Q4 2019 Earnings Call
Good morning, and welcome to JBT Corporation's fourth quarter 2019 earnings Conference call. My name is one thing and I will be or conference operator today.
At this time all lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
Yes. Good question during the session you will need to press star one on your telephone.
[music] I will now turn the call over TGP T V. P of Investor Relations make him out again to begin today's conference.
Thank you Wendy good morning, everyone and welcome to our fourth quarter and year end 2019 conference call with me on the call, our chairman President and CEO, Tom Giacomini, and our executive Vice President and CFO Bryan back.
In today's call. We will use forward looking statements that are subject to the safe Harbor language in yesterday's press release, an 8-K filing.
JBT 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 web site.
Also our discussion today include references to certain non-GAAP measures a reconciliation of these measures to the most comparable GAAP measures can be found in yesterday's press release.
Now I'd like to turn the call over to come.
Thanks magazine and good morning.
JBT posted solid growth in earnings gains and 29 team.
Earnings per share, where it had 24% compared with 2018.
Well adjusted EPS expanded 13%.
Got it curbing net income increased 24% adjusted EBITDA, which is important gauge of its important grew 50% to 292 million in 2019.
We continue to enjoy strong growth in aerotech foodtech delivered solid growth.
Hi, Techs fourth quarter order prove it was encouraging.
It's too soon to claim a turnaround from the conditions, we experienced through most of 2019 with order commitments hurt by trade issues and business uncertainty.
That said as we discussed throughout the year, a restructuring activities along with the implementation of JBT operating system.
As enhanced efficiency and profitability.
The three acquisitions, we made it 2019 are performing well. Moreover, the continued growth there were aftermarket business has benefited margins. It continued to create a more stable and resilient JBT.
Looking ahead to 2020, we expect to grow.
Capture further margin expansion at both the 10% increase adjusted EBITDA.
I'll turn the call over to Brian provide more detail JBT is performance in 2019 guidance for 2020.
Afterward, I'll talk more about the poultry show geographic trends.
Recent acquisitions and the strength of our recurring revenue stream.
Thanks, Tom and good morning, everyone.
As a release provided a detailed breakdown of revenue growth.
Let me jump into an analysis of performance and trends for the year.
Even environment hurt by trade and business uncertainty, who takes 2019 organic growth was 1%.
At the same time, we delivered an 8% growth contribution from acquisitions.
And we expanded who took profitability.
Segment operating profit margins up 140 basis points.
And adjusted EBITDA margins up 270 basis points.
19.3%.
Hooters fourth quarter margins were down slightly year over year due to higher incentive compensation expense.
Product mix.
Aerotechs full year performance exceeded expectations.
Bolstered by a strong 7% growth inorganic revenue.
Which was on top of the 20 eighteens organic growth of 16%.
We're also able to expand profitability aerotech with a 130 basis point increase in segment operating profit margins.
Aerotechs adjusted EBITDA margins expanded 160 basis points to 13.7 per cent for the year.
Including a record high a 15.9% to the fourth quarter.
Before your 29 team who took orders declined 2%.
As Tom mentioned, we enjoyed a pickup in the fourth quarter.
With an 8% year over year gain to the highest levels a year.
And Aerotech orders came to 1% for the full year declined 14% in the fourth quarter coming off an exceptional year in 2018.
Additionally, there are few significant orders that slipped from your end into 2020.
Overall conditions for Aerotech remain solid with particular strength in the fixed product lines.
JBT is adjusted EBITDA of 87 million for the fourth quarter and 292 million for the year inline with our most recent guidance.
On the E. P. S line reported four hours and three cents per share came in under our guidance support I wasn't 10 cents to 4020 cents.
This reflects the fact that a 10 cents per share discrete tax benefit we expected in the fourth quarter didn't materialize.
We also incurred more M&A costs than anticipated.
As a reminder, both of those items impact Gaby P. S not just to keep yes.
On the other hand, adjusted EPS at $4.96 came in above our $4.
80 cents to 4090 cents guidance range.
This was primarily due to lower than expected tax and interest expense.
GB cheese full year 2019 free cash flow was below guidance and 83 million, primarily due to higher than anticipated accounts receivable and inventory levels at aerotech.
And ladies and supply chain challenges and shortages aerotech faced in 2018.
