QualTek Services Inc.

Good morning. My name is Chantal and I'll be your conference operator today. At this time, I would like to welcome everyone to the Qualtech Services Inc. Q1 2022 earnings conference call. As a reminder, today's conference call is being recorded. 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. Michael Bowen, you may begin your conference.

Thank you, Operator, and good morning, everyone. Welcome to Qualitech's first quarter 2022 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 filing with the Securities and Exchange Commission, specifically in the company's forms 8K and 10K. Except as otherwise required by federal securities laws, Voltech 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 Heisey, Qualtech CEO, and Adam Stittler, 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?

Thanks, Michael, and good morning, everyone. Today, we will discuss Qualtech's performance for the first quarter of 2022 and tell you about the progress that the company made during the quarter. We will also share our outlook for the balance of the year. Before I begin, I just wanted to take a moment and thank our employees and long-term valued customers. Qualtech will be celebrating our 10th anniversary later this year, and we're so appreciative of all of our partners who are without question responsible for our building a significant, now public telecom and power infrastructure company with a bright future. I'm also proud of our team and for what we have accomplished together. Very few companies have met the challenge of growth, performance, and volume necessary to enter the public markets as an infrastructure services company. We're excited to continue to build value for our shareholders in the future. For the first quarter of 2022, Qualtech's revenue was $148.2 million, an increase of 24.4% year over year. Adjusted EBITDA was $4 million, an increase of 38% year over year. This includes the results of our discontinued Canadian operation. We had strong revenue growth while EBITDA was in line with expectations. Backlog at the end of the quarter grew to $2.2 billion, which is the largest 24-month backlog in the history of the company. The increase in backlog was directly related to 5G wireless program expansion. In the first quarter of 2022, we continued to position the company for what we believe to be the most significant telecommunications build in the history of our country. As this upgrade cycle is now moving into full swing, our telecommunications customers continue to deploy at a strong pace as we upgrade new and improved networks. We are encouraged by our customers' commitment to quality and performance, and we have been asked by our major customers to meet their increased build plans. In a tight labor market, having a foundation of long-term, skilled employees as our base is critical. We look to continue to build upon that base as we meet the exciting growth opportunities in our industry. A major accomplishment for Qualtech during the quarter was the extension of our ABL. We are pleased to report that we have extended our ABL for two additional years, a significant accomplishment given the general market conditions. The 5G build-out, coupled with important public, private, and government-initiated fiber and power grid build-outs are historic. We're confident that Qualtech is poised to continue to be a major partner to the largest service providers in these segments. Now we'll move on to our first quarter highlights. They include closing our public transaction on February 14th, extending our ABL to match the expiration of our term date, these facilities did not mature until july of 2025. we significantly increased our q1 revenue year over year added 200 new team members specifically for our telecom segment this investment in talent relates directly to 5g build outs that we're seeing ramping in the second half of 2022 through 2023 we increased our 24-month backlog to 2.2 billion Positioned our recovery logistics business to meet ever-changing demands of our power grid and telecom customers by adding additional leadership and resources. Now I'll provide some details on each segment. For our telecommunications segment, revenue, backlog, and opportunity continue to increase in this segment as the 5G build-out is now beginning to gain momentum. In recent quarters, our wireless customers have publicly discussed their robust 5G build-out plans. We are now seeing that work starting to materialize as we approach the second half of 2022 and 2023. We continue to invest in personnel, training, and equipment during the first quarter, including adding more than 200 new resources dedicated to 5G build-outs. We also continue to see new opportunities in wireline fiber deployment programs. We believe that we are positioned to look at these new opportunities while pricing them to match the current labor market. We are encouraged that we have good visibility in the longer-term plans of our wireline customers. There are some exciting new bids associated with government funding and rural programs that will be available to Qualtech in late 2022 and 2023. Overall, we are excited by the rebound in the telecommunications sector and believe that our technology-driven workforce will continue to provide quality and performance for our customers. We see the same general market pressures and wage inflation, supply chain delays, and fuel costs as all companies do. We will continue to seek ways internally with our own processes and externally with our customers to create new scale and efficiency to continuously improve margins going forward. On to our recovery and renewable segment. We have continued to make investments in our recovery logistics business. During the first quarter, we signed new agreements and repositioned our assets for our clients in anticipation of another forecasted active tropical season. It is important to remember that Qualtech has some unique assets that our power and telecommunications industry customers rely upon. We have enhanced our focus to participate in more steady work and have positioned Qualtech for deployments in a more recurring nature. Overall, we believe we are in a strong position to support storm