Art's Way Manufacturing Co Inc (ARTW) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Today is Friday, April 16, 2010. Welcome to the Art's Way Manufacturing Co. Inc. first-quarter financial results conference call. (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 the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you, Erica. Good morning, ladies and gentlemen. I would like to draw your attention to, 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 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 made only as of this date, 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 caption risk factors in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission.

With that completed, we will turn the call over to Mr. McConnell. Mr. McConnell, it's all yours, sir.

Good morning and thank you for tuning in. I would like to this morning tell you a bit about Art's Way's first quarter and I think I will start by advising you that, for [Iowa, I] had a lot of snow during that first quarter, and we had 13 lost days of production and shipping and what have you during the quarter because of snow. It also impacted a little bit our costs because we had to haul it away out in Iowa where generally we can push it in a pile, but the piles got to be 18 or 20 feet high so we had to deal with that.

But the first quarter also had some time spent -- quite a bit of time spent rearranging our facility. As I have said before, the Company was a batch build in that it only had one product for many, many years, and we've added to it in the past years about 15 more. We have about 16 product lines now, and it changed the whole focus of the business. Or the production of the business.

The floor plan, the use of computers was sort of hit or miss until about October last year, and we decided to cure it. We've really rearranged the floor plan. We've put in staging areas for each of our product lines. We've been teaching and training and pushing our people to become more computer literate and to be able to make entries into the computer and so on, which are necessary to make this new thing work.

And as a result of that, it did slow down our production some because we engaged everybody in the building -- in the plant to work at that. And it's not totally completed as I speak, but it's improved dramatically from where it was, and we hope from that to attain something maybe $300,000 to $500,000 additional gross margin during -- not all this year but over a year's time from these changes.

So, the first-quarter sales were down some, but not -- I don't think it's to be concerned. I think that the backlog is higher than it was a year ago today, and it's at gross -- good, better gross margins than we've had, and as you can see in the first quarter our gross margin increased quite a bit as well.

Though it increased primarily in the first quarter because we were shipping product at different pricing than we'd been shipping in 2009. We had a lot of 2007 pricing, and so -- that we had to deal with because we were late delivering back in 2008. So, we honored the sales and delivered it, and -- but it did cause us to have some -- well, it caused us to have better gross margins.

Going forward, I am sure you are interested about Scientific. First of all, the stimulus money is being delayed. It's -- everybody is overwhelmed with it and everybody made an application -- everybody in the world, not just for our products but a whole lot of things. And, so it's kind of in a befuddle.

It's estimated less than 20% of the stimulus money has been released. I don't know the number, but that's what we heard from one of the scientific conventions this week. The one area that is up a little bit is the Veterans Administration. They are allowing some of the stimulus to go to that. And that is helpful because we do have some stuff going with that.

And we have some near orders. Our backlog at the moment is about $3.5 million. Excuse me, it's about $3.1 million. But we have some near orders, and last year after -- later in the year, months, the orders really, really tailed off terribly.

And it's kind of -- I think we'd have been better off if the stimulus never happened because it's kind of a false thing. They all wait for the stimulus now. Any programs or any buildings they wanted to be buying might have come through in the normal course of business, and the stimulus held up everybody and really hasn't really been released like we thought it would be, and so my opinion is we would've been better off if it was more regular business. Business as usual.

But having said that, we are still very optimistic some more of this is going to be released and we have some pretty darned nice orders that are pending that are pretty close. So I hope that that comes to fruition. I don't know.

In the ag business, our backlog is up about -- it's up about $3 million. Our backlog is up about $3 million over a year ago at this time. And we have more Beet Harvesters sold than we have in prior years, and they are high-dollar items for us. Our OEM business is less, but the Beets overcome it. So I'm optimistic on that.

We just came from an ag convention in Kansas City last week, and there's a lot of optimism among the farm equipment manufacturers.

Finally, Vessels has got going. It did a little better in the first quarter, but I can tell you today we sit with $855,000 of backlog, most of which we think will be delivered by the end of June. So I think we've finally turned the corner so this current quarter we're in will show us profits. That will be a, I think, a very big help to our year.

We've -- during this quarter, we've made an agreement to buy another facility, and the reason we've done that is almost entirely for expansion. However, with all the product lines we now have, it's difficult to have room for it in the facility in Armstrong. Our new facility, we are closing on at the 29th of the month, it's agreed -- everything is agreed on it.

It's 190,000 feet, and we're going to shift some production over there gradually and we're certainly going to put inside a lot of machinery that we have outdoors that is weathering. That's one of the objectives of this building. It seems that it sits in the backyard too long and gets rusty, and then it has to be repainted and so on. We've gone through that for years. This will alleviate that dramatically.

The new building in West Union, Iowa, is being financed -- we are paying a man $300,000 for it. It's being financed by industrial revenue bonds and we have agreed 3.5% over a 10-year period. We think that's pretty good terms. That's a fixed rate. So, we're pretty pleased with that. And we're going to 100% finance it.

Currently, we have no short-term debt. We're pretty proud of that. But we will be going into it -- probably next week because we're into the very heavy run of the Beet Harvesters.

