Arts-Way Manufacturing's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: Art's-Way Manufacturing (ARTW)

Arts-Way Manufacturing Co. Inc. (NASDAQ:ARTW)

Q4 2013 Earnings Conference Call

February 26, 2014 11:00 AM ET

Executives

David Drewitz - IR

Ward McConnell - Executive Chairman

Carrie Majeski - President and CEO

Dan Palmer - General Manager

Marc McConnell - Executive Vice Chairman

Analysts

Brian Hillingdon

Sam Rebotsky

Roger Miller

Operator

Good morning, ladies and gentlemen. Today is Wednesday, February 26, and welcome to the Art’s-Way Manufacturing Year End 2013 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 David Drewitz, Investor and Press Relations Representative; J. Ward McConnell, Jr., Chairman of Board of Directors; Ms. Carrie Majeski, President and CEO of Art’s-Way Manufacturing.

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

David Drewitz

Good morning, ladies and gentlemen. 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 involve known and unknown risks and uncertainties which may cause Art’s-Way Manufacturing’s 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 statement included in this conference call are only made of this 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. The 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, I would like to turn the call over to Mr. Ward McConnell. Mr. McConnell?

Ward McConnell

Thank you, David. This morning we’re going to change the format a little bit. We’re going to have financial report from Carrie Majeski. We’re going to have a report from Art’s Way Scientific by Dan Palmer and a forward view by Marc McConnell. And so we’ll start with Carrie Majeski this morning. Are we all set Carrie?

Carrie Majeski

Yes, I’m ready. Thank you.

Ward McConnell

Thank you.

Carrie Majeski

Good morning everyone. Just wanted to start with giving you kind of the outline of Art’s Way Manufacturing now. We’ve added a couple new companies to our business this year. We now have seven different locations and four different operating segments. Our first segment is our Ag segment, which consists of Art’s Way Manufacturing, which has two locations, one in Armstrong, Iowa and one is West Union, Iowa; UHC, which is in Ames, Iowa and Art’s Way International, which was purchased in 2013 in Clifford, Ontario. We also purchased this year a new segment, Ohio Metal Working and they make our by-tools and then we have the two other segments that we’ve had traditionally, which is Art’s Way Vessels and our modular buildings, Art’s Way Scientific.

Art’s-Way Manufacturing, which is Armstrong and West Union, had sales this year of $23.721 million, compared to $21.633 million. This was an increase of over $2 million, a 10% increase. The income results in 2013 were 1.254 million compared to 1.307 million, a slight decrease of $53,000.

In the third quarter we discussed a little bit our struggles with productivity and efficiencies. To rectify that problem we have brought in a new director of manufacturing in Armstrong, Iowa. His name is Jeff Lamendeer [ph] and he has been with us since the beginning of January and we are certainly starting to see the efficiency and productivity gains.

Some of the other productivity problems we were having was equipment downtime. We have also invested significantly this year, bringing in two new break presses, a saw, a new mill and a new paint system in Armstrong. We believe all of these things, the new management as well as the new equipment will help us gain productivity and efficiency in 2014. The backlog here in Armstrong and West Union is currently at $8.492 million compared to $8.187 million last year.

UHC, the second business in our Ag segment had sales in 2013 of $4.083 million compared to $3.087 million in 2012, an increase of $1 million. Their income in 2013 was $96,000, compared to $315,000 in 2012. 2012 was a half year for us as we acquired UHC in 2012, and we talked a little bit in the third quarter that we were seeing some sales declines as our OEM customers were going through an R&D process.

Our main OEM customer is Honey Bee and we have seen their sales come back as they have gotten through their R&D process. Our second OEM customer was AGCO and we do expect to see a decline in their sales going forward, as they’re going to bring production into their own facility. However they are a much smaller OEM for us, compared to Honey Bee.

In an effort to combat this loss of sales coming from AGCO, we are increasing our R&D efforts and increasing our sales and marketing budget and going after the sales to AGCO dealers, even though AGCO equipment won’t be coming out with the UAC reel from the factory. We have also reduced our work force there due to the decrease in sales. The backlog at UAC is currently sitting at $671,000 compared to $1.475 million in the prior year.

Our most recent addition to the Ag sector is Art’s-Way International. They manufacture snow blowers in Clifford, Ontario and they also rep other lines of Ag equipment to include the Art-Way clients. Their sales in 2013 were $394,000 and their income, or their loss in 2013 was $130,000. This purchase we purchased at a very, very low cost, really only buying some manufacturing equipment and we’ve been selling off their inventory on a consignment basis. This company had decided that they were going to shut down the plant whether they found a buyer or not. So they had been in the process of eliminating inventory and employees and kind of in that shut down phase. So we are now in the process of bringing in the inventory and stabilizing our employee base and then of course filling sales orders. This is a highly seasonal business and we’re just getting through kind of their busy period and now really working on what we’re going to do going forward.

