Art's Way Manufacturing Co Inc (ARTW) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Today is Thursday, July 12, 2012. And welcome to the Art's Way Manufacturing Company, Inc. second-quarter and six-month financial results conference call. At this time, all participants are in a listen-only mode. Operator assistance is available any time during this conference (Operator Instructions).

Your call leader for today's call are Jim Drewitz, Investor and Press Relations Representative; J. Ward McConnell, Chairman of the Board of Directors; and Carrie Majeski, President and Chief Executive Officer.

I would now like to turn the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

Thank you, Erica. Good morning, ladies and gentlemen.

Before we get started, I would like to draw your attention to, except for the historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements about 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 caption Risk Factors and 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. Ward McConnell. Mr. McConnell?

Thank you, Jim. Good morning, ladies and gentlemen. We're going to start this morning with Carrie Majeski reviewing the numbers, and then I'll answer all your questions -- try to answer all your questions after.

Good morning. For the three months ended May 31, our consolidated net sales were $11,685,000 compared to $7,845,000 in the previous year. This was a 48.9% increase over last year. The ag sector's revenue for the three months was $8,006,000 compared to $6,664,000. The modular laboratory segment was $3,062,000 compared to $779,000 in the prior period. So that was our largest gain. And the pressure vessel segment was $617,000 compared to $402,000.

Our operating income for the three months consolidated was $1,494,000 compared to $548,000. Our net income for the same period was $936,000 compared to $291,000. For the segment information for the three months, the ag sector had income before tax of [$1.24 million] compared to $679,000 in the prior period. The modular laboratory segment had $468,000 compared to a loss of $74,000 in the prior period. And the pressure vessel segment showed a loss of $87,000 compared to a loss of $175,000 in the prior period.

Our year-to-date results for net sales is $17,997,000 compared to $12,509,000. Again, the ag sector's breakdown for that period was $11,994,000 compared to $10,321,000. The modular laboratory segment was $5,057,000 compared to $1,224,000. And the pressurized vessel segment was $946,000 compared to $965,000.

The consolidated increase for the year is 43.9%. Our operating income year-to-date is $1,956,000 compared to a loss of $111,000 in the prior period. The net income year-to-date is $1,129,000 compared to a loss of $194,000.

With that, I will hand the call back over to Ward.

Well, we'll try again. Who would like to start the questions?

(Operator Instructions) Nick Halen, Sidoti & Company.

Can you tell us how much of the modular building revenue in the quarter actually came from the contract that was announced in January? And I guess how much revenue is still left to be realized on that contract?

We have a couple of different segments to that contract. We have a fabrication segment and an installation segment. At the end of the quarter, I believe we were at about 50% complete on that project. And the installation, we were just getting started on.

Okay. So (multiple speakers) -- so there's -- I'm sorry. Go ahead.

(multiple speakers) It was about $6.5 million remaining after the end of that quarter.

So $6.5 million -- there's $6.5 million left. Okay. And just in terms of the revenue recognition there, I mean, is that -- will that be -- are you expecting it to be spread pretty evenly the next two quarters? Or I mean -- I was originally under the assumption that the majority of that would be in the second and third quarters of this year. It seemed the second quarter came in a little lighter than I was expecting. So I mean, should we expect a pretty big jump in the third quarter?

The second -- I mean, excuse me -- the third and fourth quarter should complete the job. And we think it may run over just a week in October, but it would not be much of any revenue in that quarter -- in the -- going into the next quarter. So we think it will be completed by year-end.

Okay. And obviously, a great quarter on the ag side. I was wondering if you could give us a little insight into which of the products in particular sold well? And, I guess, Ward, do you anticipate any headwinds in the second-half from all the droughts that we're seeing in the Midwest?

Well, not really. Our backlog in the ag is over $8 million currently, against just under $8 million a year ago. So -- in the ag. So, not really. We think it's going to be -- go on pretty well.

Okay.

In terms of products that did well for us, our grinder mixer sales are up. Some of our forage equipment is up as well. Our beet harvesting equipment, we're a little bit behind schedule from where we were last year, so those sales are down, but we expect them to regain in the third quarter.

