JBT Marel Corporation (JBTM) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the JBT Corporation's First Quarter 2013 Earnings 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 first quarter 2013 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 2012 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'll recap our first quarter 2013 performance and discuss our business outlook for the year. Ron will cover our first quarter financial results before we open up the call to questions. Revenue for the first quarter was $186 million, down 9%. As we have described our seasonality on previous occasions, the first quarter is typically our slowest quarter of the year. We are pleased with the significant gross profit margin expansion in the quarter, driven by gains from ongoing margin improvement initiatives. For example, we have discussed our program to manufacture higher-capacity freezers out of North America. We have been successful in delivering a number of these freezers while steadily increasing margins every quarter. In this last quarter, as we rode down the learning curve, we achieved significant year-over-year margin expansion. We're also very pleased with our backlog at the end of the quarter, which positions us well for the year ahead. The backlog comprises several larger orders received over the last 3 quarters, affording us better visibility into the rest of the year. Next I'd like to provide some commentary on the business environment for our 2 segments, starting with JBT FoodTech. Global revenue for FoodTech freezing and protein processing equipment was lower in the first quarter. However, strong order activity resulted in a record high backlog, up approximately 40% year-over-year. Demand was particularly strong in North America with the ready meal and meat categories largely driving customer orders. With a backlog level about 80% higher than the prior year period and with continued good quote activity, North America is on track for solid revenue growth in 2013. New equipment revenue for freezing and protein processing equipment out of Europe, Middle East and Africa was strong in the quarter as a result of year-end backlogs. However, inbound orders declined as customers continue to hold back in light of the uncertain macro environment in the region. We are actively engaged with customers and expect order rates in the near term to be stable. But as a result, we expect only a modest increase in full year 2013 revenue in Europe relative to 2012. In Asia, we were awarded 2 large orders totaling $10 million for freezing equipment. As a result, quarter-end backlog increased over 25% year-over-year. Customers are planning for expansion of existing capabilities and new capacity in the region, driving demand for new equipment. We have not yet seen a direct impact on sales from the media intensity around avian flu. However, it is a topic of conversation in the region, and we continue to closely monitor developments. We are currently expecting to achieve full year 2013 revenue in Asia above last year's level. Aftermarket sales for freezing and protein processing equipment dipped in the quarter for both North America and Europe. However, we have already seen a return to our normal run rate in North America, as well as an improving rate in Europe. Moving to the sterilization product line, demand for new equipment and aftermarket continues to be strong, driven by dairy applications in Europe and fruits and vegetables and ready meals in North America. We are also seeing a healthy prospect list with some larger opportunities as a result of new production lines being launched. Quarter-end backlog in sterilization was at a record high, up nearly 60% compared to 2012. We expect all of this backlog to convert to revenue this year, resulting in a very strong 2013 for sterilization. For FoodTech overall, we ended the quarter with record backlog, 55% higher than the prior year level. While this -- while backlog this year consists of larger orders that carry longer lead times in general, we expect a high percentage of the backlog to convert to revenue in 2013. We are forecasting roughly mid to high single-digit percentage revenue growth in FoodTech, with revenue and earnings once again back-half loaded. In addition, we expect to achieve further margin expansion in the year, keeping FoodTech segment operating margin on track with our long-term margin goals. Turning to AeroTech, the International Air Transportation Association, or IATA, recently revised its 2013 profitability forecast from $8.4 billion up to $10.6 billion. Driving this upward revision is IATA's improved optimism for global economic prospects, strong passenger demand and renewed growth prospects in cargo markets. Coming off a profitable 2012, the sustained profitability in the airline industry is a positive for us. Regarding our larger AeroTech businesses, gate equipment inbound orders were lower than the prior year primarily due to timing. Second quarter orders have come in strong thus far, as expected, bolstering our expectation for significant revenue pickup in the back half of 2013. We already expect our Shenzhen, China manufacturing facility that services international orders to run at near full capacity through the first half of 2014. Activity in Ground Support Equipment also declined from the prior year quarter, again primarily due to timing. The second quarter is off to a good start. As we noted on our last earnings call, we expect an increase in demand for deicers as a result of the adverse weather conditions this past winter. We recently announced an order for 26 deicers by a major air carrier that supports our outlook. Moving to our Halvorsen line of military Loaders. We started the year with very little backlog relative to 2012. In addition, some orders have been delayed by the implementation of sequestration measures by the U.S. government. We are anticipating a pickup in sales in the back half of this year. Overall, for AeroTech, we are off to a slower start in 2013. However, we are encouraged by the strong order activity thus far in the second quarter. If customer orders continue to come in as anticipated, we expect mid-single-digit percentage revenue growth in AeroTech in 2013. We forecast AeroTech segment operating margin for the full year 2013 to be flat to slightly down from the record 2012 margin. In summary, for the full year 2013, we project diluted earnings per share from continuing operations to be in the range of $1.38 to $1.52. The upper end of the range reflects potential for additional revenue opportunities across some of our businesses. Driving the lower end of the range are the challenging market conditions in Europe and Middle East and the potential impact of sequestration measures on some military Loader sales. With volume being concentrated in the back half of the year, we expect second quarter diluted earnings per share from continuing operations to be roughly in line with the prior year. Now I'll turn it over to Ron Mambu to provide some more details on the first quarter.

