Tesco Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 12 speakers on the call.

Operator

Good day, and welcome to the GEO Group First Quarter 20 24 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Pablo Paez, Executive Vice President of Corporate Relations. 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 Q1 2024 earnings results. With us today are George Zoley, Executive Chairman of the Board Brian Evans, Chief Executive Officer Wayne Calabrese, President and Chief Operating Officer Shane March, Acting Chief Financial Officer and James Black, President of GeoSecure Services. This morning, we will discuss our Q1 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 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 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

Thank you, Pablo, and good morning to everyone. Thank you for joining us on our Q1 2024 earnings call. I'm pleased to be joined today by our senior management team. During today's call, we will review the Q1 financial results and the operational milestones for each of our business segments, provide an update on our recent refinancing transactions and our continued efforts to enhance long term value for our shareholders, and discuss our financial guidance and outlook for the balance of the year. During the Q1, our diversified business units continued to deliver strong operational and financial performance.

Speaker 2

This morning, we reported 1st quarter revenues of approximately $606,000,000 and GAAP net income of approximately $23,000,000 We also reported 1st quarter adjusted EBITDA of approximately $118,000,000 Looking at our key quarterly trends, revenues for our owned and leased secured facilities increased by approximately 7% from a year ago. This increase was driven primarily by year over year population increases across our ICE facilities. Utilization in our ICE facilities averaged approximately 13,000 beds during the Q1 of 2024. We estimate that during the same time frame, the utilization across all ICE facilities nationwide averaged approximately 38,500 beds. We estimate that the utilization across ICE facilities nationwide is currently at approximately 37,000 beds and that the current utilization at GEO's ICE facilities remains at approximately 13,000 beds.

Speaker 2

With respect to federal funding, the appropriations bill for fiscal year 2024, which recently was enacted by Congress increased funding for ICE detention to 41,500 beds from the previously funded level of 34,000 beds. Moving to our managed only segment compared to 1 year ago, our quarterly revenues increased by approximately 14%. The year over year increase in managed only revenues was driven by new contract activations in our secured transportation and international businesses. In the Q3 of 2023, our GTI Transportation division activated a new contract to provide air operation support for ICE. This contract was first activated on an emergency basis and more recently, we announced a new long term 5 year contract for GTI to continue to deliver these services as a subcontractor to CSI Aviation, which holds the prime contract with ICE.

Speaker 2

Internationally, our GEO Australia subsidiary activated a new contract in July of 2023 to deliver primary health care services across 13 public prisons in the state of Victoria. Moving to our GEO Reentry Services division, we renewed 3 residential reentry center contracts with the Federal Bureau of Prisons during the Q1 of 2024. And the quarterly revenues for our non residential reentry services segment increased by approximately 19% from a year ago. With respect to the federal government's Intensive Supervision Appearance Program or ISAP, participant counts averaged approximately 188,000 individuals during the Q1 of 2024, compared to an average ISAT participant count of approximately 192,000 during the Q4 of 2023. Since the end of the Q1, the ISAT participant count has fluctuated between approximately 184,185,000 individuals.

Speaker 2

With respect to federal funding, the appropriation bills for fiscal year 2024, which was recently enacted by Congress, increased funding for alternatives to detention programs to approximately $470,000,000 an increase of approximately 7% over the previously funded level of approximately $440,000,000 While we would expect utilization rates for detention beds and the alternative detention programs to potentially increase in the second half of the year consistent with seasonal increases in border crossing activity, the timing and impact of such increases are difficult to estimate. Additionally, policy and budgetary decisions that can often impact the utilization of ICE detention beds and the alternatives to detention programs like ICEF are outside of GEO's control as a service provider to the federal government. For these reasons, we have decided to maintain our full year 2024 adjusted EBITDA guidance. We remain focused on providing high quality services on behalf of DHS and ICE, and we stand ready to provide any needed services and resources to help the federal government and all of our government agency partners meet their needs. Finally, we are pleased to have recently completed the refinancing of substantially all of our debt.

