JBT Marel Corporation (JBTM) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation Second Quarter 2012 Earnings Conference Call. My name is Holly, and I'll 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, Holly. Good morning, everyone, and welcome to our second 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. Today, I will discuss our second quarter performance and our outlook for 2012. Ron will cover our financial results, before we open up the call to questions. In our 2011 year-end earnings call, we guided that first half 2012 FoodTech results would be roughly comparable to first half 2011 results and that AeroTech would be down significantly due to a production gap in passenger boarding bridges. Our first half results were exactly as guided. Our second quarter results were also right in line with our expectations. Segment operating profit margin increased over 150 basis points, largely driven by strong aftermarket performance and savings from our cost-reduction plan announced in January of this year. We are particularly pleased with our aftermarket performance as volume across the company grew 9% year-over-year. Before I comment specifically on our businesses, I would like to address some broad points that we've been following, which have a bearing on our earnings outlook. First, regarding the economic conditions across the Eurozone. I'm pleased to report that for our FoodTech freezing and chilling product lines, which represent our largest European exposure, we have over 90% of our forecasted full year equipment volume on hand. To be clear, volume on hand represent sales from the first half of the year and the backlog that is shippable in 2012. In addition, order activity through July has remained strong, and with a solid prospect list, we are increasingly confident with our volume targets for the year. Turning to Asia. Despite weaker order activity in the quarter, we have over 70% of our forecasted full year equipment volume on hand. We are closely monitoring order activity in the region, but feel it is too early to call the softness a trend. We are still bullish on the long-term growth prospects in Asia, so we continue to invest in the region. Our latest assembly facility outside of Shanghai is on track to be operational later this year. Second, the drought conditions across the U.S. have pushed corn prices to record levels. We are closely following market developments and reactions from our poultry processing customers. However, with over 90% of our forecasted full year equipment volume, already on hand in our freezing and protein product lines in North America, we are comfortable with our full year forecast for this region. Lastly, I'm pleased to report that our planned cost reductions announced in January and other strategic margin improvement initiatives have already realized savings in the first half. We expect to realize an additional $8 million in net cost savings in the second half of the year versus 2011. I'll now provide some commentary on our 2 segments. First, JBT FoodTech. Equipment order activity for freezing and protein processing remained healthy in the second quarter, despite some softness in Asia. We feel comfortable with our second half 2012 projections, given our high volume on hand percentage and our prospect list across all global regions. Aftermarket performed particularly well in Europe, up over 14% year-over-year. In North America, order activity in the second quarter was particularly strong, with inbound orders up over 25% versus 2011. This was highlighted by several large freezing equipment projects that we have previously announced. Turning to fruit and juice processing. We recently announced a large order for $6.7 million with a global food and beverage company. We will be providing a complete new fruit base beverage blending line to be installed in Asia. This new beverage line will be used for the production of orange-juice-based drinks, a testament to our leadership in food processing and sterilization technologies, as well as our growing presence in Asia. Moving to the sterilization product line. Aftermarket activity in the quarter was strong with volume up over 12% year-over-year. And in line with our 4G strategic initiative to grow our technology leadership, we acquired rotary sterilization technology from a South African company. This acquisition further strengthens our sterilization portfolio for the canned food industry. For FoodTech, overall, as we have previously guided, earnings in the first half of 2012 were roughly in line with the prior year, despite slightly lower sales. Healthy year-to-date inbound activity has resulted in an 18% increase in FoodTech backlog. The higher backlog, coupled with stronger gross margins relative to last year, positions FoodTech well for the second half of the year. This, combined with a further expected savings from our strategic actions and our normal business seasonality, will have a significant positive impact on earnings in the second half of the year. We remain on track to return FoodTech EBIT margins to double digits for the full year of 2012. Turning to AeroTech. Volume in the first half of 2012 was down, largely due to the production gap in passenger boarding bridges across the 2 quarters. However, with over 90% of our total full year 2012 volume forecast in hand for gate equipment, we feel confident about hitting our targets for the year. Moving on to Ground Support Equipment. Order activity in the quarter was down, largely due to timing. A significant order from a major freight carrier was delayed to the third quarter, a portion of which we announced last week. Operating profit margin for the margin product line continues to see the benefits from the operational efficiencies we implemented in the fourth quarter of 2011. To summarize for AeroTech, as expected, revenue and earnings were significantly lower in the first half due to the production gap in boarding bridges. We expect the production pickup in passenger boarding bridges in the second half, coupled with our normal business seasonality in Ground Support Equipment to result in a recovery in earnings in the second half of 2012. For the full year, we expect AeroTech earnings to be slightly lower relative to 2011 results. Overall, our second quarter results were in line with our expectations. Higher aftermarket volume, segment operating profit margin expansion and strong cash flow were highlights in the quarter. We also successfully executed a technology acquisition that strengthens our FoodTech product portfolio. Looking forward, both FoodTech and AeroTech are well positioned to realize margin expansion and earnings growth in the second half of 2012. Accordingly, we are reaffirming our guidance range of $1.35 to $1.45 for full year earnings per share from continuing operations. Now I'll turn it over to Ron Mambu to provide more details on our second quarter results.

