Art's Way Manufacturing Co Inc (ARTW) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Today is Thursday, July 14, 2011 and welcome to the Art's Way Manufacturing Co. second fiscal quarter of 2011 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, and J. Ward McConnell, Jr., Executive chairman of the Board of Directors. I will now turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you, Erica, and good morning, ladies and gentlemen. Before we begin 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 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 of the date of this call and Art's Way Manufacturing undertakes no obligation to publicly upgrade 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.

What that completed, I would like to turn the call over to Mr. McConnell. Mr. McConnell?

Yes, good morning, and welcome to the call. The quarter was interesting in that ag was hot. Our ag sales were up significantly and the gross margins on that were up well and that came out well and ag continues strong. We have currently got about $7,800,000 worth of backlog at Art's Way Manufacturing, the ag side of us.

I can't tell you the same thing about Scientific; Scientific is having a period where we have lots of activity, we have lots of quotations out, we have some minor activity but it's not significant. And it seems to be about budgets and our government's problems and all of the colleges, universities who depend upon our government for their grants and loans and so forth are struggling to get them, in fact they're not getting them.

And it seems that these research laboratories are maybe at the bottom of the list. I don't know if they always will be. I think not, but we do have some stuff going on. But the one thing that has happened -- we're doing some leasing and we're now pushing leasing. And we have currently got about $500,000 a year of lease income on the ones that we've done, just over that. And it's currently in the struggle.

But Vessels has really, really stepped up. We have new management in our shop down there. We have figured out how to quote finally and it's taken us a long time. And we're quoting at very good gross margins and we're getting orders and we have a backlog -- it's not as big as we'd like, but we're running a good shop and that's what we needed to do to get this going.

And of course, in addition to that, we're in negotiations with Imperial Steel Tank to do a deal with them to put us together and we're still negotiating that. So with that brief information I'm ready to go with questions.

Erica, let's go ahead and proceed with questions then. Erica?

We lost Erica.

Erica? Ward, I don't know what to tell you here.

One of the questions that -- among the questions that we expected to talk about was Imperial and Imperial is being negotiated. It's not completed yet. We look forward to closing it as soon as possible, if we can get it closed.

The other -- the next thing on our -- is our harbor operation. We finally have gotten it closed over in Salem and we have it all in West Union right now and we are in production on augers in West Union. We moved it across in order to get the efficiencies in the building at West Union, we had room there. Although that building is now very, very full.

We are manufacturing the augers there and we are shipping the augurs out of there. We have not doing that only in the last couple of weeks. But we are shipping augurs out of there.

We look to that to -- augers will not be as much this year. One of the reasons we moved it too was because we -- the old company, which was making augers in Salem, South Dakota cranked up again out of bankruptcy and took some of the customers that we had there and also was taking our help and we were having a struggle with that. And it seemed more economical to put it in our building in West Union. And so our sales are down somewhat in augers.

The item that we have that seems to be the hottest right now is our grinders. We put out a new grinder last year starting in December to ship it. We have so far this year shipped more of these grinders than we did all of last year and we have a backlog, a rather significant backlog of those at the moment as well. And we do have our production up and we're manufacturing one of those every day. And we have a backlog of orders for a couple months yet and of course it's added to every day or two.

We are very busy in West Union. It's not running like a fine watch yet, but it's coming along very nicely. We have put a lot of stuff out of there in the past month. We are making forage boxes there, we are making hay rakes there, we're making the augers there now and we're making running gear there. Those things were all in -- not the augers, but all of the other things were in Armstrong and Armstrong was choking with it and this is really, really helping it out. Erica? Do we have Erica?

Erica, are you on the line still with us?

I am. Are you ready for questions?

Yes, ma'am, we sure are.

(Operator Instructions). Nick Halen, Sidoti.

Good morning, guys. The first question I had is, you just mentioned about how one of your hottest items right now is the grinders and they're selling well with significant backlog. I was wondering if you can give us a little bit of insight into who exactly are the customers for the grinders right now, who seems interested in buying these?

Well, they're sold -- they're the same -- they go to the same people they always have, which are livestock producers, dairy farms, chicken farms, hog farms for grinding their grains into meals for their animals.

Okay.

And we sell them of course to all the dealers and we -- the one we did -- the grinder we've done is significantly more money than any of our prior ones per unit. It's like $6,000 to $7,000 more than the prior units, but it is twice as fast and it's just -- it's a real advancement, we're ahead of the curve.

