JBT Marel Corp (JBTM) 2014 Q2 法說會逐字稿

Good morning and welcome to JBT Corporation's second-quarter 2014 earnings conference call. My name is Tiffany, 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, Tiffany. Good morning, everyone, and welcome to our second-quarter 2014 conference call. With me on the call are our Chairman, President and CEO, Tom Giacomini, and our Executive Vice President and CFO, Brian Deck.

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 2013 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.

As you saw on the earnings release, we reported another solid quarter at JBT. For the second quarter of 2014, revenues increased 9%, and segment operating profit expanded 21%. Reflected in this margin expansion, we are capturing the initial benefits of the value pricing initiative and restructuring.

Reported GAAP earnings per share was $0.38. On an adjusted basis, earnings per share was $0.45 compared to $0.30 in the second quarter of 2013, an increase of 50% year over year.

The general business environment continues to be favorable with strength in the US and improvement in Europe. While Asia has been a strong contributor to our performance this year, we have seen some recent softness in the marketplace. We continue to believe in the growth potential in Asia. As I will discuss in a moment, we are investing in facilities and sales resources to enhance our presence in this important market.

As you saw on our earnings release, inbound orders for the second quarter were down 16% year over year. Several orders we expected to recognize in the quarter did not incur at FoodTech and AeroTech, but they remain in the pipeline, and we expect to receive them in the back half of the year.

Beyond the quarter, JBT is taking steps to enhance our long-term performance, both through restructuring actions that improve efficiencies and rightsize our business and with the implementation of our next level strategy that creates a culture of continuous improvement and a platform for growth.

We are pleased with the progress we have made and are on track with projected benefits and savings. Brian will address this more in detail in his remarks.

For those of you who intended our Investor Day in May, you heard details of our next level strategy. At the event, we talked about how our two well-positioned businesses, FoodTech and AeroTech, have underperformed their potential from a growth and margin perspective. We laid out a detailed plan around fix, strengthen and grow to close the gaps and create value. I have and the organization has committed to the following.

In terms of fixed and strengthen, we plan to capture 200 basis points of margin expansion by 2017 based on the combined benefit of our organizational simplification, value-based pricing, continuous improvement and strategic sourcing.

With our next level strategy, we are creating growth culture. Over the 2013 to 2017 period, we plan to accelerate revenue growth to a 6% to 8% annual rate. We will achieve this by investing in new products, committing resources to our aftermarket franchise, capitalizing on growth in emerging markets with locally tailored products and through strategic acquisitions. This planned improvement in our top-line growth and margin expansion translates to a projected 10% to 14% annual growth in segment operating profit and a 17% to 23% annual growth in operating income.

Let me update you on the progress on [GEM], the JBT excellence model. A critical aspect of GEM is what we call relentless continuous improvement or RCI. It has an integrated focus on safety, quality, cost and delivery that creates a sustainable, competitive advantage. We are rolling out lean manufacturing training. By the end of this year, we expect to have introduced RCI at most JBT production facilities.

Our Orlando ground support agreement facility where we have completed RCI training is an early example of what we can achieve. We are implementing continuous flow for the primary product lines and daily gamble walks in the production and office areas. The new RCI system will enhance productivity, reduce working capital and improve quality.

Now, we are taking what we have learned in Orlando and sharing it with other JBT locations. Last quarter we talked about specific plans to build our aftermarket parts and service franchise. We are in the process of hiring talent as we build a dedicated effort to leverage our installed base and grow aftermarket revenues.

As I mentioned at the start of the call, we are investing in the important Asian market. We see high-growth opportunities there and believe a greater direct presence will enhance our competitive physician.

In the second quarter, we opened a new joint FoodTech and AeroTech sales office in Shanghai. We are completing a joint manufacturing center in Kunshan, just outside of Shanghai, which we expect to be operational in the third quarter. The facility will include a demonstration center with freezing and portioning equipment. A follow-on investment will be a complete tech center in Kunshan that will include a full range of FoodTech equipment. We plan to have the tech center operational by mid-2015.

