Earnings Call Transcript - SOTK Q4 2023

Operator, Operator

Good morning, and welcome to the Sono-Tek Fiscal Year End 2023 Earnings Conference Call. All participants will be in a listen-only mode for the duration of the call. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Stephanie Prince with PCG Advisory. Please go ahead.

Stephanie Prince, PCG Advisory

Thank you, Gerald, and thank you to everyone joining us today. Sono-Tek released their fourth quarter and year-end fiscal 2023 results earlier 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 Dr. 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 that 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 & CEO

Good morning and thank you, Stephanie, and thank you to everyone for joining us. Today we're going to discuss our fourth quarter and year-end fiscal 2023 results that we released this morning before the market opened. I will begin with some opening remarks and then Steve Bagley, our Chief Financial Officer, will provide a financial review. Steve Harshbarger, President and COO, will then go through the business and operational results. Following his comments, we'll be happy to open the call for your questions. As a reminder, Sono-Tek currently holds two earning calls per fiscal year. This is our fiscal year-end call, which ended on February 28, 2023. Our next earnings call for the first half of fiscal year 2024 will be in October of 2023. Now briefly for those who are new to us, Sono-Tek developed a 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 uniform micron-thin coatings for our customers. Our solutions offer dramatic savings in raw material, water, and energy usage, and are environmentally friendly among other advantages. The principal advantage is the ability to apply precision thin films, which is very important in today's world. 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 commonly sell for over $300,000, and systems prices can reach $1 million, which can meaningfully impact quarterly revenue. Most recently, we have remained focused on opening new markets for our technology. This includes three main areas with very strong global growth: microelectronics and semiconductors, clean energy including fuel cells and carbon capture, and medical devices. All three of these sectors are experiencing strong demand from long-term societal needs, and they all benefit from Sono-Tek's unique thin film coating technology and systems. Now as our capabilities continue to advance, more and more of the over $8 billion global coating market opens to our advanced solutions. Our investments in these areas have begun to pay off, with the receipt of our first $1 million order in August. The order valued at $1.1 million was also the first from the clean energy sector and one of the largest in Sono-Tek's corporate history at that time, marking an important milestone. Since then, we received another $1.1 million order from the same customer as well as two other initial orders that are expected to total $7 million each when the respective production lines are complete. Revenue for the fiscal year declined by 12% to $15.1 million, and like many high-tech equipment manufacturers, we encountered a number of supply chain issues that impacted our growth. To avoid this issue again, we've aggressively taken several actions. First, we resolved a large portion of the supply chain issues by significantly increasing inventory levels and creating early reorder points, even with simple items that you would never expect to have problems with availability. Some of this is reflected in the $870,000 year-over-year increase in inventories that we just reported. After implementing this inventory change, we next isolated the remaining key supply chain issues which we're addressing by increasing our in-house capabilities to make similar products for our own needs. We actually started this process prior to COVID-19, and today we internally produce about 25% of the components that we need in that area. By year-end, we hope to produce about 40% with the long-term goal to manufacture about 60% of the components we need in-house. We hope that these actions will mitigate any future supply chain issues that may arise. The delay in receiving critical components we need can be seen in our backlog, which increased 60% during the year-end and totaled $8.5 million at fiscal year-end. This is where you can see that several of our largest orders have been held up. We expect this bubble of shipments to work its way through to delivery in fiscal year 2024, beginning in our second fiscal quarter that starts on June 1. However, due to supply chain delays that lingered into the first quarter of fiscal 2024, which is ending next week on May 31, Q1 net sales are expected to be slightly below net sales of $3.7 million in Q4 fiscal 2023. It's our first time attending and we look forward to meeting some of you there.

