Sono-Tek Corporation (NASDAQ:SOTK) Q2 2024 Earnings Call Transcript

Sono-Tek Corporation (NASDAQ:SOTK) Q2 2024 Earnings Call Transcript October 12, 2023

Sono-Tek Corporation misses on earnings expectations. Reported EPS is $0.03 EPS, expectations were $0.05.

Operator: Good morning, and welcome to the Sono-Tek Corporation Mid-Year Fiscal Year 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Stephanie Prince from PCG Advisory. Please go ahead.

Stephanie Prince: Thank you, Andrea, and thank you to everyone joining us today. Sono-Tek released their second quarter and first half fiscal 2024 results premarket this morning. If you don’t have a copy of the release, please go to the company’s website at www.sono-tek.com and click on the Press Release News Tab in the Investor section. 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’d 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?

Dr. Chris Coccio : Good morning, and thank you, Stephanie, and thank you everyone for joining us. Today, we’re going to discuss our second quarter and first half of fiscal year 2024 results that were 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 open the call for your questions. Now, as a reminder, Sono-Tek currently holds two earnings calls per fiscal year. This is our midyear call for the six months ended August 31, 2023. Our fiscal year-end is February, so fiscal 2024 will end on February 29, 2024, and our next earnings call for the 12 months of fiscal 2024 will be in May of 2024.

Now, as many of you already know, Sono-Tek developed a revolutionary method of applying thin film precision coating several decades ago. The proprietary technology involves the use of our advanced high-frequency ultrasonic nozzles, incorporated into specialty motion control systems, and these are able to achieve uniform micron and nano thin coatings onto our customers’ products. Our solutions offer dramatic savings in the raw material, water, and energy usage, and are environmentally friendly therefore. Now the first critical advantage of our ultrasonic coating systems is the ability to apply precision thin films, which are vitally important in today’s world, with thousands of products and micro-components now requiring a functional or protective coating to be added to them.

The strategic shift that we made several years ago to offer more complex, complete solutions has meaningfully broadened our addressable market and resulted in significant growth in our average unit selling prices. Excuse me – our larger machines now commonly sell for over $300,000, and the systems prices can reach $1 million or more, which significantly impacts our quarterly revenue. This is what happened in the second quarter when we finally were largely free of the supply chain constraints that held back our sales growth over the past year. We reported our strongest quarter ever, 50% higher than a year ago and ahead of expectations. We shipped one of our newest multi-axis systems, valued at over $1.1 million. In addition to new orders, sales reached $5.64 million.

Now, in addition to the high sales, backlog still increased 26% from the end of our last fiscal year six months ago, it was $10.7 million, the highest in our history. This growth was due to our strategic shift to large, complex systems and platforms, and also our focus on opening new markets for our unique thin-film coating technology. This includes three main areas with very strong global growth that we’ve talked about before, microelectronics and semiconductors, medical devices, and alternative or clean energy. We’ve served these industry sectors for many years and are continuing to advance our products and system solutions in these areas for the latest generational technology. Clean energy, including fuel cells, green hydrogen generation, carbon capture, and advanced solar cells, our markets we’ve been providing R&D and pilot lines for close to a decade.

We’re now having a lot of success with these customers transitioning from production – to production scale systems as a result of prior R&D and process development work they did with our experienced application engineers. Over the past year, we’ve announced nearly $6 million in large orders, primarily from the clean energy, but also the medical sector. The largest and most recent order is valued at $2.19 million, and it’s the largest order from the clean energy sector to date, as well as the largest in Sono-Tek’s history. These orders are among the first from our deliberate shift in strategy to large, customized systems. Although our proprietary ultrasonic atomization technology, where Sono-Tek began more than 40 years ago, remains at the heart of all of our systems.

