JBT Marel Corp (JBTM) 2013 Q4 法說會逐字稿

Good morning and welcome to the JBT Corporation's fourth-quarter 2013 earnings conference call. My name is Victoria and I will be your conference operator today.

(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, Victoria. Good morning, everyone, and welcome to our fourth-quarter 2013 earnings conference call. With me on the call are our President and CEO, Tom Giacomini; our Vice President and CFO, Brian Deck; and former 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 filing. Our 2012 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 Tom.

Thanks, Debarshi, and good morning, everyone. Let me start today's call with a few comments on finalizing our management succession plan.

As part of that plan, Ron Mambu retired when Brian Deck was hired effective February 3. Ron has agreed to remain with us through the end of March to ensure a smooth transition for JBT and the closing of 2013 financials.

I know many of worked with Ron since our 2008 spin-off. On behalf of the JBT team and our stake holders, I wanted to personally thank you, Ron, for your 40 years of dedicated service and keen financial management. Without your many accomplishments, JBT would not be what it is today.

I am very pleased to introduce to you to the newest member of JBT's executive team, Brian Deck. Brian brings with him 20-plus years of comprehensive financial experience. His skill set and management approach are a strong fit with JBT.

Before I turn the call over to Brian, who will provide details on our financial performance and planned restructuring initiatives, I would like to take a minute to talk about JBT's promising outlook. As I talked about last quarter, JBT's two segments, FoodTech and AeroTech both have leading positions in their markets. Moreover, both are positioned to capitalize on improving global trends.

But the Company's recent performance has fallen short of our expectations and as a whole, I believe we can do more to leverage the potential of our businesses. With the new management team in place, we have recognized the need to make changes and are implementing initiatives that will accelerate our growth and enhance profitability.

With that, I will hand it over to Brian.

Thank you, Tom, and good morning, everyone. I'm excited to join JBT and look forward to playing a key leadership role. I also look forward to meeting all of you in person. With that, let's turn to our full-year 2013 financial results.

FoodTech achieved record performance and we made good progress on our strategic initiatives to grow margins. AeroTech performance was down and corporate expense was higher. Revenue for the full year of $934 million increased 2%.

FoodTech sales of new equipment and revenue from after-market parts and services across the Company grew by 6.7% and 3.6% respectively. However, JBT's revenue for the if full year fell some what short of our expectations, largely because of lower fourth-quarter volume in AeroTech ground support equipment and shipment delays at FoodTech Europe.

Operating income for the full year of $53 million decreased by $8 million. Total segment operating profit increased by $4 million or 4%. Corporate and restructuring expenses were approximately $11 million higher, driven largely by $5.3 million of costs related to management succession and actions taken by new management.

For 2014, we expect corporate experiences to be in the range of $26 million to $28 million. This estimated range excludes $3.7 million of management succession costs, about $2 million of continuing consulting costs in connection with our initiatives, as well as restructuring charges.

Income tax for 2013 reflected a tax rate of 29% compared to 31% in 2012. The lower rate reflects $2.1 million of additional R&D credits claimed, much of which we do not expect to repeat. The Company's 2014 tax rate is expected to be in the range of 31% to 33%.

Full-year diluted EPS from continuing operations was $1.15. Adjusting for the $5.3 million of costs previously mentioned, diluted EPS from continuing operations was $1.26, flat compared to 2012.

Turning to segment results, FoodTech full-year revenue and operating profit grew by 4% and 10% respectively. Operating profit margin expanded by 60 basis points. Both operating profit and margin were record highs.

Although the overall business was strong, we did have two headwinds. Earnings were impacted by a smaller US citrus crop and higher execution costs, particularly in Europe.

Turning to AeroTech, full year revenue was flat while operating profit decreased by 7%. Gate equipment sales, particularly of jetway aviation support equipment or JASE, and after market revenue, increased.

These were offset by lower revenue in ground support equipment, military loaders and in airport services. Operating profit margin contracted by 60 basis points, driven by an unfavorable product mix as a result of the lower military equipment sales.

Looking at order activity for the Company in the fourth quarter, inbound orders were $298 million, driven primarily by large orders for gate equipment and continued demand for freezing and processing equipment in Asia. As a result, year-end backlog increased 33% over the prior year. As a reminder, our backlog predominantly consists of new equipment orders, which represent approximately one-half of our revenue.

Next, I would like to provide guidance for the first quarter of 2014, which is our seasonally slowest quarter. We expect to see positive order trends continuing and anticipate inbound orders in the first quarter of 2014 to be slightly higher than in 2013.

