exv99w2
Exhibit 99.2
CORPORATE PARTICIPANTS
Pablo Paez
Geo Group Inc VP of Corporate Relations
George Zoley
Geo Group Inc Chairman, CEO
Brian Evans
Geo Group Inc SVP, CFO
John Hurley
Geo Group Inc SVP North American Operations
Jorge Dominicis
Geo Group Inc President of GEO Care
CONFERENCE CALL PARTICIPANTS
Kevin Campbell
Avondale Partners Analyst
Jamie Sullivan
RBC Capital Markets Analyst
Todd Van Fleet
First Analysis Securities Analyst
Unidentified Participant
SunTrust Robinson Humphrey Analyst
Clinton Fendley
Davenport & Company Analyst
Chuck Ruff
Insight Investments Analyst
Greg Weis
Unknown Company Analyst
PRESENTATION
Operator
Good day, ladies and gentlemen. Welcome to the second quarter 2011 GEO Group Inc earnings
conference call. My name is Erika and I will be your Coordinator for today. At this time all
participants are in a listen-only mode. We will be facilitating a question and answer session
toward the end of this conference. (Operator Instructions)
I would know like to turn the presentation over to your host for todays call, Mr. Pablo Paez, Vice
President Corporate Relations. Please proceed.
Pablo
Paez Geo Group Inc VP of Corporate Relations
Thank you, Operator. Good afternoon, everyone, and thank you for joining us for todays
discussion of the GEO Groups second quarter 2011 earnings results. With us today is George Zoley,
Chairman and Chief Executive Officer; Brian Evans, Chief Financial Officer; John Hurley, President
of GEO Detention and Corrections; and Jorge Dominicis, President of GEO Care. This afternoon we
will discuss our second-quarter performance and current business development activities. We will
conclude the call with a question-and-answer session. This conference call is also being webcast
live on our website at www.geogroup.com.
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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 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. 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 Forms 10-K, 10-Q, and 8 K reports.
With that, please allow me to turn this call over to our Chairman and CEO, George Zoley.
George Zoley Geo Group Inc Chairman, CEO
Thanks Pablo, and good afternoon to everyone. Thank you for joining us as we review our
second-quarter results and provide an update of our business development efforts. We reported
strong second-quarter results driven by the continued solid performance of our core operations in
our 3 business units of US detentions and corrections, GEO Care, and international services. We
have also updated our outlook and guidance for 2011 and provided our guidance for the third and
fourth quarters.
Our updated outlook reflects additional business development and professional fees in the second
half of the year in preparation for state of Floridas procurement for more than 16,000 beds, which
it was issued last week and is expected to be awarded in the fourth quarter. This is the largest
single contract procurement in the history of our industry, and weve taken what we believe are
important steps to put our Company in a competitive position to pursue this unprecedented
opportunity. Following my initial remarks, Brian will address our financial results and guidance in
more detail.
During the quarter, we announced the signing of a 1300 bed contract for the housing of federal
immigration detainees at are at Adelanto ICE Processing Center in California, which will be
activated in two phases; 650 beds by September of this year, and another 650 beds in August of
2012. Additionally, we continue to work towards the activation of two new projects in the United
Kingdom. Our wholly owned subsidiary GEO UK was awarded a contract by the border agency for the
management of the Dungavel Immigration Center in Scotland, and our newly formed joint venture, GEO
Amey PECS, was awarded contracts by the Ministry of Justice for the provision of prisoner escort
and custody services in England and Wales.
These important contracts mark a significant milestone for GEO as we expand our presence in the US
Federal market as well as the UK market where we have now been appointed a crown representative
further enhancing our ability to market our services in the UK. Now I would like to turn the call
over to Brian for our financial review. Thank you.
Brian Evans Geo Group Inc SVP, CFO
Thank you, George. Good afternoon, everyone. As George stated, we reported strong quarterly
pro forma EPS at $0.40, ahead of the $0.37 per share we reported in the second quarter a year ago.
Our second-quarter pro forma EPS excludes $0.06 per share in after-tax startup and transition
expenses and international bid and proposal cost, and $0.01 per share in M&A related expenses. Our
second-quarter G&A expense reflects corporate expenses related to the transition and activation or
new prisoner escort contracts in the UK during August of this year. Our total revenues for the
quarter increased to $408 million from $280 million a year ago.
Breaking down each of our reporting segments, our US detention and corrections second order
revenues increased to $242 million from $192 million one year ago. In comparison to second-quarter
2010, our second-quarter 2011 revenues do not include the managed only contracts for the Grace
Fillmore Haven facilities in Florida, and the Bridgeport North Texas and South Texas intermediate
sanction facilities in Texas, which were discontinued in the third quarter 2010. These facility
discontinuations were offset by the activation of our new contract with the Bureau of Prisons at
our D. Ray James facility in Georgia and the activation of the managed only Blackwater River
facility in Florida, both of which began in the fourth quarter of 2010.
GEO Care second-quarter revenues increased to $111 million from $37 million for last years second
quarter. Our GEO Cares 2011 second-quarter revenues reflect the activation of the new 100 bed
Montgomery, Texas facility in March of this year. Our international services revenues for the
quarter increased at $55 million from $45 million one year ago. This revenue increase was primarily
driven by the expansions of the Harmondsworth facility in the UK in July of 2010 as well as
favorable foreign exchange rates.
