Art's Way Manufacturing Co Inc (ARTW) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Today is Wednesday, April 15, 2009, and welcome to the Art's Way Manufacturing Company Inc. (technical difficulty) conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) (Technical difficulty)

I'm having a problem.

I'm having a problem, as well. Erica? Erica? Mercy. (Technical difficulty)

Good morning, ladies and gentlemen. Today is Wednesday, April 15, 2009, and welcome to the Art's Way Manufacturing Company, Incorporated first-quarter 2009 financial results conference call. At this time, all participants are in a listen-only mode. Operator assistance is available at any time during this conference by pressing star zero.

Your call leaders for today's calls 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 Mr. Jim Drewitz. Mr. Drewitz, you may begin.

One moment, ladies and gentlemen. We are trying to reach Mr. Drewitz.

Hello? Anybody home?

One moment, ladies and gentlemen. We're trying to reach Mr. Drewitz.

Hello, Erica?

Sir?

Yes, this is Jim Drewitz. We lost you completely.

I am not sure how that happened to be honest, but we are live on the call (multiple speakers).

Is Ward speaking?

Yes, I'm here.

Have we started at all, Erica?

No, we have not, sir.

All right. Let's crank it up again and apologize to everyone for your technical difficulties.

I am sorry, everybody, for that. Would you just like (technical difficulty)? Gentlemen?

Yes, Erica, we lost you again. We never did hear your explanation.

I am not sure what the problem is, to be honest. I'm just letting you know that everybody can hear us right now.

Okay. All right. Well, then, go ahead and introduce me and let's proceed.

Good morning, ladies and gentlemen. Welcome to today is (technical difficulty) to the Art's Way Manufacturing Company Inc. first-quarter 2009 financial results conference call. At this time, all participants are in a listen-only mode. Operator assistance is available any time during this conference by pressing star zero. Your call leaders for today's call are Jim Drewitz, (technical difficulty). Mr. Drewitz, you may begin.

Thank you, Erica. Ladies and gentlemen, we apologize for the inconvenience. We seem to have a little bit of a difficulty. Hopefully you can hear me, and we will be able to hear Ward when he begins [to speak].

If I can, let me draw your attention to the fact 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 risks and uncertainties which may cause Art's Way Manufacturing actual results and future periods to differ materially from forecasted results.

Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; new governmental safety, health and environmental regulations which could require Art's Way Manufacturing to make significant capital expenditures.

The forward-looking statements included in this conference call are only made as the date of this call, and Art's 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 Risk Factors in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission.

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

Okay, thank you, Jim. Hopefully by now most of you have had a chance to review the press release we issued on April 13 and read the Form 10-Q filing issued on the same date. I would like to go over some of the pertinent financial information and then open it up for questions.

First of all, the first quarter I'm not very proud of, but the revenue was about the same as it was in the prior year in the same first three months of the year. But the operating income was rather significantly lower.

The basic reason for that is because we had a number of orders a year ago now that we received for our Miller Pro product line that we had just purchased in September of the prior, in '07, and the production difficulties we had in getting that integrated into our system and into our manufacturing caused us to have a lot of manufacturing problems.

In addition, we had scheduled as though we were able to produce it at a faster rate, which we weren't able to do, and this also resulted in us having a ballooned inventory. That particular problem caused us to go to the dealers and say, okay, dealers, we can't get to you on time, but we will deliver to you after the seasons are over, which are the harvest season in the fall. And we will hold the price on these products to the price we took these orders for. In addition to that, we will have to give you -- we would not have to give you -- but we will give you terms until the following season.

All the Miller Pro equipment is seasonal. It is harvest time, harvest for hey, it is harvest for corn and so on. So we ended up with those delays in delivering in this first quarter that we are talking about now at old pricing. Some of it was as old as '07. We've since had a couple price increases, and we have that issue behind us. And we've since delivered that material. We finished delivering it mostly in the first quarter.

