Q4 2019 Earnings Call
Greetings and welcome to the target hospitality fourth quarter 2019 earnings conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to our host Mark.
Your Vice President of Investor Relations. Thank you you may begin.
Good morning, everyone and welcome to target hospitality fourth quarter and for year 2019 earnings call.
The press release, we issued yesterday outlining our fourth quarter and for your 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 the same language applies to statements made on todays conference call.
This call will contain time sensitive information as well as forward looking statements, which are only accurate as of today March 12 2020.
Target hospitality expressly disclaims any obligation to update warm in 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 periodic filings with the FCC.
We will discuss non-GAAP financial measures on todays call.
Please refer to the table in our earnings release posted in the Investor 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, well be bread Archer, President and Chief Executive Officer.
And by Eric Ti, killing Merit, Executive Vice President and Chief Financial Officer.
After their prepared remarks, we'll be joined by Troy shrink Chief commercial officer and open the call for questions.
I'll now turn the call over to our Chief Executive Officer right Archer.
Thanks, Mark Good morning, everyone and thank you for joining us today to discuss our fourth quarter and for year 2019 results before we get started I would like to take a second to a knowledge the recent volatility and global financial and commodity markets, which have consequently put significant pressure on the price of crude oil.
These events have created macro uncertainties that have rippled through the markets and we will continue to closely monitor any potential effects to our business.
Now turning back to 2019.
I want to first look at the cumulative steps we have taken in the first year of being a public company to solidify our competitive advantage and add to our unmatched network, a first class communities and service offerings, while strategically positioning target to produced industry, leading returns over the long term.
We created strong operational momentum throughout 2019, and continue to position target as the leading provider of specialty hospitality accommodations and services and the U.S., we successfully integrated two acquisitions and combined with organic bed additions increased our average utilized.
That's a 44% to a record of over 12000.
We expanded multiple communities as demand for our Premier full turnkey services remains strong in the heart of the Permian Basin.
The dominant hub of U.S. energy production.
We have effectuated this growth in a manner consistent with our core focus of aligning with the right customers in the right locations and being disciplined with our capital allocation, which has consistently allowed us to achieve attractive returns.
In the second half of 2019, we saw a reduction of growth in the domestic shell place.
And the Permian basin has not been immune to this moderation of activity.
This impacted capital spending levels and the second half of 2019, and what's more permanent now than expected.
Impacting our results as we move towards year end.
However, these challenges proved the resiliency of our business model as we saw meaningful growth in for year 2019 revenue and adjusted EBITDA, while maintaining strong EBITDA margins of approximately 50% all while generating record cash flow.
While we were beginning to see activity level stabilized and even start to increase as we moved into 2020. The recent global macro events will likely cause reduced activity levels to persist until there's a clear understanding as to how our customers will address any impacts to their business.
However, it is important to note that as we sit here today, we have not had conversations with our core customers regarding modifications to their existing contracts due to recent macro uncertainty.
Why our core larger customers have performed well the reduced gross rates and activity in the fourth quarter impacted our uncontracted business, which represents about 15% of our revenue.
These customers represent less predictable workloads.
We remain focused as always on converting these customers into a contract but realize that one size does not fit all we're cognizant of varying customer needs throughout our community footprint and will offer a varying degree of terms to capture the marginal customer.
Now.
Let me touch on our business and what differentiates target.
The industry experience lower activity and the second half of 2019, and our results were not immune to this as we also experienced a reduction in utilization and 80 are most notably in our fourth quarter results. However, there are several key points that differentiates target from other business.
First throughout 2019, we maintain robust margin of 50%, while generating significant discretionary cash flow.
I have said before we're positioned target to be successful through a variety of business cycles. We believe this is evidenced by our 2020 outlook, where we expect target to generate meaningful discretionary cash flow.
This significant cash generation allows us to further strengthen the financial posture of the business predominantly to debt reduction while simultaneously evaluating other potential growth factors.
Second one of the key tenets of our business strategy is a disciplined approach to capital allocation.
Our capital expenditures are highly discretionary and allow us to carefully evaluate investments ensuring we maintain a high degree of returns certainty and all environment.
In addition, we underpin these capital investment decisions with long term contracts, which provide a high degree of revenue visibility years in the future.
Third.
