JBT Marel Corp (JBTM) 2017 Q4 法說會逐字稿

Good morning, and welcome to JBT Corporation's Fourth Quarter 2017 Earnings Conference Call.

My name is Emily, 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. Jeff Scipta, to begin today's conference.

Thank you, Emily.

Good morning, everyone, and welcome to our Fourth Quarter and Full Year 2017 Conference Call.

With me on the call are 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.

JBT's periodic SEC filings also contain 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 on our Investor Relations website.

Now I'd like to turn the call over to Tom.

Thanks, Jeff.

It's good to be with you this morning to talk about another excellent year for JBT.

In 2017, the first year of our Elevate strategy, we delivered well against our framework and 3-year goals for growth and profitability.

We captured benefits from our major initiatives, which I'll speak about later in this call, and we have positioned ourselves for continued strong performance in 2018 and beyond.

Brian will provide color on our 2017 performance and provide initial guidance for 2018.

Brian?

Thanks, Tom, and good morning, everyone.

For the fourth quarter of 2017, JBT posted revenue growth of 19%, comprised of 6% organic growth, 11% from acquisitions and a 2% foreign exchange benefit.

Total segment operating profit increased 33% as segment margins expanded 140 basis points to a record 13.4%.

Adjusted EBITDA expanded 39% with a 200 basis point margin gain year-over-year.

AeroTech performed well across-the-board with revenue growth of 8% and a 13% gain in segment operating profit.

FoodTech's revenue growth of 24% exceeded our expectations.

Segment margins expanded 170 basis points to a record 14%.

Excluding acquisitions, FoodTech's fourth quarter margins were a robust 14.7%.

Nonetheless, FoodTech margins fell short of the target we had for the quarter.

FoodTech faced some operational inefficiencies that we expect to resolve by the end of first quarter of 2018.

Additionally, we incurred some acquisition-related costs we had not factored into our guidance.

For full year 2017, JBT posted revenue growth of 21%.

Organic growth of 8% exceeded our guidance of 6% to 7%, and growth from acquisitions met our expectation at 13%.

At the segment level, both FoodTech and AeroTech posted record sales and operating income in 2017.

FoodTech's revenue growth was 26% for the full year, including 8% organic and 18% from acquisitions.

FoodTech's segment margins were down 30% -- 30 basis points in 2017.

Excluding the impact of acquisitions, margins expanded 76 basis points.

FoodTech acquisitions had full year revenues of $195 million with margins of approximately 6%, inclusive of deal items and integration costs.

AeroTech performed well in 2017, posting full year revenue growth of 10%, including 8% organic.

Margins expanded 30 basis points to 11%, and excluding their acquisition, AeroTech margins expanded 50 basis points.

We also held corporate expenses flat year-over-year due to lower incentive compensation costs and good expense discipline, bringing corporate expense in at 2.6% of revenues.

Overall, business conditions and global demand remained very healthy.

We were pleased with the 23% expansion of inbound orders in 2017, composed of gains of 29% at FoodTech and 9% at AeroTech.

Backlog was ahead 12%.

JBT's adjusted EBITDA of $199 million hit the high end of our guidance of $190 million to $200 million and was up 29% from 2016.

For the full year, we generated free cash flow of $82 million, representing a conversion of 84%, excluding $11 million in pension contributions.

This was short of the 90% conversion we had projected.

The majority of the shortfall was a function of higher accounts receivable as we shipped equipment later in the fourth quarter.

And for full year 2018, we expect free cash flow conversion of about 100%.

At the end of 2017, we had a major adjustment on the tax line that impacted the fourth quarter and full year.

Reported results included a onetime tax charge of $15.5 million associated with the passage of the Tax Cuts and Job Act.

Approximately half of this charge related to a repatriation tax on accumulated overseas earnings.

The other half primarily rose from the revaluation of deferred taxes.

As a result, we reported EPS from continuing operations of $0.61 in the quarter, and on an unadjusted basis, which excludes this tax charge and minor restructuring expenses, we reported fourth quarter earnings of $1.10, up 29% year-over-year.

Full year 2017 GAAP EPS from continuing operations was $2.58 while adjusted EPS was ahead 21% to $3.10.

