John Bean Technologies Corporation

excuse me this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience Thank you. Thank you. Good morning and welcome to JPT Corporation's third quarter 2020 earnings conference call. My name is Laura and I will be your conference operator today. 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. To ask a question, you will need to press star 1 on your telephone at that time. I would now like to turn the call over to JPT's Vice President of Investor Relations, Megan Radigan, to begin today's conference. Ma'am, please go ahead.

Thank you, Laura. Good morning, everyone, and welcome to our third quarter 2020 conference call. With me on the call is Brian Deck, Interim Chief Executive Officer, and Matt Meister, Interim Chief Financial Officer. Also joining us this morning is JBT's Chairman of the Board, Alan Feldman. 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-K filing. JVT'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 references certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found in the press release on our website. Now, I'd like to turn the call over to Brian.

Thanks, Megan, and good morning, everyone. I cannot start without saying a few words about our former CEO, Tom Giacomini. He was our friend, mentor, and an inspirational leader who transformed JVT and established a culture, strategy, and operational fitness that accelerated growth and profitability. He fostered deep customer and employee relationships and elevated JVT's reputation within the industry. Now, it is up to the rest of us across JVT to honor Tom's legacy and continue the strategy that has enhanced JVT's competitive position customer orientation, and performance. I'd ask our chairman, Alan Stelzman, to share a few words. Alan?

Thanks, Brian, and good morning to all of you on the call. Let me start by echoing Brian's heartfelt comments about Tom Chaconini. Over the past seven years, the Board had developed great respect for Tom, and we are all deeply saddened by his passing. It's important for you to know that the Board has complete confidence in Brian Deck and the entire leadership team to keep JBT moving forward. Having said that, our search process to select a permanent CEO is well underway and moving quickly. Our hope is to name a CEO by year end. I'll close by thanking you for your continued support and faith in JBT through these challenging times. Now, Brian and Matt will cover our third quarter report. Brian?

Thank you, Alan. JBT's third quarter exceeded our expectations from a P&L and cash flow standpoint. Moreover, we captured double-digit sequential order pickup with food tech outpacing expectations. A key factor in our outperformance in the quarter was improved access to customers, both at their plants and in terms of mindshare. While we are pleased with the quarter, it is too early to pronounce a sustained recovery given the continued risk of pandemic effects on the economy. But the improving translation of our active pipeline into solid orders is very encouraging. Of note, the timing of the Q3 orders received and the state of the backlog coming into the period will affect the traditional fourth quarter seasonality. Let me turn the call over to Matt Meister to provide analysis of our third quarter performance. Matt previously served as CFO of our protein division and brings extensive experience in global manufacturing and operational financial leadership to the interim CFO role. Matt?

