John Bean Technologies Corporation (NYSE:JBT) Q2 2023 Earnings Call Transcript

John Bean Technologies Corporation (NYSE:JBT) Q2 2023 Earnings Call Transcript August 2, 2023

Operator: Good morning, and welcome to JBT Corporation’s Second Quarter 2023 Earnings Conference Call. My name is Bo, and I will be your conference operator today. As a reminder, today’s call is being recorded. At this time, all lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to JBT’s Vice President of Corporate Development and Investor Relations, Kedric Meredith. Please go ahead, sir.

Kedric Meredith: Thank you, Bo. Good morning, everyone and welcome to our second quarter 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 harbour language in yesterday’s press release and 8-K filing. JBT’s periodic SEC filings also contain information regarding risk factors that may have an impact on our results. These documents are available in the Investor Relations section of our 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.

Brian Deck: Thanks, Kedric, 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&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 second 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. With that, I’ll turn the call over to Matt, who will walk you through our second quarter performance and revised full year guidance.

Matt Meister: Thanks, Brian. As you saw in the earnings release, we have now classified AeroTech as a discontinued operation as of the second quarter and recast our prior period financial results accordingly. JBT’s revenue from continuing operations increased 8.6% year-over-year in the second quarter at the high-end of our previous guidance for the FoodTech business. Adjusted EBITDA margins of 16.7% increased 320 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 million. Included in adjusted EBITDA from continuing operations was approximately $13 million of corporate related costs.

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 second quarter 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 second quarter, we made progress on our inventory actions and delivered positive free cash flow from continuing operations of $34 million, representing a conversion rate of 120%.

We expect free cash flow conversion for continuing operations to be slightly above 100% for the full year. 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 million after estimated taxes and transaction costs will be used to pay down approximately $300 million of higher cost variable rate debt. The remaining portion of the proceeds will be held in short-term securities until redeployed to strategic M&A. On a pro forma basis, we consider — which considers the impact from the AeroTech sale, our net debt to adjusted EBITDA ratio from continuing operations would have been below 1x 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.

We now anticipate full year 2023 restructuring charges of $11 million to $13 million compared with the previous guidance of approximately $4 million. That brings the total expense of our restructuring program including those costs incurred in 2022 to $16 million to $18 million. With that, we expect to generate annualized run rate savings of approximately $18 million to $20 million by mid-2024. 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% a quarter to 19.5% 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. Adjusted earnings per share is now forecasted at $3.80 to $4.05, an increase over our previously implied guidance for continuing operations of $3.25 to $3.65. For the third quarter, 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 third quarter. With that, let me turn the call back to Brian.

Brian Deck: Thanks, Matt. JBT’s order strength in the second quarter highlights the benefit of our diversified product and end market mix. Demand for meat and poultry end markets remains under pressure, similar to first quarter 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 cost of higher cost and tighter availability of capital is continuing to impact the appetite and time line to invest. Looking forward, JBT’s priority is optimizing our opportunities and managing a smooth transition to a pure-play food and beverage technology company.

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 to our customers. As we’ve always said, we will maintain a highly disciplined M&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 complementary to our existing offering that would expand our customer value proposition.

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&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.

Regarding our digital solution, OmniBlu, we continue to gain traction and find additional customer contracts. Our customers see OmniBlu 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, OmniBlu has produced meaningful efficiency gains in the daily sanitation process and improve monitoring of quality compliance and oversight of third-party support providers. OmniBlu has also enhanced asset life through prescriptive maintenance and identification of suboptimal operating conditions, including the avoidance of downtime events.

The result in this case has been 350 hours of incremental annual uptime, representing an 8% to 10% gain, all while operating more efficiently. 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 AeroTech’s market leadership and strong demand environment. With that, let’s take your questions. Operator?

Q&A Session

Operator: Thank you, Mr. Deck. [Operator Instructions]. We’ll take our first question this morning from Mig Dobre at RWBaird.

Mig Dobre : Thank you, and good morning, everyone.

Brian Deck: My first question is really around from 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 they’re some other elements at play here that we need to think about to be aware of.

Brian Deck: Sure. Mig, it’s Brian. Yes, I would say from the poultry side, in particular, Q2 was probably the bottom in terms of the macroeconomics 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 second quarter. So we’re hopeful that the slightly improved economics will lead to incremental orders in the third and fourth quarter, frankly, more likely fourth quarter than the third quarter, as 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 — concerned or cognizant of until they make money, they’re not going to invest the time 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, in monitoring and supporting them on their performance, but more likely than not, third quarter is going to be similar to the second quarter. But again, we’re starting to see some signs of life that are hopefully supportive to the fourth quarter.

