Jeff Scipta - Director of IR Thomas Giacomini - Chairman, President and CEO Brian Deck - EVP and CFO.

Allison Poliniak - Wells Fargo Walter Liptak - Seaport Global Chris McGinnis - Sidoti & Company John Joyner - BMO Larry De Maria - William Blair George Godfrey - C.L. King Mig Dobre - Baird Steve Tusa - JPMorgan David Stratton - Great Lakes Review Walter Liptak - Seaport Global.

Good morning and welcome to JBT Corporation's Fourth Quarter 2017 Earnings Conference Call. My name is Emily, 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. Jeff Scipta, to begin today's conference..

Thank you, Emily. Good morning, everyone, and welcome to our fourth quarter and full-year 2017 conference call. With me on the call are our Chairman, President and CEO, Tom Giacomini; and our Executive Vice President and CFO, Brian Deck.

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. JBT’s periodic SEC filings also contain information regarding certain risk factors that may have an impact on our results.

These documents are available on our Investor Relations 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 on our Investor Relations website. Now, I’d like to turn the call over to Tom..

Thanks Jeff. It's good to be with you this morning to talk about another excellent year for JBT. In 2017, the first year of our Elevate strategy, we delivered well against our framework and three-year goals for growth and profitability.

We captured benefits from our major initiatives which I'll speak about later in this call, and we have positioned ourselves for continued strong performance in 2018 and beyond. Brian will provide color on our 2017 performance and provide initial guidance for 2018.

Brian?.

Thanks, Tom, and good morning, everyone. For the fourth quarter of 2017, JBT posted revenue growth of 19%, comprised of 6% organic growth, 11% from acquisitions, and a 2% foreign exchange benefit. Total segment operating profit increased 33%, and segment margins expanded 140 basis points to a record 13.4%.

Adjusted EBITDA expanded 39%, with a 200-basis-point margin gain year-over-year. AeroTech performed well across the board, with revenue growth of 8% and a 13% gain in segment operating profit. FoodTech's revenue growth of 24% exceeded our expectations. Segment margins expanded 170 basis points to a record 14%.

Excluding acquisitions, FoodTech’s fourth quarter margins were a robust 14.7%. Nonetheless, FoodTech margins fell short of the target we had for the quarter. FoodTech faced some operational inefficiencies that we expect to resolve by the end of the first quarter of 2018.

Additionally, we incurred some acquisition-related costs we had not factored into our guidance. For full year 2017, JBT posted revenue growth of 21%. Organic growth of 8% exceeded our guidance of 6% to 7%, and growth from acquisitions met our expectation at 13%.

At the segment level, both FoodTech and AeroTech posted record sales in operating income in 2017. FoodTech’s revenue growth was 26% for the full year, including 8% organic and 18% from acquisitions. FoodTech segment margins were down 30 basis points in 2017. Excluding the impact of acquisitions, margins expanded 76 basis points.

FoodTech acquisitions had full-year revenues of $195 million with margins of approximately 6% inclusive of deal items and integration costs. AeroTech performed well in 2017, posting full-year revenue growth of 10% including 8% organic. Margins expanded 30 basis points to 11%; and excluding their acquisition, AeroTech margins expanded 50 basis points.

We also held corporate expenses flat year-over-year due to the lower incentive compensation costs and good expense discipline, bringing corporate expense in at 2.6% of revenues. Overall, business conditions and global demand remained very healthy.

We are pleased with a 23% expansion of inbound orders in 2017 composed of gains of 29% at FoodTech and 9% at AeroTech. Backlog was ahead 12%. JBT’s adjusted EBITDA of $199 million hit the high end of our guidance of $190 million to $200 million and was up 29% from 2016.

For the full year, we generated free cash flow of $82 million, representing a conversion of 84% excluding $11 million in pension contributions. This was short of the 90% conversion we had projected. The majority of the shortfall was a function of higher accounts receivable as we shipped equipment later in the fourth quarter.

And for full-year 2018, we expect free cash flow conversion of about 100%. At the end of 2017, we had a major adjustment on the tax line that impacted the fourth quarter and full year. Reported results included a onetime tax charge of $15.5 million associated with the passage of the Tax Cuts and Job Act.

