JBT Marel Corporation (JBTM) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation’s Fourth Quarter 2015 Earnings Conference Call. My name is Barbara 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, Barbara. Good morning, everyone and welcome to our fourth quarter and full year 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 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. The full year 2015 JBT’s revenue of $1.1 billion was up 12.5% from 2014. This represents record revenues. It is also the best year-over-year revenue growth we’ve ever reported. Segment operating profit was up 20% and earnings per share was $1.88. We maintain excellent momentum on the order front with inbound orders up 25% year-over-year. We ended the year with 42% expansion in our backlog. When we introduced JBT’s next level strategy almost two years ago, we articulated a three-pronged strategy to take the Company to the next level of economic returns and profitable growth. Our 2015 results speak to the progress we have made in creating a ONE JBT culture, enhancing our operating efficiency and investing in growth. While I’m pleased with our accomplishments to date, our progress galvanizes our result to do even more. In fact, as you saw in our earnings release, we announced an optimization program. I will update you on the significant progress we’ve made towards our next level goals and provide some details about the 2016 initiative in a few minutes. First, Brian will walk you through our performance in 2015 and provide initial guidance for 2016. Brian?

Thanks, Tom, and good morning. JBT's record revenue reflected across the board strength in growth in every geographic region. In the third quarter call, we projected full year revenue growth of 9% to 10%, composed of 8% organic and 9% acquisition growth, offset by a 7% currency headwind. In fact, we generated full year revenue growth of 12%, composed of organic growth of 11% and acquisition growth of 9%, offset by an 8% foreign currency translation impact. As you can see, our performance was driven by strong organic growth. On a segment basis FoodTech posted year-over-year revenue growth of 14%, composed of organic and acquisition growth of 11% and 14% respectively, offset by an 11% currency impact. At AeroTech revenue grew 9% year-over-year all organic. By leveraging our volume and the success of our next level initiatives, segment margin expansion was at the high end of our expectations at 73 basis points versus guidance of 50 basis points to 75 basis points. JBT's effective tax rate was 31.9%, a little less than our guidance due to Congress passing the Tax Extender legislation in December 2015, which allowed us the benefit of the R&D tax credit. As a result JBT reported diluted earnings per share from continuing operations of $1.88. That compared with reported EPS of $1.03 and adjusted EPS of $1.56 in 2014. On the order front, FoodTech’s orders were up 27% for the year. On a constant currency basis, orders were up 40% with about half of that organic. AeroTech’s orders were up 21% year-over-year. JBT's fourth quarter inbound orders were up 66% from the year-ago period. We had a few orders totaling some $25 million, they materialized earlier than planned and ended up in the fourth quarter. Either way it was a great quarterly bookings performance. Those year-end orders, which produce advance payments along with our ongoing working capital management contributed to excellent cash flow, for the year operating cash flow was $112 million, up from $78 million in 2014. That enabled us to pay down debt associated with the acquisitions and control our interest expense. Our net debt to EBITDA leverage ratio was 2.1 times at year-end. This modest leverage level along with our access to capital provides ample capacity to operate and grow. Regarding our $450 million credit facility, we are in conversations with our banker group about increasing the size of the line, which we expect to complete in the first half of 2016. Looking ahead to 2016, our guidance includes the following parameters; revenue growth of approximately 15%, which breaks down into organic growth of 4% to 5% and acquisition growth of about 10%. FoodTech organic growth approaching 5% and acquisition growth of 16% and AeroTech organic growth of 3% to 4%. For the full year we expect segment margin expansion of 25 basis points to 50 basis points. FoodTech margins will be impacted in the first half of the year by purchase accounting related to acquisitions completed last year. We anticipate expanding margins in the back half as we capture the benefits of our continuous improvement. We expect corporate expense to remain at approximately 3% of sales inclusive of the previously discussed $2.5 million expense associated with our ERP upgrade, which is now underway. We expect 2016 interest expense of $10 million to $11 million and an effective tax rate of about 33%. And our capital expenditure forecast is approximately $40 million. As indicated in our earnings release, we estimate cost associated with optimization program of $11 million to $13 million over the course of 2016. And project run rate savings of more than $8 million by late 2017. More than half of the costs are expected to be charged in the first quarter of 2016. And we will provide additional details in the next earnings calls, as we finalize the plan during the first quarter. Given the above factors, our bottom line guidance for 2016 is adjusted earnings per share of $2.15 to $2.30 excluding the optimization costs and GAAP EPS of $1.90 to $2.05. Looking at the quarterly breakdown, while we expect revenue expansion in the first quarter earnings are projected to be roughly flat year-over-year due to acquisition accounting. The strong 2015 year-end backlog is expected to contribute to faster revenue growth in subsequent quarters. And the fourth quarter is expected to be the strongest consistent with historic trends. With that, I’ll turn the call back to Tom.

