Art's Way Manufacturing Co Inc (ARTW) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen. Today is Wednesday, October 8, 2008 and welcome to the Arts Way Manufacturing Company Incorporated 2008 third quarter and nine months financial results conference call. At this time, all participants are in a listen only mode. (Operator Instructions). Your call leaders for today's call are Jim Drewitz, Investor and Press Relations Representative and J. Ward McConnell, Jr. Executive Chairman of the Board of Directors. I would now like to turn the call over to Jim Drewitz. Mr. Drewitz, you may begin.

Thank you very much. Good morning everyone. It is my privilege to read the forward looking statement and I will get right to that. Except for historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk and uncertainties which may cause Arts Way Manufacturing actual results in future periods to differ materially from forecasted results.

Those risks include others -- other things, the loss of marketshare through competition or otherwise; the introduction of competing technologies by other companies; new governmental safety, health and environmental regulations which could require Arts Way Manufacturing to make significant capital expenditures. The forward-looking statement included in this conference call are only made as of the date of this call and Arts Way manufacturing undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Important factors that could cause actual results to differ materially from the expectations reflecting the forward-looking statements include but are not limited to factors described under the caption Certain Risks in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission.

And with that, I would like to turn the call over to Mr. Ward McConnell. Ward, it is all yours, sir.

Good morning. Thank you all for being on. I am here to try to explain to you what has occurred during the quarter and to tell you somewhat about what I expect to happen after this quarter. You have seen the results, I think. Our sales were rather significantly up and in every area except the pressure vessel division. And as you saw, our earnings year-to-date are only up slightly but they are up.

First, I would like tell you why the earnings were not up more on the increased sales. We had a situation where we had a very difficult time starting up the Miller Pro line which we bought in September '07. We took orders in the fall of '07 for delivery in the winter and spring months, which is very typical in this industry, and give our dealers terms in (inaudible) which they would normally be sold.

With the best plans we had, we intended to start making most of these Miller Pro products in January and February and we did start them and it went very, very slowly. We were having computer problems with -- we thought when we bought it, our due diligence said the computer data would come across to our system from the system (inaudible) at Miller and it didn't. It took us time to integrate that and we had to buy some more software to do it.

But, it just did not get going. It wanted to argue I guess. But it was very difficult to get it started. The result was that we were unable to deliver the orders we had on hand in a timely manner, and it being very seasonal we actually missed a considerable portion of the season.

We still have about $1 million worth of products we have to deliver which will be on 2007 pricing, which we don't like very well but we felt it was necessary to do. We had the orders on hand and we felt to keep our dealers happy and going that we would have to do that. Nobody has canceled those orders. The price increases are so much that they are happy to get them at these prices.

But, fortunately, the marketplace was having problems from all of the other vendors of the same type of equipment and their deliveries were not very good either. Not as severe as ours, but for example, we missed entirely on hay rigs. We missed entirely on a product called mergers. The seasons were all over by the time we were ready to deliver them.

We do feel like we have solved those problems and we have been able to get the production up higher briefly to -- more or less as a test. But we were making, for example, some of the products of three a day and annualized use would be about 1.5 a day and trying to catch up. But it happened so late into the year that it did not really too much.

We did concentrate very hard with the dealers to be sure that we delivered to them the orders which they had sold to their customers, which in many cases they took trade ins and so on, and we really made a strong effort and put those to the front of the line and did deliver those so that we know of no retail orders that our dealers lost.

But, in the process, we had a very, very difficult costing situation. We threw people at it trying to get the product out. Our efficiencies dropped significantly during the third quarter as that process was going on and it just did not come out well.

So, while I think we satisfied our customers we did not satisfy our bottom-line very much. But we now cut the thing back. We have had a layoff of people because they were inexperienced and did not know much about our product line or how to do it. We cut back.

We are now working on the efficiency and we're going to be delivering these orders on out into January that we have on hand, but at a more realistic level like 1.5 pieces per day. And we will be delivering them right away as they come off. But as we look forward, our efficiency level I think is now where it belongs. We cut back almost immediately as the use of these wore down and tried to get into the area where we would be efficient.

The other thing that we have had a problem with is our vessels division. If you have seen the 10-Q it has been operating at a loss. Actually we weren't even operating because we were put out on the street by our landlord and we built a new building and we moved into it through the spring months and we just -- we struggled.

But on August 1 we hired a real professional to run that division and we're extremely pleased with the results so far. He has the thing running and he has been shipping product in the month of September. He did pretty well. And it is escalating. And his quotations level has really escalated. In very recent days he has quoted $1 million worth of business and I'm very optimistic about the possibility of receiving those orders.

To a lesser degree, we have had some steel increases but these have not hurt us so bad. We bought a lot of steel early in the year. But it has caused us, too, to have a lot of inventory. The ordering of steel and product was done on the basis of the orders we had on hand, not on the basis of what we were shipping out. So we're sitting with a lot of inventory now which now is being depleted. So our inventory I intend to see our inventory go down rather dramatically over the next few months up until the first of the year. But, there was some price increases in there that we were able to grab because of our late deliveries.

I might add that we were having some problems with the product. We replaced our production manager at the plant in Armstrong. We brought in a professional there. I could also add that both of these people cost us a lot more money what we have been used to paying in Armstrong, Iowa. But they are professional managers and we're doing a real effort to try to upgrade our professionalism and our confidence and I think we are getting there.

We have youthful people. We have some experienced people mixed in and I think that we are going to -- these problems we just witnessed this past quarter we are dealing with and I think are getting behind us.

With that, I guess I can answer some questions.

(Operator Instructions) [Joe Dancy].

Interesting quarter. Can you talk to me about the backlog? I saw your backlog is up to $17 million from $12.5 million one year ago. What sector of the company is that backlog in and how long do you think it is going to take you to work that through? And just any other comments on your backlog I would be interested in hearing.

Thank you Joe. The backlog is still up because of these items which we have not delivered of the Miller Pro line and which will stretch on into January.

The backlog also at Scientific is up dramatically. We doing very -- we are getting orders in down there. We are -- that division is doing very well, as you can see in the numbers. So, the backlog down there is somewhere $7 million of it or so.

And the other is in the ag equipment. Very little of it at this point is in vessels but it is growing. It started to grow already. Ag equipment, I don't think we see much change in it. The commodity prices are down but we think that when the commodity prices are down, the people will use our grinder mixers and our equipment will perk up and probably do more in it.

The animal prices, the livestock and the hogs are coming back up again. I think we will sell more grinders with -- no matter what happens for next year and export continues to look pretty good. So I really think the backlog is solid if not tainted by what the pricing of it is going to be in order to deliver some of it at the older pricing. But we have increased our prices all throughout the year, except on that which we have sold in the winter -- back in the winter a year ago.

So, we also sell of our beet harvesters in January and close out the ordering of those by the end of February. So we are got hit a little bit there on steel prices but not significantly.

We did have one major hit on backlog and that was we had an order for 10 harvesters to go to China. Nine of them got canceled. That is contributing somewhat to our inventory too. But we did have deposits on those which got forfeited. But I do think we have a solid backlog, Joe.

Just asking sort of following up there, (inaudible) before you've talked about some of the demand and you were starting to see some overseas interest in some of your equipment. And I assume now with everything that is gone on in the last -- seems like a few weeks, but last few months with the economies in credit crunch and everything. Are you still getting some interest with regard to your equipment from non US sources?

Yes. I just got back from England a couple of weeks ago attending farm shows there. Of course, I really don't know what the effect of the euro and the pound is going to be, as we've seen it in the last week two or three. But I have instructed our importer over there to keep his pricing up before, because these things do fluctuate and he has done that. So I don't think we are going to run into particular sticker shock in our export.

We have been going to shows over in England a lot. I just presented a plaque to our English importer for being the biggest importer this year or in 2007 for Arts Way. We went to a show in Hanover, Germany last year. We're going to another one in November. And those shows have resulted in orders from France, container load orders, and orders from Belarus. We have an order for a container up in Finland.

That is just I think the beginning of what we can do over there. But I think in England in particular we have gotten established so that unless the euro, or [in any] case the pound, goes really bad I think we will continue to do very well in that market. I don't know what to tell you about China.

I guess last question, with all of the credit issues that are out there and the impact on financing, I know whenever you are selling to third parties, have you seen any impact on the credit freeze up on either your customers, your sales? For Arts Way, are you having issues with any lines of credit our cash flow or financing or anything? Can you give us a flavor has this impacted you at all in any way?

Not that I can see. Of course sitting here watching this, seeing what's going on, it is awfully hard to know. But we have had no problems whatsoever. I don't see any. God knows we're -- our bank is a small bank in Des Moines, Iowa. They have been very, very good to us and very, very -- you know we did lower our interest rate on our long-term money this summer. And we took fixed rate and I think we are sitting pretty good with that. But, no, not at all, Joe. It could change any minute I guess.

