JBT Marel Corp (JBTM) 2015 Q3 法說會逐字稿

Good morning and welcome to JBT Corporation's third-quarter 2015 earnings conference call. My name is Samantha and I will be your conference operator today. (Operator Instructions).

I would now like to turn the call over to JBT's Vice President, Corporate Development and Investor Relations, Mr. Debarshi Sengupta, to begin today's conference.

Thank you, Samantha. Good morning, everyone, and welcome to our third-quarter 2015 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 2000 (sic) 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.

Also, our discussion today includes reference to (technical difficulty) to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and posted on our investor relations website.

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

Thanks, Debarshi, and good morning all.

We are delivering meaningful progress at JBT. From simplifying our structure to integrating acquisitions via our JBT excellence model, we are making real improvements. I am pleased to say that we have a team that is taking action on numerous fronts that significantly enhance JBT's growth and profitability.

Our focus on growth and margin expansion was again reflected in our third-quarter performance. We generated strong growth organically and from acquisitions, with excellent performance at FoodTech. Higher segment margins reflect the success of our RCI program, including strategic pricing, productivity gains, and growing benefits of our sourcing activity. And solid bookings for FoodTech and AeroTech reflect good momentum.

Brian will walk you through details for the quarter, provide geographic trends, and update you on our full-year outlook. Then I will provide some color about the benefit of our acquisitions and the growth drivers for the Company. Brian?

Thanks and good morning.

In the third quarter of 2015, we again posted gains across all key metrics. Year over year, revenue growth was 12.4%. FoodTech revenue was up 20%, while, as expected, revenue was flat at AeroTech.

As we discussed last quarter, we planned for a big second half from FoodTech and they are delivering. On a constant-currency basis, FoodTech's revenue increased to 33% year over year, composed of organic and acquisitive growth of 19% and 14%, respectively, for the quarter.

At AeroTech, we anticipated tougher comparisons, given a particularly strong second half of 2014. AeroTech beat our expectations as they successfully booked and billed additional mobile equipment in the quarter.

To a smaller degree, JBT's third-quarter performance reflected our continuous improvement efforts to even out operating activities.

On the order front, total inbound orders were up 5%, including a 19% increase at FoodTech. On a constant-currency basis, FoodTech orders were up 33%, 24% organically and 10% from the acquired businesses. While AeroTech's orders were down year over year, they posted another strong quarter of $96 million.

Let me give you some color on geographic trends. Overall, business conditions in the US remain strong. In Europe, we are capturing significant margin gains from restructuring and are enjoying good topline growth, although offset by currency effects. While the food side of the business is strong, AeroTech is seeing tougher competition in Europe, largely due to the weaker euro that benefits our competition more than JBT.

In Asia, we expect to be up slightly for the year. Our liquid foods business is doing well, aided by acquisitions and the globalization of the product offering. Protein processing in Asia is down, due to weakness in China. For AeroTech, both our fixed and mobile products have improved in Asia.

In Latin America, our Brazilian-based business is projected to have a record year in local currency.

Looking ahead to full-year 2015, we raised our midpoint -- we raised the midpoint of our guidance with a revised range of $1.75 to $1.80. Included in that range is a currency translation headwind of $0.18 and $0.08 per share unfavorable impact from acquisitions.

We have increased our full-year revenue growth estimate to 9% to 10%, reflecting organic and acquisitive growth of 8% and 9%, respectively, less a 7% foreign-currency translation impact.

We expect full-year 2015 segment margins to improve 50 to 75 basis points from the 10.4% achieved in 2014. On a segment EBITDA basis, which reflects the progress of our business before the stepped-up amortization charges associated with the acquisitions, we anticipate full-year margins to improve 75 to 100 basis points from the 12.9% achieved in 2014.

We project corporate expense for the full year to remain at about 3% of revenue. And interest expense will increase in the fourth quarter, given the incremental debt from the acquisitions.

As for the individual businesses, we expect AeroTech 2015 revenue growth of about 7%. In terms of profitability, we previously said we were pleased to be able to hold AeroTech's 2015 margins flat, given the phaseout of the profitable Halverson program. We now foresee about a 50 basis-point margin expansion from the 8.6% in 2014, due to better productivity and sourcing gains, the success of our pricing strategy, and better operating leverage in connection with the stronger year-over-year sales.

At FoodTech, we increased our full-year topline forecast. We now project constant-currency growth of 8% organically and 14% from acquisitions, offset by a 10% currency headwind. This gets us to year-over-year growth of about 12% for FoodTech.

