Ladies and gentlemen, thank you for standing by and welcome to the Dycom Results Conference Call. [Operator Instructions] I'll turn the call now over to your host, Mr. Steven Nielsen. Please go ahead, sir.

Thank you, John. Good morning, everyone. I'd like to thank you for attending this conference call to review our fourth quarter 2020 results. Going to Slide 2, 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 Ryan Urness, our General Counsel. Now, I will turn the call over to Ryan Urness.

Thank you, Steve. The statements made during this call maybe forward looking in nature and are provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. Forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections, including those risks described in our annual report on Form 10-K, filed March 4, 2019 and our other filings with the U.S. Securities and Exchange Commission. We assume no obligation to update any forward-looking statements. Steve?

Thanks, Ryan. As we refer to our results. Please note that organic revenue is a non-GAAP measure that excludes revenues from storm restoration services. In our comments today and in the accompanying slides, we referenced this and other non-GAAP measures. We refer you to the quarterly report section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures. In addition, our fiscal year 2021 is a 53-week year, ending January 30, 2021. Accordingly any references to fiscal year 2021, include the last 11 months of calendar 2020 and the first month of calendar 2021. Now moving to Slide 4. To begin this call, I will provide general comments on cash flow, debt pay down, backlog, operating results and our current outlook regarding a large customer program. Operating cash flows was strong during the quarter, funding a reduction in net debt of $176.3 million. We ended the quarter with over $54.6 million in cash and no draws on a revolving credit facility. Backlog increased by nearly $1 billion, reflecting strong bookings. When compared to our expectations at the beginning of the quarter revenue was above the midpoint, but gross margin was disappointing. On an approximate basis one quarter of the gross margin pressure was due to several factors including adverse weather and greater seasonal effects, the remainder in equal parts was a slow start with a customer whose activity is expected to increase this year and ongoing challenges with a large customer program. This large customer program experienced increased cost related primarily to two factors. First, particularly difficult soil conditions in two markets that are approaching completion and second, the rollout of a new system by this customer. With respect to this large customer program, we continue to be challenged by the cost driven by the…

Thanks, Steve. And good morning, everyone. Going to Slide 9. Contract revenues for Q4 '20 were $737.6 million and organic revenue growth was 1.3% with increases from three of our top five customers. Adjusted EBITDA was $44.5 million or 6% of revenue. Gross margins were at 14.2% and were approximately 175 basis points below our expectations for the quarter. A quarter of the variance was from several factors, including adverse weather and greater seasonal effects, the remaining margin pressure was split between the slow start with the customer, whose activities are expected to increase this year and margin pressure on a large customer program. Adjusted G&A expense increased 49 basis points compared to Q4 '19 higher administrative costs were partially offset by reduction of performance-based incentive compensation, and share-based compensation during the quarter. Our non-GAAP adjusted loss per share in Q4, '20 was $0.23 per share. Now going to Slide 10, our balance sheet and financial position remain strong. During Q4 '20, the company reduced net debt by approximately $176.3 million by repaying $103 million of revolver borrowings and $5.6 million of term loan borrowings on the senior credit facility. Purchasing $25 million of principal amount of our convertible senior notes at a discount for $24.3 million and by increasing cash by over $42 million. We ended the quarter with $54.6 million of cash and equivalents, no outstanding borrowings on our revolving line of credit. $444.4 billion of term loans outstanding and $460 million principal amount of convertible senior notes outstanding. Our liquidity is ample at $337.3 million, consisting of availability from our credit facility and cash on than cash balances. Cash flows from operations were robust at $191.8 million during Q4, we made solid progress invoicing and collecting balances during the quarter, as reflected by the $189 million sequential…

Thanks, Drew. Moving to Slide 13. 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 presence throughout our markets, second, our extensive market presence 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 enabling new wireless technologies are underway in many regions of the country, wireless construction activity in support of expanded coverage and capacity continue to grow through the deployment of enhanced macro cells and new small cells. In fact, we have recently completed or begun work associated with several thousand 5G small cell sites across 11 states. 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 are increasing. Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing dramatically. 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 for wired and converged wireless/wireline networks. We remain encouraged that our major customers are committed to multiyear capital spending initiatives and we are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team, as we grow our business. Now, John, we will open the call for questions.

[Operator Instructions] And first go to line of Adam Thalhimer with Thompson Davis. Please go ahead.

Hey, good morning guys. Sorry about the tough finish to the year.

Yes. We understand, Adam,

Yes. I wanted to ask about the Q1 revenue guide, it seems kind of abnormally low, yet two customers who were down in Q4. And are those two customers - is that the weakness that you see in Q1?