Stephen Bagley, CFO

Thank you, Chris and good morning everyone. For fiscal 2023, total sales decreased 12% to $15.1 million, which was due to delayed shipments resulting from supply chain challenges, and Steve Harshbarger will go into more detail concerning this. During the year, approximately 55% of sales originated outside of the United States and Canada compared with 68% in fiscal 2022. Our gross profit decreased 11% to $7.7 million when compared with fiscal 2022. The gross profit margin was 51% compared with 50% in the prior year. The increase in the gross profit margin was due to less than anticipated warranty costs and a favorable product mix when compared to the prior year. For fiscal 2023, our total operating expenses increased 4% to $7 million compared with $6.7 million in the prior year period. Our research and product development costs increased 24% to $2.1 million for the year, primarily due to increased salaries and the higher costs of research and development materials and supplies, which are for use in the development of new products for new and existing markets. Marketing and selling expenses decreased 6% to $3.2 million for the year. The decline was primarily due to decreases in commissions, salaries, and related costs, and these decreases were partially offset by increased travel and trade show expenses. General and administrative expenses increased 2% to $1.7 million, primarily due to an increase in stock-based compensation expense, which was partially offset by decreases in corporate expenses and bad debt expense. Operating income decreased to $683,000 for the year primarily due to the decrease in gross profit combined with the increases in operating expenses. The operating margin for the year was 5% compared with 11% in the prior year. For fiscal 2023, net income was $636,000 or $0.04 per share compared with $2.5 million or $0.16 per share for the prior fiscal year. The decrease in net income is due to the current period's decrease in operating income and income tax expense combined with the $1 million paycheck protection program loan forgiveness that was recorded in fiscal 2022. Diluted weighted average shares outstanding increased slightly to approximately 15.8 million shares. Cash, cash equivalents, and marketable securities at February 28, 2023 were $11.4 million, an increase of approximately $700,000 when compared to February 28, 2022. At February 28, 2023, there continues to be no debt on our balance sheet. Capital expenditures for the year were approximately $600,000, all of which is directed to ongoing upgrades of our manufacturing and product development lab facilities. And now I'll turn the call over to Steve Harshbarger, President and COO, for an operational review of the year.

Stephen Harshbarger, President & COO

Thanks, Steve, and good morning everybody. Thanks for joining us today. I want to dive a bit deeper into our record high backlog and supply chain going into FY 2024. Let me first explain that Sono-Tek records full revenue recognition at the time of shipment. We only hold back a small financial allocation for installation activities, so our revenue stream can look lumpy, particularly as we saw more of these $1 million-plus platforms. Now, turning to our results, I wanted to remind you that Sono-Tek breaks down our sales in three ways: by market, by product, and by geography, and that's how I'm going to address my comments. You can refer to the short tables on the last page of the earnings press release for all of these details. For FY 2023, total sales decreased by 12% compared to last year to $15.1 million. This decline was primarily due to delayed shipments resulting from supply chain challenges, some of which Dr. Coccio talked about. All of these delayed orders rolled over into the new fiscal year that began on March 1. Importantly, we've begun to see that these follow-on sales of spare parts could reach that 10% to 20% of the total order value. By market, key this year, of course, is the impact of supply chain issues which clearly can be seen in the revenue declines from these three markets. The alternative energy, electronics, and medical market sales each decreased by 17%, 23%, and 15% respectively. This is because large portions of all of these markets use our multi-axis coating systems, which have been particularly impacted by the delayed deliveries that resulted from these challenges. As I mentioned, all shipments have shipped into the current fiscal year, and we have not received a single cancellation. The industrial market grew by 131% due to the shipment of 71% of a large multi-system order in fiscal 2023. The remaining 29% of that order is scheduled for shipment in the current fiscal quarter. The 62% decline in the merging R&D and other category reflects the shift into other market basket sectors for new applications that have become successfully established. By geography, approximately 45% of sales originated in the U.S. and Canada in fiscal 2023 compared to 32% in fiscal 2022. This shift was positively impacted by several U.S. Government initiatives to invest in the green energy sector and other research markets. For the year, APAC revenue decreased by 39%, impacted we believe, by reduced sales to China as a result of several China-based manufacturing sites moving operations back to the U.S. and Mexico. In addition, the strong U.S. dollar temporarily made our products more expensive in Japan and South Korea, where we have good customer relationships, but this resulted in several delayed purchases. Backlog on February 28, 2023 was $8.5 million, which is 60% higher than last year-end, reflecting the delayed shipments of several large orders, as we've talked about. Customer deposits more than doubled to $2.8 million from $1.2 million, a 143% year-over-year increase, and this increase reflects the new orders we've been receiving during this fiscal 2023. In closing, as Chris mentioned earlier, our expectations for our first quarter that ends May 31, the supply chain challenges will still impact our deliveries in the current quarter resulting in lower revenue compared to Q4 FY 2023. We expect higher revenue in subsequent quarters over the balance of the year as we ship new orders and as well as the large number of orders that are presently in our backlog. I'll now turn back to the operator to open this up for our Q&A.

