John Bean Technologies Corporation

Good morning and welcome to JBT Corporation's second quarter 2022 earnings conference call. My name is Erica 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Press star followed by the number one again. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedrick Meredith, to begin today's conference.

Thank you, Erica. Good morning, everyone, and welcome to our second quarter 2022 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 8K 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 on 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.

Thanks, Kedrick, and good morning, everyone. JVT made progress in the second quarter of 2022 with sequential gains in revenue, margins, and earnings. We had record sales of FoodTech while Aerotech continued its march to recovery. However, persistent disruption from inflation, supply chain shortages, logistics challenges, and COVID-related absenteeism continued to weigh on margins. foreign exchange was a greater headwind than anticipated. Additionally, the concern we raised last quarter about developing economic pressures and the impact of the Ukrainian war on the European markets has materialized. At the same time, as we unveiled with our Elevate 2.0 strategy, one of JBT's pillars of growth comes from our plan to deploy more than $1 billion of capital on strategic M&A over the next four years. We are executing on that strategy. On July 1, we announced the acquisition of Alco Food Machines. Alco's solutions complement JBT's portfolio in further processing for high-growth markets, including convenience meals, poultry, and plant-based proteins. It has excellent technology that is well regarded in the marketplace. Alco also provides further penetration into the attractive German market as well as the opportunity to leverage its technology globally. And yesterday, we announced a definitive agreement to acquire BevCorp. BevCorp provides filling and closing systems for ready-to-drink carbonated beverages, a growth market that goes beyond soft drinks to include alcoholic beverages and blends, energy drinks, seltzers, and sparkling waters. Compelling aspects of BevCorp include its unique process know-how and best-in-class service culture, as reflected by its EBITDA margins in the low-to-mid 20% range. BevCorp serves the largest players in the market with long-term relationships and operates 100% in North America. Its technology provides a great adjunct to GBT's existing solutions for the beverage market. And aftermarket represents north of 60% of revenue, providing a resilient business model with a proven record of growth and stability. It also maintains strong cash flow with a low CapEx profile. Moreover, as a spinoff of a publicly traded company, it operates with discipline and brings a talented management team. While we recognize acquisitions in this economic environment require higher scrutiny and selectivity, BevCorp and ALCO are two companies we've tracked and been interested for several years and provide a great strategic fit that we believe adds to our customer value proposition and shareholder value creation.

Now, let me turn the call over to Matt. Thanks, Brian.

JVT posted double-digit year-over-year revenue growth of 14% in the second quarter of 2022. While Aerotech's top-line performance exceeded our guidance, FoodTech fell short. primarily due to higher than expected negative foreign exchange impact. Margins improved sequentially at both businesses, but were shy of our guidance. At Foodtech, revenue grew 9% year-over-year, with 10% organic and 4% from acquisitions. This growth was partially offset by a negative foreign exchange impact of 5%, exceeding our guidance of a 2% headwind. Adjusted EBITDA of $68 million included a $3 million negative foreign exchange impact. Adjusted EBITDA margins were 17.2%. At Aerotech, revenue grew 29% with adjusted EBITDA margins of 7.6%. Beginning with the second quarter, we modified our definitions of adjusted EBITDA and adjusted earnings per share to exclude the impact of non-cash, non-operational LIFO adjustments. We believe this change provides better comparability both between periods and with peers by eliminating the variability associated with the election of LIFO accounting, especially in periods of rapidly changing prices. While this adjustment had modest impact both historically and in Q2, for the full year 2022, we expect LIFO expense to be $4 to $6 million. With that, we posted gap earnings per share of $1.04 versus $0.95 in the prior year period, and adjusted EPS was $1.13 versus $1.20. The second quarter of 2022 included a discrete tax benefit of $2.2 million, or approximately $0.07 per share, related to deferred stock awards. Conversely, the previously mentioned foreign exchange headwind had an impact of $0.05 on EPS. Through the first half of 2022, free cash flow was $4 million, which included a meaningful investment in inventory in support of second half 2022 revenue growth and capital expenditures of $20 million associated with our digital strategy. The full year, we now anticipate free cash flow conversion of about 80%. Looking to full year 2022, we have slightly lowered our expectation for food tech revenue growth to 13% to 15%. due to the softening economic conditions in Europe, as well as a higher FX headwind for the strong dollar. That breaks down to growth of 13% to 15% organically and 4% from acquisitions, offset by a 4% to 5% FX headwind. At Aerotech, on the other hand, we are raising our revenue guidance to full-year growth of 23% to 25%. In terms of margins, we continue to expect sequential improvement as we progress through 2022. Foodtech full-year operating margins are forecasted at 13 to 13.75%, adjusted EBITDA margins of 17.5 to 18.25%. Our guidance for Aerotech is unchanged, with operating margins of 8.5 to 9.5%, and adjusted EBITDA margins of 9.5 to 10.5%. That brings us to GAAP earnings per share guidance of $4.40 to $4.60, and adjusted EPS of $4.90 to $5.10. Included in our updated full-year guidance is a benefit of approximately $0.13 from lower taxes, offset by a foreign exchange headwind of approximately $0.15 and $0.13 from lower food tech results due to the continued supply chain disruptions and lower European demand. Now, regarding our recent announcements on M&A, as previously stated, we do not expect ALCO to have a material impact on adjusted earnings in 2022. BevCorp is not included in the above guidance. We will provide details on its impact upon close, which we anticipate in Q3, after receipt of regulatory approvals and the satisfaction of customary closing conditions. At the time of the close of the BevCorp transaction, We anticipate that JVT's pro forma debt leverage will temporarily exceed our target range of three times. However, we do expect to be below three times by year end 2022 based on forecasted free cash flow and improved earnings profile. Now let me turn the call back to Brian.

