J. Ward McConnell Jr., - Executive Chairman Carrie Majeski - President, CEO, Interim CFO Marc McConnell - Executive Vice Chairman.

Roger Miller - Frontier Asset Management Sam Rebotsky - SER Asset.

Good morning, ladies and gentlemen. Today is Thursday, October 9, 2014 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 Carrie Majeski, President, Chief Executive Officer and Interim Chief Financial Officer, J.

Ward McConnell, Jr., Chairman of Board of Directors of Art's-Way Manufacturing; and Marc McConnell, Vice Chairman of the Board of Directors of Art's-Way Manufacturing. I'd now like to turn the call over to your host. Ms. Majeski, you may begin..

Good morning. I will start by reading our forward-looking statements. You should note that some of the statements made during this call maybe 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 from operation.

Forward-looking statements are inherently subject to risks and uncertainties such as competitive factors, difficulties and delays and development, manufacturing, marketing and sales of our Art's-Way products, general economic conditions and other risks and uncertainties described in Art's-Ways periodic report 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 this forward-looking statement. With that, I will hand the call over to J. Ward McConnell to welcome the group..

Well, thank you very much for tuning into us this morning. I think you'd like what you are going to hear and I will come back to you later, but in the interim I would like to have you get a report from Carrie and then Marc. So Carrie, you go first..

I'm going to report the numbers for the quarter and for year-to-date. I will start with our agricultural product segment, which is comprised of three business units for us, our Art's-Way Manufacturing unit, Art's-Way International, and Universal Harvester.

For the three months ended August 31, 2014, our net sales for the quarter were $9,362,000 compared to $8,005,000 a year ago. This is an increase of $1,356,000. Our income before tax for the quarter was $991,000 compared to $108,000 a year ago, that is an $883,000 increase.

Year-to-date, our income for the ag product segment is $21,366,000 compared to $22,727,000 a year ago. Let me say those numbers again, I think I misspoke. Year-to-date ending in August, our revenues for the ag product is $21,366,000 compared to $22,727,000. Our backlog for our ag products currently sits at $3,256,000 compared to $2,305,000 a year ago.

That is a 41% increase in our backlog for the ag sector. A large portion of that increase is due to adding backlog from Art's-Way International this year that we didn't have last year. Their backlog specifically is sitting at $606,000 compared to $326,000 a year ago. That's an 85% increase for them.

But our main ag business has a backlog of $2,417,000 compared to $1,804,000, so there is a 34% increase there. Again, the overall increase in the ag sector backlog is 41%. Our pressure vessel segment for the quarter ended August 31, 2014, had sales of $606,000 compared to $635,000 a year ago.

Our income before tax is a loss of $64,000 compared to income of $14,000 a year ago. Year-to-date that segment has sales of $1,504,000 compared to $1,671,000. Their loss before tax year-to-date is $190,000 compared to $200,000 a year ago.

The vessels backlog is currently sitting at $312,000 compared to $296,000 a year ago, which represents a 5% increase in the backlog for the pressure vessel segment. Our modular building segment had sales for the quarter of $820,000 compared to $710,000 a year ago, that is an increase of $110,000.

Their income before tax was breakeven for the last quarter compared to a loss of $73,000 in the prior year. Our year-to-date income for modular buildings is $1,818,000 compared to $2,618,000 a year ago. The income before tax is a loss for the modular segment year-to-date at $240,000 compared to income in the prior year at $420,000.

Again, in the prior year, we did have the large Stanford job that closed up that we are comparing to, so there is a little bit of an offset there. Our modular building segment is showing increase in sales. Their backlog is currently sitting at $902,000 compared to $584,000 a year ago, that's a 54% increase in their backlog.

Our new segment carbide tools had sales for the quarter of $797,000 compared to zero in the prior year. Income before tax is a loss of $82,000 compared to zero in the prior year. Year-to-date, our revenue in that segment is $2,603,000 compared to zero and a loss of $18,000 for the year compared to zero.

