Target Hospitality Corp. (NASDAQ:TH) Q1 2024 Earnings Call Transcript May 8, 2024
Target Hospitality Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Target Hospitality First Quarter 2024 Earnings Call Conference Call. At this time, all lines are in a listen-only mode. Follow the presentation we will conduct the question and answer session. [Operator Instructions] This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Mr. Mark Schuck. Please go ahead.
Mark Schuck: Thank you. Good morning, everyone, and welcome to Target Hospitality’s first quarter 2024 earnings call. The press release we issued this morning outlining our first quarter 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. This call will contain time-sensitive information as well as forward-looking statements, which are only accurate as of today, May 8, 2024. Target Hospitality expressly disclaims any obligation to update or amend the information contained in this conference call to reflect events or circumstances that may arise after today’s date, except as required by applicable law.
For a complete list of risks and uncertainties that may affect future performance, please refer to Target Hospitality’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. Finally, as previously announced on March 25, 2024, Arrow Holdings, an affiliate of TDR Capital,, proposed to acquire all outstanding shares of common stock of Target hospitality, it or affiliates do not already own. The Board of Directors of Target Hospitality has established a special committee of independent directors to evaluate this proposal.
The special committee has retained their own independent outside financial and legal advisers, and collectively, they have commenced their review and evaluation of the proposal. At this time, the Special Committee has made no decision with respect to the proposal. As a result, management will be unable to comment on the proposal or the evaluation process during today’s call. Leading the call today will be Brad Archer, President and Chief Executive Officer; followed by Jason Vlacich, 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.
Brad Archer: Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. Our impressive first quarter performance reflects the benefits of our network capabilities, which allow us to maximize operational efficiencies while simultaneously providing world-class solutions to our customers. The scale and flexibility of our efficient operating structure continues to support seamless alignment with changes in customer demand, allowing us to preserve strong operating margins through cycles. These attributes have significantly enhanced our financial position and materially strengthened our balance sheet, supporting a highly durable and flexible operating model. In the government segment, these elements have supported the longevity of our PCC community, which has entered its fourth year of operations and is the longest operating influx care facility in the United States.
Since its inception in 2021, this community has served approximately 2 million mills to unaccompanied children cornerstone to the government’s influx care facility network. This established presence supports Target’s continued engagement with the U.S. government and other strategic partners to jointly pursue the creation of a third ICF site, not currently in the government’s portfolio. We remain actively engaged and are pleased with continued dialogue regarding this opportunity. As we have previously stated, we anticipate additional details regarding the third ICF site in the back half of 2024. In addition, our South Texas Family Residential Center is entering its 10th year of operations, a testament to the operational success of that community.
This community has evolved through multiple contract renewals across 3 different federal administrations, exemplifying its importance as a critical humanitarian solution for the U.S. government. Regarding our HFS segment, we continue to benefit from strong customer demand, which has supported positive momentum over the past year. This demand illustrates the value of our world-class customers find in the network flexibility and premium hospitality solutions we provide. We have taken deliberate steps to enhance operational efficiencies across this segment, and we’ll continue to evaluate opportunities to optimize margin contribution through enhanced network optimization. Our ability to utilize the scale of our network to seamlessly align with changes in customer demand has consistently supported strong financial results.
This focus has materially strengthened our financial position and established a robust balance sheet with significant liquidity. These elements continue to support impressive operating income and industry-leading cash conversion, which establishes the ideal position to continue evaluating a pipeline of growth initiatives. We believe these naturally adjacent opportunities will complement our existing service offer, while establishing multiple avenues to expand Target’s long-term growth opportunity set. In addition to the third ICF, we remain engaged with multiple federal agencies on a variety of solutions they are seeking to implement pertaining to increased activity along the U.S. Southern border. Further, we continue to actively pursue a robust pipeline of nongovernment growth initiatives.
As we have previously discussed, these opportunities include large industrial projects throughout the U.S., including technology infrastructure, energy transition and the increase in domestic rare-earth development. As a reminder, these growth opportunities tend to have longer sales cycles. While we are pleased with the active dialogue and progress of discussions, the timing and final outcomes are uncertain and can be difficult to predict. As we evaluate these initiatives, we remain committed to achieving defined objectives of our growth strategy. Our primary objective is focused on diversifying our customer base and contract portfolio, which we believe is essential in broadening our long-term growth pipeline. By accomplishing this, we will establish a foundation to identify and consistently execute repeatable growth opportunities, while remaining focused on generating strong operating income and industry-leading cash conversion.
