Axion International Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Apr. 7.14 | About: Axion International (AXIHQ)

Axion International Holdings Inc. (AXIH) Q4 2013 Earnings Conference Call April 7, 2014 4:30 PM ET

Executives

Andrew Haag – Managing Partner, IRTH Communications

Steven L. Silverman – President and Chief Executive Officer

Analysts

Jim P. McIlree – Chardan Capital Markets LLC

Operator

Greetings ladies and gentlemen and welcome to the AXION International’s 2013 Year End Earnings 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, Managing Partner of IRTH Communications. Thank you Mr. Haag, you may begin.

Andrew Haag

Thank you Manny. I would like to welcome all of you to AXION International's 2013 year end earnings conference call. With us today is AXION's President and CEO, Steve Silverman. 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 a replay of this conference call will be available at the phone number provided on the earnings release issued earlier today.

Now before we get started, I will take a moment to read the Safe Harbor statement regarding today's conference call. This conference call will contain forward-looking statements within the meaning of the U.S. Federal Securities 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, April 7, 2014, and AXION expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call.

Please note, that the filing of AXION’s 10-K has been delayed due to the company’s accounting team working with its auditors on recording the acquisition of Y City Recycling assets.

Now, I would like to turn the call over to Steve Silverman, AXION's President and Chief Executive Officer, who will provide a review of AXION’s operational results. Steve.

Steven L. Silverman

Thank you, Andrew and thank you everyone for joining us on the call toady. Overall 2013 was a period of transformation in growth; we ended the year with operational and financial results that demonstrate our ability to execute all of our fundamentals successfully.

More specifically we shifted from being a company of development and proof of concept to a company undergoing expansion on all fronts, consistently delivering solid growth and quality products that solve problems for our customers around the globe. Revenues for the year ended December 31, 2013 were $6.6 million, up 24% over revenues in the prior period of 2012, exceeding our expectations.

Sales of ECOTRAX rail ties contributed approximately $5.3 million, while STRUXURE building products accounted for approximately 657,000 of 2013 revenues. This has been a result of disciplined focus and our collaborative vision of being a leader in high quality recycled plastic and plastic composite technologies in our two divisions, our engineered products and our reprocessing division. Our engineered products division is very focused in expanding our revenues from our rail tie and STRUXURE mats.

Our recently added reprocessing division now has two main revenue sources which are sales of reprocessed plastic scrap and toll processing. This year for our engineered products, we saw an increase in global demand for ECOTRAX and STRUXURE products and their transition from testing phase to repeat orders and new customer orders. We diversified our customer base during the year with 40 new customers, grew our revenues and also raised the bar on our internal performance standards.

In November, we made an asset purchase of Y City Recycling and launched our wholly-owned recycled plastics division called AXION Recycled Plastics. For those of you following our company, we have indicated on our last few quarterly calls that we intended to decrease our cost and increase quality controls by vertically integrating our operations with the supply of materials. This opportunity immediately added to our top line revenue and enabled reduction in our supply chain cost for each of our products.

Today, we have a variety of engineered products while improving all facets of the business including manufacturing, quality, material supply, sales and marketing. By operating in the raw material supply chain and processing our own material for production, we have the benefit of enhanced quality control and consistent reliable sourcing. Shortly after having launched the subsidy, we announced a multimillion dollar, multiyear contract with one of the largest thermoplastics companies in the U.S., this development reinforced our business strategy and strengthened our presence as a provider of new process plastics.

We now operate reprocessing operations in Waco, Texas and Zanesville, Ohio. Also during the fourth quarter we closed our Jersey headquarters and relocated to corporate offices to Zanesville, Ohio. We entered into 2013 with two major objectives to become a vertically integrated manufacturer, which I just touched on and to achieve higher sales volumes from both existing and new customers. AXION has taken tremendous stride in expanding our markets with regard to continued and new customer adoption of our products.

For our engineered products we made shipments to a total of 58 paying customers in 2013 with 40 of these being new customers. We also significantly expanded market adoption of our products around the world and improved our gross margins as we continued to increase our production volume on a year-over-year basis, our trials are on the globe remain on schedule and our products continue to perform well.

In early 2013 we shipped our first order for installation in Europe for in-track testing, after two years of laboratory testing. We are happy to report that ECOTRAX is performing very well and the in-track trial is scheduled to conclude at the end of 2014.

