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Target Hospitality Corp (NASDAQ:TH)
Q3 2020 Earnings Call
Nov 9, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Target Hospitality Third Quarter Earnings Call. [Operator Instructions]

I would now like to turn the conference to Mark Schuck. Please, go ahead.

Mark Schuck -- Senior Vice President, Investor Relations

Thank you. Good morning, everyone, and welcome to Target Hospitality's third quarter 2020 earnings call. The press release we issued this morning, outlining our third 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 this 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, November 9, 2020. 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 table 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 November 5, 2020 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 intends to establish a special committee of independent directors to evaluate this proposal. Management will be unable to comment on this proposal or the evaluation process during today's call. In view of this ongoing process, following today's call, we will not open the line for questions.

Leading the call today will be Brad Archer, President and Chief Executive Officer, followed by Eric T. Kalamaras, Executive Vice President and Chief Financial Officer.

I will now turn the call over to our Chief Executive Officer, Brad Archer.

Brad Archer -- President & Chief Executive Officer

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. In addition to discussing our third quarter performance, I will touch on the recent trends we have seen across our business, as well as our continued priorities amid persistent macro uncertainties.

Target's third quarter results are a testament to the Company's ability to successfully navigate a challenging and uncertain operating environment. We have taken the appropriate steps to align with customer demand, while creating a more efficient operating structure. These steps have allowed us to meet increased customer demand with little incremental cost providing support for margin expansion during the third quarter. This allowed us to deliver strong third quarter adjusted EBITDA of $17 million. Equally impressive, we reduced our outstanding borrowings by $15 million in the third quarter, further enhancing our liquidity position.

While our focus remains on preserving our financial strength, our first priority is always the health and well-being of our employees and customers. With COVID-19 cases continuing to rise, we have remained vigilant on adhering to our operational response plan. And as a result, we have not had any cases of COVID-19 impact our business.

Now turning to the recent trends we have seen across the business. We remain encouraged by the continuing positive trends in customer activity levels, which contributed to steady increases in occupancy and utilization during the quarter. These trends, along with our contract structure including exclusivity, has allowed us to benefit from improving demand for our premium accommodations. Further, the increase in customer activity resulted in the reopening of several communities during the quarter to meet increased demand. We continue to benefit from our network scale and first-class customer base, who find increased value and allocating labor to our premium hospitality and accommodation service offerings.

As it relates to our government segment, we are pleased with the outcome of contract renewal discussions with CoreCivic. We were able to renew and extend our lease and services agreement, servicing the STFRC for an additional five years, through September 2026. The extension adds approximately $265 million in committed revenue over the contract term. As we move into the fourth quarter and begin looking into 2021, the path of the global economic recovery remains unclear. While we have seen meaningful increases in key operating metrics, we are aware of the continued economic uncertainty surrounding the recovery.

As COVID-19 cases continue to rise, some countries have resumed restrictions on economic activity, causing the pace and trajectory of the demand recovery to remain volatile and fragile. If the persistent global pandemic results in additional heightened control measures for a long period of time, further demand destruction could occur. Amidst these market uncertainties, we remain focused on what we can control: effectively managing our cost structure to match network demand; continuing to provide our first-class customer base premium service offerings; and prioritizing the health and safety of our employees and customers.

We have positioned Target to be successful through a variety of business cycles. Target's network has achieved significant scale in its operating areas. This scale, along with a focus on cost containment, has allowed Target to benefit from a more efficient operating structure. These attributes, along with our premium accommodations, set us apart and position Target to continue benefiting as market demand increases for its hospitality and accommodation services.

I'll now turn the call over to Eric to discuss our third quarter results in more detail.

Eric T. Kalamaras -- Chief Financial Officer

Thank you, Brad, and good morning, everyone. In the third quarter, we experienced continued improvements in utilization from lows experienced during the second quarter. Combined with meaningful reductions in both cost of services and corporate expenses, we delivered strong third quarter financial results.

Third quarter 2020 total revenue was approximately $48 million, and adjusted EBITDA was approximately $17 million. Third quarter discretionary cash flow was approximately $3 million, contributing to over $27 million in year-to-date discretionary cash flow.