Thanks, Matt. Let me start with a discussion of business trends by segment and geography. Food tech orders for the second quarter were nearly $400 million, a very solid quarter, especially considering a cool-down in Europe. While we are, of course, cognizant of macroeconomic pressures, orders and pipeline trends in North America remained strong. Overall, our U.S. customers have largely been able to pass through price increases to the retail level and continue to need to expand production capacity, improve food yield, and add labor-saving automation. In Asia, we saw some improvements from the first quarter and expect a more stable environment in the second half of 2022. We've also seen a pickup in activity in the Middle East as the region seeks to become more food production independent, which hopefully will make this region a more reliable source of growth for JBT. We have experienced a different environment in Europe. Food producers have struggled to fully pass through higher input costs to retailers leading to some tightening that is affecting JBT's performance in the region. It has also made the market more price sensitive for equipment. As a result, we are assessing actions in Europe to align the cost structure of a few businesses with those regional market conditions and will consider other actions more broadly if and when necessary. In general, global food price inflation is extraordinarily high due to high input costs for raw materials energy, labor, and logistics. JBT will continue to play its part in expanding food production capacity, improving food yield, and reducing labor costs through automation. Notwithstanding these economic concerns, we will continue our planned investment in digital transformation and new product development, both of which are essential to addressing customer needs and enhancing JBT's competitiveness. On the new product front, we remain committed to helping customers on their path to automation and in their sustainability journey to make better use of the world's precious resources. As an example, customers have told us that traditional preservation systems are one of the largest users of water and energy in their factories. Therefore, we have introduced in-container preservation systems with significant production and environmental benefits. Specifically, our new retort preservation systems reduce steam usage by about 15%, and our low-energy hydrostatic preservation system requires 45% less water usage. As it relates to JVT's digital transformation and OmniBlue, our suite of digital tools designed to enhance our customers' success, we continue to make progress. Customers appreciate OmniBlue's focus on machine performance optimization, maintenance management, frictionless parts and service, and the resulting improvements in uptime, capacity utilization, and quality. They're also excited about the potential benefits of digitalization across multiple pieces of equipment within a line or factory under a single interface as we roll out OmniBlue broadly across JBT's product lines. As we move forward toward digital and outcome-based relationships, The commercialization of OmniBlue relies on meaningful customer engagement with multiple decision-making points as we demonstrate OmniBlue's value proposition. We continue to invest in resources, including service technicians and analytical and technical capabilities to support the ramp of our digital journey. We remain confident about the value we will bring to our customers as we deploy OmniBlue over the next several years. Turning to Aerotech, the recovery continues to gain momentum with orders exceeding expectations in the second quarter, particularly for our mobile ground support equipment business tied to expanding demand from commercial airline customers. Our pipeline also reflects customer demand for automation, electrification, and intelligent operations, areas where JVT has invested and created compelling product offerings. Our customers, including commercial airlines, cargo, and defense, are committed to reducing their environmental impact and are converting their ground support fleet to emission-free operation. This is expected to accelerate the historical replacement cycle of ground support equipment over the next five-plus years, with Aerotech well-positioned to capture a meaningful share of revenue from this cycle. While we expect a moderation in Aerotech orders in the third quarter, due to large project timing and seasonality, the environment remains favorable as passenger travel continues to rebound and we enjoy a positive infrastructure investment cycle. Overall, we're very enthusiastic about Transit Aerotech. We're operating with a record backlog and we're on track to deliver low double digit adjusted EBITDA margins in the back half of 2022. Finally, none of the progress would have been possible without JBT's talented and engaged workforce. To support our employees who want to give back to the communities where they live and work, JBT is rolling out a more robust corporate giving platform that will connect employees with charities and volunteering opportunities. We have also presented awards for those JBT businesses that demonstrate excellent community support as well as sustainability initiatives. We applaud our employees' commitment and service above and beyond their day-to-day roles at JVT. With that, let's open the call to questions. Operator?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, followed by the number one again. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Lawrence Demaria with William Blair.

