Q2 2023 Sono-Tek Corp Earnings Call
Okay.
Good morning, and welcome to the Sone Atech Corporation first half of fiscal year 2023 earnings Conference call.
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I would now like to turn the conference over to Stephanie Prince from P. C. G Advisory. Please go ahead.
Thank you Gary and thank you to everyone joining us today John .
China Tech release, the second quarter and first half fiscal 'twenty 'twenty three results after the market closed yesterday.
Don't have a copy of the release. Please go to the company's website at Sonatrach Dot 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 Dr. Chris coach you Sanna Techs, chairman and CEO .
Steve Harshbarger, President yellow and Steve Bagley, Chief Financial Officer.
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 secure.
<unk> 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 U S. D C. 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 <unk>, Chairman and CEO Summit you Chris.
Good morning, and thanks, Stephanie in particular for taking care of the Safe Harbor statement.
Thank you for joining us.
They were going to discuss our results that were released yesterday after the market closed for the second quarter and the first half of fiscal year 2023 bear in mind that ended August 31 2022.
I will begin with some opening remarks, and then Steve Bagley, our Chief Financial Officer, who will provide a financial review.
Harshberger President and C. O O will then go through the business and operational results.
His comments will be happy to open the call for your questions.
As a reminder, Donald check currently holds two earning calls for fiscal year. This is our physical midyear call. Our next earnings call for our fiscal year end 2023, which ends on February 28 will be in May of 2023.
Now briefly for those who are new to us.
<unk> developed a revolutionary method of applying precision thin film coatings several decades ago.
Terry technology involves the use of patented high frequency ultrasonic nozzles incorporated into motion control systems that are able to achieve uniform micron thing coding for our customers.
Our solutions offer dramatic savings in raw material water and energy usage and are all environmentally friendly among other advantages. The principle advantage is the ability to apply precision thin films very important in today's world.
The strategic shift that we made several years ago to offer more complex complete solutions versus components sales has broadened our addressable market and has resulted in cig.
Significant growth.
And our average unit selling prices.
Our larger machines now commonly sell for over $300000 assistance prices more and more often reach 1 million.
Which can impact quarterly revenue and a more meaningful way than previously.
Most recently, we're focusing on opening new markets for our technology. This includes three main areas with very strong global growth Mike.
Across electronics, 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 final checks unique thin film coating technology and systems.
In August we were excited to receive the largest order to date from the clean energy sector.
At 1.1 million Val.
Validating the resources, we've invested in this opening market.
This order was lost one of the largest and final tax corporate history.
As our capabilities continued to advance more and more of the approximately $8 billion global coating market opens to our advanced solutions.
A good example, we previously mentioned is the expansion of our coding capabilities and roll to roll product family, which is used in approximately 15% of the global coatings market.
In Q2, we were proud to ship, our first roll to roll order, which went into the food packaging industry and it's just the beginning of what we expect will become an important product line for us.
Revenue for the second quarter, ending August 31st was impacted by the slow delivery of components and assemblies that we need to fulfill and ship orders.
This resulted in a slight year over year increase in the first half sales to $7 8 million and a decline of 8% to $3 8 million in the second quarter.
Our backlog of orders remained strong ending the quarter at $5 million.
And Steve will go into more detail on this subject in a few moments.
Operating expenses increased 6% in Q2 in part due to increased employee compensation costs in the current competitive job market.
Travel cost for sales and service calls have increased as well now the COVID-19 concerns have abated now the increase in employee compensation is expected to have a continuing impact on our earnings going forward.
Salaries have risen substantially to attract and retain the critical technical and managerial personnel that we need in a highly competitive inflationary market.
Our people are truly the most important thing.
We also expect sales and travel costs to approach pre pandemic levels over the next nine to 12 months as well.
While we have begun raising our prices to reflect these additional labor and material costs. There clearly is a lag effect in realizing those increases as the hires salary and material costs are already in place.
However, we continue to see growth opportunities in many of our traditional markets such as float glass and scrape flushing.
And we're especially excited about opportunities in our target sectors of semiconductors medical devices and clean energy.
We remain confident that our outlook for growth based on the quarter and $5 million backlog and the continuing very high level of customer visits to our development labs.
Where customers test out the feasibility for their new applications.
So, although we cannot provide any assurance and despite the many economic crosscurrents today, we continue to expect annual sales to be higher than last year.
