Cemtrex Inc. (NASDAQ:CETX) Q2 2017 Earnings Conference Call May 11, 2017 11:00 AM ET
Garth Russell - KCSA Strategic Communications
Saagar Govil - Chairman & CEO
Aron Govil - Executive Director
Renato Delrama - CFO
John Noble - Taglich Brothers
Andrew Hanson - Redwood Investment Management
Matt Morrison - Morgan Stanley
Greetings and welcome to the Cemtrex Inc., Second Quarter 2017 Conference Call. [Operator Instructions]
It is now pleasure to introduce your host Garth Russell of KCSA Strategic Communications. Please go ahead sir.
Thank you. Before I turn the call over to management I’d 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 others expressed or implied by these forward-looking statements. Cemtrex expressly disclaims any intent or obligation to update these 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 Aron Govil, Executive Director and Renato Delrama, our CFO. We’ll begin by providing you with an overview of our performance during the second quarter of fiscal 2017 which will be followed by the details of our financial results. After our prepared remarks I’ll be happy to answer any of your questions.
With that let’s get started. This is another strong quarter for Cemtrex as we continue to advance our growth strategy. We reported a 61% increase in total revenue to $30.5 million for the second quarter of fiscal year 2017. We’re pleased with the activity across both business segments as the electronics manufacturing services division and the industrial product and services division contributed $15.2 million and $15.3 million to the top line respectively.
The acquisition of Periscope nearly a year ago continues to add value and will be a major contributor to our organic expansion as we reach further into the higher margin, higher complexity, lower volume electronics manufacturing services market.
As a remainder this acquisition significantly enhanced our electronic manufacturing capabilities and know how to support customers end-to-end needs. We’re now able to provide our product design and sustaining engineering services, electronic assembly and production, cabling and wire harnessing, comprehensive testing services and completely assemble the electronic products to multiple industries we were not in previously including the highly attractive automotive electronics market.
During the quarter we announced the multi-million dollar order from a new customer HBH GmbH which we plan to execute over the next 12 to 18 months. Under the terms of this agreement we will build electronic components for high-power HF amplifiers to be used in the FRIB particle accelerator at Michigan State University. Our ability to support the development and manufacturing of extremely complex high-tech electronics such as this further validates our ability to build market share and niche high value, high margin markets.
Furthermore, it is this type of customer engagement and manufacturing services that is expected to drive strong revenue growth and long term value for our shareholders. Since acquiring Periscope we’ve reviewed opportunities to improve our efficiencies and reduce costs while being able to better serve our customers. As a result we’ve decided to consolidate the majority of the manufacturing operations at our facility in Paderborn, Germany into our Neulingen Facility. This consolidation will provide economies of scale by having all production machines and personnel, inventory, supporting resources at one location which is our owned facility.
The Paderborn facility will remain operational in a smaller capacity in order to support a select group of logistics awaited customers that had unique service needs. We’re aiming to complete this consolidation by December 31 of this year.
Our IPS division continues to deliver steady growth as we move on a number of market opportunities for future growth. Recently we announced that our subsidiary AIS received a $1.45 million contract with Fitesa, a new customer in the non-woven fabric industry. Under the terms of the agreement AIS will be relocating a product manufacturing lines to Fitesa’s new facility which is located in South Carolina. This project started onsite in late March and will continue through the summer months encompassing an array of disciplines including rigging, mill riding, optical alignment, process piping, electrical transportation and fabrication.
Fitesa specializes in products for medical and industrial specialties. We believe this is an exciting new customer as we’re relatively new entrant into this particular industry. We believe there is significant future growth potential in domestic markets particularly around the non-woven fabrics.
Additionally, over the past few weeks we’ve also won contracts with important clients such as the US Mint, Covanta Energy, WestRock, Mitsubishi Heavy Industries, PPG Industries and many more. This is the glimpse of the increased opportunity we see occurring across U.S. industrial landscape as more companies are looking towards insuring due to the favorable proposals by the Trump and global labor trends, as well as a general increase in activity around manufacturing and oil and gas industries in the United States.
To tackle these opportunities we’ve over a 100 field personnel servicing mark key clients through which we had a reputation as a premium quality service provider. Also the relationships these field personnel are establishing have resulted in a customer base with a higher rate of repeat business.
To summarize we’re pleased with the momentum of our business as we look out over the second half of fiscal 2017, customer demand remains strong putting us on track to maintain a strong growth for the remainder of the fiscal year.