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Finally, we did not have any construction revenues during the quarter. Company-wide, our adjusted
EBITDA for the first quarter grew to approximately $82 million from $47 million last year.
Additionally, we reported adjusted funds from operations of approximately $48 million compared to
approximately $18 million for the same period last year.
Moving to our financial guidance for 2011. As disclosed in our press release, we have updated our
guidance for 2011 to tighten our previously issued ranges and have provided our guidance for the
third and fourth quarters. We have revised our 2011 pro forma earnings to a range of $1.54 to $1.58
per share excluding startup and transition expenses, international bid and proposal costs, and
transaction expenses for the BI and Cornell acquisitions. Our revenues for 2011 are now expected to
be in the range of $1.62 billion to $1.63 billion.
We have updated our 2011 adjusted EBITDA guidance to a range of $320 million to $325 million, and
our 2011 adjusted funds from operations guidance to a range of $175 million to $180 million, or
$2.70 to $2.77 per share. As George mentioned, our revised guidance assumes additional business
development and professional fees in the second half of this year in preparation for the state of
Floridas procurement for more than 16,000 beds which was issued last week and is expected to be
awarded in the fourth quarter. This is an unprecedented opportunity in our industry, and we now
expect to incur between $1 million and $1.5 million per quarter in the second half of this year for
additional business development and professional fees.
Additionally, we have assumed that our contract with the California Department of Corrections and
Rehabilitation at our North Lake Michigan facility continues to operate in the delayed start up
mode with its current population of 270 inmates based on the funding provided in the recently
approved budget for CDCR. These two assumptions, along with additional startup expenses for our
Adelanto, California ICE Processing Center and our new 1500 bed River Bend Correctional Facility in
Georgia, both of which are not expected to be activated in September and December 2011
respectively, are the primary drivers for our updated financial guidance.
We have also issued our guidance for the third and fourth quarters. We expect pro forma earnings
for the third quarter to be in a range of $0.39 to $0.41 per share excluding $0.06 to $0.07 in your
startup and transition expenses and international bid costs. Our total revenues for the third
quarter are expected to be a range of $407 million to $412 million. We expect pro forma earnings
for the fourth quarter to be in the range of $0.40 to $0.42 per share, excluding $0.06 to $0.07 in
startup and transition expenses in international bid costs. Our total revenues for the fourth
quarter are expected to be in a range of $413 million to $418 million. As I previously stated, our
third and fourth quarter guidance reflects between $1 million and $1.5 million per quarter in
additional business development and professional fees related to the new opportunity in Florida.
Turning to our capital availability, Capital Expenditures, and our recently announced stock buyback
program. We currently have approximately $210 million in outstanding borrowings, plus approximately
$70 million set aside for letters of credit under our $500 million revolver, leaving approximately
$220 million in available capacity. With our available capacity, our $57 million in cash on hand,
and strong free cash flows, we believe we are well positioned to continue to pursue future growth
opportunities. We expect to have liquidity of more than $500 million over a 2-year period.
With regards to our current capital projects, we presently have 4 projects under development
totaling more than 3900 beds that will require approximately $155 million in capital expenditures
between the third quarter 2011 and early 2012 to be completed. While we continue to believe that
the best use of our company capital remains in new organic growth opportunities, we also recognize
that we may be able to enhance our shareholders value with the repurchase of our common shares, at
times when we believe our stock is undervalued in the market and the expected returns of the stock
buyback program meet or exceed our targeted returns on invested capital. To that end, our Board has
authorized a stock buyback program of up to $100 million effective through the end of 2012. We
expect to implement this program with an opportunistic strategy that maximizes the expected returns
for our shareholders and does not impede our Companys continued growth prospects.
With that, I will turn the call to John Hurley for an update on GEO Detention and Corrections.
John?
John Hurley Geo Group Inc SVP North American Operations
Thank you, Brian, and good afternoon, everyone. Id like to address or business developed
efforts for the GEO Detention and Corrections. I will start with the federal market segment and
the three federal government agencies that we serve, the Federal Bureau of Prisons, the United
States Marshal Service, and Immigration Customs Enforcement, or ICE.
The continued growth in the criminal alien population as well as the consolidation of existing
detaining populations from small facilities that often fail to meet agency standards, and to the
larger compliant facilities will continue to drive the need for federal beds based across the
country. With regards to our current projects under development at the federal level, we are
undertaking the construction of a new 600 bed civil detention
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center in Karnes County, Texas, procured under an intergovernmental agreement between Karnes County
and ICE. This $32 million Company owned facility is expected to be completed during the first
quarter of 2012 and is expected to generate approximately $15 million in annualized revenues for
GEO.
As George mentioned, in California, we were recently awarded a 1300 bed contract for the housing of
immigration detainees at our Adelanto ICE processing center. We have completed a $22 million
renovation at our 650 bed Adelanto Processing Center East which we had acquired from the city of
Adelanto in 2010 or approximately $28 million. We are also investing approximately $70 million to
develop a 650 bed expansion to be located on land immediately adjacent to the existing center,
bringing the total capacity of the center to 1300 beds. The initial intake at the existing center
is expected to begin by September 1, 2011, and the new 650 bed expansion is expected to be
completed by August of 2012. At the full occupancy level of 1300 beds, the center is expected to
generate approximately $42 million in annualized revenues.
