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John Bean Technologies (NYSE:JBT)

Q2 2014 Earnings Call

August 07, 2014 10:00 am ET

Executives

Debarshi Sengupta -

Thomas W. Giacomini - Chairman, Chief Executive Officer and President

Brian A. Deck - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

John Francis O'Brien

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Gary Farber - CL King & Associates, Inc., Research Division

Operator

Good morning, and welcome to JBT Corporation's Second Quarter 2014 Earnings Conference Call. My name is Tiffany, 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. Debarshi Sengupta, to begin today's conference.

Debarshi Sengupta

Thank you, Tiffany. Good morning, everyone, and welcome to our second quarter 2014 conference call. With me on the call are our Chairman, President and CEO, Tom Giacomini; and our 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. Our 2013 Form 10-K also contains information regarding certain risk factors that may have an impact on our results. These documents are available on our Investor Relations website.

Now I would like to turn the call over to Tom.

Thomas W. Giacomini

Thanks, Debarshi. As you saw on the earnings release, we reported another solid quarter at JBT. For the second quarter of 2014, revenues increased 9% and segment operating profits expanded 21%. Reflected in this margin expansion, we are capturing the initial benefits of the value pricing initiative and restructuring. Reported GAAP earnings per share was $0.38, on an adjusted basis, earnings per share was $0.45 compared to $0.30 in the second quarter of 2013, an increase of 50% year-over-year.

The general business environment continues to be favorable with strength in the U.S. and improvement in Europe. While Asia has been a strong contributor to our performance this year, we have seen some recent softness in the marketplace. We continue to believe in the growth potential in Asia. As I'll discuss a moment, we're investing in facilities and sales resources to enhance our presence in this important market.

As you saw in our earnings release, inbound orders for the second quarter were down 16% year-over-year. Several orders we expected to recognize in the quarter didn't occur at FoodTech and AeroTech, but they remain the pipeline and we expect to receive them in the back half of the year.

Beyond the quarter, JBT is taking steps to enhance our long-term performance, both through restructuring actions that improve efficiency and rightsize our business and with the implementation of our Next Level strategy that creates a culture of continuous improvement and a platform for growth.

We're pleased with the progress we've made and are on track with projected benefits and savings. Brian will address this more in detail in his remarks.

For those of you who attended our Investor Day in May, you heard details of our Next Level strategy. At the event, we talked about how our 2 well-positioned businesses, FoodTech and AeroTech, have underperformed their potential from a growth and margin perspective. We laid out a detailed plan around fix, strengthen and grow to close the gaps and create value.

I have, and the organization, has committed to the following: in terms of fix and strengthen, we plan to capture 200 basis points of margin expansion by 2017 based on the combined benefit of our organizational simplification, value-based pricing, continuous improvement and strategic sourcing.

With our Next Level strategy, we are creating a growth culture. Over the 2013 to '17 period, we plan to accelerate revenue growth to a 6% to 8% annual rate. We will achieve this by investing in new products, committing resources to our aftermarket franchise, capitalizing on growth in emerging markets with locally-tailored products and through strategic acquisitions. This planned improvement in our top line growth and margin expansion translates to a projected 10% to 14% annual growth in segment operating profit and a 17% to 23% annual growth in operating income.

Let me update you on the progress on JEM, the JBT Excellence Model. A critical aspect of JEM is what we call Relentless Continuous Improvement or RCI. It is an integrated focus on safety, quality, cost and delivery that creates a sustainable competitive advantage. We are rolling out Lean manufacturing training. By the end of this year, we expect to have introduced RCI at most JBT production facilities.

Our Orlando ground support equipment facility, where we have completed RCI training, is an early example of what we can achieve. We are implementing continuous flow for the primary product lines and daily Gemba walks in the production and office areas. The new RCI system will enhance productivity, reduce working capital and improve quality.

Now, we are taking what we have learned in Orlando and sharing it with other JBT locations. Last quarter, we talked about specific plans to build our aftermarket parts and service franchise. We are in the process of hiring talent as we build a dedicated effort to leverage our installed base and grow aftermarket revenues.

As I mentioned at the start of the call, we are investing in the important Asia market. We see high-growth opportunities there and believe a greater direct presence will enhance our competitive position.

In the second quarter, we opened a new joint FoodTech and AeroTech sales office in Shanghai. We are completing a joint manufacturing center in Kunshan, just outside of Shanghai, which we expect to be operational in the third quarter. The facility will include a demonstration center with freezing and portioning equipment. A follow-on investment will be a complete tech center in Kunshan that will include a full range of food tech equipment. We plan to have the tech center operational by mid-2015.

