JBT Marel Corporation (JBTM) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation's First Quarter 2016 Earnings Conference Call. My name is Sally 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 speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to JBT's Executive Vice President, Corporate Development, Mr. Debarshi Sengupta to begin today's conference.

Thank you, Sally. Good morning, everyone and welcome to our first quarter 2016 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 Debarishi, and thank you all for joining us on the call this morning. While it's still early in the year and the first quarters are lighted, I am pleased to report we are off to a good start for 2016. First quarter revenue was up 19% and segment operating profit was up 27% from the year ago period. Margins were at approximately 70 basis points year-over-year with a strong quarterly performance for FoodTech aftermarket business. Excluding restructuring charges associated with optimization program, first quarter earnings per share improved 7% or 26% from the first quarter of 2015. With that, I will turn it over to Brian to provide some color on the first quarter of performance and the optimization program. Brian?

Thanks Tom, and good morning. JBT posted strong revenue growth and segment merge and expansion in the first quarter of 2016. Revenue growth was 19% including organic growth of 4%. Our segment operating profit growth was 27% of which 20% was organic. Currency translation was a modest headwind. On a constant currency basis revenue and segment operating profit growth were 21% and 31% respectively. On the segment basis FoodTech posted year-over-year revenue growth of 28% composed of organic and acquisition growth of 3% and 28% respectively partially offset by currency translation of 3%. In AeroTech revenue grew 5% year-over-year all organic, contributing to the segment margin expansion of 67 basis points with the particularly good performance of FoodTech's aftermarket business and favorable product mix within AeroTech. Similar to our equipment sales, aftermarket revenue can be on a quarterly basis. Overall the aftermarket business continues to perform well. First quarter corporate expense was as expected and remained on track to get our expense target of revenue of full year 2016. We recorded a restructuring charge of $7.2 million in the quarter and continue to expect an $11 million to $13 million for the full year related to the optimization program. We have started the optimization of our Liquid Foods business in Europe. The organization will create a unified Liquid Foods unit integrating our historic businesses with the acquired operations of ICS and stock, food and dairy. This integration is modelled after the successful 2014 restructuring of our European Protein business which enhanced our top line growth and profitability by creating a stronger commercial organization and streamlining the cost structure. Consistent with our last earning's call we expect the optimization program to generate annualized run-rate savings of more than $8 million by late 2017. We anticipate savings of around $2 million in 2016 which was factored into our original earnings guidance. JBT reported diluted earnings per share from continuing operations of $0.17. Adjusted EPS was $0.34 compared with GAAP earnings of $0.27 per share in the first quarter of 2015. On the order front FoodTech orders were up 8% year-over-year. On a constant currency basis FoodTech orders were up 12% including the growth from our acquisitions partially offset by small decline in organic orders. This quarter was in line with our expectations given the extremely strong inbound order performance in the fourth quarter 2015. AeroTech orders were up 21% year-over-year driven by overall market strength and several large orders for boring bridges. With the good start of the year and orderly momentum we have reiterated our full year 2016 guidance of $2.15 to $2.30 of adjusted EPS which equates to $1.90 to $2.05 on a GAAP basis. With that I will turn the call back to Tom.

