Q1 2022 Target Hospitality Corp Earnings Call
Good morning, and welcome to the target Hospitality, Inc. First quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you made.
Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Mark Schuck Senior Vice President of Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone welcome to target hospitality <unk> first quarter 2022 earnings call.
Our 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 this 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 may 10 2022.
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 periodic filings with the SEC.
We will discuss non-GAAP financial measures on today's call. Please.
Please refer to the tables in our earnings release posted in the investors section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.
Leading the call today will be Brad Archer, President and Chief Executive Officer, followed by 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.
Now I'll 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 target's first quarter results continued to exemplify the strength of target's operating position, which continues to benefit from positive momentum in customer activity across targets Premier network of communities.
<unk> top tier customers continue to find added value in the size and scale of our network, which provides premium hospitality solutions and unmatched logistical flexibility for their labor allocation requirements.
Our superior operating capabilities and World Class network has supported a 65% increase in customer demand since the first quarter of 2021.
Additionally, the intrinsic value of target's network has supported and over 90% customer renewal rate for more than six years.
These strong demand fundamentals and superior operating capabilities allow target to efficiently respond to increasing customer demand, while generating top tier operating margins and strong financial results.
Targets Hff's segment continues to benefit from its premium network and World Class service offering.
These elements have supported continued strength in customer activity, resulting in six consecutive quarterly increases in hff's south customer demand.
Additionally, the strong demand fundamentals and target strategically located communities supported the reopening of previously idled assets during the first quarter of 2022.
We anticipate consistent increases in customer activity throughout 2022 and are well positioned to benefit from this positive momentum across our network.
Additionally, target continues to benefit from its increased concentration of critical humanitarian support services. It provides to the United States government.
Targets government segment represented over 58% of first quarter 2022 revenue.
Supported by a fully committed minimum revenue contracts backed by the U S government.
This is a clear illustration of our commitment to diversify and expand targets end markets, while high grading counterparty exposure and contract structure.
These accomplishments have allowed target to materially enhance its financial strength, while simultaneously diversifying its business mix and establishing a foundation to continue pursuing strategic growth initiatives.
These growth initiatives are focused on broadening targeted end markets.
While significantly expanding our long term growth opportunities.
Target will pursue these initiatives while also remaining focused on expanding the critical support services. It provides to the United States government.
Target has intentionally established itself as the premier provider of permanent hospitality solutions for the U S government long term domestic humanitarian aid missions.
Targets Premier and comprehensive service offering is viewed favorably by the U S government and our scale and operational capabilities are unmatched in North America.
As it relates to our latest government service contract, which began in March of last year. We continue to have active discussions regarding the extension of this contract.
These discussions include the potential for a meaningful increase in contracts scope due to continued strong demand of targets critical service offerings.
Additionally, the U S government has recently outline its intention to expand capacity and enhance capabilities to address the ongoing domestic humanitarian aid missions as.
As part of the U S. Government plan there has been a fiscal year 2022 annual appropriation of approximately $8 8 billion.
Appropriation illustrates the magnitude of the humanitarian aid mission and the volume of resources needed to appropriately respond.
We continue to work diligently with our customer on finalizing contract terms and are highly confident in a successful outcome to these contract discussions.
We are encouraged by the sustained momentum experienced in the first quarter of 2022 and believe we are well positioned to continue benefiting from our strategic position as north America's leading provider of comprehensive hospitality solutions and value added services I will now turn the call over to Eric to discuss our first quarter financial results and ongoing growth.
Initiatives in more detail.
Thank you Brad.
In the first quarter, we experienced continued strong demand fundamentals and positive momentum in customer activity.
First quarter 2022, total revenue was $80 million and adjusted EBITDA was approximately $33 million.
Our government segment produced quarterly revenue of approximately $47 million compared to $18 million in the same period last year.
The significant increase was attributable to an additional U S government contract award executed in March 2021.
Which contributed approximately $33 million of revenue in the quarter.
As a reminder targets government segment is supported by minimum revenue contracts, which are fully backed by the U S government.
Our hff's segments delivered first quarter revenue of $33 million.
Third to $26 million in the same period last year.
This increase was driven by sustained momentum in customer demands for targets premium service offerings supported by strengthening economic fundamentals.
