Q4 2020 Optical Cable Corp Earnings Call
On your conference operator today.
This time I would like to walk on due 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. If you'd like to ask a question during that time and they may do so by pressing star.
The number one on your telephone keypad.
It is now my pleasure to hand, the conference over to Mr. Payless cash you may begin your conference.
Terrific. Thank you Nicole.
Good morning, and thank you all for participating on obstacle cable Corporation's fourth quarter and fiscal year 2020 conference call Bye.
By this time, everyone should have a copy.
The earnings press release issued earlier today.
You can also visit www dot O.C.C. fiber dotcom for coffee.
On the call with US today are Neil Wilkin, President and Chief Executive Officer growth Cc, and Tracy Smith, Senior Vice President and Chief Financial Officer.
Before we begin I'd like to remind everyone.
Youre going at this call may contain forward looking statements and 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 and the forward looking statement section of this mornings press release these.
These cautionary statements apply to the contents of the engine.
And that webcast on www dot OGC fiber dotcom as well as today's call.
With that I will turn the call over to Neil Wilkin Neil Please begin.
Thank you Aaron and good morning, everyone.
I will begin the call today with a few opening remarks price.
And we will.
Then review the fourth quarter and full year results for the three month and 12 month period ended October 31 2020.
It would and some additional detail.
After Tracy's from March 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.
We'll investors during the Q and a session. However.
However, we also offer other shareholders the opportunities submit questions and advance of our earnings call instructions regarding such submissions are included in our press release announcing the date and time of our call today.
Based on a significant headwinds in 2020, the ULCC team demonstrated strength and resiliency focusing on what we could control to drive cost reductions efficiency improvements and enhance 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.
Net position.
And have assisi position to grow and build on our strong market positioning.
As we as we anticipate business conditions normalizing in the year ahead.
We've all heard the onwards. This past year was extensively used an overused described the covert pandemic and its impact on economies and families.
Words.
Like unprecedented uncertain unchartered on mutual.
And on imaginable to name a few.
But despite the significant and persistent disruption and challenges caused by COVID-19.
The negative impact on and SEC financial results during fiscal year 2020 and more.
More than justifiable reasons.
As to use such words I did not hear those words used by the FCC team.
Rather the FCC team demonstrated strength, the dedication flexibility and creative problem solving and their words attitude and access.
We've maintained our regular work schedule and all three of our from manufacturing.
Moving facilities during fiscal year 2020.
Consistent with the directives by the US Department of Defense and the US Department of Homeland Security Cyber security and infrastructure Security Agency.
Throughout the pandemic, our first priority has been to protect as Cc team members, we implemented safe.
Safety programs and protocols and each of our facilities as well as travel and visitor restrictions to mitigate the spread of the virus consistent with us federal and state directives.
I am incredibly incredibly grateful to the FCC team.
And their dedication.
And and tireless efforts throughout this past year.
And with the teams per surveillance and hard work that enabled us to see to provide the uninterrupted supply of our mission critical products and solutions to our customers and end users, including our country's military and those on the front line against COVID-19.
Like healthcare facilities, and hospitals health centers and laboratories.
My sincere thank you to the FCC team and their families.
From a results perspective, we believe the COVID-19 pandemic impacted us Ccs revenues productions and operating.
Operations and finances and fiscal year 2020.
Net sales for fiscal year, 2020 were down 22.5 per cent compared to fiscal year 2019, as the COVID-19 pandemic negatively impacted most of our markets.
More some more than others.
Our specs.
Specialty markets will most significantly impacted with net sales declined 30% compared to the prior year.
Net sales and our enterprise markets decreased 11.4% in fiscal year 2020 compared to the prior year.
Additionally, larger products were most affected as customers and.
And end users delayed and major expenditures on.
As cc sales business development and marketing initiatives helped to mitigate the impact on other orders.
Our fiscal year 2020 was challenging.
We took proactive and aggressive actions to mitigate the impacts of the pandemic.
And physician FCC for future growth and value creation.
First we implement and manufacturing improvements.
We preserved the significant improvements to manufacturing throughput efficiency and flexibility specifically on our Roanoke facility achieved as a result of our production process and.
Operating improvement initiatives begun during fiscal year 2019.
We also continue to execute on new initiatives to further improve manufacturing throughput and efficiency.
As a result.
During each of the second third and fourth quarters of fiscal year 2020, we delivered gross profit margin.
Loans.
Between 25.5% and 30.3% the ladder achieved in the fourth quarter.
Second.
We took action to reduce cost and operate efficiently.
While we took steps to preserve jobs and protect employees. We also.
Also reduced some headcount and implement and other cost savings initiatives that contributed to the decrease in ESG and expenses by 17.9% or $4.2 million when compared to fiscal year 2019.
