QualTek Services Inc.

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Qualtech Services' fourth quarter 2021 earnings release. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your cell phone keypad. To withdraw your question, please press star one again. Thank you. Michael Bowen, managing director at ICR. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Qualtech's fourth quarter 2021 earnings call. Before we begin, I would like to remind everyone that we will make forward-looking statements during today's call. Whether in prepared remarks or during the Q&A session, these forward-looking statements are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the risk factors section of our filings with the Securities and Exchange Commission, specifically in the company's forms 8K and 10K. Except as otherwise required by federal securities laws, Qualtech disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions, and circumstances. With us today, we have Scott Heise, Qualtech CEO, and Adam Spittler, Qualtech CFO. The format of the call will be opening remarks from Scott, followed by a financial review from Adam. We will have a Q&A period following these updates. With that, I'll go ahead and turn things over to Scott.

Scott? Thank you, Michael. Good morning, everyone, and thank you for attending our first earnings call as a public company. For those of you who do not know our company, Qualtech was founded in 2012. We are a leading technology-driven provider of infrastructure services for 5G wireless, fiber deployment, power grid modernization, and renewable energy sectors across North America. Qualtech has a national footprint with more than 80 operations locations across the U.S. and approximately 2,000 employees and a total workforce of over 5,000 people. We completed our SPAC merger with Ross CH3 on February 14th, and we're pleased to enter the public markets in one of the most exciting times in the history of our industry. This transaction has been well received by our customers as Qualtech now has greater liquidity, which can be utilized in the execution of our growth strategy for 2022 and beyond. On this call, we will discuss our fourth quarter and full year 2021 results, backlog, and our strategy and outlook for 2022. This year, Qualtech will be celebrating our 10th anniversary, a significant milestone. First and foremost, I want to thank our employees for their tireless efforts to ensure that we deliver on our commitment to safety, quality, and performance for our customers across the country. I'd also like to mention that Qualtech has made a commitment to hiring and training our veteran heroes. As a Navy veteran myself, and on behalf of the 2,000 employees of Qualtech, we thank those who have and continue to serve our country. As we look to the future, we anticipate adding men and women to our team to help serve our customers, and we will always look to the veteran community for great candidates. Now on to our 2021 results. During the fourth quarter of 2021, Qualtuk had revenue of $147.1 million and adjusted EBITDA of $4 million. For the full year 2021, revenue was $612.2 million and adjusted EBITDA was $60 million. On a pro forma basis, assuming the recently closed acquisitions had been owned for the full year ending December 31, 2021, Qualtech estimates adjusted EBITDA would be approximately $72 million. Qualtech has significant operations in California, New York, and Massachusetts. We experienced considerable obstacles because of COVID-19 health and safety protocols in these highly populated states during 2021. In many instances, we experienced project delays and cost increases due to the adherence of local COVID-19 protocols in the areas where we worked. Certain 5G programs and renewable projects were also delayed due to equipment and supply chain difficulties, along with delays in the timing of initial C-band spectrum launch. Despite these challenges, the results delivered by Qualtech represent a significant improvement over 2020. We now see reductions of health and safety protocols which will allow our company to return to pre-COVID scale and efficiency. This is extremely impactful for Qualtech as we begin to ramp up on new projects in these critical markets for 2022 and 2023. We are in the early stages of the 5G build and see increases in many grid modernization projects. We see considerable tailwinds over the next three to five years in both our telecommunications and recovery and renewable segments. During the year, several of our customers' initiatives became more clear. We now have increased visibility into the C-band spectrum projects for AT&T and Verizon, as well as definitive target start dates for other carrier projects. Backlog at the beginning of 2021 for 24 months was approximately $1.7 billion. By the end of the year 2021 backlog for 24 months increased by 22% to 2.1 billion. This is especially important as we continue to see unprecedented bid activity and opportunities to expand our business in both segments that we serve. Our growth and backlog year over year is also a testament to our strong performance and our customers' reliance on Qualtech to play a critical role in building, maintaining and upgrading their networks. As we increase our liquidity, improve our balance sheet and have greater access to capital, we will continue to create opportunities for strong organic growth with existing and new customers. During 2021, Qualtech completed four acquisitions. The acquisition of Baycom, based in New Mexico, strengthened our wireless operations on the West Coast. We added additional crew capacity, which allows us to execute on our expanding West Coast backlog. Secondly, the acquisition of Urban Cable, based in Pennsylvania, resulted in Qualtech having important Northeast fiber and cable construction capabilities. This will enable Qualtech to begin to pursue greater RDOF and other customer fiber expansion programs. The acquisition of FNS, based in Texas, enabled Qualtech to begin to perform power and renewable energy programs. Although this was a slower than normal year in renewables due to material delays and a rebalancing of large project priorities by our customers, we remain very encouraged by the sheer magnitude of opportunities available to grow this business. In September, we acquired Concurrent, a southeast-based overhead power and grid modernization specialty contractor based in Florida. This was a key acquisition for Qualtech as we can now build overhead and underground power crews to meet our existing customers' demand and also have additional resources available to deploy and storm events. As we have a long-standing relationship with all the major utility providers in the Southeast and Gulf states, we see this acquisition as the foundation for building a significant business as the focus has shifted toward grid modernization and utility upgrades. These acquisitions have been integrated into our shared services platform and are performing as expected. Our customer acquisition strategy will remain consistent as we seek opportunities to partner with top-performing and well-respected companies that meet both our expansion objectives and our customers' consolidation initiatives. We have and will continue to seek highly accretive acquisitions that meet our post-close integration and organic growth initiatives. Due to the timing of our transaction closing in mid-February, we are announcing our results a little later than our public peers. I do want to echo a few other public stated sentiments. In my 32-plus years of industry experience, I have never seen a period of such demand and, frankly, necessity to meet our customers' expansion and upgrade goals. The building of 5G networks and telecom and the reality of grid modernization and proliferation of renewable programs are truly upon us. Qualtech's strategy is to continue to play an important role for our communications and power companies as they build and rebuild their networks for the future. Our customers have sent us a clear message that they want us to grow and expand our service offerings and geographic service areas. We're extremely focused on field execution, increasing cash flow, steadily improving our balance sheet and creating value for our shareholders. We plan on aggressively adding crews during Q1 through Q3 and are continuously training to meet future strong demands. To recap, 2021 was a critical year for our company. We grew margins substantially from 2020 and are on a path to be a significant industry player in both telecommunications and power industries. We positioned Qualtech to successfully go public in early 2022. We are executing a strategy to position Qualtech for future success, including substantial increase in our customers and backlog. In closing, I'd like to once again thank Qualtech's employees, our customers, and our shareholders for having great faith in our company as we continue to build momentum for the future. I will now turn the call over to Adam Spittler, our Chief Financial Officer, who will give more detail on our financial performance. Adam?

