JBT Marel Corporation (JBTM) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation's Second 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 speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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 second 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 that forward-looking statements in today's call are subject to the Safe Harbor language in yesterday's press release and 8-K filing. JBT’s periodic SEC filings also contain 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. Now, I would like to turn the call over to Tom.

Thanks, Debarshi, and thank you all for joining us on the call this morning. As you saw on our earning release, JBT posted healthy gains again in the second quarter of 2016. Revenue increased 29% year-over-year and segment operating profit improved 38%, driven by segment operating margin expansion of 80 basis points. Diluted EPS was $0.63 for the second quarter of 2016 compared to $0.48 in the year ago period. Excluding restructuring charges adjusted EPS was $0.67 in the second quarter of 2016. Profitability exceeded our expectations. With the ongoing benefits of our next level of strategy and solid performance in FoodTech’s protein business and aftermarket coupled with favorable mix at AeroTech led by strong military sales. While FoodTech’s inbound orders increased 38% year-over-year, including organic growth of 17%, some orders anticipated in the quarter were delayed. Our close continued communication with customers gives us reason to expect these projects will convert to orders in the future. We continue to see significant project in core activity at the customer level that precedes order issuance and are focusing our commercial and engineering resources on converting these projects to orders in the back half of the year. We remain confident about the full year. As a result of our growth and improved profitability, we are raising our full year guidance. I’ll let Brian to provide some color on the second quarter performance, our restructuring program and JBT’s full year outlook. Brian?

Thsnk, Tom, and good morning. JBT’s year-over-year gains in the second quarter were strong across the board. Revenue expanded 29% comprised of 14% organic growth and 15% growth from acquisitions. Segment operating profit was up 38% of which 26% was organic. Currency translation had very little impact on the quarter. On a segment basis, FoodTech posted revenue growth of 40%, including 16% organic growth. AeroTech posted revenue growth of 11%, all organic. FoodTech’s segment margins were down slightly year-over-year due to the impact of acquisitions; still margins were better than expected aided by strong protein equipment sales and aftermarket performance in the quarter. AeroTech’s margins expanded over 200 basis points versus prior year due to strong military sales and in otherwise favorable product mix as well as ongoing benefits of our relentless continuous improvement initiatives. Second quarter corporate expense was somewhat above expectations, driven by higher incentive compensation in accounting and audit costs, particularly in connection with the 2015 acquisitions as well as shared service center costs. We recorded a restructuring charge of $1.9 million in the quarter for our optimization program, bringing the first half charge to $9.1 million. We still anticipate full year charges of $11 million to $13 million. When we announced the optimization program, we talked about the realignment of FoodTech’s protein business in North America and liquid foods business in Europe. In Europe, we are optimizing liquid foods including the consolidation of duplicate offices, integrating engineering and establishing a unified commercial organization. Similarly in North America, we are optimizing engineering and sales support for the protein business. Additionally, we are taking steps to improve our cost structure in Asia and Brazil. We now expect to capture savings associated with the optimization program of more than $3 million in 2016, up from our previous estimate of $2 million, which is reflected in our updated guidance. Looking ahead, we expect incremental savings of $4 million in 2017 weighted towards the back half of the year and another $1 million in 2018. That brings total annual savings associated with the program to $8 million. These savings will continue to support investments in our growth initiatives as well as contribute to segment margin improvement. On the cash flow front, we expect free cash flow conversion of about 80% for 2016 excluding pension contributions of about $14 million for the year. Our working capital build was supported first half. Higher first half sales and our seasonally stronger second half forecast will moderate by year-end. Based on our first half performance and expanded margins, we have raised our full year 2016 guidance. We now anticipate GAAP diluted earnings per share of $2 to $2.10 or $2.25 to $2.35 on an adjusted basis. We expect full year revenue growth of about 16%, reflecting organic growth of 5% to 6% and 10% growth from acquisitions. We now expect segment operating margin expansion of 50 basis points to 75 basis points compared with the previous guidance of 25 basis points to 50 basis points. Corporate expenses are forecast to be slightly over 3% of revenue, interest expense between $9 million and $10 million and a tax rate between 32% and 33%. With that I'll turn the call back to Tom.

