JBT Marel Corporation (JBTM) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation Second Quarter 2015 Earnings Conference Call. My name is Tamika 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.

Thank you, Tamika. Good morning, everyone and welcome to our second quarter 2015 conference call. With me 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 our 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 have been posted on our Investor Relations website. Now, I would like to turn the call over to Tom.

Thanks, Debarshi and good morning all. I am pleased to be here this morning to talk about JBT’s continued healthy performance and promising outlook. As you saw from our second quarter earnings release, JBT posted another strong quarter and finished ahead in all key metrics. Revenue was up 3% year-over-year or 11% on a constant currency basis. Segment earnings were up 8% or up 20% without FX impacts. EPS increased $0.10 to $0.48 or up $0.03 against adjusted prior year EPS. Inbound orders were 15% higher or up 23% on a constant currency basis. I am going to have Brian walk you through details of the quarter and update you on our full year outlook. Then I will come back and provide some color about acquisitions and progress towards our 2017 Next Level goals. Brian?

Good morning, everyone. I will start by breaking down the components of our second quarter performance. FoodTech performed in line with our expectations, while AeroTech exceeded them. Year-over-year revenue growth of 2.8% was composed of a 22.5% increase of AeroTech and a 5.5% decline at FoodTech. On a constant currency basis, FoodTech’s revenue increased 5.2% year-over-year. Breaking down FoodTech constant currency revenue a step further, acquisitions drove a 6.5% increase, which more than offset a 1.2% decline in organic revenue. For the full year, we expect FoodTech organic revenue growth of more than 5% on a constant currency basis. We had strong bookings in the first half across both protein and liquid foods, which we expect to drive solid growth in the second half of 2015. AeroTech’s second quarter revenue and income benefited from a particularly favorable mix. Looking ahead to the second half of 2015, AeroTech’s performance was a difficult comparison against a particularly strong second half of 2014. For the full year, we expect AeroTech revenue growth in the mid single-digit range. In terms of profitability, we expect full year AeroTech segment margins similar to last year’s 8.6%. As a reminder, the projected results reflect a loss of approximately $6 million in operating profit in 2015 from the phasing out of the Halvorsen program. For the first half of 2015, JBT’s adjusted EBITDA increased 24% versus prior year demonstrating the benefits from organic growth, margin expansion and completed acquisitions. On the order front, total inbound orders were up 14.6%, with a 4.4% increase at FoodTech and 34.6% at AeroTech. On a constant currency basis, FoodTech orders were up 16.3%. A quick comment on our capital structure. We have $75 million of private placement notes due on July 31. We intend to retire the notes using our bank line of credit. We recently announced an agreement to acquire Stork Food & Dairy Systems B.V. With annual revenue of around $70 million, it will be a significant addition to our $300 million liquid foods portfolio. Given anticipated transaction and integration costs and purchase accounting impact, we expect the acquisition to have a $0.05 dilutive impact in the back half of 2015. We project it to be accretive by about $0.05 in 2016 while compressing FoodTech segment margins slightly. As synergies come into play, we expect the margin profile to significantly increase and the acquisition to add approximately $0.10 to $0.15 per share in 2017. Looking ahead to full year 2015, we expect top line growth of 7%. That breaks down to 5% organic growth and 7% from acquisitions offset by an adverse currency impact of 5%. We expect full year 2015 segment margins to improve 50 basis points to 75 basis points from the 10.4% achieved in 2014. In terms of EPS, we have raised the low end of our 2015 guidance by $0.05 and project full year diluted earnings per share in the range of $1.70 to $1.80, inclusive of FX headwind of about $0.15 and $0.05 from the acquisition impact. With that, I will turn the call back to Tom.

