Optical Cable Corporation (OCC) Q3 2020 Earnings Report, Transcript and Summary

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Optical Cable Corporation Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Mr. Palash, you may begin your conference.

Great. Good morning, and thank you all for participating in Optical Cable Corporation's third quarter of fiscal year 2020 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 content of the Internet webcast on www.occfiber.com as well as today's call. With that, I'd like to turn the call over to Neil Wilkin. Neil, please begin.

Thank you, Aaron, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the third quarter results for the 3-month and 9-month periods ended July 31, 2020 in some additional detail. After Tracy's remarks, we will answer as many of your questions as we can. As 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 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 call today. 2020 continues to be a challenging year for all of us. I want to thank the OCC team for its continued diligence in adhering to the precautions we have in place to keep OCC COVID free. It is through this diligence both at work and at home that we will continue to remain safe and healthy. We've taken a number of steps to ensure the health and safety of our employees and their families and we've been able to mitigate the impact of COVID-19 on our employees and on day-to-day operations, which we have continued uninterrupted at all three of our locations, but at lower production volumes. As I mentioned in our second quarter conference call, OCC is obligated and continues to operate during COVID-19 pandemic because of our workforce is classified as a defense industrial-based essential critical workforce -- infrastructure workforce, under the guidelines from the U.S. Department of Defense and an essential critical infrastructure workforce under the guidelines of the U.S. Department of Homeland Security, Cybersecurity and Infrastructure Security Agency. This is something that we are deeply humbled by and is a responsibility that we do not take lightly everyday, but especially in light of tomorrow being the 19th anniversary of September 11, we are reminded of the importance of our job to ensure the uninterrupted supply of our mission-critical products to our country's military, first responders and other essential workers including healthcare facilities and hospitals. This quarter we have seen both the strength and resiliency of our offering as strong demand from certain customers has helped to partially offset those COVID-19 related reduced sales to customers in other industries. That said, while we continue to operate we have experienced decreases in revenues in many of our markets in particular our specialty markets causing production volumes and operations to continue to be negatively impacted due to the COVID-19 pandemic. As a result our net sales for the third quarter fiscal year 2020 decreased 21.5% compared to the same period last year. Sequentially net sales decreased 8.2% in the third quarter compared to the second quarter of fiscal year 2020. Despite these headwinds, we've made important progress and are benefiting from cost reductions, efficiency improvements and enhanced production throughput at our Roanoke production facility. We also made important progress strengthening our financial position by successfully refinancing our revolving credit facility with North Mill Capital during the third quarter of fiscal year 2020. The new revolver allows OCC up to a maximum aggregate principal amount of $18 million, with availability based on a working capital, borrowing based calculation. This provides the company with greater financial flexibility for our working capital needs. OCC has a strong foundation and as we have proven before, a resilient business model. Further OCC continues to be uniquely positioned in our industry and we remain focused on operating as efficiently as possible, while continuing to serve our customers. We are confident that our distinct competitive advantages, capabilities, initiatives underway will facilitate future profitable growth, further strengthen our market positioning and ultimately enable OCC to successfully compete against our larger competitors both now and into the post pandemic economic recovery in our markets. And with that, I'll turn the call over to Tracy Smith, who will review in additional detail our second quarter of fiscal year 2020 financial results.

