Art's-Way Manufacturing Co., Inc. (ARTW) Q2 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Today is Friday, July 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 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 with our forward-looking statements. 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 operations. 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 its forward-looking statements. And with that, I’ll turn the call over to Marc.

Yes, thank you all for joining us. You’ve all seen our earnings release and it’s obvious we had a very challenging quarter and we look forward to telling you about that in greater detail. And Carrie has a presentation that she will go through now.

Today, I’m going to start with our agricultural product segment. Incoming orders continue to be slow. Our revenues were [off] [ph] 11% for the quarter or $406,000, year-to-date our revenues are [off] [ph] 16% or $1.236 million. The products where we saw our largest decline in were our grinders, manure spreaders, plows, and our OEM blowers. Our forage boxes, we have seen a significant increase in sales and that’s been due to the introduction of our new commercial forage box. Our backlog is 29% compared to a year ago. Most of that increase we saw when we secured the orders during our early order program. So little bit inconsistent but our backlogs are up 29% compared to a year ago. However, we do feel that incoming orders are a little slower right now. Again where we have seen most of the increase, have been with the new products that we have introduced which has definitely validated the extra efforts and expenses that we have incurred over the last several months. We have seen a significant shift in our product mix, which is impacting our gross margins pretty significantly. The products with strong gross margins we have seen a decline in and that’s our spreaders, our manures - our grinder mixers, our spreaders. And the products that we have seen an increase in sales and are new products the commercial forage box where we are trying to enter a market and our margins are pretty slim. We’re also offering some larger discounts to move slow moving inventory, which has impacted our gross margins as well. We’re very much focused on getting our new products into the fields. We have incurred significant additional cost due to inefficiencies as we trained our production staff and our dealers on how to build these machines and set them up and get them into the field but we are really, really following these machines closely to ensure that both our dealers and our customers have a positive experience with Art's-Way and Art's-Way products. Our engineering expenses are up 40%, compared to a year ago and again this is due to our focus on new products. We have added sales reps in both US and Canada, but I would point out that these positions are commission only [indiscernible] reps and not direct hires of the company. We have made some significant overhead cuts towards the end of the second quarter to improve our position going forward. Next, I am going to talk about Ohio Metals. At Ohio Metals, we have seen our sales increase 33% for the quarter from 480,000 to 639,000. Year-to-date our sales were up 24% from 1.053 million to 1.304 million. Here we are seeing a pretty significant improvement in our gross margins. They have gone up from 24% in 2016, and we are currently running at 33% year-to-date. In late 2016, we had hired a new director of sales and we have talked about him on previous calls as well. He is very well known in the industry for distribution network and we are definitely seeing the increase in the quotes and the sales of our specialty products; and again this is an area that we have really been focusing on because we feel that by growing that side of the business we can smooth out some of the peaks and valleys that we see on the standard side of the business, which is tied heavily to oil and gas. So just on the specialty side of our business alone, we have seen about a 27% increase in our sales, and we anticipate continued increases on our specialty product side throughout the year. We did also make some significant overhead reductions late in the second quarter at Ohio Metals as well. The last segment is Art Way Scientific. Here we have seen the sales for the quarter decline about 30%. We had sales of 888,000 compared to 1.259 million for the quarter last year. Year-to-date, our sales are off 42% 1.276 million compared to 2.192 million. Where we are seeing the biggest decline is into the dairy markets. Our animal production buildings are not selling due to the poor dairy markets at this point. We were able to secure two leases. So we had stock buildings on hand and inventory and we were able to get those buildings leased. The leases won’t actually go into effect until the third quarter but we were able to put the deals together here at the end of the second quarter. So that will kind of put those assets to work for us. One of those leases is a 12-month lease with an option to purchase and the other is a three-year financing lease. While we continue to operate under difficult economic times in the Ag industry, we’re very much focused on delivering our new products to the market and strengthening our image and our dealer relations. The learning curve moving from R&D into production has impacted our efficiency rates for the manufacturing sector pretty significantly. Our backlog numbers have increased over last year’s, across all segments with the exception of Art’s Way scientific. There we have seen a slight decrease in our backlog. It is a 6% decrease there. We continue to improve our distribution network both at Ohio Metals and at Art’s Way Manufacturing Ag division through adding sales reps, dealers, and distributors. Both Ag and the oil and gas continue to be difficult markets for us. Our consolidated backlog levels are up 25% compared to this time last year. The majority of that increase does come from our Ag sector and can be tied directly to our new products. We continue to focus on our balance sheet striving to decrease inventories and the bank borrowings and improving the overall health of our business. Despite these poor economic times, we have been able to keep our executive management team in place. We do see successful implementation of some of the key strategic changes that we’re making and we’re decreasing our burden levels and we're working to improve our day-to-day operations to strengthen the company so we can capitalize as the markets improve. With that, I’d turn it back over to Marc.