For 2018, we expect another year of double-digit revenue growth and earnings expansion.

Projected revenue of 10% to 13% consists of 7% to 8% organic growth, 2% to 3% from completed acquisitions and a net revenue benefit of 1% to 2% from the new FASB ASC 606 revenue recognition standard.

As a reminder, ASC 606 became effective January 1, 2018, and provides new guidance on whether revenue should be recorded at a point in time or over time.

As we get better visibility in new contracts and the timing of revenue recognition, the estimated impact from the new standard will be refined.

For 2018, we expect segment margin expansion of 100 to 125 basis points above the 11.6% reported in 2017.

That gain reflects an estimated 125 to 150 basis points increase at FoodTech and about 50 basis points at AeroTech.

Corporate expense should be around 2.6% of revenues, which includes an estimated increase on our noncash pension expense of about $2 million.

Net interest expense is expected at about $15 million.

Notably, there will be changes on the tax line as JBT benefits from the reduction in the statutory rate in the U.S. We anticipate a tax rate of 27% for 2018 versus 30.6% in 2017, both before discrete tax items.

Included in our guidance is an earnings pickup of $0.18 to $0.20 per share from the tax rate reduction.

We continue to watch for any income tax rate changes by the state jurisdictions.

In addition, JBT booked a discrete tax benefit of $6.4 million or $0.21 per share in 2017, associated with tax benefits on stock compensation.

Almost all of this was recorded in the first quarter of 2017.

For 2018, that benefit will occur in the second quarter and, subject to the stock price of the time of vesting, is currently estimated at $4 million or about $0.12 per share.

All this brings us to our adjusted EBITDA guidance of $235 million to $250 million, representing year-over-year expansion of 22% at the midpoint, and earnings per share from continuing operations guidance of $3.85 to $4.05, a pickup of 27% at the midpoint when compared with adjusted earnings per share of $3.10 in 2017.

We expect 32.4 million average diluted shares in 2018 versus 31.9 million in 2017, factoring the remainder of the effect of the 2017 equity issuance.

The EPS guidance factors $0.46 to $0.50 incremental contribution from a 5 pre-2018 acquisitions as well as a $0.03 unfavorable impact from the Schröder acquisition and $0.06 to $0.10 pickup from the incremental revenue associated with ASC 606.

All said, this implies contribution margin of about 15% to 20% from core revenue growth.

This is net of our investments for future growth, including those in new product development, iOPS and aftermarket resources, collectively in excess of a $7 million increase in 2017.

Today's guidance does not give effect to any impact from planned restructuring activities.

As we announced in the earnings release, we plan to take a restructuring charge in 2018, part of our ongoing efforts to improve margins.

Specifics will be available when we announce first quarter 2018 results.

For the first quarter of 2018, we anticipate year-over-year revenue growth of approximately 8%, segment margins of 8% to 9% and earnings per share of $0.32 to $0.36.

In addition to resolving operational efficiencies from the fourth quarter, the first quarter will be impacted by project-related timing and higher R&D on our iOPS initiative and new product development.

In terms of revenue cadence, we expect first half revenue to be approximately 45% of the total year and the second half revenue to be about 55%.

As a result of a new revenue recognition standards, we do not expect the fourth quarter of 2018 to be as outsized as we experienced in 2017.

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

Thanks, Brian.

As of year-end 2017, we completed the first year of our 3-year Elevate strategy to deliver continued revenue growth and margin expansion.

Let me update you on key components.

The first element of our Elevate strategy is to accelerate new product development.

Over the course of 2017, we wrapped up R&D activity, invested in new products that will strengthen our competitive position over the short and long term.

We're pleased with the market reception.

A number of our analysts and investors joined us at the recent IPPE, otherwise known as a poultry show, where we introduced the DSI 800 S portioning system.

Among its many advantages, the 800 S significantly reduces labor and improves throughput.

This redesign puts our product at the forefront of portioning automation while increasing the value we create for our customers.

In addition, we demonstrated early progress towards robotic automation for secondary processing as well as our iOPS technology, JBT's Internet of Things.

Customer interest in these new technologies from JBT was significant as they address their key challenges, food yield and labor availability.