Turning to the detailed review of our financial results for the quarter ended March 31, 2017. We reported quarterly revenue of $30.5 million, an increase of 61% compared to $18.9 million for the same period last year. This includes revenue of $15.3 million from the IPS division for Q2 of 2017, an increase of 19% compared to $12.9 million for second quarter of 2016. This growth is attributable to increased shipments and execution of orders during the quarter.
Revenue from the EMS division for the second quarter of 2017 was $15.2 million, an increase of 152% compared to $6 million for the second quarter of 2016. The primary reason for this increase was the acquisition of Periscope in May of 2016.
Total revenue for the six months ended March 31, 2017 came in at $59.9 million, an increase of 86% compared to $32.2 million for the same period in 2016. To put this revenue performance for the first half of 2017 into perspective our total revenue for the 12 months of fiscal 2015 was only $56 million. This revenue growth is primarily a result of the strategic acquisition of AIS in December of 2015 and Periscope in May of 2016.
However, we’ve also taken these benefits and the increased scale of our combined operations, the organic growth over the past year. We’re excited by the opportunities in the market that we believe will allow us to continue this organic expansion as well as for the potential for future acquisitions.
Looking at the performance of the divisions for the six months ended March 31, 2017, revenues from the IPS division was $28.6 million, an increase of 38% compared to $20.7 million for the same period in 2016. This increase is primarily due to the increased shipments of goods and execution of projects as well as our acquisition of AIS.
Revenue from the EMS division for the second quarter of 22017 was $31.3 million, an increase of 173% compared to $11.5 million for the same period in 2016. The primary reason for the growth of this is the acquisition of Periscope. Gross margin for Q2 2017 was steady at 31% compared to Q2 2016, for the six months ended March 31, 2017 gross margin was 32% compared to 30% for the same period in 2016.
Operating margins for Q2 2017 were $8.6 million or 3% operating margin compared to $4.9 million or 5% operating margin for Q2 2016. The decrease in operating margin year-over-year is attributable to an increase in sales, marketing and professional service for the second quarter of 2017.
For the six months ended March 31, 2017 operating expenses were $16.3 million or an operating margin of 5% compared to $8.3 million or an operating margin of 4% for the same period in 2016.
Net income for Q2 2017 was $413,468 or $0.04 per share compared $829,896 or $0.10 per share for Q2 of 2016. This decrease was due to increased sales and marketing expenses, a loss on disposal of asset and one time litigation expenses.
For the six months ended March 31, 2017, net income increased 20% to $1.8 million or $0.18 per share compared to $1.5 million or $0.19 per share for the same period in 2016. The increase was primarily due to the acquisition of AIS and Periscope.
Turning to the balance sheet, cash and equivalents as of March 31, 2017 were approximately $15.9 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. This has boasted our balance sheet and increased our working capital putting us in a better position to exceed.
Additionally, our booked value per share is $3.38 as of March 31, 2017 up from a $1.57 as of March 31, 2016, an increase of 115%.
In closing I’d like to mention that the management team and Cemtrex’s Board of Directors are proud of the growth that the company has delivered and shareholder value established over the course of the last 12 to 18 months. We do not believe the valuation of the company stock fully represents this progress we’ve made or opportunities ahead. As a result the Board of Directors put into place a stock buyback program last June that allows us to take advantage of the gap we see in the value of the company and its stock as well as show our support to our long term holders.
However, we’re limiting this activity more than we would like as we want to limit the impact on our already small outstanding flow. In addition, we’re proud to have paid out the first dividends to common and preferred shareholders including the annual dividend of $0.02 per share on common stock and a prorated portion of the $1 per share a year cash dividend on our outstanding series 1 preferred share. We believe these actions benefit our existing shareholders while also attracting a broader shareholder audience for the company’s stock.
Before we open it up for questions, I’d like to briefly the securities lawsuits that have been initiated against the company. As we’ve mentioned previously we strongly believe that the securities class action litigation is without merit and we’re rigorously defending the litigation. The 3 alleged securities class actions are in the process of being consolidated into a single action by the court. The court will appoint a lead plaintiff who will then file a consolidated complaint.
Sometime in the late summer or fall of this year we will file a motion asking the court to dismiss this litigation. Because the case is in litigation it is best for us not to comment on it further outside of our court filings and SEC filings. However, as I said earlier we strongly feel that the securities class action litigation is without merit. This brings us to the end of our formal remarks. Operator would you please open the call to questions.