Thank you and good morning, everyone. Today I will cover our 2021 fourth quarter and annual financial results. As Michael indicated at the beginning of the call, our discussion of financial results will include non-GAAP adjusted EBITDA. Reconciliation and details of non-GAAP measures can be found in our earnings release. Fourth quarter 2021 revenue increased 11% to $147.1 million compared to $132.4 million for the fourth quarter of 2020. Fourth quarter 2021 adjusted EBITDA was $4 million compared to a loss of $13.5 million for the fourth quarter of 2020. Full year 2021 revenue was $612.2 million, a decline of 6.7% from $656.5 million for the full year 2020, driven primarily by closeout of a large customer program and delays in customer spending related to the C-band spectrum auction. Full-year 2021 adjusted EBITDA increased 356.9% to $60 million, compared to $13.1 million for full-year 2020. The increase in adjusted EBITDA was driven primarily by margin improvement initiatives across both our telecom and renewable and recovery segments. As we have indicated in the past, strong industry tailwinds, including the C-band spectrum option, are expected to drive significant 5G infrastructure build-out and to provide significant growth opportunities across our business. We expect continued growth in both of our segments during 2022 and beyond. I will now provide some detail on our segment results. Fourth quarter telecom revenue was $138.2 million with adjusted EBITDA of $5.6 million, a significant improvement over the same period last year with revenue of $118.9 million and adjusted EBITDA loss of $13.6 million. For the full year, telecom segment revenue was $498.2 million in 2021, down 15.2% from $587.6 million in 2020. This decline in revenue is attributable primarily to closeout of a large customer program, coupled with delays in customer spending related to the C-band spectrum auction. Annual telecom segment adjusted EBITDA was 32.5 million in 2021, a significant improvement over full year 2020 of 2.4 million. Fourth quarter revenue for the telecom segment represented the third straight sequential quarterly increase. Fourth quarter renewable and recovery segment revenue was $8.9 million with adjusted EBITDA of $2.7 million, a decrease over the same period last year with revenue of $13.6 million and adjusted EBITDA of $4.7 million. Annual renewable and recovery segment revenue was $114 million, an increase of 65.5% from $68.9 million in 2020. This increase in revenue is attributed primarily to our expanding service offerings within this segment. Annual renewable and recovery segment adjusted EBITDA was $44.9 million, an increase of 55% as compared to $28.9 million from 2020. Fourth quarter corporate cost was $4.3 million, a 6.6% reduction as compared to a cost of $4.6 million in the prior year period. Annual corporate cost was $17.4 million, or a 4.6% reduction as compared to a cost of $18.2 million in the prior year period, equating to 2.8% of revenue. Now we'll discuss the summary of our five largest customers for 2021 as a percentage of revenue. AT&T was 41%, which includes wireless, wireline, and recovery logistics services. T-Mobile was 13%. Verizon was 12%, Entergy was 11%, and Comcast was 4%. This compares to the prior year of AT&T at 54%, Verizon 18%, T-Mobile 5%, Entergy 4%, and Comcast 3%, reflecting the execution of our strategy to diversify our customer base. As it relates to backlog, we report a rolling two-year backlog on a quarterly basis. As of year end 2021, total backlog is $2.1 billion, reflecting a 22% increase from year end 2020 total backlog of $1.7 billion. Lastly, I want to discuss our unaudited capital structure upon transaction closed on February 14th of 2022. Our line of credit, net of cash, is drawn at $19.6 million on a $103.5 million facility, resulting in over $80 million of available liquidity. Our term loan balance is $351.5 million, and our convertible note is $124.7 million. Our pro forma common stock outstanding is 51.1 million shares, of which 6.1 million shares are held in escrow, subject to certain earn-out targets. This concludes our remarks, and now we will turn the call back to the operator for Q&A. Operator?