Paramount to maintaining that high degree of revenue visibility as our commitment to focusing on a long term contract structure, while doing business with well capitalized customers that have long term investment horizons.
These large customers are far less correlated to short term fluctuations in commodity prices and demand consistent high quality accommodations for their employees, while benefiting from the efficiencies our network provides.
Our first class network provides unparalleled flexibility, which allows us to seamlessly grow utilize bad what our customers needs.
This is illustrated by the two announcements we made earlier this year executing major contract renewals with four key customers, which represented approximately 20% of 2019 energy revenue.
And the expansion of our El Capitan facility, which marked the second expansion of this community when did that first year of operation and was driven exclusively by customer demand.
We have created a structurally sound business with a strong financial position in a proven track record of creating consistent and profitable growth.
This foundation provides the ability to continue evaluating potential growth opportunities.
Including strategic value enhancing acquisitions and other value added adjacent markets as we evaluate potential growth vectors any opportunities, we're squarely fall within targets core competencies and lean on the competitive advantage. We have created three years of experience in the hospitality industry.
When considering target suite of competitive advantages.
It is important to remember that we're not simply a provider a bare bones sleeping accommodations.
We are full service hospitality provider with many expert core competencies. This is illustrated in the fact that while we added approximately 1500 ran through our network in 2019.
We provided 2.8 million service nights wash more than 4.1 million sheets thousand linens served over 11 million mills, consisting of more than 2.4 million pounds of lane protein nearly 3.5 million fresh oranges and over 206000 pounds the banana.
Our customers know, we keep their people well said well rested and well prepared for the next workday.
As we reflect on 2019, we're pleased with the results in momentum we are able to sustain while navigating late year headwinds and fill we are positioned target for continued success.
I'll now turn the call over to Eric discussed, our fourth quarter and full year financial result, as well as our 2020 outlook in more detail.
Thank you Brad and good morning, everyone.
I will begin with the discussion of results review, our capital program and conclude with details on our recently announced 2020 outlook.
In the fourth quarter and full year, we continued to benefit from our growing network, including acquisitions, Newbuilds and expansions and remain focused on operational execution and the integration of these assets into our network.
Well, a fourth quarter results were modestly impacted by the headwinds that persisted within the energy end market as well as a slower than expected pace. The Transcanada pipeline project, we still achieved excellent margins with a growing network available beds, and importantly continued to generate significant discretionary cash flow.
For full year 2019, total revenue was $321 million increase of 30% compared to full year 2018, adjusted EBITDA was $159 million, an increase of 36% compared with the same period last year with an adjusted EBITDA margin of 50%.
Did you ever your growth in adjusted EBITDA was primarily driven by approximately 4400, new bed additions as a result of the signature acquisition and approximately 1500, new bed additions from new communities and expansions, which contributed to over 40% growth both average available beds and average utilized.
Yes.
Turning to our second performance the Permian Basin delivered fourth quarter revenue of $53 million, an increase of 6% versus the prior year quarter.
This increase was primarily driven by an increase in average utilize beds as a result of the signal integration.
As well as new community additions and expansions.
Average available that's increased by over 2000 or 29% compared to tweak team.
HDR decreased by $2 need besides primarily from lower average mdrs and acquired signal communities and softness in the Uncontracted portion of the business.
We have completed the signal enhancement program and continue to focus on opportunities to convert these customers to more typical legacy target pricing model overtime.
In the Bakken, we right sized our footprint in 2018, which drove the expected decline in average utilize beds, while significantly improving utilization increasing cost efficiencies.
Revenue declined by 29%, mainly due to this decrease in average utilize beds at lower HDR, reflecting lower activity levels compared to the same period last year.
Our government segment remains very consistent with <unk> revenue for the quarter up slightly to $17 million.
Fixed contractual nature of this asset provides relatively stable 80, our utilization in revenue.
Our all other segment, which consists primarily of construction fee revenue from the Transcanada project had revenue of $2 million adjusted gross profit margin of 21% for the fourth quarter.
This was driven by significantly lower than anticipated pre a friday activities.
While we are hopeful for a contract start in 2020, we have taken a conservative approach not included revenue associated with this project near 2020 outlook.
Recurring corporate expenses for the quarter and full year or approximately $8 million going $31 million respectively.
The increase from last year is primarily associated with the transition to becoming a public company.