Thank you, Charlie. Revenue for the first quarter was $186 million, down 9% year-over-year due to lower sales across both FoodTech and AeroTech. As Charlie noted, we are pleased with the gross profit margin expansion in the quarter despite the volume decline. Gains from margin improvement initiatives resulted in approximately 250 basis points expansion. Operating income margin declined by about 25 basis points due to a combination of lower sales and higher corporate items in the quarter. First quarter diluted earnings per share from continuing operations was $0.14, flat relative to the prior year period. Overall performance in the quarter was in line with our typical seasonally weak first quarter. First quarter backlog of $330 million increased 26% from the prior year period after adjusting for the removal of backlog associated with 2 AeroTech U.S. Air Force contracts. Turning to segment results, JBT FoodTech's revenue decreased $12 million year-over-year, largely due to lower new equipment and aftermarket volume. As requested by a sterilization customer, we delayed a $3.5 million project from the first to the second quarter. Aftermarket revenue for freezing and protein processing product lines decreased by approximately $5 million, largely across North America and Europe. As Charlie noted, we have already seen a return to our normal run rate in North America, as well as an improving rate in Europe. Despite the lower revenue, JBT FoodTech's operating profit increased in the first quarter 2013 compared to the same period in 2012. Operating margin expanded by approximately 160 basis points. This included a gross margin improvement on high-capacity freezers manufactured out of North America and savings from cost reduction initiatives implemented in 2012. JBT AeroTech's first quarter revenue of $78 million declined 9% from the same period in 2012. Higher passenger boarding bridge and Ground Support Equipment sales were more than offset by lower automated systems and military Loader equipment sales in the quarter. Lower relative backlog at the end of 2012 for both product lines largely drove the unfavorable revenue comparison. Overall, lower sales in AeroTech in turn drove a decline in segment operating profit margin of approximately 50 basis points. Corporate items in the first quarter were $7 million, up $1 million from the prior year period. The increase was mainly due to higher incentive-based compensation expense and pension cost driven by lower discount rates. We also had a restructuring reserve release in the prior year quarter and no comparable amount in this quarter. For the full year, we expect corporate items, excluding net interest expense, to range between $28 million to $30 million. Income tax expense in the first quarter of 2013 reflected a full year estimated effective income tax rate of 33.5%, within our previously guided range of 33% to 34%. In the first quarter, the company recognized $700,000 in discrete tax benefits, primarily due to the extension of the U.S. research and development tax credit. As of March 31, we had $15 million of cash and cash equivalents. Our cash balance was reduced due to renewal of intercompany loans and a reduction of debt at quarter end. Debt net of cash was at a record low of $87 million. Cash generated by operating activities was $18 million and includes the funding of $4 million to the company's U.S. pension plan. Capital expenditures for the quarter totaled $8 million with the year-over-year increase largely attributable to the upgrading and expansion of the company's installed base of leased equipment. For the full year, we continue to forecast capital expenditures of about $35 million. The increase from 2012 is driven by the planned spending on the replacement of our Lakeland, Florida manufacturing facility, which began in the first quarter. Lastly, we did not repurchase any shares in the quarter. We plan to file our 10-Q tomorrow, so there will be more detailed information readily available for your review. In summary, for FoodTech, given its record backlog, we expect to achieve mid to high single-digit percentage revenue growth in 2013, with revenue and earnings back-half loaded. We also project AeroTech to achieve mid single-digit percentage revenue growth in 2013, though again, back-half loaded. We expect second quarter diluted earnings per share from continuing operations to be roughly in line with the prior year. For the full year 2013, we project diluted earnings per share from continuing operations to be in the range of $1.38 to $1.52. With that, we'd like to take your questions. So operator, please open up the call for questions.