But as you can imagine, our gross margins were squeezed badly, but we thought it was better to retain dealerships in the long term than it was to try to raise prices on them.

That is the biggest reason for the drop-off in gross margin, which our other expenses stayed relatively constant. So we ended up with kind of quite a huge drop in earnings.

Going forward, with that behind us, and we now have pricing in place. We also have our efficiencies much improved and are able to deliver within the proper time periods for this season and at proper pricing.

I am going to just review each one of our four divisions. I call them divisions, but they are the four different locations. First of all, I'd like to talk about our newest one, the Auger division over in Salem, South Dakota. We have cranked that up, and we have made our first product there, and we are going to be starting our deliveries in May. We have a significant backlog for a startup, I think. We have about a $1.5 million backlog there now. And we have completed the first products. We haven't shipped them yet, but we have completed them. So we are actually a couple weeks ahead of where we thought we would be at this time of year.

Our Vessels division in Dubuque, Iowa, continues to increase its volume. Its backlog is now $268,000, versus a year ago it was $83,000. We are increasing about 30% a month, and -- so far this year, and each month has been better than the prior, including March and now into April. We assume we will back on track there, I believe.

The Scientific division in Monona, Iowa is changed dramatically with the current stimulus packages and the budget. The federal government budgets have allocated a lot of money for science. And we are seeing a tremendous increase in inquiry and in projects now being released which were not funded back to 2005, which are now being funded and being released. And there has been a tremendous increase of inquiry to us and request to update those quotes we did in '05. We see it as being very, very good going forward this year and into next year.

Art's Way Manufacturing at Armstrong, Iowa is now pretty well caught up. We do still have a significant backlog, but it is of newer product, and proper pricing and so on. But it's not as strong as it has been. Our order intake the last couple months is not as strong as we've had in prior year. But we still think because we are not outsourcing and because we have right-sized our production and watched our overheads going forward, we will be looking a lot better.

In other words, what I'm trying to say, I think, is that our -- we've got these bad couple quarters behind us, and we are looking just a whole lot better going forward. So with that, I am ready to try to answer some questions.

All right, Erica. Let's open it up for Q&A.

(Operator Instructions) [Lance Rodveld], a private investor.

Hi, Ward. This is Lance. I've been concerned about the increase in inventories over the Company as a whole. I see that we are up around $15 million now and have been up -- or recently $6 million -- or a couple years ago, $6 million was pretty standard. So I wonder if you could explain where the inventory is lying. Thank you.

Yes, certainly can. First of all, a significant event -- significant events are happening. In the month of March, we reduced our inventory by $1 million. So far this month, it looks like it is down about $500,000. We are in the process of reducing it. And the reason that is happening is because those orders which we had last year, we had the inventory in stock to finish, even though we weren't able to finish it.

So now we are shipping that and working it down significantly, and expect to see some more work done in that inventory. We have targeted a number I am not sure we can reach, but we've targeted getting it down to $10 million. One issue with it is that -- well, one other thing that causes it is that we've opened up the Art's Way Auger division, and so far we have $300,000, $400,000 worth of inventory over there, which we didn't have last year. But it is on the way down, and will continue down. It is on our target. We are going to try to get that reduced.

I don't know if I am still on, but thank you, and that is the only question I have right now.

Thank you.

Joe Dancy, LSGI Advisors.

Hi, Ward. I've glad the technical problems were on your end. I thought they on mine. That is one good thing this morning.

My question is actually on the Auger business. Can you refresh my recollection? Are you selling those through dealers, or how are you building backlog on a new business like this, and how is the word getting out?

Well, the Auger business is pretty much in four states. It's in Nebraska, Iowa, Minnesota and South Dakota. We turned that loose to our Art's Way salesmen back when we first started, which was in December. And almost immediately, because there was some pent-up demand from a company that had been in Salem, South Dakota, who we hired their employees because they closed, there was a pent-up demand, I think, for those augers. And we immediately got about $1 million worth of orders for them through our own Art's Way salesmen.

