Sono-Tek Corporation (SOTK) Earnings Call Transcript & Summary

Hi. My name is John Peyton, business development at Sequire. Sono-Tek Corporation designs and manufactures ultrasonic coating systems for applying on parts and components for the microelectronics and electronics alternative energy, medical, industrial and research and development for various markets worldwide. The company was incorporated in 1979 and is headquartered in Milton, New York. Sono-Tek team, take it away.

Hello, everybody. First, let me extend cordial greetings to LD Micro attendees and participants. We appreciate the opportunity to tell you a little bit about our company Sono-Tek. I am Christopher Coccio, the CEO and Chairman of Sono-Tek. And with me here today is Steve Harshbarger, our President and Chief Operating Officer. Next slide, please, is simply the boiler plate that goes with the safe harbor requirement. And the one thing different in this past year has been COVID -- the mention of COVID. And I'm happy to say that it had a very minor impact on our company due to the excellent adjustments made by our staff. Next slide, please. So who are we? Who is Sono-Tek? This is an overview. We're the world leader in the design and manufacture of ultrasonic coating equipment and that's used to put down precise thin film coatings by a variety of customers, most importantly, in the microelectronics and semiconductor industry, the alternative industry, energy industry -- medical device industry and then other industries as well. And on the right-hand side, you can see our trading data and information. We're about a $15 million company. We have about $9 million in cash. So it's a pretty strong company. Next slide, please. We're very happy to report that we were uplisted from the over-the-counter market to NASDAQ at the end of April, and we actually spent today in New York City ringing the bell and having a great celebration. So it's just a real pleasure to help our shareholders with the ease of transactions and to increase liquidity in the stock, which has taken place quite dramatically since we uplisted. So that's been a big step forward for our company. Next slide, please. No company succeeds without a really good team. We have an excellent team here at Sono-Tek. In particular, you can see the management team here. And each of these people have been working with us together for the past 15 to 20 years. So it's been a real strong vibrant community. And you don't see this, but there's a Board of Directors that consists of retired executives from a variety of industry and they provide very good counsel and advice to us in matters. Next slide, please. What do we do? Well, our mission is to provide thin film coating equipment to a variety of important customers, but not just the equipment. We're regularly providing solutions for them. They come to our laboratories. We work with them. We can handle them around the world with our application expertise, and we work in their factories to make sure that everything goes according to plan. And so they become partners as much as customers. The other thing that we do that's quite important is advancing our technology. Since we invented this technology in the 1970s, we have continued to advance the technology and its application. So that's really what we do here. So the advancement leads to growth, and that leads to shareholder value increase. And I think you'll find that quite impressive. Next slide, please. So what is ultrasonic coating? The picture in the bottom right hand is of an ultrasonic nozzle cutaway. It's about the size of a hand grenade and I occasionally made the mistake of trying to carry it on board and we very quickly learned not to do that. That's only a part of it though. The technology also consists of firmware, electronics that you don't see and in addition to this precision hardware. And it's used to take liquid and turn it into micron-sized drops that can then be applied to all these high-tech specialized surfaces that you don't want to coat them with a garden hose, you want to do something quite precise and that's what we do. Next slide, please. This is a good way to show you the advantages of ultrasonic coating. It's a big application. This happens to be a glass line. They're about 12 feet wide. And you can see at the end of the line, there's something being sprayed. Well, that's an acidic spray to protect the glass as it sits in storage. That's not a good thing to have floating around in your factory and people have to get into that room and knock off some of the stuff that accumulates on those nozzles. The bottom is what we're replacing that top system with and it's an operation. You just can't see it unless you have really good eyes, you might see a little spray on the close nozzle. So it reduces everything overspray, cost, and it makes it possible to have a very high process repeatability. So this is a big winner for the glass industry. Next slide, please. If you read the papers, I read The Wall Street Journal daily, you can see these types of headlines, and they fall into 3 major areas of the climate change, big deal; chip shortage, another big deal; semiconductor manufacturing, it's a global problem. And then medical devices as people in our country and around the world age and as they look