Thank you. As a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Brent Thielman with DA Davidson. Your line is open.

Brent Thielman, DA Davidson, Great. Thanks. Good morning, Scott, Adam. Good morning, Brent. I guess first question, just how do you see this book of business and telecom rolling out over the next several quarters. I mean, I know we, you know, some of it is contention upon sort of equipment and availability for some or certain customers. Maybe any read on how that progress is developing to kind of get you off and running here maybe by summer?

So the way we're looking at it on our West Coast operations, you know, particularly in wireless, a lot of the C-band spectrum is available. So in that area, a lot of that work has already been issued, and we're hiring and adding crews and buying materials, and we're well on our way. From an East Coast perspective, the back half of 2022 – is where most of the load for 5G is set for us. So we really see Q2 as a significant ramp period. Once we closed this deal in February, the first thing we did was order every bit of materials that we could. I will tell you that, you know, in working with our customers, we have great visibility into the back half of the year in 2023. So really it's about adding people and timing the materials and making sure we execute to our customers' expectations.

Okay. And the telecom margins, I mean, you had good growth this quarter, and I know there's some acquisitions embedded in that. Maybe you could just talk about what overhangs kind of remain in the margins here, and mostly just thinking about certain of that large program work, investment initiatives you're making. I'm just trying to understand when we start to get towards those levels of profitability, kind of gearing toward that 10% target level.

