JBT Marel Corp (JBTM) 2018 Q2 法說會逐字稿

Good morning, and welcome to JBT Corporation Second Quarter 2018 Earnings Conference Call.

My name is Shawn, 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, Shawn.

Good morning, everyone, and welcome to our second quarter 2018 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.

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 would like to turn the call over to Tom.

Thanks, Jeff, and good morning, all.

JBT's second quarter revenue margins were strong, with significant year-over-year and sequential gains.

At the same time, we booked record orders at FoodTech and AeroTech.

This performance reinforces our confidence in JBT's ability to achieve double-digit revenue and adjusted earnings growth for the full year.

Let me turn the call over to Brian to review results for the quarter and outlook for the year, then I'll provide some color on our restructuring program, market conditions and acquisitions.

Brian?

Thanks, Tom, and good morning, everyone.

As Tom stated, JBT posted solid gains across-the-board in terms of top line growth and profitability.

Second quarter revenue expanded 27% year-over-year, including a $32 million or 8% benefit from ASC 606.

On a segment basis, it break downs as follows: FoodTech reported revenue growth of 30%, with organic growth of 13%; 4% from acquisitions, 2% from foreign exchange and 11% from ASC 606.

AeroTech's revenue growth was 21%, with 15% organic, 4% from acquisitions and 1% each from foreign exchange and ASC 606.

We experienced some pressure on the gross profit line, with gross margins down 110 basis points year-over-year.

Some 2/3 of the decline was due to revenues associated with ASC 606.

The remaining 1/3 was from higher cost, primarily from labor and metals.

As we've discussed in the past, we are generally able to pass through higher input costs with our project quotes, albeit with some lag.

That said, segment operating profit margins of 12.6% were up 170 basis points versus a year ago.

FoodTech margins of 13% -- 13.1% were ahead 190 basis points year-over-year and 600 basis points sequentially.

AeroTech margins were also up significantly to 11.4%, representing expansion of 130 basis points year-over-year and 390 basis points sequentially.

In the second quarter of 2018, acquisitions and deal costs were a drag of about 40 basis points versus a 120 basis point drag in the year ago period.

Corporate expense was 2.4% of revenue in the second quarter.

We still expect corporate expense of 2.5% to 2.6% of revenues for the year.

Separately, we recorded an expense of $8.5 million in connection with our restructuring program, which Tom will give you more color on.

The discrete tax benefit of $0.15 per share and ASC 606 benefit of $0.17 per share were essentially as expected.

With that, we reported diluted earnings per share from continuing operations of $1.04 for the second quarter of 2018.

Adjusted for the restructuring charge, EPS was $1.24.

We were pleased with our inbound orders.

FoodTech's inbound of $350 million was ahead 24% year-over-year and 12% on a year-to-date basis.

AeroTech's inbound orders of $180 million were up 34% year-over-year and 36% year-to-date.

Both segments achieved record levels for the quarter and the first half of 2018.

Free cash flow for the quarter was $18 million, excluding a $6 million pension contribution.

Year-to-date, we are $20 million to $25 million short of our cash flow expectations.

JBT's strong second -- JBT's strong growth in the second quarter and similar expectations for the back half resulted in increased accounts receivable and inventory at most businesses as appropriate for the season and activity.

The majority of the shortfall was related to AeroTech.

The large increase in volume at our ground support business has required us to build incremental subassembly inventory in anticipation of production.

Additionally, in order to meet the heavy deliveries on jet bridges in the second half, we had to build first half inventory more than usual.

We expect AeroTech inventory build to materially convert to revenue by year-end.

Accordingly, our updated estimate for full year free cash flow is $70 million to $90 million, depending on the timing of receivable collections.

Looking at the full year, we're maintaining our guidance of $2.80 to $3 on a GAAP basis and $3.95 to $4.15 adjusted for the restructuring charge, while absorbing the $0.07 EPS impact of the FTNON.

Our revenue and margin guidance remain on track.

We continue to expect full year organic growth of 7% to 8%, 3% from acquisitions, 1% to 2% from foreign exchange and 4% from ASC 606.

The FTNON acquisition is expected to negatively impact full year FoodTech margins by approximately 30 basis points versus previous guidance, while AeroTech's margins will be slightly higher for the year versus previous guidance.

We expect third quarter performance to look similar to the second quarter, absent the discrete tax benefit.

Given expected shipment timing and somewhat smaller ASC 606 impact, at FoodTech, we expect slightly lower sequential revenues with stable margins.

At AeroTech, we expect a modest sequential pick up in revenues and a slight sequential progression on margins.

At our Technology Day in September, we look forward to providing an updated financial framework through 2020.

