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| EX-99.2 - EXHIBIT99-2 - DYCOM INDUSTRIES INC | exhibit99-2.htm |
| EX-99.1 - EXHIBIT99-1 - DYCOM INDUSTRIES INC | exhibit99-1.htm |
| 8-K - FORM8-K - DYCOM INDUSTRIES INC | form8-k.htm |
Exhibit
99.3
CORPORATE
PARTICIPANTS
Steve
Nielsen
Dycom
Industries, Inc. - President, CEO
Rick
Vilsoet
Dycom
Industries, Inc. - VP, General Counsel, Secretary
Drew
DeFerrari
Dycom
Industries, Inc. - SVP, CFO
CONFERENCE
CALL PARTICIPANTS
Alex
Rygiel
FBR
Capital Markets - Analyst
Adam
Thalhimer
BB&T
Capital Markets - Analyst
Simon
Leopold
Morgan
Keegan - Analyst
Michael
Funk
BofA
Merrill Lynch - Analyst
PRESENTATION
Operator
Ladies
and gentlemen, thank you for standing by. Welcome to the Dycom results
conference call. (Operator Instructions).
As a
reminder, today's call is being recorded. With that being said, I will turn the
conference now your host, Mr. Steve Nielsen. Please go ahead, sir.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Thank
you, John. Good morning, everyone. I’d like to thank you for attending our
fourth-quarter fiscal 2010 Dycom results conference call. During the call, we
will be referring to a slide presentation which can be found on our website,
www.dycomind.com under the heading Events. Relevant slides will be identified by
number throughout our presentation. Going to slide one, today we have on the
call Drew DeFerrari, our Chief Financial Officer, and Rick Vilsoet, our General
Counsel. Now I will turn the call over to Rick Vilsoet. Rick.
Rick Vilsoet - Dycom Industries, Inc. - VP,
General Counsel, Secretary
Thank
you, Steve. Referring to slide two, 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 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
for future periods to differ materially from forecasted results. Those risks and
uncertainties are more fully described in the Company's periodic filings with
the Securities and Exchange Commission. The Company assumes no obligation to
update forward-looking statements. Steve.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Thanks,
Rick. Yesterday, we issued a press release announcing our fourth-quarter 2010
results. As you review this release, it is important to note the following. We
utilize a 52/53 week fiscal year ending on the last Saturday in July. As a
result, the fourth quarter of fiscal 2010 contained 14 weeks compared to 13
weeks in the fourth quarter of fiscal 2009. For clarity and to enable
comparability between periods, my comments with respect to organic revenue
growth rates will adjust for the additional week in fiscal 2010. See slides 10
and 11 for a reconciliation of these non-GAAP revenue items, as well as slide 12
for other reconciliations of our non-GAAP results to our GAAP results for the
fiscal years 2010 and 2009.
Moving to
slide three. Revenue increased sequentially by 12.9% to $281.5 million, with
trends improving in the latter part of the quarter. Revenue on an organic basis
declined year-over-year by 3.1%, reflecting moderating reductions in customer
capital spending plans. Volumes during the quarter were mixed from telephone
companies, with some companies growing, while others continue to cautiously
deploy capital for new network initiatives and tightly manage routine capital
and maintenance expenditures. On the other hand, spending by cable customers
improved and increased year-over-year. Earnings of $0.12 per share for the
fourth quarter decreased from last year's earnings of $0.17 per share, with
gross margins increasing sequentially, but declining by approximately 170 basis
points year-over-year, reflecting increased labor, material and fuel costs.
During the quarter, we entered into a new $225.0 million five-year revolving
credit agreement and finished the quarter with strong liquidity.
Going to
slide four. During the quarter, we continued to experience the effects of a slow
growth economy. Revenue from AT&T was up sequentially and up year-over-year.
