Axion International Holdings Inc. (AXIH) Q3 2013 Earnings Call November 14, 2013 4:30 PM ET
Andrew Haag – Managing Partner, IRTH Communications
Steve Silverman – President and CEO
Allen Safer – Integra
Greetings and welcome to the AXION International Holdings 2013 Third Quarter Financial Results. 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, Andrew Haag, Managing Partner of IRTH Communications. Thank you sir. Please go ahead.
Thank you. I'd like to welcome all of you to AXION International's 2013 third quarter conference call. With us today is AXION's President and CEO, Steve Silverman. After Steve Silverman’s statements, we will open up the call for a question-and-answer session. I also want to bring to your attention that a replay of this call is available at the phone number provided on the earnings release issued today.
Now before we get started, I'd like to take a moment to 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 these forward-looking statements. All forward-looking statements are made as of today, November 14, 2013, and AXION expressly disclaims any obligation to revise and update any forward-looking statements after the date of this conference call.
Now, I will turn the call over to AXION's President and CEO, Steve Silverman.
Thank you, Andrew. Today we issued our earnings release announcing our results and filed our 10-Q today. So listeners who may not have already done so may wish to look at those documents as we provide a summary of the results on this call.
In the third quarter, our revenues were $1.3 million, up 59% over Q3 of last year. Our margins increased compared to last year, driven by a diversified customer base. We sold products to 12 new customers in the quarter and we significantly reduced revenue concentration of our class I railroad customer to 53%. At the end of Q3, we remained on tract to see our 2013 full year revenue surpassed 2012, which will make 2013 another record year for AXION. We recognize that in order to achieve positive earnings, we need to focus our efforts on achieving higher sales volumes from both existing and new customers with becoming a vertically integrated manufacturer. We made significant advancements during the third quarter as highlighted below.
We continue to diversify our current customer base in new and used markets to create revenue growth. Projects around the globe in our pipeline remain on schedule. We are now operating our owned manufacturing facility in Waco, Texas and we have doubled our manufacturing capacity, positioning ourselves for further vertical integration with the goal of improving margins and enhancing quality controls. During Q3, we invested approximately $2 million into manufacturing equipment, operations and processes that – and at the beginning of Q4, we are now fully operational 24x7 and processing our own raw material streams.
Our sales pipeline of opportunities continue to grow and projects in trials continue to progress. We believe that demand will increase in Q4 2013 and Q1 of 2014. In Q3, our revenues increased to $1.3 million. This is a 59% increase over Q3 of 2012. In the first three quarters of 2013, revenues were $4.5 million, which was a modest decline from the same period last year. During both the quarter and the nine month period in 2013, our gross margins increased due to a more normalized revenue mix and less concentration of sales with our largest class I rail customer, which as you know and may recall, received favorable pricing in the three-year contract.
We also saw gross margin grow as we continued to increase our production volume through our fixed overhead model in our Waco facility. We expect this will continue to improve as we push more volume through that facility and realize the benefits of processing our own raw material streams. We diversified our revenue base in the third quarter by selling to 12 new customers and 8 existing customers.
In the nine months period, we have sold our products to 33 new customers and 24 existing customers. Our reliance on our class I rail customer declined to 53% of our total revenues in the third quarter and 46% in the nine months period. Additionally our construction mat trials are concluding and sales opportunities are now being quoted. We also placed our first mats on rental during the third quarter.
We continue to see orders for turn-outs and street crossings during the quarter. We also won competitive bids for the US military and have begun receiving confirmations for orders booking for shipment in Q1 2014. We won’t get into describing those in any – at this time due to competitive reasons. But we do believe we will see order flow from some key wins we’ve had for ECOTRAX which we’re in tract testing this quarter.
In September, we announced our first purchase order for ECOTRAX to Russia. We sold ECOTRAX to our in-country distributor and business partner TVEMA, a large international group of companies based in Moscow. We have been working closely with TVEMA to create composite rail tie standards and specifications for Russia which are in final approval stages. This purchase order was significant as it confirms TVEMA’s confidence in our products.
