John Bean Technologies Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to JBT Corporation's First Quarter 2024 Earnings Conference Call. My name is Marvie Lou, and I will be your conference operator today. As a reminder, today's call is being recorded. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedrick Meredith to begin today's conference. Kedrick, you may begin.

Speaker 1

Thank you, Marvolou. Good morning, everyone, and welcome to our Q1 2024 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 ks filing. JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results.

Speaker 1

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.

Speaker 2

Thanks, Kedric, and good morning, everyone. JBT's Q1, our seasonally lightest period, came in largely as expected. Consistent with previously outlined commentary, we continue to capture margin expansion with a 60 basis point increase in adjusted EBITDA margins compared with the prior year period. As announced in our April 5 press release, we signed a definitive transaction agreement with Morral. The agreement, which was approved by both companies' Board of Directors, reflects extensive collaboration between the teams.

Speaker 2

Based on our diligence, it confirms our belief in the industrial logic of the combination and value creation opportunities for customers, shareholders and other stakeholders. The agreement also represents a significant step forward in anticipation of the submittal of a voluntary takeover offer. With that, I'll turn the call over to Matt, who will walk you through our Q1 performance. Then I'll speak about the anticipated recovery in the poultry market and provide greater detail about the progress we've made on the proposed merger with Merau. Matt?

Speaker 3

Thanks, Brian, and good morning. For the Q1, our revenue was $392,000,000 an increase of 1% year over year. Our gross margin in the quarter of 35.8%, an improvement of 160 basis points was driven primarily by the cost saving benefits of restructuring actions and continued progress on our supply chain initiatives. Adjusted EBITDA of $57,000,000 increased 6% year over year and adjusted EBITDA margin increased 60 basis points to 14.6 percent as increases in incentive compensation and in labor inflation partially offset the gross profit improvements we realized in the quarter. From an operating perspective, we are pleased with our continued margin expansion.

Speaker 3

As we have discussed, we believe that JBT's greatest opportunity for margin improvement is from our supply chain initiatives. In the Q1 alone, we realized savings of approximately $5,000,000 in terms of direct, indirect and logistics spend. Additionally, we have seen a significant and steady improvement in supplier on time delivery, driven by our actions to consolidate procurement activity with key suppliers. This has had a meaningful and positive effect on JBT's production efficiency, allowing our businesses to further shift their resources to additional supply chain and manufacturing productivity projects. 1st quarter adjusted EPS was $0.85 versus $0.61 in the prior year.

Speaker 3

EPS was positively impacted by our operational improvements, which added about $0.07 per share, as well as $9,000,000 of net interest expense improvement, which contributed about $0.22 per share. This was partially offset by a higher effective tax rate for the quarter, which included a discrete item of approximately $0.03 per share. 1st quarter is generally our seasonally slowest free cash flow quarter and our results in the Q1 reflect our preparation for revenue growth through the remainder of the year. While we still have work to do on working capital management, we remain confident in our ability to achieve a free cash flow conversion rate in excess of 100% for the full year. As of the end of the Q1 of 2024, we completed our multiyear restructuring program, recording total charges of $18,000,000 All in, cumulative annual run rate savings are on track to be $18,000,000 as we exit the quarter Q2 of 2024.

Speaker 3

Regarding our full year 2024 outlook, we are reiterating our guidance for adjusted EBITDA at $295,000,000 to $310,000,000 and adjusted EPS at $5.05 to $5.45 which at the midpoint represent 11% 28% year over year growth respectively. We continue to expect organic revenue growth of 4% to 6%. However, we did adjust the total revenue range to account for current expectations for foreign exchange translation. Additionally, we have updated guidance for GAAP EPS to a range of $4.40 to $4.80 for the following items. First, we revised our expectations for M and A costs, which are now estimated to be $30,000,000 to $35,000,000 for the full year, excluding any transaction contingent fees.

Speaker 3

Additionally, our updated forecast for net interest income of $2,000,000 includes the impact of our new bridge credit facility secured as part of the expected tender offer for Morrell. Finally, in the Q2, we are forecasting a discrete tax benefit of between $8,000,000 to $9,000,000 related to the successful implementation of internal tax planning actions. With that, let me turn the call back to Brian.