With regard to existing federal contract rebids, ICE has issued a rebid notice for our Company
owned 1904 beds South Texas Detention Complex in Pearsall, Texas. The solicitation calls for an
existing facility with a minimum capacity to house 1800 detainees and which has to be located
within 30 miles of interstate 35 between San Antonio and Laredo. We expect an award decision later
this year. ICE has also issued a solicitation for the rebid of our Aurora, Colorado facility
increasing the capacity to 525 beds from 432, and this would be under a new ten-year contract
inclusive of all renewal option periods. We expect an award to be announced in the second half of
this year.
As we have previously noted, our federal contracts have increasingly longer terms of 5, 10, and
even 20 years when accounting for all renewal option periods. As a result of this trend, most of
our major owned or leased facilities housing federal populations, will not be up for rebid for
several years, which limit our exposure to contract rebids in any given year.
Turning to other federal procurement, the Bureau of Prisons has requested proposals under its
CAR-12 procurement for 1750 beds, which is a rebid of an existing private facility. Under this
procurement, facilities can be located anywhere in the United States with an award expected in the
third quarter of this year.
Now I would like to turn to the state market segment. While states continue to face budgetary
constraints we believe that state opportunities outweigh any potential near-term challenges. Many
of our 12 state clients require additional beds as inmate populations continue to increase, and
aging inefficient prisons need to be replaced with new more cost effect efficient facilities. As
states across the country face budgetary pressures, their ability to achieve cost savings becomes
an even more important priority, which leads to increased interest in prison privatization
projects.
With regard to our current projects under development at the state level, we are currently
constructing a 512 bed expansion at the New Castle Correctional Facility under an agreement with
the Indiana Department of Corrections. We are funding this $21 million expansion, which is expected
to open the second quarter of 2012. This expansion is expected to achieve an additional $8 million
in operating revenues with profit margins consistent with other GEO owned facilities.
In Georgia, we are currently developing the new 1500 bed River Bend Correctional Facility under a
contract with the Georgia Department of Corrections. Under the terms of our contract with the
Georgia DOC, GEO will finance, build, and operate the new $80 million prison on a state owned site
under a 40-year ground lease. We expect the 1500 bed facility to generate approximately $28 million
in annualized operating revenues once it is completed in December of this year.
Before I discuss our new business development opportunities at the state level, Id like to address
a recent announcements are guarding the state of California. As we announced in early July, the
state of California has decided to implement its criminal justice realignment plan, which is
expected to delegate tens of thousands of low-level state offenders to local county jurisdictions
in California effective October 1, 2011. The state has therefore decided to discontinue contracts
with community correctional facilities which currently house low-level state offenders. Per our
previous announcement, CDCR will discontinue three GEO facilities. The Company leased 305 bed Leo
Chesney Community Correctional Facility by September 30, 2011. And the Company owned 643 bed Desert
View Modified Community Correctional Facility and 625 beds Central Valley Modified Correctional
Community Facility by November 30, 2011.
As we have previously disclosed, we are in the process of actively marketing these facilities to
local county agencies in California. Given that most local county jurisdictions in California are
presently operating at or above their correctional capacity, we are hopeful that we will be able to
market these facilities through local county agencies for the housing of low-level offenders who
will not be their responsibility. Additionally, as Brian discussed, at the present time we expect
our contract at the North Lake Michigan Facility to continue to operate in a delayed startup mode
with its current population of 270 inmates, based on the funding provided in the recently approved
a budget for CDCR.
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Turning now to new state solicitations, we are very excited about the new growth opportunities we
are currently pursuing. States of Arizona, Ohio, and Florida have pending procurements which total
approximately 28,000 beds. These procurements are unprecedented in our industry and will be decided
between late August and mid November of this year. The state of Arizona has a pending RFP for 5000
in-state beds. Our proposal, involving 2 state owned sites, has been short-listed in the state has
scheduled our two public hearings for August 10, 2011 and August 16, 2011 with contract award
expected by the end of the third quarter.
In Ohio, the Department of administrative services has issued an RFP for the purchase and operation
of 5 facilities totaling approximately 6500 bed. The RFP has been structured in three packages
which group facilities by geographical location. Bidders could submit proposals for one, two, or
all three of the packages. Proposals under this procurement were submitted in late June, and we
expect upwards to be announced in late August 2011.
As George and Brian mentioned, the state of Florida issued an RFP last week for the management and
operation of all correctional facilities in a broad geographic region known as region 4, which
encompasses 29 facilities totaling more than 16,000 beds. This significant project is indicative of
Floridas desire to bundle services for better value and improve the quality of services across the
entire corrections spectrum. The procurement will be awarded under a single contract which
envisions improved delivery of rehabilitation programs aimed at reducing recidivism with the
contract start date of January 1, 2012.
