JBT Marel Corp (JBTM) 2011 Q1 法說會逐字稿

Good morning and welcome to JBT Corporation's first-quarter 2011 earnings conference call.

My name is Regina, 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 will now turn the call over to JBT's Director of Investor Relations, Ms.

Cindy Shiao to begin today's conference.

Thank you Regina.

Good morning, everyone, and welcome to our first-quarter 2011 conference call.

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

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 2010 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.

Now I would like to turn the call over to Charlie.

Thanks Cindy.

Good morning everyone.

I'm pleased to report another quarter of solid results.

Both revenue and earnings came in higher than we expected.

For the quarter, sales were up 19%.

Operating income was up 18% while earnings per share increased 21%.

This improvement was primarily driven by our AeroTech business, reflecting the strong backlog at the end of 2010.

As I have mentioned in previous calls, the first quarter is typically our slowest quarter of the year.

Inbound orders declined 12% primarily due to the receipt of three large AeroTech workers totaling more than $41 million in the prior-year quarter.

Backlog was up 5%.

Before I delve into the outlook for our segments, let me first comment on recent global events as they relate to JBT.

First, regarding the political turmoil in the Middle East and North Africa, this region represents only about 4% of our total revenue.

Quoting activity in the region remains high, and on balance our business has not been meaningfully affected at this point, but we are experiencing some order delays for freezing systems in Egypt.

In regards to recent disasters in Japan, this country is not a big market for us.

Many of our customers are located in southern Japan, and therefore have not been significantly impacted.

We continue to wish the people of Japan well as they recover from the epic human and economic losses that accompany these disasters.

Now, I'd like to provide some commentary on our two segments.

First, demand for JBT FoodTech freezing and protein processing product lines remained strong during the quarter, driven by Western Europe and Asia Pacific.

Germany continues to show a high level of activity following a record 2010 in both inbound orders and sales.

Activity in the UK is accelerating with several near-term projects in the bakery and protein segments.

Eastern Europe is also active.

However, Italy and Spain remain very soft.

Asia-Pacific continues to be a good market.

We recently announced an order of more than $6 million from a large poultry processor in South Korea.

We expect order levels to remain strong in this region throughout the year.

The Latin American market continues to slowly improve with primarily smaller freezer projects.

Moving to North America, the poultry segment was active.

Inbound orders for the quarter increased both year-over-year and sequentially, reflecting continued investment by our major poultry customers to improve operational efficiency.

However, corn prices climbed another 21% in the quarter while poultry prices increased by just 2% over the same period.

The USDA recently raised its estimate on corn usage for ethanol in 2010 and '11, which supports a forecast for continued higher corn prices.

With feed making up approximately 60% of poultry producers' costs, we are beginning to see some project delays.

But it is still too early to tell whether this recent softening in demand will become a trend.

In this environment, poultry processors are put putting a premium on cost reduction initiatives to offset the impact of high input costs.

This should provide opportunities for JBT, given our long track record of providing solutions that help our customers improve their productivity.

In summary, we are cautiously optimistic the strong order activities across most regions will more than offset the current soft poultry demand in North America and support year-over-year improvement for freezing and protein processing in 2011.

Turning to fruit processing, in April, the projection for the Florida orange crop size was revised upward to 142 million boxes, an increase of 6% over the last season.

Additionally, the Florida Department of Citrus is forecasting an average crop size of 140 million boxes over the next ten years.

Brazil is also forecasting a 10% increase in its orange crop size versus the prior season, the first in three years.

This is welcome news for the industry and for JBT as well.

We are also encouraged by a robust prospect list for fruit processing equipment, reflecting the strong global demand for fruit-based drinks.

Moving to the sterilization product line, we are off to a very slow start, particularly in the US as the industry absorbs capacity added during 2009 and 2010.

Although we have a good level of interest across all international regions, we are seeing canning customers postpone purchase decisions which may delay orders into the second half of this year.

FoodTech aftermarket volume for the quarter increased 7% year-over-year.