Further, we demonstrated JBT's significantly enhanced capability to deliver comprehensive, end-to-end solutions.

By offering more comprehensive systems as opposed to discrete pieces of equipment, JBT reduces complexity for our customers and improves performance.

It was really encouraging to see the progress we have made on this front in the last few years.

Our Elevate strategy also focuses on growing JBT's recurring revenues.

In 2017, we grew recurring revenues 26% with a 9% gain organically.

That brings recurring revenue to over 40% of total revenues in 2017.

Our investment in aftermarket focused sales, service and application engineering capacity is driving this growth.

Building our Asia Pacific business is also an Elevate priority.

In 2017, sales expanded 27%.

When we ramped up our investment in Asia, it was with an eye towards selling complete systems, tailoring products for the market and leveraging our Asian infrastructure to expand the sale of acquired and core products.

As anticipated, this strategy has contributed to our success in the market.

Acquisitions remain a key element of our growth strategy.

In 2017, we completed Avure, a major provider of: cutter -- cutting-edge high-pressure processing solutions; PLF, which makes food and beverage filling systems; and AMSS, a manufacturer of military aviation equipment.

As we said, these acquisitions all represent a tight fit with our strategy and enhance JBT's ability to expand our customer relationships, providing more comprehensive solutions.

In the first quarter of 2018, we completed a small but strategic acquisition of Schröder.

In addition to solidifying our position in the marinating and injection portion in the protein value chain, we see significant opportunities for Schröder in Asia.

While total revenues from completed acquisitions put us ahead of pace on our Elevate journey, we have a robust pipeline and financing capacity to continue JBT's successful acquisition program.

With respect to geographic trends, for our protein business, we continue to experience strong demand in North America and Asia and are enjoying meaningful improvements in Europe.

At liquid foods, we're seeing good activity in the U.S. and Europe, coupled with improvements in Asia.

Mexico and other Latin American countries are strong with the exception of Brazil, which is slowly improving.

We haven't seen any change in the favorable trends at AeroTech.

In North America, which represents the majority of AeroTech's business, the replacement cycle for equipment remains strong, and air freight continues to accelerate as the consumer pivots from brick and mortar to online sales.

While Europe remains relatively flat due to competitive conditions, the Asian market has shown recent improvements.

Looking across JBT, we're encouraged by market conditions and JBT's ability to make the most -- make the most of these buoyant markets in 2018.

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

Operator?

(Operator Instructions) Your first question comes from the line of Allison Poliniak with Wells Fargo.

Could you guys give a little bit more color on what those operating inefficiencies were and your confidence that they won't persist past Q1?

Sure.

As I look at it and we look at how we execute in the fourth quarter, it was really around some new product launch and configuration activity we had in one of the businesses and a bit of the ramping of the volume as we had it in Q4, putting a bit of pressure on the margins.

And then Allison, as you asked, as we head into Q1, we see an end to this new product launch development, and then there's a bit of a continuation of the R&D spending run rate that we had in Q4 that goes across a lower volume base as we look into Q1, which puts some pressures in margins.

And the last piece that contributes to that is we had some military and filling equipment that's moving from Q1 into Q2 and out, and that kind of affects the margin balance.

So when you look into it, we see the new product issues wrapping up, and then we have the insights into the orders and the delivery timing that we see.

And that's what gives us the confidence to have the strong margin improvement for the full year and positions us for the great growth that we're communicating.

That's great.

And then just on R&D, you talked about it being up.

Is there any way to quantify what that increase will be in '18?

Yes.

It's about $4 million, including about $1.5 million or so more in Q1 versus Q1 of last year.

Your next question comes from the line of Walter Liptak with Seaport Global.

Congratulations on the improvement in operating leverage in the fourth quarter.

And I wanted to ask about operating leverage, excluding the noise that you talked about from operational problems.

What kind of operating leverage do you expect to get in 2018, I guess beyond the first quarter?

And I think Brian, in your prepared remarks, you mentioned 15% to 20%, but then talked about how there'd be some offsets to that.

Can you walk us through your thoughts on operating leverage?

Sure, yes.

So I think of it from both the acquisition side and the organic side.

So on the organic side, I did mention the 15% to 20% contribution.

