Target Hospitality - Earnings Call - Q4 2019
March 12, 2020
Transcript
Speaker 0
Greetings and welcome to the Target Hospitality Fourth Quarter twenty nineteen Earnings Conference Call. At this time, participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to our host, Mark Shook, Senior Vice President of Investor Relations.
Thank you. You may begin.
Speaker 1
Good morning, everyone, and welcome to Target Hospitality's fourth quarter and full year twenty nineteen earnings call. The press release we issued yesterday outlining our fourth quarter and full year 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, 03/12/2020. 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.
Leading the call today will be Brad Archer, President and Chief Executive Officer followed by Eric T. Calimaris, Executive Vice President and Chief Financial Officer. After their prepared remarks, we will be joined by Troy Schrank, Chief Commercial Officer, and open the call for questions. I'll now turn the call over to our Chief Executive Officer, Brad Archer.
Speaker 2
Thanks, Mark. Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and full year twenty nineteen results. Before we get started, I would like to take a second to acknowledge the recent volatility in global financial and commodity markets, which have consequently put significant pressure on the price of crude oil. These events have created macro uncertainties that have rippled through the markets, and we will continue to closely monitor any potential effects to our business. Now turning back to 02/2019.
I want to first look at the cumulative steps we have taken in the first year of being a public company to solidify competitive advantage and add to our unmatched network of first class communities and service offerings while strategically positioning Target to produce industry leading returns over the long term. We created strong operational momentum throughout 2019 and continued to position Target as the leading provider of specialty hospitality accommodations and services in The US. We successfully integrated two acquisitions and combined with organic bed additions increased our average utilized beds 44% to a record of over 12,000. We expanded multiple communities as demand for our premier full turnkey services remained strong in the heart of the Permian Basin, the dominant hub of US energy production. We have effectuated this growth in a manner consistent with our core focus of aligning with the right customers in the right locations and being disciplined with our capital allocation, which has consistently allowed us to achieve attractive returns.
In the 2019, we saw a reduction of growth in the domestic shale plays, and the Permian Basin has not been immune to this moderation of activity. This impacted capital spending levels in the 2019 and was more pronounced than expected, impacting our results as we move towards year end. However, these challenges proved the resiliency of our business model as we saw meaningful growth in full year 2019 revenue and adjusted EBITDA, while maintaining strong EBITDA margins of approximately 50%, all while generating record cash flow. While we were beginning to see activity levels stabilize and even start to increase as we moved into 2020, the recent global macro events will likely cause reduced activity levels to persist until there is a clear understanding as to how our customers will address any impacts to their business. However, it is important to note that as we sit here today, we have not had conversations with our core customers regarding modifications to their existing contracts due to recent macro uncertainty.
While our core larger customers have performed well, the reduced growth rates in activity in the fourth quarter impacted our uncontracted business, which represents about 15% of our revenue as these customers represent less predictable workloads. We remain focused as always on converting these customers into a contract, but realize that one size does not fit all. We are cognizant of varying customer needs throughout our community footprint and will offer a varying degree of terms to Captioner, the marginal customer. Now let me touch on our business and what differentiates Target. The industry experienced lower activity in the 2019, and our results were not immune to this as we also experienced a reduction in utilization and ADR, most notably in our fourth quarter results.
However, there are several key points that differentiates Target from other business. First, throughout 2019, we maintained robust margin of 50% while generating significant discretionary cash flow. As I have said before, we have positioned Target to be successful through a variety of business cycles. We believe this is evidenced by our 2020 outlook, where we expect Target to generate meaningful discretionary cash flow. This significant cash generation allows us to further strengthen the financial posture of the business, predominantly through debt reduction while simultaneously evaluating other potential growth vectors.
Second, one of the key tenets of our business strategy is a disciplined approach to capital allocation. Our capital expenditures are highly discretionary and allow us to carefully evaluate investments, ensuring we maintain a high degree of return certainty in all environments. In addition, we underpin these capital investment decisions with long term contracts, which provide a high degree of revenue visibility years in the future. Third, paramount to maintaining this high degree of revenue visibility is our commitment to focusing on a long term contract structure while doing business with well capitalized customers that have long term investment horizons. These large customers are far less correlated to short term fluctuations in commodity prices and demand consistent high quality accommodations for their employees while benefiting from the efficiencies our network provides.
