Q4 2023 John Bean Technologies Corp Earnings Call

Participants

Kedric Meredith; Vice President - Corporate Development and Investor Relations; John Bean Technologies Corp

Brian Deck; President, CEO & Director; John Bean Technologies Corp

Matt Meister; EVP & CFO; John Bean Technologies Corp

Lawrence Maria; Analyst; William Blair & Company L.L.C.

Walter Liptak; Analyst; Seaport Research Partners LLC

Mircea Dobre; Analyst; Robert W. Baird & Co. Incorporated

Presentation

Operator

Good morning, and welcome to JBT Corporation's Fourth Quarter and Full Year 2023 earnings conference call. My name is Audra and I will be your conference operator today. As a reminder, today's call is being recorded. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations Kendra Meredith, to begin today's conference.

Kedric Meredith

Thank you, Audra, and good morning, everyone, and welcome to our year end 2023 conference call. With me on the call is our Chief Executive Officer, Brian Dec, 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 eight K filing. Jbt's periodic SEC filings also contain information regarding risk factors that may have an impact on our results. These documents are available in the Investor Relations section of our website and 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 being scheduled.

Brian Deck

And good morning, everyone. A lot has occurred since our last call a few months ago. So let me dive in. As you know, JBT announced its intention to pursue a merger with morale. We believe this merger would be transformative for our customers and shareholders, bringing together two exceptional providers of Food & Beverage Solutions with synergistic products, great technology and globally recognized brands. I'll provide more color on that.
But first about our financial performance. We are very pleased with JBT's strong results in 2023 on a 5% increase in full year revenue, adjusted EBITDA increased 20%. We also generated a strong free cash flow with a conversion well over 100%. Moreover, we introduced financial guidance for 2024, which reflects further revenue growth and continued margin expansion.
With that, I'll turn the call over to Matt, who will walk you through our 2023 performance and our guidance for 2024. Matt?

Matt Meister

Thanks, Brian, and good morning. Our full year and fourth quarter performance reflected a significant year-over-year improvement in profitability and outperformed the guidance we provided on our last earnings call. For the full year, revenue increased 5% and gross margins improved 190 basis points year over year, driven primarily by the benefits from restructuring savings, enhanced operating efficiency, a favorable mix of recurring revenue and our supply chain initiatives.
Adjusted EBITDA grew 20% year over year to $273 million. Adjusted EBITDA margin increased 210 basis points to 16.4%. From an EPS perspective, we delivered diluted earnings per share from continuing operations of $4.02 compared with $3.23 in 2020 and adjusted EPS of $4.10 versus $3.67.
We were also very pleased with our 2020 free cash flow performance for the full year, excluding any impact from AeroTech, free cash flow was $167 million, representing a conversion rate of 129%. Our year-over-year increase in free cash flow was driven by strong operating results and better inventory management and the supply chain constraints experienced 2022 improved. As of year end, our net debt to adjusted EBITDA ratio was 0.6 times, a slight increase from the end of the third quarter due to the tax payment associated with the sale of Maritech fourth quarter of 2023. Strong execution resulted in an adjusted EBITDA margin of 18.2%, a 260 basis point improvement year over year. Adjusted EPS, which excludes the $0.33 discrete tax benefit from the sale of a subsidiary, increased 24%.
Regarding our guidance for 2024, we are projecting solid top line growth of 5% to 7% or 4% to 6% organic, which excludes the benefit from FX of 1%. Our organic revenue guidance includes approximately 1% from price as we work to stay price cost neutral. And about 1% to 2% impact from equipment market growth. As we expect North American poultry demand to show some recovery in the back half of the year. Additionally, we expect to see growth from our AGV business as we deliver a strong backlog that has been built from demand for warehouse automation.
Finally, we are forecasting continued growth in our recurring aftermarket revenue as we invest in resources to support improved customer equipment uptime as well as benefit from continued ramp in omni blu adoption 2024, we are forecasting adjusted EBITDA of $295 million to $310 million, representing year-over-year growth of 11% at the midpoint.
Our margin guidance of 17% to 17.5% reflects a year-over-year improvement of approximately 85 basis points at the midpoint. This increase is the result of continued benefits from our ongoing supply chain initiatives and operating leverage, along with restructuring savings of $7 million to $9 million. We expect full year net interest income of $4 million and a tax rate of 22% to 23%, resulting in adjusted earnings per share guidance of $5.05 to $5.45. At the midpoint, our adjusted EPS guidance represents a year-over-year increase of 28%.
And finally, we anticipate free cash flow conversion of more than 100%, which includes CapEx of about $50 million to $60 million. Included in our full-year guidance is approximately $15 million in M&A costs for the first half of the year related to the intended merger offer for morale. As a reminder, these M&A costs are excluded from adjusted EBITDA and adjusted EPS.
On a reported GAAP basis, we have updated our guidance ranges versus our preliminary outlook from January 19 to reflect the revised M&A cost assumptions. We will continue to provide updates on estimated costs from this potential merger as we move throughout the year.
First quarter is traditionally our seasonally slowest in terms of revenue and profitability, a trend that we expect will continue in 2024, given the timing of the anticipated recovery in North American poultry markets, we expect the 2024 second half revenue to be approximately 53% of the total versus 51% in 2023. We are forecasting margin improvement in each sequential quarter of 2024 as market conditions are expected to improve and supply chain actions flow through to the results.
With that, let me turn the call back to Brian.

