JBT Marel Corporation (JBTM) Q4 2014 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation's Fourth Quarter 2014 Earnings Conference Call. My name is Kimberly and I will be your conference operator today. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions] 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.

Thanks Debarshi. 2014 was a year of transformation for JBT. The company institute management changes and introduced our next level strategy designed to capitalize on the strong market positions of our business. We committed to aggressive goals for 2017 which includes annualized revenues growth of 6% to 8% while capturing 300 basis points of margin expansion. In 2014, we delivered progress towards these goals ahead of our expectations. At the same time, we posted strong financial results for the year. For 2014, segment operating profit expanded 12% on a 5% increase in revenues, GAAP earnings per share from continuing operations was $1.03 compared with $1.15 in 2013. On an adjusted basis, earnings per share was $1.56 an increase of 24%. Our next level strategy revolves around detail plans to fix strength and grow our business. As part of fix, we embarked on efforts to streamline our organization. We incurred restructuring charges totaling $14.5 million in 2014 to improve efficiency and right size our business. We completed our corporate and most of our U.S. restructuring actions in 2014. Our European restructuring is well underway and expected to be completed in 2015. [The fixed] also involves standardizing practices to leverage our scale. We implemented a shared services model, consolidated back-office operations in the U.S. We've also consolidated manufacturing and sales operations allowing for cost efficiencies across food, tech and aerotech. In 2015, we look to complete our European back-office consolidation. However, the most essential and permanent part of fix in our organization is the cultural transformation under one JBT. We've seen exceptional cooperation across our businesses and geographic regions. Our people are making joint sales calls, sharing best practices and we've even seen talent move between the business units. This level of cooperation has also had a positive impact on the integration of acquired companies enabling us to capitalize on complementary products and end markets. The strength in the business, we introduced the JBT Excellence Model or JEM. JEM includes value based pricing which has been rolled out across all major businesses. JEM also includes implementation of lean initiatives or what we call relentless continuous improvement. This has an integrated focus on safety, quality, delivery and cost that establishes a sustainable competitive advantage. We've introduced [RCI] via extensive leadership training and have implemented at almost all JBT production facilities in 2014. There are specific components to our growth strategy including expanding the profitable aftermarket business, establishing a more direct presence in emerging markets like China, investing in aviation support equipment and enhancing our protein processing and liquid foods portfolios, new product development and strategic acquisition. In our aftermarket business, we are building a dedicated sales and service network that will capitalize on JBT's global installed base of equipment. We increased our aftermarket sales and service staff by 31 people in 2014. This puts us on track with our next level objectives and positions us to continue to generate superior growth and profitability from the aftermarket business. In 2014, aftermarket revenues grew at a rapid 9.5% rate and margins expanded. In addition to ongoing new product development across both business segments, acquisitions are an integral part of JBT's growth strategy. In 2014, we completed three strategic acquisitions that complement our protein processing and liquid foods portfolio. In December 2014, we had a big win with our acquisition of Wolf-tec an innovative and well respected leader in protein processing. The combination expands our product line and significantly strengthens our presence in pork and beef processing. And we are excited about the opportunity to globalize Wolf-tec's technology. As part of our next level strategy, our goal is to have 70 million to a $100 million in annual revenue from acquisitions by 2017. We are already approaching the low end of that range but that doesn't mean we will slow our efforts. The success of our acquisition activity is the result of building our corporate M&A capabilities as well as engaging our business teams in the process of identifying, executing and integrating acquisitions. Looking forward we have a growing pipeline of M&A opportunities and will maintain a disciplined approach to growth through acquisition. We are successfully implementing our next level of strategy. Overall the benefits of the restructuring and operational initiatives were ahead of schedule in 2014 and we remain encouraged to develop the ongoing transformation. Of course we have not lost sight of our inbound order rates. As you saw in the earnings release inbound orders in year-end backlog declined compared to 2013. Our order rates at most of our businesses performed well for the year comparisons were weak in Asia-Pacific, Euro and AeroTech. As we discussed before, we believe that food consumption trends in Asia-Pacific will fuel demand for our equipment. We also expect our direct presence in China to enhance win rate. In Europe while weak economic conditions present a challenge we are optimistic that our new commercial organization in place as of year-end 2014 will enhance our competitive posture. AeroTech experienced difficult comparisons in 2014 as expected following a very strong 2013. Overall the JBT overall pipeline is developing for 2015. With that I will turn the call over to Brian to talk about 2014 and our business trends.

