Alex Rygiel - B. Riley FBR Chad Dillard - Deutsche Bank Tahira Afzal - KeyBanc Capital Markets Adam Thalhimer - Thompson Davis Jennifer Fritzsche - Wells Fargo Noelle Dilts - Stifel Alan Mitrani - Sylvan Lake Management

Ladies and gentlemen, thank you for standing by. Welcome to the Dycom Results Conference Call. At this time, all the participant lines are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steven Nielsen. Please go ahead.

Thank you, Greg. Good morning, everyone. I'd like to thank you for attending this conference call to review our Third Quarter Fiscal 2019 Results. Going to Slide 3. During this call, we will be referring to a slide presentation which can be found on our website's Investor Center main page. Relevant slides will be identified by number throughout our presentation. Today we have on the call, Tim Estes, our Chief Operating Officer, Drew DeFerrari, our Chief Financial Officer, and Rick Vilsoet, our Chief Legal Officer. Now, I will turn the call over to Rick Vilsoet.

Thank you, Steve. Except for historical information, the statements made by Company management during this call may be forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements including those related to the Company's outlook are based on management's current expectations, estimates and projections and involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in the Company's transition report on Form 10-K for the six months ended January 27, 2018 and other periodic filings with the Securities and Exchange Commission. The Company assumes no obligation to update forward-looking statements. Steve?

Thanks, Rick. Now moving to Slide 4 and a review of our third quarter results. As you review our results, please note that we have presented in our release and comments, certain revenue amounts that exclude revenues from storm restoration services during the quarter and the prior year quarter and from a business acquired during the April 2018 quarter. We will also reference Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings per Share. All of these measures are Non-GAAP financial measures. See Slides 13 through 21 for a reconciliation of our non-GAAP measures to GAAP measures. Revenue was $848.2 million, an increase of 12.2%. Organic revenue, excluding $3.9 million of storm restoration services in the quarter and $15.9 million in the year ago quarter increased 12.9%. As we deployed 1 gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from four key customers. Gross margins were 18.99% of revenue and general and administrative expenses were 8.11%. All of these factors produced adjusted EBITDA of $98.6 million or 11.6% of revenue and adjusted diluted earnings per share of $0.98, compared to $0.99 in the year ago quarter. Liquidity was ample as cash and availability under our credit facility was $350.1 million and during the quarter, we amended and restated our credit facility increasing revolver capacity to $750 million, our term loan to $450 million and extended the maturity to October 2023. Going to slide 5. Today, a number of major industry participants are deploying significant wireline networks across broad sections of the country. These networks are generally designed to provision bandwidth enabling 1 gigabit speeds to individual consumers. In addition, emerging wireless technologies are driving significant wireline deployments. These wireline deployments are necessary to facilitate what is expected to be a decades’ long…

Thanks, Steve, and good morning, everyone. Going to Slide 8. Contract revenues for Q3 2019 were $848.2 million and organic revenue growth was 12.9% reflecting increases from four key customers. Storm restoration services contributed $3.9 million of revenue in Q3 2019 compared to $15.9 million in the year ago period. Also revenue from acquired business contributed $8.8 million of revenue in Q3 2019. Adjusted EBITDA was $98.6 million or 11.6% of revenue. Gross margins were at 19% and declined 156 basis points from the October quarter last year. G&A expense decreased 43 basis points, compared to the prior year quarter. Our non-GAAP adjusted diluted EPS in Q3 2019 was $0.98 per share. Now, going to Slide 9. Our balance sheet and financial profile continue to reflect the strength of our business. In October, we entered into a new five-year amended and restated credit agreement. The new agreement increased the maximum revolver commitments to $750 million from $450 million and increased the outstanding term loan to $450 million from $346 million. We ended the quarter with no revolver borrowings outstanding. Liquidity is ample at $350 million at the end of the quarter, consisting of availability on our credit facility and cash on hand. Cash used in operations was $55.5 million. The combined DSOs of accounts receivable and contract assets net were 106 days for Q3 2019. This increased from the July – from July reflected the impact of the sequential revenue increase for the quarter including storm work, as well as the timing of invoicing and collections on large customer programs. We expect substantial collections during the January quarter based on recent invoicing and normal seasonal collection patterns. Capital expenditures were $42.6 million during Q3 2019 net of disposal proceeds and gross CapEx was $47.3 million. Based on current trend, we…

