JBT Marel Corporation (JBTM) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the JBT Corporation First Quarter 2015 Earnings Conference Call. My name is Tamika and I will be your conference operator today. [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.

Thank you, Tamika. Good morning, everyone and welcome to our first quarter 2015 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 2014 Form 10-K also contains information regarding certain risk factors that may have an impact on our results. These documents are available on the investor relations website. Also, our discussion today includes references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement and posted on our investor relations website. Now, I would like to turn the call over to Tom.

Thanks, Debarshi and good morning, all. As you saw from our first quarter's earnings release, we're off to a great start for the year. Revenue increased 14%. Earnings per share in the first quarter was $0.27 versus a loss of $0.16 in the prior-year period. Compared to adjusted earnings of $0.15 per share in the first quarter of 2014, EPS increased 80% year over year. Sales increased across food and aero. We also delivered segment operating profit margin improvement of more than 200 basis points. Regarding orders, on the year-end call we said that preorder activity was encouraging for 2015. We successfully converted this activity to bookings in the first quarter, with inbound orders up 17% year over year. Adjusted for currency translation, our orders increased 24% over the prior year. I would also note that this was a record bookings quarter for our FoodTech business. As you know orders and sales for equipment can be lumpy at JBT, so we won't be extrapolating from first quarter levels. Moreover, the strong performance indicates that the Next Level strategy is enhancing our growth and profitability and enabling us to invest in building JBT's competitive advantage in the marketplace. Let me quickly comment on a few areas of importance, then I will let Brian update you about the details and trends behind our solid quarterly results. As we discussed on the year-end conference call, we experienced some weakness in Europe and Asia in 2014. We're cautiously optimistic about trends in these markets and believe we're benefiting from restructuring in Europe and investments in China. The strong dollar is creating a significant headwind on our reported results and bookings. Additionally, in some situations a strong dollar puts our European-based competitors and also our European-based businesses in a better cost position when selling into the U.S. and Asia. In addition, when appropriate we're taking advantage of JBT's global footprint and shifting production to weaker currency markets. On the acquisition front, we're pleased with the integration and performance of the three companies we purchased in 2014. Specifically, we have been able to broaden the geographic reach of these acquired businesses. In February, we announced two large orders from Asia for liquid foods equipment. These orders were the direct result of technology we acquired with ICS Solutions. Utilizing JBT's global sales capabilities, we were able to take that technology to Asia, leveraging our significant presence and customer relationships. Another key objective of our acquisition strategy is to bundle and market a broader product line with the integration of acquired protein and liquid food processing technology. As an example, we're in negotiations with customers to provide a broader processing line, due to the addition of Wolf-tec. As we move forward, we continue to develop our pipeline of potential acquisitions for JBT, with particular focus on proteins and liquid foods. I am pleased with the progress we're making this year, deepening our relationships with potential partners in support of our acquisition program. With that, I will turn it over to Brian.

Thanks and good morning. As Tom addressed, we posted good top- and bottom-line growth in the first quarter of 2015. Year-over-year revenue growth of 14% was composed of 3% growth at FoodTech and 38% at AeroTech. Currency moves had a significant impact on FoodTech, so let me break that down. On a constant-currency basis, FoodTech's organic revenue growth for the quarter was 2% and acquisitions added another 10 -- 7%. Currency translations reduced revenue growth by 6%, for net FoodTech revenue growth of 3% year over year. AeroTech's revenue expanded 38% in the first quarter, with higher shipments of both fixed equipment and mobile equipment. AeroTech's revenue was not materially impacted by FX translation. On a profitability basis, we continued to capture the benefits of our strategic pricing initiative, the streamlining of our organization, our ONE JBT cultural transformation and our lean initiative. FoodTech's segment operating margin profit increased 70 basis points to 9.4%, due to these initiatives and operating leverage. AeroTech's segment margin more than doubled, expanding from 3.7% to 9.7% on higher volume and a favorable mix. With the wind-down of the Halvorsen business which ended in the first quarter, we expect AeroTech's operating margins to return to a more normalized range of 8% to 8.5% for the full year. As of this quarter, we're now including an EBITDA metric in our earnings release. We believe this is an important measure of shareholder value creation, particularly in light of our acquisition activity which results in increased amortization expense in connection with purchase accounting. As we have discussed before, we're focused on working capital management. In the first quarter of 2015, we generated significant reduction in working capital of $23 million versus the first quarter of 2014. As a result, we generated operating cash flow of $30 million on net income of $8 million. On the order front, we bounced back nicely from softness at year-end 2014. FoodTech orders were up 28% compared to the year-ago period, while AeroTech's bookings were also strong, with $100 million of orders for the quarter. On the subject of orders, please note for competitive reasons we're discontinuing JBT's practice of issuing press releases for large orders. Looking ahead, as previously discussed we're making efforts to moderate the seasonality of our shipments to improve operational efficiency. While we expect a heavy fourth quarter in 2015, the second and third quarters are shaping up to be fairly balanced. We anticipate that this, along with the wind-down of the Halvorsen business, will put modest pressure on the second-quarter comparison on a year-over-year basis. For the full year, we estimate a foreign currency translation headwind of about $0.15 per share, an increase of $0.05. Despite this pressure, we continue to project full-year 2015 diluted earnings per share in the range of $1.65 to $1.80. On a revenue basis, we expect this translation effect result in a 5% headwind. While the impact from a strong U.S. dollar is looking to be worse than estimated a couple months ago orders have picked up as expected. As such, we remain comfortable with our guidance range. With that, I will open up the call for Q&A. Operator?

