JBT Marel Corporation (JBTM) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation Third Quarter 2015 Earnings Conference Call. My name is Samantha 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 like to turn the call over to JBT's Vice President, Corporate Development and Investor Relations, Mr. Debarshi Sengupta to begin today's conference.

Thank you, Samantha. Good morning, everyone and welcome to our third 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 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 posted on our Investor Relations website. Now, I would like to turn the call over to Tom.

Thanks, Debarshi and good morning all. We are delivering meaningful progress at JBT from simplifying our structure, to integrating acquisitions, we are JBT excellence model, we're making real improvements. I'm pleased to say that we have a team that is taking actions on numerous fronts that significantly enhanced JBT's growth and profitability. Our focus on growth and margin expansion was again reflected in our third quarter performance. We generate strong growth organically and from acquisitions with excellent performance at FoodTech. Higher segment margins reflect the success of our RCI program, including strategic pricing, productivity gains and growing benefits of our sourcing activity and solid booking for FoodTech and AeroTech reflect good momentum. Brian will walk you through details of the quarter, provide geographic trends and update you on our full year outlook. Then I will provide some color about the benefit of our acquisition and the growth drivers for the company. Brian?

Thanks and good morning. In the third quarter of 2015, we again posted gains across all key metrics. Year-over-year revenue growth was 12.4%. FoodTech revenue was up 20% while as expected revenue was flat at AeroTech. As we discussed last quarter, we planned for a big second half from FoodTech and they're delivering. On a constant currency basis, FoodTech's revenue increased to 33% year-over-year composed of organic and acquisitive growth of 19% and 14% respectively for the quarter. At AeroTech, we anticipated tougher comparison given the particularly strong second half of 2014. AeroTech beat our expectations as they successfully booked and billed additional mobile equipment in the quarter. To a smaller degree, JBT's third quarter performance reflected our continuous improvement efforts to even out operating activities. On the order front, total inbound orders were up 5%, including a 19% increase at FoodTech. On a constant currency basis, FoodTech orders were up 33%, 24% organically and 10% from the acquired business. While AeroTech orders were down year-over-year, they posted another strong quarter of 96 million. Let me give you some color on geographic trends. Overall business conditions in the U.S. remain strong. In Europe, we're capturing significant margin gains from restructuring and are enjoying good top line growth although offset by currency effects. While the food side of the business is strong, AeroTech is seeing tougher competition in Europe, largely due to the weaker Euro that benefits our competition more than JBT. In Asia, we expect to be up slightly for the year. Our liquid foods business is doing well aided by acquisitions and the globalization of their product offering. Protein processing in Asia is down due to weakness in China. For AeroTech both our fixed and mobile products had improved in Asia. In Latin America, our Brazilian based business is projected to have a record year in local currency. Looking ahead to full year 2015, we raised the midpoint of our guidance with a revised range of $1.75 to $1.80, included in that range of the currency translation headwind of $0.18 and $0.08 per share on favorable impact from acquisitions. We've increased our full year revenue growth estimate to 9% to 10% reflecting organic and acquisitive growth of 8% and 9% respectively, less of 7% foreign currency translation impact. We expect full year 2015 segment margins to improve 50 basis points to 75 basis points from the 10.4% achieved in 2014. On a segment EBITDA basis which reflects the progress of our business before the stepped up amortization charges associated with the acquisitions, we anticipate full year margin to improve 75 basis points to 100 basis points on the 12.9% achieved in 2014. We project corporate expense for the full year to remain at about 3% of revenue. An interest expense will increase in the first quarter given the incremental debt on the acquisitions. As per the individual businesses we expect AeroTech 2015 revenue growth of about 7%. In terms of profitability we previously said we're pleased to be able to hold AeroTech's 2015 margin flat, given it stays out of the [indiscernible] Halvorsen program. We now foresee about a 50 basis point margin expansion from the 8.6% in 2014 due to better productivity in sourcing gains, the success of our pricing strategy and better operating leverage in connection with the stronger year-over-year sales. At FoodTech, we increased our full year top line forecast. We now project constant currency growth of 8% organically and 14% from acquisitions offset by 10% currency headwind, this gets us to year-over-year growth of about 12% for FoodTech. I would note, acquisition related items will pressure food tech margins by approximately 50 basis points in the fourth quarter and into the first half of 2016. More importantly we expect the acquisitions to collectively contribute $0.15 per share to $0.20 per share to earnings in 2016. By 2017 we project that to increase to $0.30 per share to $0.40 per share. Lastly, I would like to thank all of the JBT members for the hard work in getting these two acquisitions closed within 60 days of one another. It is certainly a busy but exciting period for us. With that I'll turn the call back to Tom.