Okay, alright. Well partly as Carrie had laid out, strategic initiatives that we have been talking about for a period of time are focusing on quality, on absolute customer service, and on developing compelling new products. These are three areas where we feel like - by focusing on these, it will really help us in the long term and I feel very much confident as I ever did that those are the right things to focus on. In the short term, you can see though that by putting some of these as priorities it affects our ability to deliver things on time at times and that means, in this case second quarter while things we were hoping we ship during that period of time spilled over to third because we wanted to be right, wanted it to have a - wanted these new products to have a successful launch. It was important to us that their initial interface with the market be as good as profitable, and you know some of that is a real struggle, and so it impacts efficiency, it impacts whether you get it out when you wanted to and all that. So our second quarter really shows the fact that our priorities where on a long-term sort of focus. And all around we hesitate to say things that set high expectations given the fact that we are still very much driven by what happens in the commodity markets, but we continue to try to do everything we can to put ourselves in the best position long term, and fortunately we entered this downturn with a very strong balance sheet and we are trying to make it stronger every day, certainly key areas where we still have progress to be made in that regard, but having the strong balance sheet is what allows us to take a long-term view and make decisions accordingly. I think long-term, I feel more confident than ever that we will be well positioned for an eventual return to normalcy in the markets that we serve, but in the meantime it’s going to remain difficult. So, we have to listen to what the market wants, try to figure out how we can help farmers save money of being more productive, develop new products accordingly, and really support our dealers, and that’s just very, very important in our business. So that will remain our focus and [indiscernible] to take that as we get there. So, with that, I’d be glad to take questions.

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

Yes, good morning Marc and Carrie. It is a difficult quarter, but Marc you indicated there, some sales were postponed to the third quarter; could you sort of quantify what kind of sales dollars we postponed?

Carrie would have that closer than I would.

That would be tied pretty specifically to the commercial forage boxes that kind of pushed over into June. I would say that specifically is probably about $300,000 to $400,000 worth of sales.

So this is the area that you have been concentrating and the reception of your product, do you see improvement in the reception of this product?

Well, I’d say it is still quite early. That was a very time sensitive launch, you know the products needed to be in the field in May for the beginning of the season and some people would have liked to have them in April, so we have been very much under the gun to try to get them out, at the same time you are trying to make sure that this first round of equipment is correct, and so we've had a lot of work to make sure that that’s true and in some cases still there were things that rose after some, when the first ones were shipped, and that kind of thing. So we’ve been battling that tremendously, but it’s something that I don't see as being a recurring problem with that product at all. So as to whether or not it has been received well, in the areas that it’s gone or that it’s been shipped to already, I feel like, I think the users have been happy with it. I don't have all feedback from everybody because I don't know that they are all in use yet, but we certainly - where issues have risen we've certainly supported the product just above and beyond, so I know that we will get good grades in that respect, but I think it is a little early for us to have a real clear view on it. You know how they perform, how productive they are versus what they used otherwise and that kind of thing. They are still using them now. So, I don't have a strong data to give you.

Okay. And as far as the scientific market, is the weaknesses unavailability of funding or I mean some of it is going into the farm, is it the universities, are you getting any increases in universities and how is the mix between the farm and the universities going forward?

I’d say we have more focus on food safety and on Ag research, but on pure Ag buildings that would go on farm and that kind of thing that’s really, really been slow this year and in the last couple of years we had a more steady level of activity with those things. So, we have seen a shift and a lot of the forward opportunity and things that I think will be part of our revenue through the rest of the year is more likely to be food safety related.

