Art's Way Manufacturing Co Inc (ARTW) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Today is Friday, February 24, 2012. And welcome to the Art's Way Manufacturing Co., Inc. fiscal year 2011 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, Jr., Chairman of the Board of Directors; and Carrie Majeski, President and Chief Executive Officer. I will now hand the call over to Mr. Jim Drewitz. Mr. Jim Drewitz, you may begin.

Thank you, Erica and good morning, ladies and gentlemen. Before we begin, 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 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, loss of marketshare 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 update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectation 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, I'd like to turn the call over to Mr. McConnell. Mr. McConnell, it's all yours, sir.

Good morning, ladies and gentlemen. I appreciate you listening to our call. Just briefly, and Mr. Majeski will get into the numbers, but briefly we considered 2011 pretty successful. We made a bit more money. The letdown of the year was the Scientific, which really went down severely, but the ag business has been good as everyone seems to know and the ag business was good for us as well last year and brought in more profits.

I would like to introduce Carrie Majeski. She has been with us since '04 starting in the CFO position and then going to President about four years ago. She is guiding the Company extremely well and very pleased with her and for the first time, we'd like to bring her into this conference call and she will bring the numbers to you for '11. Carrie?

Thank you. Hello and welcome to the call. I'm just going to start off briefly by giving a rundown of the sales numbers year-to-date and quarter-to-date and break it down by segment. Manufacturing, year-to-date sales were $22.613 million compared to $20.586 million in the previous year, which was a 9.8% increase for the Ag division. Quarter-to-date for the Ag division, it was $4.522 million compared to $4.659 million.

So there was a slight decrease there, but we attribute that to the seasonality that we have in our productlines. Typically, our fourth and our first quarters are not our strongest quarters. When the farmers are in the field and using the equipment, that's when we see our more favorable quarters.

Scientific year-to-date had sales of $3.209 million compared to $6.831 million last year. That is a significant decrease and we have been talking about that really for most of the year. A lot of the projects that Scientific does, they are projects that take two years from just starting to talk about the project to completion. So we really struggled this year with getting some projects to close. We are optimistic for next year because we have really strong backlogs for the Scientific division and Ward will go into the backlog numbers a little bit later. Quarter-to-date, Scientific had $907,000 compared to $1.093 million and that was a 16% decrease for Scientific.

Sales for Vessels year-to-date was $1.797 million compared to $1.534 million in the previous year. That is a 17% increase there in sales. Quarter-to-date sales were $429,000 compared to $290,000. Vessel, we really struggled with that company over the last couple of years. It's really kind of a startup for us because we had to change locations and have all new employees across the board.

We finally feel that we are at a point now where we have management that understands the product and the processes and they know what it takes to do a project now and they are meeting their quotes when they start doing projects. So we really feel that we've got this one under control and expect more favorable results next year.

Our income year-to-date consolidated -- well, I will give you a consolidated sales I guess first -- ended up being $27.619 million and that is compared to $28.951 million last year. So that ended up being a 4% decrease and of course, Scientific with their 53% decrease in sales really drove that down. The other two divisions had increases. Quarter-to-date, consolidated was $5.858 million compared to $6.042 million, so that was a 3% decrease and again Scientific had a 17% decrease.

Year-to-date income consolidated was $1.249 million compared to $1.053 million in the prior year. Manufacturing income was $1.767 million compared to $1.293 million, so Manufacturing had a 37% increase. Scientific did end up the year with a loss of about $80,000 compared to income of $311,000, so that represented a very large decrease.

Vessels ended up with a loss of $438,000 compared to $551,000 in the previous year. So still a significant loss, but we feel like we've got a much better business there.

We are very happy with where the backlog levels are. We did a press release in January kind of announcing where we were. Net income for the year was up 18.5%. Our earnings per share is up $0.05 per share. We are at $0.31 per share. And backlogs are up 41%. So with that, I'll turn it back over to Ward.