Speaker 2

These important refinancing transactions have pushed our debt maturities, reduced our overall cost of debt and have given us greater flexibility for potential capital returns under our debt covenants. I will now turn the call over to our CEO, Brian Evans.

Speaker 3

Thank you, George. Good morning, everyone. Our continued and steady financial performance continues to be underpinned by the strength of our diversified services platform. As we have demonstrated over the last several years, the diversification of our company has allowed us to deliver steady operational and financial results. As we have expressed to you in the past, the government policy and budgetary decisions that can impact the utilization of our diversified services are outside of our company's control as a service provider to agencies at all levels of government.

Speaker 3

Therefore, our focus has always been on delivering high quality services and innovative solutions to meet the needs of our government agency partners with an unwavering commitment to operational excellence across all our service lines. At the Board and management level, we have focused our growth and investment strategy on developing a service platform that we believe is unmatched in terms of diversification and scope in our industry. We have done so by carefully allocating capital for more than 20 years, investing in company owned facilities and strategic acquisitions of businesses and assets. We believe this strategy has allowed us to develop leading market positions across the spectrum of services in our industry, giving us the ability to effectively respond to the needs of our government agency partners as policy priorities evolve over time. Specifically, as it relates to U.

Speaker 3

S. Immigration and Customs Enforcement, we have a longstanding public private partnership with the federal government dating back to the mid-1980s. We currently have 17 company owned facilities under contract with ICE providing needed bed space and support services across the United States. Our BI subsidiary has provided electronic monitoring and case management services on behalf of ICE under the ISAP contract for over 20 years. Over this time frame, BI has built what we believe is an unparalleled platform of technology solutions and case management services, successfully achieving high levels of compliance under the program with bipartisan support.

Speaker 3

Given our unparalleled diversified services platform and our long standing public private partnership with ICE, we believe GEO is uniquely positioned to continue to support the agency with a spectrum of support services and solutions, including additional bed capacity, secure transportation, electronic monitoring technologies and case management services. While we expect the utilization of ICE detention beds and alternatives to detention programs to potentially increase in the second half of this year, consistent with seasonal increases in border crossing activity, it remains difficult to estimate the exact timing impact of these potential trends. We remain focused on the daily delivery of high quality services on behalf of ICE and all our government agency partners, and we stand ready to support their potential future needs. We are focused on marketing our currently idle secure services facilities, which total approximately 10,000 beds to local, state and federal agencies for reactivation, either under a traditional secure services contract or a lease arrangement. These important assets could provide meaningful upside to our annualized revenues and cash flows if fully reactivated.

Speaker 3

Another strategic priority for our management team is to continue our disciplined allocation of capital to enhance long term value for our shareholders. For the past 3 years, we have prioritized deleveraging our balance sheet and reducing our debt, and we have made significant progress towards this objective. We are pleased that the successful execution of the strategic priority enabled our company to refinance substantially all our debt this previous month. In addition to pushing out our maturities and lowering our average cost of debt, the recent refinancing transactions have given us greater flexibility to explore options to return capital to shareholders. Under our new credit facility covenants, we will be able to retain 25% of excess cash flow until September 2025 and 50% of excess cash flow after that date as long as our leverage remains between 2.5 and less than 3.5 times adjusted EBITDA.

Speaker 3

This would give us the ability to use our cumulative retained excess cash flow for restricted payments such as dividends or share repurchases as long as our total leverage remains below 3.5 times adjusted EBITDA. Under our new senior notes indenture, we will have an initial restricted payments basket of $125,000,000 which will increase over time by 50% of net income. We believe that these new covenants will provide our Board greater flexibility to evaluate options to return capital to shareholders in conjunction with our company's overall capital needs. We will also continue to evaluate future potential asset sales to complement our capital needs, primarily focusing on our idle or underutilized residential reentry centers. Since these assets are typically located in urban areas, can usually be repurposed for alternative uses and generally attract a larger pool of potential interested buyers.