Thanks, Brian. Since we are at midpoint of our year, let me start with an update on geographic tents. At FoodTech, customer activity remains quite strong in North America for our protein and AGV businesses with liquid food softer. In light of the recent Brexit vote, we're actively engaging our customers and keeping a watch on any possible impact on our business in Europe. For reference, JBT's UK sales represent less than 5% of total revenue. At this point in the process, our business in Europe remains on track. Asia has been improving for protein while liquid food is steady. Quote activity in Asia is up, which is a positive indicator for future opportunities. In Latin America, activity is mixed for both protein and liquid foods. With export oriented customers like protein processors and orange juice producers sparing well being offset by lower local market activity. At AeroTech customer reaction to JBT's new products has been encouraging. In North America, which represents the majority of our business, market conditions remain positive. Europe remains more challenging with our competitors benefiting from exchange rates. Switching gears, I would like to provide an update on our RCI initiative, which is an important part of our strategy to utilize continuous improvement to enhance our top and bottom line and to deliver a sustainable competitive advantage. JBT's RCI activity in 2016 has included a significant step up in our strategic sourcing activity. Until 2014, our business units sourced independently. Through our sourcing analysis, we identified that they were largely buying similar items. In 2015, we started negotiating as an organization for indirect categories with good results. This year, we are starting to tackle the much larger direct material side. In the second quarter of 2016, we hired a highly experienced VP of Strategic Sourcing to lead our efforts. The goal of our sourcing program is to consolidate purchase with fewer stronger suppliers. This allows us to negotiate more favorably on material costs. It will also results in improved lead times, inventory levels and ultimately the value we provide JBT customers. We expect the benefits to crew over the next few years as we continue implementation, first in North America with Europe and the rest of the world to follow. On the M&A front, our acquisition pipeline remains robust. We're driving an active and disciplined process. Our focus is on developing opportunities that meet our criteria for strategic fit with our customers’ needs. In the past quarter, we did choose to pass on an opportunity. While it was a good strategic fit, the pricing expectations exceeded our desired metrics. I'd like to highlight some recent customer activity that affirms JBT’s strong position in the marketplace. In the second quarter, I visited a key East Coast customer that is leading the charge on innovative nutritional beverages including organic teas and specialty waters. I was pleased to see that they've had a good experience with their high tech Stork linear filler for these growing beverage categories and how our liquid foods organization has come together to offer service and support for this customer. Last, I was encouraged by discussions about potential future investment using JBT's comprehensive solutions including capabilities from our recent A and B acquisition and our core fruit and juice business portfolio in combination with technology from Stork. Another interesting project underway is with a major protein processor in Asia. As we've discussed in the past, customers in this geography represent a strong opportunity for full line solution selling. In this case, our team in Asia is working towards a complete further protein line that includes breading, cooking and freezing equipment. This project is particularly exciting for us as it demonstrates JBT's ability to meet emerging market customers’ Greenfield project requirements. These opportunities confirm the importance of our recent investments in Asia including our new technology center and stronger leadership. As you've heard from my remarks and Brian’s, we are pleased with our second quarter performance and our outlook for the year. Our optimization program and ongoing RCI initiatives are benefiting our top and bottom line performance. With that we’ll open the call to your questions. Operator?

[Operator Instructions] Thank you. Your first question comes from the line of Schon Williams with BB&T Capital Markets. Your line is open.

Hi. Good morning.

Good morning.

Good morning, Schon.

Congrats on the quarter here. I just wanted to first off address the guidance. It looks like you raised the bottom end $0.10, but only kept the top-end only raised at $0.05. And that comes despite a pretty big beat in the quarter, some lower guidance around kind of interest and tax. And I'm thinking kind of seasonally – seasonally, I'd maybe expect a little bit more out of the back half of the year. Can you just talk about, I don't know are you being conservative here, is there any headwind that we need to keep an eye on in the next two quarters here?