Thanks, Charlie. Revenue for the second quarter was $214 million, down 15% compared to the same period last year. As Charlie noted, aftermarket processing service volume increased 9% year-over-year, which as you know, is one of our 4G strategic initiatives. Second quarter diluted earnings per share from continuing operations was $0.27 compared to $0.35 in the prior year period. On a sequential comparison, second quarter inbound orders of $243 million and backlog of $308 million increased 2% and 10%, respectively. I'd now like to comment on our segment results. JBT FoodTech's second quarter revenue of $138 million decreased 11% or 6% in constant currency from the same period in 2011. We had strong performance in freezing and chilling and protein processing equipment sales across North America, Asia-Pacific and Latin America. Additionally, aftermarket volume was also strong, growing 6% compared to 2011. However, those revenue gains were offset by an unfavorable year-on-year comparison in the project-based tomato and fruit processing equipment business and lower freezing and chilling equipment volume in Europe. FoodTech operating profit of $14.1 million increased 8% in constant currency, relative to the prior year quarter. Segment operating profit margin increased 120 basis points to 10.3%, largely driven by the higher aftermarket volume and savings from cost-reduction actions announced in January 2012. Second quarter inbound orders of $163 million increased 5% compared to the prior year or 14% in constant currency and 11% sequentially. This was largely driven by a 25% year-on-year increase in orders for freezing and chilling equipment in North America. Backlog of $155 million increased 18% from the second quarter of 2011 and 20% sequentially. Moving to AeroTech. Second quarter revenue of $78 million declined 20% from the same period in 2011, a 17% gain in aftermarket volume, coupled with higher military loader sales were offset by lower gate equipment sales, resulting from the anticipated production gap in passenger boarding bridges. Despite the significant volume decline, segment operating profit is $7.5 million was essentially in line with the prior quarter. Segment operating profit margin increased 180 basis points to 9.7% as a result of higher aftermarket volume, a favorable product mix and a gain from the transfer of automated system contracts and services for French hospital equipment to our strategic partner, Swisslog. Second quarter inbound orders totaled $81 million, down 36% from the prior year, primarily due to unfavorable comparisons against strong second quarter 2011 order activity in gate equipment and automated systems. As a result, backlog was $154 million, a decline from the prior year but up 2% sequentially. We expect AeroTech's backlog to continue to grow in the third quarter. Now regarding corporate items. Income tax expense in the second 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 second quarter, excluding net interest expense were $7.6 million, an increase of $3.4 million from the same period in 2011. The increase was driven primarily by a $1.7 million unfavorable impact of foreign currency transactions, $600,000 of costs related to JBT FoodTech acquisition and $0.5 million of higher U.S. pension costs. For the full year, we expect corporate items, excluding interest, to be in the range of $23 million to $25 million, assuming no significant foreign exchange movement. Second quarter capital spending and depreciation and amortization were each $5.9 million. While we anticipate spending a total of $16 million and $19 million over 3 years to replace our existing Lakeland, Florida manufacturing facility, the timing has shifted further into the future. As a result, we expect full year 2012 capital spending of approximately $25 million, representing a lower level than previously projected. Cash generated from operating activities totaled $32 million for the quarter. Debt, net of cash, was $105 million at quarter end. This record low level represents a decline of $19 million from $124 million as of March 31, 2012. In the second quarter of 2012, we settled certain foreign subsidiary intercompany loans. As a result, we had $75 million of cash as of June 30, of which $73 million was held by our foreign subsidiaries. Although we have no immediate need to repatriate these funds, we expect these funds to be available for general company use during the remainder of 2012. As you know, our board has authorized $30 million of stock repurchases over a 3-year period. That works out to about $3 million per quarter for the remainder of the program. The timing of our repurchases is based upon a number of factors, and last quarter, we did not repurchase any shares. We remain committed to returning value to shareholders, and the repurchase program remains in place. We believe we have ample time to execute the authorized repurchases over the next 2.5 years. In summary, second quarter results were in line with our expectations. Higher aftermarket volume, segment operating profit margin expansion and strong cash flow were highlights in the quarter. We also successfully executed a technology acquisition that strengthens our FoodTech product portfolio. Looking forward, both FoodTech and AeroTech are well positioned to realize margin expansion and earnings growth in the second half of 2012. In FoodTech, we remain on track to return EBIT margins to double digits for the full year of 2012. In AeroTech, we expect full year EBIT to be down slightly from 2011. Accordingly, we're reaffirming our guidance range of $1.35 to $1.45 for full year earnings per share from continuing operations. We plan to file our 10-Q tomorrow, so there will be more detailed information readily available for your review. With that, we'd like to take your questions. So operator, please open the call.