First-quarter inbound orders and backlog remains steady, but we expect to see increases as we move through the year.

As a result, we anticipate continued FoodTech revenue and earnings growth in 2011.

This will be driven primarily by improved market conditions in Europe and Asia-Pacific for our freezing and protein processing product lines.

However, given the foreign exchange and commodity headwinds, we expect margin to be flat for this segment.

Moving to JBT AeroTech, overall order activity remains strong in most of AeroTech's product lines.

First-quarter inbound orders for ground support equipment increased 26% from the prior-year quarter.

Despite the run-up in fuel prices and the political unrest in the Middle East and North Africa region, air travel and airfreight volume for the first quarter continued to grow year-over-year, albeit at a slower rate.

Although all four major US airlines reported losses in the first quarter, they were able to offset some if not all of the negative impact of the higher fuel prices by maintaining high load factors and aggressive cost reduction.

In March, the International Air Transportation association lowered its industry profitability forecast to $8.6 billion, reflecting rising fuel costs.

This is still very healthy compared to their historic earnings level.

The air cargo industry is forecasting strong demand for the year.

Our current quote activity is high, reflecting continued investment by our customers to reduce costs.

Furthermore, the severe snowstorms in Europe and North America may result in incremental deicer orders before the next winter season.

Based on our current backlog and quote activity, we are optimistic that ground support equipment will continue its upward trend this year.

Our gate equipment business remains very active with many bid opportunities on the horizon.

However, first-quarter inbound orders were significantly lower than last year's, primarily due to timing.

As a matter of fact, we were just notified of a significant project win of over $25 million at a major domestic airport, the details of which will be announced in a press release in due course.

Based on the current level of order activity, we are anticipating year-over-year revenue growth for gate equipment.

Our airport services business saw some gains in the first quarter.

We were ordered a new contract at LAX and one rebid several other airports during the quarter.

However, we remain in a highly competitive pricing environment for our service business and therefore expect continued pressure on margins.

Moving to the Halvorsen program, we received a $7 million order from the U.S.

Air Force to provide engineering and logistics services through March of 2012.

We are also working on several international orders which may help to extend production into next year.

Finally, AeroTech's aftermarket volume for the quarter increased 13% year-over-year.

Looking forward, we expect JBT AeroTech's revenue to grow in 2011 based on current backlog and strong order activity in most product lines.

Margin for AeroTech should continue to improve, reflecting leverage of higher volume, partially offset by lower Halvorsen volume and the increasingly competitive pricing environment in airport services.

In summary, on a consolidated basis, we anticipate moderate growth in most of our end markets, reflecting continued improvement in the global economy.

We are encouraged with a high level of quoting activity in most regions and expect second-quarter inbound to be higher versus the same period last year.

On the margin front, we anticipate the full-year margin to be flat to slightly up versus 2010 levels as we face increasing headwind from foreign exchange and higher commodity prices.

As a result, we are providing full-year earnings guidance in the range of $1.35 to $1.50 per share.

With that, I'll now turn it over to Ron Mambu to provide you more detail on the financials,

Thanks Charlie.

Our first quarter exceeded our expectations and our prior-year results.

First-quarter revenue of $201 million increased 19% year-over-year.

Diluted earnings per share for the quarter was $0.17, up 21% from the same period last year.

Inbound orders were down 12% year-over-year, but backlog improved 5%.

Net debt at March 31 was $123 million, a reduction of $10 million from 2010 year-end levels.

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

FoodTech revenue of $106 million (Sic -- see press release) was up 5% versus the prior-year quarter, primarily due to foreign currency translation effects.

Higher sales of freezing equipment in Western Europe and increased FoodTech aftermarket revenue were offset by lower sterilization equipment sales in North America.

FoodTech's operating profit was $5.7 million, down 34%, and operating profit as a percent of revenue declined to 5.3%.

The lower margin resulted from a combination of unfavorable product mix and higher selling and R&D expenses.