for better and better medical treatments. Those are 3 big drivers for any business, and we happen to be right in the heart of those businesses. And on the next slide, you'll see some of the examples -- or at least you'll hope to see them. They're kind of small. But I can tell you what they are. In the top line, the semiconductor end of it it's MEMS, it's handheld devices, it's touchscreens, it's semiconductor fabricating as well. And in the medical device, it's things like cardiac stents, balloon catheter coatings, blood collection tubes, diabetes monitors, all those things are -- these all represent actual customer interaction for us. In the bottom the latest big deal is clean energy and the environment, while fuel cells, solar cells all require specialized coatings, advanced batteries. And if we're even working with companies on carbon capture, which is probably the next big thing, this is what Sono-Tek does, and these are the industries that we're focused on. Next slide, please. How does it translate to money because when people invest, they can get excited as we are about the applications, but they want to know what about the bottom line. Well, the bottom line has been quite good; the gross margins for our company are very high, indicating a highly protected competitive position over the years. And on the right-hand side, the revenue has been growing, except for the slight haircut that took place during the COVID year, but it didn't affect the income. The income was about the same as the previous year. And Steve will tell you a little more about what's happening in this current year, which started in March of 2021, it's growing. It's back on that growth track now that COVID is starting to become in our rearview mirror. So we're a company that has very high margins and very strong revenues. The next slide shows the other half of the financial picture which is your balance sheet. And you can see that the cash and cash equivalents have grown. We're close to $10 million these days. The debt has gone down to actually 0 as we paid off the industrial park that we purchased for expansion. 20 years ago, the picture was the opposite. We had no cash and we had a lot of debt. So this team has worked over the years to continue to grow the company and it's really a very powerful position. Steve will talk about some of the initiatives that we're using some of that cash on, we have the luxury of looking at things to grow the company. I'm going to introduce you now to Steve Harshbarger, our President and Chief Operating Officer. Steve?

Thanks, Chris, and good afternoon, everyone. Although we did our best to shorten the presentation. It's still fairly detailed. So I'm going to just touch upon many of the upcoming slides. But please feel free to send any questions you may have to Dr. Coccio or myself. At the end of the presentation, you'll see our e-mail addresses there shown. Almost 8 years ago, Sono-Tek began the process in making this very important strategic decision and shift away from being a high-quality equipment provider to becoming a machine solution provider. Prior to this, we were really focused on selling a well functional machine, but not necessarily an end customer solution. This shift took a very concerted focused effort from several departments within Sono-Tek to provide these full system solutions. We first focused on enhancing our application engineering capabilities to fully understand our customer specific needs and targeted markets that we felt were important to us. This continues to be an ongoing process. Every year, we're adding engineers to expand our knowledge for new applications and continuing to expand our laboratory capabilities both in the U.S. and expanding our overseas labs at Sono-Tek distributor sites. Once having established this direct connection of application expertise with our customers, and that allowed our design engineering team to focus on advancing our equipment for those specific application needs and to develop next-generation Sono-Tek machinery to expand our capabilities and product offering. With the accumulation of all these capabilities and this continually expanding product line, it then allowed the front end of the operations to confidently focus on expanding our customer base to the most promising advanced technology markets and applications which could typically generate higher margins and separates our superior expertise from others. We're now starting to see the results of the shift as our average selling price of machines climbs each year and our capabilities to solve customer coating challenges are really unsurpassed. Customers recognize us for having state-of-the-art engineered products with a well-established network of strategic partners to take on these large system integration projects, which provides much higher value to the customers and it's going to be driving our future growth. Now this next page gives you a snapshot of our diversification by markets geographically and by the product lines we have. You can see the primary markets we serve are in the industrial market, in alternative energy, electronics, emerging R&D and the medical market. With our largest market basking being the electronics market with 40% share of our revenue. Looking at the geography of where our machines