Of note, acquisition-related items will pressure FoodTech margins by approximately 50 basis points in the fourth quarter and into the first half of 2016. More importantly, we expect acquisitions to collectively contribute $0.15 to $0.20 per share to earnings in 2016. By 2017, we project that to increase to $0.30 to $0.40 per share.

Lastly, I would like to thank all of the JBT members for their hard work in getting these two acquisitions closed within 60 days of one another. It was certainly a busy but exciting period for us.

With that, I will turn the call back to Tom.

As you heard from Brian, we expect our recent acquisitions to be meaningfully accretive in 2016 and 2017.

One of the exciting aspects of our acquisitions, even better than we expected, is the opportunity to create new growth prospects as we combine both product-line and end-market expertise. As an example, we now offer more comprehensive solutions for tray packed protein. By combining several pieces of equipment, including our crush freezer and water jet, with our new [role] tech slicer, we have created an integrated solution that increases yields for our customers on the proteins you purchase at the grocery store.

This is a new opportunity for JBT and a win for our customers. We are very encouraged by the customer reception and have already booked $10 million in orders this year.

On the liquid foods side, sales of ICS equipment have exceeded expectations. This has been made possible by leveraging JBT's global sales, manufacturing, and service presence with the ICS technology to better serve our customers.

Specifically, we are now in the process of building a significant equipment order to produce popular coconut-based beverages in Asia with ICS technology. JBT's local presence and service support were instrumental in giving the customer for this project the confidence to place the order.

And with the combined full-line solutions we now offer inclusive of stored food in dairy and [AMD], we are able to compete for more comprehensive projects that we could not entertain in the past. More specifically, our sales and engineering teams are now tracking or courting over 20 new projects in liquid foods that would not have been possible with JBT's prior product offering.

Through our acquisition program, we have added over $200 million in FoodTech revenue, exceeding our next level target of $70 million to $100 million. We are on track to achieve our next level goals for 2017. The strong revenue growth and margin expansion you saw in our third-quarter results is a reflection of our progress.

There is still much work to do as we move forward. Meaningful opportunities exist to enhance our competitive position, capture organic and acquisitive growth, and improve profitability as we look beyond our 2017 next level objectives.

Looking ahead, we are encouraged by longer-term trends in the marketplace. On the AeroTech side, we are enjoying a favorable spending cycle from the US airline industry, coupled with new products introduced by JBT that better meet the needs of our customers, like our new tractor and just-introduced Ranger Rotor. As for FoodTech, which now represents some three-quarters of our income on a pro forma basis, we see long-term secular trends that will benefit our business.

This is exciting for me as a CEO. Just think -- if you ate or drank something today, whether from a restaurant or a grocery store, if it is organic or not, there is a good chance that JBT equipment touched it along the way. As worldwide populations expand and disposable incomes rise, we see a fundamental shift in dietary habits towards increased protein consumption and higher-value solid liquid foods. That is a long-term evolution in global food consumption that favors JBT.

With that, we will open the call to your questions. Operator?

(Operator Instructions). Gary Farber, CL King.

Just a question. Can you just provide more of an update on the acquisition pipeline? Can you also talk about, because the Company has become so active, are you seeing people come to you that want to sell companies or is it pretty much just you guys going out to the field?

And then, in regard to acquisitions, can you also talk about at some point is there some kind of technology aspect to it? Is it possible there are software companies out there or food inspection companies and things like that that might be interesting?

Good morning, Gary. I think you have been sitting in some of our meetings. No. Just kidding.

Well, you can always invite me, if you want to.

No, I'm just kidding.

There are -- we are and do continue to build our pipeline and, obviously, our preference is to source the deals directly and not participate in broad auctions or activities brought underway by bankers.

But I will tell you that as JBT has become more active in this space, we are certainly getting a lot more outreach from seeing opportunities that are being offered by banks or also being reached by private equity owners who think one day they may want to act on one of their properties.

As we look forward, I would say yes. You could and should expect that JBT may engage in certain partnerships, licensing activities, or purchasing technology specifically that we can leverage across our broad platform of businesses and take globally. And we will get a lot of leverage on those activities without a huge investment. So we definitely have that ongoing in our M&A activity, also.

I am just curious on that. Is software within that? Are there opportunities to combine software with what you are doing where you really get a nice recurring revenue stream?

Yes, there are. We do currently offer some software solutions with our products. And as we look forward, Gary, we see two primary activities that relate to software or what we are kind of referring to as our Internet of things for JBT.

Across our entire product offering, there is opportunities to provide our customers updates about how our equipment is functioning, its productivity, its yield, its need for maintenance. We have got a major activity underway across JBT where we are working with all of our engineering groups to make that functionality common, multilingual, and available to our customers. And we are excited that not only will that increase revenues via licensing of the technology, but, more importantly, will drive our aftermarket.

