AXION International Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Axion International Holdings, Inc. (AXIHQ)
by: SA Transcripts

AXION International Holdings, Inc. (AXIH.OB) Q4 2012 Earnings Call April 1, 2013 4:30 PM ET

Executives

Andrew Haag – Managing Partner, IRTH Communications

Donald W. Fallon – CPA, MBA Chief Financial Officer and Treasurer

Steven L. Silverman – President and Chief Executive Officer

James J. Kerstein – Founder and Chief Technology Officer

Analysts

James Liberman – Wells Fargo Advisors

Marc Green – CompEquity LLC

Michael Altobell – Moss Adams Wealth Advisors

Operator

Greetings and welcome to the AXION International Holdings 2012 Year-End Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Andrew Haag with IRTH Communications. Thank you, Mr. Haag. You may begin.

Andrew Haag

Thank you. I would like to welcome you all to AXION International’s 2012 year-end earnings conference call. With us today are AXION’s President and CEO, Mr. Steve Silverman; and AXION’s CFO, Mr. Don Fallon. After management’s statements, we will open up the call for question-and-answer session. I want to bring all your attention to the replay of this call is available at the phone number provided on the earnings release issued earlier today.

Now, before we get started, I’ll take a moment to read the Safe Harbor statement regarding today’s conference call. This conference call will contain forward-looking statements within the meaning of the U.S. Federal Securities loss concerning AXION International Holdings Inc.

The forward-looking statements are subject to a number of significant risks and uncertainties and actual results may differ materially. Please refer to the company’s filings with the SEC which contain and identify important risks and other factors that may cause AXION’s actual results to differ from those contained in its forward-looking statements made today.

All of the forward-looking statements are made as of today April 1, 2013, and AXION expressly disclaims any obligation to revise or update any forward-looking statement after the date of this call.

Now, I would like to turn over the call to Mr. Don Fallon, AXION’s Chief Financial Officer who will provide a review of AXION’s financial results for the year ended December 31, 2012. Don?

Donald W. Fallon

Thank you, Andrew. During 2012, our revenues increased by 37% or a loss from operations narrowed by 15%. We increased investments in product development, quality management, sales, and marketing while reducing general and administrative expenses.

Revenues for the year ended December 31, 2012 were $5.3 million, this is a 37% increase over revenues of $3.9 million in 2011. Sales of our ECOTRAX rail ties contributed approximately $4.6 million, while our STRUXURE building products accounted for approximately 700,000 of the year 2012 revenues.

Gross margin increased in 2012 to $194,400 or 3.6% of revenues from $112,900 or 2.9% of revenues in 2011. Because two-thirds of our revenues in 2012 and 2011 were derived from a key Class 1 railroad customer who was an early adopter of our ECOTRAX ties. This has put heavy pressure on our margins. At the time the three-year purchase agreement was signed with those customers, we gave them favorable pricing in order to gain market adoption. Since then our ECOTRAX ties have been sold to and tested by dozens of domestic and international rail and freight line customers.

We believe that as we diversify our revenue base and offer premium products, we have an opportunity to increase our margins. We are also working in reducing our raw material costs while increasing our economies of scale and manufacturing both of which should contribute favorably gross margin in the future.

Product development and quality management expenses increased to $1.1 million in 2012 compared to $533,000 in 2011. Marketing and sales expenses similarly increased in 2012 to $1 million from 510,000 in the prior year.

General and administrative expenses declined to $3.8 million in 2012 compared to $5.8 million in 2011. Loss from operations narrowed $5.7 million in 2012 from $6.7 million in 2011. Net loss attributable to common shareholders in 2012 narrowed 41% to $7.1 million or $0.27 per basic and diluted share compared to a net loss attributable to common shareholders of $12 million or $0.49 per basic and diluted share in 2011.

Now, I will turn it over to Steve who will provide further information on development. Steve?

Steven L. Silverman

Thanks, Don. 2012 was a fantastic year for AXION on many fronts. As any young company would, we had hoped for higher revenue numbers. However, we did achieve significant.milestones that we believe will help to secure our future success. We increased our customer base, grew revenues, introduced new product applications for our STRUXURE building products, and raised the bar on internal performance standards for our ECOTRAX rail ties.

We also completed lab testing and gained approvals with major rail lines around the globe and have moved to in track testing in these regions of the world AXION has taken tremendous strides in expanding our markets with regard to customer adoption of our products.