[Operator Instructions] And your first question comes from the line of Liam Burke, Janney Capital Market.

Charlie, you talked about freezer activity, obviously, in Europe. Could you give us a little color on the activity in China, especially on the new basic product introduction?

Yes. I think we sold 6 since we started up over there. And we got a prospect list that we're working on right now. And these are the lower capacity classics, 600 freezers that, as you know, Liam, we have de-featured somewhat to make them simpler. We're kind of excited, because we're seeing customer names we've never seen before, as we try to call on local people, and we're trying to bolster our sales presence on the ground over there. So we're, I guess the word's, cautiously optimistic or excited about penetrating the local market for the first time. As you know, we've been in China for decades, but, typically, we've been selling to the exporters or the big QSR people, not the small local customers.

And on the jet bridge side internationally, are you seeing stepped-up activity there as well?

It's interesting. We've had this gap in our production this year. And, of course, you always worry that the gap becomes permanent, but the activity level is pretty strong. Actually, 2013 right now is shaping up to be a busy year for bridges around the world. In the United States, you got sort of a divided situation. You got the big gateway airports like LAX and JFK and Miami, and the people competing internationally who are spending a bit of money on infrastructure to make sure that their facilities -- I'm sure, Liam, you know the -- what JFK looks like, and you also know what -- like Munich or the Hong Kong airport looks like. So we -- those airports are in need of infrastructure spending. On the other hand, smaller regional airports in the U.S. are under some pressure as airlines consolidate. And so the demand there is maybe not going to be as strong. Having said that, I commented that aftermarket was really strong in AeroTech, and part of that was a small regional airport that was going to buy new bridges. They decided to refurbish all their bridges, and so Jetway had a very strong aftermarket, first half.

Good. And then Ron, the free cash flow was very strong for the first half of the year. You had some working capital adjustments, I guess, for lack of a better word, receivables were way down, and what -- based on timing and other issues, what is working -- what do working capital needs look like for the second half of the year?

The inbound on FoodTech has been strong. And when we hit that -- go in the right direction, our working capital comes down, because of advanced payments. And that's what we've seen on the first half of the year. And as we look at our July results, looks pretty similar. So as we go forward from here -- and first half has been really strong in terms of free cash flow. Our net debt, was a record level low level of $105 million approximately, and that's after the $5 million acquisition that we pay for the first installment of the acquisition from Molenaar. So net debt and cash flow had been very strong in the first half of this year. Our outlook going forward is that the third quarter still looks pretty good. And I'm hopeful that we may even see a slight draw down of net debt even further by the end of third quarter. We had made some pension funding in the third quarter, but cash flow looks pretty good right now. I suspect though, as we get towards the fourth quarter and we have the big surge as we usually do in the fourth quarter, that working capital will go up some, but -- so it wouldn't surprise me if we closed the year with net debt, around where we are now, even after a fourth quarter build in working capital.

Your next question comes from the line of Arnold Ursaner, CJS Securities.

Backing up Jason, who's got a different problem he's got to deal with today. I guess, my key question is your outlook is second half driven, and you highlighted, I think, the key components, your backlog in hand, the additional order activity and the cost savings. But could you expand, perhaps, a little bit more on which of these is more important to you? And I have a follow-up regarding margins.

Well, the way I would answer that is -- I hate to use the term in the bag, but the cost savings are done -- I mean, so in a way, there's a certain level of certainty to the achievement of that part of the earnings improvement. I think what creates the span of $1.35 to $1.45 seen here in July is the question of does the activity level we're seeing hold up? Or do we see further softness in Asia and -- so that creates the low end to the high end. So I would say I would say, I don't know if I would say it's more important, I would say the key variable, really, is the continued order rate and our ability to deliver before year end.