We also shipped our first orders to Russia after lab testing for many years, our trials and testing continue with positive results in Australia as well as well as many others just to name a few. Our sales, marketing and branding efforts combined with the growing repetition of quality products have generated a sales pipeline consisting of approximately $30 million in current sales opportunities. 57 active opportunities with 51 potential customers for our engineered products only.

Our ECOTRAX products have transformed the composite rail ties industry as we have delivered great value to our customers, we continue to meet and exceed American Railway Engineering and Maintenance-of-Way Association standards and all of our products have also been tested to American Society of Testing and Materials standards. Rail operators are actively seeking alternatives to address the increasingly expensive maintenance and replacement issues associated with wooden ties and ECOTRAX provides them with a solution on a global scale.

We sold to major transit lines in the U.S., which are current and repeat orders, including one Class I rail customer. We also shipped purchase orders for ECOTRAX rail ties to one of the largest multi national chemical companies and multiple major domestic transit lines. Internationally, we have gained significant traction; we have completed in-track testing in Russia and received a second purchase order through in-country distributor and business partner TVEMA, a large international group of companies based in Moscow. As we have indicated in the past, Russia is a massive opportunity as the railway system is the second-largest rail network in the world, so there is a huge potential for a widespread adoption throughout Russia’s rail network.

We also began shipping to a second European railroad for in-track testing through our European partner Sicut Enterprises Limited and expect to see more opportunities for sales orders through this partnership over the next 12 months. Additionally, Europe is a fantastic market for our products, as the region is very serious about sustainability and the rail industry very technologically advanced, also Europe is working against a deadline that will potentially ban the use of creosote treated wood products by 2018. So we are extremely excited about that as well.

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

AXION has grown along with the industry, using the same successful patented formulas that have served as the basis of our products. We have further enhanced performance to better meet the rail industry’s evolving need. These enhancements are a result of the investments we have made in personnel and systems in the areas of quality management, material sourcing and manufacturing.

Our STRUXURE infrastructure grade building products have been generating a lot of exciting opportunities for us. Based on our construction mats field performance and the favorable life-cycle cost to customers, we have received a high level of interest from both potential customers and distributors for this product. More recently we have developed the in-house capability to fabricate our mats and our vehicle facility. This will increase margins on our mats moving forward. The construction mat business offers a significant opportunity. Construction mats are used at infrastructure construction sites and oil and gas drilling and pipeline construction sites to support heavy equipment on unpaved, wet or soft surfaces.

As indicated previously based on talks with industry participants, we believe that North America the traditional wood construction mat market is over $500 million in annual sales. Wood construction mats have a life-cycle that is relatively short, depending upon the length and location of use, wood mats can be considered disposable. At the end of the construction site job, they must be discarded because they have been torn up or under the heavy weight of construction equipment treads. Our STRUXURE construction mats offer durability and long-term use.

In 2013, we sold STRUXURE products the counties in New York and Ohio for bridges, the numerous oil and gas pipeline and drilling contractors in the U.S. and Canada and to coal mining industry for roof supports. One of our most significant events was our strategic distribution partnership with Spartan Mat. The company produces and supplies crane mats and timber mats used for pipeline wind farm transmission and distribution lines. And through them, we have been able to expand awareness for all of our Recycled Structural Composite matting solutions and established a fabrication solution and a distribution supply chain to deliver mat for the market and customers through various distributors.

In early January, we reported that we received a $150,000 purchase order for our 100% Recycled Structural heavy construction mats from Spartan Mat, which were distributed across the U.S. and Canada to midstream and energy companies and civil contractors. Energy and civil construction projects are on the rise and we are at a trajectory of the growth given the demand for more environmentally friendly solutions. We also anticipate closure larger order similar to these moving forward. In the short period of time, we have already secured fiver separate order from Spartan. We will also launch a later temporary road mat during the second quarter of 2014.

We have come a long way to where we are today. Our relentless focus on the major fundamentals of our business has generated operational achievements and financial progress. Our objective remains to generate value creation for our shareholders and we are pleased with where we are today.

By the end of 2013, we have built the company foundation from all facets including manufacturing, quality, material supply, sales and marketing. We have a sales and marketing focus in rail ties STRUXURE mats and now our new reprocessing business that not only supports our engineered products business, but also drives incremental and diverse revenue.

