JBT Marel Corporation (JBTM) Q2 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to JBT Corporation Second Quarter 2021 Earnings Conference Call. My name is Beck, and I will be your conference operator today . After the speakers remarks, there will be a question-and-answer session. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedric Meredith to begin to this conference.

Thank you, Beck. Good morning, everyone, and welcome to our second quarter 2021 conference call. With me on the call is our Chief Executive Officer, Brian Deck; and Chief Financial

Thanks, Kedric and good morning, everyone. It's great to be here to talk about JBT's strong financial performance and the strategic progress we made in the second quarter. As we highlighted last quarter, JBT continues to enjoy robust demand in FoodTech and encouraging signs of recovery at AeroTech. At the same time, we continue to face a challenging macro environment, driving increasing costs of doing business, including material costs inflation, supply chain constraints and tight logistics. Those pressures have intensified but now also include rising labor costs and labor shortages. Notwithstanding this challenging backdrop, we outperformed expectations on the top and bottom lines in the second quarter. I'd like to express my appreciation to everyone at JBT who did an excellent job of getting orders out the door to satisfy customer needs in this tough operating environment. And a specific thank you to our service technicians who’ve gone above and beyond to meet customer expectations despite the complexities and restrictions associated with the pandemic. In the second quarter, we also booked record orders and generated excellent cash flow. Moreover, we advanced our growth strategy with the exciting acquisition of Prevenio, which expands our recurring revenue stream and further strengthens JBT’s role in food safety. I'll hand it over to Matt who will provide a more detailed analysis is the second quarter results, speak to the benefits of the convertible note offering we completed in the quarter and walk you through our updated guidance.

Thanks, Brian. JBT’s second quarter performance continues to demonstrate our ability to deliver on growth in a challenging operating environment. FoodTech revenue was $361 million, an increase of 19% year-over-year and 15% sequentially. As Brian mentioned, we outperformed in the quarter, driven primarily by better than expected shipments and our businesses executed well despite the challenges they face. The impact of foreign exchange translation was also a positive factor in the quarter, accounting for approximately 5 percentage points of the year-over-year growth, which was 3 percentage points higher than expected. Adjusted EBITDA margin for the quarter was 19% and operating margins of 14.3% at the low end of our guidance range and negatively impacted by the cost pressures we experienced with supply chain and labor markets.

Thanks Matt. As I mentioned at the top of the call, JBT generated record orders in the second quarter. FoodTech orders expanded 3% sequentially from the first quarter's record level. We continue to enjoy robust demand from customers servicing the retail market with improvements on the food service side with particular strength in poultry, plant based foods, pet foods, fresh produce and packaged ready meals. In addition, our automated guided vehicle business outperformed in the second quarter with several large food customer orders, a reflection of the growing demand for back end automation among our customer base. FoodTech’s robust order trends are also a direct reflection of the continued investment we've made in product innovation. JBT's recent product launches, featuring advances in hygiene, capacity and automation have gained nice successes in the marketplace. Furthermore, new features that reduce food waste and promote more efficient use of water and energy enable JBT to help our customers on their sustainability journey. Geographically, FoodTech commercial activity in North America remain robust. Europe was essentially flat versus a volatile first quarter, but with progress on vaccine penetration and governmental economic support, it’s outlook seems to be more promising, albeit subject to uncertainty surrounding COVID. As it relates to Asia and South America, we are experiencing some fresh pandemic related delays in customer investment decision making.

Your first question comes from the line of Lawrence De Maria from William Blair.

I want to talk about the orders and backlog, I think you noted that from the FoodTech --AeroTech with next year. But can you talk broadly about new orders backlog and conversion time? What it means ultimately for the first half of '22, which seems like more important than the second half of '21, given the timing of the orders? And if supply chain freeze up, does that imply that the orders for next year can slip into '21, or we've specifically seen orders that are pushed out into '22? That would obviously give us some more confidence into the growth trajectory for next year?

