2012 Letter to Shareholders
Let’s talk Cemtrex! This is my first Annual Letter since taking office and I will try to make it a regular event you can look forward to in order to hear directly from me about the business activities of Cemtrex. Many of you have been asking about what Cemtrex’s plans are for 2013 and beyond and what have we been working on the past year since my appointment as CEO in December of 2011.
My initial goals in the role were to improve our balance sheet, continue to grow the company, and determine the direction of the company for the next few years considering that the environmental legislations that the Company had hoped for previously never materialized.
As far as improving our balance sheet two of the primary metrics I use to evaluate our progress are book value and current ratio. Our book value has increased from $94,486 to $816,685, a growth of 849%. This year we also improved our current ratio from about 2.9 to 4.5. These two improvements with the addition of reducing our overall debt obligations have been essential to our on-going growth plans and making Cemtrex an attractive investment to new investors.
Our strategy to grow the company is multi-faceted to say the least. While our heritage has been in the emissions monitoring business we are by no means married to it. Due to the stagnation of environmental regulations domestically we believe it is imperative to utilize our strengths and find more opportunities where we can count on consistent long term growth. While regulations create an opportunity for our emissions monitoring business, existing regulations create primarily a replacement market and the lack or postponement of new regulations has hindered our business in the past – think mercury and CO2 related regulations; this is something we aim to avoid moving forward. In mature markets like this one, pricing typically is the leading differentiator between competitors and reducing our margins to gain market share is not a long term viable strategy to grow in my opinion. As a result we aim to grow our existing businesses through enhancing and differentiating our existing products, expanding product offerings, and providing more value added services.
One way we are doing this is by expanding into product lines that allow us to serve our existing customer base in more ways. This year we signed a distribution agreement with Modcon, an Israeli company, specializing in oil & gas analysis systems. These systems will help many of our existing refinery customers to achieve high ROI and these sales are not regulation driven. One Modcon product in particular, the NMR analyzer, provides real-time online monitoring of the crude distillation process. Refineries can use this to optimize their crude blending or distilling processes thereby increasing the yield on many of their products. Right now most refineries have no real-time online monitoring solution for this process and perform such tasks through lab analysis which results in an 8 hour optimization lag. By switching from lab to real-time monitoring, a recent installation of Modcon’s achieved a return on investment in less than six months. Our goal is to have our first two NMR systems installed by the end of the year to use as demonstration sites for all our potential customers in the future.
Let’s take this example one step deeper: to understand the market potential here there are about 120 refineries in the US and an average selling price of $500,000 creates a $60,000,000 total available market size for this product alone as well as additional annual service based revenue. What differentiates this product from what has previously been available is an innovation unique to Modcon, developed over the last 10 years, that makes the product more applicable and durable. Due to our existing relationships with Citgo, Valero, BP, Chevron, and other refiners, we believe that we can develop this opportunity over the next three years. Like with Modcon, we aim to sell similar products that focus on process optimization rather than regulatory compliance, can leverage an existing strength like our customer base, and have compelling competitive advantages going forward.
Griffin Filters, historically a domestic serving company, has expanded internationally and secured several equipment supply and construction projects overseas in recent years. For 2013, Griffin will be looking to expand its product offering from primarily baghouses to include precipitators, and other related construction projects internationally as well. Based on our past experience in these product lines, our strategic partnerships in international markets, and the superior demand for these types of systems we believe it is in our best interests to continue to expand in these markets.
This past year we also looked to acquire several different companies both in and peripheral to our core business, some domestic and others international. Generally speaking, our main criteria for acquisition targets are to find a company that is in an industry we feel we understand and is undervalued. After thorough due diligence processes of potential acquisition targets we were not convinced that we were getting enough value for the purchase price. We still plan to acquire companies that we feel can benefit Cemtrex in the long run and although we cannot put an exact time table on when an acquisition will take place, when the right opportunity comes along we will pull the trigger. We also believe our prospects for acquiring a company and structuring a deal are greatly improved for this coming year due to the strengthening of our balance sheet in 2012.
Additionally in 2012, we funded a mobile technology startup called Pluto Technologies Inc. Mobile devices will impact virtually every industry on the planet especially in commercial sectors, but even on the industrial side as well. Pluto has set up a team of software engineers in Pune, India where they are developing software for both commercial and industrial markets. On the commercial side we aim to develop software that facilitates consumers to perform transactions and license our technology for niche communities and markets. On the industrial side we are working with our customers and suppliers to find areas where we can differentiate our product offering by adding mobile and data acquisition software whereby providing more value to our customers. I expect that sales initially will be relatively meager this coming year but that it is something necessary to expand and differentiate Cemtrex’s value proposition over the longer term.
To touch on some points investors have been asking about, in 2011, we announced that we had signed an agreement with an Indian company for the installation of Green DCV systems worth about $25M. Due to poor global economic climate, the financial situation of this company changed significantly after the signing of the agreement. This project was put on hold due to lack of investment funds with no timetable to proceed with the contract. As far as we are concerned we are not counting on it for sales and if the project ever does get the green light in part or full we will re-announce it. Earlier this year we announced that there was renewed interest in our MCDR based on a project development agreement signed with a Turkish company. After several trips of our engineers to potential project sites we have been unable to get a commitment to proceed any further at this time. The customer has advised us that due to current economic situation in Europe their funding commitment could not be finalized. Again in this instance we have not given up but we do not have a time frame to see definitive progress with these units.
Despite these two setbacks, our Company has had positive developments this year. Even when U.S. and global economies have not been flourishing we have managed to maintain a decline of only 11% in our overall sales from $13,732,153 to $12,162,046 from 2011 to 2012 respectively. Our current backlog is down since there have been delays in securing some of the new projects. However, we expect to secure some large projects within the next few months which would allow us to relatively maintain our annual sales. The Company’s activities over the past year have put us in a place where we can stay competitive and be assured there will be stronger demand for our products for years to come.
Cemtrex’s stock price has declined recently, and we attribute this to overall bearish market sentiments and to a lack of communication to investors regarding our business strategy. It is important to understand that the fundamentals of our business have not changed and in our opinion this decline simply indicates our stock is cheaper to buy and not in fact worth less. With regards to communication I will issue quarterly updates describing Company performance and future plans. I implore investors to send me emails at investors@cemtrex.com for any questions, concerns or suggestions.
I am very confident about Cemtrex’s prospects. We have a very talented and dedicated team here. It is because of their efforts that we were able to land a spot on Deloitte’s Fast 500 for Fastest Growing Technology Companies this year. Our goal looking ahead is to double our sales by the end of our fiscal year ending 2014. We will do this by maximizing the value of our existing businesses and through investing in new ones. I am convinced that if we can achieve our goal that our stock price will follow suit and investors will realize the fruits of their patience.
I want to thank you for your continued support of Cemtrex. No one is more committed to Cemtrex’s long term success than I am and I want to assure each and every one of you that we are taking the necessary steps to see your company thrive and achieve significant growth in coming years. We have been busy in 2012 and I am looking forward to an even better 2013.
Yours Truly,
Saagar Govil
CEO
Cemtrex Inc.