Okay, thank you, Carrie. Talking about history and going forward here, we are off -- right now, our backlog is up to $21.090 million versus $14.840 million last year at this time, which is a significant increase. The increase is a result of a large order from a customer in California for 24 units of modular building, which are in the shop being produced now and which will we shipped before year-end.

The backlog for the Ag is almost identical to last year; it's within $80,000. And Vessels, their backlog is up about $180,000 also. The biggest thing I think we have done this past year is -- to improve our business -- is to put the right people in the right place. As we were buying these and hiring people to operate them, we didn't end up with what I would consider the best type operators.

This year, we have changed the management at Vessels of the shop, particularly the shop. Pat O'Neill is still with us, but he's doing the sales now and I report -- people are coming back to buy from us that left us because of our situation in the shop. A couple very large customers, I've had one there a couple weeks ago and he told me a couple years ago he would never buy again, but he's back and he's quoting.

The same was one of our major customers a couple years ago left us because of our quality. We're having very much quality problems in Vessels. It is a totally different pace. If you people get by Dubuque, I wish you would go see it. It's clean, it's neat, and it's orderly, and it looks like a business now and we certainly did suffer from that.

In West Union, a startup situation as well and it's totally different today. If you people are by West Union, stop too. But we have a new manager there and he came from John Deere. I think he's adding value very quickly. The place does not look the same as it did and it's going along well and we are shipping out of there now. And we do have orders to ship from there and all of our former Miller Pro products are over there, almost all. There's a couple items still in Armstrong.

We changed production managers in Armstrong as well this year and we consider that a significant increase in production. Our production percentages are climbing almost daily since he started December 1 and we really have a handle on what our efficiency levels are at now, daily. We keep (inaudible) of it daily.

We've also -- he is been a -- he is a bug for safety. He is very much into quality and some of his first moves were to send some of it back for being repainted and they just can't get it out of there now if it's not painted correctly. This is -- we needed that very badly. We have had paint troubles for two or three years and we didn't cure them, but he tore it apart. He cleaned every piece of equipment and every oven and so on and I have seen some of the paint coming out of there now and I don't believe it's the same shop. We needed that so badly.

So I think overall one of the nicest things going forward is we've got the right people in the right place and we have not had that with startups and changes and so on, but I think we have a good group now.

I'm going to just mention a little bit about the first quarter here that we are in. It's up and in that quarter, of course, is the California job for Scientific. So we feel like we are reasonably well-situated and since we got that, we've got another job for -- it's not as big, but it's $150,000. So I think Scientific should be good. We're looking with new business going back into Vessels, the ones that we've had in the past coming back and Ag remains strong. Yesterday, we got an order from Japan, which is a new type business for us and I am looking forward to a very good 2012. I do better with questions.

Would you like to take questions at this time?

Yes, please.

(Operator Instructions) Joe Dancy, LSGI Advisors.

Good morning, Ward and Carrie. I've got a question for you. I guess this is -- you didn't even address this, but I know you went out for, I think for the first time ever, to an analyst meeting in New York City and presented the Company's story to a bunch of analysts and investors, etc. And I was curious how that went, what was the response? Was there any interest from these folks? Was it worth your time? Are you going to do it again? Just sort of give us what happened. I'm very curious.

Well, you know that we are green as grass. Was the first one I have ever been to and I presented the history of the McConnells at Art's Way and Mark presented a PowerPoint. We had some play on it. It wasn't probably as tremendous as we had hoped. Would we go again? We would question I think. I'm not sure what kind of good we got out of it. We have some additional people that are in contact with us. There isn't any doubt of that.

We, of course, being new at it, we went and saw some of the other presentations that were given. There were 450 people registered to that and we went and listened to a couple of the other ones and I think we would agree that we would probably do better at it the next time because we have a better idea of how it operates.

