Clearfield, Inc.

Good afternoon. Welcome to Clearfield's fiscal second quarter 2021 earnings conference call. My name is Paul, and I will be your operator for this afternoon. Joining us for today's presentation are the company's president and CEO, Sherry Beranek, and CFO, Dan Herzog. Following their commentary, we will open the call for questions. I would now like to remind everyone that this call will be recorded and made available for replay via a link in the investor relations section of the company website. This call is also being webcasted and accompanied by a PowerPoint presentation called the Field Report, which is also available in the investor relations section of the company's website. Please note that during this call, management will be making forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, field report, and in this conference call. The risk factors section in Clearfield's most recent Form 10-K filings with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provides descriptions of those risks. As a reminder, the slides in this presentation are controlled you, the listener. Please advance forward through the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield CEO, Sherry Beranek. Please proceed.

Sherry Beranek Good afternoon, and thank you everyone for joining us today. I hope you all are continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon. and to share Clearfield's results for the fiscal second quarter and first six months of 2021. During the second quarter, we saw demand for fiber fed broadband networks expand across the community broadband market. As you can see in slide four, this robust demand helped drive a 45% increase in net sales to a record $29.7 million. Our growth in the period was again led by double digit increases from our community broadband and MSO markets, which were up 68% and 60% respectfully. As our performance demonstrates, Clearfield is strongly executing on its brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements. Sales booking started strong in January and accelerated throughout the quarter end. resulting in a 115% increase in backlogs growing to $19.2 million on March 31, 2021 versus $9.3 million on March 31, 2020. We expect to ship the majority of our backlog during fiscal quarter three and have begun to receive longer scheduled orders as service providers establish longer-term deployment plans. Our strong top-line performance and business model leverage helped to produce solid gross profit and net income margins in fiscal quarter two. Gross margin dollars totaled a record $12.9 million, up 59% from quarter two last year. As a percentage of net sales, our 43.6% margin was up from 39.9% in quarter two of last year. Moving down to P&L, as expected, our expenses increased modestly year over year, resulting in $3.6 million in net income, or 27 cents per diluted share. This was a significant improvement from the $750,000, or 5 cents per diluted share, in earnings we generated in Q2 of last year. We anticipate expenses to increase slightly in future quarters, as we invest in additional resources within our community broadband programs and as business travel limitations start to decrease. Our robust financial performance in quarter two contributed to a record first half for Clearfield. At a high level, we generated $56.8 million in net sales through our first two quarters of fiscal 2021, which was up 43% from the same period of last year. Our favorable product mix in the period, coupled with our ongoing efficiency measures, helped generate $24.3 million in gross profit, an improvement of 53% compared to last year. We also delivered 42.8% gross profit margin for the period, which was compared to 39.9% last year. From a profitability perspective, we generated $6.8 million in net income or $0.50 per diluted share, which was a significant improvement compared to $1.2 million or $0.09 per diluted share in the first half of last year. Looking at our market segments by net sales on slide five, starting first with our core community broadband markets. In the second quarter of fiscal 2021, We generated net sales of $20.5 million to this market, which was up 68% from the same period last year. For the trailing 12 months ended March 31, 2021, community broadband markets net sales totaled $75.5 million, which was up 44% from the comparable period last year. Our MSO business comprised 13% of our net sales in fiscal quarter two. From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 60% year-over-year increase in net sales to $4.2 million in the second quarter of fiscal 2021 and a 48% year-over-year increase to $14.6 million for the trailing 12 months ended March 31, 2021. Net sales in our national carrier market was down 15% year-over-year to $12.1 million for the trailing 12 months ended March 31, 2021. As I've talked about previously, our position in the national carrier market is related to the continuing demand from fiber to the home and fiber to the business applications. As COVID constraints have limited the deployment of 5G solutions into the access part of the network, Net sales to our Tier 1 customers in the second quarter of fiscal 2021 decreased 42% year-over-year to $2.3 million. Although sales in our Tier 1 market have not yet experienced the same robust growth as our other markets, we continue to support our sales presence in the Tier 1 national carrier market for both fiber-to-the-home and business, as well as 5G initiatives. We shipped several new products into that market during Q2 and are working to gain a stronger foothold with them. As we have previously communicated, the global pandemic has stalled the introduction and training of our new technologies into the Tier 1 market. As 5G deployments into the access network increase, we are optimistic for increasing net sales among Tier 1 markets moving forward. Net sales to our international markets was up 105% year-over-year in the second quarter and remained flat year-over-year for the trailing 12 months, ended March 31, 2021. As the pandemic begins to get under control, fiber-fed broadband in Mexico and Canada is showing a resurgence in demand. Net sales in our legacy business was flat year-over-year in Q2 and down 31% year-over-year for the trailing 12 months. This legacy part of our business is highly dependent upon the two key customers in this segment. We believe the business to be fluctuating from normal levels due to the slowdown in the economy related to COVID. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the second quarter of fiscal 2021.

