John Bean Technologies Corporation

Good morning and welcome to JBT Corporation's first quarter 2023 earnings conference call. My name is Audra 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Cedric Meredith. To begin today's conference, please go ahead.

Thank you, Audra. Good morning, everyone, and welcome to our first 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 Harbor language in today's press release and 8K filings. 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.

Thanks, Kedrick, and good morning, everyone. Overall, we outperformed our expectations in what is typically JVT's seasonally slowest quarter of the year. As we have said before, food tech continues to be driven by a resilient business model, a diverse product offering, and value-added acquisitions. In the first quarter, food tech revenue and margins exceeded our guidance largely on the strength of recurring revenue. At Aerotech, we're no longer on a path to recovery where we are there. with exceptional demand and record orders in the quarter. With that, I'll turn the call over to Matt to provide details on the first quarter and outlook for the second quarter.

Thanks, Brian. JVT delivered solid Q1 results, with double-digit year-over-year growth of 13% on revenue and 30% on adjusted EBITDA. At FoodTech, revenue increased 9%, with growth of 2% organic and 10% from acquisitions. partially offset by a 3% negative foreign exchange impact. The year-over-year growth exceeded our guidance due to the strength of recurring revenue, which represented 56% of total revenue in the quarter, and an improving supply chain environment enabling the delivery of more products than forecasted. Food tech adjusted EBITDA margins of 18.1% improved 180 basis points over the prior year, driven by the favorable mix of recurring revenue and continued improvement in price cost. At Aerotech, first quarter revenues increased 25%, and adjusted EBITDA margins of 10.1% improved 300 basis points from the prior year period. Aerotech's year-over-year margin expansion resulted from volume-driven leverage on fixed costs and the realization of pricing actions. On a JVT consolidated basis, Adjusted EBITDA increased 30%, or $16 million, in the first quarter of 2023 to $70 million. Adjusted earnings per share was $0.94, compared with $0.88 in the first quarter of last year. As strong operating performance was partially offset by higher depreciation and amortization, higher interest expense, and a lower discrete tax benefit. For the second quarter of 2023, we anticipate total year-over-year revenue growth of 5% to 9%, and adjusted EBITDA margins of 14% at the midpoint, or an improvement of approximately 200 basis points. At Foodtech, we expect revenue growth of 5% to 10%, with adjusted EBITDA margins of 18% to 18.75%. At Aerotech, we are projecting revenue growth of 4% to 7%, and adjusted EBITDA margins of 10.75% to 11.75%. As a result of this continued top-line growth and margin expansion, we project second-quarter GAAP earnings per share of $0.90 to $1.05 and adjusted EPS of $1.10 to $1.25. For the full year, our guidance is essentially unchanged, with consolidated revenue growth of 7% to 10% and adjusted EBITDA growth of 23%. or 170 basis points at the midpoint. We still expect free cash flow conversion to be above 100% of net income for the full year. With that, let me turn the call back to Brian.

