Sono-Tek Q4 2023 Earnings Call Transcript

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Provided by Quartr
May 25, 2023

There are 8 speakers on the call.

Operator

Morning, and welcome to the Sonotech Fiscal Year End 2023 Earnings Conference Call. All participants will be in a listen only mode for the duration of the After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Stephanie Prince of PCG Advisory. Please go ahead.

Speaker 1

Thank you, Joe, and thank you to everyone joining us Today, Sonotech released their 4th quarter year end fiscal 2023 results earlier 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 News tab in the Investors 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 Doctor. Chris Cocchio, Sonitek's Chairman and CEO Steve Harshbarger, President and COO And Steve Bagley, Chief Financial Officer.

Speaker 1

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, Sonotech.

Speaker 1

Chris?

Speaker 2

Good morning, and thank you, Stephanie, Thank you for everyone for joining us. Today, we're going to discuss our Q4 year end fiscal 2023 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, Steve Harshberger, President and COO, will then go through the business and operational results. Following his comments, we'll be happy to open the call for your questions. As a reminder, Sonotech currently holds 2 earnings calls per fiscal year.

Speaker 2

For the first half of fiscal year twenty twenty four, it will be in October of 2023. Now briefly for those who are new to us, SonaeTech developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of patented high frequency ultrasonic nozzles incorporated into motion control systems and are able to achieve uniform micron thick coatings for our customers. Our solutions offer dramatic savings in raw material, water and energy usage and is environmentally friendly among other advantages. The principal advantage is the ability to apply precision thin films, which is very important in today's world.

Speaker 2

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 commonly sell for over $300,000 and systems prices can reach $1,000,000 which can meaningfully This includes 3 main areas with very strong global growth microelectronics and semiconductors Clean energy, including fuel cells and carbon capture and medical devices. All three of these sectors Are experiencing strong demand from long term societal needs and they all benefit from Sonotech's unique thin film coating technology and systems. Now as our capabilities continue to advance, more and more of the over $8,000,000,000 global coating market opens to our advanced solutions. Our investments in these areas have begun to pay off with the receipt of our first $1,000,000 order in August.

Speaker 2

The order valued at $1,100,000 was also the first from the clean energy sector and also was The largest in Sonaeffect's corporate history at the time, all important milestones. Since then, we received another 1.1 $1,000,000 order from the same customer as well as 2 other initial orders that are expected to total several $1,000,000 each when the respective production lines are complete. Revenue for the fiscal year declined by 12% to $15,100,000 And like many high-tech equipment manufacturers, we encountered a fair number of supply chain issues that impacted our growth. As a result and in an effort to avoid this issue again, we've aggressively taken several actions. 1st, we resolved the large chunk of the supply chain issues by significantly increasing inventory levels and creating very early reorder points, Even with simple items that you would never expect to have problems with availability, some of this is reflected in the $870,000 year over year Increase in inventories that we just reported.

Speaker 2

After implementing this inventory change, we next isolated the remaining key supply chain issue, which we are addressing by increasing our in house capabilities to make similar products for our own needs. We actually started this process prior to COVID and today we internally produce about 25% of the components that we need in that area. By year end, we hope to produce about 40% with a long term goal to manufacture about 60% We hope that these actions will mitigate any future supply chain issues that may arise. The delay in receiving critical components we need can be seen in our backlog, which increased 60% during the year end And totaled $8,500,000 at fiscal year end. This is where you can see that several of our largest orders have been held up.

Speaker 2

We expect this bubble of shipments to work their way through to delivery in fiscal year 2024, beginning in our 2nd fiscal quarter that starts on June 1. However, due to supply chain delays that lingered into the Q1 of fiscal 2024, which is ending next week on May 31. Q1 net sales are expected to be slightly below net sales of $3,700,000 in Q4 fiscal 2023. However, our expectations for our net sales for both the first half And 12 months of fiscal 2024 is to show positive year over year growth as any remaining supply chain issues ease. Before I turn the call over to Steve Bagley, our Chief Financial Officer, I want to mention that Steve Harshberger and I will be presenting at the LD Micro Conference in Los Angeles on Wednesday, June 7 at 11 a.

Speaker 2

M. Pacific Time or 2 p. M. Eastern Time. It's our first time attending and we look forward to meeting some of you there.

Speaker 2

Now Steve Bagley will provide additional details on our financial results. Steve?

