Art's-Way Manufacturing Co., Inc. (ARTW) Q4 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Today is Thursday, February 2 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 Gunnerson, CEO and President of Art’s Way Manufacturing. I’ll now turn the call over to Ms. Gunnerson. You may begin.

Good morning. I’m just going to start by read through our forward-looking notes. You should note that some of the statements made during this call 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 the forward-looking statements. With that I’ll turn the call over to Marc McConnell.

Thank you all for joining us. We appreciate you being interested and being involved with our call today. Obviously you would have all seen the results for the fourth quarter and full fiscal year for 2016 which has been a challenging one for us and the industry at large. We’ll be talking later about a lot of the more encouraging parts of what’s going in our business right now and look forward to going through that after Carrie’s presentation. Carrie?

Thank you, Marc. I’m going to start today by going over our corporate initiatives that we have established for 2016. The first one I’m going to talk about today is our customer experience enhancement. This is goal that we feel like we made great strides in accomplishing but it’s one of those goals that you never give up and you’ve never done [indiscernible]. This year we were able to upgrade our phone system, add a manager to the parts department, we consolidated our parts and our inside sales and cross trained the group in there and we significantly changed our warranty procedures to decrease the amount of time it takes to respond to our end users. Though we feel that we achieved our short-term goals, we’re going to continue to focus on this area with both short and long-term efforts. The next initiative is growth of new business at Art’s Way Scientific. During 2016, we did increase our sales at Art’s Way Scientific by 15% over last year. However, we did not see the increases that we were hoping to see in the key areas that we were working on, but this would be an initiative that we’re going to continue to work on as we go forward into 2017. The next initiative is increasing profitability across the board. Obviously this is an initiative that we were not able to achieve due to our significantly reduced revenue numbers. Now I’m going to move onto the balance sheet and looking at the items that we really were able to control despite the Ag economy. We had a goal to reduce our growth inventories by $2 million. We did achieve this goal, we ended decreasing our inventories by 12% or $2,029,000 that reduction allowed us to lead into our next corporate objective which was the reduction of the loan balances and we were able to reduce our loan balances by 27% this year or $2,714,000. Another event that significantly impacted that was the sale of the UHC Building in early 2016. Now I’m going to move onto discussions about the Ag segment. As we’ve noted in previous calls, we have anticipated that sales for the first and second quarter of 2016 to be down on a year-on-year comparison but as we came into the second half of the year. We thought we would be more comparable with 2015. This did prove to be true for us in the third quarter however fourth quarter sales did see a decline of 28% in revenues. Our revenues were $2,998,000 compared to $4,164,000 in 2015. The largest decline came from forage box line, OEM equipment and our grinder sales. Our year-to-date sales decrease was 18% with revenues of $21,557,000 compared to $26,326,000 in the prior year. This decrease is comparable to other manufacturers in our industries such as CAD, which showed a decrease of 18%, Titan had a decrease of 13% and AGCO had a decrease of 3.5%. Now Titan and AGCO those results are just for a nine-month as their year-end is January 31 and they have not reported yet. And AGCO’s numbers are also little bit because they had an acquisition within the year, so their decrease of that core business is offset a little bit due to that acquisition. Our gross margin year-on-year decreased 1.4% or 1,400 basis points due to large reductions in our high margin category such as grinders and service parts. Gross margins for 2016 were 24.2% compared to 25.6% in the prior year. Our gross margins for the quarter were 21.1% compared to 19.2% in 2015. We were able to significantly decrease our SG&A expenses year-over-year with a decrease of 13% or $630,000. Again our customer service initiatives we believe to be key for our AG segment and for our upcoming order cycle. We believe that improving our relationships with these dealers and the end users will enable us to increase our revenues. The next area we have for the AG products is our new product offerings as we’ve been going through these difficult times, this is another area that we significantly focused on throughout the year and we have several new products that have either recently been launched or will be launched shortly. One of those is the commercial grade forage boxes with significantly increased capacities. We did put that in our fall order writing program and we do have sales on the books for those now. Our hammer blower was also unveiled in late 2016 and that, we will be showing at the Louisville show coming up here in February. We also have another product that has not yet been unveiled but it is a bale spreader, bale processor. We’ll be showing this product at Louisville as well. And then also have a 24-foot pull type manure spreader. In the past we’ve had pull type manure spreaders but not of this size, so we believe as we come out with the commercial grade forage box that a commercial grade spreader and the size of that, they will play well together. Then we also came out with a beet high dump cart and tested that during the 2016 fall season and have offered that and are really order program. Also in the beet sector we’ve unveiled our 692z which is a smaller beet harvester. We have for the last several years been manufacturing and selling a 6812, which is a 12-row unit. The 692 can be a sick thrower in eighth row, which will go into some of the smaller market areas. I’m going to move now to our Art’s Way Scientific division. Sales for the quarter were lower than last year at $572,000 compared to $1,029,000 that was a decrease of 45%. Our year-to-date sales did increase there from $3,191,000 compared to - they moved up to $3,764,000 or 15% increase. The sales of Ag buildings have increased significantly for us in the last couple of years and that’s been the driver of our sales over the last couple of years and the decline in the dairy market over the last half of the year really did impact our sales and that’s when we kind of saw the quarter coming down in comparison to the prior year. We continue to focus on new products at Art’s Way Scientific as well. Food safety is up and coming area we’ve invested significantly in marketing to