beds at the existing levels or higher levels. Or will there be another continuing resolution which would preserve the funding and the bed capacities at the 34,000 bed level? So we are waiting to see the outcome.
spk10: And how does that, you know, if it was to drop from 34 to 25, how does that impact you know, GEO and the contracts that have the minimum guarantees, if it impacts them at all?
spk07: From what we know right now, it doesn't seem to have any impact that we're aware of. You know, we haven't lost any ICE contracts, and our facilities are occupied at far significantly lower occupancy levels than historical averages. So, if the funding was at just $25,000, for example, we wouldn't expect any impact to our current contracts.
spk10: Okay. Thanks for that. Switching gears a little bit here on the debt restructuring. So you need approvals, and you mentioned, you know, when the initial release came out, some of the approval rates, and you provided an update today, you know, like for the term loan, it was gone from 56% to 70%, but the 23 notes only went from 41 to 42. Is there...
spk05: something that you're hearing on pushback as to why that has not increased above the the goal rate of 50 percent this is brian no i think they're just it's two different processes with the uh term loan there's fewer institutions and they're larger larger holders and so we've been able to work that side of the ledger more quickly on the um 2023 notes There's more outreach. The holders are smaller. We're going through that process. I would say that we have reached out to most of the other larger institutional holders that would easily compromise or get us over the 50%. We have indications from some of them, nothing in writing yet, but we have indications of either that they'll consent or that they will participate in some way that puts us closer to 46 to 47%. And we're going to continue that outreach, and we expect to get over the 50% threshold. And I think on the term loan side, you know, there's no, again, no guarantees, but we've reached out to many of the institutions there, and we have indications based on our discussions of additional support from those creditors as well that'll probably put us somewhere between 75% and 80% participation level. You know, those are subject to change. But so we're having very positive discussions with both creditor groups, and we expect to, you know, close within the 20 days or end the process within the 20 days, as we've discussed. Subject to SEC review. Okay, great.
spk10: Thanks for that. Right, right. Two kind of numbers types of questions here, Brian. One on the interest, increased interest expense. You mentioned the total $27 to $30 million between the third and fourth quarters. Can you kind of break that out as to what percent of that you think will be in the third or what amount will be in the third versus what amount will be in the fourth quarter? And then when you look at your financials on the EPS calculations, maybe you could just briefly walk us through, you know, how you get the 37. I know that's something to do with the as converted share amount to get the 37 cents, even though it's a higher net income number than the 42 cent adjusted calculation.
spk05: Well, let me start with the interest expense. So I think our forecast assumes a close of mid-August to September 1. So you're looking at really only about one month of additional interest expense, a month and a half or so. So a third to a half a quarter in the third quarter. And then the fourth quarter, you know, is a full run rate of the additional interest expense that we would expect coming out of the box. And that also includes our assumptions on what the underlying SOFR rates will be during the fourth quarter. I'm not sure I followed your question on the net income. The interest expense is tax deductible, so the net impact to income is post-tax. Was there something else to your question?
spk10: Yeah, I'm sorry. I wasn't clear enough. So if you go through your, if you're looking at your net income statement, you know, net income attributable to GEO is 53.7 million, which gives you, you know, net income of 37 cents a share. But when you look at, you know, adjusted net income, it's, hold on one second here, I think it's 50 something million, it's 50.9 million, which is 42 cents a share. And that has something to do with the EPS calculation I was just wondering if we could do this offline if necessary as to how you get to that calculation.
spk05: Yeah, Joe, I know what you're talking about. That's related to the convertible. And that's always been there. I think it's just as the income is changing, that amount is changing or that difference is changing. But there's a reconciliation or there will be in the 10Q program. And I think it's even in the, Jose's pointed out, it's even in the press release that you can look at that reconciles that. But that's related to the convert, and it will be reconciled in the 10Q. But I can also walk you through that separately if you need to, if you want to.
spk10: I'll take a look at the Q. Thank you. I'll hand it off to somebody else.
spk03: Okay. Thank you. All right, questions. who come from Mitra, Ramgopal, of Sidoti, please go ahead.
spk01: Yes, hi, good morning. Thanks for taking the questions. First, I just want to touch on the labor market. A lot of companies are having difficulty in terms of recruiting and retaining labor. I'm just curious in terms of I know you're getting some help from state and government agencies, and how reliant are you on that and the ability to just convince people to come to the correctional industry versus elsewhere in this environment?
