JBT Marel Corp (JBTM) 2014 Q4 法說會逐字稿

Good morning, and welcome to JBT's Corporation's fourth-quarter 2014 earnings conference call.

My name is Kimberly, and I will be your conference operator today.

(Operator Instructions) I will now turn the call over to JBT's Vice President, Corporate Development and Investor Relations, Mr. Debarshi Sengupta, to begin today's conference.

Thank you, Kimberly.

Good morning, everyone, and welcome to our fourth-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 risks factors that may have an impact on our results.

These documents are available on our investor relations website.

Separately of note, starting with the fourth quarter 2014, we are classifying FX hedging, gains and losses in the individual segment results where previously they were reported in corporate expense.

We have reclassified the historical results accordingly, and the reclassification impact is immaterial.

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

Thanks, Debarshi.

2014 was a year of transformation for JBT.

The Company instituted management changes and introduced our Next Level strategy designed to capitalize on the strong market positions of our business.

We committed to aggressive goals for 2017, which includes annualized revenue growth of 6% to 8% while capturing 300 basis points of margin expansion.

In 2014, we delivered progress towards these goals ahead of our expectations.

At the same time, we posted strong financial results for the year.

For 2014, segment operating profit expanded 12% on a 5% increase in revenues.

GAAP earnings per share from continuing operations was $1.03 compared with $1.15 in 2013.

On an adjusted basis, earnings per share was $1.56, an increase of 24%.

Our Next Level strategy revolves around detailed plans to fix, strengthen and grow our business.

As part of fix, we embarked on efforts to streamline our organization.

We incurred restructuring charges totaling $14.5 million in 2014 to improve efficiency and right-size our business.

We completed our corporate and most of our US restructuring actions in 2014.

Our European restructuring is well underway and expected to be completed in 2015.

The fix also involves standardizing practices to leverage our scale.

We implemented a shared services model, consolidated back-office operations in the US.

We've also consolidated manufacturing and sales operations, allowing for cost efficiencies across FoodTech and AeroTech.

In 2015, we look to complete a European back-office consolidation.

However, the most essential and permanent part of fixed in our organization is the cultural transformation under one JBT.

We've seen exceptional cooperation across our businesses and geographic regions.

Our people are making joint sales calls, sharing best practices and we've even seen talent move between the business units.

This level of cooperation has also had a positive impact on the integration of acquired companies, enabling us to capitalize on complementary products and end markets.

To strengthen the business, we introduced the JBT excellence model, or JEM.

JEM includes value-based pricing, which has been rolled out across all our major businesses.

JEM also includes implementation of lean initiatives, or what we call relentless continuous improvement.

This is an integrated focus on safety, quality, delivery and cost that establishes a sustainable competitive advantage.

We have introduced RCI via extensive leadership training and have implemented it at almost all JBT production facilities in 2014.

There are specific components to our growth strategy including expanding to profitable aftermarket business, establishing a more direct presence in emerging markets like China, investing in aviation support equipment, and enhancing our protein processing and liquid foods portfolios through product development and strategic acquisitions.

In our aftermarket business, we are building a dedicated sales and service network that will capitalize on JBT's global installed base of equipment.

We increased our aftermarket sales and service staff by 31 people in 2014.

This puts us on track with our Next Level objectives and positions us to continue to generate superior growth and profitability from the aftermarket business.

In 2014, aftermarket revenues grew at a rapid 9.5% rate and margins expanded.

In addition to ongoing new product development across both business segments, acquisitions are an integral part of JBT's growth strategy.

In 2014, we completed three strategic acquisitions that complement our protein processing and liquid foods portfolios.

In December 2014, we had a big win with our acquisition of Wolf-tec, an innovative and well-respected leader in protein processing.

The combination expense our product line and significantly strengthens our presence in pork and beef processing.

And we are excited about the opportunity to globalize Wolf-tec's technology.

As part of our Next Level strategy, our goal was to add $70 million to $100 million in annual revenue from acquisitions by 2017.

We are already approaching the low end of that range, but that doesn't mean we will slow our efforts.

