Optical Cable Corp (OCC) 2012 Q3 法說會逐字稿

Good morning, my name is Maria and I will be your conference operator today. At this time I would like to welcome everyone to the Optical Cable Corporation's third-quarter 2012 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. (Operator Instructions). Mr. Siegel, you may begin your conference.

Good morning and thank you all for participating on Optical Cable Corporation's third quarter of fiscal 2012 conference call. By this time everyone should have a copy of the earnings press release. If you don't have it, please visit OCCfiber.com for a copy.

On the call with us today is Neil Wilkin, Chairman, President and Chief Executive Officer of OCC. Before we begin I would like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties.

The actual future results of Optical Cable Corporation may differ materially due to a number of factors including but not limited to those factors referenced in the forward-looking statement section of this morning's press release. These cautionary statements apply to the contents of the Internet webcast on OCCfiber.com as well as today's call. Now I will turn the call over to Neil Wilkin. Neil, please begin.

Thank you, Andrew, and good morning, everyone. Joining me today on the call is Tracy Smith, our Senior Vice President and Chief Financial Officer. I will begin the call today with a few opening remarks; Tracy will then review the third-quarter results for the three-month and nine-month periods ended July 31, 2012 in more detail. After Tracy's remarks we will answer as many of your questions as we can.

As is our normal practice, we will take questions from analysts and institutional investors during the Q&A session. We offer 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 earnings call.

We are pleased to report that OCC achieved significant increases in net sales, gross profit and net income for both the third quarter and year to date periods compared to the same periods in fiscal 2011. OCC again demonstrated that our operating leverage allows us to deliver disproportional earnings growth rates relative to our net sales growth rates as fixed costs are spread over larger sales volumes.

Net sales and gross profit increased by double-digit percentages for both the quarter and year-to-date periods and net income attributable to OCC during the third quarter of fiscal 2012 was almost 10 times that of the same period in 2011 and during the year to date period was more than five times that for the first nine months of fiscal 2011. Net income attributable to OCC was $0.18 per share during the third quarter of fiscal 2012 and was $0.36 per share for the first nine months of fiscal 2012.

After the end of the third quarter of this year our sales order load was again high, particularly for our fiber-optic cable products as a result of the new business generated by two customers we referenced on last quarter's earnings call. At the end of August 2012 our sales order forward load was $8.9 million.

As a result at this time we believe it is likely we will again see a positive impact on net sales and earnings during the fourth quarter of fiscal year 2012, similar to what we experienced during the second and third quarters of fiscal 2012. And we are looking forward to a strong finish to our fiscal year.

I also want to highlight that during our third quarter we maintained a solid balance sheet and we continue to return capital to shareholders through the regular quarterly dividend as well as by completing the purchase and retirement of 200,000 shares of OCC stock approved for repurchase by the Board of Directors in November of 2011. OCC ended the third quarter with a net book value per share of $4.58.

Looking ahead we are focused on executing our growth strategy in order to continue delivering positive results and long-term value for our shareholders. I will now turn the call over to Tracy Smith who will review some specifics regarding our third-quarter and our fiscal year 2012 to date financial results. Tracy?

Thanks, Neil. Consolidated net sales for the third quarter of fiscal 2012 increased 17.2% to $22 million compared to net sales of $18.8 million for the same period last year. Net sales to customers in the United States increased 10.8% in the third quarter of fiscal 2012 compared to the same period last year and net sales to customers outside of the United States increased 39.1%.

Consolidated net sales for the first nine months of fiscal 2012 increased 14.4% to $61.4 million compared to net sales of $53.7 million for the same period last year. Net sales to customers in the United States increased 10.5% in the first nine months of fiscal 2012 compared to the same period last year and net sales to customers outside of the United States increased 26.5%.

Our increase in net sales during the third quarter and first nine months of fiscal 2012 was attributable to increased sales of our fiber optic cable products. In the third quarter and first nine months of fiscal 2012 we recognized net sales totaling in the aggregate approximately $5.1 million and $11 million respectively as a result of a number of large orders for two customers.