Speaker 3

As we continue to execute our strategic priorities and allocate capital towards enhancing long term value for shareholders, we believe our company will continue to be an attractive value proposition for investors given the strong and predictable nature of our cash flows. At this time, I'll turn the call over to acting CFO, Shane Marks.

Speaker 4

Thank you, Brian. Good morning, everyone. Today, we reported 1st quarter 2024 GAAP net income of approximately $23,000,000 on quarterly revenues of approximately $606,000,000 We also reported Q1 2024 adjusted EBITDA of approximately $118,000,000 Quarterly revenues in our owned and leased secured services segment increased by approximately 7% year over year, primarily driven by higher occupancy rate levels at our U. S. Marshals Services and ICE facilities.

Speaker 4

Revenues in our managed only segment increased by approximately 14% during the Q1 of 2024 compared to 1 year ago. This year over year increase in our Managed Only segment was driven by higher revenues in our Secure Transportation and International segments. Finally, quarterly revenues in our non residential services segment increased by approximately 19% year over year. These revenue increases were offset by lower quarterly revenue from our Electronic Monitoring and Supervision Services segment, which is the result of lower participant counts under the ISOC contract compared to 1 year ago. During the Q1 of 2024, operating expenses increased by approximately 2% as a result of inflationary cost increases, higher occupancy levels and the shift in quarterly revenue mix compared to the Q1 of 2023.

Speaker 4

Our Q1 2024 results also reflect a year over year decrease in net interest expense due to the repayment of debt over the past 12 months as well as due to higher interest income compared to the Q1 of 2023. Our effective tax rate for the Q1 of 2024 was approximately 26%. Moving to our guidance for the full year and the Q2 of 2024. For the full year of 2024, we expect GAAP net income to be in a range of $55,000,000 to $75,000,000 on annual revenues of approximately $2,400,000,000 in an effective tax rate of approximately 20%, inclusive of known discrete items. Our full year 20 24 guidance reflects a $86,000,000 pre tax loss on the extinguishment of debt as a result of our recent refinancing transactions.

Speaker 4

We expect our full year 2024 adjusted EBITDA to be in the range of 4.85 $1,515,000,000 The low end of our adjusted EBITDA guidance range assumes a continuation of the current utilization rates for our ICE detention beds and the current ISAT participant count, which is presently below the average participant count we experienced during the Q1. The high end of our adjusted EBITDA guidance range assumes that utilization rates for ICE detention beds and the ISOP contract increased during the second half of the year, consistent with seasonal increases in border crossing activity. For the Q2 of 2024, we expect a GAAP net loss in a range of $27,000,000 to $30,000,000 as a result of the $86,000,000 pretax loss on the extinguishment of debt during the Q2 and we expect Q2 2024 revenues to be in the range of $600,000,000 to $610,000,000 We expect Q2 of 2024 adjusted EBITDA to be in a range of 119 dollars to $125,000,000 Moving to our capital structure. As previously noted, we recently completed the refinancing of substantially all of our debt. On April 18, we closed on a new $760,000,000 senior credit facility comprised of a $450,000,000 term loan bearing interest at SOFR plus 5.25 percent and a $310,000,000 revolving line of credit, which had no borrowings outstanding at closing.

Speaker 4

In a simultaneous transaction, we also closed our 2 senior note offerings, a $650,000,000 senior secured note at 8.5 percent and a $625,000,000 senior unsecured note at 10.25%. The offering of these two notes and the term loan resulted in net proceeds of approximately $1,670,000,000 We used the net proceeds to refinance approximately $1,500,000,000 of existing debt, including our previous 2 term loans, the 9.5% 10.5% senior second lien secured notes and the 6% senior unsecured notes. Subsequently, on May 6, we also retired approximately $177,000,000 in principal amount of our 6.5% convertible notes in exchange for approximately $177,000,000 in cash and approximately 9,800,000 shares of GEO Comstock. There are now approximately 136,000,000 shares outstanding of GEO common stock. We now have approximately $53,000,000 in outstanding principal amount of our convertible notes due 2026 and we are considering all of our options for addressing these sub notes.