March is typically when we run, or they run their order program and that’s what we will be doing as well. The snow blower market had been pretty slight in recent years due to the lack of snow across the country. This year we’ve had a lot of snow and so the pipeline has been depleted and we believe there’ll be an increase in orders for those snow blowers in 2014. The backlog there is currently sitting at $65,000.

Our total Ag sector sales for 2013 was $28.199 million compared to $24.720 million. Income in 2013 was $1.221 million compared to $1.622 million. Our total Ag backlog is currently sitting at $9.228 million compared to $9.662 million. Our new sector the tool sector, Ohio Metalworking, which was purchased in the fourth quarter of 2013 had sales of $650,000. Their income was $19,000 for the year. This was a purchase that we went after because it was a stable company that had consistent income and they make a consumable product. We have increased our efforts in R&D and looking for new markets and we’ve currently got them fully integrated into our computer system at this point in time. The backlog there is currently sitting at $632,000.

Our next segment is Art’s-Way Vessels. And they had sales in 2013 of $2.137 million compared to $2.091 million, an increase of $50,000. They had a loss in 2013 of a $150,000 compared to a loss in $2012 of 232,000. This segment we’ve been struggling with, trying to get it into the black. We do believe we have strong management team there. We have controls over our manufacturing process. We’re putting out a good product. We have been vetted by large companies in the water industry and they are approved through us, companies like Culligan and Resicam. So our focus in 2014 is to increase our sales volumes and to bring on a standard product offering, that’s partly vessels. The backlog there sits at $495,000, compared to $405,000.

Our modular building segment Art’s Way Scientific had sales in 2013 of $3.240 million compared to sales in 2012 of $9.645 million . Again there was a large decrease, decrease of over $6 million or 66% and this was an increase that we all saw coming. We knew that 2012 was an extremely strong year for us, because we had one large job. Our income numbers correlate to those numbers as well. In 2013 our income was $462,000 compared to $1.265 million in 2012, a decrease of over $800,000.

Currently our backlog there is sitting at $546,000 compared to a year ago at $595,000. Dan Palmer will be on in just a little bit to talk about that segment a little bit further. Our corporate totals, our sales for 2013, up $34.237 million, compared to $36.457 million in 2012, a 6% decrease. Income in 2013 was $1.551 million, compared to $2.665 million a decrease of $1.114 million.

While our numbers show a decrease over the last year, we certainly feel it was a strong year for us, it was a building year. We completed two acquisitions and have them fully integrated. We increased the strength of our management team and we have strong backlogs going forward.

I think some of you may have noticed we also had a news release here in the last couple of weeks announcing Bryant Phillips as our new Group VP. Bryant Phillips will be focusing his efforts on our vessels segment, our tool segment, UHC in Ohio -- I think I said Ohio already -- Art's Way International. These are segments that are away from our corporate office little bit and we just feel like they have a lot of opportunity and Bryant is going to be able to add some focus so that we can grow our businesses at each of those entities.

With that Ward, I'll hand the call back over to you.

Ward McConnell

Thank you Carrie. The was a good report. And I would like Dan Palmer to come on now. He has the Scientific Modular Building Guru, and I'd like to have your report now, Dan.

Dan Palmer

Thank you. I've been called a lot of things, but never a guru. Good morning. From the Art's-Way scientific perspective in 2013, we saw as Carrie mentioned a decrease in the sales volume due to a couple of things. First of all it was an expected decline, because of very large job that we did the year prior, but also because we were impacted by the sequestration and the delay in federal budgets, which impacted even state budgets and impacted the amount of money that the colleges that we were typically working with are willing to spend. So we still have a lot of interest in the pipeline. We still have projects that we expect to come into play that were slated for 2013, that are delayed. Our coating activity is as robust as it's ever been.

In 2013 we took a couple of different steps to pursue market opportunities that have emerged and are now available to us. Mid-year we released a 660, six fairly [indiscernible] 60 head at nursery building because of swine industry, primarily focused on show pigs and we did that at the World Pork Expo in June. We've had a great response on that new product offering, have been doing all lots of coating and expect that once the weather turns this year and construction is going to begin, that we will be hopefully integrated with orders on that. Again that was a forward looking type of statement and a lot of optimism on my part but we sold three of those units within the last six months. So we’re happy to see that.