Operator, Operator

And our first question here will come from Bill Nicklin with Circle N Advisors. Please go ahead with your question.

Bill Nicklin, Analyst

Good morning.

Christopher Coccio, Chairman & CEO

Good morning, Bill. Thanks for joining us.

Bill Nicklin, Analyst

Right, thanks for taking my questions. I have three questions all focused on revenue expansion and visibility. The first is kind of the nature of the order that you're getting now, I've noticed that in your most recent announcements we see the terminology multiphase program for additional systems and multi-systems. What appears to be taking place is quite different than the size and cadence of Sono-Tek's orders in the past, or at least as long as I've been following the company. The announcements also indicate that individual systems within the order are each priced higher than most orders in the past, and my guess is this is likely because they're from production equipment. So my question is, can you get a little more granular on what is taking place and what this means for the visibility of revenues and revenue growth out over the next few quarters and even years?

Stephen Harshbarger, President & COO

Yes, yes. You're correct. The wording of multiphase is significant for most of these large platform machines that now have the very high average selling prices that we're starting to sell more often. The manufacturing cycle is much longer than our smaller $100,000 machines that we have been traditionally selling. So when our customers need the fastest possible deliveries to meet urgent requirements, they need to share this with Sono-Tek, and they start to coordinate their schedules for production requirements. Really, it can be a good year in advance of when they actually need our machines to reach the manufacturing floor. This does create a situation where we start to get much better visibility of what's likely to come down the pipeline for future orders. And this is what we're seeing in particular from the clean energy sector. Customers are placing their first orders for high-volume manufacturing systems and presenting their planned configurations for the follow-on machines to meet their ultimate production needs. At Sono-Tek, we don't share these current forecast requirements until their production plans transition into a purchase order for us. But I can tell you that most of our customers buying these large platform systems in the clean energy sector aren't just looking to buy one or two machines. They often have the need to buy five to ten systems to meet their production requirements over the next one to two years. The urgency of these green energy customers, in particular, going from R&D to pilot lines to multiple high-volume production lines, is really like nothing that I've ever seen, which is certainly driven by the massive amount of money being put into this sector.

Christopher Coccio, Chairman & CEO

Did that answer your questions, Bill?

Bill Nicklin, Analyst

Yes, okay. I heard a beep kind of cut you up, yes. Getting even more specific given what you're looking at now, what's the largest number of production machines you expect from a single customer? And then on other customer orders, are there similar situations that are maybe somewhat smaller number of systems?

Stephen Harshbarger, President & COO

Yes. For sure again, the larger customers out of the green energy sector, again, in particular, transitioning from R&D over to high-volume product pilot lines, are all looking at multiple lines. They are all looking at five to ten to even up to fifteen lines that should be happening. And again, these are the machines with the high average selling prices that are over $1 million typically. And we are continuing still to get a regular flow of R&D machines on top of that. That is still the kind of flow business, I would describe it as one to two machines that is coming from the R&D sector that will continually fill in the backlog as well. But the ones that are going to make the big impact for our backlog are going to be these big platform, high-volume production machines.

Bill Nicklin, Analyst

All right. So if I understand correctly, on the announcements that you've made, where there are $600,000 machines and $1 million machines, the orders that you just referenced will be multiples of that $600,000 or multiples of the $1 million number.

Stephen Harshbarger, President & COO

They all have the high potential of being multiples of that. None of these customers are purchasing those initial production machines with the expectation that this is just the starting phase. If they only acquired one machine, it would indicate that something went horribly wrong. They all plan to buy multiple machines. The demand for these green energy products is currently experiencing rapid growth, so to meet their volume requirements, they need to purchase multiple lines, typically five to ten systems.

