JBT Marel Corporation (JBTM) Q2 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation's Second Quarter 2018 Earnings Conference Call. My name is Sean, and I will be your conference operator today. [Operator Instructions] I will now turn the call over to JBT's Director of Investor Relations, Mr. Jeff Scipta, to begin today's conference.

Thank you, Sean. Good morning, everyone. And welcome to our second quarter 2018 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 on our Investor Relations website. Now I'd like to turn the call over to Tom.

Thanks Jeff, and good morning, all. JBT's second quarter revenue margins were strong with significant year-over-year and sequential gains. At the same time, we booked record orders at FoodTech and AeroTech. This performance reinforces our confidence in JBT's ability to achieve double-digit revenue and adjusted earnings growth for the full year. Let me turn the call over to Brian to review results for the quarter and outlook for the year. Then I’ll provide some color on our restructuring program, market conditions and acquisitions. Brian?

Thanks Tom, and good morning everyone. As Tom stated, JBT posted solid gains across the board in terms of topline growth and profitability. Second quarter revenue expanded 27% year-over-year including a $32 million or 8% benefit from ASC 606. On a segment basis it breaks down as follows; FoodTech reported revenue growth of 30% with organic growth of 13%, 4% from acquisitions, 2% from foreign exchange and 11% from ASC 606. AeroTech's revenue growth was 21% to 15% organic, 4% from acquisitions, and 1% each from foreign exchange and ASC 606. We experienced some pressure on the gross profit line with gross margins down 110 basis points year-over-year. Some two-thirds of the decline was due to revenues associated with ASC 606. The remaining one-third was from higher costs primarily for labor and metals. As we've discussed in the past, we’re generally able to pass through higher input costs with our project quotes albeit with some lag. That said, segment operating profit margins of 12.6% were up 170 basis points versus a year ago. FoodTech margins of 13.1% were ahead 190 basis points year-over-year and 600 basis points sequentially. AeroTech margins were also up significantly to 11.4%, representing expansion of 130 basis points year-over-year and 90 basis points sequentially. In the second quarter of 2018, acquisitions and deal costs were a drag of about 40 basis points versus 120 basis point drag in the year ago period. Corporate expense was 2.4% of revenue in the second quarter. We still expect corporate expense of 2.5% to 2.6% of revenues for the year. Separately, we recorded an expense of $8.5 million in connection with our restructuring program which Tom will give you more color on. The discrete tax benefit of $0.15 per share and the ASC 606 benefit of $0.17 per share were essentially as expected. With that, we reported diluted earnings per share from continuing operations of $1.04 for the second quarter of 2018. Adjusted for the restructuring charge, EPS was a $1.24. We were pleased with our inbound orders. FoodTech's inbound of $350 million was ahead 24% year-over-year and 12% on a year-to-date basis. AeroTech's inbound orders of $180 million were up 34% year-over-year and 36% year-to-date. Both segments achieved record levels for the quarter and the first half of 2018. Free cash flow for the quarter was $18 million excluding a $6 million pension contribution. Year-to-date we are $20 million to $25 million short of our cash flow expectations. JBT's strong growth in the second quarter and similar expectations for the back half resulted in increased accounts receivable and inventory at most businesses as appropriate for the season and activity. The majority of the shortfall was related to AeroTech. The large increase in volume at our ground support business is required us to build incremental subassembly inventory in anticipation of production. Additionally, in order to meet the heavy deliveries on jet bridges in the second half, we had to build first half inventory more than usual. We expect AeroTech inventory build to materially convert to revenue by year end. Accordingly, our updated estimate for full-year free cash flow is 70 million to 90 million depending on the timing of receivable collections. Looking at the full year, we are maintaining our guidance of $2.80 to $3 on a GAAP basis and $3.95 to $4.15 adjusted for the restructuring charge while absorbing the $0.07 EPS impact of FTNON. Our revenue and margin guidance remain on track. We continue to expect full year organic growth of 7% to 8%, 3% from acquisitions, 1% to 2% from foreign exchange, and 4% from ASC 606. The FTNON acquisition is expected to negatively impact full year FoodTech margins by approximately 30 basis points versus previous guidance, while AeroTech's margins will be slightly higher for the year versus previous guidance. We expect third quarter performance to look similar to the second quarter absent the discrete tax benefit. Given expected shipment timing of somewhat smaller ASC 606 impact, at FoodTech we expect slightly lower sequential revenues with stable margins. At AeroTech we expect a modest sequential pick up in revenues and a slight sequential progression of margins. At our Technology Day in September, we look forward to providing an updated financial framework through 2020. This will provide better visibility into our revenue and margin profile considering our operational improvement efforts. With that, I’ll turn the call back to Tom.