So the big thing for us was really getting back to normal with efficiency and how we utilize our crews and really having visibility into where we need to add crews. I think the overhang of the large customer program is substantially behind us is now I know other peers have been talking about that for years. I hope to only talk about it once today, and it's, you know, largely behind us. I think the ramp part of the build is here now for 5G. I think that, you know, from a telecom perspective, we're really built to scale. So, as you can see, we manage SG&A pretty tightly. And how we manage our operations, this platform is now set to add a substantial amount of crews. That's how we'll effectively improve margins.

And Brent, this is Adam. Just to add on to that, as you see early in the C-band spectrum rank, we do procure materials for our customers, and the margin profile of that is a good amount less than what we see from the service labor portion. So you'll see margins expand pretty significantly back half of Q2 into Q3.

Got it. And then any update on the recovery logistics business? I guess you're in the first quarter. I think there have been some events around the country. Would you expect a better performance to start the year?

Yeah, so there have been, you know, some events, particularly in the Midwest. So, you know, we've always seen that business growing. as being an offset to some of the weather where we get impacted in the northeast and the Midwest during the winter months. And I'll tell you, we've continued to grow both our customer base and our service offering in recovery logistics, and they continue to perform at an extremely high level.

Okay. Just the last one for me, maybe you guys could just talk about how you bridge from the $72 million kind of pro forma EBITDA for 21 to that midpoint of guidance called the $110 million. What sort of incremental contribution you sort of assume from, you know, renewables and recovery logistics versus the telecom business?

Yeah, Brent, this is Adam. So, you know, I think if you look at the year-over-year from a reporting segment perspective, you know, we anticipate the renewable and recovery could be up about $15 million roughly of EBITDA, and that's growth across footprint, customer base. particularly in the renewable and the grid modernization portion. And then the balance of that is coming with telecommunication, not just as it relates to C-band ramp, but also on the fiber side as we expand some of our footprint with customers such as Lumen and some of the RDoC bids that we see coming in.

Okay. I appreciate it, guys. I'll get back in queue. Thank you.

Thank you. Again, please press star 1 to ask a question. The next question is from Christian Schwab with Craig Hallam Capital. Your line is open.

Great. Good morning, guys. So as far as given the tight labor market, getting the people and the crews for the significant amount of work, Are you seeing, you know, any meaningful wage inflation that would kind of potentially change, you know, the EBITDA margin profile that that business could operate at in the second half of this year, coupled as well with, you know, we do roll pickups everywhere with the increased costs of gas per gallon? You know, are we able to offset that? any of those costs, potential headwinds, or did you take those into account while we were bidding this work?

Good morning, Christian. I would say the best answer is we're really in the same situation as everyone else around labor. There is a great need not just for Qualtech and everyone else but really in our country to develop skilled labor. i think our emphasis has been squared around retaining and developing our own people and making sure that we're meeting and communicating with our customers from a wage inflation standpoint you know our our goal is to continue to build upon our platform and really leverage scale and efficiencies which we have built in to offset any type of inflation from both wages and fuel And, you know, we work very closely with our customers. I think, you know, for Qualtech, a lot of the new work that we plan on winning on the telecom side, particularly in wireline and fiber, we can sort of account for and price in some of those changes. And, Christian, this is Adam.

When you look at our overall book of business, I mean – The majority is under master service agreements. And keep in mind, you know, they renew staggered. So it's not like we're signing up for 100% of our contracts today and we're locked in for two or three years. You know, we'll have about a third of our contracts renewed this year. So as we reprice the contracts, we can factor in what we're looking through in the future. And, look, this isn't the first time we've gone through this cycle. So we'll navigate it, you know, the way we have in the past. Mm-hmm.

Great. And then, Adam, as we scale the business and the intensity, uh, increases across the board. Um, you know, is there an opportunity for, you know, even the margins of the telecom business, you know, to expand, uh, over time, you know, uh, well north of 10% or is 10% kind of, you know, the bogey and the target and what we should be thinking about regardless of the, uh, um, the workload.