Speaker 4

As a result of these transactions, we have reduced our average cost of debt by approximately 1% on the portions of our debt that were restructured in 2022. This meaningfully improved debt structure, our fixed rate I'm sorry, under this meaningfully improved debt structure, our fixed rate debt represents approximately 75% of our total indebtedness and we've pushed out substantially all of our debt maturities to 2029 and 2,031. Going forward, we expect to continue to focus on further reducing our net debt. And as Brian discussed, we also have greater flexibility to evaluate options to return capital to shareholders under our new debt restrictions. At this time, I will turn the call over to James Black for a review of our Jio Secured Services segment.

Speaker 4

Thank you, Shane. Good morning, everyone.

Speaker 5

It is my pleasure to review the quarterly milestones for GEO Secure Services. During the Q1 of 2024, our Secure Services facility successfully underwent a total of 60 audits, including internal audits, government reviews, 3rd party accreditations and the Prison Rape Elimination Act or PREA certifications. 5 of our secure services received accreditation from the American Correctional Association with an average score of 99.8% and one facility received PREA certification. Our GTI Transportation division and our GEO AMI UK joint venture completed approximately 5,000,000 miles driven in the United States and the UK during the Q1. Moving to current trends for our government agency partners.

Speaker 5

At the federal level, populations at our U. S. Marshals Detention Facilities increased by approximately 5% since the beginning of the year. Our U. S.

Speaker 5

Marshals Facility around the country support the agency as it carries out its mission of providing custodial services for pretrial detainees facing federal criminal proceedings. We believe that our U. S. Marshals facilities provide needed bed space near federal courthouses where there is generally a lack

Speaker 4

a

Speaker 5

experienced stable utilization of approximately 13,000 beds throughout the Q1 of 2024. During the Q1, we estimate that the utilization across all ICE facilities nationwide averaged approximately 38,500 beds. We estimate that the utilization across ICE facilities nationwide is currently at approximately 37,000 beds. The current utilization at our ICE facilities remains at approximately 13,000 beds. With respect to federal funding, Congress recently enacted an appropriations bill for fiscal year 2024, which provides funding for 41,500 ICE Detention Beds, an increase of 7,500 beds from the previously funded level of 34,000 beds.

Speaker 5

GEO has a long standing track record of delivering professional support services on behalf of ICE at geo contracted ICE Processing Centers, and we stand ready to support ICE with any additional needs. We have a total of 10,000 beds at several idle facilities that we believe are well suited to support ICE's mission. And we have the expertise and resources to provide the needed ancillary services to meet the agency's need. GEO contracted ICE Processing Centers offer around the clock access to quality health care services. Our healthcare staff at ICE Processing Centers where we provide resident healthcare is generally more than double the number of healthcare staff in a typical state correctional facility.

Speaker 5

GEO contracted ICE processing centers offer full access to legal counsel and legal law library and resources and we have dedicated space at each ICE center to accommodate meetings with legal counsel. GEO contracted ICE processing centers provide residents with 3 daily meals that culturally sensitive, special diet appropriate and approved by registered dietitians. We also provide access to faith based and religious opportunities at each GEO contracted ICE Processing Center, and we partner with community volunteers as needed to ensure a fair representation of various states and denominations. GEO contracted ice processing centers also offer to quality recreational activities. We have made significant investments in enhanced amenities at these centers, including artificial turf soccer fields, covered pavilions, exercise equipment and multipurpose rooms.

Speaker 5

We provide secure transportation services for ICE, primarily at 12 of the GEO contracted ICE processing centers. Starting in the second half of twenty twenty three, our GTI Transportation division also began providing secure air operation support for ICE initially under emergency contract. During the Q1 of 2024, we announced that GTI had been awarded a long term 5 year contract to continue to provide air operation support services on behalf of ICE as a subcontract to the CSI Aviation, which holds the prime contract. This important contract is expected to generate approximately $25,000,000 in annualized revenues. At this time, I will turn the call over to Wayne Calabrese for a review of our GEO Care division.