Russian’s railway system is the second-largest rail network in the world, so there is a massive potential for a widespread adoption throughout Russia’s rail network. The ties were installed in the Moscow area and are reportedly performing very well.
We received more purchase orders for our STRUXURE construction mats from J.F. Kiely Construction, has ordered their mats for an environmentally sensitive project in Monmouth County and Northeast Remsco Construction, following an initial 10-month trial will expand the use of STRUXURE mats. We also shipped mats to Canada for use by a number of energy companies there.
We expect a strong finish through the end of 2013 and expect next quarter to be the most exciting yet. Current backlog and sales initiatives in our pipeline are on schedule and sales opportunities give us a high degree of confidence that our 2013 year end revenues will exceed 2012. We had our largest ever presence at the REMA [ph] conference in Indianapolis with positive feedback from many customers and prospects.
During the quarter we also completed lab testing and installation testing on a full solution for use in tunnel applications. This has been a two-year process and this is a fantastic specialty application where we are providing rail tie fastening system, adhesive and pre-plating services. There will be more news on this solution as we head into 2014.
On the manufacturing front, we have doubled our manufacturing capacity at our Waco, Texas facility by investing approximately $2 million. There were main two components of our investment. First, we purchased and installed our second molding and extrusion line which came online into full production in mid-October. We are currently running our manufacturing 24x7. Currently all of the product manufactured both extrusion lines is being allocated for current orders. These two extrusion lines allow us to run more pounds of plastic through a fixed overhead, thus lowering our costs.
Second, we purchased raw material processing equipment which enables us to vertically integrate our raw material stream. We now have the ability to purchase raw materials directly from sortation centers, grind and wash them all under one roof, thereby eliminating others in the supply chain. These investments will have significant long-term impact on our company, on our ability to achieve higher margins and attractive price points in the domestic market.
In the recycling business, you must control your raw material streams and purchase them as close to source as possible. This obviously has lower-cost implications reducing others in the supply-chain. However, just as important, we now have a 100% control of the quality of these raw materials. We see exactly what we are buying and processing and are not relying on others to supply us with our specification.
With this facility now operated by us, we have the capacity to offer value-added services, such as custom fabrication of our STRUXURE construction mats and pre-plating services for our ECOTRAX rail ties. We are prudently managing our operations to further improve our margins and also our operational costs through tighter controls and higher quality standards. As we have said in the past, it is our primary focus to produce consistent quality composite products with both ECOTRAX and STRUXURE.
As of the end of Q3 we have a $2.4 million backlog for the balance of 2013, plus additional significant sales opportunities that are anticipated to close by year-end or by the first quarter of 2014. Our sales opportunities through 2014 total approximately $50 million. This consists of 84 active opportunities with 57 potential customers. We are very excited about our outlook for the first quarter of 2014, which includes projects in our pipeline that we anticipate closing by the end of this year for delivery in 2014.
We’re very excited about what lies ahead for our company. Customer adoption of our products continue to grow, 33 new customers so far this year and the opportunities and projects continue to move along as anticipated. We have built the foundation of manufacturing to provide the ability to control cost and quality. We have executed as planned on all fronts, sales, marketing, manufacturing and quality.
Thank you for your time today and now I will be happy to answer any questions you may have.
As we hold for people to queue up their question, I just like to again congratulate you, Steve, on the growth and the customer adoption and all the other business developments that you have been able accomplished in the first nine months of the year and I think our first question is queued up here.
Thank you, and our first question comes from the line of Jeremy Rowe [ph] with Integra.
Hey Steve, thanks for the update. Extremely informative, concise, I appreciate it. I have been watching the company, and as Andrew showed it to me, oh man, it’s probably already or right around a year ago. I think it just recently announced that it has increased manufacturing capacity. I have got two questions or I have two questions. Increased manufacturing capacity strong for 2013, I know you touched [ph] just a little bit but can you give a little bit more color on that, like how strong do you expect the finish to be? I know you said that this trend will continued into 2014 and is this just from rail tie business? Additionally AXION has been dealing – specific as a Class I rail customer for some time. I would like to get a little bit more information as to how is that relationship developing and are you guys looking for work with other Class I railroads here in North America?