Their backlog is sitting as $446,000 compared to $381,000 a year ago, which is a 16% increase in their backlog. Our consolidated numbers for the quarter had net sales of $11,585,000 compared to $9,350,000, an increase of $2,235,000. Our income before tax consolidated for the quarter was $845,000 compared to $49,000 a year ago.

Year-to-date, revenue for consolidated purposes is $27,291,000 compared to $27,016,000. Our income before tax is $835,000 compared to [$2,020,000] (ph) a year ago. And our consolidated backlog numbers are $4,917,000 compared to $3,567,000, an increase of 37% year-on-year. With that, I will hand the call back over to Ward McConnell..

Thank you, Carrie.

And Marc, are you ready to go?.

Yes..

Go ahead..

I'm aware obviously, we are pleased to have found ourselves performing much better in the third quarter after a challenging first half of the year. As we have discussed in prior calls, there are a lot of things that really are working into our favor while the broader ag sector as we all read about is struggling.

The dairy and livestock segments have margins that they haven't had in really a long time. And that's driving sales in some of our – in certain products of ours that go to those markets, and fortunately those tend to be pretty high margin products for us.

So that explains to a great degree how this part of the year is coming around to better performance for us. Some of what we are doing – looking ahead the rest of the year, we are continuing a lot of focus on our R&D efforts.

We are introducing new products and making evolutionary improvements to some and really trying to stay ahead of the game in the segments that we are the leader in such as grinder mixers. We continue focus on that.

We have introduced a new forge box in a new size 24 foot, which is larger than we have ever produced before or producing 30 foot land planes. We are moving where we think the market is going which is to bigger products.

And a few other things to note importantly is, we have had some significant changes that will start to show in our numbers going forward here to overhead. We have between $700,000 and $800,000 worth of overhead in retirements that we feel like we will have – we will really be able to do well after these retirements have taken place.

Some of them are high salaried positions from companies that we acquired. But, all in all, we feel like we have a succession in place for a lot of these roles, and ultimately we are going to have a significant impact financially with those changes. We have been continuing to build out our management team.

We have a new Director of Sales and I'd say we have a more complete and younger management team than we've had at any time in recent memory. Beyond that and looking ahead – further ahead including the rest of the year and some of next year, we feel like the outlook particularly for the ag segment will be somewhat similar.

We don't have a lot of reason to think that that will be very different. And with that being the case, we feel like our products like grinder mixers and manure spreaders and hay and forge equipment should continue to be strong as they have been this year.

The margins are projected to remain pretty good for the dairy and livestock sectors for a longer period of time not just a few months, but beyond a year. So those should continue to drive sales of the products that we are enjoying the benefit of right now.

Similarly, however, on the flip side, we don't have much reason to believe that sugarbeet equipment is going to do much better next year than it had this as we reported before we went down significantly, I believe from 20 foot 29 to 5 sugarbeet harvesters of old type this year, which very much impacted us earlier in the year.

So with the price of sugar remaining pretty low, we don't have much reason to think that that's going to rebound a whole lot next year. But frankly, our margins are better in some of these other products like grinder mixers.

So we think that going into next year, the landscape at least ag would be pretty similar, but we will be better prepared for it after having been through a difficult first half of this year and also with $700,000 or $800,000 less in overhead to carry.

So that looks good and furthermore, as we have discussed, we do have a reason to believe that we will be having some stronger times with Scientific in the year ahead a lot of that is slow to come to fruition. But, we remain pretty comfortable that we will be having a better year next year in that segment.

And all in all, we are unfortunate to be performing much better this part of the year after a tough first half. And we are pretty positive about how things look going forward. Carrie touched on the backlog that says as much as anything company wide backlog is up 37.8%. So our outlook is pretty strong. And thank you for the opportunity to comment on it.

Back to you..