Speaker 3

Thank you, Chris, and good morning, everyone. For fiscal 2023, total sales decreased 12 percent to $15,100,000 and this was due to delayed shipments resulting from supply chain challenges. And Steve Harshberger will go more into detail concerning this. During the year, approximately 55% of sales originated outside of the United States and Canada compared with 68% in fiscal 2022. Our gross profit decreased 11% to $7,700,000 when compared with fiscal 2022.

Speaker 3

The gross profit margin was 51% compared with 50% for the prior year. The increase in the gross profit margin For fiscal 2023, our total operating expenses increased 4% to $7,000,000 compared with $6,700,000 in the prior year period. Our research and product development costs increased 24% to $2,100,000 for the year and that is primarily due to increased salaries and the higher costs of research and development research and development materials and supplies, which are for use in the development of new products for new and existing markets. Marketing and selling expenses decreased 6% to $3,200,000 for the year. The decline was primarily due to decreases in commissions, salaries and related costs, and these decreases were partially offset by increased travel and trade show expenses.

Speaker 3

General and administrative expenses increased 2% to $1,700,000 primarily due to an increase in stock based compensation expense, which was partially offset by decreases in corporate expenses and bad debt expense. Operating income decreased to 680 3,000 for the year, primarily due to the decrease in gross profit, combined with the increases in operating expenses. Operating margin for the year was 5% compared with 11% in the prior year. For fiscal 2023, Net income was $636,000 or $0.04 per share compared with $2,500,000 or $0.16 per share for the prior fiscal year. The decrease in net income is due to the current period's decrease in operating income At income tax expense combined with the $1,000,000 Paycheck Protection Program loan forgiveness that was recorded in fiscal 2022.

Speaker 3

Diluted weighted average shares outstanding increased slightly to approximately 15,800,000 shares. Cash, cash equivalents and marketable securities at February 28, 2023 were $11,400,000 an increase of approximately $700,000 when compared to February 28, 2022. The year were approximately 600,000, all of which is directed to ongoing upgrades of our manufacturing and product development lab facilities. And now, I'll turn the call over to Steve Forsberger, President and COO, for an operational review of the year. Steve?

Speaker 3

Thanks, Steve, and

Speaker 4

good morning, everybody. Thanks for joining us today. I want to dive a bit deeper into our record high backlog and supply chain going into FY Let me first explain that Sonotech records full revenue recognition at the time of shipment. We only hold back some very small financial Allocation for installation activities. So our revenue stream can look lumpy, in particular, as we sell more and more of these $1,000,000 plus platforms.

Speaker 4

Now turning to our results, I wanted to remind you that Cenoteq breaks down our sales in 3 ways, by market, by product and by geography. And that's how I'm going to address my comments, and you can refer to the short tables on the last page of the earnings press release for all of these details. For FY 2023, total sales decreased by 12% compared to last year to 15,100,000 This decline was primarily due to delayed shipments that resulted from supply chain challenges, some of which Doctor. Cocchiou talked about. All of these delayed orders rolled over into the new fiscal year that began on March 1.

Speaker 4

By product, revenue from multi axis coating systems declined 32% to $6,800,000 due to the lingering supply chain issues that we've already mentioned. Fluxing sales increased 71 percent to 1 2,000,000. This is due to the continued adoption of our recently updated spray flexing platform called the Sonoflux X2. We have several large PCB contract manufacturers that are upgrading their systems to this latest model machine. Sales in the other product category continued to grow and increased by 29% to $3,800,000 during the year.

Speaker 4

And this was primarily increased sales of high value spare parts packages that support our large platform multi access quoting machines that are already in the field. Importantly, we've begun to see that these follow on sales of spare parts could reach that 10% to 20% of the total order value. Key this year, of course, is the impact of supply chain issues, which we clearly can be seen in the revenue declines from these three markets. The alternative energy, electronics, medical market sales each decreased by 17%, 23% and 15%, respectively. This is because large portions of all of these markets use our multi access coating systems, which have been particularly impacted by the delayed deliveries that resulted from these challenges.

Speaker 4

As I mentioned, all shipments have shifted into the current fiscal year and And we have not received a single cancellation. The industrial market grew by 131% due to the of 71% of a large multi system order in fiscal 2023. The remaining 20% 29% of that order is scheduled for shipment and the current fiscal quarter. The 62% decline in the emerging R and D and other category reflects The shift into other market basket sectors for new applications that have become successfully established. By geography, approximately 45% of sales originated in the U.

