Target Hospitality Corp. Q3 FY2024 earnings call

• The strength of underlying business fundamentals supports strong quarterly performance, and the proven operational flexibility and efficient operating structure contribute to this. - The government segment's PCC community serves as a cornerstone in the US government's domestic humanitarian aid mission, and a normal course renewal of the contract for this community is anticipated in the coming weeks, marking its fifth year of continuous operation. - The HFS segment benefits from premier service offerings and has seen a 12% increase in customer demand since the fourth quarter of 2023, with a focus on identifying incremental operational efficiencies and evaluating opportunities to strengthen margin contribution through network optimization. - There is a focus on solidifying the balance sheet and optimizing the liquidity profile to allocate capital to value-enhancing growth initiatives. A pipeline of strategic growth initiatives is being evaluated, including government end market opportunities along the US Southern border and non-government growth initiatives such as large industrial projects throughout the US. - Select inorganic opportunities are also being evaluated to accelerate customer diversification and the growth trajectory.

In the third quarter of 2024, Target Hospitality reported total revenue of approximately $95 million. The government segment generated quarterly revenue of around $53 million. The HFS and other segments brought in $42 million in revenue. The government segment accounted for approximately 55.79% of the total revenue, while the HFS and other segments made up about 44.21% of the total revenue.

• 2024 total revenue is expected to be between $375 million and $385 million. - Adjusted EBITDA for 2024 is anticipated to be in the range of $184 million to $190 million. - 2024 capital expenditures are projected to be between $25 million and $30 million. - It is anticipated to end the year with over $350 million in total available liquidity. - Incremental PCC occupancy based variable revenue is excluded from the 2024 financial outlook due to dynamic fluctuations in PCC community population. - Liability management initiatives for the outstanding 2025 senior notes are being evaluated to strengthen the financial position while pursuing growth initiatives.

• Growth opportunities, especially non-government ones, have longer sales cycles, and the timing and final outcomes of these opportunities are uncertain. - Inorganic opportunities evaluation involves risks while remaining centered around core competencies. - Dynamic fluctuations in PCC community population can impact revenue, which is why incremental PCC occupancy based variable revenue is excluded from the guidance.

Q: Regarding the demand for your government assets, how do you see the recent election outcome influence the outlook?

A: We continue to be actively engaged with federal agencies and Republican representatives. We believe the new administration's policies will be very positive. We've had recent dialog, are engaged, have thousands of beds ready for immediate use with an exceptional past performance record and are well positioned to provide solutions to various government departments, expecting a positive trend in that business.

Q: You previously talked about the third ICF facility. Do you have any updates regarding that process?

A: Recent conversations indicate the government's desire to proceed with the third ICF but at a more measured pace. We expect no substantive update until 2025 as the government is proceeding through the evaluation and selection process at a more measured pace.

Q: Utilization expanded, ADR was down a bit. Could you address the outlook for that business and how do you see the election outcome influence that?

A: The HFS business has held steady. ADR fluctuates within expected ranges. We expect moderate seasonality in Q4 like last year. The election outcome is positive as the new administration's policies are seen as positive, and we expect a positive impact on the business.

Q: Looking at gross margins in the quarter, they were pretty solid. Any color on how we should think about that in relation to bridging to your 2024 EBITDA guidance and going forward?

A: With respect to the government segment future looking ex-Dilley, there could be a few percentage points drop in gross margin due to holding fixed costs to keep the facility warm for future government opportunities. But as occupancy goes up, margins will strengthen. Keeping the Dilley facility warm is worth the spend for future opportunities in 2025.