JBT Marel Corp (JBTM) 2008 Q3 法說會逐字稿

Good morning.

My name is Bobby Jo and I will be your conference operator today.

At this time I would like to welcome everyone to the JBT Corporation third quarter 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Ms.

Cindy Shiao, Director of Investor Relations.

Ma'am, you may begin.

Thank you.

Good morning and welcome to JBT Corporation's third quarter 2008 earnings conference call.

Our press release and financial statements were issued early this morning.

If you do not have a copy, the information can be accessed through our website.

During our call any comments in reference to 2007 and 2008 earnings per share are to pro forma earnings per share in order to account for our spinoff from FMC Technologies effective July 31, 2008.

Additionally, we will reference earnings from continuing operations, which excludes results from two small FoodTech product lines we exited in 2007.

Historical results have been revised to reflect these operations as discontinued.

I would like to caution you with respect to any forward-looking statements made during this call.

Although these forward-looking statements are based on our current views and assumptions regarding future events, future business conditions, and the outlook for us based on current available information, these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements.

I refer you to our disclosures regarding risk factors in our registration statements on Form 10 filed with the Securities and Exchange Commission.

Now I would like to turn the call over to Charlie Cannon, JBT Corporation's Chairman and CEO.

Thank you, Cindy.

Good morning and welcome to JBT Corporation's earnings call to review our third-quarter results.

Joining me today is Ron Mambu, our Chief Financial Officer.

We are pleased with our operating results for the quarter and I believe we are positioned to close out the full year of 2008 with record high sales and earnings for the Company as well as both our segments.

For the third quarter, consolidated revenue and segment earnings were in-line with the prior year level.

We continued to generate free cash in the quarter and on a year-to-date basis we have generated free cash flow more than $2 per share, which has allowed us to reduce our net debt to approximately $109 million.

In September, we took our first step in executing on our core strategies by completing the acquisition of USA Sales & Automation.

The integration process is going well and we were very pleased with the results today.

In addition, we will be distributing our first cash dividend of $0.07 per share in two weeks.

On a consolidated basis our business has performed well.

Total revenue increased from the prior year quarter.

Segment operating profit decreased slightly by $800,000.

The pro forma diluted earnings per share for the quarter were $0.29 and year-to-date were $1.08.

As we mentioned to many of you during our roadshow and in one-on-one meetings, the shape of this year's earnings pattern is different than our typical seasonality.

For 2008 our first-half earnings were unusually strong and we have expected a softer second half.

Ron will provide some additional comparisons and comments on the corporate cost and EPS outlook for 2008.

I would like to now review our individual segment results.

JBT FoodTech's revenue of $143 million was $4 million lower versus last year's quarter.

Operating profit was down 11% reflecting that lower volume, as well as unfavorable product mix partially offset by lower selling and administrative expenses.

JBT FoodTech third-quarter backlog declined both year-over-year and sequentially.

The North American poultry market remains challenging, although the recent softening in grain prices is a net positive for processors.

In the developing markets, Asia Pacific, Latin America, Middle East and pockets of Eastern Europe, we still have a good flow of activity.

With the unprecedented volatility in the financial markets, projects are starting to take longer to close.

Some of our customers are temporarily delaying projects waiting for a clearer picture of the economy to emerge.

However, as we reported in the second quarter call we did receive two large orders in North America totaling $27 million in August.

We remain confident with the fundamentals of our business and our ability to execute on our core strategies.

The demand for convenience and choice are still strong in the developed world.

Additionally, in an uncertain economic time, consumers gravitate to lower-cost dining choices such as quick service restaurants, which is good for many of our customers and for JBT.

Also worldwide interest rates are declining and the recent decline in the commodity prices will provide relief to many of our customers.

Moving to the JBT AeroTech segment.

I am pleased to report another solid quarter.

Revenue increased 9% over last year's third quarter and segment operating profit was up 8% driven by the increased volume.

I believe these results reflect a diversity of our AeroTech customer base, which is not wholly dependent on US airlines for growth and no single customer represents more than 10% of total segment revenue.

The JBT AeroTech backlog did decline in the quarter both year-over-year and sequentially.

As you know, airlines and air freight companies are facing significant headwinds.

Demand for our ground support equipment has declined, particularly among air freight and ground handling companies.

But despite the current challenges we face in the ground support product line, we do see growth opportunities in other parts of AeroTech.

You may have seen our press release last Friday of the three-year service contract awarded to JBT for the Raleigh-Durham Airport.

As airport authorities and airlines continue to reduce costs, we anticipate more such opportunities for our airport services business.

Additionally, we are encouraged with the order activity in the jetway business and expect to close a number of projects in the fourth quarter.