At $59.8 million or 21.2% of revenue, AT&T was our largest customer. Revenue
from Comcast was up sequentially. Comcast was our second largest customer at
$39.2 million or 13.9% of total revenue. CenturyLink was our third largest
customer, with revenues of $29.3 million or 10.4% of total revenue. CenturyLink
was up sequentially and year-over-year. Revenue from Verizon was $26.5 million.
Verizon was Dycom's fourth-largest customer for the quarter at 9.4% of revenue.
And revenue from Time Warner Cable was up year-over-year. Time Warner Cable was
our fifth largest customer at 7.1% of total revenue. Altogether, our top five
customers represented 62.1% of revenue, and were down 5.5% year-over-year. All
other customers increased 1.2%. Interestingly, if Verizon is excluded, we grew
5.8% organically year-over-year, our best growth rate in 10
quarters.
Now
moving to slide five, backlog at the end of the fourth quarter was $1.114
billion versus $1.024 billion at the end of the third quarter, an increase of
approximately $90.0 million. Of this backlog, approximately $640.0 million is
expected to be completed in the next 12 months. During the quarter, we continued
to book new work and renew existing work. With AT&T, we renewed three-year
construction and service agreements in North Carolina and Tennessee. From
Comcast, we received three-year installation services agreements for Washington,
Oregon, California, Georgia, New Jersey, Pennsylvania, and Delaware. For
AT&T, a three-year utility line locating contract in Georgia. From Comcast,
a network upgrade project in Connecticut. And from various rural telecom
providers, fiber construction services in Kentucky and South Carolina. Headcount
increased during the quarter to 8,897, reflecting normal seasonal factors and an
improving environment. Now I will turn the call over to Drew for his financial
review.
1
Drew DeFerrari - Dycom Industries, Inc. - SVP,
CFO
Thanks,
Steve, and good morning, everyone. As a reminder, our fourth quarter of 2010
results included 14 weeks of operations compared to 13 weeks for the fourth
quarter of fiscal 2009. We have provided a reconciliation of non-GAAP measures
to the GAAP measures in the slide presentation for today's call.
Going to
slide six of the presentation, contract revenues for the fourth quarter of 2010
were $281.5 million compared to $269.7 million for the fourth quarter of 2009.
Excluding the incremental week in the current quarter, the revenue decline was
3.1%. Telecommunications
and utility-locating customers made up over 96.0% of our revenue on a combined
basis, with electric, gas and other construction and maintenance customers
making up the balance. Income from continuing operations for the current quarter
was $4.6 million compared to $6.7 million in the prior year. Earnings per share
were $0.12 per share compared to $0.17 per share in Q4 '09.
Turning
to slide number seven, cost of revenues as a percentage of contract revenue was
impacted by higher training and labor costs, as well as increased material costs
compared to Q4 ‘09. In addition, higher prices of fuel drove up our costs by
approximately 50 basis points. As a percentage of contract revenues, G&A
costs were unchanged, while depreciation and interest expense were up slightly.
Other income was higher in the current period as we sold more assets at
generally higher prices. Our effective tax rate for the quarter was
approximately 42.5% and 45.5% for the year-to-date period. The fourth quarter
effective tax rate included the impact of several tax credits and deductions
that reduced the rate compared to expectations. As we look forward to fiscal
2011, we expect next year's full-year rate to be closer to 44.0%.
Now
turning to slide number eight. Our balance sheet remains strong, and we ended
the period with $103.3 million of cash on hand. During the quarter, operating
cash flows were $5.5 million, and DSO's were 61 days, down slightly from 62 days
in the fourth quarter of last year. Capital expenditures, net of disposals, were
$15.0 million for the quarter and $46.6 million for fiscal 2010. Gross capex for
the quarter was approximately $17.2 million. We expect fiscal 2011 capital
expenditures, net of disposals, to range from $55.0 million to $65.0 million.