We have supported these market developments by continuing to improve and advance our manufacturing and quality control signatures in order to better our internal standards an create an improved valve-added proposition. These two events are the most significant developments to-date at AXION yielding greater market opportunities in 2013 and beyond.

Additionally, we also closed a significant round of financing with several existing long-term investors who have taken an active support of role in the company as Directors. We shipped products to a total of 33 paying customers in 2012 with 22 of these being new customers. We have significantly expanded market adoption of our products around the world. The rate at which we are seeing or selling new customers combined with the rate at which current customers are submitting new orders both point to a strong 2013 for AXION. We currently have $5.3 million backlog of shippable orders in 2013 comprised of purchase orders in hand and our multiyear delivery contract.

Our sales and marketing and branding efforts combined with the growing reputation for the excellence of our products has led to a $45 million in current sales opportunities that we are working on consisting of 68 active opportunities with 52 potential customers. $28 million of this is for ECOTRAX representing 38 sales opportunities and $17 million for STRUXURE with 30 sales opportunities. We’ve invested in manufacturing equipment to support between $30 million to $40 million worth of product sales. During one of my first conference call as a CEO, I have noted the most critical component to our success was going to be our ability to show customers that we can consistently manufacture high performance quality products from recycle materials. I’m happy to report that we have done that.

ECOTRAX and AXION are transforming the composite rail tile industry. In February, we announced the increase of internal mechanical property standards for ECOTRAX rail ties. These new standards are in average 50% above the American Railway Engineering and Maintenance-of-Way standards for measures including modulus of elasticity and flexural strength.

These new standards have been introduced to the AREMA subcommittee for composite ties in an effort to advance the industry and eliminate competitors who have substandard ties.

As with much of AXION’s technology, we have worked closely with our customers, who are industry leaders, to advance and improve our products to better address the specific needs of the industries which we serve. As the rail industry moves toward heavier axle load trains and seeks to make itself a more efficient service provider, AXION has grown along with the industry.

Using the same successful, patented formulations that have served as the basis of our products, we have further enhanced performance to better meet the rail industry’s evolving needs. These enhancements are a result of the investments we have made in personnel and systems in the areas of quality management, material sourcing, and manufacturing.

During the third and fourth quarters of 2012, we worked closely with our domestic and international customer to provide third-party testing and trials that have validated our internal numbers. Following customer lab testing, ECOTRAX ties which meet these higher internal standards have been purchased at an enhanced price by customers, including our key domestic Class 1 rail line and ties are now installed long some of the highest traffic rail lines in the U.S. and in international territories. This significant development had a short-term negative impact on our revenues.

I would like to point out that while our Class 1 customer was testing the ties that perform at the higher standards, the customer asked us to temporarily halt shipments on their three-year supply agreement during the evaluation period. This slowed our revenue growth in 2012. We are pleased to have resumed shipments to the Class 1 customer. We are scheduled to ship 50,000 ties to them in 2013.

We believe this is an opportune time in the rail industry for the broader adoption of our high performance composite tie and we believe ECOTRAX is that tie. To understand the opportunity that the rail industry presents today to a company like AXION, I would like to point you to a Wall Street Journal article that was published last week on March 26.

The article was titled Boom Times on the Tracks, Rail Capacity, Spending Soar. I’m going to just read an exert from this. Welcome to the revival of the railroad age. North America’s major freight railroads are in the midst of building boom unlike anything since the industry’s Gilded Age heyday in the 19th century. This year pouring $14 billion into rail yards, refueling stations, additional track. With enhanced speed and efficiency rail is fast becoming a dominant player in the nation’s commercial transport system and a vital COG in its economic recovery.

The article goes on to describe how companies, including United Parcel Services are increasing their use of rail, as well as how the domestic energy production boom is turning to rail to transport fuel. Traditional wood ties have a certain life cycle based on the kind of wood used, where it’s used and how it’s been chemically treated.

In 2012 some of AXION’s formulated rail ties that were in use for over eight years on the Long Island Rail Road were pulled out and tested by a third-party engineering firm. The ties proved to not only maintain all of their performance specs, they actually improved on some specs over their eight plus years of use.

As rail operators commit to make deliveries on time and with consistency, they use a higher performing tie – ties that require no maintenance and last longer, becomes very important. Simply put track down time is expensive, plus railroads are looking for longer lasting products, and we think this is a very significant factor in the future rates of adoption for our ties.