Demand for our energy efficient products, such as preconditioned air and 400 hertz gate equipment remains strong.

Finally, we also anticipate receiving the 2008/2009 fiscal production order for the Air Force Halverson loader by year end.

Based on our strong year-to-date results we are forecasting record revenue and profit in both segments for the full year 2008.

However, we expect the fourth quarter will lag the same period of 2007 due to the overall slowing market conditions.

There is no denying we are in a very challenging time.

Along with most other companies, we are concerned with the general economic outlook.

We are closely monitoring our inbound order rates and are prepared to adjust our cost structure as market conditions dictate.

With our strong balance sheet, low capital requirements, and variable cost structure we are confident we will navigate this challenging environment.

In closing we believe our leading global market positions, diverse customer base, high proportion of recurring revenue, and strong cash flow will continue to fund opportunities for growth as well as a continued dividend to our shareholders.

Due to the global downturn in bank and financial market conditions, it is too early and too uncertain to provide a specific outlook for next year at this time.

We do plan to offer our view regarding 2009 earnings guidance during our year-end conference called in early March.

I will now turn it over to Ron Mambu to provide you with some further details on the quarter.

Thank you, Charlie.

Total revenues improved over last year's third quarter to $259 million.

Total segment operating profit declined slightly to $24.6 million.

Including debt and interest expense for all periods, pro forma net income for the quarter was $8.2 million, down $3.5 million from the prior year quarter.

Higher corporate costs mainly explain the lower net income and an unfavorable product mix in FoodTech in the current quarter versus the prior year quarter was also a factor.

I will comment further on these items in a few minutes.

Pro forma diluted earnings per share for the quarter from continuing operations was $0.29.

On a year-to-date basis pro forma net income from continuing operations and pro forma diluted earnings per share from continuing operations were up 48%.

JBT FoodTech revenue of $143 million was lower by $4 million and operating profit declined $1.6 million to $13.1 million.

Poultry sales in Latin America remained strong as we have converted backlog to sales.

However, the North American poultry market continues to lag and we are seeing some early signs of slowing in ready meals, bakery, and dairy markets.

Also margin from the mix of products in a quarter can be lumpy and that is what we saw in the third quarter of 2008 versus the third quarter of 2007.

Finally, as we have discussed in our roadshow and our one-on-one meetings, we expected a different pattern to this year's earnings due to the timing of customer orders and project deliveries.

Inbound orders in the segment totaled $139 million, down 12% from last year's third quarter.

As Charlie mentioned, we booked two large orders in August, but we are now seeing some delays with new projects.

As a result, backlog declined 18% from the prior year quarter to $151 million.

In JBT AeroTech, revenue increased 9% over last year's third quarter to $115 million.

Strong shipments of aviation fuel-saving, preconditioned air units, and Halverson loaders contributed to the increase.

Partially offsetting the increase was lower shipment of ground support equipment as air freight and ground handling companies reduced capital spending.

AeroTech's net operating profit increase from the prior year quarter to $11.5 million, up 8% primarily driven by the higher sales volume.

Operating margin remained flat with the prior year quarter at approximately 10% of sales.

Inbound orders in the segment totaled $99 million, down 26% from last year's third quarter as the air transportation industry faces concerns of high fuel prices and global recession.

However, we are expecting a number of contract awards which slipped from the third quarter.

Backlog at September 30 decreased from the prior-year quarter to $171 million.

As I mentioned earlier, corporate items represent a major difference in the quarter-over-quarter lower profit level.

Corporate expense for the quarter was $4.2 million.

This amount represents one month's allocation of charges from FMC Technologies and two months of actual JBT-based expenses.

The overall increase is in part due to spin-off related costs mainly recruiting and relocation expenses associated with establishing JBT's corporate staff.

Other corporate expense of $5.8 million increased $3.4 million from the prior year quarter.

We incurred a one-time to $2.3 million hedging loss that resulted from the disaggregation of pooled hedges associated with our spinoff from FMC Technologies and the rapid strengthening in the US dollar.

Additionally, we recorded non-cash mark-to-market charges on foreign currency contracts related to expected exposures in our Brazilian operations.

As these exposures materialize next year, the effect of the mark-to-market losses will reverse.

Our overriding foreign exchange policy is to hedge economic risks.

However, we have decided to not apply the hedge accounting requirements of FAS 133.

We can expect some accounting fluctuations from period to period and we would expect them to be lower in a more typical economic environment.

Regarding income taxes, the year-to-date effective rate was 35%.

The lower tax rate for the quarter of 33% reflects some one-time adjustments related to the spinoff.