So Adam, as we talked about on the call in November, if you recall, we had - we disclosed - we have a little over $60 million of AT&T fiber-to-the-home, our revenue in the April 2019 quarter. And that's what's come - that's come out of the business. We've been encouraged by some of their comments recently, that as they demonstrate success in selling into that footprint, they may resume some build, but right now, that's what's coming out of the business.

Okay. And then, a lots of awards with CenturyLink; it seems like you picked up some new states in fact. Their capex forecast is up low-single digits, I'm just curious with some new territory, if you can do kind of meaningfully better than that?

Well, as you saw, both in the October quarter, which I think we grew organically at 38%, then this winter quarter at 31%. I think we've had some nice growth with CenturyLink. They had some encouraging comments on there - on a recent call, where they've decided to invest in expanding their fiber footprint. As for fiber-to-the-home, in fact, don't see any near-term limits to that level of activity. And then also with bringing off-net buildings on that to their own network where we're also seeing activity there. So I think fundamentally increased activity, as they implement those strategies as well as some additional footprint.

Okay. And then, last one from me. Just curious on the DSOs Drew, are you trying to signal, those have really come down, kind of January of calendar '21 or does that process start mid-year of calendar 2020?

So Adam, we continue to work at it, we've got a large program, we're working at it every day. And as you look back at the comments that I had we made solid progress on the quarter, but we've got work to do still there as we work our way through the initial phase and complete documentation around that, that's something that we think can improve.

Yes, I think, Adam, I would just add. Look, we've had a good cash flow quarter, we paid down some debt, but we still got work to do. We're working hard at it, we've got to increase operating cash flow when we've got increased cash collections. And we're exploring - we're working in a number of areas to do that and we want to do it in a sustainable way.

Okay. Thanks, guys.

Our next question is from Chad Dillard with Deutsche Bank. Please go ahead.

Hi, good morning guys. So just as a pick up on Adam's question just with respect to the DSO, as you are at a 130 days right now. How do you think about like what should be the normalized level? And then if you can break out just how much would be tied to kind of the big program? And then lastly, just thinking about your leverage comfort. How do you think about that? And do you expect to continue reducing that through pay down through '20 - fiscal 2021?

Drew, why don't you take DSO?

Yes. So, Chad I mean, we've made progress on the program in the period and it's something we continue to work through and improve that amount. So we made progress kind of across the board with customers.

And then with respect to kind of normalized DSO, I think for the mix of customers that we have Adam, I mean - Chad, excuse me, yes, we need to be in the 90s. I mean that's the objective that we've set in the company, we have a number of customers that are there, we have the others that once again, we're working with to get there in a sustainable way. And so I think that's where we need to be. In terms of leverage, I think over a long period of time, we've had kind of a - kind of a two area net leverage objective. We're not there now, we'd like to get there over time. We continue to have growth opportunities, as we discussed on the prior question, we have been able to grow footprint, we're going to have the capital to expand the business, but we'd like to get leverage to continue to move down over time.

Got it. And then, just on gross margins; I think you called out a couple of issues with soil conditions and delay in terms of ramp of a customer. And understanding that, it's going to continue in the first quarter, I just wanted to get a sense for how to think about that, as we go through the balance of the year?

So, I think with respect to the soil conditions and the large customer program, if you recall, it was two quarters ago, we were able to negotiate a contract modification that provided a benefit in that quarter. And so this is a program, where there have been some challenges both ways on forecasting. I think we continue to work hard to get better with the program, but the initial phase is the most challenging, as we complete that structurally, we need to get better.

Great. Thank you.

Our next question from Brent Thielman with DA Davidson. Please go ahead.

Thanks, good morning.

Good morning.

Steve, as you wrap up this initial phase of this large customer program. Can you talk about what should sort of change for you as you move into the next stages of this? Just trying to get a better - or understand kind of how these cost pressures should abate, kind of beyond as of '21?

Well, I think as we talked about last November, Brent, that as we go beyond the initial phase, we negotiated some new arrangements for subsequent portions of the work that we think more adequately reflect the cost of providing the service. So we think we have made adjustments there. We continue to work on systems and we continue to work hard on improving performance. But I think at a structural level, we think we have an arrangement that more appropriately reflects cost and risks of providing the service.

Okay. And the actual work that you'll be doing, will that change at all?

So, in - as you go deeper into any network build, that the core or the backbone, the center part of the build, which ties together in the cable world head-ends and hubs in other customers, they use different nomenclature, but in that portion of the build, you tend to be in more urban heavier construction areas and that's created some risk here.