Next, I would like to talk about the huge progress we’ve made in 2012 in customer adoption for both ECOTRAX and STRUXURE. The majority of our customers this year were new customers with infrastructure-grade building materials used in railroads, bridges, highways, and construction. Performance is key, and with each new customer, we prove our products performance.

We continue to sell ECOTRAX on a regular basis to passenger transit lines in the U.S. including Bay Area Rapid Transit, Dallas Area Rapid Transit, Miami-Dade Transit, and Long Island Rail Road to name a few, as well as our Class 1 railroad we spoke about earlier and many others.

We have sold ECOTRAX to another domestic Class 1 for in track testing as well in 2012. Internationally, we’ve greatly expanded the adoption of ECOTRAX. In Canada, we sold products to Calgary and Toronto transit for street crossings. This is an example of ECOTRAX’s strong performance and adoption in severe cold climates. In Chile, we completed a 1.5-year in track testing with one of the largest mining companies in the world and are in the queue for 2014 purchasing budgets.

We completed lab testing and specification approval and our in track testing with the largest freight line in Brazil. In Europe, we created a composite sleeper specification completed lab testing on that sleeper and we will enter in track testing with one of the largest railroads on the continent. This presents a potential annual opportunity of 300,000 rail sleepers per year for AXION. In Russia, we are in the process of writing specifications for composite railroad ties and we’ll submitting samples and specifications for lab testing.

In New Zealand, we’ve received opening orders from Kiwi Rail and completed laboratory testing and specification documents have been produced. In Australia, our distributor Alcoa Fastening Systems have established reoccurring business from mining, transit, and freight lines throughout the country. ECOTRAX Switch Ties were recently installed at one of the largest freight railways in Australia.

We recently entered into a in track collaborative testing agreement with one of the largest transit lines in Australia as well. The rates of adoption for our structure, infrastructure-grade building products continue to expand. We’ve recently announced additional sales of our STRUXURE building materials for bridges and roads.

Our STRUXURE products have been well proven for many years and this has led to engineers having more confidence in our products. In 2012, we sold STRUXURE products that were used to build two highway bridges, one in Ohio and one is Maine. In conjunction with Parsons-Brinckerhoff, a global leader in designing and building critical infrastructure projects around the world, we published the first ever composite bridge deign guide. This is very significant since now, STRUXURE engineers can use this design guide to build composite bridges that are up to 25-feet long to recognize high standard.

We are finding the counties in particular looking for alternative building materials and composite specific bridges that are in dire need of repair. Over $10 billion a year we spent on the repair and construction of bridges in the U.S. As we increased our marketing sales and branding efforts and as we see increased adoption by counties around the U.S., we believe we will make meaningful inroads into this large market for STRUCTURE. We are also identifying and expanding the applications, where our STRUXURE products maybe the beneficial when compared to traditional products.

In December of 2012, we field tested our newly introduced STRUXURE Construction Mats. Based on our construction mats, field performance and the favorable life cycle cost to customers, we are receiving a high level of interest from both potential customers and distributors for this product.

In 2013, the Construction Mat business presents a significant opportunity where we believe we may achieve market traction quickly. Construction Mats are used at infrastructure construction sites and oil and gas, drilling and pipeline construction sites to support heavy equipment on unpaid web or soft services. Based on talks with industry participants, we believe that in North America the traditional wood construction mat market is over $500 million in annual volume.

Wood construction mats have a life cycle that is relatively short. Depending upon the when and the location of use, wood mats can be considered disposable. At the end of the construction site job, they must be discarded, because they have been torn off under heavy way of construction equipment trends.

STRUXURE Construction Mats offer durability and long-term use. They offer potential new business model and how construction mats are used due to their longer life cycle. We have already received purchase orders from pipeline contractors for our mats. Now, we have signed agreements with sales agents and distributors all of whom share our excitement about this new product. We expect STRUXURE Construction Mats to contribute to 2013 sales growth.

Quickly in 2013, we have sold mats for trail in our underground testing with three pipeline contractors. In summary, 2012 was a breakout year in terms of customer adoption of our technology and products. This happened in 2012, because over the past two years, we have built our corporate infrastructure they can deliver.

During our call today, I would list a significant market adoption and sales activity. Many of the new customer purchases in 2012 were trial orders, so we didn’t see big impact on revenues from these new customers in 2012. However, based upon the performance of our ECOTRAX and STRUXURE products and the level of customer satisfaction, we believe these initial orders will lead to larger repeat orders in the future. It has required a tremendous effort and investment to move AXION to where it is today.