Thanks, Tom and good morning. Overall results for 2014 surpassed our expectations we achieved revenue growth of 5.4% for the year. AeroTech and FoodTech revenues were up 8.2% and 3.9% respectively. Excluding acquisitions organic revenues increased about 3% for the year. On a constant currency basis organic revenues increased 4.5% and total revenues increased 6.9%. Both FoodTech and AeroTech contributed to the 12.5% year-over-year expansion to segment operating profit with a 70 basis points increase in segment margins. Corporate expense for the year of 37.5 million was up 2.7% this included 8.8 million in management succession and consulting cost compared to 3.7 million in 2013. Excluding these items corporate expense was 28.7 million versus 32.8 million a year ago. Separately we took a 14.5 million charge for the year in connection with our restructuring activities. As a result our diluted earnings per share from continuing operation was $1.3 in 2014 compared to a $1.15 in 2013. Adjusted earnings per share was $1.56 an increase of 24% versus the year ago. Looking ahead to 2015 we forecast constant currency revenue growth of 7% about 3% organically and 4% from completed acquisitions. This is in line with our next level expectations for long-term growth. However due to the expected currency translation headwind we anticipate top-line growth of 4% for the year. We expect an increased segment operating margin by 50 basis points to a 100 basis points based on the continued implementation of our restructuring and operational initiatives. The acquisition of Wolf-tec is expected to generate over $30 million of revenue in 2015 with EBITDA margins higher than our core FoodTech business. In 2015 we expect a $0.12 EPS contribution before integration and purchase accounting impact. This translates to $0.06 EPS contribution on a GAAP basis after such item. The company realized cost benefits of 4 million in 2014 from restructuring and expects to capture incremental benefits of more than 5 million in 2015. That puts us on target to achieve our 10 million run rate cost savings goal by mid-2015. As far as strategic pricing initiative we are also ahead of schedule realizing benefits of 4 million in 2014. We anticipate 4 million of incremental benefits in 2015 for total about 8 million versus 2013 in line with our next level of targets. These gains are partially offset by the planned investments in next level initiatives and other cost increases including about 1.5 million in incremental pension expense in 2015. Also as previously discussed the phasing out of AeroTech's military sales of the Halvorsen product line will have an unfavorable impact on operating income of about 6 million. We project corporate expense of 3% of sales inclusive of higher pension expense. Interest expense will be slightly higher primarily due to incremental debt in connection with last year's acquisitions. Lastly, we expect the effective tax rate to be around 33%. Based on these forecasts and assumptions we arrive at JBT's guidance of $1.65 to $1.80 per share for the full year 2015. That range includes an estimated $0.10 per share negative impact from foreign currency translations. As part of our next level initiatives we are also focused on improving our working capital management particularly at AeroTech where our performance has lagged. In 2014 we achieved a 10% in working capital needs at AeroTech with improved collections, better inventory management and more customer advance payments. We are very pleased with the progress that we're making towards our next level goals on this front. On February 13 we announced a new larger credit facility. The facility was expanded from 300 million to 450 million and also features a 250 million according upsize option. The facility provides us with greater financial flexibility to invest organically pursue acquisitions and provide ample capacity to repay our private placement notes due July 2015. I am very pleased as this marks another important milestone in the ability to execute our next level of strategic goals. With that, I'll open up the call for Q&A. Operator?

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

Just first looking at the FoodTech segment, there was a sizable margin improvement versus last year, the base last year was a little bit -- seems like it was a little held back because of a tough year in freezing and protein processing, so just wondering when you look at the margin improvement how much would you attribute to the strategic initiatives and pricing and cost alignment versus just maybe a better mix that you with those markets coming back?

Jason, I would say it's tough to result that exactly because interaction between the business that is mentioned but I'd say overall the strategic initiatives were more meaningful in their impact than just general operational improvements particularly in Europe, but also we had done a good portion of restructuring in Europe and that's started to benefit us as we exited the year. So I'd say all together as we've talked about with our initiatives they drive growth and improvement and we're starting to see that be going out in terms of our operating results.

Okay and just staying with FoodTech to again margin was higher but revenue orders and backlog were all down a bit on an organic basis, so understanding the currency factors in there I guess how do you measure if some of the initiatives on pricing specifically are working or whether at some point maybe you're possibly pricing yourself out of the market?

Sure. Just to remind you as we mentioned on the earlier calls, the pricing overwhelmingly as we exited the year and the benefits we got were all -- were really driven by our aftermarket business where we saw that strong 9.5% growth. The new equipment pricing is slowing phasing in and as we mentioned we're being very selective on that as upon on the razor blade handle and razor blade. So from my perspective, I don't see pricing has been a headwind in terms of our bookings and as we look across the numbers, the sales really were basically flat Jason on the constant currency basis so my feeling it was a really solid into the year in 2015 for JBT and I was really pleased that how the margins progressed through the year. So I think it was just a really strong year for us.