The feedback I heard from someone who was there was positive and I know you have the slides -- I think you have the slides from the presentation.

Yes, they are on our website.

On the website, and they are really -- I think it tells the story pretty well. In my opinion, it's real well. Moving on, how about some equipment shows for Ag or for Scientific? Have you guys been attending any ag shows and gotten any feedback as to ag equipment or the -- I don't know if the manager of Scientific has been out. I know he speaks a lot at the industry shows also.

He is a speaker at those shows. He is at one next week all week. He goes -- we have cut them back a little bit, a couple of shows from where we were, but he goes to several shows. And that's where the -- actually that's where our jobs come from, through those shows. We have done little bit of direct mail. We have got some interest in that in the leasing side of it, but shows are our most important sales event for those.

Ag, we just got back. We were in Louisville, Kentucky to the largest farm show in North America, indoor they, but, golly, that was well attended. There were just hundreds of thousands of people there and every show space is full and tried to get a better position. We haven't been able to do, but we have a pretty good spot and we had a pretty good -- we had some pretty substantial equipment there.

And we got a lot of inquiry out of that show. I think we go to for five more major ones, but we kind of rely on our dealers to do the regional ones and we help them with the local sales. There's a show this week in New York State in Syracuse. We are there and our man is there and he's got some of our equipment there. But the major ones are in Iowa in the summer and I think in August and then this one we just came from.

The optimism is very, very high on ag again. Although creeping in, there is a pessimist here and there. Our farmers are loaded with money. They're spending it on land and they are buying equipment with it. Some people think they are getting kind of full of equipment, but they are consolidating very, very rapidly. It's a very, very changing market out there.

Interesting. I listened to a call from Titan International yesterday. They make agricultural tires and the CEO said the ag sector is extremely dynamic and he sees just incredible growth for the next -- at least for the next year, if not longer with all the planting, etc. and of course, you run equipment, you need new tires, so he was very optimistic. It sounds like you sort of have the same cautious -- a little more cautious optimism.

We are optimistic. Our sales are ahead of last year so far, so that certainly is optimistic. Overall, the industry is extremely optimistic. I am too old I think, Joe. I remember 1960 when it was not quite that strong, but it can change. So we have changed our operations somewhat because we anticipate it changing. We are running almost every piece of equipment we make at the same time now in our shops and that means that we have fresh inventory and we don't have a lot of finished goods inventory. It's declining as we do this and yet, we are ready to ship at any time any of the products.

But we're also ready to shut it off at any time if we need to. We also can increase it. For example, our grinder, if we want to increase it, we would probably put two people on it and increase it 50% or something. I think we are well-poised for whatever happens and whether the thing goes up or whether it goes down. I like our position in that very much.

Not only that, but I like the fact that you have a couple different non-ag sectors now to keep things (multiple speakers).

Well, that's right. Certainly, we saw last year how low the Scientific can go, but this year how high it can go. So we have some offsets that we had offset this year with Ag versus Scientific. We have some offsets going forward with Scientific perhaps and that was the objective when we bought them, was to get some diversity.

Well, you know, this new $7 million modular unit that you sold, is that going to open any doors with other customers that might be looking at - I don't know exactly what the buildings look like -- but is there any other customers out there looking for similar type equipment or buildings and see this order, and look at it and might consider Art's Way for a bid versus what they might have done otherwise?

Certainly, that would be true, yes. This is a very prestigious university where this is going and it's a large project overall. Our portion of it is pretty small. But yes, this is going to be really ballyhooed in the industry.

Okay, excellent. How is the leasing program going on Scientific?

Well, we are quoting them. We have quoted quite a few, but we have tried -- we have been a little bit -- I think a little bit greedy. We tried to pay for them in the first lease and maybe that's a little bit aggressive. We are looking to finance it with -- we have been financing it internally and we have been quoting it as if we were financing it internally. But we are talking to a large bank about giving five, six-year terms on these things and dramatically reducing the monthly payment. The way we were doing it, we were trying to give full recovery too fast.

