JBT Marel Corporation (JBTM) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation's Third 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 third 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 in our earning release, JBT posted solid year-over-year gains in the quarter. Revenue increased 28% and segment operating profit improved 34% from the third quarter of 2015. Diluted EPS was $0.69 for the third quarter of 2016 compared to $0.43 in the year ago period. We were also pleased with their inbound order rates. On the second quarter call, we said that some FoodTech orders anticipate toward the end of the quarter had been delayed. Since then most of these orders are come in as expected. FoodTech inbound orders were up 27% year-over-year and were very solid on an absolute basis at $242 million for the quarter. JBT inbound orders were up 21% and backlog increased 25% versus a year ago period. I’ll let Brian to provide some color on our third quarter performance and JBT's full-year outlook.

Thanks Tom and good morning. JBT’s year-over-year gains in the third quarter were strong across the Board. Our 28% revenue growth was comprised of 17% organic growth and 11% growth from acquisitions. On an individual segment basis, FoodTech posted revenue growth of 33% including 16% organic growth. AeroTech posted revenue growth of 18% all organic. Both FoodTech and AeroTech segment operating margins were up year-over-year with a 50 basis point improvement overall. Included in FoodTech segment operating income was 2 million of acquisition related costs. Third quarter results benefited from strong aftermarket performance at FoodTech and AeroTech. Additionally, we enjoyed a few customer shipments originally anticipated in the third quarter. Third quarter corporate expense was 3% of revenue in line with our target. We recorded net restructuring charges of 300,000 in the third quarter bringing the total to $9.4 million for the first nine months of 2016. We continue to expect full-year 2016 charges of $11 million to $13 million. Our optimization activities remain on track and we continue to expect total annual benefits of about $8 million, with $3 million of benefits this year, $4 million in 2017 and an additional $1 million in 2018. As for the tax benefit we highlighted in the earnings release, every year we have a tax true up in the third quarter relating to the prior years IRS filing. This year we identified additional benefits mainly related to R&D tax credit. Total discrete benefits in the third quarter were $1.5 million or $0.05 per share. We expect these discrete items to reduce our full-year 2016 reported tax rate to about 29% and we expect an ongoing run rate of about 31%, given the law change making the R&D credit permanent as well as our increased R&D activity. This normalized run rate is prior to any impact from the two acquisitions. As you may recall we built working capital in the first half of the year in support of our seasonally stronger second half. We made decent progress in the third quarter and generated operating cash flow of $26 million after CapEx of $4 million we generated a free cash flow of $22 million which includes pension contributions of some $4 million. We expect good cash flow in the fourth quarter resulting in a free cash flow conversion for the year of about 80% excluding pensions and any operating cash flow associated with the two acquisitions. Earlier this month JBT increased its credit facility from $600 million to $750 million to provide additional borrowing capacity. As it relates to leverage our bank leverage ratio as of September 30, was 2.1 times. Pro forma with both acquisitions we expect that ratio to be approximately 3.2 times. Our unused borrowing capacity on a pro forma basis after acquisitions is expected to be between $130 million and $150 million. Neither the leverage ratio nor the borrowing capacity considers the benefit of the $48 million in cash on our balance sheet. We would expect to lower the pro forma leverage ratio by year-end based on our expected fourth quarter cash flow. Finally let me comment on our outlook. We raised our topline guidance to the strong revenue growth trends in 2016 and the expected contribution from the acquisition. We expect modest year-over-year revenue growth in the fourth quarter. Given the comparisons to the exceptional fourth quarter of 2015. With that I am pleased that we are increasing our full-year revenue growth forecast to approximately 20% comprised of a solid 7% organic growth and 13% growth from acquisitions. That compares with the previous forecast of 16% revenue growth with 5% to 6% organic growth and 10% growth from acquisitions. For 2016, we anticipate interest expense of approximately $11 million including about $1.4 million related to the acquisitions. We have raised our full year earnings per share guidance by $0.05 inclusive of anticipated dilution of $0.06 to $0.10 per share in the fourth quarter in conjunction with the two acquisitions. The dilutive impact from acquisitions in the fourth quarter relates to interest costs, integration costs and GAAP accounting requirements such as the flow through of inventory cost step up. We now anticipate diluted earnings per share of $2.05 to $2.15 or $2.30 to $2.40 on an adjusted basis for 2016 that compares to $1.88 in 2015. Excluding the impacts of the two acquisitions the Company continues to expect segment margin expansion of 50 basis points to 75 basis points. With the acquisitions margins are expected to increase 20 basis points to 50 basis points. With that I'll turn the call back to Tom.

