Q1 2023 Target Hospitality Corp Earnings Call
non-GAAP financial measures referenced in today's call and their corresponding GAAP measures.
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 are strong first quarter performance reflects the positive business momentum we have sustained over the past year, which has supported many strategic achievements, we have meaningfully diversified the business and revenue mix with over 70% of revenue now derived from <unk>.
<unk> contracts backed by the United States government.
Hi, grated contracts have provided enhanced revenue and cash flow visibility supporting over $339 million of discretionary cash flow over the last 12 months.
Representing an impressive discretionary cash flow yield to revenue of approximately 60% over that time.
These accomplishments have solidified targets balance sheet with over $350 million of cumulative debt reduction since 2020, and an 80% improvement in target net leverage ratio over the past year.
We have significantly transformed targets operating platform, while continuing to serve our existing world class customers and simultaneously positioning the business to quickly respond to strategic growth opportunities.
And our HFF South segment, we have remained focused on providing premium full service hospitality solutions to our world class customers, many of whom have been customers for over a decade.
As a result target continues to benefit from consecutive quarterly increases in customer demand.
Resulting in a 15% year over year increase in utilization with consistent customer renewal rates over 90%, which we've enjoyed for over seven years.
This continued strong demand and positive customer outlooks supported the acquisition of select community assets in the first quarter to appropriately align our network capacity with an existing customers growing labor allocation requirements and.
In addition, the strategic location of these assets enhances targets regional presence and provides opportunities to further expand our premier customer base.
We are pleased with our current hff's utilization and its ability to meet our strong customer demand while benefiting from the more fully optimized network, we have created over the past year.
Regarding our government segment, our purpose built portfolio of assets continue to serve the critical humanitarian aid mission that they were designed to support while exceeding the expectation of our partners in the U S government since our first community was established in 2014.
Further the U S. Government has continued to state an urgent need for additional humanitarian housing capacity.
Particularly with the impending removal of title 42, which is anticipated to result in a substantial increase of individuals' crossing in the U S southwest border.
In preparation for this meaningful increase in demand and to ensure uninterrupted access to existing humanitarian housing solutions, including targets expanded humanitarian community.
U S government has indicated it intends to exercise the existing contract six month option.
This decision will allow for seamless continuum of the service offering to expanded humanitarian community and serve as a bridge prior to a long term contract specification being finalized.
As previously discussed our nonprofit partner was awarded indefinite delivery indefinite quantity contract related to the extension of our humanitarian community in Pecos.
As a reminder, this award.
Consisting of a base five year term with an additional five year option establishes the contracting vehicle required by the U S government to appropriately fund multi year contract awards.
<unk> IQ award to our nonprofit partner is one of the final steps in the government contract award process prior to working through definitive agreements.
We remain highly pleased with ongoing discussions with the U S government and our nonprofit partner and we anticipate working through additional contract specification over the coming months.
With likely combination in the fall of this year, we look forward to solidifying the longevity of this community and the critical humanitarian mission. It was purpose built to support.
In summary, we have achieved our strategic objectives to materially strengthen targets financial position, while simultaneously diversifying our customer base and continuing to accelerate value creation for our shareholders.
I'll now turn the call over to Eric discussed, our first quarter financial results 2023 outlook and capital allocation initiatives in more detail.
Thank you Brad.
In the first quarter, we experienced continued strong demand fundamentals and positive momentum in customer activity.
Which further solidified our strong financial position.
First quarter 2023, total revenue was $148 million and adjusted EBITDA was approximately $91 million.
Our government segment produced quarterly revenue of approximately $110 million.
Care to $47 million in same period last year.
This significant increase was attributable to the expanded humanitarian community.
As a reminder, targets government segment, including expanded communitarian community centers around annual minimum revenue commitments.
Additionally, extended communitarian community includes variable services revenue lines with monthly changes to community population.
This contract structure provides ideal flexibility for our customers as their occupancy requirements fluctuate over time, while providing meaningful minimum revenue commitments that create significant revenue and cash flow visibility target.