this new sector. At this point there are rules and regulations that have gone in place, that we believe it’s going to drive demand for this segment. However, the companies are not required to be following these rules at this point in time. So as we move forward, we look to see that effect to grow. With the increase in the Ag sector and the Ag buildings, we looked for additional ways to add value to those buildings and we are now also marketing stalls that go into those cast buildings and selling them not only into our modular buildings but also to site buildings and retrofit buildings. We are also focusing at an execute level and a board level to develop a targeted strategic plan for our Art’s Way Scientific as we go forward into 2017. I’m now going to move on to Ohio Metal. Sales increased by 3.2% for this segment in the fourth quarter. We went up from $529,000 to $546,000. Our year-to-date sales did decrease 11% from $2,379,000 to $2,128,000. We did hire a new Director of Sales in September of 2016. He is very well known in the industry and has extensive history not only in the US but in Mexico and South America as well. We’ve been working diligently over the last quarter to improve and increase our distribution network and we are starting to see significant increase in our quotes [ph] for our specialty products. This sector is impacted significantly by the oil and gas industry. We have seen a slight improvement there over the last quarter and that does significantly impact the standard side of that business. Further we feel that the recent changes affecting the pipeline are likely to be good for our customers and our standard tool sales as well. I’m now going to move into our corporate initiatives for 2017. With all the new equipment that I just recently discussed as I talked about the Ag products. The successful launch of these products is going to be key for us in 2017. We’re launching these products in shows in mid-February. We’ve five new products that will be on display in Louisville and then in March we will be displaying at Sugar Beet Show with two more additional products there. So along with these products launches we will have marketing campaigns and training sessions to ensure that not only our sales people but our dealers understand the product and how to sell it. We’ve already seen an uptick in our backlog for some of these new products that have already been released and just one of the products that I mentioned today has not yet been released to the public, but the rest have been put on into our early order programs. We believe by adding these new products it leverages our dealer network and our representatives and offers more catalog and shelf space and gives our end users a reason to upgrade their equipment. We believe that this will drive future revenue. The next corporate initiative I would like to talk about is again a reduction in growth inventory. We did career goal for that in 2016, but we still feel that based on our revenue levels that there is still inventory that we can be reducing. So our goal for 2017 is to reduce our growth inventory by $2,400,000 or 15%. Our next initiative is profitability and improvements. We believe as revenues increase, we anticipate that we’ll be able to improve our profitability levels both in terms of gross margin and in terms of net income. The next initiative is the reduction of bank debt, we did reduce our bank debt by 27% in 2016 and we look to reduce that bank debt by another 27% to $2 million in 2017. We believe by reducing our inventories and improving our profitability we’ll be able to bring down the bank borrowing. We also have the Art’s Way [indiscernible] facility on the market, so should that building sell that would be an additional pay down of debt. The last corporate initiative is growth of revenue at both Art’s Way Scientific and Ohio Metal. I do want to go over our backlog numbers just a little bit as they’re up compared to a year ago. Art’s Way Scientific’s current backlog is sitting at $685,000 compared to $450,000 in the prior year, that’s an increase of 52%. Ohio Metal has a backlog of $139,000 compared to $137,000 in the prior year 2% increase there and then on the AG sector are more significant increase. Our current backlog is sitting at $5,283,000 compared to just $3,209,000 in the prior year. That’s an increase in the backlog of $2,073,000 or 55%. So our total backlog corporate wide is sitting at $6,109,000 compared to $3,797,000 in the prior year an increase of 61%. In conclusion, while we continue to operate in difficult economic times in both Ag and oil and gas. We’ve been extremely proactive. This pro-activity has made for a lot of transition for us during 2016. We transitioned production out of our West Union facility and the Ames facility. This move allowed us to significantly reduce our overhead. However there is always a learning curve when we production of product lines to different facilities. This did impact our efficiency rates in 2016. We also had significant transition in our selling structures at Art’s Way Manufacturing and Ohio Metal Working. At both entities we improved our overall coverage as well as the scale and expertise levels of our distribution network. We were also able to increase the resources at management levels at both entities. We are not just waiting for the market to come to us and we’re aggressively out there trying to gain market share by providing new equipment, new tools at a high quality with skilled support-to-support the dealer networks. It does seem that both AG and oil and gas seemed to have bottomed out in the markets and we have seen an uptick in orders pushing that consolidated back levels up by 61% compared to last year at this time. The majority of that increase has come from the AG segment and much of those increases can be tied directly to our new product offerings. A significant portion of those new product offerings will not be able to be delivered until the second and third quarters of 2017. We continue to strengthen our balance sheet over last year by decreasing our inventories and decreasing our bank borrowings and improving the overall health of our business. We’ve discontinued the business of Art’s Way Vessels freeing up resources to focus on our core business. The Dubuque facility is on the market. Our annual carrying cost for that facility is approximately $175,000 compared to our average annual pretax loss of nearly $400,000 in the last several years. Our executive management is stronger than it is then and we are successfully implementing key strategic changes. We are seeing the results of our initiatives and our day-to-day operations, but we still have a lot of execution that will need to be done as we move forward into 2017. But we’re continuously improving the company significantly and strengthening our position to benefit from improved market conditions as we move forward in the year. With that I’ll turn it over to Marc.