This will provide better visibility into our revenue and margin profile, considering our operational improvement efforts.

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

Thanks, Brian.

Last quarter, we introduced our $50 million restructuring program, which will enable us to unlock the benefits of JBT's increased scale and global enterprise.

This program is about fundamentally enhancing the way we do business by focusing on the factors that impact JBT's competitiveness, such as cost, quality, lead time and efficient use of capital.

Underlying our restructuring program is a comprehensive operational assessment, from the ground up, that has resulted in more than 100 detailed improvement projects.

We're implementing these projects to meaningfully increase effectiveness on direct labor, indirect labor and overhead spend, while improving design, quality and service capabilities.

We remain confident these actions will improve our cost structure by $45 million in total, with approximately $15 million of benefit in 2019 and an incremental $30 million in 2020.

All told, this should result in more than 200 basis points of margin expansion.

At the same time, we continue to evaluate further opportunities to capture additional benefits as part of this program.

Moving to market conditions.

As indicated by our strong second quarter activity, JBT continues to enjoy healthy markets.

Our protein markets are performing well, with favorable trends in the frozen foods, ready meals and value-added proteins offsetting weakness in the U.S. poultry market.

Equipment and aftermarket activity remains strong in the U.S., Europe and Asia.

In Asia, growing demand for protein continues to drive a healthy pipeline of opportunities, and we're seeing early signs of a market recovery in South America.

For liquid foods, while quote and project activity remains strong across all geographies, some orders have pushed out to the back half of the year.

For FoodTech overall, we expect growth in protein to be a bit better than earlier expectations, with slightly less robust growth at liquid foods in 2018.

We are monitoring the potential impact of tariffs.

In particular, we are watching U.S. food producers, which could be hurt by constraints on export markets.

Fortunately, JBT has a global customer base and relationships that soften any specific U.S. impact as food production relocates geographically to close the gaps in supply.

JBT's enjoying particularly strong markets at AeroTech.

Underlying AeroTech's strength is continuing favorable profitability and investment outlook for U.S. airlines, airport improvements and global airfreight.

On the M&A front, earlier this month, we announced the acquisition of FTNON, a provider of equipment for the fresh produce, ready meals and pet food markets that adds about $30 million to annual sales.

As part of JBT, we plan to expand FTNON's global penetration, particularly in the U.S., building on its current leading position in Europe.

We also have significant opportunities to grow its aftermarket business, which has been limited due to the company's lack of a service installation network.

Looking forward, we continue to develop a strong pipeline of potential acquisition candidates that are a compelling fit with our food strategy and enhance the value we provide our customers.

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.

One of your comments was the liquid foods side maybe not being as strong as you want it.

Should we think of it in any way in terms of mix impact, when we're modeling for this for the year?

The margins are reasonably similar to proteins, just slightly higher proteins, slightly smaller liquid foods.

But all in all, we factored that into the guidance for the year and it doesn't materially move things.

Like Tom said, protein's a little bit bigger.

Liquid foods is a little bit smaller, but all in all, FoodTech is well on track.

Got it.

And then just second on China specifically, with all the noise going on there.

I know you guys have done a lot of investing there over the years.

Are you rethinking that?

Is that not impactful?

How should we be thinking about that for you?

In terms of our M&A program, Allison, I mean we still remain very much committed.

As I mentioned on our prepared comments, we have a strong pipeline.

We were pleased to close FTNON in the period.

That's a nice advancement for us into those ready-to-eat vegetables and ready meals and pet foods, which we're excited about.

And we see some real geographic opportunities.

And we're actively out there working our pipeline.

And we certainly are working to continue the trajectory JBT's enjoyed in the past.

But I guess, more specifically with China in your investments there over the years.

And if you look at that region strategically, are you a little bit more cautious entering it now?

Actually, when we think of it as Asia as it's a fast-growing market for our food equipment, both proteins and liquid foods.

And we think of not just China, but you think of Indonesia, Malaysia, Philippines.

And from our perspective, we think JBT's very been much been benefiting from our strategy in Asia.

And we're seeing the continued strength, as I've commented in the last few calls, so we continue to be bullish.

And although we have a manufacturing presence in China, it's very much an Asia effort.

And we think the macros there are just really strong now, Allison, and we remain highly committed to it.

And we think it's a great thing for our franchise and for our customers and shareholders as we move forward through the years.

Because the growing middle class and the consumption, that's going to drive.

And the equipment, that's going to be required to support that.

Your next question comes from the line of Joel Tiss with BMO.

I've been hearing a little bit about some protein kind of being piled up in storage.

And I just wondered, you touched very quickly on tariffs.

And I just wondered if we could take a step back and you could give us a sense of what your customers are saying?

