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spk06: Good morning, and welcome to the Sonotech Corporation fourth quarter and fiscal year 2022 year-end 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 telephone keypad. 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 with PCG Advisory. Please go ahead.
spk00: Thank you, Gary, and thank you to everyone joining us today. SunTech 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 Sonitech.com and click on the Press Release 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, Sonitech's Chairman and CEO, Steve Harshbarger, President and CEO, COO, excuse me, 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?
spk05: Thank you, Stephanie, and good morning, everyone. Thank you for joining us today for our fourth quarter and fiscal year 2022 year-end earnings conference call. Today, we're going to discuss our results that were released earlier this morning for fiscal year 2022, which ended February 28, 2022. I will begin with some opening remarks, and then Steve Bagley, Chief Financial Officer, will provide a financial review of the year. Steve Harshbarger, President and COO, will then go through the business and operational results and the sales growth guidance. Following that, we'll open the call for your questions. This is our second earnings call. The first was when we reported our mid-year results last October after we uplisted to NASDAQ last August. Briefly, for those who are new to Sonotech, 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 micron-thin 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, then Asia, and Latin America. Our solutions offer dramatic savings in raw material, water, and energy usage, and are environmentally friendly among many other advantages. The strategic shift that we made several years ago to offer more complex, complete solutions versus component sales has broadened our addressable market and has resulted in significant growth in our average unit selling prices. Our larger machines now sell for over $300,000, and system prices more and more often reach over $1 million. Most recently, we focused on opening new markets for our technology. This includes three main areas of strong global growth, microelectronics and semiconductors, clean energy, which includes fuel cells and carbon capture, and medical devices. All three of these areas are experiencing strong demand from long-term societal needs, and they all benefit from our unique thin film coating technology and systems. We've had growing success penetrating each of these markets. This includes the application of thin films onto advanced diagnostic test kits, which are used in genomics and blood identification and are now being deployed for rapid COVID test diagnosis. As we continue to advance our capabilities, more and more of the approximately $8 billion global coding market opens to our advanced solutions. One example is that we are in the process of expanding our coding capabilities to include role-to-role product handling, which is used in approximately 15% of the global coding market. We're also in the process of changing our SIC code to the technology instrumentation designation. This is where Sonotech 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 were 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 1st, the world was still impacted by the pandemic. Yet Sonotech's flexibility to quickly change 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 million 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.
spk04: 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 improvement is due to increased sales, a favorable sales mix, and lower than expected warranty and installation costs. Operating income increased 41% to $1.9 million compared with $1.3 million for the prior fiscal year, primarily due to growth in revenue and gross profit. The operating margin for fiscal 2022 increased to 11% compared with 9% in the prior fiscal year. Net income was $2.5 million compared to $1.1 million in fiscal 2021, an increase of $1.4 million, or 127%. The increase reflects an increase in operating income combined with the PPP loan forgiveness offset by an increase in income taxes. On a per-share basis, earnings were $0.16 compared with $0.07 for the prior year period. Diluted weighted average shares outstanding totaled $15.6 million compared to about $15.7 million for the prior year period. Cash and cash equivalents in short-term investments at February 28, 2022, were $10.7 million It increases 2.1 million from a 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, sorry, of our manufacturing facilities. And now I'll turn the call over to Dean Harshberger, President and COO for an operational review of the year.
spk01: Steve? Thanks, Steve, and good morning, everyone. 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. Sonotech 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 was 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 the significant sale of a six-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 2020-21 that 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. One billion of that will be directly invested into electrolysis R&D, which is the heart of the process. You know, coating these membranes used in electrolysis is one of Sonotec's key areas of expertise and one of our targeted markets for our 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 six-axis robot machine that was sold to the semiconductor industry for over 1.7 million, as well as a strong sales of machines used in the clean energy sector and medical diagnostic markets, both of which use our highly sophisticated multi-axis platforms. OEM sales were 2.4 million, an increase of 51% year-over-year, which were the result of several new OEM relationships gaining momentum as they incorporated Sonotech OEM packages into their new product designs. Integrated coding 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 2022, compared with 65% in the prior fiscal year. As you can see, the U.S. and Canada APAC and EMEA all grew from 6% to 27% in FY 2022, with only Latin America showing a 10% decline in sales. The increased international sales were a 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 year was strongly attributed to our product line expansion and full system solutions sales strategy, which includes customizing and enhanced automation and delivers increased value to our customers with a higher average selling price for Sonotech, of course. Looking ahead at our 2023 fiscal year, ending February 28, 2023, Sonotech expects to again report our highest annual sales in corporate history, And the first quarter of FY2023, ending May 31st, 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.
spk06: We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 comes from Bill Nicklin with Circle and Advisors. Please go ahead.
spk02: Good morning. Congratulations on a good report. It appears you're getting significant traction in these decent markets that you've been working on for quite some time and that are now beginning to accelerate. So it sounds good. Thanks. My first question is, in recent presentations, you've included illustrations depicting the your understanding of the size of the general coating equipment market and the size of 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 as it relates to its size and your share and changes that are taking place and initiatives in your customer shops?
spk01: Yeah, good question. Thanks, Bill. You know, over the past, you know, 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, you know, to either reduce costs or increase quality. So now there's this, what we see as a rapid shift of these same customers to implement production-level ultrasonic coating machines into their operations. It's in particular because many of the growth markets that Sonotec and we're participating in, they've really matured out of R&D and are moving into what I would describe as full-blown production. And with that, our product line has, 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.
spk02: All right, thanks. Then if we look at the general coding 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 coding equipment market?