Thanks, Drew. Going to Slide 12. Within a growing economy, we experienced the effects of a strong industry environment and capitalized on our significant strengths. First and foremost, we maintained strong customer relationships throughout our markets. We continue to win an extend contracts at attractive pricing. Secondly, the strength of those relationships and the extensive market presence they have created has allowed us to be at the forefront of evolving industry opportunities. The end-market drivers of these opportunities remain firm and are strengthening. Fiber deployments in contemplation of emerging wireless technologies have begun in many regions of the country. Wireless construction activity in support of expanded coverage and capacity is poised to accelerate through the deployment of enhanced macro cells and new small cells. Telephone companies are deploying Fiber-To-The-Home to enable 1-gigabit high-speed connections. Cable operators are deploying fiber to small and medium businesses and enterprises. A portion of these deployments are in anticipation of the customer sales process. Fiber deep deployments to expand capacity as well as new build opportunities are increasing. Dramatically increased speeds to consumers are being provisioned. Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business. In addition, we are increasingly providing integrated planning, engineering and design, procurement and construction and maintenance services. Within this context, we believe we are uniquely positioned to manage and capitalize to meaningfully experience an improving industry environment for the benefit of our shareholders. We remain encouraged with our major customers possess significant financial strength and are committed to multi-year capital spending initiatives. We remain confident in our strategies with prospects for our company, the capabilities of our dedicated employees and the experience of our management team as we grow our business. Now, Greg, we will open the call for questions.

[Operator Instructions] Your first question comes from the line of Alex Rygiel from B. Riley FBR. Please go ahead.

Thanks. Nice quarter, Steve.

Thanks, Alex.

Steve, can you help me to bridge the difference between your twelve month backlog being down 14% year-over-year. Your organic growth guidance in the fiscal fourth quarter being a positive 10% to 15%?

Sure. So, as you know, for about two-thirds of the business was our master service agreements. We look backwards to get a runrate, which increased because the organic growth is coming back. But we have renewals that happened throughout the year. We have some key renewals that have already occurred subsequent to the October quarter. And so, we don’t see that as a particular problem.

And then, turning over to DSOs of 106 in the quarter. That’s a big step-up sequentially and year-over-year. In each one of the last, kind of handful of years, DSOs have been kind of creeping higher. Is there any way to reverse that trend? Or is that just an industry phenomenon that you are just managing through?

So, there are couple of near-term factors. So, we had a very strong October. So, clearly that’s going to impact the DSO calculation. We also had pretty significant billings towards the end of the quarter, which we expect to collect this quarter. And so, we don’t see any particular long-term significance to the movement in the DSO in the October quarter.

Very helpful. Thank you.

Your next question comes from the line of Chad Dillard from Deutsche Bank. Please go ahead.

Hi, good morning guys.

Good morning, Chad.

So, against the backdrop of the next 12 months backlog coming down about $2.6 billion. So, what’s your confidence level of being able to grow the business from a revenue and net earnings perspective into calendar 2019? And maybe you can walk through some of the moving parts here?

So, Chad, we are encouraged to begin with that the October quarter that we just reported was up over 12%. That’s the first time we’ve had double-digit organic growth since the April 2017 quarter. We had growth across four of our top-five customers. And so, if you look at our guidance for the fourth quarter, that also implies at the midpoint double-digit organic growth. So, we see a good trend emerging in the business. As I mentioned to Alex, the way we calculate backlog under master service agreements, it’s a look backwards measure. We’ve not only had some renewals subsequent to the October quarter, we’ve had some nice wins and so, we are not concerned about backlog being an impediment to growing the business. We got to execute. But we are pleased that we had double-digit growth in the October quarter and are guiding at the midpoint to the same in the January quarter.