Gross profit increased 35% to $8.8 million in the third quarter of fiscal year 2012 compared to $6.5 million for the third quarter of fiscal year 2011. Gross profit margin or gross profit as a percentage of net sales increased to 39.9% in the third quarter of fiscal year 2012 compared to 34.7% for the third quarter of fiscal year 2011. Gross profit increased 26.1% to $23.8 million in the first nine months of fiscal 2012 compared to $18.9 million in the first nine months of fiscal 2011.

Gross profit margin increased to 38.8% in the first nine months of fiscal year 2012 from 35.2% in the first nine months of fiscal 2011. Our gross profit margin percentages are largely driven by product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix.

Additionally, our gross profit margins for our product lines tend to be higher when we achieve higher net sales levels as we did during the third quarter and first nine months of fiscal 2012 for our fiber-optic cable products as a percentage -- as certain fixed costs -- certain fixed manufacturing costs are spread over higher sales volume.

SG&A expenses as a percentage of net sales were 31.4% in the third quarter of fiscal year 2012 compared to 33.2% in the third quarter of fiscal year 2011. SG&A expenses increased 10.8% to $6.9 million during the third quarter of fiscal 2012 compared to $6.2 million for the same period last year. SG&A expenses as a percentage of net sales were 33% in the first nine months of fiscal 2012 compared to 34.1% in the first nine months of fiscal 2011.

SG&A expenses increased 10.9% to $20.3 million for the first nine months of fiscal 2012 from $18.3 million for the same period last year. The increase in SG&A expenses during the third quarter and first nine months of fiscal 2012 compared to the same periods last year was primarily due to increased employee related costs and shipping costs.

For the third quarter of fiscal 2012 we reported net income attributable to OCC of $1.2 million or $0.18 per basic and diluted share compared to $118,000 or $0.02 per basic and diluted share for the comparable period last year. Net income attributable to OCC for the first nine months of fiscal 2012 was $2.3 million or $0.36 per basic and diluted share compared to $430,000 or $0.07 per basic and diluted share for the first nine months of fiscal 2011.

As of July 31, 2012 we had outstanding borrowings of $1.3 million on our revolving credit facility and approximately $4.7 million in available credit. We also had outstanding loan balances of $8 million under our real estate loans as of July 31, 2012. And subsequent to July 31, we modified our real estate loans lowering the fixed interest rate on both from 5.85% to 4.25%. With that I will turn the call back over to Neil.

Thank you, Tracy. And now we are happy to answer as many of your questions as we can. Operator, if you could please indicate the instructions for participants to call in their questions I would appreciate it.

(Operator Instructions). Orin Hirschman, AIG.

Can you take us through a little bit some of the dynamics? I mean obviously there is unusually good demand for some of your products. Where in particular are you seeing it? Is it demand for the very high-quality fiber? And can you go through what you are seeing on both sides of the business right now a little bit more in detail?

Sure. This is Neil, obviously. We haven't talked in too much specifics about where we are seeing the biggest demand other than to say it is on the fiber-optic cable side. We are seeing some specialized product demands there that have caused us to see our sales increase. I think generally the industry right now we've seen a little bit of weakness, there have even been some announcements of other companies in our space cutting back on personnel.

We have three general product lines that we offer -- fiber-optic cable, enterprise connectivity and what we call our AIS or applied interconnect systems products. We have seen some decrease in military spending, but that has been offset by demand in our fiber-optic cable product specifically for the two customers that we referenced.

In terms of the military beginning to bounce back or beginning to show any signs of strength, are there any positive signs?

We haven't really seen any positive signs of military bouncing back specifically. And I think that generally while often communication products like we offer tend to be needed even when there are military cutbacks in order to provide the military branches with ready communications, we haven't really been counting on the military bouncing back. Instead OCC has been focused on moving our sales efforts towards other areas that we're already in.

And this isn't atypical. I mean we have seen over a number of periods times where we will have one area of our business which is down and another area of our business is up. Our products are sold to a fairly diversified end user base and as a result, while we are seeing decreases in military spending and that has affected some areas of our business, it hasn't affected our consolidated results.

Okay. And in terms of any of the trends towards higher speed on the ethernet side, is that driving any demand for higher quality cable like you make?

