Q3 2021 Target Hospitality Corp Earnings Call
Good morning, and welcome to the target hospitality is third quarter 2021 earnings call.
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Now I'd like to turn the conference over to Mark Schuck Senior Vice President of Investor Relations. Please go ahead.
Thank you good morning, everyone and welcome to target hospitality <unk> third quarter 2021 earnings call. The press release, we issued this morning outlining our third quarter results can be found in the investors section of our website. In addition, a replay of this call will be archived on our website for a limited time.
Please note the cautionary language regarding forward looking statements contained in the press release.
This same language applies to statements made on today's conference call. This call will contain time sensitive information as well as forward looking statements, which are only accurate as of today November 12 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 investors section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.
Leading the call today will be Brad Archer, President and Chief Executive Officer, followed by Eric <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 will 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 demand fundamentals have strengthened throughout 2021 and have supported consistent increases in demand for targets premium hospitality service offerings. Since year end 2020 target has experienced an over 40% increase in customer demand across.
Hospitality and facility services segment.
This robust demand has resulted in expansion of operating margins and utilization throughout 2021, and I have supported the continued execution of our strategic objectives.
Targets exceptional third quarter results are a direct reflection of the intentional actions, we have taken to appropriately position target to take advantage of building customer demand.
Target's top 10, hff's customers have increased their labor allocation by over 95% since mid 2020.
This demonstrates the value of our best in class customers find and allocating labor to targets World Class network and Premier holistic service offerings. These.
These attributes continue to support and over 90% customer renewal rate, which we have enjoyed for many years.
As targets utilization increases we are approaching an ideal level of network optimization and are beginning to benefit from the scale and efficiencies we have created within our operating structure. This.
This network optimization creates an ideal operating environment and maximizes the margin contribution from each utilize bed with negligible capital requirements.
This efficient operating structure has resulted in meaningful cash flow generation, which has been directed towards significant debt reduction and accelerated the strengthening of targets financial position.
This intentional focus has resulted in a 52% reduction in target net leverage ratio in 2021.
These accomplishments have allowed target to materially enhance its operational flexibility, while simultaneously diversifying its business mix and establishing a robust growth pipeline.
Additionally, target has advanced its diversification focus with its government segment now representing over 50% of third quarter and anticipated full year revenue.
As we continue to focus on network optimization, we recently relocated a number of assets from our Hff's Midwest segment to be utilized in servicing our existing contract within our government segment.
This illustrates the flexibility of our network and our ability to optimize assets to generate the highest returns.
We have illustrated our ability to appropriately position the company to systematically execute on our strategic objectives.
By doing so we have established a trajectory in which to continue pursuing our growth strategy.
Focused on enhancing value through a diversified portfolio of service offerings.
Targets unique capabilities translate across a range of end markets and provide the opportunity to pursue a variety of value enhancing growth initiatives.
Target will pursue these opportunities while simultaneously remaining focused on expanding its reach providing critical support to the United States government.
Our established platform creates avenues to utilize our existing core competencies to support critical services, including including humanitarian aid efforts across a variety of federal agencies. Additionally.
Additionally targets holistic service offerings create a broad suite of commercial opportunities across a range of end markets. These.
These services extend beyond our legacy accommodation offerings offerings and include facilities management building operation asset maintenance and other critical support services.
Target has identified and is currently evaluating a robust pipeline of expansion and diversification initiatives within the government and commercial services markets.
These multiple growth levers are underpinned by the existing strengths and target's core offerings and include both inorganic both focused initiatives and broadening our existing commercial portfolio.
As it relates to our government services opportunity set we continue to have active and productive conversation with various government agencies regarding their continued need for permanent humanitarian solutions.
<unk> Premier and comprehensive service offering is viewed favorably by the U S government, providing multiple avenues to expand targets offering in support of these critical humanitarian solutions, while we can never be sure of a successful contract outcome. We're very encouraged by the frequency and scope of our ongoing dialogue with the U S.
Government.
We are strategically positioned target as north America's leader and Premier vertically integrated hospitality solutions.
We have accomplished this by intentionally identifying and transitioning targets business mix to capture the greatest value creation and expand its long term growth pipeline.
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 have been encouraged by the sustained momentum experienced throughout 2021 and as our results have illustrated the benefits of our strategic positioning as north America's Premier provider of vertically integrated hospitality solutions.
The progress we have made in executing our strategic initiatives is impressive and has exceeded our expectations.
This positive momentum as illustrated in our recently raised 2021 financial outlook, which represents the second increase to our financial outlook. This year.
