Target Hospitality Q4 2024 Earnings Call Transcript

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Provided by Quartr
March 26, 2025

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Target Hospitality Fourth Quarter and Full Year twenty twenty four Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, 03/26/2025. I would now like to turn the conference over to Mark Schuch, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to

Speaker 2

Target Hospitality's fourth quarter and full year twenty twenty four earnings call. The press release we issued this morning outlining our fourth quarter and full year results can be found in the Investors section of our website. In addition, a replay of this call will be archived on our website for a limited time. Please note the cautionary language regarding forward looking statements contained in the press release. This same language applies to statements made on today's conference call.

Speaker 2

This call will contain time sensitive information as well as forward looking statements, which are only accurate as of today, 03/26/2025. 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 Investors section of our website to find a reconciliation of non GAAP financial measures referenced in today's call and their corresponding GAAP measures.

Speaker 2

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.

Speaker 1

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. Target's twenty twenty four 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.

Speaker 1

These characteristics consistently support our ability to successfully navigate through cycles, while maintaining focus on key strategic growth and diversification initiatives. Turning to our segments, 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 and strategically located assets.

Speaker 1

These distinct core competencies supported the recent announcement of our multi year workforce subcontract, supporting Lithium Americas development of Thacker Pass. 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 of 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.

Speaker 1

Now moving to the government segment. Our government segment experienced a transition as we move 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.

Speaker 1

The reactivation of our Dilley community early 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. Target's 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.

Speaker 1

Specifically, Target's existing West Texas asset 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.

Speaker 1

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.

Speaker 1

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.

Speaker 1

As illustrated by the Lithium Americas Workforce Hub contract award, the size of these growth opportunities inherently leads to longer sell sites. 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.

Speaker 1

I'll now turn the call over to Jason to discuss our financial results in more detail.

Speaker 3

Thank you, Brad. Our fourth quarter results continue to reflect the benefits of our flexible and efficient operating model. Fourth quarter twenty twenty four total revenue was approximately $84,000,000 with adjusted EBITDA of approximately $41,000,000 Our government segment produced quarterly revenue of approximately $44,000,000 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 08/09/2024. However, the Dilley assets associated with the prior South Texas Family Residential Center contract were recently re contracted effective 03/05/2025 under a new contract that is expected to provide over $246,000,000 of revenue over its anticipated five year term.

Speaker 3

Regarding the PCC community, as we previously announced, Target's contract for this community was canceled effective 02/21/2025. 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 end market. This decision, which is similar to the approach we took regarding our Dilley assets, will result in carrying costs prior to a potential new contract award of approximately $2,000,000 to $3,000,000 per quarter.

Speaker 3

Turning to our HFS segment. Our HFS and all other segments delivered quarterly revenue of approximately $40,000,000 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 $9,000,000 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 $4,000,000 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.

Speaker 3

We ended the quarter with $191,000,000 in cash and $366,000,000 in total liquidity with zero borrowings under the company's $175,000,000 revolving credit facility and a net leverage ratio of zero point zero times. This focus supported the achievement of zero net debt as of year end 2024. Our strong financial position supported our ability to return approximately $33,000,000 to our shareholders during 2024 by repurchasing approximately 3,800,000.0 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 03/25/2025, we redeemed all outstanding senior notes due June 2025 at a redemption price of 101% up par, resulting in expected annual interest expense savings of $19,500,000 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.

Speaker 3

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 $265,000,000 and $285,000,000 and adjusted EBITDA of between $47,000,000 and $57,000,000 Our revised 2025 outlook gives effect to the previously announced PCC contract termination effective 02/21/2025 and the recently announced Dilley contract award effective 03/05/2025. 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 distribution through our efficient operating structure.

Speaker 3

With that, I will turn the call back over to Brad for closing comments.

Speaker 1

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 end market opportunity and we believe we are well positioned to support the U. S.

Speaker 1

Government 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.

Operator

Thank you. And your first question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Speaker 4

Thanks. Good morning, everybody. Good morning. Good morning. Thanks.

Speaker 4

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 of the application that would warrant sort of 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 and the application?

Speaker 3

Yes, good question, Steven. 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.

Speaker 1

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

Speaker 4

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?

Speaker 3

Yes. 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 $15,000,000 to $20,000,000 and the project is pacing quite well. And so, we feel we're well positioned to potentially go into multiple phases beyond 2027.

Speaker 3

Economics would be tough to say at this point. I'd say the best proxy is what we've already announced.

Speaker 1

Yes. Just a little bit on that project. It's publicly out there. Their idea is not to do just one phase of this project, right? Just as late as last week, the Governor Nevada was out there.

Speaker 1

We were out on-site at site as well for that tour. So, the 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 there's more years in it than what we've got in today, right?

Speaker 1

That's the hope. And then, when you look at the resource play around that within a 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 our sales force is actively knocking on doors, talking to folks about the need out there, gathering capital project information. So, we look for this to be more of a long term area to get some growth out of.

Speaker 4

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 is 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?

Speaker 4

Is that the reason do you understand what I'm asking?

Speaker 1

Yes, 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 mine, there's multiple mines around. So, very similar to 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?

Speaker 1

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 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 ten, they're a fifteen, they're a twenty, and they continually are putting money into these.

Speaker 4

Yes. So, if you think about it more like an oil sand than a Permian oil and gas well, Is that reasonable?

Speaker 1

That is reasonable. Yes. Perfect.

Speaker 4

Great. Thank you.

Speaker 1

Yes. You're welcome.

Operator

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

Speaker 5

Thanks very much. Good morning, all. Good morning. I think it would be helpful with all the moving parts that new contract wind 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 are starting?

