Target Hospitality Corp. (NASDAQ:TH) Q4 2023 Earnings Call Transcript
Target Hospitality Corp. (NASDAQ:TH) Q4 2023 Earnings Call Transcript March 13, 2024
Target Hospitality Corp. beats earnings expectations. Reported EPS is $0.29, expectations were $0.24. TH 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 Year-end 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation we will conduct the question and answer session. [Operator Instructions] This call is being recorded on Wednesday, March 13, 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 fourth quarter and full year 2023 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. This call will contain time-sensitive information as well as forward-looking statements, which are only accurate as of today, March 13, 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. 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 strong 2023 results continue to illustrate the benefits of our strategic accomplishments over the last several years. These accomplishments have supported an enhanced operating platform, which allows us to efficiently align network capabilities with changes in customer demand while consistently achieving our financial goals. This efficient operating structure and network scale allows us to provide our world-class customers with the premium service offerings they demand, while simultaneously continuing to pursue strategic growth opportunities. The scale and flexibility enable Target to quickly respond to a strategic growth initiative, which ultimately resulted in a materially expanded presence, providing critical humanitarian solutions to the U.S. government.
We continue to benefit from this expanded presence with 72% of 2023 revenue being derived from committed contracts backed by the U.S. government. This benefit is illustrated in the success of our PCC community, which is entering its fourth year of operations as an established component of the U.S. government's domestic humanitarian aid mission. It is important to remember that since 2021, this facility has evolved through multiple contract renewals and community expansions to be the longest serving influx care facility in the United States. Additionally, as the government sought to ensure the longevity of this critical solution, they initiated a comprehensive and competitive bidding process, which took nearly a year to complete. This process was conducted under an indefinite delivery, indefinite quantity or IDIQ contracting vehicle.
The IDIQ allows the government to appropriately establish a required funding vehicle to support long-term contracts and ensure continuity of a central multiyear service offerings. As we announced in December of last year, Target and our nonprofit partner were successfully awarded this multiyear IDIQ contract. The successful outcome of this competitive process coupled with Target's long-standing reputation as a proven provider of these critical humanitary solutions to the U.S. government, supports our belief that the PCC community is well positioned to remain a critical component of the government's influx care facility solutions through 2028 and beyond. Further, Target remains actively engaged and continues to build strategic partnerships to jointly pursue the creation of new ICF sites, not currently in the government's portfolio.
In addition, our South Texas Family Residential Center is entering its tenth year of operations, a testament to the operational success of that community. The longevity of these established communities and critical solutions they provide will continue to support a high degree of revenue visibility and strong cash generation for years to come. Regarding our HFS segment, we continue to benefit from strong customer demand, which supported select asset acquisitions in 2023. This demand illustrates the value our world-class customers find in the premium hospitality solutions we provide. Coupled with continued operational efficiency gains, we anticipate positive momentum across this segment over the coming quarters. These elements continue to support impressive operating income and industry-leading cash conversion, which has allowed us to achieve several strategic balance sheet objectives last year and established a highly flexible capital structure.
We believe this is the ideal position to continue evaluating a robust pipeline of value-enhancing growth initiatives. As we continue to pursue unique organic and inorganic opportunities, these initiatives remain centered on elements of our existing core competencies. We believe these naturally adjacent opportunities will complement our existing service offerings, while establishing multiple avenues to expand Target's long-term growth opportunity set. As we evaluate these initiatives, we remain committed to achieving defined objectives of our growth strategy. Our primary objective is to focus 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 remain focused on sustaining the momentum we have created over the past several years. We have established a strong financial and operating platform to continue supporting our world-class customers, while simultaneously pursuing the most robust growth pipeline we have seen in many years. I'll now turn the call over to Jason to discuss our fourth quarter financial results, recent balance sheet initiatives and expanding capital allocation and growth opportunities in more detail.