Our auger business is growing. We did about 2 million last year. We'll do more than that because we have a backlog of more than that right now. We -- in order to secure our location over there, we've purchased a building in Salem, South Dakota. It's not a very big building, but it served us quite well last year. And we purchased it for about $194,000 during the quarter -- excuse me, during this quarter.

And I guess with that I'm almost ready for questions. I would like to invite everybody to come to the annual meeting April 29 in Armstrong, Iowa, at 10 o'clock. We've had fairly good participation, more participation in recent years. We used to not have hardly anybody, but we have more participation now than we had in earlier times. And with that, I guess we can try questions.

Erica, you can open the lines to questions.

(Operator Instructions). Joe Dancy, LSGI Advisors.

I've read some articles recently on just agricultural equipment sales. Apparently, some of the major dealers are short of equipment. The manufacturers apparently have left them short of inventory. Are you seeing any of that equipment demand out there, and I assume we have enough inventory to supply anybody -- any dealer that wants some of our equipment?

Yes, no. But with a backlog, this stuff is all on order and has to be delivered yet and has to be delivered before their seasons. Joe, I think that's John Deere mostly you're talking about (multiple speakers) and I think it's in the big equipment. I think it's in tractors and large combines. I don't think there is a shortage or back-up much in the short lines that we are.

I know we don't compete with them, but I thought that was an interesting story with regard to that sector.

One thing along that line that we are hearing, and we heard a lot of last week, our farmers are in terrific shape. Their debts to equity is 7%. That is terrific, and they've got money to spend and they are buying farms, and what we are told, instead of buying the farm and financing it, they are pulling out the checkbook and writing checks. So, I think our farmers are in great shape. They bought a lot of equipment in the last few years, but they seem to continue to want to buy equipment. I think overall that's good for us.

(Operator Instructions).

Excuse me?

[Roger Miller], [Foggy Days International].

I was reading Titan's report on their quarterly earnings, and they stated that 47% of their overall gross profit comes from parts and service for the fourth quarter, compared to 40% last year. They also stated as we enter fiscal 2011, farmers in the upper Midwest continue to have strong balance sheets and ample access to credit, which is just what you stated. And industry data suggests that the operating equipment for farmers to be favorable in the coming year. Do you want to talk about your parts business now that you've added augers and manure spreaders? You failed to mention anything about the new manure spreader line.

Sure. Our parts business is also a significant part of our business. And, yes, our part -- the manure spreader adds to that. However, we've just gotten it home and we plan on making some spreaders in June. But we are shipping parts, although we've just -- we just nicely got it into our parts bins.

I noticed yesterday what the parts sales were. It's not very significant yet. But it's beginning to grow. I may have it here. But -- I don't have the percentage, but I know that it's a significant part of our business and very, very profitable part of our business.

But it also has some negatives, always, as everything does. We have to carry a large inventory because of the 56 years or 57 years that we've been in business. The -- we basically supply parts way back when, and it does take inventory. But we still have a nice gross margin.

I certainly agree that the farmers are in good shape. We -- I think it's pretty evident that it is. We're glad to hear that, of course. I don't know if I answered you very well, but --

You start -- you basically did. Let me ask you. This -- you've got warehouses or manufacturing facilities spread out. Do all the parts come from basically one facility or are they housed everywhere?

No. The -- we do part of the augers in Armstrong, Iowa, and ship them to Salem, South Dakota, about 125 miles, and they make part of it over there and we assemble it over there.

We're thinking that we'll do the same thing in West Union. It's -- a little story about augers is that they're kind of awfully awkward to ship. They seem to sell pretty much in a circle of a couple hundred miles of the availability. And there's -- as the season develops, the dealers sell them and come pick them up.

We think we'll do the same thing in West Union, and have a twenty -- couple of hundred mile radius of that -- where that happens, too. In analyzing our sales of augers, they were almost all within 200 miles of the factory. The Salem factory. So we think if the same thing is true in West Union, and we know the saleability or the usage is within a couple of hundred miles of West Union, so we think that we'll increase our sales over non-augers because of West Union.

So, there is also -- and the building in West Union can do a 122-foot-long auger, which we can't do in the building we have in Salem, even though we have requests for it. But we will continue to make the parts for them, for both places, when we get going over in West Union.

Next week, we start -- we're going to have a job fair in West Union and start some of the hiring process, and -- but we do intend to have augers there so that we can distribute them for a couple of hundred miles around there.

Let me ask you about the price of sugar and how that has impacted you because of the fact that we know that it was an excessively high prices in February and it's come down. And now, it has started to return slightly back upward. Has that impacted at all in the sale of Sugar Beet Harvesters or parts?

Well, it's certainly affected our sales of Beet Harvesters. Our Beet Harvester sales are up rather significantly, and we still -- we forecast more than we have orders for right now, but we always have sold some during season and we always have sold some right after season.

And we have some customers who trade every year, and so I think our sales would be up more than 60, 70 -- they'll be up 60%, 70% if we sell all we have in process -- on Beet Harvesters, and Beet Harvesters are one of our major products, so I'm talking about being up $1.5 million or so from last year on Beet Harvesters.

