JBT Marel Corporation (JBTM) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation's First Quarter 2019 Earnings Conference Call. My name is Emily, 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 I will now turn the call over to JBT's VP of Investor Relations, Megan Rattigan, to begin today's conference.

Thank you, Emily. Good morning, everyone, and welcome to our first quarter 2019 conference call. With me on the call are our Chairman, President and CEO, Tom Giacomini; and our Executive Vice President and CFO, Brian Deck. In today's call, we will use forward-looking statements that 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 risk factors that may have an impact on our results. These documents are available in the Investor Relations section of our 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 in the Investor Relations section of our website.

Thanks, Megan, and good morning. On our last call, we spoke about how we are reshaping operations, making JBT a more efficient and productive company and a stronger competitor. As you can see from our first quarter results and margin expansion, our restructuring actions and introduction of the JBT operating system are paying dividends. With a good start to the year, we have raised our full year revenue and earnings guidance. We're also very pleased with the deal we announced yesterday, the agreement to purchase Proseal. I'll turn the call over to Brian to provide more detail on the quarter and improved expectations for the year. Afterward, I'll speak to the strength and opportunities in our aftermarket business and much more about Proseal.

Thanks, Tom, and good morning, everyone. JBT's first quarter performance reinforces our expectation for continued growth and significant margin expansion in 2019. Revenue of $418 million in the first quarter increased 2% from the year ago period, about $20 million above the high end of our guidance. As we said in the earnings release, top line outperformance benefited primarily from favorable timing of customer shipments and increased production levels. Breaking down our revenue growth in the first quarter, organic growth was 14%. Acquisitions contributed 3%. This was offset by a 3% FX headwind and a 12% decline reflecting the absence of $51 million of ASC 606 revenue included in the year ago period. On a reported basis, FoodTech revenue declined 3% in the first quarter of 2019. Organic growth was 15% with 3% from acquisitions. Offsetting that growth was a 4% FX headwind and a 17% decline reflecting the absence of ASC 606 revenue a year ago. FoodTech segment margins were an outstanding 13.1%. Profitability benefited from a favorable mix and more importantly, it reflected operational improvements Tom and I have been talking about, with better execution and productivity throughout our businesses. AeroTech revenue was ahead 16% in the first quarter, with growth of 13% organically and 4% from acquisitions with a minimal FX impact. Aero's margins were slightly better than expected at 8.2% versus 7.5% in the year ago period, as it leveraged higher volume and stronger aftermarket performance. Order rates in the first quarter were about as expected. FoodTech orders declined 3% or about flat, excluding FX impact. AeroTech orders were up 26%. Cash flow was as anticipated as we work toward our full year goal. Regarding the restructuring, we recorded an expense of $5.9 million in the first quarter of 2019. For the period, we generated savings of over $5 million. That translates to an annualized run rate of more than $20 million towards our goal of $55 million.

Thanks, Brian. One of the elements we haven't spoken about lately in terms of our growth strategy is the investment we've made in growing our recurring revenue base. As you probably know, roughly 40% of our revenues derive from recurring sources, including consumables, aftermarket parts and services, lease revenue and airport services. We continue to see a tremendous opportunity to leverage our large installed base and generate superior growth and returns. Recurring revenue expanded 7.5% in 2018 and 11% in the first quarter of 2019. On a 3-year basis, recurring revenue has grown at a compound annual growth rate of about 9% organically and 16% overall. As we've discussed in the past, we focus on hiring technicians and aftermarket sales specialists. With the right personnel in place, we are engaged in a more proactive selling approach to capture a greater share of the wallet of our customers' aftermarket spend. We're also in the process of making operational changes to enhance the speed and responsiveness of our aftermarket business. This includes stocking off-the-shelf rebuilds for more common equipment. It also means having JBT parts geographically dispersed and available for quick ship, further strengthening our service capabilities. The key aspect of building recurring revenue is PRoCARE, a comprehensive approach to system maintenance. With the PRoCARE service contract, which includes preventive inspections and equipment maintenance, customers maximize system uptime with the goal of reducing total cost of ownership. For JBT, it delivers a higher penetration of our customers' aftermarket spend. From a base of close to zero 5 years ago, approximately 20% of key product line sales now include a PRoCARE contract. PRoCARE, powered by iOPS, our Internet of Things initiative, takes our proactive service capabilities to the next level, improving customers' costs and efficiency with real-time operation monitoring. While the technology is operational, we have a lot of runway to realize its full potential. Additionally, our acquisitions, which generally have a lower percentage of recurring revenue at time of purchase, represent an opportunity to expand the recurring revenue base over time by leveraging JBT's global service capabilities. We will continue to invest in building our recurring revenue base, as it provides organic growth, stability and higher margins. Last, I'll explain why we are so pleased about the agreement to acquire Proseal. The addition of Proseal advances JBT's strategy of providing full line customer solutions with a significant expansion of our end-of-line food packaging capabilities. Moreover, we believe Proseal's technology represents a high-growth segment of packaging.

