Optical Cable Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 10, 2024

There are 4 speakers on the call.

Operator

Good morning.

Speaker 1

My name is Angela, and I will be your conference operator today.

Operator

At this time, I

Speaker 1

would like to welcome you to Optical Cable Corporation's 2nd Quarter of Fiscal Year 20 24 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. Hoffman, you may begin your conference.

Speaker 2

Good morning and thank you for joining us for Optical Cable Corporation's Q2 of fiscal year 2024 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.

Speaker 2

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.

Speaker 3

Thank you, Spencer, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the 2nd quarter results for the 3 month and 6 month periods ended April 30, 2024 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 and A session.

Speaker 3

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. I'm proud of the OCC team, which has continued to execute and solidify OCC's position as a leader in our industry despite the macroeconomic pressures that OCC and other industry participants continue to face. We believe we delivered solid results in this environment. And while our results are down year over year when comparing the Q2 of fiscal 2024 to fiscal 2023, as well as the first half of fiscal 2024 to the first half of fiscal twenty twenty three, we are facing a tough comparison.

Speaker 3

As Tracy will get to get into in a moment, last year, our net sales for the 2nd quarter and first half of fiscal 2023 were boosted by higher than typical sales order backlog and forward load, which we believe normalized this year. Yet sequentially, we achieved top line improvement with OCC's net sales increasing 8.5% during the Q2 of fiscal year 2024 compared to net sales for the Q1 of fiscal year 2024. This growth reflects sequential increases in both OCC's enterprise and specialty markets during the Q2 of fiscal year 2024 when compared to the Q1. We believe this improvement is better than what many of our competitors are experiencing. OCC's gross profit also sequentially increased 8.8% during the Q2 of fiscal 2024 when compared to the Q1 of fiscal 2024.

Speaker 3

Looking ahead, the team has created a competitive advantage. As market conditions improve, we believe our decision to maintain headcount will serve our company well and position us to outperform moving forward. As we move forward, we continue to take steps to control what we can, operate efficiently and optimally position OCC to meet rebounding demand. We remain committed to capturing profitable growth opportunities, meeting and exceeding the needs of our valued customers and end users and advancing our strategy to enhance shareholder value. And with that, I'll turn the call over to Tracy, who will review in additional detail our Q2 of fiscal year

Operator

fiscal 2024 were $16,100,000 a decrease of 17.9% compared to net sales of 19 point $6,000,000 for the same period last year. Consolidated net sales for the first half of fiscal twenty twenty four were $31,000,000 a decrease of 18.3 percent compared to net sales of $37,900,000 for the first half of fiscal twenty twenty three. Sequentially, net sales increased 8.5% during the Q2 of fiscal year 2024 compared to net sales of $14,900,000 for the Q1 of fiscal 2024. OCC experienced sequential increases in both its enterprise and specialty markets during the Q2 compared to the Q1 of fiscal year twenty twenty four. During the second quarter and first half of fiscal twenty twenty four, we experienced decreases in net sales in both our enterprise and specialty markets, including the wireless carrier market compared to the same period last year.

Operator

We believe this is consistent with current weakness across our industry and uncertain of our target markets. Our net sales during the comparable periods of fiscal year 2023 positively benefited from a higher than typical sales order backlog and forward load of more than $12,000,000 at the beginning of fiscal year 2023, while sales order backlog and forward load at the beginning of fiscal year 2024 had returned to more normal levels. At the end of the Q2 of fiscal year 2024, sales order backlog and forward load remained at a more typical level of approximately $5,600,000 Additionally, net sales for the 2nd quarter and first half of fiscal year twenty twenty four were negatively impacted by various macroeconomic pressures, risks and uncertainties in our industry, which we believe is consistent with weakness being experienced in our industry generally. While certain of our markets continue to show signs of softness, including our enterprise and wireless carrier markets, we believe there are positive indicators in certain of our other markets. Overall, we expect our net sales to begin to grow compared to the first half of fiscal year twenty twenty four.