So as you know, we do a broad range of lead times related to our product offering, anywhere from six to eight weeks up to nine months and even a year. I will tell you that the strength of the orders in FoodTech for the quarter a little bit will go into the fourth quarter but quite a bit will be going into 2022, given the size and nature of the projects that we're looking at, particularly I mentioned the AGV side and some larger orders on the diversified food and health side, which will help have a much larger backlog at the end of this year versus where we were at the end of 2020. So we are putting ourselves up for a decent first half of 2022. And similarly on the AeroTech side, as I mentioned, those infrastructure related projects, almost all of that will go into 2022. And we are seeing the improvement on the commercial airlines and generally speaking on the ground support side. So we would also expect a larger backlog ending 2021 in AeroTech as well.

And then the second point, maybe just talk about price. I know there's lot of inflation out there, obviously and historically, I think there's more risk on price cost on AeroTech. But can you just talk about how you're protecting yourselves on these next year that would ensure obviously, margin expansion or just what kind of risk there is in the backlog and pricing and margin?

So I’ll specifically talk to FoodTech first. So as you know, FoodTech is largely project based and obviously, also almost half of our revenues based on a recurring revenue aftermarket, et cetera. So generally speaking, we have a good ability to factor in product inflation into our price. So the price cost and the product inflation is fairly well covered, especially when you consider the strength of our supply chain team. As you know, Larry, we put a lot of resources behind supply chain over the last two years and those investments have really proven to pay dividends, especially in this time while we're not seeing enough of that we otherwise would have gotten absent inflation is really significantly up and hold the line. So we’re generally be able to price for inflationary items and materials. The challenge comes more so on the logistics side. As you may know, things like ocean freight has more than tripled, almost quadrupled versus this time a year ago. So that is why we do see some pressure on the margins and the back half of the year for FoodTech, and we've tried to appropriately adjust our guidance accordingly. So generally speaking, we've got some pretty good shape, we’re guiding to north of 19% margins for the year. And given the environment that we're in that's pretty flat versus where we were in 2019. So we're really pleased in our ability to price costs and just manage the cost in general, it's just a little bit of pressure in the back half. On the AeroTech side, you are correct that it is a little bit tougher given the nature of the products and services. On the infrastructure side, those are project based. We do a pretty good job of factoring our current cost and outlook for the environment as we prices those, it was tend to be longer term contracts. So as you know, we’re going to go well into 2022. So we will do some metal hedging on that. And historically, we've done some metal hedging on the products but it's not 100%. So there's a little bit of risk there. But in the current environment with metals at pretty high levels, we would be very hopeful that things don't get worse as we go into 2022, if there's any abatements on the metals prices are actually going to be a little bit of upside. On the ground support equipment, it is a tougher environment from a competition perspective. So price cost is more reflective of the market itself as opposed to material cost. You can see some of that pressure over the last couple quarters, but we happen to outperform a little bit based on some of the mix on our margins. In the back half of the year, we do see some further pressure versus what we would normally see in terms of our flow through on EBITDA, given the high volume in the back half of the year. So we have tried to properly account for that in the back half of the year given that price cost pressure. But all-in-all if you take a step back and look at the margin profile for JBT for both Food and AeroTech, given the conditions we’re in, we're really pleased with our current situation. We’re holding margins for the most part versus where we were in 2019. And if you look at FoodTech in general, if you exclude -- even if you exclude the impact of acquisitions, overall, FoodTech is looking to outperform 2019, not by a large margin but the rebound is there, both on margin side and on the revenue side.

Your next question comes from the line of Mig Dobre from Robert W. Baird & Company.

Just to sort of follow-up on this margin discussion. I guess I'm trying to get a better sense from you in terms of what's incremental relative to your prior outlook. At least to me, it sounds like maybe things have gotten more challenging on the labor front than what you had envisioned in the past. And I'm also sort of trying to get a sense from you in terms of the various ranges that you provided for each segment, but it's really FoodTech that I'm most interested in on a margin side. I mean what takes you to the top end versus the bottom end of your margin guidance at this point?

