Axion International Holdings, Inc. CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Axion International (AXIHQ)

Axion International Holdings, Inc. (AXIH.OB) Q1 2013 Earnings Call May 16, 2013 4:30 PM ET

Executives

Andrew Haag – Managing Partner, IRTH Communications

Donald W. Fallon – Chief Financial Officer and Treasurer

Steven L. Silverman – President and Chief Executive Officer

Analysts

Brett Conrad - Longboard Capital Advisors

Operator

Greetings, ladies and gentlemen and welcome to the AXION International's 2013 First Quarter 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 Mr. Andrew Haag with Managing Partner of IRTH Communications. Thank you, Mr. Haag. You may begin.

Andrew Haag

Thanks Manny. I would like to welcome you all to AXION International's first quarter 2013 conference call. With us today are AXION's President and CEO, Steve Silverman; and AXION's CFO, Don Fallon. After management's statements we will open up the call for a question-and-answer session. I also want to bring to your attention that the replay to this conference call is available at the phone number provided on the earnings release issued earlier today.

Now before we get started I'd like to take a moment to just read the Safe Harbor statement regarding today's conference call. The conference call will contain forward-looking statements within the meaning of the U.S. Federal Securities laws 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. All the forward-looking statements are made as of today May 16, 2013, and AXION expressly disclaims any obligation to revise or update any forward-looking statement after the date of this conference 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 quarter-ended March 31, 2013. Don?

Donald W. Fallon

Thank you, Andrew. In the first quarter of 2013 we made strides in improving our gross margins and economic fundamentals of our business and narrowing our operating loss. Revenues for the quarter ended March 31, 2013 were 1.8 million, which was a 23% decline from revenues of 2.3 million in the first quarter of 2012. Sales of our ECOTRAX rail ties contributed 1.7 million while STRUXURE building products accounted for the balance of first quarter 2013 revenues.

Gross margins in the first quarter of 2013 were $237,000 or 13.5% of revenues compared to $11,000 or 0.5% of revenues in the first quarter of 2012. This improvement in gross margin was driven by a diversified revenue mix selling to 15 customers. We anticipate further pressure on our gross margins for the balance of 2013 due to the impact of our shipments pursuant to the three year supply agreement with our Class I railroad customer.

Product development and quality management expenses decreased slightly to 218,000 in the first quarter of this year, compared to 235,000 in the same period of the prior year. Marketing and sales expenses increased to 245,000 in the first quarter of 2013 from 139,000 in the prior year. General and administrative expenses declined to 718,000 in the first quarter of 2013 from 835,000 in the first quarter of 2012.

Loss from operations narrowed to 944,000 in the first quarter of 2013, from 1.2 million in the first quarter of 2012. A non-cash charge representing the change in fair value of derivative liabilities associated with our 8% convertible promissory notes was 5.6 million and accounted for the majority of the net loss attributable to common shareholders of 7.3 million or $0.25 per basic and diluted share for the first quarter 2013. This compares to a net loss attributable to common shareholders of 1.8 million or $0.07 per basic and diluted share for the first quarter of 2012. Without this non-cash charge Axion's net loss would have narrowed.

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

Steven L. Silverman

Don, thanks. Axion cleared a major hurdle during the first quarter of 2013. We have shown that the acceptable gross margins for our business are achievable. Our gross margin this quarter was 13.5%, which is far higher than what we have achieved in the past. This was achieved by normalizing the sales mix to a diversified customer base across multiple geographies without a heavy concentration from one customer.

Additionally we have discovered a great deal about the scalability of our manufacturing process. In February Axion began operating the Waco facility with our own labor, removing third party contractors from the equation. We are at a critical point in time with regards to the total volume of plastic being manufactured. Our financial models indicate that as we achieve the higher volume projected and with operating of our own facility and reducing our reliance on contract manufacturing where appropriate we will yield reduced costs and higher margins.

For the first time in the second quarter we will run a fully integrated process from (bell) bottles, grinding cleaning and into a manufactured rail tie in the Waco facility. These trial runs will validate our belief that processing our own raw materials will result in additional savings. We will be eliminating two touches in the supply chain.

