Target Hospitality Corp.

And welcome to the Target Hospitality fourth quarter and full year 2024 earnings call. At this time, all lines are in the listen-only mode. Following your presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, March 26, 2025. I would now like to turn the conference over to Mark Shook, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Target Hospitality's fourth quarter and four-year 2024 earnings call. The press release we issued this morning outlining our fourth quarter and four-year results can be found in the investor 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, March 26, 2025. Target 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 the Target Hospitality's 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 investor 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 Jason Vlasic, Chief Financial Officer and Chief Accounting Officer. After their prepared remarks, we will 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 2024 results illustrate the benefits of our established network capabilities and strong operating platform. Our efficient operating structure, together with our approach to disciplined capital allocation, form the basis of a highly flexible and resilient business model. These elements support our ability to provide premium service offerings to customers across our network. while producing strong financial results and maintaining financial flexibility to quickly react to the growth opportunities. These characteristics consistently support our ability to successfully navigate through cycles while maintaining focus on key strategic growth and diversification initiatives. Turning to our segment, regarding our HFS segment, we continue to benefit from consistent customer activity and constructive market dynamics. Additionally, we remain focused on identifying opportunities to strengthen margin contribution through enhanced network optimization and operational efficiencies. This segment continues to exhibit positive momentum, where our customers find added value in our network capabilities and unmatched hospitality solutions. These attributes supported the expansion of existing customer relationships in 2024. as well as adding new customers who find incremental value in our unique capabilities and strategically located assets. These distinct core competencies supported the recent announcement of our multi-year workforce subcontract, supporting Lithium America's development of ThackerPath. We have referenced this opportunity and growth initiative for some time, and we were excited to finalize this contract. As we have consistently stated, these large industrial opportunities inherently have longer sales cycles prior to contract award. However, the Workforce Hub contract exemplifies Target's focus and commitment in utilizing its existing service offering to deliver on strategic diversification initiatives. We're excited about this partnership and establishing a regional presence as we continue evaluating additional growth opportunities in the area. Now moving to the government segment. Our government segment experienced a transition as we moved through the election cycle of 2024 and into new administration in January. However, amidst this disruption, Target has illustrated its ability to provide unmatched solutions supporting a range of critical U.S. government initiatives. The reactivation of our DILI community earlier this month exemplifies the importance of our proven reputation, unmatched capabilities, and strategically located assets. These elements have supported a seamless reactivation of this community and further illustrate the benefits of our flexible operating model and ability to quickly respond to customer demand. In addition, the current administration has indicated the need for a significant increase in facility and hospitality solutions required to adequately implement their stated immigration policy initiatives. Targets existing government-focused network capacity and operational capabilities align with this increased demand, providing a natural solution to support this critical mission. Further, our strong operational reputation and partnerships with industry-leading companies uniquely position Target to quickly and effectively implement these mission-critical solutions. Specifically, Target's existing West Texas assets offer the benefit of purpose-built, readily accessible solutions. We believe this establishes a distinct advantage as we actively pursue opportunities to recontract these assets in support of these critical U.S. government initiatives. We are actively engaged in discussions with industry leading partners and U.S. government agencies regarding opportunities to reactivate our West Texas community. These conversations have included proposals regarding our capability and tours of the facility. We are encouraged by the level of interest in the West Texas community and believe it can quickly satisfy a portion of the government's significant demand for appropriate housing solutions. While final outcomes remain uncertain, we are encouraged by the frequency and substance of ongoing dialogue. While we're actively engaged in pursuing these unique opportunities supporting the U.S. government, we are also continuing to evaluate non-government growth initiatives. As we have previously discussed, these opportunities center on target existing capabilities and include a variety of large industrial projects throughout the U.S. As illustrated by the Lithium America's Workforce Hub Contract Award, the size of these growth opportunities inherently leads to longer sell cycles. However, we believe pursuing these non-government growth initiatives is an important element of our diversification strategy, and we remain committed to pursuing these opportunities. In summary, the strength of our existing customer base, network capabilities, and proven operational flexibility support a resilient business model. These elements have consistently supported our ability to navigate through cycles while maintaining focus on our strategic objectives. This foundation supports our continued focus of providing premium services to our customers while simultaneously pursuing attractive growth opportunities. I'll now turn the call over to Jason to discuss our financial results in more detail.

