Cemtrex, Inc. (CETX) Q3 2017 Earnings Report, Transcript and Summary

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.

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.

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 to further investing in our sales and marketing efforts and related activities in order to increase our sales pipeline. Our outlook is promising and we believe our investments have been worthwhile and will continue to provide returns in the future. We believe that our ability to attract and retain customers comes from our ongoing commitment to understanding our customers' business performance requirements and further our expertise in meeting or exceeding these requirements enhancing their competitive edge. We work closely with our customers to achieve a deep understanding of their goals, challenges, strategies, operations and products to ultimately build a long lasting successful relationship. This will assist us going forward as we expand our relationship with each customer, helping to supply them with additional services. Activities for both our electronic manufacturing services division and industrial products and services division continues to expand through new and existing clients. During the third quarter of 2017, we saw a greater focus of activity for our EMS division, resulting in year-over-year growth of 17%. However, we are pleased with the pipelines for both businesses we see moving forward. Recently, we also announced the establishment of our new subsidiary, Cemtrex Advanced Technologies Inc., which is a fusion of our extensive experience in product design through our existing businesses. Under this new subsidiary, we will pursue both organic and inorganic growth opportunities in the Internet of Things and wearables markets by designing and developing product to support our customers ahead of the technology curve. Our electronic manufacturing capabilities and knowhow to support customers end-to-end needs has been key to the launch of our new subsidiary. As we now have strong prowess in providing product design, sustaining engineering services and a successful track record of designing and manufacturing some of the most advanced products available in the market from technology for particle accelerators to airbag jackets for motorcycle drivers. Our initial focus under the Cemtrex Advanced Technologies group is reinventing the workplace environment, which has not evolved over the years at the same speed as technology has been advancing. This concept has been of interest to the company for some time, and it is exciting to have finally launched this division to make our concepts a reality. We introduced our initial concept under development, the advanced smart desk which reimagines the computer workstation form factor. It is an extremely cutting edge concept with some key features to include a high resolution multi-touch display with ability to draw, scan documents, documents, wireless connectivity for the cloud and next generation wireless charging capabilities for mobile device. But the smart desk is just the beginning and we believe our experience in both industrial and consumer product development and design has helped us provide – helped us to best identify our product pipeline moving forward. We are working quickly and diligently to make our ideas a reality. To summarize, we are excited by the innovation happening at Cemtrex. In all of our divisions, we are taking our services and products to the next level. We are pleased with the brand we have developed this far and look to increase awareness moving forward. As we look out to the end of fiscal 2017 and beyond, customer demand remains strong and we expect to maintain attractive growth for the remainder of the fiscal year. Turning to the detailed review of our financial results now for the quarter ended June 30, 2017. We reported quarterly revenue of $27.8 million, an increase of 13% percent compared to $24.7 million for the same period last year. This includes revenue of $13.5 million from the IPS division for the third quarter of 2017, an increase of 8% compared to $12.5 million for the third quarter 2016. This growth is attributable to an increased shipments and execution of order during the quarter. Revenue from the EMS division for the third quarter of 2017 was $14.3 million, an increase of 17% compared to $12.2 million for the third quarter of 2016. The primary reason for this increase is the acquisition of Periscope in May of 2016. Total revenue for the nine-months ended June 30, 2017 came in at $87.7 million, an increase of 54% compared to $56.9 million for the same period in 2016. This revenue growth is primarily the result of the strategic acquisitions at AIS in December 2015 and Periscope in May 2016. We have also seen that steady organic growth in our business. Per our business model, we remain on the lookout for potential future acquisitions to add on to our existing business as we continue to scale. Looking at the performance of the divisions for the nine-month ended June 30, revenue from the IPS division was $42 million, an increase of 27% compared to $33.2 million for the same period in 2016. This increase is primarily due to increased shipments of goods and execution of project as well as our acquisition of AIS. Revenue Revenue from the EMS division for the nine-months ended June 30 was $45.7 million, an increase of 93% compared to $23.7 million for the same period in 2016. The primary reason for this growth is the acquisition of Periscope. Gross margin for the third quarter of 2017 was 36% compared to 33% in the same period for 2016. For the nine-month ended June 30, gross margin was 33%, compared to 31% for the same period in 2016. Operating expenses for the third quarter of 2017 were $8.5 million or 5.5% operating margin compared to $6.5 million or a 6.9% operating margin for Q3 2016. The increase in operating expenses year-over-year is attributable to an increase in the sales, marketing and professional service cost. For the nine months ended June 30, 2017, operating expenses were $24.8 million, or a 4.7% operating margin compared to $14.8 million or a 5.4% operating margin for the same period in 2016. Net income for Q3 2017 was $1.2 million or $0.11 per share compared to $1.4 million or $0.16 per share for Q3 2016. This decrease was due to increased sales and marketing expenses and a loss on disposal of assets. For the nine-months ended June 30, 2017, net income increased 2% to $3 million or $0.26 per share compared to $2.9 million or $0.36 per share compared for the same period in 2016. This increase was primarily due to the acquisition of AIS and Periscope. Turning to the balance sheet, cash and cash equivalents as of June 30, were $13.2 million, up from $6 million as of September 30, 2016. The increase in cash is mostly attributable to the net proceeds of $12.8 million from the rights offering we completed during the second quarter of 2017. Additionally, our book value per share is $3.49 as of June 30, up from $1.67 as of June 30, 2016, an increase of 108%. In closing, we are pleased with the momentum we have during the third quarter of 2017, especially in the electronics manufacturing space from both our EMS division and our newly launched Advanced Technologies division. Our pipeline is strong in all of our businesses as we focus on building out our sales and marketing activities. We see the remainder of 2017, as an inflection point for the growth to come over the next five years. This brings us to the end of our formal remarks. Operator, would you please open the call to questions.

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

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?

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.

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?

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.

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.

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.

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?

That's correct.

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.

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

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.

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.

Okay, great.

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

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

Thanks a lot John.

Thanks a lot John.

[Operator Instruction] Our next question comes from the line of Matthew Larson with 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.

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.

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?

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.

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?

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.

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

Yes. Thank you, Matt.

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

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?

On an annual basis.

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.

Sure.

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

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.

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.