Thanks Brian. Last quarter we introduced our $50 million restructuring program which will enable us to unlock the benefits of JBT's increased scale and global enterprise. This program is about fundamentally enhancing the way we do business by focusing on the factors that impact JBT's competitiveness, such as cost, quality, lead time, and efficient use of capital. Underlying our restructuring program is a comprehensive operational assessment from the ground up that has resulted more than 100 detailed improvement projects. We’re implementing these projects to meaningfully increase effectiveness on direct labor, indirect labor and overhead spend while improving design quality and service capabilities. We remain confident these actions will improve our cost structure by $45 million in total with approximately $15 million of benefit in 2019 and an incremental $30 million in 2020. All told, this should result in more than 200 basis points of margin expansion. At the same time, we continue to evaluate further opportunities to capture additional benefits as part of this program. Moving to market conditions is indicated by a strong second quarter activity JBT continues to enjoy healthy markets. Our protein markets are performing well with favorable trends in the frozen foods, ready meals and value-added proteins offsetting weakness in the U.S. poultry market. The equipment and aftermarket activity remains strong in the U.S., Europe and Asia. In Asia, growing demand for protein continues to drive a healthy pipeline of opportunities and we’re seeing early signs of market recovery in South America. For liquid foods while quote and project activity remains strong across all geographies, some orders have pushed out to the back half of the year. For FoodTech overall we expect growth in protein to be a bit better than earlier expectations with slightly less robust growth at liquid foods in 2018. We're monitoring the potential impact of tariffs. In particular, we're watching U.S. food producers which could be hurt by constraints on export markets. Fortunately, JBT has a global customer base and relationships that soften any specific U.S. impact as food production relocates geographically to close gaps in supply. JBT is enjoying particularly strong markets at AeroTech. Underlying AeroTech's strength is continuing favorable profitability and investment outlook for U.S. airlines, airport improvements and global air freight. On the M&A front, earlier this month we announced the acquisition of FTNON, a provider of equipment for the fresh produce, ready meals and pet food markets that adds about $30 million to annual sales. As part of JBT, we plan to expand FTNON’s global penetration particularly in U.S. building on its current leading position in Europe. We also have significant opportunities to grow its aftermarket business which has been limited due to the company's lack of a service installation network. Looking forward, we continue to develop a strong pipeline of potential acquisition candidates that are compelling fit with our food strategy and enhance the value we provide our customers. With that, we’ll open the call to your questions. Operator?

[Operator Instructions] Your first question comes from the line of Allison Poliniak with Wells Fargo. Your line is now open.

I think one of your comments was the liquids food guide maybe not being a strong as you wanted. If you rethink of it anyway in terms of a mix impact, where you’re modeling for this for the year?

The margins are reasonably similar to proteins, just slightly higher proteins, slightly smaller liquid foods but all in all we factor that into the guidance for the year and that doesn't materially move things. Like Tom said proteins is a little bit bigger, liquid foods little bit smaller but all in all FoodTech is well on track.

And then just second on China specifically, with all the noise going on there. I know you guys have done a lot of investing there over the years. Are you rethinking that, not impactful, how should we be thinking about that for you?

In terms of our M&A program Allison, I mean we still remain very much committed. As I mentioned on our prepared comments we have a strong pipeline. We were pleased to close FTNON in the period, it's a nice advancement for us into those ready-to-eat vegetables and ready meals and pet foods, which we're excited about it. And we see some real geographic opportunities and we're actively out there working our pipeline. And we certainly are working to continue the trajectory JBT has enjoyed in the past.

Well, I guess more specifically with China and your investments there over the years. If we look at the region strategically, are you little bit more cautious entering it now?

Actually, when we think of - we think of it as Asia. It's a fast growing market for our food equipment, both proteins and liquid foods. And we think of not just China, but we think of Indonesia, Malaysia, Philippines and from our perspective, we think JBT is very much been benefiting from our strategy in Asia, and we're seeing the continued strength as I've commented in the last calls. So, we continue to be bullish and although we have a manufacturing presence in China, it's very much an Asia effort. And we think the macro there are just really strong Allison, and we remain highly committed to it, we think it's a great thing for our franchise and for our customers and shareholders as we move forward through the years because of the growing middle class and the consumption that's going to drive and the equipment that's going to be required to support that.