Okay. And then, just on the 2Q outlook and kind of basis around the margins, kind of nearing prior year levels. Is that - is that more a function of one program kind of expected to ramp up and offset, one where you're incurring the higher costs? Or is it a little more line at sight, to kind of winding down its initial phase on the larger kind of higher cost program?

Well, I think we are encouraged across the customers that we see good growth with CenturyLink and Windstream. We have another customer, where we have a pretty detailed plan and understanding, where not only is activity on current projects increasing but we're initiating new projects and I think as we see that come into the business and less of a drag from the roll-off of the AT&T fiber-to-the-home program. I think that's where, what we're looking to.

Okay. And then just lastly, looks like an uptick here in capex expected for fiscal 2021, is that just to ramp up spending on equipment, to support the bigger bookings, any sort of one timers embedded in that?

There is really no one - I mean, in every year there is something you have to do, I think, once again, we know we have work to do on operating cash flow, we're going to be prudent in our capex, but where we have good opportunities for growth. We're going to fund those.

Okay, great. Thanks for taking the questions.

Next, we'll go to Jennifer Fritzsche with Wells Fargo. Please go ahead.

Great, thank you. Steve, I wanted to explore your small cell comment and specifically on AT&T and Verizon, sorry if you announced this. But can you disclose your wireless revenue? And then as you look at AT&T, I know you're lapping on that $60 million. But do you see small cells and the fiber related to small cells picking up for that slack. And then I guess more importantly Verizon, a few weeks ago at their Analyst Day spoke of significant densification and much of their densification efforts are small cells being connected to their own fiber. Are you playing a role in that? Can you kind of explore that a little bit.

Yes, so with respect to wireless revenue was actually 10.1% of total revenue. So first time it's been north of 10% in many years. So we were encouraged with that, we had organic growth in wireless of 22.3% and our largest customers there is AT&T and it was actually up 65%. So we're seeing lots of opportunities in wireless, a mix of macro cell and small cells, and we think that continues to increase, which I think is consistent with customer commentary. With respect to densification, I think particularly as 5G is deployed on millimeter wave, but even other mid-band, but higher frequency spectrum, you need more cell sites to deliver the true promise of 5G. And we expect a number of participants to continue to deploy those and we will both install the small cells themselves as well as connect them with fiber. One of the interesting things that we are beginning to see and it's small, but it's illustrative of kind of the theme behind your question is. We're actually seeing on some of our master contracts, where we're actually incorporating what historically would be considered small cell wireless work right into our core wireline master service agreements, either in the provisioning of the fiber or actually in one instance, we're actually starting to set the structures. So we think this is, I think this is a trend that will continue for a period of time.

Sorry, if I could just - there is some questions about Verizon needing more spectrum and participating in an upcoming C-band auction, is there anything you're seeing from them imply like a hold back of capital or anything that would suggest that it sounds like no, but I want to confirm that.

I think as the comments that they've made publicly; I think they are enthusiastic about the pace and runway for their fiber deployments. And I think - we see no sign that, that's changing.

Okay. Thank you.

And next, we'll go to Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Hi guys. Thanks for taking the questions. I hate to beat a dead horse here, but just going back to this sort of Phase 1, Phase 2 dynamic on the challenging customer program. I'm just trying to understand. So Phase 1 runs through fiscal '21, as we've indicated. I'm just wondering at what point does - is there a point in fiscal '21 that Phase 2 kind of overtakes Phase 1 in terms of revenue contribution or it is the Phase 2 not really take off in earnest until fiscal '22? Just trying to understand that dynamic.

Yes, Sean. I think we've got to be limited in our comments, we're not going to get ahead of the customer. Other than to say, we have started a modest amount of work under the new arrangements and the customer is working through their priorities for this year's plan.

Got it. And so I guess, maybe beyond this transition from Phase 1 to Phase 2, is there any other important dynamics, we should be thinking about from a margin progression standpoint or is that really the big driver here, as we look to see this kind of year-over-year margin expansions positively inflect?

Yes, I don't think that we have much to add beyond that we do have other customers that are growing throughout the year, some particularly as the year progresses through the summer. Utilization goes up, we get more balanced growth across the customers that's always been helpful to our margins doesn't mean, we don't have to work hard to execute it and we can always do better at things, but I think that's how we're looking at the year.

Okay, great. And then, just on the working capital unwind piece; I think commentary on the last call was quite positive on the progress in navigating this difficult invoicing process, would you say that the progress in the quarter was kind of in line with your expectations and kind of continuing to improve or has there have been any kind of set back there in terms of where your expectations were the last time we spoke.

