JBT Marel Corp (JBTM) 2016 Q1 法說會逐字稿

Good morning and welcome to JBT Corporation's first-quarter 2016 earnings conference call.

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

(Operator Instructions).

Thank you.

I will now turn the call over to JBT's Executive Vice President, Corporate Development, Mr. Debarshi Sengupta, to begin today's conference.

Thank you, Sally.

Good morning, everyone, and welcome to our first-quarter 2016 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 that forward-looking statements in today's call are subject to the Safe Harbor language in yesterday's press release and 8-K filing.

Our 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 references 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 thank you all for joining us on the call this morning.

While it's still early in the year, and the first quarter is our lightest, I am pleased to report we are off to a good start for 2016.

First-quarter revenue was up 19%, and segment operating profit was up 27% from the year-ago period.

Margins were ahead approximately 70 basis points year-over-year, with a strong quarterly performance for FoodTech's aftermarket business.

Excluding restructuring charges associated with our optimization program, first-quarter earnings per share improved $0.07 or 26% from the first quarter of 2015.

With that, I will turn it over to Brian to provide some color on the first-quarter performance and the optimization program.

Brian?

Thanks, Tom, and good morning.

JBT posted strong revenue growth and segment margin expansion in the first quarter of 2016.

Revenue growth was 19%, including organic growth of 4%.

Our segment operating profit growth was 27%, of which 20% was organic.

Currency translation was a modest headwind.

On a constant currency basis, revenue and segment operating profit growth were 21% and 31%, respectively.

On a segment basis, FoodTech posted year-over-year revenue growth of 28%, composed of organic and acquisition growth of 3% and 28%, respectively, partially offset by currency translation of 3%.

At AeroTech, revenue grew 5% year-over-year, all organic.

Contributing to this segment margin expansion of 67 basis points was a particularly good performance of FoodTech's aftermarket business and favorable product mix within AeroTech.

Similar to our equipment sales, aftermarket revenue can be lumpy on a quarterly basis.

Overall, the aftermarket business continues to perform well.

First-quarter corporate expenses was as expected, and remains on track to hit our expense target of 3% of revenue for full-year 2016.

We recorded a restructuring charge of $7.2 million in the quarter, and continue to expect an $11 million to $13 million charge for the full year related to the optimization program.

We have started the optimization of our liquid foods business in Europe.

The reorganization will create a unified liquid foods unit, integrating our historic businesses with the acquired operations of ICS and Stork Food & Dairy.

This integration is modeled after the successful 2014 restructuring of our European protein business, which enhanced our top-line growth and profitability by creating a stronger commercial organization and streamlining the cost structure.

Consistent with our last earnings call, we expect the optimization program to generate annualized run rate savings of more than $8 million by late 2017.

We anticipate savings of around $2 million in 2016, which was factored into our original earnings guidance.

JBT reported diluted earnings per share from continuing operations of $0.17.

Adjusted EPS was $0.34 compared with GAAP earnings of $0.27 per share in the first quarter of 2015.

On the order front, FoodTech orders were up 8% year-over-year.

On a constant currency basis, FoodTech orders were up 12%, including the growth from our acquisitions, partially offset by a small decline in organic orders.

This quarter was in line with our expectations, given the extremely strong inbound order performance in the fourth quarter of 2015.

AeroTech orders were up 21% year-over-year, driven by overall market strength and several large orders for boarding bridges.

With a good start to the year and order rate momentum, we have reiterated our full-year 2016 guidance of $2.15 to $2.30 of adjusted EPS, which equates to $1.90 to $2.05 on a GAAP basis.

With that, I'll turn the call back to Tom.

Thanks, Brian.

I thought today's call would be an appropriate time to share a few details on our organic growth initiatives.

Let's start with our food business.

First, JBT is benefiting from favorable market trends with expanding global demand for food equipment, driven by fundamental shifts in dietary habits towards increased protein consumption and higher-value liquid foods.

Demand also benefits from changes in food safety requirements, new food preferences, and improved packaging.

But we are not just relying on the positive macro trends.

