Sono Tek Corp Q4 FY2022 Earnings Call

Thank you, Gary and thank you to everyone joining us today. Sono-Tek released their fourth quarter and fiscal 2022 year-end results pre-market today. If you don't have a copy of the release, please go to the company's website at sono-tek.com and click on the press release/news tab in the Investors section. The product, market and geography sales tables on the last page of the release will be part of today's discussion. With me on the call today are Chris Coccio, Sono-Tek's Chairman and CEO; Steve Harshbarger, President and COO; and Steve Bagley, Chief Financial Officer. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note the various remarks that may be made on this conference call about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's filings with the SEC. The company assumes no obligation to update the information contained in this conference call. I would now like to turn the call over to Chris Coccio, Chairman and CEO of Sono-Tek. Chris?

Thank you, Stephanie and good morning everyone. Thank you for joining us today for our fourth quarter and fiscal year 2022 year-end earnings conference call. Today we're going to discuss our results that were released earlier this morning for fiscal year 2022, which ended February 28, 2022. I will begin with some opening remarks. And then Steve Bagley, Chief Financial Officer will provide a financial review of the year. Steve Harshbarger, President and COO will then go through the business and operational results and the sales growth guidance. Following that, we will open the call for your questions. This is our second earnings call. The first was when we reported our midyear results last October, after we up listed to NASDAQ last August. Briefly for those who are new to Sono-Tek, we developed a revolutionary method of applying precision, thin film coating several decades ago. The proprietary technology involves the use of patented high-frequency ultrasonic nozzles incorporated into motion control systems that are able to achieve uniform microns and coatings for our customers. We focus on important high-tech markets that require the ability such as semiconductor manufacturing, handheld electronic devices, medical devices, fuel and solar cells, and industrial processes such as glass lines, textiles, and even food coatings. Over the years, we've expanded our footprint from the U.S. to Europe, and Asia and Latin America. Our solutions offer dramatic savings in raw material, water, and energy usage and are environmentally friendly among many other advantages. The strategic shift that we made several years ago to offer more complex complete solutions versus component sales has broadened our addressable market and has resulted in significant growth in our average unit selling prices. Our larger machines now sell for over $300,000 and system prices more and more often reach over $1 million. Most recently, we focused on opening new markets for our technology. This includes three main areas of strong global growth: microelectronics and semiconductors, clean energy, which includes fuel cells and carbon capture, and medical devices. All three of these areas are experiencing strong demand from long-term societal needs. And they all benefit from our unique thin film coating technology and systems. We've had growing success penetrating each of these markets. This includes the application of thin films onto advanced diagnostic test kits, which are used in genomics and blood identification, and are now being deployed for rapid COVID test diagnosis. As we continue to advance our capabilities, more and more of the approximately $8 billion global coating market opens to our Advanced Solutions. One example is that we are in the process of expanding our coating capabilities to include roll-to-roll product handling, which is used in approximately 15% of the global coating market. We're also in the process of changing our SIC Code to the technology instrumentation designation. This is where Sono-Tek really belongs. And it's helpful for customers, the investment community, and other stakeholders to better understand our business and outlook. We entered fiscal 2022 on a high note. The fourth quarter trends are strong, and we finished the year with over $17 million in sales, a new record for the company. When our fiscal year began last March 1, the world was still impacted by the pandemic. As Sono-Tek's flexibility quickly changed focus geographically and by market segment, combined with our expanding system and project capabilities allowed us to capture new and larger orders during the year. Steve and Steve will go through the details in a few moments. The fourth quarter trends continued into the new fiscal year, and we again expect double-digit sales growth for the first quarter and the year, which will be another record. We ended the year with a cash balance of $10.7 million, over $2 billion higher than at the end of the last fiscal year. We also paid our mortgage debt off during the year and currently have no debt on our balance sheet. We're very excited about the new applications that we're developing for our technology and our opportunities for growth in our focus markets of semiconductors, medical and clean energy. And we have the right team with the right capabilities and drive to achieve our goals. With that, I'll turn the call over to Steve Bagley, our Chief Financial Officer for some details of our financial results. Steve?