Approximately half of this charge related to a repatriation tax on accumulated overseas earnings. The other half primarily rose from the revaluation of deferred taxes. As a result, we reported EPS from continuing operations of $0.61.

And on an adjusted basis which excludes this tax charge and minor restructuring expenses, we reported fourth quarter earnings of $1.10, up 29% year-over-year. Full year 2017 GAAP EPS from our continuing operations was $2.58, while adjusted EPS was ahead 21% to $3.10.

For 2018, we expect another year of double-digit revenue growth and earnings expansion. Projected revenue of 10% to 13% consists of 7% to 8% organic growth, 2% to 3% from completed acquisitions, and a net revenue benefit of 1% to 2% from the new FASB ASC 606 revenue recognition standard.

As a reminder, ASC 606 became effective January 1, 2018, and provides new guidance on whether revenue should be recorded at a point in time or over time. As we get better visibility of new contracts and the timing of revenue recognition, the estimated impact for the new standard will be refined.

For 2018, we expect segment margin expansion of 100 to 125 basis points above the 11.6% reported in 2017. That gain reflects an estimated 125 to 150 basis points increase at FoodTech and about 50 basis points at AeroTech.

Corporate expense should be around 2.6% of revenues which includes an estimated increase on our non-cash pension expense of about $2 million. Net interest expense is expected at about $15 million. Notably, there will be changes on the tax line as JBT benefits from the reduction in the statutory rate in the U.S.

We anticipate a tax rate of 27% for 2018 versus 30.6% in 2017 both before discrete tax items. Included in our guidance is an earnings pickup of $0.18 to $0.20 per share from the tax rate reduction. We continue to watch for any income tax rate changes by the state jurisdictions.

In addition, JBT booked a discrete tax benefit of $6.4 million or $0.21 per share in 2017, associated with tax benefits on stock compensation. Almost all of this was recorded in the first quarter of 2017.

For 2018, that benefit will occur in the second quarter and subject to the stock price at the time of vesting is currently estimated at $4 million or about $0.12 per share.

All these brings us to our adjusted EBITDA guidance of $235 million to $250 million, representing year-over-year expansion of 22% at the midpoint and earnings per share from continuing operations guidance of $3.85 to $4.05, a pickup of 27% at the midpoint when compared with adjusted earnings per share of $3.10 in 2017.

We expect 32.4 million average diluted shares in 2018 versus 31.9 million in 2017, factoring the remainder of the effect of the 2017 equity issuance.

The EPS guidance factors $0.46 to $0.50 incremental contribution from a five pre-2018 acquisitions, as well as a $0.03 unfavorable impact from the [Schröder] [ph] acquisition and a $0.06 to $0.10 pickup from the incremental revenue associated with ASC 606. All said, this implies contribution margin of about 15% to 20% from core revenue growth.

This is net of our investments for future growth, including those in new product development, iOPS, and aftermarket resources, collectively in excess a $7 million increase in 2017. Today's guidance does not give effect to any impact from planned restructuring activities.

As we announced in the earnings release, we plan to take a restructuring charge in 2018, part of our ongoing efforts to improve margins. Specifics will be available when we announce first quarter 2018 results.

For the first quarter of 2018, we anticipate year-over-year revenue growth of approximately 8%, segment margins of 8% to 9%, and earnings per share of $0.32 to $0.36.

In addition to resolving operational efficiencies from the fourth quarter, the first quarter will be impacted by project-related timing and higher R&D on our iOPS initiative and new product development. In terms of revenue cadence, we expect first half revenue to be approximately 45% of the total year and second half revenue to be about 55%.

As a result of the new revenue recognition standards, we do not expect the fourth quarter of 2018 to be as outsized as we experienced in 2017. With all of that, I'll turn the call back to Tom..

Thanks Brian. As of year-end 2017, we completed the first year of our three-year Elevate strategy to deliver continued revenue growth and margin expansion. Let me update you on key components. The first element of our Elevate strategy is to accelerate new product development.

