JBT Marel Corp (JBTM) 2012 Q3 法說會逐字稿

Good morning, and welcome to the JBT Corporation's third-quarter 2012 earnings 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 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 remind everyone 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 contain 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, and good morning, everyone. Before I review our results, I want to acknowledge that for several of you on the call today, Hurricane Sandy has had and is still having a significant impact. Our thoughts and prayers are with you and your families. And we very much appreciate that you're taking the time to join us on the call today.

Today, I will discuss our third-quarter performance and our 2012 guidance. Ron will cover our financial results before we open up the call to questions.

As discussed during our October 23 preliminary results conference call, order activity in the third quarter continued to be strong, with year-over-year and sequential increases in both inbound orders and backlog. I am pleased to report today that preliminary inbound order results for the month of October indicate continued strength. We are also pleased with the gross margin expansion in both segments and the strong cash flow in the quarter.

Despite these very positive developments in the quarter, and as we reported on October 22nd, third-quarter earnings fell short of our expectations, largely as a result of a shift in delivery schedules of several orders across both FoodTech and AeroTech. Ron will elaborate further on these developments in his remarks.

I will now provide some market commentary on our two segments. First, JBT FoodTech. Orders for freezing and protein processing were particularly strong in the quarter across Europe, North America, and Asia-Pacific. Inbound orders were up over 20% on average across all regions, though 2012 shippable orders came in lighter than forecasted earlier. October is turning out to be yet another strong month for orders.

Turning to fruit and juice processing, the US Department of Agriculture has projected the Florida orange crop for the 2012/2013 season at 154 million boxes, up 5% from last season. This is positive news for our customers and, in turn, for us. In the quarter, we received an order for a lemon processing plant in China totaling just shy of $4 million. This order, which included juice room equipment and several extractors, reflects our continued growth in that region.

Next, with regards to the in-container sterilization product line, despite inbound order activity coming in about 20% lighter relative to last year's third quarter, backlog continues to be well above last year. More importantly, we also see the level of machine quote activity increasing across all regions.

For FoodTech overall, we continue to project a record fourth quarter for revenue and earnings. For the full year of 2012, we are projecting modest topline growth, and EBIT margins approaching double digits. Since we are currently anticipating fourth-quarter inbound orders to be up double-digit over last year, we are also expecting to enter 2013 with a backlog that is substantially higher than last year's.

Turning to AeroTech, on October 1, the International Air Transport Association announced an upward revision to its global aviation outlook for 2012. Airlines are now expected to earn $4.1 billion this year, up $1.1 billion from their prior forecast. Additionally, the Association sees global profits rising in 2013 to $7.5 billion.

Inbound orders in the quarter for our gate equipment business more than doubled from last year. This was primarily the result of a large international order for passenger boarding bridges received in the quarter. A press release announcing this order is still under review by the customer. This order, in addition to other international orders received, will likely keep our Shenzhen, China facility running at capacity throughout 2013.

Moving on to ground support equipment, order activity in the quarter was up over 25% relative to last year. The increase was partly due to a shift in orders from the second quarter to the third, and also higher demand from a major airfreight customer.

To summarize for AeroTech, order activity has picked up significantly in line with our expectations. Preliminary results indicate that October was also a strong month. We anticipate entering 2013 with a backlog equal to or slightly higher than last year. We expect 2012 revenue will come in lower, partially as a result of a shift in production to 2013 for a large international gate equipment order. We expect AeroTech full-year EBIT margins to come in higher than 2011.

Overall, we are projecting a record fourth-quarter performance supported by a strong quarter-end backlog, and continued savings from cost reduction initiatives taken earlier in the year. However, a modest revenue contraction is expected for the full-year 2012, primarily resulting from lower than previously forecasted sales volume, and shifts in delivery schedules to 2013 of a couple of large orders. As a result, and as communicated on our October 23rd conference call, we have updated our full-year earnings per share guidance to $1.22 to $1.28.

