Target Hospitality Corp.

Q4 2022 Earnings Conference Call


spk_0: the morning and welcome to the target hospitality fourth quarter and four year twenty twenty two earnings conference call all participants will be and listen only mode did you need assistance signal a conference specialist by pressing star and zero on your telephone keypad after today's presentation their will been opportunity to ask questions to ask the question you may press stars and one on your telephone keypad to withdraw your question please press stars and to please note this event is being recorded i would now like to turn the conference over to march shot senior vice president of investor relations
spk_1: please go ahead
spk_0: thank you good morning everyone and welcome to target as fatalities fourth quarter and four year two thousand and twenty two earnings call a press release we issued this morning outlining our fourth quarter and for your results can be found in investor section of her 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 the same language applies to statements made on today's conference call this call could take time sensitive information as was forward looking statements which are only accurate as of today march tenth two thousand 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 to accept as required by applicable law for complete list of risk and uncertainties that may affect future performance please refer to target hospitality fatalities periodic filings with the fcc we'll discuss not yet financial measures are today's go please refer to the tables in earnings release post in the investor section of or website to find a reconciliation of non gaap financial measures referenced in today's call and their corresponding gap measures please call today we brought archer president and chief executive officer followed by eric t telomeres executive vice president and chief financial officer after they're prepared remarks will be joined by choice shrink cheap commercial officer and open a call for questions oh now to the call every our chief executive officer brad archer benchmark good morning everyone and thank you for joining us on the call today targets record setting twenty twenty two results are a direct reflection of our commitment to further solidify are strong financial standing while positioning the business too quickly respond to strategic great opportunities to route twenty twenty two target meaningfully increased it's minimum revenue commitments diversified as in market customers and emperor yes discretionary cash flow by two hundred fifteen percent we achieve these accomplishments are serving a diverse customer base across twenty nine communities we have remained focused on providing premium full service hospitality solutions to our world class hss clients many of whom have been customers for over a decade as a result target had consecutive quarterly hss demand increases resulting in a seventeen percent year over year increase in utilization with consistent customers are no rates of of over ninety percent which we have enjoyed for over seven years
spk_2: targets reputation and our commitment to these customers supported numerous hf fast contract renewal and extensions over the past year we anticipate these contracts will add over two hundred million of cumulative revenue through twenty twenty eight we are pleased with our current hf s utilization and it's ability to meet are strong customer demand however we will thoughtfully evaluate select opportunities to add capacity and response to customer demand where appropriate for also adequately expanding our significant market share
spk_0: during twenty twenty two we demonstrated targets superior operational flexibility that law that allowed us to match increasing hf asked best man while simultaneously utilizing is existing assets to expand our government segment but sixty percent the end result was a more fully optimized network and more valuable contracts
spk_2: guarding the government segment we have completed the enhancements to our expanded humanitarian community announced in july of twenty twenty two with it's completion we have solidified this community as the only purpose built campus but the sole mission of providing critical hospitality solutions in support of the government's humanitarian aid aid efforts we can say this one of a can all inclusive community has exceeded the expectations of our partner and the us government since it's inception and twenty twenty one it has been our belief this world class facility would be the premier community providing critical hospitality solutions to the government's humanitarian aid missions disbelief has recently been affirmed with us government publicly announcing their intention to consolidate the remaining act of influx care facilities additionally we're pleased to announce that are non nonprofit partner has recently been awarded an indefinite delivery and definite quantity cohen's contract related to the extension of our humanitarian community and tigers this award consisting of a base five year term with an additional five year option
spk_0: establishes the contracting vehicle required by the us government to appropriately fun multiyear contract wars the idea q award to our nonprofit partner is one of the final steps in the government contract award process
spk_2: prior to work in to defend a disagreements we are highly pleased with the progress as the contracting big was come sooner than expected and we anticipate working to additional contract specifications over the coming months
spk_0: we look forward to solidify the longevity this community and the critical humanitarian mission it was purpose built to provide