Right, right. Of course, the good news is, on most of this stuff, the collateral is -- you could just drive up and cart it away. It's not stuck -- or is it?

When you do a short-term one, you charge -- there's a lot of freight to deliver them and get them set. And then there's almost going through the same thing if they don't keep them. If they come back in two years time, you are really loading an awful lot of extra expense on it. If we get it spread out six years or something, then it doesn't look so severe.

Okay, the last question I have is on Vessels and it's just a marketing question. I know North Dakota, the oil play up there, actually it's an incredible frenzy, as well as down here in Texas in the Eagle Ford formation, but I know with Art's Way's facility located up there, the Vessels grew. They are using these high-pressured hydraulic fracturing -- just incredible pressures, Ward. They are shooting the liquids underground.

And I know a mechanical engineer and we were just talking and he said, gee, anybody who does any pressure vessels or anything, that might be a really good market for you to look at or Art's Way to look at. I really hadn't thought about it and I just talked to this guy about two weeks ago and just came up inside of it. Have we looked at all or is there a niche, if we have looked at all in the oilfield business up in North Dakota to supply some pressure vessels or vessels?

There are tanks being sold up there and also there are tanks being made and about 60 days ago, I sent Pat O'Neill up to have a look and he hasn't got it into his schedule yet. I have had some correspondence from the company making tanks up there and they are in the process of building a new building and expanding their operation. But we need to -- we really -- to evaluate it, we need to go up there and do some talking and see what's going on, see if there's some people who will buy from us.

From what I've read, obviously, energy and ag are two areas I specialize in, but the North Dakota, the equipment up there for vessel and pressure pumping, I guess they call it, is just -- it's just an explosive growth area. The Wall Street Journal also had an article on how -- there was a company in Idaho that was making these mancamp sort of apartment-type stuff and there were actually modular equipment and shipping them over to North Dakota and they said they've been hiring left and right. And I was thinking, God -- of course, Scientific, we have the shop full now, but these mancamps are not as sophisticated as laboratories, but that might be another interesting (multiple speakers).

I saw a picture of that, Joe.

Did you? Okay.

That's quite a field of buildings.

Yes, and I was going to say, gee, if we don't have anything going on in the Art's Way Scientific shop, I'm sure, like I say, I know Pat would or I know the manager down there would rather build scientific laboratories, but I'm sure we could kick out -- or I would assume we could -- some good-sized essentially apartment or motel-type modulars you can ship up there and slap on the ground pretty fast.

Okay, Ward, it sounds like a good quarter and I look forward to hearing progress here in the future.

Yes, thank you, Joe.

Roger Miller, Foggy Daze.

Well, my first question today is about the debt level. Would you like to go into that about what you have done to pay any of it down or where it stands?

Well, yes, we have incurred no long -- anymore long-term debt and we paid down our long-term debt throughout the past year. And our current -- well, we've been out of the bank on our short-term debt for about the past month. We need to go back into it. We did not have the same terms this year on our prepayment on beet harvesters. We had prior demand in full payment. This year, we demanded 50% of the payment. So I don't know, we are having trouble with 100%. But no, our balance sheet is in great shape.

Well, I expected it was.

It still is.

So even with the increase in business, you haven't increased your debt level at present time?

Ward McConnell No.

It's actually been decreased.

That's an accomplishment. Would you like to discuss going sideways from that the amount of bids that you have out this year versus last year in the different divisions? Approximately is it up, flat or where would it be?

Well --

I can tell you that, for Vessels, Pat O'Neill, our sales manager, he used to be the general manager there. He has now moved to more of a sales division and he has been out on the road. So we are generating a much, much higher level of quotes for that company than we have in the past.

Scientific, we still have a high level of quotes going through there, but again that quote process from starting to talk about projects to actually getting a job can be fairly long, so I would say it's pretty level at Scientific, but where we are seeing an increase at Scientific is the interest in the leasing.