[Operator Instructions] Gary Farber with CL King. Gary Farber - CL King & Associates, Inc., Research Division: Just 2 questions. I might have missed it in the earlier part of your commentary, just your thoughts on the whole sequestration thing and also your thoughts on just your liquidity, what your priorities are now for the balance of the year.

On the sequestration, the impact has been with some U.S. Military customers trying to scramble to figure out what the rules are, and we had some orders we were working. It's not all of our Halvorsen Loaders because, as you know, we're chasing international orders around the world. But for the U.S., different military units, especially some special operations army bases, we've had some order slowdown. We -- in our forecast, we're assuming we will pick up some orders in the back half of the year. I'll let Ron talk about liquidity.

Yes, on liquidity, Gary, the company's been a very good cash flow producer. We expect cash flow to be positive for the remainder of the year. And in terms of applications, we continue to look at investment in our 4G strategy, including bolt-on acquisitions. So that continues to be our first priority. And secondarily, our buyback plan is in place. It still has the commitment of the board and management. So that's also a consideration, and following that, continuing to meet our dividend requirements and pay down debt, fall in line. So that's kind of how we see it. Gary Farber - CL King & Associates, Inc., Research Division: Okay. And just one follow-up on the Loaders internationally. What does that market look like? Is there a lot more opportunity in that market?

Well, I think it's -- that market is slowly as the -- I'm drawing a blank on the airplane type. Oh, C-17, Foreign Military Sales. As those programs kind of wind down, demand for our Loader will probably wind down a little. But we are, I mean, believe it or not, looking at a sale to Iraq. We're chasing different orders in the Middle East. And because of the profitability of the product line, it moves us to chase the onesie-twosie orders, and that's kind of how we've been doing it the last 3 or 4 years.

Your next question is from the line of Jason Nacca with Sidoti & Company. Jason Nacca - Sidoti & Company, LLC: The first thing I just want to speak to is the seasonality in the third and fourth quarter. Given that we had a strong -- a record fourth quarter, I'm kind of just -- and given your better visibility looking into the rest of the year, how should we be looking at the third quarter and compared to the record fourth quarter we had in 2012?

Well, I would say, if you recall, the last year's third quarter was a disappointment, so I would consider that a low bar. And I would say, in general, this year is shaping up to be kind of "normal seasonality," if you look back at the last 4 to 5 years of quarters, so I don't think it's that different. I mean, the way I look at it, sitting here today, compared to a year ago, a year ago, we entered 2012 with very light backlogs and the order activity was just beginning to pick up in the first quarter. And we were having to forecast the year based on our continued good inbound. This year, we're -- I'm in a much better position. FoodTech enters the year with a strong, really strong backlog, and then it -- and grows the backlog in the first quarter. And so I mean, this may help you, this anecdote might help you. A year ago, in FoodTech backlog, we had 3 orders over $4 million in value. Today, I'm sitting with a FoodTech backlog that has over 13 orders that are greater than $4 million for a total of almost $70 million. Now you can imagine a $4 million-plus project does not deliver in 12 weeks. And so what I'm really saying is -- says is I have much better visibility in FoodTech third and fourth quarter than we did last year. So that's good news. On the AeroTech side, we're a little similar to last year. We -- backlog is not as strong as in FoodTech, and we're counting on the order rates picking up in the second quarter and we are forecasting that. Now we just closed the books on April, I think, yesterday, but -- or today, this morning. And the inbound in AeroTech was north of $45 million in the month of April. So that gives us pretty -- that makes us feel confident about our forecast of the inbound AeroTech. So that's how I'm viewing the Aero. We're -- we've got a lot more visibility into the back half of this year than we did last year. Jason Nacca - Sidoti & Company, LLC: That's great. And now moving on to aftermarket opportunities. I know in past quarters, we talked about the opportunity there, but maybe just a little update on the penetration of some of your existed installment base of equipment, both on the FoodTech and AeroTech side?

