Carrie Majeski - President & Chief Executive Officer Marc McConnell - Chairman.

Sam Rebotsky - SER Asset Management.

Good morning, ladies and gentlemen. Today is Monday, July 18 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, Chair of the Board of Directors of Art's-Way Manufacturing; and Carrie Majeski, CEO and President of Art's-Way Manufacturing. I'll now turn the call over to Ms. Majeski. 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 Manufacturing products, general economic conditions, and other risks and uncertainties described in Art's-Way's periodic reports on file with the SEC.

Actual results may differ materially from anticipated results and Art's-Way does not undertake to update its forward-looking statements. With that, I'll turn the call over to Marc..

Yes, thank you. Hi, I appreciate you having interest in the company and calling in to follow us.

Obviously, if you’ve seen our results for the quarter, we continue to experience the headwinds that the whole industry is experiencing and we are battling through every day to try to achieve profitability and we’ve been improving our company day by day and we’ll be talking more about that later, but clearly we remain in the midst of challenging times and are working through it.

So, we’ll talk about that a little bit at the end in the outlook and Carrie will go through the numbers..

Okay. Thank you, Marc. And today we have already filed our 10-Q with the SEC, so all of that information is already public and was public on Friday. So, we’re really going to do more of a high level overview and I’m going to start today by just talking again about our corporate initiatives. We’ve talked about those each quarter now.

We have five corporate initiatives. Our first one was increased profitability. This is an extremely difficult, given the severe decrease in sales due to the overall ag economy. We have been able to reduce our operating expenses by about 14.5% for the quarter and just over 12% year to date.

We continue to push sales and reduce inventory levels, looking for cost savings and reductions and all aspects of the business. We believe that we have taken the necessary steps to strengthen our business to ensure profitability as the ag markets improve.

Our next corporate initiative was inventory reductions and we had a goal of reducing our inventory by 10% during the [indiscernible] fiscal year. Our main focus was going to be in our ag sector, as it does carry the highest volume of inventory.

We are down $993,000 or 6.2% in our ag sector, and overall all corporate wide inventory is down $1.2 million or 6.5%. So, we are pretty pleased with how we’ve been able to produce our inventory over the first two quarters.

We do have a couple of sectors that have increased their inventory values since our year-end and that would be Art's-Way International and that is due to their highly cyclical snow blower product line. Typically that inventory will ship out in the fourth quarter.

At this point, we’ve seen an increase over year-end of $236,000, but still would look for a decrease in overall inventory levels as we move towards the end of the year.

Art's-Way Scientific is our other segment with increased inventory and their inventory has increased approximately $155,000 and that is due to our choice to stock buildings for the ag sector which has seen increased sales this year and we want to be able to provide immediate delivery when possible.

That along with our investment in the food safety industry and having a lab available to take the food safety shows. Our next corporate initiative was reduction in debt. At November 30, 2015 our total bank borrowing was $9.908 million. As of May 31, our total bank borrowing is $6.436 million, a total reduction of $3.472 million or 35% since year end.

There’s been a couple of key factors that has enabled us to reduce inventories by that much. The first one was our liquidation of the AIMs facility. We sold that building for $1.2 million and we were able to pay off some long-term debt with the proceeds.

And then again with the reduction of inventory at $1.2 million has also enabled us to pay down that debt. Our fourth corporate initiative was customer service and this continues to be a daily talking point for us throughout our organisation. We've added a customer service manager.

We've increased our focus on customer feedback and the customer experience. We’re doing more high level dealer visits and we’re also in the process of introducing a customer loyalty program.

Our fifth and final corporate initiative was forward-looking, our forward planning to position ourselves to the best move forward and a lot of our efforts here go to Art’s Way Scientific and our focus on the food safety area we’ve increased our advertising, I mean increased the number of shows we’re going to for food safety.

We’re also looking at adding a mobile lab and then also having the stock buildings available for immediate delivery, and having leases available. For Art’s Way Manufacturing, our forward looking projects have included new product development and staff development for our sales departments.

And I’ll go into some of those little more in-depth as we move forward. Our agricultural products saw sales decrease by 44% for the quarter, and 34% year to date. The largest decline in product lines is our forage boxes at a 75% decrease that decreased $986,000. Our OEM blowers, our silage blowers decreased 55% this year or $539,000.

