Q3 2022 Target Hospitality Corp Earnings Call
Dr.
I was talking to when it's off the spending.
Yeah.
Good morning, and welcome to the target hospitality third quarter 2022.
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Two questions.
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Investor Relations.
Please go ahead.
Thank you good morning, everyone and welcome to target hospitality third quarter 2022 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 nine 2022.
Target hospitality expressly disclaims any obligation to update or men. 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 refer to the tables in our earnings release posted in the investors section of our website.
Finally, a reconciliation of non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.
Leading the call today will be brought Archer, President and Chief Executive Officer, followed by Eric E Calomiris Executive Vice President and Chief Financial Officer.
After their prepared remarks, we will be joined by Troy Schrenk, Chief commercial officer and open the call for questions.
I'll now turn the call over to our Chief Executive Officer, Brad Archer.
Thanks, Mark Good morning, everyone and thank you for joining us on the call today target's record setting third quarter results are a direct reflection of our continued commitment to enhance operational flexibility, while increasing financial strength and maximizing asset utilization.
We generated record operating cash flow executed multiple long term contracts and achieved our strategic objectives to materially strengthen our financial position, resulting in over $220 million of cumulative debt reduction since 2020 with over $300 million of liquidity. These.
These accomplishments created the ideal platform to continue capitalizing on value enhancing initiatives across our operating segments.
And our Hff's segment, we continued to experience positive trends in customer activity, resulting in three consecutive quarterly increases in customer demand.
Hff's customers continue to benefit from the size and scale of our network, which provides premium hospitality solutions and logistical flexibility for their dynamic library allocation requirements. The intrinsic value targets network has supported and over 90% customer renewal rate for seven years and a <unk>.
14% increase in utilization from the third quarter of 2021.
The strong momentum supported multiple extensions to large hff's contracts during the quarter for customers that represented over 20% of target's third quarter Hff's revenue.
We anticipate these contracts will contribute over $75 million of cumulative revenue through 2025.
Highlighting our long standing partnership with these world class customers.
These meaningful contract extensions illustrate our commitment to preserving the premier customer base, we have been committed to serving for over a decade, while simultaneously growing and diversifying the business.
In the government segment, our priority during the quarter was substantially complete the infrastructure enhancement required to service the expanded humanitarian community, which we announced in July .
To facilitate the timely completion of these critical enhanced hand Smith increased.
Increased targets network optimization and materially increased project returns, we deliberately chose to maximize the use of existing assets.
This decision has enhanced our operating efficiencies by creating a more fully utilized network, particularly within the Hff's Midwest region.
In recent years, we have evaluated a range of scenarios aimed at rationalizing a portion of the Hff's Midwest assets, but have been unable to meet our desired economic returns.
We've now accomplished that objective.
Ultimately the opportunity reallocate these assets to the government segment was the ideal outcome and resulted in a significantly higher return on assets than we had previously anticipated.
We are pleased with the progress of the expanded humanitarian community and believe it is on track to meet or exceed targets medium and long term objectives.
While continuing to fill the critical humanitarian mission it was designed to service.
In connection with the substantial completion of the infrastructure enhancements, we entered an 11 year partnership with our national nonprofit partner.
The long term agreement solidifies, our joint commitment to continue providing critical humanitarian services to the United States government at this highly customized campus.
Further we believe this reinforces our collective belief that this purpose built community will remain an ongoing fixture and supporting domestic humanitarian aid missions.
Targets government segment represented over 77% of third quarter 2022 revenue and is expected to represent over 70% of full year 2022 revenue.
This is a clear illustration of our commitment to diversify and expand targets end markets, while simultaneously high grading counterparty exposure and contract structure.
These accomplishments have supported the achievement of our strategic objective to materially strengthen targets financial position and establish the ideal platform to continue pursuing strategic initiatives focused on accelerating the value creation for our shareholders.
I'll now turn the call over to Eric to discuss our third quarter financial results financial outlook and capital allocation in more detail.
Thank you Brad.
