The GEO Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 13 speakers on the call.

Operator

Good day, and welcome to the GEO Group Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over To Pablo Paella, Executive Vice President of Corporate Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for today's discussion of The GEO Group's Q3 2023 earnings results. With us today are George Lolley, Executive Chairman of the Board Jose Gordo, Chief Executive Officer Brian Evans, Chief Financial Officer Wayne Calabrese, Chief Operating Officer and James Black, President of GeoSecure Services. This morning, we will discuss our 3rd quarter results as well as our outlook. We will conclude the call with a question and answer session.

Speaker 1

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. 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.

Speaker 1

These forward looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ including the Form 10 ks, 10 Q and 8 ks reports. With that, please allow me to turn this call over to our Executive Chairman, George Zoley. George?

Speaker 2

Joining us on our Q3 2023 earnings call. I'm joined today by our senior management team to review our Q3 financial results, discuss our financial guidance for the balance of the year And our continued focus on debt reduction and provide an update on the trends for each of our business segments. This morning, we reported 3rd quarter revenues of approximately $603,000,000 GAAP net income of approximately $24,500,000 and adjusted EBITDA of $119,000,000 Our diversified business units continued to deliver steady operational and financial performance. During the Q3, our Secure Services business unit renewed several important contracts. At the federal level, we renewed 2 direct contracts with the U.

Speaker 2

S. Marshals Service. 1 was at our company owned 1900 Bed Rio Grande Processing Center in Texas for a 5 year term and the second Was at our company leased 770 Bed Western Region Detention Facility in San Diego for a 2 year term. We also renewed 3 contracts with ICE for respective 1 year terms that include our company owned 700 Bed Broward Transitional Center in Florida, our company owned 1904 Bed South Texas ICE Processing Center and our company owned 1314 Bed Montgomery Processing Center in Texas. Populations across our ICE processing centers have continued to steadily increase.

Speaker 2

Since the beginning of July, we've experienced approximately a 30% increase, particularly in our Central and Western regions. At the state level, we recently renewed our management only contract in the state of Florida for the 2000 Bed Blackwater River Correctional rehabilitation facility for a 2 year term. During the Q3, our GEO Reentry Services division Also renewed 7 existing contracts for our residential entry centers and 6 existing contracts for our Non residential day reporting centers. Our 3rd quarter results reflect an increase in our GTI secure Transportation revenues. This increase was primarily driven by our new emergency contract to provide air operations In support for ICE, this contract could generate up to $16,000,000 in total revenues if it runs for its full Term of 9 months.

Speaker 2

The multi year procurement for these services remains under bid protest and we hope to continue to be a Strong contender for a long term contract award in the future. Internationally, our 3rd quarter results Reflect a sequential increase in revenues due to the activation of our new contract to deliver healthcare services across public prisons in the state of Victoria in Australia. Turning to our Electronic Monitoring and Supervision Services segment, The number of participants in the federal government's Intensive Supervision Appearance Program or ISAF Has remained relatively stable since early August at approximately 192,000 to 195,000 individuals. While the iStaP participant count has remained largely stable over the last 3 months, we have not experienced The moderate increase beginning in the Q4 that was contemplated in our previously issued financial guidance. We believe that ICE continues to face budgetary pressures and the timing of the passage of appropriation bills in Congress remains uncertain.

Speaker 2

Given these factors, our tightened financial guidance range for the Q4 now assumes the ISAT participant counts will be flat to slightly down for the balance of the year. The federal government is currently funded under a short term continuing resolution, Which expires on November 17 and Congress has yet to reach an agreement on the appropriation bills to fund The government in fiscal year 2024, which began on October 1st. We estimate the ICE Detention Census is presently at approximately 39,000. The Senate version of the Homeland Security Appropriations Bill keeps funding for ICE at the current level of 34,000 beds And slightly increases the overall funding available for the alternative to detention programs. The current version of the House Homeland Security appropriation bill would increase ICE BEDS to 41,000 And includes a provision that would require the use of ISAP electronic monitoring capabilities for all individuals Additionally, the White House has submitted a supplemental appropriations request to Congress, which we believe includes additional funding for ICE BEDS and the alternatives Detention program.

Speaker 2

If Congress is unable to reach an agreement within the next 10 days, the federal government could once again Be funded under a short term or long term continuing resolution or face the prospect of a government shutdown. We are continuing to monitor the congressional appropriations process and remain focused on providing High quality services on behalf of DHS and ICE. We are continuing our efforts to market our current idle facilities to federal, state and local Government agencies. As has been publicly reported, several counties across the country are experiencing overcrowding Challenges in their local jails in some of these jurisdictions are exploring the potential use of private sector facilities to address these challenges. We believe that our modern well located facilities could generate significant increased annualized adjusted EBITDA if they are reactivated either under geo management or leased to local, state or federal agencies.