Thanks, Brian. I thought today's call would be an appropriate time to share a few details on our organic growth initiatives. Let's start with our food business. First, JBT is benefitting from favorable market trends with expanding global demand for food equipment driven by fundamental shifts in dietary habits, towards increased Protein consumption and higher value Liquid Foods. Demand also benefits from changes in food safety requirements, new food preferences and improved packaging. But we are not just relying on the positive macro trends. JBT is gaining traction within our markets by developing products that are responsive to customer needs. For example in Europe our Protein customers are still oriented towards smaller processing lines, very different from the U.S. which is focused on large capacity production. Frankly, JBT has off sided this difference for a while focusing on producing higher capacity equipment. We are now addressing the needs of our European customer to the smaller scale, more flexible equipment. Specifically, we recently launched our G360 freezers that are targeted towards lower capacity processing lines, maximizing yield and food safety while improving returns for our customers. Given the order strength we are enjoying we expect revenues to double for this product in 2016. Our customers are also looking for increased production flexibility and food quality. We have experienced a positive response in the introduction of the new JBT twin drum oven which has a flexibility to cook a wide range of Protein products. This oven has industry leading air flow and humidity control characteristics. These features drive improved yield, improved quality resulting in higher profitability for our customers. We have improved our liquid food business by becoming more focused on evolving market needs. Traditionally our citrus extractors were optimized for maximizing juice yield at the expense of other valuable by-products. Today we are aggressively targeting the growing global lemon segment with the combination of pre extraction and extraction technology to maximize both juice and oil recovery. This effort has won us several new accounts notably in Argentina, Brazil, Mexico and South Africa. Additionally, we are capitalizing the capabilities acquired with stock, dairy, food and AMV, cross-selling a septic filling and sterilization equipment for the faster growing blended juice and vegetable drink category. In 2014, we reoriented our automated systems business towards the food industry to leverage our strong relationships of food processors and consumer packaged goods companies. This business automated guided vehicles for material handling in production and warehouse facilities. While automated system is relatively small it made significant progress with this new approach to our customers. In 2015, orders were up more than 25% from the prior year. With the need for automation of plants fast becoming a priority of our customers I am excited about the future prospects of this business. Turning to FoodTech aftermarket our progress continues to build momentum. For example; through our Pro Care that has been in this offering, we proactively provide long term service agreements to our customers. By 2013, the number of Pro Care agreements is more than doubled, increasing aftermarket revenue and equally important our ongoing customer engagement. To date we are two-thirds of the way towards our 2017 target for adding dedicated sales and service support for our aftermarket franchise. Our expanded capabilities contributed to the high single digits aftermarket growth we achieved in 2015. Moving to AeroTech, the majority of the business is up is in North America where our position is strong. We believe we are in upcycle spinning for both our mobile and fixed equipment's. The customers for our mobile equipment's are primarily the airlines and air freight companies. The airlines that have been spending on upgrading their aircraft fleet are starting to spend on support equipment. Our fixed equipment's primarily sold to airport authorities although the airlines do influence their decision making. We are seeing increased dating activity in orders in reflection of the need to replace the aging infrastructure while also improving the customer experience at the gate. Finally, let me speak to growth through acquisitions. We continue to cultivate a rich pipeline. JBT remains a highly disciplined in our approach making sure we buy great companies that create values for our customers and complement our existing offerings. With that, we will open the call to your questions. Operator?

Thank you. [Operator Instructions] And your first question comes from the line Walter Liptak with Seaport Global. Your line is open.

Hi, good morning guys, an excellent quarter. I wanted to ask about the guidance the EPS came in a little bit stronger than we were looking for I guess because of the FoodTech aftermarket business but you maintained the guidance for the full year so I wonder if there is some moving part that crept up during the quarter or you know why you didn't increase your full year guidance?

Walt, you know as I mentioned it was a great quarter but it is our lightest quarter, the first. And although we are encouraged by trends of the business we felt we are still very much on track what we hope to achieve this year and maintain the guidance this point, makes perfect sense but we are certainly encouraged by the way business is developing.

Okay. Let me ask about the aftermarket parts and service. It sounds like during the quarter you have either some large contracts that came in or maybe some of the feet-on-street are starting to bear fruit. I wonder about the sustainability of that. How much, you know, you are commentary about this being kind of one time improvement or bumpy as in you called it? How should we think about the rest of the year and aftermarket of FoodTech?

Yes, as we guide to, we have solid organic growth of JBT this year. We are pleased to deliver that if we meet our expectations and of course important part of that is our continuing aftermarket program. What we can predict, having followed this for a period of time is that we do occasionally see orders that come in one month before the end of the quarter, one month after just depending on customer preference and our feeling is that as we focus on the year we are definitely see great trends in the way we are building our FoodTech aftermarket but it becomes a little more difficult to predict that quarter-to-quarter. So from our perspective we are encouraged by progress on the aftermarket, we have made good progress on our hiring or staffing objectives in the Pro Care process so all the arrows are pointing in the right direction so we continue to work at it but from our perspective, it's right on track.

Okay. Great and if I can just ask one last one, just stepping back from the food tech orders during the quarter in organically maybe down a little bit. You had really strong orders in the third and fourth quarter of last year. How are you thinking about the flow of orders on organic basis for FoodTech this year? Do we start out light and ramp throughout the year, what should we expect?

Walter, good morning this is Brian. As you mentioned we did have strong order flow in the third quarter and the fourth quarter. The first quarter not quite strong on the organic side for FoodTech but frankly, came in right where we thought it should come in down about 10% for the quarter versus prior year and by the way last year first quarter was quite strong in the FoodTech area. So we think about the run-rate revenue for FoodTech overall and look at the pace that we booked in the first quarter its right where we expect it to be.