Your next question comes from the line of Joel Tiss with BMO. Your line is now open.

I've been hearing a little bit about some protein kind of being piled up in storage, and I just wondered you touched very quickly on tariffs and I just wondered if we could take a step back in and you could give us a sense of what your customers are saying, like, what are they worried about. And I'm trying to figure out if there's any kind of potential for 2019 to be impacted or this is more everyone just kind of scrambling and it's a transition and they'll figure it out?

Yes, that's kind of a two-part question. So, as I mentioned in my comments Joel, I'd say the U.S. poultry markets have probably seen the biggest challenge, it's a production and a bit of a tariff issue, and we've certainly seen some softness in orders there, but the protein business overall up, because of the various areas we play in, our global franchise and the broad set of customers. We've seen actually quite strong order activity there, and we're pleased with the performance and very confident with the way that's developing. And so, from our perspective, we reflected that in our view through the end of the year. And as we think about next year, we'll give you more view as we get into Technology Day in September. But, right now, we continue to be optimistic on proteins overall. And one of the interesting things you do see play out is tariffs, if they were to become more of an issue the food - the fundamental food consumption remains there. It just needs to be geographically relocated and JBT is well positioned to provide that need, and we'll just have to see how the U.S. poultry manufacturers work their way through this production issue. But we believe we've reflected that in our outlook for the year as best as we understand it right now.

And then just quickly, I didn't hear anything about - very quickly, about pricing, you know any pricing actions you've taken and raw material cost issues and trends there and things like that, so just a little flavor?

Sure. So, for JBT, certainly we do consume stainless steel, some carbon steel and aluminum. And we have seen some increases. Brian mentioned that it's impacted in our gross margins to a small extent. And generally Joel, we're able to price for them and when we price new projects and also we've taken some pricing actions on our parts et cetera throughout the year. And we've reflected that in our margin outlook for the year. So, I think in general, we'll be able to convert fairly well on the increases. But there's always a bit of a lag because of the orders we have in backlog. So, when we book an order it reflects our best thinking on the materials, but if they move more than we expect, there can be a bit of a headwind there. But overall I'd say, JBT has been fairly effective in pricing for it as we've gone through the year.

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

Every quarter there's 20% move, hoping not, but right direction. Curious, first on the orders; the change from 1Q to 2Q, and I know even 1Q orders were pretty good off a tough comp, but were there some timing issues, did some go from 1Q to 2Q? And with the poultry changes you talked about, are you seeing - do you think of the fundamental shift in the market and capacity is caught up or is it just more or less potentially short term pull, curious what you're overall thoughts there?

Yes, I'd say that as you know and have been following JBT for a number of years now. There's always a bit of lumpiness to our orders, right. We can't perfectly predict when a customer is going to commit to a project, but I'd say overall the trends have been encouraging and have been strengthening through the year. And in fact the strengthening in the second quarter through the quarter. So, as we ended June we had particular strength in our order book which I would tell you was encouraging to us. As I look at the protein market in the U.S. in particular where there are some discussions and particularly poultry, there has been production in excess of what appears to be some of the demand that we're seeing. We would expect that to work it out over time and we've certainly done our best to reflect our thinking on that in the year and we're still planning to deliver really strong organic growth both in protein and liquid foods. So that's our best understanding as we see it today, Larry, and we continue to watch it is as we said. But I think we've got our best view of it in the numbers here and still looking to deliver really strong year for JBT.

And Tom, you talked about the restructuring benefit, just correct me if I'm wrong, but are we pushing out the benefits and it seems like there's little bit of a lag to getting the benefits from compared to the cost. And you said 2020, you'll get the full if I recall it, by the end of 2019 before. So, do we get the full benefit for full-year 2020, just how do we think about that if there's been some changes there?

Sure, Larry. What we had said on the last call was that, as we exited 2019, we would see the full benefit with some modified benefits in 2019. We've actually increased the amount of benefits we expect in 2019 from, we basically said a few $3 million , $4 million, $5 million, $6 million, in 2019 to now $15 million, and basically you're saying the remaining as we exit 2019, you'll get that full benefit in 2020, so - the $45 million. So, the big number hasn't changed and the timing of the full number hasn't changed. We actually just pulled in some of the savings a little bit quicker into 2019. Yes, so, $15 million and $30 million sequentially there.

And last question, I'll leave it there. Thank you. The specific changes you made to the second half guide, was it - I know you touched on that already, I'll go back and read it again, but, we're just thinking lower margins for fourth quarter FoodTech, what has specifically have been changed in the outlook?

