JBT Marel Corporation (JBTM) Q3 2018 Earnings Report, Transcript and Summary

Good morning and welcome to JBT Corporation's Third Quarter 2018 Earnings Conference Call. My name is Emily and I will be your conference operator today. [Operator Instructions]. I will now turn the call over to JBT's Director of Investor Relations, Mr. Jeff Scipta, to begin today's conference.

Thank you, Emily. Good morning, everyone, and welcome to our third quarter 2018 conference call. With be on the call are our Chairman, President and CEO, Tom Giacomini; and our Executive Vice President and CFO, Brian Deck. Before we begin, I would like to remind everyone that forward-looking statements in today's call 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 certain risk factors that may have an impact on our results. These documents are available on our Investor Relations 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 on our Investor Relations website. Now I'd like to turn the call over to Tom.

Thanks, Jeff, and good morning, all. JBT delivered double-digit revenue and segment operating income growth in the third quarter. For the full year, we expect double-digit growth in revenue and adjusted EPS. Looking forward, JBT is positioned for continued growth, while we are on track with our restructuring program to capture benefits of $45 million by 2020. As we addressed in the earnings release, FoodTech shipments and orders were below expectations in the third quarter. As the quarter developed, we observed an increasing level of certainty in our FoodTech customer base due to global trade and geopolitical concerns. This is driving a more measured approach to their investment decisions, leading to a lengthening of the order cycle. At the same time, while we exhibited good expense control and are capturing initial operational benefits from our restructuring program, profit margins were hurt by lower-than-expected volume at FoodTech and rising input costs across JBT. I'll turn the call over to Brian to provide more detail on the quarter and our revised outlook for the year. Afterward, I'll discuss order trends, highlights from our Technology Day and discuss JBT's ability to capitalize long term on our attractive end markets.

Thanks, Tom, and good morning, everyone. The third quarter reflected mixed results for JBT, driven in part by order trends. FoodTech's inbound of $282 million disappointed, down 5% year-over-year, while on a year-to-date basis, ahead 6%. AeroTech's inbound orders of $166 million exceeded expectations and were up 15% year-over-year and 28% year-to-date. Total company revenue in the third quarter expanded 15% year-over-year, including an $18 million or 4% benefit from ASC 606, and a 2% unfavorable impact from foreign exchange. On a segment basis that breaks down as follows: FoodTech reported revenue growth of 12%, with 5% organic growth, 4% from acquisitions and 6% from ASC 606, with a drag of 3% from foreign exchange translation. This fell short of our expectations, primarily due to weak book and ship orders in the quarter. AeroTech posted robust revenue growth of 20% in the quarter, all of which was organic. On the gross profit line, we continued to experience pressure, with gross margins down about 90 basis points year-over-year, with a slightly larger decline at food versus aero. About half the decline for FoodTech was due to inclusion of additional equipment revenues from ASC 606 and the remainder due to input cost pressures. For FoodTech, we are able to generally pass along higher input costs with our project quotes with some lag. As a result, we expect input cost pressure on its gross margins to ease in 2019. FoodTech operating margins were 12.6% in the quarter of 2018 versus 12.8% in '17. Both periods were affected by acquisition-related items of about 75 basis points. FoodTech's third quarter 2018 operating margins also had about 40 basis points of unfavorable FX translation, which is about $0.05 a share, offsetting a 45 basis points favorable impact from ASC 606. The remainder of the difference reflects the aforementioned higher input costs. At AeroTech, rising steel prices due to pressure from tariffs were a significant factor. In addition, operating inefficiencies arising from supply chain disruptions were a material drag on gross margins. The ability to pass through higher input costs for aero is being challenged by longer order cycles for fixed equipment and for our mobile equipment by European competition that has been less impacted by rising steel prices. As a result, AeroTech operating margins of 11.8% were down about 55 basis points year-over-year. Corporate expense was just 2.3% of revenue in the third quarter. We expect corporate expense of about 2.4% for the full year. Separately, we recorded an expense of $11.6 million in connection with our restructuring program. We expect the full year restructuring expense to be about $50 million. We remain quite bullish on the cost savings that we expect to deliver from the program. Among the success we have already -- are seeing are consolidating roles across geographies, improving direct labor productivity, automating processes to improve SG&A efficiency. Embedded into 2018 guidance is about $4 million of savings, with another $10 million to $15 million expected in 2019 and the remainder to be realized in 2020. Our net interest expense was down slightly, despite higher average borrowing levels resulting from the most recent acquisition. This reflects the benefit of a cross-currency swap we entered during the quarter to take advantage of disparity between U.S. and European interest rates. With that, we reported diluted earnings per share from continuing operations of $0.82 for the third quarter of 2018. Adjusted EPS was $1.06. Free cash flow for the first 3 quarters of 2018 was $15 million prior to a $16 million contribution to our frozen pension. A $7.5 million contribution in the was inclusive of an extra $5 million to take advantage of 2017's higher tax rates. As mentioned in the second quarter, inventory levels have been particularly high at AeroTech. This inventory is expected to decline significantly during Q4. But considering the large backlog at AeroTech, higher input material costs and some continued supply chain disruptions, we anticipate about $10 million of higher inventory levels exiting 2018 than previously forecasted. Cash flow in the quarter was also affected by lower-than-expected FoodTech customer deposits, resulting from weaker orders. We currently expect to generate $45 million to $55 million in cash flow in the fourth quarter, which would bring full year free cash flow prior to pension contributions to about $60 million to $70 million. Looking at the full year, we continue to expect organic revenue growth of 7% to 8%. We now project organic FoodTech revenue growth of 5% to 6% and AeroTech of 14% to 15%. The other components of top line growth are forecasted to be 2% to 3% from acquisitions, 6% to 7% from ASC 606. That brings total top line growth to an estimated 17% to 18%. Segment margins are expected to expand about 30 basis points for both FoodTech and AeroTech versus a year ago, reflecting the pressure from higher input costs. JBT now expects 2018 diluted EPS from continuing operations of $2.90 to $3, and adjusted EPS of $4 to $4.10. EPS guidance includes ASC 606 benefit of $0.60 versus prior guidance of $0.35. With that, I'll turn the call back to Tom.

Thanks, Brian. In the earnings release, we mentioned 3 factors that impacted FoodTech revenues and orders. In the quarter, we had a shortfall of book and ship orders as we didn't achieve our normal close rate, primarily in North America. We have redoubled our direct customer engagement aimed at improving the close rate as we move to the remainder of the year. We also mentioned large orders, primarily Liquid Foods. A few projects we expected to close in the third quarter were delayed due to M&A activity and strategic realignments at our food customers. We also experienced a specific delay due to trade concerns. Ultimately, the majority of these projects should move forward, given their attractive returns for our customers. Looking past the short term, we feel customer consolidation will benefit JBT as we are positioned to be a supplier of choice to the larger customers, given our global footprint and comprehensive offerings. Meanwhile, JBT is adapting our approach to the market and has been making inroads with smaller innovative food producers. Last, JBT experienced a slowing of protein orders in Asia. Economic and trade issues are causing uncertainty among our Asian customers. We have robust project pipeline and see outsized growth opportunities in this market, with rising per capita protein and prepared food consumption. We believe our significant investment in local sales, production and technology positions us to reap the benefits of Asian market expansion for many years to come. AeroTech orders are very strong across fixed and mobile. Of note in mobile equipment, we're had a particularly strong year in deicers. While we don't expect to repeat the same level of deicer sales in 2019, we do expect the overall AeroTech markets to remain quite favorable. At our recent Technology Day, we demonstrated new products that support our goal of delivering solutions that offer best-in-class yield and labor reduction, while maximizing customer profitability. Our newest AGV technology automates traditional forklift. We partnered with 2 leading forklift companies to offer a hybrid vehicle that enhances productivity through better labor and equipment utilization. These partnerships offer the potential for increased penetration of JBT technology across a broader customer base. We also demonstrated our DSI waterjet portioner with enhanced iOPS capabilities. We simulated equipment issue and showed how, through remote iOPS data analysis, we're able to quickly pinpoint and correct the problem. Our improving capability in this area creates value for our customers and JBT. With PRoCARE powered by iOPS, we provide behind-the-scenes data monitoring and analysis that improves our customers' yield and process efficiency. This offering enhances our aftermarket service capabilities and provides a recurring revenue stream through a subscription model. As we continue the improvement journey, we are introducing the JBT operating system across all of our businesses in the fourth quarter. This system will simplify and standardize management processes across JBT, adding more rigor by increasing communication and accountability. It will also enable us to be more effective in identifying and rectifying concerns before they become problems for JBT or impact our customers. With respect to M&A, we continue to develop a strong pipeline of opportunities that are a compelling fit for our business, enhancing JBT's offerings and the value we provide to customers. Strategically, we are investing in new products, high-growth geographies, aftermarket parts and services and our disciplined acquisition program, while we reshape our operations for greater efficiency, all positioning JBT to capitalize on our attractive end markets. Within FoodTech, rising protein consumption, the desire for convenience and the demand for clean labels and organics provide a favorable backdrop. At AeroTech, increasing passenger traffic, strong growth in cargo transport, airport infrastructure upgrades and increasing military spend provide robust market environment. With that, we'll open the call to your questions. Operator?

[Operator Instructions]. Our first question comes from the line of Allison Poliniak with Wells Fargo.

Can we touch on, you gave the issues with -- or gave the reasons for some of the issues in FoodTech. But just going back to the shortfall in North America, that seems like it's your issue, if I'm hearing you correctly, and it's the second operational issue we've had this year in that business. I mean, is it people, is it process? Can you give us some sense of what you think is going on there?

Well, Allison, I was referring to book to ship orders. So throughout the year and from quarter to quarter, we manage a large pipeline of projects and customer activity. And generally, we see a number of orders that book and ship within the quarter. So it wasn't an operational issue at JBT, to be very clear. It was simply we didn't have the normal order development of book and ship projects that move in and out through the quarter. So that impacted our ability to hit our revenue target. So it wasn't an operational issue inside of JBT, it was just the customer activity. As I mentioned, we brought a lot of focus on those book and ship orders and redoubled our customer engagement activities. So we expect to be able to offset some of that as we move through the end of the year. But it was very much customer external issue, not an internal JBT issue.

And then just obviously orders, particularly in FoodTech, a little disappointing here post quarter end. Can you give us any color, has there been any change in that trend? Or is it still fairly weak just given the external issues out there?

Sure. I mean what I would say is we did see some disappointments in FoodTech orders, and it impacted our trajectory and certainly our revenues in the quarter and quarter three, as we think about quarter 4. That said, you kind of think about our book to bill around our core revenues inside of food, it's still a positive number for the year as we ended the third quarter. And I would tell you that we have strong project activity. It's just about the -- kind of some of the choppiness in the market, Allison, given some of the things we're seeing. And we expect some of that to improve a bit in the fourth quarter, and we continue to work at it. And as I've talked about, a little bit of a pivot for us moving forward with some the more innovative, smaller food producers, and tailoring our approach a little bit, because of some of the issues we're seeing in Asia and with some of the consolidation in the industry. As I look longer term, just the favorable trends we see around food, increasing protein, consumer demand for convenience and ready meals, improvements in the frozen food markets, they're all really positive things. And JBT is strategically positioned with our global footprint and our comprehensive product offering to build and perform well in those markets. And we're just going to continue to work away. We've got a good plan here, and as we look forward, we see those favorable trends for JBT.

Your next question comes from the line of George Godfrey of CL King & Associates.

I heard what you said on the reasons for the FoodTech weakness and warning, but I'd like to segment between North America and the Asian. Specifically, so we didn't have book and ship closings for deals in North America. Can you talk about why you believe that was the case versus Asian markets, which I understand the tariffs and concerns on global activity there. But I want to differentiate the FoodTech orders between North America and Asia.

Yes, George, I would attribute just kind of our customers are certainly making investment decisions. I just think some of the concern around uncertainty, the trade and tariff issues are just lengthening those order cycles a bit. And the investments are real. They create good returns for our customers. We're just seeing those decisions take longer. So our approach is to just make sure we're staying very close to those customers, making sure they understand the benefit that accrue to them, and making sure from JBT's perspective, we're making all the information available to them. And it's my expectation, over time, those orders develop. We're just seeing these lengthening order cycles, and certainly that affects the book and bill business as we move through the quarter. And it does affect both Asia and North America, but I think it's a little less of an issue in North America as we work our way through this. We just have a little bit of a pushout. And we just need to make sure as a company, we're being more effective in getting those decisions brought through by our customers.

Understood. And then just a follow-up. In the press release, it reads, "Delays in large projects at Liquid Foods and a slowdown and Protein business from Asia." Does that mean that the protein in North America is going well, but the liquids are slow in both Asia and North American? Or can you just delineate that -- more detail on that sentence?

Sure. So it's a two part question. Thanks for asking. Liquid foods in general has more large project orders. So certainly those, given the current economic conditions, are getting more scrutiny by our customers, and those effects are demonstrated in our order book. Protein is materially as we expected it in North America. We had mentioned some concerns with the U.S. protein poultry producers. But that said, we are seeing strength in beef, pork in the U.S. And our protein business also has a strong frozen foods and ready meals portfolio, which is performing well. So that's kind of the breakdown. In Asia it is more specific and we do hear that the economic concerns that are resulting from the trade, and that's affecting our customers' order timing and decision-making process.

Your next question comes from the line of Larry De Maria from William Blair.

You commented pretty similar to what your closest competitor has said in terms of the orders and the outlook. But curious as it relates to the orders, 2 things first. In Asia, there is China and the rest of Asia. Was there much of a change or a difference between the 2? And in North America, you talked about the book and ship business being weaker. Is that pervasive across liquid and protein? And what are the customers giving for reasons for the book and ship business being weaker? Is it also trade and uncertainty related? And sorry, I'll leave it there for now.