Thanks, Matt. As we discussed last quarter, the backdrop of economic uncertainty remains a factor in the pace of FoodTech customers' investments decision-making, as does the cost and availability of capital. With that in mind, FoodTech orders the $406 million or $417 million on a constant currency basis met our expectations. We were encouraged by further stabilization in Europe, particularly in Southern Europe, while North America moderation persisted. Asia remains inconsistent, and the Middle East and Africa showed continued strength. Overall, we remain encouraged by the engagement with WhoTech customers entering the second quarter as they continue to be motivated by the need for automation, operating efficiency, and sustainability. In terms of end markets, we enjoyed healthy order trends from fruit and vegetable, convenience meals, and ready to drink and functional beverages. And we witnessed some modest sequential improvement in poultry investments after declines in the back half of 2022. However, this market generally remains under pressure. Lastly, our automated guided vehicle business continues to enjoy strength and demand. Since our last call just two months ago, we've continued to sign customer contracts for our digital solution OmniBlue. Its value proposition is resonating with customers and we remain excited about its potential for deepening our customer relationships. Our internal technical and support teams are fully built. With the core product development stage largely behind us, we are increasingly focused on commercialization, and we are working side-by-side with customers to continually enhance the product. Moving on to Aerotech, orders expanded 51% year-over-year to a record $232 million, $50 million above any prior period. with improved price recovery and robust demand across the infrastructure and commercial airline and markets. Regarding our intent to become a pure play food and beverage solutions company, last quarter we indicated separation is more likely to be realized through the sale of AeroTek. Indeed, this is the path we are pursuing. Our intent remains to execute by year end while remaining cognizant of the capital market environment. In the meantime, with a recovery in commercial air demand, growth in defense applications, and continued robust airport infrastructure spending, Aerotech's backlog reached an all-time high, and we are quoting well into 2024. Finally, I'd like to talk about JBT's corporate responsibility and sustainability initiatives. Last week, we issued our 2022 ESG Annual Report, Sustainable Solutions for a Growing World. As the population expands, we need sustainable solutions to feed the future. JBT has those solutions today, enabling customers to enhance food yield, quality, and safety while reducing food and packaging waste. Our technologies also reduce the use of precious energy and water resources while cutting operational emissions. We believe JBT's dedication to a sustainable future will leave a positive legacy that can truly impact future generations. In 2022, we estimate that more than 70% of JBT's products and service revenues stem from equipment that delivered environmental benefits. Sustainability and profitability are not mutually exclusive for JBT and our customers. Our solutions have always been built around enabling customers to reduce food production costs and improve profitability. OmniBlue further supports customer profitability and resource utilization through next-level data intelligence that improves equipment efficiency and uptime. These sustainable solutions make JVT more competitive and critical to the food industry. JVT is also supporting the development of sustainable foods with solutions for production of plant-based proteins and dairy alternatives. Moreover, we're helping food innovators with cell-based with cell-based protein production, which can revolutionize the way food is produced. We recently joined a number of initiatives around the globe reflecting our commitment to sustainability. For example, by partnering with the World Climate Foundation, JBT joins a network of organizations committed to accelerating the transition to a low-carbon, climate-resilient global economy. Of course, none of our growth and progress would be possible without JBT's highly skilled and engaged workforce. This year, I signed the CEO Action for Diversity and Inclusion Pledge, reflecting our ongoing commitment to diversity, inclusion, equity, and belonging. We launched and grew our first two employee network communities, employee-led teams that foster diverse and inclusive workplace aligned with JBT's core values. And I am particularly proud of the progress we made this year, increasing the representation of female and minority leaders at all levels of the organization. A sincere thanks to all employees across the globe. With that, we'll take your questions. Operator?

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll go first to Mig Dobre at Robert W. Baird.

Thank you for taking the questions, and good morning, everyone.

Good morning.

I guess where I would like to start is with a little more color maybe on what you're seeing in terms of food tech demand trends. I'm curious, the protein business, how you see that progressing through the year. And I'm also curious from a pricing standpoint how things are changing and where you sort of think you are on a price-cost balance at this point.

Mm-hmm. Okay, so from a demand perspective, I would say it's still mixed across the globe. We're seeing regional strengths and weaknesses. Right now, as I mentioned, Europe is a little bit stronger. North America, some of the moderation persisted. It was stronger in the fourth quarter, sorry, in the first quarter versus the third quarter last year, but not quite as strong as the fourth quarter. And that's mainly driven by poultry and even the pork industry. Both are those are a little bit challenged right now. What we've seen in Europe, if you recall the first half of last year, we saw some deferred investments in lower demand. And typically what we've seen that played out in this case is that our customers can typically only go a couple quarters before that drumbeat of food demand ultimately requires some investment. And that's what we think we're seeing there. And ultimately we think that will play out in North America as well. But at this point, North America is lower than I would say the normal baseline. As it relates to price cost, we are seeing we're getting to that upward limit on pricing, generally speaking. That said, we remain in an inflationary environment. We will continue to make sure we capture our increased costs. But there's certainly more pressure on pricing than there's been In prior quarters, that said, we feel we can maintain our margin profile.

Understood. Then maybe a follow-up on your guidance. Obviously, the quarter played out quite a bit better than the way you initially guided. You're not really carrying the Q1 beat to the full-year outlook, so maybe a little bit of commentary as to what is unique in a quarter that perhaps doesn't repeat on a go-forward basis and really any other puts and takes to the outlook relative to what you previously expected?

