Optical Cable Corporation (NASDAQ:OCC) Q1 2023 Earnings Call Transcript

Optical Cable Corporation (NASDAQ:OCC) Q1 2023 Earnings Call Transcript March 13, 2023

Operator: Good morning. My name is , and I will be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corporation First Quarter of Fiscal Year 2023 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. Mr. Palash, you may begin your conference.

Aaron Palash: Thank you, Shelby. Good morning, and thank you all for participating on Optical Cable Corporation’s first quarter of fiscal year 2023 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.

Neil Wilkin: Thank you, Aaron, and good morning everyone. I will begin the call today with a few opening remarks. Tracy will then review the first quarter results for the three-month period ended January 31, 2023 and 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. We are pleased to report a strong start to fiscal year 2023. The OCC team continues to build on our momentum and successfully execute our growth strategies.

During the first quarter of fiscal year 2023, we achieved significant growth in net sales, gross profit, gross profit margin, and bottom line results. At the same time, our sales order backlog and forward load continue to be higher than typical levels, reflecting the strong demand for our products. Additionally, our results reflect the strength of our operating leverage. As we have noted in the past, OCC as a strong business model and our operating leverage enables us to grow gross profit and profitability at a faster rate as our fixed production costs and SG&A expenses are spread over higher net sales levels. Our performance continues to be impacted by certain challenging macroeconomic factors, although to a lesser extent, than we experienced during the first quarters of fiscal year 2022.

Supply chain challenges, including material availability and costs, and even some lingering personnel recruiting challenges, particularly for production personnel still exist. Importantly, both our supply chain and personnel recruiting have shown improvement during the first quarter fiscal year 2023, continuing the improvements we experienced toward the end of fiscal year 2022. We will continue to monitor these and other evolving macroeconomic trends and we believe we are prepared to make appropriate business adjustments as necessary as 2023 continues to unfold. Looking ahead, we remain well-positioned in our target markets and we are confident OCC is on a path towards further shareholder value creation. And with that, I will turn the call over to Tracy, who will review in additional detail our first quarter of fiscal year 2023 financial results.

Tracy Smith: Thank you, Neil. Consolidated net sales for the first quarter of fiscal 2023 increased 26.6% to $18.3 million, compared to net sales of $14.4 million for the same last year. We experienced an increase in net sales in both the enterprise and specialty markets, including the wireless carrier market during the first quarter of fiscal year 2023, compared to the same period last year. We believe the increase in net sales reflects increased product demand and increased production throughput during the first quarter of fiscal year 2023, compared to the same period last year, as well as improved product pricing that began to take effect from new orders received during the latter half of fiscal year 2022. Turning to gross profit.

Gross profit increased 61.2% to $6.5 million in the quarter of fiscal 2023, compared to gross profit of $4 million for the same period last year. Gross profit margin, our gross profit as a percentage of net sales increased to 35.7% in the first quarter of fiscal 2023, compared to 28% in the first quarter of fiscal 2022. Our gross profit margins tend to be higher when we achieve higher net sales levels as certain fixed manufacturing costs are spread over . This operating leverage, which is beneficial at higher sales levels, positively impacted our gross profit margin during the first quarter of fiscal year 2023 when compared to the same period last year. Our gross profit margin percentages are also heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix.

SG&A expenses increased to $5.5 million during the first quarter of fiscal 2023, compared to $4.8 million for the same period last year. SG&A expenses as a percentage of net sales were 29.8% in the first quarter of fiscal 2023, compared to 33.1% in the first quarter of fiscal 2022. The increase in SG&A expenses during the first quarter of fiscal year 2023 was primarily the result of increases in employee and contracted sales personnel related costs. Included in employee and contracted sales personnel related costs are employee incentives and commissions, which increased due to increased net sales and the improved financial results during the first quarter of fiscal 2023. OCC recorded net income of $810,000 or $0.10 per basic and diluted share for the first quarter of fiscal 2023, compared to a net loss of $936,000 or $0.12 per basic and diluted share for the first quarter of fiscal year 2022.

As of January 31, 2023, we had outstanding borrowings of $6.8 million on our revolver and $4.8 million in available credit. We also had outstanding loan balances of $4.4 million under our real estate term loan. With that, I’ll turn the call back over to you, Neil.