are going. The U.S. and Canada market grew this year to about 35% of our total sales. And COVID certainly contributed to this increase as several of our customers brought their manufacturing operations back closer to home. Europe and Asia were evenly split about 28%, 29% and Latin America was 8% of our sales. And our product lines range from very complex multi-access coating machines and large integrated coating systems, our OEM products and our more established products like our fluxers. The Multi-Axis Coating Systems really continues to be the largest contributor to our sales. And this area will likely continue to be a significant growth area for Sono-Tek, in particular due to our 6-axis robot platforms. Now this next slide has a lot of information on it, which I'm sure is a bit difficult to read for those of you joining us here today, but it provides the next level of segmentation of the applications within the markets that we serve. As Dr. Coccio mentioned, the 3 marketplaces that we're very excited about and focused for growth over the next few years are in the microelectronics area, medical area and the alternative energy area. Just to touch on these individual market sectors, the microelectronics market contains semiconductor and sensor manufacturing, which are very important sectors for us with lots of room for growth in both of those areas. I think everyone nowadays can appreciate the huge demand for sensor miniaturization and the appetite of course for these electronic devices that incorporate these sensing technologies. And now the challenge is, of course, for industry to help resolve the supply chain demand problems for requiring these semiconductor chips. Our medical market is one that continues to develop with lots of new opportunities for Sono-Tek. This past year, we made huge advancements in area diagnostic coating systems used in genomics and blood identification test kit manufacturing. Coronavirus is, of course, a prime example for the need for these rapid diagnostic tests. Alternative energy, I believe, is one of the most exciting opportunities for Sono-Tek, clean energy, carbon capture, CO2 reduction in fuel cells, in particular, are attracting a great deal of investment. There continues to be this huge push for environmentally friendly conscious technologies and Sono-Tek will be participating in these growth markets. Our industrial markets have a wide range of opportunities in a number of applications. They range from advanced textile applications to manufacturing of raw float glass to several automotive and aerospace applications. Sales are historically lumpy for us in this industrial market. And FY 2021 showed growth in this area with a large textile machine for nano coatings sold to Europe. The emerging R&D basket is really what I would describe as an incubator for the development of future applications into the new areas that don't fall under one of our existing established market baskets. From this basket, we're always looking to find our next significant application and for it to rise above and create the next new market category for us. In recent years, we've been aggressively broadening our customer base through 2 primary strategies. First, we've been expanding our existing markets with the introduction of new products. And secondarily, we've been capturing new emerging markets, which we've identified as having significant growth opportunity. In our existing already established markets, we've been implementing opportunities to sell larger, more complex engineered solutions that expand our capabilities beyond what Sono-Tek has historically offered. This includes the evolutions of our products to use advanced robotic cleaning platforms, complex multi-nozzle systems and sophisticated product handling systems, all of which are now being designed with the latest generation of connectivity in Industry 4.0 in mind. In the area of emerging markets, we typically look at a few very focused opportunities each year. They're often in markets which are in their infancy, but we believe have big opportunity to mature into something significant. Two months ago, we announced a program that Sono-Tek is undertaking to develop a new roll-to-roll coating machine directed at the fuel cell and membrane coating market, which I'll discuss more on the next slide. And last month, we announced our plans to kick off a new emerging markets development program. This new initiative is our first steps to create a program to have dedicated application engineers that we focus on emerging markets that are not necessarily customer-driven applications. Our application engineers are extremely busy today working on applications that customers are bringing to us in our labs. And they get very limited time to work on new areas we feel could emerge into something significant. This program will involve hiring both personnel and investments into the necessary equipment needed to work on the applications being developed. Other development programs we're presently focused on are EMI shielding, fuel cells, CO2 reduction and clear medical laser welding. These emerging markets are at various stages in the development process. And not all are going to be home runs, but there's going to certainly be some successes among them. Many of them will generate