Over the course of 2017, we wrapped up R&D activity, invested in new products that will strengthen our competitive position over the short and long term. We're pleased with the market reception. A number of our analysts and investors joined us at the recent IPPE, otherwise known as the poultry show where we introduce the DSI 800S portioning system.

Among its many advantages, the 800S significantly reduces labor and improves throughput. This redesign puts our product at the forefront of portioning automation while increasing the value we create for our customers.

In addition, we demonstrated early progress towards robotic automation for secondary processing, as well as our iOPS technology, JBT’s Internet of Things. Customer interest in these new technologies from JBT was significant as they addressed their key challenges, food yield and labor availability.

Further, we demonstrated JBT’s significantly enhanced capability to deliver comprehensive end to end solutions by offering more comprehensive systems as opposed to discrete pieces of equipment, JBT reduces complexity for our customers and improves performance.

It was really encouraging to see the progress we have made on this front in the last few years. Our Elevate strategy also focuses on growing JBT’s recurring revenues. In 2017, we grew recurring revenues 26% with a 9% gain organically. That brings recurring revenue to over 40% of total revenues in 2017.

Our investment in aftermarket focused sales, service and application engineering capacity is driving this growth. Building our Asia Pacific businesses also an Elevate priority. In 2017, sales expanded 27%.

When we ramped up our investment in Asia, it was with an eye towards selling complete systems, tailoring products for the market and leveraging our Asian infrastructure to expand the sale of acquired and core products. As anticipated, this strategy has contributed to our success in the market. Acquisitions remain a key element of our growth strategy.

In 2017, we completed a Viewer, a major provider of cutting-edge, high-pressure processing solutions; PLF, which makes food and beverage filling systems; and AMSS, a manufacturer of military aviation equipment.

As we've said, these acquisitions all represent a tight fit with our strategy and enhance JBT’s ability to expand our customer relationships, providing more comprehensive solutions. In the first quarter of 2018, we completed a small but strategic acquisition of Schröder.

In addition to solidifying our position in the marinating and injection portion of the protein value chain, we see significant opportunities for Schröder in Asia.

While the total revenues from completed acquisitions put us ahead of pace on our Elevate journey, we have a robust pipeline and financing capacity to continue JBT’s successful acquisition program.

With respect to geographic trends for our protein business, we continue to experience strong demand in North America and Asia and are enjoying meaningful improvements in Europe. At Liquid Foods, we're seeing good activity in the U.S. and Europe, coupled with improvements in Asia.

Mexico and other Latin America countries are strong with the exception of Brazil which is slowly improving. We haven't seen any change in the favorable trends at AeroTech.

In North America which represents the majority of AeroTech business, the replacement cycle for equipment remains strong, and air freight continues to accelerate as the consumer pivots from brick-and-mortar to online sales. While Europe remains relatively flat due to competitive condition, the Asia market has shown recent improvements.

Looking across JBT, we are encouraged by market conditions and JBT’s ability to make the most point - make the most of these buoyant markets in 2018. With that, we'll open the call to your questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Allison Poliniak with Wells Fargo. Your line is open..

Could you guys give a little bit more color on what those operating inefficiencies were and your confidence that they won't persist past Q1?.

Sure. As I look at it and we look at how we execute in the fourth quarter, it was really around some new product launch and configuration activity we had in one of the businesses and a bit of the ramping of the volume as we had it in Q4 putting a bit of pressure on the margins.

And then Allison as you asked, as we head into Q1, we see an end of this new product launch development and then there's a bit of a continuation of the R&D spending run rate that we had in Q4 that goes across a lower volume base as we look into Q1 which puts some pressures and margins.

And the last piece that contributes to that is we had some military infilling equipment that's moving from Q1 and into Q2 and out and that kind of affects the margin balance.

So when you look into it, we see the new product issues wrapping up and then we have the insights into the orders and the delivery timing that we see and that's what gives us the confidence to have the strong margin improvement for the full year and positions us for the great growth that we're communicating..

And then just on R&D, you talk about it being up; is there any way to quantify what that increase will be in 2018?.