Yes, all good questions. Thank you very much and we appreciate the support over the last year. Yes, the manufacturing – what we realized very quickly is we got the certain volume levels, especially in the plastic business, and recycled plastics business. That is very, very important to be able to get economies of scale. And although we have great relationships with contract manufacturers that have produced those before, we saw it in our best interest to consolidate that into a facility where we owned and operated it and have the ability to drive efficiencies and drive pounds, if you will, through a single location. So we upstarted a second extrusion line, that’s a little bit bigger than the first one. It’s got more mold capacity and more pound capacity. I won’t get into technical jargon around extrusion. But it is a little bit bigger and we’ve got that running now in the facility.
We will -- next week or actually this week the facility went to a 24x7 operation which involves basically three shifts that work 12-hour shift. So the goal there is to meet demand of orders that we currently have in place. So that production is just coming off of those extrusion lines right as sold product. We are not building inventory or holding inventory in that facility at this point. So I think that kind of answers your question on the capacity side.
As far as the Class I relationship goes, everything is fine. If you recall earlier in the year we have put out an announced that we had upgraded the properties of our railroad tie to meet the growing needs of the railroad industry here. So it’s no secret that railroads here in the U.S. are running heavier traffic and faster traffic, mainly it is a technology product that in a rail tie that could perform at higher weights and faster speeds and we were able to achieve that with our technology. And we had sold that Class I railroad some higher property rail ties that went into track earlier in the year. They are performing fantastically as a matter of fact. I think on the last call, for the second quarter call, we had just been on track and had actually walked the track with the customer so that the rail ties have been performing fantastically. So I think Class I railroad recognizes us as an industry, they see our technology as a technology that can be advanced, which is always good. I use the analogy of the computer-industry, right, computers keep getting faster and with more capability right? So we proved that our composite technology could be advanced and to a major customer like that, that’s a major statement. So the relationship is strong, we continue to work with them and we look forward to the relationship continuing beyond 2013.
In regards to the other Class I railroads, we are in trial with a another Class I railroad. We had talked about that publicly. That trial is doing fine, performing well. We don't have any next steps from that Class I railroad and we have begun conversations with a third Class I railroad, really more specifically around specialty type applications like street crossings and turnouts. So I think the solid news there is that people are recognizing AXION as the industry leader. They see us with a technology that can be advanced, can be scaled to mass manufacturing and I think the significance of the Waco operation is also very impressive to customers, especially to Class I level and at a transit level. We’ve given bunch of customer visits and tours to that facility. They see our quality operations, they see how we run a building, and they understand that our technology can be controlled, that can be consistent and it can be scaled to massive volumes which is obviously the game they play in. So I hope – I think I have touched on everything so.
Hey Steve, this is Andrew. You mentioned you’ve got $50 million in sales opportunities for 2014 and that's with 84 active opportunities and 50 potential customers – 57 potential customers, how many new customers do you have in that, can you break that out? Do you have that?
No, I don’t. Yes, the good news and bad news of the rail industry is – you know who all the roads are and you know who all the transits are around the world. So there is X number of those players. But there is also increasing opportunity in that pipeline which is really exciting, which is really around mat business that we are excited about – as excited about the rail industry opportunities as well. But this mat product is something that’s relatively new to the company. We put our first trials on the ground right at the end of last year. We continue to expand those trials. We’re now starting to understand the distribution and logistics of moving a mat of that size. And for everybody’s reference it’s basically 5,- 16 foot railroad ties bolted altogether.