This is a huge undertaking for any company, we’ve managed to do this successfully while strategically focusing on migrating away from contract manufacturing and diversifying our customer base. Today, we can proudly say that AXION is a leader in the industry through the fostering of high value customer relationships and delivery of high quality, high value priority products stemming from both our vertical integration and strong intellectual property.

We have a priority position that protects our technology and products, with over 10 years of documented proven durability and zero failure. The technology has been built with leading scientists and engineers and we continue to test and improve our products in order to secure our market leadership in the segment that we have created. A whole new segment with in our industry that promotes an eco conscious green infrastructure building material.

At AXION, we believe that being green doesn’t have to compromise excellence and superior performance along with global recognition, and implementation proves this fact. Current backlog and sales initiatives on our pipeline are on schedule, the sales opportunities give us a high degree of confidence that 2014 year-end revenues will exceed 2013. 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 some good visibility for the first quarter of 2014, I would like to provide you with an outlook of our financial performance for the quarter. During the first quarter of 2014, we have generated revenues in excess of $4 million. This was almost 60% of 2013 revenues and we are very confident that this is going to be a record year for the company. We’re excited by our prospects for the year and look forward to updating our investors on our progress. Andrew.

Andrew Haag

Everyone can you hear me?

Steven L. Silverman

Yes.

Andrew Haag

Okay, great. Manny, go ahead and queue people up on how to ask questions and get in the queue. And I think we have a couple of people in the queue for questions already.

Question-and-Answer Session

Operator

Certainly. Ladies and gentlemen we would now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Jim P. McIlree of Chardan Capital. Please go ahead.

Jim P. McIlree – Chardan Capital Markets LLC

Thanks and good afternoon. Steve at the end of the year remarks, you said greater than $4 million in revenues for the March quarter. Is the March quarter unusual relative to the other quarters that is can you get at least $4 million in the other three quarters of 2014 as well?

Steven L. Silverman

Yes from a base – hi, Jim, first of all, how are you? Thanks for joining the call. Yes, absolutely, we from the capacity perspective and a sales pipeline perspective, where we see various revenue potentials on different customers and projects that are closing in our pipeline, we believe that’s a very achievable number.

Jim P. McIlree – Chardan Capital Markets LLC

Great. And do you have a backlog number for year-end?

Steven L. Silverman

Not at this point that we are going to put out, no. We traditionally talk about our pipeline and the opportunities that are in them and the number of the opportunities as well as the number of customers that those opportunities will touch.

Jim P. McIlree – Chardan Capital Markets LLC

Okay. I think in prior quarters you have talked about backlog, is that something you’re not going to talk about going forward?

Steven L. Silverman

Yes, with the addition of the reprocessing business, it’s a little bit different than just the engineered products business. So, it wouldn’t really be an accurate number when you look it. The reprocessing business really runs on a kind of month-to-month pricing allocation game as oppose to longer kind of scale project.

Jim P. McIlree – Chardan Capital Markets LLC

Got it, okay, that’s fine.

Steven L. Silverman

I don’t want to – we’re going to – as we develop here, we are going to get our arms around how we want to actually communicate some of the reprocessing businesses are built, they are very, very different businesses from one and another. So…

Jim P. McIlree – Chardan Capital Markets LLC

Okay, got it.

Steven L. Silverman

Get our arms around how we want to talk about the numbers.

Jim P. McIlree – Chardan Capital Markets LLC

And then for 2014, are you expecting any significant increases in operating expenses in order to get – in order to serve the sales growth that you’re looking for?

Steven L. Silverman

Yes, what we’ve done which I think is a very, very good approach. As we’ve kind of worked our way backwards from the ground up. So, we’ve taken the current assets both of the old AXION, if you will from the engineered product side and we’ve taken the assets from the asset acquisition of the reprocessing company and we built – from the ground out we built at really based on capacity.

So, we don’t see major capital investments at this point to hit, what we are considering to be our baseline plan for the year. It’s purely based on here is the capacity we have, its improving, being more efficient getting our arms around the reprocessing business from a manufacturing operational standpoint which we are making great stride in everyday, but really its about maximizing the capacity that we have currently with the machines that we currently have.

Now with that said, some of the projects that we have in our pipeline relatively larger and those would be outside of work considering to be our baseline plan and those – if all of them come in at the volumes that they are anticipated to we would need to purchase additional equipment to meet those demands, but as – I think that would be a good problem for all of us to have.