Speaker 4

S. And Canada in fiscal 2023 compared to 32% in fiscal 2022. This shift was positively impacted by several U. S. Government initiatives to invest in the green energy sector and other research markets.

Speaker 4

For the year, APAC revenue decreased by 39%, impacted we believe by reduced sales to China as a result of several China based manufacturing sites moving operations back to the U. S. And Mexico. In addition, the strong U. S.

Speaker 4

Dollar Temporarily made our products more expensive in Japan and South Korea, where we have good customer relationships, but this resulted in several delayed purchases. Backlog on February 28, 2023 was $8,500,000 which is 60% higher than as it was last year end and reflecting the delayed shipments of several large orders as we've talked about. Customer deposits more than doubled to $2,800,000 from $1,200,000 a 143 percent year over year increase. And this increase reflects the new orders we've been receiving during this fiscal 20 In closing and as Chris mentioned earlier, our expectations is for our Q1 that ends May 31, The supply chain challenges will still impact our deliveries in the current quarter, resulting in lower revenue compared to Q4 FY2013. We expect higher revenue in subsequent quarters over the balance of the year as we ship new orders and as well as the large number of orders that are presently in our backlog.

Speaker 4

I'll now turn back to the operator to open us up for Q and A.

Operator

We will now begin the question and answer session. Before pressing

Speaker 1

the keys.

Operator

And our first question here will come from Bill Nicklin with Circle N Advisors. Please go ahead with your question.

Speaker 5

Good morning.

Speaker 4

Hey, Bill. Thanks for joining us.

Speaker 5

Right. Thanks for taking my questions. I have three questions, all focused on Revenue expansion visibility. The first is kind of the nature of the orders that you're getting now. I Notice that in your most recent announcements, we see the terminology multi phase program And cadence of Sonatek's orders in the past or at least as long as I've been following the company.

Speaker 5

The announcements also indicate that individual systems within the order are each priced higher than most orders in the past. And my guess is this is likely because they're from production equipment. So my question is, can you get a little more granular on what is taking place and what this means for the visibility of revenues and Revenue growth out over the next few quarters and even years.

Speaker 4

Yes, yes. You're correct. The wording of multi phase is significant. For most of these large machines would have the very high ASPs that we're now starting to sell more often. The manufacturing cycle is much longer than Our smaller $100,000 machines that we have been traditionally been selling.

Speaker 4

So when our customers need the fastest possible deliveries to meet urgent requirements, They need to share this with Sanotech and they start to coordinate their schedules for production requirements. Really, it can be a good year in advance of when they actually need our machines to reach the manufacturing floor. This does create a situation where we start to get much better visibility What's likely to come down the pipeline for future orders. And this is what we're seeing, in particular, from the clean energy sector, I would say. Customers are placing their first orders for high volume manufacturing systems and presenting their planned configurations for the follow on machines to meet The ultimate production needs say that they would have, Sanotech, we all share these current forecast requirements Until their production plans, of course, transitions into a PO for us.

Speaker 4

But I can tell you that most of our customers buying these large platform systems in the clean energy sector. They aren't just looking to buy 1 or 2 machines. They often have indeed to buy 5 to 10 systems to meet their production requirements over the next 1 to 2 years. The urgency Of these green energy customers in particular, going from R and D to pilot lines, to multiple high volume production lines, It's really like nothing that I've ever seen. And it's certainly, of course, driven by these massive amount of money that's being put into this particular industry sector.

Speaker 4

Call. Does that answer your question, Bill?

Speaker 5

Yes. Okay. I heard a beep kind of covered you up. Yes. Getting even more specific, given what you're looking at now, what's the largest Number of production machines you expect from a single customer.

Speaker 5

And then, on other customer orders, Are there similar situations that would maybe somewhat smaller number of systems?

Speaker 4

Yes. For sure, again, the larger customers out of the green energy sector, again, in particular, that are Transitioning from R and D over to high volume product pilot lines, they're all looking at multiple lines. They're all looking at 5 to 10 to even up to 15 Lines that should be happening. And again, these are the machines with the highest ASPs that are over $1,000,000 Typically. And we are continuing still to get a regular flow of R and D machines on top of that, Coming from the R and D sector that will continually fill in the backlog as well.

Speaker 4

But the ones that are going to make the big impact for our backlog is going to be these big Platform high volume production machines.

Speaker 5

All right. So if I understand correctly, on the announcement that you've made where there are $600,000 machines and $1,000,000 machines. The orders that you just referenced will be multiples So of that $600,000 or multiples of the $1,000,000 number?