In the past, we have had success capturing business with Western companies in Asia, but we also want to grow business with local customers and believe having a more robust direct presence is critical. We know from experience with our tech centers in the US and Europe that we can significantly enhance our win rate by providing customers an opportunity to conduct test runs on our portioning, cooking and freezing equipment. We believe that adding a tech center in China will drive conversion in Asia.

On the acquisition front, we are expanding our pipeline of M&A opportunities. In the first quarter of 2014, we completed a small bolt-on acquisition of Formcook AB of Sweden, which made us the leader in Teflon cooking equipment and complements our protein processing portfolio. And on July 1, we acquired ICS Solutions, a worldwide leader in engineering, installation and servicing of high-capacity food preservation equipment. The acquisition expands our liquid foods portfolio and helps us on two strategic fronts. With ICS' complementary product line, JBT now offers the most complete range of in container sterilization solutions available to the beverage, dairy and canning industries.

Additionally, ICS' large worldwide installed base provides a strong, recurring revenue stream.

With that, I will turn the call over to Brian to talk about the second quarter, our business trends and our revised outlook for 2014.

Thanks, Tom, and good morning. Let me start with the highlights of our second-quarter financial performance.

Revenue increased 9% year over year. Both businesses posted solid gains with FoodTech revenue up 7% and AeroTech up to 12%.

Segment profits grew 21%. AeroTech profits more than doubled from a lower base in the year ago period, primarily as a result of higher sales volume and favorable product mix in the quarter.

FoodTech operating profits were up 10% as we started to see the benefits of our value pricing strategy. Additionally, the strong revenue gains in our equipment offering specifically to the protein processing market provided good operating leverage for the quarter.

Corporate expense in the second quarter was $9.1 million. That included $2.1 million in management succession costs and consulting expense. As a result, for the second quarter of 2014, we reported diluted earnings per share from continuing operations of $0.38. Adjusted earnings were $0.45 per share compared to $0.30 a year ago.

Beyond the quarter, as Tom mentioned, JBT is taking steps to enhance our long-term performance. One of the early programs we developed was a value-based pricing model. We are capturing the benefits of the pricing initiative a bit faster than anticipated. We expect to generate more than $3 million from our operational excellence initiatives in 2014, primarily from strategic pricing actions.

Our planned restructuring actions are also on track. We booked $11 million of restructuring expense in the first half of the year and plan to book an additional $1 million to $2 million in the second half.

We continue to expect more than $3 million in restructuring savings in 2014 and at least $10 million in run rate savings by mid-2015. The 2014 restructuring savings together with this year's benefits of our valued pricing efforts will fund planned spending on the Company's strategic growth initiatives in the back half of the year. This includes our commercial growth efforts in our aftermarket business, Asia and in our Jetway aviation support business. And we are adding M&A resources as we look for additional growth primarily in protein processing and liquid foods.

Speaking of acquisitions, we acquired ICS Solutions in July for EUR26 million. The business' profit margins are attractive and above FoodTech's current margins. For the second half of 2014, ICS should be neutral to JBT's earnings after integration and transaction costs. For 2015, we expect the business to contribute $20 million to $25 million in revenue and $0.10 in earnings per share.

Moving on to our full-year 2014 forecast, we continue to expect mid-single digit revenue growth. We believe segment operating margins will be up slightly from the 9.8% level posted in 2013, largely due to the benefits of our pricing and cost savings initiatives. The margin expansion will be somewhat offset by higher than previously estimated corporate expense. Specifically we expect corporate expense to be about $1 million higher than previously estimated as a result of setup costs associated with our back office consolidation in the US and the higher level of M&A activity.

As a result, we believe our corporate expense, excluding one-time costs, will be at the upper end of our previously announced range of $25 million to $27 million. The one-time cost for consulting expense and management succession are still estimated to be approximately $9 million for the year.

As it relates to income taxes, we still expect a tax rate in the range of 32% to 33%.

One last item worthy of mention: we have a union contract that expires in the third quarter at our Ogden, Utah operation. We hope to successfully negotiate the new contract as we have done in the past.

With those guidelines, we have increased our earnings forecast for 2014. We expect adjusted earnings, which excludes the restructuring charge, management's succession and the pricing and strategy consulting costs, to be $1.45 to $1.55 per share.