Your first question comes from the line of Larry De Maria with William Blair. Your line is open. Please go ahead.

Thanks, good morning everybody.

Good morning, Larry.

Hey guys. Just to start on Proseal. Just thinking with this end-of-line expansion, is this a shift in strategy at all to move out of secondary for the processing and open up some more white space? And is the HPP – does that tie in with Proseal at all?

Larry, from my perspective, it's not a shift of the strategy, it's just us furthering our strategy. As we've indicated, we very much want to be a full line solutions provider. And from JBT's perspective, the packaging, as it relates to food, is an integral part of that. But as you do think about businesses like Avure, our HPP business, or Tipper Tie, where we're already in that end of the line kind of position and in that packaging segment of the line, this certainly strengthens our competency. So from our perspective, we feel it's really positive to be adding this deal. And it's a great time to go into tray sealing as I talked about with the environmental sensitivities around packaging, having a great solution there and Proseal having really strong technology. Their equipment has very quick cycle times, quick changeover for product configuration that create real advantage in the marketplace for our customers meeting the consumer interest and, at the same time, create a great position for JBT. So we were really pleased to get this deal done and make it happen.

Okay, thanks. And then maybe shifting over to FoodTech, organic sales probably up around 17% ex 606, given the FX and the acquisitions maybe offsetting. I think that implies to get up for a few percent for the year, you probably need flattish sales for the rest of the year in FoodTech. So does that imply any quarters being down organically for the rest of the year? And given the orders are a little bit maybe, obviously, negative for the quarter organically, is there a shift in the market? Have we kind of reached a plateau here? Or is it still kind of a trade impact, let's say?

Right. Thanks, Larry for the question. So we look at the trending for the rest of the year. We did shift about – we mentioned in the prepared comments about $15 million of revenue from Q2 to Q1. So we will see a slight decline in organic revenue in Q2. And then in Q3 and Q4, we still expect growth in FoodTech in that 3% to 4% range, which would get us to the 4% to 5% for the year. So we actually raised our revenue guidance for the full year in light of the strength in Q1 and just generally what we're seeing. So nothing has changed from a macroeconomic perspective.

Yes and I'd like to add on a little bit to Brian's answer. I mean as we've always talked about JBT, there is a bit of lumpiness to our orders, Larry. And I'd say we're coming off of a particularly strong fourth quarter, where we saw a really strong performance across JBT and in food. And then you couple that with the backlog and the trailing 12-month position, and we still feel very much we're in a position to grow the business and are comfortable. On a macro stage, I would say, from our perspective, if anything, the marketplace in terms of our customers has gotten a little better this quarter in terms of particularly the poultry, with some of the pressure on pork coming out of Asia. And that's a bit of a, we would think over time, an improving story, but then we have some of that continuing softness in the center of the grocery store with CPG. So as we see it, we see an opportunity to grow through the year with some differences from quarter to quarter across both FoodTech and AeroTech. And we intend to leverage that growth really well with these margins and just deliver really strong operating performance for the company for the full year.

Okay, thanks very much. Good luck guys.

Your next question comes from the line of Mig Dobre with Baird. Your line open, please go ahead.