Thank you, Marc. I'm going to speak a moment about the present quarter, it's a way ahead so far at this – six-week of the quarter and we are going to finish strong because we have this backlog which is $1.5 million roughly ahead of where we were a year ago.

And so I think we are going to finish up the year a strong and as Marc pointed out, I think we are going to have a good looking year next year. We are off to a pretty darn good start. With that, let's go to questions..

Ladies and gentlemen, at this time we will conduct the question-and-answer session. (Operator Instructions) Our first question comes from Roger Miller from [Frontier Investment] (sic) [Frontier Asset Management]. Please state your question..

Good morning..

Good morning, Roger..

Well, obviously, the quarter was good and the outlook is good and I guess looking at the color of all the divisions, it would appear to me the main division that I want to talk about is Scientific, and that's because of all the news that's going on in the biocontainment modular buildings that you produce.

Does somebody like to add some color to that?.

Carrie, would you like to talk through that?.

Yes. We typically will have Dan Palmer on this call to address these types of questions, but he is traveling this week to a show in California, so he was not able to be on the call today.

We still have a lot of interest and that we have a couple of large jobs that we have interest in and then we have smaller jobs and then we have the ag building jobs as well. Our ag buildings which are less expensive and do have smaller margins on them, we have had a significant increase in our business there and in interest.

And we attribute that in large part due to a co-marketing agenda that we had this year where we are marketing our agricultural equipment with the buildings. We have a very well-known name in Art's-Way Manufacturing in the ag sector. And so, Art-Way's Scientific was trying to tie into that to increase awareness and increase our brand recognition there.

And that has been very beneficial and we just got back from the World Dairy Expo a week ago, which was a very good show for us on both sides for manufacturing and scientific. Our leads for those buildings are up significantly.

I think we are chasing around 130 leads for those buildings right now, and we would expect to close some orders here before the snow flies and get those foundations in place so we can set the buildings. And then we would look again in the spring to see an up tick in that ag business as well.

Dan has talked a little bit about some jobs that he has been working on in the past, and he is still working on those jobs to get a purchase order in place, and And we will put out news releases whenever we get a significant job there at Art's-Way Scientific..

Thank you, Carrie.

Let me ask you about – let me go into this a little bit further, obviously I would rather talk to Dan Palmer, but – so the 130 leads in your coating orders are those from the World Dairy Expo or are these just existing on the books going forward?.

Those are just the ag building leads that I referred to. And those really we've saw an up tick in the spring about the time we went to the World Pork Expo in Des Moines. And those leads have been continuing to grow as we had the marketing campaign.

Now in terms of leads that we have gotten back from the Diary Expo, obviously, we talked to several people at the Dairy Expo with different levels of interest. You have people that just kind of come through and kick the tires. And then you have people that are actually talking numbers. So we probably added around 20 leads at the Dairy Expo last week..

And the average cost of the buildings that you are quoting in these ag buildings, where would we be on that, like for instance, can we have a minimum to a maximum price point or an average point?.

They run about 150 to 180 per unit. So that's per building segment that we ship. So as they were going to put three buildings on – you would have to add accordingly. But, each unit is about 150 to 180..

A lot higher than I expected because I have seen like for instance hog farm buildings, do you know where they start?.

You mean a traditional build hog building?.

Yes, yes.

That you would put out a modular building, are those…?.

Yes. That's what I'm talking about. They started out at about 150 to 180..

Okay. And then….

Many times, they will buy several units..

Okay.

And are those replacing traditional barns, is that what's going on?.

But, if you see a dairy farmer out and you see a hutch out there for their calves, our buildings put them up off the ground in a controlled temperature and control every way and the mortality rate – this is – I was at that show last week.

And one of the customers we have had several units, but they were losing up to as high as 27% of their calf population. They had several thousand calves and they made a lot of money to them and now they are down to 1.5% because they are up off the ground. Those hutches around the ground and the calves really just don't do well there.