The success of our acquisition activity is the result of building our corporate M&A capabilities as well as engaging our business teams in the process of identifying, executing and integrating acquisitions.

Looking forward, we have a growing pipeline of M&A opportunities and will maintain a disciplined approach to growth through acquisition.

We are successfully implementing our Next Level strategy.

Overall, the benefits of the restructuring and operational initiatives were ahead of schedule in 2014, and we remain encouraged about the ongoing transformation.

Of course, we have not lost sight of our inbound order rates.

As you saw in the earnings release, inbound orders and year-end backlog declined compared to 2013.

While order rates at most of our businesses performed well for the year, comparisons were weak in Asia-Pacific, Euro and AeroTech.

As we discussed before, we believe that food consumption trends in Asia-Pacific will fuel demand for our equipment.

We also expect our direct presence in China to enhance win rates.

In Europe, while weak economic conditions present a challenge, we are optimistic that our new commercial organization in place as of year-end 2014 will enhance our competitive posture.

AeroTech experienced difficult comparisons in 2014 as expected following a very strong 2013.

Overall, the JBT order pipeline is developing well for 2015.

With that, I'll turn the call over to Brian to talk about 2014 and our business strength.

Thanks, Tom, and good morning.

Overall, our results for 2014 surpassed our expectations.

We achieved revenue growth of 5.4% for the year.

AeroTech and FoodTech revenues were up 8.2% and 3.9%, respectively.

Excluding acquisitions, organic revenues increased about 3% for the year.

On a constant currency basis, organic revenues increased 4.5% and total revenues increased 6.9%.

Both FoodTech and AeroTech contributed to the 12.5% year-over-year expansion of segment operating profit with a 70-basis-point increase in segment margins.

Corporate expense for the year of $37.5 million was up 2.7%.

This included $8.8 million in management succession and consulting costs compared to $3.7 million in 2013.

Excluding these items, corporate expense was $28.7 million versus $32.8 million a year ago.

Separately, we took a $14.5 million charge for the year in connection with our restructuring activities.

As a result, our diluted earnings per share from continuing operations was $1.03 in 2014 compared to $1.15 in 2013.

Adjusted earnings per share was $1.56, an increase of 24% versus a year ago.

Looking ahead to 2015, we forecast constant currency revenue growth of 7%, about 3% organically and 4% from completed acquisitions.

This is in line with our Next Level expectations for long-term growth.

However, due to the expected currency translation headwind, we anticipate top-line growth of 4% for the year.

We expect to increase segment operating margins by 50 to 100 basis points based on the continued implementation of our restructuring and operational initiatives.

The acquisition of Wolf-tec is expected to generate over $30 million of revenue in 2015 with EBITDA margins higher than our core FoodTech business.

In 2015, we expect a $0.12 EPS contribution before integration and purchase accounting impact.

This translates to $0.06 EPS contribution on a GAAP basis after such items.

The Company realized cost benefits of $4 million in 2014 from restructuring and expects to capture incremental benefits of more than $5 million in 2015.

That puts us on target to achieve our $10 million run rate cost savings goal by mid-2015.

As for our strategic pricing initiative, we are also ahead of schedule, realizing benefits of $4 million in 2014.

We anticipate $4 million of incremental benefits in 2015 for a total of about $8 million versus 2013, in line with our Next Level target.

These gains are partially offset by the planned investments in Next Level initiatives and other cost increases, including about $1.5 million in incremental pension expense in 2015.

Also, as previously discussed, the phasing out of AeroTech's military sales of the Halvorsen product line will have an unfavorable impact on operating income of about $6 million.

We project corporate expense of 3% of sales inclusive of a higher pension expense.

Interest expense will be slightly higher primarily due to the incremental debt in connection with last year's acquisitions.

Lastly, we expect the effective tax rate to be around 33%.

Based on these forecasts and assumptions, we arrive at JBT's guidance of $1.65 to $1.80 per share for the full year 2015.

That range includes an estimated $0.10 per share negative impact from foreign currency translation.

As part of our Next Level initiatives, we're also focused on improving our working capital management, particularly at AeroTech, where our performance has lagged.

In 2014, we achieved a 10% in working capital needs at AeroTech with improved collections, better inventory management and more customer advanced payments.

