JBT Marel Corp (JBTM) 2010 Q3 法說會逐字稿

Good morning and welcome to JBT Corporation's third-quarter 2010 earnings conference call.

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

At this time 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 JBT's Director of Investor Relations, Ms.

Cindy Shiao, to begin today's conference.

Thank you, Sarah.

Good morning and welcome to our third-quarter 2010 conference call.

With me on the call are Charlie Cannon, Chairman and CEO, and Ron Mambu, Vice President and CFO.

After their prepared remarks we will take your questions.

Before we begin, I want to remind everyone that the forward-looking statements in today's call are subject to the safe harbor language in yesterday's press release and 8-K filing.

Our 2009 Form 10-K also contains information regarding certain risk factors that may have an impact on our results.

These documents are available on our investor relations website, as are a reconciliation of non-GAAP financial measures that we may refer to with their corresponding GAAP measures.

Now I will turn the call over to Charlie.

Thanks, Cindy, and good morning, everyone.

Heading into the third quarter we were cautiously optimistic about our outlook, and our results came in a little better than we expected.

Both sales and earnings were up 10% year over year.

The favorable results were driven largely by the product lines most significantly impacted by the global recession -- freezing, protein processing, and ground support equipment.

Demand levels for these product lines remains strong, underscoring the strength of our market position and a positive signal that our end markets are continuing to recover.

During the quarter, orders increased by 19% year over year, while backlog grew 31%.

Diluted earnings per share were $0.32, a 10% improvement from the prior-year quarter.

Now, let me provide some commentary on the business environment of each of the two segments.

First, JBT Food Tech.

In the third quarter, as I mentioned, order activity for our freezing and protein processing product lines was strong.

In Europe, Germany continues to lead the recovery with one of the best years for inbound every recorded in that country.

Order activity in the UK and France is also improving.

Eastern Europe and Middle East markets are also active; however, Italy and Spain continue to be soft.

As for the North American market, the poultry segment was a bright spot, which helped drive the year-over-year inbound.

Most of the orders were motivated by the need to improve labor efficiency.

Our poultry customers are steadily increasing production in anticipation of growing demand, both for domestic and export markets.

Although corn prices have recently increased significantly, poultry prices are holding up.

Most poultry processors are hedging raw material purchases, which may mitigate some of the negative impact for our customers.

We are optimistic that this segment over time will return to historical spending levels.

Asia-Pacific continues to be active, while sales in Latin America are improving, albeit from a small base.

The merger between two of the largest poultry processors in Brazil is still pending.

We do not expect a significant improvement until this merger has been approved by the Brazilian authorities later in 2011.

Overall we are pleased with the continuing recovery in freezing and protein processing.

We expect the current activity levels for these product lines to carry into next year.

Turning to fruit processing, in 2010 this product line was hit by an 18% lower Florida orange crop.

Additionally, the oversupply of tomato commodities substantially reduced capital investments by our tomato processing customers.

Although we were able to offset some of the falloff, our 2010 performance has been negatively impacted.

To align our costs to the lower demand levels we have implemented a temporary furlough program in the fourth quarter in tomato processing.

Looking forward, the USDA is forecasting a 9% increase in the Florida orange crop for the next season.

And in regards to tomato production, a significant supply correction is underway.

Overall, processed tomato output is forecasted to be 15 to 17% below last year, and as a result, commodity prices have improved over the past few months.

This bodes well for our customers and, in turn, the future demand for tomato processing equipment.

Moving to the sterilization product line, activity levels are slowly improving, particularly in Asia and the Middle East.

Lastly, Food Tech aftermarket volume increased 8% year over year.

In summary, our outlook for Food Tech's full year 2010 remains unchanged.

We expect Food Tech revenue and earnings to grow modestly year over year, primarily driven by the improved market conditions in Europe and North America for our freezing and protein processing product lines.

Moving to JBT AeroTech.

Third-quarter inbound for ground support equipment doubled from the prior-year level.

We received two large deicer orders totaling over $20 million, which contributed to the increase.

Backlog is the highest since the third quarter of 2008.

