Earnings Call Transcript - TH Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Target Hospitality First Quarter 2025 Earnings Call Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Monday, May 19, 2025. I would now like to turn the conference over to Mark Schuck. Please go ahead, sir.

Mark Schuck, Investor Relations

Thank you. Good morning, everyone, and welcome to Target Hospitality's first quarter 2025 earnings call. The press release we issued this morning outlining our first quarter 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, May 19th, 2025. 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 the 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 would now like to turn the call over to our Chief Executive Officer, Brad Archer.

Brad Archer, CEO

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. We delivered strong first quarter results centered on the strength of our business fundamentals and proven capabilities. These elements illustrate the benefits of Target's efficient and durable operating model, supporting our ability to successfully navigate a variety of economic environments. During the first quarter, we announced two multi-year contracts, which are expected to generate over $380 million in revenue over the coming years. These contracts illustrate our unique ability to support a range of critical domestic initiatives, spanning both commercial and government end markets. We are well positioned with strong momentum as we continue evaluating and pursuing the most active and robust growth pipeline we have had in many years. We are excited about this opportunity set and focused on accelerating our strategic growth initiatives. Now turning to our segments and growth pipeline. Our HFS segment continues to benefit from consistent demand where our world-class customers find added value in the unmatched solutions our network provides. These capabilities support Target's longstanding customer relationship, some for over a decade, and a consistent 90% renewal rate since 2015. This consistency illustrates the value proposition of our network and ability to appropriately match customer demand through a variety of economic cycles. These characteristics support a well-optimized network and enhance revenue cash flow visibility. The workforce hub contract which we announced in February continues to progress in line with expectations. This expansion and diversification further illustrate our ability to utilize our distinct core competencies to advance our strategic growth initiatives. Our ability to provide customized solutions across industries highlights to reach of our capabilities as we continue evaluating a strong commercial growth pipeline. This pipeline is predominantly centered around large capital investments focused on modernizing critical domestic infrastructure and advancing 21st-century technologies. As this potential historic capital investment cycle takes shape, we have seen growing demand for hospitality solutions to support the significant workforce requirement associated with these initiatives. These opportunities include large industrial projects throughout the US, including technology infrastructure, increased domestic critical mineral development, and other related large capital investment programs. As a reminder, the size and scale of these growth opportunities inherently leads to longer sales cycles. However, we are encouraged by the pace of active conversations and progress on certain initiatives. We believe these commercial growth opportunities provide meaningful long-term growth potential and are an important element of Target's strategic growth and diversification strategy. Moving to the government segment, our government segment experienced a transition as we moved into 2025. However, amidst evolving policy initiatives, Target has illustrated its ability to provide unmatched solutions, supporting a range of critical US Government initiatives. This execution underpins our ability to actively pursue a significant growth opportunity set supporting the current administration's immigration initiatives. The reactivation of our Dilley, Texas, facility is progressing, and the community was able to receive an active population ahead of schedule. Our decision to maintain this community in a ready state was critical to the contract award and our ability, along with our partner, to quickly facilitate the community reopening. Regarding our West Texas assets, we are encouraged by the continued interest from the US Government in utilizing this readily accessible community. We have conducted numerous site visits and tours of the facility with positive feedback indicating this community's ability to serve the current administration's policy objectives. Further, the substance of our conversations has indicated the US Government's desire to utilize this facility consistent with its current layout, minimizing the need for additional capital investment. However, timing remains uncertain as there are likely administrative steps required, including securing necessary funding prior to potential contract award. While we are actively remarketing our West Texas assets, we are simultaneously evaluating multiple opportunities to support immigration initiatives beyond Target's existing asset portfolio and available beds. Given the scope of executive orders and resources required to adequately implement the government's current immigration policies, there is a significant demand for solutions aligned with Target's core competence. We are taking intentional steps to demonstrate Target's capabilities and believe there are multiple avenues to support these critical policy initiatives. Further, our strong operational reputation and partnerships with industry-leading companies uniquely position Target to participate in many of these mission-critical solutions. In summary, the strength of our existing customer base, network capabilities and proven operational flexibility support a resilient business model. This foundation supports our continued focus on pursuing strategic growth initiatives aimed at expanding and diversifying Target's contract portfolio across end markets. I'll now turn the call over to Jason to discuss our financial results in more detail.

