JBT Marel Corporation (JBTM) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation's First Quarter 2012 Earnings Conference Call. My name is Katie, 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. Debarshi Sengupta, to begin today's conference.

Thank you, Katie. Good morning, everyone, and welcome to our First Quarter 2012 Conference Call. With me on the call are our Chairman and CEO, Charlie Cannon and our Vice President and CFO, Ron Mambu. Before we begin, I would like to remind everyone the forward-looking statements in today's call are subject to the Safe Harbor language in yesterday's press release and 8-K filing. Our 2011 Form 10-K also contained information regarding certain risk factors that may have an impact on our results. These documents are available on our Investor Relations website. Now I would like to turn the call over to Charlie.

Thanks, Debarshi, and good morning, everyone. On today's call, I will discuss our first quarter 2012 performance and our outlook for 2012. Ron will cover our financial results before we open up the call to questions. Our results were in line with our expectations. Inbound order activity across most product lines was strong. We are particularly pleased with our FoodTech performance, where an increase in revenue and operating profit was driven by gains in new equipment revenue, strong aftermarket performance and savings from our cost reduction action plans announced last December. AeroTech was down year-over-year. As noted on our last call, results are being impacted by a first half production gap in the passenger boarding bridge business. Before I comment on our business environment, I would like to update you on some of the strategic initiatives we are implementing. First, in prior quarters, we have discussed our initiative to shift production of certain high-capacity freezer product lines from Sweden to North America. We have now shipped 10 of these freezers out of North America. While the learning curve costs were over $1 million in the first quarter, we anticipate margin performance for these freezers to be significantly higher in the back half of the year. Second, on the heels of a successful operational efficiency project conducted in AeroTech in the fourth quarter of 2011, we concluded a similar project in one of our FoodTech businesses. We expect to realize about $1 million in annualized savings as a result. Third, aftermarket volumes were higher across the company, increasing 15% relative to the prior year. As you know, a high percentage of our revenue base is derived from recurring revenue streams and one of our 4G strategic goals is to grow aftermarket sales. We have aftermarket teams focused on selling solutions, and we exchange best practices across the company through knowledge-sharing webinars. I am pleased to see our efforts are gaining momentum in supporting our customers beyond the initial sale. Lastly, our execution of our cost reduction actions in FoodTech is proceeding according to plan. We are on track to realize significant benefits, largely in the second half of this year and expect to achieve about $9 million in annualized savings by 2013. Now let me provide some commentary on the business environment for our 2 segments. First, JBT FoodTech. Order activity for freezing and protein processing started 2012 on a strong note. In the first quarter, we saw healthy order activity across both developed and emerging markets. While recent activity out of Europe is encouraging, we continue to monitor the market closely, given the prevailing economic uncertainty in that region. In North America, corn prices, while still historically high, have come off their 2011 peaks. This, along with recovering poultry prices and operational discipline by the poultry processors, is improving industry economics, and that bodes well for us. Turning to fruit and juice processing, the USDA Florida orange crop estimate for the 2011-2012 season was revised to 145 million boxes, representing a 3% increase from the prior season. This modest growth is good for the U.S. citrus industry in general, and supports our favorable outlook. Moving to the sterilization product line, we saw increased inbound orders, reflecting customer activity in both Asia and Europe, along with strong aftermarket activity. For FoodTech overall, healthy inbound activity since the beginning of this year has strengthened FoodTech backlog. We still expect FoodTech revenue and earnings in the first half of 2012 to be roughly in line with the prior year. Looking at the full year, we expect savings from the strategic actions being implemented, along with normal business seasonality, to have a significant positive impact in the second half. We are on track to return FoodTech EBIT margins to double digits for the full year of 2012. Moving to AeroTech, the global airline industry profitability estimate for 2011 was recently increased to $7.9 billion from the early estimate of $6.9 billion, reflecting better-than-expected performance by Asian airlines. With forecasted growth in global passenger traffic and flat cargo volume in 2012, the global industry is expected to be profitable once again this year. Reflecting that positive sentiment, we expect steady order activity in ground support equipment. To help us capture growth in China, our newest manufacturing facility outside of Shanghai is on track to be operational later this year. Moving on to our gate equipment business. We had significantly lower revenue and earnings in the first quarter. This was in line with our expectations, given the production gap in passenger boarding bridges that will continue into the second quarter. However, strong order activity in the first quarter supports our projection for recovery in the second half. In summary, for AeroTech, airline industry sentiment is expected to remain positive in 2012. As we discussed last quarter, we expect AeroTech's revenue and earnings to be significantly lower in the first half due to the production gap in passenger boarding bridges. We anticipate that a combination of a production pickup in bridges and normal business seasonality will result in recovery in sales and earnings in the second half of 2012. For the full year, we anticipate AeroTech results to be slightly down from 2011. To recap, 2012 is off to a good start, driven by healthy order activity across both segments, as well as strong aftermarket performance. Although we continue to expect significantly lower earnings in the first half versus 2011, we anticipate earnings will rebound in the second half of the year. Savings from strategic actions, along with our normal business seasonality should drive significant margin expansion and earnings growth. Accordingly, we expect full year earnings per share from continuing operations to be in the range of $1.35 to $1.45. Now I'll turn it over to Ron Mambu to provide more details on our first quarter results.