Mig Dobre: 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 the margin side? Can you talk about that a bit?

Brian Deck: 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 fourth quarter, 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 fourth quarter 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. 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 time frame, and that’s where we’re seeing the strength on the order side.

Mig Dobre: 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 how maybe price/cost or any idiosyncratic elements specifically 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 increment — normalized incremental EBITDA margins?

Matt Meister: Yes. I’ll take the first part, sure, Mig and then we go to the second question. The margins in the quarter were definitely were 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. 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. 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. So, really, there will be a little bit of a drag at the consolidated level from the corporate costs 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.

Mig Dobre: I’m sorry. So, in the mid to high 20s consolidated, including the unallocated corporate costs?

Matt Meister: That’s right.

Mig Dobre: Okay. Thank you.

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

Walter Liptak: Hey thanks guys and congratulations on the work on the AeroTech divestiture and sale.

Brian Deck: Thanks.

Walter Liptak: I wanted to just ask a follow-on 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 product category?

Brian Deck: Yes. Generally speaking — I’ll start with AGV. They’re obviously enjoying quite a resurgence or a surge and 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, 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. There are still some challenges on the — a 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 two ago.

And now you’re starting to see those investments flow. And we’ve been — as you may know, we’ve got a lot of experience and skills on the dairy side, but also an aseptic filling in preservation as well as powder filling, and all those crossed nicely with where investments are going on that nutraceutical baby formula side. 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 plasma are where we’re seeing some success. But generally speaking, we do see the pharma as pretty supportive. But again, similarly to the nutraceutical side, it’s going to be chunkier orders. 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 part of right now.

Walter Liptak: Okay. Great. Thanks for that detail. I heard your comments about the OmniBlu and it sounds like your uptake of new contracts is going well, and that’s great. But I wonder one, if you — maybe you can just quantify or even qualify, how you’re feeling about the OmniBlu and the customer acceptance of that product? And two, you had that feedback on the freezer project freezer install. I wonder, if you could talk about what that equates to in terms of ROI, how quickly you can in something like this payback for your customer?

Brian Deck: 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, on this particular case study, which was one of the early installations that we saw an 8% to 10% increase in capacity opportunity does translate to a very attractive 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 products and service, our e-commerce portal. 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 OmniBlu aside from the customer stickiness that we’ll see there.

Walter Liptak: Okay. Great. Are we starting to see some of that, aftermarket come through yet, or what do you think the timing is on…

Brian Deck: We are starting to see it. It’s a little bit — we are starting to see it. It’s a little bit tricky on how to measure it relative to a baseline on a line basis. So, but we are starting for the installations that have occurred. 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 — our data analyst team right now.

Walter Liptak: Okay. Great. Thank you.

Brian Deck: Thank you.

Operator: [Operator Instructions] And we’ll go next now to Lawrence De Maria at William Blair.

Lawrence De Maria: Hi. Thanks. Good morning. Congrats on sales and everything in the closure.

Brian Deck: Thank you.

Lawrence De Maria: Hey. I don’t have much, but just kind of curious, you did talk about moving more into primary and the line. Just curious what’s behind that? I mean, is it just as simple as opening up TAM, or is it more necessary as the digital takes over and you want to have more solutions across the board. So kind of curious if this is like strategically imperative because the market is changing for just simply opening up more TAM and or even perhaps maybe the pipeline and secondary and further processing is just more mature in terms of consolidation?

Brian Deck: 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 and 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 decision on the primary type activities. And then later on, they make the 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. We do have multiple levers that we could pull within the M&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 we can pull. And then obviously, there’s other levers in terms of end 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. 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 and tour 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.

Lawrence De Maria: Okay. Thanks for that color. Just quickly, and I apologize if you mentioned this already, but is OmniBlu still about a $15 million profit headwind and breakeven next year, or does that change with the AeroTech divestiture?

Matt Meister : Yes. In terms of the expense, it’s about $10 million a year, about half embedded in corporate have 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.

Lawrence De Maria: Okay. Perfect. Thank you very much and good luck.

Matt Meister : 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.

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

Operator: Thank you, Mr. Deck. Ladies and gentlemen, that will conclude JBT Corporation’s second quarter 2023 earnings call. We’d like to thank you all so much for joining us and wish you all a great day. Goodbye.