Thanks, Brian. Before I provide details on JVT's third quarter, let me mention that the period reflects all organic performance, as we had no significant acquisitions completed over the past 12 months. Food tech revenue declined less than 1% sequentially, outpacing our forecasted 10 to 12% contraction. While recurring revenue continued to perform well, we exceeded guidance predominantly on the equipment side, with pressing demand from our customers, especially as it relates to equipment for the production of retail center of the store products. We also completed installations and service projects at a faster pace than expected due to improved access to our customers' facilities. Food tech operating margins of 12.6% and adjusted EBITDA margins of 18.1% were in line with the guidance we provided on last quarter's call. As mentioned, we realized higher than expected equipment and service revenue, which generally contribute lower margins than our recurring streams. Additionally, SG expense was up sequentially as our cost reduction efforts moderated in response to improving customer engagement. Aerotech revenue increased 9% sequentially, just above our guidance of 6% to 8%. Operating margins of 9.6% were impacted by 1.9 million inventory write-offs associated with the rationalization of the Spain manufacturing operations. Aerotech's adjusted EBITDA margins expanded sequentially to 150 basis points. This exceeded expectations primarily due to the team's continued focus on cost controls. We are pleased with Aerotech's ability to maintain double-digit EBITDA margins, considering the sharp decline in airline customer activity. Corporate expense of $13.9 million came in a little better than expected, after adjusting for $3.5 million of management succession costs. Now, regarding the previously announced manufacturing capacity rationalizations. During the third quarter, manufacturing operations at the Aerotech facility in Spain were significantly downsized. Also in the quarter, we began the process of rationalizing capacity at two PUTEC plants. In total, we recorded exit costs of $9 million in the third quarter and anticipate additional charges of $1 to $2 million in the fourth quarter. In the fourth quarter, we expect to realize $500,000 in cost savings and expect incremental savings of approximately $5 million in 2021 associated with these restructuring efforts. All told, JVT posted net income million and diluted earnings per share from continuing operations of $0.54. Adjusted EPS was $0.83 and adjusted EBITDA was $59.7 million in the third quarter. Adjusted earnings and EBITDA declined sequentially as some of our short-term cost actions moderated, as expected. As Brian stated, order trends were encouraging in the quarter. Sequentially, food tech and aerotech orders expanded 18% and 35% respectively. We remained disciplined on the cash flow front. Third quarter free cash flow of $53 million resulted from continued proactive efforts on collecting outstanding receivables and customer deposits, as well as improved inventory performance. With our strong cash flow, we've been able to deleverage our balance sheet. At $548 million, net debt declined $42 million in the third quarter and $112 million through the first three quarters of 2020. Total liquidity stood at $448 million at the end of the third quarter. Our bank leverage ratio stood at 2.2 times, which is at the low end of our target range of two to three times. Looking ahead to the fourth quarter. At FoodTech, we anticipate a 3% to 5% increase in fourth quarter revenue on a sequential basis. With better than anticipated shipments and timing of orders in the third quarter, we do not expect a typical seasonal improvement. Margins within Foodtech are expected to improve sequentially to operating margins of 13 to 14% and adjusted EBITDA margins in an 18 to 19% range. On the Aerotech side, we expect a 7 to 8% decline in sequential revenue. Due to a shorter de-icer season, shipments will not flow into the fourth quarter. Additionally, despite extraordinary end-market shipping demand, cargo customers have largely delayed air freight capital investments into 2021. Operating profit margins should be approximately 10%, while adjusted EBITDA margins are expected to be in the 11% to 12% range. For the fourth quarter, we anticipate corporate expense of $11 million to $12 million, which includes approximately $1 million in depreciation. Separately, we expect $2 million to $3 million in restructuring, management succession, and M&A costs. Interest and pension expense should be about $4.5 million and a tax rate of approximately 25%. That puts our earnings per share guidance for the fourth quarter at 75 to 85 cents and adjusted EPS guidance at 80 to 90 cents. With that, let me turn the call back to Brian.