Well, we've got a whole myriad of initiatives. We talked about some of them. We've got an initiative in Europe called PRoCARE. where we're actively signing up maintenance contracts. We've got initiatives in sterilization in North America, where we're blanketing customers with prepared maintenance contracts and overhaul bids. In AeroTech, we've got, in the Ground Support Equipment, an initiative called the Medallion program, where we can overhaul at the platinum, gold or bronze level, and we have been growing our rebuild sales in Ground Support Equipment. That question would take me about a day to answer because we've got so many initiatives around the world in aftermarket. We did mention in our notes that aftermarket was down in FoodTech in freezing and protein in both Europe and North America, which set off some alarm bells for us. As we looked at it, we think, in Europe, it just had to do with the general malaise. It is coming back. And in North America, we think it has to do with the poultry industry's concern about the price of corn and what the year was going to hold. Now we looked at Tyson's earnings results, and they look like they had a pretty solid poultry numbers, and I saw on the Wall Street Journal yesterday that the fear about the wet spring and the planting of corn has abated somewhat with the recent weather. And so the price of corn has been coming back down. We have seen a return to normal run rates for aftermarket North America over the last 1.5 months, so we just think it was a temporary dip. Jason Nacca - Sidoti & Company, LLC: Okay. And then my last question is sterilization. It's continuing to show a continued growth driver for you guys going forward. So my question is, is the overall sterilization opportunity getting larger? Would you say, for example, that South African technology acquisition is just -- is building upon that growth as well?

Yes, I would say, there's a couple of things marked -- and the acquisition obviously helped. The acquisition gave us some additional installed base to go after and as you -- also helped us in our margin improvement initiatives. A couple of things in the market that occurred, the European Union changed their rules on exporting of data -- excuse me, of dairy products, I guess, a year or 2 ago, and now we've realized that after the fact, but we've had several large projects go for canned dairy products from Europe to be exported to the Middle East. And then we've told you before, when we look at the developing world and you see rising incomes, that diets change. We are seeing big demand for shelf-stable dairy products, sweetened condensed milk, canned milk, things that are right in our sweet spot for sterilization, and that's driving some orders in Asia.

Your next question is from the line of Jason Ursaner with CJS Securities.

This is actually Michael filling in for Jason Ursaner. So in FoodTech, despite the timing of Q1 shipments going out, it obviously continued to see relatively strong activity with record first quarter end backlog. And there was a recent article in an industry publication, food processing magazine, and it highlighted the budgeting CapEx spending for 2013, and it mentioned that the market right now is cash-rich but shovel-dry, and that these companies are sitting on very strong balance sheets but not really opening up CapEx. So within your results, do you still think that you're seeing any underspending? Or is that dynamic not really impacting your customers and markets?

I can't comment on that article because I didn't see it. But all I know is, from our point of view with our customers, FoodTech's on a roll right now.

Fair enough. And as far as the AeroTech segment is concerned, can you expand a little bit on what you're seeing in Ground Support Equipment and what we can expect to see in 2013?

On the Ground Support Equipment, I mentioned we were counting on increased orders. One of the -- if you look at the range of earnings guidance we gave, one of the unknowns at this point is deicers. We're encouraged by an order for 26 units. And given the bad winter last year and just rumblings in the marketplace, we think it could turn out to be a banner year for deicers, but we don't know that yet. And if it turns out to be a banner year, that would help push us toward the higher end of the guidance. That'd be one of the factors that would push us higher. We're doing a lot more rebuild business in Ground Support Equipment, and we're going through the learning curve with that, but a lot of customers are just looking at their fleets and trying to decide how much they want to buy new and how much they want to rebuild their products.

And is there sort of a percentage of new versus rebuild that you're seeing? Is there a trend, or is it customer-dependent?

It's -- right now, I don't have anything I could call a trend. It's customer-dependent.

Okay. And lastly, on the Halvorsen line, can you expand a little bit on what you're seeing outside of U.S. Military orders?

Well it's U.S. Military and State Department and Special Ops. And then outside, it's typically Foreign Military Sales that can be, like in India, tied to a C-17 buy from Foreign Military Sale in India or in the Middle East to other foreign allies with Foreign Military Sales. So we're basically done with the Air Force contract for the last several years, but we've been successful in sort of doing what I call guerrilla marketing around the world, selling onesie-twosie Halvorsens.

Okay. So the U.S. Military sales is really the brunt of it, though? It's not -- it's sequestration that's impacting the timing of those orders?

Yes, of the ones in the U.S., correct.

[Operator Instructions] At this time, you have no further questions. I will 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.