JBT Marel Corporation (JBTM) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation's Third Quarter 2013 Earnings Conference Call. My name is Victoria, 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, Victoria. Good morning, everyone, and welcome to our third quarter 2013 earnings conference call. With me on the call are our Executive Chairman, Charlie Cannon; our President and CEO, Tom Giacomini; 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 filings. 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. On August 26, we announced implementation of our management succession plan by naming Tom Giacomini our new President and CEO. I couldn't be more pleased to be passing the baton to Tom. He is an extremely experienced and well-seasoned executive, who brings broad, strategic and operational expertise to JBT. I will remain with the company as Executive Chairman through our next annual meeting to assist Tom, as needed, with this leadership transition. I want to thank all of you for your support for JBT and for me personally. I am proud to have been affiliated with JBT and the track record of success that JBT employees have established. I am confident that under Tom's leadership, the company will continue to improve. With that, I'll turn it over to Tom.

Thanks, Charlie, and good morning to everyone on this call. Since joining JBT, I have met with some of our customers, our management leadership team, and also visited a majority of our domestic and international facilities. The company has strong technology and market positions, a large installed base, global reach and excellent growth in profit improvement prospects. These meetings and visits have reaffirmed my initial assessment of JBT. As a result, I am very excited about our future. We greatly appreciate Charlie's many contributions during his 30-plus years of service, and his leadership with JBT since it became an independent, public company in 2008. The company has made significant strides on its 4G value creation strategy. Working together with the leadership team and the company's talented and dedicated professionals around the world, I am confident we will continue to create value for our shareholders and customers. Over the next few months, the leadership team and I will continue to review our strategic initiatives. We have already started exploring margin expansion projects, primarily around pricing, and identifying productivity improvements. As we continue to develop these initiatives and our strategy, I anticipate sharing further details with you in the first half of 2014. As part of the management succession plan, we also announced Ron Mambu's intent to retire as CFO, upon the identification of a successor. Ron and I are heading the effort with the aid of a leading search firm, and the process is well underway. With that, I will provide some commentary on the business environment for our 2 segments. I will also discuss our business outlook, and Ron will cover our third quarter 2013 financial results, before we open up the call to questions. Starting with FoodTech. Freezing and protein processing in North America continues to stay on track to deliver record performance in 2013. Equipment demand this year has been largely driven by non-poultry food categories, primarily meats, bakery and ready meals. This trend slowed in the third quarter. With corn prices down nearly 40% year-over-year, economics have improved for poultry processors, so we anticipate increased demand for poultry customers over the next year. In Asia, I am pleased with our strong backlog position for freezing and protein processing, up nearly 25% over last year. This reflects the success we have achieved with our locally designed and manufactured freezers in China. We anticipate entering 2014 with a strong backlog position, aided by a large project expected to be received before year end. Performance in Europe, however, has been disappointing. Aftermarket volume has been light. While equipment quote activity coming out of the summer vacation months has been healthy, our inbound orders were not in line with our expectations. The resulting impact of lower volumes, coupled with higher anticipated execution costs, are driving lower fourth quarter earnings expectations for the region. However, order-to-quote [ph] activity in October has been encouraging, and we continue to closely monitor the developments. Moving to the in-container product line. Inbound order rates have been strong throughout the year, driving significantly higher year-over-year backlog levels. As a result, this business is well-positioned for a record year in 2013. We see a healthy prospect list, attributable to the strong market tailwinds, and we anticipate the business will enter 2014 with a continued favorable backlog position. Last, the fruit and juice processing business is on track to achieve solid results this year. Earlier this year, we entered into lease contracts with several new customers and renewed a contract with a major customer. Although the USDA's preliminary forecasts for Florida's 2013 to '14 crop is down relative to last year, our actions are expected to more than offset any unfavorable impacts of lower forecasted box counts. For FoodTech overall, we continued to trend with the earlier guidance, did mid to high single-digit percentage revenue growth for 2013. We expect full-year FoodTech operating income margin to be almost 11%, representing more than 100 basis points improvement over last year's margins. FoodTech continues to be on track to deliver record profit performance in 2013. Turning to AeroTech. Demand for de-icers and ground support equipment has been significantly higher than last year. We expect to sell over 50% more units this year than last year. Partially offsetting this increase, demand for loaders out of Europe has recently been weaker than expected. We attribute this to challenging macro conditions and increased competitive pressures in the region. However, the fourth quarter in ground support equipment overall is shaping up to be yet another seasonally strong quarter. Moving to Gate equipment. I'm pleased to report that inbound orders in the quarter nearly doubled sequentially, and were up over 70% year-over-year. This was in line with our expectations with project deliveries scheduled for 2014 and beyond. As we close out the year, we have limited order risk and remain focused on execution. Last, turning to the automated systems business unit, recent order activity has been very strong. We ended the third quarter with a backlog nearly double that of last year. There is good momentum in the business, with demand coming in from new market segments, and we anticipate entering 2014 with backlog significantly higher than last year. Overall for AeroTech, we started off the year slowly, but order activity picked up substantially in the second and third quarters. We have a seasonally strong fourth quarter ahead of us, and we remain focused on execution. We continue to project AeroTech segment revenue to grow at a single -- excuse me, low single-digit percentage in 2013 and segment operating income margin to be roughly 8.5% for the full year. Lastly, we expect AeroTech backlog, heading into 2014, will be up relative to the prior year. In summary, for the full year of 2013, we are projecting segment operating results in line with prior guidance. However, we are revising our projected diluted EPS from continuing operations to be in the range of $1.26 to $1.32. This includes the impact of incremental Management Succession Plan expenses and foreign currency impacts. Excluding all management succession-related expenses for the full year of 2013, the guidance range for adjusted EPS from continuing operations would be $1.32 to $1.38. Now I will turn it over to Ron to provide more details on our third quarter results.