[Operator Instructions] Our first question today is coming from John Noble from Taglich Brothers. Please proceed with your question.
Hello, good morning Saagar. Couple of questions. First question, your news lately, it’s been mostly related to your electronics and industrial contracting businesses. I was wondering if you could talk a little about your environmental products and your outlook for this business in 2017 and beyond?
Sure, absolutely. The environmental business we’re excited about, we’ve some strong contracts with our new opportunities, with our new products for monitoring specifically for greenhouse gases. However, with the current Trump administration it’s unclear as how the global environment will sort of proceed on a lot of these initiatives. To-date the Trump administration hasn’t set a clear policy about what they will do regarding the Paris Climate agreement and as a result we remain cautious about this business. So, that just continues to remain steady and grow incrementally but we’re not – we’re sort of cautious approaching that market.
Okay. And I was wondering if you could provide an update on your planned electronics manufacturing plant in India. Last call you had mentioned us that you anticipated being finished this year and I think there are total CapEx on that about a $1 million so is there anything more to report on this?
At this point we’re still in the planning stages, so we haven’t incurred expenses really in regard to that. It takes a little bit of time for us to put those plans in motion. But as we make progress on that front we will make announcements accordingly.
Okay. But do you still anticipate this year 2017 or your fiscal year which is September having this plant up and running in India?
I think it would likely extend into the next calendar year.
Okay, into calendar year. Okay. And could you talk about what the primary factors that drove second quarter operating expenses, they were up over 75% about $8.6 million in the second quarter. What level of operating expenses should we expect going forward, is this an anomaly or what really was in this that cause it to be that high?
Yes, I think we incurred some additional expenses as we mentioned relating to investing in our business. We spent on sales and marketing activities to pursue new opportunities in the different markets that we’re aggressively going after whether it’s automotive, electronics or on the industrial side with the oil and gas market opportunities and so forth. So, it’s really a variety of expenses. I think our goal is to keep those expenses in-line and you can look towards the past quarter to kind of see where we would like to be and additionally we had some one-time expenses related to some of the legal matters that we’ve had to deal with over the last quarter. So it was really just a combination of those factors.
Okay. That would be broken up more into the 10-Q that comes out shortly I believe, hopefully?
Yes, the Q was filed so it should be available to read.
Okay. Just one final question. You talked about acquisitions, I don’t know if there is anything new to report regarding potential acquisition candidates if you could just shed some light on that?
We’ve completed the rights offering, we’re constantly evaluating new opportunities as I usually mention to you and others and the investment community that we’re always evaluating new opportunities and as we get to high level of certainty with the status of an acquisition then we make an appropriate announcement. So, while we’ve opportunities in front of us as they become little bit more substantial in nature then we will comment on those and make announcements accordingly.
Okay, well great, thank you, that’s all I have.
[Operator Instructions] Our next question is coming from Andrew Hanson from Redwood Investment Management, please proceed with your question.
Yes, congratulations Saagar on all you’ve accomplished, you’ve come a long way in a year and a half. I’ve got two questions, the first has to do with SG&A, should we interpret some of your comments as saying that you’re going to be investing higher amounts in sales and marketing in the future in anticipation of building sales based on those efforts that’s the first question?
And then second, with regard to improving shareholder value, have you considered among other things buying the warrants, which are in overhang to some extent on the stock and are relatively more efficient use of funds and buying in the stock itself?
Yes, thanks for the questions Andy, I appreciate it. So to answer your first question, yes, absolutely we’re investing in sales and marketing due to the opportunities that we see so that’s an area that we like to see ongoing expansion of our activities so that we can continue to grow our brand and grow our presence in the various markets where we see most opportunities. So, that’s absolutely correct.
And then, regarding your second question, regarding open market purchases of the warrants it’s certainly something that we’re considering. The company had been in a blackout period for the last several weeks so we hadn’t really initiated something like that right now the board is on the authorized common stock purchases, but it’s something that we’re slated to discuss in the near term as far as, we’re still in that avenue.
Great, thank you.
[Operator Instructions] Our next question is coming from Matt Morrison from Morgan Stanley, please proceed with your question.