spk_2: as a reminder last year we entered into an exclusive eleven year partnership with our national nonprofit partner a long term agreements solidified our joint commitment to continue providing critical humanitarian services to united states government at is highly customized campus
spk_0: in summary we have achieved our strategic objectives to materially and targets financial position while simultaneously diversifying our customer base and continuing to accelerate value creation for our shareholders i now turn the call over to eric to discuss our for fourth quarter financial results twenty twenty three financial outlook and capital allocation a nest nest us in more detail
spk_3: thank you brat
spk_4: in the fourth quarter we experienced continued strong demand fundamentals and possible moment of my customer tiffany predominately driven by growth in our government segment and materially expanded humanitarian to me
spk_0: poker twain twenty two told revenue was hundred sixty million dollars adjusted ebitda was approximately ninety one million dollars
spk_4: or government's submit put his quarterly well the new have approached me one hundred and fifty million dollars to build forty seven million dollars and simply last you the significant increase was attributed to be explained to me a chance mean the we lost in july as reminder targets thomas said including it's don't to community center lump in your minimum rupnik months additionally expanded humanitarian community includes variable several revenue that along with monthly changes to comey population this complex structure provides a deal flexibility for customers as the octopussy with climates fluctuate overtime while also providing me for minimum level it's moments that tweet significant revenue can cast low visibility for target we are family structure is the optimal outcome for all parties and create a sustainable structure which we believe is the basis for contract longevity for years to come each of us segments delivered fourth quarter revenue of to the six million dollars about thirty four million dollars in the same period last year this increase was driven by system momentum and customer demand for targets premium service offers
spk_0: the corncob expenses for the quarter with hawks me nine million dollars and we anticipate the cooling cooper expenses moon mean nine to ten million per quarter for the remainder of the year
spk_4: total capital expenditures for the corner would cost me twenty seven million dollars with twenty three million dollars willing to the substantial infrastructure enhancements required at expanded to to meet with a depletion of team has been to tweet tweet two weeks that's a more moderate pace capital expenditures we end of the coated with one hundred eighty two million dollars cash and other two thousand and five million dollars of the could with zero balance under the company's hundred twenty five million dollars with all kind of silly and in that leverage ratio of zero point six times
spk_0: i'm twenty twenty two twenty twenty two target has remained focused on reducing tone deafness and maximise financial flexibility
spk_4: over this time we have reduced total commitment debt but more than two and twenty five million dollars additionally we recently announced in hadn't twenty five million dollars partially dumps of the none have percent seems to notice further goes to any our commitment to discipline couple allocation strategy focused on high return initiatives inclusive of the hundred and twenty five million dollar no redemption we will have reduced total and getting a spy over three hundred fifty million dollars since twenty twenty and over two million dollars in patent the last twelve months alone over the past twelve months with twins increase intrinsic of the equity both too loud for share just amuse bouche in the ships this highlights or to mimic allocated capital to at high risk return initiatives are continuing to maximise die you crazy for shareholders turning to our financial outlook a couple allocation objectives targeted hands and multiple folio and contract structure as potent increase the minimum lovely commandments and provide greater visibility amount of revenue and joshua additionally we are pleased with the progress of discussions relating to the motor your term extensions for the experimenter include we believe the government's decision the sweet issued object you pass or toward to a nonprofit park solidifies the sustainability of this purpose built to be by status in the necessary mechanism to find specific motor your toddler towards we continue were closely with another partner and to stay additional contract specific splayed to targets critical hospitality solutions to finalize the much coupled with our ongoing business development uppers that had created the strongest project pipeline the company has seen in several years the company is rewriting it's preliminary twenty twenty three financial outlook
spk_2: which includes revenue of thousand twenty five million dollars maximum of seven and ten million dollars with adjust ebitda a brilliant sixty five night owls excluding acquisitions twenty twenty three couple spending should approach more normal levels between twenty and thirty million dollars per year
spk_4: for w focused on a granite grow up the range of luminary twain twenty seven reflects the possible contribution of valuable service revenue associated with expanded you may change me along with other potential second half way to grow the catalyst