Jason Vlacich, CFO

Thank you, Brad. First quarter total revenue was approximately $70 million with adjusted EBITDA of approximately $22 million. Our government segment produced quarterly revenue of approximately $26 million. The decrease from prior year was primarily driven by the termination of the PCC contract effective February 21st, 2025, and partially by the termination of the South Texas Family Residential Center contract on August 9th, 2024. These declines were modestly offset by the reactivation of our Dilley, Texas, assets and the Dilley contract award effective March 5th, 2025. As a reminder, this contract is based on fixed monthly revenue regardless of occupancy, and is expected to generate approximately $30 million of revenue in 2025 with over $246 million of revenue over its anticipated five-year term. However, as the community progressively reopens, 2025 monthly revenue contributions will correlate with the reactivation of each neighborhood within the facility. Further, this space reopening will result in lower margin contribution through the second and third quarter of 2025, prior to full reactivation. We anticipate the community will be fully activated by September of 2025, at which point we will realize revenue and margin contribution commensurate with the entire 2,400-bed community. Regarding our West Texas assets, as a reminder, we have decided to maintain these assets in a ready state as we actively remarket them. This decision, which is similar to the approach we took regarding our Dilley assets, will result in carrying costs prior to potential new contract award of approximately $2 million to $3 million per quarter. Turning to our HFS and all other segments. Our HFS and all other segments delivered quarterly revenue of approximately $44 million. These segments continue to experience consistent customer demand, illustrating the value our customers find in our premium service offering and network capabilities. We have benefited from a more fully optimized HFS South segment, which continues to perform in line with our expectations in a competitive market. We're pleased with the Workforce Hospitality Solutions segment, which includes our recently announced Workforce Hub contract. Construction activity associated with the Workforce Hub contract is pacing on schedule and generated approximately $5 million of revenue in the first quarter. We anticipate that the majority of the construction revenue will be realized in the second and third quarter of 2025, with completion in the fourth quarter of 2025. As a reminder, this contract also provides for services revenue, which will support the premium Workforce Hub with comprehensive hospitality solutions through 2027. The contract exemplifies the benefits of our full-service capabilities and establishes a long-term revenue stream. Recurring corporate expenses for the quarter were approximately $10 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 $21 million, including approximately $16 million of growth capital to expand strategic network capacity and support the Workforce Hub contract. As we previously announced on March 25th, 2025, we redeemed all outstanding Senior Notes due in June of 2025 at a redemption price of 101% of par, resulting in an expected annual interest savings of over $19 million. Our decision to redeem the 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. We ended the quarter with $35 million in cash and $169 million in total liquidity, with $41 million of borrowings under the company's $175 million revolving credit facility and a net leverage ratio of 0.1 times. We will continue to prudently manage the capital structure and look for opportunities to further reduce outstanding borrowings as we progress through 2025. Target's strong business fundamentals have established a flexible and durable operating model. These elements support the company's reiterated 2025 financial outlook, which consists of total revenue of between $265 million and $285 million and adjusted EBITDA of between $47 million and $57 million. Target is well positioned with a flexible operating model and optimized balance sheet as we continue evaluating a robust growth pipeline, which we believe provides the greatest opportunity to accelerate value creation for our shareholders. While we continue to thoughtfully evaluate a holistic set of capital allocation initiatives, our primary focus is growing and diversifying Target's contract portfolio. As we focus on strategic growth initiatives, we believe it is prudent to maintain the financial flexibility we have established to quickly react to value-enhancing opportunities as they arise. Importantly, as we evaluate these opportunities, we will remain focused on maintaining the strong financial profile we have established while optimizing margin contribution through our efficient operating structure. With that, I will turn the call back over to Brad for closing comments.