activity in all affected areas of the U.S. and Puerto Rico for 2022 and in the future. We have also begun to add additional crews to our power grid modernization business in the southeast. Many of our customers have increased their grid modernization programs and have asked us to grow with them. We see this opportunity as increasing over the next several years as federal mandates around grid modernization and funds are expected to percolate into this market by the end of 2022 and over the next decade. We see this as a key area of future growth. For renewable projects, we continue to monitor new opportunities in this segment that has been largely resetting for the past 12 months. This area has been more greatly impacted by supply chain delays and other regulatory items that have caused delays in the build schedules. In spite of these challenges, we remain excited by the future of renewable energy projects. Guidance for the year will remain unchanged. We will address guidance after the third quarter as this will be the period of the year that most closely allows for more meaningful update if warranted. In closing, this was easily the most significant quarter in our company's history. We went public, organically grew revenue, added crew capacity, reset our ABL credit facility, grew our backlog, and positioned the company for future success. 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 first quarter 2022 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. As Scott mentioned, we extended the maturity of our ABL through July of 2025. This provides Qualtech with liquidity to execute on organic growth plan, particularly around 5G deployment. Now I will move to our Q1 financials. First quarter 2022 revenue increased 24.4% to $148.2 million compared to $119.1 million for the first quarter of 2021. First quarter 2022 adjusted EBITDA was $4 million compared to $2.9 million for the first quarter of 2021. Note that Q1 2021 includes losses related to our since discontinued Canadian operation. Including losses related to our Canadian operation, adjusted EBITDA increased by 38% year over year. The increase in both revenue and adjusted EBITDA were driven primarily by increased volumes around 5G rollout in telecom, as well as a higher volume of events in our renewable and recovery segment. As we've indicated in the past, strong industry tailwinds are expected to drive significant 5G infrastructure build-out and to provide increased growth opportunities across our business. We expect continued growth in both our segments during 2022 and beyond. net loss from continuing operations for the first quarter 2022 was 40.5 million dollars compared to a net loss from continuing operations of 19.9 million dollars in the first quarter 2021. the increase in net loss in 2022 is primarily due to one-time transaction costs stock-based compensation and public company readiness expense i will now provide some detail on our segment results First quarter telecom revenue increased 24.6% to $132.7 million compared to $106.5 million for the first quarter of 2021. The increase in revenue was primarily due to increased 5G deployment. First quarter telecom even was $4.8 million unchanged compared to the first quarter of 2021. We have taken delivery of a large amount of materials related to 2022 5G build out that we anticipate having a sizable impact to labor revenue throughout the remainder of 2022. To further clarify, early in the 5G cycle, a large amount of our revenue consists of material and a cost plus margin. As we begin to install materials, the service revenue yields a larger margin, blending margins to our expected level. As our service revenue increases in the second half of the year, we anticipate margin expansion within our telecom segment. First quarter renewable and recovery segment revenue was $15.5 million with adjusted EBITDA of $5.3 million, an increase over the same period last year of revenue of $12.6 million and adjusted EBITDA of $2.9 million. The increase in both revenue and EBITDA are due to higher volume of recovery logistics events as well as new service offerings provided to our customers in 2022. First quarter corporate cost was $6.1 million as compared to a cost of $3.9 million in the prior year period. The increase in corporate cost was due primarily to public company costs, in particular, D&O insurance and increased headcount in first quarter 2022, not experienced in 2021. I'd like to reiterate that the increased corporate cost is a one-time step up related to our private to public transformation, and we expect corporate cost as a percentage of revenue to decline as we continue to execute on our organic growth plan. Now I will discuss a summary of our five largest customers for the first quarter 2022 as a percentage of revenue. AT&T was 38%, which includes wireless, wireline, and recovery logistics services. Verizon was 15%, T-Mobile was 13%, Comcast was 6%, and Duke Energy was 5%. This compares to the prior year of AT&T at 51%, Verizon and T-Mobile at 15% each, Duke 4%, and Comcast 4%. Our top three customers accounted for 66% of our revenue versus 81% in the year-ago period, which is a 15% improvement in our customer diversification. As it relates to backlog, we report a rolling two-year backlog on a quarterly basis. At the end of the first quarter, 2022 total backlog was $2.2 billion, an increase from the $2.1 billion that was reported at year-end 2021. Our increase in backlog is primarily related to increased visibility into our customers' 5G build plans. Lastly, I want to echo a few points that Scott touched on. During the quarter, we closed our SPAC transaction, providing liquidity to allow us to execute on our organic growth plan. We are now seeing the early stages of 5G acceleration. We successfully extended our ABL through July 2025. Finally, none of this would be possible if not for the dedicated employees and partners of Qualtech. This concludes our prepared remarks, and now we'll turn it back to the operator for Q&A.

At this time, I would like to remind everyone, in order to ask a question, please press star 1. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Brent Philman with DA Davidson. Your line is open.