We remain confident in the underlying strength of our businesses. We continue to see momentum in order activity, and anticipate entering 2013 with a year-end backlog position significantly higher than at the end of 2011.

Now I'll turn it over to Ron Mambu to provide more details in our third-quarter results.

Thank you, Charlie. Revenue for the third quarter was $205 million, a decline of 9% in constant currency from the prior-year quarter. While lower volume across the product lines contributed to this decline, it was largely due to shifts in delivery schedules in both FoodTech and AeroTech. These delays, totaling about $25 million, equated to approximately $0.12 impact on earnings per share in the quarter.

Despite the revenue decline, gross profit margins expanded across the board, in turn driving 120 basis point increase in segment operating profit margins. However, these gains were more than offset by an unfavorable comparison in corporate items related to mark-to-market adjustments on foreign currency transactions. As a result, third-quarter diluted earnings per share from continuing operations was $0.21 versus $0.28 in the third quarter of 2011.

I'll now discuss segment results. JBT FoodTech's third-quarter revenue of $117 million decreased 6% in constant currency from the same period in 2011. New equipment revenues decreased, as higher revenue from freezing and protein processing in Europe was more than offset by lower revenue in North America and Asia. The lower revenue in the third quarter reflects approximately $11 million of orders across several regions and product lines, where deliveries shifted from the third quarter to the fourth quarter of 2012.

Despite the lower revenue, FoodTech operating profit margins increased by 135 basis points to 7.7%. Earlier this year, we announced cost reduction initiatives in FoodTech, and these initiatives continue to drive cost savings. FoodTech's segment inbound orders of $136 million increased 8% year-over-year, primarily driven by strong order activity in freezing and protein processing across Europe, North America, and Asia. This was partially offset by low order rates for in-container sterilization equipment. Backlog of $173 million increased 36% from the third quarter of 2011 and 12% sequentially.

Now, turning to JBT AeroTech, third-quarter revenue of $88 million decreased 11% from the same period in 2011. Revenue from sales of new equipment was lower, largely resulting from fewer automated systems projects and lower revenue from gate equipment projects. The lower revenue largely reflected approximately $15 million in shifts in project and delivery schedules for gate equipment and ground support equipment. Despite the lower revenue, AeroTech operating profit margin expanded 70 basis points to 9.5%.

A stronger mix of higher-margin Jetway ancillary equipment, and higher margins on park and gate equipment, largely drove the margin expansion. Third-quarter inbound orders of $123 million increased 47% from the prior year, predominantly due to large orders received for gate equipment and ground support equipment, as Charlie noted earlier. Backlog of $171 million was lower than the prior-year period by $12 million.

During the quarter, two contracts with the U.S. Air Force were modified, resulting in cancellation of $17.5 million in remaining unfilled deliveries on those contracts. And they were removed from backlog in the quarter. There were no deliveries on these contracts in either 2012 or 2011.

Now regarding corporate items, income tax expense in the third quarter reflected an effective -- an expected effective income tax rate for the full year of 35%. However, we had approximately $700,000 of favorable discrete adjustments to our income tax provision. Corporate items in the third quarter, excluding net interest expense, increased $4.5 million from the same period in 2011. The increase was primarily a result of a $3.7 million unfavorable comparison related to mark-to-market adjustments on foreign currency positions.

For the full-year, we expect corporate items, excluding interest, to be in the range of $25 million to $27 million, assuming no significant foreign exchange movements. We ended the quarter with a record low level of debt, net of cash, of $92 million; a decline of $13 million from the second quarter. As Charlie mentioned, we had good cash flow in the quarter. Year-to-date, cash generated from operations was $69 million.

Strong collections and an increase in advance payments have largely driven the cash flow generation. With an anticipated significant volume pickup in the fourth quarter, we expect to end the year with cash flow somewhat lower than the amount generated year-to-date.