That’s helpful. And then, just switching over to margins. As I look at, how that – what you are implying in your January quarter guide, it looks like, we think the incremental EBITDA margins are about like 5%. I compare that to historical, it seems like it’s a little bit light. I just want to understand, how to think about that trajectory of the incremental as we go forward?

Sure. So, if we look at the October quarter, we had EBITDA margins in our range. That’s a good thing, but at the low-end. We certainly didn’t get any help from Hurricane Florence. We have substantial operations in the Carolinas, in the Mid-Atlantic. It was pretty wet there. I think you have seen the news. Texas has been pretty wet. I think historically wet. And so that impacted the October quarter. And we are just taking a prudent view of weather. We had a wet week last week in the Mid-Atlantic again. In fact, some of our businesses have worked last weekend to make up work as we have things to do. But we just don’t want to get ahead of ourselves in what is the most uncertain weather quarter of the year.

Got it. Okay. If we think through – I guess, maybe beyond this quarter in terms of incremental margins, I mean, like how should we think about that as we see the cycle starting to pick up here?

Sure. So, I think, what was encouraging about the October quarter is that, we had double-digit growth across the top-five, almost 18%. We had one customer that’s growing substantially. And also others that began to grow, I think as that growth becomes better distributed. And that gives us opportunities to manage better. We can always execute better. We got a number of initiatives that we are working on as we always do. But, when you have a customer that doubles, year-over-year and grows nicely sequentially, there is some effort there that we’ve got to factor into our outlook for the fourth quarter.

Great. That’s helpful. Thanks guys. I’ll jump back in queue.

Your next question comes from the line of Tahira Afzal from KeyBanc. Please go ahead.

Hi, Steve, congrats on being back on track.

Thanks, Tahira.

Steve, obviously, Verizon, a pretty nice surprise in terms of the step-up. Should we assume, based on that in your commentary in regards to the question that, we started a step-up, but maybe this is just an inflection point and we continue to see a nice step-up from this point forward?

I mean, we continue to work hard to grow the business. There has been a lot of growth in the business. But once again, if you look at our fourth quarter guidance, that double-digit organic growth across the whole business, we were continuing to work hard to meet all of our customers’ needs.

Got it. Okay, Steve. And then, if I look back historically, you have had quarters that AT&T which grow above $200 million. When you look at what you are seeing in prospects for Verizon, could we see those types of quarters going forward for Verizon?

Well, I think, if you look at the growth rate that is implied, once again, Tahira, in the fourth quarter, we are not guiding to - beyond the fourth quarter. But clearly, your second customers got to continue to grow with overall you think your double-digits across all the customers.

Got it. Okay, Steve. So, I mean, we could be back in the mid-teens type of revenue growth scenario sometime next year?

We are not guiding to next year. We are pleased for the first time since October 2017 that we had double-digit organic growth.

Got it, Steve. Thanks a lot.

Your next question comes from the line of Adam Thalhimer from Thompson Davis. Please go ahead.

Hey, good morning guys.

Hey, Adam.

Steve, can you comment on the bidding environment in general? And I am just curious the backlog that you printed last quarter, do you think that’s the high watermark for the cycle?

So, there is a lot of work out there, Adam. We think we are getting our fair share. We are working hard as always to get more. We had some encouraging wins for an expansion of a relationship into some new geographies subsequent to the October quarter and some renewals. So, I think we will continue to have good opportunity. Once again, Adam, because of the duration and the nature of these master service agreements, as runrates go up, you may be able to have revaluation of the remaining term as we see more growth. So, I am not here to say one way or another, but we feel good about the environment.

But what was the – are you able to quantify the wins in November?

As you know, Adam, we never break down below total backlog by customer. But we are encouraged with what’s going on in the industry.

