JBT Marel Corporation

Thank you, Kathy. Good morning, everyone, and welcome to our fourth quarter 2012 conference call.

With me on the call are our Chairman and CEO, Charlie Cannon; and our Vice President and CFO, Ron Mambu.

Before we begin, I would like to remind everyone the forward-looking statements in today's call are subject to the Safe Harbor language in yesterday's press release and 8-K filing. Our 2011 Form 10-K also contained 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 Charlie.

Thanks, Debarshi. Good morning, everyone.

Today, I'll recap our fourth quarter full year 2012 performance and discuss our business outlook for 2013. Ron will cover our fourth quarter financial results before we open up the call to questions.

We ended the year with a record fourth quarter, achieving new highs for revenue, operating income and earnings per share. Customer orders in the fourth quarter were up 12% year-over-year, and our year-end backlog was up 15%, positioning us well entering 2013.

You will recall that in 2011, our FoodTech segment was negatively impacted by currency headwinds. We responded aggressively and, as a result, FoodTech operating profit margins expanded 190 basis points to 9.7% in 2012.

AeroTech full year operating profit margin expanded 50 basis points to a record high of 9.4%. Margin improvement initiatives, including the 2011 restructuring plan and savings from operational improvements, drove the margin expansion across both segments.

In addition, recurring revenue streams remained strong, representing about 45% of total JBT revenue in 2012.

We continue to focus on segment operating margins as central tenet of our 4G value creation strategy. We are making good progress on our long-term margin goals of 12% to 14% in FoodTech and 10% in AeroTech.

Additional savings from our 2011 restructuring plan, continuing operational improvements and growth of our recurring revenue streams will continue to drive up our margins.

I'll now comment on market conditions within our FoodTech and AeroTech segments. Overall, our FoodTech freezing and protein processing order rates in Europe, Middle East and Africa remained essentially flat through 2012.

Pockets of growth in the U.K. and Spain were offset by weakness in Germany, Scandinavia and Italy.

However, inbound orders thus far in 2013 have been healthy.

Like most companies today, however, we are closely monitoring the continued political and economic volatility in Europe and the Middle East. Freezing and protein processing in North America had a stronger year with both customer orders and 2012 year-end backlog up over 25% relative to the prior year.

Equipment demand from bakery and dairy applications drove significant inbound. Although poultry processing equipment demand was down, we expect a rebound in 2013 as higher poultry prices are helping customers mitigate the impact of higher feed prices.

In Asia, order activity started slow in the first half of 2012 but picked up as the year progressed. We saw particular strength in China, underscored by 2 recently announced large orders totaling nearly $10 million.

In the first half of 2013, we will deliver the first freezers manufactured at our new facility in Kunshan, China. Overall, we are encouraged by the ongoing Asia market activity, largely fueled by growth in the QSR sector.

Demand for our in-container sterilization product line was strong in 2012, driven both by expansion as well as replacement projects. In particular, strong inbound in the fourth quarter of 2012 resulted in a year-end backlog position nearly double that of 2011.

Sterilization market activity remains strong so far in 2013.

For FoodTech, overall, we entered 2013 with a backlog that is over 50% higher than the year-ago level. However, most of this backlog is scheduled for delivery after the first quarter of 2013.

If orders hold at levels we are currently experiencing, we anticipate roughly mid-single-digit top line growth in 2013, albeit with earnings once again back-half loaded. Supporting our full year outlook, our first quarter ending backlog in FoodTech is expected to be significantly higher than the 2012 year-end backlog.

Turning to AeroTech. I'll first comment on 3 industry developments.

First, in December, the International Air Transportation Association (sic) [International Air Transport Association] or IATA revised its 2012 profitability forecast from $4.1 billion to $6.7 billion. IATA also moved up its 2013 profitability forecast from $7.5 billion to $8.4 billion.

Sustained profitability in the airline industry is a positive for us.

Second, our revenue exposure to the American Airlines, USA Airways merger announced in February is minimal. We may see some delays in orders in our Ground Support Equipment business.

However, in the longer term, we believe this consolidation could positively benefit our services business.

Finally, we entered 2013 with a lighter backlog for military Loaders relative to 2012. While we are actively pursuing several military customers, the recent sequestration process has begun to delay the decision-making process of our customers.

Regarding our larger AeroTech businesses, gate equipment inbound orders were lower than the prior year. A pickup in the back half of 2012, aided by the large third quarter order for Oman, was not sufficient to overcome the weak first half.

We have started 2013 on a lighter note, but we are anticipating a buildup in orders starting in the second quarter. We are projecting good annual growth in 2013 but again with higher revenue concentration in the back half of the year.

Activity in Ground Support Equipment remained healthy throughout 2012, with year-end backlog about 35% higher than the prior year. Lower deicer demand was more than offset by strong demand from our airfreight customers.

