JBT Marel Corporation (JBTM) Q2 2019 Earnings Report, Transcript and Summary

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

Thank you, Natalie. Good morning, everyone, and welcome to our second 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. Now, I'd like to turn the call over to Tom.

Thanks, Megan, and good morning. For the past several years, we've talked about JBT's value creation strategy. We are investing in new products and services with an emphasis on expanding our recurring revenue base, capitalizing on key trends in the food industry and building our presence in Asia. We completed acquisitions that complement our product portfolio and positioned JBT to provide comprehensive customer solutions. For the last few quarters, we've added a keen focus on operations, making JBT a more efficient company and a stronger competitor. We've implemented the JBT operating system and are in the midst of restructuring that not only improves productivity but brings more rigor and accountability to how we run our business. JBT strong second quarter performance is a reflection of our ability to capitalize on the value creation strategy and capture operational efficiency. I'll turn the call over to Brian to provide more detail in the quarter and improved expectations for the year. Afterward, I'll talk about our most recent acquisition and investment strategy focused on capturing growth.

Thanks, Tom, and good morning everyone. JBT's second quarter results outperformed expectations with the small revenue beat and better-than expected margin expansion. Revenue of 493 million in the second quarter of 2019 was about level with the year ago period. Organic growth was 4% while acquisitions contributed 5%. This was offset by 2% FX headwind and a 6% decline, reflecting the absence of 32 million in ASC 606 transition revenue included in the year ago period. Adjusted for the two recent acquisitions which were not in our original guidance, revenue exceeded by 8 million that was nearly all due to the strength of our aftermarket business. On a reported basis, FoodTech revenue declined 5% in the second quarter of 2019. Organic revenue was up 1% with a 5% increase from acquisitions. Offsetting that growth was up 3% FX headwind and 8% decline, reflecting the absence of ASC 606 revenue included in the year ago period. Keep in mind that FoodTech organic revenue was 7% in the first half of 2019 as some shipments originally expected in the second quarter had accelerated into the first. FoodTech segment margins in the second quarter 2019 were outstanding 14.9% compared with 13.1% in the year ago period. Adjusted EBITDA margins were 20.3%, up from 17%. FoodTech enjoyed a highly favorable mix with a higher percentage of aftermarket business as well as an advantage equipment mix. Profitability also reflected better than expected improvements associated with our restructuring, which includes capturing operational efficiencies as well as direct cost reductions. AeroTech revenue was ahead 16% in the second quarter of 2019 with growth of 13% organically and 7% from acquisitions, partially offset by a 3% decline associated with lack of ASC 606 transition revenue. AeroTech margins improved to 11.9% from 11.4% in the year ago period. Adjusted EBITDA margins for the segment were 13.2% versus 11.9% year ago. Order rates in the second quarter declined 12% from a year ago period and essentially flat sequentially for both FoodTech and AeroTech. Year-over-year comparisons for both businesses were against record orders in the year ago period. As FoodTech, general economic and trade uncertainties has continued to slow the decision-making process among some customers. We expect some quarter rate improvement at FootTech in the second half based on conversion of pipeline activity in North America and Asia. Meanwhile, conditions at AeroTech remain solid as we continue to see investments in infrastructure, in commercial and military aircraft support equipment. Cash flow for the quarter was primarily impacted by lower advanced payments associated with orders in the period. Year-to-date, our advance payments are shorter planned by about 35 million. We expect to get about half of that back to the remainder 2019. That leaves us with an expected full year free cash flow of about 100 million or conversion rate of about 80% before any voluntary pension contributions. Regarding restructuring, we recorded an expense of 4.3 million in the second quarter. For the period, we generated savings of more than 8 million versus an expected 5 million. For full year 2019, we now plan to capture year-over-year savings of 26 million. When combined with the savings achieved in 2018, that leaves us with plan incremental savings of 22 million in 2020 to achieve our total program savings target of 55 million. In addition of the restructuring charge, adjusted EPS reflects an expensive $10.8 million associated with the significant second quarter M&A activity including transaction fees and expenses, integration cost and inventory step up. On the tax line, we booked the discrete tax benefit associated with stock compensation of $2.2 million, essentially as expected. With that, we reported diluted earnings per share from continuing operations of $1.06 compared with the $1.04 in the second quarter of 2018. On an adjusted basis diluted earnings per share was $1.42 versus the $1.27 a year ago. JBT operating income was $47 million in the second quarter of 2019 including restricting and M&A related cost. Adjusted EBITDA of $78 million was up 17% year-over-year. Adjusted EBITDA margin was 15.8%, up 230 basis points from the year ago period. For full year 2019, we have increased our top line growth forecast to reflect the completion of the Proseal and Prime acquisitions. We continue to expect organic growth of 4% to 5%. The contribution from acquisitions expands to approximately 7% versus the previous guidance of 2% to 3%. The FX headwind is now expected to be higher at 2% from the year, reflecting the $127 million ASC 606 transition revenue included in 2018 results, 2019 GAAP revenue is expected to be up about 3%. We continue to expect full year segment operating profit margins of 12.5% to 13% for AeroTech and 13.5% to 14% FoodTech while absorbing M&A related cost. As you saw in our earnings release, we started to communicate segment performance on an on the basis of the adjusted EBITDA margins. Internally, we look to this metric as a way of tracking progress as it exclude short-term M&A related expenses therefore capturing to operating trends. At FoodTech, we expect full year adjusted EBITDA margins of 18.5% to 19.5%. This is a pickup of more than 250 basis points above 2018. At AeroTech, we anticipate adjusted EBITDA margins of 13% to 14% up a 150 basis points in 2018. We continue to project a tax rate of about 25% for 2019 excluding discrete items. Our forecast for interest expense is now $23 million to $24 million, reflecting the incremental acquisition related debt. We've adjusted the guidance range for the full year 2019 diluted earnings per share from continuing operations to $3.95 to $4.15, reflecting higher M&A items. On an adjusted basis, we’ve raised our guidance. The previous range was $4.35 to $4.55. We are now guiding to $4.75 to $4.90. On an adjusted EBITDA basis, we’re forecasting a full year range of $290 million to $300 million compared to our previous guide of $260 million to $275 million. The increase primarily reflects the contribution from acquisitions and better-than expected second quarter results. For the third quarter of 2019, we project revenue of $500 million to $510 million. Our diluted earnings per share from continuing operations guidance is $0.90 to $0.95 or $1.05 to $1.10 on an adjusted basis. With that, I will turn the call back to Tom.