I think as we think about how we're structured here, you know, we have over 80 locations, and each one of those locations we have our fixed cost and our support staff. So as we ramp revenue in those locations, we have a really strong economy of scale there. So, you know, every dollar of revenue is going to drop 17 to 25 cents a margin, you know, as an example, to the bottom line where we won't have to add support. So I think to your point, you know, the 10% number is a target in the near term, but we think we can get low to mid-teens as we're fully ramped up here, you know, into, you know, early, mid-2023.

Great. And then to my last question here, you know, have you guys begun to see kind of mentioned, you know, fiber work from Lumen and RDOF? You know, RDOF always comes a little bit slower than investors like, but it appears to us that the activity is finally starting in earnest out there. Are you guys beginning to see increased activity? bidding activity, and have you guys begin to win any deals in ARDOF yet?

So we're just now in a position to really go after some of this ARDOF work. We're excited about it. Having, you know, a substantial wireline business and the longer-term relationships, we're pretty excited about a lot of the new projects that not even just with our existing customers who are building more fiber and have announced some pretty aggressive plans, but also with new customers like Lumen and Frontier and others where we're starting to big new projects and get involved more heavily in wireline than we have recently. And as you know, Christian, we're pretty heavy in wireless and 5G and have significant turf agreements and other arrangements where we've been long-term with the wireless carriers. So we're really looking at the opportunity to build out our wireline business as well.

Great. No other questions. Thanks, guys.

Thank you. The next question is from Adam Thalheimer with Thompson Davis. Your line is open.

Thanks for taking the question, guys. Hey, I just wanted to To actually build off on that, Scott, how do you see your mix of wireless and wireline changing if you think two or three years out?

I think we can certainly balance more wireline and fiber into Qualtech. Obviously, as we built the business, we built a significant wireless business. but just the magnitude of the opportunities in wireline. And keep in mind, this is what's going on right now. There's been no real infrastructure money rolled down into these projects yet. We anticipate that to happen later in 22 and into 23. but all of our customers and a lot of new projects that we're approaching are out there right now. We are heavily in the bid activity and bid season right now, and I think we're in a good position because we can sit back and look at the projects that make the most sense for us, best utilization of our resources, the best return on our capital investment into longer-term projects. I think we're positioned pretty well to make some choices there. in terms of the future and how we look at wireline.

Okay. And how would you frame the current wireline bidding cycle to what you've seen in the past?

I've got to tell you, I have never seen anything like it. It seems like everyone's building at the same time. You know, in years past and decades past, there was generally an order to it. and certain companies would build, whether it's telecom building or cable building, now everyone seems to be building at the same time so it's so much more important that you have systems and tools and you're efficient and you don't get over your skis and you make sure you bid the right projects at the right prices and you know i have not seen this type of activity i know others have spoken on their calls about the bid activity and the work that needs to be done but the next few years there's just a significant amount of work that needs to be done in our space it's really a great time but also you have to be measured to make sure that you're taking the right projects and then just lastly when the c-band build starts what does that look like how what does the ramp look like there well it kind of looks like a hockey stick and there's a lot of projects that are coming on board i think once these licenses are all cleared everyone will be building at the same time i think from the geographic areas where we're pretty well dialed in for you know markets like california and new england and new york where we've been sort of a larger provider for close to a decade just the amount of work coming into our existing operations is you know more than we've seen and i think that coupled with having other carriers all building at the same time you know It's going to be challenging, but certainly a really good time in our industry because there's just every bit as much as work out there as everyone has been talking about it has now hit.

Sounds great. Thank you, Scott.

Thank you.

I'm showing no further questions at this time. I'll turn the call over to Scott Heisey for any closing remarks.

Thank you, Operator. I just want to thank everyone for joining our first call. It's a very exciting time for Qualtech. I would be remiss if I did not mention the Roth Hound teams and the Brightstar Capital teams who have supported us as we've taken our company to this new level as a public company. We're excited for our employees and our customers, and we look forward to catching up with everyone again in May when we announce Q1. Thank you and have a great day.

Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating.