Optical Cable Q3 2023 Earnings Call Transcript

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September 12, 2023

There are 4 speakers on the call.

Operator

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corporation 3rd Quarter of Fiscal Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Mr.

Operator

Palash, you may begin your conference.

Speaker 1

Thank you, Angela. Good morning and thank you all for joining us for Optical Cable Corporation's Q3 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.

Speaker 1

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 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.

Speaker 2

Thank you, Aaron, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the Q3 results for the 3 month 9 month periods End of July 31, 2023, and some additional detail. After Tracy's remarks, we will answer As many questions as we can. As is our normal practice, we will only take questions from analysts and institutional investors starting the Q and A session.

Speaker 2

However, we also offer other shareholders the opportunity Before we discuss the Q3, I want to note that yesterday was, of course, The OCC team is proud of the work we do to support our armed services and first responders. OCC is honored to be trusted with the responsibility of manufacturing and supplying our mission critical products And now turning to the Q3 fiscal year 2023. With year over year increases in key metrics during the 1st 9 months of fiscal year 2023, including net sales, gross profit, Gross profit margin, operating income and net income. Our results so far this year reflect the OCC team's Hard work and success executing our strategy in a dynamic market. Looking at the Q3 of fiscal year 2023, our gross profit increased 6.4% Our gross profit margins also increased even while our net sales decreased 2.5%, All when compared to the Q3 of fiscal year 2022.

Speaker 2

In certain of our specialty markets, We continue to see robust demand for our diversified suite of mission critical cabling and connectivity products and solutions, Even while certain of our other targeted markets like the enterprise and wireless carrier markets are softening At this time, consistent with the industry trends. One of OCC's core strengths And we benefited from this diversification during the Q3 of fiscal 2023. Our sales order backlog and forward load remains at higher than typical levels, but had decreased by the end of the Q3 of fiscal year 2023 compared to the end of the Q2 of fiscal year 2023. Looking forward, while certain of our markets are showing signs of continued softness, including our enterprise and wireless carrier markets, We believe certain of our other markets are showing signs of continued strength. We are continuing to monitor the evolving macroeconomic trends, industry trends and potential risks that could impact our business.

Speaker 2

We are continuing to execute our strategic initiatives and are committed to capturing demand, driving growth, working safely and operating efficiently. As we move into the Q4 of fiscal year 2023 and beyond, we are focused As ever on finishing the fiscal year strong, serving our valued customers and end users and driving enhanced value for shareholders. And with that, I will turn the call over to Tracy, who will review in additional detail our Q3 fiscal year 2023 financial results.

Speaker 3

Thank you, Neil. Consolidated net sales for the Q3 of fiscal year 2023 decreased 2.5% to $16,900,000 compared to net sales of $17,400,000 for the same period last year. Consolidated net sales for the 1st 9 months of fiscal 2023 were $54,800,000 an increase of 11.9% compared to net sales of $49,000,000 for the same period last year. During the 3rd But this increase was partially offset by decreases in our enterprise market. Net sales for the Q3 Showing signs of continued softening, including our enterprise and wireless carrier markets, we believe there are positive indicators in certain of our other markets.

Speaker 3

Additionally, our manufacturing operations have returned to normal functionality after being impacted by the cyber incident that occurred in June 2023. As Neil mentioned, our sales order backlog and forward load continues to remain at higher than typical levels approximately $6,800,000 at the end of the Q3 of fiscal year 2023 compared to approximately $8,000,000 at the end of the Q2 of fiscal 2023 and more than $12,000,000 at the end of the Q4 of fiscal year 2022. Turning to gross profit. Gross profit increased 6.4 percent to $5,100,000 in the Q3 of fiscal 2023 compared gross profit of $4,800,000 for the same period last year. Gross profit margin or gross profit as a percentage of net sales increased to 30 point percent in the Q3 of fiscal 2023 compared to 27.7% in the Q3 of fiscal 2022.

Speaker 3

OCC realized improved gross profit margins compared to the Q3 of fiscal year 2022 despite a comparable decrease in net sales levels. We attribute this margin improvement to gains in production efficiency as well as the impact of a more fully trained workforce. Gross profit increased 32.6 percent to $18,400,000 in the 1st 9 months of fiscal 2023, to $13,900,000 in the 1st 9 months of fiscal 2022. Gross profit margin increased to 33.6 percent in the 1st 9 months of fiscal 2023 compared to 28.3% in the 1st 9 months of fiscal 2022. Our gross profit margins tend to be higher when we achieve higher net sales levels due to our operating leverage as certain fixed manufacturing costs are spread over higher sales.