Like what are they worried about.

And I'm trying to figure out if there's any kind of potential for 2019 to be impacted?

Or this is more everyone just kind of scrambling and it's a transition and they'll figure it out.

Yes.

That's kind of a 2-part question.

So as I mentioned in my comments, Joel, I'd say that the U.S. poultry markets have probably seen the biggest challenge.

It's a production and a bit of a tariff issue.

And we've certainly seen some softness in our orders there.

But the protein business, overall, because of the various areas we play in, our global franchise and the broad set of customers, we've seen actually quite strong order activity there.

And then we're pleased with the performance and very confident with the way that's developing.

And so from our perspective, we've reflected that in our view through the end of the year.

And as we think about next year, we'll give you more view as we get into technology day in September.

But right now, we continue to be optimistic on proteins overall.

And one of the interesting things you do see play out is as tariffs, if they were to become more of an issue, that the food -- the fundamental food consumption remains there.

It just needs to be geographically relocated, and JBT's well positioned to provide that need.

And we'll just have to see how the U.S. poultry manufacturers work their way through this production issue.

But we believe we reflected that in our outlook for the year as best as we understand it right now.

Okay, great.

And then just quickly, I didn't hear anything about -- very quickly, about pricing.

Any pricing actions you've taken and raw material cost, the issues and trends there and things like that?

So just a little flavor.

Sure.

So for JBT, certainly, we do consume stainless steel, some carbon steel and aluminum.

And we have seen some increases.

Brian mentioned that's impacted in our gross margins to a small extent.

And generally, Joel, we're able to price for it when we price new projects.

And also, we've taken some pricing actions on our parts, et cetera, throughout the year.

And we reflected that in our margin outlook for the year.

So I think in general, we'll be able to convert fairly well on the increases, but there's always a bit of a lag because of the orders we have in backlog.

So when we book an order, it reflects our best thinking on the materials.

But if they move more than we expect, there can be a bit of a headwind there.

But overall, I'd say, JBT has been fairly effective in pricing for it as we've gone through the year.

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

See if every quarter's a 20% move, hopefully not but right direction.

Curious, first, on the orders.

With the change from 1Q to 2Q, and I know even 1Q orders were pretty good off the tough comp, but were there some timing issues, did some go from 1Q to 2Q?

And the poultry changes you talked about, are you seeing -- do you think it's a fundamental shift in the market and capacity has caught up?

Or is it just more or less potentially a short-term pause, curious about your overall thoughts there.

Yes.

I'd say that, as you know and you have been following JBT for a number of years now, there's always a bit of lumpiness to our orders, right?

We can't perfectly predict when a customer's going to commit to a project but I'd say overall, the trends have been encouraging and have been strengthening through the year.

And in fact, they've been strengthening in the second quarter through the quarter.

So as we ended June, we had particular strength in our order book, which I would tell you was encouraging to us.

As I look at the protein market in the U.S., in particular, where there are some discussions, and in particular, in poultry, there has been production in excess of what appears to be some of the demand that we're seeing.

We would expect that to work it out over time.

And we've certainly done our best to reflect our thinking on that in the year, and we're still planning to deliver really strong organic growth, both in protein and liquid foods.

So that's our best understanding as we see it today, Larry.

And we continue to watch it as we've said, but I think we've got our best view of it in the numbers here and still looking to deliver really strong year for JBT.

And Tom, you talked about the restructuring benefit.

Just correct me if I'm wrong, but are we pushing out the benefits?

And it seems like there's a little bit of a lag to getting the benefit from -- compared to the cost.

And you said 2020, you'll get the full benefit.

If I recall, it's by the end of '19 before, so do we get the full benefit for full year 2020?

Or just how do we think about that, if there's been some changes there?

Sure, Larry.

What we had said on the last call was that as we exited 2019, we would see the full benefit with some [moderate] benefits in 2019.

We've actually increased the amount of benefits we expect in 2019 from we basically said, a few, $3 million, $4 million, $5 million, $6 million in 2019 to now $15 million.

And basically, you're [saying] the remaining as we exit 2019, you'll get that full benefit in 2020.

So the $45 million.

So the big number hasn't changed and the timing of the full number hasn't changed.

We actually just pulled in some of the savings a little bit quicker into 2019.

15 and 30 sequentially, Larry.

That's helpful for clarification.

Then last question, I'll leave it there.

The specific changes you made to the second half guide, was it -- I know you touched on earlier, and I'll go back and read it again, but were you just thinking lower margins for fourth quarter FoodTech?

Or what specifically have we changed in the outlook?

Yes.

Specifically to the outlook on the back half, previously, we had expected a fairly decent uptick from Q2 to Q3.