JBT is gaining traction within our markets by developing products that are responsive to customer needs.

For example, in Europe, our protein customers are still oriented towards smaller processing lines, very different from the US, which is focused on large capacity production.

Frankly, JBT lost sight of this difference for a while, focusing on producing higher-capacity equipment.

We are now addressing the needs of our European customers with smaller scale, more flexible equipment.

Specifically, we recently launched our GC 60 freezers that are targeted towards lower-capacity processing lines, maximizing yield and food safety while improving returns for our customers.

Given the order strength we are enjoying, we expect revenues to double for this product in 2016.

Our customers are also looking for increased production flexibility in food quality.

We have experienced a positive response to introduction of the new JBT Twin Drum oven, which has the flexibility to cook a wide range of protein products.

This oven has industry-leading airflow and humidity control characteristics.

These features drive improved yield and food quality, resulting in higher profitability for our customers.

We have improved our liquid foods business by becoming more focused on evolving market needs.

Traditionally, our citrus extractors were optimized for maximizing juice yield at the expense of other valuable byproducts.

Today we are aggressively targeting the growing global lemon segment with a combination of pre-extraction and extraction technology to maximize both juice and oil recovery.

This effort has won us several new accounts, notably in Argentina, Brazil, Mexico, and South Africa.

Additionally, we are capitalizing on the capabilities acquired with Stork Food & Dairy and A&B, cross-selling a septic filling and sterilization equipment for the faster-growing blended juice and vegetable drink category.

In 2014, we reoriented our automated systems business towards the food industry to leverage our strong relationships with food processors and consumer packaged goods companies.

This business provides automated guided vehicles for material handling in production and warehouse facilities.

While automated systems is relatively small, it's made significant progress with this new approach to our customers.

In 2015, orders were up more than 25% from the prior year.

With the need for automation at plants fast becoming a priority for our customers, I'm excited about the future prospects of this business.

Turning to FoodTech aftermarket, our progress continues to build momentum.

For example, through our PRoCARE extended maintenance offering, we proactively provide long-term service agreements to our customers.

Since 2013, the number of PRoCARE agreements has more than doubled, increasing aftermarket revenue, and, equally important, our ongoing customer engagement.

To date, we are two-thirds of the way towards our 2017 target for adding dedicated sales and service support for our aftermarket franchise.

Our expanded capabilities contributed to the high-single-digit aftermarket growth we achieved in 2015.

Moving to AeroTech, the majority of business is up -- is in North America, where our position is strong.

We believe we are in an up cycle in spending for both our mobile and fixed equipment.

The customers for our mobile equipment are primarily the airlines and air freight companies.

The airlines that have been spending on upgrading their aircraft fleet are starting to spend on support equipment.

Our fixed equipment is primarily sold to airport authorities, although the airlines do influence their decision-making.

We are seeing increased bidding activity and orders, a reflection of the need to replace the aging infrastructure while also improving the customer experience at the gate.

Finally, let me speak to growth through acquisitions.

We continue to cultivate a rich pipeline.

JBT remains highly disciplined in our approach, making sure we buy great companies that create value for our customers and complement our existing offerings.

With that, we'll open the call to your questions.

Operator?

(Operator Instructions).

Walter Liptak, Seaport Global.

Nice quarter.

Thanks, Walt.

I wanted to ask about the guidance.

The EPS came in a little bit stronger than we were looking for, I guess because of the FoodTech aftermarket business.

But you maintained the guidance for the full year.

And so I wonder if there's some moving part that crept up during the quarter, or why you didn't increase your full-year guidance?

Walt, as I mentioned, it was a great quarter; but it is our lightest quarter, the first.

And although we're encouraged by trends in the business, we felt we are still very much on track for what we hope to achieve this year, and feel that maintaining the guidance at this point makes perfect sense.

But we're certainly encouraged by the way the business is developing.

Okay.

Let me ask about the aftermarket parts and service.

It sounded like during the quarter you had either some large contracts that came in, or maybe some of the feet on the street are starting to bear fruit.

