Art's-Way Manufacturing's (ARTW) CEO Carrie Majeski on Q1 2016 Results - Earnings Call Transcript

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

Art's-Way Manufacturing Co., Inc. (NASDAQ:ARTW)

Q1 2016 Earnings Conference Call

April 14, 2016 11:00 am ET

Executives

Marc McConnell - Chairman

Carrie Majeski - President, CEO

Analysts

Sam Rebotsky - SER Asset Management

Roger Miller - Frontier Investments

Operator

Good morning, ladies and gentlemen. Today is Thursday, April 14 and welcome to the Art's-Way Manufacturing Quarterly Investor Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

Your call leaders for today's call are Marc McConnell, Chairman of the Board of Directors of Art's-Way Manufacturing; Carrie Majeski, CEO and President of Art's-Way Manufacturing; J. Ward McConnell, Jr., Vice Chairman of the Board of Directors of Art's-Way Manufacturing; and Dan Palmer, President of Art's-Way Scientific.

I'll now turn the call over to Ms. Majeski. You may begin.

Carrie Majeski

Good morning, I'm going to start by reading our Forward-Looking Statements. You should note that there are some statements made during this call that may be considered forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to our market position, strategies for growth, and future results of operation.

Forward-looking statements are inherently subject to risks and uncertainties such as competitive factors, difficulties, and delays in development, manufacturing, marketing and sales of Art's-Way products, general economic conditions, and other risks and uncertainties described in Art's-Way's periodic reports on file with the Securities and Exchange Commission. Actual results may differ materially from anticipated results and Art's-Way does not undertake to update these forward-looking statements.

With that, I'm going to hand the call over to Marc McConnell.

Marc McConnell

Yes. I'd just like to welcome everyone. Thank you for your interest in the company and for being part of the call today. I trust that everyone has had an opportunity to view our release which showed our earnings for the first quarter, which were profitable, which we were pleased about after the last couple of quarters and we continued to find ourselves in the challenging market environment that we are very active and aggressive and trying to adjust our business to remain profitable.

So Carrie will go through the details about the quarter itself and we will be glad to discuss it at more length there after. Carrie?

Carrie Majeski

Great. Thank you, Marc.

I'm going to start-off today's call just by talking a little bit about our corporate initiatives which we discussed on the last call. Our first corporate initiative was increased profitability. And as we look at this quarter, we are certainly pleased that we were profitable, while after tax profits year-on-year and comparison remain down 87,000 or 51% first quarter to first quarter. When we look at our results in comparison to the quarters before us, this quarter we had income before tax of $120,000 compared to a loss in the fourth quarter of $278,000 and a loss in the third quarter of $1,185,000. So we've really seen some progression in our numbers as we look across the last quarters that we have had before us.

Our next corporate initiative was a reduction in our inventory. Our annual goal for our reduction in inventory is 11% and at the end of the first quarter, we saw a 6% reduction in inventory. So we definitely feel like we've made good progress on reducing those inventories.

The main factors that make up our decrease in inventory of just over $1 million over the fourth quarter is the reduction of -- with inventory at vessels. We've had a large job flowing through that facility for a number of months and that did ship out in the first quarter of this year which brought our [whip] [ph] down about $250,000 at vessels.

Our Art's-Way Scientific division was able to sell some of our stock buildings that we have for quick sale and they brought their inventories down about that amount as well $250,000. And the rest comes from reduction in whole goods inventories at Armstrong and with the [ag's factor] [ph].

Our next corporate initiative was reduction in debt. We did finalize our building sales in Ames, Iowa, which was the UHC facility in the first quarter that building sold for $1.2 million and we paid-off a note with the proceeds. That in addition to turning our inventory and being able to bring down our line of credit has allowed us to show good progress in the reduction of debt in the first quarter.

The next corporate initiative was customer service. We believe that in these difficult economic times it's important to solidify our relationship with our dealers and our customers. So this is an important focus for us this year. And along those lines, we have filled our Director of Sales and Marketing position and we did that back in December of 2015. And we have also added a customer service manager and this would be a new addition for us as we go forward.

We have already seen marked improvements in the timing it takes us to complete warranty claims, if we have a dealer problem. We are really seeing the time it takes to get those issues resolved decrease significantly.

The next corporate initiative is really to be a company that's more forward-looking. As we got into the second half of last year and the sharp decline in business, we were really forced to play more of a defensive role as we right-sized our business and try to get back to profitability. We feel now that we've reached this profitability levels that we are able to really look forward and how we grow our business, how we better manage our business, so that we can take advantage of growth opportunities across all segments as we go forward.