Thank you, Brad. Our fourth quarter results continue to reflect the benefits of our flexible and efficient operating model. Fourth quarter 2024 total revenue was approximately $84 million with adjusted EBITDA of approximately $41 million. Our government segment produced quarterly revenue of approximately $44 million. The decrease from the prior period was primarily driven by lower PCC variable services revenue and no infrastructure revenue amortization, which was fully amortized as of November 2023. In addition, the decrease was partially a result of the termination of the South Texas Family Residential Center contract, effective August 9, 2024. However, the DILI assets associated with the prior South Texas Family Residential Center contract were recently recontracted, effective March 5, 2025, under a new contract that is expected to provide over $246 million of revenue over its anticipated five-year term. Regarding the PCC community, as we previously announced, Target's contract for this community was canceled, effective February 21, 2025. However, as a reminder, Target owns the modular assets and real property associated with this community, and we are actively remarketing these assets to prospective customers. We are encouraged by the ongoing conversations and interest in these assets, and as a result, we have elected to keep this community in a ready state. We believe maintaining these assets in a readily accessible manner provides a distinct advantage as we pursue growth opportunities, particularly in the government and market. This decision, which is similar to the approach we took regarding our DILI assets, will result in carrying costs prior to a potential new contract award of approximately $2 to $3 million per quarter. Turning to our HFS segment, Our HFS and all other segments delivered quarterly revenue of approximately $40 million. These segments continue to benefit from consistent customer demand, illustrating the value our customers find in our premium service offering and network capabilities. Recurring corporate expenses for the quarter were approximately $9 million. As we move through the year, we will continue to look for opportunities to optimize our cost structure and strengthen margin contribution. Total capital spending for the quarter was approximately $4 million, primarily focused on enhancing and maintaining Target's asset base across our expansive network. We have continued to prudently manage our capital allocation initiatives while benefiting from strong cash generation. We ended the quarter with $191 million in cash and $366 million in total liquidity, with zero borrowings under the company's $175 million revolving credit facility and a net leverage ratio of 0.0 times. This focus supported the achievement of zero net debt as of year-end 2024. Our strong financial positions supported our ability to return approximately $33 million to our shareholders during 2024 by repurchasing approximately 3.8 million shares of Common Stock. These repurchases illustrate our focus on utilizing a broad range of initiatives to pursue value-enhancing opportunities for our shareholders. Regarding the 2025 senior notes, on March 25, 2025, we redeemed all outstanding senior notes due June 2025 at a redemption price of 101% of par, resulting in expected annual interest expense savings of $19.5 million. Our decision to redeem all outstanding senior notes was focused on maintaining a balanced capital structure and financial flexibility as we continue pursuing a pipeline of strategic growth initiatives. We believe the current structure supports our ability to react to value-enhancing growth opportunities as they arise while appropriately balancing our obligations. Target's strong business fundamentals, including an efficient operating structure and commitment to network optimization, have established a flexible and durable operating model. These elements support the company's revised 2025 financial outlook, which consists of total revenue of between $265 and $285 million and adjusted EBITDA of between $447 million and $57 million. Our revised 2025 outlook gives effect to the previously announced PCC contract termination, effective February 21, 2025, and the recently announced DILI contract award, effective March 5, 2025. Target is well positioned with a flexible operating model and distinct core competencies as we continue pursuing value-enhancing growth initiatives. Importantly, as we evaluate these opportunities, we will remain focused on maintaining a strong financial profile centered on disciplined capital allocation while optimizing margin contribution through our efficient operating structure. With that, I will turn the call back over to Brad for closing comments. Thanks, Jason.

Our 2024 performance benefited from the strong operating platform and durable business model we have established. Target's flexible and efficient network provides the ability to appropriately match customer demand, while simultaneously remaining focused on strategic growth initiatives. We are excited about the government in-market opportunity, and we believe we are well-positioned to support the US government's increased demand for hospitality solutions. In addition, We remain intentionally focused on pursuing opportunities to grow and diversify our customer reach and contract portfolio. We are encouraged as we pursue these growth initiatives intent on further strengthening Target's business fundamentals and contract portfolio while 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 would now like to open the call for questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the store followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the store followed by the number two. Once again, please press the store one to join the queue. And your first question comes from the line of Stephen Gengaro with Steeple. Please go ahead.

Thanks. Good morning, everybody. Good morning. Good morning. Thanks. So two things from me. The first one would be, when you think about remarketing the West Texas PECOS assets, and we sort of think about the economics of the Dilley contract versus where PECOS was, is there anything about the specific assets or the application that would warrant sort of a higher economic contract for you for the West Texas assets versus Dilley? Just maybe help us understand if there's any difference in the assets in the application.

