Q2 2021 Target Hospitality Corp Earnings Call
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Good day, and they'll come to the target hospitality second quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance with Miller conference specialist by pressing the star followed by the Doe.
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I'd now like the telling the content of what the Mark share nearby President of Investor Relations.
Please go ahead.
Thank you good morning, everyone and welcome to target hospitality second quarter 2021 earnings call the.
Press release, we issued this morning outlining our second 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 August 11.2021.
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 to target hospitality is 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 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 will be Brad Archer, President and Chief Executive Officer, followed by Eric T <unk> 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 Good morning, everyone and thank you for joining us on the call today as the economic outlook continues to improve supported by post pandemic reopening and increasing global economic activity target has continued to benefit from consistent increases in demand for its customized hospitality solutions and services. This is.
Supported building momentum and strength in target operating metrics through the first half of 2021.
Target strong second quarter results are a direct reflection of the aggressive actions. We took in 2020 to appropriately position the business to take advantage of these improving market fundamentals.
Our actions created an efficient operating structure, allowing us to expand our customer reach with highly attractive margins that generate significant cash flow, which allows us to execute on our strategic priorities. The.
Sustained momentum target has experienced over the past year has provided the basis for both materially accelerate the strengthening of target financial position and grow the end markets we serve.
<unk> continues to see positive momentum in customer demand anchored by our Premier first class customer base. This is supported meaningful increases in occupancy from our top 10, nongovernment customers, who have increased their utilized beds by over 20% during the first half of 2021.
The positive momentum contributed to target second quarter utilization of 72%, which represented the fourth consecutive increase in quarterly utilization.
Additionally, we continue to focus on asset optimization across our network.
In March we reallocated approximately 2400 beds to our government segment. This reallocation allowed us to fully optimize our assets and resulted in several communities being fully utilized during the quarter.
This network optimization creates an ideal operating structure and maximizes the margin contribution from each utilize bet with negligible capital requirements.
Our customers find added value and the flexibility of target's network of relocatable asset the hospitality solutions, which provides scale and flexibility to meet their needs, while delivering superior service offerings.
These attributes have supported the addition of more than 50, new customers in the first half of 2021.
And while we continue to have plus 90% customer renewal rates.
We have enjoyed for several years.
This positive momentum has also supported the continued execution of our strategic objectives.
Target has achieved significant debt reduction with no outstanding borrowings under the company's credit facility.
Which is materially enhanced targets for the next financial flexibility.
Further the company has meaningfully enhanced its government segment now represents approximately 60% of second quarter revenue.
This marked an important juncture as we believe this more balanced revenue profile creates the strategic inflection point for target.
We have illustrated our ability to appropriately position the company to systematically execute on its strategic objectives.
By doing so we have established the trajectory in which to continue pursuing our growth strategy focused on enhancing value to our diversified portfolio of service offerings.
Target unique capabilities translate across a range of end markets and provide the opportunity to pursue a variety of value enhancing growth submissions.
Target will pursue these opportunities while simultaneously remaining focused on expanding its reach providing critical support for the United States government.
Target has intentionally increased the concentration of services supporting federal agencies and has established itself as a trusted provider of these critical services.
This creates the optimal foundation to continue expanding its strategic long term partnerships with the U S government.
Our established platform creates the avenue to utilize our core competencies to support critical service needs across a variety of U S government agencies as well as a broader suite of commercial opportunities.
Services extend beyond our legacy accommodation offerings and include facilities management building operations asset maintenance and other critical support services.
Additionally, our established position as a proven government service provider enables target to begin engaging these various agencies as a direct prime contract, which further validates target as a premier provider of government services and enhances contract and counterparty strength.
Additionally, our increased government scope and the breadth of our services should bode well for additional commercial opportunities across a variety of industries.
Target has identified and is currently evaluating a robust pipeline of expansion and diversification initiatives within the government and commercial services markets.
The pipeline includes expansion opportunity within our existing service offerings as well as inorganic growth focused on broadening our reach across the government agencies.
The target has intentionally enhanced its operational and leadership capabilities to effectively identify and evaluate these growth opportunities, which it believes provides the greatest opportunity to accelerate value creation.
We entered 2021 encouraged by the improving economic outlook supported by sustained progress in post pandemic reopening and increasing global commercial activity.
We were confident that the deliberate actions taken to appropriately position the company would allow us to take advantage of a balancing market.
The pace of these improvements have exceeded our expectations and the momentum target and sustain is impressive.
