Q1 2021 Target Hospitality Corp Earnings Call
Good day and welcome to the target hospitality first quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask the question Press Star then 1 on a touchtone phone to withdraw your question Press Star then 2.
Please note this event is being recorded.
I would now like to turn the conference over to Mark <unk>. Please go ahead.
Thank you.
Morning, everyone and welcome to target hospitality <unk> first quarter 2021 earnings call.
The press release, we issued this morning outlining our first 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.
The 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 may 24th 2021.
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 refer to target hospitality periodic filings with the SEC.
We will discuss non-GAAP financial measures on today's call. Please refer to the table in our earnings release posted in the investors section number of website to find the reconciliation of non-GAAP financial measures referenced in today's call and the corresponding GAAP measures.
Leading the call today will be Brad Archer, President and Chief Executive Officer, followed by Eric T Calomiris Executive Vice President and Chief Financial Officer.
After their prepared remarks, we will be joined by Troy Schrenk, Chief commercial officer and open the call for questions.
I'll now turn the call over to our Chief Executive Officer, Brad Archer.
Thanks, Mark and good morning, everyone and thank you for joining us on the call. Today. In addition to discussing our first quarter performance I will touch on the continued momentum we are experiencing across the business and indications of further strengthening through the balance of 2021, we continue to see signs of an improving global economic <unk>.
Recovery, increasing global vaccine distribution is fostering renewed commercial activity and global demand. These factors have supported meaningful improvements in target operating metrics through the first quarter of 2021.
This is even more impressive considering the severe winter weather experienced in February which had an unprecedented impact on regional commerce within our Permian Basin segment.
As a result of the storm, we experienced limited financial impact of less than $1 million and no lasting network disruptions. This is notable and illustrates our operational continually and network integrity, which enabled us to meet customer demands with few service interruptions.
The new partnership within our government services segment is off to a strong start and illustrates target superior operational flexibility and scale the.
These attributes allowed us to rapidly mobilize and begin servicing our customers' needs now.
Now turning to the first quarter operational trends.
We continue to see positive momentum and customer demand.
Which contributed to increases in occupancy and utilization during the quarter.
Elevation increased 800 basis points from the fourth quarter of 2020 as customer activity and labor allocation for our premium service offerings continue to build.
The efficient operating structure, we have created allowed us to meet increasing customer demand with little incremental cost.
This supported sequential margin expansion of 900 basis points from the fourth quarter of 2020.
Our network scale combined with our premium service offerings is unmatched these.
These attributes enabled us to effectively increase our market share our service offerings and capabilities continue to drive customer pool in the first quarter alone. We added over 20, new customers and continue to realize on over 90% customer renewal rate.
As we think about the second half of 2021 and into 2022, we are encouraged by the improving improving economic outlook the.
<unk> and momentum of post pandemic reopening continues to improve providing greater confidence in the cadence of demand recovery.
We continue to benefit from our expansive network and Premier service offerings, where our first class customers buying added value and allocating labor to our premium network, we have seen meaningful increases in labor allocation from our top 10 customers, who continue to see head count demand increase as commercial activity strength.
<unk>.
This promoted enhanced network optimization with several largest being fully utilized during the quarter.
Additionally, the expansion of our government services segment illustrates target ability to expand customer reach while securing high quality contracts that provides significant revenue visibility.
This positions target as a trusted provider of critical hospitality service offerings and solutions of <unk>.
Stablish being a platform to continue developing strategic long term partnerships with government and nonprofit organizations.
The target has a unique set of capabilities and core competencies that translate across a variety of end markets. These attributes position target to evaluate a range of organic and strategic growth opportunities both within our core business segments and adjacent end markets.
As we continue to evaluate the pipeline of diversification and expansion opportunities.
We will remain vigilant on the principles of identifying scalable opportunities that increased revenue visibility, while enhancing our financial strength.
We entered 2021 encouraged by signs of improving customer demand supported by global stimulus and sustained progress on post pandemic reopening.
The pace of these improvements have exceeded our expectations.
We anticipate these elements will continue to support positive momentum in customer activity and provide the backdrop to further enhance our financial strength through the balance of 2021.
I'll now turn the call over to Eric discussed our first quarter financial results in more detail.