I'll try to answer as best I can. I think as you mentioned, we did see the inflation on labor accelerate in Q2, and we try to take that into our guidance, which is putting pressure in the second half. As well as Brian mentioned the inflation on logistics costs that are also in our guidance. As Brian mentioned, we are fairly well set up to address material inflation through pricing on the FoodTech side, but there could be some lag there if material costs continue to get worse in the second half of the year. Additionally, on the FoodTech side, there has been a lot of inefficiency on the operations side as we've had really difficult issues with vendor, liability of vendor supply and delivery and that forced the business to be relatively inefficient sometimes on the operating floors and has picked up and set down different various equipment to deliver to the customer. So we try to build all that into our guidance and that's what's putting some of the pressure in the back half on the margins. What would potentially get us to the top end would be our ability to offset some of that inflation by our supply chain team, as well as favorable mix on the aftermarket side if that continues to get better, we could see slightly higher margins in the back half if we see higher mix of aftermarket and recurring revenue.

And I'll also add logistics prices come down that would help a lot, as well as if supply chain ease up, we would get better productivity at the factories. So that would help as well. So we did try to factor that in the range of outlook that we see.

And when we're talking about mix at FoodTech recurring versus nonrecurring, the recurring portion of the business has done quite well throughout the COVID downtrend, it's become a bigger portion of the pie. I'm sort of curious as to how you're thinking on a go forward basis. I'm presuming that the rebound in orders that we're seeing is resulting in growth for the nonrecurring portion of the business. If that's the case, should we expect negative margins mix as the nonrecurring portion of the business is rebounding, or is that not a factor as we think about 2022?

It is a factor. And as you may recall in the last call, I think we were close to 50% after recurring revenue mix last year, given the lower equipment sales, and we guided that will be reverting to more of about 45%, 55% mix, 45% recurring, 55% equipment in 2021. And we're generally on that pace, actually slightly ahead on the aftermarket. But generally that is -- and you think our progression from 2020 to 2021 that is a negative factor and again, considered in the mix and the margins. As we roll into 2022, that’s a little early to know the precise mix but I wouldn't see it diverting significantly from the mix that we see in the current year. So I think the margin profile for 2022 is going to be more of a consideration of supply chain, logistics and labor as opposed to a huge change from the mix versus 2021.

So we're taking a hit this year basically on that. Then maybe the last question on this for me. Assuming that material costs don't accelerate yet again from here. Do you think you're going to be fully caught up in terms of the pricing actions or the adjustments that you need to make exiting 2021? So as we think about 2022, is it fair for us to think of normal incremental margins for your business? And related to that, can you also remind us how you view normal incremental EBITDA margins given your evolving business mix?

That's a pretty big assumption regarding no change in cost from where we are today. But absent changes or moderation of inflation and other pressures on labor, et cetera, we would expect to be more in a normalized incremental price flows through, so to speak. And for FoodTech that is typically somewhere in that 25% to 30% flow through, we thought flow through here. And then on the AeroTech side that's kind of, I would say the swings for mix are potentially a little bit bigger. But absent again, changes in mix or material cost inflation they typically are in that 20% to 25% flow through.

Your next question comes from the line of Michael McGinn from Wells Fargo Securities.

Sorry if I missed this, but you mentioned the working capital ramp and the CapEx ramp for the back half of the year. I don't know if you gave a dollars for that balance sheet or your net working capital stay here, but is that kind of shaking out like I guess your $30 million per quarter free cash flow for the back half. Is that kind of what you guys are thinking?

We did not give specific guidance on the number for free cash flow in the back half. Again, we just expected to continue to be positive above 100% of net income for the second half of the year as the balance sheet grows with higher inventory and higher revenue lead to higher cash receivable. So I think like I said the balance sheet will expand to give you the exact numbers is kind of difficult. But we would expect it again to be positive and favorable to the back half of the year. And the CapEx, as I mentioned, is $5 million increase over our prior guidance. So our CapEx expectations for the full year are about $45 million to $50 million.