And then, we also believe that by doing this properly, it will have solid economics for our customers because as our equipment requires maintenance or, let's just say, a tune-up, it is important that we get that done right away because it affects the customers' returns on their operation of our equipment. For example, in the food business, if you are using a water jet portioner to trim a piece of protein, if it starts to drift a little bit and needs adjustment, that significantly deteriorates the yield. And that is just one example of how we can leverage this.

So we are very encouraged about our ability to do this, and it is just going to take us a year or two to just work our way through and to start to see this stuff hit in the marketplace.

Walter Liptak, Seaport Global.

Good quarter. I wanted to ask first about the AeroTech margins, which were a little bit better than we expected. And Brian, I think you called out a number of [things]. I wonder if maybe you could give us a little bit more color on how the factory floor is doing or how pricing is doing, and you called out the mobile equipment. Maybe there is mix that helped the margins. And I guess what I am trying to get to is, is this a sustainable level of margin or how do we think about improvement for next quarter?

Yes. Good morning, Walt. So, agreed. The margins were good in AeroTech for the quarter and the first thing I would point to is we just had nice productivity gains from the RCI program that we are working on.

That has been very helpful as they streamline their shop floors. There has been a lot of activity at both the jetway side and on the mobile business in Orlando. And as I mentioned, on our short-cycle business, which is more the mobile products, we didn't really have a nice quarter and that really helps out on the utilization of the overhead.

So if the volume continues at that level, as we would expect that type of margins to be sustainable, and, obviously, we are going to continue on the aftermarket growth and on the pricing programs. So we're fairly confident on where we stand on AeroTech.

Yes, Walt. This is Tom. One additional bit of color on, as Brian mentioned, the mobile equipment, I would remind everyone that that was the piece of our business on the AeroTech side that was most impacted by the slowdown in airline spending.

And it is particularly a US-based business, so we are fairly encouraged that, as we see the health of the US airlines continue and as they have gotten through their major spending or spending plans for aircraft, we are starting now to see some early stages of their investment in the ground support of mobile equipment. And we think that is a trend that will continue for a period of time, unless the airlines receive some kind of shock that nobody would expect. So we are feeling pretty optimistic about how that business is shaping up as we end the year here.

Okay, good. Thank you for that.

In your prepared remarks, you commented about Asia and China. I wonder if you could just refresh us on what percentage of revenue is there in products and any trends. It sounded like your China exposure during the quarter slowed down a little bit.

Yes. So Asia is about -- a little less than 10% of our overall revenues. Part of that is impacted by currency effects, et cetera.

Specifically on the activities, you have got a combination of China and the rest of Asia. And, generally speaking, the rest of Asia is doing better than China. China has some economic challenges generally, but, as we have stated before, the long-term secular trends there are very favorable for us. Our tech center is opening in the first quarter, so we are really excited about that. So we are still in good shape longer term in Asia. China is just a little bit weaker here compared to the rest of Asia.

Right, and I will just give you a little further color. As we look at Asia, we mentioned that the liquid foods business is performing very strongly, and it is in China and in the rest of the Asian countries, and I mentioned the coconut water. But there is a lot of other opportunities that we have actually booked orders on and we are in the process of producing and shipping it.

But the other trend that is somewhat encouraging -- and I don't want to say it is completely healed up, but as we -- in the second half of 2013 and the first half of 2014, we saw our protein-related orders be quite slow in China/Asia. And we were kind of on the receiving end of that activity now as we produce the equipment and ship it and that is why that business is off.

I would tell you that it is early days, but we have seen some fairly encouraging order trends on the protein side more recently, and it is our hope that as the bird flu and some of these other issues that have worked their way through the economy kind of sort themselves out, that Asia, on the protein side, will heal up a little bit more and get a little bit of a tailwind as we end the year here.

Interestingly, the tech center, as Brian mentioned, we feel that is very important. We think that will give us a leading presence in Asia in terms of our freezing and cooking our protein and liquid foods businesses. And we know that when we put a tech center in a region, our order closure rates do improve. So it is our intention that as we make that investment and get it up and running by the end of the year, we will be in a position to have a higher closure rate on the opportunities we are able to identify.

All right. Sounds good. I wanted to ask about corporate expenses for the fourth quarter. I wonder if we can get a little bit better read on what that number might look like.

Yes. Corporate expenses, you know, we have continued to guide at about 3% of revenues for the year. And so, it will be fairly similar to the third quarter when you do the math there.