Yes specifically, the outlook on the back half - previously we had expected a fairly decent uptick from Q2 to Q3. But Q2 was stronger, we saw little bit movement from Q3 into Q2. And therefore there was - of course they're going to look pretty similar. And then we still have the decent uptick going on from Q3 to Q4. And now we just have a better view of how our year is going to lay out. But no real meaningful movement other than some of that Q3 into Q2, and then the net impact of the FTNON press on margins, is what you see on the margin side. But otherwise, we have maintained our full year margin profile for FoodTech for the year.

Your next your next question comes from the line of Mig Dobre with R.W. Baird. Your line is now open.

Just quick clarification on Q3. I thought I heard you say that you expected revenue in FoodTech to be slightly below Q2. So does that - what sort of organic growth would that imply for the quarter?

Are you asking year-over-year or sequentially?

No, year-over-year of course.

Well, year-over-year it's still pretty decent. I don't have it right here in front of me unfortunately, but you're talking a little bit - one of the reasons why we're going sequentially from Q2 to Q3 down a little bit is a little bit less ASC 606 impact. I honestly - I can follow up with you. I don't have it right in front of me, the organic growth. But you can see we're going to have about $10 million to $20 million in ASC 606 impact in our benefit in the third sector versus about $30 million in the second quarter.

The thing that I was little confused about, it seems to me like if you're talking about the third quarter is being somewhat similar to the second revenue wise, then it would seem to me that you're actually raising the organic growth guidance for the full year FoodTech, which I guess will be consistent with your strong orders?

Just a touch. Right. And Mig, I guess the way I'd take it up the top, and we always caution people about looking too carefully quarter-to-quarter for JBT, but we're still looking at that 7% to 8% range for the full year, which I think is really an important cap stone to understand it from my perspective. We're working hard to deliver that and we think that's a really solid number for JBT.

I want to go to ASC 606. So, you benefited to the tune of $0.47 in EPS from ASC 606 in the front half. Your full year guidance is as I understand it is unchanged, that implies a $0.15 drag from ASC 606 in the back half of the year? Can you maybe help us understand how that flows from quarter-to-quarter Q3 versus Q4?

Sure. We still expect a little bit of benefit of ASC 606 in the third quarter and some of that previously recognized revenue continues. But then as we mentioned, you do have some accelerations in deferrals based on all the aspects of the contract. So, it is a contract-by-contract analysis. You have to look at it. When it would be recorded as revenue on old accounting versus the new accounting, but that does imply that the fourth quarter will be a drag, a decent size drag, in order to get to employ your math to work. So, you'll actually have a negative impact from ASC 606 in the fourth quarter. And then as I mentioned, Q3 will have about $10 million to $20 million benefit from 606.

Benefit?

Yes. That's our current thinking. And to be honest with you, it is difficult to forecast because you're trying to figure out exactly when something would it shift versus otherwise would have under the -- how would it be recorded versus otherwise. So, it's not that easy to predict, but that is our best thinking at the time.

Understood. And then maybe as important, as we look into 2019, the margin themselves, they've been reported, they've been to some extent distorted by ASC 606 this year. So, I'm trying to understand as we're modeling year-over-year and we're looking into next year, how should we think about this ASC 606 impact for 2019?

Right, Mig. We're looking at the Technology Day to give you a better insight into that in September and just kind of thinking about that, and that's why we have broken out the ASC, so you'll have those insights. And from our perspective, we're going to do everything we can to make sure the framework is clear and understandable as we get there, and we would point to the fact that as we get through this year and into next year, you should start to see things stabilize, and not have to keep such a careful eye on this. It won't be perfect heading into next year but the comparables will become much easier.

Maybe last question from me. On FoodTech margins, so, if we're looking at the quarter itself, seems like ASC 606 added about 90 basis points to margin at least by my math. You had 80 basis points favorable from M&A. So, you had all the core margin expansion on organic growth about 20 bip. As we're looking in a back half going forward, right, you told us there's going to be a drag on margin in the fourth quarter from ASC 606, but it seems to me like the guidance, the full year guidance would imply that incremental margins would have to step up pretty significantly? I get the fact that organic growth is definitely there, I'm just trying to understand what gets those incremental margins to step up, is it a matter of efficiency and savings, is it catching up with price cost, is it mix, how do you think about it?

