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Executives

Valter Pinto - Alliance Advisors, LLC

Frederic Scheer - Chairman & CEO

Michael Okada - SVP & CFO

Analysts

Jason D'Amico - JPMorgan Chase

Cereplast, Inc. (CERP.OB) Q1 2013 Earnings Call May 20, 2013 4:30 PM ET

Operator

Good afternoon ladies and gentlemen. Thank you for standing-by. Welcome to the Cereplast 2013 First Quarter Financial Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, May 20, 2013.

I would now like to turn the conference over to Valter Pinto from Alliance Advisors. Please go ahead, sir.

Valter Pinto

Thank you. Good afternoon, and welcome to the Cereplast 2013 first quarter financial results conference call. With us today is, Frederic Scheer, Chairman and CEO and Michael Okada, Chief Financial Officer.

Before I introduce the speakers, I would like to remind listeners that during the call, management’s prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC.

In addition, any projections as to the company's future performance represented by management include estimates today as of May, 20, 2013 and the company assumes no obligation to update these projections in the future as market conditions change.

At this time, I would like to turn the call over to Frederic Scheer, Chairman and CEO. Fredric, Please go ahead. The floor is yours.

Frederic Scheer

Thank you, Valter, and thank you, for everyone joining us today. I would like to begin today the call by analyzing our achievement of generating approximately $1 million in revenue during the first quarter of 2013 which exceeded our revenues for 2012. This could not have been accomplished without the dedication of the team here at Cereplast.

It has been a challenging period for our company and continues to be in many respect, but the growth and opportunities we've recently seen is a testament to our technology and its validity and would be in our future. The majority of revenues were derived from Europe, and specifically Italy. The Italian Plastic Bag Application Decree was published and has been a driving force in our revenue growth. Enforcement is scheduled to begin at the end of this month.

Although, Italy continues to experience political and economic turmoil, they are still on target to begin enforcing the sanctions within days against those who do not discontinue the use of traditional plastic bags. We do anticipate the transition period of two weeks as the decree sanctioned starts to be in force and we anticipate that the full effects of the decree would start probably by summer.

We should see a surging demand for our bioplastic resins as a result in the weeks to come. We estimate that after the initial transition period, the total addressable market for compostable blown film graded in Italy will exceed $500 million. Based on current competition, current production capacity, a full production staff and sufficient working capital, the estimated market opportunity for Cereplast exceeds $50 million a year.

Manufacturing capacity of the company’s Seymour, Indiana plant is currently 3,000 tons per month based on current market price of about $4,500 per ton, this plant is capable of producing in excess of $10 million per month at full capacity. The Cereplast compostable blown film resin has a competitive advantage because it can be processed on traditional equipment without requiring modification and they do not emit problematic fumes. The company expect continued growth in demand for blown film as a result of the anticipated legislation in Italy.

It is worth noting that all customer payments were received in advanced of shipment or within conservative credit terms. We now have a very conservative credit policy with our clients and we require payment in advance, cash on delivery or bank guarantees. We have no clients representing more than 5% of our revenue and we would not expand more than one container credit to avoid any credit risk.

Additionally, we have bolstered our sales team in Italy. We have added sales agents to promote the company’s product in Italy and neighboring countries. The sales agents concentrate on the Cereplast compostables blown film grade. The sales agents are not employees of the company and have been retained with a commission based structure, so the agent compensation is completed on their own success.

Our Italian team is working on several significant contracts and we are hopeful that within weeks we may recall several new contracts. Italy and Europe remains the main target for our efforts for compostable application.

The Supreme Court of India is moving towards [turn the] legislation to control the country’s plastic population problem. We have begun receiving orders and payment for compostable 3002 for the manufacture of single-use bags and expect to receive more orders for this material in the near future. However, we do not anticipate any meaningful revenue from India for another two months. It is clearly a large market, but our expectation should be realistic and we believe that with the support of our technical team in India several sales will be completed this year. But their magnitude will be relative to our investment in time, money and manpower in the country.