We're still delivering beet harvesters. And last year, I think, we were pretty well delivered by this time.

Okay. And just lastly, in the press release, you mentioned manufacturing efficiencies as a reason for the 500-plus basis point increase on ag margins. And I was wondering if you could just elaborate on that a little bit more? And how sustainable, in your opinion, are those margins?

Well, we've really had an effort on here for the past -- well, it really started on December 1st, the first month of our fiscal year. We went into a constant improvement process where everything was recognized as it was and looked at to be improved. And it's been improved. It is better and it's certainly nonstop. It's an ongoing -- as long as we are alive, it will be ongoing.

And the other thing about that is that we have pretty well got the products that we bought over the prior years integrated into the system in a more manageable and more efficient way than they were, because when you first have a product come in, you have a learning curve which goes on a while. And -- but those are quite well behind us now. So I think we're going to continue to improve.

Okay. Great. Thanks, guys. Congrats on the quarter.

Thank you.

Brent Hoffman, Great Plains Financial.

One of my questions was related to the drought and that was pretty much answered. And I know that this is pretty new, but do you have any reaction or comments to what the USDA announced in terms of helping to relieve the drought? And the other question I have is, do you have any comments on the letter of intent that you signed recently to purchase the harvester? Thank you.

Well, it's -- the harvester is closed -- it closed May 10th and is contributing a bit. Our backlog includes that now and that backlog is $1.2 million. So it's going to be a contributor. In fact, even the first month, we -- two-thirds of the month we owned it, which were in this quarter that we're talking about, we were profitable. And these months since then are -- this thing went very good for us.

The revenues in the quarter for UHC were $164,000, but we only had UHC since May 10th. So it was just about 20 days that we had UHC within this quarter.

As far as the drought is concerned, I traveled Iowa this week and they need a rain, but they're not devastated by any means here. And if a rain comes, I don't think they've lost anything.

Farmers, generally speaking, farmers are pretty good at crying about rain and so on. And so far -- this is only my observation, though. I'm not with the USDA, but -- and I'm not an expert on corn, but it sure looks to me like that some of them are going to make a hell of a lot of money. And some of them are not going -- in the drought areas, some of them aren't going to do so well. But it still remains to be seen. It's not a done deal, by any means. So they do need rain. They need rain in Iowa, but they don't -- it's not a crop loss by any stretch.

I assume that it could only help your bottom line going forward due to the fact that the USDA has said -- and if they follow through on it -- that they're going to make low interest loans available to these farmers. Would you agree?

Well, I don't know because they just cut -- the farm bill thing looks -- and they cut $6 billion, the farm -- the ag bill? Something like that. It was a big number. And -- I don't know.

Let me give you a little example of our beet deal. Beet farmers have been getting roughly $30, $35 an acre -- excuse me, a ton for their beets. And last 12 they got $80 a ton for their beets and they're wallowing in money, believe me. I spent -- two weeks ago, I went to beet areas to see what was going on and they're wallowing in money. They want to spend it. So I don't know. Forecasting it, I just shouldn't -- I should shut up, I guess. I don't know.

All right. Well, thank you very much. Good quarter.

Thank you.

Sam Rebotsky, CER Asset Management.

Good morning, Ward and Carrie. Good quarter. Let me understand your total backlog currently. You said $6.5 million from the modular and $1.2 million. Is there anything else?

Yes. Let me read it to you more accurately. The ag sector at 5/31 had $8 million -- I'm sorry. As of now, not $8 million 5/31.

As of May 31, the ag sector's backlog was $8,123,000 and that does include our newly acquired UHC. The modular laboratory business had a backlog of [$5,075,000]. And the pressure vessels had a backlog of $435,000, for a consolidated backlog of [$13,633,000].

And how does this compare to the last quarter in the same quarter last year? Do you have those numbers?

Yes, right here. Last year, the ag sector was $7.8 million. The modular was $1.5 million. And the vessels were $365,000.

So this is (multiple speakers) significant --

For a total of $9,670,000. The backlog is about $4 million ahead.