Thanks. Hey, good morning, everybody. Good morning, Larry. First question, you know, obviously second half implies a big ramp, which it did with the prior guidance as well. And I think we need to do somewhere around $1.75 and 4Q, which would be the biggest, I think, ever, and obviously a big improvement, so... I'm kind of curious about what kind of visibility and what kind of bridge you can provide. I mean, perhaps that inventory build is part of it, but can you help us get comfortable with how you're going to get to that big number given the supply chain constraints out there and cost increases?

Yeah, Larry, I think to your point, the inventory build is certainly a part of that, right? I mean, we have been trying to increase our inventory levels to support that back half revenue ramp. And that's also clear in our backlog that we have the demand to be able to support that revenue ramp. So part of it would be on executing on that backlog, and we expect to be able to do that because of that inventory investment that we made. Certainly that is not without challenges, but that's what the team has been working hard to overcome. On the margin side, you know, we do see a pretty significant ramp in margins from the first half of the year to the back half of the year. On food tech, I'd say half of that ramp is related to just the volume leverage with the higher revenues that we see. And about 25% of the improved margins is from improved productivity around certain projects that impacted us in the first half, as well as the other quarters is just to continue to improve pricing as we continue to catch up, especially in some of our businesses in food tech in the back half of the year. And we do have some encouragement. We did see some really good progress in some of our businesses, especially on the protein side, around pricing in the second quarter. And we just need to catch up in some of the other parts of our business to be able to achieve those margins. And we have been putting action in place to do so. On the aerotech side, it's really a story about, again, both volume leverage, significant volume leverage in the back half, and pricing. We've kind of communicated... a lot over the last couple of quarters that there are some projects that will be better priced in the back half of this year, and we are seeing that come to reality in the back half of 2022.

Great, thanks. And then it's a great color. And then secondly, on BevCorp, noted it's all North America, obviously taking something and putting it on your platform could be compelling. Can you talk about the international opportunity? Is there a line of sight on bringing that global, or is that going to be more of a North American business?

Sure. Thanks, Larry. We're excited about BevCorp. It's a great company. As we mentioned in prepared remarks, these guys are really best in class in the space that they play in terms of customer service and technology know-how. And that in the North America consideration is important for a couple reasons. First of all, here in the short term, obviously, given some of the concerns in Europe, and the strength in North America, we do think that's a strong value proposition here in the short term, which led to our continued interest. But in terms of expanding the marketplace, the first place that we think relatively short order, we think we can move into Latin America. Latin America has a good installed base of businesses that do invest in carbonated beverages, which is obviously their expertise. And so that will be the first phase over the next 12, 18, 24 months, and there's plenty of opportunity to keep us busy there. Thereafter, we would look at both Asia and Europe, but really for the first two years or so, a tremendous opportunity in the Latin America side. And just more broadly, just thinking about BevCorp and how it fits and why it's such a good acquisition beyond kind of the company-specific attributes, Think about GBT's position in juices over the last, since I've been here, it's been all of the non-carbonated sites. So we're great at mixing, blending, juice extraction, all the coffees, the teas, the blended juice drinks, all those things. And then we've got tremendous capabilities on the back end with preservation, sterilization. We do filling and closing for non-carbonated drinks. But this was the one hole that we had in our portfolio. So it tremendously fits in terms of the overall capabilities in terms of what we can provide to our customers in terms of fuller line solutions within the factory or within a particular line. And so some really great points of connectivity between the two businesses. And in fact, in some cases, we're actually already a vendor to BevCorp and some of the tanks and blending systems that they do. So it's a perfect fit. And I'm really excited about it.

Okay, thanks very much.

I'll jump back to you. Thank you.

Your next question comes from Walter Liptech with Seaport Research.

Hey, thanks. Good morning, guys. Good morning. I wanted to ask kind of a follow-on to the last one about Europe. I wonder if you could talk about, just remind us how much Europe is a percentage of total revenue. And, you know, can the strength that you're seeing in North America, the Middle East, can that offset the kind of slowing that you might be seeing? And maybe a third one kind of along the same lines. What were the monthly trends like in Europe? You know, and, you know, what are you seeing in July?