Operator

Turning to gross profit, our gross profit was $4,000,000 in the Q2 of fiscal 2024 compared to gross profit of $6,800,000 for the same period last year and gross profit of $3,700,000 for the Q1 of fiscal 2024. Gross profit margin or gross profit as a percentage of net sales was 25.1% in the Q2 of fiscal 2024 compared to 34.6% in the Q2 of fiscal 2023 and compared to 25% for the Q1 of fiscal 2024. Gross profit was $7,800,000 in the first half of fiscal twenty twenty four, a decrease of 41.7% compared to $13,300,000 in the first half of fiscal twenty twenty three. Gross profit margin was 25% in the first half of fiscal twenty twenty four compared to 35.1% in the first half of fiscal twenty twenty three. Sequentially, gross profit increased 8.8% during the Q2 of fiscal 2024 compared to $3,700,000 for the first quarter of fiscal 2024.

Operator

Gross profit margin for the second quarter and first half of fiscal twenty twenty four was negatively impacted by lower volumes as fixed charges were spread over lower sales as well as reduced plant efficiencies as fewer sales and lower backlog impacted the flow of products through our manufacturing facilities, the impact of operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. SG and A expenses decreased to $5,300,000 in the Q2 of fiscal year 2024 compared to $5,700,000 for the same period last year. SG and A expenses as a percentage of net sales were 33% in the Q2 of fiscal 2024 compared to 28.9% in the Q2 of fiscal 2023, which reflects our operating leverage relative to net sales. By comparison, SG and A expenses as a percentage of net sales were 34.3% in the Q1 of fiscal 2024.

Operator

SG and A expenses decreased 6.3 percent to $10,400,000 during the first half of fiscal year 2024 from $11,100,000 for the first half of fiscal year twenty twenty three. SG and A A expenses as a percentage of net sales were 33.6 percent in the first half of fiscal twenty twenty four compared to 29.3% in the first half of 2023. The decrease in SG and A expenses during the Q2 and first half of fiscal year twenty twenty four compared to the same period last year was primarily the result of decreases in employee and contracted sales personnel related costs. Included in employee and contracted sales personnel related costs are employee incentives and commissions, which decreased due to decreased net sales and the financial results during the second quarter and first half of fiscal 2024. OCC recorded a net loss of $1,600,000 or 0 point $1 per basic and diluted share for the Q2 of fiscal 2024 compared to net income of $2,400,000 or $0.31 per basic and diluted share for the Q2 of fiscal 2023.

Operator

OCC recorded a net loss of $3,000,000 or $0.39 per basic and diluted share for the first half of fiscal year twenty twenty four compared to net income of $3,200,000 or $0.41 per basic and diluted share for the first half of fiscal year twenty twenty three. And with that, I'll turn the call back over to Neil.

Speaker 3

Thank you, Tracy. And now if any analyst 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. Again, we're only taking live questions from analysts and institutional investors.

Speaker 1

It appears we have no questions at this time. I will now turn the program back over to our presenters for any additional remarks.

Speaker 3

Thank you, Angela. Spencer, I know that we have some questions that were submitted by individual investors. If you could ask those questions, and Tracy will respond to those.

Speaker 2

Absolutely. The first question. In your annual report in 10 ks, you referred data centers as one of your markets. Could you comment a bit more on your attempts to penetrate this market? And if so, what niche is?

Speaker 2

And what can we look forward to more business and can we look forward to more business from this burgeoning market in the future?

Speaker 3

Well, OCC does offer products that are used in the data center market, some products, And we do have some participation in that market. The data center market, as I'm sure folks understand, has a number of tiers from hyperscale data centers to smaller private data centers. Some of the most recent is talking about the growth in data centers is focused on the hyperscale data centers. And OCC's product offering does not specifically include products that are designed for that hyperscale data center market. It is a market that we're watching and look at periodically to see how we can benefit from it.

Speaker 2

Thank you, Neil. Next question. What is the status of the water damaged office building in Asheville?

Speaker 3

Tracy is going to take this one.

Operator

Sure. We're still evaluating our options with regard to the office building in Asheville. As indicated previously, this was an administrative building and the water damage didn't have an impact on our production processes. So we feel we can spend some time analyzing the options and making a decision that best suits our business needs.

Speaker 2

Thank you, Tracy. The next question. Could you comment on the purchasing patterns in the carrier industry? Are your customers building large inventories they work through over time?