Well were compensated in 2019 and did not depleted inventory by year end as expected.
In terms of accounts receivable, some expected large customer payments rolled into the first quarter 2020.
Looking ahead, we are applying the JBT operating system problem solving tool set to tackle the issue and better line aerotechs inventory with demand.
As such we're committing to free cash flow conversion of more than 100%. The 2020 and improved cash flow performance in the first quarter 2020, compared with a year ago period.
Taking a step back our restructuring activities along with the implementation of the JBT operating system have enhanced GB cheese efficiency and profitability.
When we looked at margins versus our pre restructuring baseline Europe 2017.
JBT EBIT adjusted EBITDA margins have expanded from 12% to 15%.
Permanently due to these operational improvement efforts, along with the benefit of increasing our mix of recurring revenue.
This progress is ahead of the peace outlined and elevate strategy framework, despite the challenging industrial economic environment.
Let me now transitioned to guidance for 2020.
Which is subject to certain and two uncertainties related to the impacts in the current virus.
For the year, we anticipate total JBT revenue growth of 3% to 4%.
That includes Foodtech for good flat organic performance.
A 4% benefit from completed acquisitions, and a zero to 1% headwind from foreign exchange.
Aerotech, we expect organic growth of 3% to 4%.
Well, we expect fourth foodtech organic revenue to be down mid single digits year over year in the first half of 2020.
Its revenue will be bolstered by the proceeds prime acquisitions completed in mid 2019.
We anticipate foodtech organic growth will pick up in the second half of 2020.
Based on the forecasted order flow.
<unk> Aerotech, we see strong we foresee strong first half organic revenue gains of 2020.
Including solid double digit growth in Q1.
With a flattish back half of the year versus 29 team given a tougher comps.
In terms of profitability, we expect adjusted EBITDA margins to expand further to 19 and a half the 20, they have presented Foodtech and 14 and they have to 15 in a percent aerotech.
JBT is guidance for full year diluted earnings per share is 4095 cents $5.15 on a GAAP basis and $5 in 15 cents to 535 on an adjusted basis.
We are forecasting adjusted EBITDA of 315 325 million.
Which represents a year over year gain of approximately 10% at the midpoint.
For the first quarter, we expect revenue of 440 to 445 million.
Reported EPS of 68 cents to 73 cents, an adjusted EPS of 75 cents to 80 cents.
With that I'll turn the call back to Tom.
Thanks, Brian.
As many of you know we recently attended a 2020 international production of processing Exco.
Otherwise known as the poultry show.
Well the told a customer enthusiasm was not as upbeat as the 2018 show it was more optimistic than in 2019.
Until export market improvement with the lifting of China's restriction on U.S. poultry should bolster industry prospects.
Speaking of China with the outbreak of the Colorado waters, the health and safety ever employees in the region is of utmost importance in we're actively working to mitigate risk.
Also concerned about the potential impact this quarter virus that supply chain and general business disruptions could be a headwind for JBT.
We really thought feedback from a number of customers in the region.
Feedback indicates that planned investments for 2020 were still moving forward.
In order for pace, given the current difficulties injury interfaces with end customers in China.
The trajectory the virus was to worsen these planned investments and 2020 could be delayed into the subsequent year.
Longer term.
This situation is likely to accelerate China's adoption of modern and safe food processing practices.
Increasing opportunities for JBT.
That's for geographic trends more broadly.
At Foodtech Asia continued to strengthen in the fourth quarter, particularly demand for food preservation technologies.
It was stable with the ready meals and convenience markets enjoying higher growth.
North America continued to be impacted by business uncertainty and U.S. poultry producers traveling with low prices.
But as I mentioned this could improve with exports to China.
And aerotech, we're experiencing very strong trends on the fixed equipment side, driven by airport infrastructure investment.
The military market is expanding.
Additions are a bit more challenging on the mobile side as a trade wars have affected industrywide airfreight demand.
Let me switch gears and talk about the three acquisitions, we completed in 2019.
That's true pro film Prime all three are operating well as part of JBT.
On a strategic basis, each compliments expands the solutions JBT provides for customers.
Moreover, all three support customers focused on environmentally friendly solutions.
Let's turn to electric aviation ground support equipment reduces environmental footprint with emissions free equipment.
Most deals trace sealing technology provides packaging that minimizes the use of plastics, while reducing food waste by extending the product shelf life.
