Art's-Way Manufacturing Co., Inc. (ARTW) Q1 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Today is March 30th, and welcome to the Art’s Way Manufacturing First Quarter 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, 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 going to start by reading 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. Marc?

Yes. I’d like to welcome you all to the call, appreciate you being interested in calling in today. You’ve all reviewed our results for the first quarter. And we’ve got really a lot of positive signals, got a lot of good things going on, good progress, but we still have things impacting our P&L significantly as is evidenced by the earnings and we will be talking about that in the call. So, I’ll turn it to Carrie to go through some of the specifics and will talk more in the end.

All right. Thank you, Marc. I’m going to start by going over some of our information for our consolidated entities. Our consolidated revenues for the first quarter and year-to-date were 5,366,000, compared to 4,421,000 in the prior year, an increase of 944,000 or 21%. We continued to bring more focus to our key operations and simplify our business. At year-end, we had two facilities on the market for sale. We have closed on the sale of our Dubuque property just yesterday for $1.5 million and the proceeds will be used to pay down debt. Our property in West Union is build for sale and is currently listed out 1,595,000. As we have stated, reductions of our inventory and our debt have been our priority and will continue to be a priority of ours, as we move through 2018. Having said that, we do anticipate that our inventory will increase as we move through the second quarter, but should be reduced below our November 30, 2017 levels as we conclude the third quarter. Our backlogs have strengthened across all segments. For our agricultural products, our revenue for the quarter and year-to-date were $3,929,000 compared to $3,638,000 in the prior year or an increase of $561,000 or 17%. Our early order program was a success and we had more dealers participating this year compared to prior years. Our backlog on the ag side. We’re currently sitting at -- for ag, we’re sitting at $3,752,000 compared to $4,036,000 in the prior year. However, if you adjust last year’s number for the self-propelled beet harvesting equipment and for Art’s Way International look no longer been in those numbers, it would bring that backlog number down to $2,495,000. So, when you really compare Art’s Way produced products and the backlog for those products, were up about 50% year-on-year. And of course the margins associated with Art’s Way produced products are higher than the number we would have been looking at with the self-propelled beet harvesters in there. Our push to bring down inventory accounts were approximately 5% of our gross margin for the quarter being at 20% compared to 25% last year. Our productivity rates did struggle in December, but did increase due to lean improvements and staff development by the end of February. As we progress into the second and the third quarters, the improvements in our productivity rate year-on-year should be significant, as our production schedule has stabilized and last year we were really struggling, making new products for the first time out on the shop floor. So really being a little bit more familiar with those product should help significantly this year in comparison to last year. We have increased our direct labor throughout the quarter to meet the increased demand for our products. In February, we did introduce a couple of new products at Louisville Farm Show. The JR50 and the JR75. These are new units for us, their grinders, one is 50 bushels, the other is 75 bushels. And these have been designed, and we’re going to be marketing them to the heaviest [ph] organic farmers and customers and developing countries. And we’re pretty excited to have this new product available. Having said that, they are two new products, however, they are very, very similar to our traditional grinder line. And we do not anticipate having the production issues that we’ve had with other new products, as we move both into production. At Art’s Way Scientific, sales for the quarter were $739,000 compared to $388,000, an increase of 91%. We have been adding direct labor due to our increased sales levels and we anticipate our productivity to increase as we go through the year. Back in February, when we met for the year-end results, we talked about how we have been pretty aggressive in the second half of 2017 to move finished goods inventory and that we have secured contracts on five of the buildings that we had in stack. Two of those buildings went to financing lease and two were rental deals. We had stated that while these contracts have been signed, the customers needed time to do site prep. And we have projected that our revenues would not be impacted until the first quarter, which we definitely did see that in the numbers that we’re reporting today. Sales have picked up in the first quarter, driving our backlog up. Our backlog bears at $638,000. If you compare that last year’s numbers, it’s about 5% higher. However, that backlog number does not include $444,000 of buildings that need to be produced for lease projects that are accounted for a little bit differently. In 2017, our ag buildings really struggled due to market conditions. We have definitely seen an uptick in the ag buildings already this year and look forward to that continuing as we go through the year. At Ohio Metal, our Carbide Tool division sales increased for the quarter and year-to-date to $697,000 compared to $665,000 a year ago or an increase of 5%. We continue to focus growth in our specialty department, in order to offset the peaks and valleys of the standard side of the business. We have seen increases on this side of the business of 52% year-on-year. So, our efforts are definitely taking hold at Ohio Metal. We have reduced our operating expenses there by about 16% year-on-year. And our income before taxes is up 46%. However, it’s still lower than we would have like; it’s at about 2.2% of sales. So, we are definitely breaking even but we have some more to do there yet. In conclusion, we continue our focus on customer service, quality and new product development, viewing it as an investment in our future. Our focus on simplifying our business and reducing inventory has freed up both cash and management resources. The sale of the Dubuque property will further reduce our debt and our carrying expenses. We will continue to focus on new products and being relevant in our market space. Our backlog numbers are stronger in comparison to last year, and we continue to drive cost out our operations while focusing on quality, customer service and productivity to strengthen our core business. Despite the market conditions of the past year, we believe that our efforts have improved our business and our image, and we continue to strengthen our balance sheet and overall business. With that Marc, I’ll turn the call back over to you.