So the second half to that question, what is the pipeline look like? What are you thinking about order flow for the rest of the year?

Yes, I would say that we continue to be optimistic. We are forecasting solid organic growth and growth from acquisitions Walt and when I look at the activity in the market place it's very solid and strong. If you look across the geographies North America is very strong and continues to be promising. Europe is improving. We are really encouraged by the progress we are making in the market place. I believe JBT is performing better but also the market place itself is healthy. Latin America, although is part of our business, continues to see good activity and Asia, we continue to see, China is being slow but being potential for upward this year but the rest of Asia being very solid with the Philippines, Indonesia, Malaysia putting in a lot of investments, our customers being busy. So as I look across that and you combine it with the trajectory on arrow, in North America also, we feel very good about the way the order books developing and JBT prospects for this year is being very strong.

Okay, sounds excellent. Thank you.

And your next question comes from the line of Larry De Maria with William Blair, your line is open.

Thanks, good morning everybody. Can you guys breakdown end markets between Protein a little bit, I know poultry is obviously [ph] but can you give a color in each sustainability? Can you give some questions as to why the poultry outlook especially since customers coming off some years?

Yes, Larry I would tell you that in our Protein business the trajectory is very solid and we are seeing orders being up in Europe and North America and as expected in continuing progress in Asia which are our three key geographies around Protein and that's in two parts. You have to understand JBT has a good position but there's lots of room for us to grow within our markets so as we continue to improve our performance what I talked about in my prepared comments, new products are focused on customer needs driving their profitability, we feel confident that the markets are developing as we hope in place with our progress within those and we don't see any slowing of customer investments in the order activity or the project activity we are working on in front of the orders as of now.

Okay. Thanks and specifically in China, the slowness in China, is that a function of capital spending in China in your end markets or more function of your position in China as you guys are obviously evolving in the market getting better positions for selves?

Right, for China its more the macro issue we experienced with the QSR slow down, the Quick service restaurant slowing combined with some of the bird flu and maybe I would describe as a bit of over capitalization few years ago but our early feelers was too early to call but are encouraging in China, particularly in Protein. We are starting to see some more interests from customers. We don't know if that's going to convert or not but let me tell you a little bit about what JBT is doing to improve its prospects in China and Asia overall. We are really pleased with the opening of our new food technical sector in China. We have seen a lot of customer activity in there and that's giving us a chance to expose our customers to our latest technology and to help them improved their profitability and food safety so that's going very well. We are doing a much better job of cross-selling our product lines. We had particular strength in one country or another where we would see one product line sell well but maybe not adjacent ones so we have invested in having more focus on product specific skill sets in the region which we see gathering traction and last we have worked very hard to rearrange our commercial organization in support of localization of production which means we are making more products available from our China facility which allows us to tailor them to the needs for example most of the cooking in North America and to lesser extent Europe is powered by natural gas. Asia is quite different, particularly China is overwhelmingly powered by electricity so we have to adapt our products to those local needs and JBT is moving on in those so significant energy being expended by the company but I feel in the long run it really is going to yield benefits for JBT because we are making investments in a market that if you look at the demographics that we talked about early and the macroeconomics behind increased Protein consumption and Liquid Foods JBT is going to be there in a material way and enjoy those trends as they play out.

That's great color, I appreciate that. Now my last two quick here; first of all, define the year, where would we be on coverage versus where we would be historically registered now? Do you have confidence in the outlook? In fact, just on the M&A pipeline, can we expect the conversation on price and if there is reason to think if you should close a deal or two this year? I will leave it there, thanks.

Yes, I think the biggest, easiest way to think about where we stand for the year is looking at our backlog so we are over $600 million now. We started the year at $520 million and so both AeroTech and FoodTech are sitting on record backlog. So it really suggest that we are going to have confidence with our guidance for the year.

On the M&A front, I did mention that and I believe the activity that's ongoing. We are working a rich pipeline, both in Protein and Liquid Foods and supported from some other core product lines Larry and we are just being very disciplined, building relationships, seeing the activity, it has to be a great fit, t has to make sense for our customers help us create value with them and last disciplined in terms of the price but I can tell you that the activities ongoing, we will work to see if we can get those stars to line up. Certainly we have demonstrated our ability to do that in the past and we are continuing to make significant efforts in that area going forward.