As most of you know we have been selling rail ties to a key Class 1 customer under a three year supply agreement at a heavy discounted price. So customer diversification was, is and will always be critical. In the first quarter of 2013 we reduced this concentration by two-thirds and sold products to 15 different customers with 11 of these being existing customers and four first time customers. This shows that existing customers are happy with our products and see a strong price to value relationship. Some of these existing customers have previously submitted small test orders. They see the value and consistent quality and have placed new orders.

Our revenues were off by 23% this quarter as compared to the first quarter of last year. Although we are not pleased with the volume of sales this was attributable to lower sales to our Class 1 rail customer. In the fourth quarter of 2012 this customer temporarily delayed shipments against its purchase order of 50,000 rail ties that is scheduled for its maintenance programs in 2013, while it performed testing on our improved ECOTRAX tie with higher internal mechanical properties. These ties were installed during the first quarter and to date are performing well. For the balance of 2013 as we ship against this customer's 50,000 rail tie order at a reduced introductory price we will have continued pressure on our margins.

To highlight some of our normalized sales mix, several orders were shipped during the quarter, including an annual tie maintenance order to Dallas Area Rapid Transit, a reorder of switch ties to Miami Dade and our first shipment of ECOTRAX ties to a major rail line in Europe for in-track testing, in conjunction with Sicut Holding Limited, the technology licensing holder in Europe. We currently have $4.5 million backlog of shippable orders for the balance of 2013, comprised of purchase orders in hand and our three year supply agreement.

Currently the sales opportunities we are working on through 2015 total $51.8 million consisting of 77 active opportunities with 56 potential customers. $30.5 million of this is for ECOTRAX represented 39 sales opportunities and $21.3million is for STRUXURE with 38 sales opportunities. Our ECOTRAX rail ties continue to be tested in-track or are undergoing purchase approval with leading transit and freight systems in Brazil, Canada, Russia and Europe, as well as two Class 1 rail line in many transit lines here in the United States.

With our STRUXURE product line we are very encouraged by the initial interest in our construction mats, having just conducted a field trial with our first construction mats in December, we have already sold and shipped mats to four new customers. There continue to be additional enquires from this market segment. In late 2011 we deployed a third party lead generation firm to generate qualified leads in the pipeline contracting business. This has proven very successful as we have increased our opportunities in this segment. The supply chain is very complex in this industry and we have started conversation with many leading energy and contracting companies. A value proposition in construction market is very strong, the sales cycle for mats is short and customers order for immediate delivery. This means that we have started building our inventories so that we are able to immediately respond to demand.

Based on talks with industry participants we believe that in North America the traditional wood construction mat market is over $500 million in annual sales. We believe we can make inroads into this market, and we expect STRUXURE construction mats to continue to contribute to our sales growth in 2013. We've entered 2013 with a very positive development on margin improvement, a new product lines with our construction mats and continued traction in revenue diversification and market adoption.

In addition, our SG&A expenses continue to trend downward while we focus on our investment and sales and marketing, all very positive trends. Thank you for your time today and we look forward to sharing further development through press releases in the future. Andrew?

Andrew Haag

Thank very much, Steven. That wrap ups the formal discussion operator. We will now open the call for the Q&A, and after the Q&A, I'll provide some closing comments as will Steve.

Question-and-Answer Session

Operator

(Operator Instructions). Thank you. The first question comes from the line of Brett Conrad of Longboard Capital. Please go ahead.

Brett Conrad - Longboard Capital Advisors

Hi, Steve.

Steven L. Silverman

Hey, Brett how are you?

Brett Conrad - Longboard Capital Advisors

I am very good, thank you. I had a question on just first on bringing more of the manufacturing in house. Can you just talk a little bit about your CapEx for that and how you see it being able to potentially improve margin and kind of what points -- like what volume points will that really start making a difference?

Steven L. Silverman

Yeah, what we've learned through the Waco opportunity where we've actually started controlling more of the -- first it was the quality process and then the operating process and then at some point we took over early this year with our staff in the facility operating with obviously our equipment that we had already purchased for our IT and then standard extrusion and blending and other equipment material handling equipment that was in the facility.

So through that process we've been able to study and understand the kind of breakeven points on a daily basis of pounds of plastic and the economies get really good and very improved. As we start really from where we are today we need to double the pounds of plastic that we are pushing on a daily basis through a consolidated facility. And then we should see margins increase from there not only on the manufacturing of the railway tie pipe product but also on the downstream processing of material which I referenced in the call that we are actually going to start running our own and processing our own flakes from (bell) bottles of HDPE directly into the product.

