Art's Way Manufacturing Co Inc (ARTW) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Today is Wednesday, October 14, 2009, and welcome to the Art's Way Manufacturing Company, Inc. third-quarter and nine-month 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 call are Jim Drewitz, Investor and Press Relations Representative; 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.

Thank you, Erica, and good morning, all. I would like to 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 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 health, safety 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 of 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.

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

Good morning. Start in by talking about the last third-quarter results and go to the annual or the nine-months' results. Our farm equipment, Ag-equipment business for the nine months, is about even with the prior year in all respects. Sales were about the same, and earnings were very close.

The Art's Way Vessels business had an increase over the prior period. Still far short of what we need to make it profitable, but it is -- the direction is correct. But Art's Way Scientific is the one that let us down this year and this quarter. Our sales there are down significantly from a year ago, about $4 million. And as a result, it went into a loss situation, as well.

I think overall, the year-to-year differences in the Company in the sales and the earnings is really about Scientific. In the early part of the year, it just shut down. Orders for modular scientific buildings just stopped.

But I'm happy to report to you today that in the past month, we've had a significant increase of orders and significant increase in [near] orders. We now have a $6.5 million backlog in orders on hand for Scientific, and in the first half of the year, we had zero. We just really fell out of bed.

But the result is that we just -- we lost money there, and these orders we have now finally in the last quarter here, although they won't get delivered in the last quarter, they will be partially delivered in the last quarter. So that's very very brief -- I guess we get more out of questions and answers.

Overall, I think the Company is poised well forward. We have reduced our inventories rather dramatically. And we are continuing to reduce the inventories. In the month of September, we reduced them another $700,000 from the end of August, and we are continuing that as we go forward.

The one thing we did in the Ag business is we got into the auger, grain auger business, and as I speak, we've shipped about 1.5 million so far in the fiscal year, which we didn't have in the prior year. We see a great potential for that. The business has been very localized. It was in four states -- Minnesota, Iowa, South Dakota and Nebraska. But with our sales force -- we have 12 salesmen covering most of the country -- we think we can do extremely well in other parts of the country because there is augers sold all over the United States.

And the logistics are a little bit difficult. You have to ship full truckloads, because these things are big and awkward and very difficult to ship. But we also have found now that there are some large dealers who buy in truckload quantities in North Carolina, for example, and in the East that we are beginning to get some play on them. So we think we are going to be able to really expand our auger business next year.

Nothing was extraordinary in the business this year in any direction. Harvesters were a little bit down. Grinders were a little bit down. Augers made up for the downs in that. But nothing was extraordinarily bad or extraordinarily good in the Ag side of it.

I guess we go back to blaming our problems on scientific. But it certainly shows signs right now of revival. The orders I had talked about earlier were -- are just arriving in the past month, just getting confirmed in the past month. So we do have some business going forward there and are very pleased about that.

With that, I guess we go to questions and answers.

(Operator Instructions) Joe Dancy, LSGI Advisors.

Ward, thanks for hosting the call again this quarter. I got a question for you on the farm equipment sector. You know, the corn prices and wheat prices and milk prices all fell out of bed if you look at the one-year chart, and still you guys are pretty much staying even on farm equipment. If prices get a little stronger with corn and milk, etc., do you think the equipment is going to sell a little better or is there any relationship there at all?

We certainly have a direct relationship with milk prices, Joe. Milk prices were $20 a hundredweight a year ago, and they are $10 a hundredweight to the farmers this year. And they tell me in the travels I did this summer that they need about $13 to break even. And they are really, really in a heap of hurt.

That directly affects us with our grinder, as I think you've been told or are aware, that the grinder has been our highest gross-margin product. So we do need those grinder sales, and we do need the price of milk to go up.

Corn, to a lesser extent; it does not affect us that much. Although we do sell a shredder which goes to corn growers. But the overall thing with corn and bean and the growers that grow that stuff in the Midwest, they don't seem to care where they make the money. They will buy tractors when they make money on whatever commodity it is. It doesn't seem to be -- if they have money, they spend it. I guess that's the way we've always thought about it in the farm equipment business.