We have got some activities going on in corporate that we continue to invest in, some of our One JBT efforts, things like the shared service center, some IT, some compliance, improvements, et cetera. So while we continue to make those investments, we look forward to putting those resources to work for the benefit on the growth side to standardize some real processes, et cetera.

But going back to your original question, about 3% for the year, and you can do the math on how that shakes out for the quarter.

Okay. And then, a last one and we can be brief on this one, but in your prepared remarks, Tom, you called out sourcing as something that you -- I can't remember exactly what you said, but it sounded like you're starting to get some benefits from sourcing. And my understanding was that was something down the road where we wouldn't see benefits for a couple of years.

Yes. As we mentioned in AeroTech and just overall for JBT, we are gaining traction more quickly than we had originally estimated in our next level activity and even as we start the year.

I will remind everybody, for 2017 run rate, we had expected a sourcing benefit of $4 million to $8 million. It looks like as we exit this year we will be around $3 million of that $4 million to $8 million. So we still have lots of room to run. But we are starting to get some pickup in this year.

Chris McGinnis, Sidoti & Company.

Congrats on a nice quarter. Just quickly, to go back to the acquisition front, can you maybe just talk a little bit about now, with the recent acquisitions, how does that change the conversations with the customers? Are they looking to come to you more? I know it is very early, but I was just wondering how that maybe has changed, kind of your position in the market.

Yes, Chris. As we complete these acquisitions, I would just like to mention that these were companies that we have partnered with or worked with in the past. So we were well aware of their position and capabilities in the marketplace and that is why we were able to, through our partnerships, to build the relationships with their leadership teams to bring these acquisitions home at the economics we were.

And I would say, absolutely. As I mentioned in my comments, we're really encouraged. I tell you when we modeled these acquisitions, we were very conservative on any benefits that would accrue to us from growth or from customer-facing activities. And we were more aggressive in terms of some of the cost actions we could take on integrating these businesses.

And we are pleasantly surprised so far with the acquisitions we completed earlier, like Tech Wolf and ICS. And as we mentioned earlier, now with Stork, in the early days of Stork, and A&B, we are seeing many more projects that we simply couldn't quote on the past because we didn't have the full range of capabilities that we needed as a company.

Now, occasionally, we could combine with the other businesses to quote, but that wasn't nearly as effective. And I referenced -- you know, we have over 20 meaningful projects we are quoting on on the liquid foods side in combination with Stork Food & Dairy and A&B that we just wouldn't have been able to quote on in the past. So that is very encouraging to me.

It is beginning to truly validate the next level of strategy where becoming a more comprehensive protein and liquid food supplier is definitely creating value for our customers because we can come in and systematically look at their challenges of operating their businesses and help them find a way to win. And as I mentioned, like in the tray packed protein, we went in there and helped those customers increase their yield, which is a huge economic benefit to them. And for us, we get a great system sale (technical difficulty) wouldn't have been able to do that in the past. So it is very encouraging to me.

And you mentioned it in your answer, but -- so if you build out -- I guess, roughly build out the liquid foods, is the focus of acquisitions now going to go to maybe protein?

We would like to continue to be active in both liquid foods and proteins. We see opportunities on both sides, Chris, and there are still categories where -- in technologies we can add and liquid foods. And protein, we have significant runway also.

The business cash flows well. Our leverage ratio is still reasonable and a little over 2. And we pay that down and have for three-quarters of a turn a year and we expect these new businesses to also cash flow quite well. So we see an opportunity for us to continue our acquisition program and continue to add value for our customers and the shareholders.

Sure. I guess to follow up on that, what leverage ratio would you feel comfortable going up to if the right acquisition comes along?

Yes. We are not describing a level, Chris. I would tell you that we are just right or a little bit above 2 on our net debt level right now.

We will increase for the right, strong strategic fit that has good economics for our shareholders and we will make sure we get that done, but we are going to remain disciplined and make sure that the economics apply. And I can tell you we have had to pass on some opportunities because the pricing around the deal just didn't meet our requirements, even though they were a good strategic fit. So with that constraint, I feel comfortable we will do the right thing and, as I mentioned, with the cash flow at JBT and the cash flow of the acquired businesses on a higher earnings base we have capacity to do what we need to do.

Good luck in Q4.

(Operator Instructions). We have no further questions, so I would like to turn the call back over to Mr. Tom Giacomini for closing remarks.

We are pleased with our third-quarter performance. The topline growth and margin expansion are a clear reflection of the progress delivering our next level strategy. Most importantly, I would like to thank our team members for their support and continued dedication.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your phone lines.