We also started a market into the food safety arena, based upon information we collected from a couple of food processing plants in the state of Iowa who are looking for laboratories at their site to able to diagnose or find or pre-warn the plant about potential food safety problems. So in that market, based upon a legislation that was passed in 2011, the Food Safety Modernization Act, we’re working with testing companies who do that kind of testing on food to provide modular buildings that will actually be put into the manufacturing facility storage.

Another, we had more international into it in the last year than we've had in prior years. We have verbal commitment to do a couple of jobs in Brazil for non-human and primate pork. Also this year we’re working with an animal pharmaceutical company on a relatively large job that is going to be in the pipeline for some period of time.

Carrie Majeski

Are you still there?

Ward McConnell

Dan?

Carrie Majeski

I think we’ve lost Dan.

Ward McConnell

We lost Dan. Well let’s move on and I think to Marc McConnell who will give some forward looking information. Marc?

Marc McConnell

And good morning. Well I appreciate the opportunity to have some discussion about some of the projects I’ve been working on. For the last several years, I’ve focused my efforts on forward projects, dealing with long term issues beyond the day-to-day, often from a 30,000 foot view and really that’s been my focus for some time and I’m pleased to have the opportunity to tell you about it. Among the things that I’ve been working on and Carrie did touch on some of these. But personnel has been an issue that in recent years as our business has grown, we’ve had difficulty keeping pace with the scope of our business in this year and the past year. We put quite a lot of effort into finding high quality management folks from outside the company that when it came time for succession in some cases were purely for new positions. We really looked further and looked harder and I think that we’ve really broadened our management team in a way that we haven’t seen in recent years. And Carrie mentioned Bryant Phillips and Jeff Lamendeer [ph] who have also been addressing areas further down the line in purchasing and HR. We’ve got great people in quality. And we also had issues in our sales team and subsidiary operations in purchasing where succession is going to continue to be an issue and part of my focus is to make sure that we are addressing those issues and trying to be proactive about dealing with them.

Another area where I’ve focused my efforts is ensuring that we are doing the research and development work that we need to do to keep pace with the broad product line that we have. We have even just in Ag around 20 different distinct product lines and all those require certain amount of ongoing innovation to keep them relevant. And for some time we were not as active in that area as we should have been and I’m trying to make sure that we are on top of that. And we’ve built out the engineering team to have that capacity. We have more staff and innovative staff and energetic staff than we’ve had in decades any time in recent memory.

And among the things we’re working on. Our evolutionary improvements to the many products we have, developing new sizes, incorporating new capabilities, and more specifically important products to us like the grinder-mixer. We’ve made ongoing settle improvements in new models but we continue to give the operators more capability and capacity and that’s really an ongoing thing with one of our main state products.

Furthermore with manure spreaders we’ve been making ongoing improvements but also we’ve been an adopter in GPS technology to that market, and it’s a new thing for us but it’s a new thing for the market too and we feel like we can make real inroads in the market by being early on that.

Furthermore with the sugar beet harvesters, we continue to make ongoing improvements and continue to have the best performing product but we work very closely with farmers in the field and really feel like we’re doing a good job of continuing to develop that product and keep it really desirable in the market. And UHC reels, we make ongoing improvements to continue to have the superior product. We’re trying to keep things moving on all of these important items and it goes beyond those three or four things I just touched on but those you should know we’re having extra focus on.

One other area within R&D though that I would say we’ve not had much opportunity in the years past to focus a lot on is improving the manufacturability of our products, removing cost, improving serviceability and we’re doing that on a project by project and product line basis. And we feel like we have a real opportunity to unlock some margin that may have been tied up for some time and also it does gives us an opportunity to really improve our product and appeal to the dealers and farmers we have to work with.

And overall, in research and development we’ve been trying to make sure that we are instilling and fostering a culture of innovation that will yield new products and new concepts beyond what we currently make or beyond what the market even already contained. So the foundation of Art’s-Way was always in innovation and part of my purpose is to make sure that we’re not losing sight of that and to try to continue to have a new generation of innovative people and activities.

Another area where I've had particular focus in the last year is in capital investments. And Carrie touched on this a little bit but in particular we’ve been investing in technology and automation with the aim of improving capabilities and capacities, while also providing long term cost savings by reducing maintenance and repair cost, reducing labor, improving efficiency and productivity. This is an area that we've mentioned it a little bit in the last couple of years but in the years prior to those, we had not been focusing very much on that, and to some degree we feel like that hampered our ability to make the profit and to deliver product.

And part of my focus is to make sure that we’re getting ahead of that and putting in a plan to over time get up to date and take advantage of new technologies that will better match the short run nature of our Ag business with quicker setups and things like that. And some of the things we’ve already done and again some of this has been mentioned but we have new automated selling operations, CNC machining center, CNC break presses, improving fabric [ph] systems, and upgrading the paint systems in our West Union facility et cetera. We’ve really had more activity in recent times than at any time before, and we feel like it’s improving our product and our ability to make the product.

