Target Hospitality Corp (TH) 2020 Q1 法說會逐字稿

Greetings, and welcome to the Target Hospitality First Quarter 2020 Earnings Conference Call.

(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 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, 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 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 will 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 the COVID-19 pandemic and the current market conditions as well as our priorities through the remainder of 2020.

As we sit here today, we are operating in a vastly different environment 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 all 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 continued through the first 2 months of the quarter and into March.

Average utilized beds for the quarter were 9,798, 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 last 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 are 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 first quarter, the effects of the COVID-19 pandemic began to accelerate across the United States.

In the face of these unprecedented events, Target quickly implemented a comprehensive operational response plan to ensure the health and well-being of our employees and customers.

As a result, we have not had any cases of COVID-19 impact our business.

We have also taken decisive steps to appropriately position our business for what is shaping up to be a challenging 2020.

As activity levels have declined, we are dynamically managing capacity across our network to align with demand and our customers' needs.

Many components of our cost of services are variable, allowing us to rapidly reduce cost across the organization in response to lower utilization.

All our cost containment initiatives have been taken to maintain operating leverage into 2021 and beyond, which will lead to continued cash flow visibility over the long term.

We have positioned Target for long-term success.

And as market dynamics evolve, there is a potential to gain additional market share as we return to a more normalized pace of activity.

Although we came into 2020 with improving expectations across our business, the global pandemic and rapid decline in commodity prices has significantly altered those expectations.

We are cognizant of the tremendous stress these global macro events have put on the businesses around the world, including our customers.

One core principle underpinning the success of this company is its strong customer relationships.

We are focused on preserving these mutually beneficial partnerships to position Target in a place of strength as activity begins to normalize.

We have had discussion with our high-quality, top-tier customers regarding their existing contracts and have taken proactive steps to modify select commercial contracts for the long-term benefit of Target.

These modifications utilize multiyear contract extensions to maintain contract value and provide Target greater visibility on long-term revenue and cash flow.

This approach, which aligns with our larger customers' long-term investment horizons, balances ADR with contract term, providing us with consistent cash flows and solidifying contract commitments into 2024.

We have maintained the integrity of these contracts while delivering a mutually beneficial outcome for Target and our customers.

We will always work with our customers to ensure we maintain a strong partnership, which is critical for our mutual long-term success and is the foundation of our 90% contract renewal rate.

We believe these modifications accomplish this goal, while preserving Target's strong capital structure and financial position to thrive in the eventual economic recovery.

While the second quarter is likely to be challenging, we do anticipate incremental improvement as we move into the back half of the year.

As activity begins to progress towards normalizing, we will provide the market a revised 2020 outlook when enough clarity is available.

We have created a structurally sound business, with the flexibility to adapt to a rapidly changing environment.

We have taken decisive steps, both operational and financially, to ensure the long-term success of Target Hospitality.

As we continue to navigate these uncharted waters, we remain focused on preserving our operational flexibility, strong financial position and liquidity.

I'll now turn the call over to Eric to discuss our first quarter results and provide more detail on the steps we have taken to mitigate the financial impact in the current environment.

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 are taking to mitigate the ongoing economic uncertainty.

While we did experience positive momentum 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 lower activity levels.

Our government segment remained 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, had revenue of approximately $2 million for the first quarter of 2020 compared to $8 million in the same period last year.

Revenue decreased as a result of significantly less activity associated with this project.

As Brad mentioned, we are encouraged by the 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.

Recurring corporate expenses for the quarter were approximately $8 million.

As we have outlined, we have taken decisive steps to reduce cash corporate expenses across the organization in response to the continued economic uncertainties.

As a result, we expect our recurring corporate expenses to be around $6 million to $7 million per quarter for the remainder of the year.

We generated cash flow from operations of approximately $11 million for the first quarter of 2020.

Even in this challenging environment, we expect to continue generating positive operating discretionary cash flow, providing sufficient capacity to fund all normal course of business activities.

Capital expenditures for the first quarter were approximately $7 million, including $6 million related to previously announced investments in new communities and less than $1 million in maintenance capital.

As a result of the deterioration in global commodity markets, we anticipated reduced activity levels.

Target anticipates capital expenditures to be less than $10 million for the remainder of the year.

