The GEO Group, Inc. (NYSE:GEO) Q4 2022 Earnings Call Transcript February 14, 2023
Operator: Good morning and welcome to the GEO Group Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there’ll be an opportunity to ask questions. Please note this event has been recorded. I’d 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 fourth quarter and full year 2022 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 four quarter and full year 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 fourth quarter 2022 earnings call. I would like to begin by welcoming back Wayne Calabrese who began serving as Chief Operating Officer in December, a position which he previously held at GEO for over a decade until his retirement in 2010. I would also like to congratulate Ann Schlarb and David Venturella on their recent retirements. We are grateful for their many years of service to GEO and look forward to their new roles as GEO consultants. I’m pleased to be joined today by our senior management to review our fourth quarter and year end financial results, our initial guidance for 2023 and our continued efforts to reduce our overall debt and reduce our net leverage.
Our diversified business units delivered strong operating and financial performance throughout the entire year. We are pleased to have achieved one of the highest quarterly revenues in our company’s history, which grew 11% from one year ago to approximately $621 million, along with quarterly GAAP net income of approximately $42 million. And our quarterly adjusted EBITDA reached a new all time high of $145 million, growing 17% year over year. We believe the adjusted EBITDA is the most important non-GAAP metric of profitability for our company, since it provides the best measure of the fundamentals deriving our operating performance before the impact of non-cash expenses related to our significant asset base and fluctuations in interest rates.
We were able to achieve strong adjusted EBITDA growth throughout the entire year, despite continuing challenges associated with a COVID pandemic and federal policy changes that primarily impacted our Federal Bureau of Prisons contracts. We believe that our strong performance has been the result of our multi year diversification strategy, which has allowed us to establish industry leading positions across the whole spectrum of correctional detention and community based services. Looking at current trends for each of our segments, our secure services owned and leased segment is currently comprised primarily a facilities under contract, with the US Marshal Service and the US Immigration and Customs Enforcement. During the fourth quarter, our active facilities in this segment experienced a year-over-year increase in compensated occupancy levels of three percentage points to 88% of capacity.
With respect to our US Marshals detention contracts, occupancy rates across these facilities have continued to be stable. We believe that our US Marshals facilities provide needed detention that space and services for pretrial federal defendants and are generally located near federal courthouses in areas where suitable alternatives are typically not available. During the fourth quarter of 2022, we were notified by the US Marshal Service of the agencies intend to exercise the five year contract option period for our 768 bed, Robert Dayton facility in Georgia, which would be effective later this month. Turning to our ICE facilities has been publicly reported occupancy rates across all ICE facilities nationwide, nationwide declined during the month of December.
Occupancy rates at our ICE facilities remained at these lower levels during the month of January. However, we recently experienced a 10% increase in occupancy rates in recent weeks. Also, has been widely reported in the media the future application Title 42 at the Southwest border, which was first enacted in March of 2020 remains uncertain and subject to several pending legal challenges. But according to some news reports, it may expire on May 11. Our outlook for 2023 assumes utilization rates across our ICE facilities that are generally consistent with what we experienced in 2022. We have otherwise not included any assumptions regarding the lifting of Title 42 in our guidance. With respect to the Department of Homeland Security Intensive supervision appearance program, or ISAP, the number of participants steadily increased throughout 2022 peaking at more than 300,000.
Just beginning of 2023, we’ve experienced a decline in ISAP participants as a result of recent changes in immigration policies and budgetary pressures. Presently the number of participants in the program is below 290,000. At this time, our outlook for 2023 provides a range of assumptions with the low end of our guidance reflecting a continued reduction in the number of participants in the ISAP program and the high end of our guidance, reflecting a steady rate based on the current level, participant level of approximately 290,000. We expect to be able to tighten their guidance range as the year progresses. With respect to the federal budget, in late December, the US Congress passed the omnibus appropriations bill funding federal government through September 30, 2023.
Under the omnibus bill approved by Congress, ICE’s funded for 34,000 detention beds same as the previous year. Moving to our managed-only business, which is primarily comprised of state level correctional facilities, occupancy rates in our managed-only facilities remain relatively unchanged at 96% of capacity in the fourth quarter of 2022. Turning to our residential reentry centers, which were significantly impacted by the COVID pandemic, as governmental agencies opted for non-residential alternatives, including furloughs, home confinement and day reporting programs. As a result of these actions, occupancy rates in our resident residential reentry segment remains well below historic levels. On the other hand, our non-residential day reporting programs continued to grow during this quarter, with compensated participant days increasing by approximately 26% year over year.