So we are going to get a true look at what does it look like when we fully integrate it, process and if we look at it purely from a supply chain standpoint anytime you can remove a touch in the supply chain there is going to be savings that will enhance our margins.

Brett Conrad - Longboard Capital Advisors

Yeah I imagine that's true and especially because the margins are (plenty). And just talking of margins to, can you go over what that -- what do you expect margins to eventually get like to say on the math or current structure or on the ties, tie is obviously going to be a difficult margin business but maybe high volume and are these other products kind of be able to trend better?

Steven L. Silverman

Well the reason we are excited about the first quarter was I think we got and I used the word normalized. I think we have got a very good snapshot. And I emphasize the word snapshot also of what the company should look like from a mix standpoint and mix brings in a couple of components; one, customer and two, products and three, in this industry geography. We shipped in the first quarter some international orders. We didn't have a heavy concentration. So our biggest customer was in the low 20% range of the total revenue number. Historically it's been up above 70%.

So I think from a mix standpoint we got a very good look, 13.5% gross margin, still not ultimately where we wanted to be but when you look at it from the sales side I think that would look like a normalized quarter for us or if you ran that out annually you would see that 13.5 based on where we are today. Now when you add on the economies of scale of operating an integrated fully vertically integrated facility with -- you start getting up in to the 150,000 pounds of plastic a day you see that 13.5% start jumping up into the 20s. And now you got a nice rounded out gross margin for the company. So it's not one factor.

I mean we have to have diversification in our customers. We have to have diversification in our products and our rail tie product is way out in front of the other product launches that we have had because we have been at it a lot longer. So for the time being it's going to be a bigger part of our business but if we can get the right mix in all three of those buckets and then put vertically integrated facility on top of that I think you see the model that you know what the company will look like as we start to move forward.

Brett Conrad - Longboard Capital Advisors

Okay, great. Okay, thank you.

Operator

(Operator Instructions). And the next question comes from (Aaron McCleary) of IRTH. Please go ahead.

Unidentified Analyst

Hi Steve, how is it going? I just had a quick question about the Construction Mat business, wanted to see how that's developing and maybe what type of customers you have in the pipeline moving forward?

Steven L. Silverman

Yeah, good question. I mean we remain really excited about the mat business. As I mentioned in the call we have actually first put the mat in the ground, mid to late December last year. We've sold a few truckloads of orders to some contractors and we started to kind of find our way around if you will in the supply chain of the mat business. What you see happening in the industry is the supply chain is getting kind of consolidated and a lot of the buying power is rolling all the way up to the energy companies, people like Exxon, Mobil, Sonoco et cetera and we think that the industry is kind of really pushing in that direction.

So we've started engaging now with bigger folks in the supply chain, people that are involved in the pipe industry, moving pipe logistically, selling pipe to projects. We saw a big bump in our STRUXURE total dollar value in the pipeline today and 95% of that is being driven by the mat business. So there are some things that are out there that are -- of good magnitude in revenue and will get us to that additional plastic on a daily basis that we want to process through the machines to enhance the margin.

So yeah, the mat business is going very well. We have yet to have anybody kind of tell us no. We are not looking for an alternative, everybody's listening very carefully. We have got a lot of truckload trial orders. This one thing I will say about this business though is it is a demand business. When they call they want their product, very different than the railroad business for us. We just recently invested in another half a dozen molds for 16 and 18 foot lengths, which is the size for the mats and we have started to build some inventory to have in the yard that are fabricated mats. So when the phone rings we can actually deliver.

This is not a big long planned out cycle business. It's, hey, I need two truckloads of mats and you got to ship them now. So it is a little different, different mindset, the word. Again we are very encouraged. We are talking to people on the energy side, people like Sonoco, Exxon, Mobil, we have got conversations with mid-stream companies and people -- pipeline companies like TG Mercer is one of the big pipeline guys that we are in conversation with. So I think our conversations are across the board in the industry, contractors, mid-stream guys and energy companies. So there will hopefully be some more good news coming around that industry.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question's from Gilver Goldstein, a private investor. Please go ahead.

Unidentified Analyst

Yes, I am a private investor. I have been with the company for quite a while. I think my question was just answered. I wanted to know how far you are going with the mat business but I think you did cover it and I thank you.