But that's actually -- well, it's after the effect of the investments that I mentioned about $7 million.

So if you add that back, that's more in the low to mid-20s contribution and then 15% to 20% after.

And then on the acquisitions, it's a fair bit higher, in the mid-20s, mainly because some of the bad news going away, right, with the inventory step-up and some of the integration costs.

So all-in, you're looking pre-investments in low 20s organically and in the mid-20s on an acquisition basis and then subtract out the R&D investments, et cetera, that we're making that pulls that down.

Okay, great.

Can you -- you gave us a number for corporate expense.

I wonder if you can do the same thing for R&D for the year.

What do you expect the full year spend to be?

Yes.

Give me one moment.

You know while -- one thing I would like to point out is that -- just -- as I look at it, it's the really strong results in 2017 with our FoodTech business driving 75 basis points organic and AeroTech, 50 basis points.

And you look at the 76 bps we got on the EBITDA, and that's leveraging in over 100 points going forward into '18.

So from our perspective, we feel we're on a really strong trajectory here.

Right.

R&D for the projected year is in the range of $32 million, $33 million versus about $28 million last year.

Okay, great.

That helps.

And then I wonder if I could -- I know you're going to provide more details on the new restructuring program after the first quarter.

But I wonder if you could give us an idea if it's going to be like a cost-related plant consolidation, something like that.

Or is it more process-related?

I know Paul Sternlieb, an ex-ITW guy, could do something like an 80-20.

I wonder if you could just comment kind of generally about what you're thinking?

Sure, Walter.

As you know, JBT's approach has been to -- is to have restructuring in alternating years and then deliver the benefits of their restructuring in the subject year.

And if you look at our timing, we're on schedule this year to head into a restructuring period.

And you should expect us to be very thoughtful and look at opportunities to look at restructure, really, from 2 parts: one would be from improving our processes and getting the benefits of the common ownership as we grow JBT; and then the second part would be around process improvements and driving efficiencies in our business that will help us contribute to margins, but also improve our value delivery to our customers, which I think is equally important, around lead times and improving our operations, to let our initial qualities higher.

It's a 2 part-ish opportunity for us, and we're being very thoughtful, putting the pieces together/and we'll give a really solid update at the time of the first quarter.

Your next question comes from the line of Chris McGinnis with Sidoti & Company.

Quickly, just -- I guess just with the ramp up and -- not ramp, but the increase in R&D spend and I guess the number of acquisitions you've made over the last few years.

Can you just talk about, I guess, where that maybe the acquisition pipeline's at versus R&D spend instead?

Sure, Chris.

And I -- I'd just like to return everybody to this 2018 guide.

R&D organic growth is a big part of our value creation.

So if you look at JBT for 2018, guiding 10% to 13% revenue growth, 7% to 8% of that is organic.

And that's certainly above GDP or market growth rates, and we're really pleased and feeling good about that, Chris.

And a big part of that is the work we're doing on new products, the iOPS and value creation that we're creating for our customers and, in particular, the automated equipment.

Whether it's the AGVs or the portioners as we talked about, those all bring significant benefits to our customers around improving their yields and driving out labor.

And if there's one consistent threat we've been hearing the last year is labor availability and consistency is a challenge for our customers.

So anything JBT can bring to the table is very value-creating from our customer's perspective.

So if you think about the growth we're putting together here and guiding to for this year and the growth we delivered last year organically, you can see how these investments create significant value for our shareholders.

If you think about the M&A program, we have a very active pipeline.

As we see the year developing, we're positioned well in terms of the discussions we're having and the strength of our balance sheet to be able to capitalize on these discussions and certainly feeling good about our Elevate framework, where we are ahead on acquisitions.

But we do see, as we move through this year and to next year, ability to continue to add value through M&A.

Your next question comes from the line of John Joyner with BMO.

So just to follow-up on maybe the acquisition question.

And when I was at the poultry show in Atlanta as -- Tom, as you highlighted, kind of showcased your [intent] solutions and capabilities.

I mean, are there any product gaps that you believe are just must-haves in the near term?

There's no real must-have.

But I would tell you, if you look at our M&A charts that we make public, there's certainly opportunities for us to deliver in some adjacencies across protein and liquid foods.