Speaker 2

Thanks, Matt. Orders booked in the Q1 of 2024 reflected select market softness in North America. Separately, we experienced some order timing issues in our AGV business, but as we have been saying, that market remains quite robust. And while orders from the poultry industry in North America didn't recover in the Q1, the economics of that market have continued to improve. Corn input price costs have remained stable, while wholesale poultry pricing has increased due to more favorable supply demand dynamics.

Speaker 2

For example, the benchmark large bird deboned breast meat is now hovering around $2 per pound versus less than $1 just 5 months ago. We are optimistic that the improved poultry industry economics will translate to orders during the Q2. We are very encouraged by the expanding level of quote activity. Specifically, we are seeing demand for midstream and downstream equipment, which we call secondary and further processing. Producers are looking to increase output and efficiency of their value added processes to capture more margin dollars and address deferred investments.

Speaker 2

Geographically, while orders softened year over year in North America as discussed, inbound remained solid in Europe and Middle East posted a record quarter. In terms of end markets, we enjoyed particular strength in fruit juice processing and convenience meals. Let me switch gears and provide updates on the proposed merger with morale. As I mentioned earlier, the execution of the definitive transaction agreement was a major milestone in combining our 2 companies. As outlined in the agreement, preserving Morrell's heritage and culture is important to advancing the combined business.

Speaker 2

And having the opportunity to work closer with Morrell since the execution of the transaction agreement, I'm as confident as ever on the compelling industrial logic of the transaction, including meaningful value creation opportunities. We expect substantial revenue synergies such as cross selling, enhanced service and an improved overall value proposition, which we continue to analyze and intend to communicate in connection with the offer launch. Regarding the cost synergies, we expect annual run rate benefits of more than $125,000,000 within 3 years of transaction close and continue to explore for upside as we refine our work. We anticipate approximately 45% of cost synergies will come from cost of goods sold and approximately 55% from operating expenses. In terms of cost of goods sold, we expect to generate meaningful supply chain savings as the combined company consolidates and optimizes procurement, standardizes components through value add, value engineering processes and expands best cost country sourcing.

Speaker 2

We also expect to leverage the combined production and gain efficiencies across a broader footprint. As it relates to OpEx, we expect to realize savings from cost overlaps, including IT systems, public company costs, 3rd party contracts and certain back office resources. Additionally, we will leverage the combined company's R and D and selling and service resources to have a greater collective impact for the customer. Since the announcement of the transaction agreement, JBT and Morrell have made considerable progress on the conditions required to launch the offer. In mid April, we initiated the review process of the offer document and prospectus with the Financial Supervisory Authority of Iceland or the FSA.

Speaker 2

In May, we expect to file the registration on Form S-four with the SEC, which will contain a preliminary proxy statement and prospectus. Subject to the approval of the required documents by the FSA, we expect to promptly launch the voluntary takeover offer. At that point, we plan to host a joint transaction specific investor call. We have secured a fully committed bridge financing facility to guarantee funds for the takeover offer as required and will pursue a conventional long term financing structure in connection with the closing of the transaction. In terms of other work streams, we have filed antitrust notification documents in the U.

Speaker 2

S. And started comparable regulatory clearance work in other filing jurisdictions. In early summer, we expect to commence the formal application for the secondary NASDAQ Iceland listing and pending approval of the final S-four by the SEC expect to hold JBT's shareholder vote later in the summer. While the overall transaction timetable remains primarily dependent on the regulatory clearance process, we continue to plan for a year end close of the transaction. As always, let me extend my sincere thanks to our teams around the globe that deliver exceptional service and solutions to our customers every day.

Speaker 2

I would also like to extend my appreciation to our partners at Morrell as we work together to advance the value creating combination of our 2 great businesses. With that, let's take your questions. Operator?

Operator

Thank you. The floor is now open for questions. And your first question comes from the line of Mig Dobre with Robert W. Baird and Company. Please go ahead.

Speaker 4

Hey, good morning guys. It's Joe Grabowski on for Mig this morning.

Speaker 2

Good morning.