Turning to our segment performance. The Permian accommodations delivered third quarter revenue of $19 million, compared to $57 million in the same period last year. This decrease was driven by lower utilization as customer accommodation demand was sharply reduced in response to the global pandemic and declining oil prices, and the impact that had on regional headcount needs for our end customers. Our Bakken accommodation segment delivered revenue of approximately $1 million during the quarter, compared to $6 million in the same period last year. During the third quarter, we continued to see incremental improvements in customer activity and demand across our accommodations assets and have reopened several lodge -- lodges across our network in response to increased demand.

Our Government segment produced quarterly revenue of approximately $16 million, and we are pleased with the successful outcome of our contract renewal discussions with a five-year extension adding approximately $265 million in committed revenue into 2026. The combination of this government services contract renewal and the recent contract modifications has added in total over $325 million in committed revenue from 2021 into 2026. Our All Other segment, which consist primarily of construction fee revenue from the TC Energy pipeline project, had revenue of approximately $12 million for the third quarter, compared to $2 million in the same period last year. Revenue increased as a result of TC Energy's continued construction activity on the project during the quarter. With a full project scope still pending, we anticipate limited activity associated with this project in the fourth quarter of 2020.

Recurring corporate expenses for the quarter were approximately $7 million. We anticipate recurring corporate expenses to remain around $7 million to $8 million per quarter into 2021. Capital expenditures for the third quarter were approximately $1 million, including minimal maintenance capital. Target has established a premium network with a substantial scale in its core operating regions. This allows Target to meet increasing demand for its hospitality and accommodation services with minimal capital spending, supporting strong margins and cash flow generation. Target anticipates capital expenditures to be less than $1 million through the remainder of 2020 or $8 million to $12 million for the full year.

We ended the quarter with $410 million of total long-term debt, including $70 million drawn on our revolving credit facility, and consolidated net leverage of 4.1 times. We continue to focus on debt reduction, and utilized $15 million of third quarter's discretionary cash flow to reduce Target's outstanding borrowings, further enhancing our liquidity position. Even in this challenging environment, we expect to continue generating robust operating and discretionary cash flow, providing sufficient capacity to fund our business objectives and further reduce our outstanding borrowings in subsequent quarters. As a reminder, our long-term debt consists of $340 million in senior secured notes due 2024, and $125 million asset-based lending facility, which has no near-term maturities or immediate financial covenants, that provides a significant flexibility and liquidity within our capital structure.

As demand for Target's premium accommodations continues to improve, we have realized margin expansion as a result of our cost reduction initiatives, network scale, and efficient operating structure. These positive trends have provided greater clarity on our 2020 financial outlook. As a result, we recently provided a revised 2020 financial outlook and are encouraged with the continued performance of the business. Our cumulative response to these economic uncertainties has been taken with the focus of preserving liquidity, protecting our balance sheet, and retaining financial flexibility. These principles will provide Target the ability to continue succeeding amid prevailing macro uncertainties, and be well positioned to take advantage of a more balanced market.

With that, I will now turn the call back over to Brad for his closing comments.

Brad Archer -- President & Chief Executive Officer

Thanks, Eric. As the economic outlook became increasingly uncertain earlier this year, we took decisive action to appropriately position the business with a heightened focus on preserving our financial strength. Target's strong third quarter results are a testament to the team's ability to quickly react to an uncertain operating environment. As we continue to navigate market uncertainty, we will remain focused on protecting our balance sheet with an emphasis on enhancing our liquidity position and continued debt reduction.

We have created an expansive network with premium hospitality and services offerings, while partnering with high-quality, best-in-class customers. These attributes underpin our ability to continue succeeding even in challenge environment. While the pace and trajectory of the economic recovery remain unclear, Target is well positioned and will continue to adapt to changing market conditions, ensuring the long-term success of the business.

I appreciate everyone joining on the call today, and thank you again for your interest in Target Hospitality.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 13 minutes

Call participants:

Mark Schuck -- Senior Vice President, Investor Relations

Brad Archer -- President & Chief Executive Officer

Eric T. Kalamaras -- Chief Financial Officer

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