Art's Way Manufacturing Co Inc (ARTW) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Today is Wednesday, March 4, 2009, and welcome to the Arts Way Manufacturing Company Inc. fiscal year 2008 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 Release representative; J. Ward McConnell Jr., Executive Chairman of the Board of Directors.

I would now turn this call over to Mr. Jim Drewitz. You may begin. Mr. Drewitz, you may begin.

Thank you very much and good morning, ladies and gentlemen, and I apologize for the inconvenience of rescheduling the call. We had some technical difficulties but they have been corrected hopefully, thankfully, and with that, I would like to draw your attention to the fact that except for historical information contained herein, the statements in this conference calls 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 results in future periods to differ materially from forecast results.

Those risks include among other things loss of market share through competition or otherwise, the introduction of competing technologies by other companies, new governmental health, safety, and environmental regulations which could require Arts Way Manufacturing to make significant Capital Expenditures. The forward-looking statements included in think 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 reflected in the forward-looking statements include but are not limited to factors described under the caption, Risk Factors in the Company's annual report on Form 10-K, filed with the Securities and Exchange Commission. And again, I apologize for the reschedule but here is Mr. McConnell, the floor is all yours, sir.

Thank you. I'd like to start off by saying that we too are sorry about the confusion about the conference call and I'd like to tell you about 2008.

It wasn't a stellar year for us but we had so many many challenges that most of all with computer inauguration of the Miller Pro Line we bought in September of '07 and came on board in '08. We started out by having a difficulty with the software not converting from Miller to our own and we moved forward to doing a lot of outsourcing, we hired a lot of extra people to try to deliver, we were attempting very strongly to maintain our dealerships and not lose them from lack of delivery of product and the overall result of that caused us to lose a lot of labor efficiency, but we also during the year had the vessels, we had to move out of our facility in October of '07 and so we didn't get going again until virtually the last quarter of '08 and it's escalating quite nicely now by the way. It's going up every month. Sales are increasing and our shipments are increasing.

But in the year last year, we spent somewhere in the vicinity of $1 million in outsourcing trying to satisfy the delivery schedules. We hired 50 extra people over the course of the year. We made production schedules that we thought we were able to keep but were not able to keep so our inventory bloated. We had a lot of overtime, about $300,000 of overtime which is a lot for us, and going forward, we've stopped virtually all of the things I just mentioned, we no longer have anything being outsourced. We have 50 less people than we had last Summer. We have no overtime whatsoever going on, and we're busily working off that excess inventory that was caused by broken production schedules.

We have had some pricing problems because we held the prices as we thought we should in order to retain the dealerships. We are still shipping some of that off as we speak, and it's at pricing that would be '08 pricing instead of '09 pricing although that is nearly finished and our production schedules are running according to the way we designed them and so going forward, I think we look a lot better. Our backlog is still about the same as it was a year ago, and really it's in better shape because of the fact that we have shipped off the old stuff throughout this Winter and late Fall.

All of our products are seasonal. Virtually all of them, and so when we miss a season as we did with some of our product last year, we're off until another year in order to get it filled up again, and so we are shipping according to schedules now. So with that, I would take some questions.

(Operator Instructions) Our first question comes from [Joe Dempsey] from LSGI Advisors. Please state your question.

Hi Ward. I was just curious, can you give us some just color or flavor on Arts Way Scientific as far as I know in the past you've talked a little bit about the backlog and I think you described it as a funnel of potential business that it sort of all funneled in at the top and takes six months or a year and sometimes two years to finally get an order out of that and a lot of that business is government business. Can you just give us a flavor as what that sector of the business looks like?

Well currently, Joe, our backlog is 3.5 million there of the 15. The government has allocated in the budget and the stimulus package money for lavatories, and the activity in the past few weeks has been phenomenal. We've had an awful lot of activity because some of these projects were started and work funded. Many of them would have been in our funnel anyway. We have a pretty good funnel system that brings those out, so optimistically I think it looks pretty good going forward. I think there's more activity than there's been in a couple of years actually.

You mentioned just current activity in the budget and I didn't even really think about that. Is this part of the situation where they have to have shovel ready projects or am I confusing things?

Well, I don't know. These projects that we have in this funnel, there's many millions of dollars worth of them and they linger until they get funded and so we're a couple years out in the funnel all the time. And some of them gel and some don't. Most of them do eventually gel. Some of them take four or five years. I know we have a project in Wake Forest University. That's been on our docket we thought for a couple years but it hasn't dropped off the edge but it's active again, more active. There's a stimulation going on for the lavatories because of the government.

Let me move over to your agricultural line and I'm just curious what the business environment, I know the corn futures and wheat futures, God after last year have come back but they stabilized and I don't know, you may not have a feel for what the outlook looks like or for agricultural machinery and in that sector now. I mean I don't know if they are in a recession like the automakers and can't move anything out of their show rooms or whether the farming community is buying machinery or not. Do you have any flavor, I'd like to hear your feedback as to what that sector looks like?

Well, from here, our backlog on ag equipment is a $1 million higher than it was a year ago at the same time. I keep thinking that it's going to slowdown. John Deere of course has been announcing some real cutbacks, but we really don't see it here. The one caveat was that we make this salvage bar and we make it for Case and we make it for ourselves. We make it for ourselves since we bought the Miller Pro. Last year and we basically make all of those that are made in America, so what happened last year was everybody ran out. Case ran out. We ran out. Everybody ran out of these and I think what you're calling an overreactionary period, we have orders for some $1.5 million more than we had last year for that particular product, so how that plays in and we're building those right now and we'll be invoicing those over the next couple months. Our beet harvesting thing looks like it's going to be down a little bit. Our export is surprising us. Right now, we have we think we are going to close 9 or 10 export grinder/mixers this month. From our perspective here, it looks pretty good. It may collapse but I don't know. It looks pretty good at the moment.

You were working on the export sector of that market I think for the last couple years if I'm not mistaking. Are you still working to expand that or is it still on hold?

Well, yes. We're trying to expand it. We attended a show again in Germany in November but it's not nearly as fruitful out there as it was with the exchange rate.

Exactly.

But still, it surprises me, we just yesterday explored what we thought we would do this month exporting and nine of those machines is just really to me quite surprising with a bigger month than we've had and they aren't closed yet but our export man says they will close them by the end of the month, so I don't know. I think surprisingly good in the ag side.

Okay, I understand. Is there any real weak area that concerns you here for the next six months or a year? Looking forward Ward with this economy and everything else, it's awful difficult to look forward but I know your vessels have been really weak. Are you getting that sector turned around?

Yes, we are. The last couple months we've seen real signs of life. We've finally gotten some of our own problems solved down there which was involved shot peening and cleaning prep prior to paint. We had been having to get the paint done outside. We now have our own paint booth in operation. These things have given the sales side of vessels impetus to get out and get some orders and they've done that. Our quotations have gone up just dramatically in the past two or three months. We quoted last week $300,000 plus worth of that which is a lot. That's a lot more, I mean a year ago we were quoting zero.

Yes. That's true. Okay, I was just curious. Looking at the Company, I know and I think you've mentioned in the past and the reason I'm interested in the Company is your attempting grow the firm both by acquisitions and organically, and even in this economy, is it still true that with the components you have, you think you can grow maybe not this year, next 12 months but over the next three or four years grow the Company substantially from a revenue standpoint and an earnings standpoint?

Well, I certainly do, I always do though. I guess I would be a little guarded there too, but organically, we're going to grow this year I think. We want our finances to catch up a little better, but and to get our inventories better in line and that's more of our target for this year, to get rid of the overtime, we spent 300,000 and we don't intend to spend any this year to get rid of $1 million of outsourcing which we don't intend to do this year, to deliver on time and deliver this backlog out I think is pretty good. If we can accomplish that, I always got a left eye open for something that will match in here and help us grow this Company.

But position wise for all of the segments you have and all of the components you're pretty pleased with how things look; is that correct?