Thank you Brad and good morning, everyone.
In the first quarter, we experienced continued improvements in our operating metrics and realized sequential quarterly improvements in utilization as we continued to see increasing demand for our premium service offerings.
The first quarter of 2021 total revenue was $45 million and adjusted EBITDA was approximately $16 million.
Due to the SEC's recent guidance change regarding the warrants issued by specialty purpose acquisition of companies, which target merged with an early 2019.
The target restated its previously issued 2020.10-K on May 6.
The change will result in the warrants being classified as liabilities rather than equity as has been historical practice the <unk>.
Statement will be noncash in nature and does not impact the previously communicated non-GAAP metrics, including adjusted gross profit adjusted EBITDA for discretionary cash flow.
Now turning to our segment performance.
Our energy segment delivered the first quarter revenue of $26 million compared.
Compared to $54 million in the same period last year.
This decrease was driven by lower utilization due to the pandemic, which created a meaningful reduction in customer demand.
Our government segment produced quarterly revenue of approximately $18 million compared to $17 million in the same period last year.
The increase was the result of the $118 million revenue.
Contract executed on March <unk>, 2021, which contributed approximately $5 million of revenue in the quarter.
The year over year increase was offset by a non cash decrease in deferred revenue as a result of the successful renewal and extension of our legacy government services contract, which occurred on September 2020.
As a reminder.
The legacy contract extension added 5 years of term and approximately $265 million of committed revenue.
Recurring corporate expenses for the quarter were approximately $8 million.
We have created an efficient operating structure will allow us to continue meeting customer demand and support additional growth with minimal incremental costs.
We anticipate recurring corporate expenses to remain around $8 million per quarter through 2021.
Total capital expenditures for the quarter for approximately $3 million, including maintenance capital of $2 million.
We ended the quarter with $6 million of cash and $400 million of total debt.
Because we are achieving a high level of cash generation, coupled with minimal capital spending.
We are of high return on invested capital from our new contract the allowed us to meaningfully reduce debt after quarter end.
As of May 24th target had approximately $379 million of total debt.
The outstanding borrowings of $39 million under the company's $225 million revolving credit facility.
As a result, the company has advanced its year end of 2021.
Target net leverage ratio to below 3.5 times.
Now turning to our 2021 outlook the.
The economic recovery continues to build the weighed by global fiscal and monetary stimulus and continued to post pandemic re openings.
These elements of supported target strong first quarter results and provide encouraging signs of continued momentum through the balance of 2021 and into 2022.
Target anticipates consistent improvements within its legacy markets, where it continues to benefit from its premium service offerings network scale and efficient operating structure.
The improvements in customer demand has outpaced our expectations, providing support and the pace of recovery through the balance of the year.
Additionally, approximately 94% of targets of 2021 revenue was under contract together, having the call of <unk>, 72% of contracted revenue has committed payment provisions.
Supporting increases in the 2021 revenue outlook.
As a result, we have raised our full year 2021 financial outlook by 10 per cent for revenue and 11% for adjusted EBITDA and 70% for discretionary cash flow.
Our 'twenty 'twenty 1 outlook now consists of revenue between 260 and $270 million.
Adjusted EBITDA of between 97 and $107 million.
Discretionary cash flow between $65 million to $70 million.
We are.
Changed our capital spending outlook for <unk>.
1% to $20 million.
Yeah.
We anticipate our discretionary cash flow to be largely directed towards further strengthening of our balance sheet and are targeting a net leverage ratio below 3.5 times by year end 2021, with well over $125 million of net liquidity.
We expect this trend of continued balance sheet improvement to continue well into 2022.
We believe target is well positioned to continue benefiting from improving global demand and continued to post the pandemic re openings.
The structural advantages of our of our business model.
Provide for significant cash generation, while allowing us to be prudent with our capital allocation.
Our discipline disciplined approach aligns of target's objectives of identifying and executing on the.
Value enhancing initiatives, while continuing to create value for our shareholders.
With that I will turn the call back over to Brad for closing comments.
Thanks, Eric we have created a premium network and developed a unique set of core competencies, which allow us to provide comprehensive hospitality service offerings and solutions to best in class customers. Our first quarter performance exemplifies our strong operating position and ability to provide customized.