We are very pleased with the progress that we are making towards our Next Level goals on this front.

On February 13, we announced a new larger credit facility.

The facility was expanded from $300 million to $450 million and also features a $250 million accordion upsize option.

The facility provides us with greater financial flexibility to invest organically, pursue acquisitions and provides ample capacity to repay our private placement notes due July 2015.

I'm very pleased, as this marks another important milestone in the ability to execute our Next Level strategic goals.

With that, I'll open up the call for Q&A.

Operator?

(Operator Instructions) Jason Ursaner, CJS Securities.

Just first looking at the FoodTech segment, there was a sizable margin improvement versus last year.

The base last year was a little bit -- it seemed like it was a little bit held back because of a tough year in freezing and protein processing.

So just wondering when you look at the margin improvement, how much would you attribute to the strategic initiatives in pricing and cost alignment versus just maybe a better mix this year with those markets coming back?

Jason, I would say, it's tough to resolve that exactly because of the interaction between the businesses, as you mentioned.

But I would say overall, the strategic initiatives were more meaningful in their impact than just general operational improvements, particularly in Europe.

But also, we had done a portion of the restructuring -- a good portion of the restructuring in Europe, and that started to benefit us as we exited the year.

So I'd say altogether, as we talked about, with our initiatives, they drive growth and improvement, and we are starting to see that be borne out in terms of our operating results.

Okay.

And just staying with FoodTech again, margin was higher but revenue orders and backlog were all down a bit on an organic basis.

So understanding the currency factor is in there, I guess how do you measure if some of the initiatives on pricing specifically are working or whether at some point maybe you are possibly pricing yourself out of the market?

Sure.

Just to remind you, as we've mentioned on the earlier calls, the pricing overwhelmingly as we exited the year and the benefits we got were really driven by our aftermarket business where we saw that strong 9.5% growth.

The new equipment pricing is slowly phasing in, and, as we've mentioned, we are being very selective on that as kind of the razor blade handle and razor blade.

So from my perspective, I don't see pricing as being a headwind in terms of our bookings.

And if you look across the numbers, the sales really were basically flat, Jason, on a constant currency basis.

So for my feeling, it was a really solid end to the year in 2014 for JBT.

And I was really pleased at how the margins progressed through the year.

So I think it was just a really strong year for us.

Yes, Jason, this is Brian.

I would add that the pressure on sales for the quarter as we ended the year was more so on Europe and Asia than it was on any impact on pricing, as Tom said.

Okay.

And for the guidance, you sort of mentioned revenue growth in the 4% range after offsetting the currency headwinds.

I'm getting to around maybe 4.5% from acquisitions.

You mentioned $30 million from a full year of Wolf-tec, and there's another couple of months from anniversarying the ICS acquisition.

So you still need some organic growth to get there.

Obviously, it's not in the backlog right now.

So just wondering, what's giving you confidence to get that as you move through the year?

Right, so with respect to the sales and the visibility into next year, keep in mind that our aftermarket is not really in our backlog.

Only about 15% of backlog consists of aftermarket.

And so while we have typically very good visibility and aftermarket and our service revenues and our other revenues that are recurring, we don't see any issues with having a good visibility into that.

Yes, and I would just add to Brian's comments as you -- as I talk with our salespeople and just understand what's happening in the markets, I was just overall encouraged with how the customer project activity was developing in the back half of the year.

And as you know, our orders are large and lumpy, and sometimes they book in one quarter, sometimes they book in the following quarter.

But I was just encouraged by the clarity and the overall order activity we were seeing with our customers.

Okay.

And just last question for me.

I guess irrespective of some of the short-term purchase accounting stuff on the acquisition, maybe just from an operational perspective, both seem to be very closely aligned to the core and yet a nice order yesterday in liquid foods.

So maybe just wondering if you could talk a little bit more about integration and expectations for growth in liquid foods and some of the new applications in protein processing specifically.

Absolutely.

We are really encouraged by the order flow -- excuse me, the deal flow we were able to put together last year, and it lined up extremely well with our strategy with two in proteins and one in liquid foods.

