Optical Cable Corporation (OCC) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is Paula, and I will be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corp. Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Mr. Siegel, you may begin your conference.

Thank you. Good morning, and thank you all for participating on Optical Cable Corporation's fourth quarter and fiscal year 2012 conference call. By this time, everyone should have a copy of the earnings press release. If you don't have it, please visit occfiber.com for a copy. On the call with us today is Neil Wilkin, Chairman, President and Chief Executive Officer of OCC. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors including, but not limited to, those factors referenced in the Forward-looking Statements section of this morning's press release. These cautionary statements apply to the contents of the Internet webcast on occfiber.com, as well as today's call. Now I'll turn the call over to Neil Wilkin. Neil, please begin.

Thank you, Andrew, and good morning, everyone. Joining me today on the call at OCC's Roanoke, Virginia corporate headquarters is Tracy Smith, our Senior Vice President and Chief Financial Officer. I will begin the call today with a few opening remarks regarding fiscal year 2012. Tracy will then review the fourth quarter and full year results for the 3-month and 12-month periods ended October 31, 2012, in more detail. After Tracy's remarks, we will answer as many of your questions as we can. As is our normal practice, we will take questions from analysts and institutional investors during the Q&A session. We also offer shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing the date and time of our earnings call. Optical Cable Corporation delivered outstanding growth and success in fiscal year 2012, with double-digit percentage growth in net sales, gross profit and triple-digit percentage growth in profitability. Our shareholders benefited from the outstanding results achieved this year, earning a 17.5% return on OCC common stock in fiscal year 2012, a return that outpaced the Russell 2000 Index, the S&P 500 Index and Dow Jones Industrial Average. There are a number of key accomplishments we achieved in fiscal year 2012 that I would like to highlight. First, OCC achieved record net sales, again. Increasing annual sales by 13.9% to $83.5 million. In doing so, we surpassed our previous net sales record achieved just last year. We increased gross profit by 20% to $31.6 million, and increased gross profit margin to 37.8% for fiscal year 2012. We achieved increased profitability during fiscal year 2012, reporting net income attributable to OCC of $0.43 per share. This compared to net income attributable to OCC of $0.11 per share in fiscal year 2011. In fiscal year 2012, OCC generated strong operating cash flow of $2 million in net cash provided by operating activities. This continued our track record of generating annual positive cash flow from operating activities every year since 2001, except fiscal 2006, irrespective of the macroeconomic environment. We increased dividends to shareholders in fiscal 2012 by declaring quarterly cash dividends totaling $0.06 per share during the year and returning $390,000 to shareholders. This represents a 50% increase in the annual dividend rate and a 54.9% increase in cash return to shareholders as compared to fiscal year 2011. Finally, we increased capital return to shareholders through share repurchases, returning $1.2 million to shareholders during fiscal year by purchasing and retiring 267,000 shares of OCC common stock. Success in any given year is not the result of a single year's efforts. OCC's performance in fiscal year 2012 was made possible by the continued successful execution of our long-term strategy over a number of years. Our strategy, including product line expansion, product innovation and a focus on providing customer solutions, has well-positioned us in our targeted markets and continues to create new and expanding future growth opportunities. OCC's success in fiscal year 2012 was also made possible by the market agility and innovation of OCC's sales, product and engineering teams, enabling the company to win new business by skillfully identifying new opportunities and providing customers better product solutions. These efforts, not only contributed to OCC's success this year, but we believe are also seeds for growing success in future years. The OCC team's adept maneuvering enabled us to significantly grow net sales and gross profit, irrespective of a weak macroeconomic and -- weak macroeconomic environment and struggling markets. We are pleased with our accomplishments to date and believe we are only at the beginning of what will be increasing success. Further, we believe the opportunity for long-term value creation for our shareholders is significant, given OCC's demonstrated operating leverage. We continue to demonstrate our commitment to creating substantial, long-term value for OCC's shareholders. We strive to create value through continued operational excellence and by using our operating leverage to disproportionately increase earnings and sales growth. OCC pays a regular quarterly cash dividend to shareholders. And we recently announced a 33.3% increase in our regular quarterly dividend rate to $0.02 per share for -- per quarter for fiscal year 2013 and applying an annual dividend rate of $0.08 per share. Our first quarterly dividend for fiscal year 2013 was declared earlier this month, on December 6, and will be paid by tomorrow before the end of the calendar year. We also continue to return capital to shareholders through our share repurchase plans. The OCC Board of Directors authorized a new share repurchase program on September 20th of this past year -- this past fiscal year, under which the company may acquire or retire up to 320,000 shares of common stock. Notwithstanding OCC's progress in fiscal year 2012, we believe OCC's underlying value is not fully appreciated by the equity markets as reflected in the company's share price. As of Monday of this week, OCC's shares were trading at 13.8% discount to the net book value attributable to OCC at $4.78 per share as of the end of fiscal year 2012. We have strived to strategically position OCC for growth and we continue to aggressively pursue that objective. Once again, in fiscal year 2013, we expect we will be required to maneuver through macroeconomic and market headwinds. It will be as challenging as ever, but we are confident that we have the right formula to continue to provide the solutions needed by our customers and to win new business. We look forward to reporting to you future positive results from our continued execution of our strategy and ongoing efforts to enhance value for shareholders. In evaluating our progress, we believe OCC's annual financial performance trend is an appropriate means of measuring our success, since OCC's markets can exhibit quarterly volatility. I will now turn the call over to Tracy Smith, who will review some specifics regarding the fourth quarter and fiscal year 2012 financial results.