Yes, thank you Carrie. I’d just like to build on what Carrie said a bit. It really was a year of transition for us in 2016 and we made significant progress that doesn’t seem apparent when you looked fairly at the financials. But our efforts in 2016 and that will continue in 2017 we’re reducing inventory, continuing to improve our purchasing, trying to sell our vessels building, improving our performance overall. All these things have helped strengthen our balance sheet and will continue to do so and I think will be moving towards having a really low borrowing level toward the end of the year and all this does benefit our banking relationship and to this point, our lenders worked well with us to help us work through these slow times in industries that we serve and that’s been very important. So while we've really been through a tough time as Carrie said with the growth in the backlog mostly attributable to new products. We do feel like we have good reason for optimism that the year will be better than the year we just existed. The market overall as Carrie said that, it feels like is likely bottomed still probably going to be somewhat of a weak year for the industries we served in general, but I can tell you that for the first time in over two years, we’re hiring labor because our backlog and build schedules show us that we really need to and that’s a significant change from anywhere we’ve been here in recent times and that’s I’m speaking about the AG sector here. But that is a very good sign for us. Also what Carrie said, a lot of this backlog is for product that will ship in the second and third quarter. So our first quarter expectations on revenue are generally still fairly weak. It’s been a struggle to ramp up to a higher production level and also some of these things really are for a later season of use. So it’s been, you know is a timing there but, I anticipate will be feeling better about our monthly profitability in future months. And we are, as Carrie mentioned we are entering a show season and we have our biggest show that the AG Company participates in Louisville in two weeks, where we’ll be introducing new products. She mentioned in one that we have not mentioned to anyone that we think will be hopefully impactful for us and being that we already have significantly higher backlog then we have had and that we’re entering a show with numerous new products. We’re very hopeful that this will lead to an even more growth in the backlog coming out of February. We hope that and I think we have reason to think that we would be earning that. So we’re pretty upbeat in that respect that we’ve done things to help our position in the market and in the health of our company. So going forward, we’re going to for this year and for every year ever after we think that focusing on quality and our customer experience is the key part of how we can differentiate ourselves from the industry and make our brand command more better pricing and to be known for excellent customer service, for innovative product development, all these things I think are going to be very important for us and we’re happy to see that some of these efforts that we’ve made in the past year and particular are starting to yield some kind of result at least in form of orders and customer feedback. So overall we’ve been trying to simplify our business and cut the unprofitable activities from our business and put more resources and effort into parts of the business that we feel like we do have a lot of opportunity with new products and AG is a big part of that and that’s how we’re preparing to grow and succeed in the kind of markets that we’ve been withstanding I would say for this year and the past year prior to that. So overall, we have a cautious optimism as we said in my quote in the earnings release. There’s a lot of good news I think that we’ve been feeling since the end of the fourth quarter and in terms of the incoming orders and our other subsidiaries are seeing uptick in activity as well. Some increase in backlog and some good opportunities in front of us with key customers for Ohio Metal and for Scientific. So on the whole, I feel like the team has done a lot to make progress in 2016 to prepare us to succeed with a healthier company and kind of foundation to grow from a simpler footprint and proud of that and while 2016 financially we remained to struggle, I really think that we’re doing things that will cause profitability to happen before long. So with that I would thank you all for joining us and I welcome any questions now.