Thanks, Brian. Let me start with a comment on geographic and product line trends at FoodTech. Our protein business is robust across the U.S., Europe and Asia. Liquid Foods which trailed earlier in the year improved meaningfully on a sequential basis, which was very encouraging. Bookings in Asia were up more than 50% year-over-year in the third quarter. We are starting to capture benefits from our tech center in China. We currently host about one customer visit per week with growing interest from existing customers and prospects. Ultimately, I would like to grow customer visits to three per week. Our tech centers are a cornerstone of our customer engagement activity, which makes us confident that the investments we make in the China tech center will benefit JBT for years to come. We are pleased with the progress of our Automated Systems business, while it is a developing part of FoodTech we are encouraged by the customer engagement built since adopting enterprise selling strategy. Customers have responded favorably to JBT solutions to their company wide material handling requirements. We will continue to invest in this higher growth business. On the new product front, we've had good customer response to our high capacity filler-closer, which we brought to market this year. This product using newly designed unit filler technology as excellent fill accuracy and hygienic clean-in-place features as well as high speed capacity. It also has the flexibility to be used with metal cans and glass bottles. We've already booked three of the fillers for delivery in 2017 in the U.S., Asia Pacific and South America. In 2016, we also introduced the ADVANTEC Steel Belt Freezer. The solid steel belt versus the mesh belt is an advantage for sensitive products such as fish where the freezing appearance is important. We have combined the solid steel belt with impingement freezing from the top and bottom of the products for maximum freezing efficiency. We have two ADVANTEC Steel Belt Freezer orders in Europe and we are promoting its advantages to our customers globally. Operationally, we are capturing the benefits of our continuous improvement culture and recent visits to our facilities I was pleased with the progress we are making on the shop floor and in our offices to improve productivity and customer service. These actions include a significant remapping of business processes to shorten lead times and improve responsiveness to customer requests. On the acquisition front, our deals last year AMB and store food and dairy systems were in JBT's Liquid Foods portfolio. This year we've been working to integrate them into our business and capitalize on a more comprehensive product line which has enabled to us to bid on and win business that we could not pursue in the past. Currently, AMB and our preservation business are collaborating on opportunities with beverage companies for Ready to Drink Coffee and Tea, protein energy drinks and flavored milks. These projects offer us the opportunity to provide comprehensive turnkey production facilities that we could not compete for historically. JBT is able to tackle these projects with batching and blending, automation and installation from AMB, preservation equipment from the U.S., and filler equipment from our operation in Europe. JBT’s [candid] team is also working with our Stork unit to offer preservation and accepted packaging systems to right customers the flexibility to produce products and customer driven new packages for the global markets. In our two 2015 acquisitions, AMB and Stork are combining their know-how. Stork was awarded as largest aseptic order in history this September. Now they are bringing in AMB to discuss instillation and start up for this project. All of these projects demonstrate the strength of our Liquid Foods business built by combining our core JBT product offering with acquired technology. This year, our acquisition activity is focused on the protein side. In October, we completed the acquisition of Cooling and Applied Technologies or CAT. We also announced definitive agreement to purchase Tipper Tie which to close in the fourth quarter. We approached CAT and Tipper Tie with our disciplined process, ensuring the transactions to meet our operational and economic threshold. Our strategy involves acquiring complimentary product lines to our proteins and liquid foods businesses enabling JBT to offer more comprehensive solutions and greater value to our customers. Both CAT and Tipper Tie are companies, we knew well with products that sit upstream and downstream from JBT's core product line in many instances immediately adjacent. CAT located in Arkansas, in the heart of the U.S. poultry industry brings extremely strong relationships with the major poultry processors. Advanced technology and secondary processing capabilities complement the ones we acquired with Wolf-Tec, which is more focused on the beef and pork industry. Our plan moving forward is to place CAT’s leadership in commercial team in the driver seat, managing and supporting JBT's comprehensive offering to the U.S. poultry industry and significantly enhancing our overall customer commitment. Tipper Tie expands JBT's protein platform to include complimentary packaging solutions that brings great technology, a well recognized brand and a significant recurring revenue stream, which move us closer to our customers on a day-to-day basis. With both acquisitions, we planned to leverage JBT's global presence to expand CAT and Tipper Tie’s geographic reach. From a cost standpoint, our JBT excellence models specifically are relentless continuous improvement process and strategic sourcing will add value. Most importantly, CAT and Tipper Tie at closing will enable JBT to provide a more comprehensive product line and greater value to our customers. As outlined in the earnings release, we expect both to be accretive to earnings in 2017 and 2018 with combined accretion of $0.13 to $0.22 per share in 2017 and $0.38 to $0.48 in 2018. With that, we will open the call to your questions. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Chris McGinnis with Sidoti & Company. Your line is open.

