JBT Marel Corp (JBTM) 2008 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the JBT fourth quarter earnings conference call.

(Operator Instructions) After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions) I would now like to turn the call over to to Cindy Shiao, Director of Investor Relations.

Thank you, Brandy.

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

With me on the call are our CEO Charlie Cannon and our CFO Ron Mambu.

During our call, any comments or references to 2007 and 2008 earnings per share, or the pro forma earnings per share, taking into account our spin-off from FMC Technology, 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 have been discontinued.

Before I turn the call over to Charlie, I want to remind everyone that the forward-looking statements disclaimer in our earnings release and 8-K filing apply to this morning's comments so I won't repeat it here.

Both documents are available on our Investor Relations website.

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

Now I will turn the call over to Charlie.

Thank you, Cindy.

Good morning, and thank you for joining us.

We are very pleased with our 2008 results.

We ended the year just as we had projected with record sales and earnings for the company as both FoodTech and AeroTech posted higher profits.

Pro forma diluted earnings per share were $1.44, a 20% increase from 2007 and 3% higher than the upper range of our guidance of $1.30 to $1.40 a share.

We also had strong cash flow.

We generated nearly $3 a share from operating activities in 2008, some of which we used to fund our first quarterly dividend payment to shareholders in November.

Additionally, we announced our second quarterly dividend of $0.07 a share last week.

We are committed to returning value to our shareholders while at the same time preserving capital to grow our business.

2009 will be an incredibly challenging year.

As I mentioned to many of our investors, not all of our businesses have been affected by the downturn.

We have a diverse customer base and broad geographic reach.

We have a solid recurring revenue base and more importantly, we have an experienced management team that has navigated businesses through challenging business cycles.

To respond to the fast changing economic conditions, our executive leadership team is meeting frequently to monitor order rates and the status of our cost reduction contingency plans for each product line.

Additionally, we have also implemented cost reduction initiatives across the country as a preemptive measure.

Since we only have about four or five months visibility into the future, it is extremely important that we monitor our markets and inbound orders and be ready to act quickly.

Let me provide some color commentary on what we are seeing in each of our markets, first, JBT FoodTech.

The current economic slowdown is not affecting all of our markets equally.

In Western Europe, market activity has slowed significantly as many countries there are now officially in recession.

Activity in Latin America in the last three to four months is also dramatically weaker, reflecting the difficult credit market.

We are discussing new projects with customers in these regions but we expect the order cycle to take longer.

As a result, we expect significantly weaker 2009 demand in Western Europe and Latin America.

In North America, the poultry industry remains challenging.

As you know, Pilgrim's Pride filed Chapter 11 in November.

However, with the declining grain prices and reduced industry capacity, our poultry customer's profitability is expected to improve.

So despite the short term challenges faced in the industry, we are optimistic with the longer term opportunity.

There is a little bit of a silver lining for FoodTech in this dark economic cloud.

In a recessionary environment, consumers gravitate toward lower cost alternatives.

The increased demand for value and increased consumption of frozen and canned foods at home to save costs is a trend that bodes well for several FoodTech products lines.

With the orders we received in the fourth quarter, we have a very good back log coming into 2009 for the North American region.

In the developing markets, Asia Pacific, Middle East and Eastern Europe, we continue to see favorable activity levels.

Additionally, with our large installed base and our track record of growing the after-market business, which by the way, we have grown an average 8% annually from 2005 through 2008, we expect our recurring revenue stream to be very helpful in this difficult environment.

Moving to JBT AeroTech.

Again, like FoodTech, AeroTech has a diverse customer base and not all of the product lines have been impacted by the economic downturn.

Ground support equipment has been the most affected product line in the company by the downturn and ground support equipment has been in decline since last summer.

We incurred restructuring costs in the fourth quarter as we continued downsizing in this area.

Our staffing level and ground support equipment is now 28% lower than one year ago.

Turning to the rest of AeroTech, in January, we announced the award of a $28 million order for the US Air Force Halvorsen Loader which provides a solid production base for our military loaders through the middle of 2010.

Additionally, we received several airport services and Jetway orders in the fourth quarter and in the first couple of months of 2009.

We anticipate more opportunities for our airport services business as airport authorities and airlines continue to outsource to reduce costs.

These contracts are typically multi-year commitments that add to our recurring revenue base.

There are early indications that the Airport Improvement Program in the US economic stimulus bill may generate airport projects including requirements for passenger boarding bridges.

However, it is still too early to know the bill's ultimate impact on our business.

