The GEO Group, Inc. (NYSE:GEO) Q3 2023 Earnings Call Transcript November 7, 2023
The GEO Group, Inc. reports earnings inline with expectations. Reported EPS is $0.19 EPS, expectations were $0.19.
Operator: Good day and welcome to the GEO Group Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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.
Pablo Paez: Thank you, operator. Good morning, everyone, and thank you for joining us for today’s discussion of The GEO Group’s third quarter 2023 earnings results. With us today are George Zoley, Executive Chairman of the Board; Jose Gordo, Chief Executive Officer; Brian Evans, Chief Financial Officer; Wayne Calabrese, Chief Operating Officer; and James Black, President of GEO Secure Services. This morning, we will discuss our third quarter results as well as our outlook. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our Investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning.
Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q, and 8-K reports. With that, please allow me to turn this call over to our Executive Chairman, George Zoley. George?
George Zoley: Thank you, Pablo, and good morning to everyone. Thank you for joining us on our third quarter 2023 earnings call. I’m joined today by our senior management team to review our third quarter financial results, discuss our financial guidance for the balance of the year and our continued focus on debt reduction and provide an update on the trends for each of our business segments. This morning, we reported third quarter revenues of approximately $603 million. GAAP net income of approximately $24.5 million and adjusted EBITDA of approximately $119 million. Our diversified business units continued to deliver steady operational and financial performance. During the third quarter, our Secure Services business unit renewed several important contracts.
At the federal level, we renewed two direct contracts with the U.S. Marshals Service. One was at our company-owned 1,900-bed Rio Grande Processing Center in Texas for a five-year term and the second was at our company leased 770-bed Western Region Detention Facility in San Diego for a two-year term. We also renewed three contracts with ICE for respective one year terms that include our company-owned 700-bed Broward Transitional Center in Florida, our company-owned 1,904-bed South Texas ICE Processing Center, and our company-owned 1,314-bed Montgomery Processing Center in Texas. Populations across our ICE processing centers have continued to steadily increase. Since the beginning of July, we’ve experienced approximately a 30% increase, particularly in our central and western regions.
At the state level, we recently renewed our management-only contract in the state of Florida for the 2,000-bed Blackwater River Correctional and Rehabilitation Facility for a two-year term. During the third quarter, our GEO Reentry Services division also renewed seven existing contracts for our residential entry centers and six existing contracts for our nonresidential day reporting centers. Our third quarter results reflect an increase in our GTI secure transportation revenues. This increase was primarily driven by our new emergency contract to provide air operations in support for ICE. This contract could generate up to $16 million in total revenues if it runs for its full term of nine months. The multiyear procurement for these services remains under bid protest, and we hope to continue to be a strong contender for a long-term contract award in the future.
Internationally, our third quarter results reflect a sequential increase in revenues due to the activation of our new contract to deliver healthcare services across public prisons in the state of Victoria in Australia. Turning to our Electronic Monitoring and Supervision Services segment. The number of participants in the federal government’s Intensive Supervision Appearance Program, or ISAP, has remained relatively stable since early August at approximately 192,000 to 195,000 individuals. While the ISAP participant count has remained largely stable over the last three months, we’ve not experienced the moderate increase beginning in the fourth quarter that was contemplated in our previously issued financial guidance. We believe that ICE continues to face budgetary pressures and the timing of the passage of appropriation bills in Congress remains uncertain.
Given these factors, our tightened financial guidance range for the fourth quarter now assumes the ISAP participant counts will be flat to slightly down for the balance of the year. The federal government is currently funded under a short-term continuing resolution, which expires on November 17th, and Congress has yet to reach an agreement on the appropriation bills to fund the government in fiscal year 2024, which began on October 1st. We estimate the ICE detention census is presently at approximately 39,000. The Senate version of the Homeland Security Appropriations bill keeps funding for ICE at the current level of 34,000 beds and slightly increases the overall funding available for the alternative to detention programs. The current version of the House Homeland Security Appropriation bill would increase ICE beds to 41,000 and includes a provision that would require the use of ISAP electronic monitoring capabilities for all individuals in the non-detained docket for the entire duration of their proceedings.