Thank you, Chris and good morning everyone. And now looking at our fiscal 2022 results, net sales in fiscal year 2022 increased 16% to $17.1 million, compared with $14.8 million in fiscal year 2021. During the year approximately 68% of sales originated outside of the U.S. and Canada compared with 65% in the prior year period. Our gross profit increased 23% to $8.6 million for fiscal year 2022 compared with $7 million for fiscal year 2021. The gross profit margin increased by 310 basis points, reaching 50.3% compared to 47.2% for fiscal year 2021. The improvements is due to increased sales, a favorable sales mix, and lower than expected warranty and installation costs. Operating income increased 41% to $1.9 million, compared with $1.3 million for the prior fiscal year primarily due to growth in revenue and gross profit. The operating margin for fiscal 2022 increased to 11% compared with 9% in the prior fiscal year. Net income was $2.5 million, compared to $1.1 million in fiscal 2021, an increase of $1.4 million or 127%. The increase reflects an increase in operating income combined with the PPP loan forgiveness, offset by an increase in income taxes. On a per share basis, earnings were $0.16, compared with $0.07 for the prior year period. Diluted weighted average shares outstanding total 15.6 million compared to about 15.7 million for the prior year period. Cash and cash equivalents and short-term investments at February 28, 2022 were $10.7 million and increases $2.1 million from our prior year period. And there continues to be no debt on our balance sheet. CapEx for fiscal 2022 was $386,000. Spending is focused on ongoing upgrades of the company's manufacturing facilities. And now I'll turn the call over to Steve Harshbarger, President and COO for an operational review of the year. Steve?

Thanks, Steve and good morning everyone. Yes, thanks for joining us today. As you can see in the short tables on the last page of our earnings press release, we break down our sales in three ways: by markets, products, and geography. And that's how I'm going to be talking to you about them today. Fiscal 2022 net sales were $17.1 million, up 16% or $2.3 million, and that's compared to fiscal 2021 net sales. By market, the alternative energy market grew 72% to $3.7 million in sales. And this was driven by accelerating investments from governments and private industries focused on the clean energy sector. Sono-Tek machinery is being used to create catalyst-coated membranes used in fuel cells, carbon capture and clean hydrogen generation applications in this particular market. Our medical market grew to $4.3 million, which is an increase of 29%. And this is primarily driven by strong sales to China for our customized medical device solutions, as well as a significant North America-based customer in the dental device industry. The electronics market grew by 19% to $7.1 million, primarily due to a significant sale of a 6-axis robot in the semiconductor market. The industrial market saw a 53% dip due to a large shipment in the textile industry that occurred in our fiscal year 2020/2021 as it didn't repeat in the current period. Looking ahead, we continue to see growth opportunities in many of our existing markets. This includes the clean energy sector for fuel cells and carbon capture applications, which are really only in the first phase of adoption and integration around the world. The recent U.S. infrastructure bill directs $9.5 billion to hydrogen and electrolysis programs. $1 billion of that will be directly invested into electrolysis R&D, which is the heart of the process. Coating these membranes using electrolysis is one of Sono-Tek's key areas of expertise and one of our targeted markets for future growth. South Korea, China, Japan and several European countries are also making similar financial commitments with billions of dollars being invested into this developing market. By product line, fiscal 2022 sales were driven by a 77% increase in multi-axis coating systems to $9.9 million. This was due to a significant shipment of a 6-axis robot machine that was sold to the semiconductor industry for over $1.7 million, as well as the strong sales of machines used in the clean energy sector and medical diagnostic markets. Both of which are highly sophisticated multi-axis platforms. OEM sales were $2.4 million, an increase of 51% year-over-year, which were the result of several new OEM relationships gaining momentum as they incorporated Sono-Tek OEM packages into their new product designs. Integrated coating systems declined 72% mainly due to the sale of a large textile machine in fiscal year 2021 that I mentioned earlier, which didn't repeat in fiscal year 2022. By geography, approximately 68% of our sales originated outside the U.S. and Canada in FY '22 compared with 65% in the prior fiscal year. As you can see, the U.S. and Canada, APAC and EMEA all grew from 6% to 27% in FY '22, with only Latin America showing a 10% decline in sales. The increased international sales resulted from many of our overseas customers bringing manufacturing operations back online with fewer COVID restrictions. South Korea especially contributed a significant increase in APAC sales due to continued growth in the clean energy sector for our machines. Backlog at February 28, 2022 was $5.3 million compared to the backlog at February 28, 2021 of $3.8 million, which is an increase of 38%. The growth here was strongly attributed to our product line expansion and full system solution sales strategy, which includes customizing and enhanced optimization, and delivers increased value to our customers, with a higher average selling price for Sono-Tek, of course. Looking ahead at our 2023 fiscal year ending February 28, 2023, Sono-Tek expects to again report our highest annual sales in corporate history. In the first quarter of FY 2023 ending May 31, we are on track to generate double-digit year-over-year growth. Lastly, before we open the call for questions, I just want to let you know that we'll be holding our next earnings call in October for the first half fiscal year 2023 financial results ending in August. We'll now open the call for questions and I'll send it back to you operator.

Our first question comes from Bill Nicklin with Circle N Advisors. Please go ahead.