Brad Archer, CEO

Thanks, Jason. Our first quarter results were supported by strong business fundamentals and continued momentum across our operating segments. We are focused on sustaining this momentum as we evaluate one of the strongest growth pipelines we have had in many years. The breadth of these opportunities spans both commercial and government end market, underpinned by strong secular tailwinds promoting significant domestic capital investments and national security initiatives. The growth opportunities are robust, extended beyond our existing asset portfolio and across multiple end markets. We are excited about these opportunities and believe Target's capabilities and proven reputation uniquely position the company as we actively pursue these strategic growth initiatives. We remain focused on enhancing Target's business mix and contract portfolio, which we believe will accelerate value creation for our shareholders. I appreciate everyone joining us on the call today, and thank you again for your interest in Target Hospitality. Would now like to open the call for questions.

Operator, Operator

Your first question comes from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro, Analyst

Thanks. Good morning, everybody.

Brad Archer, CEO

Good morning.

Stephen Gengaro, Analyst

There are two points I want to address. The first concerns the potential opportunities related to idle assets on the government side. Can you provide any additional details about the discussions you are having, the possibilities for utilizing those assets, and any relevant data points or factors driving demand? I'm looking for a better understanding, even if you can't share specifics about timing or financial aspects. Any further insights would be appreciated.

Brad Archer, CEO

Yeah. Stephen, this is Brad. Good morning. Let me just kind of give you a high-level on some of the things that happened since our last call, and I would address kind of the government segment as a whole, but specifically starting on the West Texas assets. We continue to have strong interest, as we said before, high-level conversations with the government and our partners. Since our last quarterly call, we've led several tours of the facility, which really increased the excitement around this asset. As we said before, and this hasn't changed, the government fully intends to increase their bed capacity by approximately 100,000 beds. And the West Texas facility, it's ready for immediate occupancy, giving them kind of, what I've said before, is an easy button, right for once funding is in place. And at this point, that is kind of the waiting game, right? Once funding gets in place, the budget is approved. But from all conversations we've had, we believe this facility is part of the government's acquisition plan, and we've been told that through the conversation. So we feel good about this facility and what happens to it in the future. What I would say, and as a reminder, I know there's a lot of focus always on the West Texas assets, and rightfully so, but what really gets us excited is all the other potential for more beds, more opportunities to service the government from the DoD side to the DHS side to other folks within the DHS community, we're seeing more and more every week that is hitting our pipeline. So, in summary, I would just say, look, the opportunity set is strong, Target's strong operational reputation, it positions us well to get some of this business in the future. We put ourselves in a really good position to grow this segment, now we need to execute, and I believe we will.

Stephen Gengaro, Analyst

Got it. Okay, great. No, that's helpful. And the other question I just had was about the contract you have regarding lithium and how we should consider what is currently contracted, what that means for contributions this year and next, and how we envision the potential for growth in 2026 and beyond.

Jason Vlacich, CFO

Yeah, this is Jason. So, in terms of the workforce subcontract, this year, the majority of the revenue generated is going to be from the construction activities, which we expect to wrap up this year in Q4. We think the majority of that activity is going to occur in Q2, and with the majority in Q3, and a wrap-up in Q4, that's going to contribute about $65 million of revenue for the year on the construction piece with an estimated margin of between 25% and 30%. After that, that's when the services part kind of more fully kicks in through 2027. So that's the balance of that $140 million revenue contract will be attributable to services. And then on the lithium project as a whole, there's a potential for multiple phases, which we're well positioned to participate in beyond 2027. These phases can go all the way through 2040.

Brad Archer, CEO

Yeah, that's why we really like this project, right? We like it for the first phase, but we really like it for multiple phases that they publicly have been talking about. Look, as we know, GM has taken all the capacity on the first phase, a big portion already on the second phase, so they're set up pretty well to continue to extend it. Again, we need to continue to perform. So, where there is a service provider in the second and the third phase on this, and we believe we will. So I look at that as the upside of this, just the longevity of the project itself.

