Earnings Call Transcript - TH Q2 2025

Operator, Operator

Good morning, everyone, and welcome to the Target Hospitality Second Quarter 2025 Earnings Conference Call. This call is being recorded on Thursday, August 7, 2025. I will now hand the call over to Mr. Mark Schuck. Please proceed.

Mark Schuck, Director of Investor Relations

Thank you. Good morning, everyone, and welcome to Target Hospitality's Second Quarter 2025 Earnings Call. The press release we issued this morning, outlining our second 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, August 7, 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 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.

James Bradley Archer, CEO

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. We entered 2025 focused on accelerating our strategic growth initiatives and diversifying our contract portfolio. In the first half of this year, we announced two multiyear contracts valued at over $400 million, supporting a diverse range of customers. These contracts exemplify Target's unique value proposition and our ability to deliver tailored solutions and exceptional services across various end markets. Additionally, we are finalizing contract discussions regarding a multiyear lease and services agreement that supports the rapidly expanding technology infrastructure and data center end market. This agreement will further broaden our diverse end market reach and contract portfolio. These achievements have driven significant progress in advancing our growth initiatives, both within Target's existing markets and in developing new growth sectors. Moreover, these diverse markets all benefit from strong long-term growth trends, providing solid platforms to accelerate our strategic objectives. Our growth pipeline remains strong, supported by a historic domestic investment cycle and rising demand from the government sector. With these strong tailwinds, we continue to focus on maintaining this momentum and advancing our strategic initiatives. Turning to our segment and specific growth opportunities. Our HFS segment continues to benefit from consistent customer demand as clients value our premium service offerings and network capability. Target's ability to deliver these unmatched solutions is essential for maintaining long-term customer relationships and achieving consistent contract renewal rates exceeding 90%. These factors helped secure a recent multiyear contract extension with one of our largest HFS customers, highlighting a relationship that has lasted over 15 years. This proven operating model is central to Target's success and has served as the blueprint for potential new customers, demonstrating the benefits and unique value propositions of our vertically integrated accommodations platform. These distinctive capabilities supported the Workforce Hub Contract announced in February, along with recent contract modifications supporting community enhancements. The increased scope of the contract, which raises the total contract value to approximately $154 million, exemplifies Target's capacity to develop highly tailored solutions to meet specific customer needs. These enhancements underscore the importance of this community, and we see further opportunities for expanded contract scope and term extensions to support the development of this critical mineral supply chain. Target's bespoke solutions and unmatched capabilities in developing comprehensive remote workforce communities have supported the advanced contract discussions for our anticipated data center community. This contract further expands Target's end market reach and creates a new growth sector supporting the unprecedented growth in AI and data center construction. As we conclude contract discussions, we have started preliminary construction for this highly customized community and expect to share more details soon. This rapidly growing market is driven by historic domestic investment and long-term growth trends. Since January 2025, more than $1.2 trillion has been committed to developing and enhancing technology infrastructure to support artificial intelligence and data centers. The scale in remote locations of these projects generates significant demand for comprehensive workforce hospitality solutions. As demonstrated by these recent contracts and advanced discussions, Target's distinctive ability to deliver integrated solutions aligns perfectly with the needs of remote workforce communities. These factors have created one of the most significant commercial growth pipelines we've seen in years. Our reputation as the leading provider of remote hospitality solutions uniquely positions Target to support this rapidly expanding end market demand. We are excited about these growth opportunities, which we believe establish a vital long-term commercial vertical aligned with Target's strategic growth objectives. Now moving to the Government segment. The reactivation of our Dilley, Texas assets remains on schedule with community ramp-up expected to be completed in September. The successful reopening of this facility highlights the importance of our decision to keep this community prepared to reopen alongside our partner. Target's ability to quickly mobilize and respond to government demand has established a strong reputation for delivering unmatched solutions across various critical U.S. government immigration initiatives. These qualities form a solid foundation as Target continues to evaluate and pursue additional growth opportunities within the government sector. With the passage of the 2025 reconciliation bill in July, the U.S. government has allocated $45 billion towards specific border security initiatives, including expanding assets and bed capacity. These initiatives will require coordination among multiple federal agencies to identify the most effective ways to implement comprehensive operational solutions. Because of the broad scope of these efforts and the resources needed for proper execution, predicting the timing of a specific contract award is difficult. However, we are taking deliberate steps to demonstrate Target capabilities and believe there are multiple avenues to support these key policy initiatives. Regarding our West Texas assets, we remain encouraged by ongoing interest from the U.S. government in utilizing this readily accessible community. We have continued to host site visits with government officials and potential partners, receiving positive feedback. We remain confident in this community's ability to deliver a vital solution aligned with the government's policy objectives. While actively remarketing our West Texas assets, we are also exploring various strategies to develop innovative solutions that support immigration initiatives beyond Target's current asset portfolio and available beds. Recently, we developed and proposed proprietary solutions to help the government urgently expand critical immigration housing infrastructure. These tailored and highly customized solutions have generated strong interest from government agencies and potential partners. We are optimistic about leveraging these innovative solutions to support their policy objectives. In summary, the strength of our core accommodations platform and our distinctive capabilities have driven considerable progress towards key strategic goals. We are encouraged by the strongest growth pipeline we've seen in years, supported by an unprecedented domestic investment cycle and increasing demand within the government sector. We believe these opportunities offer multiple pathways to expand our business portfolio and continue advancing our strategic objectives. I'll now turn the call over to Jason to discuss our financial results in more detail.