<unk> to meet our customers' varying needs.
As the economic outlook improves and momentum builds targets operational flexibility network scale and capabilities position the company to quickly respond and serve a variety of customers across diverse end markets.
Does that attributes underpin our ability to continue producing strong financial results, while utilizing this momentum to materially enhance the financial posture of the business.
I appreciate everyone joining us on the call today and thank you again for your interest in target hospitality.
We will now begin the question and answer session.
To ask a question press Star then 1 on a touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time of your question has been addressed and you would like to withdraw your question Press Star then 2.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Stephen <unk> with Stifel. Please go ahead.
Thanks, Good morning, gentlemen.
Yes.
Good morning, Steven.
Couple of things from me, if you don't mind.
What I would what I'd like to start with if you don't mind is.
When I look at the Permian piece of the business.
I think about the gross margins and.
The kind of come down from the mid to high <unk> in 2019 to the low <unk> currently.
How should they progress. Thanks, So when you think about the guidance that you've given for the year on EBITDA on.
Well they may.
Move back towards the 50% level this year.
It seems like they would have to do to get to your guidance, but I was just curious if you could add some color to that.
Hey, This is Brad let me, let me speak on that first.
As we looked at 2020 with the pandemic you would expect the definitely decreased throughout that but towards the back half of 2020, we started to see that increase and we're still seeing that today.
When you put back in the government piece as well and start to.
The increase your margins the throughout the back half of the year and into <unk>.
The even into 2022, we definitely see these margins coming back to pre pandemic levels.
The quickly as we move throughout the year, especially when you add in.
The government piece of the business.
Yes, Steve I think the the 1 thing that I might add is where we've seen some of the pressure on the margin is really what we call. The tier 3 revenue right, which is which was really the on contracted portion in that that part can switch on and off quite quickly as we see the ongoing normalization across really across the.
The energy value chain, we would expect it to come back.
Net back pretty sharply towards the back half of the year, we'll see how it goes but but that can come back pretty quickly.
But it is my assumption that based on the government margins in the piece of the business that's government U.
Can't get the model to the.
The EBITDA guidance without having Permian margins on the gross profit margin level of getting to 50% is that is it.
Is my math right.
Your I mean, maybe we can take it offline and see what the timing of it what it looks like but I would say youre going to have to see a continued improvement through the back half of 2021 to get the numbers, which is what we're expecting so what type of what's.
<unk> talked through what we have kind of where youre at end of its the way it's trending now.
This is the way, it's trending and so I think youre on the right you look youre on the right track. Okay. Most of the offline call Mark and we can we can sort of okay. No I. Appreciate it that's helpful. Thank you and then the other the other question I had was just as it pertains to the.
The the contracted revenue.
You, obviously of a large chunk of revenue on a committed contracts.
And a portion of the government of portion of that is clearly in.
The Permian as well are you what are you seeing on the on the oil and gas side as far as.
The conversations with customers renewals et cetera, I would imagine it's trending well, but I was just curious to get your your take on kind of how the market's been developing.
Stephen Good morning, this is Troy.
Yes on regards to the oil and gas the energy front. The conversations with customers are are very constructive they remained consistent and as we think about renewals look we're proud of the fact that we've been able to maintain even through the pandemic now that 90% customer renewal rate and that hit rates pretty.
But it comes with a lot of work great relationships doing business with customers for a very very very long time and continuing to deliver on our service quality and flexibility on the network. So now as we look at the top 10 customers they've really returned to work very kind of fulsome Lee here in the first.
<unk> and we expect the 2021 will be a.
The steady increase in activity kind of throughout the year, especially in that kind of top 10 category.
That's contracted on a long term basis so.
Very constructive and positive outlook really for the balance of the year.
Thank you gentlemen.
Thank you.
The next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Thanks, very much and good morning.
Gentlemen, just curious about on the.
On the new government partnership contract.
Looks like I think you had quantified what that total number of beds was and then discuss what number of beds that was actually in the Permian I was just curious what it what is occurring there.
The delta on the M. The implied delta there what are the eye.
Of those new beds, we're aware of those beds coming from and then I'll ask the follow up thanks.