This is truly an unprecedented opportunity in our industry. For the first time, a significant
portion of correctional services in a broad geographic region will be privatized through a
continuum of care, which is expected to deliver performance-based outcomes while maximizing cost
savings for taxpayers. Under the RFP, the successful bidder will be responsible for managing all
correctional facilities, reception centers, work camps, and community-based work release centers in
South Florida. The contractors performance will be in part measured by the successful
implementation of inmate rehabilitation and reintegration programs which reduce offender recidivism
overtime.
Given our existing diversified platform of correctional, mental health, and treatment services, we
believe GEO is uniquely positioned for this Florida initiative. Let me reiterate. This is a very
important milestone for our industry, and we are hopeful that additional opportunities such as this
will develop at the state level over the coming years as states across the country look for ways to
maximize savings and improve offender rehabilitation.
Next, Id like to update you on our international business development efforts. We are currently in
the process of activating our new contracts with the Ministry of Justice in the United Kingdom for
the provision of prisoner escort and custody services in all of Wales and England, except London
and the East of England, under our new joint venture, GEO Amey PECS. Our new GEO Amey joint venture
will employ approximately 3000 professionals responsible for over 460 vehicles and more than 2600
daily offender movements. These contracts are expected to have an annual revenue value of
approximately $150 million. Additionally, our GEO UK subsidiary is preparing to assume management
of the 217 bed Dungavel House Immigration Facility effectively late September of this year. This
new contract is expected to have an annual revenue value of approximately $8 million.
As a result of these important contract awards, GEO has been assigned a crown representative from
the UK government, marking a significant milestone in our efforts to grow our business presence in
the UK market, which we believe will present additional growth opportunities in the near future.
Specifically, the Ministry of Justice has announced a new privatization plan in telling 9 existing
facilities, which total approximately 6000 beds. We expect an RFP to be issued in the near future
with a contract awards sometimes next year.
In South Africa, you may recall, that the Department of Correctional Services, or DCS, is moving
forward with this plan to privatize the development and operation of 4 new 3000 bed prisons. We
expect a decision in the fourth quarter of this year. In New Zealand, the government has issued a
procurement for the design, financing, construction, and management of a new 960 bed prison. We
were previously short-listed to proceed to the next round under this procurement and have now
submitted our response. We expect the contract award to be announced by mid February next year.
As you can see, we are actively pursuing several meaningful opportunities in each of our core
markets, and we remain optimistic about our industry and are enthusiastic about our position within
that industry. At this time, I will turn the call over to Jorge Dominicis for a review of GEO Care.
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Jorge Dominicis Geo Group Inc President of GEO Care
Thanks, John. Good afternoon to everyone. Each of our GEO Care divisions is pursuing several
new growth opportunities, As you may remember, our Residential Treatment Services Division achieved
a significant milestone with the activation of the 100 bed Montgomery county [mental] treatment
facility in Texas, which is expected to generate approximately $12.5 million in annualized
revenues. The opening of this facility marks our entry into the mental health market in Texas,
which we believe may provide additional growth opportunities. In fact, the recently approved budget
directs the state to privatize another Texas state hospital, which could represent between 200 beds
and 300 beds.
In addition to Texas, several states, including Georgia, Louisiana, South Carolina, North Carolina,
Pennsylvania, Virginia, and others have indicated the desire to privatize one or more of their
state psychiatric hospitals. In North Carolina, the state has issued an RFP for a 90 bed forensic
hospital, which is expected to be awarded in the fourth quarter. In Virginia, we recently submitted
an unsolicited proposal for the management of the states Sexually Violent Predator Facility,
involving around 250 beds. We expect the state to make a final decision on this proposal later in
the year. As you can see, we have a number of new opportunities in the residential treatment
services market.
Our community-based services division is also pursuing a number of new business development
opportunities. Federal Bureau of Prisons is expected to issue several formal solicitations for
community-based reentry centers across the country. Additionally, we are working with our existing
local and state correctional clients to leverage new opportunities in the provision of
community-based reentry services in both residential facilities as well as nonresidential Day
Reporting Centers.
Our Youth Services division continues to work toward maximizing the utilization of our existing
asset base. We have a number of initiatives underway to increase the utilization of some of our
largest youth service facilities working with our clients in states like Pennsylvania, Ohio,
Illinois, Texas, and Colorado. We are very optimistic that these efforts will maximize the
utilization of our Youth Service facilities, thus, improving our overall financial performance.
Finally, our BI subsidiary continues to successfully market its supervision and electronic
monitoring services to local state and federal correctional agencies nationwide. BI is the worlds
largest electronic monitoring service provider with approximately 60,000 individuals under
supervision. We expect a number of correctional agencies across the US to increase the use of
electronic monitoring technologies to supervise offenders who have been placed under community
supervision.
Before I turn the call back to George, let me briefly reiterate that we are very excited about the
RFP that was recently issued by Florida. This opportunity represents a groundbreaking approach,
which will bring together under one contract the provision of all correctional services including
adult and juvenile correctional management as well as community-based facilities and reentry
services.
At this time Id like to turn the call back to George for closing remarks. George?
