JBT Marel Corporation (JBTM) Q3 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation's Third Quarter 2014 Earnings Conference Call. My name is Victoria, and I will be your conference operator today. [Operator Instructions] Thank you. I will now turn the call over to JBT's Vice President, Corporate Development and Investor Relations, Mr. Debarshi Sengupta, to begin today's conference.

Thank you, Victoria. Good morning, everyone, and welcome to our third quarter 2014 conference call. With me on the call are our Chairman, President and CEO, Tom Giacomini; and our Executive Vice President and CFO, Brian Deck. 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 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. As you saw on our earnings release, JBT posted another solid performance in the third quarter of 2014. At the same time, we are making excellent progress on our operational initiatives under ONE JBT, both the restructuring and cost-cutting actions in the near term, and the Next Level strategy over the longer term are transforming our company and we are just getting started, with significant upside over the next several years. For the third quarter of 2014, segment operating profit increased 16% on a 4% increase in revenues. As we discussed last quarter, benefits from our value pricing initiatives and cost control actions are driving margin expansion. Reported GAAP EPS from continuing operations was $0.30 compared with $0.25 in the year-ago period. On an adjusted basis, EPS was $0.36, up 33%. As you saw in our earnings release, inbound orders for the quarter were up 7% year-over-year. On last quarter's call, we said that several large orders we expected to recognize in the second quarter of 2014 slipped into the back half of the year. As of the third quarter, we received all but one of these and expect to receive the last. AeroTech inbound orders continue their strength and were up 8% in the third quarter. However, we do expect a more difficult comparison in the fourth quarter. We were not completely satisfied with our order rates at FoodTech, which were up 4%. While activity in North America and Latin America remain healthy, inbound orders in Europe and Asia were soft in the third quarter and remain a concern. We continue to believe both Asia and Europe represent attractive markets for JBT. In Asia, we remain committed to investing and creating a direct robust -- or excuse me, a robust direct presence, which is key to winning business from local producers. Our joint FoodTech and AeroTech manufacturing center is now fully operational in Kunshan, and we're on track to complete a full tech center in Kunshan by late 2015. The ability to demonstrate our food equipment to customers and allow them to conduct test production runs will be a competitive advantage for JBT. In Europe, a slow economy is hurting our business activity. Additionally, during the third quarter, we were in the process of realigning the sales organization at our FoodTech business in Europe. Amid the changes, we were not operating at our best. However, with the new structure in place, we feel confident about our commercial effectiveness moving forward. And due to the success of our overall restructuring, we plan to accelerate actions in Europe and book an additional $1 million charge in the fourth quarter. This charge will cover restructuring of our operating footprint, which will enhance our cost position in 2015. Of course, our focus is well beyond the next quarter. As we've talked about over the past year, our Next Level strategy is about enhancing long-term performance at JBT. We recently went live at our North American service center in Orlando, Florida. As part of our ONE JBT focus, we are consolidating back-office operations, standardizing practices and leveraging the scale of our combined business. We have already hired more than 90% of the positions in Orlando. While the workload is still in transition, we expect the cash for the cost savings from the consolidation in 2015. Our businesses have embraced the new shared service center in the U.S. This gives us confidence as we embark on a shared services model in Europe in the first half of 2015. Another important Next Level initiative is to leverage JBT's large installed base and build our aftermarket parts and services franchise. We are actively hiring to expand the aftermarket-focused resources in our business. As we grow the ranks, we expect to increase the percentage of business from aftermarket parts and services, furthering our organic growth. In the meantime, we have already captured higher margins from our aftermarket business, up over 250 basis points year-to-date in 2014. On the acquisition front, we have a growing pipeline of M&A opportunities. In the first half of 2014, we completed 2 acquisitions: Formcook and ICS Solutions. Both were the type of acquisitions we are looking for, providing a highly complementary product line within our focus areas of the FoodTech business. Formcook adds to our product line within protein processing, while ICS Solutions complements our liquid foods portfolio. Integration of both businesses is on track. The Formcook facility closure and workforce transition was completed within 3 months and bookings are ahead of plan. At the larger ICS acquisition, global sales teams at both companies have been cross-trained and are making joint sales calls. Moreover, the reception from customers has been very positive. Specifically, we've heard favorable comments about ICS' product portfolio. There is also a consensus that JBT's strong service and support will enhance that portfolio. With that, I'll turn the call over to Brian to talk about the third quarter and our business trends.

