John Bean Technologies Q3 2023 Earnings Call Transcript

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October 25, 2023

There are 6 speakers on the call.

Operator

Good morning, everyone, and welcome to JBT Corporation's 3rd Quarter 2023 Earnings Conference Call. My name is Beau, and I will be your conference operator today. As a reminder, today's call is being recorded. There will be a question and answer session. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedrick Meredith.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Beau. Good morning, everyone, and welcome to our Q3 2023 conference call. With me on the call is our Chief Executive Officer, Brian Deck and Chief Financial sir, Matt Meister. In today's call, we will use forward looking statements that are subject to the Safe Harbor language in yesterday's press release and 8 ks filing. JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results.

Speaker 1

These documents are available in the Investor Relations section of our on the website. Also, our discussion today includes references to certain non GAAP measures. A reconciliation of these measures to the most comparable GAAP measure be found in the Investor Relations section of our website. Now I'll turn the call over to Brian.

Speaker 2

Thanks, Kedrick, and good morning, everyone. JBT reported another good quarter and our first as a pure play food and beverage technology business. 3rd quarter orders were solid. While we maintain a cautious posture due to macroeconomic uncertainty, interest rate pressure and geopolitical risk, We're encouraged by some strengthening of activity in Europe and Asia and we believe that improving price cost dynamics in the poultry industry We'll create a more attractive environment for investment and higher order activity in the Q4 and in 2024. While Q3 revenue came in a little soft, we are very pleased with margins that exceeded our forecast and resulting EBITDA growth.

Speaker 2

Overall JBT's performance continues to reflect the benefit of our resilient business model, a diverse product and end market mix in our value added acquisitions. With that, I'll turn the call over to Matt, who will walk you through our Q3 performance and fine tuned full year guidance.

Speaker 3

Thanks, Brian. In the Q3, revenue increased 1.2% year over year, slightly below our guidance as book and ship orders were below expectations. However, as Brian stated, margins were stronger than we forecasted with gross profit margins increasing over the prior year by 170 basis points, the result of our actions on pricing, for restructuring and supply chain. With that, adjusted EBITDA grew 9.4% year over year to $66,000,000 adjusted EBITDA margin of 16.4%, an increase of 120 basis points. Excluding corporate related costs, the adjusted EBITDA margin from our operations was 20.9%, reflecting strong execution as continue to make progress toward our Elevate 2.0 margin target.

Speaker 3

Income from continuing operations exceeded the midpoint of our guidance, driven by higher interest income from the investment of the proceeds on the sale of AeroTech. Additionally, our effective tax rate for Quarter of 12.3 percent, which included some beneficial discrete items, was significantly better than we forecasted. Diluted earnings per share from continuing operations was $0.95 in the 3rd quarter compared with $0.80 in the prior year. Adjusted EPS was $1.11 versus $0.96 Year to date free cash flow from continuing operations was $62,000,000 representing a conversion rate of 83%. For the quarter, free cash flow of $33,000,000 represented a conversion rate of 107%, which excludes pension contributions of approximately $10,000,000 Moving forward, we expect our conversion rate to be more stable as a pure play business.

Speaker 3

Completion of the sale of AeroTech, Our net debt to adjusted EBITDA ratio as of September 30 was less than one time, providing excellent flexibility to to pursue strategic initiatives. Looking ahead, our guidance for the Q4 of 2023 includes year over year revenue growth of 0 4% and adjusted EBITDA of $73,000,000 to $79,000,000 representing a margin of 16.5% to 17%. We expect interest income of about $2,500,000 at a tax rate of 22% to 23%, resulting in forecasted adjusted earnings per share of $1.25 to 1 $0.40 Given our updated Q4 guidance and year to date performance, we are narrowing our full year outlook for adjusted EBITDA to $265,000,000 to $271,000,000 and adjusted EPS to $3.95 to $4.10 The midpoint of our guidance ranges that translates to year over year growth of 18% 10%, respectively, for adjusted EBITDA and adjusted EPS.

Speaker 2

With that, let me turn the call back to Brian. Thanks, Matt. Let me start by speaking to geographic trends. As I mentioned at the top of the call, we are seeing some improvement in Europe with the pickup in orders and the pipeline. Activity in Asia improved as well.

Speaker 2

In North America, demand from protein customers remained soft in the 3rd quarter. However, we believe rising prices at the wholesale level, lower corn feed costs and the resulted improvement in profitability among our poultry customers Will translate to healthier orders. Otherwise, in terms of end markets, we enjoyed strength in the fruit and vegetable, beverage, dairy and turkey end markets and continued strength for our AGV warehouse automation business. One important shift we are seeing across our customer base is their demand for sustainability. As we have discussed at length, sustainability is a core element of JBT's cultural Our equipment features environmentally friendly packaging solutions, low emissions technologies and systems that reduce food waste and lower energy and water consumption.

Speaker 2

Increasingly beyond yield improvement, high efficiency and labor savings, demand for sustainability of solutions is becoming a larger part of our customers' decision process. We believe the commitment and investment JBT has made to enhance the environmental performance Our systems will increasingly be a competitive advantage. On the logistics and supply chain front, Conditions have materialized has stabilized materially with minimal component shortages and reduced lead times for electronics and fabricated parts. This is enabling us to more aggressively execute our supply chain initiatives, the area that represents JBT's largest margin enhancement opportunity. We are largely offsetting inflation with cost savings actions, including leveraging our spend, consolidating our supply base and value engineering our products.

Speaker 2

Additionally, with the improvement in lead times, we're able to lower safety stock requirements and we remain focused on improving inventory management. Changing gears, with the completed sale of the AeroTech business in the 3rd quarter, which generated net proceeds of $793,000,000 before taxes. GBT has the liquidity and capital structure to continue to invest in our We're committed to identifying and acquiring technologies that expand our capabilities We'll provide entry into near adjacencies that enable us to provide more comprehensive customer solutions. Recently, the overall M and A market activity has been muted. Yet with JBT's always on posture, we have maintained an active pipeline, including proprietary opportunities.

Speaker 2

Moreover, we believe our strong balance sheet and ability to create value through globalization Regional technology, supply chain synergies, leveraging our digital infrastructure and keen aftermarket focus are distinct advantages. As always, we will maintain a thoughtful and disciplined approach, assuring that all transactions meet our strategic and financial objectives, while preserving an appropriate debt leverage ratio. During the Q3, we made an investment in the Denmark based company, Innospection, to advance JBT's value proposition in the poultry, meat and seafood markets. Innospection is an innovative bone detection system that has raised standard for accurate identification of even the smallest bones. The system reduces false detection rates, lowers work, rework labor and cuts product yield loss, all while enhancing food safety and quality.

Speaker 2

Through our new partnership with Innospection, this cutting edge Bone Technology solution is now available to JBT customers worldwide. Of course, none of JBT's progress It would be possible without the commitment of our employees around the globe. Thank you for your dedication and service to our customers. With that, let's take your questions. Operator?

Operator

Thank

Speaker 2

you.

Operator

And we'll go first this morning to Mig Dobre at R. W. Baird.

Speaker 4

Great. Thank you. Good morning, everyone.

Speaker 2

Good morning. I guess,

Speaker 4

Where I'm looking to start is getting a little more context around what you're seeing from a demand standpoint. Europe and Asia, you talked about being a little bit better. So I don't know if there is sort of something specific that's driving things over there because obviously from a macro standpoint, NITA region seems to be doing frankly all that great. So I'm kind of curious what's changing over there for your business?

Speaker 2

Yes, it's interesting. I would say generally speaking when you think about geographies and end markets in general, it's kind of all over the board and mixed. That said, what we have seen in Europe over the last 30 days and at the end of the quarter and as we entered the Q4 here, Some strengthening in Northern Europe, which has been the weakest area for the last several quarters in Europe in general, while Southern Europe has been a little bit stronger Middle East has been a little bit stronger. So we are starting to see some benefits there. Germany still remains pretty tepid.

Speaker 2

But as a whole, just in terms of where we're penetrated in our product lines, we are seeing some pickup in activity. North America, as we mentioned, it's actually if you exclude poultry, which is hard to do because it's such a big market for us, Otherwise, it's kind of been okay, right, not awful. But obviously, poultry kind of leads the way there in terms of its impact on JBT.

Speaker 4

In poultry market, is that comment just Relevant for the OE component of the business or has there been an impact on aftermarket parts that sort of thing as well?

Speaker 2

It's mostly related to the equipment side of the business. And as I mentioned, we are seeing some improvement in the fundamentals In terms of input costs as well as wholesale prices, so that's the good news. It has impacted some of their aftermarket, But the more meaningful obviously is on the equipment side.

Speaker 4

Okay. Then I guess my final question on demand just Sort of level set expectations here. Your 4th quarter guidance implies that normal sort of seasonal uptick In revenue Q4 relative to

Speaker 2

Q3. Right.

Speaker 4

I'm sort of curious if you

Speaker 5

expect that to

Speaker 4

be reflected in Incoming orders as well. So I recognize that you probably can't guide to book to bill for the Q4. But As it stands right now, do you expect a significant backlog burn in the 4th quarter or is demand in terms of incoming orders Sort of consistent with this seasonal uptick that you normally get in the Q4?

Speaker 2

I would say we'd still expect some seasonal uptick in orders in the Q4, whether or not that exceeds revenue and it builds backlog Our opposite, it won't I don't think it will meaningfully affect our backlog. We still expect a pretty decent backlog Going into the quarter, as I mentioned on the poultry, we actually do expect some improvement in orders in the Q4 on poultry, which is good news. So that will help along with Some of the seasonal activity, we'll see where the backlog shakes out. But as a whole, I think you saw from our release that Our backlog is in pretty good shape, decent year over year, and it should be in relative similar situation as we exit the year. So obviously, it's a little too early to talk about revenue and demand for 2024, but we feel decent about our backlog and What we expect as we end the year.