The unfavorable product mix was driven by high-margin sterilization projects, both in new equipment and overhauls in the first quarter of 2010 that did not repeat in 2011.

Additionally, the impact of product mix was magnified in a seasonally low volume quarter.

Lastly, there was a negative effect of the strengthening Swedish krona, which appreciated year-over-year against both US dollar and the euro by 10% and 11% respectively.

This resulted in margin compression for both equipment and aftermarket parts.

We are taking some actions to mitigate future currency effects, and we have been able to offset some of the negative impact through our systematic hedging program.

However, as we do not generally use hedge accounting, the gains from hedges are reported as part of corporate items and not included in segment earnings.

FoodTech's first-quarter inbound orders increased 4% versus the same period last year.

During the quarter, we received one large order of more than $6 million from a new poultry customer in South Korea.

FoodTech's inbound was down 8% sequentially, which was a function of timing.

Inbound in the fourth quarter of 2010 included three large orders totaling more than $20 million.

FoodTech's backlog of $130 million was up both year-over-year and sequentially by 6% and 26% respectively.

Moving to AeroTech, both revenue and earnings improved versus the prior-year quarter.

Revenue of $92 million (Sic -- see press release) increased 37% from the same period a year ago.

Sales were up in most product lines, reflecting a strong backlog from 2010.

AeroTech operating profit of $7.7 million increased 60% from the prior-year quarter.

Segment operating margin improved 120 basis points, driven by leveraging of fixed expenses.

JBT AeroTech's first-quarter inbound orders of $77 million were down 33% year-over-year.

The decline was primarily driven by an unfavorable comparison resulting from the receipt of three large gate equipment orders totaling more than $41 million in the prior-year quarter.

All other product lines reported higher inbound orders during the quarter.

In addition, as Charlie just mentioned, we've been notified of a significant project win of more than $25 million for gate equipment, which is not included in our first-quarter backlog.

Inbound orders were down 7% sequentially.

AeroTech's backlog was up 4% year-over-year but down 8% sequentially.

Now, regarding corporate items, our first-quarter effective tax rate was 35%, in line with our guidance of 34% to 36%.

Total corporate items, excluding interest for the quarter, were $1.4 million favorable versus the prior year.

This was driven primarily by higher mark-to-market games on hedges, reflecting the strengthening of the Swedish krona and the Brazilian Real.

During the quarter, we took $1 million in restructuring charges for FoodTech operations to continue to reduce costs.

For the full year of 2011, we expect total corporate items, excluding interest, to be 6% to 8% higher than 2010, assuming no significant foreign exchange movement and no additional restructuring charges.

First-quarter capital spending and depreciation and amortization were $5.8 million and $5.9 million respectively.

After evaluating several alternatives for our Florida citrus facility, we've decided to construct a new facility in Lakeland, Florida.

Our Florida base supports global operations and technical support for our citrus customers in the United States and the rest of the world, except for Brazil.

Expenses for the project will be incurred over 24 months and approximately $4 million will be spent, largely in the back half of 2011.

As a result, we expect total 2011 capital spending to be in the range of $26 million to $28 million.

Net debt was $123 million at the end of the first quarter, down $10 million from the 2010 year-end level.

We generated more than $21 million from operating activities, primarily due to a reduction in working capital.

We expect strong cash flows to continue, resulting in a further reduction of our net debt by year-end.

At the end of the first quarter, we had $10 million in cash on hand and about $155 million in available and undrawn credit lines.

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

To summarize, we are pleased with our first-quarter results.

We anticipate that our second-quarter inbound order rate will be higher than the prior year.

As a result, we are providing full-year earnings guidance in the range of $1.35 to $1.50 per share.

We are confident in our ability to continue to generate positive cash flow from operations.

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

So operator, please open the call for questions.

(Operator Instructions).

Jason Ursaner, CJS Securities.

It's actually Arnie Ursaner backing up Jason.

Good morning to you.

The $25 million order for gate equipment, over what time frame is that likely to be realized and what sort of margin profile does that business have?