Hey, Schon, as I mentioned, our confidence is building in the year and we're optimistic about how it's developing. But that said, as you know, JBT – our back half of the year requires a significant amount of execution, particularly our fourth quarter, which are quite large. But as I look at it, I'm quite pleased that we're showing strong organic growth for the company at 5% to 6% and we're delivering with this upgrade in our guidance of $0.075 improvement in our midpoint of our guidance and that translates to over 20% EPS growth for the year. So from our perspective, this is really a strong guide and we're really pleased with the results we're delivering this year.

Okay, excellent. And then on the new sourcing manager, could you just talk a little bit about – I don't know is there low hanging fruit that he can get started on immediately? Is this kind of more of a – kind of 12 to 18 months in terms of when we'll start to see some benefit there? Just any color there would be helpful.

Sure. So the new sourcing manager is somebody I've worked with in the past. He is a very capable and confident individual and I'm pleased to have him on our team. I would tell you that we've already started some of the work on some of the easy areas, as I mentioned the indirect categories, those are things like travel and supplies that you use, MRO and we've started to take advantage of that and some of that's coming into our results. But as go into the direct category, Schon, where there's a real opportunity, those are the steel spends, the pumps, the motors, the controls et cetera. That's where the largest opportunity is for JBT and that's where it takes more heavy lifting. And we’re quite confident that there's going to be some nice results giving our historic purchasing activity in the way we manage that. But we're just going to have to put the effort in to realize those results. So it will be a multi-year payoff, as you mentioned. We'll start to see things materialize in 12, 18 and 24 months, but it's going to be a real benefit to the company in our margins. And I don't want to minimalize the fact that the way we've purchased as independent business in the past has really sub-optimized our supply base and our ability to get good terms, consignment inventories, shorter lead times and things of those nature that will also come along with this project. So it's multi-dimensional of the benefits that will accrue to us.

And do you have a sense just segment wise? Who benefits the most out of those? Is it AeroTech versus FoodTech?

Well, it will be similar benefits, but obviously the food spend is considerably larger. So in terms of absolute dollars, you would expect the food to have a greater contribution, but you should expect similar benefits on a margin basis perspective. And I would tell you that the food spend was probably even more fragmented than the aero spend because we had more units, so there might be a little additional tailwind that comes from that.

Okay, perfect guys. I’ll get back into queue. I appreciate that.

Thank you.

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

Thanks, good morning.

Good morning, Larry.

Good morning.

Hi, guys. As it relates to the FoodTech orders, I guess we can back into kind of a first half plus 1% year-over-year organic FoodTech number. It seems a little bit light especially with the second quarter being an easy comp. So I was just kind of wanted if you guys can dig into that a little bit. If it just – is it mostly around timing? And how do we think about the rate of organic growth in the second half and so therefore we have some nice organic growth into next year.

Right, Larry, and that’s something we did mention with the timing of the orders and some of that moving out into later in the year, that’s exactly the point. We did experience 1% growth organically in the front half of the year even with the favorable comps year-over-year and that’s why we highlighted it. From my perspective and in close communication with the customers where we did see the orders move out, they still remain committed to the projects we’re working on. It’s just that the orders had not originated the timeframe we expected. And as we work our way through the back half of the year, we have a significant amount of orders to book and we’ll continue to work that. And from my perspective, its all around making sure our customers have all the information they require. The engineering – the activity is complete, things of that nature. And I don’t believe any of the delays that we saw so far where to do with JBT, which is simply our customers deciding, when it was appropriate or when they wanted to make the investments. And as you know, we do make our large equipment sales, our capital oriented purchases for our customers by nature, so they do have some flexibility when they commit that capital. And from our perspective, we’ll just continue to be very diligent and work towards that. As you pointed 2017, obviously from our perspective, we do have to complete the order book as it stands in the back half of the year, but for 2016, our confidence is solid. And that’s why Brian and I and the team felt confident in raising our guidance. And that’s how we’re moving forward, which will give us the solid organic growth that we’ve outlined for the year.

Okay. And some of the orders just slipped, I guess, every month into the next quarter, have there anything converted yet? And with these push outs, is it really just customer specific or they concerned about the market or anything out there to worry about in other words is it relates to the market or I would think that some of them would have already converted so far?