Speaker 2

Finally, we remain focused on reducing our net debt, which is a key strategic priority for our company. During the Q3, we reduced our net debt by approximately $109,000,000 and are at $1,800,000,000 in total net debt presently. Our objective is to continue reducing net debt by $175,000,000 to $200,000,000 per year in the future. We also remain hopeful that we will Be able to refinance portions of our debt at the earliest possible time. I will now turn the call over

Speaker 3

Thank you, George. Good morning, everyone. Today, we reported GAAP net income of approximately $24,500,000 On quarterly revenues of approximately $603,000,000 we reported quarterly adjusted EBITDA of approximately $119,000,000 3rd quarter 2023 results reflect higher transportation revenues due to our recent emergency contract to provide air support services for ICE And higher international revenues from the activation of our new healthcare contract in Victoria, Australia. Additionally, in the Q3 2023, we experienced a year over year increase of 14% And revenues from our residential reentry centers as populations in our reentry segment have continued to improve post pandemic. Similarly, quarterly revenues from our non residential day reporting centers increased by almost 10% year over year during the Q3 2023.

Speaker 3

These revenue increases were offset by lower revenue from our Electronic Monitoring and Supervision Services segment during the Q3 2023. Our Q3 results also reflect an increase of approximately $13,000,000 And net interest expense compared to the Q3 of 2022 due to higher interest rates and the debt restructuring we completed in August of 2022. Moving to our guidance for the balance of the year. Our previous guidance for the Q4 of 2023 Assumed a moderate increase in ISAT participants during the quarter. While the ISAT participant count has remained relatively stable over the last 3 months, We have not experienced the moderate increase that was contemplated in our previous guidance.

Speaker 3

As George mentioned, we believe that ICE continues to face budgetary pressures and the timing of the passage of appropriations bills in Congress remains uncertain. As a result of these factors, we have updated our guidance assumptions and now assume for budget purposes that the ISAT participant count We'll be flat to slightly down for the balance of the year. This morning, we provided updated guidance for the Q4 2023 of GAAP net income in a range of $19,000,000 to $24,000,000 and quarterly revenues a range of $590,000,000 to $600,000,000 We expect our Q4 2023 adjusted EBITDA To be in a range of $117,000,000 to $122,000,000 For the full year 2023, we expect GAAP net income to be in a range of $100,000,000 to $105,000,000 on annual revenues of approximately $2,400,000,000 We expect our effective tax rate for the full year 2023 to be approximately 29%, exclusive of any discrete items. We expect our full year 2023 adjusted EBITDA to be between $495,000,000 $500,000,000 Our full year 2023 guidance represents the 2nd highest level of annual adjusted EBITDA in our company's history. Our continued and steady performance is representative of the strength of our diversified services platform.

Speaker 3

We have been able Offset declines in our Electronic Monitoring and Supervision Services segment throughout 2023 with growth in revenues and earnings from several of our Other diversified segments. Our guidance does not include the potential reactivation of any of our remaining idle secure services facilities, which total approximately 9,000 beds and could provide meaningful upside to our annualized revenues and cash flows to fully reactivate. Additionally, increases in the ISAT participant count or further increases in the utilization of our ICE detention beds To generate significant upside to our guidance. With respect to ISAP specifically, BI is the sole provider of electronic monitoring solutions to ICE and has provided these services with bipartisan support for over 20 years, successfully achieving high levels of compliance under the program. BI has all the necessary resources to assist ICE going forward should the agency decide to increase the utilization of ISAP once appropriation bills are approved Moving to our capital structure.

Speaker 3

During the Q3 of 2023, we reduced our total net debt by $109,000,000 We ended the quarter with total net debt of approximately $1,800,000,000 Our debt reduction during the Q3 was supported by the sale of our Beau Robinson reentry facility in New Jersey for approximately $15,000,000 which closed in September. Our objective is to continue to reduce our net debt by approximately $175,000,000 $200,000,000 per year in the future, bringing our total net debt to approximately $1,600,000,000 by the end of 2024. Going forward, we expect interest rates to stabilize and potentially decrease, further enhancing our ability to reduce our net debt. As a reminder, approximately half of our debt is under floating interest rates and future increases in interest rates would bolster our annual or future decreases in interest rates We bolster our annual free cash flows that could be used to further reduce our overall debt. We also expect to explore further asset sales to complement these efforts, including the potential sale of additional residential reentry assets.