spk07: I think we've had excellent cooperation with our state clients where this is more of a problem. At our federal agencies, the wages are generally higher because of Department of Labor wage determination for those wages. But at our state institutions, there has been pressure on wages But that same pressure exists in the public sector as well. So as the states have faced their own staffing shortages, they've been increasing wages. And when they do so, they typically provide the same additional level of funding for us to increase our wages. So we've had wage increases in Georgia, Florida, Oklahoma, Arizona, New Mexico, to name a few states.
spk01: Okay, thanks. And clearly, the pandemic continues to have an impact, as you mentioned, in terms of occupancy and just the COVID-related costs you're experiencing. But as you look out to 2023, and again, not looking for any specifics or guidance related, What's your best sense in terms of how much of a sort of a tailwind you might get from the ebbing of the pandemic?
spk07: Well, I think the biggest change would possibly occur in our ice facilities where we would return to closer, normal historical conditions. levels of occupancy. Our state facilities are, even at this time during the pandemic, are in excess of, I believe, 90% of their allowed occupancy. So the only change would probably be ICE facilities. I think the Marshalls facilities are fairly consistent with their occupancy in the 80s or 90s. So, again, it would be the ICE facilities that could see an increase in their occupancies because of the decline in COVID issues.
spk01: Okay, thanks. And again, I guess it's still up in the air as to whether we head into a recession over the next year or so, but assuming that's the case, I was wondering if you could remind us historically how you have fared in an environment where there is a recession.
spk07: Historically, we've fared fairly well because In a recession, there's usually more plentiful labor supply, and we're a labor-intensive organization. Sixty percent of our costs or more are attributable to labor costs. So as the unemployment rate would be expected to increase, that would provide additional labor applicants for our positions, and it would improve possibly improve our financial position.
spk01: Okay. Thanks. And I was wondering on the idle facilities if you're getting any interest in terms of using them or even potential asset sales.
spk07: Yes, we have been in discussions with state as well as federal agencies about the potential use of our idle facilities. And we'll continue to show them and market them, you know, to all prospective clients.
spk01: Okay, thanks. And then finally, just on the... debt transactions and the plan to reduce the net recourse debt. If I read it, approximately 80% of the cash flow will have to be used for debt reduction. Is that correct?
spk05: So under the terms of the new agreements, when we close, 80% of excess cash flow as calculated in accordance with the terms of the agreements will be applied to the senior secured debt. So, against any remaining term loan from our current credit agreement that doesn't participate and rolls over and will still mature in 2024, some portion of that 80% will get applied to that, and then the balance will be applied pro rata or offered on a pro rata basis to the tranche one and tranche two term lenders in the new agreement. And then the other 20% is available for the company to use to satisfy debt obligations on the unsecured notes that don't participate in the transaction, also referred as stub 23 and 24 notes. So as George said, Jose said, I think I've said, you know, we intend to and expected to use the substantial majority of our free cash flow to reduce debt. Importantly, the... The excess cash flow is calculated after our maintenance CapEx and our growth CapEx, so it doesn't necessarily restrict our ability to make investments in the business. There are some constraints within the credit agreements that don't exist today, but we still have a fair amount of flexibility to make appropriate investments as necessary to maintain the business as well as to grow the business.
spk01: Okay, thanks for taking the questions and congrats on a nice quarter.
spk05: Thank you.
spk03: Thank you. Our next call comes from Kirk Utkey of Imperial Capital. Please go ahead, sir.
spk09: Hello, guys.
spk05: Good afternoon.
spk09: A couple of follow-ups on the guidance. One, the $200 to $250 million of net debt reduction that you are looking for in both 2023 and 2024, is that all from free cash flow, or have you included proceeds from some asset sales?
spk05: No, that would be our expectation based on our cash flows, as we described, maintaining sort of current levels of performance. assuming no new contracts or reactivations of vital facilities, and assuming our current contracts remain in place. So pretty much, I would say, the status quo.
spk09: Got it. Including the three direct Marshall contracts?
spk05: That's correct.
spk09: Okay. Thank you. And then with respect to monitoring, You mentioned that you expect the population, at least under the ISAT program, to remain at current levels. How much lead time do they give you before they would ramp up to another level?
spk05: Well, there's constant dialogue, but, you know, in the current program, it changes every day, you know, and it's a constant back and forth. There are dozens of sites where... Our staff work in partnership with the government, and there's people that are added to the program and people that are removed from the program. So it's a very volatile and dynamic program, but it's been increasing over the last year and a half or so.