Speaker 4

No, that's very helpful. My last question on capital allocation, you talked a little bit about how you're looking at various opportunities to deploy this capital. But I guess what I'm trying to learn from you is Whether or not you're looking outside of the U. S. Or if you have a preference geographically at this point, and What are some of the priorities as you look at your portfolios where you would think that Incremental assets and capital deployment can really accelerate your business.

Speaker 4

Thank you.

Speaker 2

Sure. We are certainly looking at both U. S. And Europe, not so much in Asia, Maybe some opportunities in South America as that market starts to grow or is growing. But moreover, it's really about To tech buying really good technology that we can globalize and put into our supply chain system and digital infrastructure, etcetera.

Speaker 2

In terms of kind of specifically to areas that we're interested in, because we are a very diversified business, The landscape is actually fairly wide. That said, I would say areas that we like, Generally speaking, we do like end of line. So we've done had some success with Bev Corp acquisition and some things around that And or packaging in general can be attractive. There's kind of a wide range of margin profiles and end of line, but there are Some things that we can feel that we can fit with our structure nicely and be value added to our customers in full line solutions. So generally speaking, end of line.

Speaker 2

I still think there's opportunities in poultry and in pork and protein in general to add around our current capabilities where we have Some holes. And then beyond that, there's some near adjacencies that we're not particularly strong in. Bakery is one, for example, that we feel that we could Add some diversification that the technology is not particularly different, but they've got some nuance and niche Capabilities that can help us penetrate that market further. So again, it's kind of a fairly wide mandate, if you will, Given our broad exposure and given the strength of our balance sheet.

Speaker 4

Great. Appreciate the color. Thank you. Sure.

Operator

Thank you. We go next now to Walter Liptak at Seaport Research.

Speaker 5

Hi, good morning everyone. I wanted to ask about your comments Brian about the book and ship and if we can get Just a little bit more detail about how what was the trend change and is it just a temporary change, what happened next?

Speaker 3

Yes, well it's Matt. I think from a book and ship perspective in Q3, I think it's just reflective of the current environment that we're experiencing especially As Brian mentioned in North America and poultry, it's a big market for us and we tend to have some Decent book and ship to orders that we expect at any given period. And in Q3, just with the current environment, it just was a little bit Lower than we would have otherwise expected.

Speaker 5

Okay. Are we expecting that to I guess the current environment Hasn't gotten less volatile with some of the political macro things, but are we expecting things to turn in the Q4 or is this

Speaker 3

Yes. I think it's certainly there is uncertainty In the economy and as you mentioned and just sort of the overall geopolitical situation, I do think as Brian mentioned, Some of the underlying fundamentals in poultry, especially in North America, we're seeing some improvement. It's certainly not out of the woods, But price cost dynamics in that market are getting better. We expect that to start to translate into improved orders that should include An improvement in book and ship in Q4. So I think, will it be back to prior to this So the last four quarters, it's hard to say, but we're certainly seeing improvement in the market and we're feeling encouraged by the improvement that we are seeing in that market

Speaker 5

Okay. For your Q4 guidance, as mentioned in the last question, you get that Seasonal upturn and that's going to happen in both sales and in EBITDA. When you're forecasting, is it largely shipments of equipment or are you factoring a book and ship seasonal pickup too?

Speaker 3

Yes. We certainly see an increase in Q4 in non recurring revenue, which will have an impact on margins from a mix perspective. But certainly right now, we have a very strong backlog as we enter into Q4 and a lot of that Growth that we're seeing sequentially from Q3 to Q4 is already built into our backlog.

Speaker 5

Okay, great. And maybe if we can just switch gears and just talk about, you alluded The ongoing restructuring cost cutting, I wonder if you've taken a look at corporate expenses And since we've got the divestiture behind us, if you've got any thoughts that you can share about how corporate expenses might look?

Speaker 3

Yes. What I'd say, although the financial and Mechanics of the acquisition are behind us with Arotech. We still have support that we are providing in terms of Transition services agreement with, AeroTech. And so we still have some of those costs that are built into our corporate environment. And I think as we said in the last call, it's really important that we do Make any adjustments to corporate costs thoughtfully, not only to support the transition services agreement, but also to support our Initiatives to deploy capital from an M and A perspective.

Speaker 3

So we haven't made any significant changes in corporate expenses at this point in time. It's Certainly something that we're going to continue to evaluate, especially as we head into the 2024 planning cycle. But at this point in time, we haven't made any significant changes, but it's certainly something that we're evaluating as we go forward.

Speaker 5

Okay, great. All right. Thank you.

Operator

Thank you. And gentlemen, it appears we have no further questions. Mr. Deck, I'll hand things back to you, sir, for any closing comments.

Speaker 2

Great. Thank you all for joining us this morning, as always, Kendrick and Marley will be available if you have any follow-up questions.

Operator

Thank you, Mr. Deck. Ladies and gentlemen, that will conclude the JVT Corporation's 3rd your 2023 earnings conference call. I'd like to thank you all so much for joining us and wish you all a great day. Goodbye.

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John Bean Technologies Q3 2023
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