Speaker 6

Thank you, James. I'm pleased to provide an overview of the quarterly operational milestones for our GEO Care division. During the Q1 of 2024, we renewed 3 residential reentry center contracts with the Federal Bureau of Prisons. Additionally, we retained 3 contracts for our non residential day reporting centers and we were awarded 1 new day reporting center contract. Our residential reentry centers, non residential day reporting centers and our ISAP offices successfully underwent a combined total of 77 audits, including internal audits, government reviews, 3rd party accreditations and Prison Rape Elimination Act or PREA certifications.

Speaker 6

3 of our residential reentry centers received accreditation from the American Correctional Association with an average accreditation score of 100% and one of our residential reentry centers received PREA certification. Our 34 residential reentry centers provide transitional housing and rehabilitation programs individuals reentering their communities across 14 states and census levels at these centers remain stable at approximately 5,000 individuals during the Q1 of the year. Our non residential and day reporting centers provide high quality community based services, including cognitive behavioral treatment for up to approximately 8,500 parolees and probationers at approximately 90 locations across 10 different states. Moving to our GEO in prison programs and our Continuum of Care division. During the Q1 of 2024, we delivered enhanced in custody rehabilitation to an average daily population of approximately 2,600 individuals at 31 in prison program sites in 7 states and to approximately 21,000 individuals at 13 Continuum of Care sites in 8 states.

Speaker 6

Our in custody rehabilitation services include academic programs 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 our facilities. 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 piece of our rehabilitation services because many of the individuals in our care suffer from addiction and substance use disorder. Our facilities also provide extensive faith based and character based programs.

Speaker 6

We've designated faith based and character based housing units or dorms across our facilities to enhance the delivery of these programs. During the Q1 of the year, we completed approximately 700,000 hours of enhanced in custody rehabilitation program. Our academic programs awarded more than 600 high school equivalency diplomas and our vocational courses awarded close to 850 vocational training certifications. Our substance abuse treatment programs awarded more than 1200 program completions. We achieved over 700 behavioral treatment program completions in more than 4,000 individual cognitive behavioral treatment sessions.

Speaker 6

During the Q1, we also allocated approximately $400,000 toward post release services. This funding supported more than 600 individuals released from GEO facilities as they made their way back to their communities. Our GEO Continuum of Care integrates enhanced in custody rehabilitation, 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 United States criminal justice system can be better served in changing their lives. Finally, turning to our Electronic Monitoring and Supervision Services segment, local agencies across the country.

Speaker 6

During the Q1, participant counts under the ISAP contract averaged approximately 188,000 individuals. Since the end of the Q1, the ISAP participant count has fluctuated between approximately 184,185,000 individuals. With respect to federal funding, Congress recently approved an appropriations bill for the current fiscal year, which funds the federal government through September 30, 2024. That appropriations bill enacted by Congress increased funding for alternatives to detention programs, which includes the ISAP contract to approximately $470,000,000 representing an approximate 7% increase over the previously funded level of approximately $440,000,000 BI has provided technology solutions, holistic case management, supervision, monitoring and compliance services under the ISAP contract for almost 20 years. Under BI's tenure, ISAP has received bipartisan support and has achieved high levels of compliance using a variety of new technologies and case management services over that time.

Speaker 6

The current ISAP contract has a term of 5 years terminating on July 31, 2025. BI will continue to explore new and innovative technology solutions to support the needs of ICE as we prepare to compete for this important contract. At this time, I will turn the call back to George for closing remarks.

Speaker 2

Thank you, Wayne. And in closing, our diversified business units have continued to deliver strong financial and operational performance. We are pleased that our steady results and our multi year strategy to delever our balance sheet successfully positioned GEO to refinance substantially all of our debt, which is presently approximately $1,800,000,000 and is expected to decrease to $1,600,000,000 by the end of the year. Our recent successful refinancing has lowered our average cost of debt and has given us greater flexibility to evaluate options to potentially return capital to shareholders. We believe we have several opportunities for potential upside in our financial performance.