But it's still going to the same -- you're marketing it to the same customer base as an (multiple speakers)?

Yes, that's right. And a lot of the ones we've sold far so far are people who like -- it's just improving their production so much. It performs literally 100% faster than the other one.

Okay. And just have you put a timeline on how long you're willing to give the Vessel segment to start showing some -- I guess some profitability and significantly better performance? Is there I guess an internal timeline on your end?

Well, no we haven't, I guess, but we're almost there. We literally are almost there. The thing had been in disarray since we opened in the new building and had to have new people and so on. But we have the proper management in the place now and we haven't had that.

And we took some jobs last year; the numbers you're comparing are last year's gross margin percentages and what have you. We took some jobs last year that we were ill-prepared to take. We shouldn't have taken them and we flubbed them badly and ran into awful overruns. But that's not going to happen again.

We have a man running the shop who's very, very good and has come from the steel mashing business and knows what it's about and has really straightened up the shop and cleaned it and so on. And we have margin going now. And so if we can put the Imperial sales on top of it, it will be very viable again.

But we got -- the background there is we got -- our landlord was also our manager and he put us in the street and we didn't have any -- we were out of business for a year. So it's almost like a start-up, but we had -- we have over $1 million worth of cold (inaudible) right now which is good news and these are at proper pricing and proper management of the build.

So I think it's -- I'm optimistic where we're going to be shortly with it. And I was a little optimistic last quarter and we didn't quite get there, but we did -- the last month of the quarter was pretty good and we're on the road to recovery there.

Okay, great. Thank you.

[Roger Miller].

First of all, I have to apologize because I was talking to Erica and missed part of the Imperial Steel Tank. So, is there a timeline when you may close on this?

Not -- there's not a date set. We're still negotiating the final details. I think it will close very, very shortly. But there are still some things we have to resolve.

And that company has been around since 1952 and I believe the revenue is about $2.5 million a year, is that right?

That's what -- yes.

So, if the merger would -- or buyout, whatever you want to call it, with Vessels, that would appreciably increase the revenue by what, about 150% or so?

Yes, something like that.

And that would definitely make Vessels highly profitable, at that point, correct?

I believe so.

And the scale of business that you could do with adding Imperial would enhance Vessels because the product line would be much greater, correct?

No, the product line would be very similar. But they had a different reach of customers than we did. They are in Chicago and when we checked our customer list against theirs we had very -- well, no crossover. So the products are very similar.

Well, what I saw when I looked on Imperial's website, they had some -- quite a few highly industrial products that I didn't realize that Vessels was even in that market.

Well, we haven't been much in that market. But it's still tanks and some of the -- we've been doing some work for them for a couple years actually -- well, we've been quoting them rather steadily for the past six months. And we've done -- we have three jobs in there -- in the shop now that were for Imperial. And they're a little more sophisticated but they're still a tank.

And Imperial has a repair team, is that correct, that they utilize and send out to do maintenance, is that --?

No.

No?

No.

So they contract that out? Because I did read where they do that kind of work. Is that correct or am I wrong?

I don't know much of that they did. They may have in the past, but in our due diligence we didn't find that much.

It's something that you might consider I guess.

I suppose, yes.

And the -- in Salem, South Dakota where you were making augers, I assume that's been moved or is that still in the process of being moved.

No, it's moved.

And is that up and running in West Union?

Yes. We're shipping augers out of West Union now.

Okay. And then at that building, you bought that, what about a year ago or something like that?

Yes. Something -- over a year ago.

So is that up for sale or is that --?

Yes. Yes.

It is up for sale?

Yes. We paid $195,000 for it.

And do you expect to receive somewhere in the vicinity of that?

Yes. I don't know what, but somewhere.

And if it doesn't sell in the near future would you consider auctioning it?

Haven't considered that. We've had one party that wants to lease it and we're negotiating with that. But I don't think we'd auction it.

Okay. I'm just thinking about cash flow. And then on the Scientific, it looks like to better utilize the labor there would be to increase the leases, correct?

Yes.

And last time I think you mentioned that the Board had approved ex-number of leases. Have they expanded on that?

Not number of leases. They -- in house we -- the Board had decided to allow us to have $1 million worth of equipment on that lease. And we have -- no, we're not there.

Yes, you're about halfway there, is that correct?