So, it's a pretty dramatic savings for the people that use it. Now, obviously, the small 60 cow dairy isn't going to use very many, but most of these dairies have gotten a lot bigger than 60 any more. So….

So it's just technology going forward basically, but its simple, right?.

Yes, it is..

So these biocontainment has described these modular buildings. Can they be used for disease control in the case of outbreaks or suspected outbreaks? In other words, at one point, Dan Palmer mentioned Africa on a conference call that he had a lead from there..

Well, that's the reason we have the leads. That's why we get the lead is because it's a laboratory. And so, however, it's probably more slanted towards like mice and primates in research. But, certainly there is – that have a place in these other places too where those diseases – human diseases..

So where I'm getting at is – can these buildings be used for medical use in cities in the United States for isolation and containment?.

They could. Where that comes into play, it's all in the HVAC systems and containing the air, airflow and kind of containing how that all works. Obviously, though when you start getting into those types of buildings with higher end HVAC systems that are redundant the prices go up significantly..

But the demand must be there because at this point all you have to do is turn on the news and facts are facts.

So are you ready to build these buildings?.

We are ready to build the buildings..

And do you have the plans in place to qualify for the contracts whether it's a government or whether it's hospitals?.

As you know from prior conversations almost all of them go to universities..

And I agree with that expect I see these things changing possibly. Wherever there is – for instance West African people or people that are traveling on aircraft coming into the country, I think that the – it's not only the World Health Organization, but right here in this country it has to be prepared.

And that's why I'm looking at the figures from Scientific, what's going on. And I'm wondering if there is going to be a huge ramp up in – because of the emergency status that's occurring as we speak worldwide..

Do we need Dan to answer that for you? Roger, I don't – I know that we talk about Ebola and we have been – I talk to them at factory a while ago about it. And some of the information I got back was alarming in that the containment is to have a full blown containment is like three feet of concrete on the walls and ceiling and floor.

I don't know, but Dan can answer you much better than I can..

Suffice to say we are trying to make it known that our offering today whoever it maybe appropriate. Dan is interacting with people in all kinds of fields and obviously, there is more conversation around these things has Ebola and things like that get in the news. So we are trying to have our foot in that to the extent that we can.

I don't know that we would be able to expound on that beyond what we have..

That's fine. While I just want to make it be known that basically there is two types of buildings. There is quarantine which separates and restricts the movement of people who have been exposed and then there is isolation, which is two different types of containment. So that's how it should be divided up.

As far as going into some of the divisions, the tool division I believe you said show to loss is that correct?.

That is correct. Year-to-date, we have a loss of $18,000..

But the sales were excellent were increasing, right?.

When we bought that they were self-insured on their health insurance. We converted that for the most part to insurance companies but this – there were a number of dependence on that insurance that cost us a heck of a lot of money on the health insurance side, I mean a lot big numbers.

Carrie, how much?.

Well, our health insurance cost doubled in the second quarter from the first quarter because we had some people that were sick and were fighting cancer go through there. And the deductible was very high for that individual. And now, those interest cost have dropped back down. So year-on-year when we look at the costs were now more in line.

We are still under a self-funded plan that we are able to work on those deductible levels and not have such high deductible levels for individuals..

And how are you able to drop the cost, I mean is there – is that different – some other insurance program or going forward is what I'm looking at?.

Well, we have to fund everything up to a certain portion for each individual. And when they put higher deductible rates on those individuals that's where we see our expenses go up dramatically. So we are trying to manage those high deductible levels..

Is that the same insurance policy that's basically within the whole company or is that excluded from the rest of the divisions?.

No, they have a union at Ohio Tools. And so we don't have a lot of flexibility there because we have to follow our union contract. They are not part of our companywide health insurance..

Do you feel that tool division will be profitable this year end?.

Let me say this about it too. They hadn't taken a price increase in 2.5 years. We have put in a price increase. So we've also eliminated a couple of people on overhead. We are not very far from being profitable significantly with that in my opinion..