So if I could switch gears to Prevenio, you mentioned the existing poultry market and then as well as the fruits and vegetables. I mean is this a situation where -- I guess, what is the in level investment needed to make the efficacy really -- or to take in the vegetable, fruit and vegetable market versus the poultry market? I mean do you think it's already being adapted like it is in the poultry market? Just any context or color there would be great.

Prevenio is very exciting, particularly as it relates to our ability to provide resources. And generally speaking when you think about acquisitions for JBT, this really fits nicely in our portfolio in terms of where we want to be going in terms of closer to customers’ operations and then finding businesses that once they’re fold into the JBT portfolio, we bring resources to the table. So specific to the fresh fruits and vegetable side. There's not a ton of investment required, it's more about the market penetration, the commercial efforts, working with our food scientists and getting them and our customers comfortable with the solutions that are provided versus their current use of solutions that provide protection to the fruit vegetable. So it's really low generally speaking from a CapEx or inventory investment, it's really more about the human resources and the time working with our customers to develop that market.

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

I wonder if you could give us a little sense on the build of the backlog. Is that -- what percent, or how do you think about how much of that is from order strength and how much of it is from inability to get stuff out the door, because of some of the constraints you were talking about?

So I would tell you that the vast majority of the build in the backlog is from the order strength. Now we are seeing some push out of lead times. And again, it's going back to, I think, it was Larry's question, it is product line by product line in terms of what the lead times, how have they changed. But anywhere from one to two weeks up to an extra 30, 60 days is what we're seeing is that in the lead times. But overall, when you just do the math, it's predominantly the order strength is leading to the build of the backlog.

And just to add to that, in some geographies where there are higher COVID outbreaks, there are some customers that are pushing delivery down a little bit too. So we are seeing some customer impacts from the COVID outbreaks and again, certain geographies where the infection rates or the vaccination rates are as high.

So in that case, it's not so much early times, it's more of the customers’ ability to accept.

And which is good, because that probably gives you some ability to see well into 2022. And then what do you need to do like this is more of a strategic longer term question. But what do you need to do to get the operating margins in AeroTech up into the mid-teens kind of range? Is that product mix? Is it volume? Can you give us a sense there?

I would tell you it's predominantly volume and some of the work, and I would tell you getting a more normalized environment as it relates to raw material costs, et cetera. As I mentioned, the price cost on the ground support side is a little bit more dependent upon the market conditions as opposed to pure kind of cost plus. So the two things, I would say, is the volume as well as some moderation of the inflationary pressures. If you go back to our guidance pre-COVID for 2020, we were on pace for mid-teens EBITDA margin. So business model totally supports the mid teens margin. It’s just getting the world a little bit back to normal. And as you know, on the ground support side with the commercial airlines, that's going to take a while. It is nice to see, the commercial traffic, it’s really strong. Domestically, we'd like to see some more of those international routes in the business route to get the airlines making more money and starting to make some investments. But typically the ground support side does trail from an investment perspective, airplane, et cetera. So that's why we say it will take a couple of years. But if you think about the pace that we're on the infrastructure side, one thing that's probably really worth mentioning is, one point last year, there was some concern on the infrastructure side, which has a longer lead time and a generally longer sales cycle that once the impact from COVID starts to get felt in 2021 of those projects that there would be some risk to 2022. We don't see that playing out. We see continued strength on the infrastructure side as we did pre-COVID. The longer term macros on that, which have been driving a lot of growth on infrastructure side remain the case. And JBT is extraordinarily well positioned on an infrastructure side, particularly as it relates to the passenger boarding bridges and the ancillary that go along with that.

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

I wanted to do a follow on with this AeroTech and the infrastructure, and maybe the way to think of it is, the orders really increased a lot from last quarter, up about $100 million, or about $80 million. And I think in your comments you mentioned guided vehicles versus infrastructure. I wonder if you could talk about just sort of the mix in that orders you saw during the quarter?