Thanks, Brian. Last quarter, I spoke about the acquisition of Proseal, which enhances JBT's position in end-of-line packaging technologies with environmentally friendly tray sealing. In June, we also completed the acquisition of Prime equipment group. With annual revenue of about $45 million, Prime expands their presence in primary poultry processing. Prime's core technology provides laborsaving automation for poultry production. Prime also offers a proprietary water reuse technology, which yields significant cost and environmental benefits in poultry production. A key part of JBT strategy has been to grow our recurring revenue through improvements and share wallets on installed base through investment in aftermarket focused resources. As Brian mentioned, revenue outperformance in the second quarter wasn't good part due to the strength of our aftermarket business, it also contributes to the outstanding margin performance. This is a clear demonstration that our investment strategy is paying dividend. Our eternal investments and M&A activity have aligned JBT with key trends in the food industry, such as growing demand for production automation and clean label. For automation, our new x-ray guided water-jet portion equipment provides automation that has traditionally been done by hand. Accuracy and yield are improved as the x-ray identifies bones and primals and calculates the optimal way to portion. At the same time, this automation reduces the need for approximately 8 to 10 operators with each installation. In addition, we are developing harvesting robotics that follow the water-jet portioner, automating the unloading of our machine, and further reducing labor by another 6 people. The reduced labor creates significant financial benefits for our customers while helping them with the challenge of staffing there facilities in tight labor market. On the clean label front, the Avure and Stork acquisitions have significantly enhanced JBT's portfolio and ability to support our customers' clean label product offering. This year, we've enjoyed a number of wins that expand the global reach of their high pressure processing and aseptic technologies as consumers demand clearly label products and our customers respond to this trend. Overall, we continue to see positive long-term macroeconomic tailwinds in both our food and aero markets and are confident our strategic position with JBT will allow us to take advantage of these tailwinds. We are enhancing our position further through M&A where our pipeline activity remains robust. With that, we will open the call to your questions. Operator.

