Good day and welcome to the GEO Group Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I now would like to turn the conference over to Mr. Pablo Paez, Executive Vice President of Corporate Relations. Please go ahead.

Thank you, operator. Good morning everyone and thank you for joining us for today’s discussion of the GEO Group’s second 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 second quarter results and as well as our outlook and 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 the 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?

Thank you, Pablo. Good morning to everyone and thank you for joining us on our second quarter 2023 earnings call. I'm joined today by our senior management team to review our second quarter financial results, discuss our financial guidance and debt reduction objectives, and provide an update on the trends for each of our business segments. This morning, we reported quarterly revenues of approximately $594 million, GAAP net income of approximately $30 million, and adjusted EBITDA of approximately $129 million; all of which were ahead of the midpoint of our previously issued guidance for the second quarter of this year. Our second quarter results reflect stable performance from our Secure Services business unit and our GEO Reentry Services segment. GEO Secure Services recently renewed contracts for the 2,000-bed Blackwater River Correctional Facility in Florida in the 2,682-bed Lawton Correctional and Rehabilitation Facility in Oklahoma. And GEO Reentry Services recently renewed 15 existing contracts for our residential reentry centers and 12 existing contracts for our non-residential care reporting centers. During the second quarter, we reactivated our 1,900-bed Great Plains Correctional Facility under a new lease agreement with the state of Oklahoma. The new lease has an initial term of 5.5 years with subsequent unlimited one-year options and is expected to generate annual straight-line lease revenue of approximately $8.5 million. Our GTI Transportation division also recently entered into an emergency contract to provide Air Operations support for ICE, which is expected to generate up to approximately $16 million in revenues over a nine-month period, assuming the contract runs through its full term. We hope to continue to be a strong contender for the currently active procurement of a multiyear contract for these services, which presently remains under bid protests. Our diversified business units delivered overall strong operational and financial performance during the…

Thank you, George. Good morning, everyone. As we reported this morning, our second quarter 2023 results exceeded our previously issued guidance. We reported GAAP net income of approximately $30 million on quarterly revenues of approximately $594 million. We reported quarterly adjusted EBITDA of $129 million and net operating income of $170 million. Second quarter 2023 results reflect the reactivation of our Great Plains Correctional Facility in Oklahoma under a new lease agreement, which is expected to generate approximately $8.5 million in annualized straight-line lease revenue. Our second quarter 2023 results also reflect an increase of approximately $26 million in net interest expense, compared to the second quarter of 2022 due to higher interest rates and the debt restructuring transactions we completed in August of 2022. Moving to our guidance for 2023. This morning, we provided updated guidance for the full year 2023 to reflect our updated expectations regarding the timing of participation levels under our ISAP contract. Our previously issued guidance for 2023 assume that the number of ISAP participants would stabilize at the midpoint of the year, and then moderately increase during the third and fourth quarters. Although the number of ISAP participants continued to decline throughout the month of July and in early August, which was longer than we previously estimated, we continue to believe that the ISAP participant count is likely to stabilize and then begin to increase moderately. We are aware of various recent policy changes that may add participants to the ISAP program as well as move participants to different monitoring alternatives. It is difficult at this time for us to calibrate the net financial result of the new policy. Consequently, we are taking perhaps a likely conservative approach in forecasting year-end ISAP participation and financial results. This assumption is the major basis for our…

Thank you, Brian. Good morning, everyone. It is my pleasure to provide an update on GEO Secure Services. During the second quarter of 2023, our Secure Services facilities successfully underwent 51 audits, including internal audits, government reviews, third-party accreditations and Prison Rate Elimination Act Certifications. Four of our Secure Services facilities received accreditation from the American Correctional Association with an average score of 99.4%, and another five of our facilities received precertification. Our GTI Transportation division and our GEO Amy U.K. joint venture completed approximately 4.2 million miles driven in the United States and overseas during the second quarter. Moving to the current trends from our government agency partners at the federal level, populations at our contract 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 felonies [ph] facing federal criminal proceedings. We believe that all these important facilities provide needed bed space and services near federal courthouses, where there is generally a lack of suitable alternative detention capacity for the U.S. Marshals service. Moving to our ICE processing centers. We recently experienced a 20% increase in populations across our facilities since early May. However, occupancy rates at our ICE processing centers remain below historical levels. As George noted, Congress has left for August recess without reaching a compromise on the fiscal year 2024 Homeland Security appropriation. Currently, the House version of the bill would fund ICE for 41,000 beds, while the Senate version would maintain funding at 34,000 beds. If a compromise between the House and the Senate is not reached, a potential outcome could be the passage of a short-term or a long-term continuing resolution that would likely fund the federal government at the current funding levels,…