Thanks, Matt. Let me elaborate on trends we saw in the third quarter and the opportunities we plan to capture going forward. Over the course of the third quarter, food tech order patterns improved. And the active pipeline of customer activity we talked about last quarter has continued to improve. Geographically, Asia has strengthened as expected. In Europe, while customer activity has improved, it's not quite at the pace we anticipated. Latin America remains soft. What propelled our third quarter order gains was North America, specifically JVT is benefiting from a rebound in quick-service restaurant drive-through business and the sustained eat-at-home trend. Consumer caution and jurisdiction restrictions on full-service restaurants, especially with recent COVID outbreaks, suggest this will last well into 2021. Our customers are now investing in support of this trend and addressing immediate capacity and product needs. This creates a runway of opportunity for JVT's broad product offering. As an example, our ProSeal business, which provides environmentally friendly tray sealing equipment, is benefiting from high consumer retail demand for safe and convenient individually packaged produce, sandwiches, and ready meals. We are also well prepared and able to mobilize on the service and installation fronts. As we said, access to customer facilities eased in the quarter. Equally important, we took advantage of alternate access solutions. We saw multiple examples of successful installations and service work where we combined local capabilities with remote technical support using JVT ProSight augmented remote assistance. These and other creative solutions deepen our partnerships with customers and demonstrate the JVT brand at its best. I'm particularly proud of the organization in this regard, especially the service installation and frontline teams. The acknowledgments we received from customers on our dedication and resourcefulness has been gratifying. Further to the customer interaction front, we are emphasizing the continued development of the digital experience and the way our customers interact with our company and brand throughout the relationship lifecycle. And as we discussed with IOPS, we're building intelligence into nearly every product and service across JVT, including tools that enable enhanced monitoring, intelligence controls, and integration of our equipment in support of our automation strategy to serve customer priorities. In support of this, today, JVT announced the promotion of Christina Pascal to the JVT executive team as Chief Information and Digital Officer. With this move, we have strengthened our leadership and further elevated this critical priority. Beyond our customer interaction efforts and the eat-at-home trend, FoodTech is investing in and focused on our customer priorities, improving food safety, increasing yield and efficiency, reducing environmental impact, and lowering labor costs. As we discussed last quarter, we are particularly optimistic about the need for automation in food production, and the reduction of labor density remains an imperative. The discussions we are having with customers around these intermediate strategic priorities are beginning to translate to orders, with more expected to come over the next several quarters. Regarding Aerotech, as you know, direct sales to passenger airlines and ground handlers which accounted for roughly 40% of Aerotech pre-COVID, collapsed suddenly with the pandemic. With minimal orders from this customer segment at this time, we don't see this getting worse. At the same time, the roughly 45% of sales to airport authorities for infrastructure work remains very strong in 2020 and is expected to remain solid in 2021. On the air cargo side, based on conversations with customer, customers, we expect that business to accelerate in 2021. And we are very enthusiastic about the opportunities on the military side, where we have invested heavily in new product development that positions us for notable growth in that market in 2021 and beyond. And we will continue to manage the cost structure within Aerotech commensurate with the level of business activity. Broadly speaking, while access to customers has improved, The worsening of COVID trends throughout the globe remains a risk to JVT and the world economy in general. Operationally, we continue to manage the impact of the pandemic, including within our workforce, as we remain diligent on our safety protocols and actively trace and communicate any open cases. Currently, all JVT plants remain open and are able to serve our customers. but we remain cautious of potential implications for customers, suppliers, and our own operations. Finally, regarding JVT's M&A strategy, with appropriate leverage and strong liquidity in cash flow, we do have the financial flexibility to continue to pursue targets that meet our financial and strategic criteria and advance JVT's competitive position. We continue to cultivate proprietary relationships that we anticipate will lead to future transactions. And we're focused on opportunities that support our customers' priorities. Notably, whether through acquisition or organic innovation, we're looking beyond the metal box. As JVT continues its evolution from an equipment supplier to a solutions partner, and in doing so, make better use of the world's precious resources. Before I open the call to questions, I'd like to thank all JVT team members. Their dedication to maintaining safe operations and exceptional customer service in the face of many challenges has been remarkable. Operator?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. And our first question comes from Lawrence DeMaria of William Blair.

Good morning, everybody. Good morning, Larry. Hi. Of course, our deepest condolences for Tom's passing.

Thank you.

I just wanted to check. You mentioned air tech not getting worse, some solid signals and positive signals out there, cargo infrastructure, et cetera. Obviously, passengers are still challenged. Is it safe to say that the outlook into 21, that the messaging is that we've hit bottom and flat to organic growth and EBITDA growth next year, all things being equal, obviously not a major negative change to the macro environment, et cetera, that that's the path to police resistance, that we've hit bottom and at least some degree of positive growth and top and bottom line for Aerotech next year?