And then as we move forward, those meaningful opportunities can be converted.

And from my perspective, the opportunities are still very strong, even though we do have a more complete systems approach.

And from our customers, I would tell you that we see this approach playing out as a positive with them.

As we've expanded our universe of offerings and as you saw at the expo, these more complete systems, the ability to our customer -- for our customers to integrate those more rapidly really helps out.

And from my perspective, it gives me the confidence going forward to really one of, want to continue to work at this M&A program, and you see the value creation coming through in the framework we gave you.

So from a shareholder's perspective, you can see it driving the top line and creating value on the EPS line.

So from my perspective and from management's perspective, we see the pipeline and then the conversations, and we plan to continue that activity in a strong way.

Okay.

And then maybe just one last one on the tax rate.

I would've thought -- granted I'm not an expert on all the moving parts within your company, but I would've thought it would've been maybe a percent or so lower than 27%.

So is there opportunity for that to drift a little bit lower?

Right.

Just to give you a little bit of color going from 30%, 31% -- about 31% down to 27%.

So first of all, understand that a little less than 50% of our profits are outside of the U.S. So that, obviously, immediately takes -- it doesn't give you quite the full benefit as a purely domestic company.

But also, as part of the tax law, we lost a significant amount of deductions as it relates to executive compensation.

That has -- that takes that 27% -- that 21% U.S. tax rate up quite a bit, closer to 26%.

So when you blend that with the rest of the world, that gets us to that 27%.

Obviously, we continue to look for ways to reduce our taxes, and we've done a good job over the last few years.

Particularly in the R&D investment, some of the benefits you get from capital expenditures, we'll look to continue to take advantage of those.

But right now, we see this coming out at 27%.

And I would add to it, if you look at it from a customer-facing perspective and you think about the strength we're seeing in our end markets, I certainly see the tax law being a benefit to our customers and their ability to invest in our equipment because of the tax deductibility, particularly in the U.S. here.

So for my perspective, there's an intangible here that, in terms of the demand creation for JBT and the capital equipment, we provide these customers.

Yes.

I agree, that's something people don't talk about very often.

Your next question comes from the line of Larry De Maria with William Blair.

Just wanted to check in on the accretions met for '18.

I think previously, you guys have said it's $0.50 and cumulative accretion '18 over '17, net.

Can you just update us on where we stand so we can delineate between what the accretion, what the tax is and what the organic is?

Yes.

So from an acquisition perspective, we had previously provided guidance of -- when you adjust for the shares, because shares change from the time we gave initial guidance to now, but the guidance was about $0.45 to $0.55, so about $0.50 at the midpoint.

For 2018 -- and that's the incremental accretion versus 2017.

Now we're seeing a $0.48 at that midpoint.

We gave the range in the prepared comments.

So it's about a $0.02 difference relative to initial guidance.

But it is about $0.48, which is a tremendous amount of value creation going from 2017 to 2018.

And then we -- on the tax side, you did mention -- well, I did mention that we have about $0.20 benefit from the tax rate, but about a $0.10 degradation due to the change in the discretes that we're going to get in 2018 versus 2017.

So those are some of the big factors.

And then you do have the impact of the rev rec, which is about $0.06 to $0.10.

And then when you factor the increase in interest expenses and then the new share count, you should be able to do all that math on a walk down from 2017 to 2018.

Larry, I would add that as I look at that framework on acquisition, we're certainly pleased with that value creation, as Brian mentioned, a nice step-up we're seeing in '18 over '17.

And as we move forward, it really does bolster our confidence on creating value through M&A.

Got you.

So the $0.20 tax benefit is actually net closer to $0.10, give or take, based on the discrete, and therefore, the organic increase is not like $0.15, it'd be more like $0.25.

Is that what you're saying?

Yes.

Actually, it should be a little bit more than the $0.25 when you do all the math.

It's a little bit north of $0.30 when we do our math.

Got you.

Perfect.

And then secondly, I was just curious, I mean, last year, we started out guiding 3% to 5% organic, ended up doing around 8%.

This year, we start at 7%, 8%.

Is that indicative of a change in philosophy in terms of maybe being less conservative and more realistic, and therefore, maybe there's less upside than there would have been before?