Yeah, good question, Stephen. I would say the best proxy for the economics at this point are the Dilley assets. It's possible they could be slightly better, but that would be what I would point you to at this point.

Yeah, I think it depends on the population, right, on what you put on there. But Jason's right. The thought is that model, you know, kind of where Dilley's at, the upside could be if there's a little bit of a different population mix on there.

Okay, okay, good. That's helpful. And then the second question I had was that when you look at the Lithium Americas contract, and sort of the opportunity set there over multiple years. Is there any way to sort of think about the size opportunity of that market and kind of what we need to see from a development perspective by them or others that would sort of accelerate their demand needs?

Yeah, I would say that there is potential to go beyond 2027 in multiple phases. We feel pretty well positioned in that regard. No guarantees, obviously, but we've expanded our workforce hub capacity there with some asset purchases in Q1, as we outlined in our release of 15 to 20 million. And the project is pacing quite well. And so we feel we're well positioned to potentially go into multiple phases beyond 2027. Economics would be tough to say at this point. I'd say the best proxy is what we've already announced. Yeah, just a little bit on that project.

You know, it's publicly out there. You know, their idea is not to do just one phase of this project, right? Just as late as last week, the governor of Nevada was out there. We were out on site as well for that tour. So, you know, And their CEO was there and talking about their plan is to do a second phase, right? If you look at the resource play itself, it's some of the best dirt that there is out there in the world. So their plan is not to stick with just one phase for sure. Nothing's guaranteed, but we like this project from day one as we think there's more years in it than what we've got inked today, right? That's the hope. And then when you look at the resource play around that within 150-mile radius, there's a lot of other mines. There's a lot of money being poured into that area. And we think it can kind of be that launching point for more work. We're actively, you know, our sales force is actively knocking on doors, talking to folks about the need out there. We're, you know, gathering capital project information. So we look for this to be more of a long-term area to get some growth out of.

Great, thanks. And just a follow-up to that, and I'm not sure how to exactly ask this, but when we think about the lithium opportunity, so when I think about HFS South and the oil and gas and the network approach you took, which was obviously an excellent way to approach that business because these projects tend to be short-term and your customers move around a lot versus some other markets where the customer's more stationary, right? Is this a market where the customer... moves around and you need like more of a network approach? Or is this a market where the labor force is really more in one location and you can have sort of a single facility that houses a number of employees? Do you understand what I'm asking?

Yeah, for sure. So we like the mining industry itself, right? When you talk about lithium, copper, gold, is there long-term investments, right? And usually if there's one One mine, there's multiple mines around. So very similar to, you know, the thought process around, if you will, in an area like the Permian for an investment. But what you're not having is that workforce moving from one facility to the other, right? But for our type of assets, like we've invested in there, we can literally house multiple different contractors, right? Not so much on the LAC side, but our thought process was spending a little bit of capital, getting that going, and it won't just serve LAC as we believe there's others out there that it will. So that area itself, I think, could look like a Permian, but the workforce itself, is not so much a traveler. The difference, again, is the long-term nature of these mining projects, right? They're not a three-year investment. They're a 10, they're a 15, they're a 20, and they continually, you know, are putting money into these.

Yeah, I sort of think about it more like an oil sand than a Permian oil and gas well. Is that reasonable?

That is reasonable.

Yep. Perfect. Great. Thank you. Yep. You're welcome.

And your next question comes from the line of Scott Schneeberger with Oppenheimer. Please go ahead.

Thanks very much. Good morning, all. I think it would be helpful with all the moving parts that new contract wins, losses in the first quarter. We appreciate the guidance for 2025. Could you speak as kind of a two-parter to the first quarter As things, you know, are starting, how should we think about revenue and EBITDA in the first quarter upcoming? And then also not asking for 2026 guidance, but how should we think about run rate for the contracts, the major contracts you have set at this point? Thanks.

Yeah, sure. So to take the second question first, so the run rate, for example, on DILI, Is that what you're getting at on that one? For example, I would say the run rate on that once we get through the ramp up phase is very similar to the prior contract, right? So roughly 50 to $55 million of annual revenue and approximately a 40 to 50% margin on that slightly less than the last one, because on the last one, we had some minor deferred revenue amortization that we have burned off on the last contract of a couple million dollars a year. But outside of that, the economics on that from a run rate standpoint should be pretty similar. And then on the LAC deal, I would say that the bulk of the revenue is going to be recognized this year on the construction. So about $65 million of that is recognized this year for the construction at a 25% to 30% margin. And the remaining portion of the contract would be recognized at approximately a 30% margin. not materially dissimilar from the HFS margin profile. And then in terms of Q1, you know, you'll have obviously, you know, very minimal amount of the DILI contract in Q1 as it just started on March the 5th, and there's a ramp-up period. So for whatever revenue we end up recognizing on that in Q1, it'll be Pretty minimal, but largely a 40% to 50% margin on that. And then we'll have a prorated portion of the PCC contract through February 21st at the same margin profile as we had last year. And then HFS will be pretty steady. I would say the utilization trends on that are actually slightly ahead of last year, but I would estimate pretty similar utilization to that of last year. for Q1.

