JBT Marel Corporation (JBTM) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT's Corporation Third Quarter's 2012 Preliminary Results Conference Call. My name is Stephanie, 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, Stephanie. Good morning, everyone, and welcome to our Third Quarter 2012 Preliminary Results 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 note that the preliminary results reported in yesterday's press release and 8-K filing are subject to completion of the company's normal quarter end accounting procedure. As such, our comments today are going to be limited to the key figures and items included in the press release. We will report full third quarter financial results after the market closes on Monday, November 5, followed by a conference call scheduled for Tuesday, November 6. I also would like to remind everyone that 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 contains information regarding certain risks 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. Good morning, and thank you for joining us on the call this morning. Today, I'll provide a brief overview of our third quarter performance and outlook for the year. Ron will follow with some preliminary financial information for the quarter, before we open up the call for a Q&A session. Order activity in the quarter continued to be strong with year-over-year and sequential increases in both inbound orders and backlog. Gross margin expansion across the board resulted in higher segment operating margins relative to last year. Cash flow in the quarter was also strong resulting in a record low level of debt, net of cash at quarter end. Despite these very positive developments in the quarter, third quarter earnings fell short of our expectations, primarily as the result of a shift in delivery schedules of several orders across both FoodTech and AeroTech. Looking ahead, we remain on track to deliver a record fourth quarter, given our current backlog position and continued savings from our cost-reduction initiatives. However, lower than previously forecasted sales volume and further delivery shifts into 2013 for several large orders, are placing downward pressure on our 2012 earnings forecast. As a result, we are updating our full year earnings per share guidance to $1.22 to $1.28. While we do not manage the business for quarterly results, we felt it was important to communicate these preliminary results as soon as possible. Obviously, I am disappointed to report quarterly performance short of our expectations and to lower our full year guidance. However, these downward adjustments are largely timing related and I remain confident in the current underlying strength of our businesses. We continue to see momentum in order activity and anticipate entering 2013 with the year-end backlog position significantly higher than that at the end of 2011. Now I'll turn it over to Ron Mambu to provide some preliminary financial information for the quarter.

Thanks, Charlie. We expect to report revenue for the third quarter of approximately $205 million, a decline of 11% from the prior year quarter. As Charlie mentioned, the decline was largely due to shifts in delivery schedules of several orders equating to an approximate $0.12 impact on earnings per share in the quarter. We are pleased with our profit improvement initiatives, which continue to drive gross margin expansion and in turn, resulted in over 100 basis points increase in segment operating profit margin. However, these gains were more than offset by an unfavorable comparison in our corporate other income and expense items. Last year, we reported $3.6 million in mark-to-market gains in the third quarter, largely due to the strengthening Brazilian real versus the U.S. dollar. This quarter, we expect to report a foreign exchange loss of approximately $100,000. We expect a lower tax rate in the quarter to increase our earnings per share by approximately $0.02. As a result of these factors, we expect third quarter diluted earnings per share from continuing operations to be in the range of $0.19 to $0.21 compared to $0.28 in the third quarter of 2011. Third quarter inbound orders are expected to be approximately $260 million and backlog is expected to be approximately $345 million, representing year-over-year increases of 22% and 11%, respectively. Sequentially, inbound orders and backlog increased 7% and 12%, respectively. We generated approximately $20 million in cash from continuing operations in the quarter bringing year-to-date cash flow to approximately $70 million. As a result, we have a record low level of debt net of cash of approximately $92 million at quarter end. Looking ahead, we expect to deliver a record fourth quarter supported by a strong backlog position and the positive results generated by our cost-reduction initiatives. However, as Charlie noted, we are revising our full year earnings per share guidance to $1.22 to $1.28 as a result of lower than previously forecasted sales and further delivery shifts of several large orders. As you also noted, we continue to see momentum in order activity. We are expecting 2012 year-end backlog to be 15% to 20% higher than at the end of 2011. This bodes well for the first half of 2013. Before we open this call for Q&A, I want to remind you that the limited financial data released with this announcement are preliminary and are subject to the company's normal quarter end accounting procedures. We will share our complete review of our third quarter earnings on November 6, but we'll be happy to take your questions on this release today. Operator, please open the call for Q&A.

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

Charlie, can you just talk a little bit about the pace of order deferrals. Was it really a September phenomenon and did it continue through October or it was kind of throughout the quarter where you were seeing it?

Well, we can obviously, as we rolled into September, it looked like we were -- we had -- we could some see things slipping. And it wasn't like slipping by months, it was weeks here and there, but -- so we could see that occurring. I don't -- we don't see a big market slowdown anywhere. It's just -- I would say there's 2 buckets of slippage. The first bucket is, can we inbound the order in time in order to ship it to make the quarter with our normal lead times and we had some orders that we -- by the time we negotiate the Ts and Cs and got the LCs in place, so we didn't have time to get them out. The other bucket is really actually have the order, in some cases, we actually shipped the order and customers call and say, "My project's behind, I can't take the equipment, I've got to delay you 3 weeks." But neither of those cases was, what I would call, economic slowdown kind of delays. It was more like tactical situations with the customer. Does that help?