As you heard from Brian, we expect our recent acquisitions to be meaningfully created in 2016 and 2017. One of the exciting aspects of our acquisitions even better than we expected is the opportunity to create new growth prospects as we combine both product line and end-market expertise. As an example we now offer more comprehensive solutions for tray packed protein by combining several pieces of equipment including our crushed [indiscernible] and water jet with our new and old tech slicer, we created integrated solution and increasing yields for our customers on the proteins you purchase at the grocery store. This is a new opportunity for JBT and win for our customers. We are very encouraged by the customer inception and have already $10 million in orders this year. On the liquidity foods side, sales of ICS equipment has exceeded expectations, this has been made possible by leveraging JBT's global sales, manufacturing and service presence with the ICS technology to better sever our customers. Specifically we are now in the process of building a significant equipment order to produce popular coconut based beverages in Asia with the ICS technology. JBT's local presence and service support were instrumental in giving the customers for this project the confidence to place the order. And with to combine full line solutions we now offer in inclusive of stored food and dairy and AMV [ph], we're able to compete for more comprehensive projects that could not entertain in the past. More specifically our sales and engendering teams are now tracking or recording over 20 new projects in liquid foods that would not have been possible for JBT's prior product offering. Through our acquisition program we had added over $200 million in FoodTech revenue, exceeding our next level target of $70 million to $100 million. We are on track to achieve our next level of goals for 2017. The strong revenue growth and margin expansion you saw in our third quarter results is a reflection of our progress. There is still much work to do as we move forward. Meaningful opportunities exist to enhance our competitive position, capture organic and acquisitive growth and improve profitability as we look beyond or 2017, next level of objectives. Looking ahead, we're encouraged by longer term trends in the marketplace. On the AeroTech side, we're enjoying a favorable spending cycle from the U.S. airline industry coupled with new products introduced by JBT that better meet the needs of our customers. Like our new tractor and just introduced [indiscernible]. As for FoodTech, which now represents some third quarters of our income on a pro forma basis we see long term secular trends that will benefit our business. This is exciting for me as a CEO, just think if you ate or drank something today, whether from our restaurant or grocery store, if it's organic or not, there is a good change that JBT equipment touched it along the way. As worldwide populations expand and disposable incomes rise, we see a fundamental shift in dietary habits towards increased protein consumption in higher value solid liquid foods, that's a long-term evolution in global food consumption that favors JBT. 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.

Just a question, can you provide more update on the acquisition pipeline? Can you also talk about because the company has become so active are you seeing people come to you that want to sell companies, is it pretty much just you guys going out on the field, then in regards to acquisition, can you also talk about -- at some point is there some technology aspect to you, is it possibly there are software companies out there or sort of food inspection companies things like that, that might be interesting?

Good morning, Gary. I think you've been seating in somewhere our meeting. [Multiple speakers] We are and do continue to build our pipeline and obviously our preference is to source the deals directly and not participating in broad auctions or activities brought underway by bankers, but I will tell you that as JBT has become more active in the space. We are certainly getting a lot more outreach from -- seeing opportunities that are being offered banks or also being reached by private equity owners who think one day they may want to act on one of their properties. As we look forward, I would say yes, you could and should expect that JBT may engaged in certain partnerships, licensing activities or purchasing technology specifically that we can leverage across our broad platform of businesses and take globally. We'll get a lot of leverage on those activities without huge investments, so we definitely have that ongoing in our M&A activity also.

And I'm just curious, is software within that? Are there opportunities to combine software, with what are you doing, are you really going to enhance that recurring revenue stream?