Our first class network provides unparalleled flexibility, which allows us to seamlessly grow utilized beds with our customers' needs. This is illustrated by the two announcements we made earlier this year, executing major contract renewals with four key customers, which represented approximately 20% of 2019 energy revenue, and the expansion of our El Capitan facility, which marked the second expansion of this community within the first year of operation and was driven exclusively by customer demand. We have created a structurally sound business with a strong financial position and a proven track record of creating consistent and profitable growth. This foundation provides the ability to continue evaluating potential growth opportunities, including strategic value enhancing acquisitions and other value added adjacent markets. As we evaluate potential growth vectors, any opportunities will squarely fall within Target's core competencies and lean on the competitive advantage we have created through years of experience in the hospitality industry.
When considering Target's suite of competitive advantages, it is important to remember that we are not simply a provider of bare bones sleeping accommodations. We are a full service hospitality provider with many expert core competencies. This is illustrated in the fact that while we added approximately 1,500 rooms to our network in 02/2019, we provided 2,800,000 service nights, washed more than 4,100,000 sheets, towels, linens, served over 11,000,000 meals consisting of more than 2,400,000 pounds of lean protein, nearly 3,500,000 fresh oranges, and over 206,000 pounds of bananas. Our customers know we keep their people well fed, well rested, and well prepared for the next workday. As we reflect on 02/2019, we are pleased with the results and momentum we are able to sustain while navigating late year headwinds and feel we have positioned Target for continued success.
I'll now turn the call over to Eric to discuss our fourth quarter and full year financial results as well as our 2020 outlook in more detail.
Speaker 3
Thank you, Brad, and good morning, everyone. I will begin with the discussion of our results, review our capital program and conclude with details on our recently announced 2020 outlook. In the fourth quarter and full year, continued to benefit from our growing network, including acquisitions, new builds and expansions, and remain focused on operational execution and the integration of these assets into our network. While our fourth quarter results were modestly impacted by the headwinds that persisted within the energy end market, as well as a slower than expected pace of the TransCanada pipeline project, we still achieved excellent margins with a growing network of available beds, and importantly, continue to generate significant discretionary cash flow. For full year 2019, total revenue was $321,000,000 an increase of 33% compared to full year 2018.
Adjusted EBITDA was $159,000,000 an increase of 36% compared with the same period last year with an adjusted EBITDA margin of 50%. The year over year growth in adjusted EBITDA was primarily driven by approximately 4,400 new bed additions as a result of the Signal acquisition and approximately 1,500 new bed additions from new communities and expansions, which contributed to over 40% growth in both average available beds and average utilized beds. Turning to our segment performance, the Permian Basin delivered fourth quarter revenue of $53,000,000 an increase of 6% versus the prior year quarter. This increase was primarily driven by an increase in average utilized beds as a result of the signal integration as well as new community additions and expansions. Average available beds increased by over 2,000 or 29% compared to 2018.
ADR decreased by $2.8 primarily from lower average ADRs at acquired Signal communities and softness in the uncontracted portion of the business. We have completed the Signal Enhancement program and continue to focus on opportunities to convert these customers to a more typical legacy target pricing model over time. In The Bakken, we rightsized our footprint in 02/2018, which drove the expected decline in average utilized beds, while significantly improving utilization and creating cost efficiencies. Revenue declined by 29%, mainly due to this decrease in average utilized beds at lower ADR, reflecting lower activity levels compared to the same period last year. Our government segment remains very consistent with rev revenue for the quarter up slightly to $17,000,000 The fixed contractual nature of this asset provides relatively stable ADR utilization and revenue.