With that, I will open up the call for Q&A. Operator?

Jason Ursaner, CJS Securities.

Good morning. This is actually Jack O'Brien calling in for Jason Ursaner. He is stuck on another conference call and apologizes for not being able to be on.

I have two primary questions. First, on the decrease in Asian orders, besides commentary on timing delays, I was hoping you could give a little more detail on what you were seeing in some of your key verticals that gives you competence beyond the very short term that the micro factors affecting your business are still trending in the right direction?

Good morning, Jack. Well, as we look across the businesses, they remain very solid. As I mentioned in my opening comments, the US continues to move along quite smartly, and we are actually seeing some improvement in Europe, particularly in the food businesses.

As we look to Asia, overall it has been a very strong contributor this year, but we did see some softness in the quarter. We do not attribute it to any sustainable situation or anything that in the long term gives us a negative view of the business. As I look across the orders specifically, we were expecting a number of large orders to be completed in the quarter that just didn't get done for a variety of different reasons at our customers. There is no single thread that runs through those orders.

I would tell you that in July we managed to close a few of those already. And as we look at the back half of the year, we feel we are on track to deliver our results and still remain quite optimistic about our business at JBT.

Okay. Great. Thank you for those details. And then the second question relates to the restructuring charges, pricing initiatives and the overall next level of strategy in general. There is obviously a lot of movement going on under the service, and you publicly committed to targets for what it all should mean to long-term revenue growth and margin expansion at the Investor Day.

But I am wondering, Tom and Brian, given that you have both lead transformations before, maybe you can comment on internally below the surface how you would compare this with some of the past experience you have had? How much of the next level strategy you see as being locked in or very achievable with the right investment versus how much is really going to be a stretch and tough to get right within the next couple of years?

Thank you. I would tell you that I am very pleased with the progress we are making so far on the next level initiatives. Brian mentioned earlier that the value pricing is well underway and that we are really making our progress on the restructuring also.

The biggest change is the cultural change at JBT as we learned to act and operate as one business and get the benefits of common ownership, and I have been very encouraged by the reception we have got from the long-term JBT employees and the progress we are making with realigning ourselves under one JBT.

From a personal perspective and some individuals, the restructuring has been a lot of difficult, but we are materially through that. And I think our people are now focused on the task ahead and looking to be delivering their tasks under next level, whether it is a growth initiative or a cost-based one, and secondly, really holding themselves accountable to the commitments they made to the organization.

So I think we are moving along smartly. I would say compared to past activities, I am encouraged by how quickly it is going. But I would ask Brian to put some color, too.

Sure. Hi, Jack. It is Brian. So I would add that the structuring activities compared to what I have seen in the past are pretty similar. There is a cultural aspect that needs to accepted, and I think we have gotten past -- we have gotten past that. And there is good acceptance onto the activities that need to occur. We have seen some changes to our strategy in terms of the cost effectiveness on a timely basis slightly, but that was really baked into our commitments and to be expected as you go through some of these changes to the organization. And we mentioned in my comments some of the costs associated with the upfront restructuring of our back office. Particularly the back office is very active right now, and that is a big part of our cultural shift moving from a more decentralized to a more centralized, everyone pulling on the orders in the same direction. But now that we are at that point where everyone has accepted, we are moving towards very rapidly and on track for our commitments.

Okay. Thank you for taking my questions.

Walter Liptak, Global Hunter.

Hi, thanks. Good morning, guys. I wanted to kind of follow on the questions or you know I guess the conversation we're having so far. But along the lines of the changes in back office, at what point are you on kind of factory throughput and changes to the lean thinking in the factories?

Yes, Walt. This is Tom. We are early in the journey on RCI, and I mentioned the Orlando example. We have got good work underway in a couple of our other operations in the US. We just rolled out our first round of training in Europe in a material way, and we are just starting to think about some of the other geographies like Asia.

So, as you know, these transformations are a journey, and we are making and putting our focus on the larger operations where they can have the greatest impact.