Thank you, James. I'm pleased to provide an operational update on our GEO Care business unit, starting with our Reentry Services division. During the second quarter, our Reentry Services facility successfully underwent 33 separate audits, including internal audits, government reviews, third-party accreditations, and pre-certifications. Five of our residential reentry centers received accreditation from the American Correctional Association with four of those centers receiving perfect scores of 100%. We also renewed 15 residential reentry contracts, including five with the Federal Bureau of Prisons as well as 12 non-residential day reporting center contracts including seven with the California Department of Corrections and Rehabilitation. Our 35 residential reentry centers provide transitional housing and rehabilitation programs for individuals reentering their communities across 14 states. Our non-residential and day reporting centers provide high-quality community-based services, including cognitive behavioral treatment, for up to 8,500 paroles and probationers at 90 locations across 10 different states. Outcome reports generated for several clients continue to demonstrate the positive impact of these centers in terms of risk reduction, employment gains and sobriety gains for participants, with program completions increasing during the second quarter of the year. Moving to our GEO Continuum of Care and in-prison programs division. During the second quarter, we delivered enhanced in-custody rehab and post-release support to an average daily population of approximately 2,600 individuals at 31 in-prison programs and approximately 20,400 individuals at 13 Continuum of Care sites. Our in-custody rehabilitation services include academic programs focused on helping those in our care, attain high school equivalency deployments. We've made a significant investment to equip all of our classrooms with smart boards to aid in the delivery of academic instruction at these facilities. We've also focused on developing vocational programs that not only lead to certification when completed, but are also based on market job placement needs.…

Thanks, Wayne. In closing, our diversified business units delivered strong financial and operational performance during the second quarter and the first half of 2023. We remain focused on reducing our overall net debt and are 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 believe, we have several potential upside opportunities, including increased populations at our ICE processing centers and/or increased number of participants enrolled in ISAP, the activation of additional idle secure facilities where we have a total of approximately 9,000 available beds, either under GEO management or under lease to state or federal agencies, new managed-only contract wins by our reentry, electronic monitoring, secure transportation or international divisions and the opportunistic 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. We believe our valuable assets underpin a compelling valuation case for our company. We own approximately 45,000 beds at secure 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 beds alone based on estimated current construction costs and sales of comparable facilities is at least 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 significant assets and substantial market presence. Based on a conservative valuation of these various components, we believe that our current stock price is significantly undervalued, which we believe represents a compelling case for equity investors. 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 do not set political priorities or agendas, and we play no role in policy decisions related to our industry. Instead, 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.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Joe Gomes with Noble Capital. Please go ahead.

Good morning, and thanks for taking my questions.

Good morning, Joe.

I wanted to start out on ICE. You said you see a 20% increase in population since the ending of Title 42. I know that, most of your guys' ICE facilities operate under minimums. What are the occupancy levels at those facilities now? Are you past the minimum level so that if you were to receive additional populations we'd start seeing a more of a contribution to the top and lines?

Many of our facilities do have a minimum guarantee, but there's a few select ones that we are below that minimum guarantee and the continued increase in occupants will materially enhance our financial results. But let me put it more simplistically. Some facilities, particularly along the southern border, are full. Other facilities located in the coastal or northern states are not as full. As we see the changes in border policies become implemented and the very possibility of more people coming across the border as temperatures cool in particular, we think the populations may continue to increase. To put a short answer, some are already full, but others are not, and we have plenty of capacity.

Okay. Thank you for that. And on ISAP, I understand what you said today in terms of the numbers have declined for a longer period of time than I think you were originally anticipating. But what gives you confidence that the participant level will either stabilize or hopefully go back up in the second half of this year?

Because of a combination of different policies that I really don't want to go into detail then because we're really not authorized to discuss DHS policy. But we are aware of these policies, and they, in effect, provide for a wider use of the alternatives to the detention programs as well as a shifting of where participants are in that program and what monitoring devices they may be using

Okay. Thank you for that. And then if I ran my numbers correctly here quickly, it looks like operating expenses were about 72% of revenue, which is up from a little over 71% in the first quarter. And again, my numbers are correct, would be about the highest level since the first quarter of 2021. I was just wondering what -- if there's anything particular that you could point out that drove that operating expense level higher in the second quarter.

No, I don't think so. I do think that you have some normalization of higher wages and more staff being brought on board. So you're going to see some of that. And then the decline in the accounts in the ISAP program, that's a higher-margin segment. So that's affecting that as well.