We’ve been able to achieve this shift through our own research and development work, which we consider to be our lifeblood. We attribute increase in sales both in this quarter and to come, a direct result of our investments in R&D, with a strong focus on product expansion. In the first half of the year alone, we’ve already invested $1.4 million compared to $1 million in the year-ago period. And to further support our growth and expansion for these large platform custom engineered systems, we’ve increased our headcount by approximately 10% this year, mainly in the areas of engineering, R&D and sales engineers. We want to ensure that we stay fully staffed and in front of our needs. We’re excited about these investments and that they’ve begun to pay off.

Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger, more complex systems for production applications with multiple and repeat orders. In fact, we’re already working on the next generation of machines. Looking ahead to the second half of this year, we’re confident that shipments of previously delayed and new orders will continue to positively impact sales. We’re expecting at least 25% year-over-year sales growth for fiscal 2024, ending next February. We expect that these results will put us back on our pre-COVID growth path. Thank you, now. And I’ll turn it over to Steve Bagley, our CFO, who will provide additional details on our financial results. Steve?

A technician in a lab coat inspecting a semiconductor processor on a microscope. Editorial photo for a financial news article. 8k. –ar 16:9

Steve Bagley : Thank you, Chris, and good morning everyone. For the second quarter of fiscal 2024, net sales increased 50% to $5.64 million and increased 57% from the $3.6 million reported in the first quarter of this fiscal year ended May 31, 2023. Steve Harshbarger will go into more detail with respect to sales. During the quarter, approximately 43% of sales originated outside of the United States and Canada, compared with 56% in the second quarter of fiscal 2023. Gross profit increased 48% to $2.8 million, compared with the prior year period. The gross profit margin was 49.7%, compared with 50.4% for the prior year period. The decrease in the gross profit margin was due to product mix. Operating expenses increased 30% to $2.2 million compared to $1.7 million in the prior year’s second quarter.

As Chris pointed out earlier, technical headcount increased approximately 10% across several areas. Research and product development costs increased 56% to $789,000, primarily due to increased headcount and related salaries and the higher costs of research and development materials and supplies, all of which are used – excuse me, all of which are used in the development of new products for new and existing markets. Marketing and selling expenses increased 22% to $945,000 for the quarter. The increase was due to increased headcount, salaries, commissions, travel and trade show expenses, partially offset by a decrease in insurance expense. General and administrative expenses increased 15% to $501,000, primarily due to increased salaries and professional fees, partially offset by a decrease in stock-based compensation expense.

Operating income increased 218% to $566,000 for the second quarter. The increase was primarily due to increases in revenue and gross profit, offset by an increase in operating expenses. Operating margins for the quarter increased to 10% from 5% in the prior year period. Interest and dividend income increased to 124,000 in the second quarter of fiscal 2024, compared with 19,000 for the second quarter of fiscal 2023, primarily due to the current higher interest rate environment and our large cash balances. Net income was 541,000 or $0.03 per share, compared to 162,000 or $0.01 per share for the second quarter of fiscal 2023. The increase primarily resulted from an increase in gross profit and interest and dividend income, partially offset by an increase in operating expenses and income tax expense.

Diluted weighted average shares outstanding increased slightly to approximately 15.7 million shares. We’ve continued to add to our cash holdings, cash, cash equivalents and marketable securities at August 31, 2023, were $12.3 million, approximately $900,000 higher than at fiscal year-end, and we continue to carry no debt on our balance sheet. CapEx for the six months was 246,000, all of which is directed to ongoing upgrades of our manufacturing and development lab facilities. We expect to invest approximately 500,000 in new equipment for the full year. And now, I’ll turn the call over to Steve Harshbarger, President and COO for an operational review of the second quarter, Steve.

Steve Harshbarger : Thank you, Steve. Good morning, everybody and thanks for joining us today. As most of our listeners likely know, Sono-Tek breaks down our sales in three ways, by markets, by product, and by geography, and that’s how I’m going to address these in my upcoming comments. Please refer to the short tables on the last page of our earnings release for all the details. For the second quarter, we were excited to report net sales of $5.64 million. This came in ahead of our expectations and is a 50% increase from a year ago and a 57% increase compared to the first quarter of the fiscal year, which ended now on May 31, 2023. The increase was primarily driven by increased shipments of our multi-access coating systems, which are commonly used in the clean energy and medical device markets.