Sure, Mig. It's a couple of things. One, you are going to get the benefit of the -- if you're excluding ASC 606, well it sounds like you're doing. You're going to get the benefit of the big growth in the fourth quarter relative to a year ago. So you're going to get the operating leverage there. We are going to get a couple million dollars of benefit from the restructuring program in the fourth quarter. And then generally, you are catching up little bit from some of the headwinds on material costs et cetera, that will even out, but all-in-all it's quite achievable.

Your next question comes from the line of Steve Tusa with JPMorgan. Your line is now open.

Congrats on a very strong quarter here. Just digging into the cash flow a little bit. You guys had a pretty big positive adjustment for progress. What do you expect that to be around kind of for the year? Is that -- it's kind of one quarter that's going to be lumpy, obviously. But is there another kind of big slug here in the back half for these good orders of progress goodness?

Yes. I'm assuming you're talking about the advance payment benefit?

Yes.

So it was particularly strong for the quarter because of the huge order rate in the second quarter, right. Protein really collects a lot of deposits. I don't think for the full year we'll have that full $55 million benefit, that will moderate over the year. But at the same time you're going to get moderation from the negative cash flow from inventory as I mentioned in my prepared remarks. So, that will start to offset each other. So basically, I should build that inventory, your customers will get the benefit of those advance payments. I expect a little bit more moderate growth from the inbound relative to Q2. So that will moderate, and then obviously, you'll collect some of your receivables by the end of the year. So we're really, from a cash flow perspective, we'll make nice progress for the remainder of the year, but in particular in the fourth quarter as you flow through all that inventory.

And then as we kind of look out, when you think about the moving parts here, whether it's restructuring or some of these dynamics around progress and inventories. What's the trajectory towards kind of 100% conversion? Is that in the cards in the intermediate term?

It absolutely is in the cards. What I would tell you, this year we said $70 million to $90 million of free cash flow. It's a fairly big range because of some of the moving parts, and that would imply somewhere in the range of 80% to 90% conversion for the year. What I could tell you is that with the big growth that we're seeing organically in the build and the working capital inventory, that really obviously makes a little bit tougher to get to 100% in the short-term. But when you look at the overall profile under our, call it, normal growth pattern, we should be over 100% because your CapEx is less than your depreciation and then you get some of the benefits of your non-cash stock comp expense. So, our general profile should, as we go into 2019, absent against some really extraordinary growth on working capital side, should be in that 100% profile.

That's on a GAAP basis, obviously, right? That’s obviously on a GAAP basis?

Yes sir.

Right. And when do you think GAAP and adjusted, the difference between those two numbers kind of narrows? Obviously it's pretty big this year.

It is pretty big this year. Yes, I would - with the $50 million or so of restructuring expense this year puts a lot of noise on the GAAP net income, obviously. Now we're spending a lot of that money. So you're still kind of net-net not all that different. But it adds a lot of noise and obviously - frankly the ASC 606 is impacting your starting point or your net income as well. You've got some, the previously recognized income. So there is a lot of noise that's why I chose to talk more about dollars than ratio. But that $70 million to $90 million, if you take a little bit noise away on RevREC and some other things, it implies that 80%, 90%-ish conversion rate.

So one last one quick one. So now that we're talking about kind of absolute dollars there, is the dynamic in 2019 that restructuring -- restructuring is obviously a big number this year. I don't know how much cash restructuring, you said maybe the majority of it is cash. Is the dynamic issue that basically free cash flow grows with earnings. And then obviously that absolute number goes up by the amount of kind of restructuring coming down? Is that kind of the rate profile for free cash going forward?

Yes. Theoretically it should. You'll have a little bit more because you'll take some of the charges in 2019 and some cash out -- sorry, charges in 2018 and more of cash out in 2019. So that you'll still have a little bit of negative there in 2019 versus 2018, but I call it more 20,000-foot level, you should be closer to that a little bit north -- if our net income is north of $100 million with some growth than you'll be in that profile.

Sorry, one last quick one. How much of that $50 million is cash this year? So that we can kind of understand the tail on that into 2019. That's my final question, I promise.

Sure. Right now my best guess, it's really tricky because it depends on various, I'll call it, severance payments, et cetera. But my best guess right now, about 40 or the 50 is cash.

This year, recorded this year in 2018?

Yes sir.

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

Wanted to ask you about the discussion on orders, and thanks for pointing out that you guys are highly diversified geographically in FoodTech. I wonder if you can give us an idea of the orders during the quarter and with a strong – internationally and then offset the U.S.? Maybe a percentage of sales on FoodTech orders U.S. versus international?