And as we go forward with some of the things that we’re looking at, our CNC lathes, robotic welding, fiber-optic cutting, to replace what we have been using, that had been the state of the art which was laser cutting. So we’re keeping our eye out on the new things that are coming along and how they might be able to help us.

Additionally in vessels, we're working on a list of improvements to improve their capabilities and overall while these last two years with 12 years running, we have been profitable but in the last few -- couple of years we also really been addressing things like roofs and improving facilities, improving lighting, overall improving the workplace so that we can do a better job of producing product and fortunately with the profitability we've hand we've been able to also attend to those items.

And just another item that I spent some time on is looking at, with Ward and Carrie, the acquisition opportunities. I will say the as part of my focus is to see that in the year forward we're doing a lot to help integrate and digests what we’ve already acquired and perhaps in the future focusing more on complementary businesses to what we have, but also I guess keeping an open ear to new types of businesses that we’re not already in, if those deals are compelling and accretive enough. So those are just a few things that I’ve been working on that more forward and outside of the day-to-day, and I appreciate the opportunity to cover it.

I will take it back to Ward.

Ward McConnell

Thank you Marc. David I think it’s time for your question.

David Drewitz

Yes. I’m not sure if Dan has been able to rejoin, but evidently -- I’m not sure but let’s go ahead and turn it over to question and answers.

Dan Palmer

David I apologize, I am out at a tradeshow and I lost contact with you but I'm back in.

David Drewitz

Thank you Dan.

Ward McConnell

Are there any questions.

Question-And-Answer Session

Operator

Ladies and gentlemen at this time we will conduct a question-and-answer session [Operator Instructions] Our first question come from Brian Hillingdon. Please state your question.

Brian Hillingdon

So internationally you sold about $400,000 into Canada and primarily that was the snow blowers. We’re just wondering how do you plan on utilizing the distribution channel? What other products do you conceive selling into the international market and then what’s your overall kind of forecast for the international group in ’14?

Ward McConnell

Carrie would you like to answer that?

Carrie Majeski

Sure. One of the key reasons why we purchased Art’s-Way International was to give us more of a footprint in Canada for our Ag equipment lines. Our grinder-mixers, our manure spreaders, our forage equipment, our all items that we think, we can open up sales by having more of a footprint there, right now we have to direct guys on staff working sales up in Canada, but they are also focusing their efforts on that manufacturing facility up there. So what we really are focused on right now is getting that manufacturing going so that our sales guys are freed up a little bit to go and sell our other products as well. I don’t know that we’re ready to give a forecast to the number of this plan.

Brian Hillingdon

Okay. But the focus is on manufacturing the snow blowers?

Carrie Majeski

Yes. That is the focus right now, but we certainly think that our sales of Ag equipment could certainly exceed our sales of snow blowers in an off year for certain, and I would hope even in a strong snow blower year that our sales of Ag equipment would exceed the sales of snow blowers up there. We’re just trying to get the manufacturing facility open and running up there.

Dan Palmer

And from the modular building perspective, having a facility in Canada opens up lots of opportunities for both our Ag building segment and research segments. So we have enjoyed having the opportunity do some coating in Canada that we hadn’t had before, on our research side. On the Ag side, we have been able to visit tradeshows along with Art’s-Way Manufacturing representatives and for the first time have the product, our calf buildings, and our swine buildings available to the marketplace in Canada.

Brian Hillingdon

And that kind of leads into the next question. We appreciate the color on modular buildings and it sounds like you have a pretty robust pipeline going into ’14. At this point is it, are you sort of comfortable enough to give a general forecast or just a growth estimate on where you see the modular building segment in 2014?

Dan Palmer

I’m always the eternal optimist and I always get myself in trouble for over-forecasting or being over optimistic with regards to what our facility can do. But I can say that we’re working on two pretty significant deals right now that we feel relatively confident about that will have a major impact on our 2014 year. That said, with all caveat to David -- David said at the beginning of the conference.

Brian Hillingdon

And then kind of switching to the overall business, looking through the press release I was just -- it wasn’t available -- I was just curious, what was the gross margin of the business in Q4?

Carrie Majeski

Can we come back to that one?

Brian Hillingdon

Yes, absolutely. I mean, if you have overall for ’13 that would work to. I could sort of back-in to what it was in the quarter.

Carrie Majeski

Okay.

Ward McConnell

Let’s come back to that.

Operator

Our next question comes from Sam Rebotsky. Please state your questions.

