Art's Way Manufacturing Co Inc (ARTW) 2009 Q2 法說會逐字稿

Good morning ladies and gentlemen. Today is Wednesday, July 8, 2009 and welcome to the Arts Way Manufacturing Company second quarter and six 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; J. Ward McConnell, Executive Chairman of the Board of Directors. I would now like to turn the call over to Mr. Jim Drewitz. You may begin.

Thank you very much Eric. Good morning ladies and gentlemen. I would like to draw your attention to -- except for the 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 Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk and uncertainties which may cause Arts Way Manufacturing's actual results in 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 Arts Way Manufacturing to make significant capital expenditures. The forward-looking statements 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 reflected in the forward-looking statements include but are not limited to factors described under the risk factors and the company's annual report on Form 10-K filed with the Securities and Exchange Commission. With that concluded, Ward, I would like to turn the call over to you. It is all yours, sir.

Thank you Jim and good morning. Today we're also joined by Dan Palmer, General Manager of Arts Way Scientific, and Pat O'Neill, General Manager of Arts Way Vessels. Both gentlemen will spend a few minutes to bring you up to date on how their subsidiaries are doing. They will also be available at the end of the call to accept your questions.

Hopefully by now most of you have had a chance to review the press release we issued on July 7 and read the Form 10-Q filing issued on July 8. We would like to go over some of the pertinent financial information and then open it up for questions.

For the three months ended May 31, Arts Way reported a net income of $112,918 or $0.03 per fully diluted share on revenues of $7.1 million, which is an improvement over the first quarter. The company improved compared to the first quarter some, not a great deal. We expect further improvement in sales during the third quarter and in 2009 as we begin delivery on several of our recent contracts.

For the six months ended May 31, 2009, Arts Way reported net income of $116,000 or $0.03 per fully diluted share on revenues of $13.8 million. The net impact -- income for this period was negatively affected by our gross margins, which we feel will continue to improve over the next several quarters.

Importantly, Arts Way's backlog has decreased drastically, 51% over the backlog we reported one year ago. The backlog at June 30 was $10.5 million. Backlog is down because we have delivered out the sort of double up we had of last year and not delivering on time and delivering against orders that we extended the terms and pricing on last year.

Now I would like to touch on the revenue for business segment. Arts Way Manufacturing segment had an increase in revenue of approximately 21% and 18% from the prior year for the three and six months respectively. The increase resulted primarily from the sales of blowers and forage boxes from the Miller Pro product line, which were delivered on the earlier pricing and orders we had on hand.

Arts Way Scientific business had revenue of $725,000 or approximately 10% of total revenue. This is a decrease of 71% from the prior year three month period. However, order volume and bidding volume is up significantly over last quarter and over the same quarter last year. Dan Palmer, our General Manager, and the staff are doing a fantastic job. And I would like to have Dan speak to you about what is going on in Arts Way scientific. And Dan you bring our investors up to date?

Sure. Thanks. Good morning. Again, this is Dan Palmer, Arts Way Scientific in Monona, Iowa. Since February 17 when the American Recovery and Reinvestment Act was signed, better known by all of us as the stimulus package, we're been drinking from a fire hose here at Arts Way Scientific, particularly around quote volume and sales related activity.

Our part of the stimulus package is related to the National Institutes of Health, who were well represented in that package, receiving about $10.5 billion over the next two years to support research as well as $1 billion of that earmarked for construction, repair renovation, which has traditionally been under funded.

So a number of institutions have seen modular buildings as a quick and shovel ready type of a project, and so we worked with over 20 institutions helping them prepare grant applications for deadlines that are happening in May through September of 2009. A number of these are CO6 improvement grants and G20 core facility renovation grants, (inaudible) of quoting is in the $70 million to $100 million range. Of course you don't expect to get all of that, but most of these folks sought us out so we have good high expectations.

We have yet to see any direct results from that, however. Most of those grant applications are in a process that takes some time to go through, that is taking a look at the scientific merits of particular grants that are submitted. We expect that sometime after September 15 we will start hearing back about how these folks have fared in the grant application process. Vendors and other industry contacts think that it might be sometime after the first of the year before we actually start to hear what is happening out there.

In terms of the general marketplace, in addition to the economic stimulus package we have also had some reversals and anticipated reversals of the stem cell research initiatives. And so that has brought to light some new opportunities for us, particularly in California where that is very prevalent.

We have also seen some increase, because of some studies in China, where pigs are offering a new source of stem cell research. We have seen a little bump and our agricultural animal types of buildings that were formerly the Double L type of confinement buildings. And so, that is a new potential source of product placement for us.

On the agricultural side of the business, the swine confinement, calf confinement types of business. We are actively quoting [billets] as well, but that is mainly to universities and institutional buyers. Our quotes are up since the June World Pork Expo but buyers are highly price-sensitive right now.