The investments in product development, manufacturing, quality control, sales and marketing are beginning to payoff. As we increased our economies of scale and manufacturing, we expect to see meaningful improvements in our gross margins. Our primary goals in 2013 include further increasing product adoption, growing revenues, and improving gross margins.

In the first quarter alone, we have announced shipments to two major passenger rail lines. In addition to resuming shipments to our Class 1 rail customer, we are starting 2013 strong and expecting solid growth. We are looking to deliver more of what we’ve done in 2012, more revenues, more customers, better margins, and more market adoption of our industry-leading proprietary composite building materials.

Once again, we thank all of our shareholders for playing a part in helping us to bring high performing innovative and eco-friendly infrastructure building products to market. These products offer higher value, greater durability, and a better use of both financial and environmental resources. Thank you. Andrew?

Andrew Haag

So that wraps up the formal discussion part of our call. Operator, we now open up the call for our Q&A. And after the Q&A, I will provide some closing comments.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Mike Altobell of Moss Adams. Please go head.

Michael Altobell – Moss Adams Wealth Advisors

Thank you. Good afternoon. Let’s focus on the Mat business that you have spoke about, have a three part question related to that, but you can comment on here. Number one, how much business you see here for the company? Number two, margins, you project solid margins here or are you looking at the kind of the same scenario with the railroad type we have to, maybe concede a little bit to the initial adopters? And lastly, how with the customer interest and when should we see sales from this product line, you mentioned 2013 is that towards the end of 2013 or do you project a little earlier? Thank you very much.

Steven L. Silverman

Great. Mike, thanks so much for the question, it’s a very good one. The Mat business is very exciting to us. One of the reasons is the, there seems to be a quicker adoption than we’ve traditionally seen in the railroad industry. Obviously, in the railroad industry, testing and trails could take years as we – as the company has demonstrated.

So we are excited about that and we’re excited about the value proposition. To your three questions, we do see very good solid margins. We don’t see tremendous discounting to the early adopters. One of the things that’s been exciting to us is, we’ve been working in this business now for a few months now basically the last quarter. And we started our where we gave away four mats for trial then the next mat we sold at a similar price to a wood mat. And then the next page, we actually sold that list price with a 20% discount and then the next mats we sold at full list price. So we’ve seen the ability to get the margins where we need them and the customers see the value in that. As far as volume goes like I stated, we see a $500 million potential market here just in North America.

We are active up in Canada as well in some of the oil and gas pipeline. But some of these projects just use a tremendous amount of mats. I mean we were in conversation last week with a pipeline contractor that has a 140-mile pipeline and uses somewhere in the range of 50,000 to 60,000 mats to put in that pipeline.

So the volume numbers are a little bit staggering for us and actually very exciting. So, we see good margins in the business that we’re able to achieve and we don’t see heavy discounting early on and we see pretty quick adoption. So we think, 2013, we’ve got a pretty good sizable number in our plan for the Mat business. But one other thing I will add to the conservational mats is really an equipment mat is made up of our railroad ties.

So we take five railroad ties at 16-feet or 18-feet long and we engineer them into a fabricated Mat that has a big bolt throne and that’s what used as a mat. So, we are really good at making railroad ties and this fits rate into that manufacturing economies of scale strategy. So it will help add to our overall railroad tie volume.

Michael Altobell – Moss Adams Wealth Advisors

Great. Thank you.

Operator

Thank you. Our next question is from [Joe Thomas of NV financial]. Please go ahead.

Unidentified Analyst

I would like to talk – I would like you to talk a little bit more about the materials advanced and you’ve made in the new ties. I mean what is 50% increase mean and like layman’s terms? And also more specifically with the 50% increase in performance, are you seeing increased interest from new and existing customers?

Steven L. Silverman

Yeah, so I’m going to handle part of that and I’m going to ask Jim Kerstein, who is on the line, he is our Chief Technology Officer and our Founder to comment on the some of the detail around the property enhancements. But what we see from customers is this, there is a very dire need to reduce maintenance in track. And the railroads both domestically and internally break their track into much like the highway system.

