Optical Cable Corp (OCC) 2006 Q2 法說會逐字稿

Welcome to the Optical Cable second-quarter earnings conference call. At this time all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, June 14, 2006. At this time I would like to the presentation over to Marilynn Meek with the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good morning and thank you all for participating on Optical Cable Corporation's fiscal 2006 second-quarter conference call. By this time everyone should have obtained a copy of the earnings release. However, if you have not, please call my office at the Financial Relations Board at 212-827-3746, and we will fax or email a copy to you immediately.

On the call with us today is Neil Wilkin, Chairman of the Board, President, and Chief Executive Officer of Optical Cable Corporation, as well as other members of senior management. Before we begin I would like to remind everyone this call may contain forward-looking statements that involve risks and uncertainty. The actual future results of Optical Cable Corporation may differ materially due to a number of factors including, but not limited to, those factors set forth in detail in the forward-looking statements section of yesterday's press release. These cautionary statements apply to the content of the Internet webcast on www.earnings.com as well as today's call. I would like to now turn the call over to Neil Wilkin. Neil, please begin.

Thank you, Marilynn. Good morning, everyone. Joining me here today at Optical Cable Corporation's offices are Tracy Smith, our Chief Financial Officer, and Luke Huybrechts, our Senior Vice President of Operations.

We will begin with a few introductory remarks. We will then briefly review the financial results for the second quarter of fiscal year 2006 in additional detail. After some closing remarks, we will answer as many of your questions as we can.

During the second quarter, the first half of our 2006 fiscal year, net sales and gross profit margins decreased when compared to the same periods last year. These were partially offset by decreases in SG&A expenses. As a result, we have posted a net loss during the second quarter and the first half of fiscal 2006.

These financial results are disappointing, particularly after four straight years of annual net income growth. However the fact that we have experienced two down quarters this year does not alter the soundness of our basic long-term strategy.

We believe two major factors contributed to the decreases in net sales and gross profit margins during the second quarter. First, a decrease in sales in certain of our specialty markets, which typically have relatively higher gross profit margins; and second, operational inefficiencies that we believe were the result of the short-term effects of the implementation of new business process and system changes that we began to implement during the first quarter of fiscal 2006.

Despite lower sales in certain of our specialty markets, during the second quarter and the first half of 2006, we experienced an increase in net sales in our commercial market with relatively lower gross profit margins compared to the same periods last year. Net sales outside of the United States have also been strong so far this year.

During the second quarter we saw our net sales sequentially increase 13.9% when compared to the first quarter of the year. Further, we believe our market share has increased slightly during the first calendar quarter of 2006.

The new business processes and system changes that we are implementing, while creating what we believe to be short-term negative impacts on operational efficiency, are designed to ultimately provide better production scalability and better customer service. We continue to take the actions which we believe are necessary to support future growth, creating capabilities and an organization that will support substantially higher sales and earnings over the long term.

As you know, Optical Cable Corporation, like a number of other companies, does not provide specific earnings guidance. Fiscal 2006 demonstrates why it is difficult provide such guidance. Sales can vary from quarter-to-quarter due to fluctuations in market segment demand and project timing, among other factors. Product mix sold can significantly affect gross margins as well.

What we know is that Optical Cable Corporation continues to be positioned well relative to its competitors in the enterprise fiber-optic cable market, and that we continue to take the steps we believe will make our business stronger and more scalable over the moderate to long term.

The issues that we have been dealing with so far this year will not be resolved overnight, but we believe Optical Cable will emerge from this period stronger than ever. We have taken and will continue to take steps we believe will increase sales; and we have taken and will continue to take steps we believe will increase gross profit margins.

SG&A expenses have decreased despite an expected $285,000 severance charge during the second quarter, and we have appropriately reduced employee incentives based on the results to date.

Now let's reviews some specifics regarding our financial results. For our second quarter of fiscal 2006, we reported a net loss of $309,000 or $0.05 per basic and diluted share, compared to net income of $364,000 or $0.06 per basic and diluted share for the same period last year.

On a year-to-date basis, we reported a net loss of $529,000 or $0.09 per basic and diluted share for the first half of fiscal 2006, compared to net income of $586,000 or $0.10 per basic and diluted share for the same period last year.

The change was primarily due to the decrease in net sales and gross profit margin in the second quarter and the first half of fiscal-year 2006, partially offset by the decrease in SG&A fences in the second quarter and the first half of 2006, compared to the same periods in 2005.

