Art's-Way Manufacturing Co., Inc.
Q2 2013 Earnings Call Transcript

Published: 16 Jul 2013

[Operator:]

Good morning, ladies and gentlemen. Today is Tuesday, July 16, 2013 and welcome to the Art’s-Way Manufacturing Second Quarter and Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Your call leaders for today’s call are Jim Drewitz, Investor and Press Relations Representative; J. Ward McConnell, Jr., Chairman of Board of Directors; Carrie Majeski, President, Chief Executive Officer; and Dan Palmer, President, Art’s-Way Scientific. I would now hand the call over to Mr. Jim Drewitz. Mr. Drewitz, you may begin.

[Jim Drewitz:]

Thank you very much and good morning ladies and gentlemen. Before we begin I would like to draw your attention to except for the historical information contained herein. The statements in this conference call are forward-looking and made pursuant to the Safe Harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause Art’s-Way Manufacturing’s ultimate results in future to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; new governmental safety, health and environmental regulations which could require Art’s-Way Manufacturing to make significant capital expenditures. The forward-looking statements included in this conference call are only made as of the date of this call and Art’s-Way Manufacturing undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to, factors described under the caption Risk Factors in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. With that completed, I would like to turn the call over to Mr. Ward McConnell. Mr. McConnell?

[J. Ward McConnell:]

Thank you, Jim. Good morning ladies and gentlemen. I appreciate you all listening to this, this morning after what happened yesterday. However, I just looking we’re up $0.25 from where we closed last night. This morning, I’m going to turn some of this over and I’m going to review the numbers. I’m going to have Carrie Majeski do that, our President, if you, go ahead Carrie.

[Carrie L. Majeski:]

Yeah, thank you. Just want to go over the financial highlights for the period ending May 31, 2013. Our net income for the six months ended May 31, 2013 increased 18.2% over the same period in 2012 and our earnings per basic and diluted share for the six months ended May 31, 2013 were $0.30 per share versus last year at $0.28 per share in the same period. For the three months ended, our net sales were $9,250,000 compared to $11,685,000. The largest factor contributing to that decrease in sales of 28.8% was decrease in sales from Art’s-Way Scientific, which had a large job in 2012. Their decrease represented $2,170,000. Our Ag products had a decrease of $290,000 with sales coming in at $7,716,000 for the quarter, compared to $8,006,000 from the previous year’s quarter. Our Pressurized Vessels segment, Art’s-Way Vessels had sales of $642,000 compared to $617,000 and increase in sales of $25,000. When we compare our sales numbers to a year-ago in the six months, our sales are up. Manufacturing sales came into the six months period at $14,720,000, compared to $11,994,000 an increase of $2,726,000. In terms of why the quarter was down versus the six months numbers, we have a little bit of a timing difference in the delivery of our blowers being delivered in the first quarter and more of our beet harvesting equipment that will be delivered in the third quarter. So we still are feeling confident about Ag sales year-on-year. Modular Buildings, again we’re seeing a significant decrease there for the six months period. Their sales came in at $1,909,000 compared to $5,057,000 in the prior year, a decrease of $3,148,000 million. Vessels; six month sales is $1,036,000 compared to $946,000 in the prior year, an increase of $90,000. Operating income for the three months period was $799,000 compared to $1,494,000. This is a decrease of 46%. Again Art’s-Way Scientific is a major contributor there. So our net income from operations on Ag sector for the three months is $578,000, compared to $1,038,000. The reason for the significant change there is the beet harvester and the equipment and the timing of when that is delivered. We expect to see an increase in income from operations in the third quarter as we delivered that equipment. Modular Buildings had income from operations of $243,000 compared to $485,000 in the prior year, so that was a decrease $242,000. Art’s-Way Vessels, income from operations came in at a loss of $12,000 that loss has decreased from last year’s $30,000 loss. So their loss was $18,000 less than the prior year. When we look at the six months numbers from income from operations, Art’s-Way Manufacturing came in at $1,129,000, compared to $1,174,000. Modular Buildings, our Art’s-Way Scientific came in at $518,000 for the six months period compared to $800,000. Art’s-Way Vessels came in with a loss of $135,000, compared to a loss of $118,000 for the six months period. Our income before tax by product lines in the three months period for manufacturing for the Ag products was $517,000, compared to $124,000. Our Modular Buildings was $231,000 compared to $468,000 and Pressurized Vessels with a loss of $87,000 compared to $38,000 for the three months period. Income before tax for the six months period for the Ag products was $1,693,000, compared to $1,161,000. Modular Buildings came in at $492,000 compared to $763,000. And Art’s-Way Vessels or the Pressurized Vessels segment came in with a loss of $215,000 compared to a loss of $231,000. When we look at the net income after tax for the three months ended, we came in at $514,000, compared to $536,000. For the three months and for the six months, we’re coming in at $1,334,000 compared to $1,129,000, again that’s an 18.2% increase. Ward, with that, I’ll hand the call back over to you.