In the second quarter of 2012, we settled certain foreign subsidiary intercompany loans. The resulting cash position on our balance sheet has carried into the third quarter. We had $84 million of cash as of September 30, of which $81 million was held by our foreign subsidiaries. We have no immediate needs that would require us to repatriate these funds.

Third-quarter capital spending and depreciation and amortization were each $6 million. As you know, the anticipated spend to replace our existing Lakeland, Florida manufacturing facility will occur in 2013 to 2015. As a result, we expect full-year 2012 capital spending of approximately $24 million lower than previously projected.

We did not repurchase any shares in the third quarter. Over the past several months, and subsequent to our Board's authorization of our repurchase plan in the fourth quarter of last year, we continue to assess various approaches to fulfill our commitment to return value to shareholders. While this assessment was underway, we thought it best to pause our share repurchases.

We have now completed this assessment, and anticipate that we will be executing on this repurchase plan through year-end and into 2013. We believe that depending on market conditions, we could complete the authorized repurchase over the remaining two years of the current authorization. To reiterate what we said during last quarter's earnings conference call, we remain committed to shareholder value return.

In summary, we are pleased with the margin expansion, strong cash flow, and healthy order activity in the third quarter, as well as our backlog position at quarter-end. We are projecting a record fourth-quarter performance, supported by a strong quarter-end backlog, and continued savings from cost reduction initiatives taken earlier in the year.

We've updated our guidance range for the full-year 2012 earnings per share from continuing operations to $1.22 to $1.28. We remain confident in the underlying strength of our businesses. We continue to see momentum in order activity, and anticipate entering 2013 with a year-end backlog position significantly higher than that at the end of 2011.

Operator, please open the call for questions.

(Operator Instructions) Jason Ursaner, CJS Securities.

It's actually Arnie Ursaner backing up Jason. (multiple speakers) I think if I heard you right, Ron, in your prepared remarks, you indicated you had a $0.12 impact from delays in the current quarter. Is that correct?

That's correct, Arnie.

So were it not for that, you would have had double-digit growth in earnings per share this quarter?

Yes, that's right (multiple speakers) -- prior-year quarter.

Okay. Okay, and Charlie, I've known you a while and I haven't heard you quite as enthusiastic as you seem to be about October and the continued strength. And so, let me start with -- in the AeroTech piece, you mentioned a fairly sizable order, which I guess is not part of backlog since you can't put out the press release. And you mentioned you're going to manufacture it in the Shenzhen, China plant. Can you give us a general sense of the geography of that order?

Yes, I can give you a general sense it's in the Middle East and it's a large order. It is in our backlog. And just an overall comment on Jetway, in terms of what we're seeing. You'll recall we shipped a good fourth quarter in Jetway last year, as customers asked us to move things up. And then we had some Jetway shipments we thought would happen earlier in the year that got shoved out, and created what I call the big production gap we had in Jetway. And we signaled that at the beginning of the year.

We also said that the activity level longer-term, given that there's a little bit longer lead-time on Jetway, looked healthy to us, and we thought we would be seeing a strong back-half of the year. We have, in fact, seen that now, I guess you could say it's three or four weeks, a little bit later than we'd like. And some of the orders we thought we'd be shipping in the fourth quarter have slipped into 2013. But the good news is, from a market perspective, it's there.

You'll recall we had a pretty sizable temporary layoff at our Jetway facility in Utah in the beginning of the year for this gap. In the fourth quarter this year, we anticipate almost all of those people will be back working. So it's -- I guess we forecasted it correctly. We might have been off three or four or five weeks.

Okay. And if you took a step back -- and obviously, you are seeing a dramatic pickup or improvement in demand; as you look at that, what do you think is causing it, and how sustainable should we think about it for entering 2013?

Well, we're not -- we have people coming in Chicago in the next two weeks to go through budget, so we're not really prepared to say much about 2013. But in terms of the current activity level, the Jetway activity level is out there. So I would say, in general terms, we feel good going into next year.