We have found the structure is the optimal outcome for all parties, creating a sustainable basis to contract longevity, while maximizing operational flexibility.
Our GFS segment delivered first quarter revenue of $26 million.
Compared to $32 million in the same period last year.
This increase was driven by sustained momentum in customer demand for targets premium service offerings.
Recurring corporate expenses for the quarter were approximately $9 million and we anticipate recurring corporate expenses will remain around 9% to $10 million per quarter for the remainder of the year.
Total capital spending for the quarter was approximately $32 million with the majority related to select Hff's south asset acquisitions focused on increasing capacity to appropriately match growing customer demand.
We expect a more moderate pace of capital spending given the remainder of the year excluding potential acquisitions.
We ended the quarter with $42 million of cash and over $167 million of liquidity with zero borrowings under the company's $125 million.
The credit facility and a net leverage ratio of 0.5 times.
As we previously announced on March 15th we partially redeemed $125 million of the nine 5% senior secured notes.
Which we view as a high.
Cash return.
As it relates to the outstanding senior notes.
Continued to evaluate a range of possible liability management initiatives focused on further strengthening our financial position.
This approach is centered on maximizing financial flexibility, enabling us to quickly react to value enhancing growth opportunities as they arise.
Turning to our financial outlook and capital allocation initiatives.
Targeted enhanced end market portfolio and contract structure has supported increased minimum revenue commitments and provided greater visibility on long term revenue and cash flow.
We believe the government's decision to issue <unk> contract award towards.
Solidifies the sustainability of this purpose built facility.
Establishing necessary mechanism to fund specific a multiyear contract awards.
Further the government's desire to exercise the existing contracts six months option.
The importance of this community as the government prepares for significant increase in demand for humanitarian housing following the big title for you too.
We continue to work closely with our nonprofit partners and anticipate additional contract specifics related to targets critical hospitality solutions can be finalized later this year.
Further in response to the government stated urgent and compelling need for additional human maturing housing solutions. We recently acquired a strategic humanitarian asset, which we believe will allow target to react quickly in support of the government demand for the humanitarian solutions.
Coupled with our ongoing business development efforts that have created the strongest project pipeline. The company has seen in several years the comprehension.
Reiterating its preliminary 2023 financial outlook, which includes minimum revenue of $525 million.
<unk> revenue of $710 million.
The minimum adjusted EBITDA of $365 million.
Excluding acquisitions 2023 capital spending should approach more normal levels between 20% and $30 million per year.
Dominantly focused on organic growth capital.
The range of preliminary 2023 revenue reflects the possible contribution of variable service revenue associated with expanded humanitarian community.
Along with other potential second half weighted revenue catalyst.
As it relates targets strategic initiatives targeted is pursuing an expanding pipeline of growth opportunities and partnerships.
These opportunities designed to jointly leverage targets operating expertise with contract vehicles that will create a number of solutions across various U S government agencies.
Projects that support National Defense.
Transition and other humanitarian projects in the U S government.
As previously stated target is prepared to allocate over $500 million of net growth capital to these high return opportunities over the next several years.
We are pleased with the progress discussions for many of these projects and partnerships. We have achieved tangible milestones regarding some of these large scale projects.
We look forward to providing additional updates in the coming quarters as the opportunities fully progress.
With that I will turn the call back over to Brad for his closing comments.
Thanks, Eric our strong first quarter results reflect our ability to sustain momentum and continue achieving our strategic objectives over the past several years, we have exponentially grown the business prudently manage our balance sheet and significantly enhanced our financial flexibility.
These accomplish have exceeded our expectations. We are excited about the operating platform. We have created and are focused on pursuing an expanding pipeline of growth opportunities, while continuing 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.
Last quick question you May press Star.
You touched on the telephone.
English speaker phone please pick up your handset before pressing the keys.
Your question. Please press star two.
The first question comes from Scott Schneeberger from Oppenheimer. Please go ahead.