And hey, Scott, this is Mark. Just to follow on to Jason's comment there too, specifically related to the Lithium Americas piece, that is going to be a little lumpy through 2025. And so the majority of that is going to be back half-weighted. So anyways, we can get into more details offline, but I would not assume that straight line through 2025. Yeah.

So to follow on to that, I would say Q1, very minimal activity on the LAC contract. and ramps up in the latter half, as Mark said.

Excellent. Thanks. Appreciate all that color for both horizons, guys. I guess I'll follow with the more fundamental, the asset that was acquired back in May of 2023. Could you give us an update on how that's being marketed right now? What purposes you're looking at for that? Thanks.

Yeah, Scott, this is Brad. Thanks for joining. Let me just maybe, this will probably answer it, but let me give maybe everybody a little bit of a high level, take a minute to touch on our government segment as a whole, and I think this will answer your question. While we recently lost a major contract in this segment, I'll tell you, we've never in my 30-year career had this many real opportunities in front of us. You know, the government has publicly stated for them to be able to manage their mission around immigration, they need somewhere between 110,000 to 150,000 beds. Today they sit around 50,000, give or take a few thousand beds. We are actively quoting and have quoted many different opportunities, ranging in size from 250 beds all the way up to 5,000 beds and anywhere in between that, right? These opportunities vary in term from one to five years, with most being a three to five-year term, very similar to the recent DILI award. We've quoted using any and all of our existing and available fleet, including the assets you mentioned, right? But with the demand for beds being so high, we're also quoting projects that would require us to source new equipment or readily available equipment that we can obtain on the open market. So look, all of these opportunities I'm describing, they're all active in some form, meaning some have moved to formal bid process. Some we've already submitted formal bid. Some are in request for information, the RFI stage for the government. And as mentioned earlier, DILI's already been awarded. So they are becoming more active in awarding projects, right? We expect others' decisions to be made on these projects over the next six months. Look, this is going to depend on funding as well, so that can slide. But I would also tell you that when I say it's very active, our pipeline continues to build weekly. So there's going to be new projects from the government that slide into our pipeline. So suffice to say, very busy. The assets you talk about are in play. just like our West Texas assets are as well, as well as other available equipment. So we've quoted thousands and thousands of beds of existing equipment, as well as much more than that on new equipment that we can get in the market.

Great. Thanks, Brad. Good comprehensive answer. Sorry, were you going to say something else?

No, that's good. I was just going to say hopefully that provides a little bit of color on where we're at kind of in the government on the opportunity set. Maybe the only thing I would add is a little bit more color on our West Texas assets while we're talking all things government. You know, very strong interest around these assets there. That facility checks a lot of boxes for the administration when it comes to, again, their mission around immigration. You know, speed and availability, location, past performance, the acceptance of the local community, you know, where we've operated for more than 10 years. So lots of, I would tell you, easy buttons here for them to put this back into their portfolio and increase beds pretty quickly, right? So we feel good about where that's headed.

Excellent, thanks. Appreciate all that color. I guess one more quick one, just throwing it back to you, Jason. Nice seeing the refinancing activity balance sheet in great shape. How much did you draw on the revolving credit facility? What do we anticipate seeing? DRAWN ON THAT AT THE END OF, WELL, AROUND ABOUT THIS TIME. JUST CURIOUS, BECAUSE YOU HAD A LOT OF CASH. LOOKS LIKE YOU ONLY HAD TO NIBBLE ON THE FACILITY A LITTLE BIT. AND THEN JUST THOUGHTS ON, WITH THE BALANCE SHEET IN SUCH GREAT SHAPE, JUST HOW SHOULD WE SEE YOU ALL BE APPLYING, YOU KNOW, APPLYING THAT STRONG BALANCE SHEET AND MAYBE APPLYING CASH IN A RETURN TO SHAREHOLDER function given it sounds like many opportunities out there available to you. Thanks.

