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Cemtrex, Inc. (CETX)

Q3 2017 Earnings Call· Mon, Aug 14, 2017

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Transcript

Operator

Operator

Greetings and welcome to the Cemtrex Inc., Fiscal Year 2017 Third Quarter Conference Call. At this time, all participations are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host Garth Russell with KCSA Strategic Communications. Thank you, Mr. Russell. You may begin.

Garth Russell

Analyst

Thank you. Before we turn the call over to management, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, beliefs, estimate, fact, intend, guidance, confidence, target, project and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements are not guarantees of future performances and may involve and are subject to risk and uncertainties and other factors that may affect Cemtrex's business, financial condition and other operating results which includes that are not limited to the risk factors and other qualifications described in the risk factor section of our Form 10-K and Form 10-Q as filed with the SEC. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Cemtrex expressly disclaims any intent or obligation to update the forward-looking statements. At this time, it is now my pleasure to turn the call over to Saagar Govil, Chairman and Chief Executive Officer of Cemtrex. Saagar, the floor is yours.

Saagar Govil

Analyst

Thank you Garth, and thank you everyone for joining our call today. I'm joined by the CFO, Renato Delrama, as well as one of our Directors, Aron Govil. We will begin by providing you with an overview of our performance during the third quarter of fiscal 2017, which will be followed by the details of our financial results. After our prepared remarks, I will be happy to answer any of your questions. With that, let's get started. During the third quarter of 2017, we experienced solid total revenue growth of 13% to $27.8 million. And for the nine months ended June 30, this resulted in total revenue growth of 54% to $87.7 million. In comparison, we reported full year of fiscal 2016 revenue results of $93.7 million. In the first nine months of 2017, we've nearly achieved those results and anticipate another positive fourth quarter to close out fiscal 2017. In April of 2017, we were pleased to receive a record number of new incoming orders for the month resulting in over $21 million over time. Included in these orders is our largest order to-date are $15 million from an existing customer operating in the information technology market. Cemtrex has had a previous relationship with this customer, but this shows the customer's commitment to Cemtrex going forward and reaffirmed the customer support of Cemtrex's services and products. This deal is for $15 million over a three year period. And under the terms of this agreement, we will be providing manufacturing, assembly and logistics services to this client. Securing a deal of this size from an existing customer is a great accomplishment. It is important for us to have a strong sales team that is capable of building off customer wins in order to further grow our business. We are committed…

Operator

Operator

[Operator Instructions]. Our first question comes from John Noble with Taglich Brothers. Please proceed with your question.

John Noble

Analyst

Good morning guys, good morning Saagar. My first question, I'd like to know what percentage of your environmental sales are currently based in the U.S. and do you see this decreasing in light of the current administration's plan for withdrawal from the Paris Climate accord?

Saagar Govil

Analyst

So, thanks for the question John. The environmental sales that we do in the United States are relatively small and I'd say under a couple of million in revenue, so it's under $5 million. And I would say, the demand in the U.S. is weak due to the current administration's position on the overall issues relating to climate change and other gas pollutants. So, our expectation is that, there won't be significant growth here in the U.S. due to those, due to the current administration. However, we still believe that the long-term growth by this type of product and services internationally will remain strong as other countries continue to expand their efforts in that regards.

John Noble

Analyst

Okay, I know the June quarter you had, well – growth in the Industrial Products segment, so I'm just curious is you know going forward, it maybe more flat or you can – you continue to see this still growing in light of maybe the U.S. not really growing as much. I'm just trying to get a handle on how to project forward this segment's revenue. So, would it be safe to say still growing but maybe not as robust as say the prior years?

Saagar Govil

Analyst

No, I think that's not necessarily the case. You know we do have a strong services part of our business which is unrelated to the environment and a lot of our revenues are project, we're doing globally. So, you know we did 8% growth annually – I'm sorry year-over-year and as I've – mentioned in the past, you know our – where we shoot for is 10% and on average that's kind of where we'll look to be. So, it will fluctuate you know any given quarter and then any given year, but I think on average we're still doing pretty optimistic as far as the growth over two or three year periods and so forth.

