Somero Enterprises, Inc. (SOM) Earnings Call Transcript & Summary

Mr. Yuncza will give us the vote.

The proxy votes received regarding this resolution were for 25,984,745 against 1,157,061 votes. Chairman's discretion, 0.

I declare the resolution carried. I now propose Resolution #6 to ratify Whitley Penn LLP as auditors of the company for the fiscal year ending December 31, 2023, as stated in the form set out in the notice of convening the meeting, and I would ask Bob Scheuer to second the resolution.

I second.

Mr. Yuncza will give us the vote.

The proxy votes received regarding this resolution were for 20,233,823 against 6,907,983 and Chairman's discretion, 0.

I declare the resolution carried. Ladies and gentlemen, that concludes the meeting of today, and I thank you for the attendance here this morning. I will now turn the meeting over to Jack Cooney, CEO, to say some words.

Thank you, Larry. I just want to tell you how much I appreciate all of you attending the meeting today, and we have the opportunity to answer any and all of your questions. So I'd like to go ahead and receive the questions that you have put in. So once again, thank you for attending, and thank you for your interest.

[Operator Instructions] Being no questions in the queue on the audio side, I'd like to turn back to management for any written questions.

Thank you. So we have a couple of questions. The first question asks discuss how well publicized U.S. bank stress and the expected knock on the CRE space is impacting Somero clients and demand for product. So obviously, the banking situation and the interest rate environment are things that we do watch closely. We obviously have not -- we have not seen any direct impact on our clients at this point in time. But certainly, the higher interest rates and lending restrictions from banks in the U.S. are things that we're watching closely as to their impact on the pace of projects that are either commissioned or currently underway or plan to begin soon. So it's a factor we continue to watch very closely. The second question is how much does the previously reported backlogs on construction work provide a buffer to demand for Somero products. And if it does, what approximate duration of this buffer. So to answer the question, I think we would revert back to the comments we have consistently made our business itself does not have an extended order book. Our business is very much a momentum business. Each month, we go into that particular month with very little of that month's revenue currently on order. A lot of the revenue each month is based on orders placed that month. But we really gauge the momentum and the health of the market through the eyes of our customers. And that's the direct feedback that we base our perspective on where the market is going. It's based on the work our customers have in front of them. They have much more extended visibility. They can see project backlogs that could go out 12 months or more. So that's really what we see is in terms of gauging the health of the market, our specific order book to the business is actually minimal. So the next question is -- excuse me, why is there no AGM trading statement this year? So to answer that question, historically, we've held the AGM in June. In this particular year, we've held the AGM in May for scheduling reasons. So it's earlier than traditional. And the trading statements we've traditionally made in June have accompanied the AGM. The timing has coincided. In this year, we would say and revert back to the conditions we noted back in the market conditions we noted back in March remain intact and that health of the market, et cetera. However, when we give guidance and reaffirm guidance for a particular year, it's important for us to get enough data to really understand where the market is and where it's going. It's very difficult for us to forecast our business. As we've always said, it's a momentum business. So traditionally, we've needed to get at least towards the end of the first half before we could really make a comment as to direction of the market or how our guidance is lining up with our current expectations. So it's really just to match historical timing of the announcement in June. The next question is, would the Board consider more aggressive buybacks below a certain share price? If yes, could you indicate what price that would be?

Sure. So the Board continuously assesses our share buyback program. Historically, the program had been designed to mitigate dilution of employee-based equity programs and not necessarily a mechanism for return of capital to shareholders. But we do continually assess the program. and we will do so every year and consider potential increases as the circumstances allow.