During
the current quarter, we entered into a new five-year $225.0 million revolving
credit agreement, which extends our nearest maturity of long-term debt out until
June 2015. The interest rate applicable to borrowings on the facility will be
based on our consolidated leverage ratio of debt to EBITDA, and currently the
rate would be at LIBOR plus 250 basis points. At July 31, there were no
borrowings outstanding and $124.1 million was available, after providing for
letters of credit related to our insurance programs. The financial covenants of
the new agreement are consistent with our previous agreement. We are required to
maintain a consolidated leverage ratio of debt to EBITDA below 3 to 1 and
maintain an initial consolidated interest coverage ratio of EBITDA to interest
greater than 2.75 to 1.0. Overall, we are pleased with the terms of this new
agreement. Now I will turn the call back to Steve.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Thanks,
Drew. Going to slide nine, in summary, despite a slow economy during the
quarter, we began to see indications of an improving environment and continued
to demonstrate strengths. First and foremost, we maintained solid customer
relationships throughout our markets, we continued to win projects and extend
contracts at acceptable pricing. These successes were reflected in a number of
notable contract awards. In addition, in an improving demand environment, we
have generally increased market share as our customers are consolidating vendor
relationships. Secondly, the strength of those relationships and the value we
can generate for our customers has allowed us to be at the forefront of evolving
industry opportunities. The long-term drivers of these opportunities are as
strong as ever, and in fact may further strengthen. The government's response to
a weak economy includes increased funding for broadband initiatives, and a
number of these initiatives are now moving through the solicitation process. In
addition, industry merger and acquisition activities are expanding new
technology deployments. In fact, one recent merger approval included explicit
commitments to increase outside plant capital expenditures as a condition of
approval.
Additionally,
we remain encouraged that cable operators have begun to deploy a number of new
technologies which will enable them to significantly increase the effective
bandwidth of their networks and offer new products to consumers and businesses,
while both telephone and cable companies as well as a number of other industry
participants are aggressively extending or deploying fiber networks to provide
wireless backhaul services. And finally, we are strong financially, maintaining
ample liquidity and a robust balance sheet. As our industry continues to evolve,
we believe our fundamental strengths will allow us to remain one of the
best-positioned firms in our industry, able to exploit profitable growth
opportunities, which appear to be increasing despite a slow economy. As we look
ahead, we expect total revenues for the first quarter of fiscal 2011 which are
down slightly year-over-year and margins which improve
sequentially.
As the
nation's economy slowly emerges from recession, we remain encouraged that our
major customers possess significant financial strength and remain committed to
multi-year capital spending initiatives. We have adjusted our business during a
weak economic period and slowing expenditures from a key customer, and these
adjustments have fortified our strong balance sheet, meaningfully increased our
liquidity and positioned us well for emerging growth opportunities. We remain
confident in our strategies, the prospects for our Company, the capabilities of
our able employees and the experience of our management team, who have grown our
business following difficult economic times many times before. Now, John, we
will open the call for questions.
2
QUESTIONS
AND ANSWERS
Operator
(Operator
Instructions) First go to the line of Alex Rygiel with FBR Capital Markets.
Please go ahead.
Alex Rygiel - FBR Capital Markets –
Analyst
Good
morning, Steve, how are you?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Good
morning.
Alex Rygiel - FBR Capital Markets –
Analyst
Backlog
is very interesting, and we’d love to get a little bit more color on whether or
not there is any interesting mix shift -- customer mix shift occurring in your
backlog as we look out into 2011 from 2010. And the follow-up question to that
is how does margin profile in backlog look?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
I think
we had -- in the contracts that we talked about, a number of those were
renewals. We’re happy with where those were renewed. In addition, there were
some extensions of the territory we covered. We’re comfortable with those. I
think because of the nice awards that we've had with Comcast, there is probably
a mix shift in the total backlog towards cable on the margin -- not significant,
but certainly in that direction. You know, we had a couple of awards in the
rural fiber market. We think there will be more of those coming as the broadband
stimulus dollars begin to hit the marketplace. So I think in general, you would
see a shift, certainly year-over-year, away from particularly Verizon and into
cable, some of the broadband stimulus and some of the other phone
companies.