Jim P. McIlree – Chardan Capital Markets LLC

Great, okay. And any timeframe on when you think the K will be filed?

Steven L. Silverman

Yes, I think we are going to be – you’ll see it within this week, the early part of this week.

Jim P. McIlree – Chardan Capital Markets LLC

Fantastic, great. Thank you very much and good luck with everything.

Steven L. Silverman

Yes, thanks Jim.

Operator

Thank you (Operator Instructions) And our next question is from David Corroto [ph] of Wells Fargo. Please go ahead.

Unidentified Analyst

Good afternoon and thank you for taking my call.

Steven L. Silverman

Hi David, how are you?

Unidentified Analyst

Fine, thank you and yourself?

Steven L. Silverman

I’m great.

Unidentified Analyst

Question regarding the revenues, I see that are couple of questions here, regarding the annual revenues. You did or expect to do about $6.6 million?

Steven L. Silverman

Correct.

Unidentified Analyst

Can you give me an estimate of the earnings per share of those revenues or I didn’t pick up on that numbers, are a number out there that you can give us or give as we can advise our clients accordingly?

Steven L. Silverman

Yes, Don do you want to take that?

Donald W. Fallon

I don’t know if you are looking for earnings per share for the year?

Unidentified Analyst

Yes.

Donald W. Fallon

Yes, or the loss per share, I didn’t know how that was connecting to the revenue question, its $0.86 loss.

Unidentified Analyst

Okay, so we are looking about $0.86, is that an improvement from last year or pretty much inline?

Donald W. Fallon

We really have to wait to get into it, but we have a significant impact of changing fair value of derivative liabilities this quarter as our stock price was trending up at the end of the quarter, so we had to increase the value of that derivative on the balance sheet, not to get into a lot of heavy duty accounting, but it impacted the fourth quarter level of $15 million.

Unidentified Analyst

Okay.

Donald W. Fallon

Buts that’s close to that $0.86.

Unidentified Analyst

All right, very good. Second question is, I understand that there was a merger or an acquisition involved which has delayed the…

Steven L. Silverman

Yes, we did a late year asset purchase and we are working diligently with our auditors to get them engaged with that business and that was that the delay in the filings.

Unidentified Analyst

Okay, can you tell me a little bit about how that arrangement was made, in other words was it done through cash, convertible debt, convertible equity, combination thereof?

Steven L. Silverman

I mean its out in the filings, in short I mean it was really we assumed bank debt for assets, it was an asset purchase.

Unidentified Analyst

Okay is it a note of some kind?

Donald W. Fallon

It’s a bank term loan, it’s 4.75% I think matures in I’ll perceive 2015, 2018.

Steven L. Silverman

Yes, 18 I think its.

Donald W. Fallon

Okay.

Unidentified Analyst

Okay. And can you tell me how much the note was for or the amount borrowed?

Donald W. Fallon

$4.5 million

Unidentified Analyst

Okay. Are there any convertible debt or equities out there that we should know about?

Donald W. Fallon

There has been for quite sometime we had a little over $13 million and 8% convertible notes and we’ve got 10% convertible preferred stock that’s carried as a non-equity item because it is redeemable.

Unidentified Analyst

Okay.

Donald W. Fallon

No that’s new, we’ve added two this year, but now it’s new.

Unidentified Analyst

All right that’s all I needed. Thank you very much gentlemen. Good job.

Steven L. Silverman

Thanks David.

Operator

Thank you the next question is from Miles Slater [ph] a Private Investor. Please go ahead.

Unidentified Analyst

Hello, Steve, how are you?

Steven L. Silverman

I am well Miles, how are you?

Unidentified Analyst

Great thanks, good. Is it possible to you to clarify a little bit the first quarter earnings as far as sales, as far as what came from your traditional business and what is coming from the recycle business?

Steven L. Silverman

Yes, I’m not going – we’ll have some more detail on the filing Miles later this week, and I would rather just have it go out that way, but it was relatively speaking right on plan where we thought it would be from a – it was probably close to 50/50 split.

Unidentified Analyst

Great, thank you.

Operator

Thank you. The next question is from Pat Galvin [ph] a Private Investor. Please go ahead.

Unidentified Analyst

Hi, Steve.

Steven L. Silverman

Hi, Pat. How are you?

Unidentified Analyst

Are we still working three shifts at Waco and is there a possibility of putting another new line on?