Okay. So from the communications we have, there is no red thread that runs through there or any specific issue that our customers are confronting that would tell us it’s a market based issue. They were specific to the customers. And from my perspective that’s the way we see it. And for that reason, Larry, we don’t believe at this point that there is a macro issue at work that’s affecting the order book. We don’t comment on current quarter activity as we ramp-up, but I would tell you that my expectation would be that a number of those orders will book in this quarter, but we just have to see how that continues to develop and the projects that we’re planning to close in the third and fourth quarter come to be. And we’re making all the efforts we can and putting ourselves in a place to win.

Okay, thanks. And just last question, as it relates to M&A, I know you guys have – I assume you have a pretty robust pipeline in common and that again if you want, but – and you passed on something because of price. If this price challenge more prevalent in the market now in other words evaluations and bid/ask spreads getting wider or do you still see good opportunities and should we temper our enthusiasm around on your guys’ ability to close M&A?

We continue to see good opportunities, Larry, and we’re maturing those. And we don’t believe this is a systematic ramp-up in the pricing for opportunities in front of us. This happened to be a process that was probably looked at it a bit more broadly than many of the deals JBT typically mature, so there was more competition around it. And from my perspective, we just remain very disciplined in terms of first strategic fit, are we bringing in a company that enhances our value creation in front of the customer – in the customer’s eyes. And then secondly as we modeled it out with our synergies and our thoughts around how JBT can manage the business. Do we generate an appropriate return for our shareholders with the capital we’re going to deploy and we need and will require and do require those two boxes to be solidly checked before we move forward on a deal. And the strategic fit was there on this deal, we really like that, but as you started to model and we did our best work on the financials of the business, the price that was figured on the deal was higher than our ability to generate adequate return, from our perspective that’s no deal and we passed, but we do have a number of other deals. We’re continuing to work towards and our pipeline is rich. And we feel we can continue to get those done in a way that creates value for our shareholders.

Okay, thanks. The discipline is very good. Thank you very much.

Thank you.

Your next question comes from the line of Walter Liptak with Seaport Global. Your line is open.

Hi, thank you. Good morning, guys.

Good morning.

Good morning, Walt.

I want to stick with the FoodTech business and ask about, I think, some of your comments where that protein was strong, but liquid foods, I think, you called out as maybe not as strong. And so I’d like to understand this. It sounds like the industry for liquid foods has been grown double digits. And I wonder your comments were about orders of shipments and may be what the pipeline for liquid foods looks like?

Yes, Walt, the commentary was more around customer activity and partially as it relates to orders, but we had seen and experienced in the quarter some slowdown and some specific customer activity on liquid foods. We don’t believe it’s a long-term or a structural change in the market place. We do believe that those markets will continue to grow, but as customers putting capacity and make investments in this equipment, they do tend to get step function type increases in their production. And as I mentioned, they make decisions around that with their capital. So from our perspective, we still remain bullish on the end markets. And what they mean, we just work with our customers to make sure we’re innovating and developing the right projects to meet their needs in. As I mentioned the visit to that East Coast customer, their business was very strong, they’re working on a lot of the specialty waters and organic ready to drink teas and they’re enjoying a great business with their end users and our equipment is serving those needs well. And we were discussing future investment plans much more comprehensively than they’d made in the past because as they become aware of JBT’s full capabilities. So from our perspective, we do like the market, but as we look at the second quarter and just the general activity, it had slowed a bit in North America. And from our perspective that’s not a long-term structural occurrence, it’s just some dynamics that are relative to the market place today.

Okay, it makes sense. Is liquids foods something where you’re expecting orders in the back half of the year that were delayed or is just something where it just the longer term growth 2017, 2018 looks good?

It’s more around the longer-term prospects for JBT. Obviously, we do have some orders. We need to book. And I want to make sure everybody understands that in the back half of the year just for JBT in general, but our confidence is there, Walt, and we do see the activity. We do see the projects we’re working on. And from our perspective, it’s just we had some quarter slip out and we want to talk about it and make sure that people are aware. But I’d also couple that with the notion that we are working on quite a few really encouraging projects and the activity levels high. It’s just making sure we’re working with the customers and they’re making the investments to get those projects converted to orders. And that’s where our energies are at this point.