In the past, we've had success capturing business with Western companies in Asia. But we also want to grow business with local customers and believe having a more robust direct presence is critical. We know from experience with our tech centers in the U.S. and Europe that we can significantly enhance our win rate by providing customers an opportunity to conduct test runs on our portioning, cooking and freezing equipment. We believe that adding a tech center in China will drive conversion in Asia.

On the acquisition front, we are expanding our pipeline of M&A opportunities. In the first quarter of 2014, we completed a small bolt-on acquisition of Formcook AB of Sweden, which made us the leader in Teflon cooking equipment and it complements our protein processing portfolio.

And on July 1, we acquired ICS Solutions, a worldwide leader in engineering, installation and servicing of high-capacity food preservation equipment. The acquisition expands our liquid foods portfolio and helps us on 2 strategic fronts. With ICS' complementing product line, JBT now offers the most complete range of in-container sterilization solutions available to the beverage, dairy and canning industries. Additionally, ICS' large worldwide installed base provides a strong recurring revenue stream.

With that, I'll turn the call over to Brian to talk about the second quarter, our business trends and our revised outlook for 2014.

Brian A. Deck

Thanks, Tom, and good morning. Let me start with the highlights of our second quarter financial performance. Revenue increased 9% year-over-year. Both businesses posted solid gains with FoodTech revenue up 7% and AeroTech up 12%.

Segment profits grew 21%. AeroTech profits more than doubled from a lower base in the year ago period, primarily as a result of higher sales volume and a favorable product mix in the quarter. FoodTech operating profits were up 10% as we started to see the benefits of our value pricing strategy. Additionally, the strong revenue gains in our equipment offering, specifically to the protein processing market, provided good operating leverage for the quarter.

Corporate expense in the second quarter was $9.1 million. That included $2.1 million in management succession costs and consulting expense.

As a result, for the second quarter of 2014, we reported diluted earnings per share from continuing operations of $0.38. Adjusted earnings were $0.45 per share compared to $0.30 a year ago.

Beyond the quarter, as Tom mentioned, JBT is taking steps to enhance our long-term performance. One of the early programs we developed was a value-based pricing model. We are capturing the benefits of the pricing initiative a bit faster than anticipated. We expect to generate more than $3 million from our operational excellence initiatives in 2014, primarily from strategic pricing actions.

Our planned restructuring actions are also on track. We booked $11 million of restructuring expense in the first half of the year and plan to book an additional $1 million to $2 million in the second half. We continue to expect more than $3 million in restructuring savings in 2014 and at least $10 million in run rate savings by mid-2015.

The 2014 restructuring savings, together with this year's benefits of our value pricing efforts, will fund planned spending on the company's strategic growth initiatives in the back half of the year. This includes our commercial growth efforts in our aftermarket business, Asia and in our Jetway aviation support business. And we are adding M&A resources as we look for additional growth, primarily in protein processing and liquid foods.

Speaking of acquisitions. We acquired ICS Solutions in July for EUR 26 million. The business' profit margins are attractive and above FoodTech's current margins. For the second half of 2014, ICS should be neutral to JBT's earnings after integration and transaction costs. For 2015, we expect the business to contribute $20 million to $25 million in revenue and $0.10 in earnings per share.

Moving on to our full year 2014 forecast. We continue to expect mid-single-digit revenue growth.

We believe segment operating margins will be up slightly from the 9.8% level posted in 2013, largely due to the benefits of our pricing and cost savings initiatives. The margin expansion will be somewhat offset by higher than previously estimated corporate expense.

Specifically, we expect corporate expense to be about $1 million higher than previously estimated as a result of setup costs associated with our back office consolidation in the U.S. and the higher level of M&A activity. As a result, we believe our corporate expense, excluding onetime costs, will be at the upper end of our previously announced range of $25 million to $27 million. The onetime costs for consulting expense and management succession are still estimated to be approximately $9 million for the year.

As it relates to income taxes, we still expect the tax rate in the range of 32% to 33%.

One last item worthy of mention. We have a union contract that expires in the third quarter at our Ogden, Utah operation. We hope to successfully negotiate the new contract as we've done in the past.

With those guidelines, we've increased our earnings forecast for 2014. We expect adjusted earnings, which excludes the restructuring charge, management succession and the pricing and strategy consulting costs, to be $1.45 to $1.55 per share.