Speaker 4

Yes. That's they all have the high potential of being multiples of that. None of these customers are buying Those first production machines were the intent of that being it, that this is the beginning phase for them. If they only bought one machine, there would have been something that went terribly wrong. They all intend to buy multiple machines.

Speaker 4

The demand for these green energy products right now, it's just skyrocketed so quickly That in order to hit what their volume needs are for their products, They have to buy multiple lines, again, in the area of like typically 5 to 10 systems.

Speaker 5

All right. Not to belabor it, but just to be clear. On the announcements that you've already made where you said a machine with $600,000 That's for one machine and you expect multiple or that's for one. So if A customer is going to buy 10 machines over time, then that's $6,000,000

Speaker 4

You're 100% correct. Yes. So when we see an announcement For this one for $1,100,000 that's for one machine and if that customer needs 10, it would be 10 machines, 10 times 1.1 or 10 times 660,000 correct.

Speaker 5

Right. That's great. Now second question. Several industrial companies that I follow Have been impeded by supply chain problems and they now in their conference call say they're coming out of this period And they're having bubbles in shipments, but then they say they're heading back toward what Most of them are describing a broad based normalization, where normal is lower shipments than in the past few quarters. So the bubble move through the system.

Speaker 5

It sounds like you're experiencing the same thing, But given the orders you're getting, it's kind of a new normal, with expectations of significantly higher growth for an extended Period of time, am I correct on that?

Speaker 4

Yes. Supply chain, Like you mentioned, it impacted us for FY 2023 revenue. And we will certainly will see a revenue bubble working its way through into our FY 2024 due to these delayed shipments. And although we are definitely predicting our revenue to be more lumpy from quarter to Quarter due to the increased frequency of these large ASP platform machines, we're still feeling very good about continued revenue growth for FY For 2024, during the supply chain surge and after the supply chain surge, Because of these highest ASP production systems that are starting to flow more regularly into our backlog, When you're only a $15,000,000 to $20,000,000 revenue company like we are now, it starts to make a huge impact when we start adding a flow $1,000,000 machines on top of what is our historically normal business already. So I think that's going to be the real big difference as we A flow of these $1,000,000 machines coming in more regularly and that's what we should be seeing happening.

Speaker 5

All right. Thanks. Just again to get quite granular on this, from what you're saying is Starting in June, the quarter that's coming up, you will see some improvement And the supply chain issues and then that'll continue to improve through the year. But from On the orders you're booking, it looks like that, that bubble or a jump in shipments Because of normal shipments plus the catch up from the supply chain problems that even with that moving Drew, you'll be able to replenish your backlog at a higher rate than the shipments are going out.

Speaker 4

Yes, yes. You hit the nail on the head. I think if you find it, if you start tracking our backlog, We'll become the strongest future indicator of where we're heading because we're anticipating our order intake To exceed the shipments going out, as our demand for our products increases. So yes, we anticipate a strong enough bookings to replenish our backlog.

Speaker 5

Great. And last question, if you will. It appears as you're going from R and D orders to pilot project orders and production line orders, Elyse, my visualization of a production line is that your equipment will probably be sitting Alongside of your customers' equipment or equipment that Your customer is buying from another vendor for a different purpose, To have a complete production line, how does this number 1, am I correct? But number 2, how does this affect The nature of the orders you're receiving and also does it open order for arrangements between Sonotech and other equipment suppliers or OEMs that might accelerate your growth down the road Where in the past you were selling single units that were kind of standalone And there was nothing else driving the business other than a single new order coming in over the transom.

Speaker 4

Yes, it's true. What you're saying is that there's, of course, many machines Before and after the ultrasonic coating systems are often really critical to the end results of the product that we're coating. And many of our customers would really prefer for Sonotech to also supply the equipment standing alongside our coating systems and to take full responsibility for large parts of the manufacturing process. So we've been rapidly increasing the number of strategic Outsourcing partners we work with, they're from a variety of several different disciplines. And this allows us to supply our an increasingly larger End customer solution, which continues then to drive higher and higher ASP for us.

Speaker 4

And some of these strategic partners also create some additional potential opportunities for even closer relationships in the future actually.

Speaker 5

That's great. Thank you. It looks like you've got the ball teed up here and I appreciate all your efforts and

Operator

And our next question will come from Ted Jackson with Northland. Please go ahead with your question.