Fiscal year with the fourth quarter projected to be the highest.
The year actual results will of course depend on how quickly the supply chain.
It goes back to more normal levels.
That I will turn the call over to Steve Bagley, our Chief Financial Officer for some greater details on our financial results.
Very good thank you, Chris and good morning, everyone.
For the second quarter of fiscal 2023, total sales decreased 8% to $3 8 million due to delayed shipments, resulting from supply chain challenges.
During the quarter approximately 56% of sales originated outside of the United States, and Canada, compared with 62% in the second quarter of fiscal 2022.
Gross profit decreased 9% to $1 9 million compared with the second quarter of fiscal 2022.
The gross profit margin was 54% compared with 51% for the prior year period.
The decrease is due to a less than favorable product mix compared to the prior year period.
Operating expenses increased 6% to $1 7 million compared to the prior year period.
Research and product development costs increased 23% to 506000, primarily due to increased salaries and the higher costs of research and development materials and supplies, which are directed at <unk> ongoing focused growth initiatives.
Marketing and selling expenses increased 5% to 777000, primarily due to increased travel and trade show expenses, resulting from the globe global lifting of COVID-19 restrictions.
General and administrative expenses decreased 8% to 435000, primarily due to decreases in professional fees and corporate expenses.
Our operating income decreased to $178000 for the second quarter of fiscal 2020 three.
Due to the decreases in revenue and gross profit combined with the increases in operating expenses.
Operating margin for the quarter decreased to 5% compared with 11% in the prior year period.
Net income was $162000 or one cent per share compared with 344000 or two cents per share for the second quarter of fiscal 2022.
Diluted weighted average shares outstanding increased slightly to 15, approximately $15 8 million.
Sure.
So the first task half of fiscal 'twenty to 'twenty three.
Total sales increased by 1% year over year.
Approximately 54% of sales originated outside of the United States, and Canada, compared with 64% in the first half of fiscal 2022.
Our gross profit increased 3%.
Two 4 million for the first half compared with the prior year period.
The gross profit margin was 51, 2% compared with 55% for the prior year period.
And that's due to a favorable product mix.
Operating income decreased 29% to $558000 operating margin for the first half of fiscal 2023 decreased to 7% compared with 10% in the first half of fiscal 2022.
Net income decreased to 468000 or three cents per share compared with $1 6 million or 10 cents per share for the first half of fiscal 2022.
Our net income of a $1 6 million as I. Just mentioned does include a pretax a paycheck protection plan loan forgiveness of $1 million.
Cash cash equivalents and short term investments at August 31, 2022 were $10 7 million and there continues to be no debt on our balance sheet.
Capex for the first half of the year was 244000 and our spending is focused on our ongoing upgrades of our manufacturing facilities.
And I'll now turn the call over to Steve Harshberger, President and C. O O for an operational review of the second quarter and first half Steve.
Thanks, Steve and good morning, everybody. Thanks for joining us today I want to start off by saying that in recent years, a growing proportion of sinopec sales are for higher revenue orders and product shipments, which is of course, a result of our success, providing our customers with complete pool coating solutions, rather than individual spray coating machines.
As a result of this ongoing shift a product shipments are now more systematically manage for customer timing requirements are for our own internal production flow management.
Currently supply chain issues as well orders and revenue can now be more highly variable from quarter to quarter in particular due to the more frequently seen million dollar plus orders, which can result in large fluctuations in our backlog.
Now turning to our results are solid to protect breaks down sales in three ways by market by product and by geography.
And that's why I'm going to be talking to them about what we do today.
You can see the referenced I referenced the short tables on the last page of our earnings release press release for all these details.
For the first half of this FY 'twenty twenty-three total sales increased by 1% to $7 8 million compared to last year and decreased by 8% to $3 8 million in the second quarter are the Q2 decline was primarily due to delayed shipments resulting from supply chain challenges are and we're confident that any delayed.
Orders will roll over into the following quarters.
Byproduct, we recently launched the selective flux X two product to several large PCB contract manufacturers are resulting in strong Q2, flexing sales, which grew to 241% over the last years second quarter to 399000 and grew 49% to 707000 for.
The first half of fiscal 2023.
Our OEM sales dipped by 10% to 762000 in the second quarter, but remained strong overall for the first half are growing by 12% to $1 3 billion.
