John Bean Technologies Q2 2023 Earnings Call Transcript

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August 2, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to JBT Corporation's Second Quarter 2023 Earnings Conference Call. My name is Beau, and I will be your conference operator today.

Speaker 1

As a reminder, today's call is being recorded.

Operator

At this time, all lines have been placed on mute to prevent any background noise. After the I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kendrick Marriott. Please go ahead, sir.

Speaker 2

Thank you, Beau. Good morning, everyone, and welcome to our Q2 2023 conference call. With me on the call is our Chief Executive Officer, Brian Deck and Chief Financial Officer, 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 2

These documents are available in the Investor Relations section of our 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 in the Investor Relations section of our website. Now, I'll turn the call over to Brian.

Speaker 3

Thanks, Kendrick, and good morning, everyone. With the closing of the sale of AeroTech, which we announced yesterday, JBT has delivered on its commitment to become a pure play food and beverage technology business. We achieved an attractive valuation For AeroTech, positioning JBT with a strong balance sheet to support strategic M and A, which we believe will make JBT an even more valuable partner to our food and beverage customers. We are pleased with JBT's continuing operations performance in the 2nd quarter with margins, earnings and orders exceeding our expectations. Once again, the solid performance of our Food and Beverage business demonstrated the benefit of JBT's resilient business model, a diverse product and end market mix and our value added acquisitions.

Speaker 3

With that, I'll turn the call over to Matt, who will walk you through our Q2 performance and revised full year guidance.

Speaker 4

Thanks, Brian. As you saw in the earnings release, we have now classified AeroTech as a discontinued operation as of the 2nd quarter and recast our prior period financial results accordingly. JBT's revenue from continuing operations increased 8.6% year over year in the Q2, at the high end of our previous guidance for the FoodTech business. Adjusted EBITDA margins of 16.7% Increased 3 20 basis points on the benefit of volume leverage, the continued improvement in price cost and initial savings from the restructuring program. With that, adjusted EBITDA from continuing operations grew 34% to $71,000,000 Included in adjusted EBITDA from continuing operations was approximately $13,000,000 of corporate related costs.

Speaker 4

Excluding those costs, adjusted EBITDA margins from our FoodTech operations was 19.7%, which exceeds our previous guidance of 18% to 18.75%. Diluted earnings per share from continuing operations was $0.87 in the Q2 of 2023 compared with $0.80 in the prior year. Adjusted EPS from continuing operations increased 11 to $0.97 versus $0.87 and exceeded the previously provided implied guidance of $0.70 to $0.85 as the improved performance from the operations was partially offset by higher interest expense and a higher effective tax rate in the current quarter. In the Q2, we made progress on our inventory actions and delivered positive free cash flow from continuing operations of $34,000,000 representing a conversion rate of 122%. We expect free cash flow conversion for continuing operations to be slightly above 100% for the full year.

Speaker 4

Sale of AeroTech will have significant impact on JBT's balance sheet now that we have closed the transaction. The net cash proceeds of approximately $650,000,000 after estimated taxes and transaction costs will be used to pay down approximately $300,000,000 of higher cost variable rate debt. The remaining portion of the proceeds will be held in short term securities until redeployed to strategic M and A. On a pro form a basis, we considered which considers the impact from the Arotech sale, our net debt to adjusted EBITDA ratio from continuing operations would have been below 1 times as of the end of June 30. Regarding our restructuring actions, as we continue to streamline our cost structure and transition to a pure play food and beverage technology company, We are increasing the scope of our program.