Or can you just -- help us to understand how -- why we're guiding so aggressively this year for organic versus last year when we ended up with the same spot, I guess.

Yes.

Larry, I would just say it's a reflection of what we see happening in the marketplaces.

We talked about the continuing strength in the U.S. and improving Europe and Asia strength continuing, and you just kind of see all the arrows pointing in the right direction.

And the new products we're bringing to the market just really gives us the confidence as we head into 2018 to have that strong guidance.

Certainly, you have that nice tailwind from the M&A activity too -- which gets you into the solid double digits for revenue growth.

And from management's perspective, we're comfortable guiding to that, and we're really encouraged and optimistic around the way we've positioned ourselves as we entered -- ended '17 and head into '18.

And then last thing, has APAC changed very much since you put in the R&D facility in terms of being able to go out, get more business, take more share?

Or is it more a reflection of the market?

And how should we think about the overall growth in APAC?

And I'll leave it there.

Yes -- no, thanks for asking about Asia.

It's been a significant investment for JBT.

I continue to think that we're really positioning ourselves there to win in the long run, which is going to create a tremendous amount of value, and I'd say it's a multi-point strategy that we're seeing playing out here, Larry.

The resources we put there, the technical center, certainly demonstrates a strong commitment and allows us to help our customers win, bring the Asian customers up on the technology curve we see in the U.S. and Europe.

The ability to take these new products in, and then tailor them for the Asian markets has improved for JBT and localizing more of that production.

And the last point we've mentioned is as we go through our M&A program, a lot of the companies requiring have little or no activity in Asia.

As we bring those in, our ability to accelerate that over a few years really helps.

So we're certainly bullish on Asia and the growing middle-class there, having a multiyear long-term benefit to JBT, even though we have strong markets in the U.S. and Europe.

So from my perspective, the strategy is playing out well, and the investments we made the last 2 years are really starting to create value.

Your next question comes from the line of George Godfrey with CL King.

And I want to continue on that organic growth trend, 8% -- 7% to 8% for next year, really good.

If I look at the book to bill here in the Q4 for FoodTech, 0.8, and Tom, I know you called out, some production issues in Q1 for 2018 revenue, are those 2 related?

So George, I'll just kind of take you back on the orders.

And I think it's important to look through the year for JBT, and we always are careful to caution people about just looking at a quarter.

And I feel really positive about our backlog being up 12% for the year.

And if you think about the business units, we saw 29% growth in FoodTech, which translated at around 10% organic growth, double digits organic growth on that order rate for FoodTech.

In AeroTech, we had 9%, which was a 7% organic.

So you look across the portfolio, really strong order growth rates through the year, and then we see the strength in the markets.

And you put the math together and that's what gives us the conviction around the revenue guide for '18.

Got it.

And yes, and the book to bill was over one for the year.

And then the margin improvement, to the degree that you can, is the margin leverage achieved through improved manufacturing, lower operating expenses, getting a little price, perhaps new products coming in at a higher profitability -- and I'm sure you're going to say it's a combination of a lot of factors.

But I'm just trying to get out where you think the greatest degree of leverage over the margin is, and I'll leave it there.

Yes.

Thanks, George, for the question.

So organically -- so we are going to get about 125 basis points or so improvement in margins year-over-year, keeping in mind that about half of that or so is due to the improvement of the acquisition performance, right, some of the bad news going away.

So organically, you're talking about 50 to 75 basis points.

And then generally speaking, the way we look at it, if you look at some of the math and looking at the contribution margins and relative to our fixed expenses, it really does come up to about half and half of, I'll call it, true process-type improvements, benefits of pricing, other cost-[outs], et cetera, versus the other half about the impact of the operating leverage.

Your next question comes from the line of Mig Dobre with Baird.

And Brian, really appreciate all the detail on the contribution margins, 15% to 20% with $7 million of investment.

I'll just say this is certainly better than what I thought initially when I looked at the numbers.

Related to this, can you comment at all on raw material impact embedded in this into 2018?

What's going on with the -- with price/cost dynamics?

I mean this is something that I think we're talking about broadly in industrials these days.

Sure, Mig.