And just remind us again, the backlog of $308 million you have on hand, what percentage of that would typically ship in the next 6 months?

Arnie, for FoodTech, I think, of the roughly $150 million or so that we have, about 88% of that is going to be delivered in 2012. You can see these are pretty precise numbers that Debarshi's got cranked up here. And AeroTech is usually a little lower, because passenger boarding bridges are a little longer cycle, so about -- for AeroTech, about 75% of our June 30 backlog is for delivery in the second half -- revenue recognition in the second half of the year.

Okay. And then, obviously, one of your 4 pillars of your growth pyramid is growing and improving your margins. And I'm well aware of how much time and efforts you've put in. In AeroTech, you had terrific margins, given some of the issues you had with the delay in production gap. And you talked about the margin expectations we have in the back half of the year. I guess, one of the questions I have, is it being driven by new products, different sales approach? Is the environment getting a little less competitive on pricing? What is driving?

I think the second quarter AeroTech, the margin performance is really related to the big mix effect. So having the aftermarket be as strong as it was -- it was a big, big positive in terms of margin percent. We also had some other product line mix that went our way in terms of positive like Halvorsen loader, which was up over year-over-year. So I would say it's more that. I don't see any deterioration in pricing really, but I wouldn't say I don't see -- I don't think I've seen much change in the pricing environment.

My follow-up question is, Molenaar is a small acquisition, but can you comment about the technical capabilities it brings to you and -- in container? And how large do you think the addressable market is? And how do you plan to go after it?

I think what it does is it broadens our technology base. They had some innovations and developments in terms of larger diameter rotary shales. They also had some innovations around custom applications, and it's things -- in some way, there's a little bit of value creation. This acquisition, it was make-buy. I mean, we could have done R&D and developed it, but it was quicker and simpler and easier to buy. I think they do have those -- a much smaller installed base in this, but it's one we'll be able to access, and so aftermarket. As you know, and this rotary sterilizer business, it's a huge -- over half of the business is aftermarket. So we're really pleased the product line we bought is literally 20 or 30 minutes from our South African operation, and we're getting key technical employees as part of the product line acquisitions. So we're going to sort of really boost our capability to produce in South Africa.

I'll just point out that in our numbers, we do have about $0.5 million -- $600,000, I guess of cost related to the acquisition that are included in our other income and deductions.

Your next question comes from the line of Gary Farber, CL King.

Just a couple questions, one was on your aftermarket. Can you add some color, just on any specific actions you're taking to sort of get the orders? Do you think you're taking market share from some of your competitors to grow that rate? And do you think you can accelerate further?

Yes. I wish I have a really crisp answer to your question, but I can -- I guess, I can go anecdote. We did reorganize in food processing systems and put more resources in aftermarket, appointed a new General Manager and put more resources after it. That division is up significantly year-over-year in aftermarket. And when I asked the manager, is that because of wind to your back in the marketplace, or is that because of your management genius? He's very humble and said that's about 50-50. So I think part of it is customers investing and increasing efficiency in other line, et cetera, but I think we do get some credit that these initiative that we have in aftermarket are paying off. I've mentioned in previous calls, we have these aftermarket webinars, 60, 70 people around the globe every 3 or 4 months. We just had a face-to-face meeting, which I haven't gotten all the results of yet just last month, but sharing best practices and even further initiatives in aftermarket. So we're hopeful that in terms of our long-range 4G strategy, the growing aftermarket not only is really good business sense but a way to improve margins overall.

Great. And can you also speak to just competitive situations in Europe?

Europe has been -- it's really mixed. I mean, it's country-by-country, "product line by product line". In my comments, I mentioned our biggest exposure is freezing and chilling. You're going to ask me why, but actually, our July inbound and Europe was actually very strong. It varies by country. The U.K. is very active. As you can imagine, Southern Europe is very slow. I wouldn't say I've seen significant competitive activities result -- maybe in the AeroTech segment a little bit, the European competitors have been pretty -- they tend to want to protect employment more than margins in a softer market. So we've probably seen a little bit more in the AeroTech side. On the FoodTech side, I can't really comment on any unusual competitive activity.

Right. Okay. And then just one last one, just on research and development for the back half of the year, just in terms of absolute dollars, would you expect it to go up or stay pretty similar to the first half of the year?

I think it will be very similar.

[Operator Instructions] And at this time, there are no further questions. I'll turn the call back over to Mr. Debarshi Sengupta for closing remarks.

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 does conclude today's conference call. We appreciate your participation. You may now disconnect.