What I would expect is when we start to get material traction on this, you will start to see the benefits of the working capital, in particular on the AeroTech side of the house where you will notice we are working harder earlier because as part of the next level we did sign up for material improvements in working capital.

Some of the things that will come a little later that we also talked about would be in the area of outsourcing. We have had to do a lot of initial work just to get ready to do sourcing activities for JBT, you know analyzing spends and things of that nature. So that is another area where we are in the first inning.

But in terms of the restructuring and the pricing, very good progress and meaningful progress, and we are pleased with where we sit. So we are on schedule, and this is a multiyear program that is going to continue to drive margins, improve working capital. And then the other third and most important element in the long run for JBT is the next level enables growth. You know, it enables growth in Asia, it enables growth in our aftermarket, and it brings us a much more comprehensive and market-leading protein processing and liquid foods portfolio.

Okay. All right. Great. Sounds good. Kind of along those lines, you mentioned the value-based pricing. I wonder how much if any value-based pricing is factored into the $10 million for 2015?

The $10 million that we talked about for 2015 was really with respect to the cost savings. Separately, we are looking at in excess of $6 million for 2015 on the pricing side.

Oh, great. So a total of $16 million in 2015?

Correct.

Okay. Great. And I guess I was hoping to get a little bit of more detail on some of the growth initiatives like the aftermarket parts. Can you tell us about the operation you are putting in? Where is it going to be located? What do you envision for it?

The aftermarket activity is still housed within the business as well. For example, inside of freezing and cooking and the reason that we decided to that is there are some fairly specific technologies that are housed inside each business. But what we are doing is we're bringing organizational focus to it, so dedicating resources, having people focused on building that franchise. And then the two biggest constraints, quite frankly, historically have been availability of service technicians and dedicated selling efforts on the aftermarket.

So we are in the process of putting those resources in place. I would tell you that it is not as easy as you might hope to hire good service technicians, but we are making progress in starting to find ways to do that. And as we put the service technicians in place, we've demonstrated to ourselves that they definitely have the ability to drive revenue and profitable revenue for us. So that is really how we go about it. A focused organization on aftermarket and then additional selling and service people.

The one thing I would add is there is, as Tom mentioned, a tremendous amount of effort in growing the aftermarket business and sales people. And we do have the benefit that the restructuring savings and the pricing initiatives will help fund those initiatives.

I understand. Okay. Great. I will ask one more and then get back into queue. So which -- you provide the little bit of color on the order delays. I wonder if we can get a little bit more from you, like which geographic regions? You know, is it Asia where we are seeing the order delays, and is there something where we are going to get a flood of orders between now and the end of the third quarter? Or are you thinking that these are going to push further into the fourth or 2015?

Well, our expectation is that the orders will materialize in the back half of the year. I mentioned we have already closed a few in July that we had expected in the second quarter. There is no specificity in terms of region or business. It was pretty broad based. I mean some might -- we might attribute some of it to just the summertime type of situation, but right now we see the orders coming through, we see the customers finalizing the steps to complete the orders, and I remind you that we have a pretty high bar in terms of booking orders. You know in a lot of cases, we expect deposits and things of that nature, and we are certainly not going to compromise or waiver on that. So we make sure we do the right things before we actually put them in our order book. So from my perspective, we still have a good degree of confidence around getting those pulled into the back half of the year.

Okay. Good. Thank you.

Gary Farber, CL King.

Just a couple of questions. One, can you sort of quantify in the quarter what percentage of revenue the US was and Asia was?

We do not actually disclose that breakout specifically.

Okay. And can you also with all the improvements you have made in the Company, I don't know if it is too early to say this, have you gotten any different feedback from your customer base? Is it visible to them, some of the changes?

Gary, this is Tom. I would tell you that we've heard in numerous cases that there is a desire, for example, for us to continue to ramp up our aftermarket service capabilities, and I would offer up the recent ICS acquisition where we had the largest customer and one of our existing large customers in the container sterilization marketplace pronounce to us or announce to us that they were very excited that JBT picked up ICS because they saw our renewed focus on service and that ICS was not at the level JBT was, and they are just very happy that we bought the business and hope we can bring that same energy and enthusiasm to the ICS portfolio.