Steven L. Silverman

Great, thank you.

Andrew Haag

Great if there is anyone else who'd like to ask a question please queue in now.

Operator

The next question comes from Avinash Wadhwani, a private investor. Please go ahead.

Unidentified Analyst

Yeah, hi. I have been an investor in your shares for quite some time. Now in addition to the rail tracks and the mats, you have also built a few bridges at Fort Bragg and couple of other places. So looking at that what are the other I guess, infrastructure related initiatives that you will have onboard? And the second question is you had a significant charge due to the 8% convertible. Is that a one-off or is that a recurring charges which caused a significant dip in your profit?

Steven L. Silverman

Hey, Don do you want to handle the back part of that question first.

Donald W. Fallon

Sure that's a, not to get too technical from an accounting standpoint, but that is a derivative liability sitting on the books that we are required to fair value at every reporting period, that is a non-cash charge and it will be at some point extinguished with non-cash and it would reverse itself in through the P&L. An example would be if the all the 8% note holders were to convert to common stock tomorrow that there is half of that, over half of that liability would go away and it would -- we'd actually have a gain on the statement of operations, or P&L for the reduction in value going from about $3.5 million to zero.

So yeah, you can consider it a one-off. I won't give you my (inaudible) about whether it's a - it's a required accounting. We do it properly and not, as I said, I will not get too deep with it. But I will be happy to talk with you offline if you want to get in a little more detail.

Unidentified Analyst

Yeah, let's to do that if possible.

Donald W. Fallon

Sure.

Steven L. Silverman

To the first part of your question, yeah, I mean in 2012 we built, there was a couple of other bridge structures that were built for the U.S. highway system that used our material, one in Ohio, one in Maine. This business the bridge business is a project by project business. We went out and completed the design guide for short span bridges. That is published online today, that we utilize with engineers but it is a long drawn out adoption process and it is a project-by-project process.

We do have quite a few projects in our pipeline today that we are working against from different parts of the country with various engineering firms. So yes the bridge side of the business does remain part of our strategy. But in our quest to drive pounds of plastic if you will through the process or through the manufacturing operation the rail ties and the mats are probably are quickest way to get there just because of the size of the industries and the markets that we are in.

As we evolve we continue to work in market. We attended I think two or three bridge shows last year, regional shows with the departments of transportation and various park and rack organizations. So we do continue to work in market into those industries, they are just, like I said they are slow developing and they are project-by-project basis. One of the things that we started to understand is our technology is very, very good in large profile formats. So when you look at a bridge or even a boardwalk we compete very, very well in the marketplace on a price-value relationship and mechanical property relationship on what they call the sub-structure, things like pilings, i-beams, girders, the heavy duty stuff underneath.

Where our technology struggles a little bit in the market is in small profile, so a lot of it kind of the topical boards or the deck boards that you see on top of the boardwalk. Axion technology is stronger in the bigger profiles. So one of the things that we have taken on in the company as an initiative is we started to look potentially at other license technologies that are very good structurally in small profiles. So then when we go out and compete in the bridge market or the boardwalk market we now have a much better value added engineered solution actually combining technologies.

So in the building products business there is really not a product out there that meets all the desires and needs of every single project all the time. Everybody has their own little their stronger attributes, some maybe models or ruptures, some maybe ultimate strength, some maybe compressive strength. So we think that there is a strategy out there in this industry to actually combine some technologies to build a better value added solution. So we are starting to take a look at that stuff. It's not a big focus right now but it is something that we are taking a look at. So I hope that answers your question.

Unidentified Analyst

Yes, very much. Thank you. And in fact I have a follow-up to one of the earlier question that I had which was outside oil and natural gas industry where you are selling a lot of mats are you looking at other industries which could obviously leverage the same product?

Steven L. Silverman

Yeah there is actually -- yeah, there are two things, there is actually three additional things. So one some of the early adopters of our mat were actually not pipeline contractors. They were actually industrial road or sewer contractors. So the first test was with Northeast Remsco which is a general industrial infrastructure contractor where they put in sewer pipes, they do roadway construction. So yes we are calling actively in that kind of contractor market if you will and the early fabricators and distributor that we put on in New Jersey, Environmental Solutions is somebody that calls on a lot of the road contractors and industrial contractors. So yes there is another side to that business that we are working on.