This growth was led by several significant shipments to our OEM partners in Europe are multi axis coating systems sales decreased by 21% and 13% to $1 5 million and $3 5 million, respectively for the second quarter and first half as a result of the delayed shipments due to some supply chain challenges as al has already we're already mentioned.
Yeah.
By market sales to the industrial market grew by 77% to 528000 in the second quarter in 118% to 806000 for the first half of FY 2020 three.
This growth included the shipment of the first of seven coating machines to ship to the industrial to an industrial manufacturing company. The remaining six machines are scheduled to ship in the second half of our current fiscal year.
And these machines are valued at around <unk> $216000 each.
Also included in this segment is the first shipment of a subtle take roll to roll system you know.
Simultaneous has invested significant capital into integrating our ultrasonic coding systems with the roll to roll product handling technology dispersed system shipped into a food packaging industry application and looking ahead. We also expect to service several other industries with this integrated roll to roll technology, including the medical.
And the clean energy sectors.
Our revenue from the medical sector decreased by 27% to 798000 in the second quarter, while increasing by 36% to $2 5 million for the first half of the fiscal year.
The increase in the first half was the result of several large U S. Based medical companies are incorporating santo take equipment into their operations.
The alternative energy market decreased by 27% and 6% to 697000, and 1.3 million respectively for the first for the second quarter and for the first half of the year. However, we expect solid growth.
For the full fiscal year in this segment based on their existing backlog in our forecast.
By geography, our strong sales growth from the U S EMEA and Latin America in both the second quarter and the first half was offset by a 49 and 46% decrease respectively. In APAC sales and this was primarily due to decreased shipments to China are impacted by COVID-19 related.
Lockdowns.
Our backlog on August 31st 2022 increased 19%, a two 5 million compared to backlog at May 31, 2022 at the end of our Q1.
This gross growth was strongly influenced by new orders from the electronics sector.
<unk> backlog decreased 5% compared to backlog of $5 3 million on February 28, 2022, which was the end of our last fiscal year.
Our customer deposits increased 52% from fiscal year end to 1.8 million, reflecting the new orders received in the first half of fiscal 'twenty to 'twenty three.
I in closing and as Chris mentioned early earlier, we currently expect supply chain challenges to continue to impact our deliveries in Q3, resulting in lower revenue when compared to the third quarter of fiscal 'twenty 'twenty. Two we do anticipate following that to see an increase of shipments in the fourth quarter and higher year over year sales.
For the 12 months of fiscal year, 'twenty 'twenty, three which ends on February 28, 2023 are bearing any additional significant changes in the economic environment or new unanticipated challenges with our supply change.
And we will now open the call up for questions and I'll turn it back over to the operator.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
Our first question is from Bill Nicklin Circle N. Please go ahead.
Okay.
Good morning, and thanks for taking my call. Good morning, Wilson How're you doing.
I have a couple of narrow questions and then one that's a quite broad a first.
On the supply chain can you describe what a resolution of a supply chain constraints might look like a well. It result in a lot of machine sitting in inventory and then suddenly moving out very quickly or do you think it will be different parts different components coming in and then just.
The gradual drawdown in the and what's been held back.
Yeah. It's a good question because you know I guess everybody's in countering the supply chain issues are these days and this past Q2 was really the first quarter, we really got a noticeably impacted by supply chain challenges. We were I guess way out ahead of most companies predicting supply chain problems, but still got it.
Some obstacles this past quarter. We are fortunate however to have a solid team in place that's been able to plan our way through the supply chain challenges are and you know we have a very systematic method on our approach. This way you know the first is in areas, where we can predict upcoming parts needed like far more standard modules and.
Systems were buying inventory now and buying it earlier and much larger quantities than typical.
We come to recognize that you know, we just simply can't trust our vendors are anticipated deliveries like we could in the past you know all the vendor will commonly tell us oh, you're going to get it in four weeks and then all of a sudden it becomes a four months and then all of a sudden it becomes 14 months you know so we recognize now we need to put these common parts on their shelves and enough quantity to eliminate them.
Possibly possibility of running out the parts.
Unfortunately, our healthy balance sheet, you know of course allows us to take on a have the luxury of this extra inventory.
The second area that we've really put a lot of energy into as you know we have a lot of an excellent engineering team are often allows us to engineer a way around supply chain problems disc and Unfortunately, you don't use some of our valuable engineering resources in areas that sometimes we don't really plan for it.