And price poultry processing solutions provide for water reuse, thus minimizing use of a valuable resource.
I've also indicate the importance of the strength of JBT is recurring revenue stream.
Which represented 41% of JBT is revenue in 2019.
At Foodtech it was 44% of revenue.
What is important factor in our success is pro care service contacts and pro care power by.
Our Internet of things initiative that provides cloud based real time operations monitoring at 2019 full care revenue expanded some 40% year over year. This increase penetration installed base and new equipment sales.
While procare still small percentage of recurring revenue.
Its expansion benefits, our customers and JBT.
Regular service visits broker optimize the system yield in uptime for our customers.
For JBT brokers contract today will enable us to operate our service organization more efficiently.
Looking beyond 2020, we remain optimistic about the secular growth opportunities for JBT with an annual organic growth afforded to 4% to 6% through cycle and total growth of 10% with acquisitions.
Our growing recurring revenue stream provides higher margins this stability.
We remain committed to an active and disciplined M&A program that enhances our competitive position.
Finally, we expect to continue to capture margin expansion across both our businesses.
With that we'll open the call to your questions operator.
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Our first question comes from Mig Dobre with R.W. Baird. Your line is open.
Hey, Good morning, everyone is Joe Grabowski on for Mig This morning.
Good morning to Joe.
Hey, good morning so.
If you're assuming a negative mid single digit organic growth and Foodtech and the first half I you know I guess certain matters, what you're assuming positive mid single digit in the second half [laughter] is that mostly just a function of easier comparisons in the second half you mentioned forecast order trends.
Yeah, what are you, saying in the second half are you expecting underlying demand to improve or again is it just through the easy comparisons.
I would say, it's more about the trajectory. The orders you know we had some challenging order conditions in the back half of 2019.
A mid second and third quarter in particular, and we see some mild improvement through this year that will allow us to recover that organic growth rate in the back half of the year and and that's a kind of what we talked about in terms of our view of the business on the last call also.
[laughter] isn't a function of the orders you saw in the fourth quarter or [laughter] orders that you're expecting then the first half their will convert to our shipments in the second half.
Sure. It's certainly a the fourth quarter was a benefit to help us get a start on the year, but we expected book some solid orders in the front half of 2020 also.
Great. Okay, and then I guess my follow up question, the $20 million the restructuring savings.
Incremental restructuring savings expected in 2020, how did those sort of flow by corridor and can you just confirm or are all of the all the 20 million incremental savings on Foodtech.
So of the 20 million, it's there's still a decent amount for aerotech fairly high parallel to each of the revenue between food and food and narrow.
You'll see little bit more savings in the.
Front half, mainly because we had some success in the back half of the year with the savings coming in and those in the successes programs.
On a comparable basis will effectively be being the numbers by Q2, maybe into Q3.
Okay all right.
Leave it there thanks for taking my questions.
Thank you.
Our next question comes from George Godfrey with CL King Your line is now open.
Thank you.
We spend a lot of time on food Tech, but it was for the talk about the aerotech for a second there Tom.
The growth rate or the organic growth rate will be still good number here in 2020, but obviously, it's been coming down do you get the sense that were on the.
Infrastructure build out that came out of the post financial crisis has been completed and know each year. The organic growth is going to trend more to a global GDP like growth in the.
Mid teen digit growth is probably behind us. Thanks.
Sure I would say George it's more around we've had some nice recovery in the and our Aerotech business, which has helped provide those outsize growth rates in the prior years I still see.
A number of years of continuing infrastructure investment you can see it in the airports around you. So that will continue to propel us.
The other two elements of aerotech, the mobile that tends to be a shorter.
Can shift type of business.
We've enjoyed some particular strength, particularly area as a benefit of E commerce.
But if theres been a bit of the headwind in the back half of last year and into this year that we're seeing just in terms of a material flow by air.
Being a bit slower and certainly the current virus situation doesn't help that right now.
And then the military which we continue invest in really.
Groundbreaking technologies that have great financial performance and that franchise.
Continues to build so overall I would say we continue to be quite optimistic about aerotech and it's just some.
Following a couple of years really outside growth it gets to be tough to start lapping those comparable but it's a it's a great franchise and we certainly enjoyed owning that and having that part of our business.
Understood and thank you and just a follow up but you enjoy owning that is that's.