Speaker 4

We now anticipate full year 2023 restructuring charges of $11,000,000 to $13,000,000 compared with the previous guidance of approximately $4,000,000 That brings the total expense of our restructuring program, including those costs incurred in 2022 to $16,000,000 to $18,000,000 With that, we expect to generate annualized run rate savings of approximately $18,000,000 to $20,000,000 by mid-twenty 24. Looking at full year 2023 performance, we are essentially holding our implied guidance for continuing operations revenue growth at 5% to 8%. Additionally, we are forecasting improved profitability, adjusted EBITDA margins of 15.75% to 16.25%. That includes adjusted EBITDA margins from our FoodTech operations of 19.25% to 19.75% compared with previous guidance of 18.5% to 19.5%. Considering their improved margins and lower interest expense resulting from the sale of the AeroTech business, we are raising our earnings guidance for 2023.

Speaker 4

Adjusted earnings per share is now forecasted at $3.80 to $4.05 an increase over our previously implied guidance for operations of $3.25 to $3.65 For the Q3, we expect a slight sequential decline in revenue And adjusted EBITDA due to a seasonal decline in recurring revenue and the impact of a softer backlog in the meat and poultry markets. With the benefit of lower interest expense, we are projecting adjusted EPS of $0.90 to $1.05 in the 3rd quarter. With that, let me turn the call back to Brian.

Speaker 3

Thanks, Matt. JBT's order strength in the Q2 highlights the benefit of our diversified product and end market mix. Demand for meat and poultry end markets remains under pressure similar to the Q1 given the weak price cost and demand environment in that space. However, we booked significant orders from the pharmaceutical and nutraceutical industry and for automated guided vehicle business. Our pipeline remains stable on the strength of our diversification, but we do note that the higher cost and tighter availability of capital is continuing to impact Looking forward, JBT's priority is optimizing our opportunities and managing a smooth transition to a pure play food and beverage technology company.

Speaker 3

A critical part of that will be deploying capital to acquire businesses that complement Existing operations and expand our end markets to build an even more compelling portfolio of solutions for our customers. As we've always said, we will maintain a highly disciplined M and A process with firm criteria for strategic fit and financial hurdle rates. As for potential acquisition candidates, we will focus on our customers' needs for automation, sustainability and efficiency. We plan to build on JBT's strength in secondary and further processing with opportunities to continue to expand our presence in end of line, including packaging or on the other end, primary processing. There are also bolt on technologies and Solutions complement Terry to our existing offering that would expand our customer value proposition.

Speaker 3

And there are some end markets such as snack foods, bakery, confectionery and sustainable food and beverage alternatives where we could grow our presence. In terms of size, we will consider highly synergistic bolt ons as well as medium and larger transactions that could bring scale and enhance our recurring revenue base. As always, we look to create value from any acquisition by leveraging JBT's operational excellence, strategic sourcing, deep customer relationships and a global sales and service network. As for the M and A environment, valuations are starting to come into alignment with the realities of the capital markets. Of course, JBT has maintained its active corporate development posture, cultivating long term relationships and proprietary opportunities.

Speaker 3

Regarding our digital solution, OmniBlue, we continue to gain traction and sign additional customer contracts. Our customers see OmniBlue as a differentiated service, one that optimizes system yield and uptime while providing frictionless parts and service, all which improves their profitability and makes it easier to partner with JBT. As part of our ongoing process of soliciting customer feedback, we have developed a case study of a large freezer installation. In this case, OmniBlue has produced meaningful efficiency gains in the daily sanitation process and improved monitoring of quality compliance and oversight of 3rd party support providers. OmniBlue has also enhanced asset life The result in this case has been 3 50 hours of incremental annual uptime, representing an 8% to 10% gain, all while operating more efficiently.

Speaker 3

Let me conclude by extending my sincere thanks to our employees across the globe. And to everyone at AeroTech, we are confident that being part of Oshkosh, a leading innovator of purpose built vehicles and equipment provides the best means to capitalize on Arotech's market leadership and strong demand environment. With that, let's take your questions. Operator?

Operator

Thank you, Mr. And we'll take our first question this morning from Mig Dobre at RW

Speaker 1

Thank you and good morning everyone.

Speaker 3

Good morning.