So, Route 95 and Route 80 are major thoroughfares and then there is territory roads that don’t get as much traffic, right. Then the major thoroughfares are the critical thoroughfares on the railroad industry to keep the big freight trains run in around the clock. And with the higher performance ties, they were able to manufacture to, allows us to participate if you will in maintenance projects along those major thoroughfares. So it opens up whole kind of a new segment of track and a whole new segment of business that we hope that we will be able to have our ties take place in as the railroads continue to build out. Jim, do you want to comment on the – on some of the specifics around the properties?

James J. Kerstein

Sure, Steve, thanks. One of the key here though I think is to just stress it, we haven’t come up with a whole new formulation or anything like that. Our patents are flexible enough to allow us to sort of re-jigger or rebalance the proportions of the different materials that we manufacture. And one other things that triggered this is simply that the railroads have gone to higher axle load trains, which just means that their freight is getting heavier. And that allows them to be more efficient time towards for freight across the country and to be better priced to their customers. Our ties sort of needed to grow with them to continue to increase in performance, so that we kept up with the railroads and that’s the whole concept behind increasing what we are doing by 50%.

The other factor in that and this is a very important factor actually is that, they are very, well, there are not a lot of competitors in the composite market, but there are some who put out what we consider a quite an exterior tie. And in going back to AREMA, which is the Railway and Maintenance-of-Way Association and proposing that standards be raised in order to meet the higher axle load need to the railroads.

We’re are actually going to close out and I don’t take a little bit of time, it has to go through communities and boards and that type of thing. But that will close out some of our lesser competitors and making impossible for them to compete in the market. So that’s the real significant, those factors keeping up with the railroads needs for the high axle load trains and actually reducing competition by providing a superior tie, that’s the meaning behind the 50% that’s what it signifies.

Unidentified Analyst

Okay.

James J. Kerstein

Steve, am I missed anything there?

Steven L. Silverman

I think everything is fine.

Unidentified Analyst

Thank you.

Steven L. Silverman

Joe, there is one other comment I would like to make on this is that the other significance here is, when you’ve – Jim focused a lot on the domestic side of the business. But internationally the ability not only to produce a railroad tier or a railroad sleeper at this level of properties as we now produce the ECOTRAX product too. It’s also significant that we are able to control the consistency of the product and this has been a problem in the past in the composite rail tie industry is the consistency and we’re very happy that our quality programs and the personnel and management that we’ve invested in has produced the product that since we’ve started selling the product years ago, that is a very, very consistent product it’s made out of recycled waste as well.

So that’s another critical component, just not about as how high can you get the properties, but how consistently can you hit those properties? And with what we’ve achieved, we’re able to do in a very consistent basis. So I think that’s also a very critical element to what we are doing.

Unidentified Analyst

Okay. Yeah and that makes sense, I appreciate you filling in that. Got it, all right. Thank you.

Operator

Thank you. Our next question is from Marc Green of CompEquity. Please go ahead.

Marc Green – CompEquity LLC

Steven, I wanted to just go back to the industrial mats if you remind disposable was something that you commented on and I was curious, because the disposal for the railroads of a creosote item is problematic. But what are the economics around the wood mat, AXION industrial mat that makes to say compelling sales item for these users?

Steven L. Silverman

Yeah, great question. So our mat much like our railroad tie carries an upfront additional, it’s a more expensive product in a wood mat. You also have to go back a little bit and understand what’s going on in the wood industry, so wood quality in this country has been decreasing rapidly over time. And also as the housing market starts to come back, wood prices continue to rise.

The issue was a wood mat, when you drive trade vehicles on it or put it in water or mud or soft surfaces where a lot of this construction and pipeline activity happens, the wood mat deteriorate very, very quickly. We’ve got some job sites with their building pipelines where they can even get through one job cycle with a wood mat.

Also, our mats are lighter in weight, so from a transporting standpoint, we’re less expensive per mat to actually transport the mat to a job site. Also, the beauty of our – a lot of times with wood mats they can’t even get amount of the ground, sometimes they just leave them in the ground, and they just led them decompose in the ground and deteriorate, or they pull amount and then they have to facilitate disposal, grinding, or burning of what’s left of the mat after its use.

So there is a few start. I think one of the exciting things that we’re exploring and hitting down the road with some customers is from a financial relationship standpoint that’s never been done before in the Mat business is a rental model. With our mats, you have the ability to actually rent those mats on a daily basis to contractors as apposed to just selling them. So the rental business could be very, very lucrative.