And Jason, it's really those fundamental long terms we talked about on protein.

As we make these investments, we are able to take what is typically a regional business and globalize it.

And we really like the long-term demand activities around protein as wages increase, people's menu choices change and they consume more proteins.

So that's a great tailwind.

And then our liquid foods in the Western markets, as people look to more convenience, having quick breakfast in the car or on the road, and the need for that is just a huge trend.

And people moving away from traditional sodas and the juices and other beverages, it's just a great tailwind.

So we are pleased to be able to make these acquisitions that fit right into that strategy, but they also -- I would point out, they've got good margin profiles, the companies we've looked at so far.

They have strong aftermarket, and they've got great brands behind them.

So we are really pleased.

And last, as you mentioned, the orders for the hydrostatic sterilizers in our acquisition in liquid foods certainly was a great and early nod to our ability to really work across the globe to develop sales for these businesses.

They both came out of Asia.

Our Asia sales team was heavily involved along with our ICS people who did a great job of getting those done and positions us for a strong year in that acquisition.

And as you mentioned, that starts to become an organic engine for JBT.

Okay, great.

Appreciate it.

Thanks guys.

Chris McGinnis, Sidoti & Company.

Thanks for taking my questions, and nice quarter.

Quickly, if you can just dig into the margin expansion seen in the quarter.

Can you maybe just go through maybe in a little bit higher level of detail of what were the contribution -- the biggest contribution points to that?

So if pricing is how much, do you mind walking through that or is that too much detail?

Yes, that's probably a little bit too much detail.

I will tell you that the pricing did have a significant impact as we went through the quarter as well as some of the operational initiatives.

And the aftermarket mix does continue to improve in our mix.

Right.

And Chris, I would add that as we talk about RCI, one of the elements I mentioned early on and I just want to indicate again is our ability to improve our lead times and our quality will drive bookings and top line ultimately.

And we have a number of very focused projects where we are looking to shorten the lead time with RCI and deliver at a higher quality so that we can secure our orders more aggressively.

And we think it will define us in the marketplace.

So if you combine the pricing, the restructuring, some of the cost-outs and the facilities just by improving our productivity, and then you add that up with some new products and shorter lead times, I think it puts us on a really strong competitive footing with improved margins and the ability to grow in difficult or more challenging market conditions.

Sure.

And I guess just maybe touching on that, how important to reach your 2017 targets is the market strengthening compared to what you can do?

Our assumption when we put that together was that the market doesn't strengthen.

And we certainly didn't foresee this currency headwind, although JBT will digest that and move on.

But in terms of it was more on a thinking around constant and steady-state market conditions, obviously if things were to significantly improve, that would benefit us.

If the economy was to move back in a material way, that would be more of a headwind.

Great.

And then just lastly on the aftermarket, you gave a little bit of detail.

Could you just maybe talk about -- I know it's very early still, but where you're at in terms of where you think it's going to be fully deployed?

Maybe like fifth inning, third inning?

Something to that effect.

(laughter)

Yes.

So in terms of the progress, a good metric that we look at is our goal is to add 80 new heads as it relates to the service and sales organizations specific to aftermarket.

We've added 31 so far, so let's call it 40% of the way through our investment.

Great.

And the -- obviously, you continue to see the deep penetration from the customer on that.

Absolutely.

And these investments, one thing you add on board the people, and then it takes six or nine months before they really start to generate sales and contributions.

So as we've always mentioned, we have to invest upfront and then the benefits come in the back.

And what I'm pleased about this last year for JBT, Chris, is that we were able to make these investments while at the same time expanding margins.

And that's really what we signed up for in the Next Level plan, and we're delivering on that.

So we're putting the pieces in to grow the business, while at the same time we're seeing our margins expand.

And I think that's a pretty powerful combination for us as we move forward.

Sure, great.

Thanks again for taking my questions.

Walter Liptak, Global Hunter Securities LLC.

Good morning, everyone, and congratulations, guys, on a good year.

Thanks, Walt.

Good morning.

I wanted to ask, Tom, in your prepared remarks, you mentioned that you were ahead of schedule on some of those 2017 goals.

