JBT Marel Corp (JBTM) 0 Q0 法說會逐字稿

Good morning and welcome to JBT's Corporation third-quarter 2012 preliminary results conference call. My name is Stephanie 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, Mr. Debarshi Sengupta, to begin today's conference.

Thank you, Stephanie. Good morning, everyone, and welcome to our third quarter 2012 preliminary results conference call. With me on the call are our Chairman and CEO, Charlie Cannon and our Vice President and CFO, Ron Mambu.

Before we begin, I would like to note that the preliminary results reported in yesterday's press release and 8 K filing are subject to completion of the of the company's normal quarter-end accounting procedure. As such, our comments today are going to be limited to the key figures and items included in the press release. We will report full third quarter financial results after the market closes on Monday, November 5th, followed by a conference call scheduled for Tuesday, November 6. I also would like 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 filings. Our 2011 form 10-K also contained 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, Debarshi. Good morning and thank you for joining us on the call this morning. Today I will provide a brief overview of our third-quarter performance and outlook for the year. Ron will follow with some preliminary financial information for the quarter before we open up the call for a Q&A session.

Order activity in the quarter continued to be strong with year-over-year and sequential increases in both inbound orders and backlog. Gross margin expansion across the board resulted in higher segment operating margins relative to last year. Cash flow in the quarter was also strong, resulting in a record low level of debt, net of cash at quarter end. Despite these very positive developments in the quarter, third-quarter earnings fell short of our expectations. Primarily as a result in shift in delivery schedules of several orders across both FoodTech and Aerotech.

Looking ahead, we remain on track to deliver a record fourth quarter given our current backlog position and continued savings from our cost reduction initiatives. However, lower than previously forecasted sales volume and further delivery shifts into 2013 for several large orders are placing downward pressure on our 2012 earnings forecast. As a result, we are updating our full-year earnings per share guidance to a $1.22 to a $1.28. While we do not manage the business for quarterly results, we felt it was important to communicate these preliminary results as soon as possible. Obviously, I am disappointed to report quarterly performance short of our expectations and to lower our full-year guidance. However, these downward adjustments are largely timing related and I remain confident in the current underlying strength of our businesses. We continue to see momentum in order activity and anticipate entering 2013 with the year-end backlog position significantly higher than that at the end of 2011.

Now I'll turn it over to Ron Mambu to provide some preliminary financial information for the quarter.

Thank you, Charlie.

We expect to report revenue for the third quarter of approximately $205 million, a decline of 11% from the prior year quarter. As Charlie mentioned, the decline was largely due to shifts in delivery schedules of several orders equating to an approximate 12-cent impact on earnings per share in the quarter. We are pleased with our profit improvement initiatives which continue to drive gross margin expansion and, in turn, resulted in over 100 basis point increase in segment operating profit margin. However, these gains were more than offset by an unfavorable comparison in our corporate other income and expense items. Last year, we reported $3.6 million in mark to market gains in the third quarter, largely due to the strengthening Brazilian real versus the US dollar. This quarter, we expect to report a foreign exchange loss of approximately $100,000. We expect the lower tax rate in the quarter to increase our is per share by approximately $0.02. As a result of these factors, we expect third quarter diluted earnings per share from continuing operations to be in the range of $0.19 to $0.21, compared to $0.28 in the third quarter of 2011.

Third quarter inbound orders are expected to be approximately $260 million and backlog is expected to be approximately $345 million, representing year-over-year increases of 22% and 11% respectively. Sequentially, inbound orders and backlog increased 7% and 12% respectively. We generated approximately $20 million in cash from continuing operations in the quarter, bringing year-to-date cash flow to approximately $70 million. As a result, we have a record low level of debt net of cash of approximately $92 million at quarter end.

Looking ahead, we expect to deliver a record fourth quarter, supported by a strong backlog position and the positive results generated by our cost reduction initiatives. However, as Charlie noted, we are revising our full-year earnings per share guidance to a $1.22 to a $1.28 as a result of lower than previously forecasted sales and further delivery shifts of several large orders. As you also noted, we continue to see momentum in order activity. We are expecting 2012 year end backlog to be 15% to 20% higher than at the end of 2011. This bodes well for the first half of 2013.

Before we open this call for Q&A, I want to remind you that the limited financial data released with this announcement of preliminary are subject to the company's normal quarter end accounting procedures. We will share a complete review of our third-quarter earnings on November 6, but we would be happy to take your questions on this release today. Operator please open the call for Q&A.

(Operator Instructions)

Jason Ursaner with CJS Securities.

Charlie, can you just talk a little bit about the pace of order deferrals? Was it really a September phenomenon, and did it continue through October, or was kind of throughout the quarter where you were seeing it?

Well, we could obviously -- as we rolled into September, it looked like we could see some things slipping. And it wasn't like slipping by months, it was weeks here and there, so we could see that occurring. We don't see a big market slowdown anywhere. I would say there is two buckets of slippage. The first bucket is -- can we inbound the order in time in order to ship it to make the quarter with our normal lead times? And we had some orders that, by the time we negotiated [in Ts and Cs] and got the [LCs] in place, that we did not have time to get them out.