We ended the quarter with $425 million of total long-term debt, including $85 million drawn on our revolving credit facility, and consolidated net leverage of 2.8x.

As a reminder, our long-term debt consists of $340 million in senior secured notes due 2024 and another $125 million ABL facility, which had no near-term maturities or immediate financial covenants, providing us with significant flexibility and liquidity within our capital structure.

Now turning to the mitigating steps we are taking in response to the continued economic uncertainties.

The COVID-19 pandemic and the simultaneous shocks to commodity markets have dramatically eroded global crude oil demand and resulted in meaningful oversupply.

These events have created significant volatility and uncertainty across global financial and commodity markets and have consequently negatively affected our energy end market customers.

In this environment, we are planning for a range of scenarios and have taken immediate actions to manage our business and cash flow in what is shaping up to be a challenging year.

The first quarter results reflect a small portion of what is anticipated to be a pronounced reduction in customer activity and utilization levels.

Our business structure does provide meaningful variable cost of services, which will offset a portion of reduced utilization over the remainder of 2020.

We anticipate this variable cost component to reduce cost of services by approximately 30% over the remainder of the year and provide the ability to appropriately manage margins in this challenging environment.

Along with these variable costs, we have taken additional steps to further reduce cash expenses across the company and restructure the organization to match activity where appropriate.

We have significantly reduced our workforce, reduced discretionary spending and eliminated all nonessential travel.

In addition, our Board of Directors, executive and senior management have voluntarily taken cash salary reductions.

We anticipate these measures, in their entirely, will reduce cash expenses by more than 30% over the remainder of 2020.

These cumulative steps have all been taken with a focus on presuming liquidity, protecting our balance sheet and retaining financial flexibility.

We believe that the strength of our balance sheet and liquidity position, along with the continued focus on capital stewardship, will provide the opportunity for Target to prevail a stronger and more resilient company.

With that, I would like to turn the call over to Brad for closing remarks.

Thanks, Eric.

We are 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 action 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 us on the call today, and thank you again for your interest in Target Hospitality.

Operator, you may now open the line for questions.

(Operator Instructions) Our first question comes from the line of Stephen Gengaro with Stifel.

I hope everybody is doing well.

A couple of things, if you don't mind.

I guess I'd start with, clearly, in the oil patch, March got tough and the second quarter looks very difficult.

I mean with expectations, I mean we're hearing from service companies, 70% to 80% reductions 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.

Thanks for the question.

Look, it's a good question.

I think we -- look, to your point, utilization is down quite a bit.

You've obviously seen a lot of the metrics.

Look, 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 it 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 giving a specific number on it.

But I would 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 it, 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 upon what you're describing, I wouldn't disagree with that.

I think a little bit of difference is some still kind of moving through this, but some of the differences, I think, were going to be set up from oil field services in our contracts, some of the guarantees, right?

So I don't think it's a one-for-one when you look at some of that.

We should be better on some of those because of our contracts.

Great.

And then just one follow-up, and I'll 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, is -- are we -- did we see the 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 statement.

Yes, we started seeing -- I'll say at a high level, the first quarter was shaping up to actually be a really nice quarter and certainly ahead of our expectations.

As we entered 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 down.

When we think about that going forward, 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.

Our next question comes from Jeff Grampp with Northland Capital Markets.

I was hoping, Brad, or maybe for Troy, if you guys can talk on the modified contracts, maybe to 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, wanted to see if we're on track with those thoughts.

And maybe if we looked at, I don't know, your top 10 customers or so, what percent of those have those types of conversations taking place?

Jeff, it's Eric Kalamaras.

A couple of things.

So when we looked at contracts, we were focused on a few things.

So as we had some customers who wanted to have those discussions, what we were trying to balance really a handful of mechanisms.

What we were 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 we -- 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 a number of years as well.

So I think you 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 5 which were meaningful discussions were being had.

I think, in total, we've had discussions with probably 30, 40, 50 customers, but I think the biggest lion's share of the revenue pool is going to be kind of in the top 5. And look, we feel good about where we ended up.

And certainly 2020 is going to be 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 drastically 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, a 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 could have held our ground here with our customers on our contracts.

And we could have had a really good 2020 when factoring in the rest in 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 wouldn't have set 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, as Eric said, a win-win for Target Hospitality and the customer.