2013 has started on a solid note across most regions, although activity in Europe remains flat.

And my next statement may be an understatement for some of you, but this winter season has generated colder temperatures and higher snowfall than last year. Thus, we are anticipating higher deicer orders relative to 2012, but, once again, the revenue will occur in the back half of 2013.

Overall for AeroTech, we are off to a slightly slower start in 2013. We anticipate order buildup starting in the second quarter, but we are closely monitoring the impact of the sequestration measures.

If inbound orders come in as forecasted, we expect mid-single-digit top line growth in AeroTech in 2013 and, with earnings back-half loaded, our usual pattern.

In summary, we finished strong in 2012, achieving a record fourth quarter. We started 2013 with higher backlog relative to last year, and market activity remains strong.

However, a majority of our backlog, more than we had earlier anticipated, is scheduled for delivery after the first quarter. We expect to see a normal seasonally weak first quarter and significant revenue and earnings pickup in subsequent quarters in line with our historical seasonality trends.

We remain focused on our margin improvement initiatives with an eye on our long-term margin goals.

I would like to take this opportunity to thank our employees, our management team and our Board of Directors for their dedication and hard work in 2012. We made significant strides in our strategic goals, and we look forward to the year ahead.

Finally, as noted in an 8-K filing earlier this week, Governor Jim Thompson will be retiring from our board effective May 16. I would like to acknowledge his guidance to our company over the past 5 years.

Governor Thompson has actually been advising our business for the last 22 years, starting with his membership on the board of FMC Corporation. His presence and counsel will be sorely missed.

Now I'll turn it over to Ron Mambu to provide more details on the fourth quarter.

Thank you, Charlie. Revenue for the fourth quarter was a record high of $293 million, an increase of 8% from the prior year quarter.

Gross profit margin of 26% expanded 150 basis points, resulting primarily from margin improvement initiatives executed earlier in the year. Record fourth quarter operating income of $29 million was 28% higher than the prior year after excluding the restructuring charges taken in 2011.

Fourth quarter 2012 diluted earnings per share from continuing operations was $0.64, also a new high.

Inbound orders of $232 million increased 12% year-over-year. As Charlie mentioned, our year-end backlog of $283 million increased 15% year-over-year.

Excluding the backlog associated with 2 canceled U.S. Air Force contracts, 2012 year-end backlog increased 24%.

Lastly, we ended the quarter with record low debt net of cash of $92 million. So overall, a strong fourth quarter performance.

Now turning to segment results. JBT FoodTech's fourth quarter revenue of $178 million is up 17% year-over-year, driven by record sales of freezing, in-container and fruit and juice processing equipment.

Recurring revenue streams continue to be strong, largely driven by our juice extraction business. In addition to the higher equipment volume and higher recurring revenue in the quarter, savings from margin improvement initiatives drove a 370 basis points expansion in operating profit margins.

In the quarter, we realized over $2 million in savings from the restructuring actions executed earlier in the year. For the full year, we achieved over $7 million in restructuring-driven savings, and we have an additional $3 million expected to come in FoodTech in 2013.

JBT AeroTech's fourth quarter revenue of $115 million decreased 4% from the prior year quarter. Ground Support Equipment sales increased 16%, despite lower deicer sales.

And we sold more military Loaders in the period relative to the prior year. However, gate equipment revenue was down over 20%, primarily as a large multi-year mobile air-conditioning equipment order for the U.S.

Military was completed earlier in 2012.

Despite the overall lower volume in the quarter, segment operating profit margin expanded 140 basis points to a record high of 11%. A favorable sales mix between product lines and lower operating costs drove the operating profit margin improvement.

Corporate items for the full year were higher, largely as a result of $6 million in higher compensation and pension expense and $5 million in lower mark-to-market gains on foreign currency transactions.

Full year cash generated by continuing operating activities was a record high of $87 million, which included the funding of over $14 million to the company's pension plans and over $8 million in restructuring payments. The strong cash flow is primarily attributed -- attributable to higher earnings, faster turnover in inventories and higher advanced payments.

Income tax expense for 2012 reflected an income tax rate of 31%. The rate was favorable to prior year, primarily as a result of discrete items recognized in the fourth quarter.

We are expecting this year's tax rate to be in the range of 33% to 34%.

Full year capital expenditures totaled $25 million. The increase of $4 million from the prior year was largely due to the installation of new leased juice extractors during 2012.

For 2013, we anticipate capital expenditures will be about $35 million. The increase from 2012 is driven by the planned spending on the replacement of our Lakeland, Florida manufacturing facility scheduled to begin this month.