[Operator Instructions] our first question comes from Tyson Bower [ph] for Oppenheimer. Please state your question.

Couple of quick questions. Just trying to put together some of your comments, you talked about inventory reductions about $2.4 million at the same time of having growing backlogs that is been generated from the new products, does that imply that the new products will be built to order or to PO as oppose to spec where you’re trying to then push through the demand. Is it a pull through situation for you?

Well we’ll be having some small degree of speculation and trying our best not to have significant inventory upticks in the categories that you know related to the new products. So I think on a general level, it will be pretty minor in terms of inventory impact because we’re entering it with that intent.

I would just add that, where we see our reductions coming from, they’re not from our product lines that have really offered us the most benefit in prior years. It’s been slow moving lines and that’s where we really see most of that reduction come from and that should more than offset that increase.

Okay. It sounds like if we fast forward to Q2, Q3 you’re in a roll forward period you have far more confidence and your ability to achieve that profitability to recognize some of the clean-up activities you took in fiscal 2015 to really show up in the numbers at that point in time. Is the years then determined by how deep or how far behind you start out of Q1 whether or not we’ll have an overall successful year?

Well obviously it will, missing that remains to be seen. Obviously it will have an impact and but I think overall that later parts of the year will be significantly better and overall I think we’ll have positive results. I know it’s a little vague but - lot of things really depend on whether truck show up on the last day of the month to take equipment away. We find that at the end of every month. I mean our profitability in the quarter can depend on that, when it’s tight as it has been.

Great. Which is why I talked about having a rolling forward and based on evaluations off of smoothening effect in that basis. You talked about scientific then quite hit what you wanted or the areas within scientific then hit where you wanted them to be in 2016. What are the keys in 2017 to really drive or really get back on track to where you think that division of that segment can be?

Well I’ll tell you we’re undergoing strategic planning basically right now. That our intent is to lead to more targeted growth instead of I think to this point, where you’ve been trying to respond to the increase that we filled [ph] and do the best we can in years past, at times in years past that worked well enough for us but I think we need to think harder about, how we’re different and how we bring value and how we go after the market with more resources to capture more business and have a steadier business and ultimately have growth in that business.

And thank you for taking my questions.

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

With America [ph] first program going on, if the border taxes enacted which is included in the Paul Ryan plans which could be as low as 20% for Mexico and as high as 45% for China. Realizing 60% of the auto parts are made in Mexico and the rest primarily China and Canada. How does that affect foreign machinery parts?

Well I don’t think, for one thing we don’t import whole lot of parts and there is some things that we important, but overall we don’t see ourselves as having a lot of exposure to our cost in that respect. Most things are locally sourced or not locally, they’re domestically source. And steel is obviously a commodity that is likely to be quite impacted by all of that and if the price of steel goes up that’s what we’re going to have to pay a lot of attention to specifically, but most of the other components in purchased items I don’t think would affect us a lot.

And how do you feel about competitors? What were they at with this?

I’d thinking be similar. Most of the companies we compete with are other mid-west based small manufacturing companies. We are not really head-to-head to with John Deere on much.

Well the good news is, at least it will show memo price increases from the border tax. How about the corporate tax rate? The observation is that you’ll be able to take advantage of lower tax rates because of Made in America. How do you feel about that?

