Good morning, and welcome to JBT Corporation's Second Quarter 2023 Earnings Conference Call. My name is Beau, 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad, and if you would like to withdraw your question, simply press star one again. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedric Meredith. Please go ahead, sir.
Thank you, Beau. Good morning, everyone, and welcome to our second quarter 2023 conference call. With me on the call is our Chief Executive Officer, Brian Deck, and Chief Financial Officer, Matt Meister. In today's call, we will use forward-looking statements that are subject to the safe harbor language in yesterday's press release and 8-K filing. JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results. These documents are available in the Investor Relations section of our website. Also, our discussion today includes references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found in the Investor Relations section of our website. Now, I'll turn the call over to Brian.
Thanks, Kedric. Good morning, everyone. With the closing of the sale of AeroTech, which we announced yesterday, JBT has delivered on its commitment to become a pure-play food and beverage technology business. We achieved an attractive valuation for AeroTech, positioning JBT with a strong balance sheet to support strategic M&A, which we believe will make JBT an even more valuable partner to our food and beverage customers. We are pleased with JBT's continuing operations performance in the second quarter, with margins, earnings, and orders exceeding our expectations. Once again, the solid performance of our food and beverage business demonstrated the benefit of JBT's resilient business model, a diverse product and end market mix, and our value-added acquisitions. With that, I'll turn the call over to Matt, who will walk you through our second quarter performance and revised full-year guidance.
Thanks, Brian. As you saw in the earnings release, we have now classified AeroTech as a discontinued operation as of the second quarter and recast our prior period financial results accordingly. JBT's revenue from continuing operations increased 8.6% year-over-year in the second quarter at the high end of our previous guidance for the FoodTech business. Adjusted EBITDA margins of 16.7% increased 320 basis points on the benefit of volume leverage, the continued improvement in price cost, and initial savings from the restructuring program. With that, adjusted EBITDA from continuing operations grew 34% to $71 million. Included in adjusted EBITDA from continuing operations was approximately $13 million of corporate related costs.
Excluding those costs, adjusted EBITDA margins from our FoodTech operations was 19.7%, which exceeds our previous guidance of 18%-18.75%. Diluted earnings per share from continuing operations was $0.87 in the second quarter of 2023, compared with $0.80 in the prior year. Adjusted EPS from continuing operations increased 11% to $0.97 versus $0.87 and exceeded the previously provided implied guidance of $0.70-$0.85, as the improved performance from the operations was partially offset by higher interest expense and a higher effective tax rate in the current quarter. In the second quarter, we made progress on our inventory actions and delivered positive free cash flow from continuing operations of $34 million, representing a conversion rate of 122%.
We expect free cash flow conversion for continuing operations to be slightly above 100% for the full year. The sale of AeroTech will have significant impact on JBT's balance sheet now that we have closed the transaction. The net cash proceeds of approximately $650 million after estimated taxes and transaction costs, will be used to pay down approximately $300 million of higher cost variable rate debt. The remaining portion of the proceeds will be held in short-term securities until redeployed to strategic M&A. On a pro forma basis, which considers the impact from the AeroTech sale, our net debt to adjusted EBITDA ratio from continuing operations would have been below 1x as of the end of June 30th.
Regarding our restructuring actions, as we continue to streamline our cost structure and transition to a pure-play food and beverage technology company, we are increasing the scope of our program. We now anticipate full year 2023 restructuring charges of $11 million-$13 million, compared with the previous guidance of approximately $4 million. That brings the total expense of our restructuring program, including those costs incurred in 2022, to $16 million-$18 million. With that, we expect to generate annualized run rate savings of approximately $18 million-$20 million by mid-2024. Looking at full year 2023 performance, we are essentially holding our implied guidance for continuing operations revenue growth at 5%-8%. We are forecasting improved profitability with adjusted EBITDA margins of 15.75%-16.25%.
That includes adjusted EBITDA margins from our FoodTech operations of 19.25%-19.75%, compared with previous guidance of 18.5%-19.5%. Considering their improved margins and lower interest expense resulting from the sale of the AeroTech business, we are raising our earnings guidance for 2023. Adjusted earnings per share is now forecasted at $3.80-$4.05, an increase over our previously implied guidance for continuing operations of $3.25-$3.65. For the third quarter, we expect a slight sequential decline in revenue and Adjusted EBITDA due to a seasonal decline in recurring revenue and the impact of a softer backlog in the meat and poultry markets.
With the benefit of lower interest expense, we are projecting adjusted EPS of $0.90-$1.05 in the third quarter. With that, let me turn the call back to Brian.
Thanks, Matt. JBT's order strength in the second quarter highlights the benefit of our diversified product and end market mix. Demand for meat and poultry end markets remains under pressure, similar to the first quarter, given the weak price cost and demand environment in that space. However, we booked significant orders from the pharmaceutical and nutraceutical industry and for our automated guided vehicle business. Our pipeline remains stable on the strength of our diversification, though we do note that the higher cost and tighter availability of capital is continuing to impact the appetite and timeline to invest. Looking forward, JBT's priority is optimizing our opportunities and managing a smooth transition to a pure-play food and beverage technology company.