Going forward we expect an effective tax rate in the 35% to 37% range.

On a year-to-date basis cash flow from continuing operations and before financing activities was approximately $62 million.

JBT has been a consistent producer of free cash due to its efficient use of capital and ability to convert earnings into available cash.

This year's record high operating results combined with our continued capital efficiency have resulted in very strong year-to-date cash flows.

Capital expenditures of $16.6 million remain stable at approximately 2% of revenue and year-to-date depreciation and amortization was $19.5 million.

Working capital, excluding cash and non-operating working capital items like that payable to FMC Technologies for the final dividend true-up, was $34 million.

On an annualized basis, this makes our working capital to sales ratio a very low 3.2%.

At the end of the third quarter debt net of cash was $109 million.

This includes a gross debt balance of $140 million.

The acquisition of USA Sales & Automation was funded through operating cash flow.

Net interest expense was $1.5 million in the third quarter reflecting two months of interest expense on debt incurred as a result of the $150.5 million initial dividend paid to FMC Technologies on July 31.

An additional amount of $38.9 million was paid on October 14, this includes reimbursement of $22 million for net cash equivalents retained by JBT Operations at the time of the spinoff.

I would like to quickly add some comments regarding our liquidity.

In light of the volatile credit market situation, we started accumulating cash in lieu of paying down debt.

We completed the third quarter with cash of $31 million on our balance sheet.

Our debt to EBITDA multiple is a very comfortable 1.4 to 1 and we have ample financing credit lines available.

With our strong cash flows from operations, we are confident we will be able to fund our operations as well as our growth initiatives, service our debt, and pay dividends to our shareholders.

Finally, regarding our outlook for 2008, we are reiterating our expectation of 6% to 10% year-over-year revenue growth and adjusted fully diluted earnings per share from continuing operations of between $1.30 and $1.40 per share, although the sharp declines among foreign currency exchange rates relative to the dollar, particularly the Brazilian real, the Swedish krona, and the euro, represent a concern.

The outlook includes segment operating margins as a percent of sales that are in-line with the prior year level.

Overall corporate costs which are also -- approximate the 2007 level and a full year of interest expense including average debt and cash balances in the fourth quarter of $180 million and $30 million, respectively.

In summary, we reported a strong result in a difficult environment.

We continue to efficiently manage capital with working capital and capital expenditures.

We have produced excellent cash flows that enabled reduction in net debt to $109 million and return of value to shareholders of a $0.07 per share dividend.

With that, we would like to take your questions.

Operator, would you please open the call for questions?

(Operator Instructions) Arnold Ursaner, CJS Securities.

My first question is a follow up to the last comment Ron made.

Ron, I think you just said to assume your balances of $180 million of debt and $30 million of cash into Q4 on average.

Yet you ended September 30 with $30 million of cash and roughly $180 million of debt after the payment of the upstream dividend.

Why wouldn't cash flow affect both of those numbers in Q4 favorably?

Arnie, let me give you a summary way of looking at that.

We finished the quarter with about $108 million -- $109 million of net debt at the end of Q3.

What we just said is that for the fourth quarter, we would average about $150 million.

The difference is that on October 15 we settled up with FMC Technologies and paid them $38.9 million.

Additionally, as you know, we declared a dividend in October for payout in the fourth quarter.

If you put those three together, you come back to around $150 million of net debt for the fourth quarter.

That is the $109 million plus the $39 million plus about $2 million for dividend.

The only thing you know about a forecast like -- well, you all know is that it's wrong.

The question is only by how much and in what direction.

So we hope we may be able to do better than that.

It's maybe a little conservative but it's about $150 million for the quarter.

We also -- maybe we typically have a little bit of a working capital build in the fourth quarter.

But we will see how it works out.

Does that help you?

It does.

It does sound unusually conservative though given you are pretty much at those levels right now.

As a follow-up to that, we had estimated the true up would be approximately $25 million.

What drove it to $38 million?

What were the changes that drove it to a higher number than even you had assumed in your public filings earlier on?

I think the way to look at it is where did we come out on net debt for the quarter.

We came out at $109 million, which is lower than what we were expecting.

The true up formula has a number of adjustments to it and that is why I said in my comments that we pay $38.9 million but we retained $22 million of cash equivalents that were held by JBT Operations as of the spinoff date.

Because we had to true up for the cash that we retained.

If you net that all out, we came out a little bit favorable than what we had anticipated.

And that is why our net debt at the end of the quarter is also a little favorable to what we had been talking about.

Final question, I don't know if you can give it to us now or if it will be in your Q, but can you give us the SG&A and R&D breakout, please?

The R&D breakout stayed at -- like what we had talked about.