The strong performance throughout the year by our diversified business units allowed us to make substantial progress towards our goal of reducing overall debt and net leverage. We close 2022 with net debt of approximately $1.975 billion and net leverage of approximately 3.7 times adjusted EBITDA. We have previously noted our goal is to continue to focus on reducing our debt each year by approximately $175 million to $200 million. Doing this still would allow us to achieve net leverage below 3.5 times adjusted EBITDA by the end of 2023, despite our net interest expense peeking at over $200 million for this year. Achieving that we hope to reduce debt by another $175 million to $200 million and reach net leverage below three times adjusted EBITDA by the end of 2024.
Assuming annual net interest expense of approximately $175 million. We are hopeful that net interest expense is reduced by $25 million in 2024 and each successive year due to the reduction in debt. By 2024, we are also hopeful that interest rates will have declined to an environment that will allow for the refinancing of portions of our debt, further reducing our net interest expense. Once we achieve our stated debt and leverage reduction goals, we expect to explore options to return capital to our shareholders. We remain optimistic that all these efforts have the potential to unlock additional equity value for our shareholders. Given our strong adjusted EBITDA is a step substantial reduction in our net leverage, we believe that our current stock price represents an attractive valuation with our enterprise value EBITDA multiple currently below our peer group and other comparable diversified services companies.
At this time, I’ll 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. For the fourth quarter of 2022, we reported GAAP net income attributable to GEO of approximately $42 million on quarterly revenues of approximately $621 million. Our adjusted EBITDA for the fourth quarter 2022 increased by 17% to approximately $145 million which is an all time high in quarterly adjusted EBITDA for our company. Our financial results were driven by growth in our electronic monitoring and supervision segment, and increases in compensated mandates in our non-residential re-entry business. Our strong performance throughout 2022 allows us allowed us to make substantial progress towards reducing our debt and net leverage. As of year end 2022, we had $1.975 billion in net debt, and our net leverage was approximately 3.7 times adjusted EBITDA.
We have been focused on reducing our debt for the last three years, and we believe that our efforts have placed you in a materially stronger financial position. In 2022, we completed a series of comprehensive transactions that staggered our debt maturities over a longer period of time, and significantly reduced our debt maturities prior to 2026. Going forward, as George noted, we expect to continue to focus on reducing our net debt with the objective of decreasing our net debt leverage to below 3.5 times, adjusted EBITDA by the end of this year, and to below 3 times adjusted EBITDA by the end of 2024. Also, as noted after achieving our stated leverage targets, our hope is to be able to explore options to return capital to our shareholders and unlock additional equity value.
Moving to our initial financial guidance for 2023, we expect full year 2023 net income attributable to GEO to be between $100 million and $127 million on annual revenues of approximately $2.37 billion to $2.47 billion. Our GAAP net income guidance for 2023 reflects an expected increase in our net interest expense of approximately $67 million due to rising interest rates, and the debt restructuring transactions we completed in August of 2022. We expect our full year 2023 adjusted EBITDA to be between $500 million and $540 million. As George noted, since the beginning of 2023, we have experienced a decline in ISAP participants and presently the number of participants in the program is below 290,000. Our full year 2023 guidance provides a range of assumptions for our electronic monitoring and supervision services segment, with the low end of our guidance reflecting a continued reduction in the number of participants in the ISAP program.
And the high end of our guidance reflecting a steady rate based on the current participant level. We expect to be able to tighten our guidance range as the year progresses. Our full year guidance also reflects no assumption for the potential reactivation of our idle facilities, which total approximately 11,000 secure services beds and 2,000 re-entry beds. Our full year 2023 guidance also reflects higher labor, medical and food expenses due to continued inflationary trends. Additionally, in our contracts from time-to-time are normally renegotiated to reflect changing circumstances, which can result in higher per diem rates to support higher wages and other expenses. Or in other cases contract changes may result in lower per-diem rates to reflect reductions in the scope of services or staffing levels.
Our 2023 guidance includes several such expected changes taken into account. We expect our effective tax rate for the full year to be approximately 28% exclusive of any discrete items. For the first quarter of 2023, we expect net income attributable to GEO to be between $26 million and $28 million, quarterly revenues of $605 million to $610 million. And we expect our first quarter 2023 adjusted EBITDA to be in a range of $127 million and $132 million, compared to fourth quarter 2022 results our first quarter 2023 guidance reflects the impact of having two fewer days in the quarter, representing approximately $14 million in revenue and $3 million in EBITDA. Additionally as we have previously addressed, our first quarter of the year is impacted by seasonality related to payroll taxes, which are front-loaded in the beginning of each year and have an impact of approximately $7 million to the bottom line.