With that, I will open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jason Ursaner of CJS Securities.

John Francis O'Brien

This is actually Jack O'Brien calling in for Jason Ursaner. He's struck on another conference call and apologizes for not being able to be on. I have 2 primary questions. First, on the decrease in inbound orders, besides commentary on timing delays, I was hoping that you could give a little more detail on what you're seeing in some of your key verticals that gives you gives confidence beyond the very short term that the micro factors affecting your business are still trending in the right direction.

Thomas W. Giacomini

As we look across the businesses, they remain very solid, as I mentioned, in my opening comments. The U.S. continues to move along quite smartly and we're actually seeing some improvement in Europe, particularly in the food businesses. As we look to Asia, overall, it's been a very strong contributor this year, but we did see some softness in the quarter. We don't attribute it to any sustainable situation or anything that, in the long term, gives us a negative view of the business. As I look across the orders, specifically, we were expecting a number of large orders to be completed in the quarter that just didn't get done for a variety of different reasons at our customers. There's no single thread that runs through those orders. I would tell you that, in July, we managed to close a few of those already. And as we look at the back half of the year, we feel we're on track to deliver our results and still remain quite optimistic about our business at JBT.

John Francis O'Brien

Okay, great. And then the second question relates to the restructuring charges, pricing initiatives and the overall Next Level strategy in general. There's obviously a lot of movement going on under the surface and you publicly committed to targets for what it all should mean to long-term revenue growth and margin expansion at the Investor Day. But I'm wondering, Tom and Brian, given that you have both led transformations before, maybe you can comment on internally, below the surface how you would compare this with some of the past experience you've had. How much of the Next Level strategy you see as being locked in or very achievable with the right investment versus how much is really going to be a stretch and tough to get right within the next couple of years?

Thomas W. Giacomini

Thank you. I would tell you that I'm very pleased with the progress we're making so far on the Next Level initiatives. Brian mentioned earlier that the value pricing is well underway and that we're really making our progress on the restructuring also. The biggest change is the cultural change at JBT as we learn to act and operate as one business and get the benefits of common ownership. And I've been very encouraged by the reception we've got from the long-term JBT employees and the progress we're making with realigning ourselves under ONE JBT.

From a personal perspective in some of the individuals, the restructuring's been a little bit difficult, but we're materially through that. And I think our people are now focused on the task ahead and looking to be delivering their task under Next Level, whether it's a growth initiative or a cost-based one; and secondly, really holding themselves accountable to the commitments they make to the organization. So I think we're moving along smartly. I'd say, compared to past activities, I'm encouraged by how quickly it's going, but I'd ask Brian to put some color, too.

Brian A. Deck

Sure. Jack, it's Brian. So I would add that the restructuring activities, compared to what I've seen in the past, are pretty similar. There is a cultural aspect that needs to accept it and I think we've gotten past -- we have gotten past that and there is good acceptance on the activities that need to occur. We've seen some changes to our strategy in terms of the cost effectiveness on a timing basis slightly, but that was really baked into our commitments and to be expected as you go through some of these changes to the organization. And we mentioned it in my comments, some of the costs associated with the upfront restructuring of our back office, particularly the back office is very active right now and that is a big part of our cultural shift, moving from a more decentralized to a more centralized, everyone pulling on the orders in the same direction. But now that we're at that point where everyone is accepted, we're moving forward very rapidly and on track for our commitments.

Operator

Your next question comes from the line of Walter Lipik (sic) [ Liptak ] of Global Hunter.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

I wanted to kind of follow on the questions, or I guess, the conversation we're having so far. But along the lines of the changes in the back office, at what point are you on kind of the factory throughput and changes to the Lean thinking in the factories?

Thomas W. Giacomini

Yes, well, this is Tom. We are early in the journey on RCI. And I mentioned the Orlando example. We've got good work underway in a couple of our other operations in the U.S. We've just rolled out our first round of training in Europe in a material way. And we're just starting to think about some of the other geographies like Asia. So as you know, these transformations are a journey and we're making -- and putting our focus on the larger operations where they can have the greatest impact. What I would expect is when we start to get material traction on this, you'll start to see the benefits of the working capital, in particular, on the AeroTech side of the house where you'll notice we are working harder earlier because as part of the Next Level, we did sign up for material improvements in working capital. Some of the things that will come a little later that we also talked about would be in the area of sourcing. We've had to do a lot of initial work, just to get ready to do sourcing activities for JBT, analyzing spends and things of that nature. So that's another area where we're in the first inning. But in terms of the restructuring and the pricing, very good progress and meaningful progress and we're pleased with where we sit. So we're on schedule and this is a multi-year program that's going to continue to drive margins, improve working capital, and then the other third and most important element the long run for JBT is the Next Level enables growth. It enables growth in Asia, it enables growth in our aftermarket and it brings us a much more comprehensive and market-leading protein processing and liquid foods portfolio.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay. All right, great. Sounds good. Kind of along those lines, you mentioned the value-based pricing. I wonder how much, if any, value-based pricing is factored into that -- the $10 million for 2015?

