Q3 2023 Target Hospitality Corp Earnings Call
[music].
Good day and welcome to the target hospitality third quarter 2023 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
They've been one unattached on phone 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 Mark Schuck Senior Vice President of Investor Relations. Please go ahead Sir.
Thank you.
Good morning, everyone and welcome to target hospitality third quarter 2023 earnings call. The press release, we issued this morning.
Arthur.
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 act as a team.
But then in 'twenty three.
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.
Our financial measures on today's call.
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 E Calomiris Executive Vice President and Chief Financial Officer. After their prepared remarks, we will open the call for questions.
Officer, Brad Archer.
Thanks, Mark Good morning, everyone and thank you for joining us on our call today, our strong third quarter results are a continuation of the positive momentum we have sustained over the past several years are meaningful scale creates a highly efficient operating platform, allowing us to appropriately match changes in customer demand.
Continuing to generate strong financial results.
We continue.
It's providing critical hospitality solutions to the U S government.
This intentional focus has resulted in over 72% of third quarter revenue being derived from committed contracts by the United States government with 73% of third quarter revenue, having minimum revenue commitment.
These elements continue to support impressive operating income and industry, leading cash conversion.
This foundation has supported targets ability to respond.
While continuing to evaluate an expanding pipeline of value enhancing growth initiatives.
And our HFF SaaS 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.
These premium service offerings have supported strong customer demand and a more fully optimized network over the past year.
Which should create a normalized.
Coupled with continued operational efficiency gains, we anticipate additional positive momentum in the coming quarters.
In the government segment, our purpose built portfolio of assets continue to serve these critical humanitarian aid mission they were designed to support.
While exceeding the expectation of our partners in the U S government for nearly a decade.
As an example during the quarter, our Pecos Children's center community seamlessly.
And for our critical hospitality solutions.
This validated at the influx care facility concept.
Illustrating the governments essential need for adequate capacity kept properly respond to dynamic changes in the number of unaccompanied children, arriving in the U S.
Further exemplifying targets were always big Brewer.
Proven and trusted provider supporting critical humanitarian missions.
We are pleased to announce this week.
Ordered a contract for the continuation of the Ics at our PCC community solar.
Solidifying its continued presence serving this critical humanitarian mission.
The contract award is a continuation of the five year indefinite delivery indefinite quantity contract, which was awarded to our nonprofit partners earlier this year.
Total this contract provides the government the ability to seamlessly and continually.
Sage through 2028.
This award solidifies PCC as one of the only influx care facilities in the United States and would represent eight years of continuous comprehensive humanitarian services.
We look forward to continuing our long relationships supporting our partners humanitarian medicine at.
That's the longest running purpose built ICF in the United States.
But this week contract award you are accurate.
Specifications with our nonprofit partners under our 11 year exclusivity agreement.
We look forward to providing additional contract details, including specific economic terms as they become available in the coming weeks.
As we previously announced the government has outlined their desire to expand their ICF network to accommodate up to 10000 individuals requiring multiple new ICF communities.
I can remains.
Those strategic partnerships to jointly pursue the creation of new Ics sites, not currently and the government portfolio.
As the government has continually stated additional humanitarian housing capacity is urgently needed to manage the increasing number of unaccompanied children, arriving in the U S.
We believe target is well positioned to pursue these opportunities and we look forward to continuing to support the U S got it. Thank you.
Summary, we remain focused on sustaining the momentum we have created over the past several years.
We have established a strong financial and operating platform to continue supporting our world class customers, while simultaneously pursuing the most robust growth pipeline, we have seen in many years.
I'll now turn the call over to Eric to discuss our third quarter financial results recent balance sheet initiatives and expanding strategic growth opportunities and more.
The third quarter, we continued to benefit from our operational efficiency and scale, which allows us to seamlessly aligned with customer demand, while consistently delivering strong financial results.
Third quarter 2023, total revenue was $146 million and adjusted EBITDA was $95 million.
Our government segment produced quarterly revenue of approximately $106 million.
And as a reminder, this segment's revenue was centered around Canada.
Yeah.
Increase in revenue was driven by occupancy based variable revenue at PC community.
Alright.
We delivered quarterly revenue of $40 million compared to $36 million in the same period last year.
This increase was driven by sustained momentum in customer demand the targets premium starts off.
Recurring corporate expenses for the quarter or approximately $9 million and we anticipate these will remain around 9% 10 per quarter.
Total capital spending for the quarter was approximately $13 million with the majority related to enhancing assets focused on supporting the government's humanitarian aid Michigan.
We anticipate minimal capital spending for the remainder of the year.
We ended the quarter with $105 million.
Cash and $230 million could be.
Zero borrowings under the company's revolving credit facility.
Ratio.
Excluding acquisitions two.
2023 capital spending should approach more normal levels between 30 and $35 million per year predominantly focused on organic growth.
We continue to make meaningful progress in achieving a net debt free balance sheet and anticipate over $315 million total available liquidity by year end 2023 or.
Our 2023 outlook includes revenue of between 555 from $2.
$346 million and $365 million.
