Greetings, and welcome to the Target Hospitality First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Schuck, Senior Vice President, Investor Relations. Thank you, sir. You may begin.

Good morning, everyone. And welcome to Target Hospitality's First quarter 2020 earnings call. The press release we issued this morning outlining our first quarter results can be found in the investor section of our Web site. In addition, a replay of this call will be archived on our Web site for limited time. Please note the cautionary language regarding forward looking statements contained in the press release. This same language applies the 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 28, 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 Investor section of our Web site to find a reconciliations 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 be joined by Troy Schrenk, Chief Commercial Officer, and 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. In addition to discussing our first quarter performance, I will also touch on the cumulative steps we have taken in response to COVID-19 pandemic and the current market condition, as well as our priorities through the remainder of 2020. As we sit here today, we are operating a vastly different environments than any of us could have imagined just a couple of months ago. The impact of the COVID-19 pandemic is being felt around the world and has had an unprecedented effect on the global economy. At the same time, global commodity markets are being dealt a dual shock of oil demand erosion coupled with the resulting oversupply. Amidst these headwinds, Target delivered solid first quarter results only slightly below our expectations. The momentum we witnessed building late in 2019 continues through the first two months of the quarter and into March. Average utilized beds for the quarter were 9798, up slightly from the first quarter of 2019. Additionally, we continue to have strong cash generation with discretionary cash flow for the first quarter of approximately $10 million. We also received positive news late in the first quarter when TC Energy announced it will proceed with the construction of the Keystone XL pipeline project. As a reminder, Target will provide hospitality and catering services for the duration of this project, which is anticipated to lap into 2023. At this time, Target has begun providing a limited amount of services related to planning and logistics prior to the full scale start of the project. We're in the process of finalizing the full project scope and anticipate increased project revenue over the remainder of 2020. Turning to our focus in this challenging environment. As we ended the…

Thank you, Brad and good morning, everyone. I will begin with a discussion of our results, review our capital program and conclude with details on continued steps we're taking to mitigate the ongoing economic uncertainty. While we did experienced positive moments through most of the quarter, the combination of COVID-19 and rapid deterioration in global commodity markets modestly impacted our results late in the first quarter. However, we still produced solid quarterly results and importantly continue to generate meaningful discretionary cash flow. First quarter 2020 total revenue was approximately $72 million, adjusted EBITDA was approximately $32 million and discretionary cash flow was approximately $10 million. Turning to our segment performance, the Permian Basin delivered first quarter revenue of $49 million, a decrease of 7% versus the prior year quarter. This decrease was primarily driven by lower average ADRs due to reduced uncontracted utilization as activity moderated across the region. In the Bakken, first quarter revenue was approximately $4 million, a 12% decline from the prior year, mainly due to decreased utilization, reflecting also low activity levels. Our governance segment remain consistent with quarterly revenue of approximately $17 million. Our all other segment, which consists primarily of construction fee revenue from the TC Energy Pipeline Project has revenue of approximately $2 million for the first quarter of 2020 compared to $8 million in same period last year. Revenue decreased as a result of significantly less activity associated with this project. As Brad mentioned, we are encouraged by recent announcement that TC Energy will proceed with the construction of the Keystone XL pipeline, and anticipated additional revenue associated with this project over the remainder of 2020. The current corporate expenses for the quarter were approximately $8 million. As we have outlined, we have decisive steps to reduce cash corporate expenses across the…

Thanks, Eric. We're living in a vastly different world today. While it is encouraging to see progress being made and signs of a gradual return of some normalcy, it is difficult to predict the duration or scope of the current market uncertainties. As we continue to navigate this unprecedented situation, we remain focused on the things that we can control. Ensuring the health and safety of our employees and customers, while maintaining a heightened focus on protecting our balance sheet and preserving liquidity. We have positioned Target to navigate a variety of business cycles and have taken decisive actions in the current environment to proactively adjust our business to changing market conditions. We believe these actions will ensure Target remains in a strong financial and operational position to take advantage of the eventual market recovery. I appreciate everyone joining on the call today. And thank you again for your interest in Target Hospitality. Operator, you may now open the line for questions.