Thank you, Charlie. As noted earlier, we had strong order activity in the quarter. Inbound orders of $238 million increased 12% year-over-year. First quarter backlog of $279 million, while down 6% compared to last year, increased 14% sequentially. Revenue for the first quarter was $205 million, up 2% compared to the same period last year. First quarter diluted earnings per share from continuing operations was $0.14 compared to $0.17 in the prior year period. FoodTech's first quarter revenue of $116 million increased 9% from the same period in 2011. This increase was across most product lines, particularly in freezing and chilling equipment in North America and Asia-Pacific, fruit and juice processing and in-container processing equipment. We also achieved strong aftermarket volume growth of 13%, which contributed to the segment revenue increase. The increase however was partially offset by lower freezing and chilling equipment sales in Europe. FoodTech operating profit of $6.7 million increased 18% from the prior year quarter, largely driven by higher aftermarket volume. The increase was offset by learning curve costs incurred in North America related to production of high-capacity freezers and consulting costs that Charlie had mentioned. First quarter inbound orders of $147 million increased 10% compared to the prior year and were up 20% sequentially as a result of strong order activity in freezing and chilling, and in-container processing equipment. Backlog of $129 million was in line, relative to the first quarter of 2011, but increased 31% sequentially. Moving to AeroTech. We had strong aftermarket volume growth of 22%. However, the production gap in the passenger boarding bridge product line resulted in significantly lower sales and more than offset the growth in other AeroTech businesses. As a result, AeroTech's first quarter revenue of $86 million declined 7% from the same period in 2011. Operating profit margin of 6.2% decreased 210 basis points due to the lower passenger boarding bridge volume and higher costs related to ground support equipment. First quarter inbound orders total $89 million, up 15% from the prior year, primarily due to order activity in the passenger boarding bridge product line. The strong order activity further supports our expectation for revenue and earnings recovery in the back half of the year. Backlog was $150 million, a decline of 11% year-over-year, but up 2% sequentially. Now regarding corporate items, income tax expense in the first quarter of 2012 reflected an effective income tax rate for the full year of 35%, in line with our guidance of 34% to 36%. Total corporate items in the first quarter, excluding net interest expense, were $4.2 million, essentially in line with the prior year. For the full year, we expect corporate items, excluding interest, to be in the range of $20 million to $25 million, assuming no significant foreign exchange movement. First quarter capital spending and depreciation and amortization were $5.2 million and $5.9 million, respectively. We continue to anticipate spending a total of $16 million to $19 million to replace our existing Lakeland, Florida manufacturing facility. This spending will take place over the next few years. As a result, we expect full year 2012 capital spending of $26 million to $30 million. Debt, net of cash, was $124 million at quarter end, a decline of $7 million from $131 million at December 31, 2011, reflecting strong cash flow from operations in the period. There were no share repurchases in the first quarter. We plan to file our 10-Q tomorrow so there will be more detailed information readily available for your review. In summary, we had a good start to the year with healthy order activity in both segments, along with strong aftermarket performance. Although we continue to expect significantly lower earnings in the first half of 2012, we anticipate earnings will rebound in the second half of the year. Savings from the strategic actions along with normal business seasonality should drive significant margin expansion and earnings growth. Accordingly, we expect full year earnings per share from continuing operations to be in the range of $1.35 to $1.45 per share. With that, we'd like to take your questions. So operator, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Jason Ursaner from CJS Securities.

Discussing the back end loaded year, what does the order picture need to look like going forward to achieve that and how much visibility do you have on some of those orders coming in?

Well, as we've always said in the past, we have 3 to 4 months of visibility on activity, and then pre-recessionary is when each had a lot more big projects. We had even a little bit further visibility. I would say the activity level that we're seeing right now and by the way, we haven't fully closed the April books, but the order inbound in April continues to look as good as it has in the first quarter, the activity level based on preliminary numbers, but -- so we feel good about that. But we need the activity level that we see today to continue. And we're not counting on a big ramp up. We're also not counting on the world going into a double-dip recession. So if we maintain the activity level we're seeing right now, we feel pretty good that we'll get the big pop that we normally get in the big -- in the back half of the year.