We expect revenue to increase by approximately 10% over the first quarter of 2013, driven by growth in FoodTech. However, we expect total segment operating profit to decrease slightly, primarily due to headwinds in ground support equipment and AeroTech and higher sales of lower-margin equipment in FoodTech.

We expect corporate expense to be approximately $3 million higher than a year ago, driven by management succession costs and continuing consulting costs. As a result, we expect diluted EPS from continuing operation, excluding restructuring charges, to be slightly above break even.

We anticipate recording $10 million to $14 million of restructuring charges in the first quarter in support of our operational improvement initiatives. We have identified opportunities to improve results in Europe, ground support equipment, as well as simplify our organizational structure and associated back office support worldwide.

The restructuring is projected to deliver between $9 million and $12 million of annualized run rate savings. We will be in a better position to report on specific economics around the costs and related savings as part of our first-quarter 2014 earnings release.

Overall, I am encouraged by the opportunities we have identified to increase the performance of JBT. And I very much look forward to implementing them with the team. With that, I hand it off to Tom.

Thanks, Brian. For our FoodTech segment with higher protein prices and lower feed costs in North America, poultry customers are looking to increase their capacity and efficiency. This bodes well for our freezing and protein processing business.

In Asia, particularly in China, an increase in consumption of processed foods and expansion of quick-service restaurants are driving sales of our equipment. For example, our freezer sales in China tripled last year. Though it's off a small base, we made good progress and plan to invest further in the region to drive continued growth.

We also enjoyed increased demand for canned dairy products in Asia and the Middle East. Local food processors are investing to significantly increase capacity in the regions.

European food processors are also investing to meet the regional supply shortfall. Both developments have benefited our in-container sterilization business.

As Brian mentioned, we are concerned with recent developments in the US citrus market. The USDA reduced this season's Florida citrus crop forecast by 14%, primarily the results of citrus greening.

However, we are encouraged the industry is taking action. The Coca Cola company has committed $2 billion to Florida citrus growers over the next 20 years. In addition, congress recently approved $125 million in citrus research over the next five years.

Looking further out, we see a rapidly-expanding global market of liquid food products driven by our food and beverage customers. We are taking action to leverage our leadership in juice processing to capture this growing market.

Moving to AeroTech, industry profitability is expected to increase significantly and eclipse previous records. We are also seeing significant investments in the Middle East and Asia, as existing airports are expanding and new hubs are being built.

These positive industry trends are supporting JBT's solid gate equipment order activity. Our new JASE products in particular, are enjoying strong demand.

However we face a headwind in our ground support equipment business. Sales remain significantly lower than pre-recessionary levels.

While we believe a replacement cycle is long overdue, it has not yet materialized. While we remain positive about the business, we have taken corrective actions to adjust costs.

Regarding our three operational excellence initiatives. First, we initiated a pricing study across JBT. The study is on track and we expect to realize initial benefits in the back half of the year.

Second, we are focusing on the Company-wide productivity improvements. Last, we are taking action to improve our lead times and product quality. These value enhancing actions are being implemented by strong internal resources along with some outside expertise.

I've tasked Dave Burdakin, our new Vice President and Division Manager of AeroTech, to spearhead this across JBT. Dave brings over 25 years of leadership experience in industrials and a very successful track record of leading these projects.

Turning to our 2014 outlook, we entered the year with a higher percentage of the year booked relative to prior year. As Brian mentioned, we expect to see positive order trends continuing.

While the backlog represents only a portion of our business, it provides some visibility into the remainder of the year. For the full year, we anticipate mid single-digit revenue growth. We expect total segment operating margin in 2014 to remain flat relative to 2013, excluding potential benefits from operational excellence initiatives and restructuring actions.

Continued margin gains in FoodTech are anticipated to be offset by the previously mentioned headwinds in AeroTech. Operational excellence and restructuring-related costs will have an impact on 2014 earnings. But we are confident the actions will drive margin expansion and significant earnings growth in 2015 and beyond.

Finally, we will be holding our first JBT Investor Day on May 22 in New York. We look forward to sharing details of our vision and strategy and hope you will join us. With that, Victoria, would you please open the call up to questions?

(Operator instructions)

Gary Farber, CL King.

Thank you. A couple of questions. One, can you speak about, you are making the changes you discussed on the pricing. But any other changes you're making in your sales efforts to close sales or anything like that?

Thank you, Gary. I would like to highlight a few areas for you. Certainly we really have been encouraged by the inbound and booking rates, as we ended the year.

And believe that's going to, it has been continuing into this quarter. So certainly the sales activity and associated bookings have been positive for us.