Air travel and air freight volume grew 7.9% and 26.6%, respectively, through August.

Air freight volume is now above pre-recession levels and near the pre-recession growth rate.

Just recently the International Air Transportation Association, or IATA, significantly increased its 2010 forecast of airline industry profitability from $2.5 billion to $8.9 billion.

However, for 2011 IATA is forecasting increased pressure on load factors and yields and an industry profitability of $5.3 billion.

The good news for the industry is the significant turnaround from the losses endured in the last two years.

As a result, we are cautiously optimistic that our ground support equipment product line will continued its upward trend, reflecting the improved business environment for many of our AeroTech customers.

Turning to gate equipment, inbound continues to be very strong.

During the quarter we received three large orders totaling over $21 million.

We recently announced two large orders for airports in Canada and Columbia and our prospect list remains healthy.

In August we celebrated the grand opening of our AeroTech facility in Shenzhen, China.

This enhances our manufacturing capability in the region and provides further growth opportunity in developing markets, enabling us to pursue some international opportunities which were not open to us in the past.

We expect the current high level of activity to moderate in the coming months, but remain at or above historical levels.

As for airport services, our sales have flattened, as the outsourcing trend has slowed.

Additionally, we continue to see a highly competitive pricing environment in our service business.

Moving to the Halvorsen program, we have started delivery for the US Navy contract in the fourth quarter and this will continue through the second quarter of next year.

Our goal is to secure additional orders to keep the production line open and we are actively pursuing several international orders.

Finally, AeroTech's traditional aftermarket volume for the quarter increased 17% year over year, reflecting the improving industry conditions.

In conclusion, our outlook for full-year 2010 AeroTech results is unchanged.

We expect JBT AeroTech's revenue to grow modestly, with improved earnings driven by the ground support and gate equipment product lines, partially offset by lower Halverson volume and continued pricing pressure in airport services.

To recap, we continue to see improvement in our order rates.

Based on our year-to-date performance and the third-quarter backlog, we have narrowed our full-year earnings guidance to $1.20 to $1.28 per share, with the fourth quarter expected to be our strongest quarter in the year.

The full-year range for EPS reflects the potential timing impact of fourth-quarter shipments.

Now I'll turn it over to Ron Mambu to provide more detail on our financial results.

Thanks, Charlie.

As Charlie mentioned, we're pleased with our third-quarter performance.

Revenue of $217 million increased 10% from the prior-year quarter and EBIT margins improved slightly.

Diluted earnings per share of $0.32 came in a little better than we had expected, up 10% from the same period last year.

Both inbound and backlog improved year over year by 19% and 31%, respectively.

Net debt at the end of the quarter was $133 million, up $8 million after a $10 million contribution to the Company's US pension plan.

I'll now comment on our segment operating performance, then corporate items.

For the quarter, Food Tech revenue of $125 million increased 9% year over year.

This improvement was largely driven by strong performance from our freezing and protein processing product lines.

These gains were partially offset by lower revenue from fruit processing equipment, mainly due to lower tomato production and softer demand in the sterilization equipment product line.

Food Tech's operating profit was $11.9 million, up 14%, and operating profit as a percent of revenue increased 40 basis points to 9.5% as the higher volume helped leverage fixed expenses.

The impact from foreign currency translation associated with exchange rate fluctuations was minimal for the quarter.

Food Tech's third-quarter inbound orders increased 2% versus the prior-year quarter.

This was driven by continued strong demand for the freezing and protein processing product lines.

For example, European inbound orders grew 14% year over year and were the highest since the second quarter of 2008.

Food Tech's backlog of $117 million is up slightly on a sequential comparison, but down 10% versus the prior-year quarter due to several large projects which were inbounded in 2008 and weren't shipped until the fourth quarter of 2009.

Moving to AeroTech, revenue of $87 million increased 11% from the same period a year ago.

This was driven by the ground support and gate equipment product lines, reflecting higher order activity from prior periods.

AeroTech operating profit of $6.1 million increased 11% from the prior-year quarter.

Margins in ground support equipment continued to improve, reflecting higher sales volume and the benefit of lower costs from the past restructuring efforts.