Well target has significantly grown its revenue and adjusted EBITDA over the past year would.
We remain diligent and appropriately managing cost components.
We take an active approach managing our input costs and benefit from our service offering flexibility, which allows us to adjust primary cost components to mitigate pricing pressure.
As a matter of practice target maintains a disciplined approach to managing costs across the organization.
This provides significant flexibility, which has allowed target to preserve margins through a variety of operating environments.
Recurring corporate expenses for the quarter were approximately $7 million.
As a result of the scalable business model, we anticipate recurring corporate expenses to remain around $7 million to $8 million per quarter through 2022.
Total capital expenditures for the quarter were approximately $4 million.
Target continues to benefit from an efficient operating structure and scalable business model, which has allowed the company to match increasing customer demand with little incremental capital requirements.
We ended the quarter with $6 million of cash and total available liquidity of $115 million, including $109 million available under the company's $125 million revolving credit facility.
The company has remained focused on preserving financial strength has achieved over the last few years.
It has a net leverage ratio of two six times, which represents a 60% improvement from the first quarter of 2021.
We are excited about the continued strengthening customer activity, we experienced during the first quarter and anticipate the cadence of customer demand to continue as we progress through 2022.
Additionally, we are pleased with the progress made and contract discussions regarding the extension and expansion of our 2021 humanitarian aid contract Award.
These discussions have evolved to include the potential for significant increase in contract scope.
Including expansion of existing facility amenities due to the strong continued demand for this critical service offering.
The United States Government has recently published a detailed summary, outlining the capacity and facility requirements, which domestic humanitarian aid program, which encompasses the services target is continuing to provide as part of the 2021 contracts.
This summary outlines the anticipated increases in scope needed to support the existing program.
The U S government has allocated a meaningful amount of resources to addressing this ongoing humanitarian crisis, including the incorporation of approximately $8 8 billion of unencumbered children in fiscal 2022 alone.
Highlighting the critical nature of the humanitarian support services targets providing.
As a result of targeted executed short term contract extensions to ensure the continuity of our critical services or contract terms are being finalized.
The economics of these short term contract extensions reasonably mirrored the terms of the original contract award.
Andy will remain in place until final contract execution.
As a reminder, the government direct prime counterparty to this contract is a leading national nonprofit organization.
As a subcontractor to this agreement providing comprehensive hospitality solutions to our nonprofit customer.
Fully committed contract backed by the U S government.
As a result of targets and our customers' past performance. We are pleased with direction of contract renewal and extension discussions and look forward to providing additional information in the foreseeable future.
As a result, we've reiterated our preliminary 2020 financial outlook, which consists of revenue between $325 million and $335 million and adjusted EBITDA between 125, and $135 million with $12 million to $17 million of capital spending.
Our preliminary outlook is representative targets current business operations only we intend.
To provide an updated 2020 financial outlook to appropriately reflect the outcome of the contract renewal and extension discussions.
Target has strategically positioned itself as north American leader in Premier modular accommodations and hospitality solutions.
Our superior network and capabilities create a highly scalable and efficient operating structure.
In these attributes support robust operating margins and strong cash flow generation creates.
Creating an ideal scenario to simultaneously pursue strategic growth aspirations focused on expanding targets long term growth opportunities.
Our strategic growth initiatives are centered around the strength in targets core existing core service offerings.
Which offer the opportunity to unlock value through unique elements of our core competencies.
Our established presence within the government services and market creates a platform to expand our unique offering to other agencies and geographies.
Additionally, our unique capabilities offer opportunities to enter adjacent commercial end markets.
Key elements of targets holistic hospitality solutions naturally translate across a wide range of commercial and industrial applications.
Including disciplined such as construction and facilities management modular solutions hospitality services and logistics.
The foundation of our existing network and broad reaching capabilities creates a platform to pursue these opportunities with limited capital requirements, creating impressive return on invested capital.
While simultaneously preserving the financial flexibility we have created.
These characteristics of our growth strategy, meaning fleet increased revenue visibility and strengthening economic returns, while enhancing targets unique value proposition.
We believe these attributes significantly increase targets long term growth pipeline.