But Q2 is -- was stronger.

We saw a little bit of movement from Q3 into Q2.

And therefore, those quarters are going to look pretty similar.

And then we still have the decent uptick going from Q3 to Q4.

And now we just have -- just have a better view of how the year is going to lay out.

But no real meaningful movement other than some of the Q3 into Q2.

And then the net impact of the FTNON press on margins is what you see on the margin side.

But otherwise, we've maintained our full year margin profile for FoodTech for the year.

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

Just a quick clarification on Q3.

I thought I heard you say that you expected revenue in FoodTech to be slightly below Q2.

So does that -- what sort of organic growth would that imply for the quarter?

Are you asking year-over-year or sequentially?

Yes -- no.

Year-over-year, of course.

Well, year-over-year, it'd still be pretty decent.

I don't have it right here in front of me, unfortunately.

But you're talking a little bit -- one of the reasons why we're growing sequentially from Q2 to Q3 down a little bit is a little bit less ASC 606 impact.

Honestly, Mig, I can follow up with you, I don't have that right in front of me, the organic growth.

But you can see we're going to have about $10 million to $20 million in ASC 606 impact benefit in the third quarter versus about $30 million in the second quarter.

But we're certainly seeing -- go ahead.

I'm sorry, the thing that I was a little confused about it, it seems to me like if you're talking about the third quarter as being somewhat similar to the second revenue wise, then it would seem to me like you're actually raising the organic growth guidance for the full year for FoodTech, which I guess would be consistent with your strong orders.

Just a touch, right.

And Mig, I guess, the way I'd take it off the top and we always caution people about looking too carefully quarter-to-quarter for JBT.

But we're still looking at that 7% to 8% range for the full year, which I think is really an important capstone to understand it, from my perspective.

We're working hard to deliver that, and we think that's a really solid number for JBT.

Okay.

I want to go to ASC 606.

So you benefited to the tune of $0.47 in EPS from ASC 606 in the front half.

Your full year guidance, as I understand it, is unchanged.

That implies a $0.15 drag from ASC 606 in the back half of the year.

Can you maybe help us understand how that flows from quarter-to-quarter, Q3 versus Q4?

Sure.

We still expect a little bit of benefit of ASC 606 in the third quarter as some of that previously recognized revenue continues.

But then, as we mentioned, you do have some accelerations in deferrals based on all the aspects of the contract.

So it is a contract-by-contract analysis.

You have to look at it when it would ship -- when it would be recorded as revenue on the old accounting versus the new accounting, but that does imply that the fourth quarter will be a drag, a decent size drag, in order to get -- for your math to work.

So you'll actually have a negative impact from ASC 606 in the fourth quarter.

And then as I mentioned, Q3, we'll have about a $10 million to $20 million benefit from 606.

Yes, that's our current thinking.

And to be honest with you, it is difficult to forecast because you're trying to figure out exactly when something would have shipped versus otherwise would have under the -- how it would have been recorded versus the other way.

So it's not that easy to predict, but that is our best thinking at the time.

Understood.

And then maybe as important, as we look into 2019, the margins themselves, they've been reported, they've been, to some extent, distorted by ASC 606 this year.

So I'm trying to understand as we're modeling year-over-year, and we're looking into next year.

How should we think about this ASC 606 impact for '19?

Right, Mig.

And we're looking at the technology day to give you a better insight into that in September and just kind of thinking about that.

And that's why we have broken out the ASC, so you'll have those insights.

And from our perspective, we're going to do everything we can to make sure the framework is clear and understandable as we get there.

And we would point to the fact that as we get through this year and into next year, you should start to see things stabilize and not have to keep such a careful eye on this.

It won't be perfect, heading into next year, but the comparables will become much easier.

Okay.

I understand that.

Maybe last question for me, on FoodTech margins.

So if we're looking at the quarter itself, it seems like ASC 606 added about 90 basis points to margin, at least by my math.

You had 80 basis points favorable from M&A.

So you had call it core margin expansion on organic growth of about 20 bps.

As we're looking in the back half going forward, right, you told us there's going to be a drag on margin in the fourth quarter from ASC 606.

But it seems to me like the guidance, the full year guidance would imply that incremental margins would have to step up pretty significantly.

I get the fact that organic growth is definitely there.

I'm just trying to understand what gets you -- what gets those incremental margins to step up?

Is it a matter of efficiency in savings?

Is it catching up with price cost?

Is it mix?

How do you think about it?

Sure, Mig.

It's a couple of things.

One, you are going to get the benefit of the -- if you're excluding ASC 606, like it sounds like you're doing, you are going to get the benefit of the big growth in the fourth quarter relative to a year ago.

So you're going to get the operating leverage there.