Yes, I would tell you the orders were broad-based, Walt. And I think one of the things that I was looking to was the bookings month, which would indicate that we're continuing to enjoy some nice strengths when you look across the portfolio. So from my perspective, I mean, we certainly acknowledge that. In U.S. poultry, as we talk about - what I would - to be careful not to use the wrong technical term, but the primary production of poultry, we did see some softness. The order is tied directly to the poultry producers and we certainly did our best to reflect our thinking is how that would mature through the end of the year. But the other elements of the portfolio both in the U.S. and in the rest of the world are just performing really strongly, and collectively we had great bookings in protein and we had building strength through the quarter.

I wonder within proteins, with the diversification, how much of your revenue is U.S. poultry manufacturing versus all other? Because may be we're overstating the importance of that market for your orders.

Ladies and gentlemen this is the operator. Apologies, there will be a slight delay in today's conference.

Hi, everyone. I'm not sure if you can hear me. This is Tom Giacomini, but we appear to be experiencing some difficulty in the connection for the call.

Hi Tom can you hear me is my line still open technical difficulty

Please go ahead.

Hello, Walt?

Tom, Brian, can you hear me?

Yes, sorry, Walt. I don’t know if you heard full answer. So maybe I should repeat it or did you get the full answer?

Yes, I think I got most of it. It sounds like its sounds like liquid foods, meats, beef are doing fine, USA and international, there was broad-based strength and that U.S. chicken, U.S. poultry might be where you're seeing a little bit of softness. So I guess the question was, what percentage of your revenue is the poultry U.S.? Maybe we're over thinking, overstating, the importance of that in the market?

I think one of the important facts I would point to, Walt, is if you think about it, for JBT, none of our customers exceed in a given year 5% of our revenues. And if you think about you have a poultry industry with a few large players here in the U.S. That just kind of gives you a little bit of the sensitivity you see as it relates to these direct customers, given the broad diversity of our revenues and the markets we play in. And I would tell you that we work hard to make sure we're in front of these trends, and I would agree that, from my perspective, we did see some softness in the U.S. direct poultry production orders as we had seen the quarter unfold. But overall, the protein portfolio was performing at a very, very strong level in terms of order activity through the quarter. And as I mentioned, the timing of the orders, as they built through the quarter, with June being very much a strong quarter, was encouraging. And on liquid foods front, we have a lot of great "project activity," but we did have some orders move from the quarter into the back half of the year. So, we're going to continue to work to convert those. But in aggregate you look at still a really solid and strong order book for the quarter.

And then, Brian, one for you. Foreign currency, the dollar has been strengthening especially against the euro. What kind of impact does that have on the back half of the year and then, for U.S. export of equipment, what kind of impact doest that potentially have on demand levels?

The second part, it's little bit easier to answer because we do manufacturer in the local economy. So, that's not a huge impact. For the U.S., we're mostly manufacturing in the U.S. For Europe, we're mostly manufacturing in Europe. And then we manufacture in China for Asia and we also export to Asia from the U.S. and Europe. So, that's not a huge issue at these rates. In terms of predicting the FX impact, that is a little bit trickier. We're showing it to be -- basically we're at – the guidance we've given does have 1% or 2% favorable, which is kind of where we are year-to-date. Because we have Europe, we have Sweden, we have Brazil which is kind of going the other way. So, we've got a lot of pluses and minuses. So, I don't see there being a huge impact in the back half of the year, frankly. But it's a little bit hard to predict, but there's just a lot of pluses and minuses, and I'm not particularly concerned about it, honestly.

Your next question comes from the line of George Godfrey with CLK. Your line is now open.

Nice job on the quarter. We don't spend a lot of time on the AeroTech side, but I thought I'd start there since we covered a lot on the FoodTech side. The 1.39 book-to-bill is good as it's been in maybe 5 years, and back then we had declining revenues. So the book-to-bill was a little bit easier. Now with growing revenue still the book-to-bill is that high. Brian, can you talk about -- or Tom, can you talk about exactly the components that are driving that? Or what specific infrastructure is being rebuilt, and where is it being rebuilt and what products you're providing?