Speaker 3

Yes. I'll answer that. So OCC has seen a slowdown in sales in the wireless carrier market as we disclosed and as our shareholders are aware of. We believe this is consistent with what a number of other manufacturers have experienced. This is happening for a number of reasons.

Speaker 3

I think one of those reasons is that we do believe there's been some excess inventory in the sales channels for the wireless carrier market, and that has resulted in lower sales for OCC in that market. We do still have capabilities to service that market, and we do believe that the wireless carrier market will improve in the future.

Speaker 2

Thank you, Neil. Next question. In 2015 to 2016, oil rig count fell significantly due in part to the implementation of new technologies. Some of your competitors saw their sales to oil and gas customers fall more than 50% over that period. The horizontal drilling increased rig productivity impact demand for your product similarly back then?

Speaker 3

So OCC does offer certain products that are sold into the oil and gas markets. As you would expect, we have seen variation in sales into that market based on a number of factors, including oil and gas prices, which impact production volumes. Our product offerings are diverse. And for that reason that we benefit from that diversity in helping to mitigate some of the volatility. I can't specifically comment on oil and gas in 20 15 to 2016.

Speaker 3

But we do participate in that market with certain products and have benefited from that market over many years.

Speaker 2

Thank you, Neil. The next question. Could you give us a rough understanding of how your sales split between end markets in 2023 or what sales growth was like in the specialty market and enterprise market?

Speaker 3

Thank you, Spencer. So, we do OCC operates in many diverse markets, both geographically as well as by targeted market application. Geographically, each year, we sell into about 50 countries or so. And by targeted market, we have various different markets that are included in specialties and also different applications in the enterprise portion of the markets we speak to generally. The diversification is a strength for OCC, and it helps mute significant volatility that can occur in our markets.

Speaker 3

General I will say that generally OCCs, enterprise markets and specialty markets, excluding the wireless carrier market, each comprise about half of OCC sales. That varies by quarter and it varies year to year. For competitive reasons, we don't talk about or disclose specific details on individual markets. But hopefully, that provides the information that's being asked.

Speaker 2

Thank you, Neil. And now the final question. In the Q4 of 2023, your gross margin came in lower than margins previously achieved at similar sales levels during other past quarters. Can you please comment on what impacted gross margins in the Q4 of 2023?

Speaker 3

Tracy is going to address that question.

Operator

Okay. In the Q4 of 2023, our gross profit margins were impacted by lower sales volumes and product mix. Comparing older periods can be difficult for many reasons, including changes that occur in cost structure over time and the impact that product mix has on our gross profit margin from quarter to quarter. So if you're looking at prior years quarters, particularly significantly older quarters. When we have something that is more unusual that we can point to, such as the production process issues that we had in the past, we definitely try to highlight those as well.

Operator

But at the end of the day, operating leverage and product mix are primary drivers

Speaker 3

And Spencer, you said that was the last question. We don't have any more.

Speaker 2

Yes, Neil. That was the last question.

Speaker 3

Okay. That being the case, I would like to thank everyone for listening to our Q2 of fiscal year 2024 conference call today. As always, we appreciate your time and your investment in OpticalFuel Corporation. Thank you very much.

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Key Takeaways

  • YoY net sales decline: Q2 FY2024 net sales fell 17.9% to $16.1 M (first half down 18.3% to $31 M) but achieved an 8.5% sequential increase from Q1 across both enterprise and specialty markets.
  • Sequential gross profit improvement: Gross profit rose 8.8% sequentially to $4 M with a 25.1% margin, though down from 34.6% a year ago due to lower volumes, fixed costs and product mix.
  • Net loss reported: OCC posted a Q2 net loss of $1.6 M (−$0.11/share) versus a $2.4 M profit in Q2 FY2023, and a first-half loss of $3 M (−$0.39/share) compared to a $3.2 M gain last year.
  • Cost control pressures: SG&A expenses fell 6.3% YoY to $5.3 M in Q2 but climbed to 33% of sales as operating leverage weighed on margins amid lower volumes.
  • Outlook and strategy: Backlog normalized to ~$5.6 M (vs. $12 M last year), headcount maintained for competitive advantage, and management expects net sales growth as market conditions improve.
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Earnings Conference Call
Optical Cable Q2 2024
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