Jason Paul Vlacich, CFO

Thank you, Brad. Second quarter total revenue was approximately $62 million, with adjusted EBITDA of approximately $4 million. Our Government segment generated quarterly revenue of approximately $7 million. The declines from the previous year were primarily driven by the termination of the PCC contract effective February 21, 2025, and partially by the termination of the South Texas Family Residential Center contract on August 9, 2024. These declines were modestly offset by the reactivation of our Dilley, Texas assets effective March 5, 2025. As a reminder, this contract is based on fixed monthly revenue regardless of occupancy. It is expected to produce approximately $30 million in revenue in 2025, with over $246 million over its expected 5-year term. However, as the community progressively reopens, 2025 monthly revenue will align with the reactivation of each neighborhood within the facility. Additionally, this gradual reopening will lead to lower margin contributions through the second and third quarters of 2025 before full reactivation occurs. We expect the community to be fully operational by September of 2025, at which point we will see revenue and margin contributions consistent with the entire 2,400-bed community. Regarding our West Texas assets. As a reminder, we have decided to keep these assets in a ready state while actively remarketing. This decision, which is similar to our approach with the Dilley assets, will involve carrying costs of about $2 million to $3 million per quarter until a new contract is potentially awarded. Turning to our HFS and all other segments. These segments delivered quarterly revenue of approximately $39 million. The scale of our HFS segment enables us to offer premium solutions across our network while maintaining substantial asset utilization in a competitive market. We will continue to balance network optimization with demand while identifying opportunities to enhance efficiencies and margin contribution. Moving on to the expanding Workforce Hospitality Solutions segment or WHS. This segment, which includes our Workforce Hub Contract, generated approximately $15 million in revenue in the second quarter, primarily related to construction activity. As announced today, the critical nature of this contract led to recent modifications and scope expansion, increasing its total contract value from $140 million to approximately $154 million. These community enhancements will lead to additional construction activity in 2025 and shift some previously expected services revenue into 2026. With the scope expansion, we now expect most construction revenue to be recognized in the third and fourth quarters of this year, with construction materially complete by the end of 2025. As we finish construction, we anticipate increased services revenue starting in 2026 and continuing through 2027. The scope expansion and contract modifications highlight the vital role of the Workforce Hub and the project's success, and we see potential for further scope expansions and contract extensions. This demonstrates the advantages of our vertically integrated hospitality solutions and our ability to create long-term revenue streams supporting large-scale remote operations. Recurring corporate expenses for the quarter were approximately $10 million. As we progress through the year, we will continue exploring ways to optimize our cost structure and enhance margin contributions. Total capital spending for the quarter was approximately $6 million, primarily focused on enhancing asset capabilities within the Government segment aligned with our strategic growth initiatives. During the first half of 2025, Target's business fundamentals and durable operating model supported strong cash conversion, resulting in over $15 million of cash flows from operations. These fundamentals are reflected in the strength of our balance sheet and our ability to maintain substantial financial flexibility through prudent capital management. We ended the quarter with $19 million in cash and a net leverage ratio of 0.1x. As of August 1, we have no outstanding borrowings under the company's $175 million revolving credit facility, providing total available liquidity of over $190 million, including approximately $23 million in cash. This robust liquidity position further enhances our financial flexibility as we evaluate a strong pipeline of growth opportunities. This momentum and positive operating environment, along with the expanded scope of the Workforce Hub Contract support our raised outlook for 2025, which now includes total revenue of $310 million to $320 million and adjusted EBITDA of $50 million to $60 million. This raised outlook reflects a 15% increase in the midpoint revenue and a 6% increase in the midpoint adjusted EBITDA compared to our previous outlook. Target is well positioned with a flexible operating model and an optimized balance sheet as we continue to evaluate a robust growth pipeline, which we believe offers the greatest opportunity to accelerate value creation for our shareholders. Importantly, as we pursue these opportunities, we will stay focused on maintaining the strong financial profile we've built while optimizing margin contribution through our efficient operating structure. With that, I will hand it back to Brad for closing remarks.