But it can sometimes often in an outcome of designing better engineered solutions.
And provides us with more depth in our parts and components selection for the future.
And in the last approach that we sometimes takes us to address supply chain, which has been a substantial shift for us to recently I want to start building.
In house several large subsystems that we were presently having sinopec partners out of House Bill Force. This approach will ultimately have a significant packed in two areas for US are first we anticipate seeing better margins for those items that were now shifting to build in house and secondarily I will have better control of course of our supply.
Chain, because we can manage our own inventory on these systems. So with that being said you know I I do believe we're going to some level work out our own supply chain problems by shifting the method of how we approach supply chain issues, but.
But we will for the short term I see some backlog that will end up ultimately building up.
I am one supply chain is resolved completely then I would think we would see a big surge you know as that happens we're well.
Orders that we would normally ship in three or four months, we will be shipping in three or four months. In addition to the orders that had been sitting out there for nine or 10 months at the same time.
As those parts start to come in.
Thanks for such a complete F or my second narrow question of its been mention of the high level of customer visits to your development lab.
Can you give us some insight into what this entails the visits are kind of the mix of business. It represents.
Particularly versus a year ago.
The trajectory of the visits and what prevented the visit so traditionally turned into equipment or services revenue.
Sure sure you know it's been fortunate that we and you saw that we are laboratories, becoming busier and busier. So we did have some pretty significant laboratory expansions over this past year. Both on an addition of a new lab and an expansion on our existing lab with existing equipment as well.
And a huge chunk of that right now, we're seeing with customers coming into us or from the clean energy sector. You know, we always have a large flow business coming through from the medical sector in that area for us, but the clean energy sector seems to really be accelerating in particular, when you get into that.
Hydrogen are areas that.
That are coming in and so we were fortunate that we did make that expansion for us and we are although the process is a little bit longer then some sections like the clean energy sector. It typically might take us six to nine months from the first lab visit to when they ultimately will buy them.
Machine and then it could be another six to nine months for Monday, they'll actually get that machine delivered.
But the activity is super high and its still maintaining right around that 75% Mark.
It has not dropped for us at all for any customer that walks into our lab.
That is ultimately buying a machine ultimately so that's very encouraging for us and that's the model that we're really trying to expand in press and other international labs outside of the U S lab as well.
Alright, so that 75% as a percentage.
Of customer with a potential customer of the visit the lab I have some work done there fool around with the instrumentation. They have questions and 75 to fill those end up being purchasers of either equipment or some kind of service with the lib.
Right.
Correct and it usually starts with the initial phase as a service, but they and we don't really track the percentage of service says, but I should say, we do but it's a different percentage than the 75% I'm talking about the 75% I'm talking about is that they are actually ultimately buy a machine.
And a lot of that 75% prior to buying a machine will actually be buying some of our coating services, whether its application expertise or contract coding prior to buying in the full system.
Thanks, Alright, now I don't want to monopolize entire coal, but I have a broad question based on some recent observations.
And that is looking back been able to see that fun attack has been expanding its customer base and application techniques and electrical life years for the hydrogen industry for well over a decade.
There appear to be a lot of interest, but the you know the progress look plotting for many years are now with the passage of the inflation reduction Act and in a similar bill in Europe called Repower, you there seems to be a dramatic change.
Experts I'm reading say that to achieve the goals laid out in those bills gonna be have to be a significant increase in hydrogen production and that's it.
Have a good increase pardon me a decrease in our cost.
Jefferies recently came out.
And said that the that area hydrogen production, particularly green hydrogen.
Hi, Jen will see an eightfold increase.
It looks like to that the green hydrogen supply chain starts with a production Oh electrolyze nothing happens without electrolyze roof, just like any of their of how much demand you have if there is no supply are the markets are going any place.
And I was reading, where the head of IR H I have said that the number you quoted a number of them very very big and we need electrolyze their producers to build a lot more capacity are they are the one critical pinch point and the capacity to actually produce a hydrogen and.
Then the IEA came out and said the ramp we need a ramp of several orders of magnitude.
And.
Kind of heading toward what you guys do S&P global came out and said we'd need a rejiggering of the electrolysis technology.
Inflation reduction act had $1 billion just for clean hydrogen electrolysis program for our reducing cost and increasing efficiency.
