Optical Cable Corporation
Q4 2020 Earnings Call Transcript

Published: 21 Dec 2020

[Operator:]

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corporation Fourth Quarter and Full-Year 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 session. It is now my pleasure to hand the conference over to Mr. Palash. You may begin your conference.

[Aaron Palash:]

Perfect. Thank you, Nicole. Good morning, and thank you all for participating on Optical Cable Corporation’s fourth quarter and 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.

[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 fourth quarter and full-year results for the three-month and 12-month periods ended October 31, 2020 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. Faced with significant headwinds in 2020, the OCC team demonstrated strength and resiliency, focusing on what we could control to drive cost reductions, efficiency improvements and enhanced production throughput, particularly at our Roanoke production facility. While this past year was challenging, the actions we took mitigate the impact of COVID-19, strengthen our financial position, serve customers and protect the business, have positioned – have OCC positioned to grow and build on our strong market positioning as we anticipate business conditions normalizing in the year ahead. We have all heard the un-words this past year, words extensively used and overused to describe the COVID pandemic and its impact on economies and families, words like unprecedented, uncertain, unchartered, unusual and unimaginable to name a few. But despite the significant and persistent disruption and challenges caused by COVID-19, the negative impact on OCC’s financial results during fiscal year 2020 and more than justifiable reasons to use such words, I did not hear those words used by the OCC team. Rather, the OCC team demonstrated strength, the dedication, flexibility and creative problem-solving and their words, attitude and actions.

[Tracy Smith:]

Thank you, Neil. Consolidated net sales for fiscal 2020 were $55.3 million, a decrease of 22.5% compared to net sales of $71.3 million for fiscal 2019. Consolidated net sales for the fourth quarter of fiscal 2020 were $13.9 million, a decrease of 23.9% compared to net sales of $18.2 million for the same period last year. Sequentially, net sales in the fourth quarter of fiscal 2020 increased 1.8% compared to net sales in the third quarter of fiscal 2020. We believe net sales during the fourth quarter and 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. Additionally, contributing to the decrease in net sales during fiscal 2020 was the fact that we fulfilled a number of large orders from one customer in the wireless carrier market in fiscal 2019 that did not occur at the same levels in fiscal 2020. Net sales to this customer decreased $6.1 million in fiscal 2020. Historically, net sales to this customer have been volatile from quarter to quarter and from year to year. Turning to gross profit, gross profit was $14.1 million in fiscal 2020 compared to $18.3 million in fiscal 2019. Gross profit margin or gross profit as a percentage of net sales was 25.5% in fiscal 2020 compared to 25.7% in fiscal 2019. Gross profit was $4.2 million in the fourth quarter of fiscal 2020 compared to $4.9 million in the fourth quarter of fiscal 2019. Gross profit margin was 30.3% in the fourth quarter of fiscal 2020 compared to 27.1% in the fourth quarter of fiscal 2019. Sequentially, gross profit in the fourth quarter of fiscal 2020 increased 21.3% compared to gross profit in the third quarter of fiscal 2020.

[Neil Wilkin:]

Thank you, Tracy. And now, if you have any questions, we are happy to answer them. Nicole, 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.

[Operator:]

We show no audio questions at this time. I will hand it back to Neil.

[Neil Wilkin:]

Thank you, Nicole. Aaron, I know we have had some questions submitted by individual investors before the call today, if you could go through those with us, we are happy to answer those questions.

[Aaron Palash:]

Terrific. The first one, why did your revenue to the wireless carrier market go down as much as it did in recent times and you see any real improvement in the foreseeable future? Was the decline due to product obsolescence or due to pricing pressures?

[Neil Wilkin:]

Well, OCC sells into the wireless carrier market but predominantly with one partner, so at least that’s the largest the partner. And that partner has been impacted this last year by both COVID and other market forces that they have been experiencing and that’s impacted OCC. We are working towards and have been for a while making inroads and other – with other paths to this market. And we believe that these actions will benefit OCC over the longer-term.

[Aaron Palash:]

Great. Next question, does 5G require fiber optic cable and connectors? How is OCC now participating in this market? And is OCC positioned to grow importantly with the expansion of 5G?

[Neil Wilkin:]

So, yes, 5G does require the types of fiber optic cables and connectors that are in our portfolio. We are participating in this market. We, as I mentioned before, are working primarily with one partner, but we are taking efforts to expand that focus we have been for a while and are starting to see some results of that – those efforts to expand our presence in the market and we are looking forward to that.

[Aaron Palash:]

Which firms might you be competing with in the 5G market? And do you have any advantages over your competitors?

[Neil Wilkin:]

Sure. 5G market is part of the – as part of the wireless carrier market, it has a lot of similarities to the long-haul telco market or the telecommunications – telephone company market. And as such, we are competing against the largest names in our industry in those markets. One of our advantages as a smaller company is we have the ability to quickly turn new designs and to meet evolving customer needs in the wireless carrier market and have done that in the past and expect to do that in the future.