Third we successfully strengthened our financial position and increased our financial flexibility.
City by entering into a new revolving credit facility for the company's working capital needs and July 2020.
We also closed on a $5 million small business administration payroll protection program loan in April of 2020, which enabled us to maintain employee headcount levels and service critical infrastructure customers.
While avoiding the need to significantly curtail our operational readiness.
Finally, we moved ahead with new and existing strategic initiative designed to capture growth opportunities and and increase revenues and our target markets as the pandemic blameless.
We made significant progress with a number of sales business development and marketing initiatives, which we believe will contribute to improved revenue post and Danny.
Given our actions and each of these areas during fiscal year 2020, we are confident that RCC is well positioned for the future.
Looking.
Looking ahead optical cable corporation remains uniquely positioned and the fiber optic and copper cable and connectivity industry.
We have differentiated core strengths and capabilities that enable LCC to successfully compete against Marshall and March larger competitors often.
Different competitors.
And as you see different targeted markets.
We do this by offering top tier products and application solutions.
In addition, and.
As cc benefits from our operating leverage.
Many of the costs, we incurred and maintain and build our strengths and capabilities.
Plus other costs like our public company costs are fixed.
As a result, ULCC growth net sales when grosses FCC gross and net sales gross profitability gross profit and profitability tend to increase at a faster rate than the rate of the increase in net sales.
This is dick.
As fixed product production costs and SGN, a expenses remained relatively stable on a spread over higher net sales levels, creating operating leverage for a SEC.
Similarly, when revenues decline gross profit and profitability tend to decrease at a faster rate.
As we begin fiscal year 2021, we anticipate a return to normalcy on the horizon.
With the impact of the pandemic on the global economy, and our markets receiving.
And.
As it as it does hopefully later this year.
We believe we will see greater revenue opportunities.
With an expectation that our various target markets may improve at different rates.
But we're not waiting for this to happen rather we're taking the opportunity to take actions to strengthen improve and control we can control.
We will continue.
Aggressively execute.
Our strategic initiatives to the best.
To best position FCC to take advantage of recoveries and our targeted markets as they occur.
Initiatives to achieve topline sales growth continued to be our highest priority using hccs operating leverage to benefit.
And our bottom line.
And our production and proven initiatives are intended to build on the pump adjustments today in order to further enhance the throughput and efficiency of our manufacturing operations.
Moreover, our other cost control efforts continue as well.
Including and focus on SGN a expenses.
Our strategy is designed to enable us to operate as efficiently as possible and the current business environment, while continuing to provide exceptional service our customers have come to expect and positioning ULCC to deliver long term shareholder value.
I appreciate the opportunity to meet the evolving needs of our customers installers Specifiers and end users and are proud of providers Ccs top tier solutions products and application.
And technical expertise to those targeted audiences.
We believe our business.
This is resilient strong and well positioned in our markets.
As we begin the net this and in fiscal year and we are excited about capitalizing on the opportunities before us and on greater opportunities as markets improve.
And with that I'll turn the call over and Tracy Smith.
Who will review and additional detail on.
Our fourth quarter and fiscal year 2020 financial results. Thank you Neil.
Consolidated net sales for fiscal 2020 were $55.3 million and decrease of 22.5 per cent compared to net sales and $71.3 million for fiscal 2019.
And.
Consolidated net sales for the fourth quarter fiscal 2021, $13.9 million and decrease of 23.9% compared to net sales and $18.2 million for the same period last year.
Sequentially net sales and the fourth quarter fiscal 2020 increased 1.8%.
Compared to net sales and 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 our significantly reduced operations of many businesses, including FCC customers and suppliers.
And.
Additionally, contributing to the decrease in net sales during fiscal 2020 was the fact that we fulfilled and number of large orders from one customer and the wireless carrier market in fiscal 2019 that did not recur at the same levels and fiscal 2020.
Net sales to this customer decreased $6.1 million and fiscal 2020.
And 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 and fiscal 2020 compared to $18.3 million in fiscal 2019.
Gross profit margin our gross profit.
Profit as a percentage of net sales was 25.5% and fiscal 2020 compared to 25.7% and fiscal 2019.
Gross profit was $4.2 million and 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.
Thank you.
Gross profit margins tend to be higher when the company achieves higher net sales levels as certain fixed costs fixed manufacturing costs are spread over higher sales.
This operating leverage which is beneficial at higher sales levels was the primary factor putting downward pressure on gross profit margin during fiscal year two.
20, as fixed fixed costs were spread and were lower sales offsetting cost reductions and significant production throughput and efficiency improvements achieved principally on the company's run and production facility.
As DNA expenses decreased approximately $4.2 million, our 17.9 per.
