Hello, and welcome to the Target Hospitality Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Mark Schuck, Senior Vice President of Investor Relations & Financial Planning. Please go ahead.

Thank you. Good morning, everyone and welcome to Target Hospitality’s second quarter 2023 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 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, May 9th, 2023. 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 Eric T. Kalamaras, Executive Vice President and Chief Financial Officer. After their prepared remarks we’ll open the call for questions. I’ll now turn the call over to our Chief Executive Officer, Brad Archer.

Thanks, Mark. Good morning, everyone, and thank you for joining us on the call today. Our record setting second quarter performance reflects the positive business momentum we have sustained over the past year, we have established significant operational flexibility and scale, enabling us to appropriately match customer demand while continuing to generate strong financial results. We continue to benefit from our material expanded presence providing critical hospitality solution to the U.S. government. This intentional focus has resulted in over 70% of second quarter revenue being derived from committed contracts backed by the United States government with 78% of second quarter revenue having minimum revenue commitments. These elements supported over 368 million of discretionary cash flow over the last 12 months, representing an impressive discretionary cash flow yield to revenue of over 61% over that time. This materially enhanced operating platform has allowed Target to efficiently serve its world class customers, while positioning the company to quickly respond to strategic growth opportunities all off attenuating to generate impressive operating income. And our HFS-South segment, we have remained focused on providing premium full-service hospitality solutions to our world class customers, many of whom have been customers for over a decade. As a result, Target continues to benefit from consecutive quarterly increases in customer demand, resulting in an 18% year-over-year increase in utilization with consistent customer renewal rates of over 90%, which we have enjoyed for over seven years. We continue to benefit from the strong demand fundamentals and the forum and the more fully optimized network we have created over the past year. These elements have supported a more normalized pricing environment, and we anticipate continued positive momentum in the coming quarters. Regarding our government segment, our purpose-built portfolio of assets continue to serve the critical humanitarian aid mission they were designed…

Thank you, Brad. The second quarter, we continue to benefit from our established operational scale and ability to align with customer demand and consistently deliver strong financial results. Second quarter 2023 total revenue was $144 million and adjusted EBITDA was approximately $91 million. A government segment produced quarterly revenue of approximately $101 million compared to $75 million in the same period last year. A significant increase was attributed to expanded PCC community. Our HFS segments delivered quarterly revenue of $42 million, compared to $35 million in the same period last year. This increase was driven by sustained momentum and customer demand for Target's premium service offerings. Current corporate expenses for the quarter are approximately $9 million. And we anticipate recurring corporate expenses will remain around $9 million to $10 million per quarter for the remainder of the year. Total capital spending was approximately $16 billion, with the majority of related to expanding our government portfolio in anticipation of the government's request to increase the ICF network capacity. We expect a more moderate pace of capital spending through the remainder of the year, excluding potential acquisitions or government contract awards. We ended the quarter with $70 million cash and $195 million of liquidity, with zero borrowings under the company's $125 million revolving credit facility, and the net leverage ratio of 0.4 times. As it relates to the outstanding senior notes. We continue to evaluate a range of liability management initiatives focused on further strengthening our financial position while balancing the expanded pipeline of strategic growth opportunities. This approach is centered on maximizing financial flexibility, enabling us to quickly react to value enhancing growth opportunities as they arise. Before we discuss the specifics around our expanding humanitarian opportunities, I would like to touch on the Influx Care Facility concept and its intended…

Thanks, Eric. A record setting second quarter results are a testament to the operational efficiencies and scale we have created, enabling us to appropriately match customer demand while simultaneously generating strong financial results. We are well positioned and excited to participate in the expanding Influx Care opportunity set. We are confident the exceptional community and service offering we have jointly created with our leading national non-profit partner and that PCC will remain a critical solution for the U.S. government. In addition, we believe our new partnership and the numerous ICF solutions we have proposed create an exciting opportunity to potentially expand our critical service offering to the U.S. government. We are well positioned and remain focused on pursuing this expanded pipeline of growth opportunities, while continuing to 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.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Scott Schneeberger of Oppenheimer. Go ahead.