At this stage, we need to make choices and Europe will yield a faster and easier return. We need to manage our efforts and expectation along with the financial resources. The immediate returns for us will come from Europe and this is where we are concentrating our efforts. The good news however, is that there is a long-term opportunity in India due to the growing anti-plastic legislation and this is why we need to have a presence there. Although, several regional plastic bans are in effect across India. The Supreme Court along with the Central Pollution Control Board are looking toward more, more widespread solution for the country to deal with plastic pollution problems. Cereplast expects the growing anti-plastic climate in India; the world’s third largest polymer consumer could generate larger growth opportunities for the bioplastic industry in the country, specifically for compostable bioplastics in the months and years to come. There is growing interest in India for Cereplast compostable resins, particularly for the blow molding grades that are suited for beverage bottle as well as the blown film grades for single use grocery bag and garbage bags. India Polymer consumption accounted for 5.7% of the world total in 2011, up from 3.5% in the year 2000. This level of consumption has its consequences.

According to the Central Pollution Control Board; India generates 5.6 million metric tons of plastic waste each year, 40% of which remains uncollected and littered. Lastly, the US markets remains our biggest frustration. American consumers have been slower to demand environmental friendly alternatives and large brand owners look at the environment as a marketing opportunity more than the necessity. Despite this there remains an opportunity for us in the United States. We have seen a discreet but steady push in legislation to expand the reach of compostable foodservice ware and compostable bag primarily on the west coast including the City of Falkland, Seattle and San Francisco which are pushing a very stringent agenda to provide compostable alternatives from conventional plastics. However there is a lot of flooding going on led by large brand owners that are trying to slow down the path of having bioplastic imposed as an alternative. The volume of small and it takes a lot of time to build that program.

We can expect that in the weeks and months to come, the demand will grow. While we continue to sell our grades and teach customers about our technology, we estimate that dedicated (inaudible) can manage cost and restructure our operations accordingly. The restructuring of our global operation is expected to reduce annual operating expenses by $600,000 to $800,000 per year. This cost production will allow the company to dedicate this cash savings towards organic growth and a required working capital to service new clients. To achieve this cost saving this month, the company relocated its corporate headquarters to (inaudible) Indiana location and has closed its office in (inaudible) California. The company has also moved its European headquarters to its office in Milan, Italy and has closed the office in Berlin, Germany in order to strategically concentrate the company efforts on the most immediate and dynamic markets for bioplastics in Europe. This chances are effective immediately as of May 2013.

In addition, better management starting with me has drastically reduced its compensation and I currently receive less and 10% of my salary. If I could briefly touch upon continuous efforts to innovate, we were happy to announce a new bioplastic resin grade, biopropylene A150D, an injection moulding grade manufactured with 51% post industrial Algae biomass. This post industrial Algae grade is a first offering with 51% Algae content and will be commercially available this quarter. The biomass content dramatically reduce the carbon footprint of the final product while reducing the petroleum based plastic content. Biopropylene A150 has a low to no odour due to the discovery of a post industrial process that significantly reduce a distinctive smell that it (inaudible) to Algae biomass.

In Algae, the main development holding corporation of Algaeplast in early March. Algaeplast was established for several reasons; first, the research and development that goes in to Algae based resin is served from the rest of our bioplastic reserves. Additionally, we anticipate the possibility of grant money to come into the sector and therefore having separate entities make that possibility easier. As a matter of fact, we have already applied for a research grant along with the university and a reminder, Algaeplast is a wholly owned subsidiary of Cereplast and its creation does not affect the investments you made in Cereplast. We do foresee some very good development in the weeks for Algaeplast and you will be kept abreast of such development by press releases as well as on our Facebook and Twitter pages.

At this time, I would like now to open the call over to Michael to review our first quarter of 2013 financial results in more detail. Michael.

Michael Okada

Thank you, Frederic. Net sales for the three months ended March 31, 2013 were approximately $949,000 compared to approximately $103,000 in the same period in 2012, which is in the mid-point of our pre-announced guidance to be released on April 17th. Sales increase from the prior year due to growing demand in our Europe markets, primarily due to anticipated legislation in Italy. (Inaudible) ban traditional plastic bags. Cost of sales was comprised of variable cost associated with our product revenues due to our reduced production volumes which required manufacturing overhead to be classified as operating expense. Cost of sales for the three months ended March 31, 2013 were approximately $0.8 million compared to $0.2 million for the same period in 2012. The increase in cost of sales was due to an increase in sales.