Thanks. Good morning, Scott, Adam. Good morning. Scott, I mean, you've got a large book of business here, over $2 billion. Maybe could you talk about what you're beginning to see in the field from customers, particularly as you're moving into kind of the seasonally more relevant quarters in telecom and kind of how all that supports the confidence toward the back half ramp up that you're talking about?

Sure. So there's really two things. One, just the nature of the geography where we're at as we start to get into the spring and summer months, you know, a great portion of the work that we have budgeted, you know, with our customers. is scheduled to start at that time. And then more specifically, in wireless and 5G build-outs, there's a long cycle, and I know a lot of folks were in great anticipation of when it was going to start and how it was going to start. I think we're pretty well past that now. We're building 5G sites every day. A lot of our attention is focused around that. Our customers build plans and build the work that we're pulling in now is all related to this bill that we're now pretty clearly in.

Okay. And, Adam, thanks for the clarification around the telecom margins. It sounds like it's sort of procurement activities and maybe some internal investments just to ramp up. you know, ahead of the busier season. I just want to get a sense if there are any other moving parts just on the year-on-year comparisons for margins in telecom, any impacts from kind of legacy challenge contracts, anything like that.

Yeah, so, you know, to your point, Brandon, and thank you for the question, materials at the cost plus margin is a big chunk of those. You know, we'll start to see margins expand in Q2. But then as we kind of mentioned the prepared remarks, I mean, obviously fuels up pretty significantly year over year, and that's about 50 basis points of increase. You know, normalizing for that, we're really on par year over year from a margin perspective.

Okay. And then maybe another one for Adam, and cash flow is a net use this quarter. Maybe talk about your expectations for cash flow as we move through the rest of the year.

Yeah, so for Q1, the use of cash is really broken into two different pieces. So $15 million of that was related to transaction costs and accrued expenses as it relates to the closing of the SPAC transaction. And then the remaining $25 million was really a build of working capital. And again, a lot of that is around procurement of materials that we're now installing for

Okay, and thoughts as we start to see that turn through the rest of the year, Adam?

Yeah, that's correct. We anticipate a little bit of a build in Q2, and then Q3 that will normalize and flip into a source of cash.

Got it. Okay. And maybe this last one. Scott, you talked a bit about it in the prepared remarks on the recovery logistics business, some efforts there to create maybe a little more steady flow of business outside of events. Can you talk about what you're doing there and how that might create a little more stability around the segment?

Well, I think just from the leadership and Tom Mix, who runs that business for us, does a tremendous job building relationships with customers. So We've really grown the business from being here's an event and we'll show up and help for just the event to actually deploying our assets in smaller storms, being more prepared and early readiness and storm assessment. and those types of other services. So, you know, the goal all along, you know, from the time that we started in that business was to really make it well-rounded and have it be a regular steady part for our power and telecom customers.

Okay. Great. Thanks, guys. I'll pass it on.

Our next question comes from Tim Holland with Oppenheimer. Your line is open.

Morning, guys. Thanks for the time. The equipment deliveries, do you think there's any concerns about the supply chain or bottlenecks? China now is slowing, getting shut down here a little bit. Or any visibility on just equipment deliveries and how impactful is that for you guys?

So we've had great visibility and communications with our customers on their build schedules. So now we have a pretty good understanding and a flow. We've ordered out as far as we can and have taken delivery of a lot of materials and equipment for the build this year. So, I mean, these issues do exist and impact every industry, Tim. You know, we're going to you know, run into these issues like everyone else does. But I think in terms of the 5G build and what we're trying to accomplish, and really from our customers' objectives, we've gotten out pretty far ahead on materials and equipment, you know, for the next couple of quarters to really build. I think we're heading into a pretty heavy season. I know our peers have talked about it on their calls, but as you get into Q3... everyone's literally going to be over 100% capacity on people. And really, for us, the team focus is matching the materials to the build schedule, but also matching people and making sure that we have the labor resources necessary to build. And that's really where we're focused right now.

And I'm assuming, you know, once the carriers kind of start to build, you know, they don't want to change the momentum, like I would assume, for a whole bunch of reasons. They want that momentum to continue.

i i guess your best guess on you know how long will it take at this point of for the major portion of the builds anyway gee that's a dangerous question i i would say you know at this point there's there's backlog that goes well into 2024 at this point So for us, looking at a two-year backlog for 2022's balance and into 2023, there's a lot of sites that have to be built or scheduled to be built. They're in our geography within areas where we have customer relationships. So we do see a pretty steady amount of work that has to occur. You know, supply chain issues notwithstanding, if those delays and things like that happen, we're just going to have to get through it because these sites have to be built in order to enable 5G.

And then on the expense front, can you talk a little bit about your ability to pass through increased fuel costs or labor costs? You know, I guess the lag or timing on that process there. Thanks.

