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Executives

Tim Morrison - Chief Executive Officer

Brian Hanna - Chief Financial Officer

Advanced Environmental Recycling Technologies, Inc. (OTCQB:AERT) Q2 2014 Earnings Conference Call August 7, 2014 11:30 AM ET

Operator

Good morning, ladies and gentlemen and welcome to Advanced Environmental Recycling Technologies Conference Call to discuss AERT’s recently filed 2014 Second Quarter 10-Q Report.

Joining us today 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 expectation 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 activities, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such future forward-looking statements.

AERT currently is considering, but may or may not in the future implement any or all of the items and initiatives discussed today due to among other things known and unknown risks or uncertainties and other factors. AERT, Inc. undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, change in strategy or otherwise. The abovementioned 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 the fiscal year ended December 31, 2013. We will begin the discussion with opening comments from CEO, Tim Morrison. We will then open up the discussion for questions from our audience. Go ahead, Tim.

Tim Morrison

Thank you very much. Well, thank you everyone for joining us as we discuss AERT’s second quarter results for 2014. I would like to start off by turning it over to Brian for financial analysis.

Brian Hanna

Thanks, Tim and good morning. Earlier this week, we filed a 10-Q for the quarter ended June 30, 2014 and our remarks are qualified by the complete financial statements, footnotes and risk factors in our 10-Q and other SEC filings.

Sales for second quarter of 2014 increased 1.7% from $24.1 million in 2013 to $24.5 million. The growth for the quarter reflects increased sales of non-decking product. 2014 first half sales of $41.2 million were up 3.8% or $1.6 million from the first six months of last year. Lower ChoiceDek sales caused by distributor inventory reductions in the first quarter exacerbated by a late spring and inclement weather were only partially offset by the second quarter growth.

Our gross margin for second quarter this year declined 24.6% of sales from 25.3% last year. The first year’s first half gross margin was 19.9% versus 25.4% for the six months ended June 30, 2013. While labor and overhead costs were up year-over-year, the primary cause of the gross margin decline was a change in the relative customer and product mix.

Selling and administrative costs were down $0.2 million for the quarter and down $100,000 for the first half. Lower employee costs in the second quarter and reduced commissions and travel for the first half contributed to the reduction. Operating income for the second quarter of $3.2 million was $0.1 million increase over that of the three months ended June 30, 2013. For the first half of this year, operating income fell by $2.6 million to $2.2 million from $4.8 million last year. The second quarter’s net income was a $0.5 million improvement over 2013, while the net income for the first six months of this year, a $0.7 million was a $2 million decrease over the first half of 2013.

If you have any questions as to 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

Thanks, Brian. From past years the positive comp versus prior years will be celebrated, we have much higher expectations for this year. The increase in sales versus same quarter 2013 doesn’t truly reflect the retail demand for our products. More precisely, where we have reliable data, retail sales of our product showed significant improvements over 2013. Some of our large distributors had reduced their inventory and our just-in-time status leaning heavily on AERT inventory and production or in some cases, they have simply underestimated demand. In the latter case, we are seeing replenishment orders in the third quarter. We continue to believe that AERT on cap composites will represent the best choice for decking for majority of customers.

We are very excited about commercial introduction of our MoistureShield Pro cap product. We began shipment of MoistureShield Pro decking late in the second quarter. While MoistureShield Pro represented a small percentage of second quarter sales, we quickly developed a backlog of orders. Initial feedback on MoistureShield Pro was quite positive. The new product uses AERT’s proven WPC as a core and we operate in two different colors and both are meeting with great feedback on the look and feel of the product. We are certifying and bringing additional production on this supported by the demand and in the second quarter we anticipate increased sales of the capstock product.

In the third quarter, we remain focused on three key areas. First, we are continuing our efforts to maintain the safe workplace. Second, we are continuing the efforts to reduce expenses. Our associates continued pursuing expense reductions with a focus on reducing labor, maintenance and raw material cost. Those efforts are showing positive results and we anticipate continued benefits from those efforts. Finally, we continue to focus on development and the introduction of new products. As always, we appreciate the support of our shareholders and our associates. And we would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And I am showing no questions at this time. I would like to turn the call back over to management for further remarks.

Tim Morrison

As always, we appreciate your interest in listening in on the call. And thank you very much for being here.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.

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