JBT Marel Corporation (JBTM) Q1 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation's First Quarter 2014 Earnings Conference Call. My name is Kimberly, 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, Kimberly. Good morning, everyone, and welcome to our first quarter 2014 conference call. With me on the call are our President and CEO, Tom Giacomini; and our Vice President and CFO, Brian Deck. Before we begin, I would like to remind everyone that forward-looking statements and today's call are subject to the Safe Harbor language in yesterday's press release and 8-K filing. Our 2013 Form 10-K also contains 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 Tom.

Thanks, Debarshi, and good morning to everyone on the call. As you saw on our earnings release, there are a number of positives underway at JBT. For the first quarter of 2014, we delivered a revenue growth of 7% and exceeded the plan on the bottom line. Our business outlook remains healthy, with strong inbound orders at FoodTech and AeroTech. I'll let Brian walk you through that and our segment trends in a few minutes. But first, I'd like to focus on the major steps we are taking to enhance JBT's long-term performance and success. As planned, JBT took a restructuring charge of $10 million in the first quarter of 2014. From a broad perspective, we're undertaking restructuring actions that will improve our margins and fund growth. Let me be a little more specific about what that means to us. Our evaluation of JBT found an organization that was administratively complex. As a result, we are targeting opportunities to streamline back-office and administrative overhead, while at the same time redeploying resources into customer-facing activities that will directly drive top line growth. For example, we're adding dedicated sales and service talent to build our aftermarket franchise. In the past, we've asked our folks to handle both new equipment and aftermarket sales. We believe this had diluted their effort and contributed to the slow growth we've experienced in the profitable aftermarket side of our business. Our global installed base of equipment is a tremendous asset. With a dedicated effort, we plan to do more to leverage that base and more rapidly grow margin reach aftermarket revenues. We've also targeted underperforming business as part of our restructuring plan. It's clear we have performance issues that need to be addressed at our European freezing and cooking business. Similarly, we are optimizing the cost structure of our ground support equipment business within AeroTech. Additionally, we are reining in costs by consolidating smaller operations where FoodTech and AeroTech can operate shared facilities. Behind this consolidation is a much broader and critical cultural shift that enables us to think and act as one company. Changing a culture is not easy, but we are already seeing results with the businesses coming together in ways we haven't seen before. We've now done some joint training and selling, and the businesses are partnering and sharing best practices in lean manufacturing. For 2014, we expect the restructuring to generate savings of $3 million. And on a run rate basis, we expect to capture annualized savings in excess of $10 million by mid-year 2015. But the restructuring, which will enable us to streamline operations and reduce costs, is just the beginning of a much larger plan as we establish a continuous improvement system, energize the JBT culture on our next level strategy and establish a strong foundation for profitable growth. One of the earlier programs is the pricing work, which I talked about since shortly after joining JBT. We are pleased with the early results we are seeing already. We expect to generate $3 million in benefits from our operational excellence initiatives in 2014, primarily from our strategic pricing actions. We also completed a small bolt-on acquisition of Formcook AB of Sweden. This acquisition makes us the leader in Teflon cooking equipment and a strong complement to our existing freezing and protein processing business. While the deal will not significantly move the needle, it is an indication that acquisitions are an integral part of our growth strategy. Formcook will also allow us to utilize our newly developed integration methodology to unlock value from the acquisition. Moving forward, we've made significant progress on the M&A pipeline, and there has been a mind shift in our leadership in terms of understanding the value creation opportunities that the right acquisitions present. As I talked about last quarter, both FoodTech and AeroTech are well positioned with leading share in their markets, and both are positioned to capitalize on favorable global trends. But we can and are doing more to capitalize on the potential of our solid positions to deliver faster growth and improved margins. We're looking forward to our upcoming Investor Day in New York on May 22. Brian and I, along with Dave Burdakin, our VP of AeroTech; and Steve Smith, our VP of FoodTech, will share more details about JBT's strategy to take the company to the next level. For now, let me turn the call over to Brian to talk about the first quarter, our business trends and our outlook for 2014.