Well, then, I'm going to jump to vessels real quick because I know the investors have been clamoring for action there.

Somebody want to comment on that? Show us some transparency as to where we are going?.

Marc?.

How can vessels be profitable?.

We are doing a few things to kind of change what we have been doing. Obviously to keep trying to do the same thing and then the same result it doesn't always work as we know. But we are going into some methods of trying to increase our sales. And there is a lot of what comes down to is having proper sales level to carry the overhead of the place.

And we are just going to market with a standard product line offering with exchange tanks which to this point, we'd always been quoting (indiscernible). And we get a fair bit of inquiry for something that could resemble a standard product that we never had it to offer, it was all made to order.

And so, we are looking to expand our sales and these are profitably with this new line that will allow us to have product on hand to make quick sales. That's one thing.

We have been working hard focusing on improving our coating process and our production process to find out where we are and why are we at times uncompetitive, yet at the same time having get difficulty margin wise. So vessels have been getting more focused attention. We are looking to turn it.

I mean, obviously, we have to do more and do some things different in order to get there. And that's what we are focused on doing now..

Going into November, would you like to make an announcement today or any comment on the dividend, is it secure?.

No comment. It would be a Board decision. It's been discussed. But our next Board meeting is in last part of October. And so that's one of the agenda items..

Okay..

What's your thoughts about it?.

My thought about it?.

Yes.

What's your thought on it?.

My main thought, I look at two factors here. One, can the company afford it? It has $0.14 in profit this year, correct, so far. The quarter looks strong so I'm anticipating another profitable quarter..

Right..

The stock in my opinion is undervalued and without a dividend could be undervalued further. I think being in this farm machinery association, there is a lot of negative reasons right now, John Deere laying off and ADCO having problems. You are separating yourself from those manufacturers and I hope that's the case. But, that's what it appears.

So in my opinion the dividend further separates you from anyone else. Being a small cap company, it's vitally important..

Well, in terms of financial prospects it's on our balance sheet, I think the dividend is secure. We have plenty of line of credit. We have really down low on our line of credit. And I had discussion with other Board members last night about it. And we feel like that company can afford to do it whether the Board will go differently or not, I don't know.

But I would – I, of course, I personally (indiscernible) and I saw a kind of don't vote, but I think its pretty good shape..

Well, let me add this too. There is five long-term huge investors as long as – as much as I can determine. That hold considerable amount of shares that's not a whole lot. And I don't want to lose any of those..

Yes..

Any impact would not be good. Obviously, I want to see the price of the stock itself to rise considerably. I guess that's all I got today, and I hope someone else is on the conference call have some strong questions. So thank you for letting me respond..

Thank you, Roger..

Our next question comes from Sam Rebotsky from SER Asset. Please state your question..

Yes Hi. Good morning, Ward....

Good morning..

…and Carrie and Marc. It's a good quarter and I guess you are on the right track to sort of do what you need to do.

And as far as the backlog say in the modular, you announce when you get is there a number that you need, you announced a contract, is it a couple of million, is it a million, is there a threshold for announcing specific contracts?.

We don't typically announce the ag building contracts because they are relatively small. But, even if we had a contract for several ag building lumping it together for $0.5 million, we would still probably make an announcement for that.

So I guess, from my point of view that's kind of where my threshold would be just around $0.5 million, we would announce..

And as far as the universities, is there any money for the modular in the universities or is that dried up?.

It's pretty much dried up. There is a lot of – there is a lot of those numbers use the 120. Our universities – and it takes the university several years the time they start a grant process. And those are still going on, but there is kind of building a backlog of them and they stay alive. Dan stays in contact with them.

But they stay in contact with Dan too because the people who are asking for those grants they want this research money and so they continue to work hard to get it. But what we did currently with budget problems with federal government, it is slower..

Okay.

And the $700,000 you expect to save, when does that start? When do you start saving this?.

That started..

It started. So….

More so on this most recent, month or so a month..

Okay.

So it's basically the 7000 evenly over the years, so that would be like 175 per quarter reduction?.

Marc?.

Let's say there about, yes. That 700 to 800 is an annualized number..

Okay, okay. That's good. And as far as the latest Dairy Conference in Wisconsin that you attended, had you found that that was more prone to – they want to spend money, the various farmers for different products to reduce their costs and they were comfortable I guess, that's what I sort of got..

Well, here is the way I see that. All of the (indiscernible) we are getting from John Deere cutting back 10% and ADCO cutting back and so on. In corn and beans, we are not in the corn and beans. We are feeding pigs and feeding dairy. And both of those are pretty good that's why our sales are up in grinder business.

We are well ahead in the grinder so far this year. And we have a backlog now which is now unusual for us to have in that product. So I guess what I'm saying is that it doesn't appear to us it's going to hurt us. All of that, but let's see about Montana who had something this morning in the Wall Street about expecting the sales drop.

But they are talking about corn and beans primarily..

Yes. And their suffering is actually has the flip side effect for livestock and dairy people..

Yes. It does..

Because it lowers their input..

Lower the price of corn, the less input cost for the people growing hogs and dairy..

And fortunately happens to coincide with high prices for pork and beef and milk and all these other things. So they were really squeezed the last several years, when all we write about is how well John Deere and ADCO and CNH were doing. These folks were really squeezed during that time and did not do very well.

And now, this is completely the other way for them. Unfortunately, more of our product line suits them or not..

And you sort of – did you find that the size of their herds are increasing….

Oh, yes..

Yes. Yes..

And we have visibility more than for the whole next year, or what is your – what's your visibility, I mean the visibility for this quarter is good and probably the following quarter.

What is the visibility at this point in time?.

I don't know, I guess. But….

Okay..

I can say this. We can try to take a look at what the landscape looks like and a lot of the projections in charge that I'm seeing of their kind of structural reasons why corn and soybeans will remain low for some period of time and they are not going to be back at $8 in 6 months.

It's going to be an extended period of time where it’s low, which is going to help our livestock and dairy people. And similarly their there projections are for structural reasons that there will be really a longer extended period of high meat prices and milk prices.

So the current strong margin environment for those people is – there is a lot of data to show that that would continue for the foreseeable future. And with that being the case we can draw the conclusion that certain products of ours will continue to do well..

Okay.

And it appears that at this point you are digesting the acquisitions that you have made and presumably you are not looking in anything else or what are you doing relative to acquisitions?.

We are looking. But, we don't have anything on the horizon right now. You are quite right. We are trying to digest the six companies we bought and three or four product lines we bought. But, and the company is 5x larger when I went there in turnover.

So and we are in good financial shape and so, yes, we are going to be looking but we are probably going to be a little more selective. We would like to – I would like to very much get these under our belts and all profitable it was in – not have to carry one. But it is digestion.

Every time we buy one of these things, the first thing we do is, we will change the computer around they get ugly at us. And but, as they get digested every one of them as potential for profit..

And as far as expansion of product of production, you are working one shift?.

Yes..

Okay.

And is it what percentage or capacity on the one shift, can you increase that or…?.

Well, we are also lower our -- head count has lowered that's been in the past..

Okay..

Yes. We have opportunity if we had 25% more sales. I don't think we will be hard pressed for equipment. We have been buying a lot of equipment in the last three years. Automatic saws, automatic machining centers and so on. We spent over $1 million in the past, well, 18 months I guess, which is a lot for our shop.

And those machines are faster in producing and no breakdown and they are all computer controlled and so on. I would say we are in pretty good shape for more expansion..

Oh, that sounds good. Good luck guys..

Thanks..

(Operator Instructions) At this time, I have no further questions..

Thank you very much for tuning in today. You can call us anytime and talk to us about it. We will tell you like it is. So I appreciate a lot that you make the effort to call and stay honest to stockholder. Thank you..

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