Earnings Call Transcript - SOTK Q2 2022

Operator, Operator

Good day, and welcome to the Sono-Tek Corporation Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince, PCG Advisory. Please go ahead.

Stephanie Prince, PCG Advisory

Thank you, Carrie, and thank you to everyone joining us today. Sono-Tek released their second quarter fiscal results pre-market this morning. 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?

Christopher Coccio, Chairman and CEO

Thank you, Stephanie. Good morning, everyone. Thank you for joining us today for our first-ever earnings conference call. For now, we're planning to hold two earnings calls for the fiscal year; at midyear like today and for our year-end results. Sono-Tek's fiscal year end is February 28. Today, we're going to discuss our results that were released earlier this morning for the second quarter of fiscal 2022 ended August 31, 2021. I will begin with some opening remarks and then Steve Bagley, Chief Financial Officer, will provide a financial review of the second quarter. 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. So those of you who are new to Sono-Tek, Sono-Tek developed their revolutionary method of applying precision thin film coatings 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 micron thin coatings for customers. We focused on important high-tech markets that require this capability such as semiconductor manufacturing, electronic devices, medical devices, fuel and solar cells, and industrial process tools such as glass line coatings and food coatings. Over the years, we've expanded our footprint from the U.S. to Europe, Asia, and Latin America. Our solutions offer dramatic savings in raw material, water, and energy usage, and we are environmentally friendly among 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 selling prices. Our larger machines now often sell for over $300,000 and system prices sometimes reach over 1 million. We anticipate demand for Sono-Tek’s technology will keep growing as electronic devices continue to become more miniaturized and the usage of implantable medical devices continues to grow around the world. The second quarter was strong and built on our recent trends as sales increased 17% year-over-year and gross profit was up 28%. We ended the period with a very strong balance sheet with nearly 10 million in cash and zero debt. We expect to finish the year with double-digit sales growth and income growth in our history, and there is a lot of upside and opportunity for growth in our focus markets of semiconductor, medical, and clean energy. Our team's hard work and accomplishments were recognized during the quarter when we were approved to uplist our common stock to the NASDAQ Capital Markets in August. The increased exposure from being listed on a national exchange has provided our shareholders much higher trading volume and visibility with the institutional investment community. We're excited to ring the bell at NASDAQ to commemorate this important milestone. I’ll now turn the call over to Steve Bagley, our CFO, for some details of our financial results. Steve?

Stephen Bagley, Chief Financial Officer

Thank you, Chris, and good morning, everyone. Now looking at our second quarter fiscal results. For the second quarter of fiscal 2022, net sales were 4.1 million, up 17% or $590,000 from the second quarter of last year. During the quarter, approximately 62% of sales originated outside of the U.S. and Canada compared with 38% in the prior year period. Gross profit increased 28% year-over-year to approximately $2.1 million. The gross profit margin was 51% compared with 46.6% for the prior year period, an improvement of 440 basis points. The improvement is due to increased sales combined with a favorable product mix. Operating income increased 123% to $449,000. Growth in revenue and gross profit were key factors in the improvement of operating income, which was partially offset by increased operating expenses. Operating margin for the quarter increased to 11% compared with 5.8% in the prior year period. Net income increased 93% to $344,000. On a per share basis, earnings were $0.02 compared with $0.01 in the prior year. Diluted weighted average shares outstanding slightly increased to 15,602,000 compared to 15,533,000 for the prior year quarter. Cash and cash equivalents and short-term investments at August 31, 2021 were 9.7 million, an increase of 1.1 million when compared to our fiscal year end February 28, 2021. There was no debt on the balance sheet at quarter end. Second quarter CapEx was 147,000 for ongoing upgrades of the company's manufacturing facilities. And for the full fiscal year, we project CapEx will total approximately $300,000 to $350,000. I'll now turn the call over to Steve Harshbarger, President and COO, for a second quarter operational review. Steve?