Thanks, Tom, and good morning. I'll start with a few highlights from the third quarter income statement. Revenues increased 4.2% year-over-year. AeroTech posted a strong growth of 10.6%. FoodTech revenues were down 1.5% year-over-year versus a particularly strong performance in the year-ago period, mainly in North America. Nevertheless, our business trends are healthy in North America, which remains our strongest geographic region. Segment profits expanded 16% year-over-year. Both businesses enjoyed margin expansion, with FoodTech operating margins up 80 basis points and AeroTech's up 180 basis points. AeroTech benefited from some high-margin military program business that we expected in the fourth quarter. As previously mentioned, that program will be coming to an end in early 2015. Both businesses are capturing the benefits of our cost control and pricing initiatives a bit ahead of schedule. Corporate expense in the third quarter of 2014 was $8 million compared to $9.5 million in the year-ago period. Excluding management succession costs and consulting expenses, corporate was $6.8 million versus $8.6 million a year ago. The current quarter included a $900,000 FX gain. Separately, we took a $1.3 million charge as we continue our restructuring program. For the full year 2014, we've confirmed our adjusted earnings guidance, but let me refine what we expect. We continue to project mid single-digit revenue growth. We expect segment operating margins to be up approximately 50 basis points over 2013. This is somewhat stronger than we guided to last quarter. As Tom said, this improvement is due to the benefits of our strategic pricing and the cost savings initiatives. We expect corporate expenses, excluding management succession and consulting costs, to be about $28 million. The increase, relative to previous guidance, is due to greater variable compensation expense as well as higher corporate discrete spending, particularly in conjunction with tax projects. Also, as Tom mentioned, we accelerated European restructuring activities into 2014. As such, we increased our restructuring estimate from the $12 million to $13 million range to approximately $14 million. We are seeing headwinds in Asia and Europe in the short term. Yet, as we realize the benefits of our pricing and restructuring initiatives a bit faster than expected, we remain on track to hit adjusted EPS from continuing operations of $1.45 to $1.55. We now expect GAAP EPS of $0.92 to $1.02. As many of you have noted, we have a lot going on at JBT, including the restructuring and new pricing strategy; the introduction of relentless continuous improvement, what we call RCI, and a Lean transformation throughout our operations; the adoption of a shared service center model to consolidate our back-office functions; and a renewed focus on M&A. One of the important aspects of my role at JBT is to ensure our initiatives are on track. We have developed a formal and thorough review process to provide the executive team good visibility into these initiatives and the ability to react as needed. On our restructuring initiatives, our corporate office and AeroTech ground support equipment restructuring is complete. Our original European operation -- reorganization is expected to be complete by Q1 2015, and the additional European rationalization should be complete by mid-2015. RCI efforts are progressing well. More than 2/3 of our domestic plants have participated in Lean training and over half of our global plants have started deployment. More importantly, the culture acceptance of RCI has been quite strong. Our pricing initiatives have been rolled out to all of our major businesses. As for driving efficiency, the U.S. back-office consolidation should be complete by the first quarter of 2015 and the European back office consolidation to commence in early 2015. And on the working capital front, we are beginning to see some early success at AeroTech. While there are always things that move ahead or behind plan, overall, we are very pleased with the progress on our initiatives and encouraged to see the impact showing up in our earnings. With that, I'll open up the call for Q&A. Operator?

[Operator Instructions] Your first question comes from the line of Walter Liptak with Global Hunter Securities.

I wanted to ask about the corporate expenses for the fourth quarter and see if we can give a little bit more color how much is comp related and how much is -- it sounds like some kind of consulting related. And then, how deep does the compensation go within the organization?

Sure. So we gave guidance of about $28 million in connection -- excluding consulting and succession costs relative to previous guidance of about $27 million. So -- and that is approximately evenly split between the additional compensation estimates for the year as we got more confident on the -- on our results that we see forthcoming. The rest of it is, for the most part, again, our tax project spending. As we see the -- we've been in an environment of particularly so much strong regulatory environment on the tax side and we've been being aggressive in dealing with those issues as well as dealing with some tax planning for the future in order to, hopefully, get our tax rate down going forward. In terms of the deepness of the comp...

Yes, the work -- the comp is primarily at the corporate level. We booked the rest of the comp in the units.

Okay, sounds good. And I wondered about the Next Level goals since you are running a little bit ahead of schedule on some of your strategies. Have you thought about adjusting or making any changes to the Next Level goals that you put out there?