Net sales decreased 3.2% to $11.2 million for the second quarter of fiscal 2006, compared to $11.6 million for the same period last year. However net sales sequentially increase $1.4 million or 13.9% during the second quarter when compared to the first quarter of fiscal 2006. Net sales for the first six months of fiscal 2006 decreased 7.2% to $21.1 million from $22.7 million for the same period in fiscal 2005.

A number of factors contributed to the decrease in net sales in the second quarter as well as the first half of fiscal 2006. While we experienced an increase in net sales in what we call our commercial market compared to the same periods last year, this increase was more than offset by decreases in net sales for certain of our specialty markets.

Further, net sales to customers outside the United States showed substantial strength during the second quarter of fiscal 2006 compared to the same period last year, while net sales to customers in the United States decreased due to lower sales in those certain specialty markets.

Despite the decrease in overall net sales, we believe our market share, based on fiber volume of multimode fiber-optic cable produced in North America, slightly increased during the first calendar quarter of 2006. We believe these product sales patterns are a result of a number of factors, including the timing of projects and other factors affecting product demand in certain specialty markets, and relatively consistent growth in our commercial market. Additionally, we have taken steps we believe appropriate to improve our position in all of our targeted market segments.

Also during the second quarter of fiscal 2006 we continued the implementation of business process and system changes in connection with our new ERP system and certain other initiatives. Those changes to some extent adversely impacted our production efficiency, as we continued to transition to new systems and processes. As expected, we continued to experience what we believe to be a temporary increase in manufacturing lead times during the second quarter, which likely contributed to lower net sales during the second quarter.

We have identified and corrected a number of the issues impacting our manufacturing lead times and manufacturing efficiencies by the end of the second quarter. However of course we cannot be certain of the impact on net sales during the second half of the year.

We continue to work towards improving operational efficiency and optimizing our systems through a number of initiatives. We believe our process and systems changes ultimately will improve the scalability of our systems and therefore our ability to better handle increased production volume, improve our plant efficiency, and improve our customer service.

During fiscal-year 2005, we did not experience the same seasonal patterns in net sales as we experienced in fiscal years 2004 and 2003 and, as previously expected, during fiscal year 2005. Specifically, we typically expect net sales to be relatively lower in the first half of each year and relatively higher in the second half of each fiscal year.

As we saw during fiscal year 2005, the effect of the seasonality patterns can be altered by the timing of larger projects. We continue to evaluate whether typical seasonality patterns are a factor impacting our net sales during fiscal 2006.

Gross profit margin or gross profit as a percentage of net sales decreased to 30.3% for the second quarter of 2006 from 40.7% for the same period last year. By comparison, gross profit margin was 33.4% in the first quarter of 2006. Gross profit margin decreased to 31.7% for the first six months of fiscal 2006 compared to 41.0% for the same period in fiscal 2005.

We believe the decrease in gross profit margin during the second quarter and the first half of 2006 resulted in part from the sale of a mix of products with lower margins. Our gross profit margin percentages are heavily dependent on product mix on a quarterly basis and may deviate from expectations based on both anticipated and unanticipated changes in product mix.

Additionally and as previously mentioned, during the second quarter and the first half of fiscal year 2006 we experienced what we believe to be temporary short-term effects of the implementation of process and system changes that are designed to ultimately provide better production scalability and better customer service.

We continue to evaluate to what extent the gross profit margin results during the second quarter and first half of fiscal 2006 are indicative of expected results for the remainder of the year.

SG&A expenses decreased 5.9% to $3.9 million in the second quarter of 2006 from $4.1 million for the same period last year. SG&A expenses as a percentage of net sales were 34.6% in the second quarter of 2006 compared to 35.6% in the second quarter of 2005.

On a year-to-date basis, SG&A expenses decreased 9.8% to $7.5 million in the first half of 2006 from $8.4 million for the same period last year. SG&A fences as a percentage of net sales were 35.7% for the six months ended April 30, 2006, compared to 36.8% for the same period in 2005.

The decrease in SG&A expenses during the second quarter of fiscal 2006 compared to the same period last year was primarily due to decreased employee compensation costs and decreased professional fees, despite an expected $285,000 severance charge. The decrease in SG&A expenses during the first half of 2006 compared to the same period last year was also due to decreased employee compensation costs, decreased professional fees, and other factors.

Compensation costs have decreased when comparing the second quarter and the first half of fiscal 2006 to the comparable periods in fiscal 2005 largely as a result of decreases in commissions, as net sales have decreased, and decreases in employee incentives, due to the fact that our financial results were less favorable than planned. The decreases in compensation costs were partially offset by an increase in severance expenses totaling approximately $285,000 before tax effects associated with certain changes implemented during the second quarter.