Right. Thanks, Larry, for the question. Yeah, so with Aerotech, I think we've definitely seen the bottom in terms of customer activity and engagement and starting to see some improvement there. Keep in mind, as well as to the financials, that Q1 of 2020 was very strong for Aerotech, and Q1 is typically our seasonal worst quarter. So there is a seasonal effect there and kind of I'll call it a bit of a carryover effect from that strong first quarter. So it's a little bit early to know precisely how 2020 in its entirety will compare to 2020, considering that I'll call it a little bit of that drag on the first quarter of 2021 versus first quarter 2020. But longer term, if you start looking at the things that are going to happen for us, as I mentioned, the infrastructure side is pretty solid. There's a lot of projects out there. The replacement, we're still not even keeping pace with the replacement cycle and the bridges. And we do see lots of good projects going into 2021. That's why we mentioned it's still solid. Beyond that, we'll need to see, but there is a lot of airports that still need improvement. And on the services side, we're still doing really well, actually better than expected in the quarter. That was actually, the services side was actually the primary source of the better than expected performance in the third quarter, which services the infrastructure airports. On the military side, as I mentioned, things are generally looking pretty good. There's a lot of programs out there that we are going to be participating in. As you know, we've been investing in R&D for the last several years, and some of those things are going to start to come to fruition for the next couple years. So I'm not going to be totally over-focused on 2021. I think we're going to continue to manage the things that we can manage. And over the longer term and the intermediate term, we do think we're really well positioned for when the airlines do start spending. And in the meantime, we really have this nice diversified revenue stream from the other customer segments.

Okay. Thanks, Brian. And I want to ask a little bit more about food tech historically. we thought of your business as fairly agnostic to where people eat, right, as long as people are eating and changing diets, et cetera, is positive. So the first part of it, I'm curious why QSR is doing well. I get ProSeal on the packaging side, but I'm kind of curious why the QSR changes are occurring and what that direct impact is to you guys. And then the second part is, you know, hearing about JBS, Dyson, et cetera, investing quite a bit more money around automation. And I'm curious if that's flowing directly to you guys or if that's more on the primary side, which I would see that don't play as much on the primary side, processing side. So I'm just curious if you're able to capture this next wave of automation in those factors that are focused on safety or if that's somebody else. Thank you.

Sure. Yeah, thanks. The QSR trend is really starting to heat up, and we do participate in that in a couple different areas, and that was actually a nice order strength in the third quarter. uh specifically what we do on the qs for the qsrs uh we do uh portioning and we uh which is an action also an automation play uh as well as we do uh batter bread bake freeze all the things that ultimately go into uh the qsrs because they're not battering breading in the store they're doing all that in the food factories and then heating them up or frying them or however they're cooking them, frozen foods, et cetera, from our equipment. So that's really been the strong push is all those, I'll call it, what we call further processing type activity. So that's been the strength there. On the automation play, Certainly, the primary side is going to, I'll call it, see some of the first benefits from the automation play. And we marginally play on the primary side. We play in our CAT business as well as our prime equipment business. So we will see some of that. But we play in the secondary processing, which is all the things once after the primal cuts happen. which is a lot of portioning is automation, x-ray scanning, and then ultimately down the line on packaging, and then some of the further processing that I already mentioned. So we will participate. The primary side might be a little bit early, but frankly, we are starting to already see orders, and we would expect that to continue to improve through the fourth quarter and into 2021.

Okay, so it's not a function of the capital is still directly going to only the primary guys. It's also going to you guys, it sounds like.

No, especially in the secondary operations, which I mentioned, which is kind of that bridge between primary and further. We're a really strong player in the secondary process.

Great, thanks. I'll leave it there. Good luck, guys.

Thanks, Larry.

Our next question is Meg Dobre of Robert W. Bearden Company.

Hey, good morning, everyone. It's Joe Grabowski on for MIG this morning.

Hey, Joe.

Hey, and we were also very sorry to hear of Tom's passing. Just wanted to make sure you guys knew that. Thank you. Yeah, I guess, you know, maybe kind of building on Larry's questions, starting with maybe the Q4 guidance in food tech implies a decline of about 12% at the midpoint, a little worse than the prior two quarters, even though the orders were pretty solid in 3Q. So maybe kind of talk about how the orders that you saw in 3Q are going to flow through and how that impacted your guidance for 4Q.

Yeah, there's a couple of things affecting the fourth quarter typical seasonality. Normally, we would see kind of a 10-ish, maybe 11%, 12% sequential pickup. Instead, we're seeing 3% to 5%. And there's two things that happen. One, I would say pent-up demand. We really got some imperatives from our customers in the third quarter to deliver demand. some systems earlier than we had expected, and we had them scheduled for the fourth quarter, and some stuff got pushed in, about $15 million or so. So that's about, I'll call it about five points of what we otherwise would have expected, because obviously we exceeded our revenue guidance significantly in the third quarter. So it's really a function of the backlog. The backlog is the backlog, right? And if some gets pushed in a little bit earlier, the third quarter, it doesn't hit in the fourth quarter. So that's the first part of it. The second part is the quarter actually started off relatively weak on the order front in the month of July, and then it accelerated into August and September. And given our lead times, et cetera, it takes a solid three, four months typically for food tech equipment orders to translate into shipments and installations. So that means we're missing a little bit of a window and some of that's pushing into 2021 compared to what I would say is a normal seasonal pattern. And all told, that's kind of how the quarter is going to shake out. But what's more important and what I'm really enthused about is the development of the pipeline. That did improve in the third quarter. And we did see some improving conversions of that pipeline. It's still below kind of where we need to ultimately be to get back to a full recovery. We're still kind of below that mid-level of what I would expect as a strong quarter. But that said, the pace of improvement was nice from the second quarter to the third quarter. Hopefully we'll see that continue. I obviously have my concerns with COVID and COVID. That remains an issue, but that said, what we do know is that the demand is out there. At the consumer level, at our customer level, the trends on QSR, the eat-at-home thing is a really strong play. It's just going to continue. The center of the store activity and our customers finally getting some dedication around making some investments in those areas we think are going to continue to play out. So I'm not overly focused on the impact of the fourth quarter. What I'm really focused on is how we are setting ourselves up for 2021 and beyond, along with that automation play that we talked about.

Got it. Okay, great. Thanks for the color on that. And I guess my follow-up question would be on the food tech decremental margins. I know you touched upon this briefly in the prepared remarks. They've been kind of bouncing around a little bit. below 20% in the second quarter, and then the midpoint, I'm sorry, below 20% in the second quarter and 35% in the third quarter. And then the midpoint of the guidance implies 25% in the fourth quarter. So maybe just talk a little bit about what's been driving the decrementals in food tech.

Yeah, going from one quarter to another quarter is a little bit tricky because you've got some of the short-term cost actions making noise. And in the third quarter, some of the return of those short-term cost actions. So So, yeah, the decrementals in Q2 were really low, which is good, given that decline in the volume. But that's a lot of it is some of that short-term cost savings, which are starting to creep back in as we see increased customer engagement, et cetera. So I think the better way to look at it is instead of one quarter and half a quarter looking at it kind of a year-to-day basis or full-year basis and As we've talked about in the past, food tech generally should be thinking about kind of high 20s contribution margins, kind of absent any specific investments or specific cost savings, and then on the arrow tech and the more in the low 20s contribution margins.

Got it. Okay, thank you. Good luck in the fourth quarter. Thank you.

Our next question is from Todd Brooks of CL King and Associates.

Good morning, everybody. And I'd like to add my condolences as well for Tom's passing. So thank you. You're welcome. Is there any detail that you can give us on the mix of recurring to non-recurring revenues in both food tech and aerotech in the quarter and maybe talk about the nature of each of those streams?

Yeah, this is Matt, Todd. For recurring revenue in Q3 for all of JBT was 45%, which is up from about 42% in Q3 of last year, and up about a 1% point from Q2. For food tech specifically, recurring revenue is about 50%, which is up about 45% from Q3 last year, and again, up about a point sequentially from Q2. And for Aerotech, recurring revenue was approximately 31% in this past quarter, which is down slightly from 34% last year, but flat sequentially from Q2.

Okay, great. Right. And to put a little bit of more color on that, one of the things that... You know, I would say, you know, we had 18.1 or 2% EBITDA margins in food tech in the third quarter. And given the revenue contribution in excess of expectations, we might have otherwise expected that 18% to exceed our guidance on that. But basically what we saw was the mix within the aftermarket was actually much more skewed towards service. And on the product side, on installations, which tends to carry a little bit lower margins. And then, as you know, equipment in general provides lower contribution margin than the recurring revenue side. So all those things combined kind of held us in that low 18% EBITDA range for the sector quarter. That's great. And then just, and this is more a qualitative question, but you talked about what your thoughts were sequentially coming into the quarter and that North America, obviously, stronger than expected in food tech and Europe, initial signs of maybe some life, but then a little bit more fragility maybe as the quarter goes on. I guess qualitatively, if you look at July entry versus September exit as the pandemic is flaring a bit again, thoughts on access, customer focus on actually placing orders, getting orders through the pipeline versus, I'm just wondering how fragile you feel it is when you're talking to your customers as far as things that did open up in the third quarter for you. Yeah, it does seem, so North America definitely was the driver of the order strength in the quarter. And as I mentioned, orders started off week in the quarter in July. And then kind of mid-August, it seems like people really got conviction about, okay, this isn't going away. QSR demand is strong. Retail demand is strong. We really need to get this stuff going here and these projects going. So I would say it was a notable kind of shift in patterns midway through the quarter. And hopefully that will continue into the fourth quarter, specifically I'm talking about North America. Europe, on the other hand, I would say it was a little bit ahead of the pace in North America as we entered the quarter. And we actually, from a revenue perspective, we did pretty good in Europe in the third quarter and actually was one of the main drivers of the outperformance on the revenue side. But that depleted backlog a little bit. And then I would say some of the conversions to orders that we expected in Europe weren't quite at the pace. It did improve from third quarter to second quarter, but not quite at the pace we had anticipated. So we're hoping to see that improve a little bit. We think some of that is COVID related. Europe was a little bit ahead of the curve in terms of some of these, I'll call it new flare ups in certain economies in Europe. And so we're just a little bit cautious there, but it is improving, just not quite at the pace. And then Asia basically is essentially as approved as expected. It's 10%, 15% of our revenue is a little bit smaller, but they seem to be recovering, particularly in China specific, a little bit faster with their COVID environment is pretty good. So that looks like it's in decent shape. And Latin America just seems to really still be struggling in terms of their recovery on the economy side. Great. That's very helpful. Thanks, guys. Sure.

Mr. Bowman, your line is open. Please proceed.

Can you hear me? Yes. Now we can. I'm sorry. It's all being done over IP and sometimes it's a little bit choppy. Good morning. Thanks for taking my questions and stuff. We want to give our condolences. Condolences. Just terrible. I wish his family the best and Thank you. Yeah, no problem. This year about the mix of business and kind of pressure and air pasture, you know, arena, air handlers, et cetera.

I think you've said it's 40% of the mail and you've got 4% that's infestated and 15% cargo.

If you were to kind of, you know, look at this year and kind of reset that mix, what does it look like heading into 2021 in terms of percentage of the business exposed to each of those areas? Sure. I can tell you it's kind of in that passenger air travel is more like 20-25% based on the declines in that market. Infrastructure is more like 60%. And military and cargo, 15%, maybe even approaching 20%. Got it. That's super helpful. And then in terms of the orders for that piece that's seen the pressure, are you getting any orders right now, or are they, like, close to zero? Domestically for airlines, I think we might have gotten an order for one piece of equipment in the third quarter. However, we did get some orders for equipment out of Asia, specifically China, on some de-icers and some loaders. So the airlines, obviously, they're just not spending any money at this point. We do do business with them on the services side, airport services side. So most of our airport services is with the airport authorities, et cetera, itself. But we do work with them on sometimes with airlines specifically. Those are coming through, I would say, at a normal pace, just slightly below normal pace because that's where we keep the lights on, et cetera, maintenance for the airports themselves. The parks business is still weak. That started to improve, I would say, just slightly as we exited the quarter, but not so much that we're pleased. It's still very disappointing. And I don't see much in the way of orders in the fourth quarter as well. We'll hopefully start to see some improvement in 2021. But as you know, this is going to be really dependent upon the profitability of the airlines, the return of air travel. Ideally, we get some kind of vaccine. So we just don't know the pace of improvement on airlines and their profitability and what that means for their investments. So But that remains to be seen, but that's kind of what the landscape looks like as of here today. Yep, makes sense. And then just to clarify, that 20% or 25% of sales this year, that's the area with the pressure of the passenger business. Yes. So you're just mentioning you've serviced in parts in there. I mean, that's not going to zero. There's some part of that that's sustainable, right? Yes. Yeah, that's why it's – yeah, exactly. Because otherwise it would have gone down to like 15%. It was just equipment. Right, okay. But there's some equipment in there, I guess, from the first part of the year maybe, and so there could be a little pressure there next year just because of the comp you're saying in the first quarter. That's correct. Okay. That's correct. Cool. Just wanted to make sure I got the numbers right on that, so I appreciate that. Then on food tech – You've mentioned a couple of times strengthening in North America orders around QSR and labor automation. What are you hearing from customers on those trends outside the U.S.? I imagine you're seeing some demand for that as well, but it sounds like you're mentioning more in North America. Just curious. Outside the U.S. Yeah, it is similar outside. It is similar. The QSR trend is not as strong in Europe. It's not as prevalent of a food source in Europe as it is in the U.S. So it's a little bit more about the center of the store. Freezing is pretty strong, scoring the stores, canning, and other sterilization-type equipment. So QSR not quite as strong outside the U.S., What Asia is doing is we're getting some good activity out of Asia and some good activity out of Europe, but the QSR trend is particularly strong in North America. Got it. And when you're talking about demand for those areas, that's more in the protein business than the liquid food side? Yeah. On the QSR side, it's more on the protein business. On the center of the store side, it's a little bit more skewed towards the liquid foods business, their sterilization and canning businesses. Any notable differences in trends you're seeing in those two sides of your business in food tech? In the third quarter specific, so if you recall from the last call, second quarter protein orders – were really pretty low. They disappointed where liquid foods was a little bit more stable. And then going into the third quarter, protein accelerated faster than, you know, it was kind of more of a V shape, but it was certainly quicker. They went down faster and they came up faster, going from Q2 to Q3. And liquid foods has just been a little bit more stable, a little slight improvement from Q2 to Q3. Okay, makes sense. Thanks. Helpful call. I appreciate the time. Best of luck. Thank you.

Once again, if you would like to ask a question, please press star, then one on your telephone keypad. Our next question is from Andrew Obin of Bank of America.

Hey, good morning. Hi, Andrew. Hey, it's Emily on for Andrew Obin. Oh, hi, Emily. Yeah, and my deepest condolences to Tom. I have a question on free cash flow. So free cash flow this quarter was very strong, and I think a lot of inventory was released sequentially. Was that a function of just demand improving or good inventory management? And then as a follow-up, any puts and takes on fourth quarter free cash flow? Thanks.

Yeah, I think the inventory improvement we saw in actually since Q1 has been predominantly the businesses being hyper-focused on cash flow and being very cognizant of the investments that they are making in inventory given the lower volume that we're seeing coming out of Q1. So I think the businesses have gotten a lot tighter on their purchases, and we've put a lot more effort around reviewing open POs and safety stocks in order to improve our overall inventory management, which has been a great progress for the business. And I would expect to see that to continue in the Q4 and even going forward because I think the teams have gotten a lot smarter about the inventory management side. Obviously, as orders improve and demand improves, as we're seeing, there will be investment inventory, but we think it will be moderated somewhat than maybe what we've seen in the past because of just our focus on free cash flow. I would say in Q4, our expectations for free cash flow is that it will be positive, slightly positive, not to the extent that we have seen it in Q2 and Q3, because as I mentioned, with the improved orders and improved demand, our balance sheet will not contract like it has in the past. And so we expect to be positive, slightly positive, and we're pretty confident that we should hit at the end of the year a free cash flow conversion of about 150%.