Okay. Now as far as the seasonal nature of your business would you say the third and the fourth quarter are they a higher or lower? How do you look at those sales compared to the first, second, third, and fourth quarters for the rest of the year?

We would expect our third quarter to be the best.

Okay.

That would historically be - that would generally be what we would expect.

So we would expect profitability in the third quarter or any on a judgment on that at this point?

I would certainly expect it to be a much better outcome that we’ve just had.

Okay. And do we, so at this point is there any of the - have we sold all the buildings that we have had for sale?

No. We have not. And that is important thing that can help our situation quite a lot, and we’re working hard on that. We do not have them sold right now.

Okay. We’re not in contract for sale or we have bids on these buildings or…?

Well, we’re trying to negotiate, but do not have it under contract, either, do not have any of them under contract right now.

Okay, okay. All right, well look I mean you are trying, it has been very difficult in the farm area and - but hopefully that there could be some more money that is put into the scientific buildings for the universities and hopefully we could improve for the rest of the year. Good luck Marc.

Thank you.

Bye.

Thank you.

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

Well good morning. As you know I was on the last conference call, I chose not to ask any questions, I heard what I, at that time what I wanted to hear. So, let me drill down about Ohio Metals. According to you, you had a significant improvement and now are profitable, correct?

I would say as of recently it is at that point.

And sales were significantly up, correct?

Yes.

And you have cut the workforce, is that correct?

We cut some of the overhead.

When you say overhead, you mean workforce or sales people or what?

Salaried positions, the direct headcount I think will be quite similar to what it had been.

Well, you have got someone new running it as of, what, a year ago or less than that?

Yes, we have a new sales director as of September I believe.

Okay. And you’ve got results and are you basically, you said you were in the specialty area, are you basically still doing oil and gas for the product?

When we say specialty, we are really referring to our precision side of that business, which has always been part of the business, but wasn't really a high percentage of the revenue historically and we’ve been trying to grow that side of it. The oil and gas driven part of it was more of what they call a standard cutting tool business and we remain in that of course, but it is much less a driver of our growth. So, I mean the price of oil has been fairly low in recent times. So we’ve been growing in spite of that in doing so in areas not driven by oil and gas.

And what happened to the diamond drill bits?

Well our PCD and CBN are what we would put in the category of precision and so that is what we are seeing the growth in.

Okay. And at the end of the year, when the results are in, will Ohio Metals be profitable as far as you can determine at this point?

You mean for the whole year?

Yes.

For the whole year, I mean if they go on the trajectory that I think they are on and with their current cost basis, I would think that that’s a possibility. I mean they also do have to carry out a fair percentage of the corporate expenses, which depending on how you choose to look at that leadership profitability or not when it’s closed, you know it could still cash flow, but still show a loss if it is closed because of the additional expenses allocated to it, but from here forward, I would expect it to perform pretty well.

Now when you say additional corporate expenses, are you talking about not that division, but the company as a whole?

Yes, shared corporate companywide expenses that they have a piece of. So if you look at them on a standalone basis without an allocation to it, if it is closed it may well show profitability when you look at it with full allocation in that way it may turn it the other way. I'm saying that’s the case when it’s closed, okay. But as far as the performance for the rest of the year, their overhead is lower, their sales are rising, their margins are up over a year ago and that kind of thing. So, it’s all positive in that respect….

So it is exact to opposite of what was going on with vessels, correct?

Basically. Yes, vessels was not on a positive trajectory at all in sales or in margins or in anything.

So you made a right move by cutting loose vessels, right? And that’s already been written off that’s out of - that's done, right?

Yes, that’s done and we don't regret that for a moment and we do still have a little bit of carrying cost from the building until it’s sold and we’re trying hard to get it sold, but that is - those operations are ceased.

Yes, there has been quite a bit of expansion nationwide as far as nationwide in buildings. So, eventually should catch up to you. As far as scientific goes Dan Palmer is primarily focusing on food safety, correct?

I don't know about primarily, but he has a lot of his focus on that, yes.

Now, at one point you were having problems with being competitive because of the huge discounting in contracts. Is that still going on?