Ah I did a back of the envelope cowboy a calculation that show that your revenue from global electrical either activities some point could be greater than the entirety of all the other markets, even assuming that your other markets are growing at a healthy rate.
So I'm going to put you on the spot and ask you a what do you think that's possible.
Well I have to tell you you don't because we're not a huge company you know it it's definitely possible that there's you know the clean energy and green hydrogen spaces. In my opinion, you know it is our most exciting opportunity for Ensign I'll take it for certainly for near term rapid growth.
It's an area that's highly unlikely to be impacted by a potential recession, because it's driven by just you were mentioning these massive government investments.
Which are much larger than I've ever seen in any other industry segment. You know as you mentioned that you have to clean the climate Bill, which is a 300 and the $70 billion are going into clean energy to reduce greenhouse emissions by 2030, the EU is dropping a $300 billion and to the green economy.
The Asian governments are also joining up with massive investments led by South Korea, and the Green energy new deal for over $100 billion in like I say, it's near a trillion dollars combined with all of these governments around the world that are focusing on Decarbonize de carbonization and clean energy.
Hydrogen green hydrogen in particular is going to be a huge chunk of the worldwide transition to reduce the carbon footprint.
This rapidly growing demand for hydrogen is coming from some massive industries like steel and fertilizer are you know, which are all being pushed to become environmentally friendly conscious and the reason why green hydrogen is so important is although hydrogen is very environmentally friendly you know and it's only water when it burns to create energy, but the Cree.
Ration of hydrogen hydrogen is commonly done through a what they call a gasification process and that's coming from carbon based fuels like coal or methane, which is bad for the environment. It's C. O two which you don't want but green hydrogen on the other hand is created through an electrolysis process and the energy.
Needed for the electrolysis process can come from environmentally friendly sources like solar or wind.
And now just as you mentioned, where sinopec is involved with this process I guess was our machines precisely apply this catalyst coating onto the membranes are used in electrolysis reactions for green hydrogen the membranes that sign up take machines coat. You know this is really the vital catalyst that's the heart of where the reaction takes place for the <unk>.
Creation of hydrogen and Sinopec systems, you know really considered a leader in this area for coding. These electrolyze. Our membranes. You know we've done this for over a decade and it we have such a vast experience.
Because it's very similar to the electrolysis process used in Perm fuel cells are where we've been providing our pool coding systems. You know so our application expertise in this area is really deep.
So what we're seeing excellent steady growth in recent years from customers using our systems for electrolysis related to fuel cells, we see a much a much larger addressable market for green hydrogen and carbon capture electrolysis combination with that.
Potential customer base becomes huge and there's massive incentives by governments to implement these changes and they're trying to do it with expedience I'm you know, it's very early for us to accurately predict the impact that these hydrogen expanses will have on us, but I would be shocked if it didn't have a major impact on our epic activity coming up this next year.
It's just such a big area.
Great. Thanks.
And you came out with the same trillion dollars that I was taking a look at and then they did some simple math and found out that 110th of 1% of a trillion dollars of the $1 billion.
So I guess, there's a lot of opportunity out there. So thank you very much for such a comprehensive answer.
You got to build good chatting with you that's it for me.
Again, if you have a question. Please press Star then one.
The next question is from Ted Jackson with Northland Securities. Please go ahead.
Thanks for taking my questions I've got a few of them.
First of all I wanted to step back into the.
The forecast in the supply chain issues and.
The numbers that you expect going forward and in some ways can you tell me what makes you confident that you're going to be able to deliver the products that had been delayed by the end of the year and in particular, how do you see it happening just in the fourth quarter.
Yeah.
We have gone out to our vendors you know we've had to shift our expectations for sure.
And it did happen this quarter and we are seeing our vendors that missed you know theres kind of a new norm you know, we're a vendor that was saying that they would be able to provide it to us are in three months. It was hitting it in six months. So we've adjusted all of our expectations are from supply chain kind of to the worst.
Case scenario, we believe now Ken things that potentially you didn't get worse, yes, it's possible, but we're doing a lot of things here internally at sinopec to avoid that from happening you know, there's some cases, where we have multiple paths were going down where we're having our vendors still build something for us, but we're also engineering a solution around it.
As a backup.
You know so it's taking a lot more time than we would like.
But we have a pretty high confidence level at this point debt with these already anticipated delayed dates that we know we're anticipating supply chain will continue to hit us.