Speaker 3

Our residential reentry centers are typically located in urban areas and can usually be repurposed for alternative uses. These factors can often result in a larger pool of potential interested buyers. We have 2 additional reentry facilities that we are currently actively marketing for sale. With respect to our idle secure services facilities, we are focused on marketing these to local, state and federal agencies for reactivation either under traditional management contract or a lease agreement. However, we may also consider the sale of some of these larger assets if the price adequately reflects their value.

Speaker 3

Finally, we remain hopeful to be able to refinance portions of our debt at the earliest possible time. As a first step, We would expect to address our revolving credit facility, which as a reminder is comprised of 2 tranches including $87,000,000 Which matures in 2024 and approximately $187,000,000 which matures in 2027. We currently have no outstanding no borrowings outstanding under either of these tranches and our goal would be to comprehensively address our revolving credit facility Prior to the maturity of the first tranche, we continue to have strong relationships with our existing banking partners, and we have received interest from several new banks as well as institutional investors who would participate in future refinancing transactions. Through these efforts, we hope to be able to achieve Interest cost savings and gain more flexibility within the covenants under our credit agreements to explore options to return capital to our shareholders In the near future, we continue to believe that our focus on reducing debt and deleveraging will enhance value for all our shareholders over time. At this time, I will turn the call over to James Black for a review of our Geo Secure Services segment.

Speaker 4

Thank you, Brian. Good morning, everyone. It is my pleasure to provide an update on GEO Secure Services. During the Q3 of 2023, our Secure Services Facilities successfully underwent 52 audits, including internal audits, government reviews, 3rd party accreditations Imprison Rape Elimination Act or PREA certifications. 6 of our secure services facilities received accreditation From the American Correctional Association with an average score of 99.2 percent and another 6 of our facilities received Our GTI Transportation division and our GEO AMI U.

Speaker 4

K. Joint venture completed approximately 4 point 3,000,000 miles driven in the United States and overseas during the Q3. Moving to the current trends for our government agency partners. At the federal level, populations at our contract U. S.

Speaker 4

Marshals Detention Facilities continue to be stable. Our U. S. Marshals facilities around the country support the agency as it carries out its mission of providing custodial for pretrial detainees facing federal criminal proceedings. We believe that all these important facilities provide needed bed space And services near federal courthouses where there is generally a lack of suitable alternative detention capacity for the U.

Speaker 4

S. Marshals Service. During the Q3, we renewed our contracts with the U. S. Marshals Service for our company owned 1900 Bed Rio Grande Processing Center For a 5 year term and our company leased 770 Bed Western Region Detention Facility for a 2 year term.

Speaker 4

Moving to our ICE processing centers. During the Q3, we renewed 3 contracts for respective 1 year terms At our company owned 700 Bed Broward Transitional Center, our 1904 Bed South Texas ice processing center And our 1314 Bed Montgomery ICE Processing Center. Across our ICE Processing Centers, We have experienced a 30% increase in population since the beginning of July. As George noted, The federal government is currently funded under a short term continuing resolution that runs through November 17. The U.

Speaker 4

S. Congress has not yet reached an agreement on the appropriations bill for fiscal year 2024. We estimate the present census of active ICE detention beds to be at 39,000. The current House version of the Homeland Security Appropriations Bill would fund ICE for 41,000 beds, while the Senate version Would maintain funding at 34,000 beds. The U.

Speaker 4

S. Congress is also considering a supplemental appropriations submitted by the White House, which would also increase funding for ICE bids. If a compromise between the House and Senate is not reached in the next 10 days, the federal government could again be funded under a short term or long term continuing resolution or face the prospect of a government shutdown. As a long standing service provider to the federal government, We play no role in and have no control over congressional appropriations decisions, the timing of those decisions or more broadly the implementation of immigration policies. Our focus remains on providing the highest quality services to ICE, and we stand ready to support the agency with any additional Our ICE processing centers have a long standing track record delivering professional support services On behalf of ICE and providing secure residential care consistent with our commitment to respecting the human rights of all of those entrusted to our care.

Speaker 4

Our ICE processing centers offer around the clock access to quality healthcare services. Healthcare staffing at our Processing Centers is generally more than double the number of healthcare staff in a typical state correctional facility. RI's processing centers also offer access to legal counsel and legal libraries and resources, And we have dedicated space at our centers to accommodate meetings with legal counsel. Our ICE processing centers also provide daily meals that are culturally sensitive and are approved by registered dietitians. We also provide access to faith based and religious opportunities We partner with community volunteers as needed to ensure fair representation of various states and denominations.