And thanks for providing us with the 2015 benefits for cost benefits and pricing.

But I wondered, where do you think you're ahead of schedule?

And if you are ahead of schedule, why didn't you pull forward more benefits in 2015?

Right, I would look at where we are ahead of schedule as being we indicated the acquisition program is certainly ahead of schedule.

We increased the amount of restructuring that we took in 2014, Walt, and the benefits that are associated with that.

So we were able to get more restructuring done in 2014 than we had originally forecasted, which allowed us to accelerate.

And then last, I would add we certainly are seeing the benefits of pricing come through in a more material way than we had originally forecasted and are pretty bullish on its ability to continue to contribute in 2015.

On the softer side of things or the little bit less tangible in terms of numbers is the investments and the hiring we were able to do in support of the aftermarket.

Some of the new products we have coming through in the queue, which I'm encouraged by.

And then last, just the big cultural changes in JBT around -- under one -- our One JBT initiative and the benefits that are coming together there.

I mentioned in my comments just the way we are working together developing market; taking AGV and selling into food customers; seeing the businesses work in shared facilities, share people, and the initiatives; the RCI.

Just a lot of positives happening there.

And I'd say the transformation is quicker than I had originally hoped, and I've just been really encouraged the way our people have embraced it.

Okay, sounds good.

Along the lines of the discussion we have had about aftermarket sales, what kind of growth rate are you expecting for your aftermarket sales in the revenue guidance that you gave us?

Hi Walt.

This is Brian.

We haven't broken out the guidance as it relates to aftermarket for overall equipment.

But I can tell you it's embedded into the 3% -- sorry, the 7% overall growth rates, which includes the 3% organic and the 4% acquisition.

Okay.

Of the 31 people added, how many are sales and how many are support?

You know, it's an interesting situation where the service people typically sell, and we really don't categorize them that way.

It's a collective organization.

I would tell you we've strengthened in both pockets, though, and we look up to all of our people in the aftermarket to be constantly searching for opportunities to sell the product and services.

For example, if an individual is in repairing a freezer, certainly he or she would look to sell some of the maintenance and other components around that going forward or indicate, hey, you need a belt or a new drive.

And so we're just going to focus on communicating the absolute number externally.

And I'm really pleased -- as I discussed this earlier in the year, we were struggling a little bit getting this hiring going, and we really accelerated the back half, Walt.

And in spite of some retirements we incurred, net net we had a great move up in the numbers by the end of the year.

Okay, great.

And just a couple of minor things.

Brian, what are you expecting in 2015 for corporate expenses?

Yes, it's about 3%, so in that $30 million to $32 million range.

And that includes $1.5 million of the pension increase.

Okay.

And what about for capital spending in 2015?

In a range of about $30 million give or take.

Okay.

sounds good.

All right.

Thank you.

Jason Ursaner, CJS Securities.

Thanks for taking the follow-up question.

Just on Wolf-tec specifically, you mentioned taking the technology global.

I thought it only had distribution rights in certain countries.

So I'm just wondering how this would work for them.

Jason, a number of the products that Wolf-tec manufactures and sells are their own technology, and we have a full ability to take those global.

Then there's a few select categories where they represent some products in the Americas.

And those, we can certainly strengthen across Central America and South America.

But a good chunk of the business is something that we can take globally.

Okay.

Appreciate it.

Thanks.

(Operator Instructions) There are no further questions at this time.

I would like to turn the call over to Mr. Tom Giacomini for closing remarks.

As Brian and I have discussed this morning, we delivered strong performance in 2014 and achieved progress towards our Next Level goals ahead of our expectations.

I am also very encouraged by our momentum going in 2015.

Of course, none of this would be possible without our JBT team members.

They have embraced the One JBT culture and are making the changes necessary to capture the full potential of our business.

I thank them for their hard work.

Finally, I like to remind you about JBT's inaugural technology day being held on March 5 in Orlando and Lakeland, Florida.

During the day, we'll provide an update on Next Level initiatives, showcase RCI implementations at plant level and provide investors the opportunity to spend time with our management team.

We hope you can join us.

This will conclude today's conference call.

Thank you for your participation.

Have a great day.