Good morning guys. And well done this quarter. I do want to follow-up on Larry's question, though, here because in terms of trends in FoodTech, maybe it's just me, but I'm struggling to kind of understand what's been changing over the past six months. The fourth quarter, you cited a number of macro and trade-related headwinds and yet, obviously, you ended up with really good orders. It sounds like your tone actually got better into Q1, yet the orders were down organically. So can you maybe help us understand really what changed here? And is it just a factor of lumpiness? And what sort of visibility do you have when you're talking to your customers and you're looking at what they have planned in terms of things that could be supporting your full year outlook going forward?

Sure, Mig. Let me give you a little insight from my perspective. So let's just go back to fourth quarter where we had orders being up 20% year-over-year. And as I mentioned, we always talk about the lumpiness of our orders. So that gave us some strength coming into the year and setting us up a bit. And then if you look at it on a trailing 12-month basis, FoodTech orders were up 8%. In addition, they were down a bit organically. If you take out FX, as Brian mentioned, they were flat for the quarter. So we feel we're in a good position with the orders to deliver on where we're at and where we hope to be for the year. Second, we talked about aftermarket, opportunities to continue to grow there, which help us get to our number. And I would just say, on the macro stage, let me give you a little more color on that. Asia remains a headwind for the reasons we've talked about in the past. I would say the North American poultry market, although it hasn't significantly changed the interaction with our customers, I'd say the pricing has become more supportive on the chicken prices, in particular, for profitability of our customers, which would, hopefully, over longer term kind of translate to some more order strength over the longer part of the cycle here. But it's a little early to call there. Europe, interestingly, remains relatively solid for JBT, and North America continues to be solid and as expected. So as I look at it, certainly we have orders to go get, particularly in Q2 and Q3. But as we look at it today with what we're hearing from our people and what we see in the marketplace, we're comfortable raising the revenue guidance as we have for the year and look to book the orders and to translate that into shipments. One of the elements from JBT's perspective is the improved operational cadence inside the business, as Brian mentioned, the higher productivity levels in our business. And our improved efficiency does allow us to do a better job of getting some of those orders translated into production and shipments, which is a bit of a tailwind for us as we work our way through this year also.

Right, I mean that part was clearly evident in the quarter, so I think everybody can observe that. But one of the comments that I get sometimes from investors, they're looking at your order comparisons, right. And if you look sequentially in the second quarter, in FoodTech, your comparisons are much, much more difficult on a one-year and two-year stack basis. And I guess, the question that I've gotten is, does your guidance – your outlook for FoodTech necessarily imply ability to grow orders in Q2 on a year-over-year basis? Or do you think that you can still get there even if that tough comp maintains order growth subdued like we've seen in Q1?

Yes, I would tell you that we certainly don't guide to orders, but from my perspective…

My understanding was that.

Yes, we're on a track, Mig, based on what we see with our order activity, our production pace to deliver the organic growth that we've indicated and to raise the revenue guidance as we mentioned. And certainly, as I mentioned, that requires us to get some orders, but – and throughout the rest of the year. We don't have it all in our backlog today. But we also have the strong recurring revenue slice that runs through, and we're comfortable making that raise. And we have a lot of investment going on in the business in new products. We continue to leverage more comprehensive selling across our portfolio. We've talked about some of the pivoting we've done as a result of some of the softness in the center of the grocery store and looking at some of the more innovative producers where there's further growth opportunities. So we're working at multiple levels. And from JBT's perspective, we always caution about sequential or year-over-year comparisons. You've just got to kind of look through the run rate, think about our ability to convert on it. And from my perspective, as we continue to get better as a business, I would expect over time we don't quite push as big a backlog as we get more efficient, become a better operator and maybe don't see the orders stack up as long or as deeply in our queue just kind of as we change the nature of how we operate. But that's going to take multiple quarters to unfold.

Fair enough. Let me, if I may, one more question. Switching gears to AeroTech, we don't talk as much about this segment, but performance here has been really good, especially on the order front. So I'm looking to get maybe a little color from you as to what some of the demand drivers are here. I'm wondering also maybe we can get some perspective on mobile versus fixed equipment, domestic, international, what's happening with the mix inside this business. Thank you guys.

