John Bean Technologies Corporation (NYSE:JBT) Q2 2022 Earnings Conference Call July 28, 2022 10:00 AM ET
Company Participants
Kedric Meredith – Vice President, Corporate Development and Investor Relations
Brian Deck – President and Chief Executive Officer
Matt Meister – Executive Vice President and Chief Financial Officer
Conference Call Participants
Lawrence Maria – William Blair
Walter Liptak – Seaport Global Securities LLC
Mircea Dobre – Robert W. Baird & Co., Inc.
Operator
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. [Operator Instructions]
I will now turn the call over to JBT’s Vice President of Corporate Development and Investor Relations, Kedric Meredith, to begin today’s conference.
Kedric Meredith
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 8-K filing. JBT’s periodic SEC filings also contain information regarding risk factors that may have an impact on our results. These documents are available in the Investor Relations section of our website. Also our discussion today includes references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found in the Investor Relations section of our website.
Now, I’ll turn the call over to Brian.
Brian Deck
Thanks Kedric and good morning everyone. JBT made progress in the second quarter of 2022. With sequential gains in revenue, margins, and earnings. We had record sales of FoodTech, AeroTech continued its march to recovery. However, persistent disruption from inflation supply chain shortages, logistics challenges and COVID related absenteeism continue to weigh on margins. Foreign exchange was a greater headwind than anticipated. Additionally, the concern we raised we raised last quarter about developing economic pressures in 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 and 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 the 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 included 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 JBT’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 attract and been interested in for several years and provide a great strategic fit that we believe add to our customer value proposition and shareholder value creation.
Now let me turn the call over to Matt.
Matt Meister
Thanks, Brian. JBT 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 we’re 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 negative foreign exchange impact 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 nonoperational 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. This adjustment had modest impact both historically and in Q2. For full year 2022, we expect LIFO expense to be $4 million to $6 million. With that we posted GAAP earnings per share of $1 for 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 defer 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 FoodTech revenue growth to 13% to 15%. Due to the softening economic conditions in Europe, as well as a higher FX headwinds strong dollar. That breaks down to growth of 13% to 15%, organically and 4% from acquisitions, offset by 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, operating margins of 8.5% and 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 $4.90, $5.10. Included in our updated full year guidance is a benefit of approximately $0.013 from lower taxes offset by a foreign exchange headwind of approximately $0.15 and $0.13 from lower FoodTech 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. That of course is not included in the above guidance, we will provide details on 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 the JBT’s pro forma debt leverage will temporarily exceed our target range of 3x. However, we do expect to be below 3x by year end 2022 based on forecasted free cash flow and improved earnings profile.
Now let me turn the call back to Brian.
Brian Deck
Thanks Matt. Let me start with a discussion of business trends by segment and geography. FoodTech’s 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 macro-economic pressures, orders and pipeline trends in North America remained strong. Overall, our US 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, is 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 has 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 price more — the market more price sensitive for equipment. As a result, we’re assessing actions in Europe to align the cost structure of a few businesses with those regional market conditions. And we’ll consider other actions more broadly, if and when necessary. In general, global food price inflation is extraordinarily high.
Due to high input costs, 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 are 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 JBT’s digital transformation and OmniBlu, our suite of digital tools designed to enhance our customer success. We continue to make progress. Customers appreciate OmniBlu’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 OmniBlu broadly across JBT’s product lines. As we move forward toward digital and outcome based relationships, the commercialization of OmniBlu relies on meaningful customer engagement with multiple decision making points as we demonstrate OmniBlu’s value proposition. We continue investing 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 OmniBlu 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 ground, our mobile ground support equipment business tied to expanding demand for commercial airline customers. Our pipeline also reflects customer demand for automation, electrification and intelligent operations, areas where JBT 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 operations. 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 meaningful share of revenue from the 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 trends a t AeroTech. We are 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 get 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 JBT businesses that demonstrate excellent community support as well as sustainability initiatives. We applaud our employees’ commitment, and service above and beyond the day to day roles at JBT.