Thanks, Brian. I will start by addressing our M&A performance. We are very pleased with the acquisitions we have completed, all of which have made JBT a stronger player in the food industry and more importantly have improved our ability to offer comprehensive solutions that create value for our global customers. As discussed before, we have a well-defined and disciplined acquisition strategy. We seek leading companies within the protein processing and liquid foods businesses that complement our existing product offering. From there, we pursue an active integration process allowing us to offer a more complete solution to our customers, expanding geographic penetration, sharing resources and maximizing synergies. Our 2014 acquisitions are being successfully integrated and we expect will be solidly accretive in 2015. At ICS Solutions, orders are well ahead of plan based on the combined strength of our sales efforts in developed markets. At Wolf-tec, we have made significant headway into the pork market by integrating JBT’s freezer and portion equipment with Wolf-tec’s equipment. Another benefit is Wolf-tec’s modern manufacturing facility. We are transitioning assemblies of our automated systems product line to this facility improving our long-term cost base. Additionally, we are in-sourcing some of the JBT protein equipment component manufacturing at Wolf-tec, reducing lead times and improving costs. Stork Food & Dairy Systems is an important addition to JBT on two fronts. First, its solutions include aseptic processing, filling and packaging, all of which complement our existing capabilities. Secondly, we are well-positioned to go after the high growth global market for blended liquid foods by combining our traditional strength in juice, with their strength in dairy. Some of these dairy customers are new for JBT. With this acquisition, we will exceed our 2017 Next Level commitment on growth from acquisitions. We continue to pursue complementary opportunities that enhance our value proposition to our customer and strengthen JBT’s core. Turning to our progress we have made on the rest of our Next Level strategy. As you may recall, we set specific targets for the benefits we expect to achieve by 2017. JBT has made excellent progress towards these goals. In terms of the restructuring and organizational simplification, we achieved target of $10 million in run-rate savings. On our strategic pricing initiatives, JBT expects to generate more than $4 million in benefits in 2015 at top of the $4 million captured in 2014. That puts us just above the midpoint of the $6 million to $10 million target set for 2017. With regards to our aftermarket growth initiative, which is also aided by our strategic pricing effort, revenues grew 9% in the second quarter and are up 7% year-to-date. JBT continues to invest and expand their aftermarket teams to fuel growth. In Europe, we have essentially completed the restructuring of our protein processing business. With the new leadership and sales organization in place, we have created a far more productive operation. While sales are relatively flat in Europe, profitability has significantly improved. In the U.S., our shared service center is up and running. The center is fully staffed with the vast majority of U.S. transaction processing and accounting being performed in the center. In Europe, we are on track for initial set up by year end and expect to complete the transition in 2016. Finally, on the relentless continuous improvement and strategic sourcing side, we continue to ramp up our efforts. Regarding RCI to-date, we have trained more than 200 leaders throughout the organization, across 32 locations and 13 countries. Managers from our acquired companies are included in these training sessions. JBT has completed more than 300 Kaizen events at our plants and also at corporate. All of our manufacturing facilities have adopted lean principles and are at various stages of implementation. We are seeing improvements in productivity, lead times and on-time delivery performance as a result of these efforts. I am a strong believer that these RCI driven improvements will make us a much stronger competitor in the marketplace, while improving service to our customers. On the sourcing side, we are implementing actions to consolidate material spends across the company, as well as focus initiatives within the business units. We are on track to achieve around $2 million of benefits in 2015 from RCI strategic sourcing and are on track to hitting our goal of $4 million to $8 million of benefits by 2017. As we have previously communicated, some of the benefits of our initiatives will be offset by continued investments in our business. Nonetheless, you can see the benefits of our strategy and JBT’s expanding margins. Looking ahead to 2016, we are evaluating further actions to enhance our growth and profitability as we did in 2014. In preparation, the first step is our commitment to an upgraded ERP platform that will fortify our foundation for growth. We expect to spend around $2.5 million annually through 2018 in support of this project. Looking across the next level strategy initiatives, although work remains to be done, JBT is well on its way to achieving the 2017 goals. We are pleased with the progress made in the last year and a half and hungry for what comes next. With that, we will open the call to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Gary Farber with CL King.

Yes. Good morning, just a couple of questions. Can you talk about your AeroTech execution and how that’s helping the margins there, can you also talk about market share gains you might be picking up overall in the market. And lastly, just on your acquisition pipeline, because you are sort of ahead of your goals to, sort of how your pipeline looks today?

Good morning Gary, on the execution fronts at AeroTech, it’s a multifaceted. We have talked about the pricing program, which has gone across food and aero, which has been a great benefit to JBT. But then as you look a little deeper, we have made impressive – investments in new products, which are coming to market. And we certainly had nice profit objectives around that and the RCI efforts in AeroTech, which have really made significant headway in both our fixed and mobile equipment businesses. So I would say the AeroTech team is doing a wonderful job of making the most of the business. And last, I would mention that overall I think we are at good point in this cycle on the AeroTech business. The airlines have replaced a number of their aircraft. And as I think they look to their next round of investments, it’s more likely to be the gate equipment, the mobile equipment around the planes. And we think JBT is well positioned to take advantage of that round of investments. So I like where we are at in the cycle on that. Looking to the acquisition pipeline, I would tell you that as I have mentioned, we are pleased with the acquisitions we have made so far. They all fit our strategy very well in strengthening and expanding our protein and liquid foods businesses. And we continue to mature the pipeline. The pipeline has a number of opportunities in it. And we will continue to work against those. And although we have exceeded our next level objective of $70 million to $100 million in revenues, we see continued opportunities going forward. But there is work to do. And as you know, with acquisitions until they are signed and completed, you can’t really ever note for sure they are going to happen.