The second thing is there is also different profile mats that are used in couple of different industries. In the oil and gas industry they use what they call a rig mat which is a drill site mat, which is a thinner profile mat. It doesn't need to support heavy tractive vehicles. So we are actually looking at engineering a thinner profile mat using our technology to replace a wood mat that they use today. And the other marketplace that uses that type of mat will be what they call a temporary road where they are not actually laying pipe or sewer or other industrial work but they are just -- they need to put down a temporary road to get into a site somewhere and they need to take that temporary road out. So yeah, there are some kind of tertiary markets that are in that industry and we are penetrating and calling on all of them.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question comes from Steve Kaizer, a private investor. Please go ahead.

Unidentified Analyst

Hey, guys, thanks a bunch for the information and congratulations on the major milestone this quarter. My question is more of a financial and can you give us a little bit more details on the convertible note, I know you said it was at 8% that was discounted to conversion. And the follow-on question to that, is are there any other convertible notes that you are holding now that will result in similar dilution and do you plan on attempting to raise capital in this forum in the future?

Steven L. Silverman

Don?

Donald W. Fallon

I mean as far as the 8% convertible promissory notes they have a conversion price right now of $0.40 a share. They have additional warrants attached to those that starts at about $0.60 a share. The five-year note and I think that's it for the main terms as far as anything else that is convertible we do about little over $7 million in face value of deferred stock that has a -- obviously has a conversion feature of a $1 a share. And it also is redeemable and it starts redeeming March of 2014.

Unidentified Analyst

Okay, do you think that's that going to be enough cash on hand for you guys to continue to fund your growth as you laid it out here today?

Donald W. Fallon

Yeah, I mean as we look at it today we will be little bit behind on the revenue side of things where we want to be, but we think based on the size of the things that are in our pipeline and the sales opportunities that we will be able to catch that up. So at this point we seem to be in a good cash position and we will continue to monitor that and take the steps necessary to make sure we stay funded on our growth.

Unidentified Analyst

Okay, thanks very much.

Donald W. Fallon

Thank you.

Operator

Thank you. The next question is from Tom Nai, a private investor. Please go ahead.

Unidentified Analyst

Hello, Steve one question on the margin considerations. I know that you mentioned the challenges with the one Class 1 railroad where you got the three-year agreement and it sounds like there are some things that you are working on in terms of the cost side of the equation there. But your other ties opportunities, not really understanding that business. I assume that you have got more flexibility in pricing on some of those other opportunities with your enhanced product or can you comment about that a little bit or is all of the railroad tie business kind of the same model regardless of the client there?

Steven L. Silverman

It's a good question. I will give you a couple of different answers. But the Class 1 relationship that we have was done by design. We needed a validator in the market, number one. And the second thing was as we needed something to jumpstart the company from a revenue and cash flow standpoint. So the pricing that they received in that agreement was kind of that incentive to get that jumpstart. What we have learned with that jumpstart on the manufacturing side was what I kind of referred to today in the call was I mean we clearly know what that pounds per plastic per day starts feeding us some better economies, okay. So that was the reason that the Class 1 piece played out.

In the rail industry itself, I think you see based on our first quarter results where we didn't have a big concentration with that Class 1, what we could potentially do with the margin. And the customers that we saw or sold in the first quarter were geographically mixed. So you see big divergence in what certain geographies will accept for a composite rail tie or sleeper, as they are referred to in Europe. And you see also in application so we do switch tie business which is quite longer rail ties where we compete a lot closer with wood and concrete's almost impossible at those lengths because of the weight.

So depending again mix is very, very important, diversification in customers is important, diversification in applications is important. When we sell into longer tie, switch ties or turnouts specialty pipe applications we can command a higher price point and various geographies allow us to command higher price points. So mix is very important in multiple fronts and I think that that will allow us to see and achieve the required margins once we get to the pounds per day thresholds that we need to get there.

Unidentified Analyst

So just one follow-up question, thanks for that, Steve. And the potential business in Europe would that require you to have a manufacturing facility there or you envision your Waco facility being able to support basically all of your rail tie business.