Our first quarter 2023 guidance also reflects our assumptions related to higher interest expense due to rising interest rates and higher labor, medical and food expenses due to continued inflationary trends. Finally, as George mentioned, as population nationwide declined during the month of December and remained at those lower levels during the month of January before beginning to increase in recent weeks. At this time, I’ll 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 fourth quarter of 2022, our employees and facilities achieved several important milestones. Our facilities successfully underwent 56 audits, including internal audits, government reviews, and third-party accreditations. Four of our Secure Services facilities received accreditation from the American Correctional Association during the fourth quarter with an average score of 99.4%. Our GTI transportation division safely completed approximately 4.1 million miles driven in the United States and overseas during the fourth quarter of 2022. We are proud of the dedication and professionalism of our employees and their commitment to achieving operational excellence, which underpin these important milestones.
With respect to the trends for our government agency partners at the federal level, populations at US Marshals detention facilities have remained stable. The US Marshals provides custodial services for pretrial detainees facing federal criminal proceedings. As we noted last year, our 770 beds San Diego facility for the US Marshal Service received the contract extension through September 30, 2023. We have two other direct contracts with the US Marshal Service in Georgia and Texas, with current option periods that run through February 2023 and September 2023, respectively. In December, we were notified by the US Marshal Service of the agency’s intention to exercise the five-year contract option period for our 768 bed, Robert Deyton facility in Georgia, which would begin later this month.
We remain optimistic regarding the continued utilization of all these important facilities, which as previously noted, provide needed bed space and services near federal courthouses, where there’s generally a lack of suitable alternative detention capacity. With respect to the US Immigrations and Customs Enforcement, as previously noted, our ICE facilities experienced the decline in populations during the month of December. While ICE detention populations remained at those lower levels during the month of January, we recently experienced a 10% occupancy rate increase in recent weeks. With respect to the current funding levels for the agency, ICE’s funded again for 34,000 detention beds under the Omnibus Appropriations bill, which funds the federal government through September 30, 2023.
As had been widely reported, COVID related restrictions first implemented in March of 2020 under Title 42 remain in place at the southwest border. And the future of these restrictions remains uncertain due to several pending legal challenges. But according to some news reports, it may expire on May 11th. At this time, we have not included any assumptions in our guidance related to the potential timing or impact of Title 42 restrictions being lifted. As a long standing service provider to ICE, our focus remains on providing high quality support services to our facilities and being prepared to respond to our government agency partners needs. The ICE Processing Centers where we provide support services offer 24/7 access to quality healthcare, access to legal counsel, culturally sensitive meals approved by registered dietitians, access to faith-based and religious opportunities, and enhanced amenities including artificial turf soccer fields, covered pavilions, exercise equipment, multipurpose rooms, legal and leisure libraries and other amenities.
Our ICE Processing Centers helped fulfill an important mission of our government agency partner with special purpose built facilities, amenities and services in key geographical areas of the country, where suitable alternatives are not often available. Moving to our state government agency partners, during the fourth quarter, we entered into two contract renewals in Arizona. In October, we signed a five-year contract renewal for our 750 beds, Florence West Correctional and Rehabilitation Facility. And in December, we signed a two-year contract renewal for the 3,400 bed Kingman Correctional and Rehabilitation Facility. These two important facilities deliver high quality support services on behalf of the Arizona Department of Corrections, including enhanced rehabilitation programs and post-release services under our GEO Continuum of Care.
Internationally, we entered into a contract with the State of Victoria for the delivery of primary health services across 13 public prisons. This new contract will commence on July 1st, 2023, and is expected to generate approximately $33 million in incremental annualized revenues. Finally, we are focused on marketing our current idle facilities, which total approximately 11,000 beds to government agencies at the federal and state level. And we hope to be able to reactivate, lease, or sell these important assets in the future. In addition to opportunities at the federal level, we are monitoring trends at the state level, as several state government agencies may consider initiatives which could involve the use of purchased or contractor-owned facilities to address challenges presented by older prison infrastructure and staffing shortages.
At this time, I will turn the call over to Wayne Calabrese for review GEO Care.
Wayne Calabrese: Thank you, James. Good morning everyone. I’m pleased to provide an update on our GEO Care business unit. Starting with our reentry services segment, our residential centers continue to operate below historical occupancy rates and in 2022, at approximately 55% of capacity. As we have previously discussed, our residential reentry centers were impacted by the COVID pandemic as government agencies prioritized non-residential alternatives including furloughs, home confinement, day reporting, and electronic monitoring programs. Despite these challenges, we have continued to successfully renew our existing contracts and we are hopeful that trends and occupancy rates will continue to improve. During the fourth quarter, we renewed five residential reentry contracts, including four contracts with the Federal Bureau of Prisons.
Additionally, six of our residential reentry centers received accreditation from the American Correctional Association during the fourth quarter with an average score of 99.8% and three of the centers received perfect accreditation scores of 100%. Looking at our non-residential programs and services, we continue to experience strong growth during the fourth quarter. Compensated participant days for our non-residential day reporting centers increased by 26% year-over-year. Our non-residential programs provide high quality community-based services, including cognitive behavioral treatment, supporting up 8,500 parolees and probationers at 90 locations across 10 different states. Our Electronic Monitoring and Supervision Segment also continued to deliver strong revenue growth.