Yes. I mean, a little bit. I mean, I guess the big question is, obviously orders and backlog stayed pretty strong throughout the quarter even with these delays, and I'm hearing you say it's not really an early indication of a slowdown at the front end with orders. But then that backlog figure up 15% to 20% relative to last year threw me a bit because that would be, I mean, it would seem that you'd be chewing through a fair bit of backlog, and that would be a bit of a slowdown on the order front.

Well, we typically chew down our backlog in the fourth quarter. You'll recall our seasonality, the fourth quarter is always our strongest quarter. And this year, in particular, it's going to be really, really strong and we're forecasting a record fourth quarter. So we will eat through backlog. But when we end up the year, we're going to be 15% to 20% ahead of last year's backlog position entering the year, which says we've got really good inbound coming.

Okay. And I mean if you just looked at this period relative to the end of 2010 where it was somewhat of a similar situation were orders weren't keeping pace. How would you compare, I guess, what you hearing from customers now versus at that time that's really giving you that confidence that you're not seeing more of a slowdown coming down the pipe?

Well, you'll recall back in '09 and '10, we used to say we're playing small ball because we weren't seeing any big sized orders. You've probably seen some press releases here in the last 6 weeks. We've got some nice chunky orders that are now in backlog. But you can anticipate in the next few weeks, you'll see a few more press releases, hopefully, even before the earnings call. It says they are giving us confidence we've got a little stronger, using 2010 and this year fourth quarter in terms of sales and earnings are, as you know 2011 was our big fourth quarter, and this one we think will be as big or probably bigger. And we will chew through backlog, but we won't chew it down as much because the inbound this quarter was going to go out stronger than 2010.

Your next question is from the line of Gary Farber with CL King.

I'm just wondering, given sort of the magnitude here of the change, is there any changes you are making internally to your processing of orders or anything like that, or is this sort of just an unusual kind of situation?

First of all, it's not abnormal at all that in the forecast we hope -- we think we're going to get an inbound order this week and it turns out it takes 2 more weeks because we had a serious negotiation over Ts and Cs. It's not unusual that a customer says, "Hey, can you just delay this 2 weeks because my project is not ready, I can't take the equipment on site." That's not unusual. I think what's magnifying it this year is the fourth quarter is so big, relative to our year and relative to even our typical strong fourth quarters is if there's some percentage of that, that normally goes on, the absolute value of that stuff is going to be bigger, if that makes any sense.

Yes. And you would say, where things shifted, it was sort of -- it sounds like it sort of spread around, there wasn't any particular areas that stood out are end markets?

No. It was -- I think we've got some numbers. Basically, versus our forecast, we -- or excuse me, versus last year, we had about $25 million of sales that we would think it would be in the third quarter, actually a little bit more than that, that slipped into fourth quarter or most of it slips into fourth quarter, and I would say it was half-and-half FoodTech and AeroTech. But there wasn't any pattern by product line.

And I wouldn't say there's any pattern by region of the world either, Gary.

You have a follow-up question from the line of Jason Ursaner with CJS Securities.

I'm just wondering, how should we look at the margin performance there as kind of a read through to Q4? And what your incremental margin might be from this space given that when you do have revenue slowdown you tend to actually see an increase in your gross margin because of that service component? And just kind of breaking down the buckets between what you're really seeing on the cost reduction efforts in terms of the effect. How much of the improvement might just be a relatively easy comp with last year, there were some adjustments with that Swedish krona and some of the restructuring efforts that you're doing. And just where you see margin going given that you're going to have a much different SKU of new equipment in Q4?

Now let me talk third quarter and then I'll segue into fourth quarter. You can see that the -- obviously, the operating margins went up on lower sales in a lifetime that's due to our, as you point out, our product mix when our aftermarket stays strong when new equipment sales are back. Actually, in this quarter, that's not what happened. That margin improvement used to be, is predominately due to our cost-reduction activity. Through June, we've had really strong aftermarket in both FoodTech and AeroTech. And while the third quarter wasn't bad, it wasn't as strong relative to last year, actually. And so the margin improvement you see in the third quarter is almost predominantly due to cost reduction activities that we kicked off into last year. As you go into the fourth quarter, we always say, we don't get a lot of leverage because our costs are largely variable, but when you pack this many sales in a quarter, we do see leverage on SG&A in both segments as well as other sort of quasi-fixed cost. So we're going to get really strong margin performance in both segments in the fourth quarter. And just to give you an idea, I don't have my calculator in front of me, but I'm sure your models can see what FoodTech year-to-date margins are. We've been saying all year long, we thought we would end up with double-digit margins in FoodTech. Well, we still think -- we may miss, but we're going to be really, really close. And so if you do the math, you'll see that the FoodTech margins in the fourth quarter are going to be super strong assuming we deliver the volume that we've got in backlog.