Well I would say that it remains competitive landscape, I don't feel like our ability to compete on prices is keeping us from getting business right now, I don't think. Now the Ag buildings are much lower priced and that’s may be more price sensitive to and when dairy farms aren't making money than they are not pulling the trigger on that kind of thing, so it kind of doesn't matter if you're able to be 5% lower or anything they are not in the market to buy.

Do you have any projections one that dairy farms will make money?

No.

Because I know you’ve always had a good handle on the Ag business from financing to manufacturing.

Daily specifically is in a bad place and it has been, I mean if you look at the chart it is really pretty ugly and I am in no position to really predict when that’s going to go up. I mean occasionally we see signs of life and that kind of thing, but I don't think that a dairy farmer spending money right now is doing so out of profitability, it’s more so out of necessity, you know if something is worn out or if he finds something that will allow him to save money and get to profitability or some such thing as that, but there is no robust profitability on dairy farms that I’ve seen and until the price of milk rises materially that’s going to continue to be true.

So, is there any other area in which you feel scientific, can manufacture, and be profitable in these buildings?

I mean in new market segment entirely?

New market segment in order, I mean due to the fact right now all the manufacturing homebuilders are just they are just on fire and obviously interest rates are still low. I’m not suggesting to go into manufacturing homes, I'm just saying, is there another area that you could expand into? Have you even thought about that?

Well we certainly think about where our concept can gain traction and not be purely commoditized. I think a lot of the modular building world is pure commodity. In as such there are much bigger companies that do it on a much more automated basis. So manufactured homes, I mean they crank those out by the thousands I think, and you know set up to do in a way that we would not be able to do it compete with. We are set up pretty much to bring our concept to more niche markets. So that will be true there. I know that we’ve looked into modular and the medical side, which it appears that there is very little margin to be gained there and it is highly, highly competitive and I don't think that’s where we would be able to get our return. The food safety has been slow to come to fruition, but our concept seems to fit there, it is not commoditized because we are kind of new ones bringing it there and I think that that remains really our best growth opportunity, and it continues to develop, but it certainly hasn't developed on the timeframe that has suited us, but I think it’s still where a lot of that opportunity lies for us, and I say that in the midst of it every day. I think there is real opportunity there and we are hopefully going to have some things that will develop in the coming quarters that will demonstrate that.

Well in the long term and looking at the past, it would appear to me that’s where the company is going and I realize you're primarily in the Ag business, but you've got to jam in this scientific company it just has to be exploited.

I agree, absolutely.

I don't know whether you need to do that with a partner, like somebody, like an Abbott Labs or who, but obviously there is lot to be gained here. And that would turn the whole company around overnight. It is just a matter of find and the niche, and that’s why I am drilling down on your right now to see if you have explored other areas. As far as Ag goes, you’ve cut back significantly in labor and cost and manufacturing some items I believe, but is that - where do you think you are really at with that other than the new items. Is it just, it is flat to down, is that where it is at?

Yes, I would say it is essentially flat to down. I mean had we not come forward with new products, it would be way, way down. So, really it’s by trying to look forward and see where the next opportunity is in developed products accordingly that we’ve been able to perhaps not profitably okay, because the start-up, the development and the start-up of all this costs money, but if we relied on the product offering we had a year ago, our situation would be materially weaker. I mean, if you just look at what our backlog is, what the make-up off it is that’s abundantly clear.

Yes and right now…

I don't think it is a long-term loss of relevance and it is just what the mix is and who customers are that are buying anything.

Right now the management is intact that’s been stated.

Yes.

And the board is intact right?

Yes.

Obviously. Have you even thought about putting in new people on the board that would bring in more business to maybe somebody like scientific?

Well we did add a member a few months ago. So you might recall that. As far as one specifically [indiscernible] to bring business to scientific based on baked in contacts or that kind of thing, I mean we have thought about that, but has not gone that right at this point.

And the last question I have, probably won't go forward to well, but, through all these cutting cost there has been no reduction obviously in management payroll and that’s got to be considered somewhere along the line, if you don't make a drastic turnaround in the next couple of quarters.

Well, I would say for one thing we do expect improvement okay and the second quarter results were a little ugly, but when you know more of the circumstances you can see it may be in a different light, but I get your point and my belief on that is that when you start doing that with your top management people that that sort of starts the exodus and I don't think that we want to do that. In the long term I think that will cause more harm. So, I have been kind of, I mean that’s been discussed, but it’s something that I have great reluctance about just because I think it comes at great expense long-term that may be - really in the short run it would be more symbolic than anything.