Sent to $19.2 million during fiscal 2020 compared to $23.4 million last year.
As DNA expenses as a percentage of net sales were 34.8% and fiscal 2020 compared to 32.9% and fiscal 2019.
And DNA expense.
And the decreased approximately $1.2 million or 21.1% to $4.3 million during the fourth quarter of fiscal 2020 compared to $5.5 million for the same period last year and.
Operating expenses as a percentage of net sales were 31% and the fourth quarter of fiscal 2020 compared to 29.
On 0.9% and the fourth quarter of fiscal 2019.
Sequentially SGN, a decreased 5.4% during the fourth quarter of fiscal 2020 compared to the third quarter of fiscal 2020.
The decrease and as gene expenses during fiscal year 2020 compared to last.
Last year was primarily the result of decreases and employee related costs and.
Including employee incentives and commissions and net reductions and other SG and expenses such as shipping costs travel expenses and marketing expenses due to the impacts of kind of and 19.
These decreases were partially offset by an increase in back.
Net debt expense due to concerns about collectability of certain customer accounts during this unprecedented pandemics environments.
And as you see recorded a net loss of $6.1 million or 83 cents per basic and diluted share for fiscal 2020 compared to a net loss of $5.7 million force.
Our 77 cents per basic and diluted share for fiscal 2019.
And if you see recorded a net loss of $406000 or six cents per basic and diluted share for the fourth quarter of fiscal 2020 compared to a net loss of $657000 or nine cents per basic and diluted share for the fourth quarter of fiscal 2019.
Team.
As previously disclosed during fiscal year 2020, and at Ccs revolving credit note with Pinnacle Bank was terminated and we entered into a loan and security agreement with North Mill capital.
As part of the refinancing transaction FCC also entered into a revolving credit master promissory notes.
Net with North mill that provides up to a maximum aggregate principal amount of $18 million with availability based on a working capital borrowing base calculation.
During fiscal year 2020, FCC closed on a $5 million small business administration payroll protection program on may necessary.
And about a significant negative impact of the COVID-19 pandemic from the company's sales and operations.
As a result of the PPP loan FCC was able to maintain employee head count levels and its ability to service critical infrastructure from customers, while avoiding the need to significantly per tell us operational readiness.
Notably the.
The us military as a key customer day cc and net sales to the company's us military customers increased during fiscal year 2020.
All proceeds of the PPP line were used for committed expenses, primarily payroll expenses and consistent with current small business administration guidelines at this time the company.
We believe this PPP line ultimately will be fully forgiven.
As of October 31, 2020, we had outstanding borrowings of $5 million on our revolving credit and eight and $1.6 million and available credit.
We also had outstanding loan balances of $5.2 million under our real estate term loans and.
On $5 million on our PTP on it.
With that I will turn the call back over to Nick.
Thank you Tracy.
And now if you have any questions we are happy to answer them.
On the coal if you could please indicate the instructions for our participants to call and any questions I mean and I appreciate it.
Again, we are only taking a lot of questions from analysts and institutional investors.
As a reminder, if you'd like to ask and audio question. You May do so my question on Star and the number one on your telephone keypad again net of star one well pause for just a moment.
[noise].
[noise] [noise] again to ask and audio question on Star one.
We show no audio questions at this time on one hand, it back to Neil.
Thank you Nicole.
And.
And I know, we've had some questions submitted by individual investors and before the call today because.
Good through those with US we're happy to answer those questions.
Terrific.
The first on.
Why did your revenue to the wireless carrier market go down as much as it did in research.
And times and do you see any real improvement in the foreseeable future was the decline due to product obsolescence and were due to pricing pressures.
[noise] flow, mostly see sales into the wireless carrier market, but predominantly with one partner.
To boost EPS the largest.
Partner and that partner has been.
Impacted this last year by both coded and other market forces as they've been experiencing and that's impacted as you see.
We are working towards and have been for a while.
Making inroads and other.
And with other Pat.
Pass to this market.
And.
We believe that these actions will benefit as you see over the longer term.
Okay.
Great next question, because fiveg require fiber optic cables and connectors how is that we'll see see now participating in this.
Market and deserve cc position to grow importantly, with the expansion on Fiveg.
So yes, five he does require the types of fiber optic cables and connectors that are on our portfolio.
We are participating on this market.
We as I mentioned.
For on pork and 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.
Those efforts to expand our presence in the market and we're looking forward to that.
And which firms might be might you be competing with and as Fiveg market and do you have any advantages over your competitors.
Sure financing market.
Is.
As part of the as part of the wireless carrier market. It has a lot of similarities to the long haul telco market or the telecommunication.
Basins tell.
Telephone company market.
And as such we are competing against.
The the largest names and our industry.