Thanks, Brian. When we unveiled our next level strategy, we laid out specific targets for initiatives. I'm pleased with the progress we've made toward our goals. In 2015, we captured $5 million in benefits from our restructuring and organizational simplification. That combined with the $5 million we achieved in 2014 puts us at the high end of our $8 million to $10 million target. On the value based pricing front, our target was to achieve $6 million to $10 million in benefits by 2017. As of 2015, we've already achieved that goal. Regarding our relentless continuous improvement and strategic sourcing initiatives, we captured benefits of approximately $4 million in 2015 putting us well on our way to our $4 million to $8 million target for 2017. As we close in on our 2017 targets, ahead of schedule. We've identified further opportunities to increase productivity and profitability with their optimization program. The primary focus of the program is the realignment of our Liquid Foods business in Europe and our Protein business in North America. This realignment is consistent with our ONE JBT culture promoting sharing and efficiency across the businesses. The new structure will further facilitate the integration of acquired businesses. So that we can more effectively capture cost and product synergies. It will also promote the development of full line solutions that provide greater value to our customers. Similarly, we will be consolidating our sourcing organization enabling JBT to pursue a more strategic approach to sourcing and better leverage our purchasing power. On the M&A side, the benefits of our acquisitions and collaborations have exceeded expectations. As I talked about last quarter, JBT’s ability to integrate complementary products and services means we can provide comprehensive solutions to customers. In turn, we have been able to bid on and win business that we couldn't entertain in the past. Last week we announced acquisition of Novus. The acquisition gives us a proven food contamination detection system that enhances food safety and can be integrated into both JBT's Protein and Liquid Foods systems. This acquisition comes on top of the two technology sharing agreements we announced in the fourth quarter of 2015. The first, on the FoodTech side, was with the Baader group. Together with Baader, we are creating new integrated offerings for fish and poultry processors. By combining JBT’s waterjet technology with Baaders X-ray and weighing technologies. On the AeroTech side, we announced an agreement with UK based aircraft maintenance support services. The agreement enabled JBT to offer an expanded suite of products to the military aviation sector and provides JBT access to new military customers outside the United States. Earlier this month, Brian and I attended the International Poultry Expo. At this show, JBT featured its new dual blade portioning system powered by our DSI Adaptive software and scanning technology. This system increases yield and accuracy while reducing system maintenance improving profitability for our customers. The dual blade product is an important new offering. As this technology is frequently the first purchase the customer will make as they move to increased automation, typically followed by our waterjet technology. Having the solution in place will allow us to serve our customers throughout this automation journey. We also featured equipment from our commercial partner [indiscernible] at the expo. Customer recession to our expanded offerings was extremely positive. Even more satisfying was the number of customers who commented on JBT's ability to address their needs and deliver productivity enhancing solutions while incorporating industry leading safety features. As you can see, we are actively engaged across all fronts in delivering value to our customers and profitably growing our business. With that, we’ll open the call to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Chris McGinnis at Sidoti & Company.

Good morning. Thanks for taking my questions and congratulations on the strong quarter.

Thank you, good morning.

I guess just quickly, in thinking about the guidance, may be can you just the puts and takes between achieving the high end to the low end in what needs to kind of happen for you throughout the year to achieve those?

Good morning, Chris. As we looked at it obviously the order rate was encouraging and we indicated we have momentum going into 2016, I'd say that's true. So if you look at the orders we've booked, the recurring revenue that flows through JBT, it's primarily its second half question. As we look at the orders I mean the customer activity was very encouraging as we ended the year. And we liked our progress on getting more of our systems in place, the more comprehensive offering, JBT's enhanced aftermarket and service capabilities. Those pieces are all really starting to come together in creating traction for us, but we do have orders to book and as we look into Q3 and Q4 and just a few orders in Q1 and Q2 just to kind of round out the order book, those still need to be happening and as JBT does have large orders, so in shipments. So we have to have arranged it to get comfortable and with and that's how we arrived at it.