John Noble

Analyst

And with your entrance into the IoT space, the Internet of Things, I don't know if you could talk about this quantitatively or even in a general sense, how accretive do you think this might be to your revenue, say in 2018 or beyond. I mean, I am just trying to get a handle on this, I know it is kind of early to ask this question. But could you actually be quantitative on this or nearly till order start coming in, we should wait.

Saagar Govil

Analyst

I think as far as quantitative, I don't want to give any specifics at this point in time. I think as we move forward over the next six months, they'll be opportunity for us to give some indications as far as what we expect. We are working on developing technology and achieving various milestones to get products to market. And I think that will become a clear as far as the revenue potential. But we are very bullish on this and I think there are immediate opportunities for revenue from this that will be accretive then and grow the business and help us continue to build on that. So, that will definitely be there, but I am not going to give a specific number at this time.

John Noble

Analyst

All right. And even with the initial sales even if they are very small to start with, that will be broken out on a separate line item on the income statement. Now you have three sets, is correct?

Saagar Govil

Analyst

That's correct.

John Noble

Analyst

Okay. The medical device market, the strong growth projected for that segment there. So, I am just curious if you could break out what percentage of your EMS sales are driven by that market in particular.

Saagar Govil

Analyst

Yeah. I would say on the order of 25% to 30% is medical device related revenue.

John Noble

Analyst

From the EMS segment? Alright, well that's a very significant. Okay. And I just have one final question relating to the EMS segment. This particular quarter, your gross margins in the EMS segment were approximately 41%, and I mean that's up significantly from, let me see last year, for the whole year you're about a 35% gross margin in EMS, and now you're at 41% this quarter. So I am trying to get a feel for what to expect going forward? Do you see this level sustainable or was there anything in it that might have caused us to be a little bit higher than what it normally should be.

Saagar Govil

Analyst

I think it's just a product service mix and as we restructure our operations, you know some of that fluctuates. But, I expect it to continue to grow, but as I mentioned to you before it does fluctuate and it will be between that 33 and 36 range. And I mean we are going to do our best to sustain it, but it's always a challenge to maintain that, but it will fluctuate a little bit I think moving forward, but I think over the long term it will continue to grow.

John Noble

Analyst

Okay, great.

Saagar Govil

Analyst

As we extend our various services, the higher margin services, the higher margin products and so forth.

John Noble

Analyst

Great. Thank for taking my question. That's all I have.

Saagar Govil

Analyst

Thanks a lot John.

Operator

Operator

Thanks a lot John.

Operator

Operator

[Operator Instruction] Our next question comes from the line of Matthew Larson with Wells Fargo. Please proceed with your question.

Matthew Larson

Analyst · Wells Fargo. Please proceed with your question.

Hi, Saagar. How are you? Question for you. What plans – can you discuss the plans you have with the cash you have on the balance sheet. I think you raised it primarily to be in a position to make strategic acquisitions. You assumed to buy back some stock and what have you. And I wanted to see whether or not you feel you are in a position to dramatically grow the revenues the way you did in the previous year to close strategic acquisitions.

Saagar Govil

Analyst · Wells Fargo. Please proceed with your question.

Yeah. Thanks for the question, Matt. That's absolutely right. We are looking at a number of acquisitions you know that are good use of cash to generate strong returns for our shareholders and scale on order of magnitude that we have done in the past. So, in 2010 you are doing $3 million in sales and here we are in 2017 or nine months doing about over $80 million. So, there is no question that we are thinking big and we are looking out there into the market and seeing what's available and what's possible. As with the nature of this process, we don't like to announce deals until we are a certain way down the road with any potential acquisition. So as opportunities materialize, we'll certainly make announcements accordingly. And at this point there is nothing concrete I would say, but we are looking at a number of opportunities in both the industrial side and electronic side and sort of tangential to some of our existing businesses that can all add strategic value to the business. So, as we make progress, material progress for sure, we'll definitely make an announcement in that light.