Hey, good morning, it's Daniel on for Scott, Thanks for taking our questions here.
Could you guys. Please elaborate on the on the May 5th update related to the workstation. Please.
Sure Good morning, Daniel spread.
Look this is what.
What we talked about the areas of performance work statement.
What that as it comes out before the task order, but it's describing whats going to be in this task order it stepped up the requirements what we.
We'll submit to the government.
And to our partner and.
Reading this performance work statement.
Very material aligned to what we're already providing so we're happy to see that.
So look at some point here over the next few months. This task order will come out we will submit to that and then on award will be made so this is just really the next step.
That we've been waiting on.
To get that out there and get a long term agreement.
Got it thank you it sounds good.
Titled 42.
<unk>.
Has there been any conversations about.
Removing a warm status on the.
This facility.
Yes, so specifically on PC, we have been in talks with them Theres been some calls about moving.
Back into hot status none.
Nothing yet.
Given to us on that other than the calls and conversations coming in and asking us how quickly we can ramp that up in anticipation of title 42 going away and the need for those beds to be filled.
Furthermore.
The board and I know, there's probably going to be this question on titled <unk> 42.
Just the amount of conversations we're having with.
Different agencies, then or.
About PCC Theyre staggering.
Theres been lots of them over the past few weeks.
Asking what we can do.
For them.
Active conversations going on across the board through different agencies as well as.
For the PCC.
Got it thank you and regarding the strategic asset purchase you made in the quarter related to the government segment could you. Please elaborate a little.
Right.
Help us think about.
The financial implications on when we May get an update.
On that.
Second part of the question is.
The capex spend of $31 million in the quarter.
Hff's Salt segment, if you could please help us think about how we should view that going forward as well.
Sure Good morning, it's Eric so.
So regarding the government.
Asset.
As you know there has been a consistent need and desire for additional influx capacity in space. That's been well stated by the government and we keep hearing that same theme. What we chose to do was acquire a strategic asset asset privately in use for similar sort of capacity.
And really to try to offer the government a more immediate solutions on other influx of opportunities because we know that.
Additionally, influx sites are something that theyre trying to evaluate as part of being an extension of the permanent portfolio. So I want to give them lots of different options for lots of different <unk>.
Geographic opportunities et cetera, so that was the purpose of that but at this point in time look very well can be part of the IQ and effectively the performance work statement alright. So in addition to what we have today, so I'm not saying that will be the case, but certainly could be.
That was one of the reasons why we wanted to strategically acquire that so as it relates to a cash flow contribution what I would say is.
Nothing to report on that yet, although we are hopeful that at some.
Some point here in the near future, we have something specific that we can do we can say.
Specifically to your question regarding the Permian transaction.
We have talked for some time that we felt like we were becoming a little bit net short in our capacity. So we want to take the opportunity to go ahead and increase and expand the market share that we have in the Permian basin and did so.
With an asset that we've been looking at for a while and so we've got some nice that was a nice addition to the portfolio.
The current cash flow.
Hello.
Super large transaction as you can see but it's important and one that continues to give us additional breadth of additional customers and defend that depend that market share. So.
I wouldn't.
From modeling perspective, such size that I wouldn't ascribe.
And do much with it in terms of your modifications of EBITDA.
Because we are still integrating that asset and we have some expense.
From that but.
Look I think that's a nice growth opportunity for us and we will continue to create those tuck ins as we as we see fit in the future yes.
Let me just add one thing on the strategic facility acquisition, Eric talks about when we first did this it was more to continue to expand the Ics kind of what's evolved out of this as a lot of other conversations with multiple agencies.
From CPP to others.
And the government. So once you once you acquire this we do a design when we go out.
And we laid this out in front of different agencies with title 42 up on us going away.
Lots of increased.
Awareness about the facility multiple discussions being had throughout different agency. So while we talk Ics I wouldn't be surprised if this ends up maybe even something else at this point, so but to Eric's point to have it to have it ready for us to be able to respond quickly. If that's how you would need to be set in.
