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Executives

Tim Morrison - President and CEO

Brian Hanna - Chief Financial Officer

Analysts

Advanced Environmental Recycling Technologies, Inc. (OTCQB:AERT) Q3 2013 Earnings Conference Call November 8, 2013 11:30 AM ET

Operator

Good afternoon, ladies and gentlemen and welcome to Advanced Environmental Recycling Technologies Conference Call to discuss AERT’s recently filed 2013 Third quarter 10-Q report.

Joining us from AERT is Tim Morrison, CEO and Brian Hanna, Chief Financial Officer. Mr. Morrison will analyze results from the past year as well as discuss the outlook for the year going forward.

Before we get started, let me read a brief note concerning forward-looking statements within this conference call. Certain statements in this discussion regarding projected results of operations or projected results of financial plans or future strategies and initiatives including, but not limited to projections of revenue, projections of profitability, any and all future expectations, and plans for future activities may and should be regarded as forward-looking statements within the meaning of the Securities Litigation Reform Act.

These statements involve among other things known and unknown risks, uncertainties, and other factors that may cause AERT, Inc.’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. AERT currently is considering, but may or may not in the future implement any or all of its items and initiatives discussed today due to, among other things, known and unknown risks, uncertainties, and other factors. AERT, Inc. undertakes no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events, change in strategy, or otherwise. The above mentioned listing of risks and uncertainties is not inclusive.

For a more detailed discussion of some, but not all, of the risks and uncertainties that may affect AERT, Inc., see AERT, Inc.’s filings with the Securities and Exchange Commission including its Annual Report on Form 10-K for fiscal year ended December 31, 2012.

We’ll begin the discussion with opening comments from CEO Tim Morrison. We’ll then open up the discussion for questions from our audience. Go ahead Tim.

Tim Morrison

Thank you. And welcome to the third quarter 2013 conference call for AERT. We appreciate you taking the time to join us today. With me today is Brian Hanna, CFO and together we will giving you a little more information on our third quarter results.

At this time, I will turn it over to Brian for our financial overview.

Brian Hanna

Thanks Tim, and good morning. We filed our 10-Q yesterday for the quarter ended September 30, 2013 and our remarks are qualified for the complete financial statements, footnotes, and risk factors in our 10-Q and other SEC filings.

Our net sales for the third quarter of 2013 at $14.7 million were down $3.1 million from third quarter net sales 2012, largely due to loss production as a result of fire on July 17th, at the Springdale extrusion facility. For the nine months ended September 30, 2013 net sales were up $5.5 million or 8.8% to $57.6 million. Our gross margin for the third quarter of this year fell 2.3% of sales from 20.3% last year. The first nine months gross margin was 19.5% versus 20.6% for the nine months ended September 30, 2012.

The lower margin in this year’s third quarter reflects the cost of our retaining our skilled labor force through the downtime resulting from the fire. In addition to the lower production volume available to absorb our overhead costs. Selling and administrative costs were up $0.7 million in the quarter and $0.4 million for the first nine months.

In the third quarter of 2012, a portion of the net settlement recovery from Ross Systems, Inc. was offset against administrative costs previously incurred. The higher quarter and year-to-date costs also reflect the hiring of additional employees, higher bank fee amortization costs and increased advertising and promotion costs. An operating loss of $2.4 million was generated in the third quarter of this year, compared to operating income of $1.5 million in the third quarter of last year, due to the higher costs and lower volume.

The October received $2.5 million from our insurers with recorded as other income. This was an advance payment for damages occurred as a result of the Springdale fire. Our net loss of $1.1 million for this year's third quarter was a $1.6 million reduction from the $0.5 million net income reported in the third quarter of 2012. The 2013 year-to-date net income was $1.6 million versus $1.4 million for the nine months ended September 30, 2012.

If you have any questions after the call you can reach our Investor Relations line at 479-203-5084, you can also visit us on the web at aert.com.

Back to you, Tim.

Tim Morrison

Thank you Brian. AERT entered the third quarter with a positive outlook for revenue in our bottom line. However the fire of July 17th affected our ability to meet our financial goals for the quarter. The financial impact of the incident is reflected in loss sales and increased period costs as reported in our financials. The overall impact of the incident is estimated to be up to $7 million. What is not reflected in the financials, is the impact of those individuals hurt in the incident, their friends and families our neighbors and all of our associates. We keep all of those affected in our thoughts every day. Safety is our top priority and I would like to spend a moment talking about AERT’s proactive safety culture.

Prior to the incident, AERT was implementing improvements to safety systems and policies that were showing effects in this and improving our safety. Prior to the incident our associates have completed 2 million safe man-hours without accident. We are dedicated to finding a safe workplace and have undertaken a complete review of our systems and system with our dedication to providing a safe workplace we're automating many of the processes, updating equipment as prudent and increasing our audit to anticipate even abnormal situations.