However, these gains were partially offset by unfavorable product mix due to lower revenue from higher margin Halvorsen orders, loaders.

JBT AeroTech's third-quarter inbound orders continued to grow with a year-over-year increase of 47%.

The most notable increases were a 67% increase in ground support and a 53% increase in gate equipment.

During the quarter we received five large orders, as Charlie mentioned.

As a result of the favorable inbound trend, AeroTech's backlog was up both sequentially and year over year by 10% and 70%, respectively.

Now regarding corporate items -- our third-quarter tax rate of 34.8% included a favorable true-up adjustment related to filing our 2009 US income tax return.

Excluding this adjustment, our tax rate for the quarter was higher than previous quarters due to a greater mix of income in higher tax jurisdictions.

As a result, we are adjusting our guidance for 2010 full-year effective rate to 35 to 36%.

Total corporate items, excluding interest, were $300,000 higher versus the prior-year period, primarily driven by corporate staff costs.

For 2010 we expect total corporate items, excluding interest, to be 5 to 10% lower than 2009, assuming no significant foreign exchange movement.

Year-to-date capital spending and depreciation and amortization for the quarter were $13.4 million and $17.1 million, respectively.

We anticipate fourth-quarter spending to be higher than the year-to-date average, reflecting timing of expenditures on some projects.

As a result, we expect capital spending for 2010 to approximate the prior-year level.

Finally, on a year-to-date basis operations generated $2 million in cash from operating activities after a $10 million contribution to our US pension plan in September.

Net debt was $133 million, an increase of $8 million from the second quarter of 2010.

At the end of the third quarter we had $13 million in cash on hand and about $129 million in available and undrawn credit lines.

We plan to file our 10-Q tomorrow, so there will be more detailed information readily available for your review.

In summary, we are very pleased with our operating results and order activity in the third quarter.

Our end markets remain steady and show no signs of softening or of a double-dip decline.

We narrowed our full-year EPS guidance range to $1.20 to $1.28, which is indicative of a strong fourth quarter, up significantly both year over year and sequentially.

With that, we'd like to take your questions.

So, Sarah, please open the call for questions.

(Operator instructions.) Liam Burke; Janney Capital.

Ron, you touched on gross margins with a lower mix of Halvorsen.

Gross margins overall were down 150 basis points year over year.

Was Halvorsen the major contributor to that?

Yes, I think Halvorsen -- we had a couple of headwinds, but Halvorsen was a significant one.

Halvorsen has one of the highest, if not the highest, gross profit margin in the Company and we shipped no Halvorsens in the third quarter versus about 10 in the prior-year quarter.

So I think you hit the head on the nail on that one.

We had a couple of other headwinds, Liam.

The citrus crop in Brazil this year was a single bloom, and so the entire processing season was -- all the crop was processed in about, I don't know, 60% of the normal length of time of a season.

And what that means was all the extractors were running at higher run rates, which use more spare parts and strong currenc- -- we had headwind in margins in citrus as well due to costs.

So we had -- there's two or three other little headwinds, but Halvorsen's probably the biggest.

Looking forward we will have some shipments of Halvorsen units for the Navy in the fourth quarter, which is part of what we see in the fourth quarter and part of what we see helping our margins and earnings in Q4.

Great.

And it sort of ties into my next question.

It looked like inventory levels, working capital generally, was up in the third quarter, which should have held down cash flow.

Are there several projects due to ship in the fourth or first quarter of next year?

Liam, as we've said many times in the past, in Food Tech, when the inbound orders go up we get more advance payments and working capital improves.

AeroTech is more of an average working capital performer, we call it, and they behave in the normal manner.

So when we have this tremendous rebound, positive rebound in inbound orders, the dark -- that's the silver lining.

I guess that I'm confusing my metaphors, but the darkness to that cloud is we do suck up working capital to ship all that volume.

So as we look ahead on our cash flow -- the working capital swings year over year provide the biggest variability to our cash flow.

So last year when the downturn -- of course AeroTech was throwing cash off the balance sheet.

That was probably one of the single biggest cash contributors.