Thank you, Tom. Our third quarter performance came in ahead of our expectations. Revenue of $234 million increased $28 million or 14%, year-over-year, while operating income of $12 million increased by 13%. These increases were driven by strong new equipment sales and higher recurring revenue of approximately $21 million and $7 million, respectively. The higher sales volume offset the margin impact of an unfavorable product mix across both FoodTech and AeroTech during the quarter and higher corporate items. Third quarter diluted earnings per share from continuing ops was $0.25, an increase of 19% over the prior year. Adjusting for the $1 million in expenses relate to the company's announced Management Succession Plan, diluted earnings per share from continuing ops was $0.27, an increase of 29%. Now turning to segment results. FoodTech third quarter revenue of $138 million increased $21 million or 18% year-over-year, while operating profit increased 38%. Higher equipment sales and aftermarket revenue contributed approximately $15 million and $7 million, respectively, in increased revenue. A higher proportion of revenue from lower-margin product lines resulted in lower gross profit margins. However, the segment operating margin expanded by approximately 120 basis points to 9% as a result of the overall increase in sales. The segment ended the third quarter with a solid backlog position of $185 million, up 7% year-over-year. Moving to AeroTech. Third quarter revenue of $97 million increased $9 million or 10% year-over-year. Higher equipment sales and aftermarket revenue contributed approximately $9 million and $2 million, respectively, in increased revenue. Growth in the quarter largely resulted from strong sales of ground support equipment and automated systems. Lower airport service sales of $2 million partially offset the revenue increases. AeroTech segment operating profit margin contracted approximately 50 basis points year-over-year. Margin expansion from the strong sales pick up in the quarter was more than offset by unfavorable gate equipment product mix. During our last earnings call, we forecasted AeroTech orders to pick up in the back half. Third quarter inbound orders of $121 million increased 17% sequentially, meeting our expectations. Segment backlog of $182 million increased 6% from the prior year. Corporate items in the quarter were $11 million, an increase of $2 million from the prior year. We incurred $1 million in expenses related to management succession. We also recognized $1.6 million net loss on foreign currency positions. For the full year, the company expects corporate items, excluding net interest expense and any future foreign currency impacts, to approximately $32 million. The increase from prior guidance is largely a result of expenses related to management succession. Cash generated by operating activities during the third quarter was $18 million, driving debt net of cash to a new record low of $73 million. Income tax expense in the third quarter of 2013 reflected a full year estimated effective [ph] income tax rate of 34%, in line with our prior guidance. In the third quarter we recognized $600,000 in favorable discrete adjustments, reflecting a lower tax liability for fiscal year 2012. Capital expenditures for the quarter totaled $7 million, roughly flat relative to the prior year period. For the full year, capital expenditures are projected to be about $30 million, slightly lower than our earlier estimates. Year-over-year increase in capital expenditures this year has been driven by the replacement of our Lakeland, Florida manufacturing facility. As Tom mentioned earlier, we are projecting segment operating results in line with prior guidance. However, we are revising our projected diluted earnings per share from continuing ops to be in the range of $1.26 to $1.32. Versus our prior guidance, our new guidance includes an incremental $0.04 impact resulting from the management succession plan. In addition, we incurred a $0.03 charge in the third quarter related to foreign currency positions. Excluding all expenses associated with the management succession plan for the full year 2013, the range for adjusted diluted earnings per share from continuing ops would be $1.32 to $1.38. It's also noteworthy that we expect incremental costs associated with our management succession plan to have an impact of approximately $0.05 per share in 2014. We planned [ph] 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. Operator, please open the call for questions.