Thank you. We will now be conducting a question and answer session [Operator Instructions]. Our first question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.

A couple things here and the second quarter looks very difficult, I mean with expectations. I mean we're hearing from service companies 70% to 80% reduction in completion activity. Can you give us any sense for what the Permian looks like in April versus February, March as far as occupancy is concerned?

Sure. Hi, Stephen. Good morning. Thanks for the question. It's a good question. I think we, to your points, utilization is down quite a bit and you've obviously seen a lot of the metrics. I think whether we're thinking about April or whether we're thinking about second quarter, I think you have to look at the macro environment in total and whether you think about in terms of crews being out, or you think about in terms of capital being reduced, whether you think about in terms of rigs being stacked. Look, I think you would assume that the utilization for April, May time frame just reflects that in general. So I think we want to avoid getting a specific number on it. But I will just tell you that it's not drastically different than I think a lot of the other macro data points that you would have heard about and thought about.

So another way to think about, if we thought activity on the drilling and completion side was going to be down 75%. Is there any variables we should think about, which would make your outcome better or worse than that?

Well, I think when it comes to utilization, it probably I think in this environment, it probably mirrors that today. We certainly have a better contractual profile, but I think based on what you're describing, I wouldn't disagree with that.

I think little bit of differences, we’re still kind of moving through this. But some of the differences I think we're going to be set up for multiple services with our contractors and some of the guarantees. So I don't think it's a one for one when you look at some of that where we should be better on some of those because of our contracts.

And then just one follow up and I will get back in line here. But if we look at the first quarter ADR and we thought about, and I know you talked about the absence of effectively spot activity, which hurts that which makes sense. Did we see a full impact of that in the first quarter or should we think about adjusting that going forward.

So when we think about the modifications in ADR that we saw just say from first quarter, we started seeing -- I'll say at a high level, first quarter was shaping up to actually be a really nice quarter and certainly ahead of our expectations. As we enter in the second half of March, we started to see some fairly meaningful shifts downward, largely from the transient activity that would have pulled that ADR. When we think about that going forward, you know you're going to see the full effects of that really from that end of March period onward to partially through today. So I think you just saw a portion of that.

Thank you. Our next question comes from Jeff Grampp with Northland Capital Markets. Please proceed with your question.

I was hoping, Brad or maybe for Troy, if you guys can talk on the modified contracts, maybe dig in on that a little bit more. Can you guys touch on maybe some of the gives and takes? I mean, I guess simplistically we think that likely exchanging utilization and/or ADR for maybe some longer contract terms. So I guess just first want to see if we're on track with those thoughts. And maybe if we look at, I don't know your top 10 customers or so. What percent of those have those types of conversations taking place?

So when we look at contracts, we focused on a few things. So as we have some customers who you know, wanted to have those discussions, what we were trying to balance were the handful of the mechanisms. What we're trying to balance was ADR with term. I would tell you that in nearly all cases, we kept ADR flat through the contract period. I think the biggest point to bear in mind is, as we look to extend term on the contract, we came out with a contract structure that is better for Target in the long term. And I think that's going to be a significant positive. And in addition to that, we also established additional revenue commitments going out number of years as well. So I think we have to bear those things in mind. I think when we look at the customers that we're engaging in discussions with, really we were talking about kind of the top five, which were you know meaningful discussions were being had. I think, you know we've had discussions with you know probably 30, 40, 50 customers. But I think the biggest, you know, the biggest lion share of the revenue pool is going to be kind of the top five. And look we feel good about where we ended up. Certainly 2020 maybe a difficult year. But I think when we look going forward into 2021 as we see the contract profile, we don't see it looking absolutely different than what we expected coming into 2020, which I think is a positive going forward.