And so, sure, there is going to be some rub-off in the lower prices of corn, but I don't think devastatingly so. I think our shredder which we sell to them and so on, will continue to be sales for it. I think our biggest concern right now is the price of milk.

On that note, I saw you hired a director or -- of sales to coordinate. Is that for just the farm equipment, or is that -- what is he going to do, and how is he going to do it?

Well, we've hired him for farm equipment. We felt that we could use some more spark and a little more life in it. We had one fellow in internal sales and very little out, and we thought with these 12 salesmen, we could get them going a little faster if we had a professional guy.

This guy has been in the farm machinery business for a long time, and he is very well-respected. He is on the Farm Equipment Manufacturers Director Association and things like that. And he had been selling Miller Pro for 10 years up until about 2004, so he knew our product line well.

And we just think that there is a lot more sales out there than we are getting, and we needed to get a little more professional in that area to bring those sales to fruition. So we looked -- and we've hired him on the basis of increasing sales.

He is very professional. He has just been around and he has been busy in the past month traveling with our salesmen and reading the marketplace for us, and very much into the auger expansion. We expect to expand this auger thing rather significantly.

I guess on the augers, were we looking at -- are the augers made in the Armstrong plant, or are they made up in North or South Dakota?

They are made in both places. Part of them are made in Armstrong, and the parts shipped to South Dakota for assembly; and part of it is manufactured in South Dakota and they are shipped out of South Dakota, just across the line from Iowa into South Dakota. Actually, I'm from Minnesota, if you (multiple speakers).

Right. I couldn't remember. Are you going to consolidate the auger operation in Armstrong or going to leave it up in -- wherever they are at now, or do you have any (multiple speakers)?

Well, we are renting a facility over there. It is not very large. We don't know exactly. It is not a product which fits in well at all with the assembly and so on. It's a big, awkward product. And the workmen over in South Dakota have made this before and they know the product. So some indecision on my part, at least at the moment, as to exactly where we are going to make it.

Okay. That's kosher. So yes, it's a new product, and it looks like it is doing pretty well. So I didn't know if you had gone through that scheme of things.

On the Scientific, it is really not as surprising to me with regard to the lack of orders there, because I know there is a lot of other firms on the Obama stimulus plan who have submitted their proposals. And apparently, there has been a substantial delay in granting a lot of the funds from the stimulus plan, especially from the National Institute of Health. And these are just universities and some other folks who are looking at that side.

As I recall, talking to Dan Palmer here a few months ago, he was talking about there was a fire hose worth of work and bids coming out of your Scientific group, and it was really make the bids and sort of sit back, and you've got your hook in the water and see which one -- see if you get any fish. So essentially, you are still waiting on a lot of those stimulus plan bids, from what I understand. Is that right?

Yes, Joe. Many, many, many of those that we have got our offers to have not been let. In fact, we don't know of any that we have that have been let that we are in on that we haven't gotten.

So nobody has heard; it is not just you guys are being cut out of the market. It is (multiple speakers) --

No, not at all. We are very much -- most of these jobs that we had quoted -- have quoted are jobs which are specing our modular building. So we are sitting in such a good position with them if they ever do release this money. But it is not being released at all in the speed anyone expected.

But it is gradually now beginning to flow out. So we have had a couple -- we have had a couple re-bids because they were over budgets and so on. But they are still being rebid. The [sci-ag] job that we have that we've announced a week ago really was rebid after the original bid, but finally got funded.

But yes, I don't see any of it going away. I don't think any of it has gone away. But it is just coming much, much slower than we expected.

And I guess that will -- as the economy comes back to -- I assume that your normal type of construction out of the Scientific group will hopefully increase, I would assume. Is that a good assumption?

I'm almost positive of it. We got some that are right on the cuspis right now.

Yes, I mean with the building sector, essentially you are building, and with everybody's capital expenditure budgets and everything else over the last year, I'm sure they sat on -- I mean, I would be sitting on my hands if I was going to be building anything, Ward. So, okay.

I think everybody -- with the stimulus plan, everybody through, well, boy, this is the thing to do now. And they all made applications and brought out jobs that they had thought about for the last four or five years. And then the money didn't come, and so they are just sitting out there. And I think everybody forgot that there were other ways to do it.

Right, right.

It is -- I think it made it -- I think that's why the first half of the year looked so bad. But this quarter, it is all of a sudden quite different.

Going forward and next year, you would expect -- I would assume you would expect the Scientific will get up and operate in some sense of normalcy. Is that right?

I think so, yes. I think better than normal. We've got just too many offers out there that these people are working on trying to get their funding, and much more than we've had historically. We had $69 million in our -- close to or we thought we had an awful good chance on six months ago, and we've gotten about 6 of it. The other 60 are still sitting out there.

So I really am optimistic about that. You know, we went right down -- in the summertime, we didn't have anything to build at all. And of course right now, our shop has perked right up.

Actually, as I recall, you guys are pretty -- you have a pretty flexible workforce there, where you can actually get people in and actually lay them off for short periods of time. Is that --?

Yes, we do do that there.

Okay. What about -- going over to the Vessels, I remember they were talking about the water treatment market and the new director over there. And I forgot his name. You had him on the call last time.

He's on this morning, aren't you, Pat? Pat O'Neill?

He is. He is just muted with the rest of the participants.

Well, that's okay. Let me ask you the question, Ward. I just was curious -- I know he was targeting the treatment -- water treatment sector. And I knew he had a lot of contacts there. Are things going along as expected or are you having issues like you've had at Scientific with regard to that market?

Well, no, it's going along and our orders are improving. Our backlog is now about $300,000 higher than it has been in the past year -- couple of years. And we have a lot of -- well, it has been a start-up. And so we've had to re-hire and build it back up again from the -- you know, we were basically down for two years.

And -- but we have a lot of quotes. We are getting in a lot more quotes than we were. And we are able to react to those. We are a little bit confined by the number of people we have in the shop at the moment, but we are gradually increasing that. And we are also putting in a production manager down there as we speak.

So it is slow, slow, slow, but I think it is gaining. And there is business out there. There isn't any doubt in my mind about that.

I know. You would think that would be a market that would be a lot more stable than building, just the water treatment (multiple speakers).

Well, it is very stable; you're right.

And actually, you've got a couple, between the Auger division and Vessels, both of them are sort of start-up type businesses. Although, like you say, Vessels has come back from nothing where you operated it before.

I think that's about all I have. I'm just looking at the stock price, too. It's interesting, year-to-date, actually, if you look at it at as of the close yesterday, the stock is actually up between 9% and 10% year-to-date, which was -- I mean, it would be nice if things turn around and we move forward. But when you have a gain in this type of market in this type of economy, you can't complain too much.

Thanks, Ward, and I appreciate all your help.

Thank you, Joe.

Sam Rebotsky, SER Asset Management.

Hi. Good morning, Ward. You said the backlog is $6.5 million.

At Scientific.

At Scientific. So that is that $3 million that you just got. And when do you expect to deliver the $6.5 million? What is the time period?

Well, there are times on each one of those jobs going into the first quarter of next year.

So the first quarter. And those are two jobs or more than two jobs?

No, there are about four jobs.

Four jobs. And you have $60 million of bids that are out there presently?

Yes.

Okay. And where I guess we can look at the -- would the modular buildings is what is considered Scientific?

Yes.

So this quarter we just had $365,000.

We only had some odds and end deals. We moved some buildings in Virginia from Charlottesville to Norfolk, some of the buildings that were built by the company prior. And just -- we just didn't have anything to deliver. We didn't have any orders for the first half, hardly.

And as far as your makeup of the inventory, is that the breakdown between -- could you sort of give an idea of what that inventory is? Is it related to Scientific or is it related to just your agricultural and pressurized vessels more?

It is 90% or so in Ag equipment.

Okay, so when you are doing a Scientific building, you buy the material at the time then?

Yes, yes, we buy it to fit the job. It is -- they are custom-built, so we do not hold a lot of material there -- same in Vessels.

Yes. Have the prices has been coming down of the cost of your materials, based on steel and various other, or have they stayed the same? What is the -- what has been going on with your costs?