Yes, Scott, maybe maybe try rephrasing that a little bit I'm not sure I entirely caught the intent of your question is it about where the beds are being displaced from and where they went to his other question.
Exactly I say, yes and to be specific on the numbers the Permian.
It's the.
The 2400, where were reallocated and then the total under the new contract is 4000.
The difference of <unk> hundred.
Just if you could speak to that a little bit and I need to both pieces of it just give us a little bit more perspective on.
Of what.
What debt activity that is is it is it new build is.
Just a little bit more color around that thanks.
Now none of its Newbuild debt. We did look 1 of the things is probably a little confusing is it's the number of beds per room.
We have mostly 1.
Some of this to fulfill the contract. They wanted to if you will to per room. So we're looking at beds versus rooms, but we did not go out and spend capital on on purchasing new equipment.
It was all in place and.
Some of it was mothballed that we reopened and put back in.
In this contract and what makes this a little bit you don't have you don't have real run rates to work with right now based on the first quarter numbers right. So.
Let's do this I think we can get you there, but let's do it let's do it offline because of its.
You're only dealing with a couple of weeks in the quarter and so you don't have profit numbers to look at so we can try to help them try help get you there a little bit closer offline.
Okay. Thanks.
Appreciate that.
And then I I and I may have missed it in there when you were speaking to.
To the to the overall contracted value, but I don't think so the.
Yes.
The new partnership is the 1 year contract I don't think I heard you say that it was extended another year, but that is something that is a possibility of the consideration could you just discuss what.
What time frame for consideration of of that occurring how we should think about that as far as potential to extend the when that may occur potentially yes.
Yes, Scott we just.
Recently Simon's, but on this deal for for 2 months of the 1 year deal so towards the back half of the year I.
I would say third quarter of those start to heat up a little bit that's what we want to see happen.
But I would say look they are very happy with where we're at today.
Performance.
So we fully expect this to continue on but true renewal discussions a little early to have that discussion at this point so.
Towards the back half of the year I think those picked up steam a little bit.
Understood and then just a final little quick 1 in there.
Just on on the the pipeline the revenue was up year over year, but I know that.
That's in a bit of of wind down phase. So if you could just address.
What what why that was a little bit larger that we may of expected in the first quarter and thoughts going forward in that category. Thank you.
Yes.
And I think the I.
I guess the question I would ask is back.
Give me a little color exactly where you're where you want to.
I guess get out of the question because I'm not sure I fully caught what you were trying to try and get out.
Yeah.
I I I was surprised to see that the Keystone project was up year over year on revenue and just wondering what that was what was driving it because I wasn't expecting a lot of activity there.
Look it's.
It's a good question. So you have to you have to remember that there is a this is long duration project right and so as.
Even though the activity got some got some press there were still some activities that we still have the.
Wind down right. So.
That's really all of it is and so on.
I think you would expect look I think we're probably not going to see much more of that but that's really what the Watson and.
And again it was only.
The minimal amount right, particularly when you look on the gross profit on an EBITDA basis, but there was a little bit of revenue that was that was the residual.
Yeah, that's what I thought I was just checking the T. If there was.
Something unforeseen there that that may add to that add to that screen, but it doesn't sound like it now.
I wish I wish I was.
I understand I will guys. Thanks, very much I'll turn it over.
As a reminder, if you have a question press Star then 1 to be joined the queue. The next.
Question comes from Doug Becker with Northland Capital markets. Please go ahead.
Thanks.
Addressed the potential of extending the nonprofit contract I was wondering if you could just.
Give any color about the potential of expanding.
Just given the problem isn't going away. So just wanted to get any color you could offer there.
Sure. This is Brad let me just touch on our overall sales pipeline.
And then I'll touch on government, but our overall sales pipeline today is stronger than I've seen it.
And of longtime.
What's encouraging is the potential demand we're seeing.
Across diverse markets, we haven't seen that allow especially since the pandemic set and so this provides a lot of opportunity not only in the government, but other areas as well natural resources government services infrastructure project is the et cetera, So strong pipeline sales.
Sales pipeline right now.
And then on the government, let me just say that the projects we have in process today theyre going well the end.
The user is very happy with our performance with.
<unk> helps to set us up for other opportunities the demand for the same services. We're providing now has not went away. It's still very strong and very real and I think we're set up to do some things down the road.
