Target Hospitality (TH) Q2 2024 earnings call transcript

(TH) Target Hospitality Corp. Q2 2024 Earnings Call August 7, 2024, 9:00 a. m. EST. Officers and Speakers Mark Schuck, Senior Vice President of Investor Relations Brad Archer, President and Chief Executive Officer Jason Vlacich, Chief Financial Officer and Chief Accounting Officer Analysts Stephen Gengaro, Stifel Scott Schneeberger, Oppenheimer Greg Gibas, Northland Securities Presentation Operator: Good morning, ladies and gentlemen, and welcome to the Target Hospitality Second Quarter 2024 Earnings Call. (Operator Instructions). Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). This call is being recorded August 7, 2024. I would now like to turn the conference over to Mr. Mark Schuck, Senior Vice President of Investor Relations. Please go ahead. Mark Schuck: Thank you.

Good morning, everyone, and welcome to Target Hospitality's second quarter 2024 earnings call. The press release we issued this morning outlining our second quarter results can be found in the Investor 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. 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. 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. This 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. 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 Vlacich, Chief Financial Officer and Chief Accounting Officer. After their prepared remarks, we will open the call for questions. I will now turn the call over to our Chief Executive Officer, Brad Archer.

Brad Archer: Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. Our second 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. 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 segment, 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. S. government and other strategic partners to jointly pursue the creation of a third 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 third 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. 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. 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. 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 Targets' 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. 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 second quarter financial results in more detail.

Jason Vlacich: Thank you, Brad. Our second quarter results continue to reflect the benefits of our efficient operating model and network flexibility. Second quarter 2024 total revenue was approximately $101 million, and adjusted EBITDA was approximately $52 million. Our Government segment produced quarterly revenue of approximately $60 million. The decrease in revenue from the prior period driven by noncash nonrecurring 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 million. 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 million, and we anticipate these will remain around $9 million to $10 million per quarter for the remainder of the year.

Total capital spending for the quarter was approximately $9 million, 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 million in cash and $329 million of liquidity with zero borrowings under the company's $175 million revolving credit facility, and a network leverage ratio of 0.1x. 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 $375 million and $385 million, and adjusted EBITDA of between $184 million and $190 million, with anticipated 2024 capital expenditures of between $25 million and $30 million.

We continue to progress towards achieving zero net debt and anticipate ending the year with over $350 million 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.

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. 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.

Brad Archer: Thanks, Jason. Our second quarter performance reflects the flexibility of our operating model and our ability to consistently deliver strong financial results. 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 on 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 Hospitality.

Brad Archer: 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, 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. 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 for that business to continue.

Jason Vlacich: 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.

When you get a more mature company in there, the Exxons, the Chevron, the Oxys 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. 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.

Brad Archer: Yes, I would just say in general, right, if you're doing business with one 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.

Brad Archer: Yes, I knew somebody would ask that question, right? But yes, so look, we anticipate an uninterrupted service operating through the November election and a normal course PCC renewal. There have 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. We do expect that, look, in November right up at the time. They'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.

Brad Archer: 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 Dilley. 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. We expect this to become more formalized, if you will, in the fourth quarter 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.

Look, they asked -- for one, let me get high- level. The assets are in great shape, and they've been used for 10 years, but they've been kept up just like all of our facilities, so great shape. They 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 sets, 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.

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. 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. 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.

And when you would expect maybe that to pick up? And what maybe you think needs to happen for increased usage of that facility?

Greg Gibas: Yes, sir. Brad Archer: 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 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 trends.

Jason Vlacich: Yes, but 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 revised guidance for the rest of the year just given the dynamic nature of that occupancy trends and utilization trends. That said, 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.

In terms of, I guess, out like -- I'm sorry -- outlook on HFS South, what did your guidance maybe assume there from either kind of an occupancy perspective? Brad Archer: 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.

Brad Archer: 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. 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, and we're going to -- we will get some of these closed. We have a lot of past value creation ahead of us, and we'll execute on some of these over time.