Thank you very much. Good morning, everyone. Morning, so the first question. I'd like to inquire I guess Eric this will be for you. The guidance range adjustment, low end and high end. What does that contemplate for occupancy at the Pecos Facility?

Hi, good morning, Scott, thanks for the question. When we look to modify the outlook, the regression that we stand were specifically related to the variable services revenue, right? So, as we think about going forward, specifically for 2023 at this point. We and our partners certainly were anticipating variable occupancy there, than what we would have received for the first part of the year. And so, I think as we look at it going forward, we're not assuming that there's any variable services revenue at this point. But I think it's prudent based on what we've seen. And I think it's safe to say that we are all somewhat surprised like that. But having said that, nothing has changed about how we view the contractor certainly its durability going forward. I think as we think about going and looking at all the opportunities, we have ahead of us, we think about the upside of the -- there's certainly a lot of opportunity where we can certainly fit towards the high end of that, just depending on the cadence and timing to when those opportunities satisfy themselves.

Thanks. And obviously, yes, not activity at Pecos at the moment. Could you just -- given what we've seen with flows, this summer and maybe compare and contrast that to recent years past. Just give us an update on seasonality considerations. Is there, it doesn't sound like it's baked into your guidance, but what you've seen with flows and your conversations with the government, do you anticipate a chance of utilization prior to year-end? Thanks.

Sure. So -- and I think it's too early to say - I always say this, now we're going to say that we're not going get increased RMC there, right? I mean, I think that's always the optionality. If you recall, we can get just a week's notice as to what the government plans to do there to raise that. In fact, I would say even going back in the early summer you were having, daily calls in and around time phrasing about -- potentially putting material occupants at that site. So, that's always a possibility at any given point in time. I think it's really a function of what's happening. So, let me give an example, right? So, when we were looking at Title 42, there was a tremendous amount of demand, really across a number of entry points. And so I think what has happened is perhaps that's appended the timing a little bit, right? And so we'll just have to wait and see how that helps and flows over time. It's really hard to really predict.

I think maybe just to clear the air on the variable piece and utilization as it sits today. I think it's really important to kind of bifurcate those two. Because if you look at utilization where we sit today, in Pecos, there is no correlation between utilization and the ultimate need for 10,000 ICF beds. The need is there for insurance for the government. -- looked at this three years ago. They did Pecos, they're moving in now to adding additional facilities as we've said in our release. But there's no correlation when you look at how many if kids you will, are sitting in there today and the need and the change in how they're envisioning this. There's a difference on, once they're there, we can all look at order flows and see that and say, okay, they're going to, is it going to be variable -- there will absolutely be some variable. There has for many, many years, but this is for influx capacity.

Okay, thanks Brad. I appreciate that. Going up a level, some discussion on this call about the government looking at not just Pecos, but a couple other locations. And I guess, not that you'll be able to answer this with certainty because you don't know what’s you’re -- the government customer will ultimately do. But do you get a sense from your discussions with them? That it's not in isolation, or are all these three there? And does it feel more like the government may put them all together? It makes it final decision and kind of --

I don't know if --.

That's it, Brad. Thanks.

I don't know if it's on our end or year-end, but you were breaking up, but we caught probably 30%. But I think what you were asking -- do you think all 10,000 beds basically would be awarded? Or is this in isolation. I'm not -- I didn't hear the whole question. So, if you can hear me good, let me just give you kind of an update on what we think about the IDIQ process. Can you here us, okay?

Yeah, I heard everything you said if you can hear me. And you got the question, do you think Pecos will be awarded in isolation and extension or all three being grouped together as the government considers it for its award? Thanks.