With that, let’s open the call to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]
Your first question comes from Lawrence DE Maria with William Blair.
Lawrence Maria
Thank you. Good morning, everybody. I guess first question, obviously, second half implies a big ramp, which you did with the prior guidance as well. And I think we need to do somewhere around $1.75 in 4Q, which would be the biggest, I think ever and obviously, big improvement. So kind of curious about what kind of visibility and what kind of bridge you can provide? I mean, perhaps that inventory build as part of it, but can you help us get comfortable with that, how you’re going to get to that big number, given the supply chain constraints out there and cost increases?
Matt Meister
Yes, Larry, I think, to your point, the inventory ability is certainly a part of that, right? I mean, we have been trying to increase our inventory levels just before 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, as part of it will be on executing on that backlog. And we expect to be able to do that because of that inventory investment that we made. So that is not without challenges. But that’s what the team has been working hard to overcome. On the margin side, we do see a pretty significant ramp, in margins from the first half of the year to the back half of the year. On FoodTech, 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 improved margins is from improved productivity around certain projects that impacted us in the first half, as well as in other quarters just continuing to improve pricing as we continue to catch up, especially in some of our businesses in FoodTech 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 a 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.
Lawrence Maria
Great, thanks. And then great color. And then secondly, on Bevcorp, noted it’s all North America, obviously taking something put it on your platform could be compelling. Can you talk about the international opportunity? Is there a line of sight and on bringing that global or is that going to be more of a North American business?
Brian Deck
Sure. Thanks, Larry. We’re extremely excited about Bevcorp. It’s a great company. As we mentioned in the 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 North America consideration is important for a couple of 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 short term, which led to our continued interest. But in terms of expanding the marketplace, the first place that we think relatively short or we think we can move into Latin America. Latin America is a — it 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 will 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 this company’s specific attributes. Think about DBT’s position in juicers over the last since I’ve been here, it’s been all the non-carbonated side. So we are graded, mixing, blending, juice extraction all, coffees, the teas, the blended juice drinks, all those things. And then we’ve got tremendous capabilities on the backhand back end with preservation and sterilization, we do filling and closing for non-carbonated drinks. But this was a 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 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 really excited about it.
Operator
Your next question comes from Walter Liptak with Seaport Research.
Walter Liptak
Hey, thanks. Good morning, guys. I wanted to ask kind of a follow on to the last one about Europe. I wondered if you could talk about just remind us how much Europe is as a percentage of total revenue? And 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? And what are you seeing in July?
Matt Meister
Sure. In terms of the overall split, Walter, it’s about — we’re about – JBT’s about 60%, North America 40% kind of rest of 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 the 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 to July. However, you can generally see the trends that 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 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’ve turned trying to take that into consideration in our guidance for the rest of the year.
Walter Liptak
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?
Brian Deck
While certainly there’s a dependence on European shipments, and we try to consider the wherever the backlog is, so we’ve — what we 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 kind of in 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
Operator
Your next question comes from Mircea Dobre with Robert Baird & Co.
Mircea Dobre
All right. Good morning, everyone. Thanks for taking question. 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 FoodTech. So that was called 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 is got be quite soft. Just my own kind of back of the envelope would suggest pretty solid double digit declines, maybe as much 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 towards so on and so forth? Or is this something that’s more prolonged in terms of a potential shift in how the market is looking to invest?
Matt Meister
I’ll take the first half and then Brian probably follow up on like, the more — the longer term question you added in there, but I think first of all, certainly we are seeing FX impact on our orders, I’d say that’s a pretty significant impact, bringing the orders, making 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.
Brian Deck
Year-over-year.
Matt Meister
Year-over-year. And so the volume that leads volume, I’d say volume down about a similar rate, as we’ve seen in price. So you got the FX headwind, you’ve got some price uplift, and then you do have some real volume coming down.