We'll be able to hit these machine dates for.
For our revenue and for our customers and our customers' needs. These machines. They are anxious to receive this equipment.
As well there for some very important applications out there, especially in the clean energy sector that they need to get up and running.
So our confidence level is pretty high.
Cause of our approach of how were looking at the back at the backlog and supply chain demand.
Yeah.
Going into kind of the weighting I know youre expecting to see year over year growth in terms of full year and you're looking for your third quarter to be down year over year can you give some kind of.
Guidance in terms of like where you think your third quarter revenues might be more just in terms of like flow my forecast kind of make sure I align with.
You know what you're expecting.
Yeah Yeah.
Haven't given too much guidance there in a very upfront. The reason being is we have a lot of orders that could potentially shift into Q3, and we hope there in Q3, but they could go out one month later the right on the edge when we look at our supply chain issues of where they will drop there very much.
Close to that edge of which side, they're gonna fall you know I I suspect you know, we're probably going to be something in the area. Like we were this past year, but we'll have to kind of this past quarter, but we'll have to kind of see how that plays out because there's just a lot of variables that could come into play here for that to happen, but but you know a good chunk of our.
Sure.
I mean, it's not that you're not going to see some sort of drastic drop or anything like that.
Okay.
Shifting over to operating expenses I mean I know.
Donald My due diligence and rolled out coverage there.
Something you'd flag so it's.
It's not that I wasn't expecting it to be up but they were a little I mean, they were actually substantially higher than I expected them to be.
I don't know what color on how you see your Opex on a go forward basis. I mean, this is kind of at.
At this point, we've got this jump up and kind of sort of trend sideways or are we going to continue to see it at this percentage of revenue and grow with revenue.
Yeah, I think sensitive to light.
You got it Chris.
Yeah.
Thank you.
Yes.
A key point for Oh, Gee company like ours.
Some companies just let the staff disappear because of competitive offers elsewhere or unwilling to to meet but it's driven by inflation and we made the decision that we're going to we're going to meet.
Because it would be a much more difficult situation. If we were to allow some key technology and management people too.
Disappear and then we have to refill all that so I think we're gonna be in stronger position that said I think we've accomplished that in the past.
Six months or so we've adjusted them.
Throughout the company salary so that we.
We will be much less subject to.
Let's call it poaching or whatever you want to call it inflation driven losses.
That has come to sort of and not 100%, but I would say pretty much where we've addressed it throughout our staff and we're not anticipating another major changes in compensation.
And we started pricing increases at least three to six months ago, but they take a while to roll through the system. So I think we're going to see an improvement over time in that relationship between inflation driven compensation and our product pricing.
Okay.
Okay. Thanks.
And I went off just a quick question is the drop in tax rate and can you just give a little color to what brought the tax rate down so much.
Yeah.
Steve do you want to answer that one absolutely and kind of what you see it going forward too.
Well, let's see.
The taxes the tax the trial, but the tax rate what you see happening right now this year is it in the prior year.
We did not pick up the R&D tax credits that were flowing through <unk>.
And that was primarily because you had to earn enough of those credits.
Before you could apply them.
And now what are our accounts have told US is that yes, you can pick them up during the year.
As you earn them versus having to have to wait.
For to have a whole quite.
Quite a bit of tax.
The credits themselves you combine that with a the drop in the taxes sorry, the drop of the income before taxes and that is primarily why you see that drop.
So so.
So it's fair to say what the tax rate the reason the rate was down.
Catch up with the R&D tax credit and going forward, you're just going to be accounting for the R&D tax credit on a quarter by quarter basis.
Yes.
Your year, if you took.
Our.
Earnings I know I'm running through the.
Numbers here with the.
Alright, we had about 11.
Fire and I think it was about 21% if you exclude the P. P. P forgiveness and you should still be I would I'm going to have to say that you're going to be at 85 and five.
I would run with about 15% to 20% right now going forward.
Oh, yes, yes, yes.
The biggest I like I said the biggest thing is the application of those R&D tax credits and.
And they shouldn't just right now it was the decrease in AR in earnings before income taxes.
So that all comes together.
Okay and then.
My last question just kind of around financials, you know what I mean.
You look at the quarter you know your operating cash flow was negative you had a big pick up in receivables.
It sounds like you've got a fair amount of.
Sales I'd say sitting in your inventory.