Walt, this is a question that I've heard a few times. I just want to remind everybody that we put a signpost out there in 2017. It was a commitment from myself and the team and we're working towards achieving that. I'm encouraged by the progress we're making operationally. I'll remind everybody, we're looking for 6% to 8% growth rates, half organic, half through M&A and then significant margin expansion, and we're putting the pieces in place. We'll continue to work the M&A. We can't completely to predict that. So as we've mentioned, the pipeline is richening. So all the arrows are pointing in the right direction, but it would be the too early to call or to make a revision. We're just busy making it happen.

Okay, fair enough. If I can ask another one, just on some of the international exposure, some color on maybe percent of revenue and the 2 divisions, FoodTech or AeroTech, how the visibility looks or the order pipeline looks.

Yes. Let me just give you a little flavor on the business development and a little color around that. From my perspective, when we look at Asia, I still remain highly committed. The fundamental trends are very positive. The developing middle class, the shifting dietary patterns to protein, the liquid foods development, those are all very long term and well in place. And I think what we're really seeing in the short term here is just a little bit of the impact of the QSR activity that you've been reading about in the press, the challenges that some of the restaurants have had in terms of some of the food safety concerns and, just in general, their growth. Our expectation is that over time, those will heal up and we'll continue our penetration of the local producers, which is still in its very early stages, getting the tech center in there that I talked about. We're designing and developing products for the local market. So that's very strong. Europe is a little bit different in that, from our perspective, it's just more of a general economic slowness, coupled with a little bit of an executional issue we had in the third quarter, which we don't expect to continue as we've now realigned our organizational structure there.

Your next question comes from the line of Chris McGinnis with Sidoti & Company. Christopher McGinnis - Sidoti & Company, Inc.: I was wondering if you could just comment maybe on the aftermarket penetration that you're seeing. And I think you mentioned a little bit of it in your preamble, but maybe just the traction you're getting there since it's such a big part of the story going forward.

Chris, this is Tom. From my perspective, it's a very exciting development for JBT in terms of our ability to further penetrate the aftermarket, and we gave quite a bit of detail around that in the Next Level. But I would just share with you that there's a lot of energy behind this at JBT. For example, just this week in Chicago, simultaneous with the PACK EXPO, we hosted a large group of our managers that we have now exclusively focused on the aftermarket, and they were sharing best practices across the organization, meaning both food and aero. They were identifying opportunities to cooperate and better serve our customers through a combined effort between the business units and across food and aero. And we're getting nice traction on some programs we're putting in place where not only are we just getting back in touch with all of our machines and where they're installed at the customers, but offering value-added programs where we can rebuild, put new programs in place to improve the productivity of the equipment for our customers and offer rebuilds and new controls, et cetera, that have a great ROI to them also. And that's really where we want to be selling on the value proposition around that. So there was a lot of positive energy as we brought our managers together and I'm comfortable and confident that this is an initiative that's got many years of upside and opportunity for JBT. Christopher McGinnis - Sidoti & Company, Inc.: Great. And then just quickly, I'm not sure if you could go into this detail, but maybe the -- just on the FoodTech side, just on a geographical basis, maybe growth rates. I don't know if you go that deep, though.

We don't go that deep or disclose that but I would tell you that, as I described, we're still optimistic about the FoodTech business and its developments. But just to kind of give you the rundown across the 4 geographies we like to talk about, North America remains very strong. Latin America is actually -- is pleasantly strong, particularly considering some of the challenges we're seeing in Brazil at an economic level, but JBT is performing quite well. Europe and Asia are a little bit more of a challenge for us.

The next question comes from the line of Jason Ursaner with CJS Securities.

This is actually Jack O'Brien filling in for Jason. Q3 was moderately early ahead of expectations, but you guys only maintained full year guidance. Now that you've seen orders and backlogs come in a bit, I was wondering if you could address what you see is this potential upside to that figure for Q4.

Well, we did not raise guidance. Approximately 35% to 40% of our margins -- of our profits are in the fourth quarter, and there's always a fair amount of execution risk as our customers decide take orders or not take orders. These are big projects. Their facilities need to be totally readied and it's not untypical for customers to push back on orders. And to the extent that everything lines up and all of our customers take everything, there's a little bit of upside. But we're really confident with where we are on the guidance that we're giving, and we'll see where it goes from there.

Okay, great. And then just following up on your commentary about the ICS acquisition. Could you talk a little bit more about the aftermarket opportunity, details on recurring revenue, the size of their installed base and how they've been doing capturing that service versus losing to third-party companies?