This does strategic fit for the activity level on maybe looking at selling or divesting that business is that pretty cold right now or is there activity. There's always ongoing discussion can you just quantify on where you see the next three to five years for JBT Foodtech versus second of the company's constructive clinics.
Sure we did did quite a bit of work on.
Understanding and we always look at our portfolio and the work we've done this last year Georges told us that the greatest creation for our shareholders is a aerotech being part of our portfolio and were up we're optimistic and bullish about that and and moving forward as we talked about into 2020 with.
Aerotech as part of JBT and.
And we're looking forward to having it continued to be a value, creating part of our offering.
Great. Thank you Tom.
Thank you.
Our next question comes from Andrew Open with Bank of America. Your line is now open.
Hi, This is David Ridley Lane on for Andrew Open.
Wondering how your M&A pipeline looks for 2020.
Our prospective sellers less willing to come to the table given market conditions.
Sure as you know at JBT, we have a very disciplined and active M&A program that.
We continue working at it every every every quarter and every year.
We continue to see a rich pipeline and strategic.
Additions to the JBT franchise that really allow us to provide more comprehensive in value creating solutions for customers.
As we look at the a sense of the pipeline I haven't.
No as to retreat, a willingness of the people were talking to to.
Engage in those meaningful conversations and I would say from JV. He's perspective, we're also being a.
Thoughtful about how we think about valuations and and how the businesses will perform post acquisition and.
In my earlier comments, we continue to see it ability for JBT too.
To do M&A through the cycle and create value I will say a week.
We have expectations as Brian mentioned to generate a significant amount of cash in and 2020. So.
We certainly have the ability to to complete some nights M&A this year without having to the need to increase our leverage and we obviously have capacity beyond that but we're in a good position we remain disciplined and we're always actively working that pipeline.
Okay and just following on that cash comment. Thank you for the color on fourth quarter free cash flow.
Should we think about a 15 million or so working capital shortfall really showing up next year.
For the does not all of that show up next year. Thank you.
Right. So so we do expect some improvement in the and the working capital performance 2020, particularly on the inventory side.
As we use our JBT operating system tools.
To better problem solved and work through that so I do see our inventory to performing better.
And when you look at our accounts receivable, that's going to be more of a function of the grow the business.
So there could be depending on the growth it could be a use of cash.
I do see and that a customer deposit side.
If we do indeed see some benefits of.
Orders, we would see benefit there as well.
Okay, and if I could squeeze in one last one.
What does your 2020 guidance imply for aftermarket revenue mix and two techno that was very strong in 2019 to you've noticed guidance contemplate.
Perhaps some of that returning to more normalized levels. Thank you.
Right. So as you know the second and third quarters were particularly strong on the on the mix.
Third quarter fourth quarter, I was a little bit more heavy on the equipment side versus the prior quarters I would say, we're expecting to go a little bit more back to a normalized.
Great and 2020, I would say was little heavy on the aftermarket side in 2019, I was a little bit more normalization next year.
Thank you very much.
Thank you.
Our next question comes from Steve Tusa with JP Morgan. Your line is now open.
Hi, good morning, guys.
Good morning.
Maybe you could sort of on free cash flow can you guys bridge us from 2019 to 2020, the 83 million to that.
Hundred 60 million I know adjusted EBITDA goes up.
30 million ish, just want to kind of bridge to the rest of the improvement I assume restructuring is a part of in working capital, but can you help us pretty tight would be helpful.
Sure so as a starting point as you mentioned with our net income starting at the top of that cash flow statement in the Coca low to mid 160 is based on our guidance.
It's somewhere in the range of at 30 35 million pickup just to start.
In dollars and then just as a reminder, in 2019, we had a $15 million.
Of.
Restructuring cash that was expensed in 2018, but paid.
Many 19, so there's another 15 million on top of that and then as I mentioned I do think our inventory will be a source of cash and 2020.
And at but I do think and I think the deposits will also be a source of cash for the year. So we add all those things up you're looking at something north of the $160 million.
Net income turning into cash flow.
Okay got it so its.
The combination of.
Makes sense, maybe switching gears on for tech margins in the fourth quarter, what why were they were down year over year just curious.
Seemed a little bit longer than expected what drove the variance.
Sure. The there's two things one the daily just a decent amount of incentive compensation as we.