Yes, very close.

And then in the West Union plant, in the manufacturing area inside that plant, how much space are you utilizing now?

100%. It's full.

Oh, okay, I'm shocked. Is that because the augers moved in there?

Well, that was the final thing. But we had equipment that was sitting outdoors in Armstrong getting rusty and when we had got an order for it we'd have to go get it and repaint it and rework and so on and it looked like hell too. So one of the reasons we got the West Union building was so we could have a roof over the top of our inventory. So a considerable amount of the building is in finished goods inventory.

Now when you move the auger division or the augers themselves, I suppose that that's a minimal cost, is that correct?

Well, it costs some money, yes. We trucked it all over to West Union which is something like 300 miles.

And then was there downtime because you had to set up the machinery and (multiple speakers)?

There was downtime and of course new employees. We did bring the manager of it over for a brief time to transition it some. And he's been over a few weeks and he's going to come back over and see how we're going again. And he's helping us with the transition.

But as you may remember, we make considerable components for those augers in Armstrong. It's -- the weldments and so on that go into the undercarriage for them were fabricated and welded up in Armstrong and then shipped to Salem. Now the same thing is still happening, but it's going to -- it's being shipped to West Union.

So the final assembly is West Union?

More of that, yes.

Now doesn't that put it in more of a sweet spot for sales because of the fact that you're not right on top of another manufacturer?

That's right.

(multiple speakers) increase in any of your dealers wanting to carry the product now (multiple speakers)?

Well, we're getting some orders out of Wisconsin and out of Illinois and so one which we weren't getting before. The stuff is sold in a circle. But we still retain quite a bit of what we had over near Salem. But our take on it so far, what we know about it is augers are sold in a circle of maybe 300 to 400 miles of where they're sourced. So we'll get an increase in sales over in -- eventually. We'll get an increase in sales over in Illinois and Wisconsin and Eastern Iowa that we didn't have before, but we'll lose some over in the circle around Salem.

But we (multiple speakers) one of our very best salesman is in that territory and he sold almost all the augers we sold over there. But -- and he'll retain some of that. But he'll have a very difficult time retaining it all. We do have -- we have made an arrangement with a small guy in Salem who assembled -- final assembles them for many of the dealers over that way and we have a stock there so for the immediate sales they can pull from there. But we left some over there when we moved for that purpose.

Would you like to comment on the price of steel since that seems to be one of your major components?

Yes, it significantly increased from November until about March and then it's plateaued. But it hasn't really gone down any.

However, it doesn't seem to be impacting your earnings by any great percentages.

Well, we're pretty much Johnny on the spot when it comes to raising prices. I monitor that very carefully and I have a weekly -- not a weekly, a biweekly report that tells me about price of steel, price of hydraulic cylinders, price of major components that goes into this stuff. And when I see that thing moving we raise prices. We're raising prices on this grinder on the first of August.

And are you getting any resistance to any of the price increases?

Oh, we get bitching every time. But --.

Well, we all understand the complaints, because in my business that I'm in it's unbelievable the price increases we're getting. But they're still buying obviously, right?

Oh, yes.

And I would assume your competitors are raising prices too?

Yes. Yes, but it's kind of a double whammy this year. We raised prices back in the winter and we're hitting them again now. Quite frankly, the grinder, we don't have any competition in that size grinder we have, and we didn't know the cost of what it was when we began to build it. And so we're implementing a second increase on that since last December.

So now that you've got -- realized the cost on that grinder, I know you don't like to talk about this, but is there any possibility that you could ramp up production on that and sell it to distributors? And I won't even name who I'm going -- who I'm thinking of. But I know they want a heavy discount, you've discussed it before. But is there any possibility to increase your revenue? Or would that hurt your sales to your existing dealers and your profit line?

We're selling to Titan, not huge amounts but we're selling to tighten Titan. I saw a grinder go out there the other day. Distributor -- let me background. 50 years ago or 47 or 48 years ago when Art's Way was first in the grinder business that was their only product. They were making 10,000 a year of these damn things. The market I believe right now to be about 300 if that.

So it's just declined so dramatically from 10,000 to 300, of course it's taken it 40 plus years. I don't think -- we have some competition in it, we don't have the entire market, but we don't -- we lead the market in grinders. So I don't think we endear ourselves much with distributors and, you're right, they want more discount. And we're not discounting these to Titan anymore than we are to John Doe -- and won't.