And 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 and as demand does get back to normal, even more so.

But we were coming up on some of these contracts, just to be frank, that were coming up next year for negotiation.

While we hated 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 look at this as being a positive as we move out of 2020 and into the further years.

Got it.

That sounds good.

I appreciate that.

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 reconfigure the business for the demand dynamics today, but if we think about your footprint in the Permian and just thinking about operators maybe consolidating to certain core areas of their acreage positions, might there be any considerations to consolidate or shut down any communities?

Or are you guys just not seeing that type of degradation and utilization in certain areas?

Look, we've always said, good or bad, we have a lot of variable cost in this business, right?

And to date, we have consolidated some of our facilities that were lower on utilization.

So we wanted a higher utilization, we put 2 together.

We are still able to service our customers under our contract scope.

And that's kind of how we've also reduced our cost in -- but our footprint kind of remained the same as far as the coverage on our lodges.

We'll continue to do that.

We think these will open back up.

We look at them as a temporary.

As demand comes back, utilization comes up.

We built these lodges, we can open them back up with a week.

But for now, what we've had to do is consolidate some of them, get the variable costs out of it and reduce our cost structure.

Our next question comes from Scott Schneeberger with Oppenheimer.

I know you're not providing guidance, but just curious on the pipeline project.

How, I guess, a 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?

Sure.

So first, we'll take TC.

Look, I think that is still a moving project for us in terms of our -- how we're modeling 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 2 in advance.

So I would tell you, we do think it absolutely is progressing from a modeling perspective, is what I would counsel you on.

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 that notional number is.

Hopefully, we can do that at some point here in the future.

But I think you would expect incremental movement really back half weighted specifically.

As we think of 2021, look, 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 through 2021 from a revenue and EBITDA perspective.

So look, that may be conservative, it may not be.

So I think from a modeling perspective, I think you have to look at 2021 and 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 lasts and how long you think it will take to get -- ultimately get personnel fully back engaged in West Texas.

Appreciate that.

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 margin 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 try and do with the whole business over the next couple of quarters, but curious to hear what you did there.

And then it kind of expands into thoughts about what we might see on margin levels across the segments over the next few quarters (multiple speakers)?

Sure.

Sure so I'll pause on the margin longer term because that's really -- as we've 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 to go through into the second quarter before we can make a -- really give a reasonable assessment on that.

To the point on 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 in the Bakken related to your question, is how we were able to maintain that.

I think, look, it's quick expense management in an environment like this when you have the structure to do it is the key, and we were able to do that.

Our next question comes from the line of Kevin McVeigh with Crédit Suisse.

I wonder, can you give us a sense, I guess, even at just a higher level, the types of contract modifications, 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 -- right, even at a much higher level, like 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.

But look, here's the good thing.

We have a strong relationship with these, 10-plus years, in some cases.

The contracts do have teeth.

So we let that calm down.

We sat down, we talked 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 that -- those back in years.

Some of these contracts were again coming up for renewal in 2021, in 2022.

We took the time now to negotiating and get those extensions now instead of waiting for the out years when we believe demand and everything is going to be much better, right?

So we gave a little, and they gave a little as well.

But most of them started off with a much bigger ask than where we ended up.

And look, I'll say it again, it turned into what we believe will be a nice positive for us.

And it was a positive for the customer in 2020.

So it ended up being a fairly good deal for both sides.

Yes.

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, right?

So that, coupled with maintaining forward margin in addition to contract duration with extended commitments.

Beyond that, look, I think when we couple all that together, you get to a spot where, look, 2020 was going to be challenging, really under -- given all the things that happen under any situation.

So I think we looked at that and said, let's really position the company for a really solid 2021 and 2022.

And I think that's how it's going to shake out.

That's helpful.

And then just, I guess, obviously, there's a ton going on, but it probably just underscores kind of the strategic rationale for diversifying a little bit.

Have you given any thoughts as to other kind of revenue areas just to kind of help balance out some of the energy exposure longer term?

Sure.

Look, we're -- we talked about this a couple of times.

Those are still in our cards.

So we're going to continue to look at diversification, even more so today, right?

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 facilities management.

Those are pieces of the business that we can do with very little capital spent, really almost 0. 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.