Our manure spreaders are down 36% or $237,000. Our grinders are down 26% or $1.2 million. And our parts are down 22%, $330,000. Our efficiency rates decreased due to the relocation of our UHC business and the relocation of our West Union products both moving into our Armstrong facility.

We did not anticipate the decrease in efficiency rates lasting as long as they have. We started the relocation of UHC and West Union in about October of 2015 and our West Union facility is approximately 200,000 square feet, so it’s a lot of building and a lot of inventory.

So we are gradually moving the products that we need to produce back to Armstrong in a manageable fashion and taste. So, we are just now starting to see our efficiency rates rebound and we just started seeing that for the month of June.

We would anticipate that our efficiency levels should now level off back to where we would anticipate them to be through the remainder of 2016. As we noted on previous calls, we anticipated the sales in the first and second quarter of 2016 to be down year-on-year.

In 2015, we really had a pretty strong first half of the year and then fell off significantly in the second half. So, we have seen significant reductions year-on-year in terms of our sales levels. Now because our second half of 2015 was light, we would look for far more comparable levels of sales as we go forward in the second half of 2016.

Our gross margins year-on-year has decreased by 2% falling from 31% to 29%. This is in large part due to the grinder and the parts sales, those two areas specifically have pretty high growth margins. So, with the reduction in those levels of sales that did bring our gross margins down slightly.

Our current backlog for the agricultural products is currently sitting at 2.533 million compared to 3.009 million last year. We are seeing decreases across all product lines there. And our [indiscernible] backlog is down this year as well. The next segment that I’m going to discuss is Vessels. Our sales here remains relatively flat.

We are disappointed that the efforts that we’ve put in to improve this business have not shown on the bottom line. We’ve put significant efforts into our capacity planning and our quoting and our scheduling. While you cannot see that in the numbers, we are seeing benefits of that on the shop floor.

Where we are still continue to see room for improvement is in the finishing end of our business. We do the welding and the fabricating pretty well and then we go down to the finishing department, which is paint, sandblasting and lining and we really struggle and seem to bleed a little bit down in that area.

So that is our current focus as to gain some efficiencies and knowledge in that area to improve our business. We’re working with our vendors, our paint suppliers, our blast suppliers, looking to increase our overall efficiencies down on that and at the building. Our backlog at vessels is currently sitting at $175,000 compared $522,000 last year.

Again, the bulk of that decrease in backlog is due to a large tanker job that sat in backlog for a significant amount of time last year. Art's-Way Scientific has seen a significant increase in their sales this year. Sales for the quarter have increased $409,000, moving sales up for the quarter to $1.25 million. That’s an increase of 205%.

Our year-to-date sales have increased from $1.058 million to $2.193 million or 107%. In late 2015 and 2016, we invested heavily in advertising of our ag buildings and this is where we are seeing the bulk of the increase in our sales. We currently have approximately 360 leads that were following.

Of that 360, 173 are for ag buildings and the total value of those ag buildings would be approximately $26 million. While that isn’t the largest segment of the funnel, it is important to note that our hit rate on the ag buildings and the time it takes to close the ag buildings is significantly less. So, we definitely view that as a positive to see.

The funnel report having that many ag leads on it and those ag leads could come to fruition in pretty short notice whereas the research buildings sometimes take significant amount of time to three years to turn into an order. We have partnered with another company and we are not offering leases on our ag buildings.

This has been something that has been requested by our customers. They look for different alternatives to finance these buildings whether they are ag buildings or the research buildings. So this will be new as we go forward in the second half of the year and we’re pretty excited to have this available to our customers.

Our current backlog at Art's-Way Scientific is sitting at $528,000, compared to $1.39 million a year ago. Our last segment is Ohio Metal. Our sales have decreased at Ohio metal by 13% from $554,000 to $481,000 for the quarter. Year-to-date, our sales are down 22% from $1.351 million to $1.053 million.

Again, this decrease was largely due to the decrease in the oil and gas industry. So, again it’s a time for us to improve our business processes, so when that sector comes back, we are well positioned. We have recently invested in a CNC mill.

We have increased our capabilities and our efficiency levels greatly since that went into production approximately a month ago. We continue to focus our efforts on the speciality side of the business with CBN and PCDs.