A critical part of that will be deploying capital to acquire businesses that complement existing operations and expand our end markets to build an even more compelling portfolio of solutions for our customers. As we've always said, we will maintain a highly disciplined M&A process with firm criteria for strategic fit and financial hurdle rates. As for potential acquisition candidates, we will focus on our customers' needs for automation, sustainability, and efficiency. We plan to build on JBT's strength in secondary and further processing, with opportunities to continue to expand our presence in end-of-line, including packaging or, on the other end, primary processing. There are also bolt-on technologies and solutions complementary to our existing offering that would expand our customer value proposition.
There are some end markets, such as snack foods, bakery, confectionery, and sustainable food and beverage alternatives, where we could grow our presence. In terms of size, we will consider highly synergistic bolt-ons, as well as medium and larger transactions that could bring scale and enhance our recurring revenue base. As always, we look to create value from any acquisition by leveraging JBT's operational excellence, strategic sourcing, deep customer relationships, and a global sales and service network. As for the M&A environment, valuations are starting to come into alignment with the realities of the capital markets. Of course, JBT has maintained its active corporate development posture, cultivating long-term relationships and proprietary opportunities. Regarding our digital solution, OmniBlu, we continue to gain traction and sign additional customer contracts.
Our customers see OmniBlu as, as a differentiated service, one that optimizes system yield and uptime while providing frictionless parts and service, all which improves their profitability and makes it easier to partner with JBT. As part of our ongoing process of soliciting, soliciting customer feedback, we have developed a case study of a large freezer installation. In this case, OmniBlu has produced meaningful efficiency gains in the daily sanitation process and improved monitoring of quality, compliance, and oversight of third-party support providers. OmniBlu has also enhanced asset life through prescriptive maintenance and identification of suboptimal operating conditions, including the avoidance of downtime events. The result in this case has been 350 hours of incremental annual uptime, representing an 8%-10% gain, all while operating more efficiently.
Let me conclude by extending my sincere thanks to our employees across the globe and to everyone at AeroTech. We are confident that being part of Oshkosh, a leading innovator of purpose-built vehicles and equipment, provides the best means to capitalize on AeroTech's market leadership and strong demand environment. With that, let's take your questions. Operator?
Thank you, Mr. Deck. Ladies and gentlemen, if you do have a question at this time, simply press star one. Just a reminder, if you find your question has been addressed, you can remove yourself from the queue by pressing star one again, and we'll pause for just a moment to assemble the roster. We'll take our first question this morning from Mig Dobre at RW Baird.
Thank you, and good morning, everyone.
Good morning.
My first question is really around your orders and backlog. Nice growth in orders, and frankly, that surprised me a little bit, given everything that we know is going on in Protein. I guess, I'm curious as to how you see demand progressing going forward. I know one of your peers has actually provided some commentary pointing to maybe better days ahead, even on the poultry side, as that market is starting to bottom. Again, I don't know if that's what you're seeing or if there are some other elements at play here that we need to think about or be aware of?
Sure, Mig, it's Brian. Yes, I would say from the poultry side, in particular, Q2 was probably the bottom in terms of the, the microeconomics associated with it, in terms of their wholesale co- prices to their customers, as well as we are starting to see some improvement in the retail prices coming down, which supports the demand environment. That said, it didn't. It didn't result in any increased orders in the second quarter. We're hopeful that the slightly improved economics will, will lead to incremental orders in the third and fourth quarter. Frankly, more likely fourth quarter than the third quarter, as it'll take some time. Because we're still not back from a poultry perspective, where it needs to be for them to make real money. Certainly, we do.
Are concerned or cognizant of the until they make money, they're not gonna invest a ton of money. We do see some projects, more one-off than I'll call it, more fundamental growth. In the meantime, we're staying close to our customers, obviously, and monitoring the and supporting them in their performance. More likely than not, third quarter is going to be similar to the second quarter. Again, we're starting to see some signs of life that are hopefully supportive to the fourth quarter.
The mix that's in your orders and, and backlog is, is obviously different based on, on, on the comment that you provided, with poultry maybe not being as, as big of a part. Does that have implications for how this revenue gets recognized? You know, does that have implications in terms of the mix on the margin side? Can you, can you talk about that a bit?
Sure. I mean, obviously, our backlog is fairly diverse, and supportive of, of, the model that we put forth with the growth, and the ramp-up in the fourth quarter, in particular. As Matt said in the prepared comments, some of the sequential slightly decline from Q2 to Q3 is reflective of, the weakness in the order book for, poultry and pork. By the way, pork is in a similar, general situation as, as poultry. but and then some seasonal, impact from the aftermarket. So we do expect some, sequential decline in the aftermarket business, and, and that's all reflected in our Q3 guidance.