Stephen Gengaro, Analyst

Great. No, thanks for the details, gentlemen. That's great.

Operator, Operator

Thank you. Next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Scott Schneeberger, Analyst

Thank you very much. Good morning. I want to follow up on the theme of new opportunities. Brad, you did an excellent job outlining what has happened since our last call concerning West Texas. Could you elaborate on the government opportunity as a whole? I thought I heard in your prepared remarks something about considering things you may not already own. In your response, could you discuss potential M&A or new asset considerations you might pursue? Then, on the non-government side, I would appreciate your insights on the current landscape and developments taking place. Thank you.

Brad Archer, CEO

Let me start by discussing the non-government aspects. Outside of the government pipeline, we are seeing strong bidding activity in large domestic infrastructure projects like mining, power, and data centers. I want to focus on the data center industry specifically, where we are witnessing a significant increase in demand for our services across the US. I'm encouraged by the progress our business development team is achieving in this area. We have previously mentioned this, but we are making substantial headway on several projects. These projects typically have a build cycle of three to six years or more. There is a tremendous influx of capital in this industry, and our services are essential for many of these initiatives that we are involved in. There is considerable enthusiasm within our team regarding the data center movement, especially since our last call, as we continue to make progress on these projects. Overall, aside from data centers, our pipeline is the strongest it has ever been. What is particularly promising is that some of these data center projects are approved and ready to go, with capital available and being utilized now. This position places us in a favorable spot to execute effectively, and it is crucial that we follow through on these opportunities.

Jason Vlacich, CFO

On the government side, I want to mention that many of the opportunities we are considering do not require substantial capital investment, particularly regarding the West Texas assets. Based on our discussions and facility tours, the layout seems to align well with the government's needs as it stands. Therefore, we do not expect significant capital investment for these immediate government opportunities. However, if there are any capital deployment requirements, we will evaluate them, especially if they are beneficial, and often these will be incorporated into the financials regarding reimbursement. On the inorganic front, this continues to be a key aspect of our diversification strategy, which I see as more applicable in the medium and long term. In the short term, our focus remains on organic growth.

Brad Archer, CEO

Just one comment on the government side is that there is no doubt the amount of rooms we have available compared to what the government needs, if we're fortunate enough to win that much, would require us to invest some capital. It would be structured in a way where we’re not stuck with that capital. We’re going to bid it into the job and get that capital back. There will be guarantees if there's early termination and those types of things. So we will structure it so that Target is protected as we always have in the past.

Scott Schneeberger, Analyst

Very good. Got it. Thanks, guys. Nice color. For a follow-up, I guess, Jason, probably more for you. In HFS, just curious if you could address trends in ADR, what you anticipate over the balance of the year and going forward, it's kind of a higher level of just what you anticipate from demand, and then obviously how that's being priced? Thanks.

Jason Vlacich, CFO

Yeah. So we always balance network optimization with ADR and utilization. The utilization, you can see, is slightly up from prior year. ADR is down. It's a bit competitive market, but nothing structurally has changed with respect to the segment. I would anticipate the remaining quarters to look somewhat similar to Q1.

Scott Schneeberger, Analyst

Great. Thanks, guys. I'll turn over.

Operator, Operator

Thank you. The next question comes from Greg Gibas with Northland Securities. Please go ahead.

Greg Gibas, Analyst

Great. Hey, good morning, Brad, Jason, thanks for taking the questions. Congrats on the results.

Brad Archer, CEO

Thank you.

Greg Gibas, Analyst

A follow-up on kind of the Workforce Hub contract, excuse me. Construction ramping in Q2 and Q3, completion in Q4. Wondering if you could just give us a sense of kind of the financial cadence for the remainder of the year, as kind of daily ramp is another factor as well?

