Optical Cable Corporation (OCC) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Optical Cable Corporation Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period [Operator Instructions]. Mr. [Weston], you may begin your conference.

Good morning. And thank you all for participating on Optical Cable Corporation’s fourth quarter of fiscal year 2017 conference call. By this time, everyone should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC, and Tracy Smith, Senior Vice President and Chief Financial Officer. 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 and risks 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 www.occfiber.com as well as today’s call. With that, I’ll turn the call over to Neil Wilkin. Neil, please begin.

Thank you, [Lyle], and good morning everyone. I will begin the call today with a few opening remarks regarding our fourth quarter and fiscal year ended October 31, 2017. Tracy will then review the fourth quarter and full year results for the three months and the 12 month periods ended October 31, 2017 and some additional detail. After Tracy’s remarks, we will answer as many your questions as we can. As this is our normal practice, we will only take questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunities 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 call. Optical Cable Corporation’s fiscal year 2017 was a year of meaningful progress, market challenges and necessary adjustments. During fiscal 2017, the OCC team achieved meaningful progress executing on few strategic initiatives. In particular, we implemented sales, marketing and product initiatives design to grow sales in targeted markets with the greatest growth opportunities and maintain our strong market position and our other markets. As a result of these efforts, we achieved sales growth of a certain industrial and specialty markets, sales growth that was offset -- that offset much of the weakness in military and wireless carrier markets, as well as declines in sales outside of the U.S. Importantly, we achieved sales growth with certain of our larger strategic distribution partners and with our -- distribution partners in total earnings in fiscal 2017. Overall, our enterprise market tails remain stable in fiscal year 2017, particularly when compared to challenges seen by some of OCCs competitors. We launched a number of new products during the year across each of our product categories, including fiber optic cable and, enterprise connectivity environment and specialty connectivity. We also focused on operational initiatives designed to increase manufacturing efficiencies and effect process improvements. As a result, we were able to grow gross profit of 5.4% during fiscal year 2017 and increased our consolidated gross profit margin to 32.4% with increased gross profit margins across all product categories, including fiber optic cable, enterprise connectivity and harsh environment and specialty connectivity. All of this took place in a challenging marketing environment in which we have overcame weakness in certain enterprise markets, particularly in the second half of fiscal year 2017 and weakness in our military wireless carrier markets. Despite these challenges, we ended fiscal year 2017 with top and bottom line financial results similar to those achieved in the prior year. At the same time, we made adjustments designed to improve our execution and achievement of our strategic objectives during fiscal year 2017 including higher hiring key new personnel and making organizational and team changes to drive top line growth. We were also able to initiate new operational excellence programs at our fiber optic cable manufacturing facility towards the end of fiscal 2017 intended to result in future increased operational efficiencies. We believe the actions taken in 2017 and our continued initiatives better position OCC for long-term success. As we look forward to fiscal 2018, we continue to execute on our strategic and accelerated sales and marketing initiatives in targeted markets and focusing on increasing operational efficiencies of process improvements design to drive top and bottom line growth. As a result of OCCs continued efforts, we began to see increases in sales activities during fiscal year 2017. We are also now beginning to see increases in order volumes, forward order load has increased during fiscal year 2018, the first quarter of fiscal 2018, particularly in military and in certain other specialty markets. As a result, we believe the first quarter of fiscal 2018 will likely show considerable sales growth compared to the same period last year. OCC has a long history of successfully competing against much larger industry players, carving out and maintaining quite enviable market positions in our target markets and building loyalty among our customers and others who depend on our products. We are optimistic about our ability to continue our establish trends in these markets. Looking ahead, we have set aggressive and challenging growth goals for fiscal 2018 to take advantage of the operating leverage in our business. We are excited about capitalizing on the opportunities before us in fiscal year 2018 and executing our strategies to deliver value to shareholders. We are also confident in our ability to continuing to meet the evolving products, innovation, service and solution needs of our customers and others counting on our products and to arrive of technical and applications expertise on which they depend. And with that, I will turn the call over to Tracy Smith, who will review some additional details regarding our fourth quarter and fiscal year 2017 financial results.