In February of this year, we turned it over to all our salesmen. We have four direct and we have about 10 reps. And we turned it over to them and explained it to them and had a sales meeting with them in February. And they are now beginning to write some orders, and currently our backlog is up to about $1.5 million.

The people that are working in South Dakota are the same people they would have called at the old company that had been there, same names, they knew each other. I think that helped us.

Okay. Are these customized augurs or are they standardized, where you are just turning them out like car tires?

Not quite, but they are standard, and you know there are a number of sizes. But they are all very, very similar, but not all exactly alike. But they are not custom either.

Okay, understood. Just curious. On the acquisition ballpark, last time you were sort of cooling your heels, so to speak, as far as looking at any additional acquisitions, just based on the environment and everything else with regard to the Art's Way financial situation. Are you looking at all for any acquisitions or divestitures or anything substantial with regard to this corporate structure?

Well, not now, Joe. But obviously, I am on a lot of radar, and if something came along, I certainly would approach it within the means we have. But I think we've had a lot of work to do to try to get this inventory squared away and trying to get our gross margin up, and I'm concentrating hard on that right now. I'm doing some realigning of jobs and so on and trying to get that gross margin restored. I think that is our first order of business right now; it's not buying something else. The Auger thing is just getting going. That keeps us occupied, as well. But our first sales from the auger thing won't be until May.

Okay. Interesting. The other question on when the scientific was -- it is sort of interesting -- it sounded like that was sort of the -- maybe I just read that wrong or interpreted it wrong, as sort of a negative surprise or one of the negative surprises for the quarter. And it sounds like the Scientific -- with the government stimulus and everything, Ward, how soon do you think you will see any results? Because I know you've described them in the past as sort of a funnel where these take forever to get contracted and approved and designated and finally get the order for you guys to start up your plant. Do you think you are going to see something relatively quickly, or is this something that is going to take another 12 months?

No, I don't think it's going to take 12 months. I think -- the reason I don't think so is because a lot of these things were originally quoted and didn't get government -- didn't get financial approval. And almost all of them are some way or another tied to the government.

And so bringing them out and now they want them approved in a hurry, I think is going to -- just this morning I have one -- we just did a $3.5 million job for the Cancer Institute in Washington. This morning, they've released another one that has to be bid in May, which is right up our alley. We just did one there.

Okay.

I think some of it is going to -- that's not going to yield a lot of sales, though. But I think the fourth quarter is going to show it. And I think the next year, '09, I think is going to be frankly I think wide open. I think we are going to really see a real, real increase in [all quarters] in business.

[Tell me about] -- the capacity and that is a new facility, and as I recall, if you get the orders, the amount of capacity you have to blow those things out the door, assuming you have the labor, is pretty substantial. Is that right?

Yes, we think we could push out of that building $50 million a year if we had the orders. Now, there is another caveat to that, and that is that most of the (inaudible) requires some field work, like we did one this year, this past year, that had 27 units in it. And they all had to be attached on site and joined together to be a much bigger building.

So right now, the caveat would be do we have enough field force. And we are exploring the possibility right now of using local contractors rather than our own people to do some of this because we think it is going to be that strong in '10.

Okay, interesting. I guess the last question, I know you've periodically been looking at the export markets. And I assume things are probably pretty slow with regard -- with all the financial volatility and everything else, Ward, with regard to any of your activities looking to export anything to Europe or China or anywhere else. Is that correct or not?

I thought that, too. But you know we just shipped a container last week to France of our grinders. We shipped a container of our forage blowers to Finland just recently. I thought it would be much worse, but England has remained strong for us, and Australia. I don't know. I don't see it declining like I thought it might.

We do see something -- we had an order for a container of grinders into Russia, and they can't get the money together. They want them, and they've ordered them in fact, but we have taken it off our backlog because they haven't been able to get it funded.