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

I think some investors are probably wondering about the commentary for Q2/Q3 leveling out a little bit and just maybe why, with the strong start, no raise to the guidance going forward. So maybe just on the Q2 pressure, if you could help me understand it a little more. Is it mostly in AeroTech or it looks like maybe you pulled forward a few deliveries into Q1 that don't get made up until the back half and then plus Halvorsen or is there also a FoodTech component there also?

Yes, overall I would say the first quarter was largely as expected and then when you start looking at the second quarter of 2015, we're coming off of a Q2 of 2014 that was particularly strong. So when you factor in the Halvorsen reduction which is hitting starting in the second quarter, as well as the FX impact, we think that there will be some modest pressure relative to last year's numbers. Overall for the year, we're still in that $1.65 to $1.80 range as a result.

Okay. And I think last quarter, the forecast of organic growth in guidance, despite inbound being down in Q4, was one of the big questions. The message had been that you guys felt confident in that growth because there was a lot of activity going on that we maybe just couldn't see as outsiders. So when you look at inbound for this quarter, should we assume that kind of materialized as you expected, given the reaffirmed guidance range or maybe just any puts or takes you saw in the inbound orders?

Morning, Jason, it's Tom. As we talked about on the last call, the activity was there and the orders just didn't quite convert themselves fully to bookings and it played out materially as we expected. We did book well this quarter and that wasn't all activity that started in the first quarter. It was activity that we were working on the back half of last year. So as we sit here today, the bookings situation unfolded as we expected. We were pleased to see those get firmly booked and we feel we're on track to do what we wanted to do this year as we look forward, with the exception of the currency, as Brian mentioned, working against us a little bit on the FX translation.

Okay. And just last one for me, I think the policy of no adjustments is a pretty admirable stance, but just on the new EBITDA metric--

Thank you.

I like it. But just how much of the D&A in FoodTech is ongoing appreciation from the deals versus more the purchase accounting?

What I can tell you is that FoodTech did have a $1 million year-over-year increase in amortization expense due to purchase accounting, so that shows up in our SG&A. So all else equal, it is in that $1 million range per quarter, based on the current acquisitions.

Your next question comes from the line of Walter Liptak with Global Hunter.

So just a follow-on to that last question, the corporate expenses looked a little bit higher than I was expecting. Is there anything in there that is nonrecurring or could you break out some of the components of corporate expense?

Sure, so corporate year-over-year was a little bit high, a couple things. So we have always said that we're investing in our shared service center, so that's part of the expense increase. Also, at this first quarter, we had some higher audit expenses in particular relating to our acquisition accounting and so that would be more of a one-time thing and we had some higher pension expense that we mentioned on last year's call and we also have some higher variable comp expense in connection with our higher earnings.

Okay and so it sounds like the pension and the compensation expense might reoccur.

Yes.

Is that right? Are some of the audit fees related to acquisitions, are those over or is that for future deals?

Well, that's a one-time type thing. What I can tell you is that we had forecasted 3% of our sales for the year would go to corporate expense and we're still comfortable with that range.

Okay, sounds good. I wanted to ask about AeroTech. The margins there were a lot higher than expected and I wonder if we can get a little bit more color on maybe the mix and the components of that. Was there final Halvorsen that went through this quarter? What's going on with that margin?

I'll talk about it a little bit and then Brian can give you a bit more detail. Yes, the Halvorsen, as we had been indicating over the last year, is in its final wrap-up or wind-down and so we do have benefits from Halvorsen in the first quarter that will go away as we go into Q2 and Q3 and Q4 and then we had a bit of benefit from the volume pickup that we saw year over year in AeroTech. But on a run-rate basis, it is going to return to that 8%, 8.5% level that we had communicated earlier.

So the first quarter did have the benefit of good Halvorsen activity, as well as our aviation support business which has higher margins and decent aftermarket business. But again, with $6 million of Halvorsen EBIT going away over the last three quarters, that will put that pressure on the margins back to the 8%, 8.5%.

Okay, great. How much revenue was Halvorsen last year?

We have not communicated that, sorry.

Okay. I understand about the margins coming back down throughout the rest of the year. Is that aviation support, is the visibility -- what is the visibility like for the rest of the year and what does the mix of business in AeroTech look like?