You don't do any financing for any of your sales? Pretty much when they buy your equipment the financing is done elsewhere. It is not through any connection with Arts Way, is that [true]? (multiple speakers)

Not altogether. We sell the paper the moment we ship it to GE Capital or to give these longer terms. And we do have recourse on that, but we never had -- never say never, almost never had anything -- I think we've had one piece of -- $20,000 worth of equipment in the past two or three years that has ever defaulted on it.

Okay. Anyway, that's it today, Ward. It sounds like you have the plan in motion and going forward and it will be interesting to see how we do. I guess -- let me ask just more question with regard to seasonality now.

Generally, going forward, as you say this is not the season to sell ag equipment, the next couple of quarters, although it looks like we're still going to be selling ag equipment because of the backlog. Is your seasonality going to be impacted with some of your Miller Pro line continued manufacturing?

No, we take the seasonality out by giving the terms. They use the products the Miller Pro products they use in June, July. We ship it -- they will order and we can ship in January, December, but we have to put it on the floor plan. Well, GE handles that floor plan.

We do have some products that are not -- that offset that. Of course Scientific will offset that. That is a more even flow. But also our grinder mixer line, which is the biggest product we have, we sell more dollars in grinder mixers than any other product, [has an] increase these months in the fall. November and December are the best two months of the year for grinder mixers. It also, coincidentally, is our highest gross margin product. So, we have a pretty good offset there.

[James Roberts, Height Key].

Thanks for the nice conference call here, but I missed about the first three or four minutes and I wish you would comment on what happened that was somewhat of a nonrecurring nature that caused earnings to come in a little less than we expected on the revenue increase?

Yes, I certainly will. We have been through it, but we bought a product line called Miller Pro in September last year. When it first came in, we had problems with the computer software. It was supposed to convert to ours. Our due diligence said it would, but when it came in it didn't.

Then we had all sorts of problems getting it cranked up. We had learning curves. The people who were putting them together did not understand. Even though we had some people -- in our purchase we had some help coming from the people we bought it from, it still drug its feet very severely and we became very late in our deliveries.

But we threw a lot of money at it trying to cure it because the stuff is seasonal. So we hired extra people and pushed to get it out for the seasons and we did not get it done. We got to ship some of it, of course. But we did not ship anywhere near our orders.

So our efficiency on the Miller Pro threw us into a tizzy during the summer. And we worked -- we wanted to our dealers happy and we wanted to keep our dealers with us, and we did work like the dickens to cover the orders which the dealers had sold, the retailers that our dealers had sold. But we did not get all of the orders filled and we decided to keep the orders and give them the same price they had and extend the terms to '09. And in doing so, we have gone back and tried to do these assemblies and so on in a very efficient manner and get them within standard cost, which we are doing now.

For example, we have the production backwards from three units to 1.5. But the three units have about seven or eight less people on the assembly line than we have before. So, and they are getting them down to the standard hours rather than five times (inaudible) hours. The learning curve, start up problem that really hurt us through the summer and hurt our efficiency levels.

Okay. I appreciate you going over that again. Do you see Arts Way in any way benefiting from the ethanol production or do you see that as not relevant?

Which production?

Ethanol. Growing corn for ethanol.

I don't know. That is kind of in flux.

I know.

It helped us -- and during the period it [was on] but you know commodity prices have gone down. We do see it helping us some because we think the people who use our grinder mixers, our biggest product line, will be grinding more feet and making more money than they were before with the commodity prices down. I think that is going to help us with our grinder mixer during the twelve months.

But, and the other thing is of course is the ethanol -- the money -- the farmer doesn't care where the money comes from when he wants to buy a piece of product. He buys it. It may come from ethanol, but it may come from somewhere else. It doesn't matter. It all rubs off on us.

Okay, you have answered my question and thanks again for the good conference call.

Eric Duncan, Moloney Securities.

Good morning. I had a couple of questions. You had been mentioning that you have made some changes in staff and you hired some people you have a higher degree of confidence in. Do you see further staff changes? Do you still feel that Arts Way needs to make additional changes in that or where are you in that process relative to what you feel your needs are?

Secondarily, you talked a lot about the Miller Pro being the big issue for the quarter. I just wanted to clarify, are you done integrating this? Is the computer problem solved? Are you still working on that? Where are you as far as feeling as though that is a fully integrated aspect of Arts Way now? Those are my two questions.