The margin profile -- this is Charlie -- will be similar to our other (inaudible) project.

I think we start shipping late, late this year, so I would say most of the sales will occur in 2012.

Just yesterday there was news out of the London airport that they're going to get a $6 billion revamp.

Is that an opportunity that you've attempted to give thought or qualify for how it could affect JBT?

I'm embarrassed to say I don't know that.

I'll check.

Two more questions if I may.

Charlie, you've obviously highlighted in great depth your growth pyramid, the four elements of it.

What I want to do first is talk about your growing technological advantage, grow beyond the sale and grow where the world is growing fastest.

Could you expand a little bit on each of those?

Then finally, let's come back on margin, but let's do the first three if you don't mind.

We are paying attention on their development programs in [intrinsic] technology, and we continue.

As you know, when we say R&D, we're really not talking much R.

It's all D.

But we are working with customers and developing new products, and we had in Germany late last year installed some brand-new technology for hamburger patty freezing for a McDonald's supplier.

They actually had multiple patented positions.

So in each product line, we are trying to incrementally push ahead, and we are actually -- our R&D spending is up slightly here in the first quarter as we are working on new projects.

In terms of aftermarket growth, as you know, I think you know, we have twice-yearly aftermarket webinars where we share best practices around the world.

We were gratified to see our aftermarket growth in both segments quarter-over-quarter in the first quarter.

We've probably -- there's probably not a lot of new initiatives on the aftermarket in terms of strategic direction because it's pretty much in the organization's DNA to go after the aftermarket.

So, I think we're doing a pretty fine job there.

On [growing] where the world is growing fastest, we are currently looking at some initiatives in particular in China and Asia in terms of building some more corporate structuring.

One of the issues here as we grow in the developing world and we're sort of a [modeling] growth business is how do we make our infrastructure around the world match the market opportunities?

So the tricky part is balancing trying to invest in, say, SG&A in the developing world region at the same time you're trying to strengthen maybe your infrastructure and your slower growth markets.

So you see this irony that we take a $1 million charge for FoodTech restructuring, which is representing sort of downsizing infrastructure.

At the same time, we're trying to spend some more money in the developing areas.

So that's a quick summary of those three Gs.

As far as the margin one, which is the toughest one to talk about this year, I mentioned in the last earnings call that we have a lot of initiatives underway over the long haul to improve our margins.

We still have aspirations to bump them 50 basis points a year.

We'd like to see both of them go up over the next four to five years, both segments.

I said in the last earnings call, having said that, this year we are facing a lot of headwinds, and we are seeing commodity, we're seeing input prices come up.

We are seeing this foreign exchange has been really put a crunch on FoodTech in the first quarter with the strengthening of the Swedish krona, not just against the dollar but against the euro where we sell a lot of (inaudible) European countries.

I guess I could keep going on, but I've got a series of little headwinds that are going to make it tough to boost margin this particular year.

Having said that, we're committed to getting our margins up over the longer haul.

If I can ask specifically, you mention margins would be flat to slightly up.

If it were not for currency, would they be up, in your opinion?

I think we'd be close.

I don't have that math in front of me at the moment.

We are -- in the AeroTech segment, because I don't have the same currency kind of impacts we have in FoodTech, we were pleased with how we got some leverage out of AeroTech and boosted our margins when their volume came.

So that felt pretty good.

Obviously, we are not real thrilled with our FoodTech margins in the first quarter, but we think, as we go forward through the year, obviously that will continue to improve.

Thank you very much.

Robert Wertheimer, Morgan Stanley.

Good morning everybody.

Pretty good quarter obviously, not too much to pick on.

But I just wanted to ask about SG&A leverage.

It's been -- if there was anything, that was just a little bit higher than what we would've thought.

I wondered how much of that was investment versus just -- your incrementals just aren't that --aren't structured as good.

I think we had some nice leverage in SG&A in the AeroTech segment.