Bill Nicklin, Analyst

All right. And not to belabor it, but just to be clear, on the announcement that you've already made, where you said a machine was $600,000, that's for one machine, and you have multiples right after one, so if a customer is going to buy ten machines over time, then that's $6 million.

Stephen Harshbarger, President & COO

You're 100% correct, yes. So when we make the announcement for those ones for $1.1 million, that's for one machine, and if that customer needs ten, it would be ten machines, ten times $1.1 million or ten times $660,000, correct.

Bill Nicklin, Analyst

All right, that's great. Now, second question. Several industrial companies that I follow have been impeded by supply chain problems, and they now in their conference calls say they're coming out of this period and they're having bubbles in shipments. But then they say they're heading back toward what most of them are describing as a broad-based normalization, where normal is lower shipments than in the past few quarters. So the bubble moved through the system. It sounds like you're experiencing the same thing, but given the orders you're getting, it's kind of a new normal with expectations of significantly higher growth for an extended period of time, am I correct on that?

Stephen Harshbarger, President & COO

Yes, supply chain, like you mentioned, impacted us for FY 2023 revenue, and we will certainly see a revenue bubble working its way through into our FY 2024 due to these delayed shipments. And although we are definitely predicting our revenue to be more lumpy from quarter to quarter due to the increased frequency of these large average selling price platform machines, we're still feeling very good about continued revenue growth for FY 2024 during the supply chain surge and after the supply chain surge, because of these high average selling price production systems that are starting to flow more regularly into our backlog. When you're only a $15 million to $20 million revenue company like we are now, it starts to make a huge impact when we start adding a flow of $1 million machines on top of what is our historically normal business already. So I think that's going to be the big difference as we see a flow of these $1 million machines coming in more regularly.

Bill Nicklin, Analyst

All right, thanks. Now, just to again to get quite granular on this, from what you're saying is starting in June, the quarter that's coming up, you'll see some improvement in the supply chain issues, and then that will continue to improve through the year. But from the orders you're booking, it looks like that that bubble or jump in shipments because of normal shipments plus the catch-up from the supply chain problems, that even with that moving through, you'll be able to replenish your backlog at a higher rate than the shipments are going out?

Stephen Harshbarger, President & COO

You accurately highlighted that by tracking our backlog, we can provide a strong future indicator of our direction. We expect our order intake to surpass shipments as demand for our products grows. Therefore, we anticipate sufficient bookings to refresh our backlog.

Bill Nicklin, Analyst

Great. And last question, if you will. It appears as you're going from R&D orders to pilot project orders and production line orders, at least my visualization of a production line is that your equipment will probably be sitting alongside of your customer's equipment or equipment that your customer is buying from another vendor for a different purpose, to have a complete production line. How does this, and number one, am I correct? But number two, how does this affect the nature of the orders you're receiving? And also, does it open orders for arrangements between Sono-Tek and other equipment suppliers? There are OEMs that might accelerate your growth down the road where, in the past, you were selling single units that were kind of standalone and there was nothing else driving the business other than a single new order coming in over the transom.

Stephen Harshbarger, President & COO

Yes, it's true. What you're saying is that there's, of course, many machines that make up the complete manufacturing line in these coating processes. We recognize the machine sitting before and after the ultrasonic coating systems are often really critical to the end results of the product that we're coating. Many of our customers would really prefer for Sono-Tek to also supply the equipment standing alongside our coating systems and to take full responsibility for large parts of the manufacturing process. So we've been rapidly increasing the number of strategic outsourcing partners we work with. They're from a variety of several different disciplines. This allows us to supply our increasingly larger end customer solution, which continues then to drive higher and higher average selling prices for us. Some of these strategic partners also create additional potential opportunities for even closer relationships in the future.

Bill Nicklin, Analyst

That's great. Thank you. It looks like you've got the ball teed up here, and I appreciate all your efforts and let's see what happens. It sounds pretty positive. Thank you.

Stephen Harshbarger, President & COO

I appreciate it, Bill. Thanks.

Operator, Operator

And our next question will come from Ted Jackson with Northland. Please go ahead with your question.

Ted Jackson, Analyst

Hey, good morning.

Christopher Coccio, Chairman & CEO

Hey, good morning, Ted.