Thank you, Neil. Consolidated net sales for fiscal year 2017 were $64.1 million a decrease of less than 1% when compared to net sales of $64.6 million in fiscal year 2016. During fiscal year 2017, OCCs net sales in the enterprise market, including OEM, remained relative stable while OCC achieved increases in a number of industrial and specialty markets compared to fiscal year 2016. These increases, however, will offset by decreases in net sales in the wireless carrier in military markets. Consolidated net sales for the fourth quarter of fiscal year 2017 were $17.2 million compared to net sales of $17.3 million for the fourth quarter of fiscal year 2016. The Company increased net sales in its enterprise market in the fourth quarter of fiscal 2017 compared to same period of last year, but the increase was offset by decrease in net sales in the specialty market. Sequentially, net sales continued to grow in the fourth quarter of fiscal year 2017, increasing 4.7% compared to net sales of $16.4 million in the third quarter of fiscal year 2016. Net sales in the fourth quarter increased 8.6% and 17.8% as compared to net sales of $15.8 million and $14.6 million respectively for the second quarter and third quarter of fiscal year 2017. Turning to gross profit. Gross profit increased 5.4% to $28.8 million in fiscal year 2017 from $19.7 million in fiscal year 2016. Gross profit margin or gross profit as a percentage of net sales increased to 32.4% for fiscal year 2017 compared to 30.5% for fiscal year 2016. Gross profit was $5 million in the fourth quarter of fiscal year 2017, a decrease of 19.2% compared to gross profit of $6.2 million in the fourth quarter of fiscal year 2016. Gross profit margin was 29.2% in the fourth quarter of fiscal year 2017 compared to 35.9% for the same period in fiscal year 2016. Gross profit margin improved in all categories of OCCs product offering during fiscal year 2017, including fiber optic cable, enterprise connectivity and harsh environment and specialty connectivity, primarily due to a shift in product mix for the sale of certain higher margin products compared to fiscal year 2016. Towards the end of fiscal year 2017, we started new manufacturing efficiency initiatives, which we believe will benefit OCC in future periods. SG&A expenses increased 5.8% to $22 million in fiscal year 2017 from $20.8 million in the fiscal year 2016. SG&A expenses as a percentage of net sales were 34.3% in fiscal year 2017 compared to 32.1% in fiscal year 2016. SG&A expenses increased 3.9% to $5.5 million during the fourth quarter of fiscal year 2017 compared to $5.2 million for the fourth quarter of fiscal year 2016. SG&A expenses as a percentage of net sales were 31.7% in the fourth quarter of fiscal year of 2017 compared to 30.3% in the fourth quarter of fiscal year 2016. The increase in SG&A expenses during fiscal year 2017 compared to fiscal year 2016 was primarily as a result of increases in employee related cost, marketing expenses and legal fees. Net loss attributable to OCC for fiscal year 2017 was $1.7 million or $0.27 per basic and diluted share compared to net loss of $1.8 million or $0.28 per basic and diluted share for fiscal year 2016. OCC recorded a net loss of $589,000 or $0.09 per basic and diluted share for the fourth quarter of fiscal year 2017 compared to net income of $761,000 or $0.11 per basic and diluted share for the fourth quarter of fiscal year 2016. As of October 31, 2017, we have outstanding borrowings of $5.7 million on our revolving credit note and $1.3 million in available credit. We also had outstanding loan balances of $6.7 million under real estate term loan. Also our balance sheet remained strong, OCC’s ratio of current asset to current liabilities was 6:5 to one as of October 31, 2017. During the year, we extended the maturity day of our real estate loans to May 2024 with a fixed interest rate of 3.95% on our long-term debt to shareholders equity ratio is relatively low compared to a number of our industry competitors. Now, I will turn the call back over to Neil.

Thank you, Tracy. At this time, if you have any questions we are happy to answer them. Operator, if you can please indicate the instructions for our participants to call in any questions they may have I would appreciate it.