Let me just start off at a high level with AeroTech. We've talked for a number of years that the airlines hadn't been spending at the level that was probably appropriate in support of their business and I would say overall the activity that is occurring in the marketplace is more encouraging than it would have been in the years past. It is too early, Walt, to call that a significant trend yet, but certainly we're encouraged by the way the preorder activity is developing in the marketplace. And we would attribute that to some of the basic financial health of the airlines, the air carriers around the world, particularly in the U.S.. As you look into the aviation support equipment, those tend to be larger, longer-term orders we see. A lot of that activity is tied in some way, shape or form to the military and we're liking the way that business is developing and our pipeline is there. I would tell you that it's not quite as margin rich as the Halvorsen contract was as we enjoyed it the last few years, but there is a lot of future for JBT into that business because we have got some great technology there that really differentiates us in the marketplace. So from our perspective, that business is developing well and we like our odds and the way the pipeline is developing in the marketplace.

If I could switch over to FoodTech, you commented that the currency from international was affecting you. I wonder about the pricing of the orders that came in this quarter and maybe what the margin profile looks like of the new orders that are inbound.

The way I saw the order book develop, the margins were consistent with what I had expected. Certainly, we do have a few competitors that are based in Europe and over time they do enjoy some advantage where we don't produce a product in Europe. But in general, we have quite a bit of flexibility in terms of where our products originate from. And that's one of the strength of JBT. Our global operating footprint gives us the flexibility we require to respond to some of this. So although I do see the revenue headwind and the headwind in terms of EPS, I think in general we should be able to sustain our margins because of our global footprint.

And maybe as the last one, just if you wouldn't mind commenting on the acquisition pipeline. I think you suggested that there might be other acquisitions that might get done this year.

I did mention that we continue to work to build our pipeline, Walt. As you know, acquisitions are episodic and it takes a willing seller and a buyer and economics that work. I can tell you that as we look at proteins and liquid foods, it is a fragmented space and there are opportunities for us to do acquisitions, but there is no ability to commit to that until you bring one across and announce it. And all I can tell you is that we're putting our efforts behind that and working to develop relationships that provide us the runway we would like to see into the future.

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

Can you maybe just discuss just on maybe the services and the aftermarket, just in terms of the -- I don't know if you want to give the growth rate. I know you mentioned it at the end of last year, just how that was trending.

Yes, I would say that, Chris, the aftermarket continues to be strong for us. We will provide regular updates. We don't intend to do that every quarter, but I would tell you that is on track and we're pleased with the progress we're making. One of the criteria I would also add for you is when we do look at acquisitions, we look for businesses that have either a strong aftermarket or the potential for us to further develop that aftermarket, based on our resources we now have in the field and our understanding of how to manage an aftermarket business. So from my perspective, I still am very optimistic about JBT's activity in this area and I would remind you that as we build that franchise, it happens to be one of our highest margin opportunities as we look forward. So, good progress and we're on track with what we have talked about.

And then, maybe, can you just dig into the strength in the -- maybe the orders coming in or even the [Technical Difficulty] just on the FoodTech side? Just dig into -- I know you have got a lot of opportunity on both the liquid foods and the protein, but maybe just talk a little bit more in terms of the depth of the growth?

Yes, Chris, I would just give you a little update just in general how we see the geographies developing for JBT and the business in the marketplace. And I would tell you overall I like the way the market is developing for us this year. The Americas, both the United States and Latin America, are remaining strong. We like the way the activity is in the marketplace. As I mentioned on the prepared comments, Europe and Asia were a little tougher for us last year. I would tell you that we booked well in the fourth quarter in Europe and that translated into results this first quarter. I would expect Europe to be improving, but still a bit choppy, based on what we see in the marketplace. Asia was flattish year over year, but from my perspective, that was off of a bit of a weak first quarter last year, but we got some nice activity going. We announced some large orders in Asia in the first quarter, but that's still a little bit of a longer-term play as I see it. I think it is going to be a bit of a tailwind for us this year, but not a demonstrable improvement. But overall as I look across the markets and the things we're doing, in terms of our new product actions, building our aftermarket franchise, the acquisitions, are all creating opportunities for us to have further and deeper conversations with our customers and, in some cases, a larger set of customers as we have completed these acquisitions. And last, I would tell you all of our managers and our people inside the business are just laser focused on execution because for JBT, there is just a lot of opportunity this last year and this year going forward just in terms of how we run the business. And that's where we're spending a good portion of time, also.

[Operator Instructions]. At this time, there are no further audio questions. I will now hand the call back over to Tom Giacomini for any closing remarks.

Our first quarter results show we're on the right course and established solid momentum to begin 2015. Of course, there is still a lot to be done as we implement strategic changes that make us a stronger, more profitable company. Thanks to our team members for the commitment and results and, as always, for your interest and support of JBT.

This concludes the JBT Corporation First Quarter 2015 Earnings Conference Call. Thank you for joining. You may now disconnect your line.