Well, there is a couple of different issues there. I mean we make higher quality cable from a rugged standpoint and then we offer higher quality cable that also accommodates the higher speeds that people are demanding. There has been more interest in higher speed fibers, but that at this point is not precisely what is driving additional revenue. But OCC is well positioned to take advantage of any trends in that area given our offerings in the fibers and the cable offerings that we have.

And just two questions on the expense side. Expenses are definitely favorable compared quarter over quarter and sequentially as well. Just any comment on the slight sequential decline, was there some unusual shows of anything in the prior quarter? And also the refinancings, approximately how much does that save on an annual basis on a pre-tax number and after-tax number?

I will let Tracy in a moment answer the question about the savings from the refinancing, and since our tax rate varies it may be more helpful just to have a pre-tax number estimate for savings and of course it would be pretty close, but an estimate.

SG&A expenses can vary a little bit based on the types of expenses we have in any individual quarter. During the first half of the year we have certain expenses of being a public company that sometimes make those quarters a little expense heavy. And there's other things that can come up.

I think we have been careful in trying to control our expenses; at the same time, we have seen some increases in employee related expenses because so much of our employees' compensation is incentive-based and/or for our sales personnel -- sales based. As we also see -- we also see fluctuations in our shipping costs when we see changes in sales and that is some of the differences that you are seeing come through SG&A.

Okay.

As far as the interest savings expected based on the modifications to the real estate loans, what we expect is that we will see about $125,000 annually savings on that modification pre-tax. And as Neil mentioned, it's a little bit harder to project based on fluctuations in our effective rate what that equates to on an after-tax basis, but pre-tax we expect it's going to be about $125,000 annually of savings.

Okay, thank you.

Richard Rudgley, Glenbrook Capital.

(Technical difficulty) you could give a bit more detail on the geography of the foreign sales and also if new customers are making up a large component of the increased sales. And also with your peers, you mentioned them cutting back. Is that something which is -- presents good opportunities for you? And just finally just if you could remind me on whether there is anything outstanding on the buyback? Thank you.

Sure. We will start with the geography of our sales, it varies by quarter to quarter and Tracy can give you some additional details about this -- specifically about this quarter if you want. But generally somewhere between 25% and 30%, sometimes higher of our sales are international sales. And those have been spread not necessarily evenly because it depends on the period.

Different areas of the world are doing better than others at different times. But there is a fairly large portion that relates to Europe and EMEA, to the America's other than the US and also to the Asia-Pacific countries. Obviously Europe and in particular the UK has already slowed down due to austerity measures and other reasons, and so we are finding those markets a little more difficult as you would expect.

But we are diversified in our product offering, we are diversified in our end users, and we are also diversified in our geographic coverage. And so generally, even though there are difficulties in our industry or in different areas of the world, we haven't seen that impact us significantly at least on a consolidated basis. There are areas that obviously are being impacted.

I think right now, based on the best intelligence that we have about what is going on in the industry, is things generally seem to be soft. I'm not in a position to predict how long that is going to continue, but -- and we have seen that in areas of our product offerings too, but on a consolidated basis have been able to overcome that. Tracy can comment on our stock buyback and I think I have covered your other questions.

Sure, Neil, the stock buyback has -- we have completed the current stock repurchase program that was in place during the quarter at 200,000 shares that were approved to be repurchased, those all have been repurchased during the quarter.

And are you planning a new buyback?

We really don't comment on those sorts of things ahead of time. But any time that we have initiated a buyback program we make a public announcement to that effect shortly after it's enacted.

Sure. Okay, thank you.

[Simon Barak].

Thank you.

If there are no further questions at this time, I would like to turn the floor back over to management for any closing remarks.

Thank you. Andrew, are there -- were there any questions submitted by individual shareholders?

No, Neil, there were no questions submitted in advance by individual shareholders this quarter.

Okay. Well, in conclusion then, I would like to thank everyone for listening in on our call today. We appreciate your thoughtful questions and, as always, we appreciate your time and interest in Optical Cable Corporation. Thank you.

This concludes today's Optical Cable Corporation's third-quarter 2012 earnings call. You may now disconnect.