Speaker 4

Our ice processing centers also offer access to quality recreational activities. We have made significant investments To provide enhanced amenities at our centers, including artificial turf soccer fields, covered pavilions, Exercise equipment and multipurpose groups. We have also historically provided secure transportation services and logistical support For ICE, primarily at 12 of our ICE processing centers. During the Q3, our GTI Transportation division Also begin providing air operation support for ICE under an emergency contract, which could have a full term of 9 months. The federal procurement for the multiyear contract for these services is currently under bid protest, and we hope GTI Our state correctional facilities deliver high quality support services across 7 states, including enhanced rehabilitation programs On behalf of corrections departments in Florida, Georgia, Indiana, Oklahoma, Arizona, New Mexico and Virginia, During the Q3, we renewed our managed only contract for the 2000 Bed Blackwater River Correctional Facility in Florida for a 2 year term.

Speaker 4

With respect to our international markets, during the Q3, we began delivering primary health services across 13 public prisons in Australia under our new health care contract with the state of Victoria. This new contract is expected To generate approximately $33,000,000 in annualized revenues. Finally, we continue to market our current idle secure services facilities, Which totaled approximately 9,000 beds. We have had recent active discussions, particularly with a number of local agencies as counties across The country are facing overcrowding challenges as a result of increases in local jail populations post pandemic. We believe our facilities are modern and well located and can help address these challenges.

Speaker 4

At this time, I would like to turn the call over to Wayne Calabrese

Speaker 5

Thank you, James. I'm pleased to provide an operational update on our GEO Care business unit Starting with our reentry services division. During the Q3, our reentry services facility successfully underwent 38 audits, Including internal audits, government reviews, 3rd party accreditations and PREA certifications. 2 of our residential reentry centers received accreditation from the American Correctional Association, both receiving perfect scores of 100% And 3 of our residential reentry centers received PREA certification. We also renewed 7 residential reentry contracts, Including 4 contracts with the Federal Bureau of Prisons as well as 6 non residential day reporting center contracts.

Speaker 5

Our 35 residential reentry centers provide transitional housing and rehabilitation programs For individuals reentering their communities across 14 states, our non residential and day reporting centers provide high quality Community based services including cognitive behavioral treatment for up to approximately 9,000 parolees and probationers at approximately 90 locations across 10 states. All key outcome metrics showed improvement during the Q3 Attesting to our evidence based practices and their track record for lowering the rate of recidivism. Moving to our GEO Continuum of Care In Prison Programs division, during the Q3, we delivered enhanced in custody rehabilitation and post release support To an average daily population of approximately 2,600 individuals at 31 in prison program sites In 7 states and approximately 21,000 individuals at 13 Continuum of Care sites in 8 states. Our in custody rehabilitation services include academic programs that are focused on helping those in our care Attain high school equivalency diplomas. We have made a significant investment to equip all of our classrooms with smart boards To aid in the delivery of academic instruction at all of our facilities.

Speaker 5

We have also focused on developing vocational programs That not only lead to certification when completed, but are also based on market job placement needs. Our substance abuse treatment programs are an important part of our rehabilitation services because many of the individuals in our care suffer From addiction, our facilities also provide extensive faith based and character based programs And we have designated faith based and character based housing units or dorms across our facilities to enhance the delivery Of these important programs, during the Q3, we completed approximately 700,000 hours of in custody Rehabilitation Programming. Our academic programs awarded 644 high school equivalency diplomas And our vocational courses awarded 6.95 vocational training certifications. Our substance abuse treatment programs awarded approximately 3,500 program completions And we achieved over 21,000 behavioral program completions and more than 18,000 Individual cognitive behavioral treatment sessions. During the Q3, we also allocated over $400,000 Ford post release services to support 873 individuals released from GEO facilities as they return to their communities.

Speaker 5

Our GEO Continuum of Care program integrates enhanced in custody rehabilitation services, Including cognitive behavioral treatment with post release support services that address critical community needs of released individuals. We believe our award winning program provides a proven model on how the 2 +1000000 people in the U. S. Criminal justice system can be better served in changing their lives. Finally, turning to Monitoring and Supervision Services segment, our BI subsidiary provides a full suite of monitoring and supervision solutions, Products and technologies on behalf of federal, state and local agencies across the country.