Our all other segment, which consists primarily of construction fee revenue from the TransCanada project, had revenue of $2,000,000 and adjusted gross profit margin of 21% for the fourth quarter. This was driven by significantly lower than anticipated pre FID activities. While we are hopeful for a contract start in 2020, we have taken a conservative approach and have not included revenue associated with this project in our 2020 outlook. Recurring corporate expenses for the quarter and full year were approximately $8,000,000 and $31,000,000 respectively. The increase from last year is primarily associated with the transition to becoming a public company, as well as infrastructure investments that will allow us to scale the business to support additional growth with minimal incremental costs.
We expect our recurring corporate costs to remain around 8,000,000 to $9,000,000 per quarter. We generated cash flow from operations of approximately $16,000,000 and $61,000,000 respectively for the fourth quarter and full year. Since much of our capital spending is discretionary given nominal maintenance capital needs, fourth quarter along with full year 2019 provides a clear picture of the exceptional cash flow generation ability of our business. We expect to continue to generate meaningful cash flow providing the flexibility to execute on a variety of value creating opportunities, predominantly focused on our enhancing our capital structure through debt reduction or other accretive stakeholder initiatives. In addition, we have developed a pipeline of growth opportunities, including strategic diversifying acquisitions in adjacent markets, which align with Target's core competencies and business strategy.
As we continue to evaluate these opportunities over time, it's paramount to remember we will not execute on growth opportunities if it does not meet our rigorous return criteria. Capital expenditures in 2019 were a $116,000,000. Almost all of this capital spending was for revenue enhancing investments, including $79,000,000 related to new community developments and expansions in high grading of legacy Signore communities, as well as $35,000,000 for the acquisitions of Superior and ProPetro Lodges. Maintenance capital spending was $2,000,000. We ended the year with $420,000,000 of total long term debt, including $80,000,000 drawn on our revolving credit facility and consolidated net leverage of 2.6 times.
As a reminder, our long term debt consists of $340,000,000 in senior secured notes due 2024 and a $125,000,000 asset based lending facility, which have no near term maturities or immediate financial covenants, providing significant flexibility within our capital structure. Since commencing the share repurchase program in August 2019, we have repurchased shares for approximately $24,000,000 or approximately 32% of the total share repurchase authorization. Turning to our full year 2020 financial outlook. Our core business is resilient with approximately 85% of 2020 revenue under long term contracts, with approximately 55% expect to have committed payment provisions and an an additional 30% that have exclusivity provisions. Further, as Brett mentioned, we have no material contracts due for renewal in 2020.
The energy markets did experience headwinds exiting 2019, and the recent global macro events have created near term uncertainties throughout markets, which were not accounted for in our previously announced 2020 outlook. We will continue to monitor the impact of these macro uncertainties, its effect on our customers, and any potential impact to target, but remain confident in our core contracted business, which provides a high degree of cash cash generating capability. The discretionary nature of our capital expenditures will allow us to generate a high level of discretionary cash flow. As we navigate the current market environment and the effects of the recent events, we will remain prudent in our capital allocation and moderate our growth capital spending to ensure continued value creation. The structural advantages of our business model provides for significant cash generation and allow us to control not only the quantum, but also the pace of our capital spending.
Our disciplined approach to capital allocation aligns with Target's objectives of deploying capital into long run value enhancing initiatives while continuing to create value for our shareholders. With that, I will turn the call back over to Brad for closing comments.
Speaker 2
Thanks, Eric. Before we close, I want to acknowledge the ongoing global concern over the coronavirus. We take very seriously the commitment to provide safe and healthy hospitality services to our customers, and the coronavirus has not impacted our lodges, employees, or customers. We continue to monitor the situation and take all necessary steps to ensure a healthy workforce at our lodges. In summary, while we did experience sustained headwinds through the back 2019, this provided an excellent illustration of the value proposition we are able to provide our shareholders through the competitive advantages we have created.
We entered 2020 with positive momentum in our core business. While we continue to generate significant discretionary cash flow, we remain focused on disciplined capital allocation and aligning with the right customers, which we believe truly differentiates Target. Our committed focus of developing long standing relationships with large, well capitalized customers provides an unmatched, mutually beneficial relationship that is truly a win win for both parties. We have positioned Target with a solid financial foundation from which to execute on its strategy while maintaining consistent and attractive returns for our shareholders. I appreciate everyone joining us on the call today, thank you again for your interest in Target Hospitality.