The other bucket is where we actually have the order -- in some cases we have actually shipped the order and customers call and say -- my project is behind, I can't take the equipment, I've got to delay you three weeks. But in neither of those cases was it what I would call economic slowdown kind of delays. It was more like tactical situations with the customer.

Does that help?

Yes, a little bit. I guess the big question is, obviously, orders and backlog stayed pretty strong throughout the quarter even with these delays, and I'm hearing you say it's not really an early indication of a slowdown at the front end with orders. But then that backlog figure up 15% to 20% relative to last year threw me a bit because that would be -- it would seem that you'd be chewing through a fair bit of backlog, and that would be a bit of a slowdown on the order front.

We typically chew down our backlog in the fourth quarter. You'll recall our seasonality. The fourth quarter is always our strongest quarter. And this year in particular is going to be really, really strong, and we are forecasting a record fourth quarter. So, we will eat through backlog, but when we end up the year, we're going to be 15% to 20% ahead of last year's backlog position entering the year, which says we have really good inbound coming.

Okay. If you just looked at this period relative to the end of 2010, where it was somewhat of a similar situation, where orders weren't keeping pace. How would you compare, I guess, what you're hearing from customers now versus at that time, that is really giving you that confidence that you are not seeing more of a slowdown coming down the pipe?

You'll recall back in '09 and '10, we used to say we were playing small ball because we weren't seeing any big-sized orders. You have probably seen some press releases here in the last six weeks, and we've got some nice chunky orders that are now in backlog. You can anticipate in the next few weeks you will see a few more press releases, hopefully even before the earnings call, it says -- that are giving us confidence. We've got a little stronger -- using 2010 and this year fourth-quarter in terms of sales and earnings are -- as you know, 2010 was a big fourth quarter. This one, we think, will be as big and probably bigger. And we will chew through backlog, but we won't chew it down as much because the inbound this quarter is going to look a lot stronger than 2010.

Okay. I have a few more questions, but I'll jump back in the queue and let some others have a chance. Thanks.

Gary Farber, CL King.

Morning. I'm just wondering, given sort of the magnitude here of the change, is there any changes you're making internally to your processing of orders or anything like that? Or is this sort of just an unusual kind of situation?

First of all, it's not abnormal at all that in a forecast we think we're going to get an inbound order this week, and it turns out it takes two more weeks because we had a serious negotiation over Ts and Cs. It's not unusual that a customer says -- hey, can you just delay this two weeks because my project is not ready, I can't take the equipment on site. That's not unusual. I think what's magnifying it this year is the fourth quarter is so big relative to our year, and relative to even our typical strong fourth quarters is if there is some percentage of that that normally goes on, the absolute value of that stuff is going to be bigger, if that makes any sense.

Yes. And you would say, where things shifted, it was -- sounds like it was sort of spread around. There wasn't any particular areas that stood out or end markets?

No, it was -- I think we have got some numbers. Basically versus our forecast -- or excuse me, versus last year, we had about $25 million of sales that we were thinking would be in the third quarter. Actually a little bit more than that, that slipped into fourth quarter, or most of it slipped into fourth quarter. I would say it was half-and-half FoodTech and AeroTech, so there wasn't any pattern by product line.

I wouldn't say there was any pattern by region of the world either, Gary.

Right. Thanks.

Jason Ursaner CJS Securities.

Thanks for taking the follow-up. I'm just wondering -- how should we look at the margin performance there as kind of a read-through to Q4 and what your incremental margin might be from this base, given that when you do have revenue slowdown, you tend to actually see an increase in your gross margin because of that service component. And just kind of breaking down the buckets between what you are really seeing on the cost-reduction efforts in terms of the effect. How much of the improvement might just be a relatively easy comp with last year. There were some adjustments with that Swedish krona and some of the restructuring efforts you were doing. And just where you see margin going, given that you're going to have a much different skew of new equipment in Q4.

Let me talk third quarter, then I'll segue into fourth quarter. You can see that obviously the operating margins went up on lower sales. And a lot of times that is due to our, as you point out, our product mix when our aftermarkets stay strong when new equipment sales are back. Actually, in this quarter, that's not what happened. That margin improvement you see is predominantly due to our cost-reduction activities. Through June, we had really strong aftermarket in both FoodTech and AeroTech, and while the third quarter was not bad, it wasn't as strong relative to last year, actually. And so, the margin improvement you see in the third quarter is almost -- is predominantly due to cost-reduction activities that we kicked off the end of last year.