The floor is now open for questions. [Operator Instructions] Your first question comes from John Deysher of Pinnacle.

I have a couple of questions. First, in the fourth quarter it was nice to see sales flat, but the gross profit declined by $1.2 million, which in our mind is significant. And I know it’s due to a change in Optical Cable product mix, perhaps you were selling more low margin product and fewer high margin products. But can we get a little more granular as to exactly what’s happening in that change in Optical Cable mix?

There was definitely a product mix change, we generally don’t comment on the specific details of which market categories have changed that are resulting in those changes, which you may realize about OCC’s fiber optic cable while it sounds like a fairly simple category includes multiple markets that were participating in whether it’s the enterprise market, the wireless carrier market, a lot of our specialty markets, including military, oil and gas, mining or other markets in which we participate in. And depending on which market we’re selling into as well as which types of products we’re selling into these markets we can see rather dramatics flames in our gross profit percentage. So, fourth quarter was a little unusual, because we have some large orders in products that had lower margins that resulted in that swing. But that can just as easily swing the other way anytime from quarter-to-quarter. So, I haven’t given you the exact specifics of which markets and which products we’re talking about, but hopefully that gives you better sense of what’s going on, I don’t think that it’s a trend that you should be concerned about going forward. But it is something we will see from time-to-time, quarter-to-quarter.

Okay. That’s helpful. So, so far in the New Year would you say that that trend is continuing or is it an operation you make into the fourth quarter?

I think specifically based on what I know now, I can’t comment on that -- well first of all, I can’t really comment on gross profit margin in the first quarter, because that’s difficult for us to see. What I can tell you is that, that those larger orders for that specific market that we saw in the fourth quarter I don’t expect to impact the first quarter in the same way we did in the second quarter. And does that mean that the margins will automatically go up, I can’t guarantee that it’s going to depend on what the mix ultimately plays out today. But based on what we’re seeing so far it that’s only would not be that same sort of product and that thing sort of market that impacted the fourth quarter. And in the first quarter we’re also seeing and I mentioned in my remarks and you’ll see this in our filings, we’ve also seen an increase in our four low volume and we believe that’s going to positively increase sales in the first quarter and that tends to, but there is no guarantee that it does increases our tends to provide to increased margin as we spread higher sales dollars over fixed cost.

And then coming down to the SG&A, I think in the prepared remarks there was comments about new hirings, healthcare cost and was there something about legal cost in there as well?

Correct, that’s correct.

What’s the legal cost related to?

So, the legal cost and I don’t know how much specifics we’ve gone into but we had some increased fees related to some litigation on a -- the acquisition of Applied Optical Systems. We had accrued -- those legal fees were essentially offset in the second quarter, correct. In the second quarter, related to a reversal of an accrual on an earn out that was made. And so while we have some increase in legal fees we also had an offset in the second quarter of about 171,000.

So that litigation is ongoing regarding that acquisition?

No. While we had some -- litigation was ongoing, but most of that’s wound down that’s -- we don’t expect the legal fees to be at the same level. There is one matter that’s still open but we haven’t ban incurring significant legal fees associated with it.

So those legal fees that probably go down in the New Year, you’re saying?

That’s what I would expect.

Thank you very much. And finally when do you anticipate filing your 10-K?

We’re hoping to file that shortly today.

[Operator Instructions] And there are no other questions at this time.

Thank you, Operator. [Lyle], are there any questions that were submitted by individual investors in advance of today’s call.

Neil, at this time we do not have any questions submitted by individual shareholders.

Well, with that, I would like to thank everyone for listening to our fourth quarter conference call today. As always, we appreciate your time and interest in OCC. During this holiday season, please remember those men and women in uniform defending freedom and protecting our country and our families, we thank them for their service and sacrifice and for their family sacrifice. Happy holidays Marry Christmas and Happy New Year to all of you. And thank you for your continued interest in Optical Cable Corporation.

Thank you. That does conclude today’s conference call. You may now disconnect.