Operator, you may now open up the line for questions.
Speaker 0
Thank you. At this time, we will be conducting a question and answer If you would like to ask a question, press star one on your telephone keypad. A confirmation tone will indicate that your line is in a question queue. You may press star two if you would like to remove your question from the queue. Our first question comes from Stephen Gengaro with Stifel.
Please state your question.
Speaker 4
Thanks, and good morning.
Speaker 3
The Good morning. Good morning.
Speaker 4
You know, when we when we think about the guidance that you guys provided, and and maybe you could sort of help to sort of, I guess, definite with with the definitions of the terms you're using and helps help me kinda triangulate. But so 55% of the midpoint of your guidance is, I think, a 172,000,000 of revenue. So I'm taking that to be locked and loaded and unwavering. But what's the difference between the 55 and the 85, and how much wiggle room is there in that 30% of revenue?
Speaker 3
Hi, Steven. Good morning. This is Eric. So the the 30% that you're referencing is is really they're really customers that are, that are under contract agreements, most of which have exclusivity provisions tied to them. So those are rooms though that, you know, while they're while they're connected to our network, they have yet to determine, necessarily timing or necessarily the amount of rooms that, that they would eventually take.
So so said differently, you know, if they are in many cases, if they are going to use rooms, they're gonna use them in our network, but they have yet to specifically define time or an amount.
Speaker 2
Let me let me just add to that a a a little bit. This is Brad. When he you know, Eric talks about not committing maybe time and amount. These are folks that are using the the the lodge in most cases today. They could be using 50 rooms.
Some of these companies could be using 300 rooms under the exclusivity. You know? So when you talk about wiggle room here, let's just you know, we all know what happened the past four to five days. What we don't see is the guy that has 300 employees going down to zero. So there's some there's will there be movement in his number if he loses some work?
Yes. But he's still required to use us if he's in the Permian Basin. K? So that's kind of the wiggle room in that. He can't stay in a hotel.
He can't stay in another competitor's lot within 40 to 50 miles of hours. So there's some wiggle room there, but it it it can't just all of it go away unless he loses all of his business. So it really depends on that customer, but there's definitely a contractual, nature between both us and in that in that in that group.
Speaker 4
So so so is it fair to say that that 30% is almost it's almost completely dependent on that customer's activity level? Whereas the 55 is you're getting paid regardless of activity levels.
Speaker 3
Yeah. The the 55 is meant to designate, really regardless of activity level. The the 30%, as Brad mentioned, right, we can have those customers today, but that, you know, that can be variable based upon their activity amount. It just happens to be that when they when they do have have usage, it's going to be in our facilities. Okay.
I do yeah.
Speaker 2
And just one you know, some of these are some of your largest oil field service companies. So with many lines of business, right, under this exclusivity agreement. So that's where I, you know, take a a view on the business that it's not going to to to all go away. You know, these are long term, mutually beneficial relationships. Been there for ten plus years, some of them.
And now they're just under an exclusivity, contract that gives them some more flexibility.
Speaker 4
Okay. So so one follow-up and then one other question. But just, I'm just trying to make sure I understand it completely. Are there customers, let's that are part of both buckets, both part of the 55 and part of the 85?
Speaker 3
Generally not. No.
Speaker 4
Okay. Okay. And then can you just give us a quick update on the government side? What's the status of that contract? How do you feel about it going forward?
When's the the renewal discussions come up, etcetera?
Speaker 2
Yeah. Look. The the the government piece is and I always say this on the call. It's, it's it's it's a very predictable business. Right?
It it's facilities management. We do the catering, and it just continues to perform year after year. We feel great about that contract. It doesn't come up for renewal until late next year, in 2021. So sometime after, you know, late in the year, is when we'll start to have those discussions in early into 2021, with the counterparty.
But at this point, there's no changes in that facility.
Speaker 4
Great. Thank you.