Yes. I guess Sean, what I would say is look we had a good cash flow quarter. There is still work to do across a number of customers, we're working hard in the number of areas to improve operating cash flow and cash collections and do it in a way that's sustainable.

Got it. And would you be able to give us maybe a rough guideline on what EBITDA to free cash flow conversion should look like in fiscal '21.

We haven't given guidance for the full fiscal year, Sean, but what I would tell you is based on Drew's guidance for the April quarter and the July quarter, there is going to be some use of working capital as we grow seasonally, that happens every year.

Yes.

But if you look at it on a full year basis, we expect to have better conversion this year than last year, because last year was not a good conversion year.

Okay, fair enough. I appreciate the time.

Our next question is from Alex Rygiel with B Riley FBR. Please go ahead.

Thanks. Good morning, Steve.

Good morning, Alex.

From a big picture, Steve, where do you think normalized margins should be?

So, I think if you look over a long period of time and you have a lot of history with the company, we've been able to achieve low, the low-teens EBITDA - low double-digit EBITDA generally, and there have been years where we've had broadly distributed growth when it has been better. We're not there now, but we are working hard in a number of areas to get back into that normalized range and better if we can.

And as it relates to this large customer program, the $400 million, is that the revenue you expect to burn in fiscal '21 and in your 12-month and total backlog. How much backlog is associated with this large customer program in future phases.

So - yes, so Alex, that is the burn rate that we expect as we complete 90% of the markets on that initial phase, it could be a little more, a little less, it's an estimate, but what we're trying to communicate is that there is a runway here for us to take some of the complexity out of the business that's been associated with the number of markets that we're in on this program. For those, for the initial phase that continues beyond, as we talked about in a couple of markets, they have extended timelines and so we'll have a lesser impact, significantly lesser impact on the overall business.

Again, and as it relates to future period backlog associated with this. Can you quantify that?

So, Alex, as we've said before, we're trying to provide additional information to help people understand the business. We don't typically break out the low total backlog by customer, it's subject to estimates, it moves up and down. We think that the burn rate is what's important to understand for this fiscal year.

Thank you.

Our next question is from Noelle Dilts with Stifel. Please go ahead.

Hi, good morning. Just wanted - I guess clarification point for my own benefit, you talked about the slow start to the customer program being a drag on margins. But you sort of look at revenue and revenue was in line with your expectations. So how should we think about that? I mean, was there a customer that was - that - where revenue came in better than you were expecting that offset maybe some of the expected revenue, you were thinking about under the program that was going to ramp. I'm just trying to kind of rectify the revenues in line versus the profitability myth there.

Yes. So I think, I think Noelle, clearly, we had strong growth with a couple of customers and weaker growth with others. I think on this program - on this particular program, we have a pretty good detailed understanding of the ramp for this year. It got a little bit - it started a little slower than we expected, but we expect to have good growth on that program this year. And so yes, they're obviously - for where we came in the range, we did better with some and not quite as well as we would have liked in two cases.

Got it. Thank you. And then going back to - you touched on this a little bit with the discussion of the Phase 1 versus Phase 2 work for the large customer program. But what I'm trying to understand is, if this is more of a - if the confidence you have in the margin opportunity there is tied more to pricing or if it's tied more to the structure of the contract in other words, are we looking at more of like a cost plus type of arrangement, so that the contract better captures the cost side of that - of the equation or is it just that you feel you have a better sense of the cost. And so it's been baked in more accurately into maybe more of a unit type agreement?

Yes. Noelle, I'm not going to characterize the agreement with the customers other than the say that what we said in November. And what we've seen on the initial work that we've done is that we - that we have reached an arrangement that more appropriately reflects not only the cost of providing the service, but the risks.

Okay.

So there's really two dimensions.

Okay, got it. And then any comments on just, Sprint - T-Mobile, Sprint I should say, and the opportunity that you see there is that relates to the industry overall on the wireless side?

Yes. I think, what we would say Noelle, is that we're encouraged with the recent court ruling that allows the merger to receipt has apparently has some state approvals that they're still working through, but generally in our industry when the - when customers combine and grow larger they create greater capabilities. There are certainly some requirements that T-Mobile agreed to in terms of deploying broad - broadband capable wireless and in many parts of rural America, that will require more infrastructure. And I think, in the past is, as companies have combined that's created competition for the other providers and that's generally spurred investment as a response, so we think that overall it's a good thing.

Thank you.

And next, we'll go to a Blake Hirschman with Stephens. Please go ahead.