Right. One of the -- thanks for bringing that up. One of the elements that we really liked about ICS is that it lined up well on 2 of our major areas of strategic focus, the aftermarket and the liquid foods. And what I can tell you is ICS has a large installed base, and our experience now is showing us and reaching out to their customers that it was a bit underserved in terms of its aftermarket support. And as we go out there with the JBT service organization, some of the programs we're having, we're having some nice discussions with the customers and the pipeline is maturing. It's going to take a little time to bring those across the finish line. But we're comfortable and confident that our initial assumptions around being able to leverage the aftermarket ICS are very much going to come true. And collectively, I'll remind everybody that when we go in now to sell a sterilization solution for a food product, we really have the full product offering. It can offer them absolutely the best solution that's in alignment with their needs, and it gives them the best return on their capital through the full and comprehensive JBT product offering we now have.

[Operator Instructions] We do have a follow-up question from the line of Walter Liptak with Global Hunter Securities.

Okay. I get another question. This is great. Wanted to ask about the backlog. And as -- it's still fairly substantial going into 2015. And if you could talk about timing on the backlog and maybe the margins of products that's in there.

Well, that's correct. We do have a solid backlog. And I would say that materially, it represents the run rate that we would expect and have been enjoying this year. So there's no major concerns that we have in terms of the quality of the backlog. And for JBT, in terms of the order rate discussion, we're just really focused on executing at a really high level, particularly in Europe and Asia. Over the next few months, there's management attention on this and we're working very hard to make the most of those markets. But we do enjoy a nice backlog and it gives us some comfort as we ramp up the year here.

Okay. Is there anything in the mix that's different for the 2015 backlog versus 2014?

Yes. We do have a nice amount of JASE in there our AeroTech business, which is some of those projects booked out into next year and the following year, which is normal, given the nature of those projects. But certainly, that's encouraging to us because as we've mentioned, we're bringing more attention and energy around the JASE business and we're moving forward. And then on the FoodTech side, obviously, in our liquid foods portfolio, that's been performing very strong and we're booking out some nice, long projects there. So we like the quality of our backlog is the way I would describe it.

Okay, sounds great. And then I wanted to see if I could just get a little better understanding of the Orlando operation, the service center, and just thinking about what kind of inventory levels you're holding, how many sales people have you added, et cetera.

Yes, just so -- you're talking about the back-office shared service center, right?

Yes. That's right. Right.

Right. So we are basically moving the back office, finance, IT functions, primarily finance at this point, out of the individual offices and into Orlando using common controls and procedures, et cetera. And that is about 90% complete in terms of the staffing. In terms of actually moving the work, we're about 50% complete and we would expect to be finished to completion here in early Q1. As we got to the close to year-end, we didn't want to get too close to our fiscal year and with the audit coming up, et cetera. But from a big picture standpoint, one of the things that we've talked about from organizational simplification and ONE JBT is that we don't need all these individual silos kind of running -- doing things a little bit differently here and there from an accounting perspective and controls perspective. Really, the goal here is to be able to use common systems, common platforms, common ways of doing business so that we can leverage up and get to scale of -- the benefit of the scale of our business as we go forward here.

Okay. So you're currently running with duplicate costs? Is that how we can think about it?

Very -- for the fourth quarter, there'll be very small duplicate of costs and that's all embedded into the guidance.

Walt, the other thing I'd mention is, in terms of the benefits here, I was pleased that we were able to move the shared service center into one of our existing facilities, which is another great message, which was a nice pickup for us, too. We didn't have to go out and identify or lease additional office space.

Okay, yes. Yes, that's great. How much cost comes out in the first quarter as a result of this completion?

Yes. We're not getting into that level of detail on the disclosures but -- as we talked about our cost savings overall. But we have about $3 million of cost savings embedded into the current year results and next year, in the range of $10 million by mid-next year for all of our programs and that's part of that.

Right. The only color I'd put around that, that's before some of the investments we're making before -- in terms of growth.

And there are currently no further phone questions at this time. I'd like to turn the call back over to Mr. Tom Giacomini for any closing remarks.

As Brian and I discussed this morning, we posted another solid quarter. The benefits of our restructuring and pricing initiatives are being realized, and we made good progress implementing our Next Level strategy to enhance JBT's profitability and growth on a longer-term basis. I'd like to thank all of our JBT team members for their contribution to our strong results in the third quarter and their dedication and hard work implementing our Next Level strategy.

Again, thank you for your participation. This concludes today's call. You may now disconnect.