[J. Ward McConnell:]

Okay. Thank you, Carrie. Dan, would you like to tell us about Scientific?

[Dan Palmer:]

Yes, thank you. Good morning. Art’s-Way Scientific as everyone knows had a phenomenal year, last year with large job that we did in California. That was comprised with 24 modular units for our major medical school. We enjoyed taking that into the first part of this year as we finished up installation and started to work on other projects. Within the last 30 days, we’ve closed at about $1 million worth of business in various sectors. We have a lot of activities in our agricultural building units right now, due to some marketing effort that we undertook around the World Pork Expo, which happened in June. So we’re trying to capitalize on those markets that are hot right now and I guess downplay those that aren’t. We’re still tracking the same amount of business on our active final report as we were last year. The complexion of that has changed a little bit, however. We’re finding that because of the sequestration and fund reversal. We have National Institute of Health funds for biomedical research that it appears this, if that research is moving offshore. We’ve got some indications both in our final report where 11% of our business interest now is outside the United States, as well as the trade publications and information that we collect and monitor. That sees places like Singapore, Malaysia, Canada and Brazil taking on more biomedical research. They’re quite willing to funded, and there is less animal rights activity. We’re also seeing some trends away from the universities and governments sector that traditionally made up 50% of the interest that we have in modular research facilities and those are going more towards contract research laboratories and organization for privately funded and for profit, who are taking on some of the research for pharmaceutical industry. So all-in-all, we’re seeing the same amount of activity and things coming in. It just at the segments that we’re going into have change a little bit. One of the exiting things is our growing presence in food safety. We were actually pulled into looking at food safety. Laboratories through folks like Hormel and Tyson Foods were familiar with our familiarity with swine buildings, and looking at ways in which to implement 2011 Food Monetization Act, which needs more inspections and more sensitivity to diagnosing Salmonella and E-coli and things like that. So all-in-all, we’re working on the same kinds of leads that we had in the past that about the same kind of volume. We love those large jobs. They are generally a couple of years in the making, before we actually capture those and can talk about them. And I guess I have two of those right now, but when they will drop, nobody knows depends on the funding and their advance work that we could get done. So from a Scientifics perspective certain windows have closed and certain doors are opening and we are just pursuing where the market takes us. Two things that I’m working on personally is more of a creation of leasing type fleet which can get us into temporary types of situations where people can see what we do and embrace the technology and then that take it to building larger facilities, and then also hopefully capitalizing on the international presence and particularly in Canada, where as you know Art’s-Way International has been created in pursue of other products. I’d like modular buildings up there. So we’re working on a plan to try to make that happen. That is a quick summary I could talk all day about this industry and my love for it, but I’ll turn it back over to you Ward.

[J. Ward McConnell:]

Thank you, Dan for brining us up to date on, I have very little to say, but I know you got a lot of questions, I have actually compared to the market I’m quite pleased with first six months this year to have earnings up. And I think that going forward we’re up significantly in June in the Ag sector and I think that we’re up a million two in the Ag sector that’s a big jump up so in June. And I think we are on a pretty good profitable year and currently what you always want to know about is we do have another ROI out that we think will help us quite a bit and of course we’ve just finished closing at the one in Canada, a company called Agro Trend who are our distributors or actually our manufacturers rep in Ontario and Eastern Canada. And they manufactured couple of machines that are used in Ag, and they are going to contribute to our sales going forward in this fiscal year and beyond. Then as I said we have another ROI out which has been agreed upon and I think it’s going to move forward without any problem. So with that, I guess I’m ready for questions.

[Jim Drewitz:]

All right, Erica let’s go ahead and open it up to the questions end.

[Operator:]

(Operator Instructions) Our first question comes from Roger Miller from Foggy Daze International. Please state your question?

[Roger Miller:]

Good morning. Unlike the market, I see some results that I’d like to question you about. First of all, your footprint in Canada, you achieve limited cost and risk of start-up manufacturing by purchasing Agro Trend from Rojac Industries, which exploited your strategic advantages in Clifford, Canada. That said Agro Trend is 14 hours approximately driving from Art’s-Way weather wise it’s similar to Iowa almost straight line on a map unlike the brutal weather in Buffalo, New York. So can you explain any synergies you achieve with this purchase?