It was a really strong number, and from my perspective it's really coming from a couple of primary factors. First of all, on our fixed equipment, George, it's U.S. airport infrastructure. It's not -- and it's important to understand it's not just new airports. It's upgrades to existing airports. And what's underlying there is just a lack of investment for many, many, years, while the airlines and airports were kind of challenged. And as there's been a return to a reasonable level of profitabilities for our airlines, they're certainly investing and it's a - started with the airplanes and now they're moving to other elements, which is around making sure that the customer experience is favorable and as we all know as travelers, the U.S. airports aren't so great and there's investment going in both by the airlines where they own bridges and by the airport authorities when they're upgrading their facilities. And then there are some new terminals et cetera being built and - so, that's on the fixed site. On the mobile side it's a couple of parts but the biggest one is, quite frankly, the strong e-commerce world we're living in is creating increasing - significantly increasing demand for air cargo and a lot of the JBT equipment is important to the handling of packages that go on air cargo, and if you look out there a lot of the air carriers that handle cargo are expecting very strong growth rates in response to this e-commerce activity. And JBT is enjoying participating in that. So, if you put those two fundamental demand drivers which are appearing quite terrible together, it's really underlying the strength we're enjoying and then there's some particular activities that we've done, investing in new products and engineering that. We've invested in last few years that have positioned us well in general on those spaces and we're starting to enjoy the benefit of some of those newer products also.

And then just one question on FTNON, I'm thinking about the prepackaged foods, pet foods, and proteins, that is fresh and ready. Does the margin on those specific food items have the potential for you to be higher than the standard or is the margin on that type of a business to stay on those the FoodTech margins in general? And I'll leave it there, thank you.

I would tell you that, what we were really looking at in that investment George is, we see those margins being similar as we bring that business in and put it into the JBT framework. But what's important is those markets have great underlying growth rates. As people it fresher healthier foods, now that's a growing market and JBT wants to be a part of that. And then the pet foods, the growth is quite strong and the investment that's going in there. So, we really liked where that business was centered and we feel that that exposes us in a meaningful way to some faster growing markets and from our perspective we have some benefits we bring to that. Being a smaller company, they had a fairly limited sales presence, particularly in North America, where obviously JBT has particular strength. And secondly, they didn't enjoy much aftermarket which actually put pressure on their margins, because they quite frankly just couldn't invest in the assets that are required to support an aftermarket business. And being part of JBT with our strong aftermarket franchise, we can grow their aftermarket and improve their profitability over time. I think if you look at the capital we deployed versus the returns we're investing, it's solid. And from my perspective, I think it's a great entry into some of these - and better positions some of these faster growing markets. I would remind you also that the HPP, the viewer investment, we also had a nice pet food plan there and was central to this whole fresh food theme too. So, as we've talked about JBT, is really pivoting and working it's strategy to make sure we're behind these macro trends of protein demand, fresh clean labels organic, so, I think we're doing a really nice job of executing against our strategy as we've already did also.

Your next question comes from Andrew Obin with Bank of America. Your line is now open.

Just couple of clarification, most of my questions have been answered. On free cash flow, $70 million to $90 million, is that with pensions or does that exclude pensions?

That would exclude.

And so how much potential run rate do we have?

My current estimate is $12 million.

And that sort of what we should be modeling for next year as well, right?

Yes, sir. I guess the one caveat after that is for 2018, there is this potential benefit of a little bit more contributions to take advantage of the change in the tax rate. So, by the end of the year I may decide to put a little bit more than that $12 million in or still go in through that. But again, we do exclude that from our analysis, when defining the free cash flow.

And $70 million to $90 million, the view is that AeroTech, that's really AeroTech contribution. That's the delta whether you're not really going to get that working capital back, is that correct?

Our prior guidance was $80 million to $90 million. And now we're seeing $70 million to $90 million, with the fast growth at AeroTech, there is some possibility that there is a $10 million or so overhang as we exit the year with all the sales and the volume that's going to happen and you may not be able to collect all that AR as you exit the year.

And it's a high class problem but if AeroTech continues to grow, could this sort of working capital issue persist for long run?

Well, working capital is - the AeroTech generally does have higher working capital as a profile, than FoodTech does. So, there would be some pressure. That said, if you look at our restructuring program, our improvement program, we are tackling some other factors that do affect their working capital, particularly the inventory. So, we haven't seen a ton of improvement in the way they've managed their inventory this year and slightly pulled back. But we do think there's some nice opportunity for improvement. And even with some growth, we think that it could be more of a modest impact going forward from here.

And then just a question on tariffs, going back to that. Are you guys considering sort of rearranging your supply chain going forward, or is this strategy mostly to deal with what you, so you're going to on longer-term just absorb it?