Speaker 4

Hey, good morning. So I wanted to start with your guidance, your organic sales guidance. Based on the 47%, 53% first half, second half split, that would seem to imply organic sales of about 1% in the first half and about 8% or 9% in the second half. Correct me if I'm not right on that. But with orders down a little bit each of the last two quarters, I guess what gives you the confidence that you'll see that level of sales lift in the second half?

Speaker 2

Sure. I'll speak to that. This is Brian. So first and foremost, we have a strong backlog going into the year end and as we sit here today. So we do have visibility as to already what's in the backlog and the delivery schedule for that.

Speaker 2

Secondly, I also say that, as I mentioned on our call, we do expect some improvements over the course of the next few quarters with respect to the poultry industry. As you know, that's about 25% of our general market. So we do expect that to improve as we progress through the course of the year here. So everything really played out as expected in Q1. So no need for us to change any gears.

Speaker 2

Everything is laying out as we expected with the slight modification of the FX translation.

Speaker 4

Okay, great. Thanks. And then maybe just drilling in on the North American poultry end market. You had the slide deck in the prepared remarks, you said you expected some orders to start flowing in the Q2. I guess maybe the level of visibility into those orders and is there any risk that maybe they're going to kind of slip into the second half of the year and maybe some of that revenue doesn't get recognized till next year?

Speaker 2

Well, there's certainly always that risk. But as I sit here today, we looked at it over the last couple of quarters, we were talking about a strong pipeline. Now we're talking about strong quotes, right? So it's really about those quotes converting to orders as we go through the next couple of quarters. We always can things always slip from 1 quarter to the next.

Speaker 2

Generally speaking, our lead times are 3 to 6 months. So you can even go into the Q3 and still have opportunity to meet your numbers. And what's really encouraging is just again because of the fundamentals of the business, our customers are making money, which is good. They've opened up the conversations. They're accepting quotes.

Speaker 2

Honestly, we're quoting like crazy right now. So, it's really a matter of getting those quotes converted to orders. And I don't think we'll be at full run rate in the Q2, frankly, but we do expect to see that beginning of that activity and then flow into the Q3 from there.

Operator

And your next question comes from the line of Walter Liptak with Seaport Global.

Speaker 5

Hey, thanks. Good morning, guys. Good morning. I wanted to ask about maybe just a follow on to the last one with the orders. Can you tell us anything about how April went like with AGV, did those the timing of those orders, do they come in April?

Speaker 5

Are those still something that comes in later in the quarter? And then same thing for poultry, are you starting to see any lift into April?

Speaker 2

Sure. We typically don't give individual guidance on months within the quarter, but what I will tell you is a couple of things. One, as we went through the Q1, every subsequent month got better than the prior. So the trend is generally good and we do have confidence in the Q2 as a whole. On AGV specifically, the shift from or I'll say the miss, if you will, in Q1 was somewhere between $10,000,000 $15,000,000 for AGV, actually closer to $15,000,000 We certainly expect that in the second quarter.

Speaker 2

And generally speaking, we expect a strong quarter from AGV here in the second quarter. So again, everything is essentially laying out as expected with the one exception of the AGV slip of that almost $15,000,000 or so.

Speaker 5

Okay, great. And then just maybe another follow on. You mentioned that the second quarter orders would be better, but maybe not full. I wonder if you could if that means that it looks like when I look back at last year, it looks like it's a tough comp for orders. That was a good order period.

Speaker 5

Could you get to say $445,000,000 which would be flat orders in the second quarter? Is that what we should be thinking about?

Speaker 2

Well, without giving specific numbers, I do certainly expect a better quarter in the second quarter, without question. The comp versus last year is tough because if you recall, we had those very large pharma orders. It's a little bit tough. I tend to not focus on any one individual quarter. I just look at the trends and I look at, do we have the backlog, do we have the momentum to continue to support our guidance on revenue and we feel we do.

Speaker 2

So I feel good about it and we'll see how things turn out. But certainly, I do expect improvement sequentially.

Speaker 5

Okay, thanks. Yes, I think the data point about quotes is great. And we get that that's starting to pick up for poultry. I wonder if I could ask one last one on aftermarket sales. They shifted down a little bit in the quarter from last year.

Speaker 5

I wonder if you can talk about that, maybe talk about the aftermarket and is there a growth rate that you could tell us about?