Sam Rebotsky

I guess this seems to be a transition and your comment as far as the statement in the releases are businesses are poised for growth and profit improvement in 2014. Is that supposed to be the profit improvement on a quarter-to-quarter basis? Is that supposed to be significantly for the modular in on Scientific versus the agricultural? Could you sort of put a little more color as best as you can on this profit improvement?

Ward McConnell

Well, I’ll try that one. There are so many things that are poised to go forward and be profitable, like international. We call it international but it’s Canada. We have no inventory up there at this point in time of our forage equipment or anything that's Ag and we’re building -- we have been [ph] scheduled to build some equipment, so they have something to sell. And then of course Ohio Metal, we only had a couple of months on that. And there is real movement going on that I’m very interested in personally as they’re going to us carbides in Ag, tillage equipment. And it's just really starting in this country and I look forward to some gains in that this year. It’s very new. I don’t how what’s going to develop, but it’s very, very popular in Europe. And since popular in Europe, I don’t why it’s not popular here, even though some of the tillage people are trying it.

We had a lot of problems, seems like during the year that we think we’ve cured. Basically Bryant Phillips, we didn’t lose tract of these seven locations, but it got harder and harder for us deal with them. And so we feel like we brought on a very high powered guy that will -- he’s going to concentrate on profitability, he’s going to get paid on profitability. I think each one of them has plenty of opportunity to be better and really working head-to-head now, I think harder than we were because we just didn’t have enough people to cover those places away.

And of course everybody knows how we've struggle with vessels. That’s his primary objective is to get that churn lose and we had an awful lot of problems earlier in life with quality. We’ve got that solved. We have no warranty claims at all now. We’re cured them. And I think we can look forward to improvements there.

So, yes, we have some caveats too. We got to pick some customers that -- like AGCO Marc mentioned. We’ve got to pick some extra business for them. But we have a nice backlog I think and I just think the company is a heck of a lot better than the company we look at 12 months ago.

Sam Rebotsky

So when we look at the $0.04 versus $0.14 for the current quarter and $0.38 versus $0.66 for the year, I guess, it’s premature to say how much better than the $0.38 you expect to show an improvement, but you expect the Scientific to kick in more? Or is it --how do we look at the profitability of which part kicks in more and on a quarter-to-quarter basis? Is it the first half that's slower and we expect it in the second half? How do we look at the profitability?

Ward McConnell

We’re pretty even across the year I think. I’ll probably need you to look and see, if I’m right. But $0.38 not acceptable to us. I don’t what we do but like I can’t forecast it, although I’m sure we’re on a road for better year.

Sam Rebotsky

Okay, okay.

Ward McConnell

I know there.

Sam Rebotsky

Yes I know and then I’m trying to just have some kind of direction to understand a little better, and do you basically see the industry with the farm bill and everything has been passed; do you see -- and the farmers doing better and with more demand for products in the farming end?

Dan Palmer

Absolutely not. Everything we read is forecasting lower sales. John Deere is forecasting less. However we’re lucky, in one way. One of our principal products is still grinder-mixers. Our grinder-mixers sales are up and look like they would remain up because grains and so on are lower and there's more pigs and there is more chickens and so. So that segment looks up. But that’s not the whole segment. It’s just a piece of it.

Marc McConnell

Palmer, I might chime in there a little bit. We are pretty -- we're diverse as a company. This is Marc, by the way. We're diverse as a company of course with different operating units, but -- within Ag itself we’re quite diverged. So while we have around 20 different products, quite a few of them are more geared towards road crops and quite a few of them are geared more towards people, feeding animals.

So fortunately we are diverse in that way. So few are purely a road crop oriented product mix, then, I think we'd have more concern due to the things that you read about the broader Ag economy. But what has led to sort of a golden era in the Ag economy as we view it in the last few years was not helping a lot of the farmers that were feeding animals such as diary or beef or pork or any of those.

And so what we have now is that commodity prices have gone down and therefore those operators have much reduced, in some cases close to 50% reduction in their input cost. At the same time that the commodity price for meat, beef, pork, chicken et cetera has gone up quite a bit. So their margins are far, far greater than they've been in the last years. Unfortunately those people need the hay and forge equipment that we build. They need grinder-mixers, manure spreaders, those types of things.

So in a lot of respects I think we’re quite well-positioned for what the highlight of Ag will be in the year going forward. So you know we are not generally in a position to do a whole lot of forecasting on some of those things or lead the public in any way. But we're quite well-positioned for what’s going on in that respect.

Sam Rebotsky

Now jumping back to the modular, is there more money has been opened up, or is there any money has been opened up, or is it just the pharmaceutical corporations that want to need to do more in the modular area? And what would the size of the contracts you’re bidding on, or what would you say, the backlog -- if you can't say backlog, what is the size of what you’re bidding on, and because it would appear that you should do much better in modular this year than last year?