Okay, that’s perfect.

We definitely remain optimistic. As we look the liquid foods market about what it means for JBT, our strong position there and the consumer trends that are behind it, the organic nature in the liquid foods, the meal kind of ready to eat on the go capability. All those kind of trends are continuing to play out. So we just got to make sure our technology and product offering fits those customer profiles.

Okay, great. If I can ask a question about the AeroTech business and the margin improvement there, I think, Brian you called out the military and other product mix as well as some of the RCI improvements. And I wonder if there is a way of parsing out a mix versus kind of structural improvements that you’ve made to that business?

So more of the improvement in the second quarter was due to the mix issues, the military products and the few other activities in the quarter were quite strong they help the margins. And if you look at the margins for the first half about 10.5% or so, 10.4% I think that’s a general guideline for what we are seeing in the second half. So you’re not going to see that kind of 11% type product mix impact as we go into the second half.

Okay. And when we’re out visiting AeroTech a year or so ago back, it look like there was a lot of progress that was being made on Lean. Any update on how those are progressing?

Yes, Walt, absolutely if you know the – and particularly our GSE or mobile equipment business in Orlando has taken a strong leadership position in developing the RCI initiatives and we have seen some benefits its shown up in our margins. But in addition we are just seeing better flexibility coming out of that facility in terms of meeting our customers’ needs in our lead times on some of our key products we are seeing some nice improvement in the back half of the year or so. The benefits are definitely accruing to us and from our perspective we still got some work to do on the inventory and things of that nature but we know we are on the right path. We know we are making progress and from our perspective we like the fact that it has this duality to it which is – it helps us improve our income statement, it improves our return on invested capital but most importantly it helps us win with our customers moving forward.

Okay. Great, thank you.

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

Morning, thanks for taking my questions.

Good morning, Chris.

Good morning, Chris.

I guess can you maybe just talk about – a little bit about maybe synergies from the acquisitions, maybe some of the positives you’re seeing from the recent acquisitions. I know you highlighted Stork in your commentary but any maybe numbers around what you are seeing from the past?

Chris, what I would like to highlight and that’s why I brought four of the examples, the visit to our customer on the East Coast it was – sitting at that table the customer it was very clear to me the power that’s coming together by combining these great businesses under the JBT umbrella. So we had a customer here who’s growing have some great end markets and customers they are providers these liquid foods to and their faster growing categories. And we had – really this customer came to us via the Stork Food & Dairy acquisition, where they had invested in some of the Stork technology product through acquisition. And we were able to sit down myself and the team included and talked with this customer about the comprehensive capabilities that came together with A&B in our core food and juice technologies our ability to deliver complete process systems to this customer now. Our knowledge around food and juice purees and introducing those into their beverages coupled with the aseptic technology we brought from Stork. It was quite powerful and it made a very clear to me the opportunity, the value that’s coming from our strategy on that side. And we were able to have a material discussion and talk about their future investments and how the JBT would now be able to get a larger share of that than what we would have historically enjoyed. So that was very satisfying to me. On the protein side, we are seeing similar things play out whereby combining our cooking, freezing and portioning with some of the secondary knowledge that we’ve gathered with Wolf-Tec and some of our recent inspection equipment activity is coming together to create much more compelling value for our customer. So instead of having to independently select a number of equipment suppliers works their way through the validation and the integration of that. JBT all of a sudden is positioned in a much stronger position to be able to offer them a system that delivers on their need. For example, portioning a steak and measuring and inspecting it and making sure that they can deliver that with a higher confidential quality to their customer but at the same time deliver it in a more effective way. So in other words using the example of steak, if you’re able to trim it more effectively and to guarantee your weight with a higher confidence then you don’t have to give your end customer additional. Because you’re not portioning properly so that translates to our direct customer to higher profitability, higher margins by running our equipment and doing that with a system. We can provide them the data and the feedback sometimes through some things like our Internet of Things in a way that give some confidence and control and they can provide that data to their customers. So it’s a double win for them, they come together with their customers with better data and it improves their profitability. So we are absolutely seeing the discipline around our strategic fit, with our acquisitions and offering these more complete solutions is definitely resonating with our customers.