If you look at our broader backlog, inclusive of some of the things that we mentioned on the nutraceutical and pharma side, that's quite supportive us as we go into the 4th quarter, and reflected in our, in our guidance. We're, we're pleased that some of the orders that we've been working on and some of the efforts that we've made in, in some of these diverse markets is, is paying off. I will generally say the environment out there is fairly mixed, right? There's generally tepid demand, as I mentioned, because of the higher cost and lower availability of capital. For certain industries, those are less of a concern, especially where they've got durable end markets, good margins on their product, and have a little bit longer timeframe.
That's where we're seeing the strength on the order side.
Okay. I, I wanna ask a margin question. You know, the incremental margin in Q2 was quite good. I, I'd love to hear more about what sort of drove that, you know, how maybe price cost or any idiosyncratic elements specific to this quarter have played out. You know, maybe, longer term here, as you've changed the reporting structure and, and, and so on, how should we be thinking about increment-- normalized incremental EBITDA margins?
Yeah, I'll take the first part for sure, Mig, then we can go to the second question. The margins in the quarter were definitely... We're pleased with the performance of the food operations during the quarter. Certainly, we continue to benefit from some of the price- pricing actions that the business implemented in the back half of last year, flowing through into the results this year. That definitely was a benefit. We continue to benefit on the margin side from the mix of higher recurring revenue. That continues to be a strong point in our business, and that definitely has a, a favorable impact on margins.
I'd say, the other two things that really helped drive margin improvement in the quarter, you know, the businesses are very conscious of sort of where the market conditions are, and they've been very proactive in managing discretionary costs. I think they did a great job in the quarter of doing that. Obviously, we're starting to see some of the benefits from the restructuring activity that we started to take actions on at the end of last year and that are currently being taken here in 2023. In terms of ongoing incremental margins, you know, I think as we've talked, talked in the past, for the food operations, we really expect that to be in the high 20% to low 30% range.
Certainly, there'll be a little bit of a drag, and consolidated level from the, the corporate costs and the lower revenue. I would say it's still probably incremental margins are gonna be maybe mid-20s-high 20s going forward for the total consolidated continuing operations.
I'm, I'm sorry, so mid- to- high 20s
Yeah.
for consolidated, including the unallocated corporate costs?
That's right.
Okay.
That's right.
All right. Thank you.
Thank you. We go next now to Walter Liptak at Seaport Research.
Hey, thanks, guys. Congratulations on the work on the AeroTech divestiture and sale.
Thanks, Wal-
I wanted to just ask a follow on, on, the pharma and AGV orders. You know, what, you know, I don't think, you said, but what is the funnel looking like, you know, as you kind of pivot and, you know, and, and try and find more orders in, in that product care category?
Yeah, generally speaking, I'll start with AGV. They're obviously enjoying quite a, a resurgence or surge, a surge in the need for warehouse automation. It really is a, a longer cycle trend. The, the pipeline and the backlog are quite robust. Frankly, it's really about managing lead times at this point and making sure we have adequate capacity in order to meet the needs of the marketplace. We could not be better positioned on, on the AGV side from here. It's really about making sure we're making those vehicles timely and a good cost basis. There are still some challenges on the, little better on the supply chain from the electronic side in, in that product line. Otherwise, things are looking quite good there.
On the, on the pharmaceutical and nutraceutical side, which they have some common characteristics. Just to speak quickly about the nutraceutical side, really what we've seen recently, and you're probably reading, reading it in the news, is the need for baby formula production, right? Given some of the challenges that industry faced, a year or 2 ago, and now you're starting to see those investments flow. We've been, as you, as you may know, we've got a lot of experience and skills in on the dairy side, but also on aseptic filling and preservation, as well as powder filling. All those cross nicely with where investments are going on that nutraceutical baby formula side. We do feel that's going to generally be a good trend.
Those projects tend to be large in nature. You know, quite a bit of capacity comes in at once, but as a whole, that generally looks good. Similarly, on the pharma side, we've been investing quite a bit of our resources on process flow technology, our engineering resources. When you think about the onshoring of, of where that's going, and we focused on. Our product lines are on the liquid side, media of pharma. In particular, things like for the orders that we took in the second quarter, bio-resins and plasmas are where we're seeing some success. Generally speaking, we do see the pharma as pretty supportive. Again, similarly to the nutraceutical side, it's gonna be chunkier orders.
I think you're seeing an environment that there could be, more chunky type orders that come, you know, a little less frequently. As a whole, those markets are, are, are nice to be a part of right now.
Okay, great. Thanks for that, that detail. You know, I heard your comments about the OmniBlu and, you know, that it sounds like your, your, your uptake of new contracts is going well, and that's, you know, that's great. I wonder, you know, one, if you maybe if you just, you know, quantify, you know, or, or, or, or even qualify how you're feeling about the OmniBlu and the customer acceptance of that product. Two, you know, you had that feedback on the freezer project, