Target Hospitality Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Target Hospitality Second Quarter 2024 Earnings Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on August 7, 2024. I would now like to turn the conference over to Mr.

Operator

Mark Shook, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to Target Hospitality's Q2 2024 Earnings Call. The press release we issued this morning outlining our Q2 results can be found in the Investors section of our website. In addition, a replay of this call will be archived on our website for a limited time. Please note the cautionary language regarding forward looking statements contained in the press release.

Speaker 1

This same language applies to statements made on today's conference call. This call will contain time sensitive information as well as forward looking statements, which are only accurate as of today, August 7, 2024. Target Hospitality expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today's date, except as required by applicable law. For a complete list of risks and uncertainties that may affect future performance, please refer to Target Hospitality's periodic filings with the SEC. We will discuss non GAAP financial measures on today's call.

Speaker 1

Please refer to the tables in our earnings release posted in the Investors section of our website to find a reconciliation of non GAAP financial measures referenced in today's call and their corresponding GAAP measures. Finally, as previously announced, on March 25, 2024, Arrow Holdings, an affiliate of TDR Capital, proposed to acquire all outstanding shares of common stock of Target Hospitality it or affiliates do not already own. The Board of Directors of Target Hospitality has established a special committee of independent directors to evaluate this proposal. The special committee has retained their own independent outside financial and legal advisors, and collectively, they are continuing their review and evaluation of the proposal as well as evaluating alternative proposals and other strategic alternatives. At this time, the special committee has made no decision with respect to the proposal.

Speaker 1

As a result, management will be unable to comment on the proposal or the evaluation process during today's call. Leading the call today will be Brad Archer, President and Chief Executive Officer followed by Jason Vlasic, Chief Financial Officer and Chief Accounting After their prepared remarks, we will open the call for questions. I'll now turn the call over to our Chief Executive Officer, Brad Archer.

Speaker 2

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. Our 2nd quarter performance continues to illustrate the benefits of our efficient operating structure and network capabilities. These elements support our ability to deliver strong financial results while remaining focused on delivering the premium hospitality solutions our customers demand. The scale and flexibility of our network has established a highly durable operating model that supports the consistent achievement of our financial goals and has established a materially enhanced financial position centered on the strength of our balance sheet.

Speaker 2

We are confident these fundamentals will continue to support strong operating margin through cycles, enabling us to support our world class customers while continuing to pursue diversifying growth opportunities. Turning to our segments. In the government segment, our PCC community has entered its 4th year of service and is the longest serving influx care facility in the United States. Our operational commitment has solidified PCC as a cornerstone in supporting the government's critical domestic humanitarian aid mission, and we anticipate a normal course renewal of this contract in November of this year. Further, this established presence and consistent operational performance supports Target's continued engagement with the U.

Speaker 2

S. Government and other strategic partners to jointly pursue the creation of a 3rd ICF site not currently in the government's portfolio. We are pleased with continued dialogue regarding this opportunity. And as we have previously stated, we anticipate additional details regarding the 3rd ICF site later in 2024. Regarding our HSS segment, we continue to benefit from consistent customer demand as our world class customers find added value and our network flexibility in the range of premium solutions we provide.

Speaker 2

As an example, our unmatched capabilities support the expansion of existing customer relationships during the quarter, further illustrating the broad reach of our service offerings to meet a variety of customer needs. Additionally, we continue to take steps to realize incremental operational efficiencies across this segment and evaluate opportunities to strengthen margin contribution through enhanced network optimization. Our existing contract portfolio and commitment to network optimization continues to support impressive operating income and industry leading cash conversion. Target's enhanced financial profile establishes the ideal position to continue evaluating a pipeline of attractive growth initiatives. We believe these naturally adjacent opportunities will complement our existing service offerings, while establishing multiple avenues to expand Target's long term growth opportunity set.

Speaker 2

Within the government end market, we remain engaged with multiple federal agencies on a variety of solutions they are seeking to implement along the U. S. Southern border. As Target continues to evaluate these opportunities, we are actively seeking to utilize Target's existing strategically located South Texas assets to support these solutions. Further, we continue to pursue a growing pipeline of non government growth initiatives.

Speaker 2

As we have previously discussed, these opportunities include large industrial projects throughout the U. S, including technology infrastructure, energy transition and the increase in domestic rare development. Importantly, these opportunities remain centered on Target's full turnkey hospitality solutions, as well as expanding our value chain participation through individual elements of existing core competencies. As a reminder, the size of these growth opportunities inherently leads to longer sales cycles. While we are pleased with the continued dialogue on many of these opportunities, the timing and final outcomes are uncertain and can be difficult to predict.

Speaker 2

As we evaluate these initiatives, we remain committed to achieving defined objectives of our growth strategy. Our primary objective remains focused on diversifying our contract portfolio and broadening our customer reach, while continuing to generate strong operating income and industry leading cash conversion. In summary, we have established an enhanced financial position centered on the strength of our balance sheet and strong cash flow generation. These elements support our ability to provide a premier service offering to our customers, while simultaneously delivering strong financial results and pursuing attractive growth opportunities. I'll now turn the call over to Jason to discuss our 2nd quarter financial results in more detail.

Speaker 2

Thank you, Brad. Our second quarter results continue to reflect the benefits of our efficient operating model and network flexibility. 2nd quarter 2024 total revenue was approximately $101,000,000 and adjusted EBITDA was approximately $52,000,000 Our government segment produced quarterly revenue of approximately $60,000,000 The decrease in revenue from the prior period was driven by non cash non recurring infrastructure enhancement revenue associated with the significant expansion that occurred at our PCC community in 2022, which was fully amortized as of November 2023. Our HFS and other segments delivered quarterly revenue of $41,000,000 These segments continue to benefit from the consistent customer demand illustrating the value our customers find in our premier hospitality solutions. Recurring corporate expenses for the quarter were approximately $9,000,000 and we anticipate these will remain around $9,000,000 to $10,000,000 per quarter for the remainder of the year.

Speaker 2

Total capital spending for the quarter was approximately $9,000,000 primarily focused on enhancing and maintaining Target's asset base across our expansive network. The strength in our core service offering continues to support strong cash generation and an enhanced financial profile. We ended the quarter with $154,000,000 in cash and $329,000,000 of liquidity with 0 borrowings under the company's $175,000,000 revolving credit facility and a network leverage ratio of 0.1 times. These impressive financial results coupled with a high degree of revenue visibility and strong cash conversion support our 2024 financial outlook, which consists of total revenue of between 3.75 $1,000,000 $385,000,000 and adjusted EBITDA of between $184,000,000 $190,000,000 with anticipated 2024 capital expenditures of between $25,000,000 $30,000,000 We continue to progress towards achieving 0 net debt and anticipate ending the year with over $350,000,000 in total liquidity. As a reminder, given the dynamic fluctuations in the PCC community population, we believe it is prudent to exclude any incremental PCC occupancy based variable revenue from our 2024 financial outlook.

Speaker 2

Regarding our outstanding 2025 senior notes, we continue to evaluate a range of possible liability management initiatives focused on further strengthening our financial position, while balancing and expanding pipeline of strategic growth opportunities. This approach is centered on maximizing financial flexibility, enabling us to quickly react to value enhancing growth opportunities as they arise. The strength of our balance sheet, high degree of revenue visibility and continued strong cash conversion provides the ability to continue to actively evaluate and pursue a strong pipeline of growth initiatives. These opportunities are designed to leverage Target's operating expertise and existing core competencies to establish a robust service offering across various U. S.

Speaker 2

Government agencies and commercial applications. Importantly, as we evaluate these initiatives, we will remain focused on maintaining the enhanced financial profile we have achieved through disciplined capital allocation and strong discretionary cash flow conversion. With that, I will turn the call back over to Brad for closing comments. Thanks, Jason. Our 2nd quarter performance reflects the flexibility of our operating model and our ability to consistently deliver strong financial results.

Speaker 2

This execution is reflected in the strength of our balance sheet, strong liquidity profile and enhanced financial position. These fundamentals provide tremendous confidence in our ability to continue delivering impressive financial results while simultaneously pursuing a growth pipeline focused expanding and diversifying our contract portfolio and customer reach. I appreciate everyone joining us on the call today and thank you again for your interest in Target

Operator

Hospitality. Thank you. Ladies Our first question is from Stephen Gendreau from Stifel.

Speaker 3

Thanks. Good morning, everybody. Good morning. Good morning. So two things for me.

Speaker 3

The first, trying to figure out exactly that after, but when we think about the HFS South business and you think about the capacity that you have that's dedicated to sort of the traditional core oilfield businesses. How is that capacity versus sort of demand and contract commitments? And I think what I'm trying to get to is, A, how do we think about that business in general going forward? And I know that there's been kind of a drop off in activity here near term. And B, are you at kind of a critical mass where you can't reallocate any of those assets if something was to pop up?

Speaker 3

Or how just trying to kind of gauge the capacity versus utilization of demand in the oil patch?

Speaker 2

Yes. Look, I think we're pretty appropriately optimized throughout the network. I would tell you there are shifts in our customer spend and just recently we relocated some assets from one location to another. So we still have the ability to do that, Steve, and we'll continue to look at that. The business has been good there.

Speaker 2

It's been steady. We look for that to continue. As we said, we're optimizing just some of the efficiencies. But overall, the business has been good and strong for us there. Optimization I think is probably the best we've seen it in a long time.

Speaker 2

It's kind of been that way for about a year and we're starting to see a few customers ask for more. So that's nice. I'm not going to guarantee that comes, but it's nice to see some of these larger folks that have now entered the Permian over the past few years looking at doing more on their own. They're kind of getting into some more remote areas and talking to us about doing some things. So we look that business to continue.

Speaker 2

And we did add capacity last year. We purchased some assets in Q1 of last year and then we also redeployed some assets from the government segment as well. So we feel like the capacity is in a pretty good spot, but we still have the ability to move things around if we need to.

Speaker 3

And then just as a follow-up to that, is the I'm glad you mentioned kind of the larger customer base. Does the M and A activity and there being kind of fewer larger players and the bigger players getting bigger, does that help in sort of negotiations, maybe not on price, but on sort of contract duration and kind of visible demand from your customers?

Speaker 2

Look, as you know, you've been in this a long time as well as me on some of the energy side. When you get a more mature company in there, the Exons, the Chevron, the Oxy's that are spending, they look longer term. So our ability to do that is helped as well, right. So we like that. We think that's a positive.

Speaker 2

They also look at the HR side a little differently than some of your smaller firms. They want to take care of it's not that the others don't, but they put a priority on making sure their workforce is taken care of. So as they ramp up, we think that helps us in that.

Speaker 3

Great. And then just one final follow-up to that and just kind of given what Exxon is doing and there's sort of expectations on the DLE on the lithium side. Does your relationship historically with companies like Exxon is one that comes to mind in the oil patch give you a leg up when you start talking about potential contractual agreements around alternative place?

Speaker 2

Yes, I would just say in general, right, if you're doing business with 1 of the larger companies, the door is open. You don't have to beat on it a lot to get in and talk to them about an Arkansas or wherever they might be looking at doing some different work that's not so much oil and gas. So, yes, it definitely helps.

Speaker 3

Okay, great. Thank you for the details.

Speaker 2

You bet.

Operator

Our next question will be coming from Scott Schneeberger from Oppenheimer.

Speaker 4

Thanks very much. Good morning. I guess just want to start out in discussing PECOS. That's on a 1 year review of extension and we won't it will be around the time of the Q3 call where that's around renewal time, that's around election time. I'm just curious, I know you probably can't say too much, Brad, right now, but what type of conversations are you having with the government?

Speaker 4

Do you have a sense of if that will be renewed or not? Or does that start much closer to that time?

Speaker 2

Yes. I knew somebody would ask that question, right? But yes, so look, we anticipate uninterrupted service operating through the November election and a normal course PCC renewal. There has been some discussions already about that and that's what kind of frames my statement to you, Scott, on the normal course PCC renewal. I won't get into too much detail.

Speaker 2

We do expect that look in November right up at the time. We're not going to do it early just kind of how these IDIQs work, but there's nothing that has been discussed that would tell us any differently. And in fact, it's quite the opposite, right? So we feel good about that going into November.

Speaker 4

Thanks. Appreciate that. And then this third potential contract for ICF, I think I heard you say anticipating something to happen before the end of the year. So this is a similar question. What type of timeline is that on?

Speaker 4

And what's the level of certainty you're feeling? Obviously, there was a change at Dilley. So, the government is considering things in a lot of different ways these days. Just curious your feel there? Thanks.

Speaker 2

Yes, I think the difference for everybody and we've talked about this a lot is when you look at the laws that protect the children, the unaccompanied minors, it's different than what was going on in Dilly. So they had some flexibility and some reasons they did that. But on the ICF, they still need this emergency influx capacity. Look, as of recent of last week, we were told this is moving forward. We have actually submitted our design as did some other competitors that they requested.

Speaker 2

We expect this to become more formalized, if you will, in the Q4 towards the end of the year. But today, we fully expect this to move forward and then to award that project, and we're in the middle of that.

Speaker 4

And just one more for me on the topic of Dilly. It feels like that's an interesting asset that could be certainly re purposed. And there's a lot that's going to happen over the coming few months with election and other things. And particularly kind of in the context of how you're answering the prior two questions. But just Brett, what's HFS could be repurposed for an option there, probably still government considerations.

Speaker 4

Just what's the future of Dilly hold, do you think?

Speaker 2

Yes, absolutely. And good question. Look, the assets for 1, let me just high level. The assets are in great shape. They've been used for 10 years, but they've been kept up just like all of our facilities.

Speaker 2

So great shape to go to use again immediately, right? The location of this facility being close to the southern border is a major positive, where it's set as it sits, right? We feel strongly the use case for this facility is very high as well. And I'll just leave you with this. We've already started remarketing this facility as soon as we found out about this, right, to government agencies as well as multiple prime contractors that do business with the government, as well as in HFS.

Speaker 2

But we think this facility where it sits, how it's designed, really has a lot of capabilities to be put back to use and not be moved. I would tell you, we're already in the early innings. We've had a formal request come through for a proposal. And so we'll get that in here over the next few weeks. We'll see where it goes.

Speaker 2

But the marketing and just the availability of this is already peaking folks' interest within the government prime contractors that lease to the government as well and provide services there. And look, it's an election year. I don't care which side of the aisle gets in on that. I think this has a lot of legs and I feel good about remarketing where it sits. If we don't, we've shown over the past through North Dakota and in Texas, we are very good at reutilizing our assets.

Speaker 2

So I have no doubt we'll get this back out on lease. Timing, I'm not going to give you, but I like what's happening kind of in the early innings today in the ballgame.

Operator

Last question on the line will be coming from Greg Kuebus from Northland Securities.

Speaker 5

Hey, good morning, Brad and Jason. Thanks for taking the questions.

Speaker 2

Good morning.

Speaker 5

Nice to hear it's stating normal course renewal with Pecos facility. Curious if you just had any visibility or hearing anything on kind of utilization trends going forward? And when you would expect maybe that to pick up? And what maybe you think needs to happen for increased usage of that facility?

Speaker 2

You mean with respect to the PCC facility, right, correct utilization? Yes. Yes. So as a reminder, we did have some utilization in Q1, some variable services revenue generated by that. It is possible that the utilization trends the way it did last year where it picked up in September Q4 timeframe.

Speaker 2

And so that is that's a possibility. Right now, obviously, there's little to no utilization in it. But it's trending exactly as it trended last year. So that's certainly within our expectations based on what we experienced last year in terms of utilization. Yes.

Speaker 2

If the trend repeated itself, you'd actually see some towards the end of the year, right? Not saying that's happening, but there's definitely the possibility. We just thought it was prudent to note. There's none in our guidance on our revised guidance for the rest of the year just given the dynamic nature of that occupancy trends and utilization trends. That said, I mean, again, the occupancy is trending exactly in line as it did last year, Q2 to Q2 year over year, the trend is exactly the same.

Speaker 2

And so that being said, last year, we did experience utilization pickup in early September through the rest of the year.

Speaker 5

Great. And makes sense from a forecasting perspective, but appreciate the color there. In terms of, I guess, outlook on HFS South, what are your guidance maybe assume there from either kind of an occupancy perspective?

Speaker 2

Yes, we expect the utilization trends to be somewhat comparable to the way they've trended in the first half of this year with some moderate seasonality in Q4 consistent with prior year trends. So pretty stable in terms of the utilization trending in HFS South for the rest of the year.

Speaker 5

Okay, great. And I guess last one, just more broad about your kind of pipeline of opportunities. Just regarding your evaluation of those organic growth opportunities that you've discussed, Any change, I guess, in your pipeline or the outlook or the timing of those potential opportunities? And or would you just say we're kind of in a similar position as last quarter as you evaluate those opportunities?

Speaker 2

Yes, Greg, I would tell you we're still in the same position. I would tell you our pipeline of project continues to build. So we've added some quality prospects there. As we've described in the past, the reality is most, if not all of these are really large projects. So, the sales cycle is really long.

Speaker 2

So for all of us the timing is difficult to predict. But our focus continues to be the diversification of our contract portfolio and expanding our customer reach. And look, we have a good track record over the years of closing large projects. We're going to do that, right? We're going to we will get some of these closed.

Speaker 2

We have a lot of past value creation ahead of us, and we'll execute on some of these over time.

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Earnings Conference Call
Target Hospitality Q2 2024
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