Jeff this is Brad. Let me add a little bit to that little color. What I would also say is that these contracts do work, we’ve said this forever in the company, it's what helped us through the North Dakota issue back in the day. But look we've got to held our ground here with our customers on our contracts and we could have had a really good 2020 when factoring in the rest and blow to live by the pandemic. With that said, as contracts come up for renewal in 2021, 2022, the outcome would not have been a favorable one for Target if we went and sat down and negotiated on some of these contracts. And some of these was us reaching out to the customer to go ahead and get in front of this and talk to them, let them know we are here to help. So look, the contract modifications were no doubt that they're a win win for Target Hospitality and the customer, and in agreements really set us up for many years of future success. But we won't start to see this roll through until demand picks back up hopefully in 2020, but the outer years get better no matter what on that as demand does get back to normal even more so. But we're coming up on some of these contracts just to be frank that were coming up next year for negotiation. While we hate to see this pandemic hit, it actually solved some things that were probably going to come up next year in that. And we gave the customer what they wanted, some relief in 2020. So at the end of the day, I wish this as being a positive as we move out of 2020 and into the further years.

And for my follow up, as you guys are kind of thinking about the right network size and I know you don't want to obviously you know reconfigure the business for the demand dynamics today, but if we think about your footprint in the Permian and just thinking about, you know, operators maybe consolidating to certain core areas of their acreage position. Might there be any considerations to consolidate or shutdown any communities, or are you guys just not seeing you know that type of degradation and utilization in certain areas?

We've always, good or bad, we have a lot of variable costs in this business. And to date, we consolidated some of our facilities that were lower on utilization. So we wanted higher utilization, we put two together. We were still able to service our customers under our contract scope and that's kind of how we've also reduced our cost. But our footprint kind of remains the same as far as the coverage on our lodges and we'll continue to do that. We think these will open back up. We look at them as temporary. As demand comes back, utilization comes up. We built these lodges, we can open them back up within a week. But for now, what we've had to do is consolidate some of them, get the variable cost out of it and reduce our cost structure.

Thank you. Our next question comes from Scott Schneeberger with Oppenheimer. Please proceed with your question.

Hey guys I know, you're not providing guidance but just curious on the pipeline project. How I guess the progressive build in revenue is what you would anticipate? And then on our end, we have to think about 2021 at this juncture. Would it be best to be perhaps conservative in 2021 based on outcome of the U.S. election? Thanks.

So first we’ll take TC. I think that is still a moving project for us in terms of how we're modelling that. I mean just to give you a little bit of color, we're working through a series of change orders. But those don't come months and quarters necessarily at this point in advance. So we're working through those a little bit a month or two in advance. So I will tell you we do think it absolutely is progressing from a modeling perspective is what I would kind of see, so I think that's the right assumption there. At this point in time, we want to be a little bit guarded in terms of what the notional number is. Hopefully, we can do that at some point here in the future. But I think you would expect the incremental movement really back up weighted specifically. As we think about 2021, I think what our base assumption is and we'll see if how right we are. But our base assumption is that we think we start seeing some progression in the November, December time frame, which means that you start ramping up from 2021 from a revenue and EBITDA perspective. So that may be conservative, it may not be. So I think from a modeling perspective, I think you have to look at 2021 still be conservative on it. But at the end of the day, make your own macro assumptions about how long you think the commodity cycle last and how long you think it will take to get, ultimately get personnel fully back engaged in West Texas.

Just as a follow up, this is getting a little into the details, but it speaks to a broader theme. In the first quarter, the gross margins was flat year-over-year in the Bakken and that was on some pressure there on the revenue line. Just kind of curious to see what action was taken to maintain that level? And obviously, there's a lot of talk of what you're going to do with the whole business over the next couple quarters. But curious to hear what you did there? And then it kind of extends into thoughts about what we might see on margin levels across the segments over the next few quarters?

So I'll pause on the margin longer term, because that's really as we said we haven't provided 2020 outlook yet. So it's tough to -- and this is such a dynamic environment as you can imagine that I think we really need a lot more time go through into the second quarter before we can make a really good or reasonable assessment on that. To the point of the Bakken, I think at the end of the day, it really comes down to pretty aggressive expense management that, and I think the company has done a really good job of doing that in a dynamic environment. So we quickly adjusted variable costs and that was able specifically as Bakken really into your question is how we’re to maintain that. I think, it's quick expense management and environment like this when you have the structure to do it is the key and we were able to do that.

Thank you. Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.

