For Frederic Scheer, the Italian debt crisis has moved from the headlines to the bottom line.
Scheer is chief executive at Cereplast, a publicly traded company in El Segundo that makes eco-friendly plastic for use in shopping and trash bags. Nearly half the company’s sales are to Italy, where a new law in January banned petroleum-based plastic bags.
When the Greek debt crisis erupted over the summer, Scheer noticed that his customers in Spain, Germany and elsewhere in Europe stopped paying their bills. His customers told him they needed to conserve cash amid the continent’s economic uncertainty.
The problem grew as the credit crisis hit Italy, the company’s biggest market. Last week in conjunction with its quarterly report, Cereplast announced that about half of its invoices, totaling more than $10 million, are 150 days or more past due.
“We knew about Greece, but nobody expected the problem would bleed over to Italy so fast,” Scheer told the Business Journal last week.
To ride out the crisis, Cereplast announced a private placement of stocks and warrants to raise $5 million. Investors quickly showed their disapproval for the dilution of their holdings, driving the stock down sharply. Cereplast ranked as the biggest loser on the LABJ Stock Index last week, down 42 percent.
Scheer understands investors’ displeasure; he owns 15 percent of the company’s stock.
“The person who is most upset about this is the largest shareholder in the company, and that’s me,” he said. “And I’m telling you, I’m very upset.”
Despite that, Scheer decided on the private placement to give the company a financial cushion after advisers at New York-based Lazard Ltd. told him it was the best option.
Eric Bunker, a broker at Raymond James in Petaluma whose clients own holdings in Cereplast, said cash-flow problems are typical of small fast-growth firms like Cereplast. He believes the company will sort out its credit problems and the share price will recover.
“The placement is what trashed the stock,” Bunker said. “If Lazard was involved, they probably looked at it from all angles. For Lazard’s clients, it’s a great deal because you can’t look at a green company like this and not think it will do well eventually.”
In the private placement, five investment funds paid $1.60 for one unit, which equals one share and one warrant for three-quarters of a share of Cereplast. At the time of the announcement Nov. 11, the stock traded for $1.98 per share, giving the funds a deep discount. The deal was completed five days later Nov. 16.
While the placement was in progress, Cereplast announced its quarterly results Nov. 14. The company reported a net loss of $3.6 million, compared with a loss of $2.2 million in the same quarter last year. The company said it expects to report 2011 revenue between $25 million and $28 million, about four times last year’s revenue of $6.3 million.
“The fundamentals of the company have not changed,” Scheer said. “I’m confident we will resolve the receivables issue shortly and get back again to our growth strategy.”
In a Eurozone Forecast last month, London-based accounting firm Ernst & Young reported that companies in Europe faced a tightening credit market. As a result, the firm predicted a 35 percent chance of a continentwide recession.
“Perplexity and risk aversion will be the most powerful reactions in many boardrooms to the economic outlook,” the report states. “If financial turbulence worsens and corporate financing becomes even more difficult, those that have maintained strong cash reserves may enjoy an important advantage.”
The desire for those strong cash reserves, as Scheer’s clients told him, drives their decisions to withhold payment. Hence, Cereplast’s decision to raise $5 million in fresh capital from equity was the best option available, he said.
Italian plant
Cereplast was founded in 2001 as BioCorp North America. Its original plastics plant was in Hawthorne. In March 2010, the company moved its production facility to Seymour, Ind., where costs are lower, and its headquarters to El Segundo.
In May, the company announced plans to buy an idle chemical plant in the Italian city of Assisi and refit it to produce bio-plastics. The new plant would more than double the company’s output, and it hopes the factory will be open by the end of next year.
The Ernst & Young forecast warned that in the midst of the financial crisis, European governments may cut back incentives for renewable materials. But Scheer said that Cereplast’s arrangement to open the Assisi factory remains in place – for now.
“We are monitoring very closely the political and economic changes in Italy and will react accordingly,” he said last week during the conference call.