But as we look forward, we are looking to sell more around the value of our products. When you think of our customers, important elements like yield, productivity, energy savings, they are all elements we are trying to highlight in JBT's highly engineered products that drive real value for our customers beyond the initial sales price. Trying to get them to think about total cost of ownership and the return on the investment they get for JBT's exceptional products.

Right. Do you see a reason that R&D needs to change at all as far as how much you are spending now?

No, I believe we are spending an appropriate amount. And we have been working on our strategy, Gary, and that is providing a road map for us on the products that we really need to provide for earnings growth and sales growth in the future.

So from my perspective, I believe that the appropriate spending is occurring. But going forward, we'll probably have a more targeted road map, around filling gaps in our product line and addressing the customer needs maybe more than just a little bit of historically a bias towards maybe incrementally improving our products.

Right. You also shifted, it looks like, your automated systems business into a different area. I wonder if you could elaborate on where you could see the growth opportunities for that.

That's correct. We see meaningful opportunities with our automated business inside of FoodTech.

Many of our customers on the food side of the business, where we have very deep and long-lasting relationships, where we have bought productivity benefits in terms of our food processing equipment. They have significant material handling challenges.

We think bringing this business under the FoodTech portfolio will allow us to address further value creation for our customers by automating their material handling. We have already had some nice wins in the last few years. We think that by bringing it in there and having the sales force working that lever, we are going to see improvement in the automated systems business.

And then one last one. Can you speak, I know you have only been there a few months, but the acquisitions. Any update on the pipeline or anything like that?

Sure. This is Brian. I would say we will be active on M&A and we have allocated adequate internal resources. And we have a nice pipeline and obviously we have a strong balance sheet.

We are going to continue the process. Tom and I bring excellent outside resources that the Company didn't have before. And we are going to look at everything that is strategic, and provides an adequate ROIC, so we just remain active.

Okay, thanks.

Just to put a little more color around Brian's thoughts, from my perspective, I would really like to point out that food business where it is a very large industry with significant fragmentation. If you look at the meaningful plays that we have in food, there's a number of areas where we can do good value adding, synergistic acquisitions for JBT.

We certainly plan to give a much more detailed view of that in our May meeting, where we can really start with the strategy of how we create value for our customers and bring that around from new products and M&A. And put it all together in a comprehensive view for all of you.

As Brian mentioned, we are encouraged and do see opportunities here. In particular, like the food business in that area of acquisitions.

Okay, thank you.

Jason Ursaner, CJS Securities.

Just a couple of questions on the guidance for FY14. On the revenue, backlog is up over 30% year to year.

You mentioned that bookings remain strong. One of the nice parts about your business is a significant portion is recurring sales and after-market.

So it just seems like a decent part of the year is already in hand at a pretty high growth rate. I'm trying to understand the full-year mid single-digit range a little better.

Thanks, Jason, for the question. I'll put some color around it and then maybe ask Brian to step in and give you a little further distillation. But we certainly are encouraged by the inbound we enjoyed in the fourth quarter and the backlog position.

We've seen the order book developing in the first quarter, as we expected. So the visibility that we have ending 2013, going into 2014, is improved over 2012 versus 2013.

That said, we have talked about a few of the moving pieces in the business and where we are at in terms of some activity in AeroTech, where we have a bit of a headwind around the ground support equipment and the citrus situation. And we felt that mid single-digits was the right position as we look into the year today.

We certainly plan to have a further refinement of that in May, as we do that. And it's unusual for us to provide this type of outlook for the year this early.

Given the promising inbound and backlog, we felt that it was something we could reasonably do. As we go into May, I think you get a better feel. Brian, would you like to add anything else around that?

Yes, the one thing I would probably add is when you look at our backlog, which is up about 30% year over year, it doesn't include any of the after-market and the recurring revenue items. So it really is focused on equipment, which is about half of our business.

We do expect higher growth in the equipment side relative to some of the after-market and revenue side, which blends into that mid single-digit number. As a reminder, as we mentioned, the 33% growth in backlog, only 80% of it or so is projected for 2014.

Okay. And after-market, the release mentions both segments seeing growth. What type of growth are you seeing in after-market across the Company?

It's certainly been a trend. As you know, we have been focused on it in our strategy, Jason. I would give you a directional number of right around 4%.

We continue to focus on it and hope to continue to build that franchise going forward, given JBT's exceptional base we have of installed equipment out in the marketplace.

And the ground support equipment -- Can you hear me okay? I hear a lot of feedback.

You're coming through loud and clear to us.

Okay. The ground support equipment piece of AeroTech, can you talk about what the challenge is? It should seem like this would be a year where you would have seen that pent-up demand, given the winter weather we've had, airline profitability continuing to appear to remain very strong. Why wouldn't it be a better year for that business?