Speaker 2

Sure. And so we it was interesting quarter for sure and I would say somewhat reversion to the mean. So we actually had if you happen to recall, Q1 last year, we had really high aftermarket. It was like 56% of our revenue mix and relatively lower equipment. This quarter, we actually grew equipment by about 10% on the revenue line and declined about 8% on the aftermarket.

Speaker 2

But again, last year, if you recall, Q1 had a tremendous amount of aftermarket and specifically refurbishments as customers started sweating the assets more than they otherwise would. So, at 52% mix, we're basically back to the mean. And actually 52% is quite a strong number for us. But I do generally expect the growth rates for the rest of the year. Actually, I expect equipment to slightly outpace aftermarket for the rest of the year, again, as the recovery and delivery of the backlog.

Speaker 2

So but generally speaking, aftermarket remains probably our best kind of resource, if you will, and stability within our financial statements. So I feel super good about it. And if we hover in this 50% range, we're really well set.

Speaker 5

Okay, great. Okay, thank you. I'll get back in queue. Thanks.

Operator

And we have Polter Deepak again on the queue. Okay. Please go ahead.

Speaker 5

Okay, great. Thanks guys. So maybe Matt, one for you. What's the cadence on the cost savings in the second quarter and for the second half? Is it pretty evenly split?

Speaker 5

How should we think about that?

Speaker 3

Well, we will hit the run rate of $18,000,000 in savings by the end of Q2. So I would expect there to be a little bit more that filters into Q3, but for the majority of the savings that we expect to achieve from our restructuring program, that would pretty much play out by the end of Q2.

Speaker 2

Okay. All right, great. Yes. And just to give a little bit more color on that sorry, Walt, just give you a little bit more color on it. Generally speaking, if you look at our margins, I would say given the restructuring, given the supply chain activity, we expect margins to increase sequentially every quarter in 2024 and every quarter will be better than 2023 from a margin perspective.

Speaker 5

Okay, great. Okay, thanks for that color, Brian. And if I could try one on the Merrell synergies, thanks for the info on the cost related synergies. Is there and I realize you're not putting any numbers on the sales synergies, but can you provide any idea of like how you will or may provide us with future guidance? Is it going to be as a percentage of revenue growth?

Speaker 5

Or are you going to be able to put a dollar amount on sales synergies as your plans for synergies come through to fruition?

Speaker 2

Yes, more likely we would not think we would give you a target dollar amount, but we may convert that to basis points. We'll see. We're working on it pretty intensely as we speak. But just in terms of the synergy potential itself, there's 3 or 4 buckets. And I would say, certainly the biggest opportunity is really this better value proposition of fuller line solutions to the customer and pull through of equipment that we can leverage one another's portfolio.

Speaker 2

Just to give you a couple of examples, right? The JBT is really well known for water jet portioning, right? Certainly, we believe we're the leaders in the market. We feel that given Morrell's strength on the primary side and into the secondary side, there could certainly be some pull through that wouldn't otherwise exist or the customers would have to figure out a solution on their own. So from an engineering perspective, from a value perspective, pulling that full line solution makes it really helpful.

Speaker 2

Similarly, on the kind of opposite on the FP side, the further processing side, Morrell is particularly strong in forming where we have some exposure in some products, but they're the leaders, right? So but we're overall very strong on the FP side, but that's just a hole in our portfolio. So we would expect to be able to pull through that. So, those are just a couple of examples on the product side. Also, I would say, on the service side, and this is what we hear from our customers, they really want to see improved service.

Speaker 2

And you think about the tremendous opportunity of bringing our very large service capabilities, combined it with their large service capabilities throughout the globe, right, in every continent, bringing those 2 organizations together to help our customers with their uptime, with their efficiency, and just helping overall making them a better company. We think that's a tremendous opportunity. So, those 2 are the largest. We'll give more color on some of the other buckets as we get into the joint shareholder call here once we do the offer. But we feel very good about opportunities on the commercial

Speaker 5

side.

Operator

That concludes our Q and A session. I will turn the call over to Mr. Brian Deck for closing remarks.

Speaker 2

Thank you all for joining us this morning. As always, Kendrick and Marley will be available if you have any follow-up questions.

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Earnings Conference Call
John Bean Technologies Q1 2024
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