Well we would certainly welcome that. We waited on the full analysis on that aspect of it, we haven’t had lot of earnings to be managing here for couple of years, but obviously we think that would be good for us.

But it looks like you’re on the verge of earnings.

That’s right.

That’s what I see from listening and reading and you can bring back the dividend, if the earnings are there.

Right.

And I would hope the dividend would come back as soon as possible, maybe at least by first quarter of next year. Is that a possibility?

We have not talked a whole lot about that. But I can tell you just off top of my head that, we’re very focused on reducing debt and I think that would be probably given priority before dividend particularly if we think that getting bank paid off is in within sight.

Well it looks like you have a lot of new product and I would hope you’re going to make an announcement for your 2017 show schedule, is that correct?

I anticipate publishing that yes.

Yes, I noticed that you haven’t done that yet, normally you do that. Some suggestions I might give you which seems relative to where you manufacture and the fact that the climate out there right now. You might want to make your logo more transparent with brighter identification with Made in USA on it and the State you’re making it, whether it Iowa or Ohio. And since 1956, that would, I think that’s a selling point to put on your farm equipment.

Yes and agree we’d take that into consideration. I will say we’re probably similarly situated in that respect to our competitors most of them were multi-decade, family-owned, mid-west based similar story in that. But the point remains I mean we’re proud of that as anyone would be.

I would be more than proud of it. I think you should label it on each piece of equipment. And as far as Ohio Metal goes as the oil business definitely the drilling is improving each week, we notice that there is more drilling coming online that should affect Ohio Metal, correct?

We believe so yes.

So maybe we can look forward to profitability there.

We think that as a very real outcome. We’ve already seen some uptick in business, it hasn’t been a wild percentage, but it’s been a nice kind of steady growth that it’s good. And yes all of the signs seemed to be pointing towards that being good. A lot of our main customers are pipe mills, that use consumable product that we produce and all of that oil and gas activity, pipeline activity, all that is good for that industry and I think we’ll have the benefit, we’ll have them benefit to us.

Well the Army Corps of Engineers approved the pipelines. There would be a held back and no matter what your position is on that obviously it will be good for Ohio Metal. As far as international goes there wasn’t much briefing in the call about what’s going on in Canada, would you like to expound on that?

Well it falls under the AG piece for us generally. But you know as interesting this year, there was a fair bit of early snow which we always see as the sort of predictor of how year is going to be. We’re glad to see that, we had a fair bit of early activity and it’s been a little bit quite since then, so overall I think it’s kind of average year in terms of their performance. It remains extremely competitive. We’ll say we’ve made, I think our sales or snow blowers in the US has been stronger and maybe a little bit less of in Canada and on the whole I think it was probably similar last year, but it’s not been very impactful one way or another to our outcome.

As far as scientific goes, your biggest gains have been in food safety, is that correct?

Well our biggest gains have been in the AG buildings in the last couple of years. Food safety is where we’ve seen the biggest opportunity for growth and we do have activity around that, we do have orders that we’re working with. So I think that statement will probably be true sometime from now, that would be the biggest growth in contribution to the company. But to this point it’s actually been more of the AG building.

And I haven’t heard about Dan Palmer lately, is he still with the company?

Yes, he is.

And you do have a new member on the board? Correct.

We do.

Would you like to talk about that?

Sure. He came on a few months ago, his name is David White who is actually Canadian but lives in Philadelphia and he’s also on the board of Ag Growth International which is another farm equipment manufacturing company that’s public, that’s actually a lot larger than us and we’re introduced to him through shareholder and talked to him a fair bit last year and felt like he had a good kind of operating background and board background and sort of strategic mind that I thought would help us and in any case, he’s joined us and we’re happy to have him.

And going forward do you have any plans for any acquisitions or divestures?

I’ve nothing to announce at this point. We’ve been obviously getting our own health and order for the most part, but we would not be completely dismissive of an opportunity that came along. But no I don’t see any big changes in the near future in that respect.

Okay, well thank you for the call today and it’s been very informative and the new products. Thank you.

Yes, sir. Thank you.

At this time we have no further questions.

Okay, well thank you all for joining us and for your investment and interest in Art’s Way and we’ve laid out obviously where we’ve been this past year and how we think 2017 may will be different and what we’ve done to have a different outcome and we’ll be diligently work trying to make that a reality. We do thank you and look forward to talking to in the next quarter. Thank you.

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