Brian Deck

Thanks, Matt, we are entering 2024 with the good order momentum and backlog. Fourth quarter orders were solid $418 million and full year orders increased 5% year over year in the fourth quarter, similar to the third, we enjoyed strengthening order trends in Europe and Asia, including from the poultry industry. While we have yet to see improved orders from North American poultry customers. The industry's price cost dynamics are improving. We recently returned from the annual IPPE., otherwise known as the poultry show where attendance was among the best ever, the mood was more upbeat and the conversations are constructive. Overall, our interactions support our belief that we are entering a period of recovery in equipment demand from that market.
Switching gears, as we have talked about for the last few years, JBT's greatest opportunity for margin improvement rests in our supply chain initiatives. Given post pandemic supply chain pressures during 2021 and 2022, we were hyper-focused on continuity of supply in 2023. Supply chain conditions improved, allowing us to shift our focus and resources to optimizing costs and inventory management. With the sale of AeroTech, we can focus our supply chain efforts on a more homogeneous supply base. We are engaged in our strategic sourcing initiative, consolidating JBT's spend, concentrate purchasing where we where we can improve the economic delivery and quality of our supply base for also engaged in our process of value engineering as we work to standardize components and reduce complexity of product design without compromising our quality or performance promise to our customers. This will lower costs, improve manufacturing efficiency, and facilitate inventory management. We plan to build on the supply chain success we captured in 2023 and generate some 25 to 50 basis points of incremental margin expansion in 2024.
As you can see from our strong performance in 2023 and our 2024 guidance. Jbt's prospects remain bright, reflecting our business, our strong resilient business model and diverse product and market mix and our value added acquisitions beyond what we've already achieved. The proposed merger with Merin represents a unique opportunity to create broad stakeholder value. We have not let we have not yet launched the tender offer for morale, which we now believe will have like most likely occur in the second quarter. And of course, the proposed merger is subject to respective shareholder approval and regulatory clearance. We will show share more about the transaction on the conference call. We plan to hold post launch. And in the meantime, here's what we can share we believe the combination will accelerate growth by capturing cross-sell opportunities across our complementary portfolios and through an expanded global commercial footprint and customer care resources. The combined company will offer an even fuller line solutions in protein, fast food and plant-based protein processing, scalable R & D would expand our ability to develop innovative solutions to address customer priorities, including the growing demand for automation and sustainable solutions. It has reached a customer care organization with improved service levels, make it easier to do business with the combined company.
Furthermore, by leveraging our complementary and comprehensive digital solutions, JBT's Omni blue and Morales. Inova will optimize equipment uptime and efficiency for customers and further the digital engagement ecosystem, even before considering revenue synergies, which could be meaningful we have identified cost synergies of more than $125 million that we expect to capture within three years of completing the transaction. We believe our ongoing supply chain initiatives would improve the collective cost base.
Additionally, we expect benefits from leveraging our collective G&A spend and optimizing manufacturing efficiency. Importantly, we will advance the business in a way that respects and supports Meralco's heritage. We anticipated that the company that the combined company will be named JBT morale, morale. Shareholders are expected to have representation on the combined Board of Directors proportional to their pro forma ownership. And we are committed to building a best in class talent organization plan is to add a European headquarters in Iceland and the Company shares will have a secondary listing and Nasdaq Iceland.
Assuming the transaction closes at year end 2020 for the combined company is expected to have a net leverage ratio of less than 3.5 times, which is prior to any cost synergies. And given the strong cash flow profile and improving EBITDA of the combined business, we would expect leverage to be well below three times by the end of 2025, with all the activity surrounding the intention to merge with morale remains business as usual, for JBT, our priority, as always, is to provide superior solutions and service to customers, and it's JBT's employees around the globe that make that happen every day.
With that, let's take your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Lawrence De Maria, William Blair.