Following the quarter, we took additional steps to create a more efficient capital structure and maximize flexibility as we continue to evaluate and expanding pipeline of breakfast.
We significantly increased our liquidity profile for a $50 million spansion of our credit facility, which now has total with bell capacity of $175 million.
Further clean.
The completion of an exchange offer for nine 5% senior notes.
Yeah. So resulted in a $181 million new tenancy corners percent senior notes due June 2025.
We have subsequently announced a redemption notice for the remaining $29 million with magnetek sets new notes to be redeemed for cash.
These pud liability management initiatives, our continuation of our focused commitment to strengthen our balance sheet.
Financials.
This provides the foundation to quickly react to strategic growth initiatives, which have supported more than 150% increase in revenue and $550 million of cumulative discretionary cash flow within the past three years alone.
All while reducing total indebtedness by 90% during that same time.
This materially strengthened balanced balance sheet, and optimize liquidity position traci ideas steel scenario targeted to pursue them.
Strategic growth initiatives, including both organic and inorganic opportunities.
These opportunities are designed to jointly leverage targets operating expertise and existing core competencies to create a number of solutions across various U S government agencies and commercial applications.
Projects to support National Defense energy transition and humanitarian missions.
These opportunities encompassed existing.
As well as select opportunities to broaden target's value chain participation through individual elements of our existing core competencies.
These solutions are focused on extending value chain participation to become more fully integrated provider of these unique offerings from immediate and urgent need to long duration and permanent solutions.
We view these opportunities as a seamless extension of our existing service offering.
Yes.
Invested capital.
As previously stated.
Target is prepared to allocate over $500 million of net growth capital to these high return opportunities over the next two years.
We are pleased with the progress of discussions for many of these large scale projects and look forward to providing additional updates in the coming quarters as the <unk>.
Chinese progress.
With that I will turn the call back over to Brad for his closing comments.
Thanks, Eric.
Our impressive.
The operational efficiencies and scale, we have created enabling us to appropriately match customer demand, while simultaneously generating strong financial results.
Since 2021, we have taken intentional steps to diversify the business, while simultaneously high grading contract structure and revenue visibility.
This week's contract award for PCC is a continuation of the strategic initiatives further supporting the enhanced trading plan.
We are well.
Position optimize financial flexibility and the strongest pipeline of growth opportunities. We have seen in many years. We are excited to continue pursuing these value enhancing 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.
Then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.
But any time your question has been addressed and you would like to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Okay.
So Scott.
Could you please address the potential duration.
Of the contract how it could look yeah. If we're talking about one year extensions of five year extensions. Please elaborate on that please.
[laughter].
How are you doing Daniel it's Brad.
This is a it's a five year agreement.
With four option periods on top of the base.
Uh huh.
If you look at it.
They are subject to annual appropriations right. This is no different than our contract on the South Texas family residential center.
Which is in its ninth year.
It varies.
Very typical and what we see in these contracts I think the positive thing here is when you look at the government they've taken three years to really design the system.
If you will this ICF program and then.
And the biggest reason is this.
This is going to become part of their long term solution right. It's their new program. It's the ICF as we know theres still bids out there for more so they're still building out this program.
Under the Society IQ platform.
Got it thank you.
I recognize you're still discussing the economics.
But how should we think about the potential.
It could.
Do you have currently with the fixed component and a variable component.
Any thoughts there would be potential structure would be helpful. Thank you.
Hi, good morning, its Eric Calvin Harris.
A couple of things.
Structure of the contract. So it will have generally the same look and feel as the existing contract with.
With PC that PCC has so there'll be a minimum revenue component there'll be the variable revenue component.
Mix between those food we have today.
So there will be some slight modifications in that but I think there is also the opportunity to <unk> been working on economically attractive in some ways than under the existing contract.
So stay tuned on that we're still in the process of finalizing all our portion of this so you know, but I think generally speaking what you what you know regarding daily today herbs are regarding PCC as it relates to the contract sure.
And anything materially different as it relates to that so it's got all the same elements. The same look and feel but there will be some slight modifications in index.
Got it. Thank you final one for me. Please how do you think about the potential for incremental contract at this point.
Yeah look as I said, they're still building out. This program. If you look at kind of their weekly report that I think most people look at them. They continually say have enough.
There's a third ICF out there.
It should be awarded sometime first half of next year, where we're definitely bidding that we're working on that so we look for this program to continue to grow and again continue on as one of their long term.
Solutions for that.
Unaccompanied children.
Great. Thanks, a lot guys.
I have a question.
Q.
Our next question comes from Stephen <unk> with Stifel. Please go ahead.
Thanks, Good morning, everybody Congrats on this award.
The.
I guess a couple of things from me first one when you guys internally think about allocating capital to growth opportunities.
Like from our seat we kind of think about the bid.
Business.
Which kind of gives you the flexibility to invest growth capital with known free cash flow coming.
Does the terms of this deal one year versus five year kind of impact the way you think about the visibility of that free cash flow and investment in other opportunities.
Hi, Stephen good morning.
I think anytime you have a business that.
That generates a large player.