As well as infrastructure investments that will allow us to scale the business to support additional growth with minimal incremental costs.
We expect our recurring corporate costs to remain around $8 million to $9 million per quarter.
We generated cash flow from operations of approximately 16 million and $61 million, respectively for the fourth quarter in full year.
Since much of our capital spending is just question, Eric given nominal maintenance capital needs.
Fourth quarter, along with full year 2019 provides a clear picture a big sector exceptional cash flow generation ability of our business.
We expect to continue to generate meaningful cash flow, providing the flexibility to execute on a variety of value creating opportunities.
Predominantly focused on enhancing our capital structure to debt reduction or other accretive stakeholder initiatives.
In addition, we've developed a pipeline of growth opportunities, including strategic diversifying acquisitions in adjacent markets, which align with targets core competencies and business strategy.
As we continue to evaluate these opportunities over time.
It is paramount to remember, we will not execute on growth opportunities. If it does not meet our vigorous return criteria.
Capital expenditures and 2090 $416 million.
Most all of this capital spending was for revenue enhancing investments, including $79 million related to new community developments and expansions in high grading of legacy signature communities.
As well as $35 million for the acquisitions of superior and Pokerpro Petro lodges.
Maintenance capital spending was $2 million.
We ended the year with $420 million total long term debt.
Including $80 million drawn not revolving credit facility.
And consolidated net leverage up 2.6 times.
As a reminder, our long term debt consists of $340 million in senior secured notes due 2024.
And 125 million dollar asset based lending facility, which had no near term maturities or immediate financial covenants, providing significant flexibility within our capital structure.
Since commencing the share repurchase program in August 2019, we have repurchased shares for approximately $24 million or approximately 32% of the total share repurchase authorization.
Turning to our full year 2020 financial outlook, our core business is resilient with approximately 85% of 2020 revenue under long term contracts.
Approximately 55% expect to have committed payments brisk provisions in up an additional 30% and have exclusivity provisions.
Further as Brad mentioned, we have no material contracts due for renewal in 2020.
[noise] energy markets did experience headwinds exiting 2019, and the recent global macro events have created near term uncertainties throughout markets, which were not accounted for in our previously announced 2020 outlook.
We will continue to monitor the impact of these macro uncertainties its effect on our customers and any potential impact to target.
But remain confident in our core contracted business, which provides a high degree of cash cash generating capability.
The discretionary nature of our capital expenditures will allow us to generate a high level of discretionary cash flow.
As we navigate the current market environment and the effects of the recent events, we will remain prudent capital allocation and moderate our growth capital spending to ensure continued value creation.
The structural advantages of our business model provides for a significant cash generation allow us to control the only the quantum but also the pace of our capital spending.
Our disciplined approach to capital allocation lines of targets objectives of deploying capital into long run value enhancing initiatives, while continuing to create value for shareholders.
With that I will turn the call back over to Brad for closing comments.
Thanks, Eric.
Before we close I want to acknowledge the ongoing global concern over the Corona virus, we take very seriously the commitment to provide safe and healthy hospitality services to our customers and the Corona virus has not impacted our largest employs more customers. We continue to monitor the situation and take all net.
The series steps to ensure a healthy workforce at our logic.
In summary, while we did experience sustain headwinds through the back half of 2019. This provided an excellent illustration of the value proposition, we're able to provide our shareholders through their competitive advantages. We have created we entered 2020 with positive momentum in our core business, while we continue to.
Generate significant discretionary cash flow, we remain focused on disciplined capital allocation and aligning with the right customers, which we believe truly differentiates target.
Our committed focus of developing long standing relationships with large well capitalized customers provides an unmatched mutually beneficial relationship that is truly a win win for both parties.
We have position target with a solid financial foundation from which to execute on its strategy, while maintaining consistent and attractive returns for our shareholders. I appreciate everyone. Joining us on the call today and thank you again for your interest and target hospitality. Operator, you may now open up the lines for questions.
Thank you.
At this time it'll be conducting a question and answer session.
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Our first question comes from Stephen Gengaro with Stifel. Please state your question.
Hi, Thanks, and good morning.
The warning morning.
[laughter] you know well when we when we think about the guidance that you guys.
I did.
And maybe you could sort of help sort of.