Alex Rygiel - FBR Capital Markets –
Analyst
Just to
clarify, the shift into cable is outside plant construction or
fulfillment?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
We picked
up some projects in outside plant, but the significant increase was on the
fulfillment side.
Alex Rygiel - FBR Capital Markets –
Analyst
And then
secondly, you've highlighted materials in the quarter as negative headwind on
your gross profit margin. Can you expand upon that a little bit
more?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Sure. The
issue with the materials is we have one customer that we've had some pretty
significant growth with, where we provision a good portion of the materials. I
don't know that it's necessarily a headwind, but on a year-over-year basis,
there is an increasing component of cost of goods to material compared to prior
periods. If you look at the balance sheet, you will see inventories are up, and
that is a reflection of that growth. That is a good client. We're happy with the
business. But it just changes the margin profile year-over-year slightly, with
more cost going into materials.
Alex Rygiel - FBR Capital Markets –
Analyst
So in
other words, you're passing through materials at effectively no margin, and the
lower margin is not a reflection of pricing pressure from your core services
business.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
We do
earn a margin on the materials, which we think is appropriate. That’s part of
the process. I think what I would look to is, as we disclosed, fuel was an
impact of call it 50 basis points, and we certainly had some training expenses
as we ramped up almost 400 employees sequentially. And I think those were bigger
drivers. Material is something that we watch on the margin, but I think those
were the bigger drivers.
Alex Rygiel - FBR Capital Markets –
Analyst
And
lastly, your comment or your guidance as it relates to net capex in 2011, does
that assume additional growth over and above what you see in backlog
today?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
It
doesn't at this point. I mean, we need to -- and we talked about it in the last
call – we’re taking advantage of some opportunities to trade out equipment
before a particular model gets discontinued. We’re doing that because it makes
us money. We’re also doing some equipment replacements, and I think generally
the way we think about growth capex is when you see it, that's a good thing
because EBITDA is growing.
Alex Rygiel - FBR Capital Markets –
Analyst
Great.
Thank you. Nice quarter.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Thank
you.
3
Operator
Next go
to the line of Adam Thalhimer with BB&T Capital Markets. Please go
ahead.
Adam Thalhimer - BB&T Capital Markets –
Analyst
Good
morning guys.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Good
morning, Adam.
Adam Thalhimer - BB&T Capital Markets –
Analyst
How much
of the growth at CenturyLink is related to IPTV?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Well,
it’s certainly a driver, Adam, but I think that’s a portion of the business
there; they certainly have been aggressive in deploying more fiber in their
networks, both to expand their DSL footprint, as well as to provision cell
towers and just other consumers of more bandwidth. As you remember, as Embarq
went into the merger, they had focused on being very disciplined around capital
expenditures, and I think in part these are some of the expenditures that needed
to be made. But clearly, at least as we looked at their comments, they seem ---
on their earnings call, they seem to be happy with IPTV, and in fact talked
about it as a potential upside to the Qwest transaction, to put that type of
traffic across to Qwest fiber network. So I think it’s not a huge driver at this
point, but it’s one that we’re optimistic will continue to grow.
Adam Thalhimer - BB&T Capital Markets –
Analyst
And
Steve, relative to other contractors, how do you feel you are positioned for
that contract?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
You know,
we have a good relationship with CenturyLink. I'm sure they have good
relationships with other vendors, and we feel like we’re getting our fair
share.
Adam Thalhimer - BB&T Capital Markets –
Analyst
Okay. And
then I wanted to ask you about -- with rural stimulus or rural broadband
rollout, you mentioned you won a couple awards in the quarter. How are these
projects on a profitability basis looking versus your normal work?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
I think
generally, because they are what I would call spot market, individual project
opportunities, that we feel like we've got to have a good margin in the business
because they are not -- unlike a master agreement, they are not going to be
continuous. Although some of these projects are potential to extend for two to
three years. But we would only address individual contract opportunities that we
thought were accretive to our margins or the core book of business. Because when
you take on projects, that is the way you have to think about it.