Brian A. Deck

The $10 million that we talked about for 2015 was really with respect to the cost savings. Separately, we are looking at in excess $6 million for 2015 on the price impact.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Oh, great. So a total of $16 million in 2015?

Brian A. Deck

Correct.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay, great. And I guess, was hoping to get a little bit of more detail on some of the growth initiatives. Like the aftermarket parts, can you tell us about the operation you're putting in, where is it going to be located, what do you envision for it?

Thomas W. Giacomini

Right. The aftermarket activity is still housed within the business' walls, for example, inside of freezing and cooking. And the reason that we've decided to do that is there's some fairly specific technologies that are housed inside each business. But what we're doing is, is we're bringing organizational focus to it. So dedicating resources, having people focused on building that franchise. And then the 2 biggest constraints, quite frankly, historically, have been availability of service technicians and dedicated selling efforts on the aftermarket. So we are in the process of putting those resources in place. I would tell you that, it's not as easy as you might hope to hire good service technicians, but we are making progress and starting to find ways to do that. And as we put the service technicians in place, we've demonstrated to ourselves that they definitely have the ability to drive revenue and profitable revenue for us. So that's really how we go about it, a focused organization on aftermarket and then additional selling and service people.

Brian A. Deck

And then one thing I would -- the one thing I would add is there is, as Tom mentioned, a tremendous amount of effort in growing the aftermarket business and salespeople. And we do have the benefit that the restructuring savings and the pricing initiatives will help fund those initiatives.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

I understand. Okay, great. I'll ask one more and then get back into queue. So which -- you provided a little bit of color on the order delays. I wonder if we can get a little bit more from you like which geographic regions, is it Asia where we're seeing the order delays. And is there something where we're going to get a slug of orders between now and the end of the third quarter? Or just -- or are you thinking that these are going to push further into the fourth or 2015?

Thomas W. Giacomini

Walt, our expectation is that the orders will materialize in the back half of the year. I mentioned we've already closed a few in July that we had expected in the second quarter. There is no specificity in terms of region or business. It was pretty broad based. I mean, some might -- we might attribute some of it to just the summertime type of situation. But right now, we see the orders coming through. We see the customers finalizing the steps to complete the orders. And I'd remind you that we have a pretty high bar in terms of booking orders. In a lot of cases, we expect deposits and things of that nature and we're certainly not going to compromise or waiver on that. So we make sure we do the right things before we actually put them in our order book. So from my perspective, we still have a good degree of confidence around getting those pulled in, in the back of the year.

Operator

Your next question comes from the line of Gary Farber of CL King.

Gary Farber - CL King & Associates, Inc., Research Division

Just a couple of questions. One, can you sort of quantify in the quarter what percentage of revenue the U.S. was and Asia was?

Brian A. Deck

We don't actually disclose that breakout specifically.

Gary Farber - CL King & Associates, Inc., Research Division

Okay. And can you also with all the improvements you've made in the company, I don't know if it's too early to say this, have you gotten any different feedback from your customer base? Is it visible to them, some of the changes?

Thomas W. Giacomini

Gary, this is Tom. I would tell you that we've heard in numerous cases that there is a desire, for example, for us to continue to ramp up our aftermarket and service capabilities and I would offer up the recent ICS acquisition where we had the largest customer and one of our existing large customers in the in-container sterilization marketplace pronounced to us -- or announced to us that they were very excited that JBT picked up ICS because they saw our renewed focus on service and that ICS was not at the level JBT was and they're just very happy that we bought the business and hope we can bring that same energy and enthusiasm to the ICS portfolio. I think our demonstrated push towards Asia is very interesting in that regard, too. The combined JBT selling office, the combined facility, the tech center, we're really demonstrating to the Asian marketplace that we are committed in the long run to being a significant player over there and we feel that the customers and -- based on our experience, the customers will see that commitment and respond positively to JBT as a result.