We have utilized this momentum to accelerate our progress strengthening the financial position of target while growing our end markets. We anticipate this progress to continue as we progress through 2021 and into 2022, while staying focused on our strategic priorities and creating value for our shareholders.
Now I'll turn the call over to Eric to discuss our second quarter financial results and ongoing growth initiatives in more detail.
Thank you Brad and good morning, everyone.
In the second quarter, we experienced continued improvements in our operating metrics and realize the fourth fourth consecutive quarterly improvement in utilization as demand for our premium service offerings increases.
The support of our strong second quarter performance with total revenue of $75 million and adjusted EBITDA of approximately $32 million.
As we continue to focus our growth strategy of broadening our reach into adjacent end markets.
We have changed our reportable segment named two line accordingly at the highlight target balanced of service offerings.
Beginning with the second quarter of 2021, the segment, formerly known as Permian and Bakken will now be referred to as hospitality and facility services, South and Midwest, respectively, or HFF, South and Hff's Midwest.
The assets and revenues within each segment remained the same from prior periods, we're growing no adjustments.
We believe this change more accurately reflects our comprehensive suite of services and solutions.
Our government segment produced quarterly revenue of approximately $45 million compared to $17 million in the same period last year.
The significant increase was the result of a new U S government contract award executed in March of 2021.
Which contributed approximately $31 million of revenue in the quarter.
As a reminder targets. The government segment is supported by minimum revenue contracts, which are fully backed by the United States government over the respective contract terms.
Our hff's segments delivered the second quarter revenue of $20.29 million.
Compared to $21 million in the same period last year the.
This increase was driven by continued improving customers' head count demand supported by post pandemic re openings and strengthening economic demand.
As the pace of the improving economic outlook continues to build.
We continue to monitor supply chain impacts and inflationary pressures, resulting from strengthening economic demand and any associated impacts on our cost of services.
We take an active approach managing our input costs and benefits from our service offering flexibility, which allows us to adjusted primary cost components to mitigate pricing pressure.
As such our input costs have remained within our expected ranges and have not impacted margins.
Furthermore, the inflationary effects that we have seen we expect it to abate over the coming months and do not anticipate negative price impacts to meaningfully affect margins for the balance of the year.
Recurring corporate expenses for the quarter were approximately $9 million.
Despite the significant increases in revenue and EBITDA, we have not had commensurate increases within our book cost.
The highly scalable business model that allows us to substantially expand growth with minimal incremental cost.
As a result, we anticipate recurring corporate expenses to remain around $9 million per quarter through 2021.
Total capital expenditures for the quarter were approximately $12 million, including.
Approximately $10 million in growth capital, primarily associated with the New Government Service award as well as an income of $2 million in maintenance capital.
We ended the quarter with $7 million of cash and $345 million of total debt.
As of August 11th target has reduced year to date outstanding borrowings by $70 million and has no outstanding borrowings under the company's $125 million revolving credit facility.
Providing available liquidity of approximately $179 million, including $54 million in cash on hand.
Because we are achieving a high level of cash generation, coupled with minimal capital spending.
He of industry, leading return on invested capital, which has significantly enhanced the targets financial flexibility.
Importantly for target and our investors we expect this trend to continue for the next several quarters.
As a result, the company has made significant progress towards the year end of 2021 target net leverage ratio of below three five times.
We are excited by the strengthening commercial activity and associated demand for our service offerings.
These elements of supported targets of strong second quarter results and provide confidence in the cadence for customer demand for the remainder of 2021.
From a contractual perspective.
Approximately 96% of target 2021 midpoint of revenue outlook is under contract and approximately 73% of contracted revenue has committed payment for patients with 54% of committed revenue related to government services segment.
As a result, we have reiterated our 2021 financial outlook, which consists of revenue between 260 and $270 million.
Adjusted EBITDA between 97% of $107 million and discretionary cash flow between 65 and $70 million with.
With $15 million to $20 million of capital spending.
And the target net leverage ratio below three five times by year end.
We have made significant progress towards our 2021 financial outlook and net leverage was approximately $179 million of net liquidity as of today.
We remain focused on preserving and enhancing the Spanish of strength throughout 2021.
And into 2022.
The positive momentum target has experienced this year has accelerated our ability to execute on our strategic initiatives.
The significant progress made in enhancing our financial flexibility through meaningful debt reduction.
Anticipate turning our focus to strategic growth.
Target growth strategy will focus on utilizing its core competencies to expand its reach within the government services end market as well as select the commercial markets, which we believe offers the greatest opportunity to enhance targets unique value proposition.