spk01: Yeah, another good question because, you know, it is so much larger. At Sonotech, 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 and 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 gravier or slot die or pressure nozzles. These are all well-established technologies, but they aren't strong at providing very thin coatings, minimizing waste, and having the flexibility to change the coating morphologies onto the products. So soon, our full system solutions are 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.
spk02: Thanks. I have another question, if I may. Sure. As I read your materials, we see discussions of fuel cells, electrolyzers, CO2 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 you know, the sizes and dynamics of each of those particular areas within this overall market?
spk01: Yeah, sure. It is kind of a technically complex area that, you know, the technical requirements of the coating equipment, you know, for all those areas you just mentioned are very similar, you know, because in almost all those cases, you know, we're applying this critical catalyst coating onto the membranes. However, you know, the process expertise is very different for each of these applications, and requires our engineers really to customize almost every machine for the specific product need, which is, to be honest, that's really where Sonotech separates our capabilities from other coding equipment providers. Out of hundreds of potential ultrasonic coding equipment configurations, our application engineers can dive in and understand how to really dial in this optimal coding configuration. They understand the correct chemistries and solvents for the applications, And it's often like the pre- and post-treatments that are necessary for the product to be successfully coated. You know, this is the sort of expertise that can take years, in some cases even decades, to develop. And, you know, we certainly look at these as independent markets because they are all at various stages in the development process. You know, fuel cells, you know, are like, for example, fairly mature with our customers talking about production requirements. where areas like carbon captures and many of the other electrolyzer applications, they're more focused on R&D and pilot lines, you know, 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.
spk02: And one more, if I may. If you look at this slide, 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?
spk01: Over recent years, we've been shifting from predominantly R&D-focused equipment to 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 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 with a higher average selling price. Of course, our R&D machines are never going to go away. They're really important to us to establish ultrasonic spray as a standard coding method for next-generation applications. But large production machines, they're definitely going to be what heavily drives our future growth.
spk02: All right, so all taken across those particular areas, R&D, pilot, and full production applications, Do you think you'll experience similar margins? I mean, your gross margins are really good right now. Is there anything that would – I imagine the larger units are more complex, so you probably build a little more in there. But yet the R&D units have had pretty high margins too, so what type of – changes, if any, do you expect over these three different areas as the machines get larger and into the full production mode?
spk01: Sure, sure. Yeah, yeah, surprisingly, our margins, you know, they've had slightly improved as we've shifted to these larger production machines. You know, 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. You know, we're really seeing the quality and time to market is many things for many of 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.
spk02: And one last question, if I may. You mentioned the billions of dollars that are being spent or at least offered up by governments, particularly in the alternative energy area. And if we look back over the years, each year has been affected by a couple of large orders or a couple of large customers at least. So how do you think the profile of your customers has changed, and are you going to be able to get a more diversified group of customers so you're not dependent on one or two or one big order each year?
spk01: Yeah, yes. Well, you know, in the clean energy sector, we're seeing lots of new company names. You know, it's a relatively focused industry where most participants, you know, already know Sonotech. But the rate of new companies entering in this market is happening really quick. In the markets of, say, semiconductor and medical, these are typically, you know, our huge multinational companies that are participating with Sonotech. And we partner with them, establish relationships with them for many years. And, you know, they've come to highly trust our ability to deliver quality coding 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.
spk02: All right. Thank you very much. Sounds good. I appreciate it.
spk01: Hey, it's good chatting, Bill. Take care.
spk02: Thank you, Bill.
spk06: The next question is from Nate with Think Equity. Please go ahead.
spk07: 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 Sonotech kind of fitting in, and do you anticipate significant growth to continue in that space?
spk01: Yeah, I think it's got to be continued growth there that's going to be very aggressive. You know, there's so many dynamics happening around the world today. You know, look at the Ukraine dynamic and the rising prices of gas, and, you know, clean energy has got to be part of the solution here, you know.
spk05: Yeah, you know, Nate, just to expand on that answer, We've seen a recent report that a European organization has put out. They've fully come awake about their vulnerability, 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 alternate 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. Sanotech 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 people just have to do You know, there may be a recession on the horizon or we may be in one already, but there are 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.
spk07: Got it. No, absolutely. Very exciting, guys. Congratulations again.
spk01: Thank you.
spk06: Thank you, Nate. Again, if you have a question, please press star then one. The next question is from Tom Carey with WellMap Capital. Please go ahead.
spk03: Yeah, thanks for taking my question, guys. Congratulations on the great results this year. Quick question about, I was hoping you could give 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.
spk01: Yes, sure. We are predicting actually a slight rise in CapEx in this coming year. You know, 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. You know, it helps especially when we're in a shortage of labor shortage. You know, 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, you know, things like aerodynamic shaping of our spray systems and the software that is utilized to maximize the capabilities of our systems there. So, you know, we'll see a similar sort of just slight growth in CapEx in the coming year here. But, you know, we are fully operational here in prepared for growth. A lot of that is to accommodate our growth as well. We're anticipating growth, so we're putting the capital infrastructure in place to accommodate that growth as well.
spk05: As Steve has mentioned, manufacturing technology, it's not often talked about in meetings like this, but it's very critical to Sonotech 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 granular level which comes about from the type of Analysis and measurement tools that we have been purchasing and putting in place in our in our facility I don't think there's anybody else in the world who's even close to what we can do today And we're continuing down that path just for the reason Steve mentioned labor is a challenge of course for all people but but the precision of 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, you know, we're the master of that, and I think it's going to continue.
spk03: Great. Appreciate it. That's all I've got, guys. Thank you again.
spk06: Again, if you have a question, please press star then 1. Please stand by as we poll for questions. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Dr. Coscio for any closing remarks.
spk05: Thank you, and thank you for joining us today, everyone. Sonotech 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.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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