James Bradley Archer, CEO

Thanks, Jason. In the first half of 2025, we have made significant progress towards achieving key elements of our strategic priorities, focused on expanding and diversifying our business portfolio. We announced two multiyear contracts serving diverse end markets and are finalizing contract discussions supporting the rapidly growing AI and data center end markets. Additionally, we see clear opportunities to enhance our growing contract portfolio with expanded service offerings and term extensions. We remain focused on maintaining this momentum as we evaluate our strongest growth pipeline in many years, comprising both commercial and government end markets. Importantly, this pipeline is supported by an unprecedented domestic investment cycle and continued strong demand in the government sector. We are excited about these opportunities, underpinned by robust market fundamentals and secular momentum. We believe that our distinctive capabilities and unparalleled solutions position us well as we actively pursue these strategic growth initiatives designed to provide exceptional value to our shareholders. Thank you for joining us on the call today. And again, we appreciate your interest in Target Hospitality. We will now open the call for questions.

Operator, Operator

Your first question comes from Scott Schneeberger from Oppenheimer.

Daniel Erik Hultberg, Analyst

It's Daniel on for Scott. I just want to start on West Texas first. I mean you mentioned site visits. How should we think about the steps from here? How those discussions could progress? And the potential for this contract to be comparable to prior contracts at that site.

Mark Schuck, Director of Investor Relations

Daniel, this is Mark. So the question was just on West Texas timeline and the opportunities there.

James Bradley Archer, CEO

Regarding the government, we weren't able to hear you clearly. Timelines remain consistent with what we've previously stated. The reconciliation budget has been passed, but we have yet to see the corresponding funds start to flow. However, we know we are having ongoing productive discussions with the government and have been informed that we are on their acquisition list. As those funds begin to be disbursed, we are uncertain of our exact position in line, but we remain optimistic about that facility, particularly in terms of being leased and reactivated. Nothing has changed in this regard. We continue to welcome various government representatives to view the property, receiving positive feedback. Therefore, we maintain a positive outlook as we approach the latter half of the year.

Daniel Erik Hultberg, Analyst

Got it. Yes, regarding the data center opportunity, how should we approach the structure? Could it be similar to the Workforce Hub Contract? It seems like the timing is close, but can you provide any additional insights?

Jason Paul Vlacich, CFO

Yes, sure. This is Jason. So I won't get into too much detail. We hope to release more details for you in the near term. But I will say, on this deal, it will be a bit different than the Workforce Hub Contract because we're going to own the assets. And I would say, the margin on that typically is a bit higher than a services-only contract. So this is a lease and services agreement, not dissimilar from the Dilley structure.