I think we are sufficiently staffed. I like the age of our people. Our President is 33 years old. And she has now a year under her belt. The other people are little older that we recently put on, like the manager of vessels, but a man who has been in the business a longtime and very, very familiar with it and in the same business as vessels and very professional.

And then in our operation in Armstrong where we had so much trouble getting this product line, the Miller Pro product line running this year, we have replaced with a real professional in the manufacturing area, a man with several years experience. And I spent all of last week with him and I am extremely optimistic about what that is going to do for us. He understands what I'm talking about.

And I -- we are reasonably I think -- I guess more than reasonably situated. We have youth in place. We have our slots all filled.

Okay, good. And as far as the integration of Miller, obviously those computer problems were expected and caused a lot of issues. Do you feel those are resolved?

Yes. We now cycled through each one of the products with Miller. The hay rigs -- we just this month or in September got it going. We missed the entire season on that product when we lost new orders.

The forage box, which is a bigger product line, we have learned how to make them. We learned how to judge the speed to make them and put them on a continuous line basis. I feel like it is behind us. I know we can make three. We have proven that. But we're going to make 1.5 which just about fits the annual production.

What do you see as your biggest challenge going forward?

Uncertainties of the marketplace I guess.

Okay. But internally, as far as Arts Way, what do you need to do better?

Well, right now we're trying to get this efficiency thing down. We want to get down within our standard cost, which is -- we have not been there. We haven't been there ever. But we're going to be a lot closer with the new management we have.

(multiple speakers) Do you have (multiple speakers) what type of margin we could expect for the next quarter or the next couple of quarters?

I think -- I expect this quarter to go back to where we have been.

So a return to a historical (multiple speakers)?

Yes.

Thank you very much for your time and best of luck with your efforts.

[Roscoe Dean], a private investor.

Mr. McConnell. Thanks so much for all the information. Quick follow-up on -- you mentioned the beet harvesters that had been destined for China. I am curious, do you know what part of China geographically or port of entry those harvesters -- although I guess one did go -- where they were going in China?

I don't.

Okay. If I were to contact you, would you be able to clue me in a little bit on that?

We can find out what port it went -- yes, we have an export manager (multiple speakers) who would give you the answer to those. I don't know.

Thanks so much. I would appreciate it.

(technical difficulty) a private investor.

This is [Eugene Greenstead] (inaudible). My question is to what level are you applying what might be called Toyota practices or lean manufacturing type ideas in your manufacturing?

Lean manufacturing, we have some grants from the state of Iowa. The most recent one was around $60,000 to teach in lean. We have had a couple in the past that did not seem to gel, did not seem to provide us much help. But if the management does not buy into it, it doesn't go very far. This time we have a manager who is all over lean and who I feel like will be able to get it implemented and is working on it and can teach it.

It is -- we have a lot of areas that we can help with it. It is a fairly old factory. It needs in some cases some floor plan rearrangement. It needs material handling teachings and those are in process right now. I believe they are going to -- with the man we have hired to run the place, run the production, he is into it too. So I'm very optimistic it will go forward and get our efficiencies much, much better.

I think the key issue in making lean happen is building an atmosphere of trust between management and the employees. No one is willing to volunteer how to improve things if they feel their job's on the line. And if mistakes aren't -- people can't raise their hand and say this is messed up, it feels they are going to get one of these who-shot-John type of lectures.

So I think the key issue if you're going to make lean happen, you're absolutely right; it is tied to the guy who is implementing it. It's establishing a level of trust in the organization that this is something for the good of all of us.

I agree with you and in our case it has been kind of difficult because the Company is 52 years old, and we have some people who have been there for 25 or 30 years. And they are the ones that wanted to do it the same old, same old. And so -- but if you don't get buy-in at the top, it doesn't go very far.

I'm teaching courses in it, so -- I used to work for a living before I retired, but anyway. Okay, good luck on it and I guess the key is it is all about management. It is all about people. If you can solve that problem, you can make lean happen. Thank you.

Thank you.

(Operator Instructions). Mr. McConnell, at this time there appears to be no further questions.

Well, I appreciate everyone's time to talk to me about it and I hope that I have passed on some information that is helpful to you. The market is kind of not being very kind to us, but I guess I'd remind you lastly, we did make a little more money than we did last year in spite of our problems. And I think we're fully on top of them. I appreciate your time. Thank you.

Thank you. This concludes today's conference call.