Dycom Industries : Q2 2023 Transcript

Dycom Industries, Inc. (NYSE: DY) Q2 2023 Results Conference Call August 24, 2022 9:00 AM ET

CORPORATE PARTICIPANTS

Steven E. Nielsen, President, Chief Executive Officer & Director, Dycom Industries, Inc.

Ryan F. Urness, Vice President, General Counsel & Corporate Secretary, Dycom Industries, Inc. H. Andrew DeFerrari, Senior Vice President & Chief Financial Officer, Dycom Industries, Inc.

OTHER PARTICIPANTS

Adam Thalhimer, Analyst, Thompson, Davis & Company, Inc.

Alex Rygiel, Analyst, B Riley Securities, Inc.

Brent Thielman, Analyst, D.A. Davidson & Co.

Eric Luebchow, Analyst, Wells Fargo Securities, LLC

Noelle Dilts, Analyst, Stifel, Nicolaus & Company, Inc.

Sean Eastman, Analyst, KeyBanc Capital Markets, Inc.

Steven Fisher, Analyst, UBS Securities LLC

MANAGEMENT DISCUSSION SECTION

Operator

Good day, and thank you for standing by. Welcome to the Dycom Industries, Inc. Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Mr. Steven Nielsen, President and Chief Executive Officer. Please go ahead.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Thank you, Operator. Good morning everyone. I'd like to thank you for attending this conference call to review our second quarter fiscal 2023 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 Drew DeFerrari, our Chief Financial Officer and Ryan Urness, our General Counsel. Now I will turn the call over to Ryan Urness.

Ryan F. Urness

Vice President, General Counsel & Corporate Secretary, Dycom Industries, Inc.

Thank you, Steve. All forward-looking statements made during this call are provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, 2022 together with our other filings with the US Securities and Exchange Commission. We assume no obligation to update any forward-looking statements. Steve?

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Thanks, Ryan. Now, moving to Slide 4 and a review of our second quarter results. As we review our results, please note that in our comments today, and in the accompanying slides, we reference certain Non-GAAP measures. We refer you to the Quarterly Reports section of our website for a reconciliation of these Non-GAAP measures to their corresponding GAAP measures.

Now for the quarter. Revenue was $972.3 million, an organic increase of 23.5%. As we deployed gigabit wireline networks, wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from 3 of our top 5 customers. Gross margin was 17.9% of revenue and increased 63 bps compared to the second quarter of fiscal 2022. Improved operating performance of 122 bps in the second quarter was partially offset by 59 bps of higher fuel costs.

General and administrative expenses were 7.5% of revenue. And all of these factors produced Adjusted EBITDA of $104.7 million, or 10.8% of revenue, and earnings per share of $1.46, compared to $0.59 in the year ago quarter. Liquidity was solid at $366.3 million improving sequentially. And during the quarter we repurchased 104,000 shares for $10.0 million.

Now Going to Slide 5. Today major industry participants are constructing or upgrading significant wireline networks across broad sections of the country. These wireline networks are generally designed to provision gigabit network speeds to individual consumers and businesses either directly or wirelessly using 5G technologies.

Industry participants have stated their belief that a single high-capacity fiber network can most cost effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment. This view is increasing the appetite for fiber deployments, and we believe that the industry effort to deploy high-capacity fiber networks continues to meaningfully broaden the set of opportunities for our industry.

Increasing access to high-capacity telecommunications continues to be crucial to society, especially in rural America. The Infrastructure Investment and Jobs Act includes over $40 billion for the construction of rural communications networks in unserved and underserved areas across the country. This represents an unprecedented level of support. In addition, substantially all states are commencing programs that will provide funding for telecommunications networks even prior to the initiation of funding under the Infrastructure Act.

We are providing program management, planning, engineering and design, aerial, underground, and wireless construction and fulfillment services for gigabit deployments. These services are being provided across the country in numerous geographic areas to multiple customers.

These deployments include networks consisting entirely of wired network elements and converged wireless/wireline multi-use networks. Fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal initiatives.

We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants.

Macro-economic effects and supply constraints may influence the near-term execution of some customer plans. Broad increases in demand for fiber optic cable and related equipment may cause delivery volatility in the short to intermediate term. In addition, the market for labor remains tight in many regions around the country. It remains to be seen how long this condition persists. Furthermore, the automotive and equipment supply chain remains challenged, particularly for the large truck chassis required for specialty equipment. Prices for capital equipment are increasing.

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As we contend with these factors, we are encouraged that industry participants increasingly understand that cost pressures are industry wide. Several have addressed those impacts while others are expected to do so as well. Within this context, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers.

Moving to Slide 6. During the quarter organic revenue increased 23.5%. Our top 5 customers combined produced 67.4% of revenue, increasing 26.6% organically. Demand increased from 3 of our top 5 customers. All other customers increased 17.4% organically.

AT&T was our largest customer at 26.3% of total revenue, or $255.9 million. AT&T grew 44.2% organically. This was our sixth consecutive quarter of organic growth with AT&T. Lumen was our second largest customer at 13.1% of revenue, or $127.6 million. Lumen grew organically 33.7%. This was our second quarter of organic growth with Lumen. Revenue from Comcast was $111.8 million, or 11.5% of revenue. Comcast was Dycom's third largest customer. Verizon was our fourth largest customer at $80.8 million, or 8.3% of revenue. And finally, revenue from Frontier was $78.7 million, or 8.1% of revenue. Frontier grew 147.0% organically.

This is the first quarter since April of 2017 where our top five customers grew organically in excess of 25% and the fourteenth consecutive quarter where all of our other customers in aggregate, excluding the top five customers, have grown organically. Of note, fiber construction revenue from electric utilities was $79.8 million in the quarter and increased organically 54.4% year over year.

We have extended our geographic reach and expanded our program management and network planning services. In fact, over the last several years we believe we have meaningfully increased the long-term value of our maintenance and operations business, a trend which we believe will parallel our deployment of gigabit wireline direct and wireless/wireline converged networks as those deployments dramatically increase the amount of outside plant network that must be extended and maintained.

Now Going to Slide 7. Backlog at the end of the second quarter was $6.028 billion vs. $5.593 billion at the end of the April 2022 quarter, an increase of $435 million. Of this backlog, approximately $3.111 billion is expected to be completed in the next 12 months. Backlog activity during the second quarter reflects solid performance as we booked new work and renewed existing work. We continue to anticipate substantial future opportunities across a broad array of our customers.

During the quarter we received, from Lumen, fiber construction agreements in Washington, Oregon, Arizona, Colorado and Minnesota. For Brightspeed, fiber construction agreements for Pennsylvania, New Jersey, Virginia and North Carolina. From Verizon, a construction and maintenance agreement in Pennsylvania. For Frontier, construction and maintenance and fiber construction agreements in California, Ohio and Pennsylvania. And from Conexon, a rural fiber construction agreement in Louisiana. Headcount was 14,951.

Now I will turn the call over to Drew for his financial review and outlook.

H. Andrew DeFerrari

Senior Vice President & Chief Financial Officer, Dycom Industries, Inc.

Thanks, Steve, and good morning, everyone. Going to Slide 8. Contract revenues were $972.3 million and organic revenue increased 23.5%. Adjusted EBITDA was $104.7 million, or 10.8 % of revenue, compared to $73.8 million, or 9.4% of revenue. This reflects an improvement of 140 bps compared to Q2 of last year. Gross margin was 17.9% of revenue and increased 63 bps. Improved operating performance of 122 bps of gross margin was partially offset by 59 bps of higher fuel costs. G&A expense of 7.5% decreased from 8.2% of revenue in Q2-22 from improved operating leverage at the higher level of revenue and tight management of costs.

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Net income was $1.46 per share compared to $0.59 per share in Q2 last year. This increase reflects higher Adjusted EBITDA, lower depreciation and amortization, and higher gains on asset sales, partially offset by higher stock-based compensation and interest expense.