This year it's the single biggest cash user as we ramp up with this wonderful inbound we're getting.

So I think for the year the question's going to be how fast we can turn inventory into receivables into cash.

And we feel very, very good about our cash generating capabilities.

Nothing's really changed in that regard.

But the calendarization of how you keep score, it'll be a mad dash to the end to see if we can hold cash flow positive for the year.

But Ron and I aren't losing any sleep over cash flow.

I'll put it that way.

Great.

Thank you.

Robert Wertheimer; Morgan Stanley.

This is Joe O'Dea for Rob.

On acquisitions, could you just talk about in this quarter if you saw any improvement in bid/ask spreads?

And then also, how you maintained the balance between sort of price discipline versus kind of executing on strategic growth objectives.

Well, I said in previous calls the fact we haven't done very many acquisitions since the spin is probably my biggest single disappointment since we've been public.

And I don't -- I'll let Ron comment as well, but we've looked at several things this quarter where we just can't believe the price expectations.

And I think part of what's driving it is the cost of money is so cheap.

I don't know if it's another bubble or not, but the private equity guys -- some of the recent deals we've seen in terms of the multiples being paid certainly are a lot higher multiple than I'm trading at.

So we're trying to stay disciplined on -- you want to add anything to that, Ron?

I don't think I can add much to that.

We continue to look.

We're not going to comment on any specific activities, but we continue to maintain a very disciplined approach towards our analysis and expectations from acquisitions.

Okay.

And then second question is just on AeroTech.

With backlog over a couple hundred million in both 2Q and 3Q now, you get a lot of top-line support.

But on the margin side if we go back to 2008 when AeroTech revs were over $100 million each quarter, margins still ranged from sort of 7 to 10%.

So as we head into the fourth quarter and next year, what do you think about that sort of variance between margins quarter to quarter and sort of where are you targeting?

The prior-year quarters that you're referring to, of course, had the benefit of the Halvorsen program in higher gear.

The program for the US Air Force completed earlier this year.

And we do have a program, much smaller program, for the Navy that will start in the fourth quarter and continue into next year, which will help the year-to-year comparisons.

But apart from that, improving margins is a key activity, a key incentive for us, and it's something that we're very focused on.

But I don't think I'd want to comment too much on what we specifically expect for next year.

We are seeing higher margins in our ground support equipment line coming off of depressed levels last year, and leveraging off of some of our cost reduction efforts.

Yes.

We've always said that we're largely variable.

But we do have some leverage and I think you'll see it in the fourth quarter.

With that backlog you're referring to for AeroTech we anticipate that our margins in AeroTech in the fourth quarter will be the highest in all the quarters of the year.

And I think we said the last call that we hope that both segments will be at or slightly above margins for the year, which implies that the fourth quarter is going to be pretty good.

Okay.

Thanks very much.

Jason Ursaner; CJS Securities.

Just for the guidance, obviously you just said Q4 should be pretty good and the implied range says that.

But it's a pretty wide range, given your backlog and the level of recurring revenue in your business.

Can you just talk a little bit about the difference between the high end and the low end of your outlook?

Well, I -- maybe we're cautious, but the reason we've got that range in there is it's a big quarter.

And as we look at the shape of the quarter, it's a big December.

And so the point at this point in the year, when you've got basically eight weeks left in the year, is we have to execute and we've got to execute flawlessly to ship pretty large volumes.

So I think what we're saying is if we slip several orders in December into January we'd be at the low end of the range.

If we can do everything we should do for our customers by contract date we'll be at the high end of the range, so.

I hope -- I mean, the spread in that range is a couple million of EBIT, basically.

Right.

And then I've got -- just staying with that, inbound seems to be holding up pretty strong.

But obviously there's been fewer press releases.

Should we assume that this is the continuation of a small ball, but it's a positive change in terms of order flow with some of the caution from customers maybe beginning to flow to orders?

Well, the -- first of all, I don't know what you call the between small ball and big ball, but we're -- in Food Tech at January 1 of this year we didn't have a single order in our backlog over $5 million.

And in previous year, of course, we had several projects in double digits.