Ward McConnell

Dan?

Dan Palmer

That’s right, I believe we will. The projects that we’re working on right now are pharmaceutical based and negotiated type of business. The state and local, federal stuff is still slow. And it’s not that they don’t need to do the project. It’s just that they haven’t got the funding released and everyone is holding back, I guess, before they go to the contract. The project that we’re working on right now for a pet pharmaceuticals company is in the neighborhood of $94 million.

Sam Rebotsky

That sounds good.

Dan Palmer

And we have, I might add that we have buildings that are already there.

Sam Rebotsky

That sounds good. All right, well look, you've been working hard at this. The previous year was good for modular and I guess hopefully you could sort of get back to the high end, the previous year, the $0.66, that would be something to shoot for and I guess create more excitement in Art’s-Way. Good luck.

Operator

Our next question comes from Roger Miller. Please state your question.

Roger Miller

Let’s start off with Dan. In Food Safety, how was the pig virus affecting you?

Dan Palmer

Probably exactly how that’s affecting us. In three ways. Number one is that the industry needs shower through facilitates so that they can keep people sanitized going in and out of the facility and not spreading this; the virus around. Number two, there is call for some quarantine types of facilities where if they get an outbreak, they can put the pigs there and monitor them. And thirdly, there is research types of facilities that are needed like, where people like [indiscernible] vaccines, who are working on vaccines with pigs, and our buildings, our standard modular buildings, then can have opportunities for sort of a quasi-research swine production type of a combination. What I mean by that is that HEPA filtration on pig buildings is becoming prevalent in new types of construction, because these things can be a transmitted airborne.

We were just at a tradeshow at Tulare County in California. My colleague Carl learned a lot in California with regards to their want and need the for buildings to quarantine pigs. So we’re out there strong and heavy on that. We'll be marketing into that at the World Pork Expo in June of this year that we’ve got specialized facilities available for combating the deadly virus.

Carrie Majeski

And if I could just jump on that a little bit as well as concerns about the pig virus raise, demand for our grinder-mixers should go up as well because they’re very concerned where the feed is coming from and there's some concern that the feed trucks that are coming from the mill will be spreading the virus as well.

Roger Miller

So do you have examples of all the concerns at the trade show, how you can market like the shower stalls, et cetera?

Dan Palmer

Yes, what we do basically is we’ve got some fingers on the pulse of the swine industry and folks tell us about how we might respond. It’s basically with customers and people who we know that are at places like Iowa State University or the Midwest Planning Service as actually published, which is of standards for how pigs are raised. We have contacts at the University of Illinois who do consulting work throughout the world on ventilation systems for swine production. And so what we do and we hear those types of things, as we call some of the specialists, we actually built test chambers five or six years ago for Dr. Scott D at the University Minnesota who is working on the virus and we did building test chambers for them.

So the published paper that came out of that then serves as the basis for the viral security and viral safety that’s required to try to kill the virus or to keep it out of the herd. So this is where we -- our experience is in research buildings crossover to production agriculture, because most of the laboratories that we build in animal research facilities require a high level of sanitary conditions. So we’re carrying that knowledge into the agricultural side of the business.

Roger Miller

Well I just wonder that gets down to the farmer himself and if he understands, if he had a simple broacher that they could read with pictures?

Dan Palmer

Yes, we do. We are developing that. We’ve actually put together a layout of a small shower through facility with two entries and it’s based upon biosafety and biosecurity requirements that are being talked about at the various pig shows now as to how people should protect their herds from people coming in. So it’s actually a building that could be put in front of a [indiscernible] to finish operation and serve as the entry point and exit point for people coming in and out of the facility.

Roger Miller

One thing I wanted to mention was in food safety, Abbott Labs is one of the largest corporations in world. Are you working with them?

Dan Palmer

I am working with Abbott, Euro Fence, SGS, Midwest Labs, Shurney [ph] and others. Last year about June we went to our first food safety show after Tyson Foods came to us and said hey, could you think about building us a facility to test for salmonella at one of our part of our food processing plants. And they turned us on to the fact that we should be at these shows. So we started that process. And over the last eight, nine months, we have identified most of the independent food safety checking laboratories and are working with those folks and we actually have two or three secrecy and non-compete agreements with some of the big ones regarding taking their technology and putting it into a modular footprint, so that they can open up labs at different types of plants, olive oil plants and bakeries and et cetera.

Roger Miller

And you specifically mentioned Canada and Canada has been mentioned quite a bit. Basically does Art’s-Way need to build or purchase another warehouse up there in order to secure farm equipment inventory to sell on demand and maybe make it display for Scientific?