Adam Thalhimer - BB&T Capital Markets –
Analyst
Okay, and
I just wondered if -- maybe this is a question for Drew, but just as we start to
model out ‘11, you know, the SG&A line, it's kind of interesting, because
revenue is down 20.0% from the peak, but SG&A has really been flattish and
hurt you a little bit in the quarter.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Adam,
here is the way we think about SG&A. You make some -- you make investments
in slow times to be better managed in better times. And we think that we've done
that. We have adjusted it, in part because of the way we are organized around
subsidiaries. There are -- there is only so much that we’re comfortable in
cutting in slow periods. On the other hand, as the environment improves, and
something like a broadband stimulus initiative, where there is literally
hundreds of different opportunities that we need to address, we think that the
strength of our decentralized model comes through in that environment. So we’re
always paying attention to G&A. But on the other hand, you don't want to cut
in the down time so that you give away some of the upside when things
improve.
Adam Thalhimer - BB&T Capital Markets -
Analyst
So in
‘11, do you think you can kind of maintain flattish SG&A as you kind of move
things around?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
I mean,
it is going to be a function, Adam, of how the opportunities come through.
Certainly, it’s tightly managed. And if we have a good idea that we’re going to
be growing in the back half of the fiscal year, then we may have a different
margin profile than the way we think about it now. I mean, there is some
leverage, and that’s the important part, is to as the revenue growth comes
through, potential revenue growth comes through, you get leverage on that fixed
amount.
Adam Thalhimer - BB&T Capital Markets -
Analyst
That's
what I'm really driving at, is what is -- to what extent is there leverage here
as the business trends back up?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Once
again, it's a function of our subsidiary structure. There ‘s a certain amount of
overhead you have to have in a business that is running $40.0 million in
business, if it goes to $50.0 million, it is not linear what they will have to
add for overhead.
Adam Thalhimer - BB&T Capital Markets -
Analyst
Okay.
Thanks very much.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Thank
you.
4
Operator
And we’ll
go to Simon Leopold with Morgan Keegan. Please go ahead.
Simon Leopold - Morgan Keegan -
Analyst
Thanks, I
want to get a couple of housekeeping ones out of the way first. In terms of your
telco/cable split, how did that turn out this quarter?
Drew DeFerrari - Dycom Industries, Inc. - SVP,
CFO
Sure, the
telco side was 47.3% and the cable was 31.0%.
Simon Leopold - Morgan Keegan -
Analyst
Great.
And could you round out the top ten customer list, give us six through ten
again?
Drew DeFerrari - Dycom Industries, Inc. - SVP,
CFO
Sure.
Charter was at 6.5%; Windstream was at 3.7%; Questar Gas, 1.7%; Electric Power
Board, 1.4%; and Cablevision was 1.4%.
Simon Leopold - Morgan Keegan -
Analyst
Okay. And
that leads me to my first sort of more substantive question, is looking for
Frontier in terms of prospects they are giving, they acquired the Verizon access
lines. Wondering how close they are to break into that top ten customer list and
what your thinking is for their outlook.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Certainly,
Simon, they made some commitments as part of the access line spinoff out of
Verizon. They are also involved in managing some of the stimulus programs that
are pointed towards West Virginia. So we did not see a meaningful pickup in the
quarter, but then again, they closed the merger the first of July. We see it as
a growth opportunity. We do have contracts with them, particularly in the
mid-Atlantic part of the country. So we think it’s there. It just may be a
little bit too early for us to see it at this point.
Simon Leopold - Morgan Keegan -
Analyst
Okay, and
then also in terms of timing, it sounds like you are looking at the broadband
stimulus similarly. Was there any contribution from broadband stimulus in the
July quarter, and if so, how much? And then what’s your expectation for how you
would think those contributions ramp within the next several
quarters?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
We saw
some RUS projects that were ongoing prior to the stimulus, but are similar, that
were awarded, that we worked on during the quarter. I think you will see the
first of the actual stimulus directly related awards in rural fiber probably in
the end of this quarter.