George Zoley Geo Group Inc Chairman, CEO
Thanks, Jorge. We are very pleased with our strong second-quarter results as well as our
continued efforts to grow our Company in each of our business segments. Because of our recent
acquisitions of Cornell and BI, we are currently pursuing opportunities in all 50 states in the US
and internationally, which represent approximately 50,000 new correctional beds as well as other
growth opportunities in community-based reentry and supervision services. This is the most active
business development market weve ever seen.
As youve heard today, the GEO group continues to execute on multiple growth initiatives which we
believe will increase shareholder value from the continued aggressive pursuit of these organic
growth opportunities to strategic diversification efforts as well as the implementation of a $100
million stock buyback program which will, we believe, enhance shareholder value. As Ive expressed
to you in the past, we view all of these initiatives as complementary and none pursuant to the
detriment of the other.
And as weve discussed today, we are currently developing close to 4000 new beds for activation in
2012, which we believe represents more beds under development than any other correctional operator,
public or private. All of these new beds are being built for known customers under signed
management agreements that will bring our total on beds to approximately 40,000 with an asset book
value of approximately $1.7 billion.
Im also pleased to see that we are increasingly pursuing larger opportunities from the $150
million prisoner escort and custody services contract in the UK, to the privatization of all
correctional services in a broad geographic region in Florida, totaling more than 16,000 beds.
Floridas privatization effort represents a ground breaking approach which combines not only the
traditional correctional management services, but for the
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first time, performance-based benchmarks that will be achieved through a continuum of correctional
care. We believe that our diversified growth and investment strategy has positioned GEO as a
leading provider of corrections, detentions, and treatment services through a continuum of care
that can deliver performance-based outcomes at significant cost savings for our clients worldwide.
As we discussed today, weve taken additional steps to invest in business development and
professional service capabilities. While these investments will result in near-term expense in the
next two quarters, we believe they will better position GEO to compete for opportunities such as
the procurement of Florida. We are hopeful that additional large opportunities involving the
provision of all correctional services and broad geographic regions will develop in additional
states and countries over the coming years. These opportunities will likely entail assuming the
management of existing public facilities with revenues and earnings being generated from day one
and without the development of significant levels of invested capital.
This concludes our presentation, and we would now like to open a call to your questions.
QUESTION AND ANSWER
Operator
(Operator Instructions) Our first question comes from the line of Kevin Campbell with Avondale
partners. Please proceed.
Kevin Campbell Avondale Partners Analyst
Good afternoon. Thanks for taking my question. I just wanted to start with these business
development expenses, and maybe you could comment about, you know, what would happen if Florida
were awarded to a competitor, what would happen with those expenses? Do you would you anticipate
to continue those infrastructure expenses because they would help you with future bids? Or would
you expect them to go away if youre not successful in Florida?
George Zoley Geo Group Inc Chairman, CEO
Well, I think some portion, maybe half the portion, are one-time expenses, the other portion
are our expenses in development of infrastructure that we believe would be applicable to other
procurements. Very possibly existing services with existing clients.
Kevin Campbell Avondale Partners Analyst
Okay, great. And as we think about sorry, Im going to jump around a little bit. The
community correctional facilities in California, can you give us a sense of the conversations you
are having with the counties at this point? Are they expressing an interest? Are they going to wait
and see how realignment plays out and see if there is actually this influx of inmates? Can you give
some color around that at this point?
George Zoley Geo Group Inc Chairman, CEO
Yes. Weve begun our marketing to not only local counties but also to federal agencies. It is
still in the early stages. We only received a notice very recently in the past couple of weeks, so
we had to take a practical decision on how to model the financial performance in the third and
fourth quarters, the earnings guidance, and we took the conservative position and assume that the
closure of those facilities. You know, in a two-week period, its not really been possible to, you
know, sign up replacement clients, but there is definitely an interest by both the federal agencies
and neighboring communities where our facilities are located in the state of California. You know,
it is a state that in which the state of California needs tens of thousands of beds, and its
also a state where the federal agencies have needed beds as well. So we think we are
well-positioned by virtue of location, location, location that eventually these facilities will be
contract with successor clients, but we cant say as we sit here today two weeks after the
termination as to who those clients are going to be.
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Kevin
Campbell Avondale Partners Analyst
Sure. Okay. Thats helpful. Maybe, Jorge, could talk about the pipeline for GEO Care. You
might have mentioned this, but I, and maybe I just missed it but I didnt hear you talk about South
Carolina or Pennsylvania. Are those still opportunities?
Jorge Dominicis Geo Group Inc President of GEO Care
Just, they are, as a matter of fact. In South Carolina, there was an RFP that was issued and
it was canceled. We expect that it will be reissued in some form. And in Pennsylvania the
governors budget actually contained language to privatize both of their forensic facilities. That
did not happen during this session, but I understand that there is a commission thats going to be
established to study globally privatization, and this is going to be one of the items that that
commission is going to review. And I think that there is a general consensus that started to form
that this is one of those areas that definitely the private sector should partner with the
government in delivering that service.
Kevin Campbell Avondale Partners Analyst
Okay. And in your prepared remarks, I heard Texas, North Carolina, Virginia. Was that right?
Jorge Dominicis Geo Group Inc President of GEO Care
Yes.