I'm going to move into our agricultural products now. Sales in the first quarter for ag markets are down 21%. In the first quarter of 2015, our sales were $5,315,000 and we're currently at $4,198,000, a 21% decrease. Our income before tax is $233,000 compared to $399,000 in the first quarter of 2015 that represents a 41% decrease.

We are pleased that we have been able to maintain high gross margin levels, we are sitting at a 31% compared to 32% last year, as we try to bring down some of these inventory levels, we are managing those gross margins and really trying to be careful not to erode that. So we are pleased that we are still sitting at a 31% there.

We have seen our efficiency rates decline in the first quarter -- over our first quarter last year and that's really primarily due to shutting down our West Union facility and having to move some of those product lines up to Armstrong. And we are very much juggling orders as they come in with our reduced staffing numbers, but, still able to meet customer demand.

Our backlog for the ag product is sitting at $2,645,000 compared to $4,588,000. This is a decrease of $1,942,000 or 42%. The big hitters in the decrease in that backlog is a reduction in sales of our main product line, the grinder mixer, which was really pretty strong in the first half of last year. And then, we've also seen a reduction in demand for our hand forage equipment.

Next, I will be moving on to our vessels segment. Our sales for the first quarter of 2016 were $679,000 compared to $527,000 in 2015. That is a 28% increase in sales and we have sales pretty consistent across the last three quarters which has really been a struggle for us. We really have seen a lot of peaks and valleys in our sales levels and we are pleased that our sales are more consistent and we are able to have a more consistent process through the manufacturing that is leading to less turmoil through the factoring.

Our income before tax is a loss of $75,000 compared to a loss of $67,000. We do have some changes in how we are recording some expenses. We have our corporate allocations change fairly significantly a lot of that is based on sales levels across all of the segments. So with manufacturing sales levels coming down some of the other segments are having to incur additional expenses that along with our Director of Business Development. We have two segments that are really seeing a lot of expenses for his wages, hit their books and vessels is one of those.

So if you take into account some of those items, we definitely feel like a year-on-year, it's really -- if you would take out some of those items that would be -- we would be much closer to breakeven at vessels if you compare to the same expense load that we had last year.

We are continuing to see increased improvements in our efficiencies and our margins at vessels. Our gross margin have been very, very low at vessels historically last year in the first quarter they were only at 5.5%, we have gotten those bumps up to 11% in this last quarter. So we believe those levels are too low, but we are definitely seeing good progress in getting those levels up to where we need them to be.

Our customer base is expanding and we are having more repeat customers. So we are pleased with that as well and that's what's helping us maintain those sales levels.

We did bring on a new manager at the beginning of January. He is our new General Manager in Dubuque and he is doing a nice job for us as I said when Larry, our old manager left in December. We saw an up tick in efficiency just when he left and now we are continuing to see improvements in those efficiency levels. He is still learning the business, but we are pleased with the progress that he has made.

Our co-activity is strong at this facility. And our current backlog is sitting at $264,000 compared to $529,000 last year. I would just like to point out that in that backlog from last year, we had a large order to one of our customers that sat in backlog for a number of months really over nine months before they released it for fabrication and then they were able to take delivery of it. So, that's what is going to inflate those backlog numbers really for the entire year, this year.

Next, I will be moving on to our Art's-Way Scientific. Our sales for the first quarter of 2016 were $943,000 compared to $650,000 in the prior year that's an increase of 45%. Our income before taxes was $7000 compared to a loss of $73,000 last year, increase of $80,000.

We are very pleased to have a significant increase in our sales. Our backlog at Art's-Way Scientific is currently sitting at $1 million, which is $1 million higher compared to where we were last year at this time. We have been able to secure some relatively large jobs over the last quarter. We have a research facility that we secured for $550,000. We have a swine operation for $950,000, and then, a job with GBI for $250,000. So three large jobs make up, $1,750,000 that we secured since our last conference call. This will definitely secure our sales levels through the second quarter.

We also wanted to make you aware that Art's-Way Scientific won a modular building institute award for its work with dairy farms and we did a facility for them for a modular calf intensive care nursery. So we're very pleased to be acknowledged for that. We're also increasing our R&D efforts at Art's-Way Scientific to get us ready for the next items that come along.