Speaker 5

At the federal level, the number of participants required to be monitored under our ISAT contract with the Department of Homeland Security Has remained relatively stable over the last 3 months at approximately 192,000 to 195,000 Individuals. While we had previously expected the number of ISAT participants to begin to moderately increase beginning in the Q4, We now assume for budget purposes that ICE staff participant counts will be flat to slightly down for the balance of the year. We believe that ICE continues to face budgetary pressures and as it has been previously noted, the timing The appropriations bills currently being considered by the U. S. Congress remains uncertain.

Speaker 5

BI has provided technology solutions, holistic case management, supervision, monitoring and compliance services under ISAP For almost 20 years, under BI's tenure, the federal government's Supervision and Appearance program has achieved high levels of compliance Using a variety of new technologies and case management services over that time. And going forward, we BI to continue to explore new and innovative technology solutions to support the needs of ICE And all of our government agency partners. At this time, I'd like

Speaker 6

to turn the call over to Jose Gordo for closing remarks. Thanks, Wayne. In closing, our diversified business units delivered steady financial and operational performance during the Q3 of 2023. We remain focused on reducing our overall net debt and on positioning our company to refinance portions of our debt In order to reduce our interest costs and gain the flexibility to potentially return capital to shareholders in the future. We continue to believe that we have several potential upside opportunities, including further increases in populations at our ICE processing centers And or increased number of participants enrolled in ISAP, the activation of our idle secure services facilities where we have A total of approximately 9,000 available beds either under geo management or under lease to local state or federal agencies.

Speaker 6

New managed only contract wins by our reentry, electronic monitoring, secure transportation or international divisions And the selective sale of non core assets. We also expect to continue to selectively pursue new areas of growth, both with our current government agency clients as well as with new clients and or in service lines that are adjacent to or complementary with our existing business. In seeking these future growth opportunities, we plan to leverage our successful track record and the talent of our employees, we believe are the best in our industry. As we have expressed in the past, we believe that our valuable assets underpin a compelling valuation case for our company. We own approximately 45,000 beds at secured facilities that we believe are generally more modern and better located than many of the existing public facilities in those geographic Markets.

Speaker 6

We believe that the aggregate replacement value of these company owned beds alone based on estimated current construction costs And sales of comparable facilities is equal to or in excess of our current enterprise value. And this valuation is before taking into account The significant operating cash flows and real estate values of our other diversified segments where we have substantial assets and market presence. Based on a conservative valuation of these various components, we believe that our current stock price has significant upside potential. We have consistently delivered as an essential government services provider at the federal and state levels through both Republican and Democratic presidential administrations for almost 40 years. We remain steadfast in our commitment to being a consummately professional organization that our clients can trust with complex resource intensive and critical projects and that prioritizes the well-being of those entrusted to our care.

Speaker 6

We are proud of our over 18,000 employees worldwide who carry out our mission on a daily basis with great purpose and professionalism. And we stand ready to continue to meet the future demands of our clients as they may continue to evolve. That completes our remarks and we would be glad to take questions.

Operator

We will now begin the question and answer The first question today comes from Joe Gomez with Noble Capital. Please go ahead.

Speaker 7

Good morning. Thanks for taking my questions.

Speaker 1

Good morning, Joe.

Speaker 7

So I wanted to start out on the Secure Services segment. You guys mentioned how the ICE population there Are up significantly since the beginning of July, but the segment revenues Actually declined year over year. Pardon me, I was just wondering is that because the majority of the population went into facilities that had yet to meet their guaranteed minimums or was there Just trying to think off the top of my head whether it was another facility that would happen to have been contract lost or terminated last year that Drove the revenues for that segment down?

Speaker 3

No, I think It's combination of the first, there was the North Lake facility, I think that discontinued in September of last year. So That was in there as a BOP facility. That was probably worth about $9,000,000 to $10,000,000 a year or per quarter in revenue that Went away. So that's not in this quarter and it was in last quarter.

Speaker 7

Okay. Thanks for that. And you also mentioned that, I think the latest that I've seen, the ICE populations Are exceeding 39,000. Are you continuing to see a similar type of increase in your guys' Populations, I think at the end of September, there was about 35,000 in the ICE population.

Speaker 2

We continue to provide approximately 1 third of the capacity that's being used in the ICE processing centers. And the majority of our facilities that have the minimum guarantees Have had an increase in above those minimum guarantees.

Speaker 7

That's good news.

Speaker 1

Great. It is.

Speaker 7

And on The alternatives to detention, you guys mentioned in your prepared remarks about the house proposal, Potentially everyone being monitored, obviously, that's Not hasn't been put into law yet, but what type of capacity increases Would you guys need to see could you handle something that large? I think the last thing I saw was like 5,000,000 people That are here that are not U. S. Citizens that could potentially be in That type of a program, or would you have to see that type of a program split amongst the number of people?

