Optical Cable Corporation (OCC) CEO Neil Wilkin on Q2 2019 Results - Earnings Call Transcript

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About: Optical Cable Corporation (OCC)
by: SA Transcripts
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Earning Call Audio

Optical Cable Corporation (NASDAQ:OCC) Q2 2019 Results Earnings Conference Call June 11, 2019 10:00 AM ET

Company Participants

Aaron Palash - IR

Neil Wilkin - President and CEO

Tracy Smith - SVP and CFO

Conference Call Participants

Operator

Good morning. My name is Lorrie, and I'll be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corporation Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

I'll now turn the call over to Aaron Palash to begin.

Aaron Palash

Good morning, and thank you all for participating on Optical Cable Corporation's second quarter fiscal year 2019 conference call. We apologize for anybody who is attempting to access the call via our website. We had technical issues on the NASDAQ hosted IR page and we'll get webcast link as quickly as possible along with the replay.

By this time, everyone should have a copy of the earnings press release issued 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'll turn the call over to Neil Wilkin. Neil, please begin.

Neil Wilkin

Thank you, Aaron, and good morning, everyone.

I will begin the call today with a few opening remarks regarding our second quarter of fiscal year 2019. Tracy will then review the second quarter results for the three months and six months periods ended April 30, 2019 and some additional details. 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.

Turning now to our performance, we are pleased by the continued demand for OCC's comprehensive suite of innovative and integrated solutions. While our topline results reflect the reduction of orders from a significant customer, we continue to drive sales growth across our markets particularly in certain specialty markets.

In the second quarter, OCC achieved sequential net sales growth compared to the first quarter of fiscal year 2019. In particular, we grew net sales in international markets and in many specialty markets during the second quarter of the year. Net sales increased 13.2% in the second quarter of fiscal year 2019 when compared sequentially to our first quarter of this year.

You will recall that we experienced throughput constraints and inefficiencies at our Roanoke facility that significantly impacted our gross profit margin and results in the first quarter of the year. These throughput constraints resulted from the expansion, training and restructuring of our manufacturing workforce and from process changes, initiatives intended to ultimately increase throughput and efficiency in order to meet increased product demand over the short and long-term.

During the second quarter, we made significant progress in our efforts to enhance operational efficiency making strides towards correcting some of the unintended constraints we experienced in the first quarter.

As a result of our initiatives including navigating through these issues caused by these initiatives, we believe we have achieved improvement in our manufacturing efficiency and throughput. We saw evidence in this improvement during the second quarter. Gross profit was up 49% to $5.3 million when sequentially compared to the first quarter of fiscal 2019.

While significant improvements were achieved to resolve these throughput issues during the second quarter, these constraints and inefficiencies still impacted the second quarter to a degree and of course impacted the first half of the fiscal year.

Our work to mitigate these initial issues continues and we believe OCC's throughput and manufacturing efficiencies will ultimately benefit from these process and workforce initiatives.

Looking ahead in 2019, operating efficiently and executing our marketing initiatives to capture growth opportunities remain our top priorities. Our business is strong and we are excited about the opportunities we see to deliver enhanced shareholder value.

And with that, I'll now turn the call over to Tracy Smith who will review some of the specifics regarding our second quarter financial results.

Tracy Smith

Thank you, Neil.

Consolidated net sales for the second quarter of fiscal 2019 were $19 million a decrease of 29.5% compared to net sales of $26.9 million for the second quarter of fiscal 2018. Consolidated net sales for the first half of fiscal year 2019 were $35.7 million, a decrease of 19.6% compared net sales of $44.4 million for the same period last year.

The decrease in net sales in comparing the second quarter and first half of fiscal year 2019 year-over-year is the result of a number of large orders from one customer in the second quarter and first half of fiscal year 2018 that did not recur at the same level in the second quarter and first half of fiscal year 2019. Net sales to this customer decreased $9.1 million and $10.1 million respectively in the second quarter and first half of fiscal 2019.

We also experienced a decrease in net sales in our enterprise and wireless carrier market in the second quarter and first half of fiscal 2019 compared to the same period last year partially offset by increases in other specialty markets. Sequentially net sales increased 13.2% in the second quarter of fiscal year 2019 compared to net sales of $16.8 million for the first quarter of fiscal year 2019 with increases in both our enterprise markets and specialty markets.

The improvement in sequential net sales was primarily the result of efforts made to address the negative impacts identified during the first quarter of fiscal year 2019 of throughput constraints and inefficiencies in our Roanoke facility.

Turning to gross profit, gross profit was $5.3 million in the second quarter of fiscal 2019 compared to $9 million in the second quarter of fiscal 2018. Gross profit margin, our gross profit as percentage of net sales was 28% in the second quarter of fiscal 2019 compared to 33.3% in the second quarter of fiscal 2018. Gross profit was $8.9 million in the first half of fiscal 2019 compared to $14.2 million in the first half of fiscal 2018.