We are going to get a couple of million dollars of benefit from the restructuring program in the fourth quarter.

And then generally, you are catching up a little bit from some of the headwinds on material costs, et cetera, that will even out.

But all in all, it's quite achievable.

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

Just digging into the cash flow a little bit.

You guys had a pretty big positive adjustment for progress.

What do you expect that to be around kind of for the year?

Is that -- is this kind of a 1 quarter -- this can be lumpy, obviously.

But is there another kind of big slug here in the back half with these good orders of progress goodness?

Yes.

I'm assuming you're talking about the advanced payment benefit?

Yes, yes, yes.

Correct.

So it was particularly strong for the quarter because of the huge order rate in the second quarter, right?

Protein really collects a lot of deposits.

I don't think for the full year, we'll have that full $55 million benefit.

That will moderate over the year.

But at the same time, you're going to get moderation from the negative cash flow from inventories, as I mentioned in my prepared remarks.

So that will start to offset each other.

So basically, as you build that inventory, your customers will get the benefit of those advance payments.

I expect a little bit more moderate growth from the inbound relative to Q2.

So that will moderate, and then obviously, you'll collect some of your receivables by the end of the year.

So we're really, from a cash flow perspective, we'll make nice progress for the remainder of the year, but in particular in the fourth quarter, as you flow through all that inventory.

And then as we kind of look out, when you think about the moving parts here, whether it's restructuring or some of these dynamics around progress and inventories.

What's the trajectory towards kind of 100% conversion?

Is that -- is that in the cards in the intermediate term?

It absolutely is in the cards.

What I would tell you, this year, we said $70 million to $90 million of free cash flow.

It's a fairly big range because of some of the moving parts.

And that would imply somewhere in the range of 80% to 90% conversion for the year.

What I could tell you is that with the big growth that we're seeing organically in the build and the working capital inventory, that really, obviously, makes it a little bit tougher to get to a 100% in the short term.

But when you look at the overall profile under I'll call it, a normal growth pattern, we should be over 100%, because your CapEx is less than your depreciation.

And then you get some of the benefits of your noncash stock comp expense.

So our general profile should, as we go into 2019, absent [against] some really extraordinary growth on the working capital side, should be in that 100% profile.

Right, and Steve, I would just put a little.

And that's on a GAAP basis, obviously, right?

That's obviously on a GAAP basis?

Yes, sir.

Right.

And when do you think GAAP and adjusted the difference between those 2 numbers kind of narrows?

Again, I would say...

Obviously, it was probably pretty big -- it's pretty big this year.

It is pretty big this year.

Yes.

Well, with the $50 million or so of restructuring expense this year puts a lot of noise on the GAAP net income, obviously.

Now we're spending a lot of that money.

So you're still kind of net-net not all that different.

But it adds a lot of noise.

And obviously, frankly, the ASC 606 is impacting your starting point on your net income as well.

You've got some that previously recognized income.

So there is a lot of noise, that's why I chose to talk more about dollars than ratio.

But that $79 million -- a $70 million to $90 million, if you take a little bit noise away on rev rec and some other things, it implies that 80%, 90%-ish conversion rate.

Sorry, one last quick one.

So now that we're talking about kind of absolute dollars there.

Is the dynamic in '19 that restructuring is obviously a big number this year?

I don't know how much cash restructuring.

You said maybe the majority of it is cash.

Is a dynamic this year that basically, free cash flow grows with earnings?

And then obviously, that absolute number goes up by the amount of kind of restructuring coming down?

Is that kind of the right profile for free cash going forward?

Yes.

It's theoretically, it should.

You'll have a little bit more because you'll take some of the charges in 2019 and some cash out in -- sorry, charges in 2018 and more of a cash out in 2019.

So you'll still have a little bit of a negative there in 2019 versus 2018, but at I'll call it more of 20,000-foot level, you should be closer to that -- it will be north -- if our net income is north of $100 million with some growth, then you'd be in that profile.

Okay.

So just -- one last quick one.

How much of that $50 million is cash this year, so that we can kind of understand the tail on that into 2019.

That's my final question, I promise.

Right now, my best guide, it's really tricky because it depends on various, I'll call it, severance payments, et cetera.

But my best guess right now, about 40 to 50 is cash.

This year, recorded this year in 2018?

Yes, sir.

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

Wanted to ask about discussion on orders, and thanks for pointing out that you guys are highly diversified geographically in FoodTech.

I wonder if you can give us an idea of the orders during the quarter.

And would a strong -- internationally and then offset the U.S.?

Maybe a percentage of sales on FoodTech orders U.S. versus international.

Yes.

I would tell you that orders were broad-based, Walt.