Yes. That seems significant. And as far as the pipeline, do we expect additional that we're bidding on? What's our expectations relative to the modular? Or could you have any -- what your visibility is now to increase backlog, et cetera?

Well, we've sold a couple of projects -- not very large ones -- and we're building those right now. We've got, again, our backlog -- our quotation level is very, very high. 85 projects still alive as of Monday when I was there, which is about the same as usual. There's still always funding problems with them or some of the live ones will happen, of course, and some of them won't. But I think it's positive. It's not overwhelming, but it's positive.

In this large project that you're working on, how long did that take before the funding came about?

Well, that was done by the Stanford University.

Okay.

They didn't go to the government for money. They used their trust funds and so on. But still took probably -- I stand corrected, probably -- about a year before it happened -- from the time they inquired about it until it became an order. And it was -- in that year was about six months of negotiations.

Yes. Yes. Are you seeing much competition in bidding for these contracts or -- compared to (multiple speakers) --?

(multiple speakers) It's more of a release problem we have with it. Some of them get turned down; some of them can't get funded; some of them are a dream, I guess. But they slowly work through and finally come to fruition.

Okay. Now, looking at your balance sheet, at the end of the February quarter, you had accounts receivable of $3,099,000 and inventory is $14,379,000. Could you sort of give me an indication where you're going with those kind of numbers currently in looking forward? Do you need to raise additional funds? I know we discussed how you previously would finance some of these projects.

We still have plenty of availability on our line of credit and the receivables are considerably affected by this job in California. And so we have more receivables than usual and our bank debt is lower than usual. So we are -- I think, financially, we're in great shape here right now. (multiple speakers) We're paying payables faster than you can believe. We just -- we have a program here where we pay our payables in 20 days, even though they're 30-day terms. So, you know, we're in pretty good shape on money.

That's wonderful. Now, as far as inventory, do we expect to get the inventory down? Or are we building it up for this major project?

We have delivered all of that project. But it's not invoiced. The way it works is, we delivered the last of it in July -- the first week and the second week of July, last week. And it doesn't get invoiced until the end of the month. That's the terms of the contract we have. So -- but it's -- we're entirely done with it in the factory.

Okay. (multiple speakers)

And the cost of those buildings never really go into inventory because that's accounted for on a percent completion. So the cost of the building materials and kind of the inventory going into that project, they go right into the project. So that never goes into the inventory line.

Okay.

Our inventory values are remaining pretty consistent.

Okay. So do we feel comfortable with the level of the inventory? Do you want to increase it, reduce it, or what is our expectations going forward?

Well, we're working to reduce it, but it's a struggle when you -- like we just bought $1 million of inventory when we bought UH -- Universal Harvester. So that main came in and the numbers would show that our inventory would be down $1 million if we hadn't done that.

Yes.

Okay. Well, it sounds very good. You seem to be on target to improve profitability significantly, and hopefully, you continue. Good luck.

Thank you.

Thank you.

(Operator Instructions) Roger Miller, Foggy Days International.

(multiple speakers) I was shocked by the numbers. I think the market was surprised. The stock is not, in my opinion, not showing the true value of the Company, so I'm going to go forward here with a couple of questions. These are all my opinions. When I did my research on Universal Harvester, I found out that they are a company that manufactures reels. And these are replacements for OEMs; correct?

Not entirely. Some of them go to OEMs on new equipment, but there's replacements as well.

And what OEM companies? Are you (multiple speakers) --

(multiple speakers) DAVCO is one. They, so far with us, at least, it's our largest customer. They're using them both ways. They use some for repair and some for original equipment. But we sell case. They don't buy as much from us, but we sell the case. And one of the other customers that's an OEM makes swathers in Canada.

Honey Bee.

Yes, their name is Honey Bee.

And you might want to put out a press release on that. That's a suggestion. As far as Universal Harvester goes, when you announce their sales under the former owners, how old were these owners?

70.

Okay. And it appeared to me that this company has a lot of room to grow. In fact, when I did my research and found out -- maybe my numbers are wrong, but they had 1,000 dealers on their books of which 750 were active. Is that -- or semi-active. Is that true?