[Aaron Palash:]

Great. Could you elaborate a bit on the steps being taken to accelerate business development and sales growth?

[Neil Wilkin:]

Sure. So, when we saw the impact from what was going on in the economy and COVID-19 on the macro economic conditions in 2020, we didn’t just sit back and wait to see – wait for to see when the market was going to improve. Rather, what we did was took the opportunity to revisit our business processes and tools, particularly on the sales, business development and marketing side. And we have made a number of changes that we believe that will generate new business, particularly as the effects of COVID start to wane and our markets start to recover. And again, as I said before, our markets have been impacted more or less in different ways during this time and so we are addressing those markets accordingly because of that.

[Aaron Palash:]

Great. Next question, you appear to have a very large products portfolio, might you be giving thoughts reducing your low volume or low margin items to concentrate the company’s efforts on OCC’s higher volume and more profitable offerings?

[Neil Wilkin:]

So, OCC competes in a number of different markets, including some specialty markets. Some of those tend to be more profitable, but are also susceptible to macroeconomic conditions or other changes in those industries. But in many of these markets, we believe we are one of the top three players. And so while we do have a broad market offering, we – that enables us to be able to maintain the size that we are at and also grow in those markets that we have a competitive advantage in. We do look at our product offering from time to time. And we also believe that if we reduced our scope of our product offering and try to narrow it to a more generic product offering, then what we would be doing is ending up competing more on price. And we believe one of our competitive advantages is to not just compete on price but also on product performance in differentiating our products from what other competitors are providing.

[Aaron Palash:]

Great. Has China been a major competitor to OCC? And has there been much pressure on pricing?

[Neil Wilkin:]

Well, typically, we do not see significant competition from Chinese manufacturers. There is always – price is always a consideration, particularly when macroeconomic conditions are not as strong, but we try not to just compete on price, but focus on our differentiated product offerings. We are cognizant of pricing pressures and we do make adjustments from time-to-time as necessary to best position ourselves in our markets. We also try to take the time to educate our customers and make sure we understand that what needs they have, so that our solutions are designed to satisfy those needs. And in some cases, that requires a more expensive product than a competitor might be offering.

[Aaron Palash:]

Okay. Have you been seeing any increased desire for U.S. sourcing in your product area?

[Neil Wilkin:]

Generally, the answer is yes. And obviously, we are proud to be an American manufacturer and to be able to meet these needs when they are required. Those requests come from various different customer types. And I won’t go into a lot of details there, but generally the answer is yes.

[Aaron Palash:]

Okay. For OCC, do you anticipate a Biden Presidency will be better or worse than a Trump Presidency?

[Neil Wilkin:]

Yes, I love this question, Aaron. OCC considers ourselves very apolitical. And we have been around for 37 years now and continue to have great relationships with both Democrats and Republicans, both at the state level and also at the – with our national representatives. And we obviously are proud to be a critical supplier to the armed forces and other government agencies and we continue to look forward to supporting our customers during president-elect Biden’s administration.

[Aaron Palash:]

Okay. And can you walk us through where we can see the impacts of your PPP loan on the recent quarterly income statement and balance sheet, if fully forgiven, how we treat the PPP forgiveness from an accounting standpoint?

[Neil Wilkin:]

Okay. I will have Tracy handle that question.

[Tracy Smith:]

Sure. Okay. So, the outstanding principal balance of the PPP loan is included in current and non-current liabilities on separate line items of the balance sheet. So, you will be able to see that clearly on our Form 10-K, which is planned to be filed later today on the balance sheet in the Annual Report. Additionally, we have been accruing interest at 1% since inception, which is included in the interest expense line item on our income statement and in the accounts payable and accrued expenses line item on our balance sheet. As far as the accounting treatment when forgiven, we expect to recognize revenue and that would show up on the income statement. As a result also, the amount of debt on the balance sheet would be reduced. Of course, as has been the case so far with PPP and the many changes that have been occurring, we are going to continue monitoring any changes to the accounting treatment that maybe required if changes occur.

[Aaron Palash:]

Great. And this one is likely also for Tracy, how much borrowing did you have at the end of the quarter? And also today on your North Mill note, what was the availability? At the end of the quarter, you only had $141,000 in cash does your cash level reflect the ease of drawing additional funds against your note?

[Tracy Smith:]

As I mentioned earlier, the balance on the revolver at October 31 was $5 million. And with this revolver, we borrow as needed. And cash receipts are swept daily to pay down the revolver balance. So, this enables us to have less borrowing on the line, but it also means less cash on the financial statements and it is fairly easy for us to draw additional funds from the note we complete a borrowing based certificate and that’s how that occurs.

[Aaron Palash:]

Great. That was the final question.

[Neil Wilkin:]

Okay. Well, thank you, Aaron and thank you, Tracy. Since there is no further questions I would like to thank everyone for listening to our fourth quarter fiscal year 2020 conference call today. As always, we appreciate your time and your interest in Optical Cable Corporation. I hope everyone continues to be safe and wish you all happy holidays to both you and your families. Thank you.

[Operator:]

This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your line.