spk_2: as it relates to the extent merchants movie target expects the government to continue magic it's keep community allotments based on variety of factors including seasonality the regular use of smaller disperse shelter capacity across the united states
spk_4: and other job will demand dynamics for the quarter the government's nomination to our community hibernate and lines expectations which contemplate the range of thirty demand max including the typically lower seasonal census during the winter months however there's no idea of other potential countless the have shifted from our original expectations
spk_0: for instance the government delayed it's previously anticipated lifting of title forty two from december twenty twenty two to measure tweet tweet tweet as a result the consolidation of many conflicts care facilities has taken longer than expected resulting in delay timing of additional variable six rabbit we expected increase verbal service rodney waited more towards second half of tweet tweet tweet as a result the shift
spk_4: targeted have balance sheet while the other to continual during a range of high return capital allocation initiatives
spk_2: focused on maximizing long term shareholder value or simultaneously expanding long term growth up
spk_4: target has identified and continues to pursue an active and expanding pipeline of to to to growth opportunities
spk_0: these opportunities including expanding reach across government agencies in support of slack national defense projects as well as unique commercial diversification opportunities spending a variety of domestic energy transition initiatives
spk_4: target is prepared to algae or five hundred million dollars of maesbrook capital to these high return opportunities to twenty seven as a result of the size and scale be strategic projects does inherently a longer program cycle prior to word announced are final outcomes are not hundred percent certain we can say we're quite pleads with the process of discussions and believe their tent or milestones being achieved cheat is important large scale projects we look forward to providing additional updates and come course as the opportunities progress
spk_2: with that i will turn to call back over the brad for is closed campus thanks eric a record setting twenty twenty two 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 objective we are well positioned entering twenty twenty three with an optimal balance sheet and over three hundred million of liquidity we will utilize this foundation and the tremendous momentum we have created to continue pursuing initiatives focused on accelerating value creation for our shareholders
spk_0: i appreciate every when joining us on a call today and thank you again for your interest in target hospitality we will now begin the question and answer session to ask the question you may press star than one hundred public phone keypad if you're using the speaker phone please pick up your handset before pressing the keys if any time your question has been addressed and you'd like to withdraw your question please press star them to at this time we will pause momentarily to assemble our roster the first question comes from scott's a burger with oppenheimer please go ahead
spk_5: and thank you very much good morning everyone off more for my first question i would like to kind of hone in on the development with your partner with regard to the yard to did to me i'd the actual ward on could you just talk a little bit more another level of beach
spk_0: yell about what has occurred there are any helpful maybe compare and contrast this year's ah negotiation period and process as opposed to last year's thank you
spk_6: i got good morning sir so pretty good great question so let's discuss last year's of first and then he gets a good segue to to discourage discussion so brick recall last year the as he was even the words were done their the reagan emergency basis right so they were done that way specifically between the moon read it and twenty twenty two within those emergency
spk_4: the mechanisms by nature are specially one your money structure during which which determines the contractor so with this idea to i think the the the big change on this is the prominent shift in how the government is thinking through the infrastructure around there there you see capacity and this this allows for the mechanisms to be much much much longer a multi process now there are effectively to stuff functions you
spk_7: the first a function which is this which is to crazy idea to funding mechanism which in this case is is a really super important point because it establishes the five years missile time and than one find your option which is what we been talking about from for many months from that point forward then there's a discussion around what exactly the scope of services look like it in and any sort of economics out of that now last year be recall and we don't expect any changes we have not made any changes to in terms of the can economic something that's important we've had that experience for nine years with delhi we had experience last year as well now last year also that the scope increased right so so the only much case we made worse gradually decrease the scope the or nor the economic terms changed now we were expect the same here and going forward as games today which is why we have not made any changes to our to ireland
spk_6: and i will continue this discussion around with our government partner
spk_7: with the government as well as are not drop a partner around that scope as the government releases that information over the next two months and got maybe fall just added to spread to her morning put out a few things there's to think it's very important to aired mention that you know going from emergency to to the to the i see yeah and when you look