Dan Palmer

Well, I love the idea of being in Canada as the spring point to other places as well, because if you got a foreign corporation, it sometimes this year the ability to go other places. But we just are actually scratching the surface on that. We were pleased last year when Brian and Carl went to Canadian -- in our show and came back with information regarding an interest for building. How to market them there, yet I'm not sure. We know that we can build our buildings to the Canadian building cones and we're researching that. And really all we need is a marketing vehicle, which I hope we can do in some sort of a synergetic fashion with Art’s-Way International.

Ward McConnell

Marc, would you want to expand on GPS technology, how it affects the company?

Marc McConnell

Well, okay, I could try to. I'm not the expert on it but for -- I think a lot of it has been, lot of where it applies to manure spreaders is that a farmer can get the data that would show maybe how evenly spread the material is, as well as how much he put down in the certain place, how much he is carrying, those types of things. And in some places because the GPS is incorporated with scales that are in the spindles, I think some of it has been driven by in fact DOT and things like that where they need to be able to prove how much they did or didn’t put down or how much they are taking over the road or a lot of this is a matter data and proof.

We don’t have a whole lot of GPS and other types of things but we're looking for opportunities to incorporate it and it’s a new thing for us really but we think that it’s a good application in manure spreaders and there seems to be some interest from the field. And so that’s why we're pleased with that and I think it really remains to be seen how much impact it could have on us but we're hopeful and we're dipping our toe in the water with it for sure. So, broader than that I wouldn’t have much to comment.

Carrie Majeski

I could just add a little bit. These farmers when they are taking their grain crops out of the field, they know exactly where in the field they need to put fertilizer and because the cost of inputs and fertilizer have gone up so significantly, they are really concerned about getting the proper amounts of nutrients in the proper places, because you don’t want to burn it either. So this helps them determine, first of all the combined house [ph] is going to determine where it needs to go and then our GPS on the spreaders will ensure that they get the proper amount on there for optimum yields.

Roger Miller

Are you riding behind the pack on this or you are leading the pack. As far as the GPS technology and the manure spreaders, where are you with it?

Dan Palmer

I would say we are one of the early adopters. We're not the only ones that have done it but in the field of quite a few manufacturers, most are not yet doing it.

Roger Miller

Because it seems like this would be a great selling point.

Dan Palmer

Yes, it is, absolutely. I'm not sure which other companies are doing it. Our product folks do but we're certainly one of the first. But I wouldn’t say we are the first.

Roger Miller

In the cost of manufacturing, one of the most important aspects is the cost of steel. Would anybody like to talk about that? How it affects your business this year, right now in 2014?

Ward McConnell

Steel is up some but we monitor that very closely with our purchasing department and we also react to price increases when this happens. Now steel, well steel is one of our biggest commodities to buy. Our steel purchases, just steel purchases of our total purchases are about a $1 million a year. So by the time we get rest of it down there to get up to $30 million a year, it’s not as significant as it might be. More of it is labor and cylinders and GPS and that crowd, bearings and all those things. They reflect the price of steel as well, but not as severely as steel itself does.

Roger Miller

Okay. When I look at the overall company and I heard the results today, I see a few really bright spots, one of them Ohio Metal working. That appears it have a decent backlog and it appears going forward sales are increasing, am I correct?

Ward McConnell

There is enough amount of opportunity for increasing sales there. It’s been fairly solid for a number of years and the use of carbides is expanded well beyond what they're doing and so I think it has a lot of potential for expansion. That’s one of the reason we bought this new man on is to explore some of that and see if we can find more market for it. Before, they have a sales guy which is basically in-house and we're looking a little broader for sales on it. I think there is a good potential for that.

Roger Miller

You are looking at Grange or have they shown any interest?

Ward McConnell

Marc answer that.

Marc McConnell

We’re in the process of talking to them. They have to this point not been -- it would be wrong to say they haven’t been a customer but we haven’t really had their business but we’re pursuing that now. We have a rep that’s working on that. In the meantime, we already do business with MasterCard and some of the other very well-known people in that space.

Roger Miller

And what do you think about putting inventory in Canada?

Ward McConnell

We got to. Can’t sell from an empty wagon.

Roger Miller

So I guess what you’re doing is you're making the sale, then you're delivering the product right?

Ward McConnell

Yes, that’s what we have been doing but we have to get product up there. And we have been so busy we haven’t -- we just put it on our schedule fairly recently. And we've got to get some forage boxes, we got to get spreaders up there, we need a grinder up there and so on. None of that’s up there now but it’s going to be.

Roger Miller

So I can anticipate that loss could possibly go away in this year?

Ward McConnell

Yeah. Very easily. The overheads is not much but you have to understand when we started with it last year, they had no inventory, they had no -- they had nothing. I mean it was just.