Good question. I appreciate you asking it. That is a multi-part question so let me walk it through in parts for you.

First part, as it relates to winter, obviously as you know, based on your question, we do have a nice plane de-icing equipment. Our history, Jason, is that typically the order activity will not materialize in the current period.

In other words, if you are having a strong winter you won't see the pick up during the winter for de-icing equipment, it will follow later in the year. So certainly we are planning for that and expect some relative strength in the de-icing business.

But answering the larger macro question as to why that ground support equipment hasn't developed in step with the return of profitability of the airline industry. As we look at it, the airlines so far have been primarily focused on replacing their aircraft fleet to drive fuel economy, and have been delaying or putting off investments in the ground support equipment.

We do expect that to improve, we just haven't seen those trends improve yet, relative to our order book. It is coming. It is just a matter of when they get through some of those aircraft upgrades and start focusing on the equipment they need to support those aircraft.

As a side note, some of the new airframes actually require slightly different designs of that ground support equipment. So that's certainly going come to be.

In addition I would highlight that Europe has been a particularly tough market for the ground support equipment. We have a number of private competitors over there that have been really scrambling for some collective share between themselves.

Quite frankly, we have consciously chosen not to accept some orders given the economics that we've seen in Europe. We've had a little bit of self-enforced discipline around making sure we are good stewards of the capital and not chasing orders that don't have good returns on them in Europe.

Last question for me. The guidance on corporate expense, how much higher is the accrual going to be for healthcare year over year? And then does it also include all of what was previously classified as other income?

Well, I would say the accrual on healthcare, we did have the unusual hits in the fourth quarter of last year. And we do, those were certainly some unusual circumstances. We are expecting some higher numbers for 2014, but not to the range that we saw last year.

Jason, this is Ron. What I would add is, we went into the fourth quarter feeling like our self-insured reserves were appropriate, and were what we needed. And what we saw in December was a few large instances of individual large claims.

So we had to top that off with $1.7 million, almost $2 million. Our reserves are back where they need to be. Based upon everything we've seen and analyzed and talked to, that these were unusual and we don't expect them to recur in 2014.

However, it's something we are monitoring on an ongoing basis. We continue like everybody else, to take actions to manage and mitigate healthcare cost increases. I'm sure that we'll be on that again in 2014.

From a GAAP basis, could you get some type of actuarial assessment where you have to put in a higher reserve that might reverse later in the year? But there would be a hit from a P&L perspective earlier in the year?

That is what happened in the fourth quarter.

So that includes accrual?

Yes it does.

Okay. I think that's it for me. Appreciate it.

Thanks Jason.

Walter Liptak, [JHS].

Maybe I could ask one overall. Now you have been there, we know what some of the strengths are of JBT.

I wonder if you could comment a little bit about what really needs to get done here. Where are the weaknesses? Relate that to the charge that we're taking in the first quarter.

Was it easy to identify these obvious changes that need to be made? And what really needs to happen long term?

Right. Very good, Walt. I have been here now about six months, and I'm very much encouraged by where we're heading with JBT.

Let me just give you an idea. It's becoming very clear to me how we unlock the value. And let's talk about the four elements for you and all the people on the call.

The first one is certainly the new management team. I believe we've assembled a team that really has the right skills and experiences to maximize the value creation for JBT. We've talked about that in releases and I commented a little about Dave and Brian on this call.

In addition, there's been a few changes underneath them. If you think about it, of the four operational leadership roles, we've now got three new people at JBT that are very clearly marching to the agenda and we have a lot of focus around that.

Second, there's some people in key operational roles underneath there that we have made changes, that I believe equip JBT for success in the future. The challenges in Europe, we have made a significant leadership change there to drive that.

In Asia we've really created a much more compelling opportunity by combining the JBT food and aero businesses under one JBT leadership to drive forward the important growth in China. In the Jetway business we have appointed a new leader who was in the business for a number of years, but was really fundamental to developing and growing that JASE business that we are proud of today. He is going to bring that experience to the overall gate equipment business. So some real positive leadership changes.

Next I'd take you to operational excellence. As you can see, we are well underway in terms of our customer value, our pricing activity. We're focused on productivity, inner operations; that includes the shop floor and the offices.

That is going to deliver significant benefit to us as we look to expand our margins in the future. We're being very disciplined in terms of how we manage and track that activity with the coordinated activity out of JBT under mine and Brian's leadership, where we have excellent visibility into that.