For the quarter, sales of these multi-access coating machines were up 96% and totaled $2.9 million. These systems contain some of our newest and highest ASP platforms, and they were also the most severely supply-constrained product lined up through our first quarter of this year. We were able to finally break out of this last year’s supply chain issues and meaningfully increase shipments as a result of a significant program we implemented to broaden our supply chain options, which included increasing our own vertical integration with the introduction of a new multi-access product line that we call the NovoCoat. This vertical integration expansion is a process that is ongoing, and we’re continuing to build and increase the depth of our in-house manufacturing capabilities every day.

Integrated coating systems sales doubled to $853,000, driven by sales of our newly developed Float Glass Coating platform, which is continuing to gain acceptance into the market. Fluxing systems sales dipped against a tough comparison to last year, when sales of a newly released spray fluxing platform called the SonoFlux X2 were strong. Over the years we’ve installed thousands of spray fluxing machines, and our customers continue to upgrade their equipment to our latest model spray fluxers when we advance our technology. So although there has been a dip in fluxer sales for the quarter and the first half, there is a large customer base and quote activity still remains very strong in this area. OEM sales were lower in the quarter as well, which we had expected, because many of our OEM partners built up excess inventory to combat their own supply chain concerns of last year.

This was largely offset by an increase of spare parts and service-related revenue, which is a growing revenue stream for us that falls in the other product category and grew 64% this quarter. Sales of spare parts and other maintenance packages that support our large platform multi-axis machines are growing in importance as we place more and more of these machines with high ASPs, Average Selling Prices, into the field. In fact, we believe that the follow-on service and support spare packages could reach as much as 10% to 15% of the total order value of our large full systems. Looking at our market baskets, sales to the alternative clean energy market grew 161% and we are positively impacted by the growing number of Sono-Tek customers transitioning from our R&D machines to production-scale systems that carry much higher ASPs. And many of our large contract – excuse me, many of our recent large contract announcements are from this area and are used in the manufacturing of critical membranes for carbon capture, green hydrogen generation, and fuel cell applications.

Sales this quarter included the shipment of a $1.1 million system and a second system for the same customer of similar values still remains in our backlog. Medical sales rebounded strongly in Q2 with 117% growth. This was driven by several large multinational companies taking delivery of specialty implantable medical device coating systems during this quarter. Industrial sales grew by 104% due to the recent introduction of several new generation systems, including the shipment of a large float glass coating machine that we delivered into Latin America. By geography, approximately 57% of our sales were to the U.S. and Canada compared to 44% in the comparable period of fiscal 2023. Sales to the U.S. and Canada increased by 94% and were positively impacted by the continuing trend of on-shoring, in addition to several U.S. government initiatives that are investing in the clean energy sector and other advance research markets.

These include the CHIPS Act and the Inflation Reduction Act, which we’ve talked about before. The difference now is that our cash is starting to reach our customer base and they are spending it on equipment such as ours. Asia-Pacific sales decreased by 35%, primarily due to decreased sales to China, while other areas of Asia remain very strong. However, now that China is back open to international visits after the COVID lockdown, we are working to regain our momentum there. Our backlog continued to grow during the quarter and on August 31 it had more than doubled to $10.7 million compared to $5 million last year and was up 26% from $8.5 million six months ago at the end of our last fiscal year. I apologize, I have a little cold. This is the highest reported backlog in our history.

Excuse me one second as I grab a drink. Again, apologies.