[J. Ward McConnell:]

Yeah.

[Roger Miller:]

New product, additional product you have planned to place in Canada.

[J. Ward McConnell:]

Yes, we intend to, first of all they had a couple of product lines which were useful to us. One of the snow blower and the other one was a trailer, we don’t make trailers. The snow blowers across the Northern part of the United States are pretty active on years that it snows and they had fallen on hard times, because two years ago, there wasn’t any snow and last year it didn’t snow until late. So but they did $2 million or so in past years in snow blowers. So they represented us up there and really didn’t keep any inventory. They sold our forage boxes. They sold some of our other equipment running here and so on but they never had any inventory, and they also didn’t ever have – they never had any spare parts and that really took them backwards as far as selling any of our products. And each times somebody needed a smaller part they had to go through customs and very expensive to get apart, but also very inconvenient, and we thought we would put some parts up there and we’ve also put some forage boxes and some of this other equipment that we are minor spares and so on that we have and we think it could fairly blossom. We also knew them, we knew them very well, because their sales people came to our sales meetings last couple of years and so we picked up people that we knew as good salesmen and really filled our gaps for people. We didn’t have to send any people or however we haven’t done much with it yet, we’re just getting it under our belt and getting the computers comparable and that sort of thing. But and we’ve learned a lot about opening bank accounts in Canada and so on and incorporating up there and so yes, I think it’s going to be, that’s going to be a home run, but it’s going to help us a lot and help us diversify and certainly what we just witnessed with the Scientific, diversification is really last year it helped us a lot and this year the Ag is up and so we you put the two and two together you have a pretty good year. And that’s why we began doing this was to get some diversity. And I think its working, I think this quarters and half show of that. So Roger, thank you again you always ask nice questions.

[Roger Miller:]

Well, how about the account list in Canada? I’m sure it’s in Eastern Canada, but those are going to Western Canada?

[J. Ward McConnell:]

Yes, it does, but not well they go out in Saskatoon with snow blowers, these are out there, they go to Fargo with snow blowers, I can’t tell you how rotten the snow blower business has been. But I think that’s why we were able to buy it from the price we did. But yes, we have a wrap out in Saskatoon, Saskatchewan and we have now they had laid off one of their reps in Eastern Canada of the Maritimes and we’ve retained him back and plus we add two others that one is a Sales Manager type and the other one was covering Ontario. So I think we’re going to see quite a lot of new sales out of it.

[Roger Miller:]

So the big farms I believe are in Western Canada, is that correct?

[J. Ward McConnell:]

Yes, that details were out there.

[Roger Miller:]

Is there any chance of looking west from where you’re at in the future?

[J. Ward McConnell:]

Well Roger, I think the best answer is that we’re always looking. We always are constantly on look and we want to grow this company. Just remember when I came to Board it was $10 million in sales and last year that was $37 million. From that early small base it’s hard to get up to $100 million, but that’s our target.

[Roger Miller:]

Those two other lines they were distributing to?

[J. Ward McConnell:]

Well, our wholesales, all the dealer.

[Roger Miller:]

All the dealers and so is there any relationship with either one of those two at this point?

[J. Ward McConnell:]

I’m sorry, I don’t understand.

[Roger Miller:]

Well, Ag growth trend basically, whose manufacture rep I believe for – engineering in Mandago if I’m pronouncing it right? Are you going to have any relationship with either one of those two?

[J. Ward McConnell:]

Launched two and we haven’t got to there yet. But I have talked to (inaudible) and they are out in Manitoba and we expect to continue with them. But we haven’t gelled it yet. We are just getting upbeat what I guess.

[Roger Miller:]

And then can I go over to Dan Palmer?

[J. Ward McConnell:]

Sure.

[Roger Miller:]

Obviously last year was a biggest year for Scientific and it was all because of Stanford University, which was a great project. And going forward recently you’ve done two projects, the one in Texas and when do you think that will be completed?

[Dan Palmer:]

Right now about Texas, Department of Corrections job is slated to start delivering about 16, 23 of September and through October for completion by following.

[Roger Miller:]

And then the other projects?