It was about 2% of revenue.

Do have the actual numbers for modeling purposes?

Cindy is digging for them right now.

That is fine, as I said, when you get around to that.

And my final question for Charlie is more strategic.

You have been through, in the years you have been at the Company, you have seen some downturns.

I know you were there post-9/11 when orders again fell off a cliff.

I know you've got a pretty good backlog now, but perhaps walk us through how you keep an eye on incoming orders and future backlog and the types of actions you have taken in the past and might take in the future to better manage a downturn?

Arnie, I as you know have been around FoodTech for about 20 years and airport for about 10, so I've seen a few downturns including 9/11.

The one thing I like about my portfolio today is we are more diverse and stronger than we were in those previous ones.

We are more international; we've got a bigger installed base.

So if anything, I don't want to be Pollyanna here, but I do feel like we've done it before and we are in a little bit stronger position going into this downturn.

Typically what happens, as you know, we don't have a ton of fixed costs.

And starting about four to five weeks ago, we started contingency planning all of our operations for the uncertainty.

So in every business today, we are monitoring our inbound order rates literally day by day, week by week.

And although the businesses have contingency planning in place -- obviously, I'm not prepared to talk about all of those -- but a lot of our expenses are veritable.

And we can adjust our structure as we see to match up appropriately with the inbound levels we see in the marketplace.

We've already taken the obvious things like discretionary expense controls, etc., etc.

Those things we have kicked in in the last month.

Arnie, the numbers that I think you were looking for in SG&A, and these are year-to-date nine months numbers, were $118 million for SG&A and $17 million in R&D.

And will the Q have them broken out for the quarter?

Yes.

If you look at our June 10-Q, you should be able to get the quarter.

It was $37.5 million in the quarter for SG&A and $5 million for R&D for the quarter.

Thank you very much.

Robert Wertheimer, Morgan Stanley.

I wanted to -- and I should apologize upfront, I was on another call and I missed part of your intro.

So I just wanted to talk about the inbound order flow just a bit.

I know it is a very lumpy business with some big-ticket orders that can sway it one way or another, but do you feel like there is -- can you just talk about -- characterize the order flow.

Is it a general slowdown, is it just lumpiness; what is going on?

Well, it is always hard to -- you always wonder whether you are reacting to an anecdote by the month or when does something become a trend.

In terms of order flow in AeroTech, we've had several months now of softening inbound for the ground support equipment product line.

And that is being driven by ground handlers and the freight guys, so really cutting back capital spending.

Having said that, I said in my comments if you missed them, Robert, that we do see some other opportunities elsewhere in AeroTech that we are hoping will offset that going forward.

In the FoodTech area, we slipped -- some orders we were forecasting have slipped, and we are trying to determine how much of that is due to current economic uncertainty or how much is due to industry-specific statistics.

We have -- and I've got two division managers with different views on it.

One division manager says the reason the orders we are expecting from China are slipping is because it's the end of the year and the Chinese are very good negotiators.

And the other division manager think it's more to do with global economic conditions.

We are seeing softening activity in Western Europe.

There's a lot of good activity around the world, and so that is what we're trying to get our arms around is how much -- as we watch our inbound rates so we know how to respond.

But we are seeing some softening in the FoodTech literally in the last five to six weeks.

Interesting.

And then FoodTech, are you able to tell us -- are they softening because they actually say we can't get credit, or is it simply confidence or is it -- you don't know?

No, I think -- well, we've got some specific attention in the US poultry market, and that has been soft for a couple of years.

So there you can read the newspapers and can see that some people, I think Tyson has just released their earnings today and they did okay with beef and pork, but in poultry it is still troubled times there.

So I don't -- it's hard for me to say specific credit squeeze on some of the orders.

It's just I think there's just so much uncertainty, people are saying should I -- let me slow down here on my capital spending until I can see which direction this thing is going.

Okay, thanks, and then just one more.

The AeroTech side of the business, was DHL a customer?

Does that impact you positively or negatively when they are getting out of the US?

DHL is a customer.

They are not that large of a customer relative to some of the other airport customer base.

They are a very good customer.

Frankly, most of our business with them has been in Europe.

We sold quite a bit to them in Germany last year as they were building out the hub in Germany.

So I don't see a huge impact other than the impact we've already seen in the last few months, which is softening in the air freight guys.

Perfect, thank you.

There are no further questions, sir.

This concludes our third-quarter conference call.

A replay of our call will be a available on our website beginning at approximately 1:30 Eastern time today.

If you have any further questions, please feel free to contact me.

Thank you for joining us today.

This does conclude today's conference call.

You may now disconnect.