Additionally, the White House has submitted a supplemental appropriations request to Congress, which we believe includes additional funding for ICE beds and the alternatives to detention program. If Congress is unable to reach an agreement within the next 10 days, the federal government could once again be funded under a short-term or a long-term continuing resolution or face the prospect of a government shutdown. We are continuing to monitor the congressional appropriations process and remain focused on providing high-quality services on behalf of DHS and ICE. We are continuing our efforts to market our current idle facilities to of federal, state and local government agencies. As has been publicly reported, several counties across the country are experiencing overcrowding challenges in their local jails, and some of these jurisdictions are exploring the potential use of private sector facilities to address these challenges.
We believe that our modern well-located facilities could generate significant increased annualized adjusted EBITDA, if they are reactivated, either under GEO management or leased to local, state or federal agencies. Finally, we remain focused on reducing our net debt, which is a key strategic priority for our company. During the third quarter, we reduced our net debt by approximately $109 million and are at $1.8 billion in total net debt presently. Our objective is to continue reducing net debt by approximately $175 million to $200 million per year in the future. We also remain hopeful that we will be able to refinance portions of our debt at the earliest possible time. I will now turn the call over to Brian Evans to address our financial results and guidance in more detail.
Brian Evans: Thank you, George. Good morning, everyone. Today, we reported GAAP net income of approximately $24.5 million on quarterly revenues of approximately $603 million. We reported quarterly adjusted EBITDA of approximately $119 million. Third quarter 2023 results reflect higher transportation revenues due to our recent emergency contract to provide air support services for ICE and higher international revenues from the activation of our new healthcare contract in Victoria, Australia. Additionally, in the third quarter 2023, we experienced a year-over-year increase of 14% in revenues from our residential reentry centers as populations and our reentry segment have continued to improve post pandemic. Similarly, quarterly revenues from our nonresidential day reporting centers increased by almost 10% year-over-year during the third quarter 2023.
These revenue increases were offset by lower revenue from our Electronic Monitoring and Supervision Services segment during the third quarter 2023. Our third quarter results also reflect an increase of approximately $13 million in net interest expense compared to the third quarter of 2022 due to higher interest rates and the debt restructuring we completed in August of 2022. Moving to our guidance for the balance of the year. Our previous guidance for the fourth quarter of 2023 assumed a moderate increase in ISAP participants during the quarter. While the ISAP participant count has remained relatively stable over the last three months, we have not experienced the moderate increase that was contemplated in our previous guidance. As George mentioned, we believe that ICE continues to face budgetary pressures and the timing of the passage of appropriations bills in Congress remains uncertain.
As a result of these factors, we have updated our guidance assumptions and now assume for budget purposes that the ISAP participant count will be flat to slightly down for the balance of the year. This morning, we provided updated guidance for the fourth quarter 2023 of GAAP net income in a range of $19 million to $24 million and quarterly revenues in a range of $590 million to $600 million. We expect our fourth quarter 2023 adjusted EBITDA to be in a range of $117 million to $122 million. For the full year 2023, we expect GAAP net income to be in a range of $100 million to $105 million on annual revenues of approximately $2.4 billion. We expect our effective tax rate for the full year 2023 to be approximately 29%, exclusive of any discrete items.
We expect our full year 2023 adjusted EBITDA to be between $495 million and $500 million. Our full year 2023 guidance represents the second highest level of annual adjusted EBITDA in our company’s history. Our continued and steady performance is representative of the strength of our diversified services platform. We have been able to offset declines in our Electronic Monitoring and Supervision Services segment throughout 2023 with growth in revenues and earnings from several of our other diversified segments. Our guidance does not include the potential reactivation of any of our remaining idle Secure Services facilities, which total approximately 9,000 beds and could provide meaningful upside to our annualized revenues and cash flows if fully reactivated.
Additionally, increases in the ISAP participant count or further increases in the utilization of our ICE detention beds to generate significant upside to our guidance. With respect to ISAP specifically, BI is the sole provider of electronic monitoring solutions to ICE and has provided these services with bipartisan support for over 20 years, successfully achieving high levels of compliance under the program. BI has all the necessary resources to assist ICE going forward should the agency decide to increase the utilization of ISAP once appropriation bills are approved by Congress. Moving to our capital structure. During the third quarter of 2023, we reduced our total net debt by approximately $109 million. We ended the quarter with total net debt of approximately $1.8 billion.