James Bradley Archer, CEO

Let me add a bit more to that and provide additional context. We're currently awaiting the final contract, but we have an early works contract that allows us to begin operations on the site. This process is set to move quickly, and we are getting ready to fully mobilize. On a broader scale, we've discussed the data centers over the last few quarters, and we are seeing significant growth in this area. It has the potential to be a transformative aspect for our company, creating a perfect storm in the sector. There's a substantial amount of capital already committed, with ongoing commitments. Across the U.S., these projects are emerging everywhere, although not every initiative aligns with the Target Hospitality model; however, more continue to fit. Many local communities are rejecting these projects due to their demand for resources like power and water, along with the influx of people during the construction phase, which can last several years. As a result, developers are being pushed to more remote locations and are struggling to secure labor, which is in high demand. This scenario mirrors past boom cycles I've experienced in this industry, where significant investments occur in remote areas where we can step in, providing housing and services that help retain and attract workers in a competitive environment. We've secured our first contract, which will be finalized soon, and we have many more prospects lined up. I believe I haven't fully conveyed the scale of this opportunity before; it's enormous. Our pipeline is expanding as we work on both short-term and long-term opportunities, and we are internally very excited about the potential benefits. This is reminiscent of our previous successes in the oil, gas, and mining industries, but on a much larger scale.

Operator, Operator

And your next question comes from Stephen Gengaro from Stifel.

Stephen David Gengaro, Analyst

Brad, if I could ask, when you think about these data center contracts as sort of the duration. So when I think about oil and gas, it's kind of this great network approach, right, where you have people moving around, but you house them for someone like Halliburton over time. Is this more like a permanent multiyear facility where workers will be in the same spot for years? Or is this kind of more of a shorter-term network approach, which kind of just a lot of demand out there that will continue to fill that?

James Bradley Archer, CEO

It's in your first statement, right? A large amount of workforce in one location for many years. right? If you see some of these that they're doing, that they're putting out in the press, first, they need the power and they need the water, right? And then what they say is we've got a build-out of 7 years. We're going to start with 2, they get those leased and they continually build another 2, another 4 as they get the commitment, very similar to the gas when they build a pipeline, right? They get the commitments and they continue to fill it. But these are longer-term, right? And huge multibillion-dollar projects in that one location where we're a very small part of the spend, but a huge critical piece of making success for them, right, and staying on budget and staying on timeline. Without us in some of these locations, especially with this first one, they just couldn't get the job done. And we're just seeing more and more of these going remote, getting closer to the power storage, closer to the water storage, being forced out of the bigger cities. And it fits right in our wheelhouse on these.

Stephen David Gengaro, Analyst

If I could connect that to the oil and gas industry for a moment, we're observing that drilling and completion activity is currently low. It seems that we might be experiencing a prolonged period of lower activity levels while OPEC addresses excess capacity. Additionally, operations with rigs and completions are becoming more efficient as fewer people are involved. Can you clarify the source of the beds for the data centers? Are they being drawn from the oil and gas infrastructure, representing incremental capital expenditure, or is it a mix of both? Does the Pecos Contract factor into this, or is there a decrease involved? How should we approach the discussion about the beds?

James Bradley Archer, CEO

Yes. It's the same way we've always thought about it in our business, right? We look at any excess capacity and try to utilize that first, right? We wouldn't be, if you will, mothballing the oil and gas side of the business. It's a great business. We have to have a certain number of rooms out there. But we do have some excess capacity out there that's not being used that we would first utilize on the data center. Secondly, we would look in the open market to buy, right? And then we would look to build new. What I would tell you is the amount of work that's out there, that's on our radar would absolutely in the future have us buying new products. In short, the amount of work in our pipeline that is very real and actionable. And if we get a few of these, we would absolutely have to go and buy because they're massive, and it's all over the U.S., right? So we would run out of equipment. That's a high-class problem, a good one. We're okay with that, right? We have the capital structure to make that happen.

Jason Paul Vlacich, CFO

And that will all be built into the economics of that opportunity that's appropriate.

James Bradley Archer, CEO

And great counterparties on these, huge companies, right?

Stephen David Gengaro, Analyst

Okay. And then just one quick follow-on. Back in, I don't know, 2019. I think the numbers that we were using was about $50,000 per bed. Is that still a reasonable number given the inflationary environment, et cetera, if you do need to ultimately add capacity or is it too early to tell?