True up all those accruals for the year, obviously, we had it would take a really nice year. This year profitability and if you look at.
Q4 last year, you kind of had the opposite effect, so theres kind of a double whammy pickup there, but also similarly interest impact Oh, we did have I would say in the quarter or more of an equipment heavier.
Mix versus the Q4 last year.
And then I would even say within the equipment. We had some decent size orders that were a little bit lower margin within that mix.
But overall.
With the restructuring benefits et cetera, we're looking at another 100 basis points of margin expansion for.
For Foodtech next year. So we think we're well on pace with with the <unk> with our elevate strategy that we've outlined.
Got it and maybe also last helps me on the M&A costs.
[music].
So what would be like the types of M&A costs, you guys reported corporate.
Sure.
So we do have M&A costs in both the business units and in the any corporate so typically if its I'll call anymore.
Business units sponsored deal.
They will have their expenses as well as all the inventory step up ends up in the business units and other trends and other transaction and integration expenses.
Corporate we mostly how all the diligence expenses. So we do we do outsource our financial due diligence that's a big one typically all of the attorney cost to tend to be corporate at any sometimes we'll do third party market studies that would also be corporate so in the past the bank.
King fees and banking fees, if theres theres any so in the last quarter, we did have a particularly active.
Quarter on M&A activity.
Out of the corporate function. So just a very busy quarter, which drove up some of those expenses that we had not previously.
Dissipated when we gave guidance after the third quarter.
Okay, Great Tom.
Hello, Thanks, Yeah. Thanks, Steve.
Hi, Dan if he would like to ask a question. Please press star one on your telephone.
Our next question comes from Larry de Maria with William Blair. Your line is open.
Hi, Thanks, good morning, everybody.
Morning, Larry clarification, and good morning, guys.
[laughter] location all the aftermarket.
Kind of returning to normal growth in Foodtech does that sort of imply more like mid single digit aftermarket growth and negative organic for 2020.
Hi negative organic on the equipment.
You're saying I'm sorry.
Yes, yes, certainly in the front half you would see negative organic growth on the equipment.
And and little bit more aftermarket mix.
Because the back half goes I think you'll have a stronger mix of the equipment and.
And offsetting some of the benefit we might otherwise Siemens.
Okay. Thank you has great food headquarters.
Yeah, obviously recent quarter, you talked a push out small the conversion time to convert orders et cetera I.
It's a monkey getting a little bit more normal our quarter times and conversion time getting.
Getting shorter and thus your optimism on the first half water trajectory or we still experiencing some of that uncertainty in the market.
Yeah, Larry I would say.
We certainly enjoyed a better closure rate in the fourth quarter.
Which was the translation of all projects that we talk about our pipeline becoming from paid committed orders from our customers.
And although we would still described the market conditions not back to normal our expectation is you know to get to our back half improvement in food Tech is mild improvement and the markets but.
Not not not anything getting back to normal, but I will say that you know even within some difficult markets JBT content continues to innovate on that.
The product front.
We are selling activity continues to be more sharpened and so even within some challenging market conditions. There are some things we can do to effective better outcome that we're focused on and as a company, we always try to get better and we put those factors together and that's how we can.
Turning to the guide this year.
I would tell you that we've heard in a position where declaring that markets are back to normal or you'd see a much bigger ramp on those orders that are revenues and then what we're currently guiding to.
Okay understood, but just wondering here just to clarify your comments in aerotech are we taking that the IDN essentially eventually spinning or monetizing or take off the table or is that still a possibility given the right circumstances.
Yes. There is you know we always this.
JBT when we analyze their business our portfolio.
You know how we go to market, we always look through the eyes as a shareholder and the lens of value creation and.
From our perspective, we will continue to evaluate.
But I would also say that with the work we've done that currently we believe the best value creation as part of JBT, but we'll we'll always continue to evaluate what makes sense and creates more value for our shareholders and allows us to be the best partner to our customers.
Okay understood. Thanks, Good luck for sure.
Thank you.
There are no questions at this time Mr., Tom Giacomini, I turn the call back over to you.
Our accelerated new product development efforts investments and building our aftermarket franchise and strategic M&A program are better position JBT to be a more valuable solutions provider to our customers.
Thank you again for joining us this morning.
This concludes today's conference call you may now disconnect.
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