Carrie Majeski

It’s virtually a startup.

Ward McConnell

It was the same as a startup.

Roger Miller

Yeah I agree with that.

Ward McConnell

So we've had pretty good sales on snow blowers and have consigned inventory, and we've made some snow blowers, because the snow blower market is hot. So -- but that’s only the last couple of months. Most of the time before that we were really a startup, more startup than we anticipated. There were just no inventory at all, it was worth a damn. And so -- that we had -- we didn’t have much of a computer system. We've had to spend money for computers and for people, the training. We had to train the people, we have sent them from Armstrong because all of our places run the same software and they are all linked to Armstrong. So there is rather -- I don’t want to say foreign to them because they are Canada. The computer part of it has been difficult in merging it in.

Roger Miller

And the banking is that going forward? I mean no problems with that in Canada?

Ward McConnell

We incorporated out there. We’re all confused yet about how the financial system works up there, and particularly withholding tax in place, it's been a real, real big learning curve.

Roger Miller

Well I was suggesting that maybe you could use the U.S. bank debt that has operations in Canada and that might help.

Ward McConnell

Well we did -- we attempted that but they have corresponding banks that they deal with and we’re not doing any borrowing there at all. We’re only checking accounts and so on, and we transfer from here up there. And the Canadian dollars is much weaker than now. So you can $1.10 for every one of our dollars at the moment. But we have to operate up there in Canadian funds, which we do.

Roger Miller

Well since this is Broadway and I heard the bells, anything else you’d like to say before I move on?

Ward McConnell

Go ahead Roger.

Roger Miller

Any question I mean that you would like to answer? I think I touched on everything myself.

Ward McConnell

I think we’re looking at a pretty good year. I don’t want to get overly optimistic like Dan is but.

Roger Miller

I think Dan has the right to be overly optimistic.

Dan Palmer

Thank you Roger.

Roger Miller

Dan had a bad year but I look at what’s going on out there and what he says and that could really affect earnings and sales. I’ll say it.

Dan Palmer

We like to be a part of it all. We like to make our contribution.

Roger Miller

One more thing I just want to ask about vessels. The losses continued every year, the backlog is good, the drought in California is overwhelming. I guess we’re going to get some rain soon. Is there a breakeven point here?

Carrie Majeski

Well, clearly the losses have been diminishing every year. But we certainly feel that if we could maintain about $200,000 per month in sales, than that would be about our breakeven point.

Ward McConnell

Monthly.

Carrie Majeski

Yes.

Roger Miller

And do you feel that you can do that? Is it close?

Carrie Majeski

Yeah, absolutely.

Dan Palmer

I'm almost betting that we’re going to have a little profit this month. We brought this Phillips fellow on because I used to -- I haven’t been there in four or five months but I go and make a round there I get one hour about in meeting with, maybe once every month or every two months and we sit down and talk these things over. And Carrie goes with me, both of us call on them. But they set it off [ph], it needs more push and more sales effort and so on more ideas and more watching it. And so it’s a moment we are kind of optimistic about what he can do to it.

Ward McConnell

I’ll just comment here a little bit, and I make the trips there and those are brief as well but as we’ve acquired these businesses we have not have the management bandwidth to give it a lot of attention, a lot of effort in business development, in leading in new directions and things like that. So basically with Bryant Phillips coming on, a great deal of his focus will be on business development at those units that he is overseeing. And much of his background is business development and certainly vessel, there is a ton of opportunity to develop new business. We have been largely focused in water but the product that we make in our manufacturing capabilities match so many other things; tanks that go into other markets, whether it’s chemical or industrial or in just other applications for what we are already able to make. And Bryant will have the time and the focus to develop that business and to really give it the attention that it was hard for us to do at our prior staffing level management wise. So I feel like he was one of the -- in my opinion missing links and us being able to optimize the things that we’ve acquired. And so a great deal of his charge is to optimize what we already have in development further and a lot of that’s going to be on the revenue side.

Roger Miller

Okay. That’s all I have today. Thank you for answering my questions.

Dan Palmer

Thank you, Roger.

Ward McConnell

Anymore questions?

Operator

[Operator Instructions] At this time, we have no further questions.

Carrie Majeski

I would just like to follow up with the answer to the earlier question on what the gross margins were in the fourth quarter, and that was 24%.

David Drewitz

Great. Thank you everyone. Ward, do you have any closing statements?

Ward McConnell

No. I appreciate everybody calling in, that calls in or listens to us. I think to cap my feeling about it and I think we’re going to have a good year. Thank you again.

David Drewitz

Thank you everyone. Have a good day.

Operator

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

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