Yeah. And let me give everybody just kind of an update on where we're at in the IDIQ process. Last call, we had just received a performance of work statement. And literally, right before our call, we did not have time to go through it. Now, in our release, you see they're asking for 10,000 total beds, three separate facilities and they need that conversation with them we worked on our bids with our partners for the past several months. We submitted phase one technical proposals a few months ago. Take if the government goes in, they grade your proposals. They look at your partnerships, how you're going to actually take on the job and get it done, right? We were selected to move forward with all of our bids into what they call phase two pricing. Phase two is the last phase of this bid before an award. So, there's, important to note, there's a limited number of companies that were selected out of phase one to move into phase two. All of our bids were pushed into phase two. We submitted our bids on July 26th, our pricing for phase two. So, now it's a waiting game on when this gets awarded. We're being told, fourth quarter would be the award. And look, could these be staggered, they absolutely could be. These are very large, very big bids. So, even with some of those number three go on a little bit further than the fourth quarter. It absolutely could. But look, I definitely think there's an award happening in fourth quarter. How many, we will see. But definitely, there could be some staggering of the award just based on how large they are.

Okay, great. Thanks I appreciate that color Brad. I’ll pass it on.

Our next question comes from Stephen Gengaro of Stifel. Go ahead.

Thanks. Good morning, everybody. A couple of things from me. And I just think just first, one clarification. The 10,000 beds, is that -- are they designed for children and staff? Or is it just -- is that just the unaccompanied minors' portion?

Yes. There's definitely more to go here, right? This is just for children. This doesn't account for what we would have to supply for our partners and our own workforce for housing. So, at the end of the day at each of these facilities, just like Pecos there would be a number of beds also on top of this for staffing. Look, some of them are different, depends on -- I'm not confirmed for competitive reasons, I'm not going to tell you where these are located and what we did, but some might be closer to a city where you can actually have something there. But there will be a number of extra rooms, if you will, and some fairly substantial depending on what locations they pick, would add to this number for us. And the contract would get bigger.

Okay, thanks. And then that does make sense, yes. Thanks, and then two other things. First, you addressed this to an extent, but I'm just curious. So, when we're looking at and these fact sheets that tells utilization has been zero for several months. And then we sort of are trying to triangulate that into long-term demand, which you had noted on the call earlier was a flawed approach. When an unaccompanied minor enters the country. Maybe it would be helpful for us to the extent you can, what are the different paths for this unaccompanied minor. And at what point would you be utilizing any Influx Care Facility versus the other parts of the system?

Yeah. And let me -- I'll let Eric jump on this, but let me say, it's not so much a flawed approach in how you look at border crossings that eventually happens to become influx, right? I'm saying it's probably -- it's the flawed approach for the need. If you're looking at just that for the need of these facilities. These needs are much deeper than just looking at, if you will, what's coming across today. They've known they've had this issue for many, many years. This is their solution for many, many more years because influx is going to come, trying to put your finger on when that happens is the kind of the million-dollar question, if you will. -- So, that's kind of my saying that, those you can't correlate those two. So, hopefully, that --

Even to Steve, to further expand on that. I think as we likely discussed before, it's really a function -- the movement from -- into influx is really a function of the strain, if you will, on the shelter capacity, right? So, they're probably 9,000 beds within the shelter system. And so at a certain level. And now those are tended to be small across a number of states. And so it can be easy at times for those to potentially get strained. And have too many occupants in any given site. At that point in time, there's obviously some logistical maneuvering that the government will do. But beyond the shelter capacity, once it gets to a certain threshold level, they'll start moving into influx, right? So, right now, we're -- let's say, we're about 70%, 75% occupied within the shelter system. At some level above that, then they start looking and shifting into influx. So, I would say that it's not that far away, but it still has happened yet. I think regardless to Brad's point, this is an insurance policy regardless of what the shelter capacity occupancy, it looks like at any given point in time because to the extent it does exceed that, you absolutely need the influx to offset immediately. So, it's not something where the government can wait, which is the whole purpose around the IDIQ and this discussion. So, hopefully, that gives you a little bit of additional context as to how that process works.

Yes. Great. And then just one final. And I know this is small, and you may not want to comment specifically. But when we look at the government revenue for the quarter, the numbers that we get based on the knowns that we have, which are probably not perfect, was that the utilization of the ICF was in the low 30s in the first quarter? But we also -- there also was some revenue contribution in the second quarter despite what I thought was an empty facility. Am I thinking about that wrong? Or is there still some, and I mean some variable revenue?