Okay, I can understand that. Now does Titan have a trade show where they bring in outside vendors other than their primary vendor?

They haven't invited us to one if they do, I don't know if they do or not. But you know they have 93 stores, so.

And I would assume that would be something on the horizon if they're not doing that and it would be a place where you'd want to be.

Yes. We're doing a number of farm shows. Wisconsin Farm Progress Show which is in Illinois and 3I Show and regional shows with the dealers. We do a number of shows.

Okay, but is that increasing over what you've done in the past?

About the same.

Are there any other shows that you might consider doing even if it's over in Europe?

We do one in England, we do a couple shows in England and I go to those every year. I just got back.

How did it go?

I had better results last year than this, there's some resistance over there because the price of corn is so high that they buy. We had a couple cancellations from retail because of their input costs, but those things -- they cycle.

Well, I've found at trade shows, which I do extensively every year, most of the sales occur after the show and not during the show.

Oh, that's right. But I was quite proud of myself in Scotland. We generally sold a couple while I was there in the show. This year we didn't do that.

Well --.

I don't think it's price resistance or anything of the kind, I think it's just -- they've had kind of a sharp increase in their costs. And some people just say, well, I'm not going to do it anymore. And they have custom operators, those guys are still buying, but --.

Okay, well, --

England's been good for us.

-- reading through everything that you've published yesterday, I noticed there was an increase in service part sales and higher margins. And usually, in my opinion, that means people are repairing products and you seem to do quite well there. Is that the case?

Yes. I don't know if they're repairing, but our sales are up this year so far on spare parts.

And that's going to the dealers, not the OEMs, right?

No, as a matter of fact I looked yesterday and we're slight -- just slightly down on OEM parts sales, but our parts sales through our dealers are up.

Which is a lot more profitable.

Well, yes.

I would assume when you sell to OEMs your profit margins shrink.

Well some, but not very seriously.

Okay, well I can't think of anything else I want to ask about at this time, so I'll let someone else ask questions. Thank you for answering me.

Thank you, Miller.

Joe Dancy.

Ward, are we hiring anybody at West Union or are we still going with the staff that we've had over there?

We've hired a few people, Joe. We're at about 15.

Okay. You already sort of mentioned this while we were waiting for the operator. The West Union operations, it sounds like they're starting to really get in gear. And I think, and I don't want to put words in your mouth, but I think you said it wasn't quite as efficient as you thought it would be. Do you think (multiple speakers)?

That wouldn't be the way I'd phrase it, Joe. It's not as efficient as it will be because it's a start up.

Right.

But as to being as efficient as I thought it would be, I don't think there's much difference between it and reality.

Okay. I guess the point I was trying to get at, as we move forward you essentially will become more efficient, cost efficient, etc., moving forward, which should benefit the Company and the facilities.

No doubt about it.

Okay, good.

We'll be able to better plan and so on too. It's a start up situation and they had to learn how to put forage boxes together, for example, and so on. They have to have the coordination from Armstrong on getting their parts and pieces and that's new to the whole thing. We did the same thing with augers, but there's a lot less parts on an auger then there are some of these other pieces of farm equipment.

Okay. On Scientific do we have any (inaudible) sort of in a world of hurt with the funding, especially from universities and government agencies, and independent agencies to -- do we have any -- are you looking at the game plan there to maybe train strategies besides leasing or are we just going to go with leasing or is it --?

I've scratched my head, Ward, and I can't figure out -- I mean it's a -- for so much potential three or four years ago and the activity then versus what there is now, I'm just sort of -- I'm clueless. I don't know if you guys have thought about it. Maybe you have and can't make it public, but do you have any strategic plan or review for that Scientific division?

Well, nothing, Joe, which would set the world afire.

Okay.

The -- we have an awful lot of pending stuff. We have a large one, we've had some offshore stuff, we've got a lot of quotes out, we're working them very hard. It just -- I suppose there's as much scare about no money in the governmental hands, but we hear so damn much of it every night on the news.

Right.

But you know about the universities not getting money that they thought they were going to have. And somehow Dan, you know Dan?

Yes.

He doesn't want to lower himself to school houses and stuff, which maybe we need to do. But he is an expert in that field and believes in it strongly.

Well, you've got the right staff there. And quite frankly, the labs and everything are such a specialized higher margin than, like you say, school (multiple speakers).

They are.

