AERT Tries to Bury Ashes

Joe Brooks isn’t burned out yet.

The chairman and co-CEO of Springdale’s Advanced Environmental Recycling Technologies Inc., Brooks has endured a litany of setbacks.

The worst came in 1996 when his father and AERT’s chairman, Joe G. Brooks, unexpectedly died of a heart attack. The same year two suspicious fires caused damage to the publicly traded firm’s Rogers facility, eventually closing business there.

More tragedies have followed. But despite escalating raw materials costs, legal battles both with Mobil Oil Corp. and AERT underwriter Lloyd’s of London, the destruction of seven total fires and a burdensome stock option plan, Brooks said he’s never thought of folding up the tent.

Brooks, 50, is camped out for the long haul.

“If we grow like we did the last five years, within 10 years this little company is going to be a billion dollar company,” Brooks said. “It’s just maintaining the growth rate we’ve averaged over the last five years.”

Brooks said his plan is to keep making quality products, introduce some strategic new ones and to not worry about the distractions that he considers temporary. He sees AERT’s 46 percent net sales increase from $43.52 million in 2003 to an all-time high of $63.64 million in 2004 as a harbinger of better days.

The trouble is, during that same time the firm saw a 42.5 percent increase in materials costs from $34.36 million in 2003 to $48.96 million last year. That kind of margin pressure has prompted AERT, which employs 600 people including 450 in Northwest Arkansas, to focus on raw material cost increases as its primary, long-term foe.

AERT recycles polyethylene plastics and wood fiber to create composite wood used for decking, windowsills, door components, housing trim, fascia board and other building materials. Polyethylene plastics are found in pallet wraps, detergent bottles, milk jugs, frozen food packaging and plastic bags. The plastic is strong and therefore very good for industrial products.

“We’re taking those materials and putting them back into something where that strength means something,” Brooks said.

Raw Numbers

The amount of polyethylene AERT recycles in one day is equivalent to what 140,000 people (roughly the population of Fayetteville, Springdale and Rogers) use daily in recyclable products, Brooks said. Going into 2006, Brooks said, AERT will recycle about 100 tractor-trailer’s worth of plastics per week.

Depending on the license of the carrier, a 53-foot trailer’s maximum capacity is about 41,500 pounds. That means AERT’s tonnage would amount to about 2,075 tons or 4.15 million pounds of plastics per week.

The cost of raw materials, such as virgin plastic, are going through the roof, Brooks said. Therefore, substitutes such as polyethylene are also getting more expensive. At the same time, the industry has become capacity restrained.

“Demand for plastic has about exceeded the ability to produce it in this country,” Brooks said. “Demand is driving up things that even if resources were available, the infrastructure is not there to handle it all during peak times.”

So, Brooks said, AERT will have to build its business model around expensive raw materials and have an infrastructure that can process more recyclable material. One of the company’s goals is to be able to process more than two-thirds of its recycled plastics in-house in order to protect them from increased costs associated with petrochemicals.

The firm currently processes about 50 percent in-house.

AERT produces three composite wood segments with multiple product lines: industrial base wood and window components; MoistureShield contractor lumber-dealer decking and exterior products; and ChoiceDek, a decking brand made exclusively for timber company Weyerhaeuser Co.

Legal and Fire Battles

AERT operated in the red for its first dozen years, not showing a profit until 2001. A rash of fires kept the company from running at full capacity. Up until 1997, it cost the firm more to buy its materials than it was able to sell them for.

Fires kept AERT from running at full capacity for much of that time, and legal battles kept it from fully concentrating on the business.

In 1993, two fires at the Junction, Texas, facility put a strain on AERT and its owners. Brooks said he believes the Junction plant fires were a result of arson, although the Kimble County fire chief, Lee Hall, disagreed.

Then in 1996 there were two fires at the Rogers facility that Brooks again said were the result of arson. The second fire resulted in the closing of that operation and moving it to Springdale, near Brooks’ family-owned Razorback Farms — the largest provider of green beans for the food-processing industry in the eastern United States.

Yet another suspicious fire took place at Razorback Farms in 1997. A small building was damaged and many acres were burnt.

Springdale Fire Marshal Dennis Miller reported it to be accidental, caused by a tossed cigarette. Brooks didn’t buy it.

“A cigarette under the metal desk burned the building down. You go figure that one out,” Brooks said.

He questioned it being “accidental” because, according to media reports, the desk was where he kept his files regarding intense litigation with Mobil. His mother, Marjorie Brooks, had taken the files out only a few hours before the fire broke out, reports said.

No one has been arrested for the fires.

Brooks said he can’t help but wonder if the Razorback Farms fire had anything to do with the lawsuit involving Mobil, which used to have a wood composite division called Timberex. It was sold to Trex Company LLC in 1996. It is a direct AERT competitor.

Mobil sued AERT after the Springdale firm threatened to sue Mobil over its new wood composite line, citing patent infringements in 1992.