Gross profit margin or gross profit as a percentage of net sales was 24.8% in the first half of fiscal 2019 compared to 31.9% in the first half of fiscal 2018. Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis, which continue to be a factor putting down with pressure on our gross profit margin during the second quarter and first half of fiscal year 2019.

Additionally as Neil noted, gross profit margin in the second quarter and first half of fiscal year 2019 was negatively impacted by the throughput constraints and inefficiencies that we experienced in our Roanoke facility.

We continue to make every effort to eliminate the initial negative impact of these initiatives and believe we will continue to see some improvements in our gross profit margin during the third quarter of fiscal year 2019 as a result.

SG&A expenses decreased 21.9% to $5.8 million during the second quarter of fiscal 2019 compared to $7.4 million for the same period last year. SG&A expenses as a percentage of net sales were 30.5% in the second quarter of fiscal 2019 compared to 27.5% in the second quarter of fiscal 2018.

SG&A expenses decreased 3.1% to $12.6 million during the first half of fiscal 2019 compared to $13 million for the same period last year. SG&A expenses as a percentage of net sales were 35.1% in the first half of fiscal 2019 compared to 29.2% in the first half of fiscal 2018.

The decrease in SG&A expenses during the second quarter and first half of fiscal 2019 compared to the same period last year was primarily the result of decreases in employee related cost including employee incentive, share-based compensation and commissions. This can be attributed to decrease net sales in our financial results during the second quarter and first half of fiscal 2019.

OCC recorded a net loss of $617,000 or $0.08 per basic and diluted share for the second quarter of fiscal 2019 compared to net income of $1.4 million or $0.18 per basic and diluted share for the second quarter of fiscal 2018. OCC recorded a net loss of $3.9 million or $0.53 per basic and diluted share for the first half of fiscal 2019 compared to net income of $981,000 or $0.13 per basic and diluted share for the first half of fiscal 2018.

The terms of our credit facilities with our bank requires us to imply on a quarterly basis with specific financial covenants including a total liabilities for tangible net worth ratios. We were not in compliance with the total liabilities to tangible net worth ratio as of April 30, 2019. However, subsequent to our quarter end, our bank provided a waiver of noncompliance of the total liabilities to tangible net worth ratio covenant for the quarter ended April 30, 2019.

As of April 30, 2019 we had outstanding borrowings of $5.2 million on our revolving credit note and $1.8 million in available credit. We also had outstanding loan balances of $6.3 million under our real estate term loans.

With that, I’ll turn the call back over to Neil.

Neil Wilkin

Thank you, Tracy.

And now if you have any questions we are happy to answer them. Operator, 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.

Question-and-Answer Session

Operator

[Operator Instructions]. At this time there are no questions. I will turn the call to Mr. Palash for any pre-submitted questions.

Aaron Palash

Sure, thank you. Neil we do have a few questions submitted in advance of the call by non-institutional shareholders. The first is, I know there is some fixed costs within cost of goods sold such as manufacturing overhead. Would you consider any of these fixed costs to be a significant portion of cost of goods sold?

Neil Wilkin

Sure. Tracy is going to address this question.

Tracy Smith

Sure. We have fixed costs in our cost of goods sold as you would expect. We have as a result operating leverage which we’ve spoken about on our calls before which basically indicates that as sales increased we do expect to see improved gross profit margins. That can be impacted by product mix - sales product mix and that can sometimes cause if we have a negative product mix that can cause a slight negative impact on even higher sales but that's a little bit hard to predict what the product mix is going to be. And but such things as product with copper included can lower our gross profit margin because of the fact that that’s more of the pass-through.

Aaron Palash

Thanks Tracy. Next question is on the same gross margin theme will cost of materials per unit decrease in any significant way as net sales increase?

Tracy Smith

Well, I'll answer that one as well. We do have some opportunity for that but I would not describe it as a significant - a significant way that that would decrease.

Aaron Palash

Do you use any robotics in the manufacturing process and are you considering increasing it's use in the future?

Neil Wilkin

Thanks Aaron. We don't endorse to see - use robotics in traditional sense. We are very proud of our manufacturing facilities all three of them. I will give an example of something that we do in our manufacturing processes a little bit more advanced. We have proprietary software that we use in our extruders that is essentially has an intelligence built in. And so that is something that's proprietary and different from other cable manufacturers that we’re very proud of and that was developed by the OCC team. And we do use that in our manufacturing process and have a benefit from doing so.

We would expect to using robotics in the future. We’re always looking at opportunities to improve our manufacturing process. I don't know if we in the near term will be using any traditional robotics of what I would define is robotics and manufacturing. Our manufacturing process is already fairly efficient in the sense that we’re able to minimize a lot of the labor component of the total cost of production by the nature of our - nature of our business.