Thanks, Tom, and good morning. Starting with the top line, revenues increased by 7% year-over-year. While this was a bit short of the 10% forecast we gave on the last conference call, we are maintaining our expectation of mid-single digit revenue growth for the full year. On a segment basis, FoodTech revenues were up 21%, while AeroTech revenues declined 12%. Segment profits were stronger than anticipated, up 14% in the first quarter of 2014. Segment operating margins at 7% compared with 6.5% in the year-ago period were helped by higher FoodTech equipment volume and strong aftermarket revenues in both segments. Within AeroTech, margins were down at our ground support equipment business, where we've talked about headwinds. However, we are encouraged by a recent pickup in quote activity for de-icing equipment following a tough winter season. Furthermore, as Tom mentioned, restructuring includes actions to improve the cost position of our ground support equipment business. Moving beyond the segment performance. Corporate expense in the first quarter of 2014 was $8.8 million. That included $1.5 million in management succession costs and $900,000 in consulting expenses related to strategy deployment and pricing initiatives. Additionally, as Tom discussed, we took a $10.2 million restructuring charge. As a result, we reported a loss of $0.16 per share in the first quarter. Excluding the restructuring charge, EPS was $0.09. And adjusted earnings from continuing operations, which also excludes the management succession expenses and consulting costs, was $0.15 per share. Looking ahead to full year 2014, we expect mid-single digit revenue growth. We also expect segment operating margins to remain roughly flat with a 9.8% level posted in 2013. We plan to capture cost savings of more than $3 million from restructuring actions in 2014. We expect an additional $3 million of benefits, primarily from pricing actions we are implementing. We plan to reinvest these amounts back into our business in 2014 to support growth and margin expansion in 2015 and beyond. Looking forward, we expect that future investments would be significantly outpaced by the associated savings and benefits. Corporate expenses, excluding one-time costs, are expected to be $25 million to $27 million. The one-time costs include the $2 million of consulting expenses and $6.7 million in management succession costs. The latter increased from previous guidance, as a $3 million non-qualified pension plan expense for retiring executives, which we originally expected to take in 2015, will now be recorded in Q4 2014. And we expect the tax rate in the range of 32% to 33%. With those guidelines, our current forecast for adjusted earnings, which excludes restructuring charge and management succession and consulting costs, is $1.35 to $1.50 per share year. On a GAAP basis, the range would be $0.90 to $1.05. Let me step back and give you some color behind why I feel comfortable with our outlook. As Tom said, our business is healthy. In FoodTech, the macroeconomic environment continues to provide a favorable setting for our business. Regarding poultry, higher selling prices, combined with lower feed costs, is benefiting poultry processors. This should spur further demand for our equipment. We also continue to see global demand -- solid global demand from dairy processors across Asia and the Middle East. Turning to AeroTech. Backlog reached a record high. We've seen particularly strong demand for our passenger boarding bridges and mobile aviation equipment, fueled by demand from the airframe industry and airports globally. With that, I will turn the call over for Q&A. Operator?

[Operator Instructions] And your first question is from the line of Gary Farber. Gary Farber - CL King & Associates, Inc., Research Division: Just a couple of questions. I mean, you had the acquisition there, which was more of a bolt-on. I'm wondering, can you talk a little bit about have you changed the acquisition team at JBT yet? I mean, have you made any sort of a significant, sort of, just process changes to how acquisitions are going to be looked at or implemented?

Gary, this is Tom. Thanks for calling. Absolutely, we've made a number of fundamental changes in the way JBT approaches acquisitions. Of course, we've got Debarshi now heading up our M&A efforts. And in addition, we really are involving the entire operational leadership team. I mentioned the M&A pipeline strengthening. I feel it's one of the key deliverables of our operational leaders to be involved in the sourcing of deals that are strategic and help move our businesses forward. But it all started with the look around our next level strategy, the areas we want to grow, where we see the most opportunities and where the most value is created for our customers. And I will tell you that, as we look across the horizon, there are a number of opportunities that are going to look interesting to us. It's just a matter of the time and pace that they become available to us. Gary Farber - CL King & Associates, Inc., Research Division: Right. Okay. And just one other question. You have a very comprehensive restructuring plan in place now that I'm sure addresses a lot. I'm just sort of wondering, not even just from an expense side, where you might have to take expense -- take on additional restructuring expenses. Do you see room beyond this? Is there another phase, longer term or is it too early to call? Will you be making -- it may not -- I guess, it may not involve cash expenses to do it, but the significant changes.