Great. Thank you, Enzo. So the next question is, the trend has been for higher prices of Somero machines, offsetting lower machine sales volumes. Can we expect this trend to continue? Well, the first part of the question with respect to higher prices, the pricing of our equipment has been to recapture the cost increases historically that we've experienced, and we do expect that to continue to pass off cost increases to our customers. As far as the trend in sales volumes, that's something we can't really predict. It really ultimately comes down to take rates across our portfolio. And those take rates are based on the types of projects our customers have in front of them. So in certain cases, there might be higher volume from some of the smaller equipment. Other cases, there could be upticks in some of the larger equipment. And we really don't look at the volumes and the mix really because that's not something we can control. We focus more on what is the work in the marketplace and making sure that we are meeting that need with the appropriate equipment. So the next question is, can you provide an -- can you provide an update on progress with the European Australian sales force and the opportunities of growth, specifically in Europe, given the relatively low contribution from this market in recent years. So to address the first part of the question, we continue to make investments and have continued to make investments to add to the team, our sales team, our customer support teams in those markets, which is reflected in the annual part, we refer to the growth in those teams in recent years. And that is to capture the opportunity that we see in each market, both from new customers and new products. We see continued growth opportunity in both. And if you look at the relative contribution from Europe and Australia, it continues to grow. Certainly, Europe is an inherently smaller market than the U.S. It will never rival the U.S. market in size for a number of reasons. It's a lot of different characteristics in that market. But our anticipation and our goal is to continue to see increased contribution internationally to our overall revenues. The next question is, has China now been fully abandoned as a target market? And do you anticipate returning to that region in the future? To address that question. So China, if you will recall, at the beginning of 2022, we undertook a restructuring to reduce our cost of the team in place and the infrastructure in China. And we continue to operate that market basically to service our existing customers and to opportunistically sell equipment when those opportunities arise. It is not a major investment. It is a minimum investment where the costs match the volume. And it is something that we'll continue to evaluate as to the ultimate plan for that market. But it's not -- certainly not a drag on our earnings at this point. And as far as plans on returning to the region, that's all going to be determined by market conditions and what we see going forward. So the -- the next question is, have you evaluated you evaluated how the inflation Reduction Act of 2022 might impact Somero's business over the next few years and what conclusions, if any, did you draw? So the answer to that is we've certainly hit a close watch on the different legislative and fiscal policy initiatives that have taken place. There's certainly been a lot of programs put in place by the Biden administration in terms of investment, particularly in infrastructure and different strategically important industries. In many cases, those acts don't directly benefit us. It does have a benefit to the overall construction environment in and around our core commercial markets, there as always, when there's activity, there's some peripheral benefits, but we don't view them as directly benefiting our business, but it's something that we obviously continue to monitor. The next question is, was the level of earnings seen in 2021 and 2022, exceptional? Or is this the baseline level of earnings that you expect to grow going forward, particularly referencing the U.S. market, which made up the majority of earnings for the last couple of years? So certainly, we had 2 exceptional years, 2021 and 2022 represented 50% growth. And we were able to ramp up quickly to meet that demand. And in 2022, that level of activity continued at a very high level. We are seeing continued activity in the U.S. market, no substantial changes in terms of the activity levels. So our expectation in terms of where the U.S. market goes in years beyond 2023, we don't have great visibility. But we certainly see that there will continue to be opportunities. Nonresidential construction has a tremendous amount of work and projects and those products are very diverse. So as we sit here today, we're comfortable with the activity that's taking place, but it is very hard for us to predict going beyond a 12-month period with any great accuracy. So the next question is, are you seeing inflationary pressures and supply chain issues abate? Or do they remain within the business?

Sure. Thanks, John. So the challenges from a supply chain perspective, logistics, the challenges are still there. They're not worsening, which is the good news. Our team does a great job of working around some of the supply chain shortages, identifying alternative components. We'd say that we have not missed a single customer order due to supply chain shortages. And it's difficult to assess when these conditions may abate. They're sort of very broad range. But we are managing around it on a weekly, daily basis and don't foresee worsening in the near term.

So the next question is, what percentage of Somero's sales come from service parts, servicing and parts and at what age does the typical Somero machine start to require more regular servicing? Can you please give us some idea of the total installed base?