Steven L. Silverman

Yeah I think at the point where we enter into multiyear supply agreements for larger volumes they will need to be geographically desirable manufacturing. The freight and the import duties and all those things will just be cost prohibitive when you get up into the 200,000-300,000 tie range on an annual basis. It just becomes too much so yes the goal then would be to do something over in those regions wherever they are, whether it's Europe or Australia or South America. At some point when you get to those multiyear commitments and they are of large size which is what we have got in our pipeline today, these are the opportunities that we are working against you will need to geographically have manufacturing.

Unidentified Analyst

Alright, thanks very much. I appreciate your candor, very much appreciated.

Steven L. Silverman

Yeah, thank you.

Operator

Thank you. The next question is from John Beatie, a private investor. Please go ahead.

Unidentified Analyst

Hi. I was just wondering what you all have done and what you can tell us you have done to ensure the price stability of the feedstock of the HDPE material and what kind of contracts you have there et cetera?

Steven L. Silverman

Yeah, so first of all from a contract standpoint the industry itself on the post-consumer side people put bottles at the curbs they get collected and they get sold off. The industry is pretty non-accepting of long term supply contracts because they play in a commodity market. So how do you combat that? There are some things that are being worked on the company there that I can't talk about at this point. They need to develop further. But the difficultly that the recyclers are having in the plastics market is also the up and down swings in the pricing with the commodities and the fact that they are dealing in commodity businesses.

So what they are looking to do is align themselves in some sort of partnership if you will with people that manufacture engineered products like Axion. So we are a prime target if you will for some sort of relationship or partnership with a post-consumer plastics recycler. And through those relationships you can stabilize your pricing and secure your supply stream as needed.

The other thing that we have done which we are really-really proud of is more of a post industrial supply stream. So one on the HDPE side comes out of the natural gas business itself when they drill a site for a well they actually put down what they call liner pad. And those liner pads are through our contracted manufacturing partner up in Pennsylvania, they have developed and invested heavily in technology that actually cleans that material and allows us to use it in our product. So now you remove yourself from the post-consumer commodity stream if you will and it helps you stabilize your supply and your pricing points.

On the other key component that we have which is our glass filled product, we have been able to secure that out of the post-industrial stream and it's very, very plentiful and at this point we are one of the only outlets for the stream. So we have been able to stabilize that pricing with the quality of the product that we need to achieve the mechanical properties. So there is a balance you have to find in the material sourcing side where you maintain your quality and your mechanical properties on a consistent basis.

One of the things, I'd like to divert a little bit here, one of the things that we have learned in the international growth of our business is that different railways and different countries operate differently, especially from a quality standard standpoint. And we've really upped our game. You saw some news last quarter about the enhancement of our mechanical properties. That is grown out of consistent raw material streams. That's one of the main participants in being able to achieve those mechanical properties on a consistent basis.

If you think about it this way one of the difficulties in the industry in the past has been consistency. And if you think about it fundamentally you taken an inconsistent raw material and you are making something consistent out of it right. That's really an engineered product. We have been able to achieve that. We have very, very tight consistency on our product, and we're actually starting to turn that into information that we talk to our customers about on a quarterly basis from a quality review standpoint.

So in the past it was how do you hit the minimum, and now we are actually raising the bar saying hey, we are not just going to hit a minimum we are going to hit a range, and it's going to be very consistent range. And I think ultimately if we stay true to that we will become a market leader that will be very difficult to chase down in this industry. And we are going to remain very, very true to that and it all ties back to your question and hopefully I gave you good answer but on the material supply side being able to secure good quality material supply and stabilize your costing by removing yourself a little bit from the commodity market and also building partnerships with people that are in the commodity market, that also want to accomplish that which is reduce the ups and downs in the commodity market, and they want to be associated with a value engineered product.

So the market trends are moving in the right direction for us in the material supply side. I know there was a little long winded answer but I wanted to get all that out there. So everybody understands the strategy as it relates to material supply as well as quality management.

Unidentified Analyst

So just as a quick follow-up and to clarify in my own head, would you agree with the statements that you're looking to become more of an off-take partner the folks who are processing this material from the curb to recycling point. Is that how characterize your strategy I guess in terms of that part of supply.

Steven L. Silverman

Let me answer that this way. That the folks that are in the recycling supply business and the processing business, they are moving downstream, okay in the supply chain to how do they align with the valued engineer product, and value engineer product companies are like ourselves, they are moving upstream. So you see this dynamic of the supply chain getting squeezed where there's brokers and processors potentially in the middle, and you see both of these organizations kind of pushing in each other's sandbox if you will. So yes the answer to your question is yes. What does that look like for Axion going forward I mean I don't know?