Sure. On the China versus rest of Asia discussion, Larry, so as you know, we participate broadly in Asia. And the markets are -- include countries like Indonesia, Malaysia, Thailand, Australia, New Zealand. But it is important to understand a lot of the flows of food from those countries are to China. So the way we see it and understand it is that certainly the concerns from China, both with trade and economically, are having an impact across Asia. And that's the way we see it playing out. On the book and ship front, it's hard to get specificity from a customer. You just know that when you would have expect them to make the decision and the frequency of order cycle and timing. And we can tell you that we did see those orders slow. But I would also tell you that from JBT's perspective, we have a more aggressive approach. And we think we can start to soften that impact as we move through the end of the year. And I certainly believe that if we were to see a little bit of a stability or a more clear message around trade, some of those would certainly go away much more quickly. So I think it's a 2-part approach. JBT is being offensive and working our customer relationships, making sure the information is available and compelling the investment. And then secondly, if we were to see a little bit of improvement on the trade messages, I would expect that to get even better.

And that brings me to the second part, and that's good color. I didn't hear their word cancellation at all. I heard pushout, obviously postponements and a lot about trade. Does that imply that there's potential for pretty good pent-up demand into '19, maybe the first half of '19? Or some of these trade issues, could they do some permanent damage?

Yes, that's certainly a difficult question to answer, but it's something that I look quite carefully at, Larry. And you're right, we are not hearing the word cancel or -- we're -- from our customers, or "We're not going to do that project." It's just simply, "We need a little bit more time to consider this. We're going through our approval process." That tends to be more the message. And when you think about it for JBT, our order activity is always a bit lumpy, and we talked about that and it's to be expected. But there is a certain amount of orders we expect, looking at the pipeline, to close within the quarter. And we're just seeing those order cycles lengthen a bit because of this customer decision-making process. But we haven't had customers say, "We're pulling in our activity. We're canceling these projects." We've simply had said, "We're considering them for a bit longer," or "We're thinking about our investment here and being a bit more contemplative." And from our perspective, we do -- and as I mentioned in my prepared comments, we do expect these projects to ultimately turn into orders, because they address either evolving consumer preferences where they want these newer products, these additional protein offerings or more convenience foods. And we talked about that strength in frozen and ready. So they're going to happen, in our mind's eye. It just happens work to do with the timing of the customer decision-making process.

Your next question comes from the line of Mig Dobre with Baird.

I want to start maybe talking a little bit about margin in FoodTech. If I'm taking out the ASC 606 impact, on my math, margin here was down quite a bit, maybe somewhere in the low 12s. You can correct my math if I'm wrong. And I guess the question that I have on this, we've had margin issues in the first quarter. Obviously, margin here in the third is also pretty challenged. Leaving aside demand and some of the issues already discussed, I guess I'm wondering from an execution standpoint, how things are going. What are some of the drags that you're experiencing? And obviously, we have expectation for margin expansion going forward. What essentially has to happen here in order for us to see some progress?

Right. Thanks, Mig, for the question. This is Brian. So a couple things. For margins in FoodTech in the quarter, I did mention we did have some pluses and minuses. So actually year-over-year, it's mid-12s, which does include some impact from the acquisitions. I would say as you roll into margin improvement into the fourth quarter, because we do see FoodTech in that 15% range for the fourth quarter. You're going to -- you do have some abatement of the acquisition-related items. But more importantly on the FoodTech side and both on the AeroTech side, revenues are going to be a record for both -- all-time record quarter for both. So you are going to get a fair amount of operating leverage. We are seeing -- I would say we saw a good, I would say $6 million or so of increased costs in the quarter across food and aero associated with the material costs that we increased that we mentioned, as well as some of the costs, inefficiencies associated with the supply chain disruption in AeroTech. We do see some of that abating; on AeroTech a little bit less, because they are more susceptible to the material costs. But I do see some onetime costs going away from them as well. So when you combine the operating leverage, some of the things that were going -- the costs going away or be able to price for some of the additional costs, and the operating leverage and abatements some of the acquisition items, we do see that progressing nicely from Q3 to Q4.

Okay. And then the second thing that I'm wondering about is this issue with ASC 606. I mean, we are -- we've gone from you expecting a headwind from ASC 606 in the fourth quarter, to now still expecting a benefit, if you would. And I mean, that's reflected in your updated guidance. What's not entirely clear is exactly why we've had this change over the past 3 months, and exactly what that means as a setup for earnings and margins into 2019. Any help there would be great.

Right. So just as a reminder, we said a couple quarters in a row that we do expect this impact from ASC 606 to evolve as we understand items. So in particular, the things that effectively either reduce the, I'll call it the non-ASC 606 or the results from old GAAP and make new GAAP a little bit better are 2 things: One, we are seeing some things that otherwise would have shipped in Q4 will now ship in Q1. And under new ASC 606 rules, you actually are still recording that revenue under the new rules, but we don't get to count that under the old rules. So that pushout effectively increases the benefit from ASC 606. The second item that we're seeing, we mentioned this back a quarter or 2 ago, is one of the determinants of revenue treatment under the new rules is some of the particulars of the contract language. We had certain concerns whether or not we would get this particular language on many of our customers. This is regarding the right to payment, et cetera, which would allow revenue to be considered on an over-time basis as opposed to point-in-time basis. We have been more successful in getting that treatment on that language with our customer contacts, which allows a higher benefit from ASC 606. So those 2 things really are adding to the benefit of ASC 606, less pushout and better contract terms, which effectively increase the number.

The swing in the fourth quarter is significant. It's material. And we're talking about the sort of revenue that you're looking to recognize in FoodTech, though.

I agree. So for those exact reasons -- so remember, we had to forecast what contract terms we were going to be having a quarter or two before we actually entered those contracts. Now that we've actually entered those contracts in the third quarter, we now know how to treat those in the fourth quarter. And that was the big swing, along with a few of the pushouts that I mentioned. So it is material, but that is just the facts of how these contracts work and how the rules work. And like I said, we did our best to estimate back where we are, and we're comfortable updating as we go along here.

Last question for me. When we're thinking back at the Technology Day framework that you presented, and we're thinking about the EBITDA framework specifically, the 2018 EBITDA as it was described, $235 million, $250 million included a benefit from ASC 606 obviously. The 2019 and 2020 framework, I guess I'm wondering given the quarter and the updated ASC 606 impact, do you think the 2019 and the 2020 frameworks are still relevant and should be considered by investors as such?

Yes. So just to be clear, the -- when you say the benefit from ASC 606, I would tell you that 2019, 2020 are on a clean basis, no particular pluses or minuses in the year from that, because you have a -- 2018 was really transition year on ASC 606, and '19 and '20 are clean. But that said, a couple things as we look at transitioning from 2018 to 2019. Just as a reminder, so you should start off your estimates into 2019 off of the 2018 results x ASC 606 benefit. That's a, I call it a cleaner number, which is under our recent guidance, it is a lower number. But I would tell you just as a reminder, the 2018 numbers included a good $8 million to $10 million or so execution issues in the first quarter of 2018. I also mentioned we had a good $6 million of cost pressure in the third quarter. We expect to get either some pricing or some abatement of some of those costs. So I think that your baseline going into 2019, prior to any revenue benefits and prior to the restructuring benefits, is more in that $230-ish million, $225 million to $235 million type number when you factor -- if you believe that some of those onetime items that we're going to be able to effectively improve as we enter the year. So from there, you add the restructuring benefits of $10 million to $15 million and any contribution margin on the growth, and obviously, we're not giving any growth numbers at this point. But we believe that would get you within the framework.

Mig, I'd also mention just kind of as I think about the framework, strongly believe our strategy, the consumer trends we talked about and JBT's global position and comprehensive offering really positions us on long term to execute well against that framework. And we've discussed there's a few issues in the marketplace right now creating some disruptions, mainly from these trade-in geopolitical issues. But that said, I feel good about where we're at as we end the year here and our opportunities. And also you add the margin expansion from the restructuring, which will be a really powerful engine as we come through '19 and '20, and I still see opportunity for some real nice value creation around JBT as we manage the business and move out of '18 into '19.

Your next question comes from the line of Walter Liptak of Seaport Global.

Just wanted to ask a couple of quick ones. Brian, I didn't hear the tax rate for the fourth quarter. Maybe I missed it.

For the fourth quarter? Yes, we -- I didn't mention it, but we still expect about a 26%.

Okay. And the restructuring benefits of $10 million to $15 million, the range, what's the difference between the high end of the range and the low end of the range?

Really, it's just how quickly we get to capture some of the individual projects. So there's a lot of projects underneath those numbers, and we're just executing on some of them now. And so as we roll into next year, we'll -- and we're doing our budgeting process right now. So we're looking at it project by project, and some of them kick off of a little bit earlier. But it's really just about when they start seeing the benefits versus -- and how successful they are.

Okay. And that capture, these are across the board? Or I'm thinking that these are primarily in Europe? Or are they across the board, across the organization?

They're across the board. Both, I would say predominantly North America and Europe, not as much in Asia.