And certainly, the pricing and customer value. You heard me talk about how we create value for our customers on an earlier question around productivity yield. We are going to sell the value of JBT and make sure we capture that in our economics for our customers. It is a win/win situation.

So driving the operational excellence, we would certainly plan to have lead times improve, which creates significant advantage for us in the marketplace. First to deliver is an important benefit. It's one that I have used in the past to strategic advantage.

We know that once a customer makes a decision to invest in some new technology or new equipment, they are desirous of getting that investment in place once it has been approved through their management chain. You think about operational excellence as a way to improve costs. I also think about it a way to create operational excellence.

As we work our way down the continuum, certainly restructuring. I would like you to think about it more in terms of improving our business model, and how we approach our customers, and how we run our operations, and streaming streamlining that, and identifying those opportunities, and bringing those to bear certainly creates opportunity for us. Not just to lower costs, but also to redeploy resources where they are appropriate.

We're pivoting more to Asia. We're pivoting more to the emerging markets. We need to change our structure and our approach to the markets so we can get the resources where they have the greatest gain.

Last, certainly encouraged by the progress we are making on our strategy and the framework that results from that. I'm looking forward to our Investor Day in May, where we are going to communicate those elements to all of you. I think you'll find it very encouraging.

From my perspective, to have this all coming together gives me a lot more clarity into how we drive the improvements at JBT and how we start to really meaningfully unlock the values. So, I'm very much encouraged with where we find ourselves today and the progress we have made in a relatively short time in this transformation. Maybe I'll turn it over to Brian to give you a little more color about the second part of your question, about the restructuring activity and what that means to JBT.

Sure, hi Walt, it's Brian. As is relates to the restructuring, the $10 million to $14 million, it is a range at this point. We're going to firm that up over the next 30 days or so.

But what I can tell you is that in my short time here, I've got decent visibility, we have decent visibility in where the opportunities lie. As I mentioned, Europe definitely has opportunities, GSE, sorry, ground support equipment and our org simplification and the associated back office.

For the size of the Company we are, we are relatively complex. There's certainly going to be some opportunities and we're going to keep working on that.

There is good visibility on those items. We'll provide more color in May, including the annualized savings associated with it. Which is right now estimated at $9 million to $12 million.

Okay, that sounds good. Thanks for the color on that. I forgot to mention I wanted the answer in two minutes or less. (laughter) Just kidding.

I'm sorry we are a little bit enthusiastic about where we find ourselves on this journey. So that will give you a little color on that.

Okay. I wanted to ask about what we are going to get in May. Are you going do a 2018 aspirations? Where you'll show us the path that you think that you'll be able to take? And the margin and return metrics?

Walt, let me comment on May. You'll get our strategy, which will tell us which markets we are focused on, how we move the business forward. You'll get some vision around where we want to take the business and what's important to us.

And then last, you'll get a framework. We'll communicate some of the financial parameters around the business.

And last, it is certainly going to be an opportunity for all of you to meet our management. I do plan to have Dave and Steve with us also. You'll get an opportunity to see another layer of management at JBT and what they think about the business.

Okay, great. And just to make sure I'm clear on the special charges for the first quarter. Are you taking the charge in the first quarter, the expenses, though, would run through the year?

For example, the consulting fees, that should be it for the year, right? Or are we going to have more charges for consulting as the year goes on?

Just to clarify, we will take the restructuring charges in the first quarter. The cash from that will go out over the course of the year and deplete the reserve.

The consulting charges are really separate from that. And those will be concentrated in the first half of the year, but will be throughout the year.

Okay, great. The pricing strategy that you talked about, which is part of the consulting fees, that's not been implemented yet. You get benefits from that in the back half, is that correct?

Right. Walt, we are sequencing ourselves through the business units. So we have started to effect some of the pricing, but it is complex.

There's a lot of elements to it and we are focused on the long-term here. We will start to see some benefits in the back half of the year, but the overwhelming majority of the benefits will accrue to us in 2015.

All right. Thanks.

(Operator instructions)

I will now turn the call back over to Mr. Tom Giacomini for any closing remarks.

Thank you, Victoria. In closing, I would like to highlight some key points. Overall our business outlook is healthy.

For the full year we anticipate a mid single-digit revenue increase. At the same time, we have taken several steps for long-term value creation beyond 2014.

We have new management in place. We are accelerating the implementation of our operational excellence programs. And we are restructuring the business to drive efficiency and margin expansion.

While the costs will impact 2014 earnings, we are confident the actions will drive significant earnings growth in 2015 and beyond. Thank you for joining us this morning, and for your continuing support.

Again, thank you for your participation. This concludes today's conference. You may now disconnect.