Speaker 3

We experienced improved gross profit margins when comparing the 1st 9 months of fiscal year 2020 to the same period in 2022. We attribute this improvement to the positive impact of our operating leverage as sales levels increased, Gains in production efficiencies as well as the impact of more fully trained workforce. Our gross profit margin percentages also heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. SG and A expenses were $5,000,000 in both the 3rd quarters of fiscal year 2023 and 2022. SG and A expenses as a percentage of net sales were 29.3% in the Q3 of fiscal 2023 compared to 28.5 in the Q3 of fiscal 2022.

Speaker 3

SG and A expenses increased to $16,100,000 during the 1st 9 months of year 2023 from $14,800,000 for the 1st 9 months of fiscal year 2022. In the 1st 9 months of fiscal year 2023, SG and A expenses as a percentage of net sales were 29.3% compared 30.1% for the same period of fiscal year 2022. The increase in SG and A expenses during the 1st 9 months fiscal year 2023 compared to the same period last year 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 1st 9 months of fiscal 2023. OCC recorded net income of $101,000 or $0.01 per basic and diluted share for the Q3 of fiscal 2020 compared to a net loss of $372,000 or $0.05 per basic and diluted share for the Q3 of fiscal 2022.

Speaker 3

OCC recorded net income of $3,300,000 or 0 point 42 dollars per basic and diluted for the 1st 9 months of fiscal year 2023 compared to a net loss of $1,500,000 or $0.20 per basic and diluted share for the 1st 9 months fiscal year 2022. In addition to improved sales and gross profit, the company's results benefited from the gain on insurance proceeds received for damage to and equipment totaling $2,000,000 which was recorded as other income net on the company's statement of operations during the 1st 9 months of fiscal year 2023. During the second and third quarters of fiscal year 2023, we received insurance proceeds in connection with our office building and its content at our Asheville facilities, sustaining water damage from a burst pipe in a sprinkler system at the end of December 2022. In connection with this event, we recognized a gain on insurance proceeds received for damage to property and equipment during the 1st 9 months of fiscal year 2023, totaling $2,000,000 To the extent we incur expenses in future periods to restore, repair or replace damaged assets, We may recognize offsetting losses in those future periods. At this time, we do not expect future restoration and repair costs to exceed any As of July 31, 2023, we had outstanding borrowings of $7,300,000 on our revolver and $3,900,000 in available credit.

Speaker 3

We also had outstanding loan balances of $4,300,000 under our real estate term loan. And with that, I will turn the call back over to you, Neil.

Speaker 2

Thank you, Tracy. And now if analysts or institutional investors have questions, We are happy to answer them. Angela, if you could please indicate the instructions for our participants to call in any questions they may have, I'd appreciate it.

Operator

It appears there are no questions at this time. I will now turn program back over to our presenters for additional remarks.

Speaker 2

Thank you, Angela. Aaron, I know we have some questions that have been submitted by individual If you can walk us through those, I'd appreciate it.

Speaker 1

Sure. Here's the first. There was a recent article in The Wall Street Journal about the building out of broadband to all types of rural areas in the USA. Might OCC be a beneficiary of this build out? And also might the increasing tension with China work to OCC's advantage in any way?

Speaker 2

And the first part of the question, OCC does have products that are used in broadband related applications. Generally, the broadband market has not been one of OCC's targeted markets for a number of reasons. However, We are following the developments and the potential opportunities in the broadband markets. With respect to the second part of the question, As you all, as listeners know for sure, there's been more on shoring and manufacturing in the U. S.

Speaker 2

And as a U. S. Manufacturer, we believe this trend provides us with additional opportunities.

Speaker 1

Is it low throughout the quarter and does this cause any issues in regards to running the company?

Speaker 2

I'm going to ask Tracy to Answer that question, Ann? Sure.

Speaker 3

The cash balance reflects the way advances on and payments on our revolver work. Our accounts receivable collections pay down our revolver on a daily basis, which is not unusual. So we believe our revolver provides sufficient capital to meet our business needs. As you know, OCC benefits from a strong balance sheet

Speaker 1

That was the last question, supported before the deadline.

Speaker 2

Okay. Thank you. Thank you, Aaron. We'd like to thank everyone for listening to our Q3 fiscal year 2020 conference call today. As always, we appreciate your time and your investment in Optical Cable Corporation.

Speaker 2

Thank you.

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Optical Cable Q3 2023
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