Gary, this is Brian. I would say it's probably a little early to call. We have a tremendous amount of actions going on behind the scenes with respect to the actions we've outlined, the $10.2 million in restructuring charges. There's more to come later in the year. We do think it will take the remainder of the year to implement those and potentially into the first half of 2015. As we move along through the year, as we identify more, we'll put those on the list of potential actions. At this point, this is what we see, however.

Yes, and a great, great answer, Brian. And the only thing I'd add, Gary, is we're really trying to do 2 things fundamentally here at JBT. We're trying to align the cost structure appropriately. But in addition, we're really trying to pivot towards growth. So you're going to -- you're hearing about a realignment of resources and priorities in the business. So we're managing both changes in the backdrop of this continuous improvement activity. So from my perspective, you really need to be thinking about us doing both, restructuring, improving the cost base and then taking a portion of that improvement and reallocating it towards growth, which is ultimately where we want to go along with the margin expansion that comes from continuous improvement. Gary Farber - CL King & Associates, Inc., Research Division: Right, okay. And then just one last one, if you don't mind. I'm not sure, I dialed a little bit late. Just sort of geographically, when you step back from your businesses just in combined, can you just walk through North America versus Europe, sort of rest of the world, what things look like?

Yes. I'd say, overall, the activity is consistently solid across the geographies. In our business, we do get some larger orders, and we had some strength in Asia as we ended the year. And North America remained solid. Europe, in particular, has been one where we had more concern, but the orders continue to come in. And we mentioned the dairy activity. That seems to be underlying some nice strength for us in Europe, as they gear up to export more dairy products to the Middle East and Asia. We've seen some nice order activity. So overall, I'd say the economy, on the broader, global stage has been solid for us. Brian, would you add anything beyond that?

No, I would just say that the general economic trends that we're seeing on -- particularly on the food side are global and continue to support our model.

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

Just in the AeroTech segment, some of the order strength there, could you maybe break it down between GSE and the boarding bridges? I think, Brian, you've mentioned expectations on de-icer orders coming in with the harsh winter. But it didn't sound like it was a big factor in this quarter. So I'm just wondering how the lag effect works there.

That's generally true. The predominant strength in AeroTech backlog is due to the passenger boarding bridges, and that demand will -- it goes all the way into 2015 as we previously discussed. The GSE is holding its own, but there are pockets of weakness depending on the product line. De-icer is showing some strength. But overall, GSE still continues to lag somewhat and the passenger boarding bridges and the aviation support equipment that is typically sold along with the passenger boarding bridges is also showing nice strength.

Okay. Is there any way to think about the pent-up demand, maybe, in deicers just given that this winter was particularly harsh, but the last couple had also been seasonally warmer than normal?

Yes. No, that's a good question, Jason. It's a strong business for us. We don't have any out-sized expectations for this year versus years past. I would say, overall, there is a latent or pent-up demand for ground support equipment. You don't need to go to an airport to realize that there's a lot of very aged equipment out there. And it is our expectation, although not in the short term, that over time, as the industry continues to enjoy the profitability that it does, we'll see some reinvestment in that equipment, along with all the new airframes that are being deployed, driving new demand for ground support equipment. In particular, I would expect that to play out stronger for JBT in North America than in Europe because we have mentioned in the past that the competition in Europe is pretty tough on the ground support equipment business, and we continue to make choices on whether or not we book business based on the economics that are around those orders. And we're just seeing some competition in Europe that's telling us we can redeploy our capital somewhere else to get a better return on it right now. And so, North America will be a big part of that turnaround. It's just a matter of when the airlines get through their capital investment programs. And right now, it's been more around airframes. But eventually, it'll work its way through to the ground support equipment that services the airframes.

Okay. And there's been recently a bit of M&A activity in some of the similar applications within the AeroTech -- your AeroTech segment. Perception has been that the acquisition strategies have been more focused on FoodTech. I mean, just wondering, I guess, a, what your overall thoughts have been on the transactions that have occurred? Has it changed any of the competitive dynamics? And then, second, I guess, just how are you viewing AeroTech as part of the long-term strategy for growth -- external growth?