Great.

And Chris, I would add, this is Brian. That when you look at the acquisition activity, it really – having those additional facilities and businesses have helped us to formulate our optimization plan. So the activities in Europe and in North America we have – be able to attack it from a more holistic view of our protein business in North America and liquid foods business in Europe with the Stork acquisition. It really allows us to do things like optimizing, engineering, the sales force et cetera, that’s what’s really helping to drive some efficiencies not just for synergies and the acquisitions itself but cost savings across JBT as well.

Sure. And I guess just thinking about the two different pieces of FoodTech with the protein and the liquids, you have almost or I guess a complete solution on the liquid side.

It’s not having a complete solution maybe on the protein side, hold you back in terms of a growth rate maybe and how important of expanding that share is that to drive further growth.

Right, so Chris just a point of clarification although we have been able to complete some larger deals on the liquid foods side there is still a significant opportunities for us in front of us to round out those categories. So I wouldn’t say that we‘ve reached the point where we’ve absolutely maximize that full systems approach on the liquid foods side. But looking forward in a perfect world, our preference would be able to do a little more on the proteins than the liquid foods to balance our portfolio. And we certainly see opportunities on both sides and we are working towards those and with protein from our perspective its not just completing – if you think about our M&A chart just fillings the boxes but there is the multi-dimensional nature of that. There is sea food, chicken, beef and pork and on the liquid foods side, you move across from teas to dairy-based beverages to juices. So there is that multi-dimensional aspect there also. So there is lots of rooms for us run and from my perspective, you should expect us to continue to do deals on both sides.

Okay. And then lastly just on the aftermarket, has there been a change I guess maybe in the way you’re going to market what’s the biggest driver of that kind of increasing that you called out in the release itself.

Sure. So in the last two quarters we’ve enjoyed strong aftermarket contribution to our results. Certainly we believe it’s a result of the next level investments we’ve made in additional engineering, additional supporting people inside the businesses and then the additional sales resources, Chris, but I would tell you that from our perspective. In the first quarter was interesting it was more of the top line we just saw some more projects and that drove that in the first quarter. In the second quarter, interestingly enough there was a aftermarket but we saw more margins and that has to do with the mix of the kind of projects we are working on in the aftermarket, not all aftermarket opportunities are created equally. So certain things, certain kind of parts, mix of parts or rebuilds are more lucrative than others. From our perspective we are just really encouraged to see the aftermarket coming through and helping JBT improve its performance given the strategic focus we’ve put on that so its confirmatory of our desire to grow that and invest behind it.

Great. Thanks for taking my questions.

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

Thank you and good morning. Thank you for taking my questions.

Good morning, George.

Good morning.

Good morning, very nice job in the Q2. I just wanted to dig in a little bit on more on the revenue guidance. The 16% for the full year, if I look at what the first half 24% growth year-over-year first half to compare the last year and I look at what the guidance implies for second half. It seems like there was a pretty significant deceleration on a top line growth rate. I’m just wondering if that’s type is delaying orders or if you’re seeing anything there.

What I would tell you, George. Is that the second half of last year had a fair amount of the acquisitions already baked into it. So the moderation in the back half is because you don't have that big impact from the acquisitions. So that 24% first half of this year versus first half of last year quite a bit of it was from the acquisitions. So we still see organically 5% to 6% growth in both AeroTech and FoodTech this year. And we did see strong growth in the first half. It moderates a little bit but part of that is we had a really particularly strong second half of last year. So that's really kind of how the math works on that.

Okay. And the 5% to 6% growth I think you call though on the press release though double-digit organic growth in FoodTech orders. So some of those orders could perhaps get pushed out into 2017 the realization?

Yes, part of them could go into the second – into 2017.

Right, which is what we'd expected; it’s not that those orders we booked are pushing out in the order book. It’s just that as you know George, a lot of the orders we booked are for six months or a year out, so that’s not unexpected.