We’re still exploring that model with some potential customers and hopefully we’ll have some news on that in the future. But the other beauty of our product is that should something happen to mat where it breaks or deteriorate, won’t deteriorate in the mud, but should it break or whatever, we have the ability to take that product back on a buyback program and actually ship another railroad tie if you will and inserted into the construction of the mat and then that mat goes back into use.

So our products not only are more durable and will last longer as a mat on a total life cycle cost basis. We also present a potential rental model and we also present a buyback program on our material. So our products will technically never deteriorate past use and they will never have to get land filed or disposed off. So it’s a – it’s really a great proposition.

And in the oil and gas business, there is some connectivity to some of the material that we are using to make the product coming from some of the well liners that are used in the natural gas industry. We’re able to use some of that material in our railroad ties and we’re able to put it back into use in the industry, which is a big thing for the natural gas business.

Marc Green – CompEquity LLC

Well, thank you. I mean the pictures on the website are quite compelling and it looks as though you might be selling more mats per mile than actually cross ties per mile to the railroads?

Steven L. Silverman

Both, we hope so…

James J. Kerstein

We hope so, that’s for sure.

Marc Green – CompEquity LLC

Thank you.

Operator

Thank you (Operator Instructions) The next question comes from Jim Liberman of Wells Fargo. Please go ahead.

James Liberman – Wells Fargo Advisors

Yes, thank you. Could you describe or talk about your patent position, because some of the patents I guess they too 1980s better I guess there was the early stages and you’ve expanded on that since then I’m assuming?

Steven L. Silverman

Yeah. So real simply we’ve got patents that are across the formulation, across the process as well as across the sizes and shapes with formulations. So some of the earlier formulations, yes big back into the late 80s or early 90s and then there is newer patents all around the world based on the major geography markets, that incorporate different formulations with recycled plastics in different sizes and shape. So if we had a formulation of HDP and glass filled polypropylene has a basic patent formulation.

There is also a patent that exists for that formulation in the shape of a railroad tie and the shape of an I-beam, and the shape of the board, that are more current patents that are in very various stages around the globe. So, Jim, I don’t know, do you have any other comments on that? Hi, Jim, do you want to comment?

James Liberman – Wells Fargo Advisors

So I have one other question actually.

Steven L. Silverman

Okay.

James Liberman – Wells Fargo Advisors

Apart from the patents, but that’s fine, feel comfortable about that. But can you explain the – it doesn’t seem, it seems kind of intuitive of that saying an I-beam formation formula or that it could have the same kind of or higher potential strength I guess how it is or then such dealers on your back, could you explain how that’s possible or…

Steven L. Silverman

Yeah.

James J. Kerstein

Steve, let me…

Steven L. Silverman

Yeah, try Jim.

James J. Kerstein

It’s actually not higher potential strength. What we’re discussing and we’ll say that is a higher specific strength and that strength per weight of the product.

James Liberman – Wells Fargo Advisors

Okay.

James J. Kerstein

Since steel can be 8 or 10 times the strength of a composite I-beam, that’s the comparison and how it’s meant. It’s not that we’re ever going to be purely stiffer than an I-beam, you are correct in that assumption.

James Liberman – Wells Fargo Advisors

Okay. But it could accomplish a lot of what we are trying to do from a structural standpoint?

James J. Kerstein

Well, the bottom line is, let’s say, you ended using three I-beams, three composite I-beams to replace one steel I-beam. You would still be shipping a significantly lighter and probably less expensive bridge or helping to build a lighter and less expensive bridge than by shipping the steel.

James Liberman – Wells Fargo Advisors

Okay.

James J. Kerstein

That would be easier to use, easier to get in place, there are times that we create a panel to drop-in. So it’s just easier to work with and certainly significantly cheaper with regards to shipping costs.

James Liberman – Wells Fargo Advisors

Thank you very much.

James J. Kerstein

My pleasure.

Operator

Thank you. Our next question is from Mark Goldstein of [HindSight] Partners. Please go ahead.

Unidentified Analyst

Yes. I’m very, very encouraged. I was a investor right from the beginning, and I think Steve has done a wonderful job in building this company. At what point, however, what kind of revenue do you really need to get to before your break-even or in the block?

Steven L. Silverman

Yeah, based on the plan we have and a lot of it will be determined by mix of products sold and what industries we sell those into and what territories around the globe we sell them into. But the number we’ve always put out there in the financial model is, if you look at our cost structure today and achieving a good solid level of gross margin, we look at a $25 to $30 million revenue number is where, the company starts hitting this stride on a cash flow basis.