In the third quarter, we experienced continued strong demand fundamentals and positive momentum in customer activity predominantly driven by materially expanded humanitarian excuse me, we announced earlier this year.
Third quarter 2022, total revenue was $160 million and adjusted EBITDA was approximately $84 million.
Our government segment produced quarterly revenue of approximately $123 million compared to $46 million in the same period last year.
The significant increase was attributed to expanded humanitarian community we announced in July .
As a reminder, targets government segment, including the expanded humanitarian community centered around annual minimum revenue commitments.
Additionally, expanded humanitarian community includes variable services revenue and aligns with monthly changes to community population.
Our Hff's segment still here third quarter revenue of $36 million compared to $33 million in the same period last year.
This increase was driven by sustained momentum in customer demand for targets premium service offerings.
Poorer by constructive economic demand fundamentals.
Recurring corporate expenses for the quarter was approximately $10 million and illustrate our ability to significantly grow the business, while incurring minimal incremental costs.
As a result of the scalable business model.
We anticipate recurring corporate expenses to remain around $10 million per quarter for the remainder of the year.
Total capital expenditures for the quarter were approximately $74 million.
With $70 million related to the substantial infrastructure enhancements required at the expanded humanitarian community.
With the completion of the Canadian enhancements by year end 2022, we expect a more moderate pace of capital expenditures into 2023.
We ended the quarter with $177 million of cash and over $300 million of available liquidity with zero borrowings under the company's $125 million revolving credit facility.
And a net leverage ratio of 0.8 times.
Further target anticipates additional balance sheet strengthening continuing into next year with the expectation of having a zero net debt by the second half of 2023.
Now turning to our financial outlook and capital allocation initiatives.
To complete the expanded humanitarian community in the most efficient way, we deliberately chose to utilize a larger portion of existing assets versus acquiring new equipment.
This decision has significantly enhanced asset optimization and create a more balanced operating structure.
In addition, the use of existing assets resulted in a substantial increase in project returns.
Than originally anticipated.
However, this decision modify the accounting treatment for previously anticipated capitalized cost and resulted in one time mobilization expenses in 2022.
These expenses will not impact sequel periods.
As a result, we have updated our full year 2022 financial outlook, which now consists of revenue between $495 million and $500 million.
Just EBITDA between 263 million and $268 million.
Discretionary cash flow between 255 at $260 million and capital spending between 130, and <unk> hundred $35 million.
While talking has experienced a significant increase in consolidated revenue and associated net income.
It intends to utilize a significant portion of its remaining net operating loss carryforwards to offset its 2022 cash tax obligations.
As such target anticipate 2022 cash tax payments of between six and $8 million, resulting in effective cash tax rate between seven and 9%.
Targets enhanced end market portfolio and contract structure has supported increased minimum brought me.
And provide greater visibility on long term revenue and cash flow.
As a result, the company is providing a preliminary 2023 financial outlook.
It includes minimum revenue of $525 million and maximum revenue of $710 million with minimum adjusted EBITDA of $365 million.
Excluding acquisitions 2023 capital spending she approach more normal levels between 10 and $20 million per year.
Approximately 70% allocated towards capital.
The range of preliminary 2022, GW with flex the possible contribution a variable service revenue associated with the expanded humanitarian community.
Target anticipates variable service revenue will contribute between 50 and $185 million of additional 2022 revenue.
Above the anticipated minimum revenue of $525 million.
The amount of variable service revenue will depend on the scale and timing of U S government nominations.
Targets enhanced balance sheet will allow the company to continue evaluating a range of capital allocation initiatives focused on maximizing long term shareholder value, while simultaneously expanding long term growth opportunities.
These growth opportunities include continuing to pursue diversifying adjacent end market acquisitions.
Well as select opportunities to strengthen our existing end market portfolio.
In addition to broaden the range of potential value enhancing capital allocation initiatives.
<unk> Board of directors has authorized a stock repurchase program for up to $100 million.
This plan will allow the company to validate a more holistic capital allocation opportunity set.
While focusing on maximizing value creation through all available means.