I guess definite with the definitions of the terms are using it helps help me trying to triangulate Brett So 55% about mid point. Your guidance is I think 172 million or revenue, so I'm picking that to be locked and loaded and unwavering.
<unk>, what's the difference between the 55 and the 85 and how much wiggle room is there in that 30% revenue.
Hi, Steve and good morning Zurich.
So the 30% the you're referencing is really really customers that are out there under contract agreements most of which have exclusivity provisions tied to them. So those are rooms, though that while they're well they're connected to our network they have yet to determine.
The timing or not so the amount of rooms that they would eventually take so so said differently. If they are in many cases, if they are going to use rooms are going to use them in our network, but they have yet to specifically defined the time worrying amount.
Let me, let me just add to that a little but this is Brad.
When you don't air talks about not committing a maybe time in a mouse. These are folks that are using the the lodge in most cases today that could be used in 50 rooms. Some of these company could be used on 300 rooms on the exclusivity.
So when you talk about wiggle room here, let's just hope we all know what happened the past four to five days, what we don't see if the guy that has 300 employees going down to zero. So there's some there's that will there be movement in his number if he loses some work, yes, but do you still required to use that if he's in the Permian.
Okay. So that's kind of the wiggle room in that you can't stay in a hotel. It gets day at another competitors Lodge within 40 to 50 miles of hours. So theres, some wiggle room, there, but it can't just all of it go away unless the most of all of this business.
So it really depends on that customer, but there's definitely a contractual.
Nature between both us and neck and neck in that group.
Sure. So so is it fair to say that that 30% is.
Almost.
It's almost completely dependent on that customers activity level.
Whereas the 55 is you're getting paid regardless of activity levels.
Yes. The 55 is meant to designate really regardless of activity level, the 30% as Brad mentioned right. We can have those customers today, but that that can be variable based upon their activity amount. It just happens to be the when they when they do have you have usage is going to be in our facilities.
Okay and I do it.
Yeah, and just one some of these are some of your largest oilfield service companies. So many lines of business right under this exclusivity agreement, so that's where I.
Take a view on the business.
Is that it's not going to tip to all go away. These are long term mutually beneficial relationships been there for 10 plus year some of them and now they're just under an exclusivity contract that gives them some more flexibility.
Okay. So so one following them one other question.
This [laughter].
Try and make sure I understand our their customers.
That are part of both buckets, both part of the 55 and part of the 85.
Generally not no.
Okay, and then can you give us a quick update on the government side, what's the status of the contract how do you feel about going forward once the renewal discussions come up et cetera.
Yes look the government pieces and I always say this on the call. It's a it's a very predictable business right. It's facilities management, we do the catering.
And it just continues to perform year after year feel great about that contract.
It doesn't come up for renewal until late next year I'm 2021, so sometime after.
Late in the year.
It's when we'll start to have those discussions and early into into 2021 with the counterparty.
But at this point there is no changes.
In that facility.
Great. Thank you.
Yes.
Yes.
Our next question comes from Jeff Grampp with Northland Capital markets. Please state your question.
Morning, guys, maybe sticking on the on the last topic with the with the government question is it are.
Are those discussions based on kind of how you guys see this plant out predicated at all on this upcoming election cycle or is that just more related to the timeline of.
In relation to Whitney contract term is ending up just kind of wondering how you guys you I guess the timing of that.
But this was built under a democratic.
You know prep President, we don't see that playing into it too much there's definitely a need where the only one in the U.S. like it.
So it is more about just.
When the contract ends and when we start those negotiations, but not more if you will about the presidential race.
Got it I understood.
And I was hoping you guys can maybe.
Talk about obviously super volatile oil pricing environment can you guys talk about your experience in the past in terms of conversations you have with with customers.
You see these periods.
Have they or do they tend to come back in terms of asking for any type.
At the modifications of the contract whether that's 80 our or.
Number of beds in the contract and maybe if you guys can just touch on him empirically how how that process is kind of gone in the path in terms of kind of revisiting contract.
Yeah, Let me first just being that the action taken by OPEC just happen.
45 days ago. It is too early for us determine the impact of the of the events will continue to monitor it but look we have been through this before as a management team.
Hi years ago, and we fared well we have long term customers a long term contracts with them and look at.
There will be some of those discussions I mean I. Thank all of US right. Now believe there is going to be a shrinkage of activity.
But we're trying to figure out how deep and how wide right and when those discussions happen.