Speaker 0
Our next question comes from Jeff Grampp with Northland Capital Markets. Please state your question.
Speaker 5
Good morning, guys. Maybe sticking on the last topic with the government question, is it are those discussions, based on kinda how how you guys see this playing out, predicated at all on this upcoming election cycle? Or is that just, you know, more related to the timeline of, in in in relation to when the contract term is is ending up? Just kind of wondering how you guys view, I I guess, the timing of that.
Speaker 2
Look. This was built under a democratic, you know, president. We don't see that playing into it too much. There's definitely a need. We're the only one in The US like it.
So it is more about just, when the contract ends and when we start those negotiations and not more, if you will, about the presidential race.
Speaker 5
Got it. Understood. And,
Speaker 0
I was hoping you
Speaker 5
guys could maybe, talk about, obviously, super volatile oil pricing environment. Can you guys talk about your experience the past in terms of conversations you have with with customers? You know, when when you see these periods, have they or or do they tend to come back, in terms of asking for any, you know, type modifications of the contract, whether that's ADR or, you know, number of beds in the contract? And and maybe if you guys can just touch on empirically how how that process has kinda gone in the past in terms of kinda revisiting contracts.
Speaker 2
Yeah. Let me first just say, you know, being that the action taken by OPEC just happened, you know, what, four to five days ago, it is too early for us to determine the impact of the of the events. We're we'll continue to monitor it. But, look, we have been through this before as a management team, year years ago, and we fared well. We have long term customers, long term contracts with them.
And and look, there will be some of those discussions. I mean, I think all of us right now believe there's gonna be a shrinkage of activity. But we're trying to figure out how deep and how wide. Right? And when those discussions happen, we'll go back to how we do business, looking at at making sure they continue to cash flow.
We have some discussions with customers, setting down with them, maybe trading term for some rate. Absolutely. We will we will do that, and that's kinda how we how we did it in the past. There will be triggers in there to get those rates back up. But you we'll always continue you know, it's gotta be a win win for for both sides.
And then, again, anything that we give is gonna be looked at. We're gonna continue to generate the free cash flow on that contract.
Speaker 6
Got
Speaker 5
it. I understood. I appreciate the comments, guys.
Speaker 0
Thank you. Our next question comes from Kevin McVeigh with Credit Suisse. Please state your question.
Speaker 7
Great. Thanks. Hey. I guess just on the 2020 outlook, how are you thinking about, you know, what price of oil is that 2020 outlook based on? And then just any thoughts around your kinda utilization levels?
And then ultimately, would you expect to see, you know, an uptick in in bad debt expense based on history in the past? Or are the contracts such that there's not a lot of real, bad debt exposure?
Speaker 3
Sure. Hi. Hi, Kevin. Good morning.
Speaker 4
So I mean, mean, a
Speaker 3
couple couple comments on the outlook and then address the the the bad debt expense, which is which is a good question. So, you know, clearly, world changed a lot from two weeks ago. Look, I mean, it changed a lot from Saturday, quite frankly. You know, we we will we will update the outlook and, you know, we'll we'll do it thoughtfully. A couple things to bear in mind.
So so if there are as we think about the 2020 outlook, there are new events like we had just over the past week or two. Now there are second, third order effects here that our customers need to react to. So, you know, we haven't seen these these reactions yet, and we'll we'll monitor those, and we'll work that process with our customers. You you know, we also have some variable cost aspects that we, you know, can can employ here to manage margin, which is, you know, historically how we've been able to to manage margin through these these these types of cycles and and keep margins at at really surprisingly healthy levels, which which I which I which I I I think you'll see as we as we move forward here. So so, you know, we'll take all that into account.
We'll we'll bake that into the to to an outlook at at some point in time when we get some additional clarity here. I think, you know, in the meantime, just, you know, recall that, you know, Target, because of our our cash flow profile and the margin profile, you know, we generate a lot of cash even in difficult even in difficult markets. Now be because of that, you know, we we tend to not see in the nature of our customer base, we tend to not see a a a meaningful amount of of bad debt expense. We we haven't we did not see a a meaningful amount in in in in the back end of of q four, which is which is what we're which one could have seen. We did not see that.