James Bradley Archer, CEO

I haven't seen anything maintain the same price since 2019 after COVID and everything. I would say it will probably increase. We won’t disclose our current costs per bed, but I want to emphasize what Jason mentioned. Whether it’s a $50,000, $60,000, or $70,000 room, we will ensure the economics work. Moreover, our HFS and similar factors reflect higher economics compared to what you see in an LAC project.

Operator, Operator

And next question comes from Greg Gibas from Northland Securities.

Gregory Thomas Gibas, Analyst

Great. Brad and Jason, nice to hear that near finalization of the data center community contract. Wanted to follow up there in terms of like how competitive the bidding was for that contract and maybe the key factors that led them to select Target?

James Bradley Archer, CEO

Yes, I would say that they checked our numbers. However, considering the scale of some of these billion-dollar projects, we become just a small part of the overall expenditure. The focus isn't on saving a few dollars on a room; instead, it's about whether we can get the job done and assist in retaining and attracting the necessary workforce. So, it isn’t primarily about price, which aligns with our interests. The key questions are whether we can deliver on our commitments and meet deadlines. Was the competition tough? Certainly, it always is. But this was not driven by price, and we are not seeing many price-driven decisions in this process because we have several similar opportunities in the pipeline.

Gregory Thomas Gibas, Analyst

That's very helpful and good to hear. I would like to know more about the factors influencing the updated guidance. I understand there isn't a significant change, but you mentioned positive momentum and an evolving environment, along with some modifications to the Workforce Hub Contract. What exactly has changed regarding that? What does the updated guidance imply?

Jason Paul Vlacich, CFO

Yes. So the two main drivers of the guidance update, the lead driver on the revenue side for sure is the Workforce Hub Contract expansion. So now the total contract value has increased from $140 million to $154 million, driven by construction activity. So that construction activity has expanded. We still anticipate the construction activity to be completed this year. Timing has shifted a little bit. But that's sort of the main driver behind the guidance, particularly on the revenue side. And then we also had that PCC Contract wrap-up settlement as well that played into the guidance. And those are the two primary drivers behind the outlook increase.

James Bradley Archer, CEO

Greg, I know jumping on Jason here. But again, this quarter, a little bit of noise, right, that I'll say this. It kind of cleans itself up as we move through the year and get into 2026 as well. So not really much to pay attention to as far as the noise here. It's kind of a tale of two stories, right? We've seen where this was going. We kind of predicted this other than the timing. But the project got a lot larger, right? We're happy to move that to the right for the customer and help them, but the project continues to grow. And then our numbers get better as we roll through the year, especially as we add new projects.

Gregory Thomas Gibas, Analyst

Yes, very helpful. Appreciate it, guys. And then if I could just follow up on West Texas assets. I'm not sure if there's that much more you can share there. But how would you maybe characterize the interest from the government agencies relative to last quarter, if that's changed at all?

James Bradley Archer, CEO

It has not diminished at all; in fact, it has increased slightly because their budget has been approved, leading to more concrete discussions about their plans. The government has a lot on its plate, and while they have the funds, it doesn’t mean they can start spending immediately. There’s a process for appropriating the money and getting it into circulation, and we anticipate seeing some of that in the latter half of the year. Their requirement for at least 100,000 beds remains unchanged, and they need to add a significant number of them. We are still heavily involved, particularly regarding our West Texas assets. Additionally, we have developed a proprietary facility called SecureFlex, which the government has inspected and is eager about. This product provides us with further options and we've even submitted quotes for new constructions as part of their goal to reach that 100,000 room expansion target. We believe this innovation will benefit us as we proceed, not just federally but also if the state requires it. There are positive developments happening in the government sector beyond our West Texas asset, with plenty of opportunities ahead.

Operator, Operator

There are no further questions at this time. Mr. Brad Archer, you may proceed with your conference.

James Bradley Archer, CEO

Yes. Thanks for joining us on the call today, and we look forward to talking to you next quarter. I'll turn the call back over.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect your lines. Have a great day.