So Walter, just as a reminder, AGV is within FoodTech these days, we moved it back in 2015 or so, 2014. So everything on the AeroTech orders, the $182 million that's another, that’s all on the infrastructure side, but the outsize strength of that number is on the infrastructure side. And then as I mentioned in the prepared remarks, a progression and seasonal impact from de-icers and cargo loaders. As you know, the cargo market is strong and we do have seasonal activity coming up. So generally speaking, it's that combination. But the bulk of the outperformance is on the infrastructure side, which is the passenger boarding .

So in FoodTech, you had the was it like a significant amount of orders that came in within FoodTech or the guided vehicles?

It was. It was a great quarter for AGV drove. Again, if you go back to kind of what is a normalized kind of quarter for JBT, $340 million, $350 million per quarter of orders to be a normal number. And I’d say with Prevenio it’s more like 350 to 360 and we're over 400 for the quarter. A decent amount of that outperformance was on the AGV side, which is actually pretty exciting when you think about it, because AGV the definition of automation. And we're seeing a lot of demand automation throughout FoodTech. But the combination of the penetration that AGV seeing into the food market, there's lot of food distributors out there. That combination and network that working together with the traditional FoodTech businesses is really paying dividends and was such well positioned from a secular perspective where that market is going. So the investments we've made in AGV as well as the rest of FoodTech over last several years is really paying off in terms of the acceptance in the marketplace.

So when you were talking about how this quarter being at that you're above that 350 to 360 range of orders, the delta is the AGV…

A portion of it, but diversified food and health also outperformed in the quarter on some of their actual impact on some pet food projects that will be completed in 2020.

And then just a follow-up on the supply chain. So you are having problems getting some shipments out. I wonder how much revenue shifted from the second quarter into the second half?

We actually -- I don't think anything really -- we did a really great job of getting stuff out the door. Actually, I would say better than we thought, which was actually part of the driver and while we outperformed on revenue in the quarter. So I would say there's not shift going from the second quarter to third quarter. If anything we outperformed and got things out the door a little bit faster. We basically hit the number we hoped we would hit but then we were mindful of the risks that we were facing in the quarter and we were able to overcome those risks.

But is there something that changed going into the third quarter or the fourth quarter where you think there could be some slippage of orders, FoodTech supply chains or you mentioned cargo ships, et cetera. Is there something that changed or is there potential to meet your shipments on time?

Well, there's two things. One, we are still faced with those challenges and they're increasing, particularly on the labor side. That's probably the biggest difference between second quarter and the third quarter are some of the supply chain challenges. Logistics, I think, equally tight in the third quarter as the second quarter but pricing is a little bit higher. Obviously we consider this in the guidance. So in terms of shipments, we try to factor that appropriately. Also, it's worth noting that the third quarter is typically a little bit lighter than the second quarter for a couple of reasons. One in Europe, there's usually fair amount of time off and vacations, you're kind of tend to take a month off there. So that usually is reflected in some of the orders -- some of the shipments. Additionally, on the food and juice side within Diversified Food and Health, there's a seasonal aspect to the orange juice extraction business that we have. So we tried to factor that as well. So that's all factored into that guidance for the third quarter.

Your next question comes from the line of Stephen Tusa from JPMorgan.

Could you maybe just talk about some of the supply issues in a little bit more detail on the food side? We all know kind of the electronic components shortages and maybe there's, obviously, some metal related components. I mean, anything more specific on like stuff that’s surprised you with regards to what you're having trouble getting, maybe in the more kind of arcane side of the supply chain? And then secondly are you seeing any signs at all of customers saying, they would have placed an order and like the fourth quarter or something but they're kind of saying we'll just make that decision next year as inflation cools down?

On the supply chain side, I don't know that we've been surprised by anything. In terms of the supply chain, we haven't been hit significantly with like chip shortage that you're hearing about in the news. We've seen some constraints on general electronics. And certainly, just general metals are hard to come by and they are increasingly higher costs. I think what we've been surprised by a little bit is the complexity and the difficulties in the logistics market that probably has hit us higher. And it doesn't hit us directly sometimes, it also hits us indirectly as that impact our suppliers. So they're having issues getting stuff into their factories, which then delays them, which then delays them to be able to supply us on time. So it's being at the end of that supply chain just causes a lot more volatility for our ability to deliver on time.