I wonder about the sustainability of that, and how much of your commentary about this being a one-time improvement -- or lumpy, I think you called it -- how should we think about the rest of the year in aftermarket for FoodTech?

Yes, as we have guided to, we have solid organic growth for JBT this year.

We're pleased to deliver that if we meet our expectations.

And of course an important part of that is our continuing aftermarket program.

And what we can't predict, Walt, as you know, having followed us for a period of time, is that we do occasionally see orders that come in one month before the end of the quarter or one month after, just depending on customer preference.

And our feeling is that as we focus on the year, we're definitely seeing great trends in the way we're building that FoodTech aftermarket.

But it becomes a little more difficult to predict that from quarter to quarter.

So, from our perspective, we're encouraged by our progress on the aftermarket.

I mentioned we have made good progress on our hiring and staffing objectives and the PRoCARE process.

So all the arrows are pointing in the right direction, and we continue to work at it.

But from our perspective, it's right on track.

Okay.

Okay, great.

And if I can just ask one last one.

Maybe stepping back from the FoodTech orders during the quarter being organically flat to maybe down for a little bit.

You had really strong orders in the third and fourth quarter of last year.

How are you thinking about the flow of orders on an organic basis for FoodTech this year?

Do we start out light and then ramp throughout the year?

What should we expect?

Walt, good morning, this is Brian.

As you mentioned, we did have strong order flow in the third quarter and the fourth quarter.

The first quarter not quite as strong on the organic side for FoodTech; but, frankly, came in right where we should thought it should come in, down about 10% for the quarter versus prior year.

And by the way, last year, first-quarter was quite strong in the FoodTech area.

So, when you think about the run rate revenue for FoodTech overall and look at the pace that we booked in the first quarter, it is right where we would expect it to be.

Okay.

So, with the second half to that question, what does the pipeline look like?

What are you thinking about for order flow for the rest of the year?

Yes, I would say that we continue to be optimistic.

Obviously we're forecasting solid organic growth, and growth from acquisitions, Walt.

And when I look at the activity in the marketplace, it's very solid and strong.

As you look across the geographies, North America is very strong and continues to be promising.

Europe is improving.

We're really encouraged by the progress we're making in the marketplace.

I believe JBT is performing better, but also the marketplace itself is healthy.

Latin America, although a smaller part of our business, continues to see good activity.

In Asia, we continue to see China being slow, but seeing potential for upward this year.

But the rest of Asia being very solid, with the Philippines, Indonesia, Malaysia, putting in a lot of investment, and our customers being busy.

So, as I look across that and you combine it with the trajectory on AeroTech in North America, also, we feel very, very good about the way the order book is developing, and JBT's prospects for this year as being very strong.

Okay.

Sounds excellent.

Thank you.

Larry De Maria, William Blair.

Can you guys break down maybe the end markets within protein a little bit?

I know poultry is obviously very big for you guys, but can you give some color in each and the sustainability of each?

Because I think there's some questions as to the poultry outlook, especially since customers coming off a couple of good years.

Larry, I would tell you that in our protein business, the order trajectory is very solid.

And we're seeing orders being up in Europe and North America and being as expected, and continuing progress in Asia, which are our three key geographies around protein.

And that's in two parts.

You have to understand, JBT has a good position, but there's lots of room for us to grow within our markets.

So, as we continue to improve our performance -- as I talked about in my prepared comments with the new products, our focus on customer needs, driving their profitability -- we feel confident that the markets are developing as we hoped.

And we're pleased with our progress within those.

And we don't see any slowing of customer investments in the order activity or the project activity we're working on in front of the orders, as of now.

Okay, thanks.

And specifically in China, is the slowness in China -- is that a function of capital spending in China in your end markets?

Or more a function of your position in China, and as you guys are all obviously evolving in the market and getting better -- getting better position yourselves.

Right.

For China, I'd say it's more the macro issues we experienced with the QSR slowdown, the quick service restaurants slowing, combined with some of the bird flu, and maybe I would describe as a bit of overcapitalization a few years ago.

But our early feelers -- it's too early to call -- but are encouraging in China, particularly in protein.