All right, great. And then I guess, can you just dig into the strengths and on the FoodTech side, I mean really a great number and maybe what’s behind that and driving that?

Sure, good morning. This is Brian. Yes, a couple of things. First of all, the Protein side was really strong across the globe. Really impressive performance on the booking side and on the revenue side as well. Liquid Foods was also strong particularly in our sterilization. And then on the AeroTech side, the ground support business our mobile business was strong in the fourth quarter that resulted in some sales in the fourth quarter, but also leads them to a strong first half of the year, this year.

The only other piece I would add our AGV business, we're making good progress in our large account selling process and getting that technology out there. We’re actually starting to produce AGV's in China, there's a lot of exciting things happening there. So altogether Chris it's really around these next level initiatives. And really presenting the power of a collective JBT particularly as we approach the Protein in Liquid Foods market and just the way we present ourselves and that the offerings we're able to put out there. We think are gaining traction in the marketplace. So we're certainly encouraged by the progress we’re making.

Sure. No, obviously it appears so in your numbers. Just one last piece maybe on acquisitions and maybe can you just dig into obviously I think it's now five acquisitions, maybe the experience with the earlier ones. How that's tracking to plan and maybe the synergies that you're realizing that maybe you haven't and that maybe we could get a little bit more positive on the most recent acquisitions as well.

Sure, Chris, it six actually.

Six, sorry, sorry.

We’re pleased with the progress we're making. We put some guidance out there in terms of our thoughts around the acquisitions and materially they're performing very well as we've talked about. And I would tell you that the benefits that have accrued to JBT particularly as we face the marketplace are significant and we're really encouraged about our ability to bring these product lines in and these regional players and explore them to the world stage and to gain traction doing that and that's working out extremely well. Let's talk specifically about a couple of the newer ones. Novus, we're very encouraged, you read about continuing challenges in the food industry around food safety as products packaged in, heads on its way to consumers and this X-ray technology is exciting for us in that. What it's really designed to do is the food, the Protein or Liquid Foods placed in a package. It looks for metallic and non-metallic contaminants, which is as you can imagine is really important that none of that finds its way to the customers. And we genuinely believe by bringing this technology on JBT can very much benefit from this activity. And as I look at it, we're very, very encouraged about our ability to do some good things with it. When we talk next level of strategy kind of going back up a level. We really talked about working multiple fronts to build our business and that included organic growth, acquisitions and partnerships. And we see all three as being important and we believe we've made good progress on it this year with the acquisitions we completed, with the partnerships we formed, and the organic growth. So I think we're doing the right things and we're going to continue to press on that. And as I mentioned, we're feeling galvanized and we want to do more this year as we go forward and kind of accelerate from where we ended last year so we've got a real sense of commitment and passion about the business.

Great. Thanks for taking the time today and, again, congrats on a great quarter.

Your next question comes from the line of Walter Liptak at Seaport Global.

All right, thanks and congratulations guys.

Thank you.

Good morning. Thank you.

I want to ask about the FoodTech orders. You gave us some color by saying there were some orders late in the quarter that sounded like they pulled forward. I wonder if you could give us some color on that and why those orders pulled forward. And then, maybe some view of why your orders seem to be growing a lot faster than the market. Is it because of the systems and solutions sales or is it parts-related? I wonder if we can get some more detail.