Unidentified Analyst

And is there a timeline?

Steven L. Silverman

Yeah, we haven’t put a specific timeline out. But as we start to understand other things like the impact of these new standard ties, some of the international developments move along a little further in the process, and the Mat business develops, we will be able to get our sites on a future time period. One other things that I think we’ve all and Mark, I know you have, you’ve been with us for a long time as a shareholder that this industry, the main industries that we play on in just, they just tend to move the railroad industry specifically.

So it’s a little difficult to put an exact time on it, but if you look at the way the company is growing, we came out in 2010 with very, very minimal revenues. We grew in 2011. We grew another 37% last year. We are very, very encouraged about 2013 and some of these in track trials and things that are happening. I think during the call I mentioned, the opportunity in Chile. I mean, we went through a year and a half trial period. The customer just filed the final reports and that will put us in Q for the end of 2013/2014 budgets for spending.

So it’s a little difficult to get our exact pinpoint on it. But I can promise you this as we get closer and more visibility we will, we’re going to start putting out some guidance and trying to figure out when we are going to get to those points.

Operator

Thank you. Our next question is from Steven Miller of [BM Marketing]. Please go ahead.

Unidentified Analyst

Yeah. I just wanted to know just curiosity on a cost basis, what is actually our cost differential on a unit for one of those panels, because it sounds like since you can reuse the material and you can’t reuse the wood that we’ve got a real good thing there.

Steven L. Silverman

Yeah. Oh, you are talking about the mat Steve?

Unidentified Analyst

The mat, yes.

Steven L. Silverman

First of all, how are you, thanks for the call, thanks for the question. Yeah, the Mat business on a purchase basis were similar to a rail tie cost differential. We are two to three times, two and a half times the cost of what a wood that is. But obviously, the life cycle some of these wood mats don’t get through 6 to 12 months worth of use depending on the job condition.

So yeah, it is a very, very compelling value proposition, which is one of the reasons that we’re very, very excited about the business.

Unidentified Analyst

Okay.

Steven L. Silverman

We have yet to run into customer or a potential customer that is actually kind of say thanks, but no thanks, we are not interested in talking to you. So we hired recently on an outsourced basis a lead generation company that has been calling out to pipeline contractors and infrastructure contractors around the country.

And the response from all of them has been, hey, let’s take a look, and that’s also very encouraging. So this is one of the reasons that we really like this business. I think as Mark pointed out with his question, if you go to our website, you can visually see the value proposition, pictures are worth thousand words, right. I mean, you can take a look at a wood mat versus our mat and you can see the value proposition very, very clearly.

So we are excited about the business. It’s just – it’s going to pushing hard on the sales and marketing effort and we just need to go forward some of these trials and bring in the sales order. So yes, we are very encouraged and the value proposition is very strong.

Unidentified Analyst

And, Steve, can I ask that on to that, I recall that once upon a time a number of years ago, you tried to get into a financing program for the railroad ties. So that on a cash flow basis, they wouldn’t be putting out anymore something been looked into that for these mats?

Steven L. Silverman

Yeah, and that brings on the, what I mentioned earlier I think when we spoke about the mats is this rental and leasing option. And so, yes, this is something that we’re actively taking a look at.

Unidentified Analyst

Okay. Thank you very much.

Steven L. Silverman

Thank you, Steve

Operator

Thank you. Our next question is from Jim Liberman of Wells Fargo. Please go ahead.

James Liberman – Wells Fargo Advisors

Yes. This does occur to me when you said in venting and leasing of the mat. That does sort of the same model that I guess on these Jersey barriers have for instance, I mean I don’t know, but I heard that Jersey barriers have never actually sold or they just leased?

Steven L. Silverman

I’m not very knowledgeable on the Jersey barriers…

James Liberman – Wells Fargo Advisors

Yeah.

Steven L. Silverman

But it’s a traditional what we are exploring is a traditional daily rental option on the mats, X amount per day for the use of the mat. Now, this is compelling to some of the infrastructure contractors that have short-term projects.

James Liberman – Wells Fargo Advisors

All right, right.

Steven L. Silverman

Six months, three months would I need to get in and get out of the job site? One of the pieces that comes with that rental model is, obviously the supply chain. So you need to be able to get into a job site, get those mats picked up, get them serviced, cleaned, and prepared to go back out into the field. So we AXION is exploring doing that on our own and we’re also working through supply chain partners that are in the industrial contracting supply business and the oil and gas service business. So, we are still a bit in the exploratory stage with the rental model, but it does look like, it could be compelling for certain types of customers.