Steve Harshbarger, President and COO

Thanks, Steve, and good morning, everybody. I appreciate you all taking the time to listen to our call today. If you look at our Q2 earnings release that was put out this morning, you'll see in the short tables on the last page that we break down our sales in three ways; by markets, products, geography, and that's how I'm going to talk about them this morning. Fiscal second quarter net sales were 4,070,000, which is up 17% or nearly 600,000, and that's in comparison to the second quarter of last year. By product line, the second quarter sales increase was primarily driven by a significant shipment of multi-axis coating systems. The systems shipped with this order are now being used to coat electronic diagnostic devices for rapid COVID test kits. Our OEM sales were up 613,000 or 264%, and this was due to strong sales from our OEM semiconductor partners and as well as our OEM PCB fluxing partners. Looking at the market segments, sales to the electronics market increased by 79% in Q2. This was primarily driven by strong sales to China for our OEM systems used in the semiconductor market, as well as those systems that I just mentioned for coating the electronic diagnostic devices for rapid COVID test kits. The alternative energy market was also strong for us. We continue to see growing investments in the clean energy sector from both the government as well as private industry driving demand for our machines used for coating membranes and fuel cells, as well as carbon capture applications. By geography, approximately 62% of our sales originated outside of the U.S. and Canada compared with 38% in last year’s second quarter. These strong overseas sales were primarily driven from APAC, and that was led by China, which reflects the transition to several countries as well as companies emerging from COVID-19 lockdowns and bringing the manufacturing operations really back online. Shipments to China during the second quarter included strong sales for our stent coating machines, the delivery of a newly developed specialty medical device coding system, and another follow-on strong quarter for our OEM semiconductor customers. Looking at APAC outside of China, sales included a new machine that shipped to Singapore for EMI coating, electromagnetic emission coatings, which is an area we've spoken about several times as part of our focus growth initiatives. As well as we had a repeat order for our latest balloon catheter coating machine that was shipped to Japan. Sales to the U.S. and Canada did dip year-over-year, and this is primarily due to the shipment of a large float glass coating line in last year's Q2 which we didn't repeat in Q2 of this year. This isn’t unusual because sales of large industrial float glass coating machines typically vary from period to period. There was also a large order from the advanced energy market in last year's Q2 that didn't repeat in the current period. Throughout the COVID pandemic, Sono-Tek's really been adapting and refocusing our sales efforts to those countries that are most operational during these COVID-19 peaks and dips. This strategy has been really helpful to us in softening the impact of the pandemic on our operations, and we expect the sales strategy to be part of Sono-Tek's go-to-market strategy for the foreseeable future here. Backlog reached a company high record of 6,332,000 at the end of our second quarter. This is an increase of 45% from the end of the first quarter, an increase of 64% compared to the end of fiscal 2021 six months ago. We believe this growth is really directly related to our expanding product line and the increasing activity of our application development laboratories. Our network of labs located at Sono-Tek distributor sites around the globe and our home base here in New York, of course, are staffed with highly experienced application engineers that work together with our customers to develop solutions for their next generation coated products. These labs are an important advantage for Sono-Tek, and they really separate us from others. In closing, Sono-Tek has a lot of momentum and a strong outlook. And we're excited about our opportunities for growth in our focus markets of semiconductor, medical, and clean energy. Looking ahead, the sales growth guidance for the back half of our fiscal year is for double-digit increases over the comparable periods of last year for both the third as well as the fourth quarters. And for the fiscal year which will be ending now February 28, 2022, Sono-Tek is expecting double-digit year-over-year growth, which will be our highest annual sales in corporate history. So this concludes the formal part of our presentation. And we now like to open up the call for questions, and I'll send it back over to the operator.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Dick Ryan of Colliers. Please go ahead.

Richard Ryan, Analyst

Thank you for taking the questions and for starting to host earnings calls. That's important for the shareholder base. Steve, could you provide details on the orders for the quarter and the composition of the backlog? I remember that last quarter there was a large system worth 1.5 million included. Did that get delivered? Also, are there any sizable orders in the 6.3 million backlog?

Steve Harshbarger, President and COO

Sure. Good morning, Dick. The system, which is a 6-axis robot system that's being sold into the semiconductor machine, is still in our backlog right now. Right now, we anticipate that unit to be going out in our Q4 of this year is when that's planned to be shipping out, so another four or five months from now. The backlog, other than that, a good chunk of it is going to be shipping this fiscal year. We do anticipate that's probably 1 million to 1.5 million that's in that backlog that will be heading out in next fiscal year though also, which is typical because some of these larger platform machines now that we offer, which are high value and high dollars, they have a longer time to build them and ship them. So that would be as to be expected for us. Does that answer your question there, Dick?

Richard Ryan, Analyst

Yes. I was wondering if there were any issues with the backlog, such as any slips or cancellations, and how do the orders look for Q2?

Steve Harshbarger, President and COO

The orders were solid. Obviously, you've got it reflected in our backlog is just increasing so much. This is the highest backlog we think we've ever had, and I know we've ever had in company history. It's pretty exciting for us to see this acceleration, and so many of our growth initiatives really starting to come through for us and to show promise. So most of these large machines, even though the orders were taken in Q2, they did not ship into Q2. They're going to be going in Q3, Q4, or Q1. Again, we don't actually report on the orders received, but it is of course always reflected in our backlog. You can see that reflects it right there as far as the number of orders that came in for us obviously was quite high.

Richard Ryan, Analyst

Okay. How about you give us sales guidance for the back half of the year? Any comment you'd care to share on margins that you're anticipating for Q3 or Q4, either on the gross margin side or operating side?

Stephen Bagley, Chief Financial Officer

This past quarter, our margins were slightly higher than usual, typically in the mid to high 40s, around 45% to 49%. This quarter exceeded that due to a significant amount of OEM systems. Our nozzles, which we sell, have excellent margins, even though they are lower dollar systems, resulting in a positive impact on our margins this quarter. Looking ahead, we expect to return to our normal operating margin range in the high 40s over the long term. However, in the short term, we continue to see strong demand from OEM customers, especially from Asia, driven by support for the semiconductor industry amid the ongoing chip shortage affecting everyone. Consequently, our Asian OEM customers are purchasing many of our smaller OEM kits, which have good profit margins, and this trend is likely to persist for at least another quarter. Beyond that timeframe, it’s uncertain how things will develop, but we expect continued demand for some period.