spk09: Got it. I was just curious if maybe you would need to arrange for some additional equipment if they wanted to take the number higher so you know, that would be maybe a limiting factor to that going higher.
spk04: Not at all. The way it works, this is Ann, is if there's, for example, organic growth, new offices, that type of thing, we get contract modifications and so many days to get a new site going and We work every day with shipments that are going to the border and the technology that's needed. We also have a nice, diverse continuum of technology so we can meet their needs one way or the other. So we have a lot of solutions available to them under the current contract and the inventory available to take care of that. So we're able to handle the growth that they bring us.
spk05: And I think just to add to that, too, that Ann and her team have done a really good job, you know, entering into the long lead items and making sure that they've got supply for those to continue to ramp up production as necessary. So we're fully able to support whatever direction the government continues to move.
spk09: Got it. Great. Thank you. You mentioned the young adult program. I was curious, is monitoring catching on at the state level or in any other parts of the business?
spk04: So to clarify, the young adult program that we mentioned would be a federal program, another ATD program. So with that, what was your question? I'm sorry.
spk09: I'm just curious if maybe the states are looking at monitoring, if you're having any success growing away from ISAP.
spk05: Well, the EM business, like we have, literally thousands of customers at the state and local level. I think we do business in every state through the EM program. And there continues to be expansion in the number of customers, the size of the contracts in the industry. But, you know, clearly this contract is unique and stands apart from the size of the other typical state and local contracts.
spk09: Got it. Thank you. And I do appreciate the compliance that you relayed, Ann. I missed the percentage who attended all the court hearings. Could you repeat that?
spk04: Yeah, it was 99.6. Do I have that right, gentlemen? And that means all the hearings that they have to attend, and there are several different types of hearings. I'm sorry, it's 99.3. attended all their immigration court hearings. So that could be from their master's hearings to their individual hearings to their hearings of final decision. And that's while they're in the ISAT program. So while we're working with them to make sure that they're attending their court hearings.
spk09: Wow, that's impressive. And then lastly, and I'll hand it off, with respect to the exchange you mentioned, I think that you're at 46% to 47% on the 23s. at least with respect to people consenting. Are you sharing what percentage of the bonds have agreed to exchange?
spk05: Well, that was to some degree accounted for in our estimate at closing of the amount of debt that would be outstanding in 2023. Let me just go back and look at We said 170, I think. Is that right? So, that number indicates about $80 million worth of the, or I guess 260, about $90 million of the debt has agreed at this point to rollover either in the cash debt option or in the all debt option. And obviously, once we close, we'll update all of those numbers based on final participation levels.
spk09: And that's the 23s.
spk05: On the 23s. And then similarly on the 24s, I don't have it. What page is that?
spk11: It's page 9. It's $430 million is the number we put out for 2024, total debt.
spk05: But that includes also the stub term loan from 2024 and some stub banks. So, again, that will be affected by final participation levels. It could be less than that. But we'll give those specific details. amounts and really probably put some detail as to which tranche has what amount of debt outstanding. Is it term loan? Is it 24? Et cetera. So there'll be more clarity in the next, you know, call it two to four weeks when we finally close the transaction.
spk11: But we've already reached the required threshold for consent and participation in the 24s.
spk05: In the 24s, the 26s, the term, and we're at 40. Just to clarify, we're at 40 one or 42 percent in legal firm commitments on the 23s, and we have indications of, based on discussions, preliminary discussions of another 4 percent or so. And then those, we have, you know, a substantial number of other investors that we're having discussions with that we believe will get us over the 50 percent through either consents or participation.
spk09: Male Speaker 1 Got it. Well, congratulations on the quarter. Good luck with the exchange.
spk05: Thank you very much.
spk03: Thank you. Our next question will be from Jay McCandless of Wedbush. Will you go ahead?
spk02: Thanks. Good afternoon. Thanks for taking our questions. The first question I had, electronic monitoring, really, really good growth there, plus 45% in the first quarter and nearly doubling this quarter. Is this 121 million kind of a good run rate to use going forward, or are you guys expecting further growth in this segment?
spk05: So what we've said for the balance of the year, we've assumed the same sort of participant level or participant count that we're currently at today. So the quarter obviously was growing throughout the quarter, so it's an average of less than the current participant count. But for the balance of the year, we're assuming more of a maintenance level right around this level of 300,000. It could grow some more, but we're, you know, that's what we're using for the forecast.