Speaker 2

Hey, good morning.

Speaker 4

Hey, morning,

Speaker 6

Ted. So I'm going to sort of at a more higher level follow-up Bill's line of thought. So looking at your backlog, which by the way is impressive, If I kind of look at the historical backlog, if you look back, say, 2 years and go forward, You used to kind of see your backlog and it'd be like, call it, 25% of the 4, 12 month revenue. And then clearly, with all the Supply chain issues, it's been kind of in the 35% to 40% range in the last part of the fiscal year. If I was to look at that $8,500,000 of backlog and the understanding that that's going to go out in fiscal 'twenty four and say that, hey, that's 40% of fiscal 'twenty four revenue, which would be kind of like the high end higher than the high end of what we've seen the last couple of quarters.

Speaker 6

You'd be pushing north of $20,000,000 of revenue. Is that a fair way to look at your business or is that a little

Speaker 4

Well, we haven't given projections, but stating that what our full fiscal year revenue will be. But Everything that's in that backlog right now, dollars 8,500,000 will be shipping out this year or we anticipate, I should say to shipping out this year and I don't think there is anything in that backlog right now that's on the edge, for example, of not being able to ship. The order intake is still going really strong. I think that there is no reason for us to anticipate it not to continue to Continue to go really strong. And without saying exactly where we think we're going to come in for the year other than we're going to definitely be showing growth, I think it's looking really positive from now whether those really large orders that we're anticipating, because there are Some really large orders that we're anticipating getting here from multiple systems.

Speaker 4

Whether the majority of those will be able to ship out in FY 2024 Or not is a question because I wouldn't be shocked if we see our backlog just start to accelerate even with healthy revenue going out, but But I wouldn't be surprised if our backlog really starts to beef up and look very, very good for FY 2025, With still a healthy revenue stream going out in FY 2024, because the production lead time And a lot of these machines is longer than typical for us. So a lot of these $1,000,000 plus machines can have Large platform machines, our smaller platform machines, which now I consider our flow business still have relatively short lead times on them, if you're Talking about $100,000 or $200,000 machines.

Speaker 2

Yes, if I might interject here for a moment, Steve. Over the years, Sonaeffects had a business that's grown at a we liked it 10% growth, whatever, but Things have really changed in the last year or so. Moving into I think Bill's questions pointed out, we're moving into the production So instead of selling one unit that for well felt good $500,000 or something, we're now In a position to sell multiple units. So that's a change in our business structure. And the other The area that was highlighted in the previous questions is just a bubble that will come and go.

Speaker 2

And we don't really see it that way because of the Large amount of money that the government is putting into this clean energy sector in particular, which is coming through to us Now and over the future. So I think there are two changes that have taken place in our business really within the past year or 2, and that's Moving into production and the large amount of federal funding in the The energy area and then Steve Harshberg just mentioned the 3rd strategic change, which we're doing, which is pre and post processing. Wherever we see an opportunity to add on to our basic structure, we do it. So I think without forecasting numbers, What I've seen in my tenure is a change in the business structure and I'm very optimistic about it personally from Just comparison with the past.

Speaker 6

Well, I'm optimistic. I just want you to don't let me get too That's all. It sounds like you guys are on the cusp of really having some good stuff happen. Let's keep going on the revenue So, I'm just thinking about sort of what's going to drive FY 'twenty four revenue. So, When we kind of look at kind of your line items, the multi access systems, clearly that's where you've had some hang ups as to where your larger systems are.

Speaker 6

They were down quite a bit from 22. Can we I mean given what you're seeing in backlog and given that We're expecting this $8,500,000 of revenue to flow through with some large multi systems, multi access systems in there. Is there is it realistic that we could see 2024 that you come back to that you would at least meet What you did in 'twenty two on that particular line item and perhaps exceeded?

Speaker 4

Most certainly for the multi axis coating systems, We should be on track to exceeding it this year. And that's partially driven by these delayed shipments That didn't go out for us in FY 2023 that are in our backlog now. So there's a lot of multi axis coating systems that you'll See, especially coming from the clean energy sector and the electronics sector, in particular, that we'll be shipping out in FY 2024. The other good news is where we've had our most significant supply chain challenges It's in the multi axis coating area, but Sanitec, we've done a pretty good job of accelerating our in house capabilities in this area, than what we have encountered this past year. So that should allow us to get ourselves back closer to a norm Without supply chain challenges, at least during the second half of this fiscal year, which will help again for the multi axis Because that is the orders intake on Multi Axis Coating Systems has not slowed.