We do have expectations for inflation in our materials factored in and our ability to capture that through our value creation program with our customers.

As I look into 2018, it's labor and, of course, materials.

It's inflationary pressures, and we've done our best to factor that.

And then we have our RCI program, which is really a continuous improvement, which helps us better leverage our labor and make better use of our balance sheet.

So as we mentioned, we've had a disciplined program there.

And the last piece, which we haven't had a lot of chance to talk about as we head into 2018 because of the other initiatives, we did give some detail on is JBT's supply chain program, where we are getting more benefits of the common ownership and increasing our buys from -- per business buy to a JBT spend, where we get larger spends.

And we have a very active program there, driven from the center, but engaging the businesses that bring us some benefits there.

So that's how we get our confidence around the margin expansion and our ability to continue to drive the profits in spite of some inflationary pressures on both materials and labor.

Yes.

And to give you just a little bit more color, Mig.

So in 2017, we definitely saw a little bit more inflation than 2016, but as Tom mentioned, our strategic sourcing program, we look through the numbers, we offset essentially all of that inflation.

In 2018, we're expecting a little bit more inflation.

We're kind of considering another 100 basis points or so of -- on the material spend, which our material is about -- our metal is about 15% of our total material spend.

So it's not huge, that's where that biggest risk seems to lie.

But we believe with our strategic sourcing and some of our other initiatives, we're going to offset that as well as Tom -- as Tom mentioned, our ability to do some escalators in our contracts and ability to lock in some prices with our vendors.

So we think that -- we have that well covered in our forecast.

That's helpful.

That's helpful.

Then in your comments, you mentioned that you're expecting 100% conversion, free cash flow conversion, and again, this is a little bit better than what I was guessing.

Can you comment at all on this?

Should we be thinking that 100% or better is something that you can do on a sustainable basis going forward?

Yes, I'll only comment on 2018.

We do believe we'll get some improved working capital performance, and we're planning on little bit better capital performance as a percent of sales.

We'll get some little bit of pickup there.

Now part of that will get offset with the -- with, obviously, the revenue growth.

But if you look at our depreciation, amortization, which we expect to get about 40 -- sorry, $56 million or so and then relative to our CapEx, which is going to be in the -- call it the mid-40s, right, you do get a little bit of leverage there.

So all in all, we do think some working capital investments will be offset by that, the net benefit of depreciation, amortization versus CapEx.

So generally, we should be in that 100% range.

And obviously, future years is kind of dependent upon the growth rates and other things.

But generally, we should be in that general range from here.

Okay.

And then maybe last item for me.

I'm trying to figure out segment level -- ranging the segment level in 1Q based on your guidance.

It seems to me that you're implying that the Aero business might be down in the low-single digits all in on this military contract being pushed out and maybe double-digit growth still in FoodTech.

Is that -- first and foremost, is that correct?

And is it also fair to -- how do we think about maybe margin dynamics at segment level?

Yes.

You're generally correct that the first quarter revenue growth for AeroTech will be lower than that in than FoodTech in the low-single digits, a little bit higher than that for FoodTech.

And then margin-wise, they'll both be in that 8% to 9% range that we guided do.

Got it.

And 1Q tax consistent with your full year guidance.

The 27%, yes.

Your next question comes from the line of Steve Tusa with JPMorgan.

So if I use kind of the high level on the first quarter of 8% sales growth and kind of the margin range you guys gave, I'm getting a little bit higher in EPS.

Is there something else in there that maybe you guys called it out already?

But is there something else in there that with below the line, below margins, the margin line, where what that's kind of hitting that number, I mean, I'm getting something more like kind of $0.40 or so?

For the quarter, itself?

Yes.

1Q, 1Q, 1Q, first quarter.

Well, I would say we do have some additional R&D expenses that we mentioned, that's going to impact, I'll call it, our normal run rate.

Additionally, we have some additional interest expense associated with the Schröder acquisition, and then the Schröder acquisition itself was a little bit of a drag.

But you should be coming up somewhere in that range when you consider all those factors.

Okay.

I guess we're going to take it off-line because I'm having a hard time kind of getting to where you guys are.

I'm using the 8% to 9% because that would conceivably include those impacts.