Ted Jackson, Analyst

So I'm going to sort of at a higher level follow up on some of Bill's line of thought. So looking at your backlog, which by the way is impressive, if I kind of look at the historical backlog, if you look back, say, two years and go forward, you used to kind of see your backlog going to be, call it, 25% of the four, 12-month revenue. And then clearly with all the supply chain issues, it's been kind of in the 35% to 40% range in the last part of the fiscal year. If I was to look at that $8.5 million of backlog in the understanding that, that's going to go out in fiscal 2024 and say that, hey, that's 40% of fiscal 2024 revenue, which would be kind of like the high end, higher than the high end of what we've seen the last couple of quarters, you'd be pushing north of $20 million of revenue. Is that a fair way to look at your business, or is that maybe too aggressive for you?

Stephen Harshbarger, President & COO

We haven't provided projections for our full fiscal year revenue. However, we anticipate that the $8.5 million in our backlog will be shipping out this year. There’s nothing in that backlog that we expect won’t ship. Order intake remains strong, and we see no reason for that to change. While we can't specify exactly where we expect to end up this year, we are confident that we will show growth, and the outlook is positive. The question remains whether the large orders we are anticipating from multiple systems will mostly ship in FY 2024. It wouldn't surprise me if our backlog begins to accelerate even as we maintain healthy revenue, and it could look very promising for FY 2025 while still generating good revenue in FY 2024. This is partly because the production lead time for many machines is longer than usual for us. Our smaller platform machines, now categorized under our flow business, still have relatively short lead times, particularly for machines priced between $100,000 and $200,000.

Christopher Coccio, Chairman & CEO

Yes, I would like to add that over the years, Sono-Tek has experienced a steady growth rate of 10%. However, we've seen significant changes in the past year or so as we transition into the production phase of our business. Instead of selling a single unit for around $0.5 million, we are now positioned to sell multiple units. This marks a shift in our business structure. Additionally, there has been concern about whether this growth is sustainable or merely a bubble. We don't believe it is a bubble due to the substantial investment the government is making in the clean energy sector, which is benefiting us now and will continue to do so in the future. In summary, there have been two key changes in our business in the last year or two: the shift to production and the significant federal funding in clean energy. Furthermore, Steve Harshbarger pointed out our third strategic approach, which involves enhancing our offerings through pre and post-processing wherever opportunities arise. While I won't predict specific numbers, I have observed a positive transformation in our business structure, and I feel optimistic about our future compared to the past.

Ted Jackson, Analyst

I’m feeling hopeful. I just want to keep my optimism in check. It seems like you are on the verge of achieving significant progress. Let's discuss the revenue. Looking ahead to FY 2024 revenue, it's clear that the multi-axis systems have faced challenges that impacted your larger systems, which were down significantly from 2022. Considering the backlog and the expectation of $0.5 million in revenue from some large multi-axis systems, is it realistic to think that in 2024 you could at least match the performance from 2022 in that area and possibly even surpass it?

Stephen Harshbarger, President & COO

We are definitely on track to exceed our targets for multi-access coating systems this year. This is partially due to the delayed shipments from FY 2023 that are currently in our backlog. You can expect to see a significant number of multi-axis coating systems being shipped out, particularly from the clean energy and electronics sectors, in FY 2024. Additionally, we faced our biggest supply chain challenges in the multi-axis coating area. However, at Sono-Tek, we have improved our in-house capabilities, which will enable us to ship products more quickly than we did last year. This should help us return to a more normal operating pace in the second half of this fiscal year, reducing supply chain issues for multi-axis coating systems. Importantly, the order intake for these systems has actually increased, so it may seem like FY 2023 was slower due to our shipping restrictions.

Ted Jackson, Analyst

Then just on the fluxing systems, you talked about how you're going through kind of an upgrade process, if you would. I mean, you put up the strongest numbers that you've seen in that area since fiscal 2019. Is that something that is sustainable? I mean, is that like the strength you've seen in that business as you go through this upgrade and the movement of a lot of manufacturing out of China towards Mexico, U.S., is that something that we should continue to see in 2024, or is it the kind of thing that will fade, and we'll go back towards the numbers that we've seen from say, 2020 through 2022?