Dr. Chris Coccio : Would you like us to take over Steve. [inaudible]

Steve Harshbarger : Yeah. All right, I think I’m back. That is the highest reported backlog in our history and it reflects the increasing order activity from the clean energy sector in particular. This also includes the recent $2.19 million order that we announced, which is the largest order from – from this sector to-date and the largest in order history. Customer deposits reached $3.4 million at August 31, reflecting the continued receipt of several large new orders. We generally require deposits of 50% or greater on orders valued at over several hundred thousand dollars. In closing, and as Chris mentioned earlier, our outlook is strong and we’re expecting a very good second half of the year, with a minimum of 25% year-over-year sales growth for the full fiscal year ending February 20, 2024.

Again, I apologize for my cough there. I caught a little cold over the weekend that’s still lingering with me. And now we’ll turn it back over to the operators for some Q&A if I can speak.

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Q&A Session

Operator: [Operator Instructions]. And our first question will come from Ted Jackson of Northland. Please go ahead.

Steve Harshbarger : Good morning, Ted. I don’t know if you can hear me, but I can’t hear you yet.

Dr. Chris Coccio : We can’t hear you, Ted.

Steve Harshbarger : I don’t think anybody hears – does anybody hear Ted Jackson?

Dr. Chris Coccio : No. Yeah, I don’t hear him.

Steve Harshbarger: Maybe we can come back to Ted and maybe figure out the audio there.

Operator: Okay. [Operator Instructions].

Steve Harshbarger: I suspect maybe everybody is afraid to ask me a question because I will start coughing.

Dr. Chris Coccio : All right. That was Ted Jackson. Nelson Obus had a question. I don’t see his – can our conference coordinator pick up the other question? They are having technical issues, according to…

Steven Harshbarger: It looks like we have several people in the queue for questions, but it doesn’t sound like we can get them through so we can hear their questions.

Dr. Chris Coccio: Yeah, yeah. Stephaney is trying to…

Steven Harshbarger: Sorry about the technical issue on the quarters call.

Dr. Chris Coccio: Right.

Steven Harshbarger : For those of you still with us, if you can hear us, just hang tight. We’re trying to work out the technical issues through the Chorus Call Group that organizes this for us.

Dr. Chris Coccio: Correct. The Chorus folks are saying this never happened to them before.

Steven Bagley : It must be that – I think it’s that guy Murphy running around.

Operator: Pardon me. The next question will come from Nelson Obus with Wynnefield Capital. Please go ahead.

Nelson Obus: Hi there! Can you hear me?

Steve Harshbarger : Oh, we got you, Nelson. Thanks for joining today.

Nelson Obus: I’m just curious what the EBITDA comparison was in the quarter.

Steve Harshbarger: Mr. Bagley, do you have the EBITDA there?

Steve Bagley : If you give me a second, because I do not have the calc right in front of me. Hold on a second there guys.

Dr. Chris Coccio: I would say while he’s trying to get an answer to you that we typically don’t even look at EBITDA. I know financial companies do, but we’re more focused on our growth and our earnings and our cash.

Nelson Obus: Yeah well, it’s very helpful for figuring out what the private market value is, which is a better – I think that’s something you should think about. It’s not just financial companies, it’s basically across the entire board and you should get credit for your cash, which is licensee, enough with that.

Steve Bagley: That’s a good point. EBITDA, I’ve got income before taxes, so 715. I’m adding back my depreciation amortization. I’m coming in around 994.

Nelson Obus: Well, very nice. Now look, I mean, don’t get me wrong. I’m not a fan of quarterly reporting, but we’re in an interesting period where it looks like the economy may be slowing down. You’re an industrial company that is operating in a way which is very counter to a lot of what industrial companies are concerned of, which is an economic slowdown. Can you just help me? What’s the rationale for not having – particularly in this environment, not having quarterly calls? Because I think that you’re atypical and you should get credit for it, and you’re going to put a Q out, and why not put color in it? I think that’s something the board should think about. But can you help me out? It’s the only company, except of course for foreign companies, that don’t have conference calls quarterly.