Speaker 5

Joe, it's Wayne Calabrese. I think we're well positioned, well resourced and well Capable of gearing up as required whether government would move to put place all of the $5,000,000 or who may be in the non detained docket into 1 or more programs remains to be seen, but they wouldn't all be in one program certainly. So there are a lot of different to the alternative to detention programs. And as I said, we're well positioned and resourced. We have offices all over the country And would be able to gear up to cover that, if that became the requirement of the contract.

Speaker 7

Thanks for that Wayne. Appreciate that. And then you talked about some of the idle facilities. I don't know how much of discussions You are currently in with ICE about restarting maybe some of the idle facilities. Maybe you can give a little more color on that.

Speaker 2

Well, ICE periodically Reviews the capacity of existing facilities as well as idled facilities. So they know what we have. They know where we're currently operating and where we're capable of reactivating facilities. So we stay in touch with them and they do the same with us.

Speaker 7

Okay. And then one last one for me and I'll get back in queue.

Speaker 8

Last couple of quarters, I think there's been

Speaker 7

a little bit of discussion. There's been some Legal cases about illegal immigration and ICE, Anything that has come on from any

Speaker 2

of those

Speaker 7

proposed or the current legal cases that have

Speaker 2

No, I don't think so. I'm not sure what legal cases you're referring to. What I have in my mind is what Maybe I read in the last couple of days that there's legal challenges to The current parole program and the desire by some individuals to further restrict it, Meaning, not as many people could come through the country, maybe some people would be put into the ICE Processing centers for a review of their cases.

Speaker 7

Okay. Thank you for that. And I'll get back in queue. Thank you.

Operator

The next question comes from Brian Violino with Wedbush Securities. Please go ahead.

Speaker 9

Great. Thanks for taking my questions. So clearly funding is a major factor as it relates to ISAT. But Looking out further ahead and appreciate you're not going to be giving 2024 guidance, but can ISAT participants grow even if funding gets I know on the last call you mentioned there was some potential policy changes that could grow ISAP. Just Curious your thoughts because we did see ISAB numbers a lot higher a year ago when funding levels were the same at least from a congressional standpoint.

Speaker 2

Well, I think we've said in prior calls that ICE as well as other divisions within the Department of Homeland Security have Certain level of budgetary flexibility and they move money around. And yes, we did have a much higher Population count in ISAT program under the existing budgetary level. So It really becomes a decision as to where to put the priorities for the agency And redirect funding towards those priorities. So that could happen, It's really an internal or decision by the agency or with the Oversight and instructions by the White House.

Speaker 9

Got it. Thanks. And I'm not sure if I missed it, but I guess if you could just clarify, within your guidance that you gave today, the updated guidance, what's the underlying assumption For ICE detention levels, I think your last guide had assumed kind of steady occupancy rates, but obviously with them climbing here, just curious what your Underlying assumption is for the Q4 for Isaac, can you see?

Speaker 3

Pretty consistent quarter over quarter. We haven't assumed any Facility reactivation or a significant step up in the existing population level.

Speaker 9

Okay, great. And then last one for me. If I look at the Secured Services segment, it looks like the Net operating margins trended down a little bit quarter over quarter. Just wondering if there's any sort of The kind of one time things in the expenses there? And I guess just general thoughts on where you think margins for that segment will trend in the near term?

Speaker 3

I think what you're seeing in the margins in the Secure Services and we've talked about this on prior calls as Our facilities which were underutilized, but were being paid for expected higher utilization levels that when those Utilization levels increased, we would get back to sort of normalized financial performance at those facilities. And I think we've seen that occur in the last two quarters, if you will, as these populations have moved up. So Most of our facilities, as George said, are at or near their fixed payments or their minimum occupancy levels That were paid for and they're also being used at those levels. So if occupancy levels or utilization increases further, We should see some increase in revenue and increase in performance.

Speaker 9

Got it. Okay, great. Thank you. Appreciate it.

Operator

The next question comes from Brendan McCarthy with Sidoti. Please go ahead.

Speaker 10

Great. Thank you for taking my questions. Firstly, on the I believe you mentioned there was a Supplemental funding initiative from the White House recently, is that in excess of the short term continued resolution Funding currently under place and will there be any potential benefit in Q4?