The foundation, we have created providing of central service offerings to United States government creates the optimal scenario to pursue highly economic growth opportunities.
The foundation of our existing network and broad reaching capabilities create a platform to pursue these opportunities with limited capital requirements, creating an impressive return of invested capital profile, while simultaneously preserving the financial flexibility we have created.
As part of accomplishing our growth objectives, we have placed significant focus on highly efficient capital allocation and deliberate management of our network that allows for the expansion of a combination of services and associated hospitality solutions.
With the use of existing assets.
As a result, we have achieved this performance with minimal capital spending and we remained focused on maximizing our discretionary cash flow potential of each new contract award.
In addition, as we have substantially increased utilization to fully optimized levels.
We're also enacting ADR increases across select Hff's markets that will further drive revenue increases.
Additionally, as our potential commercial and contract backlog continues to build.
So does our acquisition pipeline.
We have engaged in an exhaustive acquisition strategy over the past several quarters that are starting to bear fruit.
We have been highly selective in any targets will be pursued with the aim of preserving balance sheet strength.
Many strategic target to acquire limited infrastructure capital and tuck into target broad ranging service offering capabilities.
These opportunities cater to a variety of government agencies and provides significant revenue visibility through long term contracts and quantifiable contract backlogs.
The context to the size and scope of this addressable market.
The old facility support and management represents an approximate $84 billion per year industry segment.
Now we look forward to providing additional information on these opportunities if and when they materialize.
These characteristics characteristics of our growth strategy meaningfully increased revenue visibility and strength strength of economic returns, which we believe create the greatest opportunity to accelerate value creation for our <unk>.
Shareholders.
With that I will turn the call back over to Brad for his closing comments.
Thanks, Eric we intentionally positioned target to take advantage of improving market conditions, while systematically continuing to execute on our strategic priorities. Our strong second quarter results reflect this commitment and illustrate our operational strength, which we have the leverage to meet and exceed our customers' varying needs.
We have created and sustained a tremendous amount of momentum over the past year, which has been reflected in our impressive results and execution.
As we look for the second half of 2021 and into 2022, we will utilize this momentum to focus on our strategic growth initiatives.
We have intentionally increased our concentration on services aiding the United States government and we believe we have established target target as a premier provider of the services.
This foundation provides the platform to pursue additional value added growth opportunities within the government services market.
Additionally, we have taken thoughtful steps to enhance our capabilities to effectively identify and evaluate these opportunities, which we believe provide the greatest avenue to accelerate value creation for our shareholders.
We have created a structurally sound business and develop a unique set of core competencies, which will allow us to continue executing on our strategic objectives.
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 Scott.
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At this time, we will pause momentarily to assemble the roster.
Our first question comes from Stephen <unk> with Stifel. Please go ahead.
Yeah.
I think I think two things.
Talk a little bit about this but so you have the government business, which is clearly.
Has gone very well and you renamed the other two segments.
Does the does the renaming of the segments suggest there.
Youre expecting opportunities that are that are non oil and gas to fall into those two buckets that are sort of non government work.
Thanks, Stephen Good morning, Eric <unk>, good to hear from you.
So the.
One can certainly think of it that way.
Way, we had thought of by the more Holistically was that new target hospitality offers a broad range of services.
And what we wanted to do is try to make those segments more encompassing and holistic of the services in the solutions that we provide as opposed to being geographic specific and the right and as we as we look to expand the business both commercially.
As well as by geography, we just felt that that particular naming convention really didn't exemplify.
One of the services, we provide and to where we're heading as as the business and as an organization and frankly, how we operated.
Let me just add to that.
Stephen Good morning.
The.
Yes.
It kind of in response to your question, maybe just add a little bit what Eric is talking about if you look at our sales pipeline today, which it is more robust than I've seen in years.
The the projects more actionable, meaning funding is in place, but I think the biggest difference is in the diversity of the projects. They range from facilities management energy transition infrastructure government related projects like we're performing today, so very diverse compared to years past, where it was heavy oil and gas.
As now with our large network built out we can service our LNG customers with very little.
Not much new capital needed for that with the network built out so it allows us to go after these other markets that we've been doing not just for the past few quarters really for the past few years. It's now the momentum is building in that so.
Along with this kind of transition I think the renaming of those sectors really worked out from that flavor for that.
Okay. Thanks.
Two other things one is a follow up to that.
Would you envision the contract and.