Hi Saagar. It looks like a nice quarter. I just have a question, the net was $0.04 and I'm not an expert at analyzing income statements but I did look at the Q and everything was up across the board revenues and some expenses and what have you and the area that showed a reversal was the other income/expenses which showed a loss of 294 and change versus a gain of 113 last year and you've kind of touched on where that came from, some of it was litigation and maybe some other SG&A expenses that are part of growing your business because you bought a couple companies last year that were responsible for the growth and revs but if you stripped out kind of onetime items or maybe non-recurring items at the same level, what would have the earnings may you have been because I did see some prints on the web that your number actually was $0.18 up from the expectation of 10, Is that accurate? Can you just help clarify that point place?
Sure. I know sometimes their web sites they grab the wrong information and so it can get a little bit confusing. So there was a few parts to that question so I'll just try to address it systematically here. So just to be clear the $0.18 per share is over our six months and so not to be confused with $0.10 the year-over-year like our 2016 Q2 $0.10 per share. So that's maybe where there's some confusion but our [indiscernible] right now we're at $0.18.
Now to address your other question about adjusting for one time cost, so we don't typically put out adjusted operating income numbers and so forth. We had, if you look at our other expenses we had took a loss on the sale and assets so that 294 it too is a one-time event and then you can also look at some additional expenses in the SG&A which were attributable to dealing with legal and marketing related to the lawsuits and so forth that we've been facing. So you can estimate some modest expand there as well to sort of get back to maybe what would be representative without those onetime expenses for us.
All right and as far as the litigation expenses, there's a deductible you have on that as far as ultimately having insurance coverage on expenses that might balloon, could you go over what the deductible is? Your exposure for [indiscernible].
Our deductible on our D&O policy is about 150k.
Alright, so that’s obviously very manageable and if indeed the lawsuit is [indiscernible] out or what have you then? That would be your max which is not that material in the long term that's good to hear and then just I guess to address the previous caller's comment that it might be more strategic to buying some of the warrants. Actually I kind of wonder why that would be better the warrants aren't dilute of until they're sick the stock is a six and change I would assume right so that why would one buy those because we would love to have the stock back up at six I mean ultimately we'd love to have it a lot higher but wouldn't it be better to buy just the comment in here I mean it reduces your flow and things like that which has a negative but you don't have to necessarily retire the shares you could buy them in and maybe buy some of the preferred which saves you a lot of dividend expense and then as your company recovers stock price wise the fear is abate hopefully of some of the negativity that surrounded the company due to this one particular blogger, would you be in a position to resell the securities you bought a lower price, I mean isn't that a better strategy than buying out of the many warrants that they may never be exercise and you might want to be exercised because that would be interesting capital to have it six in change you might want to that point.
You're right. That's actually correct. So I guess I wasn't clear in the last point but we hadn't authorized the buyback for preferred or warrants which why I wanted to clarify but that's accurate and it wouldn't necessarily be the best use and you're right we do and I mean that's part of the reason why we bought over 250,000 common stock over this calendar year and we will take a close look at the preferred as well as another option so those are on the table and I agree with your thoughts there as well and we also weigh those decisions against potential acquisitions that are front us. So these are all the decisions that we're looking at and continue to evaluate as continue.
Alright and I will just close with this I mean since this whole event has occurred which is you're dealing with the questions put forth by this blogger and what have. Really to keep handling very well. You haven’t been caught up in too much hype verbally or whining about short sales and things like that.
You've simply addressed it I think on an [indiscernible] manner, you've had some share buybacks, you paid dividends, you've led the investment community understand that you feel it's meritless on every level and that you expect to win. And that's about all you can do at this juncture. And then to operate the company in a way that shut organic growth and so far that's exactly what you've done.
So, my apology for that and hopefully we see higher stock prices in the meantime which would just validate that notion?
Yes, absolutely man. We 100% agree, the outlook for the company is quite compelling and we have, we believe that there are a lot of great opportunities are out in front of us and so we try to deal with the backlash from that article as best as we can. And we're going to continue to fight. As we mentioned, we do believe those allegations and the losses are meritless.
So, we're going to continue to focus on growing our business and keep executing and continuing to build. So, that's our objective and we're looking forward to it.
Great, that's all you can do. Thanks, so much.
Thank you. We reached end of our question and answer session. I just want to fall back over to management for any further or closing comments.
At this point, we're looking forward to continuing and growing our business as I just mentioned. We have a lot of great opportunities, and so I just want to thank everybody for participating in the call. And see you next quarter.
And as always, please feel free to reach out at firstname.lastname@example.org or call the company for any information or questions that you might have. Thank you for your time.
Thank you. And that concludes the teleconference. You may disconnect your lines at this time. And you have a wonderful day. We thank you for your participation today.
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