We'll go back to how we do business looking at making sure. They continue to cash flow, what we have some discussions with customers setting down what them.
Maybe trading term portion right absolutely we will we will do that and that's kind of how we how we did it in the past there will be triggers in there to get those rates back up.
But you will always continue Scott to be a win win.
For for both sides.
And then again anything that we give is going to be looked that we're going to continue to generate the free cash flow on that contract.
Got it I understood I appreciate the comments got.
Thank you are next question comes from Kevin Mcveigh with Credit Suisse. Please state your question.
Great. Thanks, Hey, I.
I guess just on the 2020 outlook how are you thinking about.
What price oil is at 2020 outlook based on and then just any thoughts around you kind of utilization levels and then ultimately.
Would you expect to see yielding uptake in bad debt expense based on history in the past or.
The contracts such that it's not a lot of real bad debt exposure.
Sure Hi, Hi, Kevin Good morning, So here, let me cover a couple of comments on the outlook and then address the bad debt expense, which is which is a good question. So clearly the world change a lot from two weeks ago, I mean change a lot from Saturday quite frankly, we we will update the outlook in animals will do it thoughtfully.
A couple things to bear in mind. So so there are as we think about the 2020 outlook.
There are when you have events like we had just over the past week or two their second third order effects here that our customers need to react too. So we haven't seen these these reactions yet we'll monitor those will work that process with our customers.
Yeah. We also have some variable cost aspects that we can can play here to manage margin, which is historically, how we've been able to to manage margin through these these these types of cycles and keep margins at it really surprisingly healthy levels, which which I would say, which I think you'll see as we as we move forward here. So.
Yes, we will take all that into account will will baked that into the two two and outlook at some point in time, when we get some additional clarity here.
I think you in the meantime, just.
Yes recall that your target because of our cash flow profile in the margin profile, we generate a lot of cash even in difficult even in difficult markets now because of that we tend to not see and the nature of our customer base, we tend to not see ace a meaningful amount of of bad debt expense. We we haven't we did not see a.
A meaningful amount in in the back end of Q4, which is which is what we're weeks one could have seen we did not see that so I wouldn't expect to see a lot going forward, but we'll continue to monitor and like I said to the extent we have we have modifications will serve beast shared update the market.
Okay.
That's helpful. And then just real quick on you know, obviously business generates a lot of cash.
How are you thinking about capital allocation within the context of.
Near term uncertainty, particularly given.
You know the way the stocks we acted in the near term in terms of buyback versus maybe M&A or just any thoughts on.
Steven the business overall.
Sure. So let me I'll give you some contracts take a step back on capital and that will dovetail that into to the allocation aspect of it wouldn't week. When we entered into 2020, we effectively felt like them. The market was fully supplied we were really shifting our approach more from Greenfield development to more of a supply and utilization and optimization focus and then the.
Whole objective of that was too to folks the business on optimizing the scale. The we've we've built over the past few years in it. So that was that that was the posture riyadh coming into into 2020.
What we what we did as well as a function of that was we meaningful meaningfully pulled down capital spending which is what we demonstrated in the outlook that we had do we had put forth.
When we when we kind of fast forward to today.
Look the equity value is is absolutely discounting from what we think will ultimately be realistic levels moving forward. So certainly significant value here today.
I would say, though we generate a lot of cash and even in challenging conditions, but I think it's important to maintain a position of balancing strength.
So while I can't comment on specific capital market activities in the end lock stock buybacks can be option I think the near term focus really needs to be.
Balance sheet Optionality versus optimization at this point so what we will continue to evaluate share repurchases I was just as a part of our capital allocation approach, but I think really what we'd like to do is be able to take advantage of whatever whatever commercial opportunities present themselves over time and put ourselves in the best spot to do that.
Understood. Thank you.
Thank you. Our next question comes from Scott Schneeberger with Oppenheimer. Please state your question.
Good morning, a this is Don you on for Scott.
Could we drove into a little bit on the Permian HDR utilization trends I.
Discuss what you've been seeing so far into 2020, and I guess help us with some perspective on how we might develop in next couple of quarters here as far as what's underlying your outlook.
Sure well, so civil or think about the outlook.
You know I think we need do we need to just take looks like said mentioned before we take the temperature of where our customers are.