Jason Vlacich, CFO

Yeah, I guess the best way to put it is, the majority of that activity is going to be in Q3. Q2 will be slightly below Q3. We had a minimal contribution of $5 million of revenue in Q1. It's probably less than 10% complete at that point. And then, Q4 will be sort of more minimal wrap-up activity. On the Dilley ramp-up, the margins are going to be bottomed out in Q2 as we ramp-up. It has an accelerated revenue rent schedule as we move through the first six months of the contract as neighborhoods open in phases, and so there's a natural sort of front loading of expenses as we have to meet certain phased milestones for the reopening. But we expect the full economics on that to begin in September. The full economics is associated with the full 2,400 beds, that's how the contract is structured. And Q4 will likely be the best quarter from a run rate standpoint on that contract going forward.

Greg Gibas, Analyst

That's very helpful. I’d like to follow up on your earlier comments in this call. Could you provide an example or some ideas about the opportunities to help the government with immigration policy, beyond just existing assets like idle facilities? Are you suggesting that these would probably require an asset purchase, or are there other opportunities as well? I wanted to understand what those might be.

Brad Archer, CEO

Sure. We will first focus on utilizing our existing resources. If we find ourselves with more demand than what we can currently provide, we will consider purchasing additional resources from the market or building new facilities. This approach mirrors how we have successfully managed our operations in the past. We will prioritize using what we already own and have available before exploring options in the market or constructing new facilities.

Greg Gibas, Analyst

Makes sense. Thank you.

Operator, Operator

Thank you. The next question, we have a follow-up question from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro, Analyst

Thanks. Thanks for taking the follow-up. Just as a kind of a curiosity, but trying to think about your network, your lodges that serve the oil patch right now, I know you kind of haven't maybe as cleanly differentiated as you used to, but are those assets like as part of the network that you have built to service to customers, are they basically like locked into that market at this point or could there be a scenario where you like you need that level of capacity and distribution across the basins or could those assets be repurposed?

Brad Archer, CEO

Look, we have repurposed in the past, and we would definitely do that in the future, right? We're going to look to see what's available, what rates are, so we have not a lot of excess capacity, but where we do to optimize that, we would definitely look at taking some of that and just throwing this out there, using it on a data center or using it on a mine somewhere. That is always how we look at that first. We want to be 100% maximized with our own equipment if we can, and then look outside if we need to buy something else, but all of our facilities can be used somewhere else, right, whether that's in the government, data center, mining, other, power projects, whatever.

Jason Vlacich, CFO

Yeah, we've done that historically, right? I mean, we built out the Government segment with HFS assets basically, that were underutilized, so we can quickly repurpose those assets. That's the benefit of having a flexible asset base.

Brad Archer, CEO

And look, to be clear, some of the bids in our pipeline, that's exactly how they're bid with, you know, taking some of our own equipment that's set up and using it somewhere else.

Stephen Gengaro, Analyst

As a follow-up, do you have a level of contractual commitment to your energy customers requiring you to maintain a certain amount of assets in specific basins over a set period? I'm trying to understand how flexible you are in this regard, or if you are restricted due to contractual obligations to keep a certain number of resources available across a wide area over time. I'm looking for a clearer understanding of this situation.

Brad Archer, CEO

We are fully dedicated to the Permian Basin for our oil and gas clients. Our extensive network there ensures we will not shut it down. We have significant contracts that we must continue to fulfill, which makes it a lucrative business. It does not require much capital, and our occupancy levels have remained stable. However, there is potential to enhance efficiency by adjusting our assets without negatively impacting our customer relationships.

Stephen Gengaro, Analyst

Great. That was what I was looking for, and I didn't ask the question as smoothly as I could have. Thank you.

Brad Archer, CEO

Yeah, no problem.

Operator, Operator

Thank you. There are no further questions at this time. I would now like to turn the call over to Brad Archer for closing remarks. Please go ahead.

Brad Archer, CEO

Thank you. Yeah, thanks to all of you who have joined the call today. And we look forward to speaking again on our second quarter call. And we appreciate your support of Target Hospitality.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.