Simon Leopold - Morgan Keegan –
Analyst
Okay. And
then just one last one, just want to clarify the margin guidance. Margins
improving sequentially. Is that both gross and operating margin that would be
improving sequentially?
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Yes.
Simon Leopold - Morgan Keegan -
Analyst
So just
wondering how much of that improvement is coming from the gross margin, I guess,
getting past the training costs, and how much might be cuts in your SG&A.
And I guess I'm trying to sort of look past the extra week, because I guess
October is a 13-week.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Yes,
that's right. We're back to -- for the next six years, we will be on a 52-week
calendar. I think kind of proportionally, Simon -- and we are not giving precise
guidance -- but I think there would be slightly more improvement on the gross
margin rather than the G&A.
Simon Leopold - Morgan Keegan -
Analyst
Great.
Thank you. That's helpful.
5
Operator
(Operator
Instructions) And we’ll go to Michael Funk with Bank of America Merrill Lynch.
Please go ahead.
Michael Funk - BofA Merrill Lynch -
Analyst
Great,
thank you good morning and thank you for taking the question. Just two really
quick ones, if you could. I think you mentioned in the call that a portion of
your growth, of course, is coming from customer consolidation of vendors.
Presumably the other portion is coming from just industry spending and growth,
or maybe new customers coming on board. Maybe if you can give me some idea of
the breakdown between those two. And then second, you mentioned you're investing
for growth in your own business during the slow times. Maybe you can address the
opportunities for consolidation, maybe picking up some assets at attractive
prices right now, given your balance sheet strength and industry positioning in
the consolidation that you highlighted earlier. If I could, actually, just one
more quick one. Can you quantify once again what you see as the tower backhaul
opportunity? We are hearing a lot of the telcos, both alternative and more
traditional ILEC carriers, highlighting non-tower backhaul as an opportunity for
them. And clearly, there will be some need for additional plant installations.
So if you guys could walk through your thoughts on that too,
please.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Sure. I
think in terms of as we think about the growth outside of Verizon in the
quarter, I think there was -- a disproportionate portion of that growth was just
industry growth. I mean, just more services through our existing footprint. We
certainly did gain some territory in the quarter. But I would say that the
general driver was overall industry growth. And maybe I will tie that into your
question about backhaul, before we get to M&A opportunities. Clearly, if you
look at the earnings calls and some conference comments over the last month, all
cable operators and all telephone companies certainly see cellular backhaul as a
significant opportunity in their businesses. I think there were several that
actually gave number of towers under contract and opportunities that they were
looking at. And so we are seeing that come through the business. I think,
Michael, in the past, we've been comfortable to say that we kind of see it as a
$50.0 million opportunity on an annual basis. And depending on the eventual
industry ramp-up, it could be $75.0 million or $100.0 million. It is a very
diffuse opportunity in that it’s throughout all of our customers and that for a
number of our customers, the business comes through our normal master service
agreements. So it’s not a separate line item in our revenue. But I do think it
is a driver. Certainly, the cable companies also on their calls talked about
their desire and ability to get into the small and medium enterprise services
for businesses. And we continue to see that and Metro-E as an emerging
opportunity for the cable companies. In terms of uses of capital, we certainly
always look at M&A opportunities, and we are seeing a number of those come
across our desk. We evaluate them one at a time and take an opportunistic
approach. We don't have any specific target to get them done. We do it when they
make sense and are accretive to our shareholders.
Michael Funk - BofA Merrill Lynch –
Analyst
Great.
Thank you very much.
Operator
And with
no further questions, I will turn it back to you, Mr. Nielsen.
Steve Nielsen - Dycom Industries, Inc. -
President, CEO
Thank
you, John. We appreciate everybody's time and attendance, and we will talk to
you just before Thanksgiving on our first-quarter call. Thank you.
Operator
Ladies
and gentlemen, that does conclude your conference for today. Thank you for your
participation. You may now disconnect.
6