Okay, got it. And then just looking at the delta of GAAP versus non-GAAP $0.20 in the first half that looks like it's annualizing the $0.40 versus GAAP and adjusted earnings. If you look out the 2017, do you have any idea what you think the adjusted versus non-adjusted earnings would be relative to one another or do you think they converge?

No, it just point we're only sticking to the 2016 guidance as we get into the back half of the year in November, Investor Day. We perhaps will give you some general guidance in 2017 but as we sit here today. We're not giving guidance for 2017.

And I can respect that. I'm just thinking you must know what the amortization of restructuring charges are as you go into the next year. So I'm just trying to get a sense of what’s that GAAP versus non-GAAP delta is?

Yes. So the $12 million to $13 million of restructuring, sorry, $11 million to $13 million of restructuring charges this year. So the expense of that will on this particular program is expected to predominantly if not all hit income statement this year. The cash will get paid out over the course of this year and a little bit into next year, over the course of several quarters. And then you start to see some of the benefits of that roll in here in the second half of the year. And we actually saw a little bit of the benefit in the second quarter but then again that incremental $4 million of benefits from the optimization program you'll see in 2017 and another million in 2018 but the charge itself is effectively all this year.

Got it, okay. And then my last question, just thinking about future years, I'm curious if I look at the cash flow from operations first quarter, second quarter versus last year or in prior years and I heard your comments about getting ready for a big second half. Is this something we should expect in future periods that the cash flow could call it would be breakeven 200,000 in Q1 and 500,000 here in Q2 versus a much higher net income numbers. Is that a pattern that we should expect in future years?

So I'll tell you generally speaking the first half of the year does have more inventory build compared to the second half. We do create more cash flow in the second half. That said, we did used more cash in the first half than prior year and talking through that a little bit if you look at our inventory on a LIFO basis its up about 16% versus June of last year. And in meanwhile our revenues up for the first half 24%, our backlog was up 36%. So we do have a lot of activity in support of a really strong second half year. So that is generally driving it a little bit more than it might normally. I will say that the efficiency of that inventory activity in the first half is not totally satisfying there are particular areas and businesses that do need to improve and we'll see that improvement in the second half. So I would say the first half a little bit less efficient than we otherwise would want this year but overall our first half would generally be more of a cash user and the second half would be a cash generator.

Okay. Thank you very much.

[Operator Instructions] And your next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is open.

Yes, good morning.

Good morning.

I wonder if you could discuss any new products on the foods side that have been, especially successful versus the competition as well as maybe some commentary around the new product pipeline?

I'd like to highlight a couple of products. I'm reticent to discuss some more specifically against the competition but we had a couple of meaningful new product introductions this year. We've launched a blade portioner, which really rounds out the lower end of the portioning world we've always been the high technology, high capacity provider with our waterjet portioners and our advanced scanners and we're able to take that learning and develop a much more compelling higher value blade portioning solution that rounds out the market for us and we're getting a lot of positive feedback from our customers on it. We're in our early field trials and we'll expect to start booking some commercial orders as we end the year and it will certainly be accretive to our revenues for the following year. Secondly on the cooking side, we've introduced it what we call our new Twin Drum oven, which is an oven that has a number of benefits versus some of the traditional technologies and the competition that's out there. We're able to maintain temperature gradients more effectively in our oven and the humidity levels and what that means from a Layman's perspective as we able to cook the product more reliably but also increase the yield because the humidity levels in the oven determine the net weight of the cooked protein. So by doing that more effectively, we're able to increase your yield which means we're able to sell the oven for a more competitively for a higher price or for a better position against the competition. And we've seen some nice sales on that we started the blade portioner in the U.S. we started the oven in Europe are two engineering areas of strength. And both those products are hitting the marketplace with a good success and we're early days on that. That said, you know the food industry move slowly and we were encouraged by the feedback we're getting by the customers but as you launch these new products it really is a multi-year annuity. And we'll see those sales grow from year one to year three, four, five just because of the way the industry moves slowly embrace new technologies. But the common piece that runs through both of those is that the designs were put together and developed around the state-of-the-art with the competition, our ability to deliver better economics for our customers by using our equipment. And very much in ROI selling not a price of our equipment selling so designed and developed to support our value selling input. Our value selling approach to our customers and it's great to see that our engineering team was able to deliver the value and our feedback from the customers so far is that they're embracing the value in terms of their acceptance in the marketplace. So we're really encouraged by those. And we have a number of other projects underway, products under development and we'll continue to work those as we invest both on the Food and the Aero side.

Okay, that sounds good. Also would you provide some detail on the ERP system implementation and the plan timeline for that?

Sure. So for 2016 right now we're very much involved in the development of the platform that will be applicable to all of our businesses that ultimately get on the platform. So we will begin our first true implementation in the fourth quarter. And we'll see that implementations over 2017 and 2018. And with some of the acquisitions it could go beyond that but we're really in the development stage and again, first two implementation here in the end of the year.

And then finally are you running up against any capacity constraints and what is the estimate for CapEx for 2016?

Yes. From a capacity perspective, we don't have any issues as we sit here. And I can tell you from a CapEx perspective we're looking at about $40 million for the year.

Thanks very much.

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

Thank you. I just had one follow-up. Tom, you were clear that the orders on the FoodTech side were delayed not washed. And you could see some of those closed in the second half of this year. I was just wondering if there was any commonality on the reasons customers gave you on why they were delaying those orders.

George, as we mentioned its – they were customer specific decisions that were made, there wasn't any trend in the marketplace that are macroeconomic issue they were pointing to, just investment decisions, readiness of their facilities. Their capital budgets and whether it's end of a new – of a current year or a new year those kinds of things.

Got it. That’s great. That’s exactly what I was looking for. Thank you very much.

Thank you.

Thank you.

Your next question comes from the line of Walter Liptak with Seaport Global. Your line is open.

Thanks. I want to do a follow-up on that capacity answer that you gave and primarily you’ve talked in the past. I think on the call you talked a little bit about throughput in the factories and your revenue came through better than expected. I wonder if you can give us an update on how your factories are doing in terms of turning orders into shipments.

Sure. Walt, we look at a productivity metric which is dollars produced as a function of labor hours and for both business as we saw some nice improvement in productivity year-over-year. As we look at the second quarter as our production started to ramp up and that's very encouraging for us. So that indicates the initiatives we're taking on Lean and things you've been seeing in your visits to our facilities. Do allow us to leverage our people and facilities better and quite simply we haven't seen any significant barriers to our ability to support the growth with our current footprint. And as Brian mentioned, as we've made acquisitions so we've been able to better position ourselves to win going forward. So for example, with the Wolf-Tec acquisition we moved our AGV production into that business and to better support our future growth because Wolf-Tec had exceptional state-of-the-art facility and it was better than what we currently enjoyed and that allowed us to optimize our facility better for the AGV business with respect to engineering development while leveraging the Wolf-Tec production capability. So from a JBT perspective, we constantly test ourselves and say hey, you know, do even appropriate capital structure or are there opportunities to improve it. And certainly the Lean and RCI allows us to make better use of our facilities without having to make investments to support the growing business we enjoyed.

Okay, great. Are there any step function so you can think of that would reduce lead times or is this an ongoing…

It’s an ongoing…

Will be up for the next couple of years…

One of things I did mention one of the areas we do see is a real opportunity, Walt, is our supply chain.

Okay.

Many times our lead times are determined more by our suppliers than JBT’s capabilities itself. So we purchased some fairly specific pieces of technology on the outside and because we don't have these deep and broad relationships across JBT with our supplier sometimes they quote a significant lead times and also minimum order quantities as you can imagine right. So both of those play against us in our current situation so one of the things that we've got that center in terms of our sourcing initiative isn't just pulling those spends together to get lower prices so to speak from our suppliers, but equally important to get the best suppliers who will offer us a shorter lead times, will offer us in many cases consignment inventory where we can pull on that immediately, to eliminate their lead time issue or at a minimum have more focus on us in a willingness to be more flexible and shorten up their lead times to us which is quite critical to our delivering a complete system in a shorter lead time.

Okay, that sounds like a great focus. Thank you.

Thank you.

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

Well, we certainly appreciate your time and interest in JBT and look forward to talking again next quarter. Thank you all for joining us today.