Going to Slide 9. Our financial position and balance sheet remains strong. We ended the quarter with $500.0 million of Senior Notes, $341.25 million of Term Loan, and no revolver borrowings. Cash and equivalents were $120.3 million and liquidity was solid at $366.3 million. Our capital allocation prioritizes organic growth, followed by opportunistic share repurchases and M&A, within the context of our historical range of net leverage.

Going to Slide 10. Cash flow used for operating activities was $12.0 million to fund the sequential growth in operations. Capital expenditures were $39.1 million, net of disposal proceeds, and gross CapEx was $42.5 million. During Q2 we repurchased 104,000 shares of our common stock for $10.0 million. The combined DSOs of accounts receivable and net contract assets was 107 days, a sequential increase of 2 days.

Going to Slide 11. As we look ahead to the quarter ending October 29, 2022, the Company expects contract revenues to increase low- to mid-teens as a percentage of contract revenues as compared to the quarter ended October 30, 2021. And we expect Non-GAAP Adjusted EBITDA percentage of contract revenues to increase modestly compared to Q3 of last year. We also expect $10.8 million of interest expense reflecting higher market interest rates, a 26.5% effective income tax rate, and 30.0 million diluted shares.

For Q4 ending in January 2023, we expect the growth rate of contract revenues to moderate for normal seasonal winter impacts compared to the October quarter. Each year, our January quarterly results are impacted by seasonality including inclement weather, fewer available workdays due to the holidays, reduced daylight work hours as well as the restart of calendar payroll taxes. These and other factors may have a pronounced impact on our actual results for the January quarter.

Now, I will turn the call back to Steve.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Thanks Drew. Moving to Slide 12. This quarter we experienced solid activity and capitalized on our significant strengths. First and foremost, we maintain significant customer presence throughout our markets. We are encouraged by the breadth in our business. Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities.

Telephone companies are deploying Fiber to the Home to enable gigabit high speed connections. Increasingly, rural electric utilities are doing the same. Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing, particularly upstream.

Wireless construction activity in support of newly available spectrum bands is increasing this year.

Federal and state support for rural deployments of communications networks is dramatically increasing in scale and duration.

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. Deployments to expand capacity as well as new build opportunities are underway.

Customers are consolidating supply chains creating opportunities for market share growth and increasing the long- term value of our maintenance and operations business.

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As our nation and industry navigate some increased economic uncertainty, we remain encouraged that a growing number of our customers are committed to multi-year capital spending initiatives. We are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees, and the experience of our management team.

Now operator we will open the call for questions.

QUESTION AND ANSWER SECTION

Operator

Thank you. [Operator Instructions] Our first question comes from Rygiel with B. Riley Financial. Your line is open.

Alex Rygiel

Analyst, B Riley Securities, Inc.

Thank you. Good morning, Steve.

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Hey Alex.

Alex Rygiel

Analyst, B Riley Securities, Inc.

Couple questions here. First, can you address labor inflation in its biggest and broadest sense, understanding that you've probably felt a little bit of it here in the first and the second quarter. But how do you think about that, address it sort of in your guidance and looking ahead?

Steven E. Nielsen

President, Chief Executive Officer & Director, Dycom Industries, Inc.

Yes. So Alex, I think we first raised the issue around what we were seeing in the marketplace a year ago or maybe even a little more. And we highlighted the fact that we saw labor cost issues around new hires, around some semi- skilled positions. It does cost more to get folks in the door, into our training programs and to positions that we had opened in those areas. I think that continues. We're working hard to bring more people in. But I think the market is tight and cost, particularly in those areas, are certainly higher.

So more broadly, if we look ahead, and this is not the first time we've ever seen this, but what's important right now is to think about what the cost of labor is going to be going forward to make sure that we're set up with the customers in a way that we are able to deliver the valuable resources that they need. And this one is tight. It's a tight -- unemployment is low, but that's really the way we're thinking about it.

Alex Rygiel

Analyst, B Riley Securities, Inc.

That is helpful. And then, obviously, there's been plenty of talk as to whether or not we're in an economic recession or not. First, do you see this developing in your business at all? And second, how have your customers reacted to a recession in the past? And how might they react? Or how might that impact your business in the future given a lot of different sort of funding sources and different dynamics with your cost structure?

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