Good morning. Congratulations on a good report. And it appears you're getting significant traction in these nascent markets that you've been working on for quite some time and that are now beginning to accelerate. So it sounds good?

Thanks, Bill Nicklin.

My first question is, in recent presentations, you've included illustrations depicting your understanding of the size of the general coating equipment market and the ultrasonic coating equipment market, where you already have a 50% market share? What changes do you see in the ultrasonic coating equipment market relevant to its size and your share, and changes that are taking place in your customers' operations?

Yes, good question, thanks, Bill. Over the past several years, a large chunk of the high-tech manufacturers that require coatings on their products have qualified ultrasonic spray as a viable alternative to either reduce costs or increase quality. So now we see a rapid shift to these same customers to implement production-level ultrasonic coating machines into their operations. In particular, many of the growth markets that Sono-Tek participates in have matured out of R&D and are moving into what I would describe as full-blown production. And our product line has shifted from predominantly R&D-focused machines to these larger, more complex production solutions as well. So that's really, I think, the primary shift that we're seeing there.

Thanks. Then if we look at the general coating equipment market, which is much larger, as we can see from past presentations you've made. How are your customers' needs changing in ways that draw you in or open the door for you into this much larger general coating equipment market?

Yes, another good question. Considering it is so much larger, Sono-Tek already dominates the existing ultrasonic coating equipment market. So our focus is really always on capturing a larger chunk of that general coating equipment market. Our customer needs and requirements are the primary drivers where we focus our growth and initiatives in that market. We always start with the customer, understand the problem and then try to work our way back to the solution. A good example of this would be the development of our roll-to-roll program that we've talked quite a bit about. The predominant coating technology used in roll-to-roll applications today is typically gravure or slot-die or pressure nozzles. These are all well-established technologies but aren’t strong at providing very thin coatings, minimizing waste, and having the flexibility to change the coating morphologies onto the products. So with our full system solutions, we're able to participate in this area with our roll-to-roll technology. And we will provide equipment that can create thinner, more uniform coatings, while using less liquid chemistry and giving the capability to provide the ideal coating morphology for the varying applications that are out there. So it's really a significant change in strategy.

Thanks. I have another question, if I may.

Sure.

As I read your materials, we see discussions of fuel cells and electrolyzers where they field two applications, and they look very closely related. Could you give me some granularity on these particular markets, how they're similar, how they're different? How the revenue prospects may be different and kind of the sizes and dynamics of each of those particular areas within this overall market?

Yes, sure. It is kind of a technically complex area. The technical requirements of the coating equipment for all those areas you just mentioned are very similar. Because in almost all those cases, we're applying this critical catalyst coating onto the membranes. However, the process expertise is very different for each of these applications and requires our engineers really to customize almost every machine for the specific product need. This is honestly where Sono-Tek separates our capabilities from other coating equipment providers. Out of hundreds of potential ultrasonic coating equipment configurations, our application engineers can dive in and understand how to dial in the optimal coating configuration. They understand the correct chemistries and solvents for the applications, including the pre- and post-treatments that are necessary for the product to be successfully coated. This expertise can take years, in some cases even decades to develop. We regard these as independent markets, as they are all at various stages in the development process. Fuel cells are fairly mature with our customers discussing production requirements, whereas carbon capture and many other electrolyzer applications are more focused on R&D and pilot lines, with ongoing participation from our application engineers to help develop a successful process. So they are certainly all unique that way.

One more if I may. If you look at this transition from R&D to pilot runs to full production, how much of those areas are currently represented in your incoming orders or in your sales funnel as you look out over the next couple of years?

Over recent years, we've shifted from predominantly R&D-focused equipment to more larger complex production-scale equipment. Eight years ago, about 25% of our machines were directed at high-volume production needs. Today, we're closer to 60% of our machines being implemented into production environments. We certainly anticipate this trend to continue as we broaden our capabilities with these larger production machines, and with a higher average selling price. Of course, our R&D machines will never go away. They're really important to us to establish ultrasonic spray as a standard coating method for next-generation applications. But larger production machines are definitely going to significantly drive our future growth.

Alright, so all taken across those particular areas, R&D, pilot and full production. Do you think you'll experience similar margins? I mean, your gross margins are really good right now. Is there anything that would I imagine the larger units are more complex? So you probably build a little more in there. But yet the R&D units have had pretty high margins too. So what type of changes, if any, do you expect over the three different areas as machines get larger and into the full production mode?

Sure, sure. Yes, surprisingly, our margins have slightly improved as we shifted to these larger production machines. What we're finding is that if we focus on these really high-tech growth areas, these markets are really willing to pay a premium if we can deliver a full system solution that really solves their needs, importantly, within an accelerated timeframe. We’re really seeing that quality and time to market is significant for many of these customers. That's where we're focused, and that time to market will help drive our margins as well, because they're willing to pay for getting things rapidly.