We also believe demand for our energy efficient and environmentally friendly products such as our preconditioned air, 400 hertz power gate equipment and electric cargo loaders may increase as stringent emission regulations and fuel conservation strategies are implemented.

To summarize for AeroTech, we expect the demand in 2009 for ground support equipment to be substantially lower but for the rest of JBT AeroTech's product lines, we are entering the new year with good levels.

As with FoodTech, we expect that AeroTech after-market will provide a healthy, recurring revenue stream.

In 2008, we grew the AeroTech after market volume by 17%.

As mentioned in our press release, it is extremely difficult to provide an accurate estimate for 2009 given the deepening global recession, volatile foreign currency markets and an uncertain credit environment which have constrained customer's capital spending.

And since we only have visibility for about four or five months, we don't believe it will be helpful to our investors to attempt to provide guidance for the entire year at this time.

We believe that our inbound order rates in the next 60 to 90 days will give us much better insight into the second half of the year, so we have decided to divert 2009 guidance until our first quarter earnings call in early May.

In this uncertain time, we need to continue to focus on what we can control, exceeding our customers' expectations, operating our businesses effectively and efficiently, continuing to lower our cost structure and capturing future growth opportunities including strategic bolt-on acquisitions.

We are confident our leading global market positions, diverse customer base, high proportion of recurring revenue and consistent cash flow position us well to face this economic downturn.

Now I'll turn it over to Ron Mambu to provide you with some further details on the quarter and the year.

Thanks, Charlie.

I'll keep my comments brief so that we can get to your questions as soon as possible.

As Charlie indicated, we are very pleased with our 2008 results and believe our strong finish improves JBT's overall position entering 2009.

Looking back over the history of the performance of the businesses that are now part of JBT, 2008 represents record results for sales, earnings and operating cash flow.

Revenue at $1 billion was up 5% and would have been about 1 to 2 percentage points higher if not for the stronger US dollar in the last quarter.

Pro forma diluted earnings per share of $1.44 topped the high end of our guidance range of $1.30 to $1.40.

In addition to growing sales and earnings, our balance sheet also finished the year stronger.

Cash flowed from operating activities totalled $81.8 million and we closed the year with net debt of $142 million, approximately $8 million below the level discussed during our third quarter conference call.

This has strengthened our position as we enter 2009.

As I mentioned in the last quarter earnings call, the fourth quarter is traditionally the strongest quarter for our businesses.

However, due to the shipment of several large orders in the first half, 2008 seasonal pattern was very different from our normal pattern.

Additionally, some product lines were impacted by the global economic slowdown.

For the fourth quarter, consolidated revenue declined 19% and segment operating profit declined 14% versus the same period of 2007.

The pro forma diluted earnings per share for the quarter were $0.37 compared to $0.47 in the fourth quarter of 2007.

During the fourth quarter, we generated $11.7 million in cash from operating activities.

Turning to individual segment results, FoodTech revenue declined during the quarter versus the fourth quarter of 2007, largely due to some slowing in order activity in Western Europe and Latin America, timing of large project deliveries in the prior year and the translation effects of the stronger US dollar.

The second and fourth quarters tend to be the seasonal highs for FoodTech, however the shape of earnings in 2008 was different with stronger results occurring in the first half of the year.

We believe FoodTech and in fact, our overall earnings for the company in 2009, will return to our more typical historical trend.

Notwithstanding the lower fourth quarter sales, FoodTech earnings increased due to reduced cost levels and improved project margins.

Inbound orders received during the quarter were behind the prior year level by about 3% after adjusting for constant foreign exchange translation rates and the quarter's inbound was about even on a sequential comparison with the third quarter level.

Backlog, again adjusting for constant foreign exchange tranlation rates, is also about 3% behind last year.

In our AeroTech segment, record annual sales and earnings were driven in large part by our unusually high backlog going into 2008.

Here, too, our seasonal results in 2008 were different from the usual pattern of prior years.

Typically, AeroTech's results improve as the year progresses and we expect a return to the more typical pattern in 2009.

In the fourth quarter of 2008, AeroTech sales and earnings lagged the higher prior year results due to continued soft demand for our ground support equipment as well as some restructuring expenses in response to the lower volume.

Other AeroTech product lines continue to perform well including gate equipment and airport services.

AeroTech inbound orders and backlog were significantly behind the prior year level due mainly to lower levels of business in ground support business and the delay of the US Air Force Halvorsen order, which we received after year end.

To close out our 2008 comments, we would offer the following.

Our full year effective tax rate came in at 33.7%, which was lower than expected, mainly due to a different mix of foreign earnings.