And I think one of the things that I was looking to was the bookings month, which would indicate that we're continuing to enjoy some of the nice strengths when you look across the portfolio.

So from my perspective, I mean, we certainly acknowledge that.

In the U.S. poultry, as we talk about -- what I would -- to be careful not to use the wrong technical term, but the primary production of poultry, we did see some softness.

The order's tied directly to the poultry producers.

And we certainly did our best to reflect our thinking as how that would mature through the end of the year.

But the other elements of the portfolio, both in the U.S. and in the rest of the world, were just -- are just performing really strongly.

And collectively, we had great bookings in protein.

And we had building strength through the quarter.

Okay, great.

I wonder, within proteins, with the diversification, how much is -- of your revenue is U.S. poultry manufacturing versus all other?

Because maybe we're overstating the importance of that market for your orders.

Ladies and gentlemen, this is the operator.

Apologies, there will be a slight delay in today's conference.

(technical difficulty)

Hi, everyone.

I'm not sure if you can hear me, this is Tom Giacomini, but we appear to be experiencing some difficulty in connection for the call.

(technical difficulty)

Yes.

Sorry, Walt, I don't know if you heard my full answer.

So maybe I should repeat it or did you get the full answer?

Yes.

I think I got most of it.

It sounds like liquid foods, meats, beef are doing fine.

U.S.A.

and international, there was broad-based strength and that U.S. chickens, U.S. poultry might be where you're seeing a little bit of softness.

So I guess, the question was, what percent of your revenue is the poultry U.S.?

And maybe we're overthinking, overstating the importance of that end market?

Yes.

So it's -- I think one of the important facts I would point to Walt, is if you think about it, for JBT, none of our customers exceed, in a given year, 5% of our revenues.

And if you think about you have a poultry industry with a few large players here in the U.S., that just kind of gives you a little bit of the sensitivity you see as it relates to these direct customers, given the broad diversity of our revenues and the markets we play in.

And I would tell you that we work hard to make sure we're in front of these trends.

And I would agree that, from my perspective, we did see some softness in the U.S. direct poultry production orders as we had seen the quarter unfold.

But overall, the protein portfolio was performing at a very, very strong level in terms of order activity through the quarter.

And as I mentioned, the timing of the orders, as they built through the quarter, with June being very much a strong quarter was encouraging.

On the liquid foods front, we have a lot of great quote and project activity, but we did have some orders move from the quarter into the back half of the year.

So we're going to continue to work to convert those.

But in aggregate, you look it's still a really solid and strong order book for the quarter.

Okay, fair.

And then Brian, one for you.

Foreign currency, the dollar's been strengthening, especially against the euro.

What kind of impact does that have on the back half of the year?

And then for U.S. export of equipment, what kind of impact does that potentially have on demand levels?

Sure.

The second part, it's a little bit easier to answer because we do manufacture in the local economy, so that's not a huge impact.

For the U.S., we're mostly manufacturing in the U.S. For Europe, we're mostly manufacturing in Europe.

And then we are manufacture in China or -- for Asia.

And we also export to Asia from U.S. and Europe.

So that's not a huge issue at these rates.

In terms of predicting the FX impact, that is a little bit trickier.

We're showing it to be basically we're at -- the guidance we have given does have a 1% or 2% favorable, which is kind of where we are year-to-date.

Because we have Europe, we have Sweden, we have Brazil, which is kind of going the other way, so we've got a lot of pluses and minuses.

So I don't see there being a huge impact in the back half of the year, frankly.

But it is a little bit hard to predict.

But there's just a lot of pluses and minuses, and I'm not particularly concerned about it, honestly.

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

We don't spend a lot of time on the AeroTech side, but I thought I'd start there since we covered a lot on the FoodTech side.

The 1.39 book-to-bill is as good as it's been in maybe 5 years.

In fact then, we had declining revenues so the book-to-bill was a little bit easier.

Now with growing revenue, still the book-to-bill is that high.

Brian, can you talk about -- or Tom, can you talk about exactly the components that are driving that?

Or what specific infrastructure is being rebuilt, and where is it being rebuilt?

And what products you're providing?

Sure, George.

It was a really strong number.

And from my perspective, it's really coming from a couple of primary factors.

First of all, on our fixed equipment, George, it's U.S. airport infrastructure.

It's not -- and it's important to understand, it's not just new airports.

It's upgrades to existing airports.

And what's underlying that is just the lack of investment for many, many years while the airlines and airports were kind of challenged.

And as there's been a return to a reasonable level of profitabilities for our airlines, they're certainly investing.

And it started with the airplanes and now they're moving to other elements, which is around making sure that the customer experience is favorable and as we all know, as travelers, the U.S. airports aren't so great and there's investment going in, both by the airlines where they own the bridges and by the airport authorities when they're upgrading their facilities.

