Target Hospitality Corp

NASDAQ:TH

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Target Hospitality Third Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, November 12, 2024. I would now like to turn the conference over to Mark Schuck. Please go ahead.

[Mark Schuck, executive]

Thank you. Good morning, everyone, and welcome to Target Hospitality's Third Quarter 2024 Earnings Call. The press release we issued this morning outlining our third quarter 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. 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, November 12, 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.

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'll now turn the call over to our Chief Executive Officer, Brad Archer.

[James Archer, executive]

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. The strength in Target's underlying business fundamentals continues to support strong quarterly performance. These fundamentals, along with Target's proven operational flexibility, support an efficient operating structure and unmatched network capabilities. Together, these elements support a highly durable operating model and our ability to deliver strong results through business cycles.

Our consistent performance has solidified our strong financial position while simultaneously providing premium hospitality solutions to our world-class customers. This focused commitment has established an ideal platform centered on the strength of our balance sheet and optimized liquidity position to continue advancing our diversifying growth initiatives.

Now turning to our segments. In the Government segment, our PCC community continues to serve as a cornerstone in the U.S. government's critical domestic humanitarian aid mission. This community stands as the longest-serving influx care facility in the United States, and we anticipate a normal course renewal of this contract in the coming weeks, marking its fifth year of continuous operation.

Regarding our HFS segment, we continue to benefit from our premier service offerings and the value our world-class customers find in our network capabilities. These attributes have supported a 12% increase in customer demand since the fourth quarter of 2023, further highlighting the benefits of our unique capabilities and our strategically located network.

Additionally, we continue to focus on identifying incremental operational efficiencies across our segment and evaluate opportunities to strengthen margin contribution through enhanced network optimization.

Our existing contract portfolio, coupled with consistent customer demand, continues to support a high degree of revenue visibility and industry-leading cash conversion. With an intentional focus on solidifying our balance sheet and optimizing our liquidity profile, we have established and enhanced our financial position. This commitment has created an ideal platform as we continue to focus on allocating capital to value-enhancing growth initiatives with the objective of expanding and diversifying our contract portfolio.

We continue to evaluate an attractive pipeline of strategic growth initiatives, which align with our existing service offerings and capabilities. These naturally adjacent opportunities can establish multiple avenues to expand Target's long-term growth profile by broadening our customer reach and end market exposure.

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. Our recent dialogue has also included conversations with Republican representatives regarding potential solutions they are considering. 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 nongovernment 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 earth development. 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.

Additionally, we are evaluating select inorganic opportunities, which we believe can offer exposure to attractive end markets while remaining centered around our existing core competencies. These opportunities, coupled with our organic growth initiatives, offer the ability to accelerate our customer diversification and growth trajectory. 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, the strength of our existing customer base, network capabilities and proven operational flexibility consistently supports the achievement of our financial goals. This execution has solidified our financial position centered on an optimized balance sheet and robust liquidity profile. These elements support our ability to continue providing premium hospitality solutions to our world-class customers while simultaneously pursuing attractive growth opportunities.

I'll now turn the call over to Jason to discuss our third quarter financial results in more detail.

[Jason Vlacich, executive]

Thank you, Brad. Our third quarter results continue to reflect the benefits of our efficient operating model and network flexibility. Third quarter 2024 total revenue was approximately $95 million, with adjusted EBITDA of approximately $50 million. Our Government segment produced quarterly revenue of approximately $53 million.

The decrease in revenue from the prior period was primarily 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. In addition, the decreases were partially attributable to lower PCC minimum lease and variable services revenue and the termination of the South Texas Family Residential Center contract effective August 9, 2024.

Our HFS and other segments delivered quarterly revenue of $42 million. These segments continue to benefit from consistent [indiscernible], illustrating the value our customers find in our premium hospitality solutions and network capabilities.

Recurring corporate expenses for the quarter were approximately $10 million. 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 $10 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 $178 million in cash and $353 million in total liquidity with 0 borrowings under the company's $175 million revolving credit facility and a net leverage ratio of 0.0x.

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 between $375 million and $385 million and adjusted EBITDA between $184 million and $190 million.

We anticipate 2024 capital expenditures of between $25 million and $30 million. We continue to progress towards achieving 0 net debt and anticipate ending the year with over $350 million in total available liquidity.

As a reminder, given the dynamic fluctuations in PCC community population, we believe it is prudent to exclude any incremental PCC occupancy-based variable revenue from our 2024 financial outlook. This enhanced financial profile and continued strong cash generation has supported our ability to return approximately $33 million to our shareholders year-to-date through November 8, 2024, by repurchasing approximately 3.8 million shares of common stock. These repurchases illustrate our focus on utilizing a broad range of initiatives to pursue value-enhancing opportunities for our shareholders.

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 an 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 actively evaluating and pursuing strong pipeline of growth initiatives. These initiatives, including select inorganic opportunities are designed to leverage Target's operating expertise and existing core competencies to broaden Target's contract portfolio and end market reach.

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.