We're starting to see some more interest from customers.

We don't know if that's going to convert or not.

But let me tell you a little about what JBT is doing to improve its prospects in China and Asia overall.

We are really pleased with the opening of our new food technical center in China.

We've seen a lot of customer activity in there.

And that's giving us a chance to expose our customers to our latest technology and to help them improve their profitability and food safety.

So that's going very well.

We're doing a much better job of cross-selling our product lines.

We had particular strengths in one country or another, where we would see one product line sell well, but maybe not the adjacent one.

So we've invested in having more focused, product-specific skill sets in the regions, which we see gathering traction.

And last, we've worked very hard to reorient our commercial organization in support of a localization of production, which means we're making more products available from our China facility, which allows us to tailor them to the needs.

For example, most of the cooking in North America, and to a lesser extent in Europe, is powered by natural gas.

Asia is quite different, particularly China; it's overwhelmingly powered by electricity.

So we have to adapt our products for those local needs, and JBT is moving on in those.

So, significant energy being expended by the Company, our Company, but I feel in the long run it really is going to yield benefits for JBT.

Because we're making investments in a market that as you look at the demographics that we talked about early, and the macro economics behind increasing protein consumption and liquid foods, JBT is going to be there in a material way and enjoy those trends as they play out.

That's great color.

I appreciate that.

And I'll just ask my last two quick ones here.

First of all, at this point in the year, where would we be on coverage versus where we would be historically versus now, to give you confidence in the outlook?

And secondly, just on the M&A pipeline, curious about the conversations on bid/ask spreads, and if there's any reason to think you should or shouldn't close a deal or two this year.

And I'll leave it there.

Thanks.

Yes.

I think the biggest, easiest way to think about where we stand for the year is looking at our backlog.

So, we're at over $600 million now.

We started the year at $520 million.

So both AeroTech and FoodTech are actually sitting on record backlogs.

So it really -- it suggests that we're going to -- that we're confident with our guidance for the year.

On the M&A front, I did mention that -- and I believe in and I see the activity that ongoing.

We are working a rich pipeline, both in protein and liquid foods and in support of some of our core product lines, Larry.

And we're just being very disciplined.

We're building relationships.

We're seeing the activity.

It has to be a great fit.

It has to make sense for our customers, help us create value with them; and, last, disciplined in terms of the price.

But I can tell you that the activity is ongoing, and we will work to see if we can get those stars to line up.

But certainly we've demonstrated an ability to do that in the past, and we're continuing to make significant efforts in that area going forward.

But the point is, bid/ask spreads haven't changed very much that would cause you guys to slow down.

Are you just being disciplined, as you always are, or has that changed?

No, that's correct.

It's continuing the process we've used so far, and we're using the same process and the same basic activities we've had.

So JBT continues to work that front.

And as you think about JBT's growth engines and you think about our opportunities in front of us, we believe M&A and organic are both significant opportunities.

And we see a fragmented space in protein and liquid foods and an opportunity for us to continue to consolidate those as we go forward.

And our outlook remains the same as it has been since we started this journey on the Next Level.

Great, thanks.

Appreciate it.

Good luck.

Chris McGinnis, Sidoti & Company.

Nice start to the year.

Good morning.

Thank you.

Thanks, Chris.

Just quickly, you did talk about maybe a better backdrop in the AeroTech market.

Can you maybe just talk about your position maybe with the installed base that you have, and how much of that may be up for a replacement?

And towards where you are currently tracking in terms of revenue growth, should we think that that can get stronger?

Chris, as I look at it, we certainly are fairly -- we have a large installed base in North America.

You look at the bridges and the amount of bridges we produce per year, there's many, many years of runway, so to speak, if we continue to execute it.

There's about 3,000 bridges JBT has out there.

And in a given year, we will produce around 150 or so.

So you do the math, that's about a 20-year cycle of production.

So, given the trends we're seeing and the investment that's happening, we are encouraged by the orders we're taking on the fixed side.

And then on the mobile side, there's also a very aged fleet that's out there.

We've seen the airlines make significant investments in new aircraft, what you see out there when you fly day-to-day.