Stephen Harshbarger, President & COO

Yes. I would predict the fluxing area to remain stable for us. I don't think it's going to go down, but it's not going to show huge massive increases. It's not where, like government sectors are really investing or anything like that. What has been significant for us there is these customers that are moving from China back to Mexico, in particular, even more so than the U.S. They may already have systems in China, but they don't send those machines back to the U.S. The machines are only valued between $25,000 to $50,000, and it's not really worth them to send back a used machine to Mexico. So they buy new machines. The great thing about our latest platform system in the fluxing area, the SonoFlux X2, it's about 40% higher priced than our traditional spray fluxers. So part of what you're seeing there with increased fluxing revenue is the increasing average selling price of our fluxing platforms as well. There's a good reason why they haven't increased average selling price because they reduce your flux by a lot more compared to our old systems and they have a lot more functionality. So customers that have tried them have said, oh wow, this is really worth upgrading our own fluxing system that we have from Sono-Tek already to our new Sono-Tek machine.

Ted Jackson, Analyst

Shifting over to the income statement, I’d like to discuss operating expenditures. Given the positive momentum we have, how should we view your operating expenditures for 2024? Are there significant investments planned for sales and marketing or research and development, or will it be more focused on steady, moderate growth?

Stephen Harshbarger, President & COO

Yes, we did...

Ted Jackson, Analyst

I guess I'm asking if we will see some operating leverage, is where I'm going with it.

Stephen Harshbarger, President & COO

Got you. We started to see some operating leverage in the prior year that I suspect, going into FY 2025, is when we'll probably see the most leverage start to occur, that we've already invested quite a bit into. It's all just been finished recently into expanding our manufacturing facility and investing those finances into that right now. So we've taken over one more building that we had been renting. All the expenditures and renovations to be able to do production in those areas have now happened. So a lot of the expenses have been completed in that area. Did you have anything else to add on that one?

Stephen Bagley, CFO

When you look at the operating expenses, the R&D is always pretty much for product development, so we should see some of that come down the line hopefully in revenue. The marketing and selling, what you're seeing is primarily in commissions due to the decrease in sales. Overall, one major variable of course is always our advertising, our trade show expenses, and that started to pick back up last year due to COVID. So you should see something there. The G&A, if you look at it, it was flat. I don't expect anything to really come through on that next year, but that's my expectation right now.

Christopher Coccio, Chairman & CEO

Yes.

Stephen Harshbarger, President & COO

Okay Chris.

Christopher Coccio, Chairman & CEO

And I should also add, just to add to what Steve Bagley was saying, we do put a lot of emphasis on what's called research and development or product development. But the other issue, as you all know, inflation is occurring in salaried people as well, particularly in the top-level engineering talent. So we're doing what we have to do to maintain a quality workforce there as opposed to starting to lose people to some other company and then having to retrain. So there are two things going on there: our continued emphasis on R&D and the inflation of salaries that's taking place.

Stephen Bagley, CFO

That's one of the major points. As Chris mentioned regarding salaries, that's where we can see leverage in several ways, because it takes time for people to acclimate. However, we have had to keep our current level of engineers, which will pay off in the long run.

Ted Jackson, Analyst

Just because you mentioned the investment related to the new building and productivity, how should we view CapEx in 2024? Perhaps we should consider it around $50,000 or that amount in 2023. Should we expect it to remain flat, or could it possibly decrease a bit now that you have moved past that phase?

Stephen Harshbarger, President & COO

Although we did finish our expansion needs here, I think we anticipate it to be flat though, because I think we're going to have to be continuing to expand based on our projections looking forward. So where I thought it might go down a little bit this year, I'm no longer anticipating it to go down as long as we see this really strong order intake happening, we'll have to be continuing our expansion plans, which would give us similar CapEx expenditures.

Ted Jackson, Analyst

Okay. And then my last question, and then I'm hogging the mic, but you've built up this inventory. You kind of went through it being part of it being your response to the supply chain issues. Will we see these inventory numbers ever trend down, or should we expect this to be kind of the new norm going forward?