[J. Ward McConnell:]

The other project is a little bit longer-term, it’s going to take a little bit more research and development for us and meetings with the University of Illinois, it is on a special swine thermometer unit. The other ones that you might be if you watch in the press releases I think the ones that most recently been mentioned is our small little swine delivery facility for Zen-Noh in Japan, which I think is a huge deal, lower dollars but huge deal for relationship, and that was done. It’s over there. It is complete and all wrapped up. And then we got some dairy buildings in here that are going to an unnamed large diary at Minnesota. Three of those and they will start delivering the week of 29 of July and there is three of those there will be about three weeks to get that doing. So what we’re doing at this point is putting the workout as to according to customer demand, with the way ask to your workforce with Stanford University and the large projects, other projects that we did last year. We took on lot of subcontractors through a bidding process and we’ve really married up with some really great mechanical and electrical people, so our plant is pretty small and handling these until we can get to next one, the next big one captured. I guess I should say that we started back in 2008 with the large job for SAIC at Frederick Maryland and then another large job at SAIC in Maryland and the guys from Storrs went to SAIC to look at their building and then we did something for the Storrs Institute a large job and the guys from Stanford went to Storrs to look at their facility and we got the Stanford job and all these are sort of taken maybe a year to two years in development and we’re involving my time and trying to make sure they got the right program. Right now we have three folks with large jobs that are that know Stanford and know – when one guys has worked there. And so of course these are in disclosure at this point in time, but we continue to just have a lot of balls in the air and then a small niche market like modular laboratories by variance. Word of mouth is what really carries us from one project to the next. What is unfortunate from me is that I haven’t been able to close multiple large projects in sequence to keep the plan at a steady level.

[Roger Miller:]

It would appear that the project in Japan obviously gives you an Asian presence and you would hope that would become a step into all of Asia include maybe China obviously the Chinese are concerned about food safety with the purchase of Smithfield Foods.

[J. Ward McConnell:]

That is correct.

[Roger Miller:]

And are getting ready to do an IPO in Hong Kong, the purchaser of Smithfield Foods from China, so that might, can you use that as a example of sales for all of Asia.

[J. Ward McConnell:]

Sure. That’s all very interesting to me, and we continue to study it there is a couple of factors that come to play one is, is that the methodology for testing food safety is not fully defined yet. And so there is not a lecture would be in biological or chemical types of research, there is not that such standard of protocols which you go through to make sure you don’t have something, that’s all still being developed and within the industry. So of course what we do is we draw parallels from folks that we talk to at Tyson Foods and at mill on facilities that they would like to have at their processing plants to guarantee that their brands stays intact. Right they’re not the ones that were on the front page in the newspaper saying that they’ve got problems. So of course we look at that as a potential market, but we also look at Zen-Noh in Japan as I guess is a place we start because this is a large cooperative, we are actually is in-charge of growing animals that’s what they do and sell feed and their farm to markets. So we want to be involved in those areas where we know the most which is basically protecting and being involved from the farm. So other leads that we have within that industry include certification organic potatoes from the farms. So I see the opportunity being to put some type of laboratory actually on the field and be that at the farm where they’re raising animals or at the farm or vegetables are raised and where there is percent of work that needs to be done to ensure that there is no nothing transmitted to the processing plant and so we see most, we’re following the same mode as what is happened with regards to Biomaker research on animals. Most of the technology starts here in the United States and then with modulation try to miniaturize it and compress it and make it austere and then take it somewhere else. So we’re watching the food safety market here in the United States and have a presence and a boost at an upcoming International Association of Food Protection at the end of this month. So I guess the answer of the question is I don’t know at this point if that’s a model but the thought is that there will be a world food safety effort and I think it will start in the United States and we will follow it wherever it goes.

[Roger Miller:]

So I guess that leads into another question, is there a world safety convention for food and if there is not maybe it’s something formal or one of the large corporations like Tyson would be interested in?

[J. Ward McConnell:]

Yes.

[Roger Miller:]

Or is it kind of a research convention?

[J. Ward McConnell:]

There is a lots of things going on and we’ve been researching that, there is a publication that is called Food Safety that we just start to advertise in and it has gotten some good play off of that, we are putting ourselves out experts into creation of modular laboratories. We are advertising as a food safety lab company. The stuff that we are going to the one that we target and selected with even a new trade show and new literature is this International Association of Food Protection which is in North Carolina at the end of this month. It is an International Show. So rather than us, running after France where there is another show, we are off to other places. We’re going to meet people here in United States and that model is after the World Pork Expo and the World Dairy Expo and other international, like the international shows that we attend. We haven’t had to attend trade shows out of the country and still have been able to attract 10% of our leads in international sales. So we’re trying to do this most ouster fashion possible, first to find if the market really exists and then capitalizing on that and doing it in a value cost – value rather than just running all over the world.

[Roger Miller:]

In North Carolina, would you be setting up – you’re going to have a booth there right?

[J. Ward McConnell:]

Yeah.

[Roger Miller:]

Right, so in the booth, are you going to actually setup a scale of the lab and the module?