[Operator Instructions] Your first question comes from the line of Jason Nacca with Sidoti. Jason Nacca - Sidoti & Company, LLC: The first question I have has to do with the strong sales in de-icers this quarter. Now was that more a function of weather patterns, or is the Snow Panther line, for example, in China kind of picking up momentum?

Well, I'll chime in here. Our de-icer sales this year are substantially up over last year, and we've seen that certainly in the third quarter and expect that will be up for the full year, well over last year. And when we've tried to correlate that in the past, it's been difficult to do. It's more a function of weather patterns and buying patterns than anything else. So our operations in China are moving forward, but we haven't -- they haven't materially moved the inbound levels yet. Jason Nacca - Sidoti & Company, LLC: Okay, and then secondly, Tom, now that you've had some time to initially overview some of the operations, in your viewpoint so far, could you kind of outline some of your initial thoughts on how to increase margins now both in FoodTech and AeroTech?

Sure. Thanks for the question. I was just reflecting. It's been 38 days since I joined JBT. It's been a busy 38 days, but as I look at the businesses, we have fundamentally strong positions, and I think the thing that probably impressed me the most is the way that we engage the customers and the value we create beyond them -- for them beyond the initial sale. And as we're starting to look inside our margins, for me there are really 2 primary levers we're going to work on. The first one is pricing, and we already have activity underway inside our business to look at pricing and how we maximize that; and then secondly, it's around productivity or operational excellence, and we are also putting measures and programs in place to further that process. Jason Nacca - Sidoti & Company, LLC: Okay. Now on the pricing, would you say that you're more balanced [ph] and more looking for the FoodTech segment, or on the AeroTech, would you say pricing would be more imminent?

I would say, there is opportunities in both businesses, and we've got some preliminary work we've already looked at. So we'll be pursuing prices in both segments.

Your next question is from Jason Ursaner with CJS Securities.

I thought you mentioned that you expect next year to be entering with backlog significantly higher than last year. So I mean, just -- on the surface seems a bit challenging, given the heavy deliveries in Q4 and relatively strong FoodTech orders last year. So I was just wondering if maybe you can walk through some more detail by market in terms of your inbound expectations for how you'd get there.

I'll cover from an overall level and then I'll ask Ron to give you any of the detail you may like. The way we see it is, we will exit 2013 with an improved backlog position over prior year. Based on our expected order rates in the fourth quarter, we also are encouraged by the fact that as we look into our backlog, year-over-year, we have more visibility in orders into 2014 and more backlog in orders for the subsequent year than we did in 2013 as we exited '12. So there is 2 positive factors there as we look at how we'll end the year.

Jason, I think Tom commented in his remarks that we expect to be up in backlog going into the year 2014. But in-container has been strong for us. We've also seen our backlog positions in Asia move up. So we're expecting to enter 2014 in better shape than we entered '13. Jason Nacca - Sidoti & Company, LLC: Okay. And Tom, you had a lot of success at Dover in terms of M&A. So at JBT, you're entering a business that's a leader in relatively fragmented markets. So just wondering if maybe you can talk about your views and criteria for acquisition and how you see it playing into the long-term growth strategy?

Certainly, as I came over to JBT, I was certainly encouraged by the promise. And as we've looked at our markets, we do serve substantially good sized markets that have a lot of fragmentation in terms of the players in them. So I would expect, as we look at growth -- and we look at the market segments we play in that have strong tailwinds and sustainable growth, we'll look to put more of our resources behind those. And there will be an organic element, and there will also be, hopefully, a strong M&A piece. My thinking is, as we sit here today, our balance sheet is in a good condition and gives us lots of optionality around what that M&A program may look like.

[Operator Instructions] There are currently no further phone questions. I would like to turn the call back over to Mr. Debarshi Sengupta for any 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.