Gross profit for the three months ended March 31, 2013 was approximately $0.1 million compared to a loss of $0.1 million for the same period in 2012. The increase in gross profit was attributable to our increase in sales and our product mix. Research and development expenses for the three months ended March 31, 2013 was $0.1 million consistent with the same period in 2012. Research and development expenses remain flat over the prior year due to our cost containment effort to preserve working capital.

Selling, general and administrative expenses or SG&A for the three months ended March 31, 2013 were $1.5 million compared to $1.7 million for the same period in 2012. Our decrease in selling, general and administrative expenses was primarily due to reduced headcount and a reduction in fixed production overhead cost associated with declassified selling, general and administrative expenses due to an extended period of abnormally low production volumes.

Other income and expense in the three months ended March 31, 2013 was a net expense of $16.5 million as compared to a net expense of $0.5 million for the same period in 2012. The increase in expense was primarily non-cash charges including the change in our derivative liability related to [once] short term convertible debt and preferred stock agreements. In addition, we recorded $1.6 million in debt extinguishment costs related to repayment of our term loan in convertible notes to our exchange agreements. Net loss for the three months ended March 31, 2013 was $18 million as compared to $2.4 million in the same period in 2012. The increase in net loss was primarily driven by an increase in other expense related to our financing transactions.

Although this quarter reported significant charges to our income statement related to our complex financing transactions, we have reduced our quarterly cash burn rate to $846,000 as reported in our cash used in operating activities represented in our cash flow statement. We continue to aggressively seek opportunities to reduce costs and improve our cash sales from working capital through restructuring operations and Frederic had earlier discussed.

I would now like to turn the call back to Frederic for our closing comments.

Frederic Scheer

Thank you, Michael. Again I want to thank all of our shareholders for their support. This will conclude our formal comments and presentation and prior to open the call for questions I would like to address some concern that have been presented by several shareholders during the past two weeks through email and telephone calls.

The first question that came very often was is recent announced legal action a precursor of Cereplast going bankrupt?

Once again, we are not considering bankruptcy today. We are adamant about defending the interest of our shareholders and we will not let the company and its shareholders to be damaged by a third party that does not respect their commitment. Prior to filing legal action, we reviewed the details of the situation thoroughly including the possible risk that we couldn’t care as a result.

We felt that it is our duty for the company and its shareholders to proceed as a lack of action from management could have been construed as an acceptance of the situation. We do have an obligation to our shareholders, to bond, lenders and creditors to manage our assets and liability in the utmost responsible manner and that’s done so to the best of our ability today. We believe that the Chapter 11 restructuring is the last resort and also our shareholders do not like the mission; it remains a better alternative to Chapter 11 filing.

The second question was to what extent is the dilution that has been occurring going to continue?

The company has entered into several financing agreement that unfortunately have created a lot of dilution. A dilution that’s created a lot of pressure on the stock and it has created a negative spiral due to the trading level of the stock. We are hopeful that with the good news that we are reporting and the fundamentals of the company that are still very good, the markets will address the current valuation and will push the stock back up. The dilution will then decrease exponentially.

We also believe that with the combination of the increase in revenue and the decrease of our operating expenses, we will be able to get the company to cash flow breakeven in a few months and therefore we will not need outside financing any longer.

The third question is Cereplast position and their relationship with lenders strengthening?

We have entertained a good working relationship with our lenders and we're grateful to all of them for their understanding and support during this challenging time. We have worked very closely with them and we have been successful in reducing the debt level of the company to our senior lender Compass Horizon by about $2 million in the past eight months and the amounts of our convertible debt has decreased to about $8 million from the original $12.5 million in 2011. Clearly, we need to continue to find solution that satisfy our lenders to repay the principal, but I am optimistic that we will find a solution that is satisfactory for all.

At this time, I would like to now open the call for question. So operator, if you could please start the Q&A portion of the call. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of [William Pal] with (inaudible) Please go ahead.

Unidentified Analyst

Is there going to be a reverse split on the stock?

Frederic Scheer

Well, we have indicated that we have no intention at this time to go through a reverse split. However, it is a decision that has been voted by the shareholders at the Special Meeting in April and management and board will have the right to eventually exercise it. But for the time being, I can tell you that there is no intention of going for a reverse split.