Thank you, Sherry, and good afternoon, everyone. It's great to be speaking with you today. Now looking at our second quarter financial results in more detail, As you can see on slide 7, our net sales in the second quarter of fiscal 2021 increased 45% to a record $29.7 million from $20.4 million in the same year-ago period. The increase in net sales was primarily due to higher sales in our community broadband, MSO, and international markets, partially offset by decreases in our national carrier markets. Turning to slide 8, Gross profit for the second quarter of fiscal 2021 increased 59% to $12.9 million or 43.6% of net sales from $8.2 million or 39.9% of net sales in the same year-ago quarter. The increase in gross profit dollars was due to higher sales volume. The increase in gross profit margin was due to a favorable product mix associated with the increased net sales in our community broadband markets and cost reduction efforts across our product lines, including increased production at our Mexico plants, as well as manufacturing efficiencies realized from higher sales volumes. As you can see on slide 9, our operating expenses for the second quarter fiscal 2021 were $8.5 million, which were up from $7.4 million in the same year ago quarter. As a percentage of net sales, Operating expenses for the second quarter of fiscal 2021 were 28.6%, down from 36.4% in the same year ago period. The increase in operating expenses on a dollar basis was primarily due to additional headcount and higher compensation costs related to performance compensation accruals and increased stock compensation expense, offset by lower travel and entertainment costs. Turning to our profitability measures, on slide 10, income from operations was $4.5 million in the second quarter of fiscal 2021, which compares to $720,000 in the same year ago quarter. Income tax expense increased to $935,000 in the second quarter of fiscal 2021, with an effective tax rate of 20.4%, up from $190,000 in the second quarter of 2020, Thank you for joining us. and customers since the COVID-19 pandemic took hold and how we are continuing to effectively navigate the current environment, both reflected on slide 11. I am encouraged to report that Clearfield continues to remain fully operational. The majority of our non-production employees are working remotely, effectively using collaboration tools and video conferencing to stay connected. Our production operations in both the U.S. and Mexico are operating close to normal while adhering to state and federal government social distancing guidelines. As a precautionary measure, we have multiple contingency plans in the event our ability to operate is diminished or eliminated at either location. As many of you know, we dual source most of our components to cover multiple points of failure and provide purposeful redundancies to reduce potential risks. While the COVID-19 pandemic has dramatically boosted broadband demand, it has also created supply chain challenges to fulfill that demand. Thankfully, the strong partnerships we have built with our suppliers globally have and will continue to be crucial. At the outset of COVID, we made the decision to maximize the availability of all product lines at all three of our plants by ensuring that each location can manufacture across the broad product portfolio. We are optimistic that we will be able to procure the necessary components for our growth ahead. necessary for its fiber management product line. That concludes my prepared remarks. I will now turn the call back over to Sherry. Sherry?