And then, Drew, I was hoping you could provide a little more color on the cash flow you talked about for Q4 and then also, do you think interest expense – I think you got at 7.5 or 7.6 for Q4. Do you think we ticked down from there as we head into 2020?

Yes, so, Adam, on the cash flow, as we talked about, we did get substantial invoicing done during the quarter and as we made on the comments, we think we can improve on collections in the fourth quarter. As far as interest, we did – as we entered into the new agreement, we did expand the term loan. And then rates have ticked up a little bit over the past couple of quarters as well. And so, that’s where we laid it out.

Yes, the offset was under the new facility that spreads came in. So, we did get some – we did get some relief on the spreads.

Okay. Thanks.

Your next question comes from the line of Noelle Dilts from Stifel. Please go ahead. And Noelle has disconnected her line. We’ll go on to the line of Jennifer Fritzsche from Wells Fargo. Please go ahead. Jennifer, your line is open.

You may be on mute.

Sorry, I was. Sorry. Thank you for taking the question. I am sorry if I missed this. But can you comment on your wireless business? What the revenue contribution was for that? And specifically, if you guys could parse out the AT&T business you did, how much of that was related to the FirstNet effort? And then, secondly, I’d call it a bigger picture question. Steve, how much of your time is spent, kind of looking for ways to – I don’t know, automate the business seems to cliché, but for ways to streamline your cost and just like thinking ahead in terms of different cost initiatives? Thanks.

Sure. Thanks, Jennifer. So, overall, total wireless revenue was just under 8% of the whole business. And we will go specifically by customer, but I would say we are encouraged that we see that growing faster than the wireline business. We are seeing as AT&T has commented publicly the FirstNet initiative is beginning to expand. We are seeing an activity. There has been other industry participants who have talked about that. And so, we are encouraged there. And then, I think, Jennifer, you bring up a great point. I mean, a number of the technologies that we are deploying, particularly on the wireless and small cell side, we are beginning to take advantage of in how we manage our field workforce. And I think there is opportunities there over the next five years for more enhancements in both safety, productivity, project management. In the next five years, we will change more than it has probably in the last 20. So, it’s nice to be able to – to be a beneficiary of the technology that we are a part of deploying.

Got it. And if I could just on AT&T and understand you don’t want to give a lot of color there. But as AT&T talks about completing their fiber build next summer, once they hit 14 million homes, it seems like from what I am hearing you say, wireless is a contributor as well, where they continue to have more work to do it seems like?

Yes, no, I think, they, as well as everybody is looking to enhance wireless through small cell deployments. There is a good portion of that, that is a close analog to wireline services and we see that growing. And what, we are encouraged generally that as they comment about their fiber program that they are getting very high penetration rates that they seem very pleased with the economic performance of new subscribers that they are signing up. And while we always know that the customers have lots of competing needs for capital, we think overtime, we like to be part of programs where they are successfully selling the service that we are enabling through our network deployment. So, we will just have to see down the road how that plays out.

Thank you.

And we will try the line of Noelle Dilts again from Stifel. Please go ahead.

Thank you. Sorry about that. My line cut out. Apologies.

And then, have you’ve been on fiber, Noelle, maybe it have been more reliable.

Maybe so.

Okay.

So, Steve, you did not mention permitting in the presentation today. I am curious if you are seeing some improvement there as it relates to the pace of work release and the timing of some of this permits going through? And then, maybe if you could just comment on how you are thinking about crew productivity and what it will take for that kind of to step-up and help drive improved margins?

So, Noelle, I think, we will go back and say, look, we had nice sequential growth in the quarter from the July quarter. Organically, ex storm services, we were up a little over $93 million year-over-year. So, clearly, we are getting more work done. We can always do better. More work means, we’ve had more opportunity to go to work. But that doesn’t mean we are not continuing to work hard to expand that effort. So, we are encouraged by the trends in the business. But we are continuing to work hard to make them better.