Sure. In terms of the overall split, Walt, JBT is about 60% North America, 40% kind of rest of the world, of which call it 30% or so is Europe at the highest level. And we do see continued strength in North America. And as we mentioned, some improvement in trends in Asia and in Middle East. but Europe is weakening. Now, we did bring our overall guidance down a little bit to account for that, so it doesn't fully offset, and that's reflected in the guidance that we've provided. In terms of trends for the quarter, I would say as the quarter progressed, it did get worse generally. I'm not going to give any color into July. However, you can generally see the trends in You've seen probably in some of the news about inability or struggles between food retailers and food producers, some of the stress that we've seen there and prices in general on food. So I do think generally we would really like to see food inflation start to come down to make some of the value propositions in Europe a little bit easier for our customers to continue to invest. But in the short term, we're trying to take that into consideration in our guidance for the rest of the year.

Okay, great. And maybe a last one for me is that the ramp in shipments for the second half, how dependent is that on European shipments?

Well, certainly there's a dependence on European shipments, and we try to consider where the backlog is. What we've really tried to do in the back half is to not do any really book and ship within the back half, meaning we're relying on existing backlog and our normal aftermarket presence as opposed to we do have some short cycle businesses that we often rely on within the quarter, and we're really trying to not rely on that with rare exception in the back half. So that's kind of how we think of it.

Okay, great. Thank you. Thanks.

Your next question comes from Mitch Dober with Robert Baird and Company.

All right. Good morning, everyone. Thanks for the question. Hi there. So I want to stick with that discussion around Europe. And I guess the way I would ask the question is this way. If I'm looking at your order intake in the second quarter in food tech, so that was called a flattish year over year. I'm sort of curious how much lift did you get from pricing? And then if Europe is where we're seeing the drags, then implicitly the volume order intake in Europe has got to be quite soft. Just my own kind of back of the envelope would suggest pretty solid double-digit declines, maybe as much as 20%, 30%. Is that sort of accurate? Is that what you're seeing over there? And do you think that this is just sort of a temporary factor related to sentiment, the war, so on and so forth? Or is this something that's more... prolong in terms of a potential shift in how the market is looking to invest?

I'll take the first half, and then Brian will probably follow up on the longer-term question you added in there. But I think, first of all, certainly we are seeing FX impact our orders. I'd say that's a pretty significant impact, making the orders a little bit lower. And then I think we are seeing price, and I think that's in the high single to low double-digit impact on orders for price.

Year over year.

Year over year. And so that leaves volume down. I'd say volume down about a similar rate as we've seen in price. So you've got the FX headwind, you've got some price uplift, and then you do have some real volume coming down.

Right, and most of that volume decline is in Europe overall, while North America remains strong. I think your number of 20 to 30% is certainly high, however, in terms of looking at it, keeping in mind that pretty much all the FX impact is going to be coming from Europe. And more generally, kind of your question about kind of short-term impact, long-term impact, we definitely saw what I would say in the quarter some pullback on what I would call some short cycle stuff as our customers look to entrench a little bit and try to take the cost out of their immediate quarter. So we saw some, what we would call short cycle, some refurbishments, even some parts and tooling here and there. Those trends are typically very, very short lived because obviously refurbishments and tooling and parts, they have to move on with that. I'm less concerned about that, frankly. And longer term, we'll have to see how deep this recession is. Again, going back to my point on food pricing, it would be very nice to see food pricing start to stabilize or at least some of those price increases make their way from the manufacturers to the retail side to put them more on equilibrium because we saw in the quarter some unequilibrium at the producer level. that they've tried to account for here but um so the equipment side obviously that's yet to be seen what happens as we move into 2023 uh but i do expect some improvements in the short cycle stuff uh as we get to a little hopefully some little more stability in the stability in the back half i see and just to kind of follow up on this when we were looking through

Some of the reports from your European-based competitors, we certainly have seen pretty decent order intake growth in their case. And I understand that it might not necessarily be apples to apples or talking about the same regions, but do you get the sense that it could be a bit of a market share issue for you in Europe? And I'm thinking specifically here at the FX headwind, right? I don't know if you're... exporting product from the US into Europe and the dollar has done what it's done this year, which clearly created an additional headwind to the price increases that you're already having to put through because of inflation. So I don't know if that's a factor or if maybe this is simply not at all.