Ohio Metal is our last segment today. Their sales for the first quarter were $572,000 compared to $797,000 and that's a decrease of $28,000. Again, we are very much impacted by the oil and gas industry that continues to be down. Our income before tax was a loss to $44,000 compared to a loss of $14,000 in the prior year. Our backlog at Ohio is $136,000 compared to $152,000 in the prior year.

We have been working hard to increase our product offerings at Ohio Metal and offer more products that are really more for industries outside of oil and gas. We've also increased our advertising efforts in the precision markets and as a result of that we have seen a significant increase in our co-levels and we're sending out a lot of sample tools which is pretty common for people to sample the tools and test their effectiveness before they put in larger orders.

Marc that concludes my presentation for today. I'll turn the call back over to you.

Marc McConnell

Okay. And I would just like to point out we are pleased that -- to be profitable and really we could attribute a lot of that to the fact that we've been quite aggressive on the front of addressing our operating cost or SG&A. We've been tackling that aggressively and it's getting a little bit harder to find more of those cuts to help ourselves with, but we are remaining in the effort of trying to find them month-in month-out to help ourselves a great deal.

So, we've really allowed ourselves to build back towards profitability even in this scenario where demand for a lot of our products is a bit weak. So we remain very focused on the financial health of the business as Carrie mentioned. We're very focused on inventory, very focused on reducing debt and really have managed to do so quite significantly over the last few months and over the last year, I mean our bank borrowings are way down and we're trying to send it much further down.

At this point we are very focused also on maintaining this profitability in the months ahead, acknowledging that we continue to be in a situation where demand is pretty weak. And so our outlook for the few months ahead -- still we don't completely know what to expect and we do know that incoming orders have been a little bit light, but we are trying to make sure that we can be profitable regardless of how weak they may prove to be in the months ahead.

So, we have a challenging year that we're in the midst of, but I feel like our management team is doing a great job of giving us the best shot at being profitable under these circumstances. So we are in some industries that are highly cyclical. I'd say the agricultural business is just famously cyclical there is nothing particularly odd about the fact that its really weak right now for everyone that's participating in that market. I think a lot of investors follow Titan and Deere and a lot of these other folks and everybody is feeling it, small people, the large people, it really affects everybody and we simply have to adjust to what's going on so that we can succeed and be there when things improve.

So with that, I'd be glad to take some questions and also Ward McConnell, Vice Chairman and past Chairman is available to add perspective if anyone has questions for him. And with that I’ll turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sam Rebotsky from SER Asset Management. Please state your questions.

Sam Rebotsky

Yes. Good morning, Marc, Carrie and rest of the Art's-Way team. Profitability is very good in this tight time. And you've expressed that you're not sure on a quarter-to-quarter basis, but hopefully you could achieve profits in the next quarter and going forward. Could you tell me on the sale which in the annual you spoke of $1.192 million and that you carried at $1.245 million, did you record a loss on the building compared to what you were carrying it at in this first quarter?

Marc McConnell

Carrie?

Carrie Majeski

No. We did not have a loss on the building, but there we have a paying system that was in that building, which we have as an asset held for sale right now, which is also rolled into some of those numbers. We are trying to liquidate that paying system, so that's what you're seeing there, but we did not record a loss on the building.

Sam Rebotsky

Okay -- yes, I'm sorry.

Marc McConnell

I was saying it was very close to even.

Sam Rebotsky

Okay. That's good. One of the things that would be helpful in the Annual or 10-K to record the four quarters sales and profits as just information on looking and I don't think we've ever done that, but that's just sort of it would be helpful as you look through the numbers to look a review in one place?

Marc McConnell

Is that a trailing four quarters you mean Sam?

Sam Rebotsky

No, yes, the -- yes the trailing four quarters for the year end to sort of look at the breakdown of what you had accomplished. And so let's the backlog in the Scientific and also to look at the Scientific in two ways, the farm animal buildings and the scientific research, is there more -- are you doing better in the farm animal backlog, or how do we look at both of those areas?

Carrie Majeski

Well, in the backlog numbers that I gave in those three jobs that I highlighted one of those was a research job the one for 550, and the other one we would consider more of the agricultural product. So that would have been just over $1 million almost $1.2 million, I guess. We still have a lot of interest that we're seeing on the ag buildings and that's really made up I'd say 80% to 90% of our sales in the last couple of years. So we are happy to see some of these research facilities hitting the books, but the main level of activity is really still in the ag.