And that's simply because of our employee counts and our footprint, Walt. So just you think about the mass people and the costs that go behind it at JBT and how we approach it, we certainly have an opportunity to benefit more in North America but also materially in Europe, and to a lesser extent the rest of the world.

Okay. To get that capture, is it all within your control? Or are there some things that have to go through government labor organizations to make it happen?

It's materially in our control. There's always -- you still have to deal with the European rules and whatnot, and that's what could delay things 1 or 2 months. That's why we have a range. But materially, this is in our control. We have the projects identified. We have the execution plans. It's just a matter of when they are executed and how quickly.

Okay. And then, Tom, I wanted to ask you about the M&A priority, given a little bit more volatility globally. Does that make you think about pausing some of the M&A or is the pipeline full and you'd execute on whatever comes that you're able to close?

Right, Walt. So for us, we do work this proprietary deal flow, as you know, and we continue to build those relationships and make those opportunities available. That said, given some of that choppiness we're seeing right now, we're being more careful about our metrics and pricing valuations, because we certainly don't want to get caught out on that. But if you think longer term, assuming we get the price right and the strategic fit is compelling, there's still a lot of value to be created through M&A program as we talked about. And so the investments are happening, as I mentioned in our strategic discussion at the end. We're continuing to make the investments in our new products, the aftermarket, building out our global franchise and driving the M&A program. And those are some of the costs you're seeing, because we know in the long run, the strategy is going to create a lot of value, and we remain highly committed to it.

Our next question comes from the line of Steve Tusa with JPMorgan.

On just the free cash flow side, anything unusual this year that's going to kind of reverse in the next year? Or how do you think about kind of conversion for next year?

Yes, so in particular, I mentioned in the prepared comments the AeroTech inventory. So a couple things you've got going on there. They're growing 14% to 15% this year. And just as a reminder, AeroTech's working capital profile is more in the lines of 20%, 25% as a percent of sales, working capital profile, where FoodTech is more in the 10% to 15%. So when AeroTech grows, just kind of all else equal, you have higher working capital growth. And we've got this tremendous growth going on at AeroTech. You've got that. But adding to that, unfortunately, you've got a higher per-unit material cost because of higher steel. And you've got these supply chain disruptions that I mentioned, that is effectively -- just to give you a little color on that, what's happening there is you've got -- our vendor base is, because of the strong manufacturing environment, generally the lead times have gone out quite a bit from our vendors which basically means we're not getting the component inventory as quickly as we otherwise would want, which means we're building some of our units partially, waiting for the inventory parts to come in and then finishing it. That's created more work in process inventory than you might normally have. But as you work through the inventory by the end of the year and into the first quarter, that will abate, and hopefully we'll start to see a little bit abatement on the steel prices. But so we do see that ultimately getting better. I don't expect to have 15% revenue growth for AeroTech next year. The other thing I will mention is in the third quarter, we had fairly weak orders for FoodTech, as you know. And FoodTech equipment orders come along with fairly robust deposits from our customers. That totally helps our cash significantly. And that customer deposit balance dropped during the third quarter. And so the order rates in fourth quarter will potentially help out that. But once you go to a normalized order rate, I would expect that to improve next year. So looking at our framework for next year, I'd still believe that we will be in a much better cash flow position next year versus this year. And Steve, one thing I would...

And what -- just remind me what your normal conversion rate is? Yes, sorry. You can go ahead, sorry. Just remind me what your normal conversion rate is, what you think you can do kind of on a normal basis.

Right. On a normalized basis, it should be north of 90%. And one thing I would like to mention, Steve, we've made a decision in particular in AeroTech, we've got some great customer relationships. And they rely on us to provide equipment that meets their needs and helps them operate these airlines efficiently, in particular. And we are working to make sure we can maintain those important customer relationships. And we have taken some of these orders with the knowledge that we'll have to work our way through these supply chain difficulties and carry this inventory, because it's really the right thing to do for JBT and our customer relationships. And in a perfect world, you might have taken a slightly different view on that if you think about working capital and cash flows, for sure. But in the long run, we're making sure we do the best we can to build a strong JBT franchise. And we're taking care of our customers and making sure we provide these products that they need to run their businesses. So in the long run, these are really good decisions we're making, but we are certainly feeling some of that in the results this year.

I don't know if you gave this early on. But can you just -- a lot of companies are giving good visibility in the kind of the size of the cost base that is influenced by tariffs. I don't know if you guys gave this. If you did, I'll get it later, whenever I read the transcript. I was on a little late. But what kind of -- what's the cost number that you guys, if they would be influenced by tariffs, that you guys are seeing inflation around?