So the logistics of moving that thing around the countryside, if you will, and we are starting to understand the players that are in that business that actually provide that service to various energy infrastructure and oil and gas companies that use mats. So we’re excited about that, those opportunities as well, so there’s a bunch of new customers in there, and I don’t know how many total are completely new companies. I mean we also reported during the script that we have customers that are continuing to re-buy from us, which is also very exciting, to know that people like our product, they see our product and our product performs, or they wouldn't be repurchasing the product for other applications. So I think on the adoption side, it never moves as fast as you want it to, but I think when you look at new customer acquisition and then reorders from existing customers, I think it’s pretty promising.
And next question comes from the line of Allen Safer with Integra.
Allen Safer – Integra
Yes sir, what would be—what you consider to be the biggest obstacle for your future growth of your company?
Great question. I think – I don’t know if it’s an obstacle or a challenge, but it's adoption. The adoption of a new technology in, let’s just call, an infrastructure space, takes an exuberant amount of time. That probably is the biggest challenge, people to see our product as an equivalent alternative to traditional building products or rail tie products made out of wood or concrete. Interesting story to that point, we were at the REMA [ph] conference as I mentioned during the call, and started our booth and I was actually carrying with one of the top engineering folks at a Class I railroad and one of his counterparts walked past another Class I railroad and they were talking about executing [ph] on our products and they said, we really need to continue to support technologies like this, because we don't see traditional products as the long-term solution.
So I was a little bit taken back by that. But adoption is really the biggest thing that we fight and battle every single day and we will continue to do that. I think when you see the frequency now of customers reordering, new customers coming on board, we have proven ourselves as a quality supplier out there in the industry. And we just need to keep winning adoption and I think at some point tables will turn and we will continue to grow the company to larger scales.
Thank you. And our next question comes from the line of Oscar [ph].
Just curious learning about your business; what is the competitive edge versus wooden ties and how do you try to price yourself to gain market share?
So a great question, I appreciate it. First of all, the answer to that question is going to vary dramatically depending where you are in the world. We – our products today have touched every continent on the globe. So in those pricing scenarios the competitive environments vary dramatically. But to narrow that down, domestically here in the US, fortunately or unfortunately wood is inexpensive. So today when you look at this in the rail application, we’re about two times cost of wood. So our advantage is lifecycle cost, our products won’t rot, they don’t rust, they don’t deteriorate over time, they are completely impervious to the outdoor elements.
So that becomes obviously our selling advantage. Then you also have the green component of it. Our product, we save trees and our product is recyclable at the end of its useful life whenever that may be. So if our product comes out of service, there is no disposal of our product. We can actually take that product back, we can cut it up, grind it up and put it back into new product. So that’s obviously another advantage. Today the railroads spend an exorbitant amount of money on disposal cost when they remove wood or concrete out of service. There is a tremendous cost associated with that disposal of those products. So the key component to costing -- to increase the volume, if somebody activities that – I talked about during the call around establishing our owned manufacturing base. We are getting our cost of our material and our processing to a level where we can actually compete for big volume opportunities at a lower retail sales price. Obviously the lower we can drive the price, the more value a customer is going to see in that price and that product.
And I think we have some work to do there, where we can get to a price point that we don't – if the customer will feel a better value proposition if you. And of course, as time goes on, people will become more comfortable with the longevity of the product and the fact that it will last as long as we say it will last. And you will feel better about spending a higher price they would for traditional materials. So it’s kind of a two-pronged approach. When I say this a lot, people in the office hear it, is we’re not building one facet of the business, we’re trying to do all at the same time. We are growing sales, we are growing capacity and we are growing process improvement as well as quality. So we need to keep pushing on all those fronts and then with the new technology, the value proposition for a customer at a price point will eventually find its own level. And that’s what we are working against today.
Okay, thank you. No pun intended but sounds like you are on the right track.
We’re trying to get there.
It seems we have no further questions at this time. I would like to turn the floor back over for any closing comments.
Okay, that wraps up our formal discussion. Steve, you want to close with here?
Yes, just one comment. First of all, I’d like to thank everybody for joining in today late in the afternoon here in the fall. Thank you for your continued support. We look forward to continuing to communicate to the market significant events and things that are going on inside the company. And again thank you all for your support and thanks for joining us this afternoon.
Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.
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