Lawrence Maria

Thank you and good morning, everybody. I just wanted to check in on this tender. So I think, you know, you say most likely in two QIPPE., I think the messaging was diligence or four to six more weeks and then the tender. So I guess a question, first of all, is the time frame slipping a little bit, and I would think it would have been sooner. And secondly, have you started a regulatory approval process yet?

Brian Deck

Right. So as it relates to the timing, specifically as we've uncovered and covered all the regulatory requirements as part of both Iceland and the U.S. on the SEC's on the SEC side, the work streams associated with that, we just found that we need a little bit more time to get through all of that prior to launch. So nothing particularly problematic with that. It's just a matter of getting through the work streams. And as part of that, we are and on the antitrust side, while we haven't formally filed yet, we do continue that process in terms of the data collection, understanding which which jurisdictions we're going to file. And so there's a tremendous amount of work associated with that. And that's and frankly, antitrust is the longer pole in the tent, and that's going to drive that the overall timing of the transaction. So we're still focused on completing everything by the end of 2024.

Lawrence Maria

Okay. Thank you. And then I'm certainly as we're going to you're going through this the process and learning. Two questions. First, is it kind of confirm what your thinking around the overlap is more complementary versus additive? And secondly, have you started to talk to Morel shareholders sort of dialing for for approval from them? And if so, what's the feedback been so far and I'll pass it on. Thank you.

Brian Deck

Right. So the on the first question, indeed, the portfolio is complementary and mostly complementary as we have expected. So we don't see it from an antitrust perspective at a particular issue. However, from a customer perspective, we think it's quite value-creating. So it is confirming some of our suspicions and hypotheses around what the combined company could look like and the value accretion and offerings that we could provide in a combined basis in terms of engaging with morale. Shareholders know, we have not started that yet. That would not start until after we launched the tender offer. Obviously, we'd like to have something formal in front of them in order to speak to. So that won't occur until until the launch itself.

Operator

Walter Liptak, Seaport Research.

Walter Liptak

I was wondering, first some maybe a fundamental question about 2024 outlook. And it sounds like I'm a pretty big part of the EPS growth is coming from margin improvement. As I wonder if you could just walk us through maybe some of the buckets of where that's going to come from? Is it some of the restructurings already done? Are there more restructuring that have cap and supply chain, et cetera?

Matt Meister

It's Matt, I'd say at some peer growth in EBITDA dollars, I'd say it's probably 50-50 between the volume benefit that we're getting from the sales growth and then the margin improvements that we expect that those margin improvements are going to come from the restructuring savings from the actions that we've already taken. So those actions are, for the most part already done. There is a little bit that's going to happen here in the first quarter, but it's very small and that those savings for 2024 are expected to be between $7 million and $9 million, and we should be able to hit full run rate by the end of the second half. So that's a big portion of the benefit come.
And then and then the other piece of it is the supply chain benefits that we saw in 2023 are benefiting the bottom line now continuing into 2024 with additional actions being taken by the supply chain team to drive cost out through both value engineering as well as some sourcing and resourcing activities. And certainly the margins are going to continue to get better as we grow because of getting leverage on the fixed costs, which will somewhat be offset by some investments we need to make to support the organic growth that we wanted. We wanted some volatility.

Walter Liptak

On the volume part of the margin answer and how much of the volume do you think is coming from the aftermarket parts sales are we seeing benefits from Omni blue? Or is it orders that are just flowing through from out from equipment?

Brian Deck

Yeah, I would say in terms of mix for 2024, we're still expecting that 50-50-ish type mix. And we are seeing as part of that, where we're certainly seeing an improvement and additional contribution from the Omni blue side, we are starting to see some nice momentum in new customers adopting it, but also convert converting our old iAPPS platform as those contracts lapse. So good, good momentum there. So we're excited about about that, but no major mix changes in 2024. Like I said, we we do have some little bit higher on the equipment growth side, big, particularly because of the AGV that we mentioned along with some recovery in the back half of the year on the protein side.

