SONO TEK CORP Q2 FY2023 earnings call

• Sono-Tek shifted strategy to offer complete solutions vs component sales, broadening addressable market and increasing average unit selling prices. - Revenue in Q2 impacted by slow component deliveries; first half sales $7.8M (+1% y/y), Q2 sales $3.8M (-8% y/y). Backlog ended Q2 at $5M. - Operating expenses up 6% in Q2 due to increased employee compensation and travel costs. - Focus on new markets: microelectronics, clean energy, medical devices; received $1.1M order in clean energy in August. - Shipped first roll-to-roll order into food packaging industry.

For the first half of fiscal 2023, total sales were $7.8 million, a 1% year-over-year increase. In the second quarter, sales were $3.8 million, a 8% decline. By product: SelectFlux X2 had Q2 fluxing sales up 241% y/y to $399,000 and first half up 49% to $707,000. OEM sales dipped 10% in Q2 to $762,000 but up 12% first half to $1.3 million. Multi-Axis Coating Systems down 21% in Q2 to $1.5 million and 13% first half to $3.5 million. By market: Industrial market up 77% Q2 to $528,000 and 118% first half to $806,000. Medical sector down 27% Q2 to $798,000 but up 36% first half to $2.5 million. Alternative energy down 27% Q2 to $697,000 and 6% first half to $1.3 million. By geography: Strong sales growth from US, EMEA, Latin America; APAC down 49% Q2 and 46% first half.

• Expect annual sales to be higher than last year, with fourth quarter projected as the highest of the year. - Supply chain issues expected to impact Q3 revenue compared to Q3 fiscal 2022. - Anticipate increased shipments in Q4 and higher year-over-year sales for fiscal year 2023 ending February 28, 2023, barring significant economic or supply chain changes.

• Supply chain constraints impacting deliveries and revenue. - Increased employee compensation costs affecting earnings, with a lag in price increases to reflect these costs. - Uncertainty in supply chain resolution and its impact on inventory and shipments.

Q: How are supply chain constraints expected to resolve?

A: Sono-Tek is buying inventory earlier in larger quantities for standard modules, engineering around supply chain issues, and building in-house for some subsystems.

Q: Can you provide insight into customer visits to the development lab?

A: Customer visits are high, especially from clean energy sector. 75% of lab visitors ultimately buy equipment.

Q: What is the outlook for green hydrogen and Sono-Tek's role?

A: Green hydrogen is a huge opportunity with massive government investments; Sono-Tek's systems are used for coating electrolyzer membranes, with potential major impact.

Q: How do supply chain issues affect Q3 revenue?

A: Supply chain issues are expected to cause Q3 revenue to be lower than Q3 fiscal 2022, with many orders on the edge of shifting into Q3.

Q: What's the outlook for operating expenses?

A: Salaries have been adjusted to address inflation, and pricing increases are being rolled out but take time to impact earnings.

Q: What caused the tax rate drop?

A: Catch-up on R&D tax credits and decrease in income before taxes.

Q: What about receivables and inventories?

A: Receivables increased due to customer agreements, inventories are being built to protect against future supply chain issues, with multi-axis coating systems being a key area with supply chain challenges.

Q: Describe roll-to-roll products?

A: Roll-to-roll involves coating continuous rolls of material, used in industries like food packaging, medical, and clean energy, increasing throughput efficiency.