One last question, if I may. You mentioned the billions of dollars that are being spent or at least offered up by governments, particularly in the alternative energy area. And if we look back over the years, each year has been affected by a couple of large orders there, a couple of large customers at least? So how do you think the profile of your customers has changed? And are you going to be able to get a more diversified group of customers so you're not dependent on one or two or one big order each year?

Yes, well in the clean energy sector, we're seeing lots of new company names. It's a relatively focused industry where most participants already know Sono-Tek. But the rate of new companies entering this market is happening really quickly. In the semiconductor and medical markets, these are typically large multinational companies that are participating with Sono-Tek. We have partnered with them and established relationships with them over many years, and they highly trust our ability to deliver quality coating solutions. These are often repeat customers that are purchasing several machines over time, or looking at larger projects that we are dealing with now.

Alright, thanks very much, sounds good. I appreciate it.

Hey, good chatting Bill, take care.

Thank you, Bill.

The next question is from Nate Nahirny with ThinkEquity. Please go ahead.

Hey, congratulations on the earnings guys impressive numbers. Wanted to touch a little bit on the clean energy portion or segment, you guys obviously had extremely good growth. That's a space that's continuing to grow and continuing to have a large addressable market. Where do you see Sono-Tek kind of fitting in? And do you anticipate significant growth to continue in that space?

Yes, I think it's got to be continued growth there. There's going to be very aggressive dynamics happening around the world today, looking at the Ukraine situation and the rising prices of gas. Clean energy has got to be part of the solution here.

Nate, just to expand on that answer, we've seen a recent report that a European organization has fully acknowledged their vulnerabilities and energy security issues. They are all in now, if they weren't before, to developing multiple sources of alternative energy, not just clean energy, but to have alternatives to the Russian pipelines. So they're going to be spending significant sums of money in every area that we're focused on, whether it's hydrogen, fuel cells or even solar cells, which are going to continue to be important. Sono-Tek has strengths in all of those fields. So I feel to a great extent that we're in a sort of perfect spot to accelerate our business even further. I mean, it has accelerated if you look at our past history. But it's going to be driven by things that people just have to do. There may be a recession on the horizon, or we may be in one already. However, there are certain things like food, medicine, and energy that you can't stop doing just because your stock market has gone down. So we're pretty excited about what will lead this company forward.

Got it? No absolutely very exciting, guys, congratulations again.

Thank you.

Thanks Nate.

The next question is from an unidentified analyst. Please go ahead.

Yes, thanks for taking my question, guys. Congratulations on the great results this year. Quick question about CapEx going forward. I appreciate the sales guidance, but just want to see what you're expecting for CapEx over the next few years. And then if you can talk a little bit about just the longevity of the manufacturing equipment?

Yes, sure. We are predicting a slight rise in CapEx in this coming year. We've found a lot of ways to increase our efficiencies with our manufacturing operations through CapEx investments and automation. We are implementing several of those throughout the factory. It helps, especially when we're in a labor shortage, as it's tough to get labor easily and automating a lot of our processes really helps us exceed that. There have been some significant areas of technological advancements that we've implemented into our processes to take our technology to the next level. I would describe it as things like aerodynamic shaping of our spray systems and the software that is utilized to maximize the capabilities of our systems. So, we will see a similar slight growth in CapEx in the coming year. But we are fully operational here, and we're prepared for growth; a lot of that is to accommodate our growth as well. We're putting capital infrastructure in place to facilitate that.

As Steve has mentioned, manufacturing technology isn't often talked about in meetings like this, but it's very critical to Sono-Tek. How we differentiate ourselves from our competitors is through a really detailed and intimate understanding of how ultrasonic spray systems work at a granular level, which comes from the type of analysis and measurement tools we've been purchasing and implementing in our facilities. I don't think there's anybody else in the world who is even close to what we can do today. And we're continuing down that path. For the reasons Steve mentioned, labor is a challenge for everyone, but the precision and the intellectual property that comes with what we're doing is really key. Small changes in the profile of any one of our pieces of equipment can have significant effects in how it gets applied in the field. So we're the master of that, and I think it's going to continue.

Right, appreciate it. That's all I've got, guys. Thank you again.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Coccio for any closing remarks.

Thank you. And thank you for joining us today everyone. Sono-Tek has a lot of momentum and a very strong outlook. And we're excited about the opportunities for growth in our focus markets of semiconductor medical and clean energy. Please contact us directly if you have any additional questions. We'll hold a Mid-Year Conference Call in November when we report results for our first half of fiscal year 2023 ending in August 2022. Have a great day, be well and goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.