So I wouldn't expect to see a lot going forward, but we'll continue to monitor it. And, like I said, you know, to the extent we have we have modifications, we'll sort of be should update the market, when we can.
Speaker 7
It's helpful. And then just real quick on you know, obviously, the business generates a lot of cash. How are you thinking about capital allocation within the context of, you know, the near term uncertainty, particularly given, you you know, the way the stocks reacted in the near term, in terms of buyback versus maybe m and a? Or just any thoughts on, just even the the business overall?
Speaker 3
Sure. So let me I'll give you some context. Take a step back on capital, and then we'll we'll dovetail that into to the allocation aspect of it. When we when we entered into 2020, you know, we we effectively felt like the the market was fully supplied. We were really shifting our approach more from greenfield development to more of a supply and utilization and then with optimization focus.
And then the and the whole objective of that was to to, you know, focus the business on on optimizing the scale that we've that we've built over the past few years. And so that was the that was the posture we had coming into into 2020. What we what we did as a as a function of that was, you know, we meaningful meaningfully pulled down, you know, capital spending, which is what we've demonstrated in in in the outlook that we had, that we had put forth. When we when we kind of fast forward to today, you know, look, the the the equity value is is, you know, absolutely discounted from what we, you know, we think will ultimately be, you know, realistic levels moving forward. So certainly significant value, you know, here today.
I would say, though, you know, look, we generate a lot of cash and even in challenged conditions. But I think it's important to maintain a position of balance sheet strength. You know? So, you know, while I can't comment on specific capital market activities, and and look, stock buybacks can be an option. I think the near term focus really needs to be, you know, balance sheet, you know, optionality versus optimization at this point.
So, you know, we'll we'll continue to evaluate share repurchases as just as a part of our capital allocation approach. But I think, really, what we'd like to do is be able to take advantage of whatever whatever commercial opportunities present themselves over time and and put ourselves in the best spot to do that.
Speaker 6
Understood. Thank you.
Speaker 0
Thank you. Our next question comes from Scott Schneeberger with Oppenheimer. Please state your question.
Speaker 8
Good morning. This is Daniel
Speaker 6
on for
Speaker 8
Scott. Could we delve into a little bit on the Permian ADR utilization trends? Discuss what you've been seeing so far into 2020? And help us with some perspective on how it might develop in the next couple of quarters here as far as what's underlying your outlook?
Speaker 3
Sure. Well, so so when we think about the outlook, you know, I think we need to we need to, just take like like I said, I mentioned before, we need to take the temperature of where our customers are. You know, know, a lot has changed in the past, really, in the past week. And and so our customers if you think about the nature of our customer base, I think you have to bear in mind that that a lot of our customers are are not direct E and Ps. Right?
Most of them are large integrated producers, very large service firms. And so they're they're they're representing a number of, in many cases, a number of a number of of clients of their own. And so like I mentioned before, there are second and kind of third order effects here that they need to evaluate as they think about their their labor movements as well. And so I think at this point in time, you know, let us let us evaluate what that what that looks like, and then we can come back and and give you a thoughtful, thoughtful response when we've had a chance to survey that with our customers, and they've had a chance to to react as well.
Speaker 8
Got it. Thank you. That's helpful. If we think about, the quarterly cadence of EBITDA and cash flow as it as it stands now, how how do you recommend us to think about that cadence in 2020?
Speaker 3
Sure. So so I'll I'll take you back to to my to to my prior thoughts around how we developed the the outlook initially. You know, we were expecting to see as we and and are seeing and we're seeing a ramp up from q four through, through even, you know, even a week ago. We were seeing a a nice progression of activity, really what we from q four levels. And so we would have expected to see a a a a gradual buildup through q one, q two, and kind of culminating to to q three, which which we always see a little bit of seasonal seasonal movement in q four.