We believe targets enhanced financial position and balance sheet strength creates the ideal platform to.
To continue pursuing these value enhancing opportunities into 2023.
With that I will turn the call back over to Brad for closing comments.
Thanks, Eric a record setting third quarter results illustrate our commitment to enhance operational flexibility maximize asset utilization and provide unmatched value to our customers, which has supported the achievement of our strategic objectives.
We are well positioned entering 2023 and will utilize this momentum to continue pursuing initiatives focused on accelerating 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.
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Todd.
Our roster.
The first question comes from Scott.
Schneeberger.
Please go ahead.
Thank you very much and good morning, all I guess I'll I'll start out with the the West Texas government are contracted at the expansion of the facility could.
Could you provide an update at <unk>. It was mentioned in the press release completed by the end of the year.
It sounds like you're on track, but just wanted to get an update on the status.
Of that and how complete that is and then a couple of follow ups on the on that Deane. Thanks.
Yes, Scott, it's Brad speaking with you this morning, but.
To answer your question look we're substantially complete well, we're tying up a few loose ends on site.
And other than that are where we're on track to finish up pretty quickly here in the fourth quarter.
Great. Thank you and thanks Brad.
And so our I guess, a couple of things a few different directions to go in but the.
The first off the.
Is it are you at a point now where you can get an indication from the government customer of what type of utilization levels. You may see in the West Texas facility now going forward because your large week gun with the expansion and if you don't have that clarity yet when might you Andrew.
Debate that clarity.
Hey, Scott Good morning, it's Eric Thanks for thanks for joining this morning. So the the question regarding the the occupancy levels and the variability there and you know as we talked about a couple a couple of times in August and then in July you know that.
That variability amounts as you know is really largely dependent upon the government allocations in terms of how they're seeing the flows in and how they wanted to know how they want to nominate two.
Just across the portfolio. So it's hard to it's always hard to say and so I think at this point in time. It's you know I think you know give us a little more time to figure out how that how that manifests itself as Brad mentioned the facility is not fully opened yet.
It's a new program for everyone.
So we're all learning around about exactly what that's going to look like you know going forward I think a couple of things to bear in mind, though while we wait.
And get try to get more clarity through time is that you know there is a little bit of that.
Ah seasonality in terms of the left flows and migration and so we do have to bear all that in mind and so the government will allocate.
With all of that and.
Hopefully when we have something specific we will provide you updated information accordingly as well.
Scott, maybe just a little bit more color as well around that definitely to Eric's point, but there just aren't there.
We have we need to finish.
Everything so there'll be a ramp up period before that utilize this more fully but taking you back to when we first started this this contract over a year well over a year ago. Our first contract. There was 19 temporary facilities holding kids throughout the United States.
Today, there's only two ICF facilities nationwide. So this is where they start to call the temporary facilities start to get into the using the the purpose built facilities and we're the only purpose built facility in the United States that uses permanent construction and again only one.
One purpose built so there's a ramp up period here, but all of the moves that we're making.
A really positive for us and everything that we've talked about so.
Excellent that sounds good and then I wanted to kind of take this further with with I thought I heard in prepared remarks, I don't believe it was in the press release this.
Hi, This is more of a rabbit, Eric will get into the one time mobilization expense, but but.
Midwest Hff's mid mid west it sounds like you're now tying facilities there into your your it sounds like your partnership with the your extended partnership with your your not for profit partner and and the government contract could you elaborate a little bit on on how the Midwest.
Hff's is being included and then I guess I'll finish up here and turn it over but Eric also after Brad goes there could you discuss kind of this this one time charge, how it impacted the quarter versus expectations on how it may impact our the fourth quarter.
Versus prior and pack it versus prior expectations.
And clearly it's not going into next year from what you've said, but just a little more elaboration there. Thank you both.
Yes, so Scott.
On the rebalancing, we've been chipping away at this for <unk>.
Five years.
And I would get a project, we would cost it out and we had moved some some units that were either not utilized or all our underutilized are in North Dakota, So we'd move them around.