On the ground support equipment side -- and those two, obviously, are our two biggest AeroTech business -- we had good inbound. And I think there, we've been growing from the downturn of '09. I think we'll probably be looking at sort of slightly up going into next year. And it kind of varies by product line.

For examples, deicers this quarter are going to be below what we hit when we're having a normal year. And we've looked at it and said, is that because of economics or because of weather? And based on the customers' conversations, it looks like it's all weather. So what happens is, they shift their capital spending from the deicers to other kinds of things.

So I wouldn't -- I hope I wasn't too optimistic. I mean, it's not like it's boom, boom, boom; but it's -- but it feels healthy right now in AeroTech. And FoodTech feels really good, and again, it varies by product line and region.

And I know one of your most important goals is growing your margin. Can you comment generally about the margin on the work you have in backlog?

Yes, we feel good about that. Ron mentioned in his comments, we've got the ongoing cost reduction initiatives with where we're working on trying to improve margins. We did the big restructuring in FoodTech, which, as we said, would pay off in the back-half of the year.

We've mentioned, I think, the last two calls, even though year-to-date, you can't see it, but we've said, we think by year-end, FoodTech will be double-digit margin. Now that may come in to be 9.7% or 9.9% or 10%, but it will be close. So, you can infer, if you take an envelope and a calculator, that we're going to have pretty rich margins in the fourth quarter this year, as the cost reduction kicks in on top of the volume.

Thank you very much.

Thanks, Arnie.

Liam Burke, Janney Capital Markets.

(multiple speakers) Charlie, on protein processing, could you -- with agricultural costs and inputs, could you give us a sense how that looks going into 2013?

Yes, I would say it's been -- it hasn't been super, super strong. It's been a little soft in the US protein market, in terms of poultry we're talking about. But the good news is the corn prices recently have been easing. And I guess the really good news, when you look at the earnings reports of all of our major customers, they somehow are managing to make money, even with these high input prices. So, if corn will continue to soften, I think we could see some positive there going into next year.

Okay. And automated systems. I know it's a smaller part of the AeroTech business, but that seems to have been pretty strong recently. Is it just business as usual, and has ebbs and flows?

I think it's ebbs and flows. It was super strong in the back-half of the year, and we -- and it's gone a little bit softer here in the current quarter to an inbound. Looking ahead to this quarter, we're looking at several large projects, and then it gets to be a question of the lumpiness. Yes, we're looking right now at a pretty big gap in what they could be next year if all these orders come in, or if just some of them come in.

Okay, great. And (multiple speakers) --

(multiple speakers) But we feel good about that business.

Oh, great. And Ron, did you break out any aftermarket sales in your prepared discussion?

We can comment on aftermarket sales. Year-to-date, aftermarket sales have been -- have held up there; we've grown, I think, about 7% year-over-year on a constant currency basis. It was a little less than that. We're actually down in the quarter, quarter-over-quarter for the third quarter; but year-to-date, overall, we're up about 8%.

Great, thank you. (multiple speakers)

(multiple speakers) Aftermarket was a super strong comparison to first half. Third quarter, we're off a little bit. We're projecting fourth-quarter to be nice and solid. Fourth-quarter is normally one of our best aftermarket quarters.

All right. Thanks, Charlie. Thanks, Ron.

Jason Nacca, Sidoti.

So, first, I'd like to speak about Sandy and some of its effects. What are some opportunities or anything you're seeing here in the Northeast that possibly could help you guys or hurt you guys? And maybe even on ground equipment as well as the Jetways as well.

We've been -- first of all, all of our airport service people, we've been monitoring their personal situation in terms of power at home and all that. And I'm pleased to report we're in pretty good shape in terms of our own people being back to work.

We've been in touch with all the airports in the I-95 corridor, asking if -- we're available to help. I can't say we've seen a ton of business there, either GSE or Jetway stuff. But we've been proactive in looking to try to help. But no significant impact on our business.