Matthew Larson

Analyst · Wells Fargo. Please proceed with your question.

All right. Do I assume that's kind of your game plan, I mean your stock is basically the same level it was when it got hit due to some article put out by a negative blogger. You guys made some moves that I thought were appropriate, at the time you bought back some shares. You initiated a dividend. And frankly have executed for now two quarters and but the real way to combat that would be to show some growth. And I know that you are looking to do it organically in some of the areas you already discussed. But presumably of strategic acquisition that would be mainly accretive, would really be the sort of thing that could get a company of your size I guess to the next level. Is that kind of your thinking?

Saagar Govil

Analyst · Wells Fargo. Please proceed with your question.

Yeah. That's a fair assessment. And we are absolutely looking at acquisitions that can continue to have strategic – significance strategic value and be accretive as we continue to grow here. So, I think that's fair. And I think we are looking to grow the business organically, so I don't want to make it seem that that's not possible as we've been able to continue growing quarter-over-quarter and so forth. But you are absolutely right. We are looking to add acquisitions that can continue to help us grow.

Matthew Larson

Analyst · Wells Fargo. Please proceed with your question.

Well as investors, I mean you are entering high growth fields in areas that command high premiums of high multiples, like the Internet of Things or wearable technology. You've touched on it and could we as investors hope to see further commentary from that that would be – these are high growth areas that again would kind of turn your stock back into a growth stock, which it's been, but unfortunately it's kind of stuck in sideways pattern currently. And that's kind of what I know myself is a fairly sizeable investor would be interested in being involved in a company that is on the cutting edge out of some very high growth areas and has the potential as you all shown in the past to make a very good strategic acquisitions that are highly accretive. I mean would that be a way to describe your company and one that should attract investors based on your track record in this area?

Saagar Govil

Analyst · Wells Fargo. Please proceed with your question.

Yes, absolutely. I believe it does and I think as we continue to make progress on this front, we will certainly make announcements with respect to our activities in this area. We have a strong plan as far as growing in this space through collaboration and partnerships with other companies that we see position well to deploy products in this field as well as our own internal product development. And so, like you said, we are going to keep focusing on these high growth markets, and then supplement that with smart acquisitions. And that's really been our strategy. That's how we've grown from $3 million in sales to where we are today, and that's how I expect us to go from here we are today to $500 million in revenue in a couple of years.

Matthew Larson

Analyst · Wells Fargo. Please proceed with your question.

All right. Okay. I like that. Okay. Thanks so much and good luck with being able to execute that.

Saagar Govil

Analyst · Wells Fargo. Please proceed with your question.

Yes. Thank you, Matt.

Operator

Operator

Our next question is a follow-up question from the line of John Noble. Please proceed with your question.

John Noble

Analyst

Yeah, just a quick question. My first question last time was about the percentage of your environmental sales that were currently in the U.S. You said it was a couple of million or roughly less than $5 million. I just needed a clarification of are we talking about the quarter you just ended or are we talking about on an annual basis?

Saagar Govil

Analyst

On an annual basis.

John Noble

Analyst

Annual, okay. All right. That makes it actually even less significant then what I was thinking if it was on a quarterly basis. All right, that's all I have. Thank you.

Saagar Govil

Analyst

Sure.

Operator

Operator

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Saagar Govil

Analyst

I just want to thank everybody for participating on the call. We appreciate your interest in the Company and we are looking forward to keeping you abreast of our activities as we continue to build the business and continue to achieve milestones. You know our commitment is on focused on delivering strong shareholder returns over the long-term and I think we've demonstrated that to this point and I encourage all investors to continue following the story and if you have any questions, please feel free. Thank you very much for your time.

Operator

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect you lines at this time and have a wonderful day.