Yeah. I don't think, a couple of things. One, we went, specifically talked about the variable contribution per quarter. But I think if there were any, it wasn't that much. We can talk about -- we can talk about and dig into it further.

All right, very good. Thanks for all the color. Thank you.

[Operator Instructions] Our next question comes from Greg Gibas of Northland Security. Please go ahead.

Hey, good morning. Good morning, Brad and Eric. Thanks for taking the questions. Congrats on the quarter. When we think about that 10,000-bed number that the government is demanding, how many incremental beds is that -- should we think about that 6400-burn capacity at Pecos and then like I think 2,200 that you have in another contract with the government. I mean, how should we think about incremental beds? And I guess as kind of the follow-up there is the assets that you've acquired that aren't currently contracted with the government, would you say those basically meet the government's needs or requirements, I guess, right now? And maybe, I guess, as they stand today? Or would additional capacity or anything requiring capital will be required?

Yes. The facility we acquired, I will tell you, was definitely used in our bid process. So, we definitely think it meets some of the needs for this bid. As I mentioned earlier, there will definitely be customer beds, employee beds, if you will, on top of on each facility on top of the 3,000 per facility, right? I'm not -- again, for competitive reasons, this is an open bid. I'm not going to get into how many that is or how large that is. Just again, would be inappropriate at this time to do that. Hopefully, we're awarding them, and then we can talk more about kind of how it's built. What's out there is definitely the 3,000 beds for the government. And what we haven't put out is how many other beds we would need to put out for the customer side, for the employee side.

And Greg, to address the incrementalization of your question, as it relates specifically to Dilley, right, that's not included here, right? So, everything we're talking about is obviously over and above that. But PCC is effectively embedded with the net 10,000 number, right? So, effectively, if you think about PCC itself, you're thinking about an additional 6,000 not, but only show 3000, not - That's right. That's I'm talking just only the -- just 3,000. So, this would be the additional 6,000 for children if that incremental. So, hopefully, that gives a little bit more clarification.

That does. Thanks for clarifying that. And I appreciate the color there. I guess just a follow-up on a previous question regarding I guess the variable revenue. I guess, the reason for the maybe slight guide down in EBITDA or relation of just less variable contributions you're expecting this year? And I guess, overall, just wondering what your updated assumptions for variable revenue are this year?

Well, typically, we see a stronger seasonality in and around the late spring through the start. I think a lot of that was pulled forward because of the Title 42. And so -- which, again, it's not an expectation that we would have had on each of those. So, I think as we look at that and we see that shift earlier in the year than we would expect to specifically make a Title 42, then I think it's caused us to look at it. And we try to be - and we're trying to be thoughtful and conservative as to how we provide outlets, right? So, it's a function of that, just feel it's prudent and appropriate adjustment to maintenance as we look at the balance of the year. That being said, there's nothing -- there's nothing that sense that, that can tie I can't elaborate. As I mentioned a moments ago, I mean, so capacity is 70%, 75% at some level over and above that, you certainly would look at influx care.

Great, very helpful. I guess lastly, just anything you can share on your new government service provider partner and maybe how they offer new market opportunities versus your existing non-profit partner?

Look, I'm not going to go into names, again, open bid, right, still out there telling we're very excited about who we partner with. A very large government services firm, this bid really takes in -- it's much larger than what we're doing today, right? We're going after all of the bid. We've been on all facilities. Geography-wise, it stretches much further than where we're at, still going and partnering with a firm like that, that really made sense. I will tell you, very happy with the existing partner that we have in PCC. As we're aligned there. So, we have an 11-year agreement with them on that facility, and we provided everything they asked for and what they wanted to submit to the government for this bid. But we wanted to go after all of it and try to grow our government business. We think we have the ability to do that with this new partner.

Great, appreciate you guys.

Thank you.

Our next question comes from Stephen Gengaro of Stifel. Please go ahead.