Okay, and then reinforcing what Joe Dancy said, about Vessels, not only in North Dakota, but in Pennsylvania. Obviously, the fracturing has been huge and it has moved into Ohio now. And even the Chinese are scooping up drilling rights and -- which is amazing to me that they would come to Ohio and these small counties and go to the county seats to get the rights to drill. And I believe you should look into that and the liquefied natural gas, have you considered doing anything with that with Vessels?

Well, we quote everything. I think -- more specifically, I'd don't think we have done much about liquid gas, although we may have some quotes in there I don't know about. We have a real long list of quotes that are out at Vessels that are much, much larger than it has been. And we have got a couple customers who just came back this past week that were with us for a while and so on.

I think the operation is good and clean and there is no warranty claims anymore and we had terrible warranty claims. It's just night and day difference. But we had to get a hold of the quality down there. We were suffering with quality, but I think we are there.

Well, your press releases over the last few months have increased and they have told the story much better. I'm still not sure the financial industry understands what this company does or where it's going. Would you like to comment on that?

Well, we are continuing to look for some smaller acquisitions or productlines. We are certainly looking at organic growth in every sector -- every product. And I am optimistic about our future. I am particularly optimistic about 2012. It's going to be a good year for us.

Well, you sit in a niche in Scientific and have you looked at anything there to make an acquisition?

No, not recently. We did look at on a couple years ago. It finally got sold to somebody. At the end of the day, we didn't like the looks of it. But we have a lot more capacity than we had. So if we -- (multiple speakers). We are working on a lot of orders all the time.

Right. And in the Ag line, you have bought numerous companies over the years and you have done well with some of the products, I believe. And you're still manufacturing for OEMs, correct?

Some, yes. We make forage blowers for New Holland and Case. Otherwise -- that has been the same for years. That's no new products OEM, but forage blowers we have been making for them for a long time and that fluctuates up and down. This year, it's better. They have ordered more this year than they had last year. It goes in cycles.

Now, over this last year, have you managed to pick up any new dealers in ag business?

Oh, yes, some. There's attrition going on in dealerships. Names change and there's less dealers all the time, but they are bigger and bigger. However, in our case, our largest dealer is an independent. He does not have an affiliation with John Deere or Case or AGCO. He is strictly an independent dealer and he's our largest dealer. We call him a short line dealer.

And we -- I think -- we wonder where the industry is going. Is it going to go all amalgamated John Deere dealers? All these John Deere dealers have got 10 locations now and took out a lot of people, but there are springing up some more of these short line dealers and we have to watch for that. We have to adjust to that and search them out because we get more attention from them. John Deere really consumes their dealers with John Deere and don't like them to handle our stuff. Not so bad with Case. Not so bad with AGCO, but still I like the looks of the independent dealer, short line dealer we call them.

Have you considered opening a warehouse in any other area outside of your sweet spot, which is Iowa?

Not really. Not really. We might have a piece of equipment here and there, but not really. We are distributing out of West Union, though, as well as Armstrong.

How much has that increased your sales?

I don't know. Probably not much.

Is there any line that you are manufacturing at the present time in Ag that's doing better than the others in the last year?

Our two largest products are grinder mixers and sugar beet harvesters for dollar volume. We have had a great big increase in grinder mixers in the past 12 months and it's still going on. We are up so far this year on grinders in numbers of unit. But sugar -- the largest product is still the grinder. The next one is the beet harvester for dollar volume.

In the last conference call, you mentioned potato harvesters and I saw it mentioned on one of your news releases. Has anything happened there?

No, we had a one-time order last year for 10 units and we made them. We have no orders for those this year. And that was the same potato harvester we made back in '90 something or other, '96, 10 years or so ago, something like that. And we hadn't made any for 10 years and we took the order for 10 and struggled through it, but it helped us out a little bit last year.