Sure, Walt. We did mention we received some orders a little earlier than we expected. I really wouldn't call them pulled forward. It's just the lumpy nature of our business sometimes orders go out, some came in and just happened a few dropped in earlier. But overall, just kind of commenting on order activity, I would say that the industry in general is very healthy, if you look at some of the players out there, the financial performance they're reporting, our customers are performing well and. From our perspective, we don't see anything that's changing that so we're encouraged by the activity level. Secondly, I'd say we're executing well on our systems and equipment orders. The aftermarket, we hit our expectations, which were for solid growth in 2015, but the equipment, which is kind of providing the franchise going forward, was very solid in the back half of the year. We're certainly pleased by that development. And as Brian mentioned, it was broad-based. It was across all geographies. All the major regions, we ended up year-over-year. And let me give you a little more color and insight around that. The U.S. was – and continues to be very strong and it was all of last year and the year before. Europe is a great story. The markets are recovering but I'd say JBT is performing better than we have historically in Europe as a result of our realignment of the Protein business in Europe. We're executing better in terms of our ability to get the customers. We're selling a more comprehensive offering than we have in the past. And as we take those orders in and convert them into production and shipment, our profitability is higher than its historically been so that's a very good story. As you look to some of the other geographies, Latin America was particularly encouraging, given some of the stories you hear, and, really, it was a story about some of the other countries, for example, Mexico was quite strong last year as Mexico ramps up its food production in both protein and other agricultural types. That was good. As you look to Asia, I would tell you that it was a really encouraging performance for us. Our Liquid Foods business in Asia was particularly strong in terms of bookings and shipments throughout the year. And the only kind of area that we – was a little less than what we hoped was protein in China directly. We mentioned that that was slow earlier in the year and that slowness continued throughout the year. As you look across all the major kind of categories or market segments we play in, the only thing I would point out and it's been a bit in the press is dairy, dairy is slower than what was expected or the way it entered the year. Dairy is a relatively small percentage of JBT's overall food business sales, but we certainly have seen that slow down a bit, but it's reflected in our forward guidance. We're aware of that slowdown. And it did show up a bit in our historic acquisition. That said, we didn't see any orders get canceled. It's more about just customers being a little bit cautious, pushing some orders out, waiting till markets heal up a bit. But altogether, it was a great show for JBT and just really encouraged about the winds we're making, the size of the systems we're getting, and the more comprehensive offering we're putting out to our customers where we're able to get in there and really help solve some tough problems for them and help them win with their business.

Okay. Thank you for that detail. I just wanted to ask about the growth rate. It looks like in the back half of the year, your order rates have been growing very solid double digits and then when we look at the organic food equipment order growth you're expecting, organic sales, I'm sorry, 4% to 5%, it's significantly lower. And I wonder if your guidance doesn't include future orders, just orders that are in your backlog, or is it because the orders tend to be lumpy.

Thanks, Walt. So if you look at our backlog that includes the equipment sales and there is – it gives us good guidance to, good visibility to Q2 and into Q3 and some activity into Q4. But there is still a firm arm in the equipment side on the go get in order to, to make our – to pick our numbers. And the reality is as we’ve always talked about there is a big amount of lumpiness in the orders and they tend and those deliveries tend to be spread out over a long period of time. And even on our AeroTech side, our orders all the way go into 2017. So I would just say that Walt, its very strong. These [indiscernible] out over the year – go get for the year.

Okay, got it. And I wanted to ask to about the AeroTech business, the strong orders in the fourth quarter. Was that international ordering or domestic and, are we looking at a healthier market for the AeroTech business in 2016.

Yes. The AeroTech had a very strong year in 2015. I was pleased not just with the orders and shipments but also the margins we delivered. The team did a great job in running the business. And the trends continue, Walt. The orders that we did receive were primarily U.S. based. There were a number of nice orders on the fixed equipment or for bridges in the U.S., larger projects. And then secondly, our ground support equipment, our mobile business, we saw great order activity developing through the year and that continued in the fourth quarter. And as Brian mentioned, those tend to be shorter cycle orders so some of those actually shipped in the fourth quarter, but also set us up for a good performance as we entered the front half of this year. So altogether, I would just tell you we were really encouraged with how the booking trends developed in the back half and in the fourth quarter and the way the teams performed in terms of getting out there and engaging the customers and offering the collective JBT solutions that were pulling together through our M&A program, through our investments in organic growth with new product developments, and then some of these new partnerships, Walt. Those things are all pieces we’re putting together to advantage ourselves in the marketplace. And you combine that with our continuous improvement program where we’re working to reduce our lead time, as I’ve talked about, improve our quality, get the products delivered more quickly to our customers to create competitive advantage. I think all of these pieces that we’ve been working on since we started the next level strategy are coming to bear and we’re certainly pleased by the traction we’re getting in the marketplace.

Okay. Thank you.

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

As you’ve heard Brian and I discuss, we are pleased with our strategic progress and financial results in 2015. And we look forward to another year of healthy gains in 2016. When I visit our facilities, I see teams that are energized, goals accomplished, optimistic about our markets and excited about the expanding capabilities we are bringing to our customers. Thank you to our employees for a great year and stakeholders four your support.

This does conclude today’s conference call. Thank you for attending. You may now disconnect.