Yes. Good morning, guys. The backlog was up nicely, quarter-over-quarter. Can you give us any sense as to how the margins look on the new work coming in? And if they're in line with that kind of low teens, low double-digits that you would normally expect to see?

Yes. They're certainly in line with our expectations, the pricing was attractive and reflects current cost in the market with existing customers. I mean in a number of cases these were renewals, where we have a detailed understanding of our cost and even in the footprint expansions are tended to be in adjacent service territory. So we feel good about the new awards.

Got it. And then, on AT&T fiber-to-the-home; I think you said $60 million what's the hit you expect in the fiscal first quarter or at least what's baked into the guide? Can you kind of remind us how that headwind looks for the rest of the year? And if it...

Sure.

Winds down in the second quarter and kind of how much you expect?

Yes. So Blake, we talked about this back in November, it's a little over $60 million in the April quarter, a little over $30 million in the July quarter and essentially negligible thereafter.

Okay, got it. All right, thanks a lot. And that's it for me.

And we'll go to Adam Thalhimer with Thompson Davis. Please go ahead.

Hey, good morning guys. What would you say your margin expectations are for the back half, Steve?

Well, I mean, Adam, as you know, we're giving quantitative guidance on the April quarter and qualitative on the July quarter. We need to get better, but we're not guiding. I mean, we're not in no way are we satisfied with current performance.

But it seems like you're guiding to a better trend because you've got a significant decline in Q1, followed by flat in Q2.

Yes.

And then in the back half, you should have this kind of rotation from Phase 1 to Phase 2.

Look Adam, I think there are certainly elements here that we are working through in this challenging period of time to make things better, I think the other thing to just keep in mind with respect to the April quarter, February's weather has not been particularly helpful in the Southeast and other regions of the country, so we wanted to make sure that we reflected that prudently in the guide.

Okay, that makes sense. The other question I'm getting from clients, kind of during the call is just about the size of Phase 2 versus Phase 1 and is it kind of a seamless transition to the total revenue from that customer stay flattish as that transition happens.

Yes. And Adam, I understand the question. I think all we can say at this point is we've done a modest amount of work. The customer is working through the plan for the year and the priorities and we will report, how that's going, as we learn more.

Okay, thank you.

And we'll go to Noelle Dilts with Stifel. Please go ahead.

Hi. Just with some of the supply chain disruptions we've heard about on the telecom side are associated with coronavirus, anything or concerns that you're thinking about is, as it relates to just the availability of equipment and the supply chain.

Yes. We have not - I'm not aware that we've had any issues with any of the equipment that we install. I mean there is a pretty robust supply chain for big telecom companies and a fair amount of inventory along the way. I mean it's obviously something that bears watching. But at this point, we've not seen that, I think if there were an impact it would be more around the wireless part of the business in the more construction, master contract related areas. I think we have much more construction content less equipment.

Got it. That makes sense. Thank you.

And we'll go to Alex Rygiel with B Riley FBR. Please go ahead.

Quick follow-up. Steve, can you remind us what your share buyback authorization is today? And whether not, you have any restrictions in that to be in the market currently?

Yes. So Alex, what I would say is, we have a program that's expiring, we have the ability to renew it. But at this point we are really focused on operating cash flow, funding the organic growth of the business and getting leverage down.

Thank you.

And we'll go to Jennifer Fritzsche with Wells Fargo. Please go ahead.

Thanks, Steve. I just wanted to ask about CenturyLink because - excuse me Comcast, because it really hasn't come up much on this call. And there is growing more evidence even since you reported last quarter that the broadband pipe usage is going through the roof, especially with cord cutter action, so I think if the number is like double a non-quarter - cord cutter. Are you seeing yet your revenue with Comcast was down, is that a trend you would expect to kind of occur, continue to happen or how do you think of that customer?

No, I think we're optimistic about opportunities with that customer in specific and with the cable industry in general. I think the numbers that I saw show that the average consumer used 340 gig of data in the fourth quarter compared to 270 in the year ago period and cord cutters were over 500. I think all of the cable operators have talked about in Comcast, as specific - as commented specifically about pivoting from a video-centric strategy to connectivity. And as they pivot those dollars from CPE and other more equipment intensive deployments, we think that's good for our business and I think we'll see a pickup there.

Got it. Thank you.

And with no further questions in queue, Mr. Nielsen, I'll turn it back to you for any closing comments.

Yes. I'll just turn it over to Drew for one final comment and some short detail.

So on the customer split for the quarter, the telco was at 73.8%, cable was at 16.8%, facility locating was 6.3% and electrical and other was 3.1%. Steve?

All right, well, thank you everybody for attending the call. We will speak to you again in at the end of May. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.