And then there are some new terminals, et cetera, being built.

So that's on the fix side.

On the mobile side, it's a couple of parts, but the biggest one is, quite frankly, the strong e-commerce world we're living in is creating increasing -- significantly increasing demand for air cargo.

And a lot of the JBT equipment is important to the handling of packages that go on air cargo.

And we're just -- if you look out there, a lot of the air carriers that handle cargo are expecting very strong growth rates in response to this e-commerce activity.

And JBT is enjoying participating in that.

So if you put those 2 fundamental demand drivers, which are appearing quite durable together, it's really underlying the strength we're enjoying.

And then there are some particular activities that we've done, investing in new products and engineering that we've invested in the last few years that have positioned us well in general in those spaces.

And we're starting to enjoy the benefit of some of those newer products also.

Great.

That's very helpful.

And then just one question on FTNON and thinking about the prepackaged in foods, pet foods and the produce that is fresh and ready.

Does the margins on those specific food items have the potential for you to be higher than the standard?

Or is the margin on that type of a business the same as the FoodTech margin in general?

And I'll leave it there.

I would tell you that, what we were really looking at in that investment, George, is we see the margins being similar as we bring that business in and put it into the JBT framework.

But what's important is those markets have great underlying growth rates, as people eat fresher, healthier foods, that's a growing market.

And JBT wants to be a part of that.

And then the pet foods, the growth is quite strong in the investment that's going in there.

So we really like where that business was centered.

And we feel that, that exposes us in a meaningful way to some faster growing markets.

And from our perspective, we have some benefits we bring to that.

Being a smaller company, they had a fairly limited sales presence, particularly in North America where obviously JBT has particular strength.

And secondly, they didn't enjoy much aftermarket, which actually put pressure on their margins because they quite frankly just couldn't invest in the assets that are required to support an aftermarket business and being part of JBT with our strong aftermarket franchise, we can grow their aftermarket and enjoy their -- improve their profitability over time.

I think if you look at the capital we deployed versus the returns we're investing, it's solid.

And from my perspective, I think it's a great entry into some of these -- and better position in some of these faster growing markets.

I would remind you also that the HPP, the viewer investment, we also had a nice pet food play in there and was central to this whole fresh theme, too.

So as we've talked about JBT, it's really pivoting and working its strategy to make sure we're behind these macro trends of protein demand, fresh clean labels, organics.

So I think we're doing a really nice job of executing against our strategy as we've [already] (inaudible) also.

Your next question comes from Andrew Obin with Bank of America.

Just a couple of clarifications.

Most of my questions have been answered.

On free cash flow, $70 million to $90 million, is that with pensions or does that exclude pensions?

That would exclude.

(inaudible)

So how much potential run rate do we have?

My current estimate is $12 million.

Okay.

And that's sort of what we should be modeling for the next year as well, right?

Yes, sir.

I guess the one caveat to that is if you -- for 2018, there is this potential benefit of a little bit more contributions to take advantage of the change in the tax rate.

So by the end of the year, I may decide to put a little bit more than that $12 million in but we're still going through that.

But again, we do exclude that from our analysis on -- when defining the free cash flow.

And the $70 million to $90 million, the view is that AeroTech, that's really AeroTech contribution.

That's the delta, whether or not you're going to get that working capital back, is that correct?

Right.

Our prior guidance was $80 million to $90 million.

And now we're seeing $70 million to $90 million.

And with the fast growth at AeroTech, there is some possibility that there's a $10 million or so overhang as we exit the year, with all the sales and the volume that's going to happen, and you may not be able to collect all that AR as you exit the year.

Got you.

And it's a high-class problem, but if AeroTech continues to grow, could this sort of working capital issue persist longer?

Working capital is -- AeroTech generally does have a higher working capital as a profile than FoodTech does.

So there would be some pressure.

That said, if you look at our restructuring program, our improvement program, we are tackling some of the factors that do affect their working capital, particularly the inventory.

So we haven't seen a ton of improvement in the way they've managed their inventory this year and slightly pulled back.

But we do think there's some nice opportunity for improvement.

And even with some growth, we think there could be more of a modest impact going forward from here.

And just a question on tariffs, going back to that.

Are you guys considering sort of rearranging your supply chain going forward?

Or is the strategy mostly to deal with what you have and, longer term, just absorb it?

Yes.

So as we look at it, Andrew, we do tend to manufacture larger products, right?

So freight is not an insignificant component of our delivered cost.

So that's why JBT has invested in making sure that we can produce our systems in the various major geographies.