[James Archer, executive]

Thanks, Jason. Our third quarter performance further illustrated our proven operational flexibility and consistency in achieving our financial goals. We have solidified our financial position with an optimized balance sheet and enhanced liquidity profile. These strong business fundamentals have established the ideal platform as we continue pursuing strategic growth opportunities focused on expanding and diversifying our contract portfolio, end market exposure, and customer reach.

We are well positioned with intentional focus as we evaluate these attractive growth initiatives centered on accelerating value creation for our shareholders.

I appreciate everyone joining us on the call today, and thank you again for your interest in Target Hospitality. We will now turn the call back over to the operator for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Scott Schneeberger of Oppenheimer.

[Unknown Analyst]

It's [ Daniel ] on for Scott. Regarding the demand for your government assets, how do you see the recent election outcome influence the outlook?

[James Archer, executive]

Sure. This is Brad. Look, we continue to remain actively engaged with the federal agencies. And I mentioned in the prepared remarks as well as Republican representatives. We definitely believe the new administration, everybody has seen the policies they talk about. We think it's going to be very positive. We've had continued dialogue as recently in the past few weeks.

So look, we're engaged. We have thousands of beds ready for immediate use with the majority of these beds being used before by different departments within the federal government. We have an exceptional past performance record, and we're well positioned to provide many different solutions to many different departments within the agencies.

So we look forward to helping. We think we will definitely see a positive trend in the business on that side of it.

[Unknown Analyst]

Got it. You previously talked about the third ICF facility. Do you have any updates regarding that process?

[James Archer, executive]

Sure. Look, our recent conversations indicate the government's desire and intention to continue to proceed with the third ICF, the pace and frequency of those conversations have slowed. We believe the government is proceeding through their evaluation and selection process just at a more measured pace.

When you look at -- they have 3 facilities now up and running. That was their push to get that done. So they kind of stepped back. We think it will continue on at a measured pace, but we don't expect anything substantive until 2025 to get a better update there.

[Unknown Analyst]

Got it. And final one for me. Switching gears to HFS. Utilization expanded, ADR was down a bit. Could you address the outlook for that business, and how do you see the election outcome influence that?

[Jason Vlacich, executive]

Yes. So I'll take the first part of that. This is Jason. Thanks for the question. So that business has continued to hold steady. We've balanced out the ADR with optimization and utilization a bit, but the ADR has fluctuated within ranges that we would expect it to fluctuate within with balancing that out. In terms of how we see it going forward for the balance of the year, I would expect it to look somewhat like last year with moderate seasonality in Q4 as we've experienced in the past.

And then in terms of the election outcome, Brad can certainly chime in here as well. But to sort of set the stage, it's a steady business. It definitely holds -- anchors the business quite nicely. It's relatively mature. And so while there are opportunities, it's a relatively mature business. So Brad, you can certainly chime in a little bit more.

[James Archer, executive]

When you talk about the Permian Basin, some of the largest operators or really the largest operators in the world are sitting there. That market has matured over the years. It's very steady. We think that's what remains of that business. Great business for many years to come.

And the way we're set up there with our network is, look, if they start to put more capital in that area, we're going to benefit without putting much money into it, right? Utilization goes up and those types of things. But we're seeing in what we believe is they'll remain very disciplined in their capital approach right now, right? But if that changes over time, we'll be the benefit of that.

[Operator]

[Operator Instructions] Our next question comes from Alec Scheibelhoffer of Stifel.

[Alec John Scheibelhoffer, analyst]

I just want to follow up on a few things on the government side of the business. Just looking at gross margins in the quarter, they were pretty solid on both a sequential and year-over-year basis. I was just wondering if you could maybe give any color on how we should be thinking about that in relation to bridging to your 2024 EBITDA guidance and just how we should think about that going forward as well?

[Jason Vlacich, executive]

Yes. So with respect to the Government segment kind of future looking ex Lilly, there could be a few percentage points drop in the gross margin while we hold some of the fixed costs to keep that facility warm for future government opportunities, which we believe there are.

But that being said, as obviously, the occupancy goes down, you'll see the margins strengthen. So overall, the margin is not going to change that much. Like I said, you could expect maybe a few percentage points loss just due to some of the fixed costs that will be ongoing at the Dilly facility to keep that warm.

[James Archer, executive]

Yes. And just to touch on the warm piece, right? Like Jason says, we want to -- sometimes, you can walk away from these and you don't think there's an opportunity, you're going to look to move it. There's a big opportunity to put that back on lease, right, especially with some of the changes over the past few weeks.

So that's always been our case, no matter who -- what administration got in there. It's a facility, we think, has a lot of opportunity in 2025. So the idea is to keep it warm. There's a little bit more expense there in doing that, but we think it's well worth the spend.

[Operator]

[Operator Instructions] That concludes our question-and-answer session. I will now turn the conference back over to Brad Archer. Please go ahead.

[James Archer, executive]

Thank you all for joining the call today and for your support of Target Hospitality. We look forward to speaking again on our fourth quarter earnings call. Have a great day. Operator, that will conclude our call for today.

[Operator]

Thank you for attending. You may now disconnect your lines.