Alright. And can you also talk about just sort of are you taking market share and sort of what are you seeing here from your competitors, given that you have meaningfully changed your operations over the last year?

I would say AeroTech – the bridge business, we have had strong share. And we have been thoughtful about it. We are more focused on maximizing the profitability of the business and the share. So, if anything we may have given a small percentage of share back, but for all of the right reasons here in North America. On the ground support equipment, we are particularly strong in North America and performing well against that. But we have some strong and trench competition in Europe that is benefiting from the weak euro. So that’s something we are managing on a day-to-day basis. I am being very thoughtful about the business we take and its impact on the profitability of JBT. But overall, I would say, we are doing very well in actively managing our share versus our profitability. I am pleased with how that, that’s coming out for us.

And then just one last one, can you also go back to AeroTech and talk about whatever opportunities or improvements you have made sort of in the cash generation out of that business?

Yes. Sure, this is Brian. So, AeroTech, as you know, as we started the Next Level review, we found that they had really high working capital as a percentage of sales compared to FoodTech and compared to a lot of their peers. So over the last 18 months or so, they have done a really good job on both the inventory and on the receivables side. And they are actually now collecting some deposits, which they had not done in the past. So that combination has been really good for AeroTech and it’s been a big contributor to our overall cash flow.

Okay, thank you.

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

Hi, good morning guys.

Good morning Walt.

I want to ask a couple of questions, first on the business trends in the back half of the year, I wondered if you could talk about Halvorsen and the impact that, that might have in revenue and margins as well as flow of the mix in FoodTech in the back half of the year?

Sure. Good morning Walter, it’s Brian, let me start. So the Halvorsen business, as you know was very large and very profitable. It’s going to reduce our overall profitability by about $6 million for the year of which about $4 million in the back half of the year. We have been – we have done a good job in replacing that with some of the aviation support equipment as well as just the general growth on the fixed side and in the mobile side overall. But when you look at the comparisons year-over-year because of that Halvorsen drop and the fact that last year’s second half of 2014, while it was really strong on both the revenue side and on the profit side, actually 70% of AeroTech’s profits came in the back half of the year. It’s going to be a tougher comparison. But on the whole, for the year, we still expect AeroTech to be up about mid single-digits on revenue. And we will hold onto its margins for the year. And when you consider that overall, when you consider the fact that we have lost Halvorsen and been able to keep margins flat and increase revenues, we are really happy.

Right. And Walt, I would comment overall. Let’s just start with JBT. As we look at how the year is unfolding, AeroTech certainly had a strong first half, which has buoyed our results. And for the reasons Brian talked about, its contributions will be solid, but not outsize the way they were in the front half the year. But in the back half of the year, if you looked at the way we have booked in the food business in the first half and the way it’s setting up, our confidence is increasing that the food business is going to have a very strong back half of the year. And we are going to see some of the benefits of the acquisitions kicking in. And certainly, our operating leverage and all the improvements we have made. So if you look, kind of comprehensively at the JBT portfolio, the combination of what AeroTech is contributing and what FoodTech is putting in for the back half of the year and as we expected and we talked about in the call last quarter, it’s going to be a really positive result for the year.

Okay, it sounds great. Thank you. I also want to ask about the Stork Food & Dairy acquisition, and if you wouldn’t mind, just commenting on how that fits into your portfolio of products offered. And then any metrics that you can provide us on multiple pay and etcetera?

Walt, as we talked about the acquisition program for JBT, we really are focused on strengthening our protein and liquid foods. And Stork Food & Dairy Systems is very strong complement to our liquid foods business. At our last Investor Technology Day, we talked about how JBT was very strong in juice, but we wanted to strengthen our position in dairy. So, as we are working our acquisition pipeline, obviously getting a player that was strong in dairy and the technologies around processing dairy was very important to us. And secondly, we wanted to be able to combine our juice and dairy in a more comprehensive solution that would offer us ability to really play strongly in these liquid foods like yogurts, blended drinks things of that nature that people are consuming today. So, Stork fits extremely well with its filling aseptic processing, which is very important technology on these healthy beverages that people buy that are refrigerated and last the ability to do some packaging also. So, from our perspective, it was a very strong fit strategically and we really liked the way it’s enhanced our business. As we talked about on all acquisitions, we remain very disciplined in terms of our sourcing and the financial metrics we put around the business. And you can see that in this particular case, we paid a little bit less than a multiple of revenues if you do the math. And the contributions that come from Stork in ‘17 – Stork Food & Dairy through the acquisition are very powerful. So, I think when people get a chance to look across the acquisitions we have made, the amount of capital we have deployed and the benefits to JBT both strategically and financially, I am very pleased with the deals we have done so far.