Speaker 2

I believe that is in addition to what has been previously requested. And we don't know exactly how many beds that funding would provide for, but it would be several tens Several

Speaker 10

1,000. Got it. Okay. And then secondly with the ISAT and capacity, just wondering just curious if you can maybe quantify Just what kind of the ramp up process might look like looking into maybe 2024 if funding levels were to increase. Are you able to quantify what the timing of a potential ramp up to a significantly more number of participants would look like?

Speaker 2

It's hard to answer that question. As Wayne said, we have the ability to scale up fairly quickly. And How do you do that? You'd have to add more staff at our Boulder, Colorado facility and probably at various locations around the country. We have a very large countrywide footprint of almost 100 different locations.

Speaker 2

But the electronic devices are made in our Boulder facility and We are capable of ramping up fairly quickly. We have the supplies and I think ICE is aware of our capabilities and like on the detention side, they stay in touch with us As to what those capabilities are and relative to the different kinds of devices we have from the Ankle monitors to watches to we have 150 1,000 phones available at the facility and there's different Programs that can be applied using those different technologies, and That can scale up to much larger populations at

Speaker 5

have a lot of personnel who are dedicated to non electronic services such as case management, office visits, home visits, all of that can be scaled up as needed. A great deal will depend, however, on the government's ability to scale up and repurpose folks that are working at the border. The ICE officials that work closely with them, all of that would have to be focused on the traffic that's coming in and the processing and enrollment persons who are coming across the border into 1 or more programs based on the administration's policies and priorities,

Speaker 7

Which is to get back

Speaker 11

to the bus.

Speaker 4

Got

Speaker 5

it. It's very lumpy.

Speaker 3

It can be lumpy.

Speaker 10

Understood. Thanks for your answers. That's all for me.

Operator

The next question comes from Greg Gibas with Northland Securities, please go ahead.

Speaker 11

Hey, good morning guys. Thanks for taking the questions. One of the, I guess, first just ask, If there's any significant or maybe notable contracts up for renewal in the near term or upcoming quarters?

Speaker 2

Not this year, no.

Speaker 11

Got it. And then as it relates to the delevering, good progress there in terms of net debt reduction. You mentioned the 2 additional facilities. I think it was the New Jersey facility, the sale of that kind of accelerated the delevering. You talked about the To additional facilities and curious if you could share maybe interest levels or timing of those, would those be like a Q4 event or do you have any sense of When those asset sales would happen?

Speaker 3

No. I think those there's facilities that we've got targeted and they're We have brokers active trying to place those properties, but right now we don't have any contracts on those properties.

Speaker 11

Okay, got it. And I guess just lastly, as it relates to you marketing the idle facilities, which I believe count for like 9,000 beds. How do you kind of weigh like when I think about you hitting these men occupancy levels and obviously increased margins As occupancies increase after that, how do you kind of weigh reactivation of idle facilities versus Just increasing those occupancy levels at existing facilities, is that up to the customer or is just curious how you're kind of weighing those 2 things?

Speaker 2

It's really up to the customer and where their priorities are on a regional basis. We have a lot of Obviously, in the Southern Belt States, Texas, Louisiana, etcetera. But we do have other locations in the North, in the Northeast that are prime locations. And what It makes it attractive for those locations is that a lot of County jails that have previously provided occupancy and services for DHS and ICE have been pulling out of the business, so to speak, because of either financial or Political reasons and therefore our particular facilities which are generally much more modern and More closely meets the most recent updated ICE standards are particularly attractive and In the long haul, we think will be utilized eventually.

Speaker 11

Got it. Thanks for the color.

Operator

The next question comes from Curt Lundki with Imperial Capital. Please go ahead.

Speaker 8

Hello, everyone. Thank you for the call. I just have a couple follow ups. With respect to ISAP, how many people do you think Would be monitored under the house proposal.

Speaker 5

Well, monitored is a generous word. It can cover a lot of topics. In terms of electronic monitoring, The numbers were substantially higher

Speaker 2

a year ago. They

Speaker 5

could accommodate that again. They Could be in other areas. They could, for example, ask for more folks to be in social service oversight, Case management, we mentioned the WATCH is a new program that's been under pilot With ISAF, so there are a lot of different ways that they could accommodate growth in their numbers should that be the direction they take. But the policy remains to be set and more importantly the budget remains to be set.

Speaker 2

And there's different programs That can be activated on a lessened on a descending less intensive basis. Yes. For example, some people could be monitored every day, every hour of every day, Some people weekly, some people monthly, some people by yearly. It's All those tools are available to ICE in deciding In addition to direct case management and support services, what level of periodic Monitoring is appropriate for that particular person or group of persons. Right.