Operator

(Operator Instructions) And our next question comes from the line of Tom (inaudible).

Unidentified Analyst

Yes Frederic thank you for your comments. I was just curious how quickly you talked about the Italy ban on the plastic bags. How quickly did you feel that that was going to start to impact revenue for Cereplast.

Frederic Scheer

Well, it’s an excellent question, good afternoon sir. I will say the following. It has already started to impact the revenue as we have reported during the first quarter, because a few companies anticipated what was to happen. So the impact that started well, now I guess that your question is how fast in fact we are going to get into cruising speed and obviously it’s a difficult question to address, but I want to expect the following.

I will expect that the decrease will start application technically as of May 27 so its about 10 days from today. I would expect a transition period where the first enforcement will take place during the months of June and July and personally I believe that we’ll start to see a major increase in sales starting by summer, so it is July 1 or September 1 it’s very difficult for me in fact to give you an answer, and I do realize that our shareholders would like this to happen yesterday morning but I think that on the long scheme of things the key point is to realize that you are looking at basically a tsunami of orders coming in the weeks to come and what we want is we want to be ready and be ready to serve.

I believe that we will reduce our transition period and in my opinion that transition period is going to be three to six months and then we will be in fairly large numbers I mean as I mentioned we believe that at full speed subject to [addressing] the type of capital that we need and so on, we are looking at minimum of $50 million a year so clearly its not for 2013 nor probably for 2014. But you know clearly between $1 million and $50 million you have a lot of space. I'm expecting to see this type of numbers coming in the months to come and this is what we've been working through.

So I know that I'm not giving you a precise date but the only precise date that I can give you is that its May 27 that the sanction start to apply and I will expect in fact to see an increase in demand going further and the pressure starting to become very, very high. But you know a little incident can create problems such as an enforcement in a large supermarket in Italy may just generate a panic and all of a sudden getting where we may get a lot of orders all at once so its difficult but you know wisely I would expect to see a steady growth with the surge within the next three to six months.

Operator

Thank you. Our next question comes from the line of [Greg Patterson with Patterson Investing]. Please go ahead.

Unidentified Analyst

I was wondering if the contracts you guys currently see for your company. If those follow through the quarter after quarter or are they normally one-time contracts?

Frederic Scheer

It's a good question. Let me explain to you. We're working on different type of things. We're working with clients on a repetitive basis that our company that are buying every two weeks or every three weeks and ordering anywhere from 10 to 20 tons of material and sometime full truck loads of material and some of those companies do not have contract. Other companies have contracts and as I mentioned earlier, we're negotiating with a couple of fairly large complex that could be for 12, eventually 24 month contract. So the clients can be sure that they will have supplied when that tsunami of orders will come and at the same time for it's good because it allows us to basically prevent an organizing factor at supply chain.

Operator

Thank you. Our next question comes from Jason D'Amico with JPMorgan Chase. Please go ahead.

Jason D'Amico - JPMorgan Chase

Basically my question is, there is a lot of focus on Italy and sales are going to come from Italy in the following months. And I did see there is some news in India and we're pursuing some orders from Indian companies and things of that nature. And my question is basically is there a team working separately on pursuing these new avenues in India or you kind of just taking it as it comes and focusing on the Italian market for the time being?

Frederic Scheer

Well, good afternoon it's an excellent. We are organized in different region of the world. We have the team in India, consisting of two people one in India, one in the United States which is working specifically on the Indian market. And we have seen in Italy and we have obviously a presence in Italy where we have basically three people in the Italy plus seven sales people. So we have basically 10 people that are covering in fact the whole Italian peninsula. And then we have people in the United States that are covering different type of things. So it's not that it comes as it comes, no. It’s really organized and we try to be very methodical in fact with the approach at the (inaudible) market.

Operator

Thank you. We have no further questions at this time. Please continue with any closing remarks.

Frederic Scheer

Okay. Thank you operator, so I just want to thank everyone who has participated today. And I look forward to talking to you again sometime in August. Thank you.

Operator

Ladies and gentlemen this concludes the Cereplast 2013 first quarter financial results conference call. Thank you for your participation. You may now disconnect.

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