Speaker 1

My first question is really around your orders and backlog. Nice growth in orders and frankly that surprised me a little bit given everything that we know is going on in protein. So I guess, I'm curious as to how you see demand progressing going forward. I know one of your peers has actually provided Some commentary pointing to maybe better days ahead even on the poultry side as that market is starting to bottom. But Again, I don't know if that's what you're seeing or if there are some other elements at play here that we need to think about or be aware of.

Speaker 3

Sure, Mig. It's Brian. Yes, I would say from the poultry side in particular, Q2 was probably the bottom in terms of the microeconomics associated with it in terms of their wholesale prices to their customers As well as we are starting to see some improvement in the retail prices coming down, which supports the demand environment. So That said, it didn't result in any increased orders in the Q2. So we're hopeful that the Slightly improved economics will lead to incremental orders in the 3rd Q4, frankly, more likely Q4 than the 3rd quarter.

Speaker 3

It will take some time because we're still not back from a poultry perspective where it needs to be for them to make real money And certainly we do are concerned or cognizant of Until they make money, they're not going to invest a ton of money. So we do see some projects more one off than I'll call it more fundamental growth. But in the meantime, we're staying close to our customers, obviously, and monitoring and supporting them and their performance. But more likely than not, Q3 is going to be similar to the Q2. But again, we're starting to see some signs of life that are hopefully supportive to the Q4.

Speaker 1

So the mix that's in your orders and backlog Is obviously different based on the comment that you provided with poultry maybe not being as big of a part. Does that have Implications for how this revenue gets recognized? Does that have implications in terms of the mix on a margin side? Can you talk about that a bit?

Speaker 3

Sure. I mean, obviously, our backlog is fairly diverse and supportive of the model that we put forth with the growth And the ramp up in the Q4 in particular, as Matt said in the prepared comments, some of the sequential Slightly decline from Q2 to Q3 is reflective of the weakness in the order book for poultry and pork, by the way, pork is in a similar General situation as poultry and then some seasonal impact from the aftermarket. So we do Expect some sequential decline in the aftermarket business and that's all reflected in our Q3 guidance. But if you look at our broader backlog, inclusive of some of the things that we mentioned on the nutraceutical and pharma side, That's quite supportive of us as we go into the Q4 and reflected in our guidance. So we're pleased that Some of the orders that we've been working on and some of the efforts that we've made in some of these diverse markets is paying off.

Speaker 3

I will generally say the environment out there is fairly mixed, right? There's generally tepid demand, As I mentioned, because of the higher cost and lower availability of capital, but for certain industries, those are less of a concern, especially where They've got durable end markets, good margins on their product and have a little bit longer timeframe and that's where we're seeing the strength on the order side.

Speaker 1

Okay. I want to ask a margin question. The incremental margin In Q2 was quite good. So I'd love to hear more about what sort of drove that, Maybe price costs or any idiosyncratic elements specific to this quarter have played out. And maybe Longer term here, as you've changed the reporting structure and so on, how should we be thinking about Normalized incremental EBITDA Margins.

Speaker 4

Yes. I'll take the first part, Sure, Mig. And then we can go to the second question. The margins in the quarter were definitely we're pleased with the performance of the food operations during the quarter. Certainly, we continue to benefit from some of the Pricing actions that the business implemented in the back half of last year flowing through into the results this year, that definitely was a benefit.

Speaker 4

And we continue to benefit on the margin side from the mix of higher recurring revenue. That continues to be a strong Point in our business and that definitely has a favorable impact on margins. I'd say the other two Things that really helped drive margin improvement in the quarter, the businesses are very conscious of Sort of where the market conditions are and they've been very proactive in managing discretionary costs. I think they did a great job in the quarter of doing that. And obviously, we're starting to see some of the benefits from the restructuring activity that we started to take actions on at the end of last year and that are Currently being taken here in 2023.