Kevin Campbell Avondale Partners Analyst
Okay. Great. A couple of quick modeling question. Start up expenses as we look into next year,
are any of the Georgia expenses going to bleed into the first quarter? Or is it really just going
to be sot of Adelanto and Karnes and New Castle for next year?
Brian Evans Geo Group Inc SVP, CFO
For the most part, it would be the three that you mention. There might be a tiny bit of
bleeding into the first quarter, but we think most of those will be incurred in the fourth quarter.
The staff would be brought on and the facility will open up in December. There will be a little bit
of ramp up time, but I think most of it will be in the fourth quarter this year.
Jamie Sullivan RBC Capital Markets Analyst
Okay. And then the capitalized interest in the quarter?
Brian Evans Geo Group Inc SVP, CFO
Was about $600,000. In Q2.
Kevin Campbell Avondale Partners Analyst
Okay. And then last question and I will jump off. The equity and earnings of affiliate, $1.4
million, I think in the quarter. Is that sort of the run rate we should use? It was up from the
first quarter, but I know its been at that level before in the past. So Im just trying to get a
handle on maybe what that number should be and especially in light of the GEO Amey contract
starting to ramp. Should that grow? Or should it be flat this year because you have start up
expenses, et cetera?
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Brian Evans Geo Group Inc SVP, CFO
I think it will be flat this year. There will probably be some reduction in the third quarter
as we start up the joint venture operation, and then going into fourth quarter it should stabilize
out some. So its really going to be moving around a little bit, I think, during this year. But the
South Africa contribution to it should be like $1.25 million to $1.5 million per quarter. $1.25
million to $1.5 million per quarter.
Kevin Campbell Avondale Partners Analyst
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Todd Van Fleet the First Analysis. Please proceed.
Todd Van Fleet First Analysis Securities Analyst
Good afternoon. I just was hoping maybe somebody could remind me what the different moving
pieces are that are impacting the September quarter in terms of contracts starting and stopping,
that sort of thing?
Brian Evans Geo Group Inc SVP, CFO
Well, the two main contracts that are starting in the September quarter are the PECS contract
in the UK and the Karnes no, Adelanto facility in California. Those are the two start ups. And
then the facility there are no facility terminations in the third quarter, although the Leo
Chesney facility in California, that contract expires at the end of the third quarter, so it will
be a fourth-quarter impact primarily.
Todd Van Fleet First Analysis Securities Analyst
Right. So the what was the revenue attached to both the UK and the Adelanto initially,
Brian?
Brian Evans Geo Group Inc SVP, CFO
The revenue associated with the project in the UK, remember, will go through the equity
earnings line. It wont be any revenue. Well just report that our 50% share, the net earnings, but
the revenue associated with that project is about $150 million US. And then the Adelanto facility,
I believe, is around $20 million to $22 million.
Todd Van Fleet First Analysis Securities Analyst
Right. Right. Okay. So I guess thats, so youre looking at $408 million in the June quarter,
and then really the one moving piece which is Adelanto, revenue wise in the September quarter. I
guess Im just wondering why the revenue performance isnt stronger in ?
Brian Evans Geo Group Inc SVP, CFO
No, I mean, when you look at the fourth quarter, theres a number of factors affecting revenue
in fourth quarter. Theres the full quarterly impact of the Leo Chesney facility being canceled.
Todd Van Fleet First Analysis Securities Analyst
Right. Right. I guess Im thinking more to Q3.
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Brian Evans Geo Group Inc SVP, CFO
Okay.
Todd Van Fleet First Analysis Securities Analyst
So if it is $408 million in the June quarter, youve got revenue coming on in September. I
believe the guidance is, what, $405 million to $410 million in Q3 for revenue?
George Zoley Geo Group Inc Chairman, CEO
The revenue I think thats a 90 day startup.
John Hurley Geo Group Inc SVP North American Operations
90 day starter.
George Zoley Geo Group Inc Chairman, CEO
Yes.
Todd Van Fleet First Analysis Securities Analyst
I had like two months, two months or three months included in the model. But I guess
regardless is there I guess Im just trying to understand what would cause the revenue to
decline sequentially, or at least stay relatively flat if Adelanto is call it even $2 million or $3
million.
Brian Evans Geo Group Inc SVP, CFO
Todd, the other piece is as we look at California contracts, we expect that those facilities,
which were nearly fully utilized, that the customer will move them more to the minimum guarantee
level so there is a reflection of that in the third quarter. That process has already started, and
then the Adelanto facility, as George mentioned, is only going to be open for one month in the
third quarter, and its ramping up during that month. So I think the two net out.
And in the Baldwin, Michigan facility, also, we expected to ramp up during the quarter. And that
staying flat at 270 beds. So when you net the moving pieces related to the changes in the
California contracts, plus adding in Adelanto, thats, those are the primary drivers during the
quarter on the revenue.
Todd Van Fleet First Analysis Securities Analyst
Yes, okay. All right. Maybe I will follow-up with you off-line, Brian. The, on the, what is
it, the equity income line in the UK contract, you said we could see a step down in that related to
the start up of that deal? Right, because that project starts up during third quarter. Right,
right. Okay. Let me ask you just about the general cost pressures you might be seeing
operationally; wages and so forth. Its Im just wondering how do you feel about the balance
between pricing increases that you are getting at state and federal levels on a blended basis
versus the cost pressures that you might be seeing overall across the system for the various issues
that would impact the cost; utilities, healthcare, you know, wages, and so fort?