And then anecdotally, Steve, I haven't heard any circumstance where customers are kind of pulling up their hands and say, you know, it's just too sloppy right now, lead times are long so I'm just going to wait it out till next year. As you know, the sales cycle on FoodTech tends to be very detailed, very involved, it can often take weeks to months to get through a quote to an order. So we just don't see that as usually a huge driver of complexity. If anything, folks are trying to, given the environment that they're working on the demand side, the strength of the demand side, we do see that's what's really driving our pipeline. We've remained strong from here.

Your next question comes from the line of Andrew Obin from Bank of America.

This is Emily Shu on for Andrew Obin. I just had another question on pricing. So we've heard some sectors has price at shipment, which means effectively they can raise customer prices at the time of shipment. So wondering if you guys do that or do you use more of a contrast pricing structure where you have to honor prices, contract prices at shipment?

On the aftermarket side, we price those and we try to publish those and update those as we need to incorporate inflation. On the equipment side, specifically in FoodTech, we base our pricing at the time of the quote and we have reduced the amount of time the quote is valid. And we don't lock in pricing until we get everything agreed to with the customer around engineering. And then we can lock in pricing, because we can start to lock in the cost from the vendors at that point in time. Now there are opportunities where we can if the inflation is significantly higher than we expected at that time, we do have sort of a break the glass clause in some of our contracts that allow us to adjust pricing after that point in time. But we try not to use that clause too often as it impacts our relationships with our customers.

And then just my last question is, can you just talk about how channel inventories are on both FoodTech and AeroTech side? Thanks.

I'm sorry I missed your question.

Just any color on channel inventory.

On channel inventory, certainly for JBT, if you're talking from our factory to our end customer, that's not really so much of an issue, because we're selling direct, like 95% of the time. So there really is no channel disruptions, or a build up or depletion of inventory. We're working almost exclusively except in some faraway places where we do use some third party to help us out in accessing the markets but predominantly like 95% of our orders are direct.

Your next question comes from the line of Mig Dobre from Robert W. Baird & Company.

Just one question for me back on FoodTech. So a few weeks ago, we saw that the USDA announced $500 million of funding for expanding meat and poultry processing. And they were talking about focusing on smaller players and trying to add competition to that market. I looked at that and that seems to be a pretty good thing for your business, but I'm kind of curious on your view on the matter. I'm curious how long with this kind of business with smaller players take to develop, do you have access to that channel? And also wondering if you think there's a multiplier effect to this funding that's been provided by the USDA? I mean, that's kind of how they're seeing as I think private capital is going to pump to add on top of what they're providing in terms of funding. So how do you think this is going to impact demand or your business and how long do you think it takes for this to materialize?

So generally speaking, the good news is that JBT has really, really broad participation in the poultry market and in the protein market in general. As we noted in the past, it's very rare for even our larger customers to be more than 5% or 10% of our business in any one year. There's obviously some peaks and valleys within there. But generally speaking, we have really, really broad participation. So any governmental support is good for us. So we actually also see that on the infrastructure side on the AeroTech with the most recent infrastructure bill that's been passed along but going back to proceeds, so we would view this as a good factor. As we've talked about in the past, it does take a while for investments, especially Greenfield ones to turn into orders. It is more on the expansion of individual lines, et cetera that can take less than six months. Generally speaking, I wouldn't expect that to impact orders for 2021, it would be more of a benefit to 2022. As to the multiplier effect, I don't know the answer to that. I'm not an economist, it's really hard for me to figure out what that means. Obviously, any kind of subsidization from government will typically bring other sources of capital just at the highest level. So you would hope and think that. But it's really hard for me sitting here today to know if that's going to specifically benefit JBT or not.

Presenters, there are no further question at this time. Let me turn the call over back to Mr. Brian Deck.

Great. Thank you all for joining us this morning. Kedric and Matt will be available if you have any follow-up questions. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.