I think our demonstrated push towards Asia is very interesting in that regard, too. The combined JBT selling office, the combined facility, the tech center, we are really demonstrating to the Asian marketplace that we are committed in the long run to being a significant player over there, and we feel that the customers and based on our experience, the customers will see that commitment and respond positively to JBT as a result.

Okay. And then, you know, JBT always had very strong market shares. Just wondering with all the changes that have gone on, maybe you are going to get in this too early, but have you seen any changes in the competitive environment, competitive responses, or when you go bid on projects, any differences, anything along those lines?

No, in terms of the marketplace, we haven't seen any material changes in our competitors. We continue to look for new technologies or opportunities to expand our offering, Gary, so that we are not boxed into our current spaces, and certainly some of the acquisitions we have done recently and maybe where we looked in the future open up running space for us.

You know, you look at ICS or you look at Formcook, we've already booked some nice orders, and by integrating those businesses, it actually opens doors. ICS enjoys a number of customers that GPT hasn't historically enjoyed and served some different market niches that we have. And we don't always know every little pocket our products can sell into. And as we bring those businesses in, we are finding out that there are, indeed, cross-selling opportunities. They are not a big part of our economic analysis obviously because we are disciplined, but we are going after those hard.

And you spoke before about I think some raising the aftermarket hires, I'm just sort of wondering as far as background of the people you are hiring, is it people with industry expertise or people with sort of a different skill set (inaudible)?

It doesn't necessarily require industry expertise. You know, you might look for somebody who knows PLC controls o somebody who knows motors and gear drives. So it is general industrial experience is what I would relay as being what we are hiring for.

Right. Okay. And then sort of lastly, it sounds like there is -- you have a lot on your plate as far as sort of reconfiguring and restructuring the Company. I am just sort of wondering, as you spend increased time with the Company, do you continue to see additional opportunities for improvement beyond sort of what you've already articulated in your plan?

Yes, we do, but we have to balance that with our ability to manage those opportunities and balance that with our desire to make sure we are not exclusively focused on restructuring or cost savings and that we are also taking the steps to grow. Because in the long term, that is what makes JBT a healthier business and that what makes JBT able to deliver the results and return that we want to.

So we are looking to balance those. But from my perspective, I have been really encouraged by the way the people and the team members at JBT have been responding and just how hard people are working. They are digging in and taking on the challenges and making things happen. So I would tell you that we are making meaningful and solid progress as a business.

Okay. Thank you.

Walter Liptak, Global Hunter.

Hi. Thanks, guys. So I wanted to ask about the backlog. You have got the $400 million backlog, and what is the margin mix or product mix looking like for the second half? For example, AeroTech you mentioned that there was a favorable mix that helped their profitability. Does that AeroTech mix continue into the second half?

So, in terms of our guidance, so we are guiding towards mid-single digit revenue growth for the year and some improvements in the margin, particularly as we get into the operating leverage that we are going to get.

There is, obviously, a focus on our aftermarket business. We continue to see strength as we put more resources on that. We do not have -- we do not have specific guidance as to increasing margin in the particular lines of business, etc. I would just say that our guidance on mid-single revenue growth year over year remains intact, and we do see some increasing margins in connection with that operating leverage that we are going to get.

Okay. Let me try it this way. You know, your gross margins were able to better than we expected in the second quarter. Is that the sustainable margin that you are going to have in the back half of the year?

Yes, we believe that the margins that we are running are sustainable, and frankly, as the pricing initiatives continue to kick in and our cost initiatives kick in, we would expect that there will be some continued progress.

Okay. Great. All right. Thanks, guys.

That was our final question. I would now like to turn the call back over to Tom Giacomini for any closing remarks.

As Brian and I have discussed this morning, our business remains healthy. We have made good progress implementing our restructuring and the next level of strategy to enhance JBT's profitability and growth on a longer term basis.

Thanks for your interest and support. We look forward to updating you on our progress again next quarter. Last, thanks to all the JBT team members for their commitment to one JBT and the positive results this quarter.

Thank you. This concludes today's JBT Corporation second-quarter 2014 earnings conference call. You may now disconnect.