Mobil initially filed the suit, challenging AERT’s rights to the composite wood materials. AERT then filed a counter-suit but lost the motion in 1994 and was ordered to pay attorney fees. AERT appealed that judgment, and in 2000 the court dismissed the motion by Mobil for repayment of $2.7 million.

Brooks stepped up security by hiring armed off-duty policemen to guard every facility, which includes Tontitown, Springdale, Lowell, Alexandria, La., and Junction.

“Really nasty business went on in the competitive side of things in the early days,” Brooks said. “A lot of it is not as much, what I’d say negligence in manufacturing, it’s that you had a very nasty competitive environment.”

However, in October 2004, Brooks said negligence did occur at the Springdale plant. Because of the nature of wood fiber products and manufacturing composite products requires intense heat, there is a risk of fire. Wood can ignite at 450 degrees Fahrenheit, he said.

The blaze was relatively small and only damaged a few trailers and the dumpster where the hot material was dumped.

Then there was another misfortune in March 2003, once again at the Junction facility.

A security camera recorded a power pole blowing up, which in turn started a fire that spread to the plant causing major damage to the raw materials area.

The plant shut down for two months before opening back up in May 2003. Even then, it was only able to operate at 50 percent production.

“We limped along to try to hold on to part of the customer base through the summer,” Brooks said.

It took more than a year and a half to rebuild, and the plant is back up to running at the same capacity as it did before, he said. It’s still not running like Brooks hoped, because an underwriter lawsuit is forcing AERT to pay for rebuilding out of the company’s cash flow.

Lloyd’s of London, AERT’s third-tier insurer for the Junction facility, filed a lawsuit in January 2005 in the Circuit Court of Washington County regarding the 2003 fire claim. Lloyd’s alleges that AERT did not rebuild the Junction facility exactly as it existed before the 2003 fire.

Therefore, Lloyd’s claims it is not responsible to reimburse the company for certain costs of rebuilding the plant. Lloyd’s also seeks to retroactively cancel its portion of the insurance policy. AERT filed a counterclaim denying the allegations and seeks $1.8 million in legal and court fees plus punitive damages, according to the lawsuit. The matter is ongoing.

“That hurts when you pay for $16 million worth of insurance and insurance won’t honor it,” Brooks said.

Taking Stock

AERT’s stock has averaged between $1.18 and $1.85 a share for the last year. Recently it was at $1.30 per share.

Brooks acknowledged the low stock price, and said that warrant overhangs are keeping it low because it depresses institutional participation. Many brokerages won’t deal with stocks that are under $3 or $5, he said, and brokerage rules make it difficult for penny stocks like AERT to make any money.

Many small companies that go public have to issue warrants to raise money, said Scott Nelson, a research analyst who covers building products at Stephens Inc. in Little Rock.

The warrants pressure earnings because they cause net income to be divided across a larger denomination. Warrants can be converted into common equity or allowed to expire, Nelson said.

Conversion would bring down earnings, so having them expire would be a positive for the company, Nelson said.

Brooks hopes to couple the expirations this year with earnings increases that would help the stock grow.

Net income finally got over the million-dollar mark in 2003, but it was skewed by insurance adjustments from the Junction fire. Net income was down 37 percent from $2.03 million in 2003 to $1.27 million last year.

If AERT wants its stock and net income to rise, Nelson said, it’s more about increasing capital and capacity than just the warrant overhang.

“As the company’s capital improves, investor and institutional interest should improve as well,” Nelson said. “The key to the story in the near term is management’s ability to execute expenditures to increase capacity. User demand is strong and should remain strong for AERT and composite decking for the next three or four years.”

And Brooks is banking on the company’s growth to increase stock prices.

“We’re working hard to try to build our shareholder value,” Brooks said.

Brooks said one of his biggest failures was not designing a proper incentive plan for his employees, and that they should be rewarded for their loyalty.

At AERT’s annual stockholders’ meeting in July, shareholders passed employee and non-employee director incentive plans. It will give shares to employees based on merit, and also give non-employee directors on the board shares.

Stock price may not be moving, but there has been some movement regarding inside transactions. Most notably, Marjorie Brooks, who presides as board secretary and treasurer, exercised her option to purchase 350,000 shares of stock in June. She owns more than 10 million shares of the company.

Joe Brooks didn’t have a comment about his mother’s recent stock sale.

The Payoff

Composite wood is only growing, which will play into the hands of AERT, if the firm can stay smolder free.

Brooks said that composites are only 15 percent of the overall market, of which AERT has about 11 percent. Actual wood still commands 85 percent of the market. Even though AERT has been around for 16 years, it’s still in the middle of a growth spurt.

The company has begun construction on its first new building, having previously only occupied renovated warehouses. The 60,000-SF facility will cover 18 acres next to its current Springdale facility and manufacture composite extrusions.

“We’ve been tested by fire and time,” Brooks said. “You keep going because you build the best product on the market place and the customers accept and understand that.”