Unidentified Analyst

You are working on that obviously

Steven L. Silverman

Yeah, the natural dynamic of the industry is working on that. We have very good contracted manufacturing partners in Pennsylvania, other folks that also probably have been with us for a very long time, and they are great partners and very good example of really value added processor, that does a lot of value added things not only for people like us but there are other customers.

So you just see in this conversion that's coming that guys that are taking the garbage from the curb and sorting it okay kind of the (inaudible) operators that are dealing in commodities they are trying to figure out how they are going to increase the value of their companies. And for us it's a cost game. We need to get upstream so we don't have a lot of processors and stuff in the middle where it warrants.

The good thing I think they did Axion has developed is where we have enough poundage on a daily basis we can official operate and vertically integrate our own facility and be very successful. And when we get an opportunity in a geography that we can't service very efficiently we can go to contracted manufacturing model. So having alternate flexibility here is going to be critical for us as we grow.

Unidentified Analyst

Do you see that convergence or the coming together of the upstream and the downstream activity as a global trend or is that just a domestic U.S. trend?

Steven L. Silverman

Right now it's big in the U.S. And the reason for that is the recycling industry itself. The supply chain in the industry and the players in the industry is probably the most mature anywhere in the world. It's a very privatized business and it has been for many years. When you go to -- one of the exciting things for us that and me personally, I really enjoy this part of it, is when you go to countries that do not have a mature recycling business the supply chains aren't established, the players aren't established there is actually initiatives at some of the government levels on developing recycling programs and curb side collection programs but also because the industry isn't privatized and the governments are so involved what they are looking to do is bring technologies like Axion to those countries to use the waste stream, create jobs and drive manufacturing industries in their countries.

The beauty of what Axion brings, which is even one step better than being able to build a retail product, is we can actually rebuild infrastructure. So we can build a railroad, okay, we can revitalize a rail line in a third world country that hasn't been used in years by just simply collecting plastic from the recycling stream. So those conversations are really, really exciting things. I mean they are a long process, you dealing politically. But when you really sit down to think about it some of these countries that don't have developed recycling systems who are actually developing them today, Axion can play a major role in the actual utilization of those waste streams.

So in different parts of the world it takes different color and we are in the middle of all those conversations around the world, so both domestically here as well as internationally.

Unidentified Analyst

Rubbish to gold, that's what we are all after right?

Steven L. Silverman

Yeah, well if you can get it from the curb and get it into an engineered product that you can drive trains on and take people to work on, that's a good picture.

Unidentified Analyst

Yeah, exactly right. Thank you very much.

Steven L. Silverman

Thank you.

Operator

Thank you. Our next question is from Avinash Wadhwani, private investor. Please go ahead.

Unidentified Analyst

Hi, thanks so much for all the insights that you have been providing on the company and I guess on the industry as well, that's been very helpful. I had two questions again. One was are you seeing any kind of competitive intensity coming into this particular space given the level of traction that you have all had over the recent past in a similar processed plastics space? And the other question is, currently you are mostly in the B2B space, catering to the railroads and the industries. Do you see at any point in time the evolution of a product for the B2C space, more in the consumer or retail space?

Steven L. Silverman

Yeah, two very, very good questions. Yeah, when you look at the international, just on the rail tie market, there are, I wouldn't call it an increased intensity, if you will of competitors, but there folks around the globe that are manufacturing or trying to manufacture a composite rail tie because you have a lot of markets around the world that are looking for alternatives. I just, I arrived this morning from South America from Brazil. And they are desperately looking for alternatives for the rail industry down there. Are there other people that are trying to develop, manufacture and get authorized and certified composites rail ties or sleepers? Yes, there are, of course there because it's a good alternative to what's been out there.

What I will say though is that the -- and many of you have watched this progress over time, this is not an industry that adopts new products and new technologies very easily. It is a drawn out long process and simple reason is the consequences of something fails, a lot of people get hurt, it's very expensive et cetera. So yeah there are other people that are trying to come into the industry. I think it's been pretty defined and pretty set out there. We have probably come the longest, with our technology we have got the most proven product, we have more testing documents from what we have been told and so I think you know we are positioned well in the composite kind of rail industry.