Yes, good question. I see the acquisitions as being net-net positive for the industry. I think that we're seeing these companies go to long-term owners that have solid value creation motives. And from my perspective, I think that's a positive for the industry. We will look for opportunities that have good returns on them, that strengthen our core positions in Aero. That's kind of where our acquisition strategy is centered right now. Longer term, certainly, we do see more opportunities on the food side. And you -- we probably and should expect that you'll see JBT invest more in the long run on the food side as we move forward. And we're going to have a nice discussion around this on our Investor Day. So look forward to discussing that further, too.

Okay. And in FoodTech, the orders were down slightly year-to-year but actually, very strong Q1, if I go back historically. Just wondering if there was any notable contributors in there, the freezing equipment versus juicers, just because you mentioned pretty balanced strength geographically.

No, there was nothing in particular. The orders remain relatively strong. It's not typically to see a lot of big seasonal pattern, and our current order strength is pretty consistent. And generally speaking, the canning and the poultry is slightly leading, but nothing overwhelmingly strong.

We are encouraged by how the order book continues to develop, though. And we're seeing -- it's early in the year, but we are seeing the orders materialize at the level we like, and we're encouraged with where we sit today.

And your next question is from the line of Ryan Cassil with Global Hunter Securities.

My first question is on the FoodTech business. You guys had strong shipments there, and the backlog is building nicely. So as we go along here and the backlog continues to grow, would we expect the timing of shipments to smooth more throughout the year? Or is it still going to be that back-half loaded, Q4 weighted delivery time, like you've seen historically?

Yes. Ryan, the reality is, is that the timing of shipment of some of these orders really is driven by the customer demands. And the fourth quarter is seasonally strong for us because of shutdowns in the industry and when they can get that equipment in, and there's very little JBT can do to affect that. So my expectation is that, over time, we'll begin to smooth this a bit more as our operational excellence becomes more a part of our routine here, and we'll do a better job of managing our operations. But generally speaking, in particular, in this year, you should expect the quarters to develop sequentially as they have historically.

Okay, okay. That's helpful. And my next question is on the cost savings you guys talked about. It sounded like, if I heard it correctly, $3 million of expected savings this year. But the -- some investments you're making will kind of overshadow that. So the -- you really don't get that benefit until next year. Is that in the $10 million in annualized savings that you're thinking about for that -- in 2015, or is that incremental to that?

Well, the $10 million in total savings by the end of -- by mid-2015 includes $3 million that we're going to get this year. And if I can just expand upon that a little bit, $2 million of that cost savings is – I'll call it already in the bank in terms of the corporate restructuring that has just been completed. And so, we're confident on those savings in the back half of the year, 6 months' worth of savings. And the only thing I would also mention is we also have some pricing savings that we've implemented, which also will get reinvested into the business. And the point of those investments is, as Tom mentioned, things like aftermarket sales and other initiatives associated with our next level strategy, will support that growth into 2015.

Okay, okay. Great. And then lastly, on the AeroTech side. I think I heard somewhere about some new product releases that you guys were working on. Any update there? Any color on those? And any successes or trends you guys are seeing there?

Yes. I believe you're referring to our B250 tow tractor. And it's still a little bit early, but the customer has been -- was very excited about it. We did have a nice open house, and there was a lot of interest and a lot of genuine discussion around how this product fits in nicely with customer demand. It's a little early in terms of getting specifics, in terms of demand. But it's a very, very promising product line and a lot of good feedback so far.

Right. And I'd just a little more color around that. A couple things that I really like about this project. One is it was a market-need-developed product. It's focused on the new single aisle 737 and Airbus product as well as regional jets, where we didn't have the best product offering. So it's right smack on top of the highest volume segment of the market. And we designed it to make the appropriate margins at the right price point. And we used some new disciplines in the ground support equipment just to arrive with that. So I'm very pleased with how the product developed, but it is early in its journey and certainly won't materially change our expectations around the impact. We had visions of this when we were shaping our thinking, so -- but it is a positive.

Okay. Sounds like, in the longer term though, it's good for market share opportunity.

Yes. It just serves the high -- it puts us in a better place on a higher volume aircraft for the -- for towing them in and out of the gates.

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

Just wondering, what was the tax rate on an adjusted basis normalized to in the quarter? The 32% to 33%, are you expecting a credit...

Yes, you are right about 32% for the quarter, and we would expect to be in that 32% to 33% for the year.

At this time, there are no further questions. I would now like to turn the conference over to Mr. Tom Giacomini for closing remarks.