Yes. It’s about $4 million, including about $1.5 million or so more in Q1 versus Q1 of last year..

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

Congratulations on the improvement in operating leverage in the fourth quarter. And I wanted to ask about operating leverage.

Excluding the noise that you talked about from operational problems, what kind of operating leverage do you expect to get in 2018, I guess, beyond the first quarter? And I think, Brian, in your prepared remarks you mentioned the 15% to 20% but then talked about how there would be some offsets to that.

Can you walk us through your thoughts in operating leverage?.

So I think of it from both the acquisition side and the organic side. So on the organic side, I did mention the 15% to 20% contribution, but that's actually after the effect of the investments, and I mentioned about $7 million. So if you add that back, that's more on the low to mid 20s contribution and then 15% to 20% after.

And then on the acquisitions, it's a fair bit higher in the mid-20s mainly because some of the bad news going away, right? With the inventory step-up and some of the integration costs.

So, all-in, you're looking pre-investments in the low 20s organically and in the mid-20s on an acquisition basis and then subtract out the R&D investments, et cetera, that we're making that pulls that down..

Can you - you give us a number for corporate expense. I wonder if you can do the same thing for R&D for the year.

What do you expect the full year spend to be?.

Yes. Give me one moment..

You know one thing I would like to point out is that just as I look at it, it’s really strong results in 2017 with our FoodTech business driving 75 basis points organic and AeroTech 50 basis points. And you look at the 76 bps we got on the EBITDA and that's leveraging in over 100 points going forward in 2018.

So from our perspective, we feel we're on a really strong trajectory here..

Right. R&D for the projected year is in the range of $32 million to $33 million versus about $28 million last year..

And then I wonder if I could - I know you provide more details on the new restructuring program after the first quarter but I wonder if you can give us an idea if it's going to be like a cost related plant consolidation something like that or is it more process related? I know Paul Sternlieb is an ex-ITW guy and could do something like an 80/20.

I wonder if you could just comment kind of generally about what you're thinking..

As you know, JBT’s approach has been to have restructuring in alternating years and then deliver the benefits of their restructuring to sub - in the subject here. If you look on our timing, we're on schedule this year to head into a restructuring period.

And you should expect us to be very thoughtful and look at opportunities to look at restructuring really from two parts. One would be from improving our processes and getting the benefits to common ownership as we grow JBT.

And then the second part would be around process improvements and driving efficiencies in our business that will help us contribute to margins, but also improve our value delivery to our customers which I think is equally important around lead times and improving our operations to let our initial qualities higher.

It's a two-part opportunity for us and we're being very thoughtful, putting the pieces together, and we'll give a really solid update at the time of the first quarter..

Your next question comes from the line of Chris McGinnis with Sidoti & Company. Your line is open. Please go ahead..

Quickly, just I guess just with the ramp-up in - not ramp, but the increase in R&D spend and I guess the number of acquisitions you've made over the last few years. Can you just talk about, I guess, where maybe your acquisition pipelines at versus R&D spend instead? Thanks..

And I just like to return everybody to this 2018 guide and R&D organic growth is a big part of our value creation. So if you look at JBT for 2018 guiding 10% to 13% revenue growth, 7% to 8% of that is organic and that's certainly above GDP or market growth rates. And we're really pleased and feeling good about that, Chris.

And a big part of that is the work we're doing on new products, the iOPS and value creation that we're creating for our customers, and in particular, the automated equipment, whether it's AGVs or the portioners we talk about. Those all bring significant benefits to our customers around improving their yields and driving out labor.

And if there's one consistent thread, we've been hearing it last year, is labor availability and consistency is a challenge for our customers, so anything JBT can bring to the table is very value-creating from our customers’ perspective.

So if you think about the growth we're putting together here and guiding to you for this year and the growth we delivered last year organically, you can see how these investments create significant value for our shareholders. If you think about the M&A program, we have a very active pipeline as we see the year developing.

We're positioned well in terms of the discussions we're having. And the strength of our balance sheet to be able to capitalize on these discussions and certainly feeling good about our Elevate framework where we are ahead on acquisitions, but we do see as we move through this year and next year an ability to continue to add value through M&A..