Lastly, in the fourth quarter, we repurchased $3.6 million of our common stock at an average price of just under $16 per share. We also replaced our existing credit facility with an upsized $300 million 5-year facility.

This new facility has more favorable terms and less restrictive covenants.

In summary, we finished strong in 2012, achieving a record fourth quarter. We started 2013 with higher backlog relative to last year, and market activity remains strong.

The majority of the current backlog is scheduled for delivery after the first quarter. We expect to see a normal, seasonally weak first quarter and significant revenue and earnings pickup in subsequent quarters in line with our historical seasonality trends.

We remain focused on our margin improvement initiatives with an eye on our long-term margin goals. We will file our 10-K later today, and anticipate providing full year earnings guidance in our first quarter earnings release.

Operator, please open the call for questions.

I want to first concentrate on the strength in orders and backlog because that had been the wildcard, whether the shift in timing from Q3 was just delays or if there was this risk of a more broad-based slowdown. And orders, through the quarter, I mean, remained really strong to keep that backlog figure where it is, given what you shipped out.

You talked about that strength continuing into 2013. So my question is, generally, looking at the markets, and you spoke about some of them -- what's your level of confidence on the strength continuing as the year goes on to really build out visibility beyond the first half?

And a few of the markets you mentioned expected pickups to do better in 2013. So would you characterize it more that you need certain things to go right to keep order rates solid?

Or you just don't need things to go wrong at this point?

I think it's the latter. But let me just quickly address the -- we had the big record fourth quarter, but we had a really, really nice inbound.

And you'll recall in the third quarter call, when we actually lowered our guidance because of the -- we said we had slippages, and I mentioned back then there were 2 kinds. Some were revenue slips, where a customer said, "I can't take delivery of it," and it slipped to the fourth quarter, and then some of them were order slips.

And so some of the orders that back in '12 we were hoping to get in that were sliding, we got in the fourth quarter. And they're not going to ship in the first quarter.

That's the comment we're making about the first quarter being normally seasonally week. I asked the guys to go back, I said, "Hey, give me a sense of what's our visibility.

And tell me -- go back and calculate how many -- " we'd normally issue a press release for an order over $4 million, "tell me how many orders we had over $4 million in 2011 versus 2012." And the answer came back that we had double the orders of over $4 million in 2012 compared to 2011.

So to your comment on visibility, where I sit today versus 1 year ago is much, much healthier. And all I can speak to, I mean, I can't tell you what the order rates are going to be next November, but I can tell you right now, January and February, both are healthy.

And we're forecasting, and I said in my comments, to end the first quarter in FoodTech in particular with a significantly higher backlog than we had at year end. So that makes me pretty sanguine about starting the year with our normal weak first quarter.

I've got a lot more visibility this year than we had last year.

Okay. And you called out the strength in Asia, China in particular.

Is this just general market strength there? Or is this really the tiering strategy or localization strategy, where you'd be taking share or maybe having access to opportunities you otherwise wouldn't have in the past?

Well, I got 2 quick answers to that. I talked to several senior people in the financial world about China a year ago.

And I don't know whether to believe it or not, but they're saying there was a slowdown as the leadership changed in China and they want the new leader to get credit for a booming market. Whether that's true or not, I don't know.

But in fact, our order pattern rate followed that. We started out a little slow in Asia at the beginning of '12, but we ended up really healthy.

That's a general comment. A specific comment, you'll recall, we were moving freezer production for low-capacity freezers with a lot less bells and whistles designed for the local China market.

And we -- to give you an idea, we were hopeful that we could maybe sell 12 or 15 of these once we got the design done. And in fact, we've done much, much better than that, and that represents all new market share.

I mean, we're talking about customers that I'd never heard of 2 years ago. So we couldn't compete against some local Chinese guys for small-capacity freezers when I had a price premium of 400% over them.

We can compete with a price premium of 40%. So we are actually getting net new business there in China, so we're kind of excited about that.

And that's one of our 4Gs.

Okay. And then just, I guess, last question for me and I'll go back in the queue.

To the extent you do see nice revenue growth in 2013, I guess I just would like to hear your view again on operational leverage because it's never really been a gross margin leverage story because of the high variable cost base. But this quarter, in particular, really highlighted your ability to capture SG&A leverage to grow earnings.

So is that the right way to still be thinking about upside going forward? And looking at that SG&A figure, is there anything in that number, as an outsider, that would be skewed up in terms of a forward run rate other than normal variable items, like commission that are tied to the higher revenue?

Yes, I think you're looking at it the right way. We don't have -- as we pointed out, we're largely variable.

But we -- you can see the results when we do have a big revenue quarter, that we do get some SG&A leverage. Offsetting that, you mentioned one, our commissions.

Some of that SG&A is also variable. And then secondly, we're making SG&A investments in our 4G strategy.