These in these sort of things into consideration I think here, but here's the here's the other thing that we are actually to think about too is you know this is wrapped up in a five year <unk> Iq.
Which is basically the multiyear funding vehicle for it. So so you know look so that in of itself and it provides a much greater degree of confidence, but we look we look at this.
Long term and I think unfortunately, we aren't aware, an envious position, where our cash shouldn't it.
And so when we look at opportunities for projects, we're always going to look at this through the lifecycle and we're going to look at whether that is a project on the HFF side or whether its a long term project lucky it needs to meet the hurdles.
Not only the return but also the minimum revenue commitment that's tied to it alright, and so that's how we're going to take them by any any additional capital deployed.
And that has not been different frankly from where the company has operated for.
Yeah.
Government contract.
We can get into all of that.
The five year agreement in the base period the option that's very typical right. The annual appropriations are it is how we're set up in daily been a nine year contract.
<unk> when we assess these this is not one we look short term, yes. It has yearly funding, but thats been typical on every gun a government contract we have done.
And in parallel.
As a long term solution for the government.
Great and on a similar along similar lines. It would it is therefore it doesn't change the way you think about how much cash you may be willing to return to shareholders as well.
Well I think I think look I think that question really goes in concert with how you look at deploying capital writ large right, whether it's whether it's shareholders or whether it's too.
Yeah.
Looking at all of that has to work in concert and so I don't look at those as you know really mutually exclusive.
And Steven I mean, those all have to go together, we have as Brad mentioned, we have the most active not only not only organic pipeline. We have the most active inorganic pipeline we've had in years as well.
And I'll tell you that there is.
There are a lot of strategic decisions that will be made coming up on that.
Yeah, So Steve.
Whether or not has to go in concert with the growth of the business.
Thanks.
First of all is to get to a five year contract alright. This first step.
And that's done so they can move forward got it okay.
It.
Is it a reasonable.
I think us and others that we talk to have sort of thought about 24 as containing similar economic cost to compete.
<unk> reimbursement is that a reasonable starting point still.
Yeah look I think again, there will be mix shift or a shift in mix. So we do have just bear that in mind, we're a little too early to be talking about that specifically I think the other thing you have to think about is the revenue contribution has to be considered as well as to what that looks like but again the concept.
Is not drastic.
Yeah look I wouldn't I wouldn't at this point I wouldn't look to change things meaningfully.
Because we are getting the construct is roughly the same and it's going to the same mechanisms the same components to it but again, it's a little too early for us to get too specific as to what that looks like going forward.
Excellent. Thanks, and then just one final one on the HFF side.
When we see what's going on with.
Activity levels in the oil patch and we've had a lull here we've gotten patent.
Yeah.
But there seems to be a consensus that the 24 youre going to start to get at least some level of recovery in activity, particularly in the Permian do you see that in your conversations with your customers or any any color on what youre seeing on that front.
Yeah, and some of the conversation Stephens that I've been involved with.
On the sell side.
I agree 24, they are saying you could see.
Some of the work and what we would hope as we get we get a portion of that I think it's going to be minimal I think we're pretty well maximize at our locations.
But look I.
I think it will be as good as yours. It was this year.
It may be a little better.
Great. Thanks for all the details gentlemen.
Thanks, David.
The next question is from.
Please go ahead.
Hey, Brian and Eric Thanks for taking the questions.
I think a few of them might've been answered, but just wanted to you mentioned that it could be more favorable and I, obviously, we can't get into the specifics, but is that in the relation to the mix of minimum revenue components versus variable revenue are you, saying, it's just gonna be like possibly more favorable mix.
Sure.
Okay. That's it.
And is there anything that you said again it comes down to the mix right. So it comes down to putting surety in place for the minimum revenue portion and then you've got the verb piece, which offers.
Greater upside potential so that's.
How I would describe it.
Sure that's fair and.
As we think about those.
You know finalize those specifications.
Is there risk to just kind of carrying forward the existing.
Yeah.
Existing contract is up.
In about a week here. So you know until everything is finalized like would be just kind of assume that.
Existing economics roll forward.
Correct. So from from a technical perspective, nothing changes from economically until the contract is under the new terms right. So that's a process we have to go through.
So right now don't change anything as it relates to the existing contract.
And then just lastly assumptions into Q4 guidance or for the year.
Just.
Assuming youre assuming.
Similar occupancy levels seen today, you know through the rest of the quarter or.
Any notable changes in your assumptions there.
No I look I don't think so I think I would offer I think I feel like I do this every year about this time I always offer the the gentle reminder, that the HFF.
Yes.
The tail end of the Q4 period.
There's not a lot, but it's you know it's a couple of hundred basis points in margin right. So it's something that needs to be aware of beyond look beyond that I don't think there's anything meaningful that we expected out of Q4. That's you know that we really didn't see in Q3.
Okay very helpful. Thanks, and congrats.
Thank you.
As we have no further questions. This concludes our conference.
Turn the conference back over to Brad Archer for any closing remarks.
Thanks again for joining us on the call today, and we look forward to speaking again after the first of the first of the year have a good day.
The conference has now concluded. Thank you for attending today's presentation, you may all of that.