When you look at the -- your net leverage is going to be pretty nicely positioned.

How big is kind of the -- you guys may have talked about this.

But are there any big ones out there from a deal perspective?

Well, we -- as we mentioned Steve, there's a whole continuum of deals.

There are some larger ones that we continue to track and actively engage.

And as you know, with M&A, it's episodic, right?

We have our willingness to -- and remain disciplined on our financial targets and returns on M&A and then the willingness to find sellers.

But certainly, there are larger deal opportunities as we look forward as long as -- as well as a continuation of the type of acquisitions we completed that create a lot of value for our shareholders and our customers.

So you should expect us to be working at both, and we have a significant engagement ongoing.

And when things line up, we'll make sure we convert those and continue to drive our M&A program.

Got it.

Then one last one.

I'm not sure if anybody asked.

But any sense from your customers of how tax reform is impacting their views on CapEx budgets in the next couple of years?

Sure.

I had mentioned that as part of the overall tax question.

But I do believe it's a tailwind, Steve.

If you think about the ability to invest in the equipment that JBT provides that reduces their labor requirements, drives their yield on their food products, improving their profitability, bringing products to market that increases customer demand and the ability to deduct that rapidly and get benefits from a tax perspective, certainly, a tailwind in my view.

And we expect that to continue to play out as long as the laws stay the way they are in the U.S.

Your next question comes from the line of David Stratton with Great Lakes Review.

When we look at your new products, you talked about the iOPS and I think some other new products that have come online recently, do you track a Vitality Index?

Is there any way to differentiate between the uptick of your newer products as they hit the market?

Or is that something that's not entirely relevant in this case?

From our perspective, we see it as one of the elements.

It's an important element.

And we have our other initiatives around Asia, the military product focus in AeroTech, the Asian initiative, and we really track each one of those individually and look to deliver that above-market growth rate.

You think about our Elevate framework, 3% to 5% organic, 6% to 7% acquisitions, double digits collectively, in our performance last year and this year is a reflection of the initiatives allowing us to outperform that framework.

And I'm pleased with the progress we're making, and we look at it as a collective effort for JBT.

And that's why the Elevate is so important to us, and we're really crystal clear on that framework and how it creates value with our customers and with our shareholders.

And to provide a little bit more color on the R&D process, so we do have a fairly robust process that looks at project by project, market -- the size of the market opportunity, the costs and time to get to the market.

And so we do effectively a plot graph of where these things or opportunities lie so that we know where to put our investments.

But we don't have like a Vitality-type Index relative to JBT entirety, but we do track, as Tom said, that along with all of our other initiatives.

And then one follow-up.

I don't know if it was mentioned earlier.

But do you have a CapEx projection for the year?

Yes.

I think I mentioned in a question to -- of Mig, somewhere in the mid-40s.

Your next question comes from the line of Walter Liptak with Seaport Global.

Just wanted to go back to the first question on the call about the operational problems and see if we can get some color.

I think you called out a ramp in production.

So I guess the question is, how big was the profit hit from that?

Why is it clear in the first quarter?

And was there any revenue that slipped out of the fourth quarter into the first quarter?

Walt, as I look at the fourth quarter, it really was around the new product introduction and a bit of a ramp cost.

And as I look into '18, we see that new product introduction issue kind of working its way through and wrapping up through the end of the first quarter.

And then it's not between the years, but as we look into 2018, we see some of the higher-margin business that we normally expect to be in the first quarter pushing out a bit, that militarily on AeroTech and some of that filling technology moving into Q2 through 4. And from our perspective, we remain very much focused on the year.

The last element that's -- that is important to keep in front of you is the continuation of the R&D spend.

Those are important long-term investments that create a lot of value for our shareholders.

And we maintain our commitment to that and maintaining that through the first quarter so that we continue to push the new products and services that we need to drive the growth.

(Operator Instructions) I'm showing no further questions at this time.

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

We posted another year of strong double-digit growth at JBT and delivered against our Elevate strategy goals, and I'm really pleased with how we've positioned JBT for 2018 and beyond.

And thanks, everyone, for the call and joining us this morning.

This concludes today's conference.

You may now disconnect.

Have a wonderful day.