spk_2: that today there's only to act as i see us in one of them we know was in portland been out publicly that at some point fear in mid mid mid year of twenty twenty three
spk_8: that are going to mothball that dog good in in in not use it anymore never know that there are they put that out publicly so this has always been out there
spk_2: it in the government moving into the more permanent type facilities longer term study that bodes well for were wrapped but that was a big distinction in this contract move into the more permanent facilitates the government rebalancing their their portfolios wellness is allowing them to do that
spk_0: okay thanks guys are very informative some some good points their the ab i get what's that transition it's to are kind of more near term that somebody an excellent long term development ah but more near term air you highlight a dog satellite second half stronger than first pass on seasonal utilization in west texas could you just speak to as as graduates mentioned kind of the fort bliss wind down dynamic arm how how should we be thinking about your inflows at west texas based on now seasonality one and and wind down the fort bliss
spk_9: during earn another got a great question
spk_10: the
spk_7: our us of our state say holistically that the the capacity to we're seeing is is exactly what we'd to expectancy in fact is very similar to what we saw last year as well and so the the contractual magnus we hadn't place in the arctic sea levels we have artwork are doing what we would expect them to do
spk_6: the one ship that we that we how that i mention was the expectations type of way to being lifted by administration in december twenty first tweet tweet two which which ultimately delays things now that's relevant because
spk_7: we also in and around that time were just completing pcc and the expansions so because of the timing of this entire for you to the government delayed the i was thinking about for blessed that was relevant because that lab for bliss contract stay a little bit longer them of would have otherwise anticipated so effectively what's happened is their capacities been shared between between pcc harmless
spk_9: so as we move forward
spk_7: with type of way to be lifted with the typical seasonality would expect from for children's specifically right because that's the census population now that we that that really impacts us and then the movement of for bless the summer and in the termination of that that ships every lot of things really to the second half so i would love to give you a quantum of number which is probably what you would for ideal but enforce i cannot do that suffice to say that i would just say that it's i think adding lot of lot of things have been position towards second half it's hard to say what quantum is because as you know migration flows are not clear albeit we can say and i think and i think we may have touched on this at some point the past is that over half of the entire touch points and immigration flows and twenty twenty two alone we'll rejected specifically due to titled forty two and the rest came in through title eight which is the typical asylum
spk_6: reason why that's relevant is because once that's lifted
spk_7: he would effectively seen as rates between twenty two at least just using as precursor you would have expected to see the immigration flows double from where they would have been
spk_6: actually and so i think that's relevant as as opposed to where we are now says see what happens in neither balances year but my expectation would be that the inflows would be pretty significant
spk_0: and and dumb it's just just one more for mean i'll turn it over bomb goes back to the first topic that i raised and and then one your comments are prepared remarks or on on and response to that first question was ah be with your partner and the i guess you what is is should we we anticipate now that it looks like it would be a five year base and five years schedule sound like data is being established in this new developments on what age i heard from something that one of you mention that it would probably be the same structure as a base we've payments and then a ya a variable utilization a component is that how we should think about the future contracts or may it be structured and another hour fashion thanks
spk_8: who's got week when we submitted with our partner on the id i q that's exactly how we submitted the way of set up to set up today we haven't heard any changes the way the idea i do at this point with was given to them so we had to put in a base concept pricing and in all of that to be awarded this
spk_5: on the soon as i got over thank you
spk_0: that you
spk_2: the next question comes from greg davis with northland please go ahead
spk_0: a good morning britain or a state of the questions congrats on quarter as well
spk_6: bob
spk_7: i really could just follow up on that that idea cue from the nonprofit partner on it you know what what are the next steps there and when would be expect to see an update on their contract yeah great great question so you're like like we sat in his it'll be the these things do take a little bit a time this is a job
spk_4: this is a little bit of other of a process i think
spk_11: what what we need to get serious is any scope modification that could be results of the of of the changes rights of the first the first step is to create funding mechanism the bring the inappropriate appropriated dollars would suspect to do with this means right
