Optical Cable Corporation

Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Optical Cable Corporation Fourth Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. It is now my pleasure to turn the conference over to Mr. Paylash. You may begin.

Thank you. Good morning and thank you all for participating on Optical Cable Corporation's fourth quarter and fiscal year 2021 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. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC, and Tracy Smith, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that invoke 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 in the forward-looking statement section of this morning's press release. These cautionary statements apply to the contents of the Internet webcast on www.occfiber.com as well as today's call. With that, I'll turn the call over to Neal Wilson. Neil, please begin.

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 period and 12-month period ended October 31, 2021, in 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. In 2021, our team successfully executed ongoing initiatives to strengthen OCC during the pandemic and for the long term, positioning us to capture current and future growth opportunities, realize improved operating efficiencies, and control and reduce costs. The COVID-19 pandemic continued to significantly impact the global economy during much of 2021, and it impacted OCC as well. We began the fiscal year with demand for our products impacted by the pandemic. While demand began to grow during our second quarter, new macroeconomic pandemic-related challenges arose. In particular, supply chain disruption and tight labor markets impacted our operations and our results. The OCC team met these emerging challenges with creative problem solving and a focus on serving our customers while protecting and strengthening our operational effectiveness and efficiency. I'm incredibly grateful to the OCC team and their dedication and tireless efforts this past year. It is their resilience, perseverance, and hard work that has enabled OCC to navigate these turbulent times and to well position OCC for fiscal year 2022. My sincere and continued thank you to every member of the OCC team and their families. Our results this year and in the fourth quarter reflect these efforts. Net sales for fiscal year 2021 increased 7% to $59.1 million. Our net sales growth accelerated mid-second quarter of fiscal year 2021. During OCC's second, third, and fourth quarters of fiscal year 2021, our net sales increased 5.9%, 14.6%, and 14.4% respectfully in each case compared to the same period in fiscal year 2020. Our sales growth was driven by our ongoing sales, business development, and marketing initiatives creating opportunities, as well as the easing of pandemic pressures on demand for our products beginning in the second quarter of fiscal 2021. Our sales order backlog forward load more than doubled by the end of fiscal 2021 compared to the beginning of the year as our sales orders and opportunities outpaced our material availability and labor capacity. Direct and indirect impacts of the COVID-19 pandemic created these production capacity challenges, particularly beginning in the third fiscal quarter, which we believe prevented us from capturing even bigger increases in sales. These challenges, which affected many other companies as well as OCC, included supply chain disruption that resulted in longer lead times and increased costs for certain raw materials. They also included a tight labor market for additional personnel needed to increase production volumes. Finally, we experienced increases in other production costs. Despite these challenges, we remain encouraged by the continued demand for our products and the effectiveness of our growth strategies. We believe our top line results will continue to improve as the impact of the pandemic continue to recede. We also realized operating efficiencies this past year. We achieved a gross profit increase of 15.5% to $16.3 million for fiscal year 2021 compared to fiscal year 2020 and a 20% increase during the fourth quarter. Gross profit margin or gross profit as a percentage of net sales was 27.5% during fiscal year 2021 compared to 25.5% for fiscal year 2020. Gross profit margin was 30.6%, 26.2%, and 31.8% during the second, third, and fourth quarters of fiscal year 2021, respectfully. In fiscal year 2021, our gross profit improved as we realized benefits from prior and ongoing manufacturing initiatives to improve manufacturing throughput, efficiency, and flexibility, and from our improved sales performance and operating leverage as fixed production costs are spread over higher production volumes. Notably, OCC's gross profit increased at a faster rate than our increase in net sales during fiscal year 2021, positively impacted by our operating leverage even as we experienced material availability challenges and cost increases, both of which impacted operating efficiency during the second half of fiscal year 2021. Again this year, we also controlled and reduced costs. Throughout 2021, we continue to focus on operating as efficiently as possible. Selling, general, and administrative expenses decreased 5.2%, or $1 million to $18.2 million during fiscal year 2021. Our decrease in SG&A expenses this year follows a significant decrease of 17.9% or $4.2 million to $19.2 million in fiscal year 2020 compared to $23.4 million in fiscal year 2019. SG&A expenses as a percentage of net sales were 30.8% during fiscal year 2021, down from 34.8% during fiscal year 2020. OCC also benefited from a Small Business Administration Paywall Protection Program loan received in April of 2020 and forgiven in full in July 2021, and from employee retention tax credits during calendar 2021. During critical periods of the COVID-19 pandemic in fiscal years 2020 and 2021, the PPP loan and tax credits enabled OCC to preserve employee jobs and maintain our operational readiness, including our ability to service critical infrastructure customers such as the U.S. military and healthcare providers. Looking ahead at the bigger picture, Optical Cable Corporation remains uniquely positioned in the fiber optic and copper cabling connectivity industry. We have differentiated core strengths and capabilities that enable OCC to offer top-tier products and application solutions and to successfully compete against much larger competitors. OCC's core strengths and capabilities include our wide range of fiber optic and copper cabling and connectivity products and solutions, that enable OCC to deliver products and solutions that meet our customers' unique needs and that are well positioned for applications in our targeted markets. The range of OCC's product offerings is extensive, with OCC often competing with different competitors in OCC's different targeted markets. We have also built enviable market positions, brand recognition, as well as the loyalty of and our relationships with customers, decision makers, and end users across a broad range of targeted markets, including the enterprise, industrial, broadcast, mining, oil and gas, alternative energy, military, and other harsh environment specialty markets, as well as the wireless carrier market. We have a broad and diverse geographic footprint, with OCC selling into approximately 50 countries this year. OCC has extensive industry experience and expertise. Our engineering, sales, and business development teams are well respected for their product and application experience and the expertise that enables OCC to create its portfolio of innovative, high performance products and associated intellectual property. Finally, we have impressive manufacturing knowledge and experience in our manufacturing, quality, and engineering teams and significant production capacity at our facilities. Many of the costs OCC incurs to maintain and build upon our strengths and capabilities, along with our public company costs, are fixed. As a result, as OCC grows net sales, gross profitability and profitability tend to increase at a faster rate than the rate of increase of net sales. This creates operating leverage for OCC as fixed production costs and fixed SG&A expenses remain relatively stable and are spread over higher net sales levels. We are confident leveraging OCC's core strengths and capabilities enables us to deliver long-term value for shareholders. As we begin fiscal year 2022, we are optimistic and excited by the opportunities before us. Customer demand in OCC's markets has significantly improved, and we are beginning to see other impacts of the COVID-19 pandemic recede, with some improvement in the availability of certain raw materials in our supply chains and some improvements in recruiting additional members to our manufacturing team. OCC is well positioned to capitalize on existing and new revenue opportunities as impacts of the pandemic on supply chains, labor availability, and global economy recede. We are hopeful that these trends will continue, and we will continue to monitor potential and developing impacts of COVID-19, including new emerging variants on OCC's business and global economy. We appreciate the opportunity to meet the evolving needs of our customers, installers, specifiers, and end users, and are proud to provide OCC's top-tier solutions, products and application, and technical expertise. OCC remains committed to leveraging our core strengths and capabilities and executing our strategies and initiatives to create long-term value for shareholders. With that, I'll turn the call over to Tracy, who will review in additional detail our fourth quarter of fiscal year 2021 financial results.