Brian Evans Geo Group Inc SVP, CFO
I dont think thats been a material issue this year in our financial performance.
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Todd Van Fleet First Analysis Securities Analyst
Its not something you are expecting to have a bit of, a bit more difficulty with moving
forward, or ?
Brian Evans Geo Group Inc SVP, CFO
No, the primary impact in past years has been turnover, because of a very strong previous
economy which we are no longer in. You know, we keep looking at our turnover numbers going down
considerably, and which saves on training costs. And those are big numbers, which we dont
really talk about very often, but they are numbers that impact overtime, and training costs, and
recruitment costs. You know, that has been a very substantially reduced because of the depressed
economy.
Todd Van Fleet First Analysis Securities Analyst
And on the health care front, though, if healthcare is maybe you can share what percentage
of the talk of operating base is healthcare. But are you seeing the high single-digit increases
they are?
Jorge Dominicis Geo Group Inc President of GEO Care
No. Health care isnt experiencing those kind of increases, and I think, you know, all
companies are becoming more adept at dealing with those issues. We have I think better systems
today than we have ever had to manage the care that we deliver in our facilities.
Brian Evans Geo Group Inc SVP, CFO
Yes, I think on the employee healthcare side as well, our average cost per employee for
healthcare and the average total cost is well below the national average. We have a younger,
typically younger workforce, and weve been able to implement a number of different programs that
have helped to keep the rate of increase, or rate of growth, very modest for our Company.
Todd Van Fleet First Analysis Securities Analyst
Okay. Very good. Thank you.
Operator
Your next question comes from the line of Tobey Sommer with SunTrust. Please proceed.
Frank Atkins SunTrust Robinson Humphrey Analyst
Hi, this is Frank in for Tobey. I wanted to ask you a little bit about pricing, just going a
little deeper in terms. Anything changing on the federal level? Weve heard from peers that there
are some changes there, and then I guess youve touched a little bit about the state level, but any
other color would be great.
Brian Evans Geo Group Inc SVP, CFO
I guess our federal clients are a bit different. I dont think theres been any changes
amongst the Marshal services. The services that we are asked to provide have remain essentially the
same, and our praise consistent, as in prior years. I think the same goes for the BOP.
ICE is probably the most different in the sense that in some locations they are asking for an
upgrade to the most recent design in operating standards which requires more space in physical
plant, more staffing, and to provide those services that they want. So I would say in general the
pricing for ICE projects in certain locations has gone up because of the desire to upgrade to the
new national standards.
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Frank Atkins SunTrust Robinson Humphrey Analyst
Okay, great. And then construction revenue for the back half of the year. Forecast there?
Brian Evans Geo Group Inc SVP, CFO
None.
Frank Atkins SunTrust Robinson Humphrey Analyst
All right, great. Thank you very much.
Operator
(Operator Instructions) Our next question comes from the line of Clint Fendley with Davenport.
Please proceed.
Clinton Fendley Davenport & Company Analyst
Thank you. Good afternoon, gentlemen. I wondered how we should think about the ramp up of the
North Lake Facility in 2012. I believe the expectation was that we would have about 1000 inmates by
the middle of next year. Should we still plan on that currently?
George Zoley Geo Group Inc Chairman, CEO
Well, I dont think theyve given such a forecast for 2012. You know, we are looking at the
current situation. We are exploring all options. You know, are we comfortable staying at 270? No.
And we are looking at different options to get us beyond that.
Clinton Fendley Davenport & Company Analyst
Okay. Thank you. And I guess on the Florida, obviously, this is a very big move by the state
here aimed at reducing the recidivism. Im just wondering, assuming that the private sector is
successful with the state, what is the prospect here that other regions could be privatized next
year as well?
George Zoley Geo Group Inc Chairman, CEO
I think thats a very likely prospect in other states around the country as well as other
countries, like the UK, Australia, who have an interest not only in reducing costs but also in
proving the effectiveness of rehabilitation toward reducing recidivism.
Clinton Fendley Davenport & Company Analyst
Do you think its possible for further privatization even within Florida as well?
George Zoley Geo Group Inc Chairman, CEO
Yes. I think maybe it will take another year before this legislature feels adequately
comfortable in that the current privatization is working properly, effectively, but I think there
is still interest in Florida for increased privatization if this one region is effectively
demonstrated. You know, the next opportunities for other states will be in the next legislative
cycle which may not be until the beginning of next year.
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Clinton Fendley Davenport & Company Analyst
Right. Absolutely. Thank you.
Operator
Our next question comes from the line of Chuck Ruff with Insight Investments. Please proceed.
Chuck Ruff Insight Investments Analyst
Can you talk a little bit about the preparational of challenge of a contract like the Florida
procurement? It would seem to be a very difficult thing to ramp up to handle 29 facilities that
quickly.
George Zoley Geo Group Inc Chairman, CEO
Actually, we had very close prior experience to that when we took over the Cornell companies.