Sure. Yes, we're really pleased with what the AeroTech team has been to do over the last few years, and the markets have been strong for us. And it's in part just because of the basic market, but I'd also tell you it's in part because of a much more competitive positioning of JBT. As we talked about we've invested significantly in new product activity in both our fixed and, in particular, in our mobile equipment businesses, which I think positions us to perform better overall in the market. If you look at the order strength for JBT, in AeroTech, it's really in two parts, the first part being fixed, Mig, and, quite frankly, some of the orders you're seeing we're booking in now are beyond this year and into the following year and maybe a bit further out. Secondly, on the mobile side, that does tend to be more of a book-and-ship business, where we tend to book most of the orders in the quarter and ship those. So as I look at the year for AeroTech, we're in really good shape on the fixed side of the business having a good order book, some strength in the military, in addition. And then on the mobile side, we do continue to have some orders to book, but the indications from our customers are positive and have been indicated in our orders. But I would tell you that as we talked last year, Q4, we do expect some negative revenue – organic growth because of the exceptionally strong de-icing orders we enjoyed last year that we don't expect to repeat at the full level that they did in the prior year. If you take it up to the macro level, there's a couple of big trends that are unfolding here. One is just increasing passenger miles. And to drive those increasing passenger miles, the airlines are really trying to turn the planes faster. When they're sitting at the airport, they don't generate passenger miles. So a lot of focus has been around better equipment, quicker turns, use of our iOPS to get the planes – in and out of the gates and serviced more quickly, which then allows them to have more flights per day in and out of a given airport. Secondly, there has been a push the last few years, which we expect to continue, to upgrade the airport facilities. A lot of the airport facilities, particularly in North America where we're quite strong, have a lot of aged infrastructure on the fixed side. So we've been enjoying some good orders there. Third is e-commerce. Continuing growth in e-commerce is pushing more and more of the transportation of those goods onto air cargo. And our business does manufacture, in particular, mobile equipment that services those air cargo planes. So if you kind of think from a macro perspective, the increasing desire for people to travel more and have more flights and couple that with the e-commerce element, those are pretty strong macroeconomic tailwinds behind the business.

Good color. Thank you so much Tom.

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

Hi, good morning guys. And good quarter, especially in FoodTech margins.

Thank you.

I wanted to ask about those margins and in relation to what got pulled forward in the quarter. Was it parts or systems that got pulled forward? And if it was systems, was it one large order? Any color there?

Yes, it's mostly, I'll call it, production systems, not as much, little benefit on the aftermarket, but that's not so much of a pull forward. It's really from a pull-forward perspective, it's shipments of equipment. And then, as Tom mentioned, production of equipment because we do record revenue as we produce. And because of our efficiency, we actually produced more than expected. The orders are the same in those cases, but they move from Q2 to Q1, and that was about $15 million or so.

Okay. And then the...

Just a quick comment...

margin typically in the first quarter – I'm sorry.

Sorry, I was just adding that the pull-in of the actual shipments itself was really customer-driven based on their needs.

Okay, got it. Okay, thank you. And the margin, typically, your first quarter is the lowest margin, and you ramped the margin through the year pretty substantially, especially into the fourth quarter. But this year, it sounds like it's going to be a little bit different, I guess, because of the strong first quarter. And I wonder if you can help us understand why you'll be more balanced through the years because of more restructuring that you got in the first quarter that came through as profits? Or is it the mix on the machines in the first quarter leverage, how should we think about that?

Yes. Two things. One, we did have a particularly strong mix in the first quarter, which really drove quite a bit of the revenues. We did have some operational improvements, restructuring benefits. So part of that, you'll have less ramp-up as you go into Q2. But again, more generally, with the way the accounting works these days, you get a little bit smoother fact as you go through the year. And that's part of it as well.

Okay. Great. And then the last one is, it sounds like the – I want to make sure I understood this. You're changing some of the way that you're dealing with purchase accounting. So the Proseal purchase accounting is going to get carved out as an adjustment to operating profits. Is that right?