Aaron Palash

Moving on to the next question, at the end of the fiscal second quarter how many shares were available in the 2017 stock incentive plan?

Tracy Smith

This number will be disclosed in our 10-Q that we plan to file later today but I can confirm that we had approximately 439,000 shares available for stock grant as of April 30 in the plan.

Neil Wilkin

And Aaron I’ll go ahead and add that OCC did not have any employee stock grants in January of 2019. Each year we tend to do grants to the leadership team and actually fairly deep into our organization there for the last few years there has been 100% performance grants that tend to vest over four to six years.

However, because of what we saw from our result standpoint or started to see from our result standpoint in the first quarter of 2019, the decision was made not to do employee grants at the time we normally would in January of 2019 and we've made that decision periodically in past years as well based on the company's performance. And we’ve done that in spite of the fact that these are really long-term incentives that are - that vest of years based on performance - operational performance.

Aaron Palash

Moving on to the next question, at the end of fiscal second quarter what was the backlog forward log?

Tracy Smith

We're not actually disclosing specific numbers on backlog and forward log today but I can indicate that backlog is within expectations given the seasonality of our business. We are seeing strong demand for our solutions and products as reflected in our sequential growth and we are focused on our initiatives to operate efficiently in job growth.

Aaron Palash

Thanks Tracy. Can you elaborate an instance this morning's press release? These constraints and inefficiencies resulted from the expansion training and restructuring of manufacturing, workforce and from process changes and initiatives intended to increase throughput and efficiency in order to meet increased product demand over the short and long-term. Was the process complete at the end of the second quarter or is it more to come. Can you clarify why those constraints and inefficiencies happened?

Neil Wilkin

Sure Aaron. So fiscal year 2018 was a truly a record year for us to see in many respects. And as a result, we saw that we needed to make some changes adjustments to the way we were managing workforce and over time and scheduling, as well as some process changes. And we took some best practices and adopted them at OCC applying them to increase ultimately increase our efficiency and our throughput.

But as can happen when you make process changes likely it is some level to what sometimes you see when you do an ERP implementation even though it wasn't a software implementation. You can create some unintended inefficiencies and issues and we saw that in a very big way in the first quarter and we quickly got on those issues and through very diligent efforts made changes and adjustments and corrections to fix those issues.

We made substantial progress and that was reflected in our second quarter results. And while we still - we fixed a lot of those issues, we still believe that there's some additional work to do and we'll continue that work and we believe that we’ll see the benefit of that efficiency over the short-term and the long-term. As we mentioned before, we’re seeing strong demand for our products and solutions particularly in certain specialty markets.

And the changes we are making even though they were difficult in the first part of this year were necessary and intended to enable us to be more efficient and capture more growth opportunities both over the short and long-term.

Aaron Palash

Moving on to the next question, when you say net sales decreased from one big customer year-over-year, are you referring to sales to a distributor or are you referring to all sales to that distributor or are you referring to solely sales related to one big project rather than discussing the decrease to the customer, can you discuss the decrease to the project and other competitors on this year's orders was the customer taking a break in a monthly project?

Tracy Smith

I can confirm that it was sales to one large customer. Beyond that we are pleased to see sequential growth of 13.2% this quarter which is a reflection of our initiatives and the strength of our suite of products and solutions. And in particular we’re seeing growth in our specialty markets.

Aaron Palash

And the last question, what steps are being taken to boost sales from make up for the reduced order from a large customer?

Neil Wilkin

Thanks Aaron. We are focused on operating efficiently and executing our marketing initiatives to capture growth opportunities that always a process. We are seeing additional opportunities from our sales and business development and I am very pleased about. We continue to listen to our customers and provide different suite of innovative and integrated solutions if they are required and need to grow their businesses. And I think it's also worth briefly mentioning it’s interesting to talk about and the question about the hole - that this was a hole in our sales and how we’re going to fill that hole.

But if you look at our overall trend over several years, while you do have some ups and downs in our sales because of some volatility that can occur despite our diversification in markets and geographically and across customers, we have been kind of on a growth - we've been on a growth path for a while and we believe that’s going to continue. We saw a huge spike last year which we are very pleased about but as you can see this year based on the sales we've seen so far, we are also outperforming what we were doing the year before in 2017 from our sales standpoint, so I am pleased with that.

Our efforts on the marketing and business development and sales side will continue and as we've said before we’re seeing significant positive impacts in our certain of our specialty markets and believe that will continue.

Aaron Palash

Great. And that was our last question.

Neil Wilkin

Okay, thank you Aaron, and thank you for our shareholders submitting questions and we’re happy to answer those as we have. I like to thank everyone for participating in our second quarter conference call today. As always we appreciate your time and your interest in OCC.

Operator

Thank you. That does conclude the Optical Cable Corporation's second quarter 2019 earnings conference call. You may now disconnect.