Jason Vlacich: Thank you, Brad. In the fourth quarter, we continued to benefit from our efficient operating platform and network scale, which allows us to seamlessly align with customer demand while consistently delivering strong financial results. Fourth quarter 2023 total revenue was $126 million, and adjusted EBITDA was $68 million. Our Government segment produced quarterly revenue of approximately $88 million. The sequential decrease in revenue was primarily driven by 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. As a reminder, this segment's revenue is centered around committed minimum revenue contracts backed by the U.S. government.
These contracts inclusive of our new PCC contract, which we announced in December of last year, provides significant long-term revenue and cash flow visibility. Our HFS and other segments delivered quarterly revenue of $39 million compared to $37 million in the same period last year. This increase was driven by sustained momentum in customer demand for Target's premium service offerings, which supported select asset acquisitions in 2023, further illustrating the value our customers find in our premier network flexibility and 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 $5 million, with the majority related to enhancing assets focused on supporting the government's humanitarian aid mission.
During the fourth quarter, we took deliberate steps to further strengthen our financial position, including the expansion of our credit facility and successful completion of the senior note exchange. These actions significantly increased our liquidity profile while simultaneously extending our senior note maturity time line, which now extends to 2025. We ended the quarter with $104 million in cash, $275 million of liquidity with 0 borrowings under our company's $175 million revolving credit facility and a net leverage ratio of 0.2x. These impressive financial results illustrate the strength of our operating platform and the sustained positive momentum we have created over the last several years. This optimized financial position supports our preliminary 2024 financial outlook, which consists of total revenue of between $410 million and $425 million and adjusted EBITDA between $195 million and $210 million.
Excluding potential acquisitions, we anticipate capital expenditures of between $25 million and $30 million. Moving on to our capital allocation initiatives and continued focus on strategic growth opportunities. The strength of our balance sheet, high degree of revenue visibility and continued strong cash conversion provides the ability to simultaneously consider multiple value-enhancing capital allocation initiatives. Included in these initiatives is our previously announced $100 million share repurchase program, which allows the company to evaluate a holistic opportunity set focused on maximizing value creation through all available means. This focus supported our decision to execute a series of share repurchases beginning in January of this year.
As a result, through March 8, 2024, we have returned approximately $18 million to our shareholders by repurchasing 1.9 million shares of common stock. This illustrates our focus on utilizing a broad range of initiatives to pursue value-enhancing opportunities for our shareholders. In addition, we continue to actively evaluate and pursue an expanding pipeline of strategic growth initiatives, including both organic and inorganic opportunities. 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 contract and service offering portfolio through individual elements of our existing core competencies.
We are focused on establishing a platform to continue diversifying our revenue streams, while simultaneously creating repeatable growth vectors to continue expanding our customer base and service offerings. We view these opportunities as a seamless extension of our existing portfolio, providing greater confidence in consistently achieving our desired returns. As previously stated, Target is prepared to allocate over $500 million of net growth capital to these high-return opportunities over the next several years. Importantly, as we evaluate these initiatives, we will remain focused on ensuring these opportunities to meet our return criteria, including maintaining a high level of continued discretionary cash flow conversion. We are pleased with the breadth of these opportunities and look forward to providing additional updates in the coming quarters as these initiatives continue progressing.
With that, I'll turn the call back over to Brad for closing comments.
Brad Archer: Thanks, Jason. Our impressive 2023 results are a testament to the operational efficiencies and scale we have created, which has enabled us to consistently exceed our financial goals and continue to strengthen our financial position. Over the past 3 years, we have taken deliberate actions to diversify the business, while strategically positioning the company to pursue value-enhancing growth opportunities. We have significantly high-graded our contract structure and materially enhanced our long-term revenue visibility while prudently strengthening our balance sheet. These accomplishments have optimized our financial position and established a highly flexible capital structure. With this foundation, we are evaluating and pursuing the strongest pipeline of growth opportunities we have seen in many years.
We are excited about the future and believe the foundation we have established supports our capital allocation initiatives focused on continuing to create value for our shareholders. I appreciate everyone joining us on the call today, and thank you again for your interest in Target Hospitality. I will now turn the call back over to the operator.
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