Thanks, Neil. Consolidated net sales for fiscal year 2012 increased 13.9% to $83.5 million, compared to net sales of $73.3 million in fiscal year 2011. For fiscal year 2012, net sales to customers in the United States increased 11.6% compared to fiscal year 2011, and net sales to customers outside of the United States increased 21.1%. Consolidated net sales increased 12.5% to $22.1 million for the fourth quarter of fiscal year 2012, compared to net sales of $19.7 million for the comparable period in fiscal year 2011. Net sales to customers in the United States increased 14.5% in the fourth quarter of fiscal 2012 compared to the same period last year and net sales to customers outside of the United States increased 6.3%. Our increase in net sales during the fourth quarter and during fiscal year 2012 was attributable primarily to increased sales of our fiber optic cable products. Gross profit increased 20% to $31.6 million in fiscal 2012 compared to $26.3 million in fiscal 2011. Gross profit margin or gross profit as a percentage of net sales increased to 37.8% in fiscal 2012 from 35.8% in fiscal 2011. Gross profit increased 4.6% to $7.8 million in the fourth quarter of fiscal year 2012 compared to $7.4 million for the fourth quarter of fiscal year 2011. Gross profit margin decreased to 35% in the fourth quarter of fiscal year 2012 from 37.7% for the fourth quarter of fiscal year 2011. Our gross profit margin percentages are largely driven by product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. Additionally, our gross profit margins for our product lines tend to be higher when we achieve higher net sales levels of certain fixed manufacturing costs are spread over higher sales volume. SG&A expenses as a percentage of net sales were 32.7% in fiscal 2012 compared to 34.3% in fiscal 2011. SG&A expenses increased to $27.3 million for fiscal 2012 from $25.2 million for fiscal 2011. The increase in SG&A expenses during fiscal 2012, compared to fiscal 2011, was primarily due to increased employee-related cost and shipping costs, which is consistent with increased net sales. For fiscal year 2012, we recorded net income attributable to OCC of $2.7 million or $0.43 per basic and diluted share, compared to $666,000 or $0.11 per basic and diluted share for fiscal 2011. For the fourth quarter of fiscal 2012, we reported net income attributable to OCC of $435,000 or $0.07 per basic and diluted share compared to $236,000 or $0.04 per basic and diluted share for the comparable period last year. As of October 31, 2012, we had outstanding borrowings of $1 million on our revolving credit facility and $5 million available -- in available credit. We also had outstanding loan balances of $8 million under our real estate loans as of October 31, 2012. With that, I'll turn the call back over to Neil.

Thank you, Tracy. And now we're happy to answer as many questions as we can. Operator, if you could please indicate the instructions for participants to call in their questions, I would appreciate it.

[Operator Instructions] You have a question from Sam Bergman of Bayberry Management.

Can you give me an idea of -- I know in the past you've mentioned orders booked for the quarter. Nothing was really mentioned other than you feel 2013 will continue increasing shareholder value. Can you give us some idea -- some quantification on the quality of orders and the bookings of orders?