Yeah, no problem. So, uh, I would say with respect to the first question, it was a very minimal draw on the ABL. I would say specifically to pay off the notes about $15 million of the ABL draw was used to pay down the, uh, the notes. Uh, so to your point, we had an abundance of cash, as you know, at the end of the Q4, we had 191 million as announced, uh, this morning, uh, And so there was some additional draw as well just for working capital requirements, but relatively minimal. So the balance sheet's in great shape. We feel really good about that. Virtually debt-free since we went public, and we've got an additional $19.5 million of excess free cash flow that that will drive. In terms of capital allocation priorities, I would say we're really focused on these organic opportunities that Brad outlined. We expect that many of them will require very minimal CapEx, but to the extent that some of them do require CapEx, that's where we're going to put our capital.

Great. Thanks, all.

And once again, if you would like to ask a question, simply press the storm one on your cell phone keypad. Your next question comes from the line of Greg Jibas with Northland Securities. Please go ahead.

Great. Good morning, Brad and Jason. Thanks for taking the questions. One of the follow up, I guess, on that last one, too, regarding just liquidity post redemption. You know, do you expect that 15 million or so drawn on the revolver to, I guess, be enough to kind of bridge the gap on liquidity? And, you know, sorry if I missed it, but could you provide maybe CapEx expectations for 2025 and maybe how you're thinking about free cash flow with that 19 million of interest savings?

Yeah, right. So free cash flow is expected to be positive. I would say our CapEx spend is projected to be lower than last year. We'll depend on the opportunities, right? But at this point in time, you know, we had reported $32.5 million or so of CapEx for last year. We expect it to be lower than that. So I would say you're going to anticipate, you know, free cash flow, lower CapEx this year, unless we get an opportunity where we feel like it's a good enough one with the credo.

uh economics to go ahead and invest in but i would expect capex to be lower than than it was last year um and then what was your other question um i guess it was just expectations for um you know do you expect to draw any more on the revolver or are we kind of um you know i guess all you know assuming kind of no changes right like um yeah i don't know right so i would anticipate

I would anticipate a short-term carrying balance on the revolver of around $40 to $50 million. That includes the $15 million and some working capital timing differences related primarily to, for example, the LAC construction project. As you know, with construction projects, there's milestones and things like that that we have to work through. So that's kind of the balance that I would expect, no more than about $40 to $50 million of an outstanding average balance on the ABL.

Perfect. That's what I was trying to get to. Great. Thanks very much. And if I could follow up on the West Tech SaaS as our PCC, you know, given you're seeing a lot of opportunities there, great to hear. And, you know, it does make sense that you're kind of not closing down the facility completely. But, you know, would you expect, you know, much in terms of modifications that would be needed to be made to those assets based on maybe, you know, those opportunities that you're seeing? You mentioned the summary. getting closer, you know, just wondering if you had visibility on kind of what changes need to be made there. And, you know, do you expect there like something to be announced to be dependent on funding, like government funding in a way?

Well, I'll just touch on capital to get that project back open. Right. Very little to none. Right. I mean, that, that is that project. It is, perfect shape for the use that they're talking to us about. So it's not like we would need to go in there and spend really any money, right? I would tell you if they say, hey, we want some things changed around, that's things we're going to get them to pay for. So again, just don't see really a capital expense on those projects, the West Texas assets.

Got it. And, you know, I guess lastly, you kind of mentioned expectations for Q1. Wanted to kind of get your thoughts on the core HFS business. So maybe X LAC expectations for the full year that are maybe implied in guidance. What was that again? Just kind of the energy side of the business. So, you know, excluding the work. Yes, I would say HFS. Yes.

Yeah, the HFS business would be relatively similar to last year.

Okay, fair enough. Thanks, guys. Yeah.

And we do have a follow-up question coming from the line of Stephen D'Angaro. Would Stephen please go ahead?

Thank you. Actually, a follow-up on the question that was just asked on HFS business. Your performance there seems to be more stable than kind of what we've seen from an activity level perspective. Can you talk about sort of the visibility there? I mean, you kind of said Flattish, your rear. Is most of that sort of behind contract with some of your larger customers? Or is that sort of an expectation off of your read on activity levels?

Yeah, majority of that is contracted under long-term arrangements with our customers. And so that's what gives us the visibility.

Okay. That's what I thought. I just wanted to clarify that. Great. That's all for me. Thank you. Thanks, Stephen. You're welcome.

I'm showing no further questions at this time. I would like to turn it back to Brad Archer for closing remarks.

Yeah. Thanks to all of you who joined today, and we look forward to speaking again very soon on our first quarter call in early May. Operator, that will conclude the call for today.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.