Okay. Thank you very much. So, as you’ve heard. There are a lot of good positive signs. We are really pleased to see the revenue picking up significantly, see our backlog is pushing up significantly, again, a lot of good customer feedback from dealers in some industry publications and otherwise. And overall, feel like we are building momentum in each of our units, now that we’re simplified and able to give the resources to them and to the sales efforts. So that is good. Carrie touched on a number of the balance sheet items, and we will continue to be working on addressing non-strategic things in our inventory. And they may continue to impact margins in the quarters ahead as we continue to work through some of these things and free up the cash that’s tied up in inventory that’s not a significant part of our future. So, anyway, we’re making real progress there. As far as our outlook, a lot of interesting things are going on in the world that are affecting us right now. Everyone has heard about the steel tariffs, and that impacts us very directly. So, here in the very immediate past few days and weeks, we’ve been studying the impact on our products and realized that raising prices is inevitable. And we are about to roll that out to our customers. And fortunately, we’re doing that at a time when we have a strong backlog and are not desperate for it, but that may -- for our whole industry, it’s going to be kind of a big deal, I think. It’s the fact that the price of everything is going to go up. And it’s at a time that the market conditions haven’t gotten robust yet. So, it’s a concern but it may also be an opportunity. And we are addressing that head on. The bigger concern about the tariff issue is whether any retaliatory actions by other countries could impact the demand for soybeans or for pork, which is very possible. So, I think a lot of people in our industry have somewhat of a wait and see attitude about what’s -- how it’s really going to shake out when all the negotiating is done. But, in the meantime, our industry could be impacted positively, negatively, it’s kind of all over the place and we’re really following it closely. At the same, all this is happening, commodities popped up. Yesterday, corn went up 3%. There’s reduced plantings -- plant and all these kinds of things that are good indicators for pricing going in a favorable direction. So, we have a lot of mixed signals out there. We see the Rural Mainstreet Index improving and dealer and farmer sentiment improving, and commodity prices improving. And on the other hand, we’ve got the tariffs and the uncertainties associated with that. And really, it’s kind of difficult to predict where things are going. But being that we are sitting on a pretty strong backlog, we feel like we have a sense of stability as we let some of those things play out. In the very near term, we are expecting to have much more positive P&L performance for second and third quarter. Remember, last year’s second quarter was very, very bad in terms of profitability for us. We had a lot of shipments that were pushed out with new product into the third quarter and that hurt our second. I’d say, the circumstance is different this year. As Carrie said, it’s not a lot of new products or things that we have difficulty building and our efficiencies and productivity is improving, and the product mix of our backlog is much higher margin. So, all those things are factors that should cause us to have a better second quarter and we would think in the third quarter as well. As Carrie mentioned, Art’s Way Scientific is really building momentum. And with leases, interestingly, we’re giving ourselves an opportunity to have some recurring revenue to level out the income stream but also doing leases allows us to steady the load of plant, and I think it’s going to be good for us long-term. So, I am really happy to see that picking up speed. And we are doing deals much more regularly than we’ve seen in the last four or five years, for sure. So, overall, I feel like we are making significant progress on the balance sheet, significant progress in terms of where we stand in the market for each market that we serve. We are really doing -- I think doing some damage to competition and raising our profile and doing a good job for our customers. And as Carrie mentioned, we’ve been wanting to simplify our business, but really quality, customer service, product development have been the real focuses for the Company. And continuous improvement is a big part of how we are going to get there in terms of efficiency and quality. And overall, I am pleased with that kind of progress and look forward to starting to show in the numbers as we get further down the road here. One thing I would point out and we talk a lot about getting our balance sheet straight. But, since the sale of the Dubuque property yesterday, our total bank borrowings got under $5 million for the first time in probably 10, 11 years and it will be going significantly lower as the years goes on. 2015, at this time, just as we were about to experience the struggles hitting our industry, we were at $10.4 million, and I think at some time prior to that, we were probably over $11 million in total borrowings. So, we bought that down really significantly during a time that’s been extremely difficult for our Company and for the industry. And I think that that puts us on a much more stable footing. And we’ve got a very good relationship with our bank right now. And all that is positive. So, our feeling about where we are this year versus where we were last year is really a much better place. And anyway, I am pleased to have made some progress on all that. A few other things I thought that might get asked and I could address them before they get asked is, you would have seen, I believe in 8-K, announcing that our CFO Amber Murra will be resigning in a couple of months. And that is personal circumstance where her family is relocating, and that’s about the long and the short of it. We had a great relationship with Amber and she is done a fantastic job for the Company. And we really did not want her to go anywhere, but due to her own circumstances that’s what’s happening. And we have a plan, succession plan working out with her and people in her department that have been working with her for a while. And we don’t think that we’re going to have a negative impact to our business. We’ll be able to manage it. And Amber will remain available and involved even beyond when she relocates. So, it’s nothing other than that. But, I thought I might have a question about that. And any other issues, I’d be glad to answer any questions that you may have. And at this time, I’ll give you the opportunity to do so.