This project itself and the decision we made a few months ago to use our own assets really allowed us to rebalance our portfolio in one fell swoop and not only in North Dakota, we actually move some product around in Texas as well they were utilized but not 100%. So this project is locked box.
Is it is it allowed us to really look holistically at all of our assets anywhere in the country and say how are we going to rebalance that to get more revenue out of it. We think this is a great move for the company, it's going to pay off our long term for us the investors et cetera. So today again.
We're pretty much done now with the rebalancing of it that's what it allowed us to do.
Scott related to your to your question on that.
For more from a financial perspective, I mean, here's kind of the calculus that one that one has to think that right, which is this is if we look at an expense shift in this in this instance call. It just call it about $10 million or so.
Effectively a onetime mobilization expense.
Impact in Q3, and then we then we.
We juxtapose that against a capital spend reduction of let's say close to $60 million right now.
That's a that's a kind of a six to one pay off that you would make that trade every day and so when we think about that there's there's de minimis impact into Q4, and then of course as you mentioned nothing it's into 2023 and so so just to kind of calibrate how do we think about the return impact on that that that was the that was effectively the calculus isn't that so hopefully that.
Gives you a little bit of a clarity.
In terms of your question in the <unk> and the impact in Q3.
Okay. Thanks, Yeah, I will turn it over but I'm just curious.
Brad I guess on on on on this rebalancing I'm I'm I'm I'm curious is it is the government.
It's going to be tied into the assets in in North Dakota or are you moving those assets down to Texas.
I don't know, if you're able to share but.
Well, what what what exactly is happening in this rebalancing. Thanks, Yeah, absolutely we actually move the units from one location. If you will with several locations in North Dakota, and some across Texas to the government.
Correct right and now all of the rooms that we moved our.
Always getting paid.
The warm status right and then at some point the variability piece as well comes in to do a deal. So we looked at this and said where can we get payment every day of the week on the Rins. It was simple as that and this project allowed us for it to be paid paid for it to be moved set up again et cetera, and saved us money.
From buying the product in and Scott. This isn't this is an important modification because you know as Brad mentioned this has been something that had been worked on for a significant period of time, but.
But when you make that that shift like that yeah that was a that's you know nothing's ever ever permanent but that's a pretty that's a pretty substantial shift in the asset and the asset mix in a way where the market up there was not you know it was not really allowing right. So you have to brad's point that was a pretty pretty important structural shift we're taking assets that were pretty.
They're now getting not only your high grading customer hiding ready contract you've also in high grade.
X exponentially and it helps and efficiencies as well right. When your when your utilization goes up you can just look at Midwest compared to last year. What it is today, you're starting to see that flow through on utilization So fisheries.
She sees an operation you're taken rooms out of the market it should help us.
As we get into the future on pricing those types of things as well, we we I guess it was a great move.
The government project allowed us to do.
Thanks, guys and then I will turn it over but just to clarify if you can share it. It. It sounds like you you. These assets went from Hff's now to government categorization and I infer they moved from North Dakota down to Texas, and if you can share.
Or is that is that what occurred or is it just are they they remain where they are and it was a year.
Yeah.
Yep.
North Dakota, they removed from North Dakota down to Texas and installed on the government project and they are in use today.
They weren't relocate okay.
Thank you both I I'll turn it over.
Thank you.
The next question is from Stephen Ju.
<unk> with Stifel. Please go ahead.
Hi, Thanks, good morning, everybody.
So a couple of things for me.
The I guess, the first pretty pretty straightforward 'twenty 'twenty three guidance does EBIT <unk> include any contribution from the variable revenue portion.
Nice David Good morning, Yeah. It does it does it.
It does include a small amount there you know we've we've allocated approximately 50.
$50 million in revenue there.
So again once we can look at that through time, but realize when we have a fair bit of runway because we as we move through 2023, we just felt given the given the material change in the in the in the business that it was appropriate to try to.
Guide the market to do something in 2023.
But $50 million.
Spot to start with okay.
Okay. Thanks, and then when we think about I'm not exactly sure had asked this question, but when I think about your business and you think about the interest level and the commentary I get from investors.