Good morning. Thanks for taking my questions and congrats on another strong quarter.

Good morning.

Good morning, Chris. Thanks.

Can you just – I know it's a smaller piece of the business, but you just dig in a little bit on the growth rate within the AeroTech and what's happening there, is that just which are comes from last year maybe just dig into that?

Chris, it's really a two part story from my perspective. First of all as we've talked about AeroTech is enjoying a solid cycle in the aviation industry with customers that have remain profitable and we expect to remain profitable that have investment that has been put off for many, many year’s right and we're certainly enjoying that and we expect that trend to continue. And then second, there's been a significant internal investment by JBT in the AeroTech business in the form of new products. Across both our fixed and mobile platforms and we are starting to see those gain traction so from our perspective we're enjoying the performance on the topline with AeroTech and then we continue to see their ability to RCI in their efforts to expand margins. So it's all together a very good story from our perspective.

Okay. And then Brian, I think you touched on a little bit. Can you just talk a little bit and I misunderstood maybe but the margin profile, you talked about the 50 basis points to 75 basis points with the acquisitions, you expected to be lower. Can you just clarify that a little bit?

Sure. Right. So the way I think of it is that the margin expansion at the segment level is 50 basis points to 75 basis points operationally. But as I mentioned there's a $0.06 to $0.10 dilution in the fourth quarter in connection with the acquisitions and that's the inventory step up costs in some of the integration costs. So those actually bring down the overall Company segment margin. So that brings it down instead of 50 basis points to 75 basis points down to 20 basis points to 50 basis points for the year.

Okay. So just for Q4 not longer-term?

Not longer-term, correct. It’s for the full – that's the full-year impact is what I mentioned.

Gotcha, okay. And then I guess just with the net leverage post acquisition still modestly low. Maybe just the appetite for more consolidation in the industry even following what you've already done and maybe how that that looks you guys right now?

Yes, Chris, this is Tom. From my perspective, we continue to work to build our pipeline. There's a lot of activity and potential in front of us. That said we are disciplined in our acquisition process and we are just completing two deals. So you know our focus is going to that but we continue the engagement because we know as we get through these acquisitions will want to continue to move forward on our program that we think is we believe is really adding value. If you look at it from a capacity perspective JBT does cash flow quite well and as we move forward our intention is to generate cash and to drive that leverage down and we feel that with where we sit today, we can continue to execute the program as we described and discussed and we're very optimistic about our opportunities going forward.

Great. Thank you. And I will all jump back in the queue.

[Operator Instructions] And your next question comes from the line of Larry De Maria with William Blair. Your line is open.

Hi, thanks. Good morning, everybody. Nice job.

Good morning.

Thank you, Larry.

Hi, guys. Trying it sounds like becoming a good story obviously. Can you remind us maybe how big it is what kind of customers? You are seeing you know you were in the business with China for example that Western customers here or at the local customers and how about that develop over time?

Sure, I'll address the just the size of the market and Tom to talk about some of the more strategic aspect. So generally speaking JBT’s revenues are about half in the U.S. and half outside the U.S. about 10% to 12% of our revenues are Asia and about half of that is China specific.

Right Larry and then shifting to the second part of your question, as we've been talking about these macroeconomic trends in JBT's position and with the evolving and growing middle class in Asia. We continue to be committed to the marketplace and we done a lot of work this last year to strengthen our management team, our commercial organization, localization and production of products and the technical center. So we believe that for many years Asia is going to be a good story for JBT and we've been very committed to that and we do believe we're starting to see some of the dividends from that.

Okay. I guess – if it's mostly local customers or if you're right out at this point following your [indiscernible] customers and then what the margin profile is like on that business as it becomes bigger. I guess since you look like in product – probably see a good corporate margin, but any color there would be helpful?

Right. It's a combination of global companies both food and quick service restaurants and local customers. So we’ve talked about projects, we've done for example on coconut, water and other Asian specific activities as well as supplying technology. So it's a broad base of business we're building Larry and it's around Asia Pacific, it's not just China as Brian mentioned which is very important because the population growth is much stronger in some of the other countries in that region and the margins are in line with what we expect to get in our FoodTech business. So from our perspective we're able to generate the profits we’d like there too.

Great. Thanks and sorry if I miss this. But what was aftermarket in the quarter in terms of aftermarket growth or absolute numbers. And I guess what I'm curious about is maybe margin could have been better given the big sales growth or maybe that's really just explained by the $2 million in acquisition costs.

Yes, a couple of things. So the revenue growth was in the mid-to-high single digits for the quarter year-over-year, so that's very strong. Additionally, on the margin side there is the $2 million impact from the acquisition costs and also if you note that from a mix perspective AeroTech had a $113 million in revenues for the quarter, which is a little bit outsized compared to FoodTech normally. So there's a little bit of a blending issue with that because AeroTech’s margins are not quite as high as FoodTech.

Right. And from an operational perspective, Larry I’d tell you both businesses had outstanding quarters both just on the topline and with margins when you exclude the cost due to the two acquisitions. So we executed very well in the quarter and I was pleased with the way the bookings developed in support of that too. So altogether a very strong quarter for JBT.

Okay, great. I guess along those lines of bookings maybe a final question or two hear. Obviously, month into the fourth quarter, is there any discernible change in trend or continue to [indiscernible] good order activity. And it sounds like there is – obviously your business is strong broadly. But I guess is there any concern or any specific markets, obviously dairy has been a little bit weak, some of your competitors have mentioned that, but I’m not sure does that affect you guys too much. So I know a lot of markets are very good, but is there any sense of caution in any of the markets right now?

Yes. So I’ll leave my comments to the third quarter, but as we ended the quarter Larry, that the order book developed very, very solidly, we saw growth both organically and with the acquisitions which we were pleased by. In terms of the business segments, I would tell you that on the first half of the year, as I mentioned, we saw a little bit of slowness in liquid foods and we really saw some nice improvement in the third quarter and we don't believe that that was just a one-quarter event, some of the new products and the activity we had in place we think it really strengthening us as I commented in my commentary that will build the franchise going forward. So from our perspective that was more of a trend than just a one-off event. And then last, as we look forward. I mentioned at the end of the call that we are presenting our Elevate strategy shortly which really gives you some insights into how we continue to grow and improve the JBT business.

Yes. Terrific. Thanks very much. I will see you next week. Good luck with the Elevate strategy.

Thank you.

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

Hi, thanks. Good morning, guys.

Good morning.

Good morning, Wal.

I want to ask – and I got on the call little bit late, so I apologize if you went into this already. But you called out the shipments that were pulled from fourth quarter into the third and it looks like the revenue beat by both – in both of my segments. So what segments do you see the pull-forward kind of products. Why is that happened?

Yes. It’s really customer driven, we often have estimates is to when the shipments are going to occur and the customers to decide when they want it, but I will tell you it happened at both the FoodTech side and on the AeroTech side particularly on the fixed side.

Okay. Have you quantified the amount of those pull forward?

No, unfortunately we have not. Just as a reminder the full-year – again, just as a reminder, we always look at the full-year revenue forecast. We’re trying to not get too specific by any particular quarter, but as you know we're pleased to say that we're going to have about 7% organic growth this year.

Okay. When you are looking at production, I think typically the fourth quarter is like a stronger shipment period because of the customer installation times. As you look at production rates for the fourth quarter, is there anything unique about it because of that pull forward that happened is our last installations that happened in the fourth quarter this year?

It’s going to be a strong fourth quarter, fourth quarter for JBT are always very large. I just would point out that last year's fourth quarter was just – and extremely strong chart topping kind of quarter. So we're seeing probably a more normal development of our business this year in Q3 and Q4 and it's probably healthier overall for the way we ship and produce. As you mentioned sometimes our fourth quarters can be so large. It's a bit of a challenge, so this probably puts us in a little better shape to finish fourth quarter and get through the year. That's where I would describe it.

Okay. All right. Great. And would that pull forward just kind of staying on that especially on the FoodTech side, I think if I guess for both segments. Did you learn anything about their ability to turn product to the factories and efficiency levels. How did you feel about the process to get those incremental sales out this quarter?

Sure. I thought the execution was – and saw the numbers very strong in the quarter and our business does leverage well on volume, so from my perspective. As we continue to seek opportunities to grow this business organically, the investments we're making in new product, investments in the aftermarket sales and commercial organization and things of those nature do allow JBT to leverage well and you see it in our results right as we ship those products and get them through our facility. And from my perspective that is encouraging that all the investments and lean in RCI also allow us to more predictably produce our systems and ship them into customer requirements which is exciting from my perspective also.

Okay, great. And then thinking about the acquisitions AMB and Stork, both of those have some dairy exposure, but the revenue I think especially for AMB came in higher than I was expecting. Can you talk about AMB and what you are seeing from their growth, the first year only in the company?

Yes. When we look at the performance, the acquisitions are definitely meeting our expectations and the commitments we made to the marketplace for AMB and Stork, so from my perspective that's extremely satisfying well. I will tell you that they're both very broad based businesses with AMB being a little less exposed to Stork on the dairy, but both of them are in the – more towards the beverage end of the world, not like the raw production of milk, it’s more in the value added beverages like we talked about the flavored milk, the muscle beverages, the specialty drink. So from our perspective, although there is some dairy exposure, it's really more at the consumer end of things where the consumer values, the contribution of the aseptic filling and the processing that make for a better and higher quality beverage which is why we're excited about the technology in the first place, right. And then as you look at AMB, it's a broad book of business there. So as we study the business and the run up to the acquisition we saw years where there was a little more dairy and a little less and it's such a broad base of business it has to do with where the customer investments are happening. So we felt we are a little less sensitized to that from an AMB perspective for the dairy industry.

Okay, great. All right. Look forward to hearing about all these strategies at the end of the day. Thanks.

Super. Thank you.

Your next question comes from the line of David Stratton with Great Lakes Review. Your line is open.

Good morning. Thanks for taking my questions.

Good morning.

Good morning, David.

Solid performance this quarter. Regarding the backlog in the inbound orders for the FoodTech segment. I was wondering if you could give us a little more color around you had a good quarter-over-quarter growth, but sequential growth particularly in the order backlog in FoodTech was a little bit weaker have it around 1.6%. How does that reconcile with the overall inbound orders and just growth going forward?

From my perspective David the order book definitely developed the way we had hoped and as we indicated we are raising our organic growth guidance for the year and both the Food and Aero businesses are performing at a level that it's high and as we expected. So we were very pleased with the way the orders came in and thought the business is developing as we had hoped.

Okay. And then when you breakout like your restaurant versus grocery store sales and RPI the Restaurant Performance Index is showing contraction for the first time in a while. Is there anything fundamental going on that you're seeing and how does that translate and your products. We’ll sell equally to a grocery store or food producer as it does a restaurant food producer.

Exactly that's the part of the JBT portfolio that I really enjoy is the fact that when we say as long as people eat and drink which they we believe fundamentally believe they have to the demand exists for our products. So when we sell these large systems that equipment to our customers they direct them to wherever the consumer is merging and so whether it's at a grocery store or restaurant, cafeteria or at work those kinds of things. So in the commercial food service David. So our equipment diagnostic in that respect and our customers flex that production into whichever part of the market is developing. So from our perspective that it does significantly reduce JBT’s sensitivity to that kind of consumer choice.

All right. Thank you, guys. See you next week.

Okay. Thank you.

[Operator Instructions] And your next question comes from the line of George Godfrey - C.L. King. Your line is open.

Thank you. Good morning, gentlemen.

Good morning.

Nice job on the quarter. I just had one question I maybe even I might have missed that. The organic growth for FoodTech orders not the revenue but the orders. Did you give that beginning of the call?

The way I indicated and we would say we were just really pleased with the way the orders developed and we did enjoy organic and acquisition growth in both FoodTech categories.

Yes. The one thing I would add in this is a clarification to David's question. So FoodTech at $242 million in orders in the quarter versus $200 million in the second quarter. So sequentially it was up like 20%. And that's obviously are organic, because we had no acquisitions in the quarter.

Okay. Perhaps I can drill down a different way. Can you segment the organic growth internationally versus domestic on food?

I would say I talked about it by geography and we were pleased with the geographic developments. It was in our protein business strong across all the geographies with the exception of South America where we had a particularly strong quarter the prior year we don't believe that symbolic of a trend because we are expecting pretty solid fourth quarter there. Our liquid foods we saw a significant improvement in the third quarter both in North America and Europe. Whereas Asia and South America been strong all year.

Okay. Thank you very much.

You're welcome. End of Q&A

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.

We appreciate your time and interest in JBT. We hope you'll join us for our 2016 Investor Day on Thursday, November 3rd at the Omni Berkshire Place Hotel in New York. For those of you can attend in person. The presentation will be simulcast on our website. I will be join in New York by our management team to discuss JBT's elevate strategy and associated financial framework. Thanks again and we look forward to seeing you soon.

Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.