We have increased our advertising and we are starting to see new customers come in with quotes and they are testing a lot of our tools. So, we look to have some modest increase in sales as we go forward. Our backlog remains consistent compared to a year ago at just under $100,000. Marc, I’d turn back over to you now..

Okay, thank you. I’ll talk a little bit about our outlook for the rest of the year. We are prepared for rest of 2016 to continue to be weak. Our demand level currently feels pretty similar to what it did a year ago and we would therefore expect the revenue to be similarly weak.

Last year the third and fourth quarter had losses and those losses were a lot worse due to some inventory write downs. For this year, we’ve significantly reduced overhead and we have no looming inventory write downs on the horizon here.

So, I would envision that the revenue maybe similar to the third and fourth quarter last year, but our profitability would be better. That said, achieving profitability in the current circumstances will continue to be very difficult.

So, we were trying very hard, we continue to try to find cost to remove, but we are in the midst of a period that’s causing challenges for everybody in our industry, particularly the ag industry.

What we are trying to focus on are things that are within our control and demand is largely driven by external factors, but there are things we can do to help ourselves. And so we continue to focus on improving our business every day. As Carrie said, the slow times are off and the best time to make the company better and that’s how we view this.

This is an opportunity for us to improve our future.

So we're very focused on the customer experience, how the customer interacts with us at all points of contact, whether it’s sales department or parts department, warranty, et cetera, we're trying to get a lot closer to our dealers and actively seek their feedback and take action on their feedback to be just a more responsive company and I think we had a lot of room for improvement in that regard and we are very, very focused on that.

And you will hear us mention that in every call and you have heard us mention it in recent calls. That's the theme here that's part of where we're going with the company. We’re also very focused on product quality making changes and improvements to our system to ensure that the product meets the customer's expectations.

This is, we’ve been trying to tackle the same challenges maybe with different approaches or more intense quality control that I think long-term will have a positive impact on our reputation, our ability to achieve the margins that we want to, and all that.

So, we've had really a long-term reputation for high quality and we need to keep a high focus on that for our long term benefits. And also we will soon be introducing some new products.

And we feel like this will positively impact sales, and I’m talking about ag specifically right now, but we do have some things that will be coming on with that I can't really go into detail about yet because we have not specifically announced, but we think that those things will help us be more relevant in the market and therefore positively impact our sales, you know in the near-term and long-term.

And we’re also taking some steps to revamp some of our sales programs to create more incentive for dealers to do more business with us. I think some of our early order programs and those kinds of things probably would do for a little bit of tweaking and updating and just maybe being something that is better received by the dealer network.

So we're using feedback to try it from them to improve that.

As far as the subsidiary operations go, we’re obviously very frustrated with vessels and we are continuing to be focused on improving that business and other initiatives have really not yet shown the results that we want to as Carrie has said, but we are exploring numerous potential outcomes for that business.

We cannot continue to lose money and struggle their just in perpetuity here. We have to go one direction or another with it. So, while we are trying to fix the business we're looking at alternative as well.

I would like to mention moving to scientific some good news that the scientific division won the modular building institute award for special applications for our dairy calf nursery building for Daisy Farms. That’s quite an achievement. I think that’s the - maybe the second modular building institute award that we’ve won.

So there is good activity there. We’ve been quite probable there this year and we've got a lot of, I think positive things on the horizon and a new market that we’re actively in and things we’re looking up.

So, we're putting resources towards scientific, we've added some staff to improve our capabilities there, invested more in key shows, and as Carrie mentioned we have a new leasing partner that would be - having that should be a good tool in our toolbox to capturing more business. So, we are excited about that.

And moving to Ohio Metal, or American carbide tools as Carrie said, we’ve made some investments in the process to expand our capabilities, but some of our business development efforts over the last year plus have taken a while to show the results, but we feel like we are starting to see some of that and we’re getting some good vibes from some potential new customers for 2017 that could be impactful to our business and this is specifically in the precision part of the business.

So this is kind of, if this comes to fruition it’s kind of the embodiment of what we’ve thought this business could be, where that more high-tech precise and higher margin part of the business becomes the bigger piece of it. So that may take a while to happen, but we’re seeing progress on that front.