And the contract terms to be.
Morris.
Solid like of government contract and some of these other endeavors or more.
Similar to what you're doing the oil and gas business right now.
Well I think when you look at the government business as a whole when you look at.
For the size of that addressable market, Eric mentioned it in his kind of his in his remarks, the $84 billion of it.
Gives you the ability to scale, which adds a lot more contract for you, but I think theyre very very visible when you start to look at the government business and you can look out many years on the so I would say, yes, the longevity of them as a as the big piece of why we're doing it.
Yes.
Steven It's in addition to that also it's also about the the.
The potential hit rate opportunities as well right. So so the structure make may look and feel similar types of it's also the hit rate and the total addressable market that you are looking at whether youre looking at industry or whether you're looking at government side.
What you're really talking about is massively expanding the pie over time and that's that level of expectancy around around contract availability is really important as the structure and really capital line for sure that's exactly right.
Great and then just.
The final thing from me is your.
Your guidance is unchanged.
I imagine that the that the variation in the in the guidance range.
Is is driven mainly by what happens with with the upstream business I mean over the next couple of quarters, just occupancy and how activity flows the next.
In the back half of the year is that.
Is that the.
Really the differences between the the low end of the high end of the range or Theres some cost issues in there too.
Sure and out of its a great question. So certainly.
There is some element of variability that we are still sort of work through we do expect as we've seen from through this year and we continue to expect positive performance.
On the on the.
On the Andrew side of the business I think what Youre also seeing here is we are we have just gotten through the first stages of the contract we want to continue to let that play out we certainly of other discussions going on and we'll come in and just the guidance if we need to going forward, but I think right now we feel comfortable with where we are for.
Quite excited about the future for us and we will come back of the later point in time. This this fall of the need to and the.
Adjusted Accordingly.
Okay, great. Thank you gentlemen.
Thank you.
The next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Good morning, Hi, it's Daniel on for Scott.
Couple of questions on the government segment, if you could please speak to the.
Dynamic at the board of or immigration issues persist.
Our children's who will kept temporarily around convention centers and.
One of the chances for target to garner incremental solutions.
Well, let me just kind of talk about that business as the whole. One this is Brad good morning.
The contract.
As of today continues to perform as expected.
We continue to receive high marks.
For the services we perform.
More directly the need for our services has continued to grow and in fact, the need of the increase to a point, where we're in active discussions with our customer on expansions as well as additional locations look we're not the company to do the.
More of the temporary type structures as you mentioned the.
Convention centers, where more of our standard type products. So we believe that is what we do best.
Of the use of really likes that we fully believe theres more business out there to be had the issues at the border has not stopped it's actually increased for the need for our services has done the same.
Got it very helpful. Thank you.
And if we think about the the existing contracts I think you alluded to it.
How would we.
Think about the potential for the for the extension of that contract.
Yes again.
I've touched on the outperformance to date.
Kind of how we are ranked on our services.
Our supply, but I think you need to look at.
My point there we're in active discussions for more expansions in more locations as it relates to the growth of longevity of this business segments. We view all of the things that I. Just mentioned is positive steps as we move forward throughout the year of 2022.
Got it. Thank you that's very helpful color and just a quick one on <unk>.
On the on the other segment.
How should we think about the the visibility I mean, you're doing well on the.
New customers. So that's great to hear about how can we think about the disability going through the back half and also into 2022.
Yeah.
Sure good morning so.
I think the way we would characterize the the business going forward in the back half of 2022 is continuing to continuing.
The positive momentum around the around the energy side, we will obviously continue to see stability around the government services side.
I think the biggest question then is how we foresee growth and as Brad has mentioned in the prepared remarks and in just a moment ago and the question. The pipeline. We have is really extensive right. So you've been looking at deals aren't done until they're done and so we feel quite quite optimistic about the back half of 2021.
But look we expect the business to continuing the performance continuing to progress and continue hopefully improve even from where it is today and we continue to see positive aspects of that so.
Look we feel great about it.
I'll just let the let the.
For the years during the rest of the year play out and like I said before and we'll adjust accordingly, and it certainly makes the marketplace of where to the extent, we have commercial discussions that materializing us.
Doing something with the outlook.
Great. Thank you very much guys.
As a reminder, if you have a question. Please press star one to be joining the queue.
The next question comes from Doug Becker with Northland Capital markets. Please go ahead.
Thanks.
I wanted to touch base on the the guidance again, just it seems like the EBITDA guidance implies that.