Sam, I don't have a specific number for you, but let me describe that disclosure that we made in the first, second, third quarters of our reports. Our backlog tends to vary and can vary significantly from quarter-to-quarter or week-to-week. However, on average, it's about 3 to 4 weeks because it doesn't take very long for us to get from the place that we've taken order until when we ship a product. And while we do sometimes get longer-term orders, that's not the typical business that we get. So when we file our annual report and our 10-K tomorrow, which you'll see is that we've looked at our backlog early into the first quarter and we haven't really gotten an indication of what that's going to mean, either positive or negative, for the first quarter of 2013. So I don't have a specific number to give you because I don't have it in front of me, but also because it hasn't been -- we've determined it hasn't been meaningful. When we've disclosed that number in the past, the reason we've done so is because we had seen a spike in our backlog and we knew, based on reviewing that backlog, specifically in the customers, that it gave us a fairly good sense that the following quarter would be higher sales. And we felt like that information, we really want to provide to our shareholders. And that's what we saw. We saw that in the -- what we've predicted in the first quarter, we saw in the second quarter and likewise in the third and -- the second and third quarters. And you'll notice in all the -- in the last 3 quarters of the year, each quarter exceeded net sales of $22 million. So, at this point, I'm not ready to provide any guidance and I don't have any data or any objective evidence that would give me a good sense of what our number would be in the first quarter. But when we do have that information or we do believe we have a good sense of what it will be, we have tried to pass that onto shareholders as we did this last year. So I don't have a number for you, but you shouldn't take that as a negative or -- and -- or you should take that as a positive. It's just we don't think that the information we have at this time gives us a basis to give any guidance for the first quarter.

No, I totally understand, but I think because you then allude to that type of booking for the quarter, the stock didn't increase shareholder's value today, it just crated [ph], which was a disappointment to all of us, I'm sure, because we're long-term shareholders. I mean for the stock to be down 20% on an earnings report that I thought was pretty good and a terrific year is a major disappointment for a shareholder and shareholders on the call.

And I agree with that. And I'd just look at the share price just before I got on the call, and quite frankly was surprised. I think that sometimes we have folks trading in our stock that assume whatever happens in the last quarter is what's going to happen indefinitely. And that has never been the case in our business. Our business has always been -- had volatility from quarter-to-quarter, whether it's in sales, sometimes, although the last 3 quarters have been fairly consistent, or sometimes in earnings. We saw a dip in our gross profit margin percentage in the fourth quarter, which is the reason why our earnings weren't necessarily as strong in the fourth quarter as I otherwise would have anticipated, given our sales levels. But I don't believe that that's a trend. I just don't believe that that's a trend. Because we have -- we've developed a customer base and we're also developing products and developing new relationships and new business that leads me to believe that we're able to kind of maintain the path that we're on. So I'm not really -- at this point, I'm not ready to predict what 2013 is going to bring exactly. I think a lot of people are trying to figure that out, given all the issues that Washington is dealing with and how that is going to impact the economy. What I could tell you is we've seen seeing some weakening in our industry. And earlier in this year -- but we've been overcome that by generating new business and through the good work of our sales team and product teams and engineering teams. And we expect to continue to do that. And so, showing the growth that we've shown this year, including in the fourth quarter, is fairly significant given what the current market conditions are, both at the macroeconomic level and also specifically in our industry when you're also looking at the enterprise space.

Your next question comes from Barry Bergman of Alba Investment.

I think my question alluded to the other one. And I was just wondering if there's anything that we should look towards in the defense budgets, one way or the other, that might impact your business and if that was a true disappointment that the stock dropped off like that this morning?

Yes. I mean, the military spending has already pulled back. We've already seen significant decreases in military spending. We didn't initially anticipate that that would be the case. But going back to my prior comments, we were able to maneuver around that. And so we didn't see our top line hit in the second, third or fourth quarter, even though we were seeing military weakness already. And so our product lines that are more developed, more targeted to military business have seen some pullback already. I don't -- at this point, we're not anticipating that that necessarily would continue. But of course if we go over the fiscal cliff, I think we're going to see some negative cuts, further cuts in military. But there's always -- one thing that's good about us, you see, is we have a diversified customer base, so that enables us to target other markets. When certain markets are weak, we're able to target other markets that provide strength, and that's what we've seen this past year.