Gary Farber - CL King & Associates, Inc., Research Division

Okay. And then JBT has always had very strong market shares. Just wondering, with all the changes that have gone on, maybe it's too early, but have you seen any changes in the competitive environment, competitive responses? Or when you go bid on projects, any differences? Anything along those lines?

Thomas W. Giacomini

No. In terms of the marketplace, we haven't seen any material changes in our competitors. We continue to look for new technologies or opportunities to expand our offering, Gary, so that, we're not boxed into our current spaces. And certainly, some of the acquisitions we've done recently, and maybe where we look in the future, open up running space for us. If you look at ICS, if you look at Formcook, we've already booked some nice orders. And by integrating those businesses, it actually opens doors. ICS enjoys a number of customers that JBT hasn't historically enjoyed and served some different market niches that we haven't. And we don't always know every little pocket our products can sell into. And then as we bring these businesses in, we're finding out that there are, indeed, cross-selling opportunities. They're not a big part of our economic analysis, obviously, because we're disciplined, but we're going after those hard.

Gary Farber - CL King & Associates, Inc., Research Division

And you spoke before about, I think, some of the aftermarket -- raising the aftermarket hires. I'm just sort of wondering, as far as background of the people you're hiring, is it people with industry expertise? Or people with sort of a different skill set that sort of...

Thomas W. Giacomini

Yes, it doesn't necessarily require industry expertise. You might look for somebody who knows PLC controls or somebody who knows motors and gear drives, so it's general industrial experience is what I would relay as being what we're hiring for.

Gary Farber - CL King & Associates, Inc., Research Division

Right, okay. And then sort of lastly, it sounds like there's -- you have a lot on your plate as far as sort of reconfiguring, restructuring the company. I'm just sort of wondering, as you spend increased time at the company, do you continue to see additional opportunities for improvement beyond sort of what you've already articulated in your plan?

Thomas W. Giacomini

Yes, we do. But we have to balance that with our ability to manage those opportunities and balance that with our desire to make sure we're not exclusively focused on restructuring or cost savings and that we're also taking the steps to grow because, in the long term, that's what makes JBT a healthier business and that's what makes JBT able to deliver the results and return that we want to. So we're looking to balance those. But from my perspective, I've been really encouraged by the way the people and the team members at JBT have been responding and just how hard people are working. They're digging in and taking on the challenges and making things happen. So I would tell you that we're making meaningful and solid progress as a business.

Operator

Your next question is a follow-up question from the line of Walter Lipik (sic) [ Liptak ] of Global Hunter.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

So I wanted to ask about the backlog. You've got the $400 million backlog, and what's the margin mix or product mix looking like for the second half? For example, in AeroTech, you mentioned that there's a -- there was a favorable mix that helped their profitability. Does that AeroTech mix continue into the second half?

Brian A. Deck

So in terms of our guidance, so we are guiding towards mid-single-digit revenue growth for the year. And some improvements in the margin, particularly as we get into the operating leverage that we're going to get. There is obviously a focus on our aftermarket business. We continue to see strength as we put more resources on that. We don't have specific guidance as to increasing margins on particular lines of business, et cetera. I would just say that our guidance on mid-single revenue growth year-over-year remains intact, and we do see some increasing margins in connection with that operating leverage that we're going to get.

Walter S. Liptak - Global Hunter Securities, LLC, Research Division

Okay. Let me try this way. Your gross margins were a little bit better than we expected in the second quarter. Is that the sustainable margin that you're going to have in the back half of the year?

Brian A. Deck

Yes, we believe that the margins that we're running are sustainable. And frankly, as the pricing initiatives continue to kick in and our cost initiatives kick in, we would expect that there will be continued progress.

Operator

That was our final question. I would now like to turn the call back over to Tom Giacomini for any closing remarks.

Thomas W. Giacomini

As Brian and I have discussed this morning, our business remains healthy. We have made good progress implementing our restructuring and the Next Level strategy to enhance JBT's profitability and growth on a longer-term basis. Thanks for your interest and support. We look forward to updating you on our progress again next quarter. Last, thanks to all the JBT team members for their commitment to ONE JBT and the positive results this quarter.

Operator

Thank you. This concludes today's JBT Corporation's Second Quarter 2014 Earnings Conference Call. You may now disconnect.

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Source: John Bean Technologies' (JBT) CEO Thomas Giacomini on Q2 2014 Results - Earnings Call Transcript

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