Our quarterly revenue in this important segment increased to almost $150 million during the fourth quarter. Our BI subsidiary provides a full suite of electronic monitoring and Supervision solutions, products and technologies on behalf of federal, state and local agencies across the country. At the federal level, BI provides technology solutions, holistic case management, supervision, monitoring and compliance services under the ISAP program on behalf of ICE and the US Department of Homeland Security. BI has been the incumbent service provider to ICE and the United States Government for close to 20 years. And we are currently delivering these comprehensive services under a five year contract effective through July of 2025. Under BI’s tenure, the program has achieved high levels of compliance for participants going through the immigration review process underpinned by our partnership with ICE and BI’s ability to continually innovate.
As a result of this success, the program has grown steadily through the years, and this growth accelerated during 2022, when the program ended the year peaking at more than 300,000 monitored individuals. As previously noted, participant levels in the program have recently declined and are presently under 290,000 as result of recent changes in immigration policies, and budgetary pressures. Turning to our GEO Continuum of Care and in prison programs division, our employees have continued to deliver enhanced in custody rehabilitation, reentry programming and post-release support services to an average daily population of approximately 31,500 participants. In 2022, we completed approximately 3.5 million hours of enhanced rehabilitation programming.
And our academic programs awarded close to 2,400, GED and high school equivalency degrees and our vocational courses awarded approximately 8,100 vocational training certifications. Our substance abuse treatment programs awarded approximately 7,300 program completions, and we achieved almost 40,000 behavioral program completions, and over 34,000 individual cognitive behavioral treatment sessions. Importantly, we also provided post release support services to more than 2,500 individuals returning to their communities. Our GEO Continuum of Care integrates enhanced in-custody rehabilitation, including cognitive behavioral treatment with post release support services that address community needs of released individuals, including housing, food, clothing, transportation and employment assistance.
During the fourth quarter of 2022, our post release support services allocated over $300,000 to support individuals released from GEO facilities as they return to their communities. This funding brings the total spending on post release expenses to approximately $8 million since we began providing support grants for released individuals in 2016 to assist them with their community needs. We believe that the scope and the substance of our GEO Continuum of Care program is unparalleled in criminal justice. Our award-winning program provides a proven model of — on how 2.2 million people in the United States criminal justice system can be better served in changing their lives. All the important milestones achieved by our GEO care segments during 2022 are the direct result of the daily commitment to operational excellence by our frontline employees guided by our GEO care management team.
We’re very grateful for their continued dedication and their professionalism. And at this time, I’ll turn the call over to Jose Gordo for his closing remarks.
Jose Gordo : Thank you, Wayne. Our business units delivered strong financial results during the fourth quarter of 2022 and throughout the entire year. We believe our performance is underpinned by our diversification strategy, which has allowed GEO to build industry leading positions in all key segments of the correctional, detention and community-based services spectrum. Our cash flows are supported by valuable company-owned real estate assets and diversified business units and tailing essential government services, ranging from secure residential care to community-based and technology solutions. Our diversified service lines are complementary to one another and helped us achieve strong growth at a time when our business was facing pandemic and policy related challenges.
We believe that our diversification sets GEO apart in our industry, and has been a distinct value creator for our shareholders. We recognize that our company’s success is supported by the dedication and commitment of our approximately 18,000 employees worldwide. We are proud of the milestones achieved by our employees, facilities and programs during 2022. These accomplishments exemplify our organizational commitment to operational excellence across all service lines. We are also proud to have achieved one of the highest quarterly top line revenues and highest quarterly adjusted EBITDA in our company’s history, which we believe is the most important non-GAAP metric of profitability for our company. Adjusted EBITDA provides the best measure of the fundamentals driving our operating performance, before the impact of non-cash expenses, and fluctuations in interest rates.
Our strong results have allowed us to make substantial progress toward deleveraging our balance sheet. Over the past three years, our management team has executed a discipline strategy to reduce our level of indebtedness, which, when coupled with our growth has significantly decreased our net leverage. A cornerstone of our strategy was the completion of the comprehensive debt transactions in August 2022, which staggered our debt maturities over — maturities over a longer period of time, and significantly reduced our near term maturities. As a result of these efforts, we close 2022 with total net debt of $1.975 billion net leverage of three points — 3.7 times adjusted EBITDA, and no significant debt maturities due before 2026. We expect to continue to focus on reducing our net debt and our net leverage.
And after attaining our debt reduction and objectives, we hope to be able to explore options to return capital to shareholders. With our strong adjusted EBITDA and the substantial reduction in our net leverage, we believe that our current enterprise value to EBITDA multiple offers an attractive equity valuation when compared to similar diversified services companies. That completes our remarks and we will be glad to take questions.
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