Thank you. [Operator instructions] And our first question comes from the line of George Godfrey of CL King. Your line is now open.

Thank you and good morning, Brian and Tom. Just a question on the order activity being a little bit like this quarter versus a tough compare, and I did hear your comments about economic weakness. My question is, how long can your customer do you think push out the ordering on a quarter-by-quarter basis? Is it something you think they have to come in and ramp up? And have you seen that as we move into the second half of this year? Thanks.

Good morning, George. I would tell you that certainly our customers have some flexibility on the timing of their investments and it really takes two parts. If it’s for a new consumer product or a customer they are supplying, generally, there is a deadline which requires them to place the order and time to be ready to go to market. If it's more of an investment to improve productivity or efficiency or to drive some results in their business, they have more latitude in the timing. And sometimes that may take that form of the rebuild or some aftermarket activity we tick up. So, it’s really in two parts. But I would tell you in the long-term, we do believe the microeconomics tailwinds we’ve talked, increasing protein consumption that pushed to clean labels. More value added foods or our protein customers and convenient and ready meal on the liquid food side. All create demand and we’re really working hard to make sure JBT’s position in front of those trends and that we have the right product offering to meet our customers’ needs. So, I’m quite confident that as we work our way through the year and into the following years, JBT is in great shape to take advantages of those trends in the marketplace.

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

I was hoping you could talk about, obviously, the orders little bit softness and just discuss some of that, but maybe some of the puts and takes as we go into 2020. Given where the orders are weak now, could we still sort of think about your plan for 4 to 6 organic with obviously some various still relevant? And then, maybe add up some of the recreation we’re thinking about for next year and restructuring? So just give us some high level puts and takes as we think about and start to get a framework for next year?

Good morning, Larry. So, when I think about 2020, I look at framework we put for us back in September which was EBITDA in the range of $315 million, what I would tell you is we’re well on that pace prior to acquisitions can be a little bit different way lower on the revenues, higher on the margins, we’re not prepared to talk about 2020 growth rate at this point, but I would tell you organically we’re well on pace with the acquisitions work, we’re looking really well above pace on the EBITDA and within the revenue we’re well within the range with the acquisitions. So, we’re feeling very comfortable where our guidance is for 2020.

In a longer-term, Larry, I do remain convinced with the markets will grow those rates and we have a very effective strategy to take advantage of that growth.

And then just remind us -- can you just remind us that just from a high level then discretion, incremental incretion for next year that out there from more deals you've done and also the incremental restructuring savings in 2020 that will go obviously on top of where we guys finished in 2019 at?

Right, so, the incremental restructuring savings is currently estimated about $22 million. And then in terms of the acquisition accretion, it’s about another. We have guiding this year with seven months of activity somewhere in that $18 million of EBITDA on an adjusted basis minus interest expense et cetera is that $0.05 to $0.10 and then next year with another five months is going to be another $0.05 to $0.10.

And then just we got a lot of question about this too. Can you maybe just discuss the impact of some of these non-meat alternatives out there? And secondly, the ASS impact, how that’s playing through so those two things? Thanks.

Sure, Larry. On the non-meat alternatives I would tell you that from our equipments perspective, the value added side of add is very similar. It flows essentially above the for example the freezing and packaging technology that follows, Larry. So, we like to think of it just finding and a good thing for our business because the equipment opportunities are similar. The Asian Swine Flu, or the ASF, is a bit more nuanced in that. You have to kind of think about the total global demand, and certainly that’s an impact to pork production in Asia, China and couple of other countries in particular. But I general, we see that it’s being a positive for JBT because that is creating additional export opportunities for pork producers, particularly in the U.S., which is causing some pricing uplift on pork which is then creating room for poultry prices to come up underneath that increase in pork pricing. So, for our customers, we believe in general that’s a good thing, and it’s a trend that should be helpful as we look at the back half of this year and into early next year.

Thanks. So just to clarify, are you actually taking orders and participating with some of these new non-meat alternatives? And then my last question is just around the slowness to close orders. That doesn’t seem that new. You guys kind of talked about there for awhile. So has than really changed materially in the quarter? Or is it kind of more the same which is kind of start-stop a little bit?