Speaker 2

We are focused on marketing our current idle facilities and our diversified services to government agencies around the country. Operationally, we remain committed to achieving operational excellence in the delivery of our services on behalf of our government agency partners. We believe that our company's strong and predictable cash flows and our improved debt structure continue to present an attractive opportunity for investors. That completes our remarks and we would be glad to take questions. Operator?

Operator

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

Speaker 7

Good morning and congrats on the quarter.

Speaker 2

Thank you.

Speaker 8

I just want to get

Speaker 7

a little clarification here maybe. You guys are saying that you're thinking that ICE currently is about 37,000. And just looking at some of the numbers that ICE puts out, it looks like the beds are more to they're saying are 34.5%. And I was just wondering, am I missing something? Or do you guys have some information that gives a more recent update versus some of the dated ICE data?

Speaker 2

To our understanding, there's been a significant ramp up in the census of those in detention facilities. I think the first half of the fiscal year, which just ended last month, there was an intent for budgetary reasons to keep the bed count at a lower level in line with the original budget. And now that the recent refunding of the agency at a higher level of 41,500 beds is allowing them to now step up their count in their ICE facilities around the country.

Speaker 7

Okay. Thanks for that. And then on the Marshalls, you got a nice increase in the number of people in Marshals. I was wondering what is driving that? Is that a reflection of the courts getting back to a more normal operating environment?

Speaker 7

Or some of these we've seen in the past locals, localities are refusing to hold on to some of the detainees these days. Just trying to figure out what's driving the increase in the Marshals populations?

Speaker 2

It's probably a combination of both of those things. The reluctance of local governments to be dealing with providing extra beds to federal agencies versus having a need for those beds themselves or for political purposes of not wanting to participate in such a federal program, but also the need to expand their the number of beds as they did have a decrease in bed capacity under this administration at the outset of the administration year.

Speaker 7

Okay. Pardon me. And you guys kind of mentioned it from the bigger the 10,000 foot level, but I don't know if there was any more detail you could provide about kind of some of the new business opportunities, especially on the state and local level that you're kind of pursuing at this point?

Speaker 2

We really don't discuss any marketing opportunities unless there are public procurements that we obviously would have a responsibility to react to. But at this time, there are no public procurements that we can comment on.

Speaker 7

Okay. Just generally, I guess then, are you seeing more opportunities

Speaker 2

It's somewhat flat with some of our clients, but we're seeing other clients asking for beds at a smaller scale than we would prefer and we haven't jumped at those opportunities because we our facilities are generally large. I would say 1,000 beds and above And it's we are keeping those facilities in reserve for larger governmental users.

Speaker 7

Okay. And then one more for me, I'll jump back in line. This is kind of more hypothetical, George. But as we all know, when the current administration came in and they ended basically the contracts with the BOP, If there was a change in administration and they were more favorable to contracts with the BOP. Looking at the BOP populations, they've risen by about 10,000 people since 3 years ago.

Speaker 7

Do you think again, this is hypothetical, the BOP would still look upon favorably if they needed space of coming to you? Or given what's happened in the past couple of years, do you think they would be more reluctant to reestablish contracts with firms like the private sector?

Speaker 2

Well, using past experience as a guide in under the previous administration, there was a reversal of the prohibition in using the private sectors for BOP contracting. So we would think that's a distinct possibility that the BOP facilities would once again be contracted to private sector entities like ourselves. And there was a similar impact under this administration regarding some Marshalls facilities that were direct contracts that were discontinued. I would think there would be a similar attitude if there's Marshals Service as well as the BOP.

Speaker 7

Thanks, Fad. I appreciate the answers to my questions. I'll get back in queue.

Speaker 4

Thank you.

Operator

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

Speaker 9

Great. Good morning. Thanks for taking my questions. Just to start on the guide, it sounds like the high end is assuming we'll see some uptick in second half occupancy levels in the detention segment. I guess could you clarify if that assumes that we're going to be going up to the 41.5 bed count that was approved in the budget or just sort

Speaker 6

of a general increase from here?