Decreases in legal and professional fees were largely due to the timing of when certain costs were incurred. We experienced reduced costs associated with quality certification fees in the first half of 2006 when compared to the same period last year, primarily due to non-recurring fees incurred in fiscal 2005 related to our efforts throughout the year and the ultimate achievement of certain qualifications and certifications.

We continue to monitor all of our expenses including SG&A in order to keep costs down while at the same time accomplishing our goal to build the Company for future growth.

As of the end of the second quarter we had an outstanding bank debt of approximately $427,000 on our bank line of credit and a total of $7.8 million available. In March, prior to the expiration of our original credit facility, we reached an agreement with our bank to amend and restate the terms of our original credit facility. The amended and restated agreement expires in April 2008; however we are engaged in active discussions with both our bank and other financial institutions to replace our credit facility with a new facility containing terms we believe to be more appropriate for our current financing needs.

In closing, Optical Cable is continuing to be on a path towards targeting market segments where our products are particularly well suited and deploying the resources, both infrastructure and personnel, we believe necessary to ensure Optical Cable consistently delivers outstanding products and value to our customers.

Despite a disappointing second quarter, we believe the fundamentals of Optical Cable's business remains sound. The Company's management team will continue to focus on taking steps and considering options to improve financial performance over both the short and long term. We have substantial work ahead, but we are quite optimistic about our prospects, our opportunities, and our ability to create significant shareholder value.

The Company is well positioned in the market. We are the second largest supplier of multi-mode fiber-optic cable in North America and the premier manufacturer of land tactical fiber-optic cable for the U.S. military. We believe our product line is broader than our competitors', as OCC is willing to design and manufacture specialty products our competitors are unable or unwilling to supply.

We continue to make capital investments in improved systems and processes designed ultimately to provide better production scalability and better customer service. We are very positive about our ability to grow our business and shareholder value over the longer-term.

Now we are happy to answer as many of your questions as we can. Marilynn, if you could please indicate or have the operator indicate the instructions for participants to call in their questions, I would appreciate it.

Thank you, Neil. As a reminder, we are taking questions only from analysts and fund investors. Also in the interests of time, we ask each person wishing to ask a question to ask only two questions and then go back into the queue. If there is time following, we will take additional questions. Operator, can you give the dialing instructions please?

(OPERATOR INSTRUCTIONS) [Adam Wink] with [Polynice Asset Management].

It's [Kevin Wang]. The first question would be I think I'd like some more detail as to what has been changed in the selling and marketing area. Because maybe I'm just looking at this from my own unique perspective, but last year you appear to be doing okay selling and marketing your products; this year you are not. But this year you are implementing changes, which I guess makes sense.

But it almost looks like timing of this is whatever changes you have implemented, in the short term anyway, have caused the sales of your products to be less effective. So maybe you can give us some more details as to what is going on there, how you were configured, how you are now configured, and so forth.

I am happy to do that. Actually the changes we made were made after the first quarter, in which we had the fairly substantial down period in sales. We did see our sales recover in the second quarter, as you know.

The changes were a couple of things. As we previously announced, Charlie Carson retired and is no longer with Optical Cable Corporation. We have done a couple of other things. We have made some changes in our international sales team; and as a result during the first quarter we saw mainly increases in international sales resultant to a couple of large orders, one specifically that I'm thinking about.

In the second quarter we saw that continued high level of international sales, despite the fact that there were not any similar types of large orders that occurred in the second quarter. So the changes that we have implemented I think had the desired effect in the second quarter.

What has not yet happened is -- and quite frankly in certain of our specialty market segments that were down in the first quarter, we saw relative increases in the second quarter.

Some of the other changes that we made were that we reorganized under one individual certain of our marketing and sales functions on the specialty cable side; and that has allowed us to focus more on those markets. We have had some bumps in those specialty markets, which includes really the harsh environment area and also includes military sales. But we believe that we've taken the right steps there, that over the longer term we're going to see those sales increase.

How many total sales people do you have at this point versus, let's say, two quarters ago? What has been the turnover in the sales force since, let's say, two quarters ago?

There has not been significant turnover. I don't have the precise number of sales people currently, but we are about at the same number, maybe up a couple or maybe down a couple from what we were a couple of quarters ago.

For example we made a change in our European sales responsibility, our European sales manager. When that change was made we put a new person in place right away. We made a change in the Asian sales representative that we had in place there; and we have a new person who is coming online right now to replace that person that was moved out. We have had a couple of people who have left not at our request. But we have a number of changes that we have made that have been at the request of the Company and we view as positive changes.

Okay. When you say not significant, is not significant to you, let's say, 10% or less of the sales force? Or is it 25% or less of the sales force?