I don't think the FX impact was a competitive pressure in the quarter. What I will say in terms of our European competitors, They obviously have the opposite effect on FX, right? Everything they report in the US is now in European dollars, right? So they're actually getting a lift. I'm not that sure if they've called that out or not, but that's certainly worth noting. I will also say we're more diverse in terms of Europe between protein and our diversified food and health. And our protein group is stronger, but we obviously have a higher mix of diversified food and health So it's more of a mixed issue because DF&H was a little bit more pressured than Europe in the quarter.

Okay. And then maybe my last question, when I'm looking at your updated full year guidance for food tech, raised organic growth a bit, margins came down. I'm wondering if maybe you can give us a little more insight into kind of how you're thinking about temporary um headwinds here whether it's price cost and efficiencies um and and how maybe some of these could potentially progress into 2023 um what do you expect to essentially kind of go away or normalize uh what potentially could become a headwind as we think of a tailwind rather as we think about 2023. thank you you're talking about aerotech right no i'm talking about food tech

Okay, because you said that our revenue increased, guidance increased a little bit, actually decreased a little, so you confused me there.

I think I might be the one that's confused here, but I appreciate that.

Yeah, okay. So, yeah, so I would say this. You know, we've done a ton of pricing actions in the front half of the year. We expect that to start seeing some of that benefit as we move into, the back half a year, getting through some of the higher cost backlog that we saw. And that's across both food and air, by the way. But on food tech specifically, we are seeing some of the pricing actions starting to come through. We've got good visibility into that. I think the challenge is always a little bit on some of the short-term stuff and the level of productivity that you see as a result of some of the supply chain challenges. That's always kind of the question mark and the range, why we need ranges on the margins. But from a price-cost perspective, we expect pretty meaningful benefits in the back half. And then obviously, as Matt mentioned, we are getting the operating leverage, right? So then as we move into 2023, the question of operating leverage will be dependent upon volume, right? Right now, again, volume's quite strong in North America, less so in Europe. Asia and Middle East, pretty decent. Latin America, kind of somewhere in between. So I think the leverage portion will be dependent, but I do think kind of absent any worsening of supply chain challenges, I do think we are largely getting caught up as we enter that fourth quarter on price-cost, which should flow back into 2023. So to me, the big question mark for 2023 is where are the volumes going to be?

Okay. Thank you. Sure.

Again, if you wish to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, followed by the number one again. We'll pause for just a moment. Your next question is a follow-up from Walter Liptak with Seaport Research.

Thanks. In your prepared remarks, you guys talked about how the Aerotech business is seeing more demand for emissions-free, and you kind of called out a potential recapitalization cycle. I wonder if that's something where you're seeing a funnel of new orders build, or is that just something that the airports and maybe the regulators are beginning to talk about?

There's a lot of talk about it for sure, but we are also seeing it in our orders. Certainly, both commercial airlines and the cargo carriers are specifically ordering electrical equipment at this point or electric conversion kits for some of the traditional diesel-powered equipment. So it is starting off, but we do think really the next really five, six years, we do think, as a matter of fact, if you look at some of the comments from the commercial airlines, they actually specifically call out how quickly they want to convert their fleets the airport equipment fleets to electricity. And it's something like 80% in the next five years and 100% in the next 10 years kind of thing. And that's fairly consistent conversations across, again, both the cargo side and the commercial side. I do think the defense side will probably take a little bit longer in terms of converting, but they also have the same considerations. And I will say, just kind of looking back at Aerotech and our history, if you recall, Walt, We bought a company called Lectro in 2018 in anticipation of what could be coming over the next several years. And strategically, that has turned out to be an excellent acquisition just given their positioning in the marketplace and the technology and expertise they brought to JVT. And now we started rolling that out across all of our ground support equipment. So it's been a really great acquisition strategically. And then operationally, they're quite busy. They're as busy as they've ever been as we speak. And again, the technology was also transferred to our Orlando ground support equipment business. So it's among some of the other R&D investments we've been making on our own in that space. So pretty excited about where we sit in the cycle on electrification.

Okay, great. That's good to hear. And then just one last one on food tech. The, you know, Like you called out, the orders looked okay. I was wondering about the European orders specifically and if you saw any cancellations.

No cancellations. Again, I think for us, that's extraordinarily rare just because the amount of deposits that we get on the food tech side, it would be very, very painful for our customers to cancel orders.

So, no, we have not seen cancellations. Okay. That sounds great. Thank you.

Again, if you wish to ask a question, please press star, then the number 1 on your telephone keypad. Again, that's star, then the number 1 to ask a question. There are no further questions at this time. I will now turn the call over to Mr. Brian Deck for closing remarks.

Thank you all for joining us this morning. As always, Kedrick and Marlee will be available if you have any follow-up questions. Thanks. Have a good day.

Thank you for participating. You may disconnect at this time.

Thank you.