In the past, you went over to Europe to sell. With the economic conditions over other, has that affected anything?

I'm going again. We are showing over there at the Wales -- Royal Wales show this year, Royal Welsh show this year and we are also showing at the Royal Scottish show, Highland show with our distributor, our importer over there. He had kind of a down year last year over there. The input costs of grain were high and some of the people sold out their smaller (inaudible), but he just ordered yesterday three more units. So we have a good presence in England in the UK, and yesterday, we got an order from Japan, which is fresh.

We are doing some export and we have hired sort of an assistant to our sales guy and we told him to contact the state of Iowa for their department, which helps export, and I had a meeting with him last week and got him started on trying to find more export business. Export has been good for a lot of these small farm equipment people and we have had some, of course, but we haven't had as much as I think is available for us. It comes slowly, but you do get pretty good help from the state.

A couple years ago, we sent one of our people to Russia and Ukraine and the state paid their airplane ticket and what have you. We've got some interest out of that and we sold a couple machines and then the Russians and Ukrainians ran out of money and they weren't importing for a couple years. But there's other places. Brazil is supposed to be good now and so on, so we are going to be putting a little more effort into that. So we are pretty well situated in Australia for grinders and we are also pretty well situated in England and Scotland, Wales.

Well, I would like to see you do more press releases as you progress and I am happy to see the ones that you have done over the last year. Transparency is important with a small company.

So that's all I've got to say, but thank you for your work this year.

Thank you, Roger.

Sam Rebotsky, SER Asset Management.

Good morning, Ward and Carrie. This seems to be doing well with this backlog improving nicely. Could you sort of indicate is there -- the shipment of the backlog, do you expect that to flow more in the first six months or is it evenly measured, the deliveries or what's your expectations of your shipment of the backlog?

Well, the larger stuff in our backlog is due to Scientific and we do account for that segment on a percent completion basis. So we will -- in the first quarter, you will start to see parts of that job hitting our sales numbers and our income numbers. So it should be a --.

All the backlog will be shipped in the Ag stuff by August.

And as far as you are bidding on additional jobs, I guess to the Scientific -- is -- would you say -- I thought there was once a number of bids of about $60 million. Do I recall that properly? Is that a reasonable number out there on what you are bidding on or --?

I think it or more.

More.

I don't have the number this morning, but, yes, there is always a lot of bids out on Scientific. They take so long to get through the process at a university where most of them go. It takes so long to get through their process. There's always a lot in there and some of them are dreams and some of them are real, but some of them take two or three years even to be considered again. But there is always a lot in there.

The California job, how long were you working on that job before they finally came up with --?

I am estimating, but I am estimating five years.

Wow.

I know we've heard about it for three. And he was -- it's something that he put together originally from a show and he knew -- he got to know the people and the people he got to know wanted to buy it. Well, by the time they got it through their bureaucracy and got it into an order, it took a long time. But they all do. There's several of them that are pending back and rebid when they want the first one. It's just the bureaucracy of the university systems and their method of money is -- they have to apply for a grant and apply for -- get approval from the school first and so on. It's just a long process, but there's a lot of schools and a lot of individuals who work in those schools that want these things.

That sounds good. One of the things about appearing at these investor conferences, you don't really get the feel right away. There's not exactly an immediate reaction to people to buy the stock, but it does once you get -- once people get to know Art's Way, it takes a little while and you'll build up more of a following and create a greater liquidity in the stock.

And your presentation, I am not sure if there is a -- I guess if you put out a press release about this presentation and going to your website would make it easier, people would be more aware of the presentation. That would be helpful, but everything seems to be moving along in the right direction and hopefully the sales and profits will keep increasing. Good luck.

Thank you.

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

Ward and Carrie, great call. Let's close it off and we will talk to them next time.

Great, thank you.

Thanks a lot for listening to us. Appreciate it.

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