Richard Ryan, Analyst

Okay, great. One last one; the alternative energy, you've had some let's say onesie-twosie business kind of going into fuel cells, and then you've talked about CO2 capture. Can you kind of tie that in with your new efforts and partnerships for the role to roll capability that's looking out over the next year or so, and just try to tie those together for me?

Steve Harshbarger, President and COO

Sure. The area where Sono-Tek is really focused and where our markets that our product serve is for coating membranes, they call it the PEM membrane and fuel cells or the membranes on CO2 carbon capture applications, and this is an application that on either marketplace, they're very, very similar. Almost all the people that are in companies that are manufacturing carbon capture devices have come out of the fuel cell industry, and it's because the technology is very, very similar. And so for us to transition from an area that we really knew well, we’re excellent at coating fuel cell membranes was very simple for us to go over to carbon capture membranes. And our customer bases, they knew us already as well because many of them came again from fuel cells. So what we're seeing now is some of these customers, as they start to increase their volumes, they are changing over from doing low to mid volume manufacturing over to higher volume manufacturing. And what's happened with that is they start to have an increased demand to go to roll to roll coating technology for these membranes versus individual pieces of them. And we've really been following it basically in the market bring us there. If you were to ask the same question a couple of years ago, we'd say, well, no one's doing roll to roll because no one's making any volume of these. Well, now they're starting to really plan to do roll to roll and starting to do higher volumes. So we engaged an outside partner, which comes from this industry and has a great deal of experience with roll to roll technology for the creation of these membranes. And the combination of this partner that's really has this awesome experience in roll to roll with our coding experience we believe is going to be a real win for us. So now this partner is helping us develop a new coding machine that will involve roll to roll technology for membranes, it will be applicable both for fuel cell as well as carbon capture. And we also are hoping that that will allow us to expand in other areas outside of these membranes once we get familiar with roll to roll technology. So there's some additional follow-on markets that we hope to be able to serve as a result of this program that we have going on right now today.

Richard Ryan, Analyst

Okay, great. Thank you, and congratulations.

Steve Harshbarger, President and COO

Thanks, Dick. I appreciate it.

Operator, Operator

Next question comes from Bill Nicklin of Circle N. Please go ahead.

William Nicklin, Analyst

Good morning.

Steve Harshbarger, President and COO

Good morning, Bill.

William Nicklin, Analyst

Could you help me out with kind of a capacity question? I know you have a complex of buildings which you own on a fairly extensive piece of land. Given those facilities and your current mix or your projected mix of business, how much revenue do you think you can get out of the existing facilities if you build out into the buildings that still have some vacant space in them?

Steve Harshbarger, President and COO

Sure. Well, our latest expansion, which was now completed last year, should allow us to easily go over $20 million in sales within our existing buildings likely up to 23 million, 24 million possibly. But we have the ability to also expand into some of the buildings that we own and are presently renting in our complex. And that would allow us to reach somewhere in the area of that $40 million area. And that is our plan. As we grow, we're only signing short-term leases with our tenants. And as we grow, we'll take over one next building and the next building at a time. We actually have right now three buildings that we are not presently occupying and we're renting. And we're just taking those over one at a time, and that's been what we've been doing. Even in the last couple of years, we've been taking more space and more space every year.

William Nicklin, Analyst

Thanks. Another capacity question, how do you get your new employees that they tend to be engineers when you get them? How do you get them up to speed on what is really a very sophisticated technology that you use in your products?

Steve Harshbarger, President and COO

Yes, it's a good question, because I'll tell you new employee recruits are hard to get in the present work environment. We tried lots of methods for recruitment, such as job fairs, the web, conventional help wanted ads. None of these really work great though, I got to tell you. The best methods that we've really seen are word of mouth from fellow employees and our really strong internship program, which we've developed over the years. We try to recruit the brightest engineers in their college classes really early on and then get them to join us when they're still students. And once they join, then they get excited about what Sono-Tek’s doing here. And we hope to hold on to them for a lot of years following. And our technology is, just as you mentioned, it's so unique that it really takes one, two, three years before someone is really fully effective to contribute in a very significant way. So employee retention is really important to us. I think our headcount right now is around 75 people today in that area. And I think we have five or six job open positions that are right now to support our planned growth at this point.

William Nicklin, Analyst

Okay. That's it for me. I appreciate it. Nice job. Looks like you've been hiring the right people because they're turning out the numbers, and that's what counts for us. Thank you.

Steve Harshbarger, President and COO

Thanks, Bill. I appreciate it. Good talking to you.

Operator, Operator

With further questions, this concludes the question-and-answer session. I'd now like to turn the conference back over to Chris Coccio for any closing remarks.

Christopher Coccio, Chairman and CEO

Okay. Thank you and thank you all for joining us today. We've got a really exciting future. Our business is strong and accelerating and the opportunities that we've been looking at and talking about have great potential for us. Please contact us directly if you have any further questions. We'll hold the year-end conference call when we report results for our fiscal year 2022 ending February 2022. Have a great day and be well. Bye now.

Operator, Operator

The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.