As you go into the fourth quarter -- we always say we don't get a lot of leverage because our costs are largely variable, but when you pack this many sales in a quarter, we do see leverage on SG&A in both segments, as well as other sort of quasi-fixed costs. And so, we're going to get really strong margin performance in both segments in the fourth quarter. And just to give you an idea, I don't have my calculator in front of me, but I'm sure your models can see what FoodTech year-to-date margins are. We've been saying all year long -- we thought we would end up with double-digit margins in FoodTech. Well, we still think -- we may miss, but we're going to be really, really close. And so, if you do the math, you'll see that the FoodTech margins in the fourth quarter are going to be super strong. So, I mean we deliver the volume that we have in backlog.

Okay. And I guess just getting back to that point, can you talk at all about the internal process for how you review backlog? What makes an order potentially at risk for delay versus something you actually think you can pull in and get delivered before the end of the year? What is the process for doing that?

Well, our normal operating process is something we call monthly performance review, so every month once we've closed the books, we have both business segments' VPs and their teams basically in a three hour in-depth review of the income statement and balance sheet, order activity, market performance, and we discuss risk and opportunities in each one of those. And so, we basically update our three-month rolling forecast every month. As we roll that up through the first part of the third quarter, we still felt like we were in good shape. And as we entered September, we could see we were going -- we could start counting orders that were going to slip for various reasons.

Yes. What I would add to that, Jason, is that we are pretty rigorous about when an order is recognized as an order, reported as an order, and included in our backlog. So, this is not done based on verbals or a casual purchase order that's faxed over or e-mailed. We have to have contracts, terms and conditions agreed, letters of credit issued, advances in nearly always. So, it's a pretty rigorous process before we report it as an order and include it in our backlog. And that's in part why we have so few cancellations.

Okay. And then, just Ron, if you could also follow-up. The cash flow from operations was still very strong. I know the CapEx budget sort of had been back-half weighted if you were going to hit that $25 million budget. Could you just give an update on where CapEx stands? And in terms of free cash flow, how much -- is it mainly going to be Q4? Because it did look like you generated a fair amount of cash.

We've been very pleased with the cash flow. We're going to have a record low net debt, so in terms of cash flow coming out of operations through earnings, as well as collection of receivables and advance payments, it's all been very positive. We will talk a little bit more on that. Our CapEx has been recently driven by the replacement of the facility in Florida, and we will have more to say on that at the November call. But our CapEx is probably going to be a little bit less this year than what we had talked about in the second quarter.

Okay. Appreciate it. I'll jump off. Thanks.

Liam Burke, Janney Capital Markets.

Morning, Charlie. Morning, Ron. Charlie, both on FoodTech and AeroTech, you had set some goals, understanding that both businesses are variable cost in nature, and you were trying to break that cycle by lifting the margins above what traditionally they had been. Looking into 2013, understanding that this quarter, the lumpy nature of the business could create a quarter-to-quarter shortfall. Do you think you are on track to meet those goals as we get through fourth quarter and into next year?

Yes. We still feel good about our 4G strategy, and we feel like the combination of the sort of process improvement initiatives are on track. The same things we did at ground support equipment last year with our consultant, we are now working food solutions division. We have not seen those results yet, but those projects are going on. And the cost-reduction activities we undertook at the end of last year actually really helped hold up the third quarter.

It's too soon for us to comment on 2013, obviously, and we are in the middle of -- we're doing budgeting right now. As I mentioned earlier, the aftermarket and our recurring revenues are a key part of our margin improvement strategy, and the third quarter was not a stellar quarter -- not bad, but not stellar. The first half of 2012, it's been doing great. So, we remain encouraged by those initiatives we have in the aftermarket as well.

The only thing I would add to that, Liam, is particularly in FoodTech, we would expect margin expansion in '13. We'll look at that when we get into the budget, but most of the cost reduction related to the reduction in headcount, particularly in Europe, that resulted from our initiatives this year were implemented over the year, and so we will have the full-year benefit of that going into -- as we get into '13.

Great, and Charlie, you referred to 2009 and 2010 as small ball. Prior to that, you had pretty good visibility on overall, call it, over the next 12 months based on order and backlog activity. Are you seeing a shift from small to longer ball, and to better visibility on the business?

I don't want to overstate our visibility capability. The way I would describe it -- back when we spun out in '08 is we had a $20 million project in Australia. We had some $12 million and $13 million projects. And those kind of projects, well, obviously with lead times of 9 and 10 and 11 months give you more visibility. As we went into the downturn, we saw that kind of go away, and the small ball limited our visibility, I would say more like to 3, 3.5 months. Now what we're seeing is, the orders are starting -- you've seen some announcements of $4 million and $5 million and $6 million, $7 million orders. You'll see some more in the next few weeks, and as those collect, it stretches you out beyond the three months until you can see maybe toward five and six months. So, we will see how it develops here in the next two months. I don't want to get out ahead of my skis on that, Liam. But it feels better in terms of some of the more recent, sizable, chunky orders.

Great. Thanks, Charlie. Thanks, Ron.

At this time, you have no further questions. I will now turn the call over to Mr. Debarshi Sengupta for closing remarks.

Thank you, everyone, for joining us this morning. A replay of our call will be available on our IR website this afternoon. If you have any further questions, please give us a call. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.