I think the place that we are diving into a little bit more reflects a little bit of what I just said about growing R&D and growing some SG&A resources in the growth areas.

I think we're going to work to see some more there on the FoodTech side.

As Arnie just pointed out, foreign exchange is a piece of that too when you see the amount of our SG&A that's outside the United States.

A fair point.

Then second, just on price costs, I wanted to ask how much of that -- I guess for instance the chicken guys are taking it from the corn side, and maybe (inaudible) the equipment as well.

I just really wanted to ask how much of it is sort of dialed in for the year at this point, how much flexibility you have and how much -- I don't know whether you're quantifying in dollars how much of a headwind that is for the balance of the year.

I don't think -- do want to comment, Ron?

On the poultry side, we are seeing a slowdown, as Charlie said, in some of the customer groups in North America.

But in Europe it's been pretty good, especially Germany.

We've had some poultry business and the quoting activity for poultry in the Middle East is still high.

So I think it varies by geography.

I think it's going to get tougher for them as we go forward if these corn prices hold, especially in the US.

Just in general, how's pricing environment feel, and I guess you're not going to adjust [any] backlog so you have flexibility a couple of quarters out or does really just not feel that easy to put through pricing?

We continue to review pricing, both aftermarket and by product line, by region, by product line.

So, that's a continuous process.

I thought you were referring to our input costs.

We are -- we have seen significant increases in stainless steel and carbon steel and hot-rolled steel.

We are just now starting to implement steel surcharges in ground support equipment.

So we are -- that's one of the little headwinds on margin.

Yes, I was kind of going for the balance, so that's both.

So you are passing some of it through --

It's never perfect.

You can never get 100% closure on it, so you get some leakage because it takes you time to react to what you are seeing.

Put [another] bluntly, we had negative purchase price variances in both segments in the first quarter.

So it's a headwind.

Exactly, perfect.

Then it's going to continue to be the headwind for the next couple of quarters, and maybe even out towards next year?

Well, you can never -- I don't know much weight to put in these industry forecasts, but the actual forecast for steel is actually it stays strong for the next few quarters and then their forecasts are for it to -- the prices get better, so it could go down.

So whether you believe it or not, but it's just another headwind we are facing.

Okay, I'll stop there.

Thank you.

(Operator Instructions).

Robert Wertheimer, Morgan Stanley.

I just wanted to ask on the AeroTech side, I guess we covered it a little bit, but there's a nice order there, again just sort of what it feels like in the commercial environment, whether the bouncing around of the oil price has led people to -- I know it's not really a direct effect, but whether it's led to some caution, people are waiting to see how it settled out, just how the conversations are going and whether there's other orders of the magnitude of the $25 million that could potentially be out there.

$25 million, those kind of orders can only come from Jetway.

We don't get orders that big in any other part of AeroTech.

But we are watching this very closely, because we can see the price of oil and (inaudible) gas going up.

We know -- we can see the (inaudible) domestic airlines losing money.

Having said that, they made a record amount of money last year, and a lot of stuff is in queue.

So we're going to be watching but the activity level remains strong.

We are -- this is going to be a year that we are counting on AeroTech to really have a good year.

So far so good, and I think the inbounds are going to look good going forward.

Okay, thanks.

Michael Saloio, Sidoti & Co.

Hi, how are you.

I guess I'll ask about acquisitions.

You mentioned that you're going to continue to pay down debt this year.

Does that mean that the environment for bolt-on acquisitions hasn't really changed much, or are there opportunities this year?

Bolt-on acquisition remains something we are -- you wouldn't know it because of our track record here recently, but we are working on it.

We've got target lists and conversations and schedules and pipelines and potential negotiations all over.

Obviously, I can't comment on any specifics in the Q&A -- I mean in the M&A area.

But we are definitely trying to look for both bolt-on acquisitions to hit our 4G strategy.

Having said that, it's a tough environment in terms of sellers' expectations on price.

You do have this -- as you see the M&A markets, it looks like another little bubble where you've got -- in the private equity area, I saw there's toggle deals coming back and there's a lot of cash out there and there's low interest rates.