So, we’re happy to be going in good direction there. And financially, our total borrowings are at the lowest level they’ve been in several years to have taken three point something million out of it since the beginning of the year, is quite significant.

And so we are very, very focused on reducing our borrowings and ultimately I think that the less debt we have the more bullet-proof we are enabled to withstand times like this. So our debt-to-tangible net worth is very solid already and we're going to be making that more solid even in the current market that we're dealing with.

We are very, very focused on doing that. So, we placed a great deal of effort into reducing inventory and otherwise cleaning up our balance sheet and we are working closely with our lender, who has been cooperative in allowing us to continue to have access to adequate liquidity despite the covenant challenges that we've had.

So that has been - the financial end of the business obviously has been a big focus here. So it required us to have a lot of effort towards inventory and managing our cash flow. In lean times, I think sometimes make us better and that’s been true here. And we are continuing to seek out areas to reduce our overhead expenses.

It’s getting a lot more challenging to find cost to cut that would not hurt us in the long term, but we continue to look and in case we will find something and take action on it. So, we have really materially reduced our SG&A expenses and we continue to try to do so.

So, in conclusion we are in solid financial condition to withstand the headwinds that are likely to continue to plague our industries for some time and in the meantime we are improving our company every day, and we are maintaining a long-term view and really we have a lot on our plate as we try to clean-up our balance sheet and continue to work down our borrowing.

We envision that the agricultural market and other markets we serve when they pickup we’ll be in a great position to be highly profitable and to deliver the kind of results that we all expect.

We’re improving the company, we are leaner and meaner and when we get a little more wind at our back instead of at our face, I think we’ll really be more profitable than ever and we’re all up for the challenge and motivated and feel good about where we are going as a company.

The market isn’t cooperative currently, but we are really making headway and later this month we’ll be celebrating our 60th anniversary in Armstrong of Art's-Way and having a large event with everybody involved in the company basically and customers and vendors and sales people and the community and all that.

And we feel happy about where we are in terms of our financial health given the circumstances and continuing to try to improve that. So with that I’d be open to questions..

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

Yes, good morning Carrie and Marc.

Good morning.

It's been tough.

Could you sort of indicate as far as the University buildings, what's the size of bids you have out there and that you are working with a partner to lease some of the buildings or trying to lease? Is that opened up or is there a possibility of additional business or what needs to be done there?.

I believe that our research buildings, I think their average value right now the ones in the funnel are about $1.6 million [per] [ph] research facility. I think it might be a little too early for us to know on the research side how the lease availability is going to factor in there.

We do know that historically money is a problem for these research facilities because they have to get grants and the grants only last a year and to pay for a facility is a problem. So, we do believe that the leases should give everybody a few more options, but I would say it’s a little too soon for us to tell..

Okay.

And now as far as agricultural buildings, do you see by dealing with the farms more and more with the agricultural buildings that could produce additional business when the economy turns around in the farming end?.

Yes, it is a little bit surprising that on one side our ag business is down significantly because of the farm economy and yet Art's-Way Scientific is selling these buildings to these ag farmer. So yes, we definitely think that that business can pick-up further as the ag economy picks up.

We talked about forage box business being down significantly, I think, like 70% to 75%, that’s dairy. So we definitely feel like when the overall ag picks up, you’ll see those forage boxes and the other dairy type products pick up and we should be able to see it pick up on the scientific side as well..

Okay.

And as far as your financial statements, do you feel for the next year or so, you have an ability to have enough funds or would you need any type of rights offering with shareholders or anything like that?.

I can speak to that. I think that we’re in good shape there.

Our line of credit balance is quite low compared to where it’s been in recent times and the availability has changed as well, but we see that continuing to go down and our inventory efforts continue and so that cash that’s freed up and in the event that we may want to sell assets anyway, that is another source.

So from our standpoint, we would feel liquidity going forward as being adequate and strong..

Okay. Good luck, Marc and Carrie..

Thank you, sir..

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

Okay. Well, thank you all for your interest and your investment and we will keep ploughing away at these initiatives and battling through kind of slow period in our industry and it will continue for some period of time.

I don’t think that the ag economy will turnaround overnight, it would probably be gradual when it happens, but we are positioning the company to be in a really good shape when that occurs and perhaps before that occurs. So, thank you again and we will speak to you next quarter. Thank you..

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