Yeah, and a lot has changed in the past really the past week and so our customers, we think about the nature of our customer base.
I think you have to bear in mind that a lot of our customers are not direct MPS right. Most of them a large integrated producers for a large service firms and so they're representing a number of in many cases number of a number of clients have their own. So like I mentioned before there are second to kind of third order effects here that they need to evaluate as they think about their labor movements as well.
And so I think at this point in time.
Let us let us evaluate what that would that looks like.
And that we can come back and give you a thoughtful thoughtful response, when we've had a chance to survey that with our customers and they've had a chance to react as well.
Got it. Thank you that's helpful and if we think about.
The quarterly cadence of EBITDA and cash collection as it stands now.
How do you recommend us to think about that cadence and 2020.
Sure. So so I'll take you back to my two to my.
Prior thoughts around how we developed the outlook. Initially you know we were expecting to see as we are seeing for and we're seeing a ramp up from Q4 through.
Three even even a week ago, we were seeing a nice progression of activity really what weve from Q4 levels and so we would've expected to see a gradual build up through Q1, Q2 and kind of culminated in Q2, Q3, which which we always see that a little bit of seasonal soon.
No.
Movement in Q4, so that's what we would've expected. So you kind of would have seen as this natural progression of a glide path heading up into Q2 in Q3.
And I think I think given what we've seen the past past week or so.
Certainly our expectations are likely to move on how we see that glide path.
Certainly I think we can all point to trends that are feeling less certainly less positive than we were even even we go in two weeks ago. So.
I think it's important to as I mentioned before we'll we'll continue to evaluate what the market conditions look like and.
And then we'll have to just see where we go from there and this update accordingly.
Got it.
So a final one for me what are you doing with your with your customers to it to test. The work is now starting a new communities from outside area two key to come to keep that virus spread from occurring out your locations.
I'm sorry can you repeat that question this is trial.
Yeah, Hi, Yeah, sorry, so I'm I'm curious on what are you guys doing with the customers. If you catch the work is just starting out your communities from outside area to to attempt to keep the virus spread from from occurring out Youre. Your location. So it's a corona meyer's question.
Thanks, Daniel So look we've been actively engaged with our customers for several weeks in advance and continue to monitor the situation very closely we're in active communication with their health safety and environmental teams of of the major customers.
Preparation.
For for such issues, we have worked very closely and public publishing documents and information related to containing such viruses, the cold and flu prevention steps that we've all been very become very familiar with and that net recent weeks.
I really have to have land on the guidance from the CDC and working very closely with our customers and I want to reiterate reiterate what Brad said on his prepared remarks, which is we have not had any ensign into incident related to the cronto virus. Thus far in a lot is fully prepared with our customers domain.
Paint a safe high quality environment for our employees and our customers, Yes, Dan you I'd, just add a little bit to that on what Troy said is look we are in the hospitality business in the in the food services business and this is something we have to do and have done four years in this business. It is the.
You kind of take yourself back to when you were growing up but it but normal things you should be doing that we have to continually reinforce even more today, but it is the cleaning. It is the coughing in your it into your sleeve or into a napkin. It's the simple things that you have to to make people aware of and do right I don't want to sound like I don't want to down.
Play it is it's big enough, but it is something.
We had we've we've looked at for years and it's something we have to continue to do and even it's more focus now where were making sure our customers are involved.
On a daily and weekly basis, we have caused we have level one level two level. Three you know scenarios, we have a pandemic plan we're all over this.
And have been at we as we think it's going to continue on for a little while.
But destroyed said it hasn't affected us yet.
But we have a plan in place and we'll continue pushing forward.
Got it. Thank you are my first time.
Our next question comes from Ashish Sabadra with Deutsche Bank. Please state your question.
My question. So just a question on the cost you talked about a.
A good portion being leading bullish mistakes I was wondering if you could talk about what what percentage of the cost is truly video.
Like the utilization does slow you down significantly.
Do you have talked smaller deals, even putting chico's and goes lodgings or do you have to keep it opened so how much is truly BT business is fixed cost.
Yes. This is Brad. Thanks. Good question one good thing about our business is there's a lot of variable cost and your cost of goods really at your large level right. If you see utilization starts to drop some of our biggest things is labor.
Food and those things you can.
Do very quickly.
To help defend your cash flow right.