So that's what we would have expected. So you kinda would have seen this this natural progression of a glide path know, heading up into q two and q three. And I I think I think, you know, given what we've seen in the past past week or so, certainly, our our expectations are likely to move on how we see that glide path. Certainly, I think we can all point to trends that are feeling, you know, less certainly less positive than we were even even a week ago and two weeks ago. So I think it's important to as I mentioned before, we'll we'll continue to evaluate what the market conditions look like.
And, you know, a and then we'll we'll have to just see where we go from there and just update accordingly.
Speaker 8
Got it. And also, final one from me. What are you doing with your your customers to test new work? Is you're starting at your communities from outside the area to key, to attempt to keep the virus spread from occurring at your locations?
Speaker 9
I'm sorry. Can you repeat that question? This is Troy.
Speaker 8
Yeah. Hi. Yeah. Sorry. So I'm I'm curious on what what are guys doing with the customers if you test new work?
Is this just storing at your communities from outside the area to to attempt to keep the virus spread from from occurring at your your locations? So it's a coronavirus question.
Speaker 9
Yeah. Thanks, Daniel. So look. We've been actively engaged with our customers, for several weeks in advance and continue to monitor the situation very closely. We're in active communication with their health, safety, and environmental teams of of the major customers in preparation for for such issues.
We have worked very closely in public publishing documents and information related to containing such viruses, the cold and flu prevention steps that we've all been very become very familiar with in the in the recent weeks Mhmm. Really have have have leaned on the guidance from the CDC and working very closely with our customers. And I wanna reiterate reiterate what Brad had said on his prepared remarks, which is we have not had any incident incidents related to the coronavirus thus far, and the lodge is fully prepared with our customers to maintain a safe, high quality environment for our employees and our customers.
Speaker 2
Yeah. Daniel, I'll just add a little bit to that on what Troy said. It it is look. We are in the hospitality business, in the in the in the food services business, and this is something we have to do and have done for years in this business. It is the you know, you kinda take yourself back to, when you were growing up, but it's the normal things you should be doing that we have to continually reinforce even more today.
But it is the cleaning. It is the coughing in your you know, in into your sleeve or into a It's the simple things that you have to to make people aware of and do. Right? I don't wanna sound like know, I don't wanna downplay it as it's big and but it is something we have we've we've looked at for years, and it's something we have to continue to do.
And even it's more focused now where we're making sure our customers are involved, on a daily and weekly basis. We have calls. We have level one, level two, level three, you you know, scenarios. We have a a a pandemic plan. We're all over this and and have been as we think it's going to continue on for a little while.
But as Troy said, it hasn't affected us yet, but we have a plan in place, and and we'll continue pushing forward.
Speaker 8
Got it. Thank you very much for your time.
Speaker 0
Our next question comes from Ashish Sabadra with Deutsche Bank. Please state your question.
Speaker 6
My question. So just a question on the cost. You talked about a good portion being variable versus fixed. I was wondering if you could talk about what hump what percentage of the cost is truly variable? Like, if the utilization does fall down significantly, do you have the optionality of even potentially closing those lodges, or do you have to keep it open?
So how much is truly variable versus fixed cost?
Speaker 2
Yeah. This is Brad. Thanks for good question. One good thing about our business is there there's a lot of variable cost in your cost of goods, really, at your lodge level. Right?
If if you see utilization start to drop, some of our biggest things is labor, food, and those things you can, you know, do very quickly to help defend your cash flow. Right? So within literally within a few days. So so, you know, it goes even to electricity, water, things that add up when you have as many locations as as we do if you start to see this flow. As far as the percentage, I'm kinda letting you know, Eric talk more on specifics, but we this is exactly, if you will, the what I talked about is the playbook we had to go to, back in '15, to help to, again, defend the cash flows, keep the margins up.
And there's a lot of variability there that we can we can start to pull levers on if we see this start to deteriorate in the utilization.
Speaker 3
Sure. So so, you know, to Brad's point, there are a number of levers we can pull. When you when you look at the operating cost lines, there are, what I would call, short run, you know, efficiencies you can take, and then there are more kind of intermediate to long term efficiencies you can take. When you when you look at the when you look at the the operating cost numbers, you know, I would say on a short run basis, Ashish, you're probably talking about half the cost are are more short term and variable in nature. So you think about food costs, certain certain labor costs, you know, what you know, what we call, you know, camp supply costs, which can move fairly fairly quickly up and up and down with the actual occup occupancy levels themselves.