Yes, Jason, this is Brian. I would add that the pressure on sales for the quarter as of the end of the year was more so on Europe and Asia than it was on any impact on pricing as Tom said.

Okay and for the guidance sort of mentioned revenue growth in the 4% range after offsetting the currency headwind, I am getting to around maybe 4.5% from acquisitions you mentioned 30 million from the full year of Wolf-tec and there is another couple of months from anniversarying the ICS acquisition, so you still need some organic growth to get there obviously it's not in the backlog right now so just wondering what's giving you confidence to get that in sort of as you move through the year?

Right, so with regard to the sales and the visibility into next year keep in mind that our aftermarket is not really in our backlog. Only about 15% of backlog consists of aftermarket and so while we have typically very good visibility in aftermarket and our service revenues and our other revenues that are recurring, we don't see any issues with having good visibility into that.

And I would just add to Brian's comment as I've talked with our sales people and just understand what's happening in the market, I was just overall encouraged with how the customer project activity was developing in the back half of the year and you know our orders are larger and lumpy in sometime they book in one quarter sometime they book in the following quarter, but I was just encouraged by the clarity and the overall quarter activity we were seeing with our customers.

Okay and just one last question for me, I guess irrespective of some of the short terms purchase accounting stuff on the acquisition, maybe just from an operational perspective, both seemed to be very closely aligned to the core and you had a nice order yesterday in liquid foods, so maybe just wondering you could talk a little more about integration and expectations for growth in liquid foods and some of the new applications in protein processing specifically?

Absolutely, we are really encouraged by the order flow -- excuse me, the deal flow we're able to put together last year and it lined up extremely well with our strategy with two in proteins and one in liquid foods and Jason it's really those fundamental long terms we talked about on protein as we make these investments, we're able to take what is typically a regional business and globalize it and we really like the long-term demand activities around protein as wages increase, peoples' menu choices change in the consumer protein, so that's a great tailwind. And then on liquid foods in the Western markets, as people look to more convenience having quick breakfast in the car or on the road and the need for that is just a huge trend and people moving away from traditional sodas and juices and other beverages, it's just a great tailwind. So we're pleased to be able to make these acquisitions that fit right into that strategy, but they also I would point out they've got good margin profiles the companies we've looked at so far, they have strong aftermarket and they've got great brands behind them, so we're really pleased. And lastly as you mentioned, the orders for the hydrostatic sterilizers in our acquisition in liquid foods certainly was a great and early nod to our ability to have really work across the globe to develop sales for these businesses. They both came out of Asia. Our Asia sales team was heavily involved along with our ICS people who did a great job of getting those done and positions us for a strong year in that acquisition and as you mentioned that starts to become an organic engine for JBT.

Your next question is from the line of Chris McGinnis with Sidoti & Company.

Quickly if you can just dig into the margin expansion scene in the quarter, can you maybe just go through maybe a little bit higher level of detail of what were the contribution, the biggest contributions points for that? So pricing is how much, would you mind walking through that or is that too much detail?

Yes that's probably little bit too much detail, I will tell you that that the pricing did have a significant impact as we went through the quarter and as well as some of the operational initiatives and then aftermarket mix does continue to improve in our mix.

Right and Chris I would add that as we talk about RCI, one of the elements I've mentioned early on I just want to indicate again is that our ability to improve our lead times and our quality will drive bookings in top-line ultimately and we have a number of very focused projects where we're looking to shorten the lead time with RCI and deliver the higher quality so that we can secure our orders more aggressively and we think it will define us in the marketplace. So if you combine the pricing, the restructuring, some of the cost outs in the facilities just by improving our productivity and then you have that up with some new products in the shorter lead times I think it puts us on a really strong competitive footing with improved margins and the ability to grow in difficult or more challenging market conditions.

Sure. And I guess just maybe touching on that, how important to reach your 2017 targets is the market strengthening compared to what you can do?

Yes our assumption when we put that together was that the market doesn't strengthen and that we certainly didn't foresee this currency headwind, although JBT will digest that and move on, but in terms of it was more of a thinking around constant and steady state market conditions, obviously if things were to significantly improve that would benefit us if the economy was to move back in a material way that would be more of a headwind.

And then just lastly on the aftermarket you gave some -- a little bit of detail, can you just maybe talk about -- I know it's very early still but where you're at in terms of where you think it's going to be fully deployed, maybe like fifth innings, third innings, something in that sense.