Right. So I mentioned in the quarter that we had a good $6 million of costs. Now some of that is just the operating inefficiencies. So on the metals side, it was $2 million or $3 million, maybe $4 million impact from the metal. And that is on a base of north of $100 million or so on metal costs.

Right. And a lot -- there's embedded spend, Steve. So you think of kind of our production, so most of what we buy is in the terms of fabrications. We don't buy a lot of metal directly. And then there's certainly embedded spends in our electronics and other components for metal. So we're managing that. And it's difficult to say exactly how much is exposed to tariffs, as our suppliers work their flows of material, right, just like JBT has a global footprint. But I would tell you that we certainly hope to see more benefits from supply chain this year. Builds were offset by difficulties we've encountered with the tariffs and just general capacity. So a lot of the components we use in AeroTech are, like you've heard in other reports, diesel engines, axles, transmissions, these items not only have a lot of steel or iron or other aluminum materials in them, but we've just seen these tremendous supply constraints that have really pulled up these lead times. So there kind of a cost issue and then there's a working capital issue, both that we're working our way through.

Okay. Sorry, one more. What do you expect for free cash flow this year? I might have missed that as well.

In dollars, about $60 million to $70 million.

Okay, so that's a pretty big fourth quarter.

Yes, it's about -- we've said about $45 million to $50 million of cash flow in the quarter.

Your next question comes from the line of Joel Tiss with BMO Capital Markets.

So have you mentioned just kind of a general -- I'm sure it moves around quarter to quarter, but a general idea of what the percent of sales that are book and ship in a quarter or a year?

It varies from quarter to quarter. And we see certainly more of that in the food business, Joel, because we have our aftermarket products. We have a number of more standard products that we sell. AeroTech tends to be longer cycles, these are larger fleet-type orders for the mobile equipment. And certainly on the fixed equipment, we see these large infrastructure investments where sometimes those orders can go out to 18, 24, kind of 36 months. So but we definitely see saw some pushouts in that this quarter, and we factored some of that moving forward in the fourth quarter.

All right, so there's no number on that. Can I also go in of a little bit a different direction? I wonder if you can talk about, is there any visibility or any way to tell if what's in backlog has similar margins to where you are now or a little bit higher or lower? And also as you reach out to medium size and smaller customers, is that a structurally higher or lower-margin business than what you currently have?

Yes. On the first part, we do generally have good, decent visibility into -- certainly the selling price, right. The question is always the amount of costs that come through the course of the quarter. I would tell you on FoodTech, we do see kind of all-in, some improvement in the margins as we progress from Q3 to Q4. Because as I mentioned earlier, we are generally able to account for higher costs as we quote. And so that does improve Q4 versus Q3. AeroTech, it's a little bit tougher [Technical Difficulty].

So correspondingly a bit smaller, particularly where we talk about some of these innovative new food categories where there's a bit more engineer and thought behind the development for JBT. Those offer the promise for even a bit higher margins for our food business.

Okay. And then can we just talk a little bit about what's driving the strength in the aerospace business? And I guess it sounds like the orders are going to be lumpy. And as we go into 2019, as we normalize, is that more of mid-single digit kind of volume growth business normally?

So for AeroTech, the trends that I talked about, Joel, at the end of the call, we see some real positive trends there. First of all cargo demand, you think about all the convenience people are enjoying with overnight, and in some cases, even less than that shipping times, the lion's share of that's ending up on airplanes. And we make a lot of the equipment that loads and unloads and facilitates the movement of those goods in these cargo airplanes. So that's a very strong trend that's developing. Secondly, we have an airport infrastructure play with our jet bridges. A lot of that infrastructure is aging in the backdrop of an increasing passenger flight miles and increased number of flights in support of that. So they're taking these aging U.S. airports and they're trying to turn around and move flights in and out of them at a higher rate. So the municipalities and the airlines are investing behind that and making that happen. The third part is just the general ground support equipment you see around the airline industry, and we're just seeing an investment cycle that's unfolding there where a lot of the airlines have historically invested in the new airplanes and the things of that nature, and now we're seeing them in support of the ground support equipment. And what that allows them to do, once again it goes back to thematically to the second point, you need this ground support equipment to be operating at a high capability and functionality rate so you can get those airplanes in and out quickly from the busy airports. The last piece is military investment. We're seeing positive trends there. And we've developed some new products specifically for the military that will allow us to take advantage of that spending. And from our perspective, as I mentioned in prepared comments, we see very favorable markets heading into '19. The one part that we do have to lap is we have particularly strong deicing equipment orders in '18 that is a bit of a headwind. But overall, we still feel very feel favorable about '19 for aero as we see trends developing right now.