Within literally within a few days so it goes even to electricity water.
I think that add up when you have as many locations as as we do if you start to see this club as far as a percentage I'm kind of let.
Eric talked more on specifics, but we have this is exactly if you will the what I talked about as the playbook, we had to go to.
Back in 15 and to help to again defend the cash flows keep the margins up.
Theres a lot of variability there that we can we can start to pull levers on if we see to start to deteriorate in the utilization sure. So so to Brad's point there are a number of levers we can pull.
When you when you look at the operating cost lines, there are well call short run.
Efficiencies you can take and then there are more kind of intermediate to long term efficiencies you can take when you. When you look at the when you look at the operating cost numbers.
I would say a short run basis, she's you're probably talking about half the costs are more short term and variable in nature, so anything about food cost certain certain labor costs.
What we called camp supply costs, which can move preempt fairly fairly quickly up an up and down with the actual aachen occupancy levels themselves.
There are other costs that can be moderated through time, but are not quite as efficiently done and those tend to be costs that have a does have a longer lead time they have to manage through so there is a they're short run and a little bit longer term you longer terms or not we're not talking years right, we're talking literally a quarter or two or sometimes three.
But generally I would say when you look at that cost bucket of the total operating costs line you got roughly 70% there that's variable I would say I've that of the seventies. The initial 50 is variable kind of on almost on a on a weekly basis.
The Delta is done more of on a intermediate term basis.
That's very helpful and maybe.
That's a little question on the cash flow sites on a lot of your expenses as you pointed out our.
Discretionary for example growth Capex you can flex that around our that other costs also from a cash perspective.
Our ability to sustain the.
Free cash flow even in this an ideal ofer utilization cutting down if you can provide any incremental color on that for sure.
Sure. So so so you're right. The if you think about.
My comments I'm a bit ago regarding how we were coming into 2020 and thinking about the market and supply and how we're positioned in capital spending out of the tend to $20 million that we had that we had provide less an outlook. We can we can look at that number and I would say that there is probably.
Two thirds to maybe even three quarters of that that is still discretionary in nature today, meaning that we can we can bring back.
Reasonably decent amount of discretionary spending and which would then flow into the obviously the casual line. So further enhancing that right. So which is positive and so we do have nice flexibility. There and then we are actively evaluating that right now and have already begun measures of curtailing some of that discretionary.
Spending so so from our perspective, you know look we have some flexibility of about an additional 15% to 20% on the on the discretionary cash flow I'll look at reality provided and we'll have to take it to see from there how much how much more flexibility, we ultimately have but but I would give you that number to work with right now.
That's very helpful. Thanks, a lot.
Our next question comes from Stephen Gengaro with Stifel. Please state your question.
Hi, Thanks.
Just as a follow up and sort of back to that cash flow question.
I know this is probably oh hardwoods sort of triangulate stretched.
I mean, the way if we won the numbers and I just take a draconian case, right, where you're basically utilization. Your revenue is 55 or 60% of your of your published guidance.
It still looks like you generate reasonably good free cash flow [laughter] is I mean.
Given the levers you have to Poland, given how you're thinking about it is that reasonable I mean, I still think you generate 30 to 40 million of free cash, but I'm just trying to figure out for missing something in the.
As we work through the income statement.
However, you want something like that or not or [noise].
Yes, so look I appreciate the question, we look I can't I.
I can't comment specifically on the numbers you quoted but I will tell you. This I think I would tell you based on what you described.
Those feel like awfully conservative numbers to me, but look the business generates a lot of cash we have flexibility.
There is the ability to.
You know to have margin.
Yes, certainly something then fire as mountain environment for margin expansion, but I would call. It more margin maintenance that does exist here and so look I think I think your yes. So we saw your note you're on the right track but.
Let's just let's just wait and see how things play out and maybe we can give you some more color.
Through time.
Great. Thank you.
Yes.
Thank you ladies and gentlemen, we have reached the end of the question answer session I will now turn the call over to Brad Archer for closing remarks. Thank you.
Thank you before we end the call today I would just like to thank all of the employees at target hospitality for their hard work and dedication I could not be more proud of the effort. They delivered 365 years a day to our customer.
Finally, we look forward to updating you can just a few months on our first quarter call. Thanks and have a good day.
Thank you. This concludes todays conference all parties can disconnect have a good day.