Obviously, we do arbitrage a bit and make choices, depending on where costs are and our ability to ship that effectively and get it into a different economy.

And one of the things that I like -- I feel better about in terms of where JBT's at, is just the fact that we do have production, as Brian mentioned early on the call, in the major economies.

So if tariffs were to become a major or a larger issue, our flexibility geographically, certainly, would help insulate us from that.

On the supply side, obviously, we do purchase components from outside of the United States or Europe, for example, in lower-cost economies.

And we're constantly evaluating if you're in Europe, are you buying from Asia?

Are you buying from Eastern Europe?

And those economies evolve, and we try to be flexible depending on the current situation.

And for JBT, it's been something we've spent a lot of time and effort on the last 6 months.

And we've tried to be in front of it as best as we can as we saw some of this coming.

And I think we're, so far, demonstrating that we've done a pretty reasonable job of managing it.

And as we go forward, we'll continue to look to those trends and make sure we're trying to stay in front of that as best we can.

Your next question comes from the line of Jason Rodgers with Great Lakes Review.

Yes.

The U.S. poultry market was talked about in some detail.

And you mentioned tariffs and production issues.

But I wonder if you could expand on what's going on in that market and your outlook there?

Well, certainly, as I've indicated from my perspective, if you think about the demand for poultry around the world, it remains quite strong.

And from our perspective, as you get into the microeconomics of it in the United States, it's just quite a bit of production that's outpacing a growing demand, even in the United States.

So over time, that will stabilize itself.

So as I think about protein in the long run and as you think about protein, poultry is a portion of that.

And we remain convicted that, that's the way the consumer's heading and it's a good macro trend.

It's just managing our way through the U.S. And we mentioned -- and as it relates to protein in the primary production of it, we did see some softness developing as we saw in the market.

And we have been able to book our way through that in terms of the other markets and in the U.S. and other types of activity that were quite strong.

So from our perspective, we'll keep an eye on it, but as we look at it right now, we're still planning for a really solid year and strong growth.

And our position on that hasn't changed.

It's the diversity of JBT's portfolio, diversity of the customers and the global nature of the markets we participate in.

And then as far as the push out in orders and liquid foods.

Is there anything of note to mention there?

Any reason why those orders are pushed out?

And have any been canceled?

So we look at those, and it's really just around customers making decisions on the timing of their investments.

And we do our best to predict it.

Sometimes in a quarter, we get a few more than we expect.

Other times, it pushes out a bit and we certainly see it and as you think about it for JBT, as we get through the second quarter and into the third, we start to see orders that will materialize in the following year.

As I mentioned, as we look at it right now, just in composite, protein's looking a bit stronger than we expected as we started the year, liquid foods a bit weaker, but both are still posting a really solid organic growth numbers, and that's an evolution of our order book.

And we'll just see how those orders come in, in the back half of the year and what that means for next year and just kind of how we end the year.

But from my perspective, it's quite normal for JBT to see this.

And that's the nature of our business.

And a few quick ones for Brian.

Do you have an estimate for what ASC 606, what the drag will be in the fourth quarter?

Right.

Well we had suggested for the full year, it would be about 4% or so.

So that's kind of in that mid-60s range in terms of revenue.

And we suggested that third quarter would be $10 million to $20 million.

So that means that the drag in Q4 would be somewhere in the, call it, $25 million, $35 million type range.

And not to talk about specific numbers for that accounting change for next year, but does that completely go away?

I'm just trying to get a better idea of how to think about that conceptually?

Well, it's a tricky question.

You're going to have effectively 2019, I'll call it a clean year, as best as you can describe that.

Now some of the comps versus 2018 will still be a little bit tricky.

But you're not going to really have much to talk about in terms of the direct impact on 2019.

It will be more about trying to figure out the comparisons to 2018, unfortunately.

Got it.

And then finally, do you have an estimate for the tax rate for the second half of 2018 as well as the CapEx estimate and updated ones for the full year?

Sure.

We're looking -- for the full year, we're looking at a tax rate of 26% to 26.5%.

Now that excludes the $4.8 million discrete tax benefit we got from the long-term incentive program that we saw in Q2.

So basically, take that out and -- but you should otherwise use a 26% to 26.5% rate.

On the CapEx side, we're about $19 million year-to-date.

We still think we're going to be in that $40 million to $45 million range for the year.

And there are no further questions at this time.

I'll now turn the conference over to Mr. Tom Giacomini for closing remarks.

Thanks, again, for joining us this morning.

We are pleased with the second quarter performance, which sets us up for a solid gains in 2018.

We look forward to seeing many of you at our technology day on September 13 at our Wolf-tec facility in Kingston, New York.

This concludes today's conference.

You may now disconnect.