Your next question comes from the line of John Joyner with BMO. Your line is open. Please go ahead..

So just to follow up on maybe the acquisition question, and when I was at the Poultry Show in Atlanta, Tom, as you highlighted, kind of showcased your intent solutions and capabilities, I mean, are there any product gaps that you believe are just must-haves in the near term?.

There's no real must-haves, but I would tell you if you look at our M&A charts that we made public, there's certainly opportunities for us to delivering some adjacencies across protein and liquid foods. And then as we move forward, those meaningful opportunities could be converted.

And from my perspective, the opportunities are still very strong even though we do have a more complete systems approach. And from our customers, I would tell you that we see this approach playing out as a positive with them.

As we've expanded our universe of offerings and as you saw at the expo these more complete systems, the ability for our customers to integrate those more rapidly really helps out and from my perspective, it gives me the confidence going forward to really want to continue to work at this emanate program and you see the value creation coming through in the framework we gave you.

So from a shareholders’ perspective, you can see it driving the top line and creating value on the EPS line. So from my perspective and from management's perspective, we see the pipeline and then the conversations and we plan to continue that activity in a strong way..

And then just maybe one last one on the on the tax rate. I would have thought, Brian, I'm not an expert on all the moving parts within your own company, but I would have thought it would have been maybe a percent or so lower than 27.

So is there opportunity for that to drift a little bit lower?.

So just to give a little bit of color going from 30% - about 31% down to 27%. So first of all understand that a little less than 50% of our profits are outside of the U.S. So that obviously maybe it takes - doesn't give you quite the full benefit as a pure domestic company.

But also as part of the tax law, we lost a significant amount of deductions as relates to executive compensation. That has a - that takes that 21% U.S. tax rate up quite a bit closer to 26%. So when you blend that with the rest of the world that gets us to that 27%.

Obviously, we continue to look for ways to reduce our taxes and we've done a good job over the last few years particularly the R&D investment some of the benefits you get from capital expenditures. We’ll look to kind of take advantage of those. But right now, we see this coming out at 27%..

And I would add to it, if you look at it from a customer-facing perspective and you think about the strength we're seeing in our end markets, I certainly see the tax law being a benefit to our customers and their ability to invest in our equipment because of the tax deductibility, particularly in the U.S. here.

So, from my perspective, there's an intangible here that in terms of the demand creation for JBT and the capital equipment we provide these customers..

Yes. I agree. That's something people don't talk about very often. So thank you very much..

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

Just wanted to check in on the accretion math for 2018. I think previously you guys have said it's $0.50 in cumulative accretion 2018 over 2017 net.

Can you just update us on where we stand so we can delineate between what the accretion, what the tax is, and what the organic is?.

So from an acquisition perspective, we previously provided guidance of approximately - when you adjust for the shares because shares changed from the time we gave initial guidance to now. But the guidance was about $0.45 to $0.55, so about $0.50 at the midpoint. For 2018 - and that's the incremental accretion versus 2017.

Now we're seeing $0.48 at that midpoint. We gave the range in the prepared comments. So it’s about a $0.02 difference relative to initial guidance. But it is about $0.48, which is a tremendous amount of value creation going from 2017 to 2018.

And then on the tax side, you did mention - well, I did mention that we have about $0.20 benefit from the tax rate, but about $0.10 degradation due to the change in the discrete that we’re going to get in 2018 versus 2017. So those are some of the big factors. And then you do have the impact of the rev rec which is about $0.06 to $0.10.

And then when you factor the increase in interest expenses and then the new share count, you should be able to do all that math on a walk down from 2017 to 2018..

Larry, I would add that as I look at that framework on acquisition, they were certainly pleased with the value creation, as Brian mentioned, the nice step-up we're seeing in 2018 over 2017. And as we move forward, it really does bolster our confidence on creating value throughout M&A..

So the $0.20 tax benefit is actually net closer to $0.10, give or take, based on the discrete, and therefore, the organic increase is not like $0.15, it’d be more like $0.25.

Is that what you're saying?.