Thank you, Neil. Consolidated net sales for the third quarter of fiscal 2020 were $13.6 million, a decrease of 21.5% compared to net sales of $17.4 million for the third quarter of fiscal 2019. Net sales were negatively impacted during the third quarter of fiscal year 2020, due primarily to the economic effects of the COVID-19 pandemic. Consolidated net sales for the first nine months of fiscal 2020 were $41.4 million, a decrease of 22% compared to net sales of $53.1 million for the same period last year. The decrease in net sales during the first nine months of fiscal 2020 was primarily the result of the number of large orders from one customer in the wireless carrier market in the first nine months of fiscal year 2019 that did not recur at the same levels in the first nine months of fiscal year 2020. Net sales to this customer decreased $5.6 million in the first nine months of fiscal year 2020. Historically, net sales to this customer have been volatile from quarter-to-quarter and from year-to-year. We also believe net sales during the first nine months of fiscal year 2020 were negatively impacted by the COVID-19 pandemic, which ceased or significantly reduced operations of many businesses including OCC customers and suppliers. Turning to gross profit. Gross profit was $3.5 million in the third quarter of fiscal 2020 compared to $4.5 million in the third quarter of fiscal 2019. Gross profit margin, our gross profit as a percentage of net sales was 25.5% in the third quarter of fiscal 2020 compared to 25.9% in the third quarter of fiscal 2019. Gross profit was $9.9 million in the first nine months of fiscal 2020 compared to $13.4 million in the first nine months of fiscal 2019. Gross profit margin our gross profit as a percentage of net sales was 23.9% in the first nine months of fiscal 2020 compared to 25.2% in the first nine months of fiscal 2019. Gross profit margins tend to be higher when the company achieved higher net sales levels as certain fixed manufacturing costs are spread over higher sales. This operating leverage, which is beneficial at higher sales levels was the primary factor putting downward pressure on gross profit margin, during the third quarter and first nine months of fiscal year 2020, as fixed costs were spread over lower sales offsetting cost reductions and significant production throughput and efficiency improvements achieved principally in the company's Roanoke production facility. SG&A expenses decreased approximately $858,000 or 15.8% to $4.6 million during the third quarter of fiscal 2020 compared to $5.4 million for the same period last year. SG&A expenses as a percentage of net sales were 33.4% in the third quarter of fiscal 2020 compared to 31.2% in the third quarter of fiscal 2019. SG&A expenses decreased approximately $3 million or 16.9% to $14.9 million during the first nine months of fiscal 2020, compared to $18 million for the same period last year. SG&A expenses as a percentage of net sales were 36.1% in the first nine months of fiscal 2020 compared to 33.9% in the first nine months of fiscal 2019. The decrease in SG&A expenses during the third quarter and first nine months of fiscal 2020 compared to the same period last year was primarily the result of decreases in employee-related costs, including employee incentives and commissions and net reductions and other SG&A expenses as we focused on controlling costs. These decreases were partially offset by an increase in bad debt expense due to concerns about collectibility of certain customer accounts during this unprecedented pandemic environment. OCC recorded a net loss of $1.4 million or $0.20 per basic and diluted share for the third quarter of fiscal 2020 compared to a net loss of $1.1 million or $0.15 per basic and diluted share for the third quarter of fiscal 2019. OCC recorded a net loss of $5.7 million or $0.78 per basic and diluted share for the first nine months of fiscal 2020, compared to a net loss of $5 million or $0.68 per basic and diluted share for the first nine months of fiscal 2019. On July 2020 OCC terminated its revolving credit note with Pinnacle Bank and along with our wholly owned subsidiaries entered into a loan and security agreement with North Mill Capital. As part of the refinancing transaction OCC also entered into a revolving credit master promissory note with North Mill that provided up to a maximum aggregate principal amount of $18 million with availability based on a working capital borrowing based calculation. As of July 31, 2020, we had outstanding borrowings of $4.6 million on our revolving credit note and $2.2 million in available credit. We also had outstanding loan balances of $5.2 million under our real estate term loans and $5 million on our PPP loan. And with that, I'll turn the call back over to Neil.

Thank you, Tracy. And now if you have any questions we are happy to answer them. Maria, if you could please indicate the instructions for our participants to call in any questions they may have. I would appreciate it. Again, we are only taking live questions from analysts and institutional investors.

Thank you. [Operator Instructions] And I'm showing no questions at this time. I'd like to turn the floor back over to Neil Wilkin for any additional or closing remarks.

Okay. Thank you, Maria. Aaron, we of course accept questions submitted in writing this morning prior to the call. I think we have received some questions. Could you go ahead and read those off and we'll respond to them please?

Yes. We have received a few questions. The first one is did OCC hire a new compensation consultant in 2020?

Okay. Short answer is, no. The -- as you all know the independent compensation committee is who hires and utilizes a compensation consultant to assist them in setting CEO and CFO compensation. We use the same consultant that the compensation committee uses to provide data that we use in setting compensation levels for the remaining members of the leadership team. The compensation consultant we're currently using is still the same one that the compensation has -- compensation committee used in the past. They do periodically consult with others and evaluate that and that's been done with the last couple of years, but there has not been a change and OCC as always has -- focuses on the design and compensation structures across the entire company that provides proper incentives based on hitting performance targets. If you have some more questions about that, we describe a little bit in our proxy statements, how we view compensation, how the compensation committee views compensation and that should be a helpful reference.

Great. Next question does David Goode have a role with the company yet?

No, other than as an investor in the company. David Goode is a native of Roanoke. And of course, as the former Chairman and President of Norfolk Southern, he's always expressed an interest in Roanoke, as a region even when he left Roanoke. And has expressed an interest in OCC and we're proud to say that he's a shareholder and appreciate his investment.

Great. Do you expect to generate significant royalty income over the next several years?

Tracy, do you want to take this one?

Sure. We continue to place importance on our new product development and using patents to protect our innovations. We don't currently have licenses that are generating significant royalty at this time – significant royalty income at this time. While we don't expect royalties to be a meaningful revenue stream in the near-term, at this time I can't say whether it will become an increased source of revenue over the long term. We have been granted patents related to certain Cat8 enabling technology for connectors, which we believe will have future value for OCC and our products and possibly could generate license royalty revenue in the future.

Okay. Last question. Do you have a time line on when you will repurchase stock?

Do you want to take that one, Tracy?

Sure. As is going to be noted in our 10-Q, which we expect to file later today, until future notice, the company has suspended repurchases and has no current plans to repurchase or retire shares. Given the market – current market environment including the uncertainty created by COVID-19, we really can't speculate about continuing our repurchase program right now.

That's it on the submitted questions.

Okay. Well, thank you, Aaron. I would like to thank everyone for listening to our third quarter conference call today. As always, we appreciate your time and your interest in Optical Cable Corporation. Hope you and your families continue to be safe. And we thank you for your time today.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.