Speaker 4

In terms of ongoing incremental margins, I think As we've talked in the past for the food operations, we really expect that to be in the high 20% to low 30% range. Certainly, there will be a little bit of a drag and consolidated level from the corporate cost and the lower revenue. But I would say it's still probably incremental margins are going to be maybe mid-20s to high-20s going forward for the total consolidated continuing operations.

Speaker 1

I'm sorry. So mid to high 20s consolidated including the unallocated corporate costs?

Speaker 4

That's right.

Speaker 5

Okay. That's right.

Speaker 1

Thank you.

Operator

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

Speaker 5

Hey, thanks guys and congratulations on the work on the AeroTech divestiture and sale.

Speaker 3

Thanks, Will.

Speaker 5

I wanted to just ask a follow on The farmer and AGV orders, I don't think you said, but what is the funnel looking like as you kind of pivot and try and find more orders in that PradaCare category.

Speaker 3

Yes, generally speaking, I'll start with AGV. They're obviously enjoying Quite a resurgence or a surge in the need for warehouse automation. It really is a longer cycle trend and The pipeline and the backlog are quite robust and frankly It's really about managing lead times at this point and making sure we have adequate capacity in order to meet the needs of the marketplace. So We could not be better positioned on the AGV side from here. And so it's really about making sure we're making those vehicles Timely and a good cost basis.

Speaker 3

There are still some challenges on the little bit on the supply chain from the electronics side in that product line. But otherwise, things are looking quite good there. On the pharmaceutical and nutraceutical side, which They have some common characteristics. Just to speak quickly about the nutraceutical side, really what we've seen recently and you're probably reading it in the news Is the need for baby formula production, right, given some of the challenges that industry faced a year or 2 ago and now you're starting See those investments flow. And we've been as you may know, we've got a lot of experience and skills in On the dairy side, but also on a septic filling and preservation, as well as powder filling and all those cross nicely with where investments are going on the nutraceutical baby formula side.

Speaker 3

So we do feel that's going to generally be a good trend. Now those projects tend to be large in nature, quite a bit of Capacity comes in at once, but as a whole, that general looks good. And then similarly on the pharma side, we've been investing quite a bit Of our resources on process flow technology, our engineering resources, And when you think about the on shoring of where that's going and we focused on our product lines are on the liquid side Media of Pharma. So in particular things like for the orders that we took in the second quarter, Bio resins and plasmas are where we're seeing some success, but generally speaking, we do see The pharma is pretty supportive. But again, similarly to the nutraceutical side, it's going to be chunkier Order.

Speaker 3

So I think you're seeing an environment that there could be more chunky type orders that come a little less frequently. But as a whole, those markets are nice to be a part of right now.

Speaker 5

Okay, great. Thanks for that detail. I heard your comments about the OmniBlue and It sounds like your uptake of new contracts is going well and that's great. But I wonder, 1, if you maybe you can just quantify or even qualify how you're feeling about The OmniBlue and the customer acceptance of that product. And 2, you had that feedback on the freezer project freezer And Saul, I wonder if you could talk about what that equates to in terms of an ROI, how quickly can Can something like this payback for your customer?

Speaker 3

Sure. So, more broadly speaking, in terms of the Customer feedback and acceptance and where we see that going, it's pretty exciting in the sense that when you think about kind of what we're trying to accomplish With our digital offering is get closer to our customer, have deep engagement with them, Being truly invested in providing visibility for them so that they can be more profitable and we feel that The digital investments we're making really will support a durable competitive advantage over time as we develop those relationships and continue to support their profitability. More specifically, as it relates to what we've seen from our customers, As I mentioned, it's a on this particular case study, which was one of the early installations that we saw, an 8% to 10 Percent increase in capacity opportunity does translate to a very Active ROI, certainly less than a year because the I'll call it the product flow immediately is incremental to them and relative to the cost of the software, It's a quite nice value add. And then I'll add what really importantly, when you think about Getting those digital tools in, it's again very supportive of us getting that aftermarket parts And service uplift as they start to use the tools on our frictionless parts and service or e commerce portal.