Okay. And then one last one for me and I get back in queue. I'm not quite sure if I heard you mention, the net debt level this quarter, it looks like, again, if I'm running my numbers correctly here quickly, it went up sequentially to net debt level. Is that – is that accurate? And if so, what was driving that?

So I think as I discussed and maybe George mentioned, quarter-over-quarter, the net debt is about the same as -- was up like $5 million. That's mainly just timing of working capital issues. In this quarter, we had a significant amount of interest and principal payments. So we used a lot of cash for that. We accrued it ratably towards this quarter, but we had to lay it out all out this quarter. So next quarter, as I mentioned in my remarks, we expect a significant reduction in net debt, about $75 million or so.

Right, right. Okay. Thanks for that, Brian. I appreciate you guys taking the time and take my call. Thank you.

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

Hi, good morning. Thanks for taking my questions. Just on the ISAP program. Based on the current funding level, I'm assuming that that continues over time, I guess, is there any sort of minimum participant count that you're able to disclose based on the current funding level?

No, I don't think there is. I don't think that's ever been discussed. This being count.

Yes. And then on state partners, I guess, is there anything notable to report on any per diem increases with state partners or any potential new or state county partners in the pipeline?

Periodically, we have renegotiations, particularly with our federal partners regarding increased department of labor wages that have to be applied to our facilities and there's contract modifications that implement those increases. At the state level, most of the states have a July 1 fiscal year starting point. So they'll be beginning the process of establishing their proposed budgets for the following year, and we will in select cases, be making requests for additional funding for our facilities that typically relate to increased wages due to market conditions or increased medical service costs, again related to either the pandemic or market conditions for wages on health care staff.

Understood. Thanks. And just one more, if I could. On the -- there was a comment about providing air operations support to ICE made earlier in the call, and I believe it was $16 million of revenue. I was just curious, is that something that's going to start immediately in the third quarter? Is there any sort of incremental investments needed? And then I think there's a larger contract that's out for bid. Just curious what kind of, opportunity that could be?

Yeah. The contract that we referenced today was an emergency contract in which we were a subcontractor to a prime, our role was to provide the security staffing on the airplane that travel either domestically or internationally. So we are a subcontractor to a prime that was awarded an emergency contract. That contract can run, I think, 8 or 9 months until a decision is made regarding the procurement that is a long-term contract, that procurement has been protested by several of the competitors are proposes and submitted to the procurement, including our team, it's comprised of the prime that we are involved with as a subcontractor. So we are one of the protesters in that procurement, but we are presently involved with our partner providing the services over the course of the next up to 8 or 9 months

Thank you. Appreciate it.

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

Hi. Yes. Good morning and thank you for taking my questions. The first one here, I'm just looking at ICE populations. I think you mentioned they were up roughly 20% in your facilities. I was wondering, I'm curious, is that in line with overall population increases at total price facilities?

No. I think I said earlier that some facilities along the southern border are full, others away from the border are -- still have vacant beds. We have plenty of capacity of the 31,000 people that are reportedly detained in facilities. At this time, we have almost 11,000 of those individuals in GEO facilities. So we have over one-third of the individuals that are presently being detained, are housed in GEO facilities. We have one-third of the market share. And presently, the private sector provides approximately 90% of the detention capacity in the country with only approximately 10% of share going to cities or counties that have contracts with DHS for the housing of detained individuals.

Got it. That's helpful. And then just regarding some of the idle facilities, I believe, according to my notes, some are located in Texas. I'm just curious if you're having any conversations with ICE just about opening some of those facilities for the anticipated, increase in ICE populations that we've seen?

I think it's fair to say we have several conversations going on regarding different facilities, and it usually comes down to a matter of funding and their budgets. So they have to wait at the federal level, the new federal budget, which starts October 1, at the state level, it's funding that will probably be approved sometime in spring of next year.

Okay, okay. And then one more, if I may. Just on some expense line items. I know we talked about operating expenses driven by higher wages, but it looked like there was a large decline in general and administrative expenses. I was just wondering if you could comment on that decline.

Nothing significant. I think just some maybe lower labor costs compared to year-over-year professional fees, especially in the legal department, legal fees. In prior quarters, we've had some higher activity on some of the cases the company is undertaken to defend, so nothing specific beyond that stuff, though.

Great. Thank you. That's all for me.

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

Hello, everyone, thank you. Thank you for the call.

Hi, Kirk.

Just a couple of follow-ups. With respect to the ICE population, you mentioned you have 11,000 people in your ICE facilities, where did that peak pre-COVID?

I would say 14,000, 15,000, something like that.

Okay. Thank you. That's helpful. You mentioned that there's potential for some incremental ISAP funding. And I missed what you said, and I was just curious if you could maybe elaborate on that and maybe quantify it?