Speaker 5

The program can be opt.

Speaker 8

That's helpful. Thank you. Is this something that's been contemplated in the past? Or is this a kind of a new thing?

Speaker 2

The different programs we were just referring to, that is presently available to ICE. So they know about our capabilities in performing these different levels of intensity of services And we have pricing for those different levels of services. It's just a matter of, I guess, funding and priorities, where they want to put their money and what's most important at That particular time.

Speaker 6

I think the element that's new in that house proposal and remains to be seen what will be part of the final legislation is the GPS monitoring of all cases until they're decided. So if that were to actually be implemented, it could in theory capture most of the legal case docket. But it's just a proposal at this time.

Speaker 8

Got it. It's interesting. And then just shifting gears quickly, I do appreciate the time. On the state level, have you been able To increase pricing on your state contracts, I know typically those state contracts get You know, repriced, I believe, on January or July 1st, did any of that take place for you?

Speaker 2

Yes, we have. The last couple of years in particular because I think I guess there's 2 forces at play. Because of COVID, there was a labor shortage and there was a drive, A need to increase labor costs. And fortunately, for the states, they got a lot of COVID funding that allowed them to do Just that in part is how they use those monies. So we've been able to fairly consistently increase The pricing interstate contract primarily to cover the increase in labor costs and medical costs.

Speaker 8

Right. You were recovering monies that were already being spent.

Speaker 2

Yes, and improving our financial position through that process.

Speaker 8

Got it. Can you quantify the magnitude of the price increases you got for this fiscal year?

Speaker 2

I've Thought about how much have we increased wages in the last 2 or 3 years? I think it's 20%. It's pretty significant because all prior years, I think the average Increase was like the 2% CPI that we've seen for years years years and we Going into the COVID years from 2020 to now, it's required almost a 20%

Speaker 8

Interesting. Thank you. That's it for me.

Operator

The next question comes from Jordan Hymowitz With Philadelphia Financial, please go ahead.

Speaker 12

Thanks guys. First of all, I don't know if you're aware that actually on this call What was going on that ICE stats came out and up to 36.8 beds, the highest level ever And Pat, we're not having the last 4 years or so. So I mean, I assume that your guidance in the Q4 wasn't in any way based On those higher numbers?

Speaker 3

No. As I said earlier, our guidance is based Where we've been running at approximately for the Q3.

Speaker 12

So not only did the quarter end higher, but the 4th quarter is beginning much higher than the average.

Speaker 2

And it's different than prior years. In prior years, the 4th Because of the weather changing on the southern border and it getting colder, lots of people coming across. That's the way it was historically for decades. This year, it seems it could be different.

Speaker 12

And I know it's not as much as CXW, but the incremental margin at these levels is higher than the average margin, correct?

Speaker 3

It varies by facility depending on how the contract is priced, but it should be incrementally better.

Speaker 12

Okay. And next of the 9,000 or roughly 12% beds that are unoccupied, Should we think about if they do get occupied the earnings and margin are about average with what's out there, in other words, They're not substantially better or worse?

Speaker 3

Well, their own facility, so they should be the margin should be the EBITDA margin should be in line with our historical average for owned facilities, which is in that 25% to 35% Range. So it would be a little higher than our average margins because our average margins include international operations and managed only facilities that have Lower margins.

Speaker 12

Perfect. And just to mention with this new proposal for Hi, Sab. I mean, we're talking 5,000,000 people that could potentially be monitored. I mean, That's like multiples of the 100 to 200 you currently are monitoring. I mean, if you don't get all of them or half of them, but that Business which has 50% margins could be substantially higher next year if this comes through.

Speaker 12

Is that correct?

Speaker 2

Yes, quantitatively, but as we've discussed, there's different pricing levels For different programs of intensity as far as monitoring, as I said, The most intensive would be monitoring on a daily basis and throughout the day, but it could be as little as Once every month or a few months or a couple of times a year.

Speaker 12

Fine. And final question is, could you remind me of the number of beds that were in place during the last Republican administration?

Speaker 2

I think they got over 50,000 maybe 52,000.

Speaker 12

I think 52 was the right number. So Again, if we head towards an election year, if the Republicans should win, the number of beds could be 30% higher.

Speaker 2

It could be.

Speaker 12

Okay. Thanks for taking my questions.

Speaker 9

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to George Dooley, Executive Chairman for the GEO Group.

Speaker 2

Okay. Thank you for joining us on this call and we look forward to speaking to you on the next Call in February. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
The GEO Group Q3 2023
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