In those markets one of our advantages as a smaller company as we have the ability to quickly turn new designs and to meet evolve.
Solving customer needs in the wireless carrier market and have done that in the past and expected and expect to do that in the future.
Great could you elaborate a bit on the steps being taken to accelerate business development and sales growth.
Or.
So when we saw the impact.
From what was going on in the economy and COVID-19 on the macroeconomic conditions and 2020.
We didn't just sit back and wait to see.
Wait for to see when the market was going to improve rather on what we did was took the opportunity to revisit our business processes and tools, particularly on the sales business development and marketing side and.
And we've made a number of changes that we believe that will generate new business.
Particularly as the IFRS.
Mexico and start to wane and our markets start to recover.
And again as I said before.
Markets have been impacted more or less and different ways.
During this time and.
And.
And and so we are addressing those markets accordingly because of that.
Yes.
Great next question you appear to have a very large products portfolio might you be giving thought to reducing your low volume low margin items to concentrate the company's efforts on lccs higher volume and more profitable offerings.
So.
Let's see see competes in a number of different markets, including some specialty markets.
Some of those tend to be more profitable.
But also susceptible to macroeconomic conditions or other or other changes and the into those industries.
But in May.
And these markets. We believe we are on one of the top we are one of the top key players.
And so while we do have a broad market offering.
We.
That enables us to two.
To be able to maintain the size and we arrived and also grow and those.
Markets that we have a competitive advantage and we do look at our product offering from time to time and we.
We also believe that if we.
Reduced our.
Scope of our product offering and try to narrow it to a more generic product offering than what we would be doing is.
And the net competing more on price and and.
We believe one of our competitive advantages to not just compete on price, but also on product performance and differentiating our products from what other competitors are providing.
Great.
As China has been a major competitor to RCC and has there been much pressure on pricing.
Well typically we do not see.
On a significant competition from Chinese manufacturers.
There.
There is always price is always consideration, particularly when.
Macroeconomic conditions are not as strong.
And we try and offer just compete on price, but focus on our differentiated product offerings.
We are cognizant of of pricing pressures and we do.
Make adjustment.
And from time to time as necessary to best position ourselves and 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 Rick.
Requires a more expensive product than a competitor might be offering.
Okay.
Have you been seen any increased desire for you a sourcing and your products area.
Generally.
The answer is yes.
And obviously, we are proud to be and American manufacturer.
And to be able to meetings on needs when they're required.
Those requests come from.
Various different customer types, and I won't go and a lot of details there but.
And generally the answer is yes.
Okay and.
For RCC do you anticipate a bite and president C will be better or worse than a Trump presidency.
Yes, and I Love This question Aaron.
Mostly see considers ourselves very apolitical.
And we've 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.
Yes.
And we.
We obviously are proud to be a critical supplier to the arms forces and other.
Government agencies, and we continue to look forward to supporting our customers during price.
President elect Bidens administration.
Okay and can you walk us through where we can see the impacts of the PPP on on a recent quarterly income statement and balance sheet if.
Fully forgive and how we treat the PPP forgiveness from an accounting standpoint.
Okay on Tracy handle that question sure.
Okay and and the.
The outstanding principal balance on that.
And your line is included in current and non current liabilities on SAP.
Separate line item on the balance sheet, and you'll be able to feed that clearly on our form 10-K, which is planned to be filed later today on the balance sheet and annual report.
Additionally, weve and accruing interest at 1% and inception, which is included on the interest expense line item on our income statement and on the accounts payable and accrued expenses line item on our balance sheet.
As far as on the accounting treatment when forgiven.
We expect.
Recognize revenue and that would show up on the income statement.
As a result off and the amount of debt on the balance sheet and be ready.
Of course as has been the case and far away PPP and and many changes that have been occurring we are going to continue.
Monitoring any changes to that accounting treatment that may be required on that.
Changes occur.
Great and and this one is likely also for Tracy how much borrowing to do you have at the end and the quarter and also today on your North mill.
I will now what was the availability at the end of the quarter you only on a 141000 and cash does your cash flow will reflect the ease of dry and additional funds against your now.
As I mentioned earlier and the balance on the revolver on October 31st was $5 million on and.
With.
Yes revolver on we borrow as needed and on cash received from sweat day way to pay down the revolver balance.
On to this enables us to have less filing on the line, but it also means less cash on the financial statements.
And it is it is fairly easy for us to drive additional funds from the night, we completed Bali.
Growing base certificate.
And and that's how that occurs.
Great and that was the final question.
Okay, well, thank you Aaron and thank you Tracy.
And so there's no further questions on.
We'd 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 and optical cable Corporation.
Hope everyone continues to be safe and.
And wish you all happy holidays to both you and your families.
Thank you.
This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.
[music].