Speaker 3

So as they get more confident, more used to using the tool, we'll see continued uplift. And I think over time, that's going to be quite a value driver on OmniBlue aside from the customer stickiness that we'll see there.

Speaker 5

Okay, great. Are we starting to see some of that Aftermarket come through yet or what do you think the timing is and when it's

Speaker 3

We are starting to see it. It's a little bit tricky on how to Measure it relative to a baseline, on a I'll call it on a line basis. So, but we are starting to for the installations that have We are starting to see it. It's just a little bit tricky in terms of the precise, is this a part that they would have otherwise not bought or not. So We're working on the analytics with our data scientist, data analyst team right now.

Speaker 5

Okay, great. Thank you.

Speaker 3

Thank you.

Operator

And we'll go next now to Laurence Di Maria at William Blair.

Speaker 6

Hi, thanks. Good morning. Congrats on the sale and everything and the closure. Thank you. Hey, Ryan, I don't have much, but just kind of curious, you did talk about moving more into primary, end of line.

Speaker 6

Just sort of curious what's behind that. I mean, is it just as simple as opening up TAM or is it more necessary as the Yes. Digital takes over and you want to add more solutions across the board. So kind of curious if this is like strategically imperative because the market is changing Or if it's just simply opening up more TAM and more even perhaps maybe the pipeline in secondary and further processing is just more mature in terms of consolidation?

Speaker 3

Sure. I would say the primary reason is in order to Provide those full aligned solutions across an entire lines for our customers. So again, the more Role that JBT can play in taking the headaches away from our customers and being At the ready because for our secondary and further processing, because typically investments on when you think about A food plant, they're often making their first decisions on the primary type activities and then later on they make Decisions on some of the secondary and further processing, and the better that we're positioned on the front end would help us. So Now frankly, the primary side is actually more consolidated than the secondary and further, Which more likely wouldn't mean that some of the acquisitions in that space will be a little bit larger because it is more consolidated. That said, it's not an imperative.

Speaker 3

We do have multiple levers that we could pull within the M and A market. Again, as I mentioned, The end of line is attractive to us. We've made some investments there with Bevcorp and Proseal over the years And that's still an attractive and largely unconsolidated space and generally speaking would flow nicely with Our further processing side, so we've got multiple levers that we can pull. And then obviously there's other levers in terms of And markets that we don't have huge participation in today, again, as I mentioned in the prepared remarks, confectionery, Bakery Snacks and some others that is another lever. So I think the good thing is that JBT is externally well positioned with our balance sheet.

Speaker 3

The market is looking to be supportive as we go forward here as they've kind of absorbed The impacts of the capital markets and the realities associated with that and the valuation gaps are seem to be closing And the conversations are constructive. So the good news is JBT has The discipline in terms of when we pull the trigger, but yet are very capable of Pulling the trigger quickly and actively and decisively when opportunities do arise without having to worry about raising capital in a tricky debt market.

Speaker 6

Okay. Thanks for that color. Brian, just quickly, And I apologize if you mentioned this already, but is OmniBlue still about a $15,000,000 profit headwind and breakeven next year or does that change with the Aretec divestiture?

Speaker 3

Yes. In terms of the expense, it's about $10,000,000 a year, about half embedded into corporate and half embedded into the Business units, it is still a drag. This year, our intent would be kind of sometime during the course of 2024, we would cross Over into profitability as we expand that.

Speaker 6

Okay, perfect. Thank you very much and good luck.

Speaker 3

Okay. Thank you.

Operator

Thank you. And it appears we have no further questions this morning. Mr. Deck, I'd like to turn things back to you for any closing comments.

Speaker 3

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

Operator

you, Mr. Deck. Ladies and gentlemen, that will conclude JBT Corporation's Q2 2023 earnings call. We like to thank you all so much for joining us and wish you all a great day.

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Earnings Conference Call
John Bean Technologies Q2 2023
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