Our debt reduction during the third quarter was supported by the sale of our Bo Robinson reentry facilities in New Jersey for approximately $15 million, which closed in September. Our objective is to continue to reduce our net debt by approximately $175 million to $200 million per year in the future, bringing our total net debt to approximately $1.6 billion by the end of 2024. Going forward, we expect interest rates to stabilize and potentially decrease, further enhancing our ability to reduce our net debt. As a reminder, approximately half of our debt is under floating interest rates, and future increases in interest rates would bolster our annual -- or future decreases in interest rates would bolster our annual free cash flows that could be used to further reduce our overall debt.
We also expect to explore further asset sales to complement these efforts, including the potential sale of additional residential reentry assets. Our residential reentry centers are typically located in urban areas and can usually be repurposed for alternative uses. These factors can often result in a larger pool of potential interested buyers. We have two additional reentry facilities that we are currently actively marketing for sale. With respect to our idle Secure Services facilities, we are focused on marketing these facilities to local, state, and federal agencies for reactivation, either under traditional management contract or a lease agreement. However, we may also consider the sale of some of these larger assets if the price adequately reflects their value.
Finally, we remain hopeful to be able to refinance portions of our debt at the earliest possible time. As a first step, we would expect to address our revolving credit facility, which as a reminder is comprised of two tranches, including $87 million, which matures in 2024 and approximately $187 million, which matures in 2027. We currently have no borrowings outstanding under either of these tranches, and our goal would be to comprehensively address our revolving credit facility prior to the maturity of the first tranche. We continue to have strong relationships with our existing banking partners, and we have received interest from several new banks as well as institutional investors who would participate in future refinancing transactions. Through these efforts, we hope to be able to achieve interest cost savings and gain more flexibility within the covenants under our credit agreements to explore options to return capital to our shareholders in the near future.
We continue to believe that our focus on reducing debt and deleveraging will enhance value for all our shareholders over time. At this time, I will turn the call over to James Black for a review of our GEO Secure Services segment.
James Black: Thank you, Brian. Good morning, everyone. It is my pleasure to provide an update on GEO Secure Services. During the third quarter of 2023, our Secure Services facilities successfully underwent 52 audits, including internal audits, government reviews, third-party accreditations and Prison Rape Elimination Act or PREA certifications. Six of our Secure Services facilities received accreditation from the American Correctional Association with an average score of 99.2%, and another six of our facilities received PREA certification. Our GTI Transportation division and our GEOAmey UK joint venture completed approximately 4.3 million miles driven in the United States and overseas during the third quarter. Moving to the current trends for our government agency partners.
At the federal level, populations at our contract the U.S. Marshals Detention Facilities continue to be stable. Our U.S. Marshals Facilities around the country support the agency as it carries out its mission of providing custodial services for pretrial detainees facing federal criminal proceedings. We believe that all these important facilities provide needed bed space and services near federal court houses where there is generally a lack of suitable alternative detention capacity for the U.S. Marshals Service. During the third quarter, we renewed our contracts with the U.S. Marshals Service for our company-owned 1,900-bed Rio Grande processing center for a five-year term and our company leased 770-bed Western Region Detention Facility for a two-year term.
Moving to our ICE processing centers. During the third quarter, we renewed three contracts for respective one year terms at our company-owned 700-bed Broward Transitional Center, our 1,904-bed South Texas ICE Processing Center and our 1,314-bed Montgomery ICE Processing Center. Across our ICE processing centers, we have experienced a 30% increase in population since the beginning of July. As George noted, the federal government is currently funded under a short-term continuing resolution that runs through November 17th. The U.S. Congress has not yet reached an agreement on the appropriations bill for fiscal year 2024. We estimate the present census of active ICE detention beds to be at 39,000. The current House version of the Homeland Security Appropriations Bill would fund ICE for 41,000 beds, while the Senate version would maintain funding at 34,000 beds.
The U.S. Congress is also considering a supplemental appropriations package submitted by the White House, which would also increase funding for ICE beds. If a compromise between the House and Senate is not reached in the next 10 days, the federal government could again be funded under a short-term or long-term continuing resolution or face the prospect of a government shutdown. As a long standing service provider to the federal government, we play no role in and have no control over congressional appropriations decisions, the timing of those decisions or more broadly the implementation of immigration’s policies. Our focus remains on providing the highest quality services to ICE, and we stand ready to support the agency with any additional services, as needed.