Well, what we're doing is the one-time-related items, so that's transaction costs, integration costs and the inventory step-up, which runs through the cost of goods sold, we're going to pull that out. In the past, we've had requests to do so, so we think that this is – particularly with the size of Proseal, that we think it's appropriate to give that visibility. So we'll do that going forward.

Yes. It's just not specific to Proseal. We'll just do this going forward to give more visibility in terms of what costs we're incurring, but also just the run rate of the deal. So you should expect that adjustment to be regular in going forward for all of our M&A activity.

Okay. Good idea. I understand. Thank you.

Your next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is open, please go ahead.

Yes. Wanted to ask a few on Proseal, if you could talk about their geographic breakdown, if you have any customer overlap there and if management will remain.

Sure. So in terms of Proseal's geographic strength, they're strongest in English-speaking countries because of their origin coming out of the UK. So their concentration of sales is primarily in the UK and U.S. They do have a nice growing business in Australia. So from JBT's perspective, if you kind of think about – if you go back to the technology here, it's around convenience foods, fresh produce, packaging of high-quality items. And interestingly enough, the UK, with a lot of the large retail – retailers in that country have really led the charge on this, the Tescos and companies like that. And Proseal has been in front of this change. And as we've seen it develop and watch this technology develop in the marketplace, now it's on a nice growth establishment and growth curve in the United States as U.S. starts to move that way. But over time, we have a fundamental belief that the consumer will desire those same attributes in other parts of the world, and that's where JBT can really bring some leverage to this opportunity, given our strong presence in Asia, Latin America. So from JBT's perspective, we see this as having many years of runway in front of it. We want to accelerate their penetration in the U.S. with our strong position here. But then over the next few years, we're going to start looking at some of the other markets, particularly Latin America and Asia and start to establish this tray sealing technology more fully there. And from my perspective, it just has the two key elements, I think, to be successful going forward in packaging, one: is it reduces the use of plastics, which I think is important from the perspective of the consumer and priorities there; and two, it is a consumer-friendly packaging because it reduces food waste and it makes the product very visible. So when you go to the store and you're going to purchase something, you can see it very clearly in the package, which is great when you're on the buying side or when you're in the canteen or the cafeteria and you're purchasing some snacks or some cut-up vegetables. And then secondly, it reduces waste because it allows you to kind of have a package that's somewhat resealable and allows the food to last for a longer time period. So we've really looked at this space for a period of time and this was an area we were really desirous of making this deal. And it's a company that the two founders started. They're still in the business. A number of the other individuals who are integral to growing and starting the business are there. And we have a commitment for them to stay through the transition and to help us get the business up and running. And then over time, as JBT becomes more integrated, we'll see some of those leaders as they age probably want to seek some retirement eventually. But from our perspective, they've made a great commitment to us, and we're quite comfortable with how this transition will play out over time, and we expect this to be a great add for JBT.

Alright, that sounds good. And Brian, do you have a pro forma net debt-to-EBITDA with Proseal?

Yes. So it'll be right about the mid-2s.

And then maybe if you could just talk about uses of capital, if debt reduction would be a priority now.

Yes. Generally speaking, when we think about our capital investments, we're always thinking about R&D, which runs through the expense side, but that's really a critical use of, I'll call it, our excess profitability. So that's really first and foremost what we look to deploy. Second, CapEx is number two in terms of margin enhancing, CapEx is part of our restructuring program, but there are several investments they're going to make to do that. And then third, acquisitions. But I will tell you, at 2.5 times EBITDA on leverage, we still think there is room to run on acquisitions, right? Our desired range is 2 times to 3 times, under the right circumstances, we could see ourselves going into the low-3s, provided we have good visibility of cash flow back into that 2 times to 3 times range.

Right. And the piece that I would add is, I agree with 100% what Brian said, but as we continue to grow our margins, JBT is in a position to increase our cash generation, and we do – and continue to work our pipeline. It remains strong, all very strategic deals that fit right into our strategy of completing these full line solutions for our customers. And we remain optimistic about our ability to continue to drive our M&A program.