spk02: Got it. Okay. And then our second question, and thank you for the outlook in terms of the levels you want to get to for the debt. But I guess what maybe is kind of a stretch goal in terms of your net debt where you are comfortable starting to return money to shareholders or, you know, whether it's dividends, et cetera. If you could maybe talk about what the longer-term goal is, we would appreciate it.
spk05: Sure. So that's going to be obviously a function of our ability to get back into the market and get more reasonable covenants that allow us to return capital to shareholders. We're going to test the markets as soon as we think that we've got to a number that's supportable. So if it's three times, we'll get into the market at three times. If it's three and a half, we'll do it at three and a half. But I think We're fairly comfortable and confident that once we get below three times, we will have access to better economic rates as well as covenants that will allow us to return capital to shareholders, either through additional dividends and or stock buybacks.
spk03: Okay, great. Thanks again. Thank you. Next question will be from Jordan Sherman, Ranger Global. Please go ahead.
spk08: Thank you. Just quickly, I apologize if I missed this. What happens to the holders of the debt who don't agree or don't consent to the exchange?
spk05: So on the on the 23s, the 24s, and the 26s, anyone who doesn't participate, whether they don't consent or they don't participate in the rollover, they'll remain in their current agreements, and we will satisfy that debt obligation when it comes due. We'll continue to pay the current interest rates on those instruments, and then when the debt comes due, we will pay it off. As we said, that's That's one of the significant benefits of the transaction. We're reducing that maturity wall from $2 billion between 23 and 24 down to $600 million and potentially lower depending on the participant level. So we believe that through at least related to the 23 and 24 maturities, that through cash on hand and cash flow and liquidity that the company has, that we can satisfy those obligations. And then going forward, the 26s and those other maturities will satisfy through a combination of cash flow, cash on hand, as well as refinancing as appropriate.
spk08: In your guidance for the rest of 2022, what participates? Because you're expecting this to happen relatively soon. What's your estimate of participation levels?
spk05: It's what we put in the process. press release and the earnings call today for the different years if the, you know, numbers move around a little.
spk08: Wherever they stand today, you're saying?
spk05: Yeah, what we've disclosed publicly, what our estimates are. So, for 2023, we're estimating around $170 million in outstanding stub 23 and the 24s, et cetera.
spk08: Perfect. Okay, I apologize. I missed that. Secondly, can you, again, I just want to be clear I understand So the moving parts that led to the earnings increase, obviously, we've got the offset of the – I mean, the guidance increase. Obviously, we got the negative from the interest rates. But what were the moving parts that led to the upside?
spk05: So on the upside, it's the better performance in a number of our facilities as well as the improved performance. performance under the ISAP contract with ISO, the BI division. And, you know, we had a facility that reactivated that was idle. So we had the full impact of that in the quarter, the most Shannon Valley facility that was idle last year. So a number of different things that led to that improvement. Okay. So better run rates that we're experiencing now. I think, as you know, I'm sure you're aware, we've been performing better than our guidance and our expectations for the last year and a half or so. And I think... Continuation of San Diego. Continuation of San Diego. That's a good point George pointed out. Our guidance and our forecast assumed that the San Diego contract ended at the end of June. We've, as we discussed, extended that through September of next year. So we have a six-month positive impact from that in there as well.
spk08: Got it. The... The facility that's going with the Marshall direct contract that's going to expire at the end of September, are those ongoing conversations with them at the moment?
spk05: Yeah, the only contract that's, Jordan, the only contract that's left to expire is the BOP facility in Northlake in Michigan. That contract ends at the end of September. So we don't have any other federal contracts that are, you know, subject to the President's executive order. Yeah. It's just the BOP contract.
spk07: Yeah.
spk08: Any potential reuse of that facility?
spk07: Yes, we are marketing that facility as we speak.
spk08: Okay. Prospects look – how do prospects look, I guess, is –
spk07: Well, we have prospects, which I think I said earlier, at the state level as well as the federal level.
spk08: Okay, so I apologize. I missed that comment as well. Okay, great. Thank you very much. Obviously a great quarter. Thank you, guys.
spk03: Thank you. That concludes our question and answer session. Now it's time to call back over to George Zoli for closing remarks.
spk07: Well, we thank you for having joined us on this conference call. We look forward to addressing you into the future. Thank you.
spk03: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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