QualTek Services Inc.
Q1 2022 Earnings Call Transcript

Published: 18 May 2022

[Operator:]

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 QualTek 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 speakers' remarks, there will be a question-and-answer session. Michael Bowen (ph), you may begin your conference.

[Unidentified Company Representative:]

Thank you, operator and good morning, everyone. Welcome to QualTek’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 filings with the Securities and Exchange Commission, specifically in the company's Form 8-K and 10-K. Except as otherwise required by federal securities laws QualTek 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 Hisey, QualTek’s CEO; and Adam Spittler, QualTek’s CFO. The format of the call will be opening remarks from Scott, followed by 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?

[Scott Hisey:]

Thanks, Michael and good morning, everyone. Today, we will discuss QualTek'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 value customers. QualTek 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 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, QualTek'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 operations. 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 history of the company. The increase in backlog was directly related to 5G wireless program expansion. In the first quarter of 2022, we continue to position the company for what we believe to be the most significant telecommunications build in the history of our country. And 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 plants. 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 QualTek 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 are confident that QualTek is poised to continue to be a major partner to the largest service providers in these segments. Now, I'll move on to our first quarter highlights. They include closing our public transaction on February 14th, extending our ABL to match the exploration of term date, these facilities do 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 discuss 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 and 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 QualTek in late 2022 and 2023. Overall, we are excited by the rebound in the Telecommunication 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 cost, 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. Onto our Recovery & 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, and in anticipation of another forecasted active tropical season. It is important to remember that QualTek has some unique assets that our power and telecommunications into (ph) customers rely upon. We have enhanced our focus to participate in more steady work and at physician QualTek 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 they have asked us to grow with them. We see this opportunity is increasing over the next several years, as federal mandates around grid modernization and funds are expected to proliferate (ph) 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, grow our backlog and position 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?

[Adam Spittler:]

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 QualTek with liquidity to execute on our 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 of 2022 was $40.5 million, compared to a net loss from continuing operations of $19.9 million 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 expenses. 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 EBITDA 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 in cost plus margin. As we begin to install materials, the service revenue yields of 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 high -- 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 costs 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 reported 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 plants. 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 from the dedicated employees and partners of QualTek. This concludes our prepared remarks. And now, I will turn it back to the operator for Q&A.

[Operator:]

Our first question comes from Brent Thielman with D.A. Davidson. Your line is open.

[Brent Thielman:]

Thanks. Good morning, Scott, Adam.

[Scott Hisey:]

Good morning.

[Brent Thielman:]

Hey, 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 towards, the back half ramp up that you're talking about?

[Scott Hisey:]

Sure. So, it'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, a great portion of the work that we had budgeted it, with our customers as scheduled to start at that time. And then more specifically, in wireless and 5G build-outs there is 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 the work that we're pulling in now is all related to this build that we're now pretty clearly in.

[Brent Thielman:]

Okay. And Adam, thanks for the clarification around the telecom margins. It sounds like it's sort of procurement activities and maybe internal investments just to ramp up ahead of the busier season. I just wanted 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 challenged contracts, anything like that?

[Adam Spittler:]

Yeah. So to your point, Brent and thank you for the question. Materials at the cost plus margin is a big chunk of those. We will start to see margins expand in Q2, but then as we kind of mentioned in the prepared remarks, I mean obviously fuel is up pretty significantly year-over-year and that's about 50 basis points of increase. Normalizing for that we're really on par year-over-year from a margin perspective.

[Brent Thielman:]

Okay. And then maybe another one for Adam on cash flows, the net yields this quarter maybe talk about your expectations for cash flows move through the rest of the year?

[Adam Spittler:]

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 are now installing.

[Brent Thielman:]

Okay. And thoughts as we start to see that churn to the rest of the year, Adam?

[Adam Spittler:]

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

[Brent Thielman:]

Got it. Okay. And maybe just 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 more stability around this segment?

[Scott Hisey:]

Well, I think just from the leadership and Tom Mix, who runs that business for us, as a tremendous job building relationships with customers. So we've really grown the business from being -- here is an event and we'll show up and help participate 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 the goal all along from the time that we started in that business was it really make it well-rounded and have it be a regular steady part for our power and telecom customers.

[Brent Thielman:]

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

[Operator:]

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

[Tim Horan:]

Good 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?

[Scott Hisey:]

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 need these issues do exist and impact every industry, we're going to run into these issues like everyone else does, but I think in terms of the 5G build and what we're trying to accomplish, really from our customers' objectives. We've gotten out pretty far ahead on materials and equipment for the next couple of quarters that really build. I think we're heading into a pretty heavy season. I know our peers have talked in their calls, but as you get into Q3, everyone is literally going to be over 100% capacity on people and really for us the keen focus is matching materials to 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.

[Tim Horan:]

And I'm assuming once the carriers kind of start to build, 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 guess your best guess on how long will it take at this point for the major portion of the builds anyway?

[Scott Hisey:]

That's a dangerous question. I would say, at this point, there is backlog that goes well into 2024 at this point. So for us looking at a two-year backlog for 2022 is balance and into 2023. There is a lot of sites that have to be built or scheduled to be built during our geography within areas where we have customer relationships. So we do see a pretty steady amount of work that has to occur supply chain issues notwithstanding of 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.

[Tim Horan:]

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

[Scott Hisey:]

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

[Tim Horan:]

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

[Scott Hisey:]

So I think 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 into 2023 because of materials. The one thing from our perspective, we're not in a 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 power and work at the substation and connectivity. So we don't control the calendar, so we're going to monitor that business and continue to find great places to and/or in terms of contracts and work that we're going to do. But I don't believe that we're going to be out in front and building any projects anytime soon. I really want to focus our attention on the part of the business that we're good at.

[Tim Horan:]

Got it. I guess our -- so those supply chain issues and regulatory issues are they largely behind the industry now is that momentum picking up the good visibility there, the next year?

[Scott Hisey:]

Yeah, I would -- 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 of 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 will 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 can 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.

[Tim Horan:]

Thanks, guys, congratulations.

[Scott Hisey:]

Thank you.

[Operator:]

Our next question comes from the line of Christian Schwab with Craig-Hallum Capital. Your line is open.

[Christian Schwab:]

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

[Adam Spittler:]

Yeah. So we're anticipating about 10% EBITDA margin in 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.

[Christian Schwab:]

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

[Scott Hisey:]

Yeah. We do anticipate that and just want to add a nuance obviously AT&T is our largest customer, the visibility into their build plan is really second half weighted. So we may be a little bit above that.

[Christian Schwab:]

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?

[Scott Hisey:]

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

[Christian Schwab:]

Great. No other questions. Thank you.

[Scott Hisey:]

Thanks, Christian.

[Operator:]

We have reached the end of the question-and-answer session. I will turn the call back over to Scott Hisey for closing remarks.

[Scott Hisey:]

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

[Operator:]

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