While it is hard to predict the mix of foreign income, we do not expect to repeat the same mix in 2009 so we believe our effective tax rate will increase in 2009 to something more in the 34% to 35% level.

Additionally, as we have discussed, approximately 50% of JBT's revenue is outside the US.

The strengthening of the US dollar will negatively impact the translation of our earnings generated overseas in 2009.

Capital spending and depreciation and amortization for the year total $22.9 million and $25.5 million, respectively.

In 2009, we expect reduced levels for both capital spending and D&A.

Year end, JBT shares issued an outstanding totalled approximately $27 million 518 thousand.

Finally, I would like to offer some comments on our liquidity.

We believe we have more than adequate liquidity given our positive cash flow and about $140 million in cash and available credit.

Our year-end balance sheet does show a significant increase in long-term liabilities primarily associated with the year-end split and true-up of pension assets and liabilities with our former parent.

At the beginning of 2008, we were part of a fully funded US pension plan whose assets were heavily weighted towards equities.

That worked quite well until last year.

We are re-examining our asset investment policies and we expect to contribute $14 million to our US pension plan in 2009 funded from operating cash flows.

In summary, we posted record results in a difficult environment.

We continue to produce strong cash flow which funded the dividend payment to our shareholders, as well as a bolt-on acquisition last September.

We have sufficient liquidity to meet our expected cash needs and fund growth opportunities.

With that, we would like to take you questions.

Operator, please open up call for questions.

(Operator Instructions) Our first question comes from Arnie Ursaner with CJS Securities.

Hi.

Good morning.

Hi, Arnie.

Good morning.

How are you?

Good.

A couple of follow-ups, if I may.

First question is for Cindy or Ron.

When will you have your 10-K out with more detailed line items within your financials?

Arnie, we are trying to get that filed next week.

Our target date was the 11th, 12th, but if we can get it done earlier, we will.

I assume you don't want to go through all the line items like COGS, SG&A, R&D and other expenses on this call.

That would be preferable.

Okay.

Makes it a little hard building out the models.

Real quick question.

Pilgrim's Pride impact on the fourth quarter?

Was there a writeoff and where would it have been taken?

No, it was de minimis.

We had been working closely with Pilgrim's management in the months leading up to the bankruptcy and in fact, we are working closely with them now as we are one of their designated--I forget the legal term, key suppliers--critical vendor.

So we are shipping spare parts to them.

We had a little bit but it was very de minimis.

Again, it is very difficult to try and understand your SG&A line per se, but were there reversals of bonus accruals in the fourth quarter?

There were no reversal of bonus accruals in the fourth quarter We did have lower costs coming from some of our risk areas that benefited SG&A in both FoodTech and AeroTech.

Two more for Ron.

You mentioned the actual levels for Cap-Ex and D&A.

You mentioned in 2009 they would be lower.

Could you try to quantify your D&A and Cap-Ex at this point?

Well, for 2009 we expect they will be lower.

I'm thinking, Arnie, in the 10 to 15% level.

10% to 15% lower?

Correct.

Thanks.

My final question.

I know you spent a great deal of time in your prepared remarks speaking about the unusual patterns you had in quarters in '07 and '08 and obviously I think you are trying to head us in a direction for the first quarter.

So we are at $0.11.

The other bulge bracket firm that has a published first quarter number is at $0.19.

Which one is closer?

We are not going to forecast quarters.

I will say we have got good visibility next four to five months and as we sit here at this point in time, I would say we look not dissimilar to 2007.

The problem is the economy may not be the same for the whole year this year as it is in 2007 which is why we want to see the inbound for the next couple of months.

Okay.

I'll jump back in queue.

Thank you.

Thanks.

Our next question comes Liam Burke from Janney Montgomery Scott.

Good morning, Charlie.

Good morning, Ron.

Hi, Liam, how are you?

On the AeroTech side, your margins came down considerably.

In that expense line was a restructuring charge.

I know you don't want to go into the expense items line-by-line but generally, how much did it affect your operating margins?

It was under $1 million and probably a little under $0.02 a share.

And then on the FoodTech side, operating margins stepped up 400 basis points.

You mentioned in the release project costs and expense cuts.

Is that a sustainable ongoing cut or is it something that we can't look at going into next year?

I don't think that's a sustainable number.

It is one of these quarters where all the arrows turn the same way.

I mean, everything in terms of mix, after market, in the fourth quarter of '07 which had large projects and when you have big projects, you have a lot of pass throughs so your margins get hit a little bit.

We didn't have any giant projects in the fourth quarter.