Okay. And I think, we’ve heard from a number of – across industries and number of different companies that’s finding and retaining labor has been challenging. Are you seeing any real labor cost inflation? If so, how is the industry absorbing and customers are they willing to absorb price increases? And, can you just comment on what Dycom is doing to kind of attract and retain key people?

Sure. So, look, any time, we are growing in by extension, the industry is growing. So, once again, year-over-year, we grew kind of in excess of $90 million. You are putting resources together to meet your customers’ needs. It’s not unusual in that environment with where unemployment is that there are going to be some spot shortages of different skillsets. We have active training programs. We have active recruiting. We’ve gone to online onboarding and recruiting. So we are taking cost out of our recruiting process. And we think we are an attractive employer for people to come to work. So, it’s something that we work through in other parts of our history. It’s never easy. But if you work hard at it, and are a good employer, that you will attract the talent over time that you need.

Okay. Thanks. And any chance, Drew that you could fill out the top customers and facilities and utility revenues?

Sure. Thanks, Noelle. Charter was number six at 3.5%, Frontier Communications was number seven at 1.7%, Crown Castle was number eight at 1.3%, Dominion Energy was number nine at 1% and iSource was number ten at 1%. Telco was at 66.8%, cable was at 24.3%, facility locating was 5.8% and electrical and other was 3.1%.

Thank you.

Your next question comes from the line of Alan Mitrani from Sylvan Lake. Please go ahead.

Hi, thank you. Steve, can you talk about the housing market? It seems like we are seeing a pretty rapid slowdown in the last couple months as it looks like given rates where they are or the permits today even came out pretty disappointing. Can you say what you are seeing from your business? And do you think that will trickle into the market next year? I realize you have the 4G to 5G coming and you have a fiber build. But do you think the general economy and the housing starts can impact your business as you get to the middle of the year?

Clearly, Alan, we extend networks into new sub-divisions. So, there is certainly some impact. It’s a much smaller portion of the business than it was ten, fifteen years ago, because the housing market is obviously smaller. On the other hand, we also have a number as you highlighted of other large programs that are not housing-sensitive. And so, sure we are following it. But the impact on the business, the direct impact of housing is smaller than it was in the past. For example, in the last cycle, we had the wireless business. So, clearly, housing has little or no direct impact on that portion of the business.

Okay. And then, also on the DSOs, I realize it was late in the quarter. But obviously a lot of the shift is towards Verizon. Verizon looks like they are trying to lay off or give buy out quarter of their workforce. Is there any disruption in general with them or with others because of the interface of your employees to them and some of the changes in personnel?

I would not think about it that way, Alan. It’s a big program. We have a number of large programs that are ramping up. It’s not unusual. Although we need to work hard every day to get through it to have new systems and new processes put into place. We did get some invoicing done pretty substantially towards the end of the quarter. We feel confident with the ability to get that back in line.

Okay. And then on the stock buyback, it looks like you only bought about 16 million this quarter stocks come in. You have the extra capacity. You are going to have good cash flow quarters - next couple of quarters. Can you give us your thoughts on stock buyback or M&A or how you can grow the business from that perspective?

Yes, Alan, to be clear, we did not repurchase any shares in the quarter. We do have the buybacks. As we’ve always said, we are going to make sure that we take care of the organic growth of the business. Once again, $95 million year-over-year and $40 million sequentially. So we want to make sure that we do that. We will look as, as we feel comfortable in that area and we will work the share repurchases versus M&A based on kind of what our assessment on relative returns. We bought a lot of stock back over the years. So, it’s something we are always considering. But first and foremost, we take care of the business and take care of the customers.

Thank you.

[Operator Instructions] And sir, at this time, there are no further questions.

All right. Well, thank you everyone for dialing in. We wish you a happy Thanksgiving to all our folks that are still working on restoring service due to the hurricanes. We appreciate all your hard work and we’ll talk to you again at the end of February. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.