We see a decline in <unk> and for Q from the second quarter level and just wanted to see if there was anything you could point to specifically that that would cause that.
Hi, good morning.
So look the no theres nothing specifically, we can point to that.
That would.
The cost that I think what youre seeing in there is we have purposely been look we've been cautious around how we see the.
How we see the business progressing through the back half of the year largely because of the pandemic reopening some of them. Initially set set the guidance of months ago, and so while we're not changing it today, what I think.
What you are hearing of say is we feel quite confident about it going going forward, but look we want to be we want to be thoughtful about how we how we have the outlook and at this point in time, while we're highly comfortable in our positioning for the outlook. We're just not prepared to change it at this point in time.
Got it.
That makes sense do you have any visibility on maybe any seasonal weakness in the fourth quarter.
Based on conversations with your customers.
We do see occasionally some seasonal weakness towards the back half of the year.
Particularly in December timeframe during the holidays.
But it's not material.
Maybe one or 2% on utilization.
Beyond that I don't think we have any additional color specifically at this point in time around around.
Matt.
One thing I would say that.
In that part of the business the there'll be pretty good about staying within the budget years.
Years past they seem to spend it.
And then in the fourth quarter, you have seen anything yet so.
We're talking with our customers is going to be a more even trajectory. If you will throughout the quarters as we move for the back half of the year. So I think that lends well to what Eric Zion kind of minimal if any drop off in the fourth quarter other than we always had to drop off around the Christmas time holidays, those types of things, but I don't see anything major no that's right.
And I want to be clear, yes, we continue to expect so, particularly on the HFF, South and particularly we do continue to expect some positive positive trends there.
We do continue to expect that and so I don't want I don't want to be any mistake around that.
Got it.
And then.
As you are pursuing the growth opportunities in the diversification.
Would you expect the used to be accretive dilutive or kind of the same as existing margins just trying to think about.
The margin outlook is as you pursue these growth opportunities.
Sure.
So.
Look we it's a great question, we have exceptionally high.
Margins, which we are obviously quite proud of and we do all we can to protect and have done that consistently for years.
As it relates to margins specifically you have to also contemplate the denominator as part of that equation and so far as a return on capital.
And what we have been very thoughtful around over the past several months and quarters is to deploy capital.
Capital deployment, and do so very thoughtfully and maximize the utilization of potential within the within the capital and when we have done that which has made this EBITDA highly accretive.
Now as we go forward, what we're looking at our businesses that are intrinsically feeling more capital light.
With that though also may come with with margin of such less margin. However, we expect the all in return of the scaffold to exit with very similar at the end of the day.
At least that's what we're trying to achieve and so youre asking the right question.
Ultimately, though you can you can capture.
The similar return invested capital, even if you have a slightly lower margin, but dropped the spending significantly less capital and for the for that.
So I think that's the perfect answer thank you.
Okay.
Next we have a follow up from.
Jenga with Stifel. Please go ahead.
Thanks.
I appreciate you taking the follow up just quickly when you.
When you think about capital deployment and you've obviously been reducing debt you have some targets in mind as you get to the leverage targets.
To the extent there is not something that is is.
Brewing on the acquisition side, what do you do with the cash at that point.
Yeah, Great question. So so yes sure let me address the balance sheet of little bit we do have some more work to do on the on the on the debt reduction we are running to a point, though is you are getting at that.
The level of pre payable debt is becoming.
Affectively, we don't we don't have any so.
We're a couple of options at that point right. So one is we'll look at we're looking at further optimizing the capital structure, if we need to as we move through the next couple of quarters here, that's certainly an opportunity for us and I wouldn't say we've ever been pleased around the cost of capital on the debt side and so we're absolutely taken opportunity to address that.
Sure.
Point number one point number two is as it is a growth oriented business and is a business, where we have clearly stated our strategic intention to position reposition the business and to continue to grow the business look I think our best use of capital is to do what we can do for continuing to increase the enterprise value of the business and we see opportunities there and we are.
Moving to continue to exploit those in.
I think there of the right way to do that is to use cash as opposed to trying to do something over the creative on the balance sheet, and which is something we absolutely don't want to do.
And so I think it's.
The effectively the effects of the use of cash and that's the goal at this point.
Okay.
Very helpful. Thanks.
I think that's all for me I appreciate it thank.
Thank you thanks, Steve.
This concludes the question and answer session I would like to turn the conference back over to Brad Archer for any closing remarks.
I just want to thank everyone for joining the call today and we look forward to speaking again in November have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.