We don't think so. It appears that on the Internet, they had put down people who bought from them pretty indiscriminately, and there was a lot of names that didn't mean much. We are finding out that there are quite a lot of customers. There are a lot of customers, but nothing in that 750 category, I don't think.

So, how many of those customers do you think, at this point, percentage-wise, will expand your selling base nationwide? Because these customers appear to be nationwide and they're -- just about every state.

Well, you know, I don't think I can answer that honestly yet. We do think we'll get some synergy out of the fact that we have 10, 12 salesmen selling them for replacement, and will be calling on -- I know of a couple of dealers we've talked to that have sold these before, and were very pleased that we bought it. But I would hate to pick a number.

But I do think we're going to get some additional sales out of it, of our products too, but it's pretty hard to tell yet. And we really haven't learned it well enough yet to -- we haven't presented it yet to our own salesmen because we're working out the pricing and so on. But we intend to do that right away.

In the whole marketplace, have you determined the percentage of sales about where this company is at with their competition?

Well, it's awfully hard to say because some of the OEMs make their own. There's a company called HCC, which is very much a direct competitor. And I guess we would say that there's some companies -- OEM companies -- that make their own, which makes them competitors as well.

But we hired a salesman who has done OEM sales. He came here a few months ago as our Sales Manager. And we've given him an assignment of working on OEM sales, including Deere and so on. But I think the most direct competition is HCC. They're in Illinois and been in the business a very, very long time. But otherwise, actually, this product has got a very good gross margin, so.

Well, not only the gross margins, but it appears if you've got a backlog of $1.2 million already, the growth of sales from the former owners to you is -- could be substantial. You want to comment on that?

Well, maybe it's a little early to comment on it. They did about $4 million in sales. We haven't got it offered yet to where we expect to get more sales out of it. I think another quarter will be a lot smarter. It's kind of nice. We did not have to -- we did not add any more people except the ones that were there working. And so it's the same as it was and it was very profitable before. So I think we have a very good opportunity to be adding to the bottom line with it.

So at this point, you've retained all the personnel and everything is running smooth. Is that correct?

That's right. I was there on Monday and I was very pleased. And it just -- we have no people working down there that we've hired. It's the same people that were there before. And the management, everybody else is there. The people we bought it from are still there and intend to be. I think -- the fact is, I think we've put them on a five-year employment contract.

The stability of the Company appears to be rock solid then.

Yes.

As far as the Universal Harvester area goes. Moving along, with that new salesman, his now capacity is OEM dealers primarily?

No. No. Partially. He's got 10 or 12 salesmen that we have -- that varies a little bit, but -- that we already have onboard is his responsibility. But he, himself, has worked on OEMs, so he knows how it works. But he's still trying to get his feet wet.

Is he (multiple speakers) --

We're very happy with him.

Is he going to push into Canada more?

You know, I don't know. I think -- there's a couple companies in Canada that make reels for their own use. And a lot of their -- we don't know yet. I've talked to them about it, but whether or not the volume they do is significant enough to them or whether they'd be willing to buy, we don't know at this stage.

We do have a FEMA convention coming up -- farm equipment manufacturers convention coming up in a couple of months here. And we'll see these people there, and we'll query some of it there. He's going to the convention with me, and Carrie. So I'm -- hopefully, we learn more about it there. And only coincidentally, Marc McConnell is going to be President of this organization next year, so.

That's interesting.

That's helpful (multiple speakers) --?

Can you move into vessels and describe the growth there?

Well, our backlog is higher too. I think we've made pretty good strides. I had hoped for a little bit better, but we're $150,000 profit size ahead in this first half. We still got a loss of $87,000, but it's running very, very well now. It's -- I made a swing through there on Monday as well. And, right now, we need more sales, but the thing is running smoothly and we're getting no warranty claims back and so on. We were having an awful time with that for a while, as you know.

But it's pretty well cured right now and I think we're okay. I like very much what's going on as far as production down there, and keeping track of costs and so on, all of which were pretty loose until this guy came, and we have there. He came a year ago on January. And he's really cleaned it up.