We have nationalized experts assisting us in these efforts and we're committed to improving where we can. Safety is core to our company and I am committed to keep to you, our associates and our community at [brisk] of our ongoing safety improvement efforts. We're focused on finishing the year with a strong push that will provide us with a positive momentum heading into 2014.

As we have previously stated our business remains focused on five key goals. Those are; maintaining a safe work environment for all our associates and neighbors, decided to produce in market our WPC product that represents the best value offering for a majority of customers, expand our product offerings to include cap stock options, continue our R&D efforts, continue to improve efficiency in our systems and invest in our associates. We've spoken about key part of our safety already, we will never stop looking for ways to improve the safety of our processes and we’ll never stop trying to do the best we can in that area.

AERT has produced WPC products for many years. Our ChoiceDek and MoistureShield products have unique properties and we believe that our WPC is the best performing WPC in the market. We have maintained our focus on producing the quality board that will stand up to a variety of situation without structural failure. Competitors have chosen to abandon their WPC offerings in favor of the cap stock, we believe WPC and cap stock offerings both have a place in the market. For that reason AERT will continue to produce our WPC product into the foreseeable future.

Our ChoiceDek foundation’s decking and (inaudible) has recently undergone evaluation of Lowe’s and will continue to be stocked in most of their 1,700 stores. We are excited to continue to partner Lowe’s and believe that new approaches to that channel will facilitate growth in sales. There has been significant disruption in the distribution channels in our industry lately. We have been successful at gaining a distributable distribution for our MoistureShield product.

We believe that we will be well positioned as consumers recognize the positive attributes of our WPC product relative to other options. We also believe that we will continue to see growth in both our sales to [BIY] channel, as well as in contracting professional builders.

That being said, AERT does need some advantage cap stock technology, if properly implemented. We have (inaudible) important that the industry long compatible space (inaudible) product to the market. In the past competitor’s efforts to reduce the cost of WPCs let the poor quality boards, [bell] product and a poor reputation for WPC in general.

We have not rushed our cap stock product to market with identical product offerings. After much R&D we are proud to announce our new cap stock offering will be available in the first quarter of 2014. Our new production line for our capstock products has been installed.

It’s important to remember that a cap stock will only be as good as the core WPC structure. The new cap stock is based upon our solid to the core WPC formula and process. We’ve undertaken research for the past few years to develop cap stock technologies that we believe will be unique in the industry. Cap stock product has enhanced durability, as well as unique statics compared to other cap stocks on the market today. We are very excited by the early feedback on this product.

Again new product development is the lifeblood of our business and we must make sure we are doing adequate testing before releasing the product to the market. We will continue to develop and introduce several lease signing option that will make enjoying our AERT deck a greater pleasure.

We will continue to maintain our focus on cost control as we obtain low cost raw materials by leveraging years of recycling experience. While Watt submission will be focused even more so than in prior years on claiming even higher more highly contaminated lower cost raw material sources. Labor efficiency will continue to be a focus for our company. Finally we will continue to build and strengthen our team. We welcome Randy Gottlieb as our new President. Randy has years of building products expertise and has already begun making a significant impact on our business.

In summary the third quarter was a difficult one from a safety perspective. Our business outlook is however quite healthy and we anticipate getting back on the confident proven track in the fourth quarter.

At this time we will open the discussion for questions.

Question-And-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of [Joe Henley] who is the Private Investor.

Unidentified Analyst

Thanks for your time and opportunity -- giving us the opportunity here to ask some questions. I just wanted to know in the previous conference calls you had mentioned that you were going to lose some I guess distribution out in the west coast because BlueLinx I believe was removing your product from that channel. What percentage of that from a net sales -- is that from a net sales standpoint?

Tim Morrison

One of the things I think that you will see prior to this refer to you was video and we actually have some very good partners. In this case, the lows teen as well as our main here has been able to secure additional distribution that has addressed that issue. We don’t anticipate moving in itself as a result of the distribution change in the west and ultimately in season improvements.

Unidentified Analyst

Okay.

Tim Morrison

And then (inaudible) has been put in place.

Unidentified Analyst

Okay. So those numbers will be reflected in the fourth quarter, but you don’t have a percentage at this point off the top of your head?

Tim Morrison

No, on our top of head.

Unidentified Analyst

Okay, all right. Thanks a lot, guys.

Operator

(Operator Instructions). At this time, I'm not showing any questions.

Tim Morrison

We want to thank everyone for joining us today. As always, we appreciate the support of all our stakeholders and I appreciate the questions. So with that, I hope everyone has a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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