We had a good aftermarket quarter.

We had some cost recovery from the parent on spin.

We had a whole litany of things that all went our way.

So we were very happy obviously with the operator results for FoodTech overcoming the decline in revenue.

But that's too high a number for ongoing basis.

Great.

Thank you.

(Operator Instructions) Our next question comes from from Arnie Ursaner with CJS Securities.

Going back to the pension item, obviously, you went from--a very sizeable jump which we at least had an inkling was coming.

You mentioned $14 million of funding in '09.

How will that run through the P&L?

How should we think it will run through the P&L?

Arnie, the $14 million we expect to fund in '09, we expect to source that through our operating cash flows and it will be a reduction of our obligation that's on the balance sheet.

In terms of the P&L, just to give you a sense of how this works, we are expecting about $2 million, maybe $2 million to $2.5 million more in expense running through the P&L in 2009 than in 2008.

When you see the 10-K and get into the details of it, you'll see that in '08 we had about $6.4 million of expense related to our global pension plans, US, non-US.

And to that $6.4 million you can add $2 million to $2.5 million to what we are thinking of in '09.

Charlie, can you give us a feel for--many industrial companies that require the customer to make a decision have seen a fairly dramatic stop almost in their business.

Can you give us a feel for how the trends of your business have sort of gone monthly since October?

And do you also sense that you have a fair number of customers that have a need they have expressed to you, have indicated they would like to express an order but just haven't placed the order yet?

Can you give us a feel for what I would almost call a shadow backlog?

This is clearly an anecdotal comment.

The one change, since going back four or five months ago, that were in my prepared remarks, when Western Europe really turned down in the fourth quarter and so we have got projects where the conversation is still going on but orders we thought might have been in backlog by now are not in backlog in the FoodTech area.

We have had a couple orders in AeroTech where they say we want to order but you know what, we are going to wait nine months.

So anecdotally, around the edges, we are seeing some delay.

We are also seeing some big project activity and it is related to cost reduction.

I know Western Europe is soft but we are in discussions with a major customer in Western Europe that supplies a restaurant chain and they are looking at a big project which would dramatically lower their costs which would be all our equipment.

So to a degree, we are serving value add and cost reduction.

That's keeping us in our customer's minds.

Just again, maybe expand a little bit.

I'm sure we will get more detail at a later date.

In FoodTech, the margins obviously dropped quite dramatically in the fourth quarter.

Were there any nonrecurring or unusual contracts that led to that?

Was there any specific team you would highlight that led to quite sizeable jump in the fourth quarter in margins?

Well, as I said before, it was four or five things that all turned the same way.

Some of them can--the revenue was reduced but my after market as a percent of the total revenue was higher, as you know, that is a more profitable mix of business.

I had mix working for me which can vary quarter by quarter.

We didn't have a lot of the big projects which a lot of times will have a lower margin because you have pass through of supply with not much margin on the auxiliary equipment that makes a richer mix.

We did have some one-time events related to some spin-off expenses that we were able to recover in terms of making the final true-ups with the parents which impacted the income statement.

So it was a litany of things.

As we think about '09, you obviously separated away from the parent.

They were providing some services for you in '08.

Is that process completely behind us and are you on a complete standalone at this point and are there still some services they are providing?

It is largely gone, Arnie.

There were a few that are converting and we would expect to have converted in the first half of this year.

But, you know, I'd say 90%, 95% of it we are on our own.

Okay.

Self-sufficient.

More conceptual for Charlie.

Obviously, you were part of a much larger company.

The cash flow you generated went back to the parent to help them grow but now your stand-alone entity in a highly fragmented industry with, as you say, pretty good flexibility to pursue opportunities.

Can you tell us a little bit about the excitement you're seeing in the space?

How you're thinking about acquisitions and whether you're targeting certain things, what sort of dialogues you're having as an independent company in a fragmented industry?

I'm not as positive as Warren Buffet was the other day in his call about being a mosquito in a nudist camp.

We are not that positive.

We think there is going to be opportunities out there and the big issue--we are trying to rebuild both on acquisition pipeline.

I think the big change from last year, or say from nine or ten months ago, is we want the seller's price expectations to adjust.

So the good news is we have got liquidity to pursue some bolt-ons but in this environment, I should be able to make good buys.

We want to be very disciplined.

We haven't abandoned our plans to build a pipeline.

We are working on some things right now.

Okay.

Thank you.

Our next question comes from Dick Ryan with Dougherty.

Good morning.

I think I caught the increase in recurring revenue in each segment on a percentage basis.