Speaker 4

It's actually grown. It's just our ability to Shift to machines, which makes it appear like it was a slow year in FY 2023.

Speaker 6

Then just on the flexing systems, I mean, you've talked about how you're going through kind of An upgrade process, if you would. I mean, you put up the strongest numbers that you've seen in that area since fiscal 2019. Is that something that is sustainable? I mean, is that like the strength you've seen in that business As you go through this upgrade and the movement of a lot of this manufacturing out of China Towards Mexico, U. S, is that something that we should continue to see in 2024?

Speaker 6

Or is it the kind of thing that will fade and We'll go back towards kind of those numbers that we've seen, like phase from 2020 through 2022.

Speaker 4

Yes. I would predict the fluxing area to remain stable for us. I don't think it's going to go down, but it's not going to show Huge massive increases. It's not where like government sectors are really investing or anything like that. But what was been significant for us there is these customers That are moving from China back to Mexico in particular, even more so than the U.

Speaker 4

S, they may already have systems in China, but They don't send those machines back to the U. S. The machines are only valued between $25,000 to $50,000 and it's not really worth them to send back a used machine to Mexico, so they buy new machines. And the great thing about our latest platform System in the fluxing area, the Sonoflux X2, it's about 40% higher priced than our traditional spray fluxers. So part of what you're seeing there with increased fluxing revenue is the Increased ASP of our fluxing platforms as well.

Speaker 4

And there's a good reason why they have an increased ASP They reduce your flux by a lot more compared to our old systems, and they have a lot more functionality. So customers that have Items said, oh, wow, this is really worth upgrading our old flexing system that we have from Sonotech already to our new Sonotech machine.

Speaker 6

Shifting over to the income statement and just on the OpEx side. So we've got all this wind in your sails. I mean is Is there any I mean, how should we think about your operating expenditures in 2024? Are there any serious investments that need to be made Your sales and marketing or your R and D efforts or is that something that's going to be more kind of steady state moderate growth?

Speaker 4

Yes, we did I

Speaker 6

guess I'm asking is what we see some operating leverage, I guess, is where I'm going with it.

Speaker 4

Got you. We started to see some operating leverage the prior year that I suspect going into FY 2025 is when we'll probably see the most leverage start to occur, that we've already Invested quite a bit into and it's all just been finished recently into expanding our manufacturing We have facility and invested those finances into that right now. So, we've taken over 1 more building that we Had been renting and all the expenditures and things to renovate to be able to do production in those areas of which now we're starting to do is now Happened, so a lot of the expenses have been completed in that area. Did you have anything else to add on that one, Yuri? When you look at

Speaker 3

the operating expenses, the R and D, that's always pretty much for product development. So we should see some of that come down the line, hopefully in revenue. The marketing and selling, The decrease what you see there is primarily in commissions due to the decrease in sales. But overall, One major variable, of course, is always our advertising our trade show. And that started to pick back up last year due to COVID.

Speaker 3

So you should see something there. The G and A, if you look at it, it was flat. And I would I don't expect anything to really come through on that next year, but that's my expectation right now.

Speaker 4

And I should also add to that go ahead, Chris.

Speaker 2

Just to add to what Steve and Bagley was saying, We do put a lot of emphasis on what's called research and development or product development. But the other issue, of course, as you all know, Inflation is occurring in salaried people as well and particularly in the top level Engineering talent. So we're doing what we have to do to maintain a quality workforce there as opposed to starting losing people to some other call. And then having to retrain. So there's 2 things going on there, our continued emphasis on R and D and The inflation of salaries that's taking place?

Speaker 2

Yes, I mean, that's

Speaker 6

one of the major

Speaker 3

That just as an offshoot, as Chris mentioned on the salaries, that's where you would see leverage in a number of different ways because It takes people a little bit time to get up to speed, but we've had to maintain our current level of our Engineers here, so that will pay off.

Speaker 6

Jessica, you brought this brought up The investment with regards to the new building and the productivity, I'm sure we think about CapEx in 'twenty four. I mean, you said you did 500 and call 50,000 or 1023, I mean, should we think of it kind of flash, maybe taper off a little bit now

Speaker 4

Although we did finish our expansion needs here, I think Anticipate it to be flat though, because I think we're going to have to be continuing to expand based on our projections looking So where I thought it might go down a little bit this year, I'm no longer anticipating it to go down. But as long as we see this really strong order Intake happening, we'll have to just be continuing our expansion plans, which would give us similar CapEx expenditures.

Speaker 6

Okay. And then my last question and then I'm hogging the mic, but you've built up this inventory, you Kind of went through it being part of it being your response to the supply chain issues. Will we see these inventory numbers ever trend down or should we expect this to be

Speaker 4

I would hope that they will trend down, but I don't see it happening this fiscal year. Right now, we're still Just so cautious with supply chain issues. And until we see that supply chain, These issues resolved 100%. It's just forcing us to make the inventory very high At this moment, it's very safe inventory. We're having a nice flow of orders, but it's just forcing us to keep it high at this But hopefully at some point when the world returns back to normal with supply chain that we won't have to worry about that.

Speaker 2

Yes. I think we all learned I mean, we've managed our inventory levels very aggressively in the past, and we saw this coming to some extent, so Started to build up inventory, not enough though to forestall any problems as seen in our numbers. I think what Steve said is true though. As we find out that the supplies are now available, we can back off a bit, but But I don't think we'll ever go down to the level that we were before.

Speaker 6

Okay. Well, that's it for me. And I just want to finish and I'm looking forward to 2024 and 2025. It seems like you guys are on the cusp of some really exciting stuff and I'm looking without watching it play out. Thanks.

Speaker 4

Thanks, Ted.

Speaker 2

Thank you.

Operator

Our next question here will come from Avi Fisher with Longcast Advisors. Please go ahead.

Speaker 7

Hi, good morning.

Speaker 6

Good morning.

Speaker 7

Just 2 or 3 quick questions. What products are delayed because of supply chain issues?

Speaker 4

Yes, the Primary product line is our multi axis coating machines. That's where we really got clobbered. And those multi axis coating machines are Very heavily used in our larger platform systems directed at both the electronic Sector and the green energy sector and a little bit in the medical sector as well. But they're not very commonly used in the industrial sector, for example.

Speaker 7

Okay. So presumably, I mean, what we're really talking about is a robot, right? This robot arm that comes from a supplier, right? That you get from a supplier?

Speaker 4

Yes, it's motion. I would describe it as motion platforms and product handling platforms, but it's They're not, for example, like simple, XYZ, vanilla robot systems that you I see from some manufacturers, most of our systems are highly custom and engineered for the application. But you are correct in saying that it's a robot.

Speaker 7

And are those coming from I mean presumably I think those are coming from like ABB or from somewhere in

Speaker 4

While we do have one robot that we purchased from it's a very inexpensive robot from Japan, Which is kind of like a vanilla machine that was just stamps out the same thing, but it's for a very, very low entry point for small universities. The majority of our robots are all customs engineered solutions and they're manufactured in the U. S. Either by SimoTek or in combination with our partners. And the product that we're looking at there, unfortunately, our partner, there is no Equivalent vendor to them in the U.

Speaker 4

S. Or Europe that has similar sort of Products or capabilities, I should say, even more so than products, it's the capabilities. There are some out of China that we've identified, but They have their own supply chain and shipment problems coming out of China as well. That's why we were really heading down the path of Bringing a lot of this expertise in house and increasing our own internal capabilities. Even though this industry partner, other than the delayed shipments, There are really good quality and really good price, but we need to get a little more control ourselves of the supply chain.

Speaker 4

So that's why we brought those some of those talent Internally within Sinotech.

Speaker 7

Is there I'm just going to sort of say something like presumably whoever this partner, call. You're a fairly small partner to them currently. But as your Addressable market grows as your R and D clients move into production. Is there an opportunity for you actually to get Instead of doing this on your own to get closer to your partner and say, hey, let's work together. We think we can sell multiples of the units we're selling now.

Speaker 7

That will move us up the priority We'll be a little more important to them. And now you may have a co branded product that can address a large an even larger market. Is that something You've thought about

Speaker 4

it all? The partner is someone do you want to answer that, Doctor. Coacheo? Are you speaking up?

Speaker 2

Yes. Look, you're on the right track and we are doing what you say without necessarily going so far as co branding. But we've had multiple conversations with That vendor who is more than a vendor in our eyes because we work so closely together, and we've brought customers in to show them call. How capable they are to serve us and therefore we deserve the customer. So yes, we're The alternative, as Steve pointed out, is that, yes, you can go to China, but we're not going to go to China to look for that type of thing, Not just for the supply chain issues, but also for the potential loss of some of the business technology and some of our So I think we're on the right track in terms of both helping our partner do better with us And also as Steve has pointed out, we're on a track to be able to produce a substantial amount of these particular Specialty robotic, if you want to use that word, we call them multi axis systems in house.