Yes we are, we do currently offer some software solutions with our products and as we look forward Gary, we see too primary activities that relates to software, we're referring to as our internet of things for JBT. Across our entire product offering, there is opportunity to provide our customers updates about how our equipments functioning, its productivity, its yield, its need for maintenance. We've got a major activity underway across JBT where we're working with all our engineering groups to make that functionality common, multilingual and available to our customers and we're excited that now we will have increased revenues, real licensing of the technology, but more importantly we’ll drive our aftermarket and then we also believe that by doing this properly will have solid economics for our customers because as our equipment requires maintenance or let's just say tune-up, it's important that we get that done right away because it affects the customers returns on their operation of our equipment. For example in the food business, if you are using a water jet portioner to trim a piece of protein, if its start to drift a little bit and needs adjustment, that significantly deteriorates the yield and that's just one example of how we can leverage this. So we're very encouraged about our ability to do this and it’s just going to take us a year or two to just work our way through and to start to see this stuff hitting the marketplace.

Your next question comes from Walter Liptak from Global [ph].

I wanted to ask first about the AeroTech margins which were a little bit better that we expected and Brian I think you called out a number of things, so I wonder if can you maybe give us little bit more color on how this [indiscernible] doing or how pricing is doing and you called out a mobile equipment, maybe there is that helps the margins and I guess what I'm trying to get to is this sustainable level of margin or how do we think about improvement for next quarter?

Good morning, Walt. So agreed, the margins were good in AeroTech for the quarter and that the first thing I would point to is we just had base productivity gains from the RCI program that we're working on, that's been very helpful as they streamline their shops floors, there has been lot of activity at both, the Jet way side and on the mobile business in Orlando. And as I mentioned on our short cycle business which is more the mobile products, we did really have a nice quarter and that really helps us on the utilization of the overhead. So, if the volume continues at that level we would expect that type of margins to be sustainable and obviously we're going to continue on the aftermarket growth and on the pricing programs. So, we're fairly confident on where we stand on now.

This is Tom. One additional bit a color on -- as Brian mentioned the mobile equipment, I will remind everyone that that was the piece of our business on the Aero side that was most impacted by the slowdown in airline spending and it's particularly U.S. based business so we're fairly encouraged that as we see health of the U.S. airlines continue and that have gone through their major spending or spending plans for aircraft, we're starting now to see some early stages of their investment and the ground support and mobile equipment and we think that's a trend that will continue for a period of time unless the airlines receive some kind of shock that nobody would expect so we're feeling pretty optimistic about how that business is shaping up as we end the year here.

Okay thank you for that. In your prepared remarks you commented about Asia and China, I wonder if you could just refresh us on what percentage of revenue is there in products in any trends. It sounded like your China exposure during the quarter slowed down a little bit?

So, Asia was about -- little bit off by some 10% of the overall revenues, part of that is impacted by currency effects, et cetera. Specifically on the activities you got a combination of China and the rest of Asia and generally speaking the rest of Asia is doing better than China. China has economic challenges generally, but as we have stated before the long-term secular trends there are very favorable for us. Our tech center is opening in the first quarter so we’re really excited about that. So we're still in good shape longer term in Asia, China is just a little bit weaker here compared to the rest of Asia.

Brian and I'll just give you a little prominent color on as we look at Asia, we mentioned that the liquid foods business whilst it’s performing very strongly and it’s in China and in the rest of the Asian countries and I mentioned the coconut water, but there's a lot of other opportunities that we've actually booked orders on and we're in the process of producing and shipping it, but the other trend that's somewhat encouraging and I don't want to say it's, it's completely healed up. But as we -- in the second half of '13 and first half of '14, we had seen our protein related orders be quite slow in China/Asia and we're in kind of on the receiving end of that activity now as we produce the equipment and ship it and that's why that business is off. I would tell you that it's early days but we have seen some fairly encouraging order trends on the protein side more recently and it's our hope that it's the kind of the bird flew some of these other issues that have worked their way through the economy, kind of sorted themselves out, that Asia on the protein side will heal up a little bit more and get a little bit of a tailwind as we end the year here. Interestingly, the tech center as Brian mentioned, we feel that it's very important, we think that that would give us a leading presence in Asia in terms of our freezing and cooking or protein and liquid foods businesses and we know that when we put a tech center in a region, our order closure rates do improve. So, it is our intention that as we make that investment and get it up and running by the end of the year we'll be in a position to have a higher closure rate on the opportunities we're able to identify.

Sounds good. Wanted to ask about corporate expenses for the fourth quarter, wondering if you could get a little bit better read on what that number might look like?