Actual investors all the time.
Theres been a big diversification away from the oil patch, which is good but there's now a customer concentration risk with this big government contract. So what I'm trying to figure out is any color you can add and clearly this partnership is a big positive, but any color you can add in sort of your comfort level.
Reallocating rooms from the energy side.
And how we should think about.
Stones and data points to help us get comfortable that there is in fact going to be a meaningful extension here down the road.
Yeah. So I'll address part of this and then I'll, let Eric jump in here too, but let me address the 11 year partnership and if we look at this it's a partnership with our nonprofit partners as you know, but it solidifies our joint commitment to continue providing the care and services.
That are needed by the U S government, but I think the bigger thing that.
We havent discussed in the past calls.
Is he here recently.
This is kind of in conjunction with the 11 year partnership but here recently.
We requested.
Got metric to provide a proposal.
For a 10 year lease on this facility.
So I look at the 11 year partnership is really a precursor to something larger and it's playing out like that you've got to check a few boxes first we've been in that's going on our second year.
You know if constructions.
Construction is about finished.
We've done this a lot on your partnership with our nonprofit partner and in turn are the government is already asking us for a.
Proposal to make this a more permanent fixture.
In their network and as I said earlier remember there was 19 of these facilities it's down to two.
So we feel really good about getting a long term deal done at some point.
We're only six months into this contract they do move a little slow.
But we actually like the patients moving at this point so feel very good about that moving forward long term.
Great that's great color.
The other question I had is when we think about it feels like Capex next year's down you're you're lowering your.
Youre lowering your debt levels pretty consistently or at least your net debt levels, how do we think about.
I mean, there there's not a lot of moving pieces I don't think between EBITDA and free cash flow next year right I mean, working capital, maybe a little bit but.
Any parameters you can provide us as we think about getting some sort of twenty-three baseline EBITDA guide to free cash flow.
No you're right Stephen there are not actually a lot of a lot of moving pieces and you would expect our cash conversion to be to be pretty substantial I think the one thing to remember and I think you know this is there is the there is the $117 million amortization, which we've which we've talked about before it doesn't release certainly happy to talk.
Talk about it offline to the extent that we need to so you know obviously that would be a that'll be an adjustment to the operating cash flow I think once you have adjusted for that.
And then take a normal working capital into consideration everything else is it's pretty much status quo.
And so to your point you end up with a significant amount of cash generation into 2023, and certainly into 'twenty 'twenty four and beyond.
And so that obviously begs a whole host of other questions in terms of capital allocation, but as you as you look at the model once.
Once you've adjusted for that what you're probably seeing is what you're going to get.
Thank you and then I just thought one final and I'll pass it over.
When you think about the oil patch and I think the utilization of your avail.
Available rooms in the Permian and each of US south was like 89% in quarter and when you when you move rooms, and reallocate rooms. The government does this tightened capacity.
In the Permian and give you any underlying pricing power.
It does and I mentioned this a little bit earlier, writing it builds in some efficiencies right because your utilization goes up you get more efficient.
And it should bring us some pricing power as well. It also gives us an opportunity to look and in some areas.
There are some equipment out there, but we're definitely continuing to grow the hff's, we're not running away from it. It's a great business that produces a great margin and we have great contract well, it's a great business. So we'll continue to look at our if some things there to continue to grow that business as well, but yes on the pricing power.
Okay, Great I appreciate the color. Thanks.
Thank you.
If you have a question. Please press Star then one.
The next question comes from Greg.
Northland Securities. Please go ahead.
Hey, good morning, Brad and Eric Thanks for that.
Questions.
Just wanted to follow up on a kind of a significance from a high level of that 11 year partnership.
Grasp on that.
You know it does it is it more kind of removing competition risks or do we think about maybe encouraging the government to work with your partner.
Or just maybe high level significance of that.
Yeah high level look I think it shows solidarity right that we both produce a great Ah.
Great service, great product the government knows that we have proven performance and showing them our alignment.
We've always.