Well, no, I didn't say there was a potential for additional ISAP funding hopeful that may be the case. There's a potential for increased participation in the ISAP program, which may require additional funding, which would help necessitate ISAP into find that additional funding within DHS or Go to Congress for that additional funding. But there's different policies on extending participation in the ISAP program and moving people around in the program for really cost efficiencies because of budget limitations. But those two things in concert would provide for better use of the program more people on the program and on a more cost-efficient basis.

Got it. I appreciate it. Thank you for the clarification. At the state level, there's been some legislation in some states that would require some more stringent sentencing. What's that like for the population in the states where you have a presence?

Could you repeat that question, please?

Like my understanding is there have been some -- there's been some state legislation that's basically made -- increased the minimum sentencing requirements. I'm just curious if you have -- what you can say about the trends in state population, where you do business?

The trend that we are responding to is one where different states that have either a growing population or even a stable population are facing physical plant problems with their aging facilities. And they're faced with either having to close a facility and they really prefer not to have to build a facility so they have an interest in one of our idle facilities, because it's a much more cost-effective solution for them. So our facilities are, by comparison, significantly newer and more modern. They're all air conditioned. They have artificial soccer turf fields and the different amenities that we've discussed, libraries, continuum of care educational programs. So by comparison, our facilities are attractive in the correctional physical plant marketplace and will be now and continue into the future because the Sunbelt states, in particular, have been adding population. They have the older facilities, and there are several states that are looking to -- for additional correctional space that they don't have internally within their own state because of the aging facilities that are very -- going to be very expensive to fix if they can be fixed at all.

That's interesting. Very helpful. I appreciate it. Thank you.

Next question comes from Jordan Hymowitz with Philadelphia Financial. Please go ahead.

Hey. Guys. Thanks for taking my question. Couple of things. First, on the ISAP program. My understanding is there's a substantial amount of money that could be reallocated within ICE and DHS towards this, that the current administration has been hesitant to do so it's not necessarily more funding, but it's a reallocation of that funding that may become available. Is that the way you understand it?

Well, I'm aware that every department like DHS has the ability to shift funds around within the department to different agencies of that department. And I think I'm aware through public publications of these stories that the -- that ICE has asked for more funding for various reasons, including the alternatives to detention programs, which includes primarily the ICE program.

Okay. And on to the -- the several , there are several cases in Florida before the appellate judge that would indicate that if it would be if the judge would rule in line with the preliminary circle rule that would be more people being monitoring process. Do you know what the timing of any of those cases are?

No, I really don't because I presume all of them are subject to appeal, and that can be a very lengthy process.

Okay. And final question is whether we go from 34 to 40 or somewhere between that at one point that number was 50. And as we head towards a presidential election, the Republicans are going to obviously start talking about numbers like 50 again, what they were before. And I guess my question is two-fold. One is, once you hit those minimums, anything above 32, 33, the incremental profit has to be double because it's not a substitute to a minimum. Is that true? And b, if we would go from a number like 30 to 50, would there be like a profitability that would be more than double on the prison side of the business because the incremental margins are not much more profitable?

Well, it certainly will be more profitable. It's difficult to calculate because it differs from facility to facility. We haven't done a cumulative aggregate calculation of that number, but it's significant. Because we have thousands of additional available beds and each of those beds is for between -- it's a double-digit number.

So the peer number would, b, has said that incremental profitability could be close to double. Would yours be anything different from that once you get above the minimums?

No, I don't think our -- if I'm understanding your question correctly, you're saying that as the occupancy increases to something above our minimum guarantees that the profitability of the company in the ice business would double and that's not accurate. That's our contract price with as guarantees to absorb a significant amount of the cost as well as the return. And there is, as George mentioned, incremental revenue, it is material and it would benefit the bottom-line, but it's not going to double our profitability.

No, no. The incremental 1,000 people above the minimum. In otherwise, if you go from 9,000 and 10,000 versus, say, 13,000 to 14,000. Once you get above those minimums, the incremental profit is dramatically greater.

Yes. And like George said, not necessarily. It depends on how the contract is priced and what those incremental per diems are, but it is meaningful.

Okay. Thank you. And when can you start buying back the debt, would you say?

Well, we're going to make additional pay downs on debt in the third quarter.

And when would the earliest the equity could be started?

We have to renegotiate some of the terms and some of the credit agreements before we can do any meaningful equity buyback.

So, it's a 2024 number at earliest?

Probably 2024 is assumed.

Okay. Thank you guys.

Thank you.

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

Thank you for joining us today. Look forward to the next investor conference call.

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