Okay. And I guess just getting back to that point. Can you talk at all about the internal process for how you review backlog? What makes an order potentially at-risk for delay versus something you actually think you could pull in and get delivered before the end of the year? Just what's the process for doing that?

Well, our normal operating process is something we call monthly performance reviews. So every month once we close the books, we have both business segments' VPs and their teams, basically at a 3-hour in-depth review of the income statement, and the balance sheet, order activity, market performance, and we discuss risk and opportunities in each one of those. And so we basically update a 3-month rolling forecast every month. As we roll that up through the first part of the third quarter, we still felt like we're in good shape. And as we enter September, we could see we were going to -- we had to start counting orders that were going to slip for various reasons.

Yes. What I'd add to that, Jason, is that we're pretty rigorous about when an order is recognized as an order, reported as an order and included in our backlog. So this is not done based on verbals or a casual purchase order that's faxed over or e-mailed. This is a -- we got to have contracts, terms and conditions agreed, letters of credit issued, advances in, nearly always. So it's a pretty rigorous process before we report it as an order and include it in our backlog. And that's in part why we have so few cancellations.

Okay. And then just, Ron, if you could also follow-up, the cash flow from operations was still very strong. I know the CapEx budget sort of had been back half weighted if you're going to hit that $25 million budget. Can you just give us an update on where CapEx stands? And in terms of free cash flow, how much -- is it mainly going to be Q4, because it did look like you generated a fair amount of cash.

We have been very pleased with the cash flow. We're going to have a record low net debt. So in terms of cash flow coming out of operations through earnings, as well as a collection of receivables and advance payments, it's all been very positive. We'll talk a little bit more on that. Our CapEx has been regionally driven by replacement of the facility in Florida, and we'll have more to say on that at the November call. But our CapEx is probably going to be a little bit less this year than what we talked about in the second quarter.

Your next question is from the line of Liam Burke with Janney Capital Markets.

Charlie, both on FoodTech and AeroTech, you had set some goals understanding that both businesses have variable costs in nature and you're trying to break that cycle by lifting the margins above what traditionally they have been. Looking into 2013, understanding that this quarter, the lumpy nature of the business, could create a quarter-to-quarter shortfall. Do you think you're on track to meet those goals as we get through fourth quarter and into next year?

Yes. We still feel good about our 4G strategy and we feel like the combination of the sort of process improvement initiatives are on track. We're -- the same things we did at Ground Support Equipment last year with our consultant will now work in Food Solutions division. We haven't seen those results yet, but those projects are going on. And the cost-reduction activities we undertook at the end of last year actually really helped the -- helped to hold up the third quarter. It's too soon for us to comment on 2013, obviously, and we're in the middle of lining [ph] up, we're doing budgeting right now. As I mentioned earlier, the aftermarket in our recurring revenues are a key part of our margin improvement strategy. And the third quarter was not a stellar quarter, not bad, but not stellar. The first half of 2012, it's been doing great. So we remain encouraged by those initiatives we have in the aftermarket as well.

The only thing I'd add to that, Liam, is, particularly in FoodTech, we would expect margin expansion in '13 and we'll look at that when we get into the budget. But most of the cost-reduction related to the reduction in headcount, particularly in Europe that resulted from our initiatives this year, were implemented over the year, and so we'll have the full year benefit of that going into -- as we get into '13.

Great. And Charlie, you referred to 2009 and 2010 as small ball. Prior to that, you had pretty good visibility on overall, call it, over the next 12 months based on order and backlog activity. Are you seeing a shift from small to longer ball and to better visibility on the business?

I don't want to overstate our visibility capability. The way I would describe it is back when we spun out in '08, we had a $20 million project in Australia. We had some $12 million and $13 million projects. And those kind of projects -- well, obviously, lead times of 9 and 10, 11 months give you more visibility. As we went into the downturn, we saw that kind of go away and the small ball limited our visibility, I'd say more like 3 to 3.5 months. Now what we're seeing is the orders are starting -- you've seen some announcements of $4 million and $5 million and $6 million, $7 million orders, you'll see some more in the next few weeks. And it's those collected -- it stretches you out beyond the 3 months until you can see maybe toward 5 and 6 months. So we'll see how it develops here in the next 2 months. I don't want to get ahead of my SKUs on that, Liam. But it feels better in terms of some of the more recent sizable chunky orders.

At this time, you have no further question. I will now turn the call 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 this afternoon. If you have any further questions, please give us a call. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.