Sure. So it's not as simple as just going to our largest customers and passing through a price increase. So obviously they also have increased wage inflation and fuel inflation and everything else. So what we've managed to do, because we do have very good relationships with our customers, is really run a process where there are instances where our customers are just having to pay us some more on certain items. But looking at scope and looking at delivery times and really looking at volume and ways to run our business more efficiently, both on how we run Qualtech And how we integrate with our customers is a key issue to battle, you know, these inflationary items that are hitting everybody. I think, you know, for us, Q1 was a strong indicator that, you know, we're getting out in front of some of these issues. And I feel as we get into the balance of the year. you know, we're working very closely with our largest customers to, you know, discuss, you know, fuel and wage inflation and really, you know, changes in scope when materials are delayed and things like that. And I think we got a pretty good handle on it, but it's something that, you know, every day we're going to have to get up and just, you know, work harder and make sure that, you know, we're always being focused on margins. I mean, a good thing Being through this transaction, it took 14 months. It felt like forever when we were doing a transaction. But Adam and I and our team are now really focused on running our business, which is, I think, essential as we go forward now.

And then just lastly on renewables, you sound more optimistic with more visibility. Can you just give us a little bit more color? I know there were supply chain and regulatory issues there. Are those issues largely resolved at this point? Can you give us just a little bit more color on what type of – is this kind of a good run rate for that business?

So I think, you know, our optimism really stems around just the vast amount of projects that have to be built and opportunities that we're seeing. I think for the next quarter or so, we're going to be at a pretty steady run rate in that business. A lot of projects have been delayed or pushed out in 2023 because of materials. The one thing, you know, from our perspective, We're not in the heavy civils. We're not actually doing the construction part of the turbines or the solar farms. So we sort of come in as a part of the build stage and do, you know, power and work at the substation and connectivity. So, you know, we don't control the calendar. So we're going to monitor that business and continue to find great places to, you know, enter in terms of contracts and work that we're going to do. But I don't believe that we're going to be, you know, out in front building any projects anytime soon. I really want to focus our attention on the part of the business that we're good at.

I got it. But I guess, so those supply chain issues and regulatory issues, are they largely behind the industry now? Is that momentum, you know, picking up? Do you think there's, you know, good visibility there the next year?

Yeah, Tim, I wouldn't say that, and I didn't mean to imply that. I meant our visibility and where the projects are at and what we see is very clear. There are a lot of issues facing that industry, particularly in 2022. There's a lot of slowdowns due to materials, and also a lot of folks in that space have sort of rebalanced their priorities of what projects they want to do. And I think That industry, to me, is more of a 2023 and beyond opportunity for us. We'll continue to work on the projects we have in 2022. I just don't see any massive surprise explosion in that space for the rest of this year. We're really focused on the grid modernization piece where we could add as many crews as we could add trucks. And similarly, on the telecom side, our core business, we could add every single person we can hire in that business for the rest of the year, and it won't be enough. So I think we're really going to focus on our core right now.

Thanks, guys. Congratulations.

Thank you.

Again, if you would like to ask a question, please press star 1. Our next question comes from the line of Christian Schwab with Craig Halem Capital. Your line is open.

Great. Good start to the year, and congrats on reiterating the EBITDA guidance. As far as the EBITDA guidance for the year is concerned, can you tell us what EBITDA margins you're assuming on a blended basis the telecommunications business will operate at on a full-year basis?

Yeah, so we're anticipating about 10%, even a margin in the telecom business. And as we mentioned in prepared remarks, Christian, we anticipate those margins expanding back half of Q2 into Q3, where you're going to see a normalized run rate.

Great. And then as far as growth in the communications business, one of your peers talked about growth being potentially well over 20%. for themselves. Is that kind of the trajectory of your plan as well for the year as far as top line?

Yeah, we do anticipate that. And just, you know, one added nuance, you know, obviously AT&T is our largest customer and, you know, the visibility into their build plan is really second half weighted. So we may be a little bit above that.

Great. And then on the recovery logistics business, just a follow-up there, it sounds like you guys were implying that you had an expansion of serviceable geography for that business. Did I understand that correctly, or did I hear that wrong?

No, we've basically filled in any gaps contractually in the areas that are impacted the most and really started to do smaller events. you know, that our customers asked us to participate in. So we really see this business, you know, really beginning to balance out and be more steady state. Obviously, the events and our opportunity to participate in events when they happen is ever increasing. But we also wanted to have, you know, a more blended, you know, BAU type of business, you know, with the assets that we have. And we're really starting to see that in 2022.

Great. No other questions. Thank you.

Thanks, Christian.

We have reached the end of the question and answer session. I'll turn the call back over to Scott Heise for closing remarks.

Thank you, operator. We appreciate everyone joining our call, and we look forward to further updates as the year goes on. Thank you, and have a great day.

This concludes today's conference call. You may now disconnect.