Speaker 5

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

Speaker 3

point? Thanks. Yes, sure. So, just take the second question first. So, the run rate, for example, on Dilley, is that what you're getting at on that one, for example?

Speaker 3

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 $50,000,000 to $55,000,000 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 of 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 $65,000,000 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.

Speaker 3

And then, in terms of Q1, you'll have obviously very minimal amount of the Dilley contract in Q1 as it just started on March and there's a ramp up period. So, for whatever revenue we end up recognizing on that in Q1, it will be pretty minimal, but largely 40% to 50% margin on that. And then, we'll have a prorated portion of the PCC contract through February 21 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.

Speaker 3

Hey, Scott. This is Mark. Just a 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.

Speaker 3

So, anyways, we can get into more details offline, but

Speaker 2

I would not assume that straight line through 2025.

Speaker 3

Yes. 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.

Speaker 5

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 twenty twenty three, could you give us an update on how that's being marketed right now? What purposes you're looking at for that?

Speaker 5

Thanks.

Speaker 1

Yes. 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.

Speaker 1

While we recently lost a major contract in this segment, I'll tell you, we've never in my thirty year career had this many real opportunities in front of us. 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 a few thousand beds. We are actively quoting and have quoted many different opportunities ranging in size from two fifty 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 in a three to five year term very similar to our the recent Dilley award.

Speaker 1

We've voted 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, 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 bids, Some are in request for information, the RFI stage for the government. And as mentioned earlier, dealings already been awarded. So, they are becoming more active in awarding projects, right?

Speaker 1

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 said 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.

Speaker 1

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 pulled 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.

Speaker 5

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

Speaker 1

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. Very strong interest around these assets. That facility checks a lot of boxes for the administration when it comes to again their mission around immigration.

Speaker 1

Speed and availability, location, past performance, the acceptance of the local community, where we've operated for more than ten years. So, lots of, I would tell you, easy buttons here for them to put this back into their portfolio and increase beds pretty quick, right? So, we feel good about where that's headed.

Speaker 5

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.

Speaker 5

How much did you draw on the revolving credit facility at 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, how should we see you all be 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.

Speaker 3

Yes, no problem. So, 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 $15,000,000 of the ABL draw was used to pay down the notes. So, to your point, we had an abundance of cash. As you know, at the end of Q4, we had 191,000,000 as announced this morning.

Speaker 3

And so, there was a little some additional draw as well just for working capital requirements, but relatively minimal. So, the balance sheet is in great shape. We feel really good about that virtually debt free since we got since we went public and we've got an additional $19,500,000 of excess free cash flow 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.

Speaker 3

But to the extent that some of them do require CapEx, that's where we're going to put our

Speaker 1

capital.

Operator

Your next question comes from the line of Greg Rivas with Northland Securities. Please go ahead.

Speaker 6

Great. Good morning, Brad and Jason. Thanks for taking the questions. Wanted to follow-up, I guess, on that last one too regarding just liquidity post redemption. Do you expect that $15,000,000 or so drawn on the revolver to, I guess, be enough to kind of bridge the gap on liquidity?

Speaker 6

And 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 $19,000,000 of interest savings?

Speaker 3

Yes, right. So, free cash flow is expected to be positive. I would say our CapEx spend is projected to be lower than last year, will depend on the opportunities, right? But at this point in time, we had reported $32,500,000 or so of CapEx for last year. We expect it to be lower than that.

Speaker 3

So, I would say you're going to anticipate free cash flow, lower CapEx this year, unless we get an opportunity where we feel like it's a good enough one with accretive economics to go ahead and invest in. But, I would expect CapEx to be lower than it was last year. And then, what was your other question?

Speaker 6

I guess, it was just expectations for do you expect to draw any more on the revolver or are you kind of, I guess assuming kind of no changes, right? Like, I would anticipate

Speaker 3

a short term carrying balance on the revolver of around $40,000,000 to $50,000,000 That includes the $15,000,000 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 $40,000,000 to $50,000,000 of an outstanding average balance on the ABL. Perfect. That's what I was trying to

Speaker 6

get to. Great. Thanks very much. And if I could follow-up on the Westech set as our PCC. Given you're seeing a lot of opportunities there, great to hear and it does make sense that you're kind of not closing down the facility completely.

Speaker 6

But would you expect much in terms of modifications that would be needed to be made to those assets based on maybe those opportunities that you're seeing? You mentioned that some getting closer. I was just wondering if you had visibility on kind of what changes need to be made there? And do you expect there like something to be announced to be dependent on funding, like government funding in a way?

Speaker 1

I'll just touch on capital to get that project back open, right? Very little to none, right? I mean, that is that project is in 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.

Speaker 1

So, again, just don't see really a capital expense on those projects, the West Texas assets.

Speaker 6

Got it. And I guess lastly, you kind of mentioned expectations for Q1. Wanted to kind of get your thoughts on the core HFS business, so maybe ex LAC expectations for the full year that are maybe implied in guidance?

Speaker 3

What was that again?

Speaker 6

Just kind of the energy side of the business. So, excluding the work

Speaker 3

Yes, I would say HFS.

Speaker 1

Yes, the HFS business

Speaker 3

would be relatively similar to last year.

Speaker 1

Yes.

Operator

And we do have a follow-up question coming from the line of Stephen Gengaro with Stifel. Please go ahead.

Speaker 4

Thank you. Actually a follow-up on the question that was just asked on HFS. 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 know you kind of said flattish year over year.

Speaker 4

Is most of that sort of behind contracts with some of your larger customers? Or is that sort of an expectation off of your read on activity levels?

Speaker 3

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

Speaker 5

And

Operator

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

Speaker 1

Yes. 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.

Operator

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

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