Actually, it should be a little bit more than the $0.25 when you do all the math, so we don’t - a little bit north of $0.30 when we do our math..

And then secondly, I’m just curious. I mean, last year, we started out guiding 3% to 5% organic and ended up doing around 8%. This year, we started 7%, 8%.

Is that indicative of a change in philosophy in terms of maybe being less conservative and more realistic and therefore maybe there's less upside than there would have been before or can you just help us to understand how - why we're guiding so aggressively this year for organic versus last year when we ended up at the same spot, I guess?.

I would just say it's a reflection of what we see happening in the marketplace as we talked about the continuing strength in the U.S. and improving Europe and Asia strength continuing.

And when you just kind of see all the arrows pointing in the right direction and the new products we're bringing to the market, it just really gives us the confidence, as we head into 2018, to have that strong guide. And certainly you have that nice tailwind from the M&A activity, too, which gets you in a solid double-digits for revenue growth.

And from management's perspective, we're comfortable guiding to that and we're really encouraged and optimistic around the way we've positioned ourselves as we ended 2017 and head into 2018..

And then, last thing, APAC changed very much since you're putting the R&D facility in terms of being able to go out, get more business, take more share or the more a reflection of the market. And how should we think about the overall growth in APAC? And I'll leave it there. Thank you..

Thanks for asking about Asia. It's been a significant investment for JBT. I continue to think that we're really positioning ourselves there to win in the long run, which is going to create a tremendous amount of value. And I'd say it's a multi-point strategy that we're seeing playing out here, Larry.

The resources we've put there, the technical center, certainly demonstrates a strong commitment and allows us to help our customers win, bring the Asian customers up on a technology curve we see in the U.S. and Europe.

The ability to take these new products in and tailor them for the Asian markets has improved for JBT and localizing more of that production. And the last point we've mentioned is as we go through M&A program, a lot of the companies we’re acquiring have little or no activity in Asia.

And as we bring those in, our ability to accelerate that over a few years really helps. So, we're certainly bullish on Asia and the growing middle class there, having a multi-year, long-term benefit to JBT, even though we have strong markets in the U.S. and Europe.

So, from my perspective, the strategy's playing out well and the investments we've made the last few years are really starting to create value..

Your next question comes from the line of George Godfrey with C.L. King. Your line is open. Please go ahead..

Really nice finish to a strong year, and I wanted to continue on that organic growth trend, 7% to 8% for next year, really good. If I look at the book-to-bill here in the Q4 for FoodTech, 0.8, and, Tom, I know you called out some production issues in Q1 for 2018 revenue.

Are those two related?.

So George I’ll just kind of take you back on the orders. And I think it's important to look through the year for JBT and we always are careful to caution people about just looking at a quarter. And I feel really positive about our backlog being up 12% for the year.

And if you think about the business units, we saw 29% growth in FoodTech, which translated to around 10% organic growth - double-digit organic growth on that order rate for FoodTech. In AeroTech, we had 9% which was 7% organic. So you look across the portfolio, really strong order growth rates through the year.

And then we see the strength in the markets, and you put the math together, and that's what gives us the conviction around the revenue guide for 2018..

Yes. And the book-to-bill was over 1 for the year.

And then the margin improvement - to the degree that you can, is the margin leverage achieved through improved manufacturing, low operating expenses, getting a little price, perhaps new products coming in at a higher profitability to it, and I'm sure you're going to say it's a combination of a lot of factors.

But I'm just trying to get at where you think the greatest degree of leverage over the margin is. Thanks, and I’ll leave it there..

Thanks, George for the question. So organically, so we are going to get about 125 basis points or so, improvement of margins year-over-year. Keeping in mind that about half of that or so is due to the improvement of the acquisition performance, right? Some of the bad news going away. So organically, you're talking about 50 to 75 basis points.

And generally speaking, the way we look at it, if you look at some of the math and looking at the contribution margins and relative to our fixed expenses, it really does come up to about half and half of I'll call it, true process type improvements, benefits of pricing, other cost out et cetera versus the other half about the impact of the operating leverage..