<unk> said that we think this is a long term solution for the government is going to be on their long term plans and look we were proven right. They've asked for this this proposal. We've submitted we think they take their time, if you will and doing something and we're just now opening up.
But we think the 11 share partner or an 11 year partnership is very significant.
In just terms of again checking the boxes and the next step is something we knew we were gonna have to do.
And not only it shows a working relationship.
Remember, our our nonprofit partners does more work than just a in PE and Pecos, so to be able to work with them in other locations as well it's not what this partnership covers but it does show you there.
Their willingness to work with us so.
So we will continue to honor that but specifically, we think it's a big outcome for us and it has more to go.
I think Greg This is Eric I think the other thing too is as Brad pointed out it doesn't necessarily cover this explicitly but there is a framework that is provided.
Provided whereby there are other opportunities overtime.
From a business development perspective to partner with with her nonprofit and other applications alright, and so you know that that's not necessarily something that is that is contractually drafted in this exclusivity agreement. However, I would say I would absolutely say that there is a commercial commitment among among parties to do just that.
And to go out and explore other opportunities together. So yeah. This is this is a it's it's certainly important from a from a contract perspective, but it's also important just from a promotional arrangement perspective.
Great Yeah. It makes a lot of sense and if I could just follow up.
I know you've already kind of spoke a little bit on the variable revenue component of next year's expectations, but.
Pretty wide range I know you said you know within the EBITDA outlook I think $50 million of revenue is expected from that.
Hum.
Maybe investor standpoint, or how does it make sense to assume maybe the low end of the range or do you have better visibility into something like the mid point or.
Anything you can kind of talk to you there regarding that wide range.
Sure It is.
A great question I appreciate the question, it's an obvious question the couple of points.
The range that we put out on revenue is designed to give us a sense of goalposts as to where things could ultimately be.
And to provide at least some some directionality.
I'll be that you'd be the saying is that we still look we still have you know 15 months 14 months through to get to that kind of that that that timeframe right. So.
So we felt it was important at least to prefer to put some guideposts out there by the company.
As it relates to the EBITDA portion. We also felt was appropriate to to provide something at a minimum level, albeit realizing it could certainly be materially higher than that.
But yeah, we just don't know exactly what that will be at this point in time and so.
Look I think if I were you all I would I would I would be towards you know towards what we provided.
And isn't it.
Look as time shifts forward, where we can all modify accordingly, but I think we want to be sensitive to it and not presuppose, what the government may or may not do over over time, it's just too early to tell and so I think we operate this where it can be a conservative management team and deliver what we say, we're going to deliver and so you know.
That's how I would position you have at this point in time.
Great very helpful.
You know I guess last I just wanted to follow up on the updated guidance is the reduction in EBITDA this year.
Is that completely a result of the <unk>.
Mobilization expense or are there other factors as well.
It is the it's the it's the lion's share of it.
There's yeah I mean does that was that was the big that was really the big piece.
Okay have you Kwon have you quantified the.
This expense there.
Sure. So we've said.
We haven't but I will we said 10 to Tim about $10 million to $12 million or so is the.
The net impact.
<unk> got certainly from an EBITDA percentage.
Okay.
Yes.
This concludes our question and answer session.
I would like to turn the conference back over to Brad Archer.
Closing remarks.
Thank you before we close I want to express how proud I am of our team our people and the minute accomplishments. We've achieved this past year and 2022 alone we have set records for revenues.
Cash generation and EBITDA and today sit with more dry powder than ever before with more than $300 million of liquidity we.
We are proud of the record setting results, which have more than doubled the size of the business, including increasing adjusted EBITDA by $135 million from our original 2022 outlook Lastly.
We said, we would diversify our business and we have and we will continue to deliver on that promise I can't be more excited about the future of target hospitality as we head into 2023.
While we are extremely proud of what we've accomplished to date there is more to do but make no mistake with the strong momentum we created I have no doubt the future target hospitality is even brighter.
Thanks for joining us on the call today and I look forward to speaking again in the first quarter of 2023, operator that concludes our call for today.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.