But having said that, we fully expect, in terms of margin improvement, if we get more top line, we will get some help through SG&A leverage. It's hard for us to calculate -- I know people like to talk about incremental margins.

It's hard for us because it really varies by product line so much, so you get a lot of mix effect. But we definitely had SG&A leverage in the fourth quarter.

In terms of the -- I know you mentioned there are some costs in FoodTech that maybe still need to come out. And is there -- are there the external costs at all that are still in the SG&A in the quarter?

Not sure I follow you, Jason.

I guess some consultant costs and various things that you were doing on the FoodTech initiatives, I mean, are those all out of the [indiscernible] at this point?

Yes. Yes, that's true.

But are those continuing into '13?

Yes. We may have some more for 4G investments.

I don't have a number or anything in front of me, but that was my example of -- we're going to get SG&A leverage with volume increases for sure. But we're offsetting that some as we're going to make expense-type investments that -- as part of our strategy.

And the first thing that's what I really want to get more detail and color on. I know we outlined in '11 some goals for 2014 for some operating margins.

So first, where are some of those steps, more specifically to get to those '14 levels? And secondly, maybe if you'd just rehighlight some of those goals that you once mentioned?

Yes, Jason, it's Ron. In FoodTech, we said our longer-term goal was to get to 12% to 14%, and in AeroTech, double digits.

And I think, in some of my comments with the restructuring initiatives that we made last year, and we still have more to be realized in 2013, about $3 million. Those are -- and in total $10 million is what we will have achieved -- are structural kind of changes that are going to help us move along that path.

And the way we articulated that was to try to get at least 50 basis points of margin improvement in each business on an annual time frame. Additionally, the recurring revenue is a higher margin business for us.

And as we continue to grow that, that makes a meaningful contribution. And then along with continued focus on growing our products through the kinds of things that we were just talking about in terms of leveraging our sales revenue growth, continuing to expand in the emerging markets and continuing to look at cost reduction.

Those are the kinds of cumulative effects that we see moving us towards our longer-term margin goals.

Okay. And then just moving right into aftermarket, I see we expanded Refurbishment Medals Program by setting a major free carrier customer and also going forward with the PRoCARE service agreements.

Maybe provide a little more color on what you're seeing there, and if you really -- if you believe that there's going to be more significant contribution to earnings going forward in '13 and '14?

I think those -- the answer is, yes, to future contribution, but I think that we put those in as examples of the kind of innovation we're doing in our aftermarket and as one of our key 4Gs. Obviously, if we can grow -- continue to grow our aftermarket, that's a big help to the EBIT margin initiative.

The PRoCARE was -- the European organization in food solutions came up with this idea to actually grow -- actively market into the installed base, schedule preventive maintenance programs, and they grew that from a single contract 2 years ago to be a significant sort of fixed contract -- contracted work. So it was a really good initiative.

And we have a -- there's a similar initiative, it's not called PRoCARE, and it's in the United States as well. On the AeroTech program, the Ground Support Equipment, as we said many times in the past, is the last priority for the airlines.

Their first priority is airplanes and their second is airport infrastructure. And so we're sort of last in line for capital spend.

And so a lot of people have been asking about rebuild, and they came up with a clever way to market. It's actually a marketing innovation, which is you can choose to have a platinum rebuild, you can have a gold, a silver or a bronze.

For a bronze, you get -- we kick the tires and change the oil. And for platinum, it comes out almost like a brand new Loader.

So we let customers choose the level, and they can debate how much of a rebuild program they want to have, but we're starting to get traction with that program and a lot more interest. And I would call those both sort of continuing innovation in the aftermarket.

And now does that also apply to the gate equipment, to the actual Jetways among the actual ground equipment?

Yes. On the Jetway business, we have this Airport Services, different business unit, that largely does a lot of preventive maintenance on Jetway, so we have those contracts.

But Jetways also got a lot of initiatives on touching their installed base and putting more resources into aftermarket. I don't have any catchy marketing programs out there.

Okay. All right.

And then moving on to China, I know you spoke about -- you featured a lower freezer line in China and becoming more competitive. But how about more specifically in some of these deicers, specifically, do you have Snow Panther in China?

And what kind of traction you're seeing there?

Well, we're just at the very beginning, but we have assembled the first couple, and I'm not sure if we've got our CAAC approval yet. We were getting the -- I think we just -- I better be careful what I say.

I think we just got approval from the Chinese authorities for the CAA approval. But it's -- either we just got it or about to get it.

So we're early going, but we think we're going to have a nice local market demand there. And that's another example of getting orders we wouldn't have gotten trying to export it from Florida.

Thank you, everyone, for joining us this morning. A replay of our call will be available on our IR website early this afternoon.

If you have any further questions, please give us a call. Have a good day.