We do not have the return of the $18 million, $12 million big projects, but we have been seeing larger projects in Food Tech in the 3, 4, 5, $6 million range, which is gratifying

On the AeroTech side, we've had quite a few press releases and you can see the booming turnaround in AeroTech, both in ground support equipment and gate equipment.

So that feels good.

So I think it's -- I was hoping my remarks would make this point -- we are feeling better.

When we were worried three or four months ago was it going to be double dip, et cetera, right now on all the product lines that were most severely hit, they have all rebounded.

And they -- currently today the order rates activity levels look solid.

Right.

And I guess I'm just wondering, as you start to see some of these larger opportunities, what does that do to margin?

And obviously, the bigger projects you pull in some third-party components.

But just in terms of margin for next year you said you didn't want to comment specifically.

But is the year-over-year growth excluding the benefits of the pension service costs at the segment level?

Or is it really more of a flat year-to-year-ish?

I'm not sure I -- we're not going to comment too much on next year.

We actually have our budget meetings for next year, which I haven't seen anything, in about a week and a half from now.

But I will say that the way we're paying the management team a third of their annual bonus is based on margin percentage.

So it's definitely top of mind and we've got a lot of products -- projects to improvement.

When you look at margin for a given year, there's lots of moving parts.

And we had some wind at our backs on some things like the pension freeze.

And then on the other hand, we had some wind in our face like the Halvorsen loaders.

So there's lots of moving parts on margins, but overall we're focused on trying to walk them up year over year.

Okay.

And the mark-to-market hedge accounting on the foreign exchange, is there something about Q3 seasonally that causes more exposure?

The larger mix percentage of South American juicing or is it really just coincidence that I guess year over year these both had larger impact?

Yes.

The hedge gains year over year are pretty much in line, as well as for the quarter and year to date.

It's really hard to identify much seasonality in the hedging results.

It's more a function of the forward rates and how they move.

So I wouldn't associate a lot of seasonality with it.

Okay.

And then just lastly, with the pension contribution out of the way, what are priorities for cash now?

Obviously, you talked about acquisitions.

The prices are a little high.

If you can't be making acquisitions what do you think you could do with the cash?

Well, we going to -- we said before that our first priority is bolt-on acquisitions and our second priority then is to continue to pay down debt.

Okay.

And in terms of CapEx, the -- I know you -- we [picked] a facility I think in Florida.

Is that still up in the air?

Or is it out of the picture, in terms of 2010?

It's probably out of the picture for 2010.

It's probably more of a 2011 item.

Eleven and '12, probably.

Right.

And what might the cost of something like that be?

We're still sharpening our pencils on that.

And the reason it slipped through 2010 is we didn't like the initial numbers.

So we sent everybody back to the drawing board and we're working with -- to look at different options for whether we rebuild in place or whether we go offsite, et cetera.

We're looking for the most cost-efficient solution to our facility issue there.

Okay, great.

I'll jump back in the queue.

(Operator instructions.) Michael Saloio; Sidoti & Company.

I was wondering if you could comment a little bit on the airport services business in the quarter and has your outlook changed for that business since the comments you gave after 2Q?

Yes, I would -- first of all, let me start by saying we still like this business.

It's -- we're under -- there is some price pressure and the growth rate on the top line has slowed.

We started this thing about seven years ago and enjoyed double-digit top-line increases as the market grew due to this outsourcing trend.

What we've seen is, we don't feel like we've lost share, but what we've seen is a sudden slow.

Now, we see a couple drivers.

One is these major mergers of US airlines, whether it's Delta/Northwest or United and Continental.

As you can imagine, their programs to outsource things take a lower priority than getting integrated and figuring out who's on first.

So we think that the outsourcing trend by airlines is probably going to stall for awhile.

And then we see the airport authorities, a lot of them are reviewing the bidding, given the local situation in labor unions, et cetera.

So I -- right now it appears the outsourcing trend has kind of stalled the growth trend.

So it's kind of -- so our revenues have flattened.

I still believe in the long-term growth rate of this -- because I think the economics are compelling, that if they continue to outsource they can provide those services more efficiently and more cost effectively than trying to do it themselves.