Speaker 2

As we said, it's hard to predict exactly where they're going. The budget allocation projects the ability to go to 41,000. But I would think that would occur on a progressive incremental basis, on a step by step basis. So we've seen a change in the last few weeks going from 34,000 to approximately 37,000. So we expect a continuation, but where it ends, we don't know.

Speaker 9

Okay, thanks. And then appreciate all the details on the indentures and the credit agreements for the bonds. Just curious if

Speaker 4

you could give us a bit

Speaker 9

more thoughts in terms of timing as it relates to capital returns. Would you potentially want to wait until the cash flow sweep steps down later next year? Or if your leverage gets lower into your target range, could you think about repurchases earlier than that?

Speaker 3

I think at a minimum we have to wait until the leverage steps down towards the middle of next year. So we're locked in on the 75% ECF through that point and then it could step down based on leverage and we can access those covenants at that point in time.

Speaker 9

Okay. And then just one more for me. It looked like the NOI margins in the monitoring segment were a bit lower sequentially and year over year. Anything to note there,

Speaker 4

otherwise?

Speaker 3

The margins in that segment are obviously being impacted as we've discussed on the call by the change in the utilization of the ISAF contract predominantly. So if George discussed earlier, if the guidance if the numbers move up later in the year in ISAP similar to may occur with the ICE detention beds, then we should see some nominal improvement in those margins.

Speaker 9

Got it. Thanks for answering my questions.

Operator

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

Speaker 10

Hi, good morning. Thanks for taking my questions. I just want to start off looking at the idle facilities. It looks like there was an increase in the secure idle facility bed count by roughly 900 beds. I think it was driven by reclassification of the or related to the Delaney Hall asset.

Speaker 10

Can you just discuss what drove that increase?

Speaker 2

It was a 1,000 bed facility that was previously reentry facility. And we are looking at that facility for marketing in the near future.

Speaker 10

Got it. Okay. And then, just kind of wanted to touch on the guidance. It looked like, the assumption for shares outstanding increased, I think it was like 137,000 from about 126,000 from the initial guidance. Obviously, that assume sorry, go ahead.

Speaker 2

1,000,000,000, yes.

Speaker 10

Right, right, yes.

Speaker 3

$137,000,000 to $137,000,000 approximately.

Speaker 10

Right, yes, sorry about that. Obviously, I assume that does not include any share repurchase activity, but driving that increase is likely related to the exchangeable notes. Is that correct?

Speaker 3

Yes.

Speaker 10

Got it. Okay. One last question for me. Do you have any comment on potential executive action from the Biden administration that's just been making headlines in recent days as it relates to the border?

Speaker 2

I'm unclear as to what is what your question is.

Speaker 3

Executive action policy is changing the border.

Speaker 2

I've heard that he's thinking about changing some policy, but I'm unclear as to what policy they're talking about.

Speaker 10

Got it. Understood. That's all for me. Thanks.

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. This is with respect to Q2 guidance, what do you expect that uplift in EBITDA to be driven by given the expectation for roughly flat revenue?

Speaker 4

Yes. That's going to be primarily caused by the cost of payroll tax that we have in the Q1, which is typical for our business. And in the Q2, you don't necessarily see a repeat of that expense. That's roughly $5,000,000 $6,000,000 of added payroll expense in the Q1 relative to the second.

Speaker 11

Okay. Makes sense. And as it relates to maybe just more general cost structure dynamics, could you address just any favorable or unfavorable trends that you're seeing on any whether it relates to payroll? Obviously, there's some seasonality like you just said, but any trends you're seeing on those line items?

Speaker 3

No. I don't think so. Over the last several years, we had to give some fairly significant adjustments at certain contracts, which we were able to negotiate with our clients' revenue increases to offset that. So I think that's slowed down. There's still pressure in the labor markets, but it's more steady than it was.

Speaker 3

We did see previously also impacts to food and utilities, but I think those have also stabilized some more recently. So not seeing any real significant pressures in those major cost categories other than what's normal in the market.

Speaker 4

Sure.