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

I really appreciate all the detail on the contribution margins, 15% to 20% with $7 million of investment. I'll just say that this is certainly better than what I thought initially when I looked at the numbers related to this.

Can you comment at all on the raw material impact embedded in this, into 2018? What's going on with price cost dynamics? I mean, this is something that I think we're talking about broadly in industrials these days..

Sure, Mig. We do have expectations for inflation. Our materials factored in and our ability to capture that through our value creation program with our customers. As I look into 2018, it's labor and of course materials is inflationary pressures and we've done our best to factor that.

And then we have our RCI program which is really continuous improvement which helps us better leverage our labor and make better use of our balance sheet. So as we've mentioned, we've had a disciplined program there. And the last piece which we haven't had a lot of chance to talk about is we headed in 2018 because of the other initiatives.

What we did give some detail on is JBT’s supply chain program where we are getting more benefits to the common ownership and increasing our buys from a per business buy to a JBT spend where we get larger spends, and we have a very active program there driven from the center but engaging the businesses that bring us some benefits there.

So that's how we get our confidence around the margin expansion and our ability to continue to drive the profits in spite of some inflationary pressures on both materials and labors..

And to give you just a little bit more color, Mig. So, in 2017, we definitely saw a little bit more inflation than 2016. But as Tom mentioned, our strategic sourcing program, when we looked through the numbers, we offset essentially all that inflation. In 2018, we're expecting a little bit more inflation.

We're kind of considering another 100 basis points or so on the material spend, which our material is about - our metal is about 15% of our total material spend, so it's not huge. That's where the biggest risk seems to lie. But we believe with our strategic sourcing and some of our other initiatives, we're going to offset that.

As well as Tom mentioned, our ability to do some escalators in our contracts and the ability to lock in some prices with our vendors, we think - we have that well covered in our forecast..

Then in your comments you mentioned that you’re expecting 100% conversion, free cash flow conversion, and again, this is a little bit better than what I was guessing.

Can you comment at all on this? Should we be thinking that 100% or better is something that you can do on a sustainable basis going forward?.

I only comment on 2018. We do believe we'll get some improved working capital performance and we’re planning on a little bit better capital performance as a percent of sales So we’ll get some little bit of pick up there.

Now, part of that will get offset with obviously the revenue growth but if you look at our depreciation and amortization which we expect to get about 40 - sorry, $56 million or so and relative to our CapEx which is going to be call it the mid-40s, right? You do get a little bit of leverage there.

So all in all, we do think some working capital investment will be offset by that, net benefit of depreciation, amortization, versus CapEx. So generally, we should be in that 100% range. And obviously, future years is kind of dependent upon the growth rates and other things. But generally, we should be in that general range from here..

And then maybe last item for me. I'm trying to figure out segment level, ranging the segment level in 1Q based on your guidance. It seems to me that you're implying that Aero business might be down in the low-single digits all in, on this military contract being pushed out and maybe double-digit growth still in FoodTech.

Is that - first and foremost, is that correct and is it also fair to - how do we think about maybe margin dynamics at a certain level?.

You're generally correct that the first quarter revenue growth for AeroTech will be lower than that in FoodTech, in the low-single digits, a little bit higher than that for FoodTech. And then margin-wise, they'll both be in that 8% to 9% range that we guided to..

And 1Q tax consistent with your full-year guidance?.

The 27%, yes..

Your next question comes from the line of Steve Tusa with JPMorgan. Your line is open. Please go ahead..

So if I use kind of the high level on the first quarter of 8% sales growth and kind of the margin range you guys gave, I'm getting a little bit higher in EPS.

Is there something else in there that maybe you guys called it out already, but is there something else in there that - with below the line, below the margin line where that is kind of hitting that number? I'm getting something more like kind of $0.40 or so..

For the quarter itself?.

Yes, 1Q, first quarter..

Well, I would say we do have some - the additional R&D expenses that we mentioned, that's going to impact, I’ll call it, our normal run rate. Additionally, we have some additional interest expense associated with the Schröder acquisition. And then the Schröder acquisition itself is a little bit of a drag.