Speaker 7

I'm sorry if you said this, have you elaborated on how much you expect to spend on this pursuit To bring more in house?

Speaker 4

We've already made the bulk of the investment upfront already and it actually started Prior to COVID is when we started this process because we recognized our high dependence on this vendor. And It's mostly been in R and D and engineering talent that we had to bring in. And so The machines that we are now shipping that we've taken on through internally made products Are going shipping out now from Sonotech. As Doctor. Koji mentioned, there's about 25% of them are coming out internally made right now.

Speaker 4

But the bulk of the investment is already done at this point. Now it's just continuing to upgrade and improve it To the next level. But again, our industry partner is actually very good as a partner. So, we appreciate For their capabilities as well. But I think it's a smart move for us to have both of these avenues going at the same time.

Speaker 4

But we don't see Another big significant investment coming down the pipeline for that.

Speaker 7

Got it. And just to clarify what you just said, it sounds like you're having this parallel track of you're continuing to work with your partner And also doing some more in house.

Speaker 4

Yes, that's correct. That's correct.

Speaker 7

Okay. One last question. You've talked in the past Can you just sort of talk about how that's progressing, perhaps how many units you're selling or what how that pipeline looks? Thank you.

Speaker 4

Yes, sure. We are still progressing with the project. It's still an active program. We still have customers that come in, And we've sold a few roll to roll machines at this point. The primary target market for us for roll to roll, you might recall, it was Going towards the green energy sector for coating of membranes used for fuel cells or carbon capture or green hydrogen generation.

Speaker 4

And we have that customer base very much is expressing that they plan to go to roll to roll, but we still have not seen them make the transition. We actually thought they would have done it this year. But right now, it seems like they're primarily just focused on single pieces and Not going to roll to roll yet, but they still are talking about short term making the transition to roll to roll. So We have got ourselves to a point where we're ready to transition with the market when they're prepared to make that move. But we're kind of waiting for the market to go there, And we still believe it will go there and will be ready when it does happen.

Speaker 7

And has this customer sort of deferred because they're looking at other technologies? Are they looking CBD instead or are they just looking to raise funding so they can move ahead at scale?

Speaker 4

Yes. It's actually broadly for the whole industry is looking to go towards not one particular customer, the whole industry for these coating of membranes is looking to go towards roll to roll ultimately, although they are not doing it today right now at this very moment. And That it's not a replacement for this particular application of coatings membranes. They don't they can't do this application by CBD. So for our competition in this Particular area is slot die coating, but thankfully we have some performance advantages about our coatings compared to slot die, Which makes most customers choose our technology over slot die technology.

Speaker 7

And so this the roll to roll opportunity, Broadly speaking, it's not even in the backlog right now.

Speaker 4

Broadly speaking, it's not. We'll get an occasional machine here and there.

Speaker 7

Right.

Speaker 4

We are still making advances Behind the scenes in our laboratories with it, and we are bringing customers in to see it. They can understand the technology and They can prepare for us for when they want to make the transition, that they've got a partner in Sonotech that is prepared for them when they want to do that.

Speaker 7

And when or if your clients are ready to move up to a production scale, how long would it take you to produce the first unit?

Speaker 4

I don't think it would take us long at all because we have the machines in house right now. We've actually made the bulk of the investment there, which allows us to Show the systems to the customers. So, we're close. Now, again, these are almost always

Speaker 2

to some level customized machines.

Speaker 4

So, it's going to So it's going to be long lead time products. But when they say they're ready, I think we're prepared to take the orders.

Speaker 7

Awesome. All right. Thanks very much. Appreciate your time. Thank you.

Speaker 4

Good chatting, Ivy.

Operator

And this concludes our question and answer session. I'd like to turn the conference back over to Doctor. Chris Cocchiou for any closing remarks.

Speaker 2

Yes. Thank you, and thank you everyone for joining us today. Sonotech has a strong outlook for growth based on the high utility of our products in many high-tech and emerging markets. We look forward to our next call in October that will review the mid year 2024 results. So please contact us directly If you have any questions recorded, be well, stay safe.

Speaker 2

And I would just remind you once again that we will be at LD Micro in Los

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Earnings Conference Call
Sono-Tek Q4 2023
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