Yes so in terms of the progress that we look at is our goal is to add 80 new heads right to the service and sales organization specific to aftermarket. We've added 31 so far so let's call 40% of the way through our investment.

And then you obviously continue to see the deep penetration from the customer on that?

Absolutely and these investments -- one thing you add onboard the people and then it takes six months or nine months before they really start to generate sales and contribution so as we've always mentioned, we have to invest upfront and then the benefits come in the back and what I'm pleased about this last year for JBT Chris is that we were able to make these investments while at the same time expanding margins and that's really what we signed up for and the next level plan and we're delivering on that so we're putting the pieces in to grow the business, while at the same time, we're seeing our margins expand and I think that's a pretty powerful combination for us as we move forward.

Your next question is from the line of Walter Liptak with Global Hunter Securities, LLC.

[Indiscernible] Tom in your prepared remarks you mentioned that you're ahead of schedule on some of those 2017 goals and thanks for providing us with the 2015 benefits for costing -- for cost benefits and pricing, but I wondered where do you think you're ahead of schedule and if you are ahead of schedules, why didn't you pull forward more benefits in 2015?

Right. I would look at where we're ahead of schedule as being we indicated the acquisition program as certainly ahead of schedule, we increased the amount of restructuring that we took in '14 Walt and the benefits that are associated with that, so we were able to get more restructuring done in '14 than we had originally forecasted which allowed us to accelerate. And then last I would add we certainly are seeing the benefits of pricing come through in a more material way than we had originally forecasted and are pretty bullish on its ability to continue to contribute in '15. On the softer side of things little bit less tangible in terms of numbers as the investments and the hiring we were able to do in support of the aftermarket -- some of the new products we have coming through in the queue which I am encouraged by and then last just the big cultural changes in JBT around under our one JBT initiative. And the benefits that are coming together today I mentioned in my comments just the way we're working together developing market, taking AGV and selling into food customers, seeing the businesses work in shared facilities, shared people and the initiatives, the RCI just a lot of positives happening there and I'd say the transformation is quicker than I had originally hoped. Just been really encouraged the way our people have embraced it.

Now along the lines of the discussion we've had about aftermarket sales, what kind of growth rate are you expecting for your aftermarket sales in the revenue guidance that you gave us?

We haven't broken out the guidance as it relates to aftermarket for overall equipment. But as I can tell you it's embedded into the 3% -- sorry the 7% overall growth rates which includes the 3% organic and the 4% acquisition.

Okay. Of the 31 people added how many are sales and how many are support?

It's an interesting situation where the service people typically sell and we don't categorize in that way, it's just it's a collective organization I would tell you we strengthened in both pockets though and we look to all of our people in the aftermarket to be constantly searching for opportunities to sell the product and services. For example if an individual is in repairing a freezer certainly he or she would look to sell some of the maintenance and other components around that going forward or indicate hey you need a belt or new drive. And so we're just going to focus on communicating the absolute number externally. I am really pleased because I discussed earlier in the year we were struggling a little bit getting this hiring going and we really accelerated the back half Walt and in spite of some retirements we incurred net to net we had a great move off in the numbers we ended the year.

Just a couple of minor things. Brian what are you expecting in 2015 for corporate expenses?

Yes it's about 3%, so in that $30 million to $32 million and that includes a $1.5 million of the pension increase.

Okay. And what about for capital spending in 2015?

In the range of about $30 million plus give or take.

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

Just on Wolf-tec specifically you mentioned taking this technology global. I thought it only had distribution rights in certain countries, so I was just wondering how this would work for them?

Jason a number of the products that Wolf-tec manufactures and sells are their own technology and we have a full ability to take those global. Then there's a few select categories where they represent some products in the Americas and those we can certainly strengthen across potential America and South America but a good chunk of the business is something that we can take globally.

[Operator Instructions]. There are no further questions at this time I would like to turn the call over to Mr. Tom Giacomini for closing remarks.

As Brian had discussed this morning we delivered strong performance in 2014 and achieved progress towards our next level of goals ahead of our expectations. I am also very encouraged by our momentum going into 2015. Of course none of this would be possible without our JBT team members. We have embraced the One JBT culture and are making the changes necessary to capture the full potential of our business; I thank them for their hard work. Finally I would like to remind you about JBT's Inaugural Technology Day being held on March 5, in Orlando and Lakeland, Florida. During the day we will provide an update on next level initiatives, showcase RCI implementations at plant level and provide investors the opportunity to spend time with their management team; we hope you can join us.

This will conclude today's conference call. Thank you for your participation. Have a great day.