Sono-Tek Corporation

Good day and welcome to the Sonotech Corporation earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince, PCG Advisory. Please go ahead.

Thank you, Carrie, and thank you to everyone joining us today. Sonotech 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 sonotech.com and click on the press release slash news tab in the investor 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, Sonotex 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 Sonitech. Chris?

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 per fiscal year, at mid-year, like today, and for year-end results. Sonotech's fiscal year end is February 28th. Today, we're going to discuss our results that were released earlier this morning for the second quarter of fiscal 2022, ended August 31st, 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 Harshberger, President and COO, will then go through the business and operational results and the sales growth guidance. Following that, we'll open the call for your questions. For those of you who are new to Sonotek, Sonotek 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 micron-thin coatings for customers. We focused on important high-tech markets that require the disability, 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 to the U.S., New York, Asia, and Latin America. Our solutions offer dramatic savings in the 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 address in the 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 sound effects 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. Net 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, the highest 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 market in August. The increased exposure from being listed on a national exchange has afforded our shareholders much higher trading volume and visibility with 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 Pagley, our CFO, for some details of our financial results. Steve?

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 were 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 two cents compared with one cent 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 Harshberger, President and COO, for a second quarter operational review. Steve?

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 significant shipment of multi-access coding systems. The system ships with this order are now being used to code electronic diagnostic devices for rapid COVID test kits. ROEM 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 to coat 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 government as well as private industry that are 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 of 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 coating system, and another follow-on strong quarter for our OEM semiconductor customers. Looking at APEC outside of China, Sales included a new machine that shipped to Singapore for EMI coating, electromagnetic emission coating, and 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 was primarily due to the shipment of a large flow glass coating line in last year's Q2, which we didn't repeat in Q2 of this year. This isn't unusual because, you know, sales of these 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, you know, Sonotech'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 this sales tactic to be part of Sonotech'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 and 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 Sonotech 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 of coated products. These labs are an important advantage for Sonotech, and they really separate us from others. In closing, Sonotech has a lot of momentum and a strong outlook, and we're excited about our opportunities for growth in our focused 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, Sonotec 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'd now like to open up the call for questions, and I'll send it back over to the operator.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Dick Ryan of Colliers. Please go ahead.

Great. Thank you for taking the questions and also for starting to host earnings calls. I think that's important for the shareholder base. Steve, just a question on trying to look at orders and backlog. Can you give us the level of orders in the quarter and kind of the makeup of backlog? If I recall last quarter, there was one large system, one and a half million in there. Did that deliver, and are there any large orders sitting in the $6.3 million backlog?

Sure. Good morning, David. The system, which is a six-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. when that's planned to be shipping out, so another five months or four or five months from now. The backlog, other than that, you know, there's a good chunk of it's going to be shipping this fiscal year. We do anticipate that's probably a million to a million and a half that's in that backlog that will be heading out in next fiscal year, though, also, which is typical because, you know, some of these larger platform machines now that we offer, which are high value and high dollars, they'd 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?

Yeah, and then just also, I mean, I didn't know if there was anything that's flipped or any cancellations in the backlog, and how did the orders look for Q2? Yeah.

The orders were solid. I mean, obviously, it got reflected in our backlog just increasing so much. I mean, this is the highest backlog I 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, you know, really starting to come through for us and to show promise. So, you know, most of these large machines, you know, even though the orders were taken in Q2, they would not ship into Q2. You know, 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.

Okay. How about you give 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?

Sure. I mean, this past quarter, obviously, our margins were a bit higher than typical for us. You know, we typically operate margins that are in, you know, the mid to high 40s, you know, 45 to 49 percent range. And this quarter was a little bit higher than that as a result of a lot of OEM systems. You know, our nozzles, if we sell nozzles, we make excellent, excellent margins on those. And those are Lower dollar systems, but very high margin systems. And that's what was reflected in the margins this quarter. Heading forward, I think we'll probably long-term be getting back down into our normal operating range for margins, which is going to be the high 40s. However, at least short-term, we are still seeing a lot of these OEM customers, in particular coming out of Asia, often to support the semiconductor industry. You know, there's that chip shortage that's happening, and it's impacting everybody, not just us here in the U.S. So we're seeing a lot of our Asia customers, the OEMs in particular, buying a lot of our smaller OEM kits, which have nice profit margins on them. And I think that's going to be continuing for at least another quarter or so. And I don't know if we'll continue beyond that, but it's going to continue for some period of time here.

Okay, great. One last one. You know, the alternative energy, you've had some – well, 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 roll-to-roll capability that's looking out over the next year or so, and just try to tie those together for me?

Sure, sure thing. You know, the area where Sonotech is really focused and where our markets that our products serve is for coating membranes, they call it the PEM membrane, on fuel cells or the membranes on CO2 carbon capture applications. And this is an application that on either marketplace, they're very, very similar. I mean, 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, the transition from an area that we really knew well, I mean, we were awesome 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 based on letting the market bring us there. If you were to ask the same question, A couple 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've 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 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.

Okay, great. Thank you, and congratulations. Hey, thanks, Dick.

Appreciate it.

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

Good morning. Good morning, Bill. 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?

Sure, 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, $24 million possibly. But, you know, 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. You know, as we grow, you know, we're only shining 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.

Thanks. Another capacity question. How do you get your new employees in? 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?

Yeah, it's a good question because I'll tell you, new employee recruits are hard to get in the present work environment. You know, we try lots of methods for recruitment, you know, such as job fairs, the web, you know, conventional help, whatnot, and that's, None of these really were great, though. I've got to tell you, the best methods that we've really seen are word of mouth from fellow employees and a 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 SoundTech'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 head count 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.

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. Thanks, Bill. Appreciate it. Good talking to you.

And if you have a question, please press star then 1. Seeing no 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.

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 every area that we've been looking at and talking about has got great potential for us. Please contact us directly if you have any further questions. We'll hold a year-end conference call when we report results for our fiscal year 2022 ending February 2022. Have a great day and be well. Goodbye now. Thank you.

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