So in that kind of environment, we just want to maintain our discipline.

So Ron, I continue to look at it as a high quality problem.

If we can't find enough good well priced deals that we can spend our cash flow on, we'll deal with our cash in another way.

I think I agree with all that.

I think the activity level is high, but as you can appreciate, you need a lot of activity and a lot of ideas in the pipeline to move some along towards the end of that and hope to get something closed.

So it's something that we are still very interested in.

Okay.

You gave some pretty good comments on the geographic mix of sales.

Could you comment a little bit on the geographic mix of orders and the progress of the boarding bridge facility in China?

Is it still running at near full capacity?

Yes, we're still good to the middle of this year.

There's some, actually some repeat orders potentially going to hit that facility.

So we're very pleased with the Shenzhen operations thus far.

I would say -- I think I touched on a lot of the regions when I was talking about freezing and protein, and I've been saying this consistently.

We are seeing a global economic recovery, but it is uneven.

So it really depends country by country.

So even though I told you that the Middle East/North Africa is 4% and Japan is really small, well even though Japan is really small, it's going to be obviously very weak this year.

The Middle East remains highly uncertain and southern Europe is slow, Germany is booming, the north Europe is just kind of really nice recovery going on, so it's really varies by geography.

That's what makes -- keeps the [uncertainty] levels up a little bit.

Okay.

I guess what I'm getting at is -- is the AeroTech business, if we look five years down the road, should we expect AeroTech business to be more heavily weighted overseas?

Yes.

Okay.

All very helpful.

Thank you.

Jason Ursaner, CJS Securities.

Once again it's Arnie for Jason.

In your prepared remarks, you mentioned Brazil had a 10% increase in its expected crop, which was the first in several years.

You mentioned Florida had a fairly sizable increase.

I guess the question I have is, as the key supplier to that market, is this enough volume increase for people to actually have to order new equipment in addition to just replacing the stuff they have on the ground?

I don't think so.

We were talking 10% Brazil, but they've got capacity in Brazil.

They're not running at 100% down there, and similarly in Florida.

So I don't think there will be a significant bump up.

Just in terms of general industry health, it's a really good sign to see the crops up in both of the major citrus juice producing regions.

Obviously those two regions we serve very well.

With the growth in fruit-based drinks, again fruit-based drinks, I assume it's not material enough to cause a real significant need for additional capacity.

That's a different animal.

Coca-Cola now has a product in China that surpassed $1 billion last year called Pulpy.

It's basically water and about 10% or -- no more than 20% juice and you add pulp to it.

So we are selling systems.

We sold one in the Middle East.

We sold at different places.

The demand for that kind of equipment is high.

We are seeing orders there.

so that's actually going to be a year-over-year area in the tomato and fruit business.

The other thing I'd add to that, Arnie, is we've talked some here this morning about headwinds.

The citrus crop growth year-over-year is really a little bit of a positive wind.

If -- a little bit of a wind at our back.

Because it doesn't help us so much in Brazil where our leases are fixed.

But in Florida where we do have part of our revenue stream is variable based, it gives us a little bit of a boost, but it's not material certainly.

I thought in terms of innovative new products, I thought you had some very interesting new opportunities in baking or oven-related products, things like processing dried nuts and things like that.

Is there any more you can expand on that at this point?

I think, in the bakery area, we bought Double D I guess almost two years ago, and it was a small company.

It takes a while to get traction but we are starting to get traction in the marketplace with their Revoband oven.

So in fact we just got an order that's not in backlog yet, but we've got the verbal for a bakery application in the UK that's going to be pretty nice order.

So we are excited about growing that aspect.

Okay, thank you.

(Operator Instructions).

At this time, there are no further questions.

I will now to the conference back over to Ms.

Cindy Shiao for 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 on our IR website later this morning.

Have a good day.

Ladies and gentlemen, this does conclude today's conference.

Thank you all for participating.

You may now disconnect.