(multiple speakers) something that. Have you -- this came up in one of the previous conference calls. I mean, I'm just -- every once in a while, Ward, I run across the apparently grain storage buildings or grain storage sites -- silos are selling like hotcakes.

Yes, they (multiple speakers).

I don't think we can make those in that facility, can we or could we?

We wouldn't be able to make them. They're galvanized rolled steel mostly. You have to have roll farmers and so on to do that. To me it doesn't seem to fit us. They also market differently than we do, we go through and implement dealer. But something to consider.

Well, it's something else in the hat. But, all right, well it sounds good. You've answered most of my questions before I even got on here, but I'm looking forward to next quarter, it should be interesting.

Yes, it should. It's off to a good start.

Excellent. Thanks, Ward.

Thank you, Joe.

Sam Rebotsky.

Yes, good morning, Ward.

Good morning.

I guess most of my questions have been answered, but I just want to get a little more picture on the Scientific. What is the size of the bids that you have out there? And is there any kind of a dollar amount that they need to be funded that we're waiting on? That if they could get their funding you would get the jobs? And if the prices you bid were too low because it hasn't started? Do you have then -- do you have the right to change the prices? Could you sort of talk in that direction?

Yes. We put a time limit on all quotes so that we can change the prices if need be. We're working on them, the largest one we're working on right now is $9.5 million and it's probably the closest one to closing. But it's not closed. And they range down -- it's pretty unusual for them to be less than $1 million.

Although some of the more recent ones we just -- we have a job in our shop now that was for a cattle building up in Minnesota someplace, which is about $600,000 or $700,000. But that's the low side of what we'd go. Most of them are $1 million, $1.5 million, $2 million, $2.5 million.

And I think you used to talk about, what, $30 million as far as the number out there or is there a number --?

Oh, we would have not that many quotes out, but (inaudible) would have $100 million in it of prospects that we've talked to. And we prune that every week -- every month, I mean. And we add to it every month. And that thing is full, we have more inquiries in there than usual. But I don't know, we have an awful lot of potential sitting there but not broken loose.

Would you say it's both the states and the federal government or would it be more prone to be the states or the federal -- I mean is there a way to look at where the money has to shake loose?

It's both. The federal stuff has a lot of the research. But these colleges and universities depend on the feds to give them the money as well as their states. Our customers, our Texas A&M, Iberia, University of Louisiana, LSU, so on. Those places are struggling because of budget cuts and so on.

And has it helped the leasing with any of these to produce the sales in this?

Well, it has a little bit. But we did our first one less than a year ago. We started this less than a year ago, more like six months ago. And the -- we're getting some traction with it now and we've got some out there and the -- someplace that should break loose a little better too, but I think it's going to.

Is the banks -- are any of the banks willing to come up with funding or have you gone that route?

For the leasing?

Yes.

Well, yes. We have had a couple meetings with Wells Fargo and another bank out of Omaha. Those people are willing to do leases with our type customers.

So do we see -- in other words, if you sort of figure out what you have to make and what has to be paid, can you shake loose some of the big jobs and sort of push them in? Or I mean, do we have visibility that in the next six months there will be more leases coming on or whatever you might need?

I'm guessing, yes.

And as far as the consolidation, are you finished consolidating in your location to increase to reduce cost and increase profitability?

Yes.

Okay. And are the opportunities for acquisitions, are there more things out there that you're looking at or do you want to digest what you hope to acquire and merge and all of that kind of stuff?

I'm looking.

You're looking?

We're working on another one now.

Okay, okay, well -- .

But they take a long time.

Look, the two parties have to negotiate a decent deal and you have to sort of find that you have a fit to work with or you could run the business after the acquisition. So it doesn't -- you have to be comfortable. So that's more important. So, as far as visibility and profitability going forward, how would we look at that compared to the improvements we've done so far?

Guarded optimism, I guess.

Okay, okay. Well, let's hope we achieve some of these things on your plate and so everybody can be happier in the next quarter.

That would be nice.

Okay, good luck.

I'm with you.

Okay.

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

Well, Ward, some great questions. Why don't you go ahead and close it off then?

Well, I really appreciate everybody that does call into this. And I hope that I'm telling you what you want to hear -- or not what you want to hear, what's reality. And we'll have another one in three months and see what happens. But I really do thank you very, very much and I also thank our employees and our stockholders for being with us. Thank you.

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