But I do agree with what you just said, I wanted to hear you say that it has been discussed. When you say it has been discussed, it has been discussed with all the management, are they aware of the situation?

Well managed is certainly aware of the difficulties we have been and without question they are very aware of that. As far as has it been discussed directly with them, what do you think about us giving you a head cut, no. Because to me that’s code for go look for a job and that is not what I'm trying to, that’s not the situation here. So we have got [indiscernible].

So at this time we would just keep that on the back burner and we will pretend that never occurred, but you have to make - you’ve got to go forward and the results, the last two quarters especially have not projected that.

Clearly they’ve not been what we want them to be, clearly. However, I do like the idea of all the new product and the engineering. If you are going to spend money, I suppose it should be in engineering and new product and I think Dan Palmer, something has to be explored there to help him out. That’s the key to the company.

Yeah, we are trying.

And the stock market doesn't see that at this point, but I see it.

Yes.

So that’s all I had to ask today. Thank you for allowing me to speak, and there are questions I threw at you today, I know they are not easy to answer.

No, we can handle. Thank you.

We have a follow-up question from Sam Rebotsky. Please go ahead.

Yeah. Marc and Carrie, I know you take ads in the progressive dairy and what kind of responses do you get when you - from the ads that you participate there?

Well it could be kind of spotty. Historically, when the reader has money to spend you get more phone calls, but I would say are we get a fair number of leads from those kinds of ads and when you do end up making a sale it ends up being worth the expense that you had over a period of time, but I don't think that it’s caused any windfalls obviously, but it keeps us in the mind of farmers that may be would make a decision later on and they say it shows and maybe once they’ve seen us and seen I guess what you would call an impression of us ten times and then maybe can come around when it fits their budget, but as far as direct ad to order doesn't happen as easily and quickly as you would hope.

Okay. Now the other thing is, have you thought about investor interest in creating more of business opportunities for Art's Way via investor interaction attracting more investors and possibly more opportunities even though the stock is low because generally speaking the income is not what it had been, but by sort of creating participation in various conferences that might create more interest and possible business opportunities, have you sort about that and what’s your response to that?

Well we have been thinking about that lately. We have participated in some of that in the past, I want to say 2008, 2009, 2010 are thereabouts. I did a fair about bit of that and presented at a few conferences for example Sidoti in New York is a small cap conference and we participated in that. So we have explored those things a bit and that was during profitable times and honestly our experience wasn't that good with it, and I think in some respect our story or our industry wasn’t sexy enough for that crowd and maybe got a little bit of a bad taste about it and if you think about it in the current context of not very good trailing performance here, and still being in a very cyclical industry that’s still down, I think my thought has been that our expense and energy is better spent trying to get things fixed at home and that that audience probably wasn't going to be very interested so we are really on the upswing and can demonstrate it. So that’s been my impression about it. And so we’ve proceeded accordingly.

Well I personally think, I mean it’s true that you do have to fix the business or just adjust to the business conditions and when that happens there will be a response, but planting some seeds at some conferences to the extent that you could setup to tell people what you are trying to do may attract more people to the stock, when the time is right, just as you suggest, as far as progressive dairy approach and I think that there is no direct quit pro-co for appearing at a conference and the impact on the stock, but people may know about Art’s Way, you’ve been around awhile, so to the extent it sort of fits into the schedule, I would say it makes sense. I mean your conferences are very, your phone calls, when you produce earnings are good, I can’t participate in all of them in my schedule permitting, but to the extent that people come become more aware of our Art's Way and your balance sheet, which has been good and you’ve tried to keep that, that would make some kind of sense, but that is just my two sense.

Okay. Well thank you very much for the input.

Okay.

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

Okay. Well thank you all for joining the call. A lot to talk about their and obviously we’ve had challenges and I think our focus remains on the right items and in due time we will have the results to demonstrate that they are the right things to pursue. We look forward to the quarters ahead where we expect to see more will come to fruition in a positive way and we look forward to talking to you after the next quarter. Thank you very much.

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