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.
I'll now turn the call over to Eric to discuss our third quarter financial results and ongoing growth initiatives in more detail.
Thank you Brad and good morning, everyone.
In the third quarter, we experienced continued improvements in our operating metrics and realized a fifth consecutive quarterly improvement in demand for our premium modular accommodation and value added hospitality solutions.
This supported our exceptional third quarter performance with total revenue of $89 million and adjusted EBITDA of approximately $38 million.
Discretionary cash flow of $35 million, representing an impressive 39% discretionary cash flow yield to revenue.
Our government segment produced quarterly revenue of approximately $46 million.
Third to $60 million in the same period last year.
The significant increase was a result of the U S government contract executed in March 2021, which contributed approximately $33 million of revenue in the quarter.
As Lynn Minder targets government segment is supported by minimum revenue contracts, which will fully backed by the United States government over their respective contract terms.
Our hff's segments delivered second quarter revenue of $32 million compared.
Compared to $20 million in the same period last year.
This increase was driven by sustained momentum in customer demand for targets premium service offerings supported by strengthening activity within our commercial surface areas.
As the pace and momentum of our economic activity continues to build we continue to monitor the supply chain impacts and inflationary pressure, resulting from strengthening economic demand.
And then the associated impacts on our cost of services.
We've taken an active approach managing input costs and benefit from our service offering flexibility, which allows us to adjust primary cost components to mitigate pricing pressure.
As such our input costs have remained within our expected ranges and have not materially impacted margin at this point.
And we have reflected our expectation for cost of services within our recently updated financial outlook.
Recurring corporate expenses for the quarter were approximately $10 million.
Despite the significant increase in revenue and EBITDA, we have not had commensurate increases within our corporate costs were.
We have a highly scalable business model that allows us to substantially expand growth with minimal excess costs. As a result, we anticipate recurring corporate expenses to remain around $10 million per quarter through 2021.
Total cash capital expenditures for the quarter were approximately $9 million.
Including approximately $6 million directed towards enhancements within our government services segment.
And the New government services award as well as an additional $3 million in maintenance capital.
We remained focused on maximizing return on invested capital and do not anticipate significant non growth capital requirements for the remainder of 2021.
We ended the quarter with $31 million of cash and $340 million of total debt.
Providing available liquidity of approximately $156 million.
With a net leverage ratio of three one times.
Because we are achieving a high level of cash generation, coupled with minimal capital spending.
We have industry, leading return on invested capital, which is significantly enhanced targets financial flexibility.
Importantly for target and our investors. We expect this trend to continue over the next several quarters as we remained focused on balance sheet flexibility because we can continue to accelerate growth.
As a result, the company has made significant progress towards our year end 2021 target net leverage ratio being below three times.
We are excited by the strengthening commercial activity and associated demand for our service offerings.
These elements support a target strong third quarter results and provide confidence in the cadence of our customer demand for the remainder of 2021.
From a contractual perspective, approximately 99% of targets 2021 that midpoint revenue outlook is under contract and approximately 73% of contracted revenue has committed payment provisions with 53% of committed revenue related to government services.
Now as a result, we recently raised our 2021 financial outlook, which now consists of revenue between 280 and $285 million adjusted.
Adjusted EBITDA between 110, and $113 million and discretionary cash flow between 75 and $180 million.
With $25 million to $30 million and capital spending excluding acquisitions and a target net leverage ratio below three times by year end of 2021.
The sustained momentum target has experienced throughout 2021 is impressive and has led to multiple increases to our full year outlook.
Our current 2021 financial outlook represents a 25% and 42% increase over full year 2020 revenue and adjusted EBITDA, respectively.
The positive momentum target has experienced has accelerated our ability to execute on our strategic initiatives.
With significant progress made in enhancing our financial flexibility through meaningful debt reduction, we anticipate turning our focus to strategic growth.
Targets growth strategy will focus on utilizing its core competencies to pursue a balanced portfolio of service offerings, while expanding its reach within the government services end market as well as select adjacent commercial markets.
We believe these opportunity sets offer the greatest potential to enhance target's value proposition.
The foundation of our existing modular solutions network and broad reaching capabilities creates a platform to add additional growth channels to our portfolio of services and solutions.
Target has strategically positioned itself as north American market leader in providing premier vertically integrated hospitality solutions.
We accomplish this by potentially focusing in markets and world class customers that offer the greatest long term revenue growth potential while optimizing our existing asset fleet and unique capabilities to maximize economic returns.
These principles have established a highly attractive financial profile that generates best in class margins with substantial cash flow conversion.
Additionally, our asset fleet requires little maintenance capital, leading to significant discretionary cash flow.
This efficient financial profile allows us to reinvest cash flows into complementary growth markets aligning with targets strategic principles and expanding targets long term growth pipeline.
These characteristics of our growth strategy meaningfully increased revenue visibility and strength in economic returns, which we believe creates the greatest opportunity to accelerate value creation for our stakeholders.
We look forward to discussing our progress as these opportunities materialize.
With that I will turn the call back over to Brad for closing comments.
Thanks, Eric targets impressive third quarter results illustrate the benefits of targets unique position as north America's leader in modular accommodation hospitality solutions, while exemplifying our commitment to executing on our strategic objectives objectives.
Target strategic position and operational strength has allowed us to meet and exceed our customers' varying needs, while significantly enhancing targets financial position and supporting our commitment to pursuing our growth strategy.
We have created and sustained a tremendous amount of momentum in 2021 and as we look into 2022, we will utilize this momentum to focus on our strategic growth initiatives.
We have taken intentional steps to enhance our capabilities to effectively identify and evaluate a range of growth opportunities focused on enhancing value through a balanced portfolio of service offerings.
This opportunity set expands across a variety of end markets, including providing additional critical support service services to the United States Government Importantly, these growth initiatives utilize target's existing core competencies, which we believe create the optimal scenario to accelerate value creation for our shareholders.
I appreciate everyone joining us on the call today and thank you again for your interest in target hospitality.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yes.
Our first question comes from Scott Schneeberger with Oppenheimer You May go ahead.
Thanks, very much good morning, everyone.
I'd like to start by asking.
Are there any new developments with regard to potential new contracts with the government and then and then follow up question, well I'll ask upfront as well as.
Has the.
The government contract that was established in March 2021, I believe that was a one year contract.
Has that been renewed extended any discussions with regard to.
Developments there. Thank you all.
Hey, Scott. Good morning. This is Brad let me I'll cover off on expansion.
And extensions here in the government segment, so look our existing contracts performing they are performing as expected.
We continue to receive high marks on the premium services that we offer to the U S government.
We continue to have active and consistent conversation with the customer.
Extending the contract the existing contract in West Texas.
I think it's important to remember the existing contract term runs through March of 2022, and we feel very confident on our successful extension by the end of the first quarter of 2022.
Got about 40% left on this contract.
I think again discussions are happening, but it gets it moves further down the road. After the first of the year and comes to a conclusion by the end of the first quarter. Additionally, I would say the target has established itself as the trusted long term provider of Premier comprehensive hospitality solutions throughout the U S government.
Also important to remember targa.
Target has established this reputation by providing two of the largest permanent hospitality solutions for the U S government humanitarian aid efforts, that's now span three different administrations.
So I think thats, an important point with this backdrop and more on expansions and the new government business, we are having active and productive conversations with various government agencies regarding their growing need for more humanitarian aid solutions, while the outcome can never be certain we do feel very good.
This segment and moving forward in 2022 very active conversations.
Very mature conversations and I'll kind of leave it at that but we feel very good about where both of these are headed last thing I would say on this.
Is.
This is very similar in how we approach daily we built a great location, we built a permanent facility.
It started out as a year to year basis, and now we are seven years.
On that contract. This is not new to us, it's not new to the government they move a little slower than most.
That's normal, but we feel very comfortable with how this is moving along.
Alright, great Thanks for that Brad.
Just one quick follow up and then I'll and then I'll pass it over but I'll keep it in the government segment.
Probably for Eric.
The average daily revenue.
78 in the third quarter I think that was up from 76 in the second quarter.
I think you probably have gotten full quarter contribution from the from the March contract win in second quarter. So just curious what that what that increases is that an inflation based escalator or something else there. Thanks.
Sure Scott.
Referring to the sequential.
Quarter, yes quarter on quarter.
Sure.
Good question. So so look the reality is is you've got increased from just the pro rata benefit right. So as you move through the quarter. So that's really that's really all it is so you can see that you can see that in the number.
Call last quarter, we had we did have a first quarter benefit, but as we were moving through that process through change orders. There are that was really a large project that was still moving into scale and scope. So as a result of that we've got additional benefit this quarter from that so that's really what thats really what youre seeing so recognizing it was there in Q2, but the worst.
Positive movements as it relates the edr because of scope and scale in Q3.
Got it thanks.
<unk> topped off here or maybe a little bit more or wait and see.
Look good question.
The scope and scale in the government is looking at a lot of things and so I think what we're seeing is increase in scope and scale and not a decrease in scope and scale.
Im not going to say that there is not positive movement. There I mean, I would work with what we have posted right now, but look there's always opportunity for that to increase.
Great. Thanks, good job on the quarter guys take care.
Thank you.
Our next question comes from Steven <unk> with Stifel. You May go ahead.
Yeah.
Thanks, Good morning, gentlemen.
Three things to me.
Just can you give us.
Your expectations on the bridge to the fourth quarter.
It feels like it seems like you're guiding to like 24, $527 5 million of adjusted EBITDA, which is.
Although down sequentially I know, there's seasonality, but is there anything else in there we should be thinking about.
Yes, no I don't think so.
Look there is you're right we have the seasonality that does impact things a couple of percent in the quarter. So you need to bear that in mind that you'd probably have accounted for that but I don't think it's anything specific going on there that we haven't already that we earn our already talked about.
If you want after the call happy to get on the phone and walk through any specific nuances.
Our interest but.
Nothing nothing specific really going on in Q3.
Thanks.
When we were hearing 20% to 25% upstream spending growth in the U S next year, which.
I think is reasonable.
If you get something like that and there is inflation. There is our cost productivity is probably up mid teens.
Well you're utilized beds rise at roughly that same rate.
Okay.
And the HFF segment.
Sure Good question so.
To the extent our customer capital spending is tied directly to the human capital allocation.
Sure.
I think it's important to remember that we haven't seen those large capital spending numbers coming from the integrated providers that are really the bulk of our customers and so I think with the numbers, we're seeing and we're seeing the same thing which is really from smaller private companies right. So there is certainly a component of the anticipated 2022 capital that is that is not due to human capital.
Alright, so just some other inflationary pressures as well.
So I would just caution.
That we would see a direct correlation there to that to that capital spending.
We do expect to continue to see positive momentum in 2022, just like we've seen all through 2021, and so we don't see any abatement there necessarily I would just be cautious though at this point in time until we put out a 2022 outlook to read too much into the headline.
Capital spending numbers that youre seeing.
And I think.
And you can correct me, if I'm wrong, but I think you do more of your work is directly oil service related and directly E&P. So does it matter if the privates or publics were spending at Liberty and.
Halliburton and others or are just as busy.
Sure it matters to the extent that the bulk of the capital spending whether it comes from right and so obviously, if youre dealing with companies like like Chevron Exelon et cetera.
That can obviously swing with a total nominal capital spending number comes from and so I just think we need to be.
Bear that in mind, but your concept is not is not wrong.
I want to be cautious about tying a one to one correlation to that the other thing I would point out is we tend to have a about a quarter lag between capital spending today versus what happens at the head count level. So just bear that in mind as well that we do tend to be a little bit lagging on that as well.
Great and one more quick one for me and I'll get back in line.
<unk>.
Potential pending acquisition of FBR Im pretty sure you hadn't fts large I'm not sure if thats still open, but I imagine you do business with them.
That impact you at all or do you do business with the potential buyer I'm just curious if theres any.
I should be aware of on that front.
13, Frac fleets working in the third quarter.
Stephen This is Troy and good morning, good question regarding that potential business combination.
We definitely.
We are continuing to service that customer and have for a long time.
And as that transaction moves forward, we anticipate that that relationship which has been intact for again for a long period of time, we will continue so.
I think your question regarding there wasn't <unk> facility at one point, while that facility is not open.
Specifically, we are servicing them throughout the entire Permian basin and continue to and expect that to continue in the future.
Can you comment if youre doing business with their potential buyer and whether it could actually be added if you are not.
Look when we think about mergers and acquisitions and business combinations as we've talked in the past, Steve and I think it's always been more favorable than not right because of who we're doing business with the size of the network that we have.
And the sheer number of customers that we service across that 85000 square square mile piece of the Permian Basin, our real estate. So with that said I would tell you that given our given our penetration into the marketplace I fully expect this to continue to do work with EFT Tsi and <unk>.
And other large oilfield service customers, regardless of the M&A outcomes.
Great. Thank you for the color very helpful.
You bet.
Again, if you have a question. Please press Star then one our next question comes from Doug Becker with Benchmark Research you May go ahead.
Thanks.
I was looking for a little more color on what drove the sequential decrease in gross margins in government services and Hff's itself.