So, corporate expenses, we have continued to guide it above 3% of revenues for the year and so it will be fairly similar to the third quarter when you do the math there we've got some activities going on in corporate that we continue to invest in some of our own JBT efforts, things like the shared service center from IT, some compliance, improvements, et cetera. So while we continue to make those investments we look forward to putting those resources to work for the benefit on the gross side to standardize some raw processes, et cetera. But coming back to your question about 3% for the year and you can do the math on how that shapes out for the quarter.

Then a last one, and you can brief on this one, but in your prepared remarks, Tom, you called out sourcing is something that you -- and I can't remember what exactly what you said, but it sounded like you're starting to get some benefits from sourcing and my understanding was that that was something down the road, where we wouldn't see benefits for a couple of years.

Yeah Walt, as we mentioned in AeroTech and just overall for JBT we're gaining traction more quickly than we had originally estimated in our next level activity and even as we start the year. I would remind everybody for 2017 run rate we had expected is a sourcing benefit of 4 million to 8 million then it looks like as we exit this year, we’ll be 3 million of that 4 million to 8 million, so still lots of room to run, but we're starting to get some pick up in this year.

Next question comes from Chris McGinnis with Sidoti & Company.

I guess just quickly I'll go back to the acquisition front. I guess, could you maybe just talk a little bit about now with the recent acquisitions, how does that change the conversations with the customers? They're looking to come to you more, I know it's very early, but I was just wondering how that maybe this changed your [indiscernible] in the market?

Yes, Chris. As we completed these acquisitions, I would just like to mention that these were companies that we have partnered with or worked with in the past so we were well aware of their positioning capabilities in the marketplace and that's why we were able to through our partnerships build the relationships with their leadership teams to bring these acquisitions home at the economics we were and I would say absolutely, as I mentioned in my comments, we're really encouraged. I’ll tell you when we modeled these acquisitions we were very conservative on adding benefits that would accrual us from growth or from customer space activities and we were more aggressive in terms of some of the cost actions we could take on integrating these businesses and we are pleasantly surprised so far with the acquisitions we've completed earlier like Wolf-tec and ICS and as we mentioned earlier now with the stock and in the early days of stock in A&B, we're seeing many more projects that we simply couldn’t quote on the past because we didn't have the full range of capabilities that we needed as a company. Now occasionally we could combine with the other business to quote, but that wasn't nearly as effective and what I referenced, we have over 20 meaningful projects reporting on liquid food side for -- in combination with Stork Food and dairy and A&B that we just wouldn't have been able to quote on in the past, so that's very encouraging to me. Just beginning to truly validate the next several strategy, we’re becoming more comprehensive protein and liquid food supplier, is definitely creating value for our customers because we can come in and systematically look at their challenges of operating their businesses and help them find a way to win and as I mentioned like with the Trade pack protein, we went in there to help those customers increase their yield which is a huge economic benefit to them and for us, we get a great system sale, wouldn’t have been able to do that in the past. So it's very encouraging to me.

Great, and you mentioned in your answer but so if you built out I guess roughly build out the liquid foods, I guess the focus of acquisition is now going to go to maybe protein?

We would like to continue to be active in both liquid foods and proteins, we see opportunities on both side, Chris and there are still categories where in technologies we can add and liquid foods and protein we have significant runway also. The business cash flow is well, our leverage ratio is still reasonable and little over $2 [ph] and we pay that $1.50 for three quarters of a turn a year and we expect these new business is to also cash flow quite well. So we see an opportunity for us to continue our acquisition program and continue to add value for our customers and the shareholders.

I guess the follow up on that, what leverage ratio would you feel comfortable going up to, the ways acquisition [indiscernible]?

We're not describing a lot of that Chris, I would tell you that we're just straight at little bit above to our net debt level right now. We will increase for the right strong strategic fit that as good economics for our shareholders and we'll make sure we get that done but we're going to remain disciplined and make sure that the economic supply and I can tell we've had pass on some opportunities because the pricing around the deal didn't meet our requirements, even though they want a good strategic fit. So, with that concentrate, I feel comfortable we'll do the right thing and as I mentioned with the cash flow at JBT and the cash flow of the acquired businesses on a higher earnings base, we have capacity to do what we need to do.

[Operator Instructions] We have no further questions. So I would like to turn the call back over to Mr. Tom Giacomini for closing remarks.

We're pleased with our third quarter performance. The top line growth and margin expansion are clearly reflection of the progress delivering our next level strategy. Most importantly, I would like to thank our team members for their support and continued dedication.

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect your phone line.