Our ICE processing centers have a longstanding track record delivering professional support services on behalf of ICE and providing secure residential care consistent with our commitment to respecting the human rights of all of those entrusted to our care. Our ICE processing centers offer around the clock access to quality healthcare services. Healthcare staffing at our ICE processing centers is generally more than double the number of healthcare staff in a typical state correctional facility. Our ICE processing centers also offer access to legal counsel and legal libraries and resources, and we have dedicated space at our centers to accommodate meetings with legal counsel. Our ICE processing centers also provide daily meals that are culturally sensitive and are approved by registered dietitians.
We also provide access to faith based and religious opportunities, and we partner with community volunteers as needed to ensure fair representation of various states and denominations. Our ICE processing centers also offer access to quality recreational activities. We have made significant investments to provide enhanced amenities at our centers, including artificial turf soccer fields, covered pavilions, exercise equipment and multipurpose rooms. We have also historically provided secure transportation services and logistical support for ICE primarily at 12 of our ICE processing centers. During the third quarter, our GTI Transportation division also began providing air operation support for ICE under an emergency contract, which could have a full term of nine months.
The federal procurement for the multiyear contract for these services is currently under bid protest, and we hope GTI can remain a strong contender for these services in the future. Moving to our state government agency partners. Our state correctional facilities deliver high quality support services across seven states, including enhanced rehabilitation programs on behalf of corrections departments in Florida, Georgia, Indiana, Oklahoma, Arizona, New Mexico and Virginia. During the third quarter, we renewed our managed-only contract for the 2,000-bed Blackwater River Correctional Facility in Florida for a two-year term. With respect to our international markets, during the third quarter, we began delivering primary health services across 13 public prisons in Australia under our new healthcare contract with the state of Victoria.
This new contract is expected to generate approximately $33 million in annualized revenues. Finally, we continue to market our current idle Secure Services facilities, which total approximately 9,000 beds. We have had recent active discussions, particularly with a number of local agencies as counties across the country are facing overcrowding challenges as a result of increases in local jail populations post-pandemic. We believe our facilities are modern and well located and can help address these challenges. At this time, I would like to turn the call over to Wayne Calabrese for a review of GEO Care.
Wayne Calabrese: Thank you, James. I’m pleased to provide an operational update on our GEO Care business units starting with our Reentry Services division. During the third quarter, our Reentry Services facilities successfully underwent 38 audits, including internal audits, government reviews, third-party accreditations and PREA certifications. Two of our residential reentry centers received accreditation from the American Correctional Association, both receiving perfect scores of 100%, and three of our residential reentry centers received PREA certification. We also renewed seven residential reentry contracts, including four contracts with the Federal Bureau of Prisons as well as six non-residential day reporting center contracts.
Our 35 residential reentry centers provide transitional housing and rehabilitation programs for individuals reentering their communities across 14 states. Our nonresidential and day reporting centers provide high quality community-based services, including cognitive behavioral treatment for up to approximately 9,000 parolees and probationers at approximately 90 locations across 10 states. All key outcome metrics showed improvement during the third quarter, attesting to our evidence-based practices and their track record for lowering the rate of recidivism. Moving to our GEO Continuum of Care and In-Prison Programs division, during the third quarter, we delivered enhanced in-custody, rehabilitation, and post release support to an average daily population of approximately 2,600 individuals at 31 in-prison programs sites in 7 states and approximately 21,000 individuals at 13 Continuum of Care sites in 8 states.
Our in-custody rehabilitation services include academic programs that are focused on helping those in our care attain high school equivalency diplomas. We have made a significant investment to equip all of our classrooms with smart boards to aid in the delivery of academic instruction at all of our facilities. We have also focused on developing vocational programs that not only lead to certification when completed, but are also based on market job placement needs. Our substance abuse treatment programs are an important part of our rehabilitation services because many of the individuals in our care suffer from addiction. Our facilities also provide extensive faith based and character based programs. And we have designated faith based and character based housing units or dorms across our facilities to enhance the delivery of these important programs.
