Sono-Tek Corporation (NASDAQ:SOTK ) Q4 2022 Earnings Conference Call May 24, 2022 10:00 AM ET

Stephanie Prince - PCG Advisory

Christopher Coccio - Chairman and CEO

Steve Harshbarger - President and COO

William Nicklin - Circle N Advisors

Good morning, and welcome to the Sono-Tek Corporation Fourth Quarter and Fiscal Year 2022 Year End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Stephanie Prince with PCG Advisory. Please go ahead.

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 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 components sales has broadened our addressable market 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 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 and 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 companies of - our manufacturing facilities.

And now I'll turn 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 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 used are highly sophisticated multi-axis platforms. OEM sales were $2.4 million an increased to 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% and FY '22, with only Latin America showing a 10% decline in sales.

The increased international sales result of many of our overseas customers bringing manufacturing operations back online with fewer COVID restrictions. South Korea especially contributed to significant increase in APAC sales due to a 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 in 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 is 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.

[Operator Instructions] 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?

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 size. So the ultrasonic coating equipment market, you've already are in and where you have a 50% market share?

What changes do you see in the ultrasonic coating equipment market relevant, relevant pardon me as it relates to its size and your share, and changes that are taking place initiatives in your customer's shops?

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 now ultrasonic spray as being really a viable alternative to either reduce costs or increase quality. So now there's this what we see is a rapid shift to these same customers to implement [ph] production levels, ultrasonic coating machines into their operations.

In particular, because many of the growth markets, that Sono-Tek and we're participating [indiscernible]. They've really matured out of R&D, and are moving into what I would describe as full blown production. And without our product line is of course then 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 drags you in or opens the door for you into this much larger general coating equipment market?

Yes another good - it's a good question, because it is so much larger, Sono-Tek and we already dominate the existing ultrasonic coating equipment market. So our focus is really always on capturing a larger chunk of that general coating equipment market and our customer needs in requirements are the primary driver, where we focus our growth and initiatives in that market.

We always kind of start with the customer then understand the problem and then trying to work our way back to the solution for the customer. 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 like gravure or slot-die or pressure nozzles.

These are all well-established technologies. But they aren't strong at providing very thin coatings, minimizing ways in having the flexibility to change like the coating morphologies onto the products. So soon our full system solutions, we're going to be participating in this area with our roll-to-roll technology.

And we'll 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 the strategy there.

Thanks. I have another question, if I may.

As I read your materials, we see discussions of fuel cells electrolyte where we 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 that you know, 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 this specific product need, which is to be honest, that's really where Sono-Tek separates our capabilities from other coating equipment providers.

Out of hundreds of potential ultrasonic coating equipment configurations, you know, our application engineers can dive in and understand how to really dial in - this optimal coating configuration. They understand the correct chemistries and solvents for the applications and its often like the pre and post treatments that are necessary for the product to be successfully coated. This is the sort of expertise that can take years, in some cases, even decades to develop.

And we certainly look at these as independent markets, because they are - all at various stages in the development process. Fuel cells are like, for example fairly mature with our customers talking about production requirements. Whereas like carbon captures, and many of the other electrolyzer applications, they're more focused on R&D and pilot lines, with lots and lots of participation from our application engineers to help them to develop a successful process so they're certainly all unique that way.

One more if I may, if you look at this, going 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 been shifting from predominantly like its R&D focused equipment to like more, larger complex production scale equipment. Eight years ago, I would say, about 25% of our machines were directed at high volume production needs. Today, we're closer to AI in the area of 60% of our machines being implemented into production environments. We certainly anticipate, this trend is going 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 - it will never going to go away. They're really important to us to establish ultrasonic spray as, a standard coating methods for next generation applications. But large production machines, they're definitely going to be what heavily drives our future growth.

All right, so all taken or crossed 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 to. 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 - they've had 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 and importantly, within an accelerated timeframe.

We're really seeing the quality and time to market is many thing for many of the - ultimately these customers. So that's where we're focused on it. And that time to market is going to really help drive our margins as well, because they're willing to pay for that - 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 order there, a couple of large customers at least?

So how do you think the profile of your customers have 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, 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 that are entering in this market is happening really quick. In the markets of say semiconductor and medical, these are typically in our huge multinational companies that are participating with Sono-Tek.

And we partnered with them and established relationships with them for many years. And they've come to highly trust our ability to deliver quality coating solutions. So these are most commonly repeat customers that are often purchasing. They did buy one or two maybe machines in the past, and they're coming back to buy several more, or to look at larger projects that we're dealing with nowadays.

All right, thanks very much, sounds good. I appreciate it.

Hey good chatting Bill, take care.

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. There's, so many dynamics happening around the world today, look at the Ukraine dynamic, and the rising prices of gas and clean energy is got to be part of the solution here.

Nate, just to expand on that answer, we've seen a recent report that the European organization has put out, they've fully come awake about their vulnerabilities, their energy security issues. And they are all in now, if they weren't before to developing multiple sources of alternate energy, not just clean energy, but it happens to be both alternative to the Russian pipelines.

And so they're going to be spending significant sums of money in every area that we're focused on, whether it's hydrogen or fuel cells or even solar cells, which are going to be continuing to be important. Sono-Tek has strengths in all of those fields. So I mean I feel to a great extent that we're in - sort of like the 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 just people just have to do. There may be a recession on the horizon, or we may be in one already. But they're certain things like food, medicine and energy, which you can't stop doing it 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.

[Operator Instructions] The next question is from [indiscernible] Capital. Please go ahead.

Yes, thanks for taking my question, guys. Congratulations on the great results this year. Quick question about also being given a little bit of color on the CapEx for just kind of going forward, if you're expecting, and 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 actually 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. And we're implementing several of those throughout the factory. It helps, especially when we're in a shortage of - labor shortage, it's tough to get labor easily and automating a lot of our processes really helps us that way.

And there has been some significant areas of technological advancements that we've implemented into our processes these days 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 there.

So, we will see a similar sort of just slight growth in CapEx in the coming year here. But we are fully operational here again we're prepared for growth, a lot of that is to accommodate our growth as well. We're anticipating growth so we're putting into capital infrastructure in place to accommodate that growth as well.

As Steve has mentioned, manufacturing technology. You know, it's not often talked about in meetings like this, but - it's very critical to Sono-Tek, because how we differentiate ourselves from our competitors is a really detailed and intimate understanding of how ultrasonic spray systems work right down to the granular level, which comes about from the type of analysis and measurement tools that we have been purchasing and putting in place 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. Just for the reasons Steve mentioned, labor is a challenge, of course, for all people, 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 it, guys. Thank you again.

[Operator Instructions] Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over 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.