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

Yes. Good morning and a happy holiday to everybody. And it seems like you’re making progress. Of the $1.5 million that you collected, how much was reflected in the balance sheet? Is there a gain or loss with the $1.5 million to be reflected in the next quarter?

Last year for the end of 2017, we had, I guess reduced the value of that asset in anticipation of maybe a closer idea of what we’d able to realize on it. So, any impact from that sale really was in the fourth quarter 2017.

Okay. So…

Extent of that was 200,000 and change. Is that right, Carrie?

Yes. That’s correct.

So, there is a gain of 200,000 on the…

No.

No. There was a balance sheet loss in fourth quarter of 200,000 and change.

Okay. So, there is a breakeven in the current quarter relative to the sale of the building?

That’s correct.

Okay. Let’s see…

The big item is that deferred tax asset.

Right. How much did that -- the changes in the tax law and the deferred tax asset, how much impact to that have in the current quarter?

That was close to $300,000.

Okay, okay. And in the quarter ending May 31, 2017, you had a $0.5 million loss and you talk about improvement in the next quarter. Do you expect to break even or show a profit compared to what we showed last year?

I think that it will be positive. There are still quarters to play out here. But I think that it will be positive.

Okay. And basically, the assets that you have, you’ve cut all the expenses at this point that you need to. And the improvement -- is the price of milk improving or not improving, and what impact is that having on the farms for the farm buildings that you’re selling?

Well, the price of milk, I’ve seen some improvement, but it’s still not very good. And really, a high concern is the fact that a major player in the dairy industry Dean Foods cut [ph] contract of 100 growers, say a month ago or so or notified them of cancellation and that’s kind of shaking things up a little bit and made people pretty scared. And there is oversupply at play there. But maybe in the long-term, this will help. And so, the dairy markets remain very weak. But, as far as scientific specifically and impact the dairy markets have had on them, we’ve actually seen an uptick in demand in ag buildings. But, it seems to be probably more due to the fact that there was -- during this rough winter, there was more mortality of calves than there usually would be in the winter. And I think that is the bigger issue where it really gets growers’ attention and starts looking for the solutions to that. And the ag buildings that we sell into the dairy markets are a solution to that.

Okay. And as far as the backlog for scientific buildings, is that -- what is that number you’ve sort of indicated? The other backlog was decently improved 50% over the previous year.

Yes. That’s right. If you count for the leases, it’s I think more like 1.1 or so. They get treated differently obviously from accounting standpoint?

Do you see any visibility for the universities? Any major jobs that you could be bidding on or is there still no -- a lack of money to spend for these larger buildings?

We sense that it’s improving. And we are looking at some that are bigger. We think it’s improving, but frankly a lot of what we look at now -- we’re dealing with corporate entities and the food safety business. And that’s where fair bit of the interest is coming from. But we -- universities with labs, I mean that’s -- I think it’s better off than it was over the last few years.

And the other building that you have for sale in the 600,000 range, you expect to close that in the next six months or…?

You’re talking about non-leased straight backlog?

The 595,000, you said you have another building for sale, this could -- that you are not using in production et cetera.

Yes. That’s a building in West Union that we have previously manufactured ag equipment and it’s for sale for $1,595,000.

$1,595,000, okay. So, do you think you will be closing that in the next six months, or it’s just on the market and you’re waiting for bids et cetera?

It’s just on the market. So, we would really not be able to say. But, we’re trying. I mean, it’s listed, we’re motivated. We’re trying to make it happen.

Okay. So, the one thing, I guess, the ability for your debt is positioned to increase to more than 50%, is there any stock for sale or is there any expectation of a transaction with the 8-K that you just filed and the authorization to go above the 50%?

No, there is nothing specific contemplated. It’s just, that agreement was from 2002 under different circumstances and I guess for different purposes. And the fact that it was there, I mean that limitation -- the view of the rest of the Board just didn’t necessarily need to be there. And with the stock trading at a significant discount to book, I think it would be smart for anybody really to be interested in and taking advantage of that discount to book. And I think an agreement from 2002 that was established for other purposes, I guess is the view of everybody that there is no need in that precluding buying basically. So, there is nothing more specific than that. It’s just didn’t necessarily need to be there.

Okay. Well, look, let’s continue the pace you’re going at and hopefully we’ll achieve profitability on each of the quarters going forward, and that will be good. All right. Have a very happy holiday to you all.

You too. Thank you.

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

Okay. Well, thank you all for calling in today and for your interest in the Company and your investment with us. I hope you can see we’re hard at work to put the Company in a best position possible for the years ahead. And we know that improving conditions will come in the ag market, otherwise at some point, we will be in a good place to benefit from that when it happens. So, thank you again. And we will talk to you next quarter.

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