I'm saying 2 or 3. When you are saying the number of folks that have changed, it has been about four, five people out of a total of approximately 40.

Okay. Thanks for that. Then the second question is on the margin -- gross margin changes, which you say is from business mix. Just in my experience, these are pretty significant gross margin changes in general, and especially attributable to mix.

So are there certain products that you're just discounting significantly? That you have more inventory than you'd like of them? Or you want to maintain your positioning with the customer? Could you give us some more detail there as to -- you know, in a year gross margins have gone from 40 to 30.

I'm happy to give you some additional detail. I think that really what is impacting gross profit margins are two things. One is product mix, and the second is some of the inefficiencies that manifest themselves in operations as we implemented new systems and processes into the manufacturing operations. We believe that a number of those issues on the manufacturing operation, the efficiency issue, have been resolved as of the end of the second quarter.

Now, not all of them have been, but we have made significant advancements in identifying the problems that we had after the end of the second quarter, and making corrections during the -- excuse me; at the end of the first quarter, and making corrections during and through the end of the second quarter that hopefully we will see the benefit of in the second half of the year.

Specifically with respect to product mix, sales, we sell a whole host of products, probably the broadest range of anyone in the enterprise fiber-optic cable space in the market. Some of those products, because they are targeted to special uses with less competition and where we are particularly well positioned, our margins tend to be higher and more normalized levels.

On the commercial side there is more of a chance that you have other competitors in there. Some of our competitors quite frankly are very focused on price competition and are more so than probably is appropriate. But that is one thing that we deal with on the commercial side.

With respect to inventory levels and pricing, we have not seen a lot of discounting. Obviously we always try to make sure that we get every sale that we can. But if you look at last -- first quarter versus second quarter or the first half of this year versus last year, we have not seen a lot of downward price pressure on a per fiber meter basis.

So I do not think that it is generally a price issue so much as it is a sales mix issue, where there's certain products in certain markets, where our products are required and specified, where margins tend to be higher than in commercial markets, where there seems to be more cost competition and there is less differentiation among products.

Okay, that's helpful. Thanks.

It is hard for us to completely separate the effects of those two factors, the product mix and the production efficiency, given the state of our management information systems. But that is one of the reasons why we decided to start an ERP implementation, to provide better information and better decisionmaking with respect to those exact things.

The fact that we have experienced difficulty in the first half of this year relative to that implementation does not make that the wrong thing to do. In fact if anything it highlights how important it is to have those information systems in place, so that we can make better decisions.

A brief follow-up on that if I could. Because of the mix changes that have happened and because of changes you're making in information systems and manufacturing processes, are you over-inventoried on certain products at this point? Because the inventories do look like they're maybe a little bit higher than you would like.

They are, but when the 10-Q is filed, Kevin, you should take a look at that and compare first quarter to second quarter, as well as second quarter to year-end. What you'll find is that the main part of the fluctuation that you're seeing in the press release relates to raw materials and work-in-process, and actually much more heavily weighted on the raw materials. So a lot of that has to do with timing.

With respect to finished goods, we are only slightly up in dollars compared to Q1 and are relatively steady compared to Q4. We have an inventory process for finished goods where we specifically inventory certain products that we want to have available to our customers as they call in. Then we have a whole host of other products that are essentially made to order. So we monitor inventory carefully.

We are currently undergoing some discussions as to whether or not there may be some opportunity to make some adjustments to inventory. But right now, while there maybe a slight decrease in finished goods inventory, going forward if we decide to do that on a planned basis, I am comfortable that inventory is about at the right level; might go down slightly; but will not need to go up relative to the levels we saw at the end of Q2 in the finished goods area.

Okay, thanks for your answer.

(OPERATOR INSTRUCTIONS) At this time we appear to have no additional questions in the queue. I will turn the conference over to you for any further remarks.

Thank you. I appreciate everyone joining us on the call today. I appreciate your interest in Optical Cable Corporation, as well as your patience with us, recognizing that OCC is not focused on short-term maximization of net income but on positioning the Company over the longer term in a way that is going to create value for the shareholders -- what we believe to be more value for the shareholders than if we took a short-term approach of maximizing net income in the short term. Thank you for your time and for your support.

Thank you, management. Ladies and gentlemen, at this time we will conclude today's conference call. If you would like to listen to the replay of the presentation, please dial 1-800-405-2236 or 303-590-3000 with access code of 11063518. (OPERATOR INSTRUCTIONS) We thank you for your participation on today's program. At this time we will conclude. You may now disconnect. Please have a pleasant day.