All right. Okay. And moving on to sterilization, I know last quarter, we talked about the technology acquisition. Are you seeing any growth or additional opportunities from this technology?

Yes, we're very -- despite the fact that third-quarter actually was a light inbound quarter for machinery, some of that -- not machinery; sterilization equipment -- some of that is timing.

We've had, interestingly, several good orders, some of which are in the developed world. But for export to the developing world in the area of canned milk and condensed milk. And that goes to that long-time theme we've been talking about in terms of developing a rise in incomes. There's a lot of production capacity going in, in the developing world, as well as the developed world, for the developing world, to do with canned milk lines. So we've had -- we're projecting nice inbound in the fourth quarter going into next year.

But I'd -- Jason, I'd add to that, I think the -- we're seeing some margin growth too with this acquisition. So, the inbounds look good and the margins look better.

Okay. And probably my last question is, given that there's a large percentage of cash held in foreign, given the significant rise in the current portion of long-term debt, maybe provide me some color about this line item and what you expect in next-year quarter?

Well, I could -- let me give you the comments for it. First, our priorities for cash really haven't changed. Our focus for cash is to invest in our growth initiatives, growing the business. Our opportunities are greater outside the US than in the US; continuing to advance our technology, aftermarket, et cetera; looking for bolt-on acquisitions and returning value to shareholders. And then, finally, paying back our lenders.

There's always a healthy tension in looking at our cash balances between cost of capital and treasury and tax considerations. Having said that, at the moment, it looks to us that we have more cash outside the US than I'd like. We have no need to remediate -- any needs for immediate repatriation. However, we are looking at country-by-country in our legal entity structures for possibilities where -- you know, that may exist in terms of possible return on capital; possible return of cash that's been previously taxed, especially in the US, that would lower the cash balances outside the US in an efficient way.

So, that analysis is ongoing. It's complex in terms of its intricacies with tax and treasury. And we have a team working on it. So, we hope to further progress that analysis over the near-term.

Now, in terms of the long-term debt, we spun off about 4.5 years ago, and it was a five-year -- with a five-year facility. We're in the process of renewing that facility now, and we expect to have that renewal complete by the end of the year. So I think you'll see most of this long-term debt -- most of the short-term debt shifting back to a long-term classification on the balance sheet, once we get the new facility renewed. And we expect to do that, as I said, by the end of the year. And we expect to do that with more favorable terms and conditions in this revolver than what we had previously.

Okay. Great. That's it.

(multiple speakers) I hope that helps. Yes.

Thank you.

Jason Ursaner, CJS Securities.

So, what your repurchase authorization is, and I think you just answered my other question -- well, let's start with, what is the repurchase authorization?

Arnie, it's a $30 million repurchase authorization that concludes at the end of '14 -- calendar '14.

Okay. And are you targeting a 10b-5 or an open purchase agreement?

No, we have a 10b-5 plan.

Okay. And should we interpret this as signaling less focus on acquisitions?

No, the overall authorization in the grand scheme of things is -- was size, certainly not a major buyback. We think it's appropriately sized. But we still have focus and capacity in our lines for acquisition. And that door is very much open and we continue to evaluate candidates.

Okay. And you mentioned more favorable terms on the five-year facility. What sort of -- 100? 150 basis point improvement? What sort of magnitude are you thinking you can get? And will there be less restrictive covenants on any of the actions you might plan to take?

Yes, all of the above. I don't really want to get into what we're seeing in terms of rates. I think the rates will be -- and the structure of the grids will be a little bit better, and the terms will be a little bit better as well.

And you have paid down quite a bit of debt with your free cash flow. Do you expect to keep the same size of facility?

We're looking for a slightly larger -- an increase in facility size.

An increase in facility.

Correct.

Okay. Thank you.

At this time, there are no further questions. I will turn the call back over to Mr. Debarshi Sengupta for any 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.