significant revenue for Sono-Tek even during the early R&D stages. This addition of new development programs to drive growth is going to be a continuing theme here at Sono-Tek, and we plan to do this at an accelerating rate. Of course, these programs are going to use some of our cash, but we believe these are smart investments in our future, and our strong balance sheet really allows us to take on these focused initiatives. So here as mentioned in the prior slide, one of the very significant emerging market development programs we've recently announced is our advancement of our equipment to incorporate roll-to-roll technology. Depending on the specific application, roll-to-roll technology has a great deal of equipment customization that's necessary to properly transfer the unique rolls of products being coated and requires a very high level of application expertise to design the proper roll-to-roll system. With this in mind, we've decided to first focus on the membrane coating market used in fuel cells and carbon capture applications as our primary roll-to-roll target with other applications that will follow. To accelerate our entrance into the specific market, we set up a strategic partnership with industry experts from the fuel cell area that can assist us in designing our first machines which will incorporate their high-volume roll-to-roll know-how in combination with our ultrasonic coating know-how on the membrane market. Most certainly, other markets and future roll-to-roll systems designed for different applications outside of fuel cells will snowball from this program as we identify these new growth opportunities for this roll-to-roll technology. One of the growth initiatives we started to speak with our investors about several years ago was the expansion of our laboratories and staff to incorporate contract coating and application engineering process optimization into our revenue stream. This is a segment that's really started to show large promise for us or with sales in these service-related areas growing each year. But even more importantly, this is an area that's showing significant value add to our customers and clearly separates us from our competitors. Having this capability to provide application expertise to develop a customer's complete coating process, followed by contract coating for proof-of-concept testing all the way up to repeatability studies, helping them through FDA approvals and clinical trials really gives the customer the ability to hit the ground running with us and -- which is a huge value to the customer, while we're as well making money every step along the way. This also creates an amazing relationship with the customer where Sono-Tek is no longer a vendor providing equipment, we now become a partner that provides solutions along every step of their process to make their coating products. The success rate of this approach has really been great with nearly all our contract coating customers to date, ultimately purchasing Sono-Tek machinery. Looking at this fiscal year, most recently announced our first quarter FY 2022 ended on May 31. So as already reported, our revenue was up 6%, gross profit was up 70% (sic) [17%], net income increased by 56%. And most significantly, we grew our backlog to $4.4 million. That's about $1 million up year-over-year, Q1 to Q1 and about $0.5 million up compared to our fiscal year end 5 months ago. As already announced, we're also predicting double-digit year-over-year growth for Q2 FY 2022, which will be coming out in another day or 2 following this presentation. And we have very high confidence in projecting FY 2022 to be our highest annual sales in company history. In closing, this slide revisits the very important global market trends that I believe we can all relate to in our personal daily lives and the impact that Sono-Tek is making in these sectors as our customer base and the market shares that we have in these areas grow. We successfully positioned ourselves as an attractive machine solution provider in these high-growth market sectors, such as semiconductor chips, diagnostic devices and clean energy alternatives. It's very exciting to see us continuing to gain new customers in these areas that are really critical to the world's economy and the well-being to the health of our planet. We're excited that our strategies for growth of the company are working. We're very fortunate to have a workforce of really hard-working smart people that understand the importance of what we're doing here and have a management team in place that is very experienced, aggressive and really focused to grow this company. I know this presentation is a bit long compared to what many companies provide. So I appreciate you guys all taking the time to listen to us. It was long because we have a lot that we're excited about here at Sono-Tek, and we like to share this with our stockholders. Hopefully, this presentation gave you a sense of why we have so much enthusiasm. Dr. Coccio and I both welcome any questions or further discussions you would like to have with us. And you'll notice our e-mail addresses on this last page, if you would like to contact us. Again, thank you, and we hope you enjoyed this presentation and was helpful for your interest in Sono-Tek.

Thank you very much.