Yes, I am. I think last years results were, actually last year was our second best year, excuse me, 2008 was our second best year. '07 was a banner year for Arts Way, profit wise. And this year, we grew our sales a lot. We grew the sale by what is it, 25%? That's a pretty significant sales growth but we had so many excess costs involved in there that we raised now with the gross margins, so with efficiencies and so on. I believe we have those solved and that's been a work in process. It takes a while to solve those problems. We had a very difficult time integrating Miller Pro into our system here, but it's done, we're making them on a schedule that fits now. We will fill all of the orders. I think, but I do think the acquisition right now until we cure this inventory problem and get our cash in better position is going to be delayed. You do know that we opened a small operation in Salem, South Dakota, to make augers.

Yes, I wasn't going to ask about that but now that you bring it up, can you tell me a little bit more about exactly the sector you're after and I actually had to look up and find out what an auger was, Ward. I had no clue. Can you tell us what it is and what the market is for that?

Every grain farm has got them. It moves grain from A to B. It moves them from the trucks to the storage bins. It moves them from the harvester to the truck. They are used everywhere.

Okay.

The reason we did it, and the way we did it and when we did it was because it was a Company over there who had been doing 12 million to $14 million a year in augers and they filed bankruptcy and there was a lot of employees over there that knew how to make these things so we rented a building quickly and moved in and started taking orders. Well, we currently have something around $1 million worth of back orders over there right now, so and it's only a small operation, I think we have four employees, five employees. And we'll be starting our shipments on May 15, May 20, actually is the date we've chosen to start delivering these products, and I went over there yesterday and had a visit and it's moving along quite nicely. The Company that went into bankruptcy is still, I mean, it's still in the court so we're still in a rented building. We may do something about that I don't know but at this point in time, I'm awfully pleased with the sales level so far and two weeks ago in Louisville, Kentucky at the major farm show we have a sales meeting and we gave it to our 16 salesmen to sell throughout the country, so we hadn't given it to our salespeople yet. We had gotten the $1 million worth of orders in osmosis, so that looks good. I don't know how, I don't know the future of the auger business but I know there's an awful lot of them sold, and they are higher dollar volume, they are higher dollar per unit than I had expected. They are somewhere 7,000, $8,000 each.

Interesting. Interesting niche. All right, well thank you for the conference call and the information and best of luck here going forward.

Thank you, Joe.

(Operator Instructions) Our next question comes from [Allen Caplan], a Private Investor. Please state your question.

Hi, I'm just a little bit confused in that you're saying your backlog is the same as last year, but you've started up several new lines. So that would suggest that your backlog for your products you had last year has gone down, is that correct or are you talking about organic growth in backlog?

Well, the only new product we've started is this thing, Arts Way Auger is the $1 million backlog in that.

Oh, when you took over Miller Pro, that wasn't new products?

Yes, they were totally new products to us.

Right and didn't you take them over in 2008 or I had the year wrong?

We actually closed the deal in September of '07.

Okay, I'm sorry. Okay.

And so we scheduled to build the products through the year and that's where we failed, we didn't get our products built. They are all seasonal and they didn't get built in time for the season, so fortunately we didn't lose any orders because we defer the delivery to 2009. I don't think the backlog is significantly different from the older products.

All right, you've answered my question, thank you.

Our next question comes from [Don DeMao] from New Bridge Securities.

Hello Ward how are you?

Fine, thank you.

You talked about the labs business and you talked about the fact that, I know the government has been talking about these labs. Has there been any interest from the government to you or anything you could talk about?

Not from the Federal Government. Most of these are universities.

Okay.

Significant increase in activity in recent months, significant. Much much more, we're chasing them like crazy right now, and we think that, we do think we'll get quite a lot of business out of them but they closed so slowly, they basically take two years to close, but some of them, a lot of them have been in process for two years and now are going to have some funding. So I think that looks extremely good to us. So far we haven't got the result of what I just said but I think it's not very far in the forward.

Okay, thank you Ward.

(Operator Instructions) Gentlemen, at this time I have no further questions.

Ward do you want to close it off?

Well, I think everybody that comes on, I try to tell the story as best I know it at this time. I hope I'm getting better at it. So I'm getting more seasoned. So I appreciate you for calling in and I appreciate you listening to my story.

Thank you all. Have a great day.

This concludes today's conference call. Thank you for attending.