But if you look at the equipment around the airplane, it's quite aged.

And we've seen many customers, just this last year, start to increase their quote activity.

We're starting to see those orders show up.

And you see that in our continuing trajectory on increased orders in the backlog on AeroTech.

And we feel optimistic about that.

And as long as the airline industry remains healthy in North America, primarily, for JBT, those are very good trends that should continue to play out.

Great.

Thanks for that.

I think last quarter you called out, maybe it was ICS that performed a little bit better.

Can you maybe just talk about the integration of the acquisitions?

Obviously you were busy in 2015.

Can you just touch on the integration process and where you are at with them?

No, sure, and that's a big part of what's happening at JBT.

As we continue to acquire, our desire is to leverage the strength of JBT.

And what I mean by that is, Chris, we are primarily acquiring either companies that have a particularly strong technology, or are particularly strong in a geography.

And what JBT really brings to the table is the opportunity to take those companies on the global stage.

And we've seen that occur time and time again.

We've mentioned, early on, some of the orders with ICS we got in Asia that were accelerated because of our activity.

We mentioned on the protein side, by combining with some JBT technologies, the orders with Wolf-Tec that we were able to bring to the table.

And that's a big part of the focus.

And then as you step further backwards from that, we work on integrating the back office, the costs, and sometimes the manufacturing facilities.

And it's interesting to see, depending on the nature of the acquisition, we folded the entire business into our facilities in the case of [Formtech].

And then secondly on the Wolf-Tec side of things, we moved some of JBT production in there.

So both sides of that equation are work for us.

And we work to do that very, very thoughtfully and very methodically so that we can maximize the commercial opportunities without damaging the business, going forward.

Great.

Thanks, Tom, for that.

And then lastly, just on the -- Brian, just on the margin expansion in the quarter itself -- can you maybe talk a little bit about mix versus internal initiatives that drove that expansion?

Thank you.

Yes.

As we mentioned, the aftermarket in FoodTech was strong.

But also it's worth noting that in AeroTech we did have some good product mix on the mobile side, particularly in some of the military applications.

So, that is market-driven.

In the backdrop, we do continue some of our investments in the pricing initiatives, and that continues to help.

We haven't disclosed anything in particular in breaking some of those out.

But I can tell you that in the backdrop on the cost side, on the pricing side, cost in particular on the purchasing side, on the material side, that is continuing in the backdrop of this, and is going to continue to drive margins for the rest of the year.

Great.

Thanks again for the --.

And coupled with the ongoing Lean and RCI efforts, which I think are really important to understand.

Chris, I would tell you that I continue to be a strong -- have strong conviction around the fact that our Lean RCI program not only will improve our costs and working capital, but it's creating advantages for us in the marketplace.

We continue to work on reducing our lead times and also improving our product quality, which we think are both very critical to our success in the marketplace.

And although I'm encouraged by the progress we've made, there's still significant opportunity for us to improve and continue to execute better, and an opportunity for the future there.

Sure.

Just one question on the margin expansion versus the revenue growth.

I know you guided to 50 basis points, I believe, this year of expansion, or thought process around there.

How long can you balance the margin expansion initiatives and also drive that top line at the rate you can?

Is there a point at where you sacrifice revenue growth for the margin expansion?

Can you maybe just talk about your thoughts on that?

Thank you.

Yes, no, that's something we talk about quite frequently inside of JBT.

From my perspective, we see a multiyear runway there.

We're fairly early in the journey for Lean.

Brian mentioned supply chain; JBT has made some reasonable progress, but there's lots of room for us to go there.

Our pricing initiatives continue to be effective, Chris.

And so I see multiple years ahead of us with the ability to continue to drive the margins.

And I will say, in the backdrop of this margin expansion, JBT is still able to invest materially in growth investments for the business.

We talked about the aftermarket staffing; we've talked about the new products we're developing on the call today.

There's further developments in the technical center in China.

Just smart, targeted investments that are helping us win in the marketplace, create value for our customers.