And in talking to a number of the farm machinery manufacturers at a recent convention we were at, they are all suffering that same problem. And some of them had some stuff on the water and so on; they are having collection problems and so on. And China, same sort of -- same thing. China has backed off on this stuff, too. Although we did have an inquiry again for a couple harvesters within the past week.

So I don't know. I think the big one -- the big jobs were sugar beet harvesters in China and Russia and both places are kind of backed off.

But we went to some shows. We did a German show in November. We did Agritechnica in Germany the prior fall. We are getting some play on that. And I think that we may be able to overcome whatever drop-off we may have. Fingers crossed.

Okay, well thank you. Those were my only questions, and I appreciate your help, and I appreciate the call.

See you the 30th.

I Hope so. Thank you.

[Sam Ribotsky], Art's Way.

It's [Sam Ribotsky]. That's [SER Asset Management]. Good morning, Ward. I am new to the company, and I sort of -- as far as the price increases, are there any further material that you are shipping in the March quarter -- the quarter that began March that has your lower prices that you did not pass along your cost increases?

Very, very minor.

Very minor, okay. And as far as contract manufacturing outside, based on the space available and your availability to do all the work in-house, so there is no need for that? And presumably you did just a negligible amount, or was that significant?

None. We brought it all back.

Brought it all back. And the capacity that you have in-house, what percentage of capacity working on one shift or what capacity you have to increase your -- the production?

We are working on one shift, and we have more capacity than we have orders right now.

Okay. And the pressurized vessels, is that the scientific vessels?

No. Scientific is modular laboratory.

I see, I see.

They're pressure vessels and stainless steel type, welded together pressure vessels.

And I was looking over the previous year, where there was -- I mean, the year that just ended in November, there was 331,000 compared to 4 million. And now -- and there were significant losses. And you've had losses on the pressurized vessels. And you say the backlog has increased. So they expect to be profitable in the year going forward?

Frankly, if we get break-even, I will be quite pleased.

Okay.

But we are building back. Our backlog is 200 and something I just mentioned and -- versus last year, it was 83. What happened -- and you may not be aware -- is that we lost a lease on the building and we ended up on the street with no place to make anything, and it took us several months to get back going. And we are now back going. But in the mean time, we've lost customers, and we have -- there is something going on, though.

We have a new customer, a large customer, who is -- it looks very good for a couple million dollars' worth of business over the next 12 months. So that's a single customer, and he's just placed his first orders this week. And I think that is going to be -- it is going to come back, but it's going to take us a bit of time yet. And we are going to have to eat up some losses we've had so far this year.

Okay. And as far as your international business, what percentage of your total sales is international?

Less than 5%.

Okay. But I guess you are looking to grow that. Is there cost of shipping a significant value to -- part of preventing you from selling overseas, or is the products that they want significant that the cost of shipping is not a problem?

The biggest issue is the exchange rates.

Okay.

The dollar -- it took $2.00 to buy a pound a year ago. Now it is taking $1.50, $1.47. Significant change in what it costs them over there.

Okay. And as far as your relationship with the bank, I guess -- there were additional charges on the negotiation -- you expect to meet the requirements with your negotiated relationships with your bank?

Well, we have a wonderful relationship with our bank, and we don't have any extra charges at all.

Okay.

We increased our line of credit at no cost -- no additional cost.

Okay. That sounds good. Well, good luck going forward. I am just getting more familiar with your company.

Where are you located?

In New York. So we will be talking, and I will get to know it a little better.

Thank you.

Okay.

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

Ward, why don't you close it off and invite everyone to the shareholders' meeting and thank them for their participation?

Yes, thank you all for participating in our call. We look forward to keeping you updated on our next call and appreciate your continued support of Art's Way. Goodbye, and have a great day, but come to our annual meeting September 30 -- excuse me -- April 30 in Armstrong, Iowa, starting at 8:00 in the morning. And we would love to have nice participation in that if you could make it. Appreciate you on the call. Thank you.

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