And so, but right now, I think probably the, I would say, next year or two we might -- we're not going to see a lot of growth here.

And even though I mentioned price competitive, all we're trying to say is year-over-year quarters, because it's still good margins.

And it requires very little capital and the EBIT margins are fine.

It's just they're not as fine as they were a year ago.

Okay.

Second question is on municipalities as it relates to the Jetway business.

Can you give us an update on how much Jetway business is in the backlog now, and if you could look past what you've already stated in 2Q?

I'm not sure I followed you there, Mike.

I'm trying to figure out how much Jetway business is currently in the backlog right now and what the demand looks like going forward as municipalities continue to see pretty significant deficits.

I don't think we give specific backlogs by product line, but you can infer it's a healthy piece of the AeroTech backlog, is Jetway.

And I would say -- I don't have a percentage in mind, but I'm -- was it about -- about half of the Jetway backlog is for 2011 and beyond.

So I would say Jetway looks pretty solid as far as we can see via the backlog.

Another way of looking at it is the Shenzhen facility, which we're now producing bridges at, is basically I guess the term would be sold out through middle of next year.

So Jetway looks healthy as far as we can see.

I think the comments were it's been booming and we don't think it'll continue to boom, but it's still going to be at historical levels going forward.

Okay.

That's it for now.

Gary Farber; CL King.

Just had one question.

In the downturn you took a lot of costs out quickly.

I'm just wondering, as things are upturning here have you been adding any kind of, not so much people, but any kind of infrastructure or do you think there will be the need to add additional infrastructure if demand keeps heading in the right direction?

I don't think we'll need infrastructure like bricks and mortar.

For sure we don't need that.

We are adding back resources, for example, in ground support equipment, but primarily direct labor.

And what we're trying to do is be as sticky as possible in adding any fixed overhead compositions.

If we ran into -- if things continue to boom back, the constraint that we'd run into is technical resources, which are engineers and tech resources.

But right now I don't think we feel like we have a problem with that.

If you're looking for the -- the one constraint we've felt a little bit here with this booming rebound in AeroTech is getting the supply chain reenergized for ground support equipment.

And that does point a little bit to our comments about the range for the year.

As ground support equipment has boomed back, it has been a little -- it's been challenging to get the supply chain rolling to get your assembly lines rolling and get your fabrications and your suppliers to ramp up with you.

So that's more of a constraint than any of our own bricks and mortar.

Great.

Okay.

And then just one other question -- your R&D expense was not meaningfully more than I had budgeted, but a little bit more.

I'm just sort of wondering, is that the normalized rate going forward?

And is there anything sort of different going on at R&D?

Well, I don't think there's anything major going on at R&D.

There was a little bit of rebound in our food solutions.

We cut back and delayed some programs in the downturn in food solutions.

And now that they're rebounding back we've got customers wanting certain develops and we're ramping back to work on.

But I don't think there's a major shift there.

Right.

Okay, thanks.

[Raoul Jadoff]; JVD Corp.

This is Raoul Jadoff from JVD Corporation and (inaudible), student.

Wanted to know, Ron, you mentioned about the difference in working capital between Food Tech and AeroTech.

Now that the airline industry is doing a little better and you're talking about the booming inbound than the last year, do you expect a higher working capital in AeroTech?

Yes, that's pretty much what we've seen.

In Food Tech we draw larger advance payments with our orders than we do with AeroTech.

And as the AeroTech orders have significantly increased, you can see that showing up in our working capital and cash flow.

And as Charlie said earlier, we have a large fourth quarter and push on to convert what you see now in inventory to receivables and then cash.

But the cash flow is such a calendar point in time measurement, we're hoping to get that in by the end of December.

But if it doesn't fall in December it'll be the first part of next year and we still feel very comfortable with the cash generating capabilities of the Company.

All right.

Thank you.

At this time there are no further questions.

Ms.

Shiao, do you have any closing remarks?

Thank you, everyone, for joining us on the call this morning.

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

A replay of our call will be available later this morning.

Have a good day.

This concludes today's conference call.

You may now disconnect.