Want to comment on them directly.
We're we're definitely setting in a good pole position for some of the as we move forward.
Yes.
No that's definitely sounds encouraging.
And as we think about that pipeline.
Any way you can frame the opportunity outside the oilfield.
Whether it's government or not government.
Joe you want to touch on here Doug.
Good morning, Troy Schrenk here look good good question.
Brad captured really the.
The view on the pipeline pretty robust as we think about it outside of energy and natural resources you look at the opportunities again.
Related to the new administration and their focus.
As a as the government and where those where those dollars will be spent.
Those are opportunities that that werent pursuit of right. So.
It's clear on our end as we think about the business from a capital project perspective on infrastructure and government services.
On that there is an ideal opportunity set out there for us to prosecute and look I think we're well underway I align with Brad that don't want the forecast when those are going to occur, but I think we're much more optimistic today than we were in 2020, certainly on the pipeline basis for sales opportunities.
Got it and I might have missed it but just the bump in capex.
Yes.
What's driving that.
Sure. So a couple of things so 1 we.
We have seen some additional I think of as.
As we indicated in the.
Scripted in the lease and we're continuing to see profit improvement across the energy space right. So we are expecting some additional capital there, but also as it relates to the new with the new contracts, we're seeing as well.
Additional monies that will be it will be spending on that as well.
Okay. Thank you.
Again it is star then 1 to join the question queue.
The next question comes again from Stephen <unk> with Stifel. Please go ahead.
Thanks, just 1 follow up.
When youre looking at Capex.
It seems like youre going to be generating pretty strong free cash for the next couple of years.
Is there a target I know you gave good guidance on you.
Improve the the.
The target leverage at the end of the year or is there a target at which point you start to think about other uses of free cash as far as return to shareholders and I know, we're not there yet, but youre going to be generating a lot of cash I'm, just curious how youre thinking about that.
Yes, it's a good question.
Thank you and thanks for asking it. So so so the answer is yes, I think returning cash to shareholders can can happen in the number of forms right.
So that can come through obviously.
Dividends share repurchases.
Alright.
And the debt reduction in which the lens you have the ability to pursue transactions and so.
Look I think.
We don't Wanna get in front of the board on where we are with all of that I would I would suffice to say that we are intent on growing the business and I think that would lead you to more of a conclusion, that's more transaction oriented but the reality is that all things all things remain on the table of all the time and.
Clearly, we are and you're right, we will be on a spot to to.
Use the balance sheet and some capacity to accrete value to the to the shareholder and so we will look at all ways to do that.
Thanks.
1 more of it.
Might be for Troy, but the.
We hear more and more about sort of digitalization in the oil patch and we've clearly heard some things on obviously with Covid theirs.
Maybe a little bit of a of a higher awareness awareness of folks at the at the well site. It doesn't seem like there's a big impact on your business from that perspective.
But I'm just curious.
Think about your Permian Bakken activity growth do you think it's fair to think about rig counts and completion activity is still being.
Pretty.
Basically pretty good drivers and.
To understand the growth from that business over the next couple of years.
Yes.
Yes, Steven.
Clearly, we still evaluate those those data points right as you think about completions and new well additions per.
<unk>.
As we've talked about in the past there are several key data points and we continue to monitor very very closely on the leading indicator basis.
Okay.
There's no better.
There is no better Intel than straight from the field and I think that's where as we start to triangulate on the data versus what's happening on the field, we do such a good job of that and putting those 2 together and really coming up with a good sound fundamental view of the business and I think that's where we have really excelled right. We've got the network to be able to service the customer based.
On on.
On the demand forecast that they've given us and then we pair that up with the datasets and I think that it gives us a pretty good pretty good view of the business in 'twenty, 1 along the obviously with the visibility on the off of our contract. So short answer yes on those 2 key key data data points. In addition, we're always evaluating the other data points.
Well to drive the business.
Yes.
Great No. That's helpful color. Thank you you bet.
This.
The question and answer session I would now like to turn the conference back over to Brad Archer for any closing remarks.
Thanks for all of you for pits for participating on the call today and thanks for your interest in the target hospitality.
We look forward to speaking with you on our second quarter call.
Have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Good day.
Okay.
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