So, two-part question, on the first part. We are seeing the opportunity to quote on some more for the non-meat alternatives, and some of that early work Larry has been done on the existing equipment and infrastructure that’s in the food industry. And on the second part, you’re right it’s not a trend. We’ve been talking about this in particular the last quarter or two. We don’t see it changing materially although we have seen some strengthening of our people and some customer projects that we do see and have conviction around in both North America and Asia that we think are going to help us get some uplift into Q3 and Q4 are orders.

And our next question comes from the line of Mig Dobre of Baird. Your line is open.

Yes, good morning everyone. Brian, maybe a question for you, and I think I should know the answer to this, but I don't. When I'm kind of looking at your reported order you sent backlog in FoodTech, what exactly all goes through that? I mean is there a portion of your revenue that just doesn’t show up in down orders and backlog? And I asked because, if I'm looking at orders, they were basically flattish sequentially and backlog has not eroded all that much, but your revenue has picked up pretty materially close to $60 million. So, obviously, I'm missing something here. Can you help me with that?

Sure, everything does run through our orders. On the aftermarket, it does comes and go typically in the same quarter. The piece that you’re missing is the acquired EBITDA -- sorry the acquired orders, the acquired backlog from posting on Prime, that’s a big chunk that you’re missing.

Okay, I see that. That makes some sense. Then maybe my question is this, if I’m sort of looking on a almost like a rolling 12 month basis, looking at the last fourth quarters. Orders have averaged something like 311 million and when we're looking at the back half of the year, at least on my model based on your guidance, we should be looking at revenues of about call it 360 million or more per quarter.

For FoodTech.

For FoodTech, yes, this is all FoodTech. How do we kind of bridge this gap? Is it all acquisitions that essentially deliver that? Or is that that you are inherently baking in some sequential acceleration on either your aftermarket or your original equipment business that you think you'll be able to convert on before year-end?

Right, so in terms of progression the back half revenue for FoodTech is somewhere between 1.5% organic growth versus a year ago, so little bit a progression versus year ago. And Q3, it will be relatively flat organically to Q4 then you have a normal seasonal impact improvement in Q4. And then, what the acquisitions are going to add, somewhere in the range of 70 million or so of revenue, 75 just based on a rolling that extra six months of revenue.

I see, okay. So, it's primarily acquisitions essentially that.

Yes.

Okay, that makes sense. Then your margin again in FoodTech was much better than what I expected that's great. I'm trying to maybe understand how you're thinking about the back half and I do understand your guidance, but obviously if I'm looking sequentially. We're not talking about margin quite as good as what you've had in the second quarter of 19. And I guess the question is. Is this a factor of conservatism or essentially is it all driven by mix? And can you maybe separate mix or whatever one-time quarter specific items that helped in the second quarter? Thanks.

Right, the margin activity in Q2 was pretty tremendous when you look at the aftermarket mix, the margins of the aftermarket and then some particular strong margins on some of the equipment. We don't expect that to be the trend were going back to our normal trend. The FoodTech, we see margins about 19% in the back half that’s actually an increase of about 50 basis points based on what we effectively previously guided to. Basically, we got a revenue coming down the back half and effectively holding our EBITDA dollars, getting a little bit more benefit from our restructuring as well as cooperation's slightly improving as well. So, really, the margins are actually improving in the back half versus what we previously said. We're just not going to get -- you just don’t really expect the tremendous aftermarket mix that we saw in Q2.

And last question if I may, is there a way that you can help us understand in FoodTech, what the year-over-year benefit from restructuring was in the quarter? And what the year-over-year benefit would be in the back half of 19 versus 18? And I’m done. Thank you.

Right. So, we mentioned about $8 million in the quarter, it's about a 70-30 mix through food to aero. And as we progress, so that's -- we had about 5 million in Q1. So, it's about 13 million. So, now, we expect incremental 13 million the back half to get to the $26 million. And this is all relative to 2018, keeping in mind. we did have some savings in the back half of 2018. So, it is actually a cumulative expected even bigger, but the back half of $30 million I would also still expect it could be about 70-30 split.

Hey, Mig. Go ahead.