But the point is, price hasn't changed very much, they would cause you guys to slow down. You are just being disciplined as you always are or has that changed?

No, that's correct. It's continuing the process we have used so far and we are using the same process and the same basic activities we have so JBT continues to work that front and as you think about JBTs growth engines, you think about our opportunities in front of us, we believe M&A and organic are both significant opportunities and we see fragmented space and Protein Liquid Foods and an opportunity for us to consolidate those as we go forward and our outlook remains the same as it has been since we started this journey on the next level.

Great, thanks. I appreciate it. Good luck.

And your next question comes from the line of Chris McGinnis from Sidoti & Company. Your line is open.

Good morning, thanks for taking my questions and nice start to the year. I just quickly wanted to talk about, maybe a better backdrop in the AeroTech market. Maybe just to talk about your position maybe where installed base that you have and how much of that maybe up for replacement and I guess towards where you are currently tracking in terms of revenue growth. Should we think that will get stronger I guess?

Chris, as I look at it we certainly are fairly, we have a large installed base in North America, you look at the bridges and a lot of bridges we have produced over the years, many years of runway to speak if we continue to execute it, 3000 bridges JBT has out there and in a given year we will produce around 150 or so you do the math, that's about a 20 year cycle production so given the trends we are seeing and the investments happening, we are encouraged by the orders we are taking on the big side and then on the mobile side, there is also very aged fleet that's out there. We have seen the airlines make significant investments in new aircrafts which you see out there and when you fly day to day, what you feel that the equipment around the airplane is quite aged and we have seen many customers just this last year start to increase their core activities and we are starting to see those orders show up and you see that in our continuing trajectory in increased orders in the backlog on AeroTech and we feel optimistic about that. As long as the airplane industry remains healthy in North America, primarily for JBT, those are very good trends that should continue to play out.

Great thanks for that. I think the last quarter you called out was ICS, I think it performed a little bit better, can you maybe just talk about the integration of acquisitions honestly, you're busy in 2015, can you touch on the integration process and where we are at with them?

No, sure, that's a big part of what's happening at JBT, you know as we continue to acquire, our desire is to leverage the strength of JBT and what I mean by that is that we are primarily acquiring a particularly strong technology or a particularly strong in a geography and what JBT really brings to the table is the opportunity to take those companies on a global stage and we have seen that occur time and time again. We mentioned earlier on some of the ICS we got in Asia they were accelerated because of their activity. We mentioned on the Protein side combining with some JBT technologies, the orders with FoodTech that we were able to bring to the table and that's a big part of the focus and then when you step further backwards from that. We work on integrating the back office, the cost and sometimes the manufacturing facility and it's interesting that the depending on the nature of the acquisition, we have folded the entire business into our facilities in case of FoodTech. And then secondly on the FoodTech side of things, we moved some JBT production so both sides of that equation have worked for us and we work to do that very thoughtfully and very methodically so we can maximize the commercial opportunities without damaging the business going forward.

Great, thanks for that. And then lastly, Brian, just on the margin expansion in the quarter, can you talk a little bit about mix versus internal initiatives that drove that expansion? Thank you.

Yes, as I mentioned that aftermarket of FoodTech was strong but it's also worth noting that with AeroTech we did have some good product mix on some mobile side particularly some of the military application so that's market driven. In the backdrop we do continue some of our investments and pricing initiatives and that continues to help. We haven't disclosed anything particular breaking some of those out, but I can tell you that some of the backdrop on the cost side, on the pricing side. Cost in particular on the purchasing side, on the material side, that is continuing in the backdrop of this and can be used to drive margins for the rest of the year.

Yes, coupled with the ongoing lean in the ICS which I think is really important to understand and Chris I would tell you that I continue to have a strong conviction around the fact that our lean RCI program will not only improve our cost but our working capital but is creating advantages for us in the market place. We continue to work on reducing our lead times and also improving our product quality which we think are both very critical to our success in the marketplace. And although I am encouraged with the progress we have made there is still significant opportunity for us to improve and continue to execute better the opportunity for the future there.

Sure. I guess just one question on the margin expansion versus the revenue growth. I know you got the 50 days extended leave this year of expansion or thought process around there. How long can you balance the margin expansion initiatives and also drive that top line at the rate you can and is there a point where you sacrificed revenue growth for the margin expansions? Maybe just talk about your thoughts on that, thank you.