Ready.
On these large types of projects to to help the government is especially in times like this so we think we think this will help us to do that.
Got it thank you so much.
The next question comes from Greg keep us from Northland Securities. Please go ahead.
Great Good morning, bread and Eric Thanks for taking the questions. Congrats on the strong results in Q1.
I wanted to just ask.
Your.
I guess, maybe the breakout between variable and fixed revenue on the humanitarian side in the quarter.
I guess just wondering if anything has changed with respect to your variable revenue expectations for the full year I think it was previously $50 million is kind of a baseline assumption just trying to get a sense of whether anything has changed.
Yes, sure so there.
It was not it's not a large variable component for the quarter certainly.
We would like to see that higher rate.
It was what we said it would be at the minimum the minimum levels on that.
But I want to refrain from giving specific numbers on that Greg I think the important point is that we.
We expected a kind of a seasonal slowdown right. We got to add that was actually very much in line.
I think the thing that we have to wait for now is with title 42. So many so many.
People are being held at the border that I think it's the question as to how how quickly.
We move into hot status, and then to what extent.
So because of that and because we allocated approximately $50 million of them.
Variable revenue through the year.
And because of the surge that we see during the during the warm summer months and into the early fall time period.
We just don't know the extent of that is going to be and for that reason, we've chosen not to not to change anything as it relates to our revenue outlook.
Frankly, I just think it's too early we were.
We are expecting somewhere in the neighborhood of only 10% of the variable revenue contribution to be the first roughly in the first call. It.
Quarter, and a half anyway and.
So we my point is we've eaten very little into that and Theres a lot of upside opportunity still left to do you have a thought on.
The business hasn't changed hasn't changed one bit.
Look the concept between.
When we set up the contract.
Jointly with our nonprofit partners and at the request of the government was four this means minimum revenue component and that was to keep the facility.
And waiting for when the surge happens in those are that's the definition of the influx capacity and so we are ready and waiting for that and when that revenue comes it hits it can be meaningful so for that reason.
Has the timing shifted perhaps.
So a little more back half weighted sure sure.
What I would have expected, maybe a little bit more by now but.
Frankly, not alarmed by that at all.
Great really appreciate the color.
It helps a lot and kind of how youre thinking about it and yet you realize that that variable is the small compete component comparatively fixed.
It was going to ask on that kind of getting back to that hot status from warm, but I think kind of already addressed that.
Discussions there.
Regarding I guess.
The.
Another step forward towards finalizing that multiyear contract you.
You mentioned being one of the final steps before completion.
Could you maybe discuss what the remaining steps, we need to see or before we get that multi contract.
Extension finalists.
Yes.
It goes from the PW two the the performance.
Work statement.
To actually putting in our numbers on a.
On an initial task order right the government will issue this past quarter.
We will put R. R.
<unk> for that if you will.
Our bid and then an award what we would think.
Towards the latter part of the third quarter.
Yes, I think the one thing Greg that I would that I would add in addition to Brad's comments is when you take a step back and you think about the performance of work statement. What that is is further defining any any scope modifications to which in this important to which their warranty.
And so that's and that's an important point because I think that allows that fit that dovetails really nicely with the facility today.
As we see it stopping that these incremental and it needs to be done today, which I think should help speed this process along.
I'm the same warm hot status. The number of everything is exactly that is backward. So it's really a function of working through the task order process.
And look I think one could logically say, okay well.
Why does it why does it need to be.
Few months three months down the road and part of it part of the reason is because as I mentioned earlier the government wants to continue to look at their influx sites and so expanding those sites.
They could come back a lot more things not just yes, and I think that's the important point. This isn't just about PCC. This is about the overall influx.
Site demand, okay over and above PC.
And so theres more to adult there's more going on than just our specific asset today and to Brad's point, they very well could come back and say, it's not mine, it's two or three.
Got it that's helpful.