Yes, Jason, I'd add 2 things to that. I mean, in terms of the point of your question about the back half of the year, part of it is what Charlie just talked about, but there's other factors that are more in our control, which we feel pretty good about. One is the cost reduction initiatives that were announced last December, which are well underway and will hit more of their stride in the second half of the year. And I think we've talked about a total savings in 2013 on an annual basis of like $9 million. But we'll start ramping that up first as where we are this quarter and second quarter and that'll get more momentum in the back part of the year. So that's positive. That's a big positive. And then secondly, is the getting through the learning curve cost on those transfer of freezers from Sweden to North America. That also is going to be more of a positive for us in the second part of the year. Those are 2 things that are sort of more in our control than the rate of market orders. So those are elements that you need to consider as well.

Okay. And staying with that for a second, you mentioned you still think you could achieve a double-digit margin for the full year. Was Q1 FoodTech margin where you thought it was? And I guess can you talk about the timing of how some of those costs dropped off, particularly you mentioned the $1 million on the learning curve? The timing of that holding cost?

Yes, I think we have a little bit dribbling over in the second quarter on the freezer learning cost, but the vast majority is behind us, and so we would expect, you will see -- we'll see margin pickup there as we really come through the learning curve. We spent the money to change from metric to imperial. We've done the resourcing of raw material that we had to do from Europe to U.S. And so, I think that will be all behind us probably in the middle of the second quarter.

Okay. And then on demand in FoodTech. Overall, the capital spending budgets from the big food processors seem to be solid year to year. You mentioned poultry specifically, they're dealing with better margins. They have corn prices coming down, can you talk about that market specifically relative to what you're seeing from some of your other food processors and how you see their capital budgets and demand coming through for the year?

Yes, we look at that data Jason, sometimes it's almost like -- it's a little bit of a lagging indicator when those published reports come out. But we're seeing good inbound and in FoodTech and as we reported, year-over-year, sort of double-digit ahead of last year in terms of inbound order rates. In poultry in particular, it's kind of customer by customer, and I don't want to name customers. But it gets lumpy so you might have one customer spend a lot of capital one year and then they go kind of quiet the next year. But we are not seeing a significant drop off anywhere in the FoodTech area. The one market we continue to watch very closely is Europe. We actually organized around Europe, Middle East, Africa and that includes Eastern Europe. And so, parts of Western Europe have been kind of spotty, but we've been able to pick up in Eastern Europe and in a couple of other countries to kind of hold steady. So we're watching that very closely because we read the newspapers everyday, too.

[Operator Instructions] Your next question comes from the line of Liam Burke from Janney Capital Markets.

Charlie, you talked about the freezer business they shifted to the U.S., but there was another piece of the project where you did shift the low end -- lower end production into China. How is that transition going?

I'm glad you mentioned that, Liam. We're pleased with that. I think we've done 5 or 6. We've completed 5 freezers in China. It's part of this initiative on the AeroTech space. We're going to look at maybe using some of that area to do some of the assembly in freezers later this year. Right now, we're working with one of our main suppliers to assemble these freezers. I think the interesting thing is, I mean, this is anecdotal, but we have monthly performance reviews of all the businesses and report in detailed results every month and in a couple of hour meeting. And when it came to China and freezers, the potential prospect list ran for a couple of pages and I said to Toby, our Vice President, "I've never heard of some of these companies." And he said,"I haven't either, but that's the result of us making freezers in China." We're going to be able to go after more of the local market because our costs is going to be better. So we're -- it's too early to say how big that is or put -- but we're pleased that we're going to -- that, that move is going to help us.

Great. And on the AeroTech side, the services business, you had mentioned I guess the last 3 or 4 quarters that the pricing has been more competitive. Are you seeing any loosening there or is it still the same?

It's about the same. It's not -- I wouldn't say it's getting any worse. Given the consolidation in some of the big customers, the outsourcing trend, which we talked about when we spun in '08, that has definitely slowed. But that side of business is kind of stable, and they're pursuing different opportunities. We've added a few smaller customers. There's a couple of bigger ones coming up for bid this year, but I would say it's relatively stable right now.

And Ron, you generated positive cash flow for the quarter, with growing AeroTech you get a working capital benefit -- I mean, with growing FoodTech you get a working capital benefit, growing AeroTech you consume the working capital. With those puts and takes and your capital budget, how do you look at free cash flow for the full year?

We were pleased with the cash flow in the first quarter. We paid down debt of about $7 million in the quarter. We're expecting that by the end of the year that, that trend will continue maybe not at that rate, but we would expect this to be more of a typical cash flow year for JBT, and that might be $30 million from operations that would enable us to continue some meaningful debt reduction. I'm assuming no acquisitions in that, Liam. We have a couple that we're evaluating. But in my remarks here about cash flow, I'm not assuming that investment.

Operator, are there any more questions? Thank you, everyone, for joining us this morning. A replay of our call will be available on our IR website early this afternoon. If you have any further questions, please give us a call. Have a good day.

This concludes today's conference call. You may now disconnect.