Great. Thanks. Very helpful. And then I just had a question on food automation equipment. How large is that business for you today? And is there any way to size the market opportunity or potential revenue tailwind for food tech from food automation in 2021? Thanks.

Sure. That's a particularly tricky question because the definition of automation is quite broad. It's, in many regards, kind of, you know, a solid a half, two-thirds of what we do arguably could be considered automation, and we continue to invest in some of those areas. The market potential is pretty significant when you think about it. Going from, you know, anywhere where there's labor within a food factory and And the pace of that change will dictate the size of the market. So, frankly, I'm not able to sit here and identify the size of the market, but it is quite large. And it's, you know, more than large enough for us to participate and have good growth in that area for several years. But it's not one of these things where we say, oh, it's a, you know, it's a you know, a $3 billion market, and we're going to participate, you know, X percent. Because by definition, converting from a labor-intensive business to an automated business, that will take many years. And specifically identifying where it starts and where it stops is particularly difficult. And, frankly, I don't even think about those things. But I think – on the side of the market, I think about serving our customers. I think about – meeting their needs and showing them the product offering that JVP has across our product offering and then helping them design lines, et cetera, that are in support of that. So as I mentioned, we're particularly bullish on that, and I think we're just well positioned.

Okay, got it. Thanks for taking my questions.

our next question is from lawrence d maria of william blair uh thanks i just had a couple follow-ups thanks for the free cash flow uh conversion number just to clarify is that a net income or adjusted net income we usually do it off of net income regular net income okay um secondly Two questions. Can you talk about the pricing environment? I assume it's been fairly stable, but just so we're still thinking about regular, at least inflationary pricing going into next year. And secondly, the M&A outlook sounds like you're active. Is there an urgency and are bid-ask spreads at a reasonable level, or is it still kind of work in progress and see how it goes?

Sir, when you say pricing, do you mean on our raw material inputs or do you mean on our actual pricing?

I mean on your actual pricing and net pricing achieved.

Yeah. Actually, there's been pricing pressure this year, as you might expect, with everybody fighting for orders, et cetera. So there has been pricing pressure. Certainly. And you can argue that's taken a little bit off of our margins. It's hard to specifically pinpoint that. But without question, we've seen that. In terms of the second question was on the M&A side, right?

Yeah, good to ask, Brad. It sounds like you guys are active. Is there kind of an urgency? You haven't done a deal in a while. Just kind of curious how the overall environment is to actually conclude a deal if there's stuff to be done out there.

Yeah. Well, we're certainly not in any urgency, but, you know, it is part of our strategy. And we'll be disciplined and, you know, obviously we're going to consider all the things that are important to us, particularly our OIC, which is our primary metric when we look at acquisitions. There are – the market is improving in terms of people starting to have a little bit better view of where their earnings in EBITDA are kind of starting to settle in. The first half of the year, that was really difficult because, you know, us included, it's really hard to know kind of where your earnings were going to end up for the year. So as that starts to get some visibility – we're starting to get a little bit more price discovery because I think expectations have been moderated from the seller's side because, you know, a year ago, things were pretty profit. So I think there's been some moderation. And I think on the buyer's side, I think there's some recognition that we're getting into more, I'll call it predictable, some predictability on where the economy sits here today. In terms of JVT specifically, we do continue to cultivate some of these proprietary relationships. We are starting to see some more books from investment bankers as well. But we've got, again, a very specific strategic plan as it relates to acquisitions, investing in technologies. that suit our customers and help us provide these full-line solutions, and then beyond that into I'll call it non-equipment type businesses that provide better service, software, support, which is where we're going to continue to focus. So no urgency, but certainly a willingness to do acquisitions.

Okay. Thank you.

And we have no further questions. I would like to turn the call back to Mr. Brian Deck for closing remarks.

Thank you all for joining us this morning. And as always, Megan will be available if you have any follow-up questions. Good day, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.