Your next question comes from Orin Hirschman of AIGH Investment Partners.

In terms of the gross margin during the quarter, what was the reason why it was, perhaps, weaker?

Orin, as you'll see in our filing that we're making tomorrow morning, we talked a little bit about the fact that we probably that's a product mix issue. We don't think that that's an ongoing trend and I don't think -- I can't be sure, but I don't think that we're going to see -- I don't anticipate that that's a trend. In other words, let me say it a different way. I'd like to be able to provide you with some sort of guidance for 2013 specifically, but it's very difficult to do at this time for a number of different reasons. Let me say it a different way. Nothing in the fourth quarter cause us to believe that the normal things that you would see that would cause margins to be squeezed occurred. We didn't see significant changing in pricing that caused us to see a squeezing of margins. We didn't see a significant change in our cost structure that would cause us to believe that margins should be squeezed or we would expect them to be continue to be squeezed. Instead, what we saw is a product mix in the fourth quarter that tended to create a little bit lower margin in the fourth quarter. And those product mixes vary from quarter-to-quarter. Additionally, we don't see, on a longer-term basis, a fundamental shift in our product mix in a way that I believe it would be affecting our margins on an ongoing basis.

Okay.

Hopefully that helps answer your question by ruling out the things that people might be concerned about.

That does. I think, also, just this is concerning all the shareholders on the call, just lack of visibility. It just sounds like visibility is not what it should be.

Well, I think that, that's always been a challenge in our market and for OCC. And part of the reason is the nature of the market that we're in. I mean, we have a competitor and I sometimes -- I won't name the name or talk in detail about, but we've had a competitor that operates in one portion of our space. And they always had -- that competitor was part of a bigger organization, and that competitor always seem to have difficulty maneuvering because the parent company would always be focused on trying to plan sales contrary to the way the market operates in the markets in which we work. And so they'd always have this difficulty of trying to explain the volatility. Well, we've always had that too. We've shielded a lot of it because of the fact that our customers -- our sales to customers and our end-user base is so diversified. And so while you see in the second, third and fourth quarter, in particular, all sales fairly consistent in above $22 million, when you look below that level, we see volatility in various different customer bases, in various different markets, depending on what's going on in these specific markets. And so for that reason, while my expectation is that 2013 is going to be challenging, particularly because of the macroeconomic environment, the fact that Europe has technically slipped into recession, the fact that I think it's the Federal Reserve recently reduced the expected growth rate for the U.S. economy, people are pulling back on projects and we're seeing that in our industry. What we're also seeing is that there's certain targeted markets where we're able to develop new business and have successfully done that this last year and expect to do that this next year. And so, I'm not for -- maybe a better way of saying it is I don't foresee us significant weakening for OCC in 2013 even though I'm not as optimistic about the global or U.S. economy. Does that help, Orin?

Yes, it does. Just in terms of the 2 large customers, any light you could shed on what's going on with them?

Say that again?

The 2 large customers that you've highlighted many times, anything you could shed light on in terms of what their status is and how they're doing?

For competitive reasons, we don't talk a lot about it. But at this point, we feel our relationships, for the most part, with those customers are strong. I mean there's some of that business that I wouldn't expect to continue. But overall, I think that's going to be offset by other factors. And so I'm not seeing anything that's going on with those 2 customers that should overall be concerning regarding OCC's results going forward.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Neil Wilkin for any closing remarks.

Thank you. In closing, at this time of year, I wanted to mention that our thoughts and prayers continue to be with those impacted by the despicable tragedy at the Sandy Hook Elementary School in Connecticut this past week. On a personal note, I'd like to thank the many people who have supported my family and me during the passing of my father on November 27. Thank you very much. For me and many others, my father, Neil Wilkin Sr., taught integrity and a lot of hard work, God, country and people. As always, we appreciate your time and interest in Optical Cable Corporation. During this holiday season, please remember those men and women in uniform defending our freedom. We thank them for our service -- for their service. Happy holidays, Merry Christmas and a Happy New Year to you and your families. Thank you.

Thank you. This concludes your conference. You may now disconnect.