Opportunity to accelerate value creation for our shareholders.
With that I will turn the call back over to Brad for closing comments.
Thanks, Eric our strong first quarter results illustrate targets ability to efficiently meet our varian customers needs, while positioning the company to continue pursuing value enhancing growth opportunities.
We're excited about the sustained momentum experienced during the first quarter and believe we are well positioned to continue benefiting from strong customer demand throughout 2022.
We remain committed to pursuing strategic initiatives focused on expanding our long term growth initiatives, which we believe creates the greatest opportunity to accelerate value creation for our shareholders.
Before we wrap up I want to comment on the leadership transition we announced earlier this year. The transition has continued and normal business course, and the board of directors has commenced an executive search process. As this process continues I will continue to lead the company in my current role until December 31 2022.
We will provide additional information on the transition in executive search as they become available.
I appreciate everyone joining us on the call today and thank you again for your interest in target hospitality.
Okay.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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And to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Yeah.
Again to ask a question. Please press Star then one.
Yeah.
And our first question will come from Steven.
Jim Garro with Stifel. Please go ahead.
Thank you and good morning, everybody.
Morning.
A couple of things for me if you don't mind.
Let's start with the HFF itself business.
Everything we've seen has been positive government activity perspective, and the outlook seems pretty bright.
I'm just trying to reconcile sort of the sequential utilized room change I know it was minor, but just curious what's going on there I know there were some weather disruptions earlier in the quarter I'm, just trying to sort of triangulate what happened there and how we should think about.
It kind of room demand HFF south as we go forward here.
Okay.
Hi, Stephen good morning.
Is there hope you're doing well.
So a couple of things let me just give some kind of high level overview of just to level set a little bit I would say that the performance this quarter and is right on plan, where we expected no surprises there at all we came into the year.
With the expectation kind of from Q4 to Q4 that is Q4 2021 to Q4 2022, we're expecting somewhere in the.
Very low teens.
Sort of sort of revenue growth.
That's coming in about where we expected and I think youre seeing sequential quarter, we have fewer days in the quarter that does make it that does make a difference as to how we as to how much revenue comes in there we are seeing bear in mind.
Was it positive or there is a lag between when we see new demand and what actually is happening in the spot market.
So we will typically see a lag.
Few months to maybe a quarter or two depending on.
Just how things shifting there, but as commodity prices come up as development happens there is a little bit of a lag. There. So you have you have to bear that bear that in mind.
That said, we are seeing steady improvement across the really across all areas, there and the hff's south side, particularly but you have to remember too that companies like maintaining the capital spending discipline and in our large customers, which you know which are the <unk>.
The Big boys out there they have maintained capital discipline and that being but that being said, we expect to see margin expansion through the rest of the year.
Hopefully a couple hundred basis points.
So zynga.
These are positive trends there.
Yes.
Mark on the timing and.
And so we're optimistic about how that looks and I do think it's probably more back half weighted than front half.
As a function of the some of the lag that we're talking about.
Okay. Thank you.
The occupancy can you just remind us.
A relative split between kind of the E&P personnel and service personnel.
Oh, it's going look it's going to be primarily more service an integrated I would be reluctant to use E&P specifically to suggest that's independence its going to be large integrated and then and then large very large services.
Okay. Thank you and then.
When you just I'm curious on the government side and I know you probably cant add a whole lot more color, but when you. When you think about this extension that you're talking about and you're obviously, you're pretty confident that you're in a good spot.
I'm just trying to think about this and this may just be my lack of knowledge on the government side, but who else could do it like when you think about the competitive landscape.
It seems like you are pretty well positioned but are there really any other options.
Hey, Stephen This is Brad look I'm sure. There are some options out there I would just point you back to how long we service the government in place today. This is not a question if you will on.
The signing of new new contract on the facility. We have it's more about how big is the expansion going to be taking it from a.
That emergency influx care facility to a more permanent.
Care facility, which adds a lot of things and you've probably seen some of the public memos out there. It's education. It's medical so I would tell you. We said in a very good position to continue to move forward with this and and get a contract signed a fairly quickly.
So we were very confident in a successful outcome there.
I don't know that I could point you to anybody that can do exactly what we do out there.
We are one of those companies are we have the buildings we have the construction we have the land we have the permits.
We have a great name and a successful track record, which is huge especially when you're taking care of.
Our children and we are on top of that we have a great nonprofit customer that has a great track record as well.
Okay. Thank you that's very helpful. And then just one final one for me the cash flow in the quarter I mean, there was a big working capital draw.
It's timing related but can you just maybe comment on that and comment on how working capital likely plays out for the remainder of the year.
Sure, Yes gorilla good question.
Good.
Good catch look I think the way to think about working capital give.
To give you a little bit there's a little bit of context and this is when we structured the large government contract last year, we had a large upfront payment on that so you did see in the quarter about $25 million shift and deferred revenue right. So you can see that shift in the balance sheet and then flowing through the course of the cashless.
Our cash flow statement, and that's largely a function of just having the.
Front payments there.
And then seeing the deferred revenue associated with that.
Essentially right you had four months of of payment without the work happening in 2021. So we're catching up for that now look as we see things moving forward as it stands today bear in mind in the <unk>.
The outlook that we provided it's business as usual right. So you'll.
Youll see another month of kind of the effective working capital shifts that I. Just described and then from there if things will things will normalize.
More of a normal working capital trend that you would have previous I expect anything more yes market just complete timing so that would be great.
Yes.
Okay, great. Thank you for the color gentlemen.
The next question will come from Greg <unk> with Northland Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions and congrats on the strong quarter.
I wanted to ask on the.
Government humanitarian aid contract.
When that's finalized do you expect your existing capacity to be sufficient to fulfill the increasing scope that they are kind of looking for.
Yes, we do we should be able to address.
Dress, especially where we're at today with them. It is a sizable increase in bed capacity.
But with what some of the Idaho equipment, we have that we can move around.
We should be able to take care of that for them.
Okay, Great and I guess, just wanted to confirm that you're saying, it's rolling over a month to month the existing contract that is safe.
Safe to assume that that was extended through the end of May.
Yeah, Hi, Greg Greg.
It's not quite through the end of May but youre on the right you are in the ZIP code and Thats an evergreen. So it will just continue to rollover technically from a contractual perspective, it's month to month.
We've done things a little bit shorter than that for the last generation or two but look we hope we hope that that's a that's a signal that the cause of the announcement.
Yeah, Gregg just a little bit more color. So we started off with a 30 and as you get closer to finalizing the contract maybe they're a little shorter right, which is a good thing for us.
We thought we would do we're finished with the final design just latest last week give you a little color and then they came back they they increase the scope. So we had to add some buildings give them a price increase on some things just because we are adding square footage.
But still on track to get this done fairly quickly we believe but this is a while it is a very large project.
For us and the government I think all of us got to remember.
It's a small piece of the puzzle are in relationship to everything else. The government is working on for immigration remember, we're just handling the unaccompanied minors. There's many other issues on the immigration front that theyre dealing with.
So while it is big we're pressing.
You can only push these guys. So fast and then with them continuing to make changes as well it just kind of extends those dates but.
We think it happens pretty quickly.
Great very helpful that is exactly what I was trying to figure out so I appreciate the color there.
If I could just turnover your strategic initiatives I'm talking about kind of translating your existing capabilities, new applications or end markets or are you kind of weighing or thinking about doing so via M&A versus organically.
Well look I think your first step is definitely organic when you start to talk about the government piece.
Even the HFF. So your initial growth's going to continue to come from from that organic.
First thing we always concentrate every morning, we wake up is to try to fill the rooms that we already own right at the same time.
With the cash this business continues to generate we're also looking at inorganic growth. So you know Eric continues to build that pipeline on inorganic growth looking at some acquisitions that fit within the company. So we're going to prosecute both of those avenues at the same time at this point.
Greg.
Greg the other thing I would point out.
Brad and on this you know as we think about the core competencies of target.
There are a number of things that we can do and I think it's a it's a thought process of taking the organic activity and operations. We have today and how can we how can we perhaps dis intermediate some of that over time and be more bespoke to certain customers right. So.
Facilities management construction management modular solutions hospitality services all of those things. We currently do as an integrated platform today, there's also applications to do that.
On a separate basis as well and so that's certainly something to look at I mean, we were highly disciplined in how we look at.
Our return objectives, when we look at transactions there have been a number of things we've looked at and frankly that we have passed on just because of the risk and the return just like it just wasn't there and so we're looking for opportunities that fit really well with us commercially and operationally and we will continue to look at those but we're also we're also disciplined and.
So we'll just we'll keep you posted and we will I think we've got some exciting things that we're looking at and hopefully we can push those across the finish line.
Great, Yes, all of Florida updates I guess last one for me and sorry, if you already have.
<unk> addressed this but.
Kind of implicit in your guidance wondering if you could discuss kind of cadence of how youre thinking about the remainder of the year are you expecting maybe typical seasonality there.
Sure so.
So from an outlook perspective.
This level set you know theres no additional upside we've assumed obviously from an any modifications to the to the government contracts right. So I think on the HFF side of the business as I mentioned, we're probably looking at about 10% year over year growth on that kind of Q4 to Q4 exit.
I do think there's going to be additional margin expansion there.
Aside on the government side, because there was a pretty significant ramp up period.
For the government occupancy last year, you, probably see on a relative basis that that margin come down a little bit.
However, I think corporate wide youll continue to see the margin increase.
In the neighborhood of 50 to 100 150 basis points through the course of the year. So I think I think what youre seeing really as you look at the performance. This quarter, we continued to see that getting better as we move through the year and then of course, hopefully we have some other things that we can announce that obviously propel that.
Sounds good thanks, guys.
Again, if you have a question. Please press Star then one our next question will be a follow up from Stephen <unk> with Stifel. Please go ahead.
Hi, Thanks, and thanks for taking the follow up.
Just curious what I.
I mean based on Brad's comments. It seems like you are pretty deep discussions with all of this contract.
It.
Is it a reasonable assumption that the ADR and the margins will be very similar to what it is right now.
Yes.
Yes.
Assumptions that there'll be very similar to what it is today.
Thank you and then yeah.
I flipped back to HFF south.
I think as I sort of think about this.
Difference in rate between sort of committed rooms at any kind of call out rooms.
I'm curious, how we should be thinking about.
Arms under contract that are in your guidance versus potentially call out rooms, and maybe the impact that might have on an ADR.
Sure so the.
There was a pretty big there is a pretty big spread between thinking about spot spot rates versus what we're seeing first of all for contractual rates right. That's the first thing is I think the second thing to bear in mind here is that.
A little bit careful on the ADR, because the edr in certain contracts, particularly for some of these large contracts is really just a function of the number of rooms that havent done it come through the system based upon our revenue based on the contract. So we have a fixed revenue amount that's coming from the contract and you bring more rooms to us right Youre effective ADR actually comes down slight.
And that can that can have a weighting on the edr all the while our revenue actually continues to go up which is why which is why I was saying before I think we could see margin expansion there, there's a little bit careful.
We are dosing that too much as a metric going forward.
Albeit it is important but the.
The other thing that's happening to us the market is it is it is tightening right. So.
Some of the pricing pressure, we were seeing a year or so ago or even six months ago. We are starting to see that the market tightens, particularly on the spot side and that will help that will help bring ADR up as well.
Okay, great. Thanks, and then just one final one that just came to mind.
When you think about particularly on the pressure pumping side, though.
Liberty and once they got together and you got a pro frac buying Sds I and a few of the other things that had been out there.
Has that consolidation impacted you either positively or negatively.
Stephen.
Stephen Good morning. This is drawing great question.
As we've talked about in the past related to consolidation.
The size of our network and the nature of our agreements as a preferred provider for the largest publicly traded oilfield service companies operating in the Permian Basin consolidation, we absolutely benefit from some of those names that you've mentioned clearly we will continue to support in the Permian today on a consolidated basis or on an individual basis. So.
Absolutely, we look forward to that and welcome more consolidation as it as it makes sense.
Okay, great well, thank you for the color gentlemen.
Yes.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Mr. Brad Archer for any closing.
Our remarks. Please go ahead sir.
Thank you everyone for joining the call today and your interest in target hospitality, we look forward to speaking with you again on our second quarter earnings call.
Operator that concludes our call for today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
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