But that doesn't mean we're going to be up $1.5 million overall. Some of the products are down. Our OEM sales are down some, so. But of course, we have better margins on Beet Harvesters than we have on OEM sales as well.

So I think we're going to have a good year, it looks to me like. But there is continued uncertainties with stimulus and government and health insurance and all the rest. Make us wonder, of course.

You touched on -- I hope I can keep asking you questions for a second here.

Sure.

You touched on the new building in West Union, 190,000 square feet. How does that compare with the other buildings you have in size? I'm looking at what's going into that building beside what you may manufacture there at the present time.

First of all, the building in Armstrong is about 220,000 feet, somewhere around that. So it's almost as big as that building. And that includes office and what have you.

The building in West Union has a very minimal amount of office. It has almost all usable manufacturing space. We think we're going to move -- first products over there would be some of the Miller Pro products that we bought a couple of years ago. We thought that would go over there quite easily.

We hope to make the manure spreader product a first run in Armstrong so that we learn how to make it, and then we intend probably to take that over there. But the plans are formulating. We've just finally agreed on the whole thing a couple of weeks ago.

It's so needed. We are so crowded in Armstrong. We need space so badly. And we certainly need to get this stuff out of the weather. So if we can relieve some of that with taking the Miller Pro forage box line over there, which takes up a lot of room, that will help us an awful lot. So I'm telling you we will have the darn thing full in no time.

Well, now that we are in a conference call, I don't suppose you want to announce any acquisition that you are in the process of making, do you?

Oh, no. But I've got to tell you, I'm looking. We're looking for more product lines.

We think that is helpful and -- unfortunately, some of these product lines are in decline and they always will be. And the numbers get smaller, just like the grinder was 10,000 units a year several years ago, and it's down to, like, total -- and there were several manufacturers. The total now is down to 300 or 400 and only a couple of manufacturers, so the numbers keep shrinking in all these farm equipment items.

So I think it's the proper thing to do is continue to get product lines. Each time we get a product line, it helps us pick up some more dealers and better distribution. So, it helps.

Do you have any idea how many dealers you have right now?

Oh, I don't. We probably have active -- we have an awful lot of dealers in name only because of the parts thing for over the years. But we probably have 100 active guys that go out and sell our stuff. Maybe 150.

And then, there's another 150 that buy $200 worth of parts here. But those are prospects for us, and we hope to build on them.

So generally, these dealers must be ecstatic, the fact that you're adding product lines and putting more product in their dealerships, is that right?

Some of them are, yes. Some of them are. Dealer attrition is becoming an issue. Dealers are consolidating very, very fast, and -- I don't know. We seem to have better luck with the smaller dealers than we do the big ones, and keeping our gross margin.

Does that got anything to do with Titan gobbling up dealerships?

Yes, we know Titan, of course, and we've talked to Titan, and some of their dealers that they buy up do buy some stuff from us.

But, for example, they are in Fargo, North Dakota, and we have a dealer in Fargo, North Dakota, which is not one of our better dealers. And so, Titan -- we've approached them and their answer to us is it's too small a product line for them. So -- and, of course, they have more buying power than they used to have. Yes, it's -- not the best thing in the world for a short line manufacturer. But it's part of the industry. This is the world we live in.

How about the augers themselves? Are you primarily selling them through dealers or are you selling them direct?

All through dealers. We do no sales except through a dealer. That added quite a few dealers for us, too, when we started selling augers. It made us quite a lot stronger in Nebraska and South Dakota, eastern Iowa.

So you'll pick up more dealers possibly when you open this new plant?

That's what we hope. If it works the same way that the augers did for us over in Salem, then within that 200-mile circle the dealers will come and pick them up at West Union. I think that -- I'd be very, very surprised if it increased our sales on augers. We have a good early order-writing program on augers, and we've got a pretty good backlog and we've been shipping augers. They are turning into a good product.

This plant that you've obtained in West Union, who was in that plant before?

A recreational vehicle supplier. It was called Atwood. They made windows and what have you for Winnebago and others. They are from Elkhart, Indiana, and their sales really plummeted with the economy, and so they closed it. And it became available.

Joe Dancy.

Ward, I just had one more question for you. On your -- your backlog's up 33% from a year-ago level, and I know Quarter 1 I think is the -- usually the slowest quarter for us. Going forward, when I put my models together can I assume if the backlog is up 33%, that over the next three quarters our sales are going to be up compared to year-ago level or is that not a good assumption?

My assumption, Joe, is it will be pretty close to the same, to year-ago level.

Sales will be about -- at year-ago level. Okay. But the margins will be better.

Yes, the margins will be better, I think.

Okay. All right, that's my only question. I'll see you at the shareholder meeting.

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

You guys are easy on me today. Appreciate it very much. Thank you for calling in. Jim, do you want to say something?

If we have an opportunity, please join us in Armstrong for the shareholder meeting. It's a great meeting. You get a chance to see the plant and listen to Ward tell us more about the growth of the Company, and we welcome you all there. And Ward, great call today. Thank you very much.

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