In regards, the other thing I will say is that you do see constant progression from other composite "manufacturers" you see mechanical property improvements, you see structural different things that existing companies are getting better at and I think that will continue to evolve as any industry would around, that's based on technology. I mean we have enhanced our technology. I mean we have took our mechanical properties on a rail tie and we have been able to raise them 40% and I think you see other composite manufacturers trying to make strides in those areas.

That goes back to one of the strategies that we are taking a look at on the infrastructure, bridge, boardwalk, marina structuring business where potentially combining two different technologies could be really a game changing kind of strategy. When you look out there in the marketplace today people have not done that that has not been embraced strategy. I think a lot of it just has to do with you know pride and big company mentality but we are taking a look at that. So that's a good strategy.

As far as the B2C goes for our technology we really haven't started to take a look at it. It will be a massive undertaking for us to from my gut feel walking around a Home Depot or a Lowe's could there be an opportunity for a structural value added alternative for a lumber type product, there might be. I think you would see it's getting more into what I will call the kind of industrial distributor market where not necessarily you do it yourself but independent contractors go and pickup a truck of lumber, build a floor or whatever. I can see potentially developing some products for their market but right now we are trying to stay focused on the markets that we have identified where we have got some value added mechanical property, advantages, price points and we think we can drive the volume that we need to get to get the company profitable.

Unidentified Analyst

Okay thanks a lot.

Steven L. Silverman

Thank you.

Unidentified Analyst

Thank you everyone for participating in the call today. Steve just on the last call that we did hear you talk a little and we talked a little bit about some of the work the company been doing to raise standards with AREMA and other areas. How is that progressing?

Steven L. Silverman

Yeah there was, I feel in the last AREMA meeting the topic was raised. There is a formal process that you have to go through, through the committee system with AREMA and one of our goals is to not only put the facts forward about what we are doing but actually have a customer, actually speak for us through the committee to drive those changes. So it's a process, we are in the middle of it. It's actually getting started from the last meeting and we will continue down that path to try and raise those standards. We think it will be a good thing for our industry.

When you look at the standard setting that we are doing in other parts of the world, where composite, rail ties or sleepers are not specified and there is no standard. We are actually leading the charge in a lot of these countries to actually develop those standards and we are able to raise the bar on those standards above where AREMA is today. So we feel pretty good about the process, the AREMA process is a mature process. They do this with a lot of different products and sub-committees and committees and we will just continue down that path and hopefully be able to raise the bar.

Andrew Haag

Also you mentioned, you mentioned other parts of the world just now and you'd also mentioned earlier in the press release and in the call that first order in Europe. Is there any more information you can provide along those lines?

Steven L. Silverman

Not at this time. We are at the testing phase with a major rail line in Europe. We worked very diligently. It's been a long process with the licensing technology partner, Sicut over there. And that's where we are right now. But there is a ban that I think comes into play in 2018 in Europe, that puts a ban on chemical treated wood being used in tracks. So there is a kind of development call if you will throughout Europe to develop alternatives to wood. And I think we are positioned well over there with the licensed partner Sicut and we continue to pound away at it if you will, the opportunities and the various things.

South America is also very exciting for us. We are -- I said I just returned there, was down there for three days. A lot of infrastructure project, the Brazilian government just set up a -- I think it's a $90 billion fund that's being deployed to rebuild ports roads, streets and the railroads. Throughout the country there is talk about expanding the metro system, that's being scoped out right now that basically runs right across if you will through Brazil connecting all the major cities, centralized in Sao Paulo.

So yeah there is exciting things throughout South America, that we are involved in, Europe, Australia is also another market that is moving away from wood. And we are in trial and testing phases with three major rail lines, down in Australia, which has great potential. And we are very excited about our partner, Alcoa down there, has done a great job penetrating the market, helping us navigate the customers down there.

So we can go on and on about all the opportunities and there is a movement around the world including domestically here to look for alternatives and get away from using chemically treated wood products in track. So I think the market is very promising.

Andrew Haag

Well, thank you again and that wraps our discussion. I would just like to end with sounds like you are making some solid steps and progressing towards -- to coin a phrase that was used earlier in the call, to turning garbage in to gold.

Operator that now wraps up the Q&A session of our call and we can close it out. Thank you everyone for your participation. Thank you Steve, thank you Don.

Steven L. Silverman

Thank you.

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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