And that's that virtuous cycle that we're talking about, where we continue to expand our margins, relay some of that into our earnings, and the other time be able to continue to invest in our business, which drives that organic growth that we hope to see and continue to deliver through the cycle.

And then last, we supplement that with a focused M&A approach, where we add on new companies.

They either have technologies or create solutions for our customer that are complementary to ours.

And you put that all together, I feel it's a very strong value creation proposition for JBT that we can do for many, many years going forward.

Great.

Very exciting.

Thank you very much for the time.

(Operator Instructions).

George Godfrey, CL King.

I wanted to shift the attention to the cash flow statement, and specifically working capital.

Can you just tell us what's going on there?

Cash flow from operations, $200,000 this quarter versus $30 million last year.

Sure.

Good morning, George.

This is Brian.

So, generally speaking, the first quarter does tend to be a lighter quarter from a cash flow perspective, seasonally.

We do have inventory build typically in the quarter in preparation for the stronger second and third quarter.

And we have typically larger tax payments and our bonus payouts during the first quarter.

But that said, we did underperform for working capital for the quarter on both AR and inventory, particularly at AeroTech.

So we are going to continue to focus on that for the rest of the year.

But overall, an overall lighter quarter would normally be expected in the first quarter, but a little bit of underperformance in that area for the quarter.

Okay.

So, specifically looking at inventory, the inventory build there looks like about a $30 million use.

Is that AeroTech related and/or food related more so?

Predominantly AeroTech.

Got it, okay.

Thank you.

And then secondly, if memory serves, last quarter in the guidance for CapEx was about $40 million for the year.

Is that still in place?

That's right.

So, $40 million for the year; that's about 3% of our guided sales, and we're just a bigger company than we've been in the past.

So you would normally expect about $10 million per quarter, a little heavier in the first quarter.

Nothing in particular I can point to, but at this point we're still looking at a $40-ish million number.

Okay.

I would only add just a little color around the capital investments.

It has been encouraging.

Our businesses are doing a nice job with coming forward with investment opportunities in our facility that allow us to improve our margins in terms of our cost position, and shorten lead times for critical components that we had historically purchased on the outside.

So, although Brian and I probably aren't seeing as many as we'd like to see, we are encouraged by the investment opportunities that are coming forward to help us improve our profitability and our ability to serve the customers, with some of this capital that we haven't seen in the past at JBT.

Got it, okay.

So, CapEx spending, a little bit more front-end loaded during Q1; and then, on a dollar basis, probably tapers down a little bit as we head to Q4.

Correct.

Okay.

Great.

And then on the restructuring charge, $7 million this quarter.

The midpoint of your range from $11 million to $30 million is $12 million, so 58% of that $12 million being spent here in Q1.

How do you see the rest of the $5-ish million over the next three quarters?

Is it more concentrated early, or does it evenly spread out on the three quarters?

Right.

And just to be clear, we took the charge; we haven't really spent the money yet, so we will pay the money out on a cash basis over the next several quarters.

But in terms of the remainder of the $5 million to $6 million, it is on little hard to tell because the rest of it is based on activity.

But I would generally expect it to be fairly even through the rest of the year.

Got it.

Okay.

And then last question, ERP -- the ERP upgrade.

Where do we stand right now on that as a percentage of completion?

Yes, it's still very early.

It's in -- we have started spending money on that in terms of building out the networks and the software engagement and the team engagement.

So, we're in the development stage.

The first implementation happens in the back half of the current year, and will continue through 2017 and 2018, so it's still early.

Okay, so the first implementation, very early days; first half -- excuse me, the second half of this year.

And it is something that will roll out over the next, call it, 10 quarters, 12 quarters.

Yes.

And then obviously as we add acquisitions, it could add to the back end of that.

Got it.

Great.

Thank you very much.

There are no further questions at this time.

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

As Brian and I discussed this morning, we are encouraged by JBT's growth and margin expansion and our continuous efforts to prove our position in the marketplace in operating efficiency.

Thank you for your time and support.

Thank you, ladies and gentlemen, for your participation.

This concludes today's conference call.

You may now disconnect.