Steven L. Silverman

Yes, the Waco facility now being a 100% in our operation is a fantastic facility it was actually an old plastic facility itself, so the infrastructure that’s there gives us great ability to expand not only to a third line, but allows us to expand to a fourth and fifth line without much struggle. So yes, we have plenty of ability to add production equipment and facilities to support that equipment.

Unidentified Analyst

Are we still working around the clock?

Steven L. Silverman

Right now I believe Waco is running a three shifts schedule Pat. And I think its running six days a week.

Unidentified Analyst

Thank you.

Operator

Thank you. (Operator Instructions) And we have a question from Steve Kiser [ph] a Private Investor. Please go ahead.

Unidentified Analyst

Hi, David, Steve here thanks very much for great update. A question for you regards the AXION Recycled Plastics. Is it correct to say that right now you all only have the one very large contract for $42 million with a single client or do you have any other business in that pipeline that you can talk about.

Steven L. Silverman

First of all the business is not hinged on to one customer that’s one customer, the company itself, the division itself has multiple customers that we sell multiple different types of resins to that are reprocessed both out of our Zanesville operation and our Texas facility, so it’s not a – it’s just not one customer. We have started to develop our pipeline in that business, the good news about the reprocessing business is there is a ton of demand for reprocess resins, it’s a pretty geographically business from a standpoint of transportation logistics to move both the raw material as well as the finished products.

So we have a pretty good customer base diversification there where we want to improve that obviously, we do have a couple what I would consider to be small concentrations, much like we did on the railroad side that we were able to take from I think its hay day was an 80% number, you know and I think we are below 50% today with a major class I railroad contract. So customer diversification is something that’s always in our rearview mirror if you will and we work hard to make sure, we are continuing to diversify the customer base.

Unidentified Analyst

Got you and if I could ask one quick follow-on, the last two quarterly calls you have mentioned contact with the Department of Defense for potential business. So that didn’t come up this quarterly call, is there any updates there, is that fallen by the way side?

Steven L. Silverman

No, it hasn’t fallen by the way side, but unfortunately not in a negative way, but dealing with the Department of Defense or the government is kind of moves at its own pace, its hot one minute and its cold the next, so we continue to talk to the Department of Defense, we actually have a conference call coming up later this week with the Army Corp to discuss some bridge applications, but it’s just – it’s an ongoing process, it never – how it gets through the process never seems to amaze me, so…

Unidentified Analyst

Okay, thanks very much.

Steven L. Silverman

Thank you.

Operator

Thank you. The next question is from Tom Nie [ph] a Private Investor. Please go ahead.

Unidentified Analyst

Hi, Steve, just a quick question for you. I see that you’ve got a new Chief Operating Officer there.

Steven L. Silverman

Yes.

Unidentified Analyst

Does that mean a single at any kind of change in direction or can you comment on what he brings to the table to the company?

Steven L. Silverman

Yes, we recently announced Claude Brown coming on Board. Claude has a – I think if you looked at the announcement and his background, it kind of speaks for itself. Claude has been with Dow Chemical Certainteed, Alcoa to name a few, all in ceramics or plastics or resin technology, and all areas from patent management, to technology development, to R&D, to manufacturing, quality assurance. Phenomenal detail guy and just a huge addition to the management team and I think speaks volumes about the company to be able to recruit a guy with that type of talent and that type of experience, so we’re exited to have Claude on Board.

I don’t think it signals any sort of change in direction from our focus basically in the rail industry to now our mat, our portfolio of mat products that we’re developing, but I think Claude brings kind of the next phase if you will to what we need to do as a company which is to continue to value engineer our products, grow our production efficiencies and our operational efficiencies and Claude brings all that background. So he is a great addition to the group, we are glad to have him.

Unidentified Analyst

Sounds good. Thank you.

Operator

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Mr. Haag for any closing remarks.

Andrew Haag – Managing Partner, IRTH Communications

I would just like to thank everyone for their participation and interest in AXION International Holdings and remind everyone that the full financials will be filed on Form 10-K shortly with the SEC, and one of the point Steve had mentioned here is that in the first quarter of 2014 the company has already achieved roughly 60% of the full year of 2013. So, we’re off to a great start, congratulations everyone. Thanks.

Steven L. Silverman

Thank you.

Operator

Thank you. Ladies and gentleman, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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