I’m sorry, but the $8 million you’re saying that that’s a year-over-year number, it’s not a sequential number?

That’s correct.

In the second quarter.

That’s correct.

Okay.

Hey, Mig, just kind of bringing it together for JBT for the year against our core prior year, I just would like to point out that. For the full year, if you look at the guidance still trends -- it translates to some great results to 10% top line growth, 30% adjusted EBITDA growth versus core 25 basis points of margin expansion. So, from our perspective, if you kind of pull the whole year together, it’s a really strong result.

And in terms of quality means to 2018 excluding the benefit of ASC 606, $27 million of profits.

Right, I get that, it’s just that there is a so many moving pieces here that it’s hard for me to keep it all straight, which is why I’m asking these questions.

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

The margin in FoodTech looked absolutely great and I wanted to ask the similar question to about the mix. And maybe I’ll try and ask in this way. What are the products? Is this poultry or these beef products that are the positive mix? Or is it the customers were doing more aftermarket in lieu of pushing out orders in the FoodTech business? And then kind of on the follow onto that in the backlog, what is the mix of like the FoodTech side? You have similar aftermarket or mix of equipment that's higher margin.

Right. So, in the second quarter, the predominant benefit was on the aftermarket side, again both the mix, we have about 42% recurring revenue in the quarter. We're normally around get about 40%, right. So, you had a couple of hundred basis points there, and that obviously carry the higher margin, and the margin itself was nice on the aftermarket. It was across both protein and liquid food. So that was fairly similar. As we go and look at the backlog into Q3 and Q4, keeping in mind that we don’t have ton of backlog in the aftermarket, it kind of comes and goes as I mentioned earlier in the period. So, we’re looking at the reversion of the normal mix of aftermarket versus equipment and that is reflected in the 19% back half margins that I mentioned. It will progress from Q3 to Q4 on the margins, but for the full back half, FoodTech margins of about 19%, which when you look at kind of where we started the year and where we were last year that what we expect to normal progression.

Okay, great. Thinking about the orders and your commentary about the insert, I wonder if you could help us home in what that means exactly, is it U.S. customers that are or should be the concern or is it international customers. And what do you think has to happen to start to see the orders in flag? Is it of matter just comps getting easier? Or is it lower interest rates or something happening to the microenvironment for the orders to start picking up again?

Walter, but I would tell you is, the activity we have with our customers which lead up to an order or project. We are really encouraged about the discussions we’re having with our customers and the quality of the projects and our pipeline and we’re working on it. What we’re very specifically seeing as a longer time between maybe some of the people that we’re working with more to local level or facility level and the approval with the corporate, and we really attribute that to this trade and just general economic uncertainty around the economy. And I would tell you that anything that starts to resolve either of those factors were in particular on the trade front, I think would be most helpful. Some certainty around Asia and some of these other trade agreements that haven’t been resolved. So, there are customers when they’re completing their facilities can have some confidence around their ability to produce and move that those food stuffs around the world as they desire. And we just continue to work those projects, have those ready, so that as our customers gain that confidence, we’ll be in a position to benefit from that translation. And we’re quite comfortable and confident the quality of the projects, the customer engagement, the things that need to be happen at our end are happening, and we’re positioning ourselves to take advantages as those issues work themselves out.

Okay, yes, that sounds great. Were the trends and order were the same in the U.S. versus international?

I would say in general, as we talked about, Asia continues to be slow although given the way our pipeline is developing, even in that slowness, we see some opportunity in the back half of the year. Europe was pretty much as expected and we did see a few customers' specific projects in North America that I wouldn’t describe so much just under the trade and economic uncertainty. But we always deal with when is the plant going to be ready for equipment et cetera, we saw some movement there in North America. This quarter that we don’t’ see it's being a trend setting that should help us in the back half of the year as those issues worked themselves out with the customers.

[Operator Instructions] And there are no further questions at this time. I’ll turn the call back over to Mr. Tom Giacomini. Please state your closing remarks.

As you've heard, we’re pleased with the benefits JBT is capturing from our value creation strategy and restructuring actions. We significantly improved our ability to win in the market place and enabled JBT to continue to deliver strong financial results. Thank you again for joining us this morning.

This concludes today’s conference call. You may now disconnect have a great day.