Neil Wilkin: Thank you, Tracy. And now if any analysts and institutional investors have any questions. We are happy to answer them. Our operator today is, Shelby. Shelby, if you could please indicate the instructions for our participants to call in any questions they may have. I’d appreciate it. Again, we are only taking live questions from analysts and institutional investors.

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Q&A Session

Operator: Thank you. And I’m showing that we have no questions in queue at this time. I will now turn the program back over to Neil Wilkin for additional remarks.

Neil Wilkin: Thank you, Shelby. We have €“ I received some questions from individual investors in advance of today’s call. Aaron, if you wouldn’t mind reading those, we will answer those questions now.

Aaron Palash: Sure. Where specifically are the sales gains coming from? Besides from the price increases, you mentioned the enterprise specialty markets, as well as the wireless carrier market. Could you be a little more specific about what is entailed by the enterprise and specialty markets?

Neil Wilkin: Yes, thank you. We have seen sales gains across many of our various target markets with some targeted markets stronger than others. We have not been implementing general price increases for our products since 2022. Importantly, our sales gains are significantly outpacing any impact from such price increases. The second part of the question was about what is entailed in enterprise and specialty markets. And OCC uses the enterprise market to describe commercial network cabling and connectivity customers. This includes a wide range of things, including business facilities, schools, universities, and many other customer types. We use the specialty market description to describe markets like military and industrial markets and many other markets typically requiring specially designed cabling and connectivity products.

Aaron Palash: Terrific. Next question. Are there any specific macro industry reasons for the gains, which areas are they related to? And is there any benefits your business derived from the 5G roll-out?

Neil Wilkin: We have seen strong demands in our market. And so, we have benefited from that. I think our execution has been strong as well. We do design, manufacture, and sell products used by the wireless carrier providers. And we believe that we will continue to benefit from the expansion of carrier networks.

Aaron Palash: Great. Next question. Is OCC benefiting in an important way from the supply chain being brought back to the USA?

Neil Wilkin: We do believe that to the extent the supply chain has brought back to the U.S., this creates direct and indirect opportunities for OCC and we’ll continue to work those opportunities for the benefit of OCC.

Aaron Palash: And you indicated in the annual report that your sales order backlog might be around $12 million, what is it after the first quarter?

Neil Wilkin: Yes. I think in the annual report, we specifically said that it exceeded $12 million. We will report in our Form 10-Q for the first quarter, which by the way, we expect to file tomorrow morning that our sales order backlog and forward load exceeded 11 million at the end of the first quarter fiscal year 2023, continuing to be higher than typical levels.

Aaron Palash: In your annual report, you spoke about the risks you see ahead possibly from COVID or not being able to hire people to do your manufacturing and such reasons. Are there any more positive things happening to your business which may not have foreseen a few months ago and may help OCC on the ?

Neil Wilkin: Well, I think our results reported for the fourth quarter fiscal year 2022, and this first quarter of this fiscal year 2023 demonstrate that many positive things are happening at OCC. And we’re pleased about that. We saw fiscal year 2022 as a transition year with negative impacts both direct and indirect of the COVID pandemic beginning to wane. At the same time, we continue to focus on improving the execution of our strategies, both sales growth and operating strategies. I believe we are well-positioned in our markets and better positioned in our operations as a result of these ongoing efforts. We also continue to monitor evolving macroeconomic trends and we believe we are prepared to make appropriate business adjustments as necessary as 2023 continues to unfold.

Aaron Palash: Great. Can you describe the state of your innovation pipeline? It seems like OCC owns a few patents that is not monetize yet? Are there plans to do so?

Neil Wilkin: Okay. OCC continues to innovate in order to better serve our customer needs. Some of these innovations are patented, others are not patented, but are trade secrets. Our patent portfolio includes both patents used in products we sell, but we also have defensive patents that help protect our competitors €“ prevent our competitors from copying our innovations. We are consistently looking for ways to monetize our innovations with a focus on meeting our customers and end users’ various patient needs in multiple targeted markets.

Aaron Palash: Next question. Have you seen improvements in the availability of skilled labor?