Sam Rebotsky

So, is it the product that you've created that's different than the other potential competition? And do you see what kind of size of the market do you see there? Presumably it would help the farm keep the cleanliness better and hopefully keep the animals greater value may be not getting mastitis or other kind of health problems -- what's the size of that market are you seeing?

Carrie Majeski

Well, I think the size of that market is pretty large, but a lot of these growers have thousands of other animals where our barns are a little bit smaller and primarily are being used for the nursery. And once those pigs are large enough then they'll go into the larger units, but definitely because everything is sealed and you can spray down everything where lot of the site buildings you do have wood that's exposed, everything is a surface that can be sanitized in our buildings which is beneficial.

On the calf side that's the market that's really kind of changing historically people have had their calves in huts or outside because it wasn't believed that the calves respiratory system could be housed their respiratory system just didn't do well inside buildings, with the ventilation system that we put on these buildings we've been very, very successful at housing these calves inside and decreasing their mortality rate over the traditional methods of housing.

Sam Rebotsky

Okay. Now, with the scientific research buildings as more and more -- there is always some other like right now the Zika is up, there is always something that's coming up, is there any money that's being freed up that the universities can spend and allocate for buildings that they could do this research on or is there anything the backlog that you could -- the pipeline is there anything larger for you to bid on and -- and money to be provided for?

Carrie Majeski

We do have a couple of larger jobs in the backlogs on the research side, but money does still seem to be extremely tight. And monies that were may be allocated for something than a research we're seeing them pulled to go to the Zika research. And that really isn't good for us if there is like emergency situation because then it takes money out of plant jobs and puts it in kind of emergency. So our preference -- we do not currently have emergency path available.

Sam Rebotsky

Okay. I just want to make one comment to Ward. Ward, I've been following Art's-Way for many, many years because before you were involved they've always sent the annual reports and even though before I owned the stock, I followed it. And it's nice that -- pass it on to Marc and hopefully we could be profitable and significantly go from the bottom to the top as the industry does improve. Okay. Thank you.

Carrie Majeski

Thank you.

Marc McConnell

Thank you, Sam.

Operator

Our next question comes from Roger Miller from Frontier Investments. Please state your questions.

Roger Miller

Good morning.

Marc McConnell

Good morning.

Roger Miller

I guess my first question was going back to the last conference call, I brought up the fact about cloud based tank monitoring systems, has there been any progress on that?

Carrie Majeski

Yes. We've talked to a couple of different companies and I can tell you that our tanks are going into smart applications. Typically, the customers that we sell our tanks with they're the ones who are engineering those controls and devices in those monitoring systems. So with the current customers we have, we do have tanks going into the smart industry.

We are working on distribution agreement with companies that do provide more of the basic monitoring technologies, but a lot of times because these tanks are so large and the internals that they have in them there is a lot of engineering that revolves around those and that's where we would bring in some of these larger customers that we're currently dealing with.

Roger Miller

So, at this time I thought that may be you would have progressed into the smart tanks and looks like you're starting to. I believe that going forward that's going to be a big issue for vessels, it should bring them profitability. As far as it was brought up about the Zika virus and the President has asked Congress for over $1 billion for funding for it and as usual Congress is doing nothing at the time. But, the World Bank and the world -- some world health organizations are asking for the U.S. to step up to the plate, so we'll have to see what happens. And that's in fact Scientific; you presume that some of that money would trickle down to the universities?

Carrie Majeski

Yes. You definitely would. It would definitely give us some opportunity and funding was opened up.

Roger Miller

I mean, imagine a $1 billion is -- at least it's significant. It looks like you're cutting your debt level and your bank borrowings are down, would you want to expand on that?

Carrie Majeski

Yes. It certainly has been an initiative of ours to bring those down. We feel like our inventory levels have historically been really high and with time to unlock some of that cash. And certainly, the sale of the Ames facility helped significantly as well. So I mean, we are definitely pleased with the progress that we have made and feel like we have additional progress we can make this year.

Roger Miller

So, your total debt in the company with all the divisions stands at approximately what?

Carrie Majeski

Just a second, I may grab that number.

Roger Miller

And would you know how much it is per share?

Carrie Majeski

No. I don't have it broken down not per share. Our total borrowings at the end of the first quarter were $4,545,000 for long-term. And that compared to $5,949,000 in the prior year.