During the third quarter, we completed approximately 700,000 hours of in-custody rehabilitation programming. Our academic programs awarded 644 high school equivalency diplomas and our vocational courses awarded 695 vocational training certifications. Our substance abuse treatment programs awarded approximately 3,500 program completions and we achieved over 21,000 behavioral program completions and more than 18,000 individual cognitive behavioral treatment sessions. During the third quarter, we also allocated over $400,000 toward post release services to support 873 individuals released from GEO facilities as they return to their communities. Our GEO Continuum of Care program integrates enhanced in-custody rehabilitation services, including cognitive behavioral treatment with post release support services that address critical community needs of released individuals.
We believe our award winning program provides a proven model on how the 2-plus-million people in the U.S. criminal justice system can be better served in changing their lives. Finally, turning to our Electronic Monitoring and Supervision Services segment, our BI subsidiary provides a full suite of monitoring and supervision solutions, products, and technologies on behalf of federal, state, and local agencies across the country. At the federal level, the number of participants required to be monitored under our ISAP contract with the Department of Homeland Security has remained relatively stable over the last three months at approximately 192,000 to 195,000 individuals. While we had previously expected the number of ISAP participants to begin to moderately increase beginning in the fourth quarter, we now assume for budget purposes that ISAP participant counts will be flat to slightly down for the balance of the year.
We believe that ICE continues to face budgetary pressures and as it has been previously noted, the timing of the passage of the appropriations bills currently being considered by the U.S. Congress remains uncertain. BI has provided technology solutions, holistic case management, supervision, monitoring, and compliance services under ISAP for almost 20 years. Under BI’s tenure, the federal government’s Supervision and Appearance Program has achieved high levels of compliance using a variety of new technologies and case management services over that time. And going forward, we expect BI to continue to explore new and innovative technology solutions to support the needs of ICE and all of our government agency partners. At this time, I’d like to turn the call over to Jose Gordo for closing remarks.
Jose Gordo: Thanks, Wayne. In closing, our diversified business units delivered steady financial and operational performance during the third quarter of 2023. We remain focused on reducing our overall net debt and on positioning our company to refinance portions of our debt in order to reduce our interest costs and gain the flexibility to potentially return capital to shareholders in the future. We continue to believe that we have several potential upside opportunities including further increases in populations at our ICE processing centers and/or increased number of participants enrolled in ISAP; the activation of our idle Secure Services facilities where we have a total of approximately 9,000 available beds, either under GEO management or under lease to local, state or federal agencies; new managed only contract wins by our reentry, electronic monitoring, secured transportation or international divisions and the selective sale of non-core assets.
We also expect to continue to selectively pursue new areas of growth, both with our current government agency clients as well as with new clients and/or in-service lines that are adjacent to or complementary with our existing business. In seeking these future growth opportunities, we plan to leverage our successful track record and the talent of our employees, who we believe are the best in our industry. As we have expressed in the past, we believe that our valuable assets underpin a compelling valuation case for our company. We own approximately 45,000 beds at secured facilities that we believe are generally more modern and better located than many of the existing public facilities in those geographic markets. We believe that the aggregate replacement value of these company owned beds alone based on estimated current construction costs and sales of comparable facilities is equal to or in excess of our current enterprise value.
And this valuation is before taking into account the significant operating cash flows and real estate values of our other diversified segments where we have substantial assets and market presence. Based on a conservative valuation of these various components, we believe that our current stock price has significant upside potential. We have consistently delivered as an essential government services provider at the federal and state levels through both Republican and Democratic presidential administrations for almost 40 years. We remain steadfast in our commitment to being a consummately professional organization that our clients can trust with complex, resource intensive and critical projects and that prioritizes the well-being of those entrusted to our care.
We are proud of our over 18,000 employees worldwide who carry out our mission on a daily basis with great purpose and professionalism, and we stand ready to continue to meet the future demands of our clients as they may continue to evolve. That completes our remarks, and we would be glad to take questions.
Operator: [Operator Instructions] The first question today comes from Joe Gomes with Noble Capital.
Joe Gomes: So, I wanted to start out on the Secure Services segment. You guys mentioned how the ICE population there are up significantly since the beginning of July, but the segment revenues actually declined year-over-year. I was just wondering is that because the majority of the population increases went into facilities that had yet to meet their guaranteed minimums or was there -- just trying to think off the top of my head whether it was another facility that would happen to have been contract lost or terminated last year that drove the revenues for that segment down?
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