I assume that the tick up in receivables is tied to your supply chain issues and you know the kind of you know.
Pig in the Python, that's going to come through in third and fourth quarters of this year.
What can we expect to see with regards to kind of your receivables as we roll into the back part of the year same thing with inventories and then what does that mean in terms of operating cash flow.
Well I'm looking at you mentioned there was a negative cash flow on operations.
I don't know if you were looking at just for the three months.
The free.
Okay. Okay.
I all I have right in front of me is that six months.
And our operating cash flow was positive at 223000 now if you look at the our my Ey, our increased 885000 and the primary reason for that was there are well so number one customer agreements that we have but there are.
There were a few customers who are it was set up okay. They did not have to pay us until the Lewis.
It was final installation and approved installation took place.
So.
Do I anticipate that to happen.
I would hope not but to be quite honest, it's all going to depend upon the agreements that we have.
And our inventories of course did increase part of that increase was due to some width and finished goods that we had sitting here and that we couldnt ship due to customer requirements.
The supply chain goes both ways, it's getting stuff fit and getting stuff out a lot of our customers ask us to use their own freight forwarders and logistics is.
Certainly affected by these supply chain issues as we have seen going forward.
I would have to say I mean, one of the biggest things. We do work on here is for the next quarter and year end of course is to have.
The least amount of open E. R. I mean, you're always going to have it.
It's going to depend upon timing of the sales.
So, but all I can speak to right now is that large increase in AUR, which I would tell you. It did drop subsequent to.
The quarter end.
And and I should know it.
It's funny that our R. R. A R. Here, we take very little risk at Sinopec, we're fortunate that way.
We write off almost nothing.
With our customers that they gave us a pretty hefty deposits.
The only people they get good terms with us are companies that are super Super stable and what do you feel like there is no risk of not collecting so and so like international sales as an example, we collect a lot more upfront on an international sale than we would for example on a U S based sale.
Which we know the company and we have a very ability to collect with you know with much easier.
But I guess, what I'm driving at this I'm, just kind of trying to get a sense of the second half of 'twenty three kind of cash flow generation.
Have this you know.
A large piece of this large receivables number and so I'm kind of curious where that receivable number is going to go as we kind of March through this year and then.
Theres kind of a.
Cross current in terms of inventory messaging.
One is that you know.
We have a fair amount of.
Inventory that'll go out the door because of your supply chain issues, but then on the other hand as you have a higher inventory level than you might've had say 12 or 18 months ago because of supply chain issues I'm kind of curious where you see your inventories going for the back half of the year and really what I'm driving at is just I'm kind of curious in terms of where what happens with.
You know operating cash flow.
Back part of 'twenty three.
Got it.
I understand that.
So, let's see I'll just look into the inventory.
At year end was 2.4 and as of quarter end, we were at $2 eight.
As Steve mentioned, and we've mentioned it before we do purchase additional inventory items are to protect us from the supply chain.
And also the flipside is I know that I have a few units sitting in there at quarter end that should have shipped.
Can I tell you specifically what the number is gonna be at year end of course not.
It's all going to depend upon a certain number of factors.
Going forward the E R M.
And I know that that did dropped subsequent to quarter end and that was due to a number of agreements that we have with our customers.
And as Steve just mentioned.
We try to minimize that the amount of risk we have out there we do not ship outside of the U S without having a considerable cash deposit or a letter of credit in process.
Those two items are gonna be influx and.
I think the key thing is that we're going to have to see where we are at the end of the third quarter.
And go from there.
That's the best I can do for you right now that we do predict inventory to grow up Ted in it for the second half of the year that that that that is something that will be happening. It's it'll be a conscious decision. Some of that will be because we have machines that are sitting here that are big expensive machines that are waiting for apart.
Oh, you know to come in to in order to ship them and some of that is just conscious the building up inventory for the future. So we don't so we can stop having the supply chain demand issues.
Yeah, I would like to say to that.
One of the benefits of where we position the company over time is to have so much.
Cash and market Securities and no debt is that we can make more intelligent decisions, they're not driven short range. So we can say we wanted to we think our team is the key thing and so we can make to stock compensation and we think that by having more inventory we can protect ourselves for.
Future problems.
And you know get back on track in terms of delivery schedules, we can do that and it's a very small impact on our total.
Balance sheet, so that gives us the freedom to act.
In a way that's best for the long term interest.