If I could follow up too on that your comments relating to that region and strategic asset acquisition seems to make a lot of sense, just given what youre hearing from the government still being that short capacity and they are being a lot of demand there but.
You kind of said don't expect anything in terms of contribution as the financials. This year.
Kind of guessing that.
Are you in discussions right now with the government in terms of how to use that and just trying to think about.
We're not expecting to see something near term menu. When you would think about timing of that facility beginning.
Yes, I'll touch on just conversations yes, I mentioned this earlier, we're in having multiple discussions with different agencies.
On this facility.
<unk>.
Activity, there and a high level of interest is kind of where I'll leave it and that interest is just kind of picked up even more so.
With may 11th right around the corner entitled 42 going away.
So while we don't have anything in the numbers.
The hope is at some point.
This is just not a real estate acquisition, it actually becomes accretive to us at some point that's the goal right.
Yes, Greg I would say.
If I if I, if I misspoke and said don't expect anything this year.
That wasn't necessarily my attention may or may not I think the point is we.
Look we have the asset ready and available so what im saying is there anything now right, but that doesn't mean to <unk> point that doesn't mean something can't happen as we work through this performance work process. It doesn't mean something can happen with that asset as part of that process.
Okay perfect. Thanks for clarifying and I appreciate the color guys.
As a reminder, if you have a question please press star one.
The next question comes from Nick Shame Hoefer.
<unk> from Stifel. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question.
So just to get started here just based on earnings and Alex from pressure properties that we've been hearing it appears activity in the Permian is likely about flat at current levels for the balance of 'twenty. Greg would you say that's in line with your view and can you talk about demand in the Permian and our expectations.
Over the next few quarters.
Sure sure.
Sure. So look as we add as we said probably for the past few quarters. We came it came off.
Yes.
Pretty good growth and we've seen that start to start to level off I do think from a.
From a gross profit perspective, I would say that.
It's probably probably steady as she goes I think we probably continue to see some some very slight improvement that continues to matriculate. This this past quarter as I mentioned, we did have some integration expenses from the from the asset purchase.
That did have an impact to bring up margins a little bit of an increase in cost, but beyond that look I think that business is a fantastic business. It continues to generate significant amount of cash for us.
As in the.
Lace their contingent.
They too are expecting.
Low to single mid digit growth as well. So I think that's that tends to follow along with that but I think thats just fine for that business. It actually works out really really well for us I think in many ways.
We prefer that type of an environment right now.
Can you allocate capital on the on the government side as well and then we can really do both at the same time here. So Bravo to smoke just say anything else I think were.
We're as excited as that business is all like that.
It's something that we've operated for a long time, it's a great customer base.
It's something that just keeps on giving.
It's a great area to be in unlike what you say, it's not going to be hockey stick growth out there, but I think it'll be consistent I think the rates will come up over time as inflation subsides.
But it takes a while as we have these long term contracts to continue to drive those rates up.
Eric is one point.
Actually some cost there that wont be ongoing it was a one time hit.
So thats definitely downplayed onto the.
On the overall profit there, but I think this continues to tick up.
At a decent rate the one thing I would say that we haven't touched on on the call. This morning is we do look to continue to expand that.
First business, though in other areas, Brian we've talked before about some of our some of our commercial diversification efforts.
Really starting to take hold and so.
And my point in that is all is not lost in so far as growth in that business.
We're saying in Hff's ours is that we expect it to be pretty steady.
Terms of true, but however, there are some other things we're looking at.
Very nice growth drivers there so hopefully more to come on those over time, but there is a lot to continue to do in Hff's segment Hoffmann get locked on the fact when.
When we added more government, we pick up some of the HFF.
Room drag so when you look at the company at a whole hopefully different much more profitable.
And then it was the past few years, so we like the direction and the mix at this point where it's at.
Okay.
That's excellent color. Thank you for that and I'll turn it back.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Brad Archer for any closing remarks.
Okay.
Thanks, again for joining us on our call today, and we look forward to speaking again in August . Thank you.
Okay.