And finally, if you have an estimate for the tax rate for the second quarter and the full year. Thanks.

Right. For – we're looking at 25%, 25.5% rate for the full year ex-discretes. We expect about $2 million of discretes in the second quarter aside from that 25% to 25.5%.

Thank you.

Your next question comes from the line of Mig Dobre with Baird. Your line is open, please go ahead.

Yes. Hey, thanks for taking my follow-up. I also have a couple of questions about Proseal. Can you give us a sense for who the player is – the other players are in that space? Who are your competitors? Are they large? Or are they typically smaller?

Yes. There's really two primary players that Proseal competes with, Mig, they're both European. They happen to be particularly stronger on the protein side of the house, where we see opportunities to leverage our strength in protein to help build the Proseal franchise. And they're independently kind of family-owned, so to speak, businesses. So we think we bring – bringing Proseal into the JBT fold, part of this large global enterprise, certainly, we think, positions them better in the future versus being independently owned and going it alone. We feel really good about that.

Can you give us a sense for how Proseal compares in terms of size, these competitors?

Sure. Yes. Some of the other competitors aren't as focused as Proseal. So they have a bit of a broader offering. So I would say, in the tray sealing, Proseal is definitely somewhat equivalent to one of the competitors and maybe a little smaller than the other. And then there's a number of very small companies that make particularly niche products. But let me speak to the strength of Proseal, which we feel really strongly distinguishes them. One is, they have a very flexible but standardized machine offering, a set of machines, which make it able to ship very quickly. They have very short lead times, very – lead times JBT would be proud to have and will work towards over time. Secondly, as I mentioned earlier, they have a ability to change their machines over very quickly compared to their competitors to run the different packages. So if you think about one of our customers, they may run five or ten different packaging types down that line every day, and you have to switch the line over. So for Proseal, their equipment switches over very quickly, which creates advantage for their customers. Third piece about Proseal is when you start to think about some of the different forms of packaging with modified atmospheres, et cetera, that create a lot of value for their customers, they tend to have some of the faster cycle times. And as you can imagine having faster cycle times is advantageous because you get more throughput through the machines. So we've studied this opportunity really well, and we're really pleased with the way this business is positioned in the marketplace.

I see. Okay. And then maybe just kind of a modeling question. Can you give us a sense for the incremental interest costs, Brian that would be associated with this deal?

Sure. A couple things to consider. Most people generally tend to forget about the D&A hit on these deals, right. So at a high level, if you look at our deals in the past, they range from 6% of sales of EBIT – sorry, 6% of D&A as a percent of sales all the way up to 10%. And certainly, that's driven by margins, and because of the high margins on Proseal, we would expect their D&A to be at that top end of the range, if not over it. And then secondly, if you look at our marginal cost of capital on our revolving credit facility, it's somewhere in that 4% range and then on a purchase price of about US$280 million.

Got it. So the EBIT margins here would be something, call it, 14-ish or thereabouts, as you report operating margins.

Well, we haven't done the purchase accounting, but if you apply 10%-ish plus, that would be the implication. That's the math.

We just have to close the deal yet though. So hopefully, by the end of the second quarter, we'll get this done, but we just want to be a little cautious about how people think about this until we get it closed.

Right. And to be clear, those margins don't include all the one-time items that we're going to exclude, the transaction cost, inventory step-up, which is quite burdensome in that first year, as well as the actual transaction expenses.

Right, then last question. Can you give us a sense for the tax rate that these guys have been running at? And what sort of growth has this business been experiencing? And that's it for me. Thanks.

Yes. So I'll comment on the growth, Mig. It's been growing at a really nice rate, all organically, and we'll give you some insight into our expectations going forward. But it has proven to grow above – let's just say, above JBT food rates for last few years, all organically.

And their tax rate would be in the low 20s.

Thank you, guys. Good luck.

Thank you.

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

Thank you, again, for joining us this morning. We're off to a good start in 2019. We look forward to speaking with you next quarter about all the progress we're making at JBT.

Thank you to all of our participants for joining us today. This concludes today's conference. You may now disconnect. Have a great day.