spk_7: the next step then is for the government to finalize it's it's scope now he's recall last year we crease the scope from four thousand bad sums dubbed an additional twenty four hundred or so sorry increase dramatically now again that's a reflection of an one the the built the first nations silly which is truly a lot to say assessing classes at that would be up there is actually absolute world class and by far the absolute best so the out there is the the other thing that needs to to to come into play here is you to bear in mind the government is is is reimagine how they think about it's it's capacity they have their twenty to shelter locations across united states as a to be very small their logistically challenging and our understanding is that they're seeking additional germans and so the point being is that there could very well be other locations that come into into play here and so was have sued sculpture he does look like if they're already
spk_2: he locations increase with the already
spk_8: and then and then go from there so but i think that process is going to take as we mentioned it's going to take the months which is much shorter than what we've been the or and we started this process and know what september with the idea i q when we submitted or even before that we've been talking about it so we we have we think your this a huge hurdle for us to get over we did that's in he just reiterate i think it's probably a couple of months of eric that probably discussions immediately
spk_2: but was you know that are already happening
spk_0: in then we should conclude this i would say the next few months
spk_12: is it in my point they're just not a long you're not talking six eight nine ten ten months here yeah agree points in in that very helpful as arm and to just follow theory can you know if we think about them thinking about
spk_2: or perhaps changing the scope arm on on the contract if we think about worthless being mothball like he said
spk_8: you know is that a safe assumption to assume that they would require more scope
spk_0: look i think when you look at title forty two are totally coming off in may i would just tell you a high level i think the need for i types of services
spk_8: the are going to be greater
spk_2: we think they will be more deals out there that we would have to win those i'm not sure they'll be more more scope if you will and are west texas facility
spk_7: when i think overall on the border across the us some of the things that we're dealing on now i think there will be a greater need doesn't mean we're going to end up with them when i think our pipeline mean we touch on this is is more active say in in in more real than it's been ever in our company so and that's a great point i think to add onto that that spread much degree point which is our pie i buy his is exceptionally active i'm in around these types of things but it in this into that your greg just for clarification the government as part of this process has clearly indicated that they are natural capacity or and they know and and so
spk_13: it just to breast point
spk_12: what the ultimate outcome of that is still yet to be determined by i would submit say it's not far stretch and looks looks much better for target sell you would sleep at that but certainly not certainly a very past
spk_7: got a very helpful
spk_6: of a that i have lastly just you know what is the be reasonable to assume regarding variable revenue this year in i know you provided the range of but the what would maybe be camera a sign that there was a fair assumption
spk_7: we had it we initially indicated that we were going to look at new post fifty million and in and verbal revenue for to for twenty twenty three and he nods i said that is though we pushed more towards the second half
spk_6: specifically partially partially due to the type of we do but but really it's it's really a function of the since this typical seasonal sense that we're seeing right now it's not that which is not an the ordinary that's actually that's actually coming and fine look i mean i'd like to say a chance that that it's dense better than all that bullet will just have to wait and see i think it's a little too really just to say it is better how much
spk_7: so in a look i think it's hard to make a determination greg when you're in a shorter period when you're coming out when you're coming off of the period where
spk_13: fewer fewer nuptial don't have been coming over the past few months right and so like that kind of winds down the influx capacity a little bit or need a little bit and then we'll see what that what that looks like a particularly coming the spring which which seasonally very very strong
spk_0: exceptionally could be exceptionally strong with the changed mister paulson gotta have some color alla as well
spk_5: thanks
spk_0: again as the have a question please press star than one the next question comes from them can girl with stiefel please go ahead thank you good morning everybody
spk_6: when it
spk_7: and the a couple things to me that the first was just on the veritable peace and about the wanna read into is too much but we think about the fifty million dollar expectation ah for the year at least i guess is absurd baseline how much those utilization of the assets this year impact the negotiation is it pretty clear and have this this long term need is sufficient were like of your utilization was was low this year that the government could we see the capacity to each longer term or is at reading into too short term for data points yes i understand the understand why you'd ask that question as a good settings very much too short term partially because what we're seeing