Okay, good. Appreciate it. Thanks, guys.

Yes. I would also mention that we have put a small primer on the Internet with our M&A strategy and kind of talking about the deals we have done so far. If somebody is interested to look at that, I would encourage you to go there.

[Operator Instructions] Your next question is from the line of Chris McGinnis with Sidoti & Company.

Good morning. Thanks for taking my questions and congrats on a nice quarter.

Thanks. Good morning.

Thank you.

I guess just first on the guidance overall on the top line that increased, is that coming more from the – is there organic or is it more from the acquisition itself, the increase?

Yes, the increase from the revenue guidance is actually both on the organic side and on the inorganic side. So, we will get some benefits of revenue growth with the Stork acquisition. But also as Tom mentioned, the food side really booked well in the first half of the year and we are going to see the benefit of that in the back half. So, organic growth is really being driven in the back half by food. So, overall, we are looking at about 3% to 5% organic growth, acquisition of 5% to 7% – sorry, organic growth going from 3% to 5% and acquisition growth going from 5% to 7%. So, they are both increasing. And of course, we do have the headwinds on the FX side.

Sure, thanks. And then I guess just thinking about that, have you booked most of that revenue? Is there something that at risk and just how good do you feel just where you are at today and where the pipeline is?

Yes, there is still revenue orders to get for the year. I can tell you it depends on the business, but our ground support business is more of a short cycle business, the mobile. So, those lead times are 4 weeks to 10 weeks, so a fair amount to get there. On the fixed side, it’s more full and on the food side, it’s more full, but still some to get for the year. So, some risk, but we are overall very confident in our guidance for the year.

Great. And then just lastly, on the M&A side, you have mentioned a little bit on some synergies you expect. Can you just maybe talk about the four acquisitions, the three that are already in, but maybe where the synergies are coming from? Is it more on revenue opportunity, cost savings or maybe lean implementation? Can you just maybe dig into that a little bit?

Sure, Chris. Yes, I would tell you that all of the acquisitions we have made so far have integration components that include both cost and growth synergies. And obviously as an acquirer, we value those cost synergies a little more highly than we do the sales synergies when we are valuing these businesses. And it’s great thing just kind of let me bring you back to the initial premise here with JBT is one of the benefits we have is our global operating capability and our strength in protein and liquid foods. So, as we do these add-on acquisitions, many of these are regional players that just simply don’t have the ability to access the global markets the way JBT does. And secondly, don’t enjoy the breadth of customer relationships we do. So, the ability to bring them in on the front-end and to maximize the opportunity where these companies have strong technologies and to move their technology and some of the production in our facilities around the world and then strongly sell those into the other markets is a real value creator for our – for JBT and our shareholders in the acquisition program. I would point to some of the orders we have talked about for ICS in Asia and how rapidly we have been able to accelerate that business by combining it with JBT as an example. Then as you move backwards and you look at the cost benefits, there are a number of layers we look at and we look to take advantage of. Certainly on the front-end, if we have redundant selling opportunities, engagements, that’s an area we look to refine tradeshows, marketing etcetera, then working our way back, supply chain where we have larger purchases, we are identifying in-sourcing opportunities, the ability as we talked about Wolf-tec to combine some manufacturing footprint and in-sourcing of components. And then benefits like the shared service center where we can bring them into a public recording – public reporting structure, very quickly and confidently and at the same time enjoy some cost benefits. So, we have a number of levers as we acquire these businesses and a big part of what we are focused on is having integration plan in place before we close the acquisition so that we are off and running on day 1. And I can tell you I am pleased with the way the acquisitions are performing and I am pleased with the way our customers most importantly and ultimately view us acquiring these companies and the value we are creating for them.

Sure. Great, well thank you very much and again congrats on a good quarter.

Thank you.

At this time, there are no further questions. I will now turn the call back over to Mr. Tom Giacomini for closing remarks.

JBT delivered a strong first half in 2015 and we look forward to continue our progress in the back half of the year, my sincere thanks to all our team members for a great quarter and for their commitment to ONE JBT.

This concludes the JBT Corporation second quarter 2015 earnings conference call. Thank you for joining. You may now disconnect your lines.