Speaker 11

Okay. And more high level, why do you I know it's just kind of slight declines here, but why is the ICET populations, what do you attribute that to in terms of why they've kind of continued to decline sequentially?

Speaker 2

Well, part of it was certainly the budget deficits that were being experienced within ICE. It's my understanding that they had an overall budget deficit of approximately $700,000,000 dollars So they had to cut back in certain areas, which included detention capacity as well as ISAF.

Speaker 11

Okay. Got it. And I guess last one for me just as it relates to full year guidance. Are there any contract renewals this year or other factors that could kind of swing it one way or another? Or is it mostly just kind of fluctuations in those ice

Speaker 4

populations?

Speaker 2

With regard to our Adelanto facility in California, I believe that the current performance period has is now extended to June 2019. June 2019. And we've been in discussions and have made a request to extend that period for the balance of the year if possible, if not through at least September 30. And we're awaiting a response to that.

Speaker 3

And we've adjusted for the balance of the year that will continue. So if for some reason it didn't, then that could have a downward impact.

Speaker 11

Okay. And we would expect maybe more of an update closer to that June timeframe on that?

Speaker 3

If something changes, otherwise, we'll update in the next earnings call.

Speaker 2

Well, we would expect an answer within the next few weeks actually.

Speaker 11

Okay, got it. Thanks guys.

Operator

The next question comes from Kirk Luedtke with Imperial Capital. Please go ahead.

Speaker 8

Hello, everyone. Thank you for the call. Congratulations on the refi. You mentioned the ISAP contract expires in May of next year. What's the typical process for renewing that?

Speaker 8

And then also have there been any developments with respect to that request for information that implied a pretty significant increase in alternatives to detention?

Speaker 2

Procurement process has not been yet announced for the rebid of that contract. And the lead time for a procurement process in that kind of contract, which is large scale, large volume is several months, probably 6, 9, 12 months lead time is necessary to reprocure such a contract. So we're not aware that any announcement to that effect has yet occurred leading to the possibility that the current term could be extended for some period of time.

Speaker 3

And Kurt, just to correct you there, the expiration date on the existing contract without any renewals, as George was talking about, our short term extensions would be July 31 next year, not May 30

Speaker 8

1st. July 31st, okay. Thank you. So the lead time is a so we're not quite to that 12 month kind of lead time, but you might start seeing something, seeing some developments there July of this year?

Speaker 4

Possibly. Yes. Okay.

Speaker 8

And the request for information from a while ago that was kind of implied as pretty significant increase in alternatives to detention more broadly. Has there been any developments on that front?

Speaker 2

Well, there was additional funding, but part of that funding was used to offset the deficit that was in that program as well as other programs. You may recall, I said moments ago that the agency as a whole had apparently a deficit of approximately $700,000,000

Speaker 4

So

Speaker 2

the different programs from detention facilities to ISAT programs to other programs were running hotter at the beginning of the fiscal year and that had to be made up with this new funding that was made available just to offset the deficits before they could achieve higher levels. And I think in both areas of detention and ICEP, we will very possibly see higher levels, but it's only been recently that they reduced the lower levels to offset the deficits.

Speaker 6

This is Wayne. As far as that alternate RFI approach, it seems to have gone fairly dormant. We really haven't heard much more about that.

Speaker 8

Okay, great. Thank you. And you mentioned that you've got the 10,000 idle beds. Are those all would those all be appropriate for ICE detainees?

Speaker 2

Yes. With some revisions to provide office space for I staff, which is not normally a requirement to any great extent for BOP contracts or Marshalls contracts. The difference in the ICE facilities is you have more on-site ICE personnel and you also probably need some courtrooms and other ancillary things.

Speaker 8

Got it. I appreciate. Thank you very much.

Operator

This concludes our question and answer session. I would like to turn the conference back over to George Soley for any closing remarks.

Speaker 2

Okay. Thank you very much. We look forward to addressing you at the next conference call.

Operator

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Tesco Q1 2024
00:00 / 00:00
Remove Ads