[J. Ward McConnell:]

We’ve tried that in the past, it doesn’t work. You got to take whole darn building there and that becomes very, very expensive. This is our really our first look seriously at food safety and so not only are we exhibiting, but we’re also there to take everybody else and learn who the other vendors are and then figure out what our presence needs to be going forward.

[Roger Miller:]

And will be there?

[J. Ward McConnell:]

I will be.

[Dan Palmer:]

Yes.

[Roger Miller:]

And hopefully there will be a new release on that.

[Dan Palmer:]

Yes.

[Roger Miller:]

Backlog for Scientific in bids, not completed jobs, not signed contracts. Is there any estimation about where you’re at there?

[J. Ward McConnell:]

Yeah, what I do is, I extrapolate the bids that we have actually put out there and the numbers that are known, because not every project is at the same phase, I mean we had calls yesterday that we’re working on. So there is no price established for those, but I take that approximately total square footage and the total amount of what I do know and then say okay we got a 136 leads and it’s about like this and so that is $46,700,000 worth of leads. So I think Roger most of the time, I consider 7% about a 10% kill rate. So I look at this as $4.6 million opportunity going forward, and then hope for the large once, which are – seem to be few and far between to take us to the levels that we want to grow the business to.

[Roger Miller:]

That’s excellent. Everything you’ve informed the market. I have one more question and it’s about the purchase of Canada and Agro Trend, there has been no transparency on that as far as costs involved, would someone like to answer that?

[J. Ward McConnell:]

Well, in an interesting way we bought that. We paid just under $400,000 for the inventory and fixed assets. And they had above $600,000 worth of inventory, a little over $600,000 of inventory, which we took on consignment and that inventory is snow blowers. So that’s almost the sum of the deal.

[Roger Miller:]

That’s shocking.

[J. Ward McConnell:]

Yeah.

[Roger Miller:]

It’s shocking, because it puts your footprint in Canada with almost very limited cost?

[J. Ward McConnell:]

Sure.

[Roger Miller:]

I could never have estimated that, I wasn’t even close to that.

[J. Ward McConnell:]

Yeah.

[Roger Miller:]

And so the actual cash you laid out was $400,000 or is that what’s you’re saying?

[J. Ward McConnell:]

Yeah, actually $313,000.

[Roger Miller:]

So going forward this looks like this will be definitely in my opinion, it looks like its accretive to earnings. Is that correct?

[J. Ward McConnell:]

I think so. We’re going to have to the fund some losses to get it started. They were not very sophisticated in their computer; we had to convert them to our computer system. All our computers are strong and these outpost all that’s were files server is, readily outpost in the course of that and that’s going to cause this. We’re also going to have to build up some inventory. There is no doubt about it. We’re going to have to fund some sales one for a little bit. We don’t – it’s a very small crew there right now, but we’re going to have some start up cost is what I’m saying.

[Roger Miller:]

Yeah, but they see minimal compared to if you would just have moved to Canada and started up from scratch, plus it looks like you have got experienced salespeople and a general manager that’s been there for years, correct?

[J. Ward McConnell:]

That’s right. That’s right.

[Roger Miller:]

Would you like to comment anything about vessels?

[J. Ward McConnell:]

I can tell you that vessels continues to do better and better and better and that we’ve added – we felt we were short of being prompt in our quotes and so on and maybe a little bit of a lag in some of the engineering. So we’ve hired another engineer there to overcome that. It’s under control, it needs some more sales, maybe that’s one way we can get to them by giving a quick quote and a delivery date and so we’ve have tried to implement that very recently, but it’s going to do better I’m sure, but its sure been unary.

[Roger Miller:]

Okay. I’m going to get off the phone and let someone else comment and hopefully we will get some more information.

[J. Ward McConnell:]

Okay, Roger.

[Roger Miller:]

Thank you.

[Operator:]

(Operator Instructions) It appears at this time we have no further questions.

[Dan Palmer:]

Well, Ward, great call. Why don’t you go ahead and close it up, I guess Roger asked all the questions.

[J. Ward McConnell:]

I guess though. We’ve really appreciate those of you who get on this call, we want to tell you everything we can, we think we have a good company and it’s certainly in a growth mode and we will continue to and I think we can grow quicker now as that we’ve gotten off the smaller numbers, and we intend to do that, we’re very intending on that, I spend an awful lot of time on that. But I thank you all out for being on today and with that I give you back to Erica of Jim.

[Jim Drewitz:]

Yeah, I think we are all done. Thank you everyone and we will catch up with you all on the next conference call. Thank you so much, good bye now.

[Operator:]

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