In summary, we have established an enhanced financial position centered on the strength of our balance sheet and an efficient operating structure. These elements support our ability to provide a premier service offering to our customers, while simultaneously delivering strong financial results and pursuing attractive growth opportunities. I’ll now turn the call over to Jason to discuss our first quarter financial results in more detail.
Jason Vlacich: Thank you, Brad. In the first quarter, our enhanced operating platform continued to support operational efficiencies across our network, allowing us to produce strong financial results driven by the strength in our core service offering. First quarter 2024 total revenue was approximately $107 million, and adjusted EBITDA was approximately $54 million. Our Government segment produced quarterly revenue of approximately $68 million. The decrease in revenue from the prior period was driven by the noncash, nonrecurring infrastructure enhancement revenue associated with the significant expansion that occurred at our PCC community in 2022, which was fully amortized as of November 2023. Our HFS and all other segments delivered quarterly revenue of $39 million compared to $38 million in the same period last year.
This increase was driven by sustained momentum in customer demand for Target’s premium service offerings, illustrating the value our customers find in our premier hospitality solutions. Recurring corporate expenses for the quarter were approximately $10 million, and we anticipate these will remain around $9 million to $10 million per quarter for the remainder of the year. Total capital spending for the quarter was approximately $10 million, with the majority focused on enhancing operational efficiencies through the purchase of previously leased equipment. The strength in our core service offering continues to support strong cash generation and an enhanced financial profile. We ended the quarter with $124 million in cash and $299 million of liquidity with zero borrowings under the company’s $175 million revolving credit facility and a net leverage ratio of 0.2 times.
These impressive financial results illustrate the strength of our operating platform and the sustained momentum we have created over the last several years. These elements support our reiterated preliminary 2024 financial outlook, which consists of total revenue of between $410 million and $425 million and adjusted EBITDA of between $195 million and $210 million, with anticipated 2024 capital expenditures of between $25 million and $30 million. Regarding our revenue and adjusted EBITDA ranges. As a reminder, there is minimal PCC variable revenue contemplated at the low end of our outlook ranges, and this revenue contribution was materially achieved during the first quarter of 2024. However, it’s important to remember that PCC variable revenue contributions will inherently be uneven over the balance of the year.
Any additional 2024 PCC variable revenue contribution will likely occur in the back half of the year. This enhanced financial profile supported our ability to return approximately $21 million to our shareholders by repurchasing approximately 2.3 million shares of common stock during the 3 months ended March 31, 2024. In addition, the strength of our balance sheet, high degree of revenue visibility and continued strong cash conversion provides the ability to continue actively evaluating and pursuing a strong pipeline of organic growth initiatives. These opportunities are designed to jointly leverage Target’s operating expertise and existing core competencies to establish a robust service offering across various U.S. government agencies and commercial applications.
These initiatives encompass Target’s existing full turnkey hospitality solutions while also focusing on opportunities to broaden Target’s customer base and service offering portfolio. We are focused on establishing a platform to continue diversifying our revenue streams while simultaneously creating repeatable growth vectors. As previously stated, Target is seeking to allocate over $500 million of net growth capital to these opportunities over the next several years. Importantly, as we evaluate these initiatives, we will remain focused on maintaining the enhanced financial profile we have achieved through disciplined capital allocation and strong discretionary cash flow conversion. With that, I will turn the call back over to Brad for closing comments.
Brad Archer: Thanks, Jason. Our strong first quarter results continue to illustrate the benefits of our enhanced operating platform. The network scale and flexibility we have established allow us to deliver a premium service offering to our customers, while simultaneously supporting strong financial results. This consistent execution is reflected in the strength of our balance sheet and enhanced financial position. With this foundation, we are continuing to evaluate and pursue the strongest pipeline of growth opportunities we have seen in many years and remain focused on expanding and diversifying our service offering. I appreciate everyone joining us on the call today, and thank you again for your interest in Target Hospitality.
Operator: [Operator Instructions] Your first question comes from Scott Schneeberger from Oppenheimer. Please ask your question.
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