Sure. There were two things, two primary contributors to the quarter. First, we did have about $5 million of equipment revenue that moved out of Q2 and into Q1, as we mentioned, a little bit better supply chain environment that allowed that. That certainly won't continue. And we had pretty extraordinary recurring revenue business in the quarter. We think that's going to moderate to back to normal levels. We'll see. Obviously, we've got a great recurring revenue franchise and continue to be a source of strength for JBT regardless of the economic environment. So we'll see how that plays out. But that said, we are really cognizant and aware of the broader economic environment and how that might impact how we go forward from here. We do have a relatively large go-get still. We're reasonably well positioned in our backlog, but there still is go-get on our revenue. And our margins obviously performed well, but in this economic environment, we didn't feel that this was an environment for raising guidance. It's just really just being very cognizant of where we sit in the market.

And just to put a finer point on the recurring revenue, What was it in a quarter that maybe boosted this portion of the food tech business that you don't expect to be sustainable on a go-forward basis?

Well, just history and data. Data history would tell us. You know, you have fits and starts sometimes. If you recall, I think it was third quarter last year, it declined for one quarter and then it rebounded, and this one spiked. And I will say what was pleasing, however, was it was strong globally. Every economic region showed strength in aftermarket. Obviously, we hope that continues, but historically, the data would suggest that it goes back to normalized levels.

Okay. Thank you for the questions. Sure.

We'll go next to John Joyner at BMO Capital Markets.

Excellent. Thank you very much for taking my questions. So, Brian, just maybe to follow up on the point about the poultry markets, and maybe this is probably an easy one, but there has been some stabilization there and gradual improvement in poultry prices in North America. Is that starting to help sentiment at all with the customer base kind of compared with the beginning of the year, or is it too early to tell?

It's a little early, but we did have an improved quarter on poultry investments. That was nice to see. It's hard to know if that's how sustainable it will be. Like I said, it did improve in the quarter, which was nice to see. We'll see where we go from here. I agree that there is some stabilization, but where it sits today is still relatively low in the grand scheme of things, despite the improvement And I know that there's a lot of work by our customers working on the efficiency side of things. I don't expect the kind of demand from the equipment perspective on new capacity. It would be more about operating efficiency, and that's some of the orders that we saw in the first quarter reflected.

Okay. That's a good color. Thank you. And then just regarding the ongoing rollout of OmniBlue across your product portfolio, I believe it last checked. You had around five connected product lines. You can correct me if that's not right today, but because OmniValue is a big focal investment for JVT, is there any update on the product categories that are now connected? You mentioned this a little bit earlier, but what has been the early feedback so far from customers?

Sure. We are in five product lines that have been Introduced in the six that we're getting closer on a couple of product lines are fairly well developed Into less well developed and starting the commercialization In terms of the feedback customers are telling us the Omni blue is a different differentiated product Which is really what you want to hear? It's a it's making us a more engaged vendor with them. It's making us more connected and more connected to their outcomes. And that's what I really think they appreciate. More than anything, they like working with vendors that help them solve problems. That's what we're looking to do. And they're looking for people that they can trust when it comes to making investments. And so we are getting excellent feedback in that regard.

Okay, excellent. Thank you, Brian. Sure.

We'll move next to Lawrence DeMaria at William Blair.

Hi, thanks. Good morning, everybody. So, Brian, you touched on Aerotech. Obviously, you have a clear path to move forward. The question is really around on Aerotech at this point is obviously the proceeds and the reallocation. So, I know there's some sensitivities around that, obviously. But can you discuss maybe the tax basis of the asset and whether you think that can be avoided if there's structures that can avoid, you know, obviously a big tax bill? And then the other side, can you talk about your pipeline and the possibility of timing a buy side in conjunction with a sell side? That's the first question, thanks.

Sure. So on the tax question, as we had mentioned earlier in prior calls, one of the reasons why it took us some time to make a formal declaration on a sale path was we were investigating some tax-efficient options. And we've exhausted those, and we don't really feel that that's a viable path at this point, given the state of the markets, but we do strongly feel that a sale process is the right path for JBT. In terms of the tax and tax basis, just to boil it down, frankly, you're talking about 100 million plus in taxes. It obviously depends on the proceeds but that's the general ballpark that we're working under today in terms of redeployment right first of all obviously we don't know precisely how the timing will work out with aerotech but we our intent on getting that executed by the end of the year and being a pure play by the end of the year our acquisition process is always on we've you know it's always been on we do continue to I have bilateral conversations with potential companies. I will say this, the market is a little bit different than we've seen currently than we saw perhaps in 2021 and the front half of 2022, where there are a lot of auctions and things of that nature. Today, it's a lot more one-on-one conversations, smaller, I'll call groups of interested parties that are talking to companies. So it's a little, which is actually good for JVT because that's how we develop quite a bit of our pipeline is engaging with those customers. And we'll certainly continue to engage and look to redeploy that capital. Timing is never perfect. So we're just going to move forward with looking at good companies, maintain our discipline process on acquisitions, recognizing that we will have more capital available at some point provided Aerotech executes as we intended to.

Thanks for that. Very helpful, Brian. And then secondly, obviously some nice orders. Can you maybe, at least from a high level, break down price and volume in the backlog, just trying to get a sense of the strength and obviously volume and compared to price as well?

Yeah, Larry, it's Matt. I think as we've sort of commented in the past, pricing you know, we've been able to effectively offset the input cost inflation that we've seen on the material side. And so price impact for us is in that, you know, high single-digit range, probably, you know, 7%, 8% kind of range. And so there is certainly a decent amount of price included in that increase of the backlog year over year. And certainly that is accelerated even more on the Aerotech side as we've been able to implement new pricing on that business here at the end of Q4 and the first part of Q1.

Okay, thank you.

And as a reminder, if you would like to ask a question, please press star 1. We'll pause for just a moment. We do have a follow-up question from John Joyner at BMO Capital Markets.

Great, thank you. Maybe, could you touch on the record order intake for Aerotech? I mean, it was clearly quite strong. What were the drivers there around, I mean, any particular projects or products that are seeing high demand? I mean, you know, I think back to kind of de-icers a few years ago. Any color there would be helpful.

Sure. Yeah, frankly, it's pretty broad-based. The commercial airlines is a huge driver, and that's across de-icers, even loaders, as well as pushback tractors. We are seeing quite a bit of activity on the fixed side, so the passenger boarding bridge side has some of the money coming from the infrastructure bill is coming into play. So we're seeing that play out largely as expected, and we expect that to be the source of strength for, frankly, for years as that money gets deployed. So it's really broad based on the commercial airlines as well as the infrastructure. And then on the defense side, we're seeing some strength too. Obviously, the world geopolitically remains a tricky place, so we are seeing more demand there as well.

Okay, excellent. Thank you.

And we'll go next to Walter Liptack at Seaport Research.

Hi, Walt. Hey, thanks. Good morning, guys. I wanted to ask a little bit more about Omnibluid. I apologize if you went into some of this, but can you just give us a refresh on sort of the spending levels that we've gone through? and how much spending levels do we have left, and maybe what inning are we in for recognizing some revenue and offsetting some of those costs?

Yeah, well, I'll take the cost side first, and then maybe Brian can talk about the revenue piece here. But from an investment perspective, last year, We invested close to $40 million from a CapEx perspective in OmniBlue. This year, that's going to come down significantly. It's probably closer to $12 to $14 million in 2023. So a significant reduction in the capital investment, which just represents sort of that upfront investment that we were making in sort of the backbone, I guess, if you will, of the system. And from an expense perspective, I'd say as we kind of talked in the last call, we started to push some of that expense out to the businesses in food tech. And so that's about $14 to $15 million of expense, about $9 to $10 million of that is B&A. And then we'll have some additional expense in corporate, about $5 million this year associated with sort of supporting the overall OmniBlue environment and continuing to sort of invest in additional capabilities from a software and a capability perspective.

And then commercially speaking, we're still very, very early, right? So most of 2022 was getting new customers signed up, reference customers that helped prove out the product, and allow us to make any changes to the product that's necessary and help to develop the value proposition. So now as we are getting further along in the actual development of the product, we are shifting more resources to the commercial side. So in terms of innings, we're really in the first, second inning from that perspective. And what OmniBlue really is about this long-term engagement with our customers, making us a better partner, helping us be more engaged in their profitability. It's really about these long-term relationships and making JVT a better company to do business with. And then when it comes to making decisions on equipment or otherwise, that we're there for them. And probably more than anything, it furthers the conversation that we're having regarding our customer care business. So OmniBlue fits perfectly in with, you know, what we've been focused on developing our customer care business and investing resources with that over the last several years. But this is just an extension of that and really more than anything, making us on the spot with our customers, making them more successful because again, as you know, the care and feeding of this equipment is critical for the efficiency and uptime operation.