But you should be coming out somewhere in that range when you consider all those factors..

I guess we're going to take it off line because I'm having a hard time kind of getting to where you guys are using the 8% to 9% because that would conceivably include those impacts. When you look at the - your net leverage is going to be pretty nicely positioned.

How big is kind of the - you guys may have talked about this, but are there any big ones out there from a deal perspective?.

As mentioned, Steve, there's a whole continuum of deals. There are some larger ones that we continue to track and actively engage and as you know with M&A, it's episodic right. We have - our willingness to and remain disciplined on our financial targets and returns on M&A and then the willingness to find sellers.

But certainly, there are larger deal opportunities as we look forward as long as well as a continuation of the type of acquisitions we've completed that create a lot of value for our shareholders and our customers. So you should expect us to be working at both.

And we have a significant engagement ongoing and when things line up, we'll make sure we convert those and continue to drive our M&A program..

And one last one, I'm not sure if anybody asked but any sense from your customers of how tax reform is impacting their views on CapEx budges in the next couple of years?.

Sure. I had mentioned that as part of the overall tax question. But I do believe it's a tailwind, Steve.

If you think about the ability to invest in the equipment that JBT provides that reduces your labor requirements drives their yield on their food products, improving their profitability, bringing products to market that increases customer demand and the ability to deduct that rapidly and get benefits from a tax perspective, certainly, tailwind in my view and we expect that to continue to play out as long as the laws stay the way they are in the U.S..

Your next question comes from the line of David Stratton with Great Lakes Review. Your line is open. Please go ahead..

When we look at your new products, you talked about the iOPS and I think some other new products that have come online recently.

Do you track the vitality index? Is there any way to differentiate between the uptick of your newer products as they hit the market or is that something that's not entirely relevant in this case?.

From our perspective, we see it as one of the elements. It's an important element, and we have our other initiatives around Asia, the military product focus in AeroTech, the Asia initiative, and we really track each one of those individually and look to deliver that above-market growth rate.

You think about our elevate framework 3% to 5%, organic 6% to 7% acquisitions, double digits collectively and our performance last year and this year is a reflection of the initiatives, allowing us to outperform that framework.

And I'm pleased with the progress we're making and we look at as a collective effort for JBT and that's why the Elevate is so important to us and we're really crystal clear on that framework and how it creates value with our customers, and with our shareholders..

And to provide a little bit more color on the R&D process, so we do have a fairly robust process that looks at project-by-project, the size of the market opportunity, the costs in time to get to the market. And so we do effectively a plot graph of where these things, opportunities lie so that we know where to put our investments.

But we don't have like a vitality type index relative to JBT entirety, but we do track as Tom said that along with all of our other initiatives..

And then one follow-up.

I don't know if it was mentioned earlier but do you have a CapEx projection for the year?.

Yes, I think I mentioned in a question to Mig, somewhere in the mid-40s..

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

Just want to go back to the first question on the call about the operational problems and see if we can get some color. I think you've called out a ramp in production.

So I guess the question is how big was the profit hit from that? Why is it clear in the first quarter and was there any revenue that slipped out of the fourth quarter into the first quarter?.

As I look at the fourth quarter, it really was around the new product introduction and a bit of the ramp cost.

And as I look into 2018, we see that new product introduction as you kind of working its way through and wrapping up through the end of the first quarter and then it's not between the years, but as we look into 2018, we see some of the higher margin business that we normally expect to be in the first quarter pushing out a bit at military, on AeroTech and some of that filling technology moving into Q2 through Q4.

And from our perspective, we remained very much focused on the year. The last element that is important to keep in front of you is the continuation of the R&D spend.

Those are important long-term investments that create a lot of value for our shareholders and we maintain our commitment to that and maintaining that through the first quarter so that we continue to push the new products and services that we need to drive the growth..

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

We posted another year of strong double-digit growth at JBT and delivered against our Elevate strategy goals. And I'm really pleased with how we've positioned JBT for 2018 and beyond. And thanks, everyone, for the call and joining us this morning..

This concludes today's conference. You may now disconnect. Have a wonderful day..