James Liberman – Wells Fargo Advisors

Thanks again

Steven L. Silverman

Thank you.

Operator

Thank you. The next question is from Aaron Holtzman, a Private Investor. Please go ahead.

Unidentified Analyst

Hi, guys. How are you doing? Just Wednesday I’m very excited about all the progress you do making. Just have a quick question, I know you are talking about in 2012 for new customers, you guys were selling at discounts. I just wanted to know for 2013, are you going to be looking at consistent margins or we still be looking at discounted our sales?

Steven L. Silverman

Yeah, so I just want to – I want to clarify. The early on the Class 1 rail contract that we signed was the main thrust behind discounting, okay, especially in the rail tie business. We gave very favorable pricing terms to the Class 1 rail contract obviously to gain market adoption. We did not necessarily do that across the board.

The issue that I think Don pointed out early in his presentation of the numbers is that a large portion in 2011 and 2012 of our total dollar volume, meaning, the Class 1 rail contract have the largest percentage of our business by far as we sold smaller orders and trial orders to these other railroads at higher prices.

So on a margin basis, the other orders and other customers were purchased at a higher margin price, there was some favorable pricing that was given to the Class 1 railroad for its early adoption and helping us gain market adoption. So and I think it’s worked, I think that strategy has proven itself. And as we solidify these trials and bring these other customers on to larger supply contracts and our concentration with the Class 1 railroad decreases, we should see overall margins improve.

Unidentified Analyst

Sounds great. Okay, thank you.

Operator

Thank you. (Operator Instructions). The next question is from Dave (inaudible). Please go ahead.

Unidentified Analyst

Hello. Can you hear me, okay?

Steven L. Silverman

Yeah. Hi, Dave.

Unidentified Analyst

Hi. Just a real quick question about what’s going on from a Hurricane Sandy. Are you guys going to do anything with the boardwalks or leave that up to tracks or?

Steven L. Silverman

Yeah, It’s been an interesting process, yes, the answer to your – the direct answer to your question is yes. We are very, very involved and engaged with the projects and the rebuilding effort in not only New Jersey, but New York and some of the other coastal areas that were hit by Sandy. I think what you will see that we found is that, there is going to be kind of two faces for this thing. There is the immediate need which focuses on how do we get stop operational for Memorial Day and this summer.

And then you are going to see everything afterwards that will take place over the next few years actually. We have been in contact and hitting New Jersey shore line in New York areas very, very heavily talking to Municipalities, engineering firms, mayors and council, various supply partners, contractors, engineers et cetera, and our product has gotten some very, very good representation.

I will tell you that some of the immediate fast paced stuff is something that will be difficult for us to participate in. And I think if you read the news recently there has been some engineering firms that have been caught up in some corruption and it’s a bit of a mess quite frankly. We are very, very encouraged about our products being used as the rebuilding effort continues.

And I think you will see some exciting news from us going forward on potential opportunities and things that we are working on and actually closing business to rebuild some of those boardwalk. So, yeah, we’re encouraged about – unfortunately about that rebuilding effort. We obviously have a good value proposition. The sad part is that if all those boardwalks have been built out of our product, originally all those pales of wood and everything that you saw in photos and on TV would have been repurchased by AXION and we would have reprocessed all that material into reusable building products.

So we think we have a good message and we are out there pushing it hard, we have some people that are in these municipalities that are running really, really fast, and they’ve got very tight timelines, and when they have that, they typically turns to things that they are very, very familiar with, and they don’t have a lot of time to look at new types of products like AXION’s products. But we have commitments from these folks to sit down and talk to us about some future other building projects and things that they have gone on a shore line. So, yeah, we’re positioned pretty well down there.

Unidentified Analyst

Very good. All right, great question, guys. (inaudible) sales reps in Colorado?

James J. Kerstein

No, we don’t have one in Colorado.

Unidentified Analyst

Okay, great. I will keep go on.

Steven L. Silverman

All right, I appreciate it. Thanks, Dave.

Andrew Haag

All right, everyone. This is Andrew Haag with IRTH Communications. That wraps up the Q&A portion of today’s teleconference. You may disconnect your phones lines at anytime. And thank you again for your participation and your interest in AXION International.

Operator

Thank you ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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