Okay, great. Thanks for that detail. And maybe just another one for me about the separation. The calendar that you guys have had, it looks like everything's on track, but I wondered if you're still on the same calendar as anything moved around from the first half to the second half or later in the year. How are you thinking about the calendar for

Right, and just for everyone's benefit, the calendar was that we would pick a defined path in the front half of 2023, which we just announced with the intention for a sale, and we had iterated that the intent would be to execute in the back half of 2023. That remains our intent. Certainly, we're aware of the capital markets, but that's currently our intent, and that's how we're proceeding.

Okay, great. Thank you.

And we'll move next to Mig Dobre at Robert W. Baird.

Hey, just two quick follow-ups for me. The first one is back to the discussion on Omniblue here. And, you know, I'm curious... What learnings you have had thus far from this program? I guess the way I would ask the question is, you know, do you view OmniBlue as truly an incremental opportunity to grow revenue for the company? Or is this more of a kind of a table stakes, something that the company really needs in order to cement these customer relationships? And it's just sort of like the kind of tools that you need, frankly, to service a customer and be in business at this point.

Sure. I think it's a little bit of both, Nick. I think generally speaking, industrials do need to continue to invest in digital and digital assets. And I do think a part of it is just making sure we keep pace with that. But really what we intended with Omniblue, and we are seeing the feedback and the value proposition there, that this will drive revenue. We do feel that there will be an uplift in the customer care side of the business because we still don't have a large wallet share. It's still in that 30, 35% range. So there's opportunities in terms of ease of doing business with, and that's critical when it comes to ordering parts on the shop floor and getting things quickly. There's a service element to this. So there's a promise of inventory availability and service availability and ease of scheduling service. Additionally, as we roll out OmniBlue to multiple products within the same line, which we're starting to do now, it allows them to have full visibility of the productivity of the line itself. So we are actually seeing some incremental interest on the equipment side. as we deploy this. So I do think it's an incremental uplift. In terms of learnings, I would say what we realized is selling software is different than selling equipment, right? So in terms of the commercial conversion and the onboarding, probably a little bit longer than we had originally anticipated. However, the value proposition and the feedback on how it's a differentiated product It gives us a lot of encouragement as how we go forward from here.

Okay, that's helpful. And my last question is on restructuring. Maybe a little bit of context as to what you guys are doing here because the savings run rate as we look into 24 is pretty significant relative to the spend that you have this year. And I'm kind of curious as you're looking beyond 2023 in food tech post-separation, do you envision more opportunity to restructure the RemainCo, the food tech business? And if so, can you sort of give us a hint as to what are some of the main areas of opportunity going forward?

Yeah, I'll start, you know, We're expecting the total cost of sort of the restructuring efforts that we have in place to be close to 9 to 10 million, and that includes some of the expense that we incurred in 2022. And so with savings of 9 to 12 million, again, I think we're kind of close to that one-year payback on the restructuring effort once we hit the full run rate savings. And as we've sort of commented last year and in our – our disclosures, the restructuring is really around almost exclusively in food tech. Or it is exclusively in food tech, sorry. And a lot of it is in Europe, making sure that we have the right cost structure and cost base for the environment that we're seeing in food tech. Not a tremendous amount at this point in time of consolidations of rooftops or anything like that. It's really around just the base cost structure. So going into your second question around RemainCo, I think it's probably a little too early for us to have a lot of visibility into what that might look like. I think, as we've always said, we're constantly looking at the efficiency of our operations. We'll continue to do that, and that won't necessarily change post any transaction with Aerotech. I think what we'll have to be thoughtful about is sort of as we remove that revenue from JBT, sort of the costs that we carry at corporate and how that overhang impacts the results. And we'll be cognizant of balancing that along with the efforts to redeploy to additional food tech business going forward.

All right. Thank you.

And there are no further questions at this time. I would like to turn the call back 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. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.