Well, steel prices last year -- just a bit earlier -- September, a month ago, last year, steel was around $0.60 a pound. In the spring, it went down to about $0.30. And it has gone back up slightly to maybe $0.40. That is a very volatile market, which the farm equipment uses all steel.

So we've had to deal with -- in the past year and this year, too -- with rolling the price of our steel price downward, so that our inventory gets hit with that $0.60 steel. But we are ahead of it. We do roll our costs sometimes monthly, but the maximum is three months.

Okay. Now as far as -- and your inventory at this point, how long does it take you to run through the inventory?

Well, farm machinery is a slow turn. It is all very seasonal. And so we have products that sell in the springtime and products that sell in the summer and the fall. And plus the fact farm machinery has, in our case, about $4 million worth of inventory for spare parts.

So -- but we had missed some -- in 2008, we missed some deliveries on our farm machinery. We did not get it done in time for season. So we had to put some of it -- we put some of it out at older pricing and extended terms to the following season, which was 2009.

But we also missed entirely a couple product lines, which bloated our inventory up. We have a thing called a merger, which is for hay, and we planned on the middle of 2008 and we built it -- we ordered the inventory into build it with, and we haven't built it yet. We are building it this year, the end of this year, while it is a bit slower for us.

So we've had -- our inventory really is down around $3 million from last year at year-end, minus what we've put into the auger business, which is $700,000. So we are down about $2.3 million in inventory as I speak. But we are going lower because we are going to build this stuff out and get it into sales.

Do you want to get the inventory down any -- how much more do you want to get the inventory down?

We are looking at $2.5 million.

Okay, okay -- another $2.5 million down?

Yes, trying to.

Yes. And that will give you more flexibility, I guess, to build. And hopefully steel stabilizes or whatever -- or if it moved up, it would give you a little more opportunity to get higher costs, etc.

The meeting -- the show in Wisconsin September 30, what did that seem -- what did the farmers -- the people that attended that show, do you have any idea? I know you exhibited there. What was the responses of the --?

Wisconsin is particularly tough because it is a milk state. And the economy of milk and the farmer economy in Wisconsin is not good. And -- because it is so heavily into the milk.

I guess I am not saying it was negative. I don't think it was very positive, though, at the [showing].

Although I believe that just recently -- I saw some statistics that indicated the price of milk was up to the $13 just recently. Is that accurate or --?

It fluctuates virtually daily. I don't know. It varies across the country, as well. Pennsylvania and New York are very dairy -- heavily dairy, and the price and the cost -- there is a real, real wide pricing, cost pricing. If they have no debt, they are able to make their milk for $10, $11.

But if they are deeply in debt, as many of them are -- they've expanded dramatically in recent years -- they have another problem. And if they grow all their own feed, they have another problem. And it is quite a variable. But if it gets to $20 again anytime soon, it will really, really help us.

And when you sell the -- I guess you check the credits of the farmers, or do you -- or do you sell through banks? How is the credit terms with your sales?

We sell all of our farm equipment through dealers.

Dealers.

And the dealers -- we floorplan a lot of it with General Electric. And they -- fortunately, General Electric has a very good system for collecting. We have recourse. But we haven't had a repossession. We've had a transfer or two this year, but just nothing in the repossession. They do a very good job of surveilling and checking inventories and so on.

So we really have no credit problems with that. It works very well. It's not cheap, but it works well.

And your competition, would you be competing against Deere? Who would your competition basically be?

Well, we compete a little bit with Deere, because Deere buys some of these type of -- same type of equipment we sell from other vendors. We've talked to Deere and they've looked at us, and I don't know why anybody would sell to them; it is kind of the Wal-Mart syndrome.

But we don't sell to them. We sell some to Case, but the equipment that we sell to Case is rather unique. It is a four-inch blower, and four-inch blowers are only made by -- basically in the United States, we are about the only one. So we get -- are able to get some margins. But mostly our competition is small companies like ourselves.

Okay. Well, look, you seem to be on top of dealing with the situation. And at least the economy, hopefully, it's turning around, and hopefully the panic is gone. And maybe there will be more money coming into the Scientific and some of your $60 million out on bid could sort of come through.

Now what is the -- how many bids are for the $60 million? What kind of --?

Most of them are $3 million, $4 million, or $5 million.

Okay, and they are all with like a general contractor that is -- or do you do it directly?

No, we do a lot of it directly.

Directly. Some -- yes.

Yes, we mostly do it directly, actually.

And does it have to be done a certain distance from your location or you can do it anyplace?

Anyplace.

Anyplace. Well --

We've done one in California, and we've done one in Miami.

So you put together your team and you just send them over wherever they are going to be put up, and they --

Well, they are only hookups when they go out. They are completely built when they leave. And sometimes they are multi-buildings, so they have to be connected on the site. But basically, they are all done in the factory.

Okay, so the cost -- but you build in the cost of the shipment then?

Oh, yes.

And then that sort of does it, huh? And what is the time frame from -- it's about six months from the time frame of starting to completed, or is it less than six months generally?

Well, I think it is pretty close to six months.

Well, I --.

If we get an emergency thing -- but they have to get their sites ready and so on -- we would react quicker. But basically, it is six months.

So do -- you feel a lot better at least that you closed this -- you're closing deals -- the $6.5 million backlog should permit you to be profitable in this business going forward.

Absolutely.

Yes. Well, Ward, it seems you are on top of what you are doing, and you've been doing this a long time. Hopefully, the economy cooperates and the price of milk will cooperate.

That would be a big help. I thank you for the kind words.

Okay, we'll see what happens.

(Operator Instructions) Joe Dancy.

Ward, just on the track the previous questioner was asking, the Scientific labs, as I recall -- and I think you've said this a couple times; I just want to double check my notes -- your labs are more -- generally more cost-competitive than labs built, say, in Florida or California, because you design them, you get them certified, you build them there in Iowa, and ship them by rail car or wherever. But generally you can -- you are more cost-competitive than a build-on-site contractor. Is that correct?

Yes, that's correct, and generally a lot faster.

Okay, so they are saving money and they are saving time when they deal with your --

Yes, they all wait until the last -- until they get their funding and they work on them for two or three years, and so they are nervous to get it in a hurry.

Oh, yes. As so as it gets approved. Obviously, when you wait that long.

But also, Joe, there are some advantages -- quite frequently they get moved.

So essentially, they could put it on-site, and if they move it from University of Michigan to their subsidiary campus 20 miles away, they can unhook it and -- okay, I didn't realize that. Okay.

Yes, and also, sometimes they locate them on the campus. Most of them go on a campus. Georgia is like that. They are locating theirs on a campus, and they intend to move them shortly, or within a couple years. Maybe it never happens, but they still think about it.

But yes, it is surprising how many of them do get moved around.

-- at a site and it was -- you can't move it. I mean, it is -- you're obviously going to -- yes, it is going to limit your flexibility when you expand or move over into a different type of research.

Well, Charlottesville, Virginia is up in central Virginia, and they moved it down to Norfolk, 200 or 300 miles.

Interesting.

And it is not cheap to do that, but it's a heck of a lot cheaper than starting over.

Exactly.

And it was -- and I think that was within the University system.

Yes, that makes sense. Because I know a lot of these campuses, I know you did something for Texas A&M down here, and --

Part of our backlog is Texas A&M as we speak.

Okay. Because I know they have numerous campuses and different research facilities and -- interesting.

Okay, well I just wanted to check on that. And again, thanks --

They have another interesting -- Joe, down in Texas, we have a Texas prison system that just bought a building.

For what?

Apparently, you people in Texas use your prisoners to grow your crops and -- and in the prison system, you feed your people your own homegrown crops. Somehow or other, the research needed for that ended up in a couple buildings.

Excellent. I didn't -- when you said that, I thought -- I hesitated when I thought you weren't building prisons, but --.

No, but there are prison farms there.

Okay, that makes sense. So, anyway. Well, thanks again for the information. I appreciate it, Ward.

Thank you, Joe.

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

Ward, go ahead and close it out then.

Well, I thank everybody that called in today. It wasn't the best nine months we ever had, but I think it looks pretty good going forward. I appreciate your calling.

Thanks, and have a great day, everyone.

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