Stephen Harshbarger, President & COO

I would hope that they will trend down, but I don't see it happening this fiscal year. Right now, we're still just so cautious with supply chain issues. Until we see that supply chain issues resolve 100%, it's just forcing us to keep the inventory very high at this moment. Now it's very safe inventory. We're having a nice flow of orders, but it's just forcing us to keep it high at this point. But hopefully, at some point, when the world returns back to normal with the supply chain, that we won't have to worry about that.

Christopher Coccio, Chairman & CEO

Yes, I think we all learned a lesson, too. I mean, we've managed our inventory levels very aggressively in the past. We saw this coming to some extent, so we started to build up inventory, though not enough to forestall any problems as seen in our numbers. I think what Steve said is true, though: as we find out that the supplies are now available, we can back off a bit, but I don't think we'll ever go down to the level that we were before.

Ted Jackson, Analyst

Okay. Well, that's it from me, and I just want to finish and just say I'm looking forward to 2024 and 2025. It seems like you guys are on the cusp of some really exciting stuff, and I'm looking forward to watching it play out.

Christopher Coccio, Chairman & CEO

Thanks.

Stephen Harshbarger, President & COO

Thanks, Ted.

Operator, Operator

And our next question here will come from Avi Fisher with Long Cast Advisors. Please go ahead.

Unidentified Analyst, Analyst

Hi, good morning. Just two or three quick questions. What products are delayed because of supply chain issues?

Stephen Harshbarger, President & COO

Yes. The primary product line is our multi-axis coating machines. That's where we really got clobbered. And those multi-axis coating machines are very heavily used in our larger platform systems directed at both the electronics sector and the green energy sector and a little bit in the medical sector as well. But they're not very commonly used in the industrial sector, for example.

Unidentified Analyst, Analyst

Okay. So presumably, I mean, what we're really talking about is a robot, right? The robot arm that comes from a supplier, right? That you get from a supplier?

Stephen Harshbarger, President & COO

Yes. It's motion, I would describe it as motion platforms and product handling platforms. But they're not, for example, like simple XYZ vanilla robot systems that you might see from some manufacturers. Most of our systems are highly custom and engineered for the application. But you are correct in saying that it's a robot.

Unidentified Analyst, Analyst

And are those coming from, I mean, presumably, I think those are coming from somewhere like ABD or from Japan? Is that correct?

Stephen Harshbarger, President & COO

We have one robot that we acquired, which is a very inexpensive model from Japan. It's a basic machine designed for a low entry cost targeted at small universities. However, most of our robots are custom-engineered solutions manufactured in the U.S., either by Sono-Tek or in partnership with others. The product we are considering has no equivalent vendor in the U.S. or Europe with similar capabilities. While we have identified some options from China, they face supply chain and shipping issues. Therefore, we are focusing on bringing more expertise in-house to enhance our internal capabilities. Although our industry partner offers good quality and pricing, we need to gain better control over the supply chain. As a result, we have started to integrate some of those talents within Sono-Tek.

Unidentified Analyst, Analyst

Is there a possibility for you, as you become a larger player in your addressable market and as your R&D clients transition into production, to collaborate more closely with your partner? By working together, you could potentially sell significantly more units than you are currently, which could elevate your position in their priority chain. This collaboration might result in a co-branded product that targets an even larger market. Have you considered this option at all?

Stephen Harshbarger, President & COO

The partner is someone you want to answer that question, Dr. Coccio. Are you speaking up?

Christopher Coccio, Chairman & CEO

Yes, you are correct, and we are aligned with your suggestion without necessarily engaging in co-branding. We have had several discussions with that vendor, who we consider more than just a vendor due to our close collaboration. We have brought in customers to demonstrate their capabilities, which in turn helps us serve our customers better. Furthermore, as Steve mentioned, while there is an option to source from China, we have decided against it, not only because of supply chain concerns but also due to the potential risks to our business technology and proprietary information. I believe we are on the right path in supporting our partners to improve with us, and as Steve pointed out, we are positioned to produce a significant number of these specialized robotics, which we refer to as multi-axis systems, in-house.

Unidentified Analyst, Analyst

I'm sorry if you've said this. Have you elaborated on how much you expect to spend on this pursuit to bring more in-house?