There are other costs that can be moderated through time, but are not quite as as efficiently, done. And those tend to be costs that have a just have a longer lead time that have to be managed through. So there is a there there's short run and and a little bit longer term. You know, the longer terms, and they're not we're not talking years. Right?
We're talking, you know, literally a quarter or two or sometimes three. But, generally, you know, I would say when you look at that cost bucket of the total operating cost line, you know, you've got roughly 70% there that's variable. I would say of that of that 70, the initial 50 is is variable kind of on almost on a on a weekly basis. The delta is done more of on a intermediate term basis.
Speaker 6
That that's very helpful. And maybe a similar question on the cash flow side. A lot of your, expenses, as you pointed out, are are discretionary. For example, growth CapEx, you can flex that around. Are there other costs also or from a cash perspective, your ability to sustain the the the, free cash flow even in in the scenario of utilization coming down, if you can provide any incremental color on that front?
Thanks.
Speaker 3
Sure. So so so you're right. The if if you think about my comments a a bit ago regarding how we were coming into 2020 and thinking about the market and and supply and how we're positioning capital spending, out of the 10 to $20,000,000 that we had that we had provided as an outlook, you know, we can we can look at that number, and I would say that there is probably, you know, two thirds to maybe even three quarters of that that is still discretionary in nature today. Meaning that we can we can bring back, a reasonably decent amount of of of, discretionary, spending and which would then flow into the, obviously, the cash flow line. So further enhancing that.
Right? So which which is positive. And so we do have nice flexibility there. And and we are actively evaluating that right now and and, have already begun measures of curtailing some of that discretionary spending. So so from our perspective, you know, look, we have, you know, some flexibility of about an additional 15 to 20% on the on the discretionary cash flow outlook that we already provided.
And we'll just have to take it and see from there how much how much more flexibility we ultimately have, but but I would give you that number to to work with right now.
Speaker 6
That's very helpful. Thanks a lot.
Speaker 0
Our next question comes from Stephen Gengaro with Stifel. Please state your question.
Speaker 4
Thanks. Just as a follow-up and sort of back to that cash flow question. I know this is probably a hard one to sort of triangulate, but I mean the way if we run the numbers and I just take a draconian case, right, where you're basically utilization, your revenue is 55% or 60% of your published guidance, it still looks like you generate reasonably good free cash flow. Is I mean, given the leverage you have to pull and given how you're thinking about it, is that reasonable? I mean, I still think you generate 30 to 40,000,000 of free cash, but I'm just trying to figure out if we're missing something in the as we work through the income statement.
I don't if you run something like that or not. Or
Speaker 3
Yes. So look, I I appreciate the question. We look, I can't, you know, I can't comment specifically on on the numbers that you that you quoted, but I will tell you this. I think I I would tell you, based on what you described, those feel like awfully conservative numbers to me. But, look, the the business generates a lot of cash.
We have flexibility. There is the ability to to have, you know, to have, you know, margin. You know, certainly, it's not an environment for margin expansion, but I would call it more margin maintenance. You know, that that does exist here. And so, look, I think think you're you're I I we saw your note.
You're on the right track. But, you know, let's just let's just wait and see how things play out, and maybe we can give you some more color, a little bit through time.
Speaker 4
Great. Thank you.
Speaker 8
You're welcome.
Speaker 0
Thank you, ladies and gentlemen. We have reached the end of the question and answer session. I will now turn the call over to Brad Archer for closing remarks. Thank you.
Speaker 2
Thank you. Before we end the call today, I would just like to thank all of the employees at Target Hospitality for their hard work and dedication. I could not be more proud of the effort they delivered three sixty five years a day to our customer. Finally, we look forward to updating you in just a few months on our first quarter call. Thanks, and have a good day.
Speaker 0
Thank you. This concludes today's conference. All parties can disconnect. Have a good day.