We had lost a lot of customers over bad quality, and we're getting them back now. And we've invited several of them to make visits there and so on, and now they're quoting again. And I think it's pretty assured that it's going to go forward and be profitable.

Well, in the last conference call, it was urged that you consider a divesting of this division. And what's your response to that at this point?

My response is that -- pretty personal -- I don't like losers and I don't have them. And I'm challenged to fix them and have been quite successful doing that outside of Art's Way -- well, Art's Way, too. And remembering back when Art's Way paid prime plus 5 and stuff like that, but I just think it can be very profitable going forward. And will be.

Can we expect any new products out of vessels? Like, for instance -- I'm going to hit the nail on the head again -- LNG or CNG? It's booming in the Ohio region, and with Chart up in Cleveland, with another company in Michigan, converting trucks to natural gas and diesel combined. You've got Chrysler and GM making pickups, the same situation, that will be for sale this year.

It appears that there's a huge market for tanks -- and similar to propane tanks -- on the rural areas for the farms to fill up the machinery. That will be natural gas, due to the cost of the natural gas versus diesel or gasoline -- about 50% less. You want to comment on that?

We haven't done very much about it. We did -- I did send the Sales Manager up to North Dakota to see what was there. But, so far, these tanks are not the type tanks we make. But that's a pretty preliminary answer for you. We have not done much.

You may think about exploring an acquisition in that area.

Yes. As a matter of fact, I have done that. There's a tank company up there that was way undersized to meet the demand of the market in Williston, and wanted us to come in with them. But they wanted so damn much for half of it that we declined it. But -- and I haven't heard from them again recently either, but that wasn't all that long ago; about six months ago. But anyway, we just haven't done much on it.

(multiple speakers) I might suggest you maybe want to attend a trade show.

That would not be a bad idea. I don't know what tradeshow it would be, but I think Pat would know -- our guy.

Yes.

Pat O'Neill would know.

I'd send him and your salesmen.

Yes. What we're doing there is -- he's currently working the water shows, so -- but I think it's a good suggestion, too.

Well, it's all about revenue and profit and backlog. And there's no doubt there's a shortage of welders, at least in Ohio and Pennsylvania, and there's a shortage of tanks right now, too.

Some of the tanks we would not be able to do. For example, a vehicle tank. That's pretty light, thin sheet metal. Our stuff is pretty heavy. And those things are made in pretty large quantities. Ours are pretty much -- pretty much one-offs.

We have a -- do have an order there now for 10 tanks a month for a customer for the next few months -- five, six months. And when he gets near to the end of that, he orders another 10 months. And these are profitable.

And we've delivered -- we're doing it right, now; we're delivering them on time, and they like the quality and so on. So we would seek more of that, and are very much working on one customer that would use 50 tanks a month. And we've quoted them and so on. And they've bought some trial runs from us -- one-offs to see our quality and so on. And then sent their people in to measure our shop up to see if it was up to their standards.

And that's in process right now. We think they'll come along pretty quickly. But they're also in the process of moving from one location to another, and so they're kind of in turmoil at the moment, but they'll get over that.

One particular question I wanted to get off my mind before I get off the phone, is the buildings. They're all filled up. Is that correct?

Yes. Yes.

So what do you do next? Any plans for expansion anywhere or --?

Not at the moment. But saying they're filled up, they are full of product. But our capacity for -- we're under capacity as far as putting product through. West Union, for example, we have something like 20 people there in a very big building. We have capacity there to use a lot more people and make more product, but we have capacity for more. But we have no buildings on our agenda at the moment.

Okay. Well, thank you for answering my questions. And I look forward to the next quarter sales. And total congratulations to all the employees for this fine earnings statement.

Thank you.

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

Well, Ward, go ahead and close it out, and we'll talk to everybody next time.

Well, I really appreciate -- and it's more fun when we have had a good quarter -- talking to you and trying to explain as best I can the status of the Company. So I'm awfully pleased you call in, and I'm glad you're interested in the Company and continue to be. It helps us to have that conviction and we appreciate it. Thanks again.

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