Roger Miller

Yes. That's a significant reduction. It sounds like about 25% just of top off my head. Well, let's move on. This is a generalized question and I think I have asked it numerous times. In this kind of environment, I would expect there would be a cause and effect here. The outlook for acquisitions, specifically looking at you mentioned Scientific in the past that's where the strength is. Is there anything on the horizon that you are looking for not specific acquisition, but a type of acquisition?

Marc McConnell

I would say that our [indiscernible] right now is not extremely high, but we do continue to look at a list of companies that would be synergistic to Scientific in various different ways. I mean it kind of depends on what is out there and how they would interact and help Scientific. Though, I would say it's a little bit generic in the sense that -- it's generic and how it effect Scientific, but most of them would pertain to scientific.

Roger Miller

So --

Marc McConnell

But, it needs to be the right thing and we were in -- of really conservative mode right now in all respects, but we are not close to great opportunities that may arise.

Roger Miller

So while you are in the conservative mode, you've -- vessels sales are up, still got losses there. That's the opportunity to make an acquisition there to bring in new customers and cut the competition. Has that been talked about, or is that still trying to workout the situation at vessels? Is there any room for expansion there to cut down manufacturing time?

Marc McConnell

Yes. There is certainly ought to be room for expansion, I would say for vessels more -- I would say lower hanging fruit then an acquisition would probably some investment that would probably improve the efficiency of our operation there. But, that is fairly significant in the cost and we continue to consider it. But, it always comes back to -- if we are going to be investing this amount of money in our overall business, is it -- where is it most impactful to us into our long-term future and I think that generally leads us to Scientific.

Roger Miller

Okay.

Marc McConnell

It's the neither or kind of thing.

Roger Miller

Whilst it's bounced of the bottom for what its worth, but it's still as it stabilized, but it still hasn't risen much. So I realize that doesn't directly effect the ag business, but it seems to effect the economy. What you see in the ag business going forward? Obviously, you have had some numbers come down significantly?

Marc McConnell

Yes. Yes. Well a month ago or so it felt more like kind of a stabilized low period and its I guess to some degree that this is still the case, but orders just this time of year historically are kind of weak, so that kind of tempers my thought a little bit. It was right around this time last year that the orders got quite -- the incoming orders got quite -- were very quite. And so we're working through backlog and for a couple of months thereafter but this tends to be kind of a quite order time.

But as far as the broader industry goes, I think everyone is talking about continued low level of demand through this year and I think some articles and things that would suggest that 2017 maybe slightly better, but all the while our equipment is being used and to some degree used up and I would hope this is creating some pent-up demand for when things free up a bit but it is kind of hard to say.

Roger Miller

Well, I think we've passed over cane, so would anybody like to expound on anything that's going on up there with manufacturing even though it's out of season?

Marc McConnell

Carrie?

Carrie Majeski

Yes. We do include Canada in our ag numbers. They are definitely through their season of use up here right now. We will be going out here on Friday with our new early order program that's something that we do every year and that's going to be very important for us to kind of see what the temperature is of -- of our dealers and our customers and see what they're going to be ordering. That early order program will run through June 30 and then that will definitely help us set our production schedules up here.

Roger Miller

Speaking these shows the 11th Annual Farm to Market Conference is in New York City May 18 and 19 and that's put on by BMO Capital Markets. So that does include beside fertilizers and chemicals and ag products, it does includes related animal health, which would be related to Scientific, have you thought about going to that?

Marc McConnell

I'm not familiar with that event. And I haven't really heard anyone ever mention it. So, the short answer is, I don't know much about it or anything for that matter.

Roger Miller

Well --

Marc McConnell

There are -- it's kind of --

Roger Miller

It is in New York City and it is with investors and industry and it's a two day event and you might want to just look into it. I believe it's at the Grand Hyatt Hotel. Investors are invited. So I guess that concludes everything I have today. Congratulations on reducing debt. I'd like to see Ohio Metals turn to profit and vessels, so that's the two keys here to me.

Marc McConnell

Yes. Well, I believe they both -- let's see I think March I think both of them are pretty close to that. There have been some little up ticks.

Roger Miller

Well, that's all I have today. Thank you.

Marc McConnell

Yes. Thank you.

Operator

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

Marc McConnell

Okay, very well. Well, thank you all for your interest in the company. And I think everyone can understand the situation that we're dealing but we've very pleased to have been able to be profitable we're very focused on continuing to be profitable under these circumstances that would be a good outcome. And thank you for your continued investment and interest and look forward to talking to you next time. Thank you.

Carrie Majeski

Thank you.

Operator

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

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