So in general, the positives are good. We have strength in our capacity and our new manufacturing facility to meet whatever comes along our way towards the end of this year. Our negatives are still animal rights activists and legislation that could be putting some restrictions on the use of animals in laboratory animal research.

Of course you see in the report that at the end of 2008 we were impacted by some capital budgets that were cut in our -- by some of our clients. We have a number of those say we're just not going to do the project, but most said we're putting the project on hold until we can get funded. And these are generally places that are funded by states or state board of regents, institutions, colleges and the academic research markets. So, overall, again, drinking from the fire hose on the quoting and sales activities and we expect to see results of that hopefully after the first of the year.

Thank you Dan. Arts Way Vessels, this big business segment had revenue of $226,000 or approximately 3.2% of total revenue. This is an increase of 151% from the prior period. Order volume and bidding volume is up significantly over last quarter and over the same quarter last year. Pat O'Neill, our General Manager of Vessels, and his sales staff are really getting the engines fired up to increase revenue and income for this segment.

Pat, I would like to have you speak to this, about what is going on in Arts Way Vessels. Pat, tell our investors about your efforts.

Again, Pat O'Neill, Arts Way Vessel, Dubuque, Iowa. Since coming on board about seven months ago my focus has been to create relationships and reestablish Arts Way Vessel is a quality supplier of pressure vessels. We had a bit of a downturn in the early 2008 area with our move over to our new facility. There were some circumstances involved that we lost some customer base. And I had been aggressively going after the major water treatment manufacturers that focus in the commercial industrial sector. That is my background of 26 years.

We are creating some decent relationships with some of those major manufacturers and we will continue to do that. That particular business is the continuing business, kind of the same tanks every month type business, and these companies order a substantial amount. We are kind of in the tryout period now with some of these, again some of these major manufacturers that are giving us a shot. And we're getting return orders and certainly quote activity with those people has increased significantly.

We're seeing some play and some of the small municipality type programs for replacement tanks and water treatment equipment through some of the engineering firms that I have dealt with over the years and those are a little more long-term. We just did get an order for one small municipal system in northern -- or just outside of Chicago that we'll be shipping next month. We hope that continues. But again, I am shooting for and aggressively going after the repeat business with the water treaters around the country as well as around the world. So that is our focus right now.

As Ward stated, our backlog is steadily increasing. The growth has not been as quick as I expected it to be, but establishing a relatively new company has taken a little bit longer than I expected. But I would expect that a nice, nice increase Greece finishing off this year as well as going into next year. So if there any questions later you can certainly present them. Thank you.

Thank you Pat. In the last few months we have had some positive events, including the growth from our start up in the auger businesses in South Dakota. We began to ship a few months ago and we are really getting into it here in July and August and September with the backlog that we have. And certainly the reception has been very good.

And it does, however, crawl into our increase in inventory. It's carried in Arts Way Manufacturing inventory with the startup. But it is coming along very, very well.

And I don't know, we are making part of the product in Armstrong, Iowa and doing most of the assembly and painting and part of the manufacturing and sale in South Dakota. Our early orders have been shipped out and the people seem to be very pleased with them, and we are getting a good response back on them and expect that -- and due to the circumstances of the startup that next year we will have a great growth there.

Looking ahead, we are trying to tap new markets. We're working hard on our export. We currently have, just in the past month, significant orders from both Australia and England. I think that exports are going to hold up.

But we are having some downturns in the domestic market on our grinder mixer. The grinder mixer is affected by milk prices which are very, very low; about half of what they were one year ago. The dairy farmers are not buying to the extent that they were.

And this is also affecting our gross margins because our highest gross margin product is the grinder and the grinder is sales are off. And we have seen a little pickup export and we think we see a little pick up just slightly going on in the domestic market for our grinders.

We are looking for new markets. I also have a couple of product lines acquisitions I'm looking at. But we are really working on this gross margin. I think we're going to see some increases on that in the third quarter.

And we're also going to see some increases on our -- decreases in our inventory. Our inventory is down from one year ago but not significantly. We expect in the third quarter the inventory is going to drop rather significantly as we ship out the products, in particular sugar beet harvesters. All of those will be shipped in the third quarter. And the fact that we don't have the backlog is going to also reduce our inventory. So, we look for that to go down.

Also during the second quarter, just after the close of the second quarter we renewed our line of credit with the bank with an increase to $6 million. And that is in place and been renewed at the same terms we had earlier. And we're pleased about that. The bank is has been -- looked at us very favorably.

With that, we would like to have you people ask questions. You can ask them of Pat and Dan as well as myself.

Let's queue up any questions that we might have and get them to these gentlemen.

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

Thank you for participating in our call, ladies and gentlemen. We look forward to keeping you updated on our next call. We appreciate your continued support of Arts Way Manufacturing. Goodbye and have a great day.

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