So generally, the parts and serve component of our business ranges in the approximately 15% of total revenue, our parts really being the crux of that part of our business and that revenue stream. In terms of our installed base, we have thousands of machines in the field. It's difficult to know exactly how many are in operation. But we have sold thousands in over 90 countries in the world. The life cycle of our machine ranges depending on the size of the machine. So the smaller machine where there's greater transportation tends to have a shorter life cycle in the range of 5 to 7 years. Our large line machines have a longer life span in the range of 7 to 10 years. But that all depends on utilization. Obviously, the more the machines are used, similar to the vehicle, the more mileage you put on it. in our case, ours. The sooner repairs and services are required. And overall, that is a key part of our business is the replacement cycle of the installed base.

Great. Thank you, Enzo. And as we've commented previously on the size of the installed base, At this point, we're probably pushing roughly 10,000 units that are in the field, which is an update from comments we made a few years ago. So it's a very large installed base. But as Enzo indicated, we we're not sure how many of those machines are accurately how many machines are actually currently in service. So the next question is, why was the company not at the U.K. Concrete show this year? Is this a sign of reduced promotional activity due to a difficult market? So the answer to that is there were actually 2 shows in the U.K. this year. And of the largest of the 2 shows, we were present, which was in March. And no, in terms of promotional activity in the market. No, we've continued to be present at trade shows. We've done local marketing. We continue to do all the promotional activity, we think, is really important for us to grow the European market, the U.K. market being our largest of the European territory. So no promotional activity remains as it always has. So the next question is, is the new Houghton, Michigan facility addition successfully up and running and working as and utilized as planned? And the second is, are you seeing improved concrete availability in North America for your customers?

Sure. So I'll take the first part of that question. Yes, the facility is now fully operational and working as anticipated. As we previously mentioned, the expansion allows room for the business to grow in the long term. We speculate that size facility will support a business in the range of $200 million or so. And therefore, we've got room to grow into it. In the meantime, however, it does provide immediate workflow efficiencies for our operational folks. We've also brought in-house a couple of activities that were previously done outside by third parties with regards to our assembly as well as bringing in-house a sort of pilot R&D area where we can test equipment indoors under controlled conditions.

Great. And then as far as the second part of the question, improved concrete availability in North America. It's -- concrete availability still remains a problem and a challenge. It isn't ubiquitous and every market isn't the same. There's certainly markets where it's better than others. But the overall impact of concrete availability or lack thereof is a factor and continues to be so. The next question is U.K. European customers -- or competitors -- excuse me, are pushing EV screens as a way forward in their markets. How is Somero innovation progressing towards a salable project as this is an increasing looking -- increasingly looking product gap? So to comment on product development, we -- it's important to note that we have a very wide range of different concepts we're working through. We work through regularly ideas we pursue. In some cases, they're meant to address very specific market needs that we have identified. In other cases, it's related to making sure that we're keeping patient with current market trends. we can say we're highly attuned to market trends, developments, where the market is going. Obviously, EV is a big part of that. So that is factored into our product development process. And certainly, we are keeping pace and very close to watching these trends and more certainly, our product development will reflect that in the years to come. So the next question is, do you have plans to move to the main market of the London Stock Exchange or seek a U.S. listing?

This is Jack. No, we do not have any plans whatsoever to move to any of the other stock exchanges.

So then the Actually, just a clarification. The U.K. Concrete show that we attended was actually -- I had my facts a bit off. It's actually the first part of May. And we had very good activity as we expected for the first couple of days. So again, we continue to have promotional activity in the European market as we always have. And then it looks like the last question is note that the -- excuse me, introduction of the Sky Screed 36 in new market appears to be a success. Is there another product like the Sky Screed that could follow that success. So what -- I guess what we would say is when we -- and we've made this on it before, when we've entered into completely new markets with disruptive products. We have always anticipated that it would be a continually ramping market penetration. And certainly, that is what we've always expected. But what's important for us is to open up and continue to expand our addressable market with new market segments, new applications. And the Sky Screed was probably the most visible and notable example of that which opens up a completely new area, high-rise structural. Absolutely, that is part of our plans in the future is to find those markets and new market segments that we can enter and increase the addressable market for us, which will ultimately increase the long-term growth trajectory of the business. And it does appear that we've gone through all the questions we received. So unless there's anything more on the voice side of things, we'll turn it over to the operator to conclude.

At this time, there are no further questions. This concludes the question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.

Good work, John.