I wondered can you give us a sense of just even at the higher level, the types of contract modification, like how the discussions were this cycle as opposed to the last, because obviously it seems like you’ve come out of the last one in a stronger position given higher retention and just better incremental market share. But just any, even at a much higher level, what were clients looking for in these concessions as opposed to last just at a broader level?

Well, to be frank, the first call is always they want everything right, because when the pandemic hit it was unknown. Look here is the good thing. We have a strong relationship with these 10 plus years in some cases, because the contracts to have teeth. So we let that calm down, we sat down and we talk to them. What we weren't going to do was give up everything, but we ended up somewhere in the middle. For us giving up some things in 2020, we needed those back in the years. Some of these contracts were again coming up for renewal in 2021 and 2022. We took the time now to negotiate and get those extensions now instead of waiting for the out years when we believe demand and everything is going to be much better. So we gave a little and they gave a little as well. But most of them started off with a much bigger asset where we ended up, and I'll say it again. It turned into what we believe will be a nice positive for us and it was positive for the customer in 2020. So it ended up being a fairly good deal for both sides.

I think, Kevin, the one other thing that I would add is the biggest thing we gave them is the element of time in 2020 for contract fulfillment. So, that coupled with maintaining forward margins in addition to contract duration with extended commitments beyond that. I think when we couple all that together, you get to a spot where the 2020 was going to be challenging really under all the things that happened under any situation. So I think we looked at them and said, let's really position the company for really solid 2021 and 2022, and I think that's how it's going to shake out.

And then just I guess obviously there's just a ton going on, but it probably just underscores kind of the strategic rationale for diversifying a little bit. Have you given thoughts as to other kind of revenue areas just to kind of help balance out some of the energy exposure longer term?

We’ve talked about this a couple of times, those are still on our cards. We're going to continue to look at diversification even more so today. We don't want to be back in this position again we think diversification for the business is good. There's a lot of things that we do really well from catering to facility management, those are pieces of the business that we can do with very little capital spend, really almost zero. So we'll continue to go after those on the outside of what we do day to day. And then we'll continue to look at some other adjacent businesses as the economy gets better. In fact we definitely, diversifications we think as the company gets out of 2020 is a big piece of the business.

And I just want to confirm, you said you haven't had any COVID cases at any of your campuses. Is that right?

We have had two cases at our campuses, they were isolated, they were removed, they were really hit towards the beginning of the pandemic. It's been weeks, actually more than that months, since we've had any cases and zero employees of Target Hospitality had been infected, which I think is even more. They’re feeding, they’re cleaning, they're face to face with these folks, they’re living with them. It's easier to control your own employees than it is somebody coming from outside but we did temperature checks. We knew where they were coming from. We have some really good customer base as well that was helping with that from the Halliburtons to the Chevrons, to the you know the bigger ones that helped us along with that. So we had very limited effect on operationally on the business other than things we changed. You know, we shut down the gyms. We shut down the cafeteria is where we had to prepare all meals to go where they eat in the rooms, those types of things. Everything that other restaurants did in hotel, but we had to keep you know taking care of the customer. But no effect on the business other than utilization and revenue. Those are things that got hurt but operationally, we fared and continue to fare very well.

Thank you. Our next question comes from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.

Thanks for taking my questions, a follow up question on the contract extension. Brad, as you mentioned you gave some concessions in 2020 that helps you going forward. I was just wondering historically 85% of your revenues were under long term contracts? How should we think about these contract extensions going into '21 and '22? Can we think about it in a similar way do you have 85% of your revenues under contract?

So I think the way you have to look at it is, you know it's really two fold. So there's the total contract portion and then there's the contract portion that's under committed volumes. And so while we haven't provided what we think that pro forma number is going to be, it's just too early. I think the way you should think about this is in a more normalized environment and that would really apply to probably 2021. So I think for modeling purposes and the way you handle that assumption going forward is to mirror your assumptions you had for 2020 when we entered the year and roll that into 2021 in the normal more normalized sort of environment. And let the kind of revenue shake out how you want, but that's how I would think about the contracts in total really heading into 2021.