Brian Deck
Right. And most of that volume decline is in Europe overall, our North America remains strong. I think your number 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 the your question about kind of short-term impact long-term impact, we definitely saw what I would say in the quarter, some pullback and what I would call some short cycle stuff, as they look — 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. So less concern about that, frankly, and longer term, we’ll have to see that how deep these this recession is, I again, going back to my point on food pricing, it’d be very nice to see food pricing start to stabilize, or at least some of those price increases make their way to, from the manufacturers to the retail side to put them more on equilibrium, because we saw in the quarter to make un-equilibrium at the producer level that they’ve tried to account for here. But so the equipment side, obviously, that’s yet to be seen what happens as we move into 2023. But I do expect some improvements on the short cycle stuff, as we get to a lot of, hopefully, some little more stability in the back half.
Mircea Dobre
I see. And just to kind of follow up on this, when we were looking through some of the reports from your European base 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 maybe this is simply not at all.
Matt Meister
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 effects on FX, right. Everything they report in the US is now in European dollars, right? So they’re actually getting a lift. And I’m not 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 more higher mix of diversified food and health, which was more of a mix issue, which because DF&H was a little bit more pressured than Europe in the quarter.
Mircea Dobre
Okay, and then maybe my last question, when I’m looking at your updated full year guidance for FoodTech, 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 headwinds here, whether it’s price cost and efficiencies, and how maybe some of these could potentially progress into 2023. What do you expect, essentially kind of go away or normalize? What potentially could become a headwind is we think a tailwind, rather as we think about 2023? Thank you.
Brian Deck
You’re talking about AeroTech? Right?
Mircea Dobre
No, I’m talking about FoodTech.
Brian Deck
Okay, because you said that we’re — revenue increases guidance increased a little bit actually decreased a little. So you confused me there.
Mircea Dobre
I think I might be the one that’s confused here. But I appreciate that.
Brian Deck
Yes. Okay. So, yes, so as we — I would say this we’re, we’ve done a ton of pricing actions in the front half of the year, we expect that start seeing some of that benefit as we move into the back half year getting through some of the higher cost backlog that we saw. And that’s across both food and aero by the way. But on FoodTech, 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, volumes quite strong in North America, less so in Europe, Asia, Middle East, pretty decent Latin America, kind of somewhere in between. So it’ll be, 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 price cost, which should will flow back into what 2023. So to me, the big question mark for 2023 is where the volume is going to be
Operator
[Operator Instructions]
Your next question is a follow up from Walter Liptak with Seaport Research.
Walter Liptak
Hi, 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 wondered if that’s something where you’re seeing a funnel of new orders build? Or is this or is that just something at the airports and maybe the regulators are beginning to talk about?
Brian Deck
It is 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 is matter of fact, if you look at some of the comments from the commercial airlines actually specifically call out how quickly they want to convert their fleets, their 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 in the commercial side. I do think the defense side will probably take a little bit longer in terms of converting but that they are also have the same considerations.
And I will say just kind of looking back at AeroTech in our history, if you recall, Walt, we bought a company called LEKTRO electro 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 JBT. 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 are 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.
Walter Liptak
Okay, great. That’s good to hear. And then then just one last one on FoodTech. Like you guys called out the orders looked, okay, I was just wondering about the European orders, specifically, and if you saw any cancellations?
Brian Deck
No cancellations. Again, I think for us, that’s extraordinarily rare, just because the amount of deposits that we get on the FoodTech side, it would be very, very painful for our customers to cancel orders. So no, we have not seen cancellations.
Operator
[Operator Instructions]
There are no further questions at this time. I will now turn the call over to Mr. Brian Deck for closing remarks.
Brian Deck
Thank you all for joining us this morning. As always, Kedric and Marley will be available if you have any follow up questions. Thanks. Have a good day.
Operator
Thank you for participating. You may disconnect at this time.
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