spk_2: is is no different we saw last year at the same time
spk_0: so so that can point of one number two i think the case of our the deli location what is it is a great tasting for this
spk_2: that was renewed for five additional years right in the middle a common with with very few were the occupants from for obviously for health reasons
spk_0: and and so i don't think there's really a correlation to that one been as as we mentioned the government isn't isn't a short on the influx capacity his hands so
spk_7: i don't think they adult thing that really has any bearing as to how the to humans
spk_6: okay thanks as a those what i thought but i've gotten questions or three i'd ask if so the other get a search take a picture question if if we work and the assumption and our model is kind of built this way that you guys do secure this long term contract and then we look out and and i mean he has blessed bless the number that you're looking at one hundred seventy five two hundred dollars or wrangle free cash flow and visibility on free cash flow waters movies do over a multiyear period as far as utilizing that cash and and maybe i know we touch on us will be but what one of the other sword and market as you remote access or for distress via a massive return of capital storage
spk_7: vessels
spk_6: look it's a it's a great question the the answer is are as i look have been a broken record probably the past year or on this but the ages are different when you're dealing with an emergency funding mechanism versus a long term idea you structure themselves some some my point is mages who takes like
spk_7: so what i think there is a time where we started you do start looking at other cavalry term incentives in i think i think we could be approaching that time now that said we are in we says many times were we're absolutely agree no to ride the so there's a lot of things we can do around that we can certainly look at some cash transactions which we have but we have been very deliberate very patient in that regard and and we have not found the right thing at the right value just yet but there are some opportunities out there there are other opportunities to commit to grow the business to do equity exchange type transactions right and so that that's that but that's not really use cash necessarily but there are two nice to do materially grow the business and and in diverse by the business that way
spk_14: and unlike any a heal up we we put the bouncy and a spot where we swear we said we would he
spk_0: and you now or spot where to the point when you start looking at of the next three or four or five years and you're you're talking six seventy one million dollars of good free castle the can accumulate is did you start looking the show and return type of activities know these mutually exclusive deborah point none of none of these are mutually exclusive and
spk_2: we have a tremendous amount of flexibility and so what we can do with this is we can do cash transactions with the agree exchange deals we can do
spk_0: devin into sarah we can do these things all contemporaneously at this point
spk_15: and insulin i think will your when or mode where will start looking at them and i'm in a more deliberate and more delivered fashion
spk_7: because i think that's probably close to the time coming
spk_4: great thank you and then it just one file for me when you
spk_7: tom when you think about the oil patch and what's going on hs or south it's a feels like ah there's a speed level of activity they're probably not allowed close given the way that in peace i remain pretty disciplined is it reasonable to think about that business has been a pretty steady state a current levels and he had contract extensions was christmas ability but at a reasonable way to be think about that pizza the business and twenty twenty three
spk_8: sir alec i think you're right and the way we think about their business is a fantastic business we just had two hundred million dollars contract renewal there we are as with as we've communicated before we do tennessee a lag
spk_2: so we do expect margin growth their over the next couple quarters and him perhaps meaningful merchant expansion their which is which is great buy duct lucky that business generate so much cash in it is it is is so helpful in diversifying or bouncy in what we can do that despite it being as you know call it a gdp type business at this point absent any other sort of strategic moves we made we may make in terms of and terms of smaller kind of talking sort of acquisitions
spk_0: intellect that's a fantastic business for us and we will continue to operate that and in captures much market share and margins possible loss about supporting our customers in their needs but you know look the yard the growth notwithstanding it's a fantastic business and musicians increase mattingly as we are we had an addict the lot we have we have put that business in a if fantastic optimization spot and we're we're really really pleased with where that's at this point started
spk_8: lisa movement on on on price not know what is it deserves that there's always that lag
spk_0: you know it's not going to be as you move with rusted we have a lot of long term contracts that are you buy them what as we if we come up on reno's and new you know hydrating customers were having a a much better outcome on on those negotiations south and not sure you'll see a huge move but it's nice to see that we are getting some a

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