[Operator Instructions]. Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

Just a question, a follow-up question on cash. So my understanding is that I guess you went from guidance of $70 million to $90 million to $60 million to $70 million. Could you just give us 3 buckets in terms of lower forecasts, particularly at the upper end of $20 million? How much was sort of lower operating income, the one you see as cash operating income? Second, how much of it was inventory buildup for aerospace? And how much of it had to do with inefficiencies on supply chain in FoodTech?

Yes, I would say on the profit side in dollars, it's a good $5 million, $6 million, $7 million impact on the profitability. On the inventories side, and predominantly that's AeroTech, that's upwards of $10 million. And then the third bucket would be somewhere in the range of close to $5 million in lower deposits from somewhat weaker orders from FoodTech.

Got you. That makes sense. And just a follow-up question on transitioning. How long do you think and how structural do you think the slowdown in orders from large companies due to consolidation? Because those transitions sometimes take a while. And operationally, what do you guys need to do to transition to smaller customers in terms of sales force, product? Because I cover other companies, and once again, it -- sometimes it's more adjustments than you think.

Sure. The consolidations are more apparent, Andrew, as I mentioned in some of these large orders, just a few of them, but meaningful that we expected to book. And we continue to work with those customers. And we will expect those to book out in the fourth quarter and as we head into the following year materially. That said, we certainly are keeping a careful eye on our operating costs just in general relative to volumes that we're seeing, in particular in food. Our restructuring program gives us those insights, and we're making sure that we're being effective in managing, if there is the downside in revenue, that we're making good management decisions so that we can maintain our margins. The last thing that is important to understand is we really do participate broadly in the food industry. And there is a lot of good activity out there behind these -- driven by these consumer trends. And for JBT, we're making sure we have our salespeople out there and our project management in place to take advantage of that. The product offering for the small customers isn't dramatically different or even materially different than what we do with some of the large customers. It's just that the order sizes tend to be a bit smaller just because of the capacities tend to be lower. But it's similar technologies for us. So that's not quite so hard to manage our way through.

And if I could just squeeze one more in. In terms of thinking about orders for the fourth quarter, is it fair to see sort of meaningful improvement in FoodTech, and deceleration but still positive in aero? Is that the right way of thinking about it?

We would expect, as we mentioned, certainly aero's had some great comps, and we would expect some strength to continue in Aero. As we look at food, certainly we would expect some moderation or improvement in what we had in the third quarter. But exactly where that lands, we're just going to have to see as the quarter works its way through. But certainly, we will be working off of a favorable kind of comp in the third quarter in terms of where we came out, and would hope to see some improvement in that.

But food should be positive in Q4, right.

Yes, that would be our desire, certainly.

Your next question comes from the line of David Stratton with Great Lakes Review.

At this point with the potential for new tariffs I think announced on Monday, and recognizing that you already said that you don't really have good visibility into exactly what products are the most impacted, but is there a potential that this could be impactful to you? Or is there any -- I guess put a different way, are there any inputs that you currently buy that have so far gone untouched by tariffs?

David, I would tell you that certainly, I don't think many companies out there would welcome the addition round of tariffs and certainly would create some additional pressures for JBT. But as I see the set that's out there, it's just the additional depth and magnitude of the tariffs that would be concerning in terms of our input costs. And secondly, I just think in terms of if you think about the macroeconomic situation and just our customers' confidence around investing, it would be a benefit if we could see some of this concern and discussions around tariffs settle down a bit as we head into the end of the year, it would certainly improve the outlook of our customers and their desire to invest. So I'd say it's kind of a 2-part answer there.

And just I guess quick follow-up, do you think that if these tariffs are enacted, would it pose an equal or larger impact than you're currently seeing?

The largest impact has certainly been on the steel and metals and as that washes through our supply chain. So as they start to look at additional tariffs, there's kind of two issues. One is do they raise the basic tariff rate on some of things they've already implemented; and two, do they expand the scope on the tariffs. So the first part of that answer would be more impactful on JBT. The second part less likely, because as you start to move closer to the consumer, as you open up that basket coming from China in particular, right.

[Operator Instructions]. Your next question comes from George Godfrey with CL King.

Just one quick follow up. R&D, just 1.2% of revenue and down on a dollar basis from Q1. Anything going on there?

Nothing in particular. I would tell you, revenues was obviously strong in the quarter generally, so the percent goes down. But we do expect that to continue to increase from here as we invest. So I wouldn't say there's anything in particular on that.

[Operator Instructions]. We have no further questions at this time. I will now turn the call back to Mr. Tom Giacomini for closing remarks.

Well, I'd like to thank everyone for joining this morning for the JBT Earnings Call. Thank you.

This concludes today's conference call. You may now disconnect. Have a great day.