I think you provided that but could you give us the absolute amount on both sides?

Well, we can dig at that for a minute.

I think the recurring revenue overall for us in '08 was still in the 36% revenue, right, Cindy?

FoodTech year-over-year recurring revenue grew, after market grew 11%, AeroTech's grew 17%.

Appreciate the comments on the acquisition front.

Is there anything in the new product pipeline that we should be paying attention to this year?

There are a few things.

I probably don't want to talk about them on this call but there are a couple of product areas.

One of the things we are doing to try to be--judicious or cautious, is we have got a couple of new products we know there is going to be demand for but we are kind of waiting to do the development until we get a customer order as opposed to--as we manage our expenses.

But nothing--there is no home run kind of things but incremental improvements especially in the food solutions area.

Okay.

Thank you.

Our next question comes from Soundpost Partners

Hi, guys.

Thanks for taking my question.

I was a little surprised on sort of the inbound on the AeroTech side.

I think Ron mentioned on the 25-K loader program that $28.3 million was deferred until the beginning of January so that didn't get recorded I guess.

But sort of for the normalized basis what do you guys expect?

I know you said 2007 was a little bit of an outlier, just trying to get some sense around there and then I had a follow-up question on the same topic.

On the--part of what happened this fourth quarter not only did we not get the Halvorsen by year end we also had a couple of Jetway orders that slipped.

We haven't announced them.

We have the contracts but we don't have permission from the customer.

We had in the order of probably $20 million of Jetway business we thought would be in by year end and it wasn't but having said that, the ground support equipment product line, I hope I got across the point that is the single biggest impact we have in the company in this downturn.

That is the largest product line AeroTech so that inbound you see is directly related to the largest product line really declining a lot.

I don't know if you have any comments sort of ongoing?

Any comment I would make is just go back to one of Charlie's comments about the other product lines in AeroTech positioned well.

Our passenger boarding bridge and airport services that they are going into the year with reasonable backlog that ground support equipment is where we see the difference.

And the GSE is primarily funded through the airlines or through the airport authority?

It's mostly airlines and freight companies and also ground handlers.

The airlines are sometimes outsourcing the loading and de-icing or the pushback trackers to a ground handler.

So we have airlines, international and US, buying it and ground handlers and FedEx, UPS, big freight guys.

All segments are off in terms of ground support equipment.

People are just delaying capital spending in those areas and we have to wait and see.

As Ron mentioned, part of the reason we are hesitant about the year, we actually have really encouraging backlog and order activity in the rest of AeroTech.

And so we are uncertain how long--whether that will just be a delay or whether we will shape up and be fine for the year.

And I'm involved with all these states and municipalities facing budget crunches.

Are you seeing push backs on--

We are seeing push backs on pricing foresure in the service sector.

One comment I should have made on backlog.

We are very disciplined what goes in our backlog.

If it's in our backlog we not only have a signed contract, we have a letter of credit, we have the financing.

So we don't put letters of intent or we don't put--it is a real order if it is in our backlog but some things that are not in our backlog, are for example in the airport services area, where we have multi-year contracts, many of those contracts the customer has a right to give 90 days notice and we think it is misleading to put seven years worth of backlog in there so I might have have a contract worth $40 million over multi-years but we don't put all of that in the backlog.

So that's one of the faster growing areas of AeroTech and we only reflect 90 days of backlog at a time in that sector.

So going back to--you were saying you were seeing some push back on pricing I guess but generally speaking--I mean, are they, I guess it is hard to say at this point but something like -- you say the Orange County California airport, how much -- I think it was $13 million or $15 million or something that you guys--if there are budgetary problems out there how does that sort of play out?

The funding for this actually comes from the airport authorities charging whatever fees and taxes they are charging for using the services, correct?

Yes, that's typically correct.

But I think your point is well taken but it is actually in some ways a positive because as the airport authorities and municipalities are under pressure, that is what's driving this outsourcing.

They are coming to the conclusion that we recognize that we are not very efficient, we don't manage this very well, why don't we outsource the maintenance of bridges and baggage systems and highback as opposed to us trying to do it as a municipality.

So that--is there price pressure because everybody is doing a budget crunch?

Yes, but it is also a big positive in terms of the growth of this market due to that same issue.

Great.

I will jump back in the queue.

Thanks.

There are no further questions at this time.

I will now turn it back over to Cindy Shiao for closing remarks.

This concludes our fourth quarter conference call.

A replay of our call will be available on our website early this afternoon.

If you have any further questions, please feel free to give me a call.

Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.