Just a little more detail on what the expectation is going forward given that decline.
Sure. So good good question on both.
Take government one so similar to the to the answer that was giving Scott, which is that contract had a pretty substantial ramp period.
When it first started.
Similar to many other contracts that we do.
Youre getting full minimum revenue commitment, but you may not be getting full occupancy per the contract and so what happens is you end up with a with a higher front front loaded margin.
Just due to just.
Higher revenue relative to the cost you're spending to facilitate the contracts as the contracts mature through time as occupancy comes up and you get to more of a steady state you end up seeing that margins start to normalize right. So it's normalizing off of a but unfortunately youre looking at a lot of a higher comp number so thats really the.
The driver there.
A similar effect that you see in the <unk> segment.
Youre seeing increased Occupancies, which is which is a good thing you've got a larger portion of minimum revenue commitments, which is also a good thing.
Can have periods, where we saw pretty good movement up the second quarter.
I'm, sorry in the third quarter and when that happens.
You obviously continue to have.
The cost increase on that so all that has all of that has to moderate due to contract when you've seen these movements up and occupancy levels that havent pretty quick over short periods of time, you can't have an element where the margin.
Does come down on a temporary basis.
Is it fair to say that for government that we move back to say a 60% gross margin.
And then.
And then Hff's, south kind of going back to an upper upper forty's.
We hope so.
On the on the government side I think I think the.
The leading edge margin, we have right now that youre seeing this quarter is the one that I would that I would guide you to.
Again.
When a new contract comes in particularly a contract of that scale that does have a tendency to till things and so I would I would I would.
What we have right now is kind of leading edge number of course, when we update 2022 outlook will of course get fresh give a fresh view on that but that's what I would use for now.
Thats for both for both government and Egypt yourself, well look I know I actually yeah, no that's right.
And the government on HFF South.
Things look I think there is there is continued positive activity there in terms of the margin of over time right.
As the marketplace there continues to strengthen as we have.
We have really tightened up utilization there significantly over the past six months.
What that does is it puts us in a spot to be able to increase prices to certain extent and which obviously is a benefit to the market.
That makes sense.
And then just.
As you were looking to expand outside of your traditional end markets. There's acquisitions I was just hoping you could help frame what the potential size of the contracts that you are looking at.
Might be just to help frame expectations there.
Sure.
Yes, good question and I appreciate it Doug.
Congratulations on the new haunted by the way before I before I forget.
Look I think as it relates to M&A.
We don't want to specifically opine on on the size of the transactions because the reality is they can vary right. There have been things that we've talked in and looked at doing tuck ins that are a little smaller.
There are some things we've looked at that are certainly.
Larger.
And in some cases can be called transformative in certain ways look I think our bias regardless of what we do is to do it in a way where we come out of it.
With a greater degree of operational scale.
Come out of it with a still a flexible balance sheet, where we can continue to explore various growth avenues.
Look the whole golar around this is to continue to increase the enterprise value of the business. So I think theres a lot of operating leverage in this business within there is a lot of commercial opportunity in this business and I think there are a lot of ways that we can look to explore that and frankly, we think the enterprise value business is worth significantly more than where the marketplace has us and so whatever we do in whatever scale and size that is and does.
Have to be a one and done right. There can just going to be a multi step approach.
But whatever we do it's going to be with an eye towards continuing to increase the value of the business in a meaningful way.
But to do it in a thoughtful way.
And just one thing to add on that and we're talking more inorganic growth right now.
Let's not forget about our organic growth I think it's a good.
Troy take a few seconds here.
And speak to our pipeline and what we have organically because it's.
It's very robust, it's very actionable and I think it is very meaningful.
Aside from the inorganic growth.
Hey, Doug Good morning, Brad I think Thats, the right way to think about it in addition to the inorganic opportunities that Eric was talking about but we continue to evaluate a very mature pipeline of organic opportunities across multiple commercial applications. We're very excited about that.
When we look at the opportunities they encompass a variety of commercial applications, including Green energy.
Energy transition and infrastructure.
<unk> also integrated facilities management.
I would I would characterize the mature pipeline number one it's robust.
Number two it's actionable and three its diverse right. So.
Look I think that I think thats I think thats exciting for the business.
We continue to pursue it as I said very mature very actionable and very diverse.
Thanks for the context.
This concludes our question and answer session I would like to turn the conference back over to Brad Archer for any closing remarks.
Yes, just wanted to say thanks to all of you for joining us on the call today, and we look forward to speaking again after the new year.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.