But we definitely -- diversifications, we think, as the company gets out of 2020 is a big piece of the business.

Got it.

And then my last, just real quick.

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

Is that right?

No.

So we have had 2 cases at our campuses.

They were isolated.

They were removed, they were really towards the beginning of the pandemic.

It's been weeks, actually more than that, month, since we've had any cases.

And 0 employees of Target Hospitality have 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 -- a really good customer base as well that was helping with that from the Halliburtons, to the Chevrons, to the bigger ones that help us along with that.

So we had very limited effect on operationally on the business other than things we changed.

We shut down the gyms.

We shut down the cafeterias where we had to prepare all meals to go where they eat in the rooms.

Those types of things.

Everything that all other restaurants did and hotels.

But we had to keep taking care of the customer.

But minimal effect on the business other than utilization and revenue, right?

Those are things that got hurt.

But operationally, we fared and continue to fare very well.

Our next question comes from the line of Ashish Sabadra with Deutsche Bank.

So a follow-up question on the contract extension.

Brad, as you mentioned, you gave some concessions in 2020, but it 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, still do you have 85% of your revenues under contract?

Sure.

So I think the way you have to look at it is really twofold, right?

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 yet, 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 would 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 a more normalized sort of environment.

And then 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.

That's helpful.

And maybe just a follow-up question on the capacity -- sorry, industry capacity.

I was just wondering, again, there were some comments made around consolidation that you've already done on the facility side, but I was just wondering the overall capacity that's still available in the Permian.

I was wondering if you can comment on it, if you've seen any consolidation there.

Have you seen some rationality, more rational capacity in this space.

Are you referring to from a competitive perspective in the industry, in general?

Yes.

Industry, in general.

Yes.

Yes.

So Ashish, this is Troy.

Absolutely, when you look at the capacity or the total available supply in the market today definitely has contracted, whether it be hotels or other direct competitors that offer this type of accommodation or a similar accommodation profile.

Clearly, we continue to monitor that supply on a real-time basis, and it has contracted, right?

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.

Our next question is from the line of Stephen Gengaro with Stifel.

Just as a follow-up, and I know the visibility here is tough, but there's 2 things I wanted to hit on.

One is, when you look at the potential occupancy levels in the second, third quarters, obviously, in the oil patch being low, are -- is it a reasonable assumption that you'll still be fairly EBITDA positive?

Stephen, it's Eric.

Yes, look, 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 been a discussion point.

I'd go step further, just because you asked the question.

So look, under any scenario that we've modeled, and we've modeled some pretty negative ones, we don't -- we have not envisioned any scenario in that application.

And even a step further than that, there's not a scenario that we have modeled where we are not discretionary cash flow positive.

Great.

Great.

That's very helpful.

And then the only other one I had was, do you have any updates as you think about the government contract?

I mean I guess it's sort of still up in the air until post-election and you get to 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 is -- it just moves along, right?

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.

The -- 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 you is there's still a big need.

It's being used and 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 -- and you do some very good detail about the conversations you've had.

Those -- in a cost-cutting world that we're in, do you find that your value proposition is even -- is easier to sell?

I mean I understand that hotel rates have come down, et cetera.

But on a relative basis, you're still, I think, providing a better value.

Is -- does that help at all?

And is it easier in an environment where these guys are so cost conscious?

Look, I would -- I'll tell you this, so we balanced ADR return.

We extended the term in all cases, right?

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 were -- they would have not been willing to set and negotiate with us, and we'd have to stuck with our own -- the contract that we had in hand.

So it does become easier in times like this.

And proof's in the pudding, we did the same thing in North Dakota.

And I think it was Kevin had mentioned earlier, we ended up better as we moved out of this and became much stronger.

We gained market share.

We see that happening.

We talked consolidation of our own lodges, but what I see is consolidation of the larger OFS 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 what Target's has, by far, right, the largest platform.

I mean, by 4 or 5 turns, right?

So here's everything that's happening commercially is that, when customers are looking for long-term partners they know Target 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, right?

Who are not -- who were there 6 months ago or 3 months ago and are no longer there today.

So I think that adds 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'd like to turn the floor back over to Brad Archer for any additional closing comments.

Yes.

I first want to thank all of the Target Hospitality team members that have been out on the front line 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 on 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.