So maybe we are in a unique position in that respect, but we took over, I think approximately 60
facilities in total on the same day, and we had a very extensive recruitment effort to meet with
the staff, understand the operations, the physical plant issues, the client contracts, client
relationships. We did it very successfully.
Chuck Ruff Insight Investments Analyst
Okay. I would think this would be quite a bit different in that Cornell was already a
for-profit corporation where coming in to do this with Florida is clearly not a for-profit
operation. Is it that much different, or not?
George Zoley Geo Group Inc Chairman, CEO
I dont think that really has much of a bearing on it all. You know, one favorable attribute
is the location of facilities. They are all in our home state versus spread around the country as
Cornell was. And its really a matter of understanding the physical plant, the operating structure,
the offender profile, and the number of staff, and the responsibilities in mission of that
particular facility.
Chuck Ruff Insight Investments Analyst
Okay. Interesting. And a different subject, can you give us a feel for how much CapEx you
expect to fall into 2011 and how much will fall into 2012?
Brian Evans Geo Group Inc SVP, CFO
Right now, I think theres about $150 million or so left. The bulk of it will happen in 2011
and maybe another $20 million to $30 million in 2012.
Chuck Ruff Insight Investments Analyst
And thats just growth CapEx, not maintenance maintenance CapEx is on top of that?
Brian Evans Geo Group Inc SVP, CFO
Maintenance CapEx is on top of that. Thats right.
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Chuck Ruff Insight Investments Analyst
Okay. So the $150 million left, you are saying $120 million to $130 million of that is in the
second half for growth CapEx?
Brian Evans Geo Group Inc SVP, CFO
Thats correct.
Chuck Ruff Insight Investments Analyst
Okay. I got it. Thank you.
Operator
Our next question comes from the line of Greg Weis with (inaudible). Please proceed.
Greg Weis Unknown Company Analyst
Hi, guys. You guys recently announced, as you mentioned, the buyback. Im just wondering, you
know the stock having sold off so much, and you highlighted, you know, the bus pipeline of RFPs, et
cetera. Can you, have you, I mean, a little more color of how you expect to act with the buyback
here? Or have you start buying back stock?
Brian Evans Geo Group Inc SVP, CFO
Well, we are in a blackout right now, so we announced the program during a blackout, so we
cant implement the program. I think what we have said is we are going to look at it until .
George Zoley Geo Group Inc Chairman, CEO
Two days after our earnings.
Brian Evans Geo Group Inc SVP, CFO
Right, before we can implement it and start. And we are going to look at it opportunistically
as I indicated based on the stock price and our capital need. But, given our current capital
requirements and stuff, we feel that the amount of the buy back that we announced over through the
period of 2012 is a prudent and executable amount.
Greg Weis Unknown Company Analyst
Got it. And give us you obviously have the California news, which you press released two
weeks ago. Is there any other what other bad stuff can happen in this back half of the year? Or
are we mostly through the bad stuff? In terms of, is there any other things like that youd expect
to happen? Or on the radar screen?
Brian Evans Geo Group Inc SVP, CFO
Well, you know, the bad stuff is normally an issue of a rebid of contracts. I dont think we
have much exposure in that area.
Greg Weis Unknown Company Analyst
Got it. All right. Thank you very much.
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Operator
Our next question is a follow-up question from the line of Kevin Campbell with Avondale
partners. Please proceed.
Kevin Campbell Avondale Partners Analyst
Thanks. Just two more questions. I wanted to ask about the Florida RFP, the requirement that
you have I guess a performance bond. What sort of impact will that have on your liquidity? Will
that will you have to issue a line of credit? How exactly does that work? Or a letter of credit
for that?
Brian Evans Geo Group Inc SVP, CFO
You know, I think theres a number of different ways that companies can approach that and
deliver that service. Id rather I think theres a little bit of a competitive advantage there,
and Id rather not disclose or discuss how we are going to do that. But I dont think it
necessarily affects our liquidity.
Kevin Campbell Avondale Partners Analyst
Okay. Lastly, Leo Chesney, I think you said, was that the leased facility? I know one of the
TCF was, so what are your plans for the leased facility? Can you put that back to the lessor? Or do
you plan on continuing to pay that rent every month? Or what are your thoughts there?
George Zoley Geo Group Inc Chairman, CEO
Well, I think we are marketing that facility as well. And as you know, we have the option to
discontinuing that project because it is a leased facility.
Kevin Campbell Avondale Partners Analyst
So if one of these counties or federal agencies doesnt express an interest after several
months sort of marking the facility, then perhaps you would look to go that option? What is the
monthly rent there, or quarterly rent, or annual?
Brian Evans Geo Group Inc SVP, CFO
Its, the total care and cost for that facility including the rent and property taxes is less
than a $0.01 per year, I think, or less than $1 million.
Kevin Campbell Avondale Partners Analyst
Okay, great. Thank you.
Operator
We have no further questions at this time. I will now turn the call over to George Zoley for
any closing remarks.
George Zoley Geo Group Inc Chairman, CEO
Thanks to everyone for joining us today. We look forward to addressing you in the next call.
Operator
Thank you for your participation in todays conference. This concludes the presentation.
Everyone may now disconnect. Have a great day.
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