Well I mean, I'm not I'm not being judgmental wanted I mean, I think the more important as the growth opportunities in front of the topline. It's you know it's just more just from a.
You get an understanding of the modeling and it won't be.
Longer term and at the end of the day you do want to see this stuff all down to the bottom line.
Can I add.
Thought I was done with financials, but I do have one kind of a more fun question, but.
Just kind of going into your delays and listening to the commentary and reading what you put in the press release it sounds like.
A big chunk of what is.
Waiting to go out the door.
As in your multi access coating systems is that a fair statement.
That is a fair statement that a big chunk of where we had a supply chain demand.
Hiccups waiting to ship things was in that area of the multi access coating systems.
There's a lot of complex parts in there and a lot of parts that require semiconductor chips and there's a.
One of the biggest areas for supply chain demand.
Glad that we're seeing right now that everybody is seeing this it comes from the chips area. So those chips are needed on some of our circuit boards and are trying to get those can be a real battle. These days.
Would it be because of that then would it also be fair I mean, you know that when we when we look at the back half of this year and those system ship out if my memory is correct.
Generally.
You know relative to say you're flexing in your integrated cooking solutions, a better margin sale for you that we would see.
Your gross margins, maybe a percent or two better than we've seen say in the first half because of that.
Our multi extra coating systems have okay margins, they're not like the one of the ones that just like Oh, that's the best margins. You know are our systems like our medical systems, our OEM platforms have the best margins.
That we have in there now if we sell some of these larger platforms like the six axis robotic platforms. They actually have a really excellent margins, but there is not one of those in the existing backlog mix right now hmm at this point.
Okay.
Okay and then my last question, which is just more for helping me learn and educate I know you were excited about the roll to roll products and shipments and stuff I Wonder if you could just take a couple of minutes and just describe what that is and you know in terms of.
Of.
They you know a technology solution in the different industries that use it.
Sure I'm, saying I mean, it's not like I'm still learning.
Yeah, Yeah, no problem no problem. So if if you picture I'm, taking it in the simplest form Matt you know you have sheets of things to cover or are like boards to cover or you have a continuous roll. So it's a difference between napkins and a paper towel role.
You know if if I'm covering napkins.
Would be individual pieces coming through and then we don't really cover napkins of course.
But if I'm covering that.
The size of a napkin.
It goes in inches. The machine then it leaves the machines. So it's a process where you go and you stop your coat and then you leave a well a lot of manufacturers are switching to a roll to roll process, where they can just continuously roll product through a nonstop like almost like a paper towel role or a picture a big rollout.
Our paper.
And especially in things like the clean energy sector, they're making a lot of flexible films. These days are in the membranes that we're quoting.
In the hydrogen space, our flexible films and right now they're mostly most manufacturers are quoting them piece by piece today, but as you start to increase your production volumes for high volume throughput. There's all of a sudden desire to say hey can we make this go overall toll roles. So.
We can put through a higher quantity in a set period of time.
And we've been seeing this coming with our existing customer base as they start to have interest of transitioning from R&D to pilot to high volume production. The interest level starts to increase to say hey, we are thinking about going to roll to roll and sign will take wants to be able to be there with them.
When they are ready to make that transition.
And it's it's in several marketplaces, you know they entered clean energy space is one that's very significant and targeted for us, but things like anything where you see a film whether that's food packaging going on top of them.
Container or whether.
Whether it's medical devices a lot of bandages.
Gauze type applications are wound up in roles before their cut.
So theyre coated in a roll format Oh.
They're all really to increase the efficiency of your throughput and it's just a matter of their product handling of how you manipulate that roll through their coding system and how you do things like hearing it and drying it and everything else comes into play too and in Rotorua handling it sounds super simple, but it's actually not believe it or not every product when it's moving through has.
Arent.
Technical aspects of how you need to move that through successfully so as not to rip it or break it or damage to the product that you're coding.
That was very educational thanks, and thanks for all the patients with all the questions you always great nice talking to you to talk to you later.
This concludes our question and answer session I would like to turn the conference back over to Chris Koch for any closing remarks.
Well thank you.
Thank everyone for joining us today.
So I don't think continues to have a strong outlook and we're excited about our opportunities for growth. Please contact us directly if you have any additional questions.
We will hold a fiscal year end conference in mid May when we report results for the 12 months of fiscal 2023, ending February 2023, So I have a great day B well goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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