Stephen Harshbarger, President & COO

We've already made the bulk of the investment upfront already. It actually started prior to COVID when we started this process because we recognized our high dependence on this vendor. It's mostly been in R&D and engineering talent that we had to bring in. The machines that we are now shipping that we've taken on through internally made products are shipping out now from Sono-Tek. As Dr. Coccio mentioned, about 25% of them are coming out internally made right now. But the bulk of the investment is already done at this point. Now it's just continuing to upgrade and improve to the next level. But again, our industry partner is actually very good as a partner. So we appreciate them for their capabilities as well. But I think it's a smart move for us to have both of these avenues going at the same time. But we don't see any other big significant investment coming down the pipeline for that.

Unidentified Analyst, Analyst

Got it. And just to clarify what you just said, it sounds like you're having this parallel track of, you are continuing to work with your partner and also doing some more in-house.

Stephen Harshbarger, President & COO

Yes, that's correct.

Unidentified Analyst, Analyst

Okay. One last question. You've mentioned roll-to-roll systems before, and I see on your website that you have a wide track system. However, I didn't catch much information about the roll-to-roll systems. Could you provide an update on their progress, some details on the units you're selling, and what the pipeline looks like? Thank you.

Stephen Harshbarger, President & COO

Yes, sure. We are still progressing with the project. It's still an active program. We still have customers that come in and we've sold a few roll-to-roll machines at this point. The primary target market for us, for roll-to-roll, you might recall, is going towards the green energy sector for coating of membranes used for fuel cells or carbon capture or green hydrogen generation. We still have that customer, who remains very much is expressing that they plan to go to roll-to-roll, but we still have not seen them make the transition. We thought they would have done it this year. Right now, it seems like they're primarily focused on single pieces and not going to roll-to-roll yet. But they still are talking about short-term making the transition to roll-to-roll. So we have got ourselves to a point where we're ready to transition with the market when they are prepared to make that move. But we're kind of waiting for the market to go there. We still believe it will go there, and we'll be ready when it does happen.

Unidentified Analyst, Analyst

And has this customer sort of deferred because they're looking at other technologies? Are they looking at CBD instead or are they just looking to raise funding so they can move ahead at scale?

Stephen Harshbarger, President & COO

Yes, it's actually broadly for the whole industry is looking to go towards, not one particular customer, the whole industry for these coating of membranes is looking to go towards roll-to-roll ultimately, although they are not doing it today at this moment. And that it's not a replacement. For this particular application of coatings membranes, they can't do this application by CBD. Our competition in this area is slot-die coating. But thankfully, we have some performance advantages about our coatings compared to slot-die, which makes most customers choose our technology over slot-die technology.

Unidentified Analyst, Analyst

And is the roll-to-roll opportunity, broadly speaking, not even in the backlog right now?

Stephen Harshbarger, President & COO

Broadly speaking, it's not. We'll get an occasional machine here and there. We are still making advances behind the scenes in our laboratories with it and we are bringing customers in to see it. They can understand the technology and they can prepare for us for when they want to make the transition that they've got a partner in Sono-Tek that is prepared for them when they want to do that.

Unidentified Analyst, Analyst

And when or if your clients are ready to move up to a production scale, how long would it take you to produce the first unit?

Stephen Harshbarger, President & COO

I don't think it would take us long at all because we have the machines in-house right now. We've made the bulk of the investment there, which allows us to show these systems to the customers. So we're close. Now again these are almost always to some level customized machines, so it's going to be long lead time products. But when they say they're ready, I think we're prepared to take the orders.

Unidentified Analyst, Analyst

Awesome. All right, thanks very much. I appreciate your time. Thank you.

Stephen Harshbarger, President & COO

Good chatting, Avi.

Operator, Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Dr. Chris Coccio for any closing remarks.

Christopher Coccio, Chairman & CEO

Yes. Thank you, and thanks to everyone for joining us today. Sono-Tek has a strong outlook for growth based on the high utility of our products in many high-tech and emerging markets. We look forward to our next call in October that will review the midyear 2024 results. Please contact us directly if you have any questions in the quarter. Be well, stay safe. I would just remind you once again that we will be at LD Micro in Los Angeles, Wednesday, June 7. Thank you and goodbye.

Operator, Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.