Operator

Mircea Dobre, RW Baird.

Mircea Dobre

Can we put a finer point on Q1? Maybe you talked about the seasonality here. Maybe frame how you how you sort of see revenue either year-over-year or sequentially and what's the starting point for margins?

Matt Meister

Yes. And I think our revenue in the quarter is going to be certainly better than we saw last year in Q1. We do see growth not to the same level of growth that we're seeing for the full year, but certainly good because of the back half nature of the recovery in North American poultry, but there is some modest growth in the first quarter. And then on a margin perspective, like we said, I mean, with year over year, there will be improvements in margins, I'd say, the 75 to 100 basis point improvement that we're seeing for the full year, we would expect to see that every quarter as an improvement year over year.

Mircea Dobre

And looking through your slide deck, you on slide 5, you kind of call out the and the strong performance that you had in recurring revenue and if my math is right, that $95 million growth that you've had in recurring revenue? Yes, it would be double digit growth, if I'm not mistaken, in 23. So I guess I'm curious as to what's been driving that growth in recurring and as you look into 24 on your implied guidance, so cost for growth in recurring revenue, but obviously, much money lower than what you had in 23. So I guess I'm just kind of curious as to what might be changing here or is --?

Brian Deck

Right. Yes, there's a couple of things. I would say the primary thing that we saw was and particularly again in North America, as there was some deferral of CapEx investment, more spending on refurbishment projects and keeping things, I'll say, more stable and keeping that output strong without having to make new equipment purchases. So obviously, as they switch a little bit from new from that to new equipment in 2024, you'll see a little bit of moderation back to the mean so that what I would say is the primary driver.

Mircea Dobre

Were there's some sort of I don't know like pricing benefits or something of the sort that might have been fortunately benefiting recurring revenue in 23?

Brian Deck

I would say generally, yes, I would say a little bit. We obviously we see we captured price increase on of both equipment and on and on aftermarket, I wouldn't say they're materially different.
One thing I should mention, however, Mig, is that we bought Tabcorp at the what I think August of 2022, and that has a 60% plus recurring revenue business. So you do get a full year benefit of that as well. So some of that would be inorganic in that high growth rate. It's interesting until you recall, they've got about -- if you recall, they've got about $90 million or so of revenue and about 60%, 65% recurring revenue. You get the full year benefit of that as said of the four months that we had and that we enjoyed in 2022.

Mircea Dobre

Yes, that makes sense. Thank you for that clarity. In terms of the OE side on the and I guess, if I'm honest, understanding things here. It looks like OE was down maybe in 23. And I'm curious, was poultry, the only source of pressure that you had in OE. Were there other verticals that's that decline as well as you look at 24 and in poultry specifically, is there a way to sort of frame for us what the swing would be? I mean, like I don't know this business is running at 75% of what you would call mid-cycle or what in what sort of recovery do you factor in into '24?

Brian Deck

No, right. So in 2023 at North American poultry was clearly though Biosyn largest contributor to. And you are right that the equipment side had. And so as some slightly slightly negative growth in 2023 of the primary culprit of that was the lower order book coming into the year and throughout the year, frankly, on equipment orders.
The other area that that reverted to us a more normalized levels with pet food pet food in 2022 and 2021 for that matter was tremendous. It remains a decent market in 2023 for compared to the of the real robustness that we saw, 2021, 2022 have reverted. So those are the two main ones and then I'm sorry, what was the second part of your question?

Mircea Dobre

As you think about 2024, where do you think you've been running in terms of what you would consider to be normalized demand in the end and markets that have compressed? I guess you are clear about petfood, but I'm not clear in poultry in terms of where you are versus what's normal demand? And what do you factor in in '24 in terms of a bounce back?

Brian Deck

Right. So we I would say, in North America, more than 20% down versus, I would say, a normal mid-cycle year on equipment freight that got somewhat bolstered by the aftermarket. But on the equipment side, north of 20% lower than what we normally would be. We don't see that full recovery this year, right? Because we don't think we're going to that's going to start work. We expect to start receiving orders here in the front half and converting that to revenue in the back half. So I would say kind of in that mid, I'll say halfway recovery, if you will, in the back half of the year and if things go as expected, kind of a more of a full recovery in 2025.

Operator

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Will pause just a moment and there are no further questions at this time. I would like to turn the conference over to Mr. Brian for closing remarks.

Brian Deck

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

Operator

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