Yes, that's something we talk about quite frequently inside JBT but from my perspective we see a multiyear runway there. We're fairly early in the journey for lean Brian mentioned supply chain. JBT has made some reasonable progress but there is lots of room for us to go there. Our pricing initiatives continue to effective Chris so I see a multiple years ahead of us with the ability to drive margins. And I will say in the backdrop of this margin expansion JBT is still able to invest materially and growth investments for the business. We talked about the aftermarket staffing; we talked about the new products we are developing on the call today. There's further developments in the technical center in China, just smart targeted investments that are helping us win in the marketplace, create value for our customers and that's kind of our virtuous cycle that we are talking about where we continue to expand or margins, relay some of that into our earnings and other times be able to continue to invest in our business that strives that organic growth that we hope to see and continue to deliver through the cycle. And last, we supplement that with focused M&A approach where we add on new companies to say they have technologies or create solutions for our customers there complimentary to ours and I put that all together and I feel a very strong value proposition for JBT that we can do for many years going forward.

Great, very exciting. Thank you very much for the time.

Your next question comes from the line of George Godfrey with C.L. King. Your line is open.

Thank you, good morning. I wanted to shift the attention to the cash flow statement and typically working capital. Can you tell us what is going on there? Cash flow from operations $200,000 versus $30 million last year?

Sure, good morning George, this is Brian. Generally speaking the first quarter does tend to be a lighter quarter from the cash flow perspective. Seasonally we do have inventory build typically in the quarter in preparation for the stronger second and third quarter and we have typically larger tax payments and bonus payouts during the first quarter. That said, we did under perform for working capital for the quarter on both AR and inventory particularly on AeroTech so we are going to continue to focus on for the rest of the year. But overall lighter quarter would normally be expected in the first quarter but a little bit underperformance in that area for the quarter.

Okay. So specifically looking at inventory here, with that inventory build there, it looks about $30 million is that AeroTech related or Food related?

Predominantly AeroTech.

Got it, okay. Thank you. And secondly, if memory serves last quarters guidance for CapEx was about $40 million for the year. Is that in place?

That's right. So $40 million for the year, that's about 3% of our guided sales, since we are a bigger company than we have been in the past so you would normally expect about $10 million per quarter. Little heavier in the first quarter, nothing in particular I can point to but at this point we are still looking at that $40 million-ish number.

We would only add a little color around the capital investments. It has been encouraging. Our businesses have been doing a nice job coming forward with investment opportunities in our facility that allow us to improve our margins in terms of our cost positions and shortened lead times for critical components that we had historically purchased on the outside so although Brian & I are probably not seeing as many as we would like to see, we are encouraged by the investment opportunities that are coming forward to help us. Improve our profitability and our ability to serve some of the customers with the capital that we haven't seen in the past at JBT.

Okay. CapEx spending little more down here in Q1 and then on dollar basis probably tapers down a little bit as we enter Q1?

Correct.

Okay. And then on the restructuring charge $7 million this quarter in the mid-point of your range of $11 million to $13 million is $12 million so 58% of that $12 million being spent in Q1, how do you see the rest of the $5 million-ish over the next three quarters? Is it more concentrated early or is it evenly spread out on the three quarters?

Right and just to be clear, we took the charge, and we haven't really spent the money yet. We will pay the money on the cash basis over the next several quarters. In terms of the remainder of the $5 million to $6 million it is a little hard to tell because the rest of it is based on activity but I would generally expect it to be fairly even to the rest of the year.

Got it. And just last question ERP, the ERP upgrade, where do we stand right now on that as a percentage to completion?

Yes, it is still very early. We have started spending money on that in terms of building up the networks and the software engagement and the team engagement and that works so we are in the development stage. First implementation happens in the back half of the current year and then we will continue through 2017 and 2018 so it's still early.

Okay. So the first implementation very early days and the second half of this year and it is something that will roll out over the next probably 10 or 12 quarters.

Yes, and then obviously as we add acquisitions, it could add to the back end of that.

Great. Thank you very much.

Thank you.

There are no further questions at this time. I will now turn the call back to Mr. Tom Giacomini for the closing remarks.

As Brian and I discussed this morning we are encouraged by JBTs growth and margin expansion in our continuous efforts to prove our position in the market place and operating efficiency. Thank you for your time and support.

Thank you, ladies and gentlemen for your participation. This concludes today's conference call. You may now disconnect.