And maybe just a follow up question on the capacity. I was just wondering again, there was some comments made around consolidation that you've already done on facility side. But I was just wondering the overall capacity that's still available in the Permian. And I was wondering if you can comment on it if you've seen any consolidation there. Have you seen some more rational capacity in the space? Thanks.

And you're referring to some from a competitive perspective and industry in general?

Yes, industry in general.

Absolutely, when you look at the capacity or the total available supply in the market today definitely has contracted, whether it’d be hotels or direct competitors that offers a type of accommodation or similar accommodation profile. Clearly, we continue to monitor that supply on a real time basis and it has contracted. So, as we think about our opportunity as things start to normalize and our ability to capture market share, we've got a plan to do so. But in terms of our, and I think Brad mentioned earlier in terms of our consolidation in the Permian, we're able to service our customers throughout the entire Permian Basin in each of the submarkets that we were operating prior to COVID-19 and we'll continue to do that on a go forward basis.

Thank you. Our next question is from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Just as a follow up, and I know the visibility here is this tough but there's just two things I want to hit on. One is when you look at the potential occupancy levels in the second and third quarters, obviously, in the oil patch being in well. Is it a reasonable assumption that you'll still be fairly EBITDA positive?

I don't think there's any, really any question whether or not we're going to be EBITDA positive. That's not even -- it hasn't even an discussion point. I got a step further just because you asked the question. So look under any scenario that we've modeled and we modeled the pretty negative ones, we have not envisioned any scenario in that application. And even the step further than that, there's not a scenario that we have modeled where we are not discretionary cash flow positive.

And then the only other one I have was, do you have any updates as we think about the government contracts. I mean, I guess it's still up in the air and post-election and we get through the renewal. I think it's about -- was it 18 to 24 months away right now?

Yes, definitely. You're exactly right. And that contract we continue to say this on each call. It just moves along. It's very consistent. You can see it in the numbers. It doesn't change much. It's a well ran facility. And we just don't see much change. To you know, getting probably more to your question, we don't see any negotiations until late part of the year, probably first of next year, just because there's time there to get that done. There's an election and everything else. What I would tell is there still a big need. The thing is that it’s being run as it has always been so not much there on the government side.

And just one final one. When you talk to your customers now, I know you gave some very good detail about conversations you've had. In a cost cutting world that we’re in, do you find that your value proposition is even easier to sell? I mean I understand that hotel rates have come down et cetera. But on a royalty basis, you’re still I think providing a better value. Does that help at all? And is it easier in an environment where these guys are so cost conscious?

I would tell you that, so we balanced ADR return, we extended the term in all cases. We maintained the integrity of the contract. So what I would tell you is it definitely helps in an environment like this, how we’re set up or they would have not been willing to set and negotiate with us, and we just got with our own, the contracts that we had in hand. So it does become easier in times like this. And you know, proof is in the pudding, we did the same thing in North Dakota and I think it was Kevin mentioned earlier, we ended up better as we moved out of this and became much stronger. We gain market share. We see that happening. You know we saw consolidation of our own lodges, but what I see is consolidation of the larger companies, the larger companies in the Permian who we’re already contracted with that should help us as we move on and demand starts to come back in future years.

I think the other thing you have to bear in mind, Stephen, as well is that Target has by far the largest platform, I mean by four or five terms. So here's the other thing that's happening commercially is that when customers are looking for long-term partners, they know Target’s is going to be there. And right now you look at the space and I think what we're seeing is we're seeing a lot of contraction from competitors who are not there six months ago, or three months ago and they're no longer here today. So I think that has a lot of value as well realizing that who your partner is going to be with and we offer the most cost flexibility across the platform.

Thank you. We have reached the end of our question and answer session. So I would like to turn the floor back over to Brad Archer for any additional closing comments.

Yes, first I want to thank all of the Target Hospitality team members that have been out on the frontline during this pandemic. These folks are away from their families for weeks at a time taking care of our customers to ensure they remain safe and healthy. Our frontline team members are truly what sets us apart in our industry. I also want to thank all of you for joining our call today, and we look forward to speaking again next quarter’s call. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.