AERT Aims to Make ‘Green’ Focus of ?08

Springdale Company Counters 2007 Losses, Nasdaq De-listing Notice

With a slight modification, a classic Barbara Mandrell song sums up Advanced Environmental Recycling Technologies Inc. of Springdale.

“We were ‘green’ before ‘green’ was cool,” said Joe Brooks, CEO of AERT.

The company, founded in 1989, has undertaken a series of moves spawned in mid-2007 to take advantage of the sustainability boom and boost its value to investors after slipping from the profitable ranks during its most recent fiscal year, which ended Dec. 31.

With nearly $100 million in revenue during 2006, a three-fold increase compared with 2001, AERT plans an all-out push through trade and consumer media platforms to tout its position as a “first mover” with patent-protected technologies in the manufacture of recycled plastics into composite construction products ChoiceDeck and MoistureShield.

The course Brooks and AERT began to chart in 2007 preceded the burst of the housing bubble and the subprime credit mess, which dragged down the entire building sector as home sales and new construction fell off dramatically.

AERT’s stock price felt the hit, falling from as high as $1.75 on June 26, to 98 cents on Nov. 8 after losing $1.5 million in the third quarter ended Sept. 30. It has been below Nasdaq’s $1 threshold ever since, triggering a de-listing notification from the exchange on Dec. 21.

Companies are notified after their share price remains below $1 for 30 consecutive days and AERT has until June 18 to regain compliance by the share price remaining greater than $1 for 10 consecutive days prior to the deadline.

If AERT’s price, 95 cents at closing on Feb. 5, does not beat the goal, Brooks said the company has two options. One is to file an appeal and present a plan for how AERT will return to compliance and the second, less appealing choice, is to do a reverse stock split. Brooks called the latter option “not in the best interests of anybody.”

“If we take care of business and keep moving forward, the rest will work out on its own,” Brooks said. “I’m not saying we’re insensitive to the stock price, but we can’t let every day determine our strategy for the future of our company.”

After Brooks sent a letter to investors calling AERT undervalued and assuring them of plans to reinvigorate the company on Jan. 9, the stock price jumped from 76 cents to close at 92 cents on Jan. 10 and has fluctuated within that range since.

“What we’re doing is in the best interests of every shareholder,” Brooks said.

Making Moves

In November, AERT hired Nicholson Kovac, a national advertising firm in Kansas City with around $100 million in annual capitalized billings, to develop a campaign for its MoistureShield Decking product. The ad campaign, which features forest animals approving of AERT products, will be featured in both trade and consumer publications and debuts at the International Builders Show in Orlando Feb. 13-16.

Renee Robinson of Nicholson Kovac said the campaign will target dealers and contractors as well as homeowners through home and garden publications. Efforts are also in progress to get AERT’s MoistureShield featured on home improvement television shows.

“It’s encouraging to see the rest of the world going mainstream,” Brooks said. “The whole world is looking at green initiatives and we haven’t done as good a job getting the message out.”

Also in November, AERT was the only U.S. manufacturer of “green” building materials invited to China’s International Exhibition on Housing Industry in Beijing.

At the time, AERT announced a strategic partnership with China-based retailer Zhengte Ltd. Zhengte, which specializes in outdoor leisure products, has 37 locations and more than 3,000 employees in China.

In December, AERT hired The Birkhill Group of New York City for corporate communications and investor relations.

“We talk about our housing market being soft, [China’s] is white hot,” said David McCarthy of Birkhill, who has known the Brooks family for 12 years. “There are 30,000 new families entering the middle class every day. They buy homes. They fix up homes. They have such large environmental problems in China. They need to go green. AERT has a run rate of $100 million and there could be a multiple demand of that in China alone.”

On Jan. 29, AERT announced plans to break ground on a new plant in Watts, Okla., this year in a partnership that included around $200,000 in incentives with the state and the Cherokee Nation. The first phase of operations is scheduled to begin by the end of 2008.

The $13.5 million plant financed by Allstate Investments will eventually create around 250 jobs, 60 to 65 in the initial phase of operations.

The LEED-certified facility will lock in raw material costs for AERT through waste reclamation, a crucial economic advantage in an industry that has seen manufacturers of composite materials who use “virgin” plastic drop out of the business entirely because of rising petroleum costs.

While products like aluminum, paper and steel are recycled at rates between 50 percent and 80 percent, only 3 percent of polyethylene plastics are recycled.

AERT already collects shopping bags from Wal-Mart, what Brooks calls more of a “clean” plastic, but the Watts plant will also collect more contaminated industrial plastics that contained items like chicken parts.

“It’s a hedge,” Brooks said. “It will be a cost advantage to produce products more competitively and insulate ourselves from the wide swings in oil and oil derivatives.”

Appreciation Opportunity

Eric Prouty of Boston-based Canaccord Adams has been with the financial services firm since 2001 and has followed the sustainability industry since the late 1990s.

Prouty is well versed on AERT and agreed with Brooks’ assertion that the company is undervalued with the full disclosure that Canaccord Adams received compensation during the past 12 months from AERT for investment banking services.

He said AERT’s recent moves are the right ones.

“We think it is taking the right steps in the downturn [of the market],” Prouty said. “The stock has an opportunity for good appreciation once the end-user markets start improving. But like anything that has exposure, it is not without risk if downturn lasts longer than expected.”

Prouty said the economic advantages of recycling plastic are obvious, and Birkhill’s McCarthy said AERT even has the opportunity to sell its excess materials on the world market.

AERT will be able to secure its materials at the Watts plant for around 25 to 30 cents a pound, McCarthy said, compared to the $1 per pound going rate in the world market.

Even without the China and Watts deals factored in, McCarthy thinks AERT, which has a current market capitalization of $45.4 million and 47.7 million shares outstanding, should be trading for more than twice its current price.

“The company has $100 million in revenue and this stock should be trading at 1.3 to 1.4 times revenue,” McCarthy said. “It’s not a commodity company. They have pricing power.

“A $130 million market cap and 60 million shares outstanding would be a $2.10 stock price without giving any upside value to China or Watts.

“The goal is realistic if two things happen: normalization of housing market and being properly positioned as a technology company.”

For Brooks, it is crucial AERT sets itself apart in the industry and he said there is a lot of “greenwashing” going on with companies making shaky claims of being environmentally friendly.

“We’re looking for an interesting and active year,” Brooks said. “We’ve got a lot of balls in the air and a lot of opportunities.”