Thanks for taking the follow-up. Just in the oil patch, just when we look at activity levels there, I mean, clearly, rig counts are down, completion activity is likely down in the second half of the year, but it does seem like we're stabilizing and looking at a recovery likely next year. Are you seeing much change in that piece of the business? It doesn't appear so from your guidance, but I just wanted to check that?

Look, we have said -- we started saying earlier in the year that we were expecting some margin expansion as we spend into the back half of this year. We start seeing that really starting in the second quarter. As we saw some additional inflation pressures come down and cost containment create some operating efficiencies. So, to that extent, things are getting better. I think as we -- I think it's really your question is the heart of what does the inflation look like going forward, right? And there's going to be a real change there. I wouldn't tell you that we have -- we are expecting anything significantly different from that high 70% area utilization that right now. I would expect that to continue. Hopefully, the playback continues to get better. There is some potential for some consolidation, which is starting to take a little bit. So, that could be helpful to us over time. But look, I wouldn't -- I would think that there's still some steady, slight growth there, but I wouldn't expect anything material at this point.

Okay, thanks. And then just one other quick one on the government. Should we think about the potential structure of contracts to be similar to Pecos, where there's sort of this fixed piece to kind of protect you and keep your assets? You're giving your assets for utilization for a long period of time, plus some variable portion. Is that the standard structure we should expect?

So, I think the way you think about these contracts going forward is the structure we have with PCC, specifically related to how that was structured from revenue piece to a variable piece as well as to the capital and the payback portions. I think you should think about those generally being roughly very similar from in concept instruction.

Okay, great. Thank you for all the details.

Thanks, Steve.

Our next question comes from Scott Schneeberger of Oppenheimer. Go ahead.

Thank you. Thanks for taking the follow-up. I just wanted to touch base on -- it didn't come up much on this call because a lot of the ICF discussion was prominent. But you previously led the opportunities across other government agencies, and I was just wondering if you could give an update on some of the non-ICF opportunities you're pursuing, if there are any updates there, thank you?

Sure. And so definitely, there's some organic progress being made as far as - I’m not getting into specifics, but some of the same things we've always talked about from natural resources, also other government services than the ICF piece. We continually are out trying to expand our government piece of the business. There's some even in the HFS side that could happen as well. But very strong pipeline organically out there. And we continue to say stronger than what we've had in many years past. Again, project’s very large. They take time to kind of get done but we're making headway on some.

Yeah. I think to that point, we have said over the past several quarters that we're continually looking to expand in further regions of the government, right? I think having the digital partner, having multiple sites, we're clearly executing on that. These are big, and I think we want to be fair around what we're looking at here. We're not taking our eye off of all and continuing to grow the business really throughout the government. There are other things that we're working on and in addition to these as well, as Brad mentioned, with the government and of course, with other business and industry. So, look, the pipeline is robust and we look forward to trying to execute on it.

Great, thanks. And then last one for me. I heard in prepared remarks, CapEx moderating through the end of the year, but the guidance did increase for the year. Was that all what you were doing in the second quarter working with that newly acquired strategic asset? Am I pointing on there? Or is there a little bit more to it. And what might -- As I said, and '24 considerations on CapEx after that one. Thanks.

Sure. No, you're right. We had most of that spending was in the first, was really in the first half, particularly in the first quarter. So, that was the nature of the comment around moderating total towards the back half of the year. As you think about going into 2024 for - we did know, I would say at a base level, I would kind of stick with something that looks similar to what we've got for 2023 as well. Then if you have to look the nature of what we're talking about here on capital spending. Look, it could be significant at gross level -- but if the structure is what we believe it to be from a kind of a spending level with the contracts on a net capital level, inventory similar as we had this year. So, you hear very big nameplate number but not a big number on a net basis.

Okay. Thanks very much.

This concludes our question-and-answer session. I would like now to turn the conference back over to Brad Archer for any closing remarks.

Thanks for joining us on our call today. And thanks again for your interest in Target Hospitality. We look forward to speaking again in November on our third quarter call. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.