Yes, so, as we look at Andrew, we do tend to manufacture larger products, right. So, freight is not an insignificant component of our delivered cost. So, that's why JBT has invested in making sure that we can produce our systems in the various major geographies. Obviously, we do arbitrage a bit and make choices depending on where costs are and our ability to ship that effectively and get it into a different economy. And one of things that I like and I feel better about in terms of where JBT is at, is just the fact that we do have production as Brian mentioned early on the call in the major economies. So, if tariffs were to become a major or a larger issue, our flexibility geographically certainly would help insulate us from that. On the supply side, obviously, we do purchase components from outside of the United States or Europe, for example; in lower-cost economies. And we're constantly evaluating, if you're in Europe are you buying from Asia or are you buying from Eastern Europe. And those economies evolve and we try to be flexible depending on the current situation. And for JBT it's been something we've spent a lot of time and effort on the last 6 months. And we've tried to be in front of this as best we can as we saw some of this coming and I think we're so far demonstrating that we've done a pretty reasonable job of managing it. And as we go forward, we'll continue to look to those trends and make sure we're trying to stay in front of that as best we can.

Your next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is now open.

The U.S. poultry market was talked about in some detail. And you mentioned tariffs and production issues, but I wonder if you could expand on what's going on in that market and your outlook there?

Well certainly, as I've indicated from my perspective, if you think about the demand for poultry around the world, it remains quite strong. And from our perspective is if you get in the microeconomics of the United States, that's just a quite a bit of production that's outpacing a growing demand even in the United States. So, over time that will stabilize itself. So, as I think about protein in long run and as you think about protein, poultry is a portion of that and we remain convicted that that's the way the consumer is heading and it's a good macro trend. It's just managing their way to the U.S., and we mentioned as it relates to protein in the primary production of it, we did see some softness developing as we saw on the market. And we've been able to book our way through that in terms of the other markets, and in the U.S. and other types of activity that were quite strong. So, from our perspective, we'll keep an eye on it. But as we look at it right now, we're still planning for really solid year and strong growth and our position on that hasn't changed. It's the diversity of JBT's portfolio, diversity of our customers and the global nature of the markets we participate in.

And then as far as the push out in orders in liquid foods, was there anything of note to mention there? Any reason why these orders were pushed out and have any been canceled?

So, we look at those and it's really just around customers making decisions on the timing of their investment. We do our best to predict it. Sometimes in a quarter we get a few more than we expect, other times it pushes out a bit and we certainly see it and as you think about it for JBT, as we get through the second quarter and into the third, we start to see orders that will materialize in the following year. And as I mentioned, as we look at it right now just in composite, protein is looking a bit stronger than we expected as we started the year, liquid foods are bit weaker but both still posting really solid organic growth numbers and that's an evolution of our order book and we'll just see how those orders come in the back half of the year-end, and what that means for next year and just kind of how we ended the year. But from my perspective it's quite normal for JBT to see this and that's the nature of our business.

And just few quick ones for Brian. Do you have an estimate for what ASC 606, what the drag will be in the fourth quarter?

Well we had we suggested for the full year it would be about 4% or so. So that's kind of in that mid-60s range in terms of revenue. And we suggested that third quarter would be $10 million to $20 million. So that means that the drag in Q4 would be somewhere in the, call it, $25 million $35 million type range.

And not to talk about specific numbers for that accounting change for next year but does that completely go away? I'm just trying to get a better idea of how to think about that conceptually.

Well, it's a tricky question. You're going to have effectively 2019, I'll call it a clean year, as best as you can describe that. Now some of the comps versus 2018 will still be a little bit tricky but you're not going to really have much to talk about in terms of the direct impact on 2019. It will be more about trying to figure out the comparisons to 2018, unfortunately.

And then finally, do you have an estimate for the tax rate for the second half of 2018, as well as the CapEx estimate, an updated ones for the full year?

For the full year we're looking at a tax rate of 26% to 26.5%. Now that excludes the $4.8 million discrete tax benefit we got from the long-term incentive program that we saw in Q2. So basically you take that out - but you should otherwise see a 26% to 26.5% rate. On the CapEx side, we're about $19 million year-to-date. We still think we're going to be in that $40 million to $45 million range for the year.

And there are no further questions at this time. I'll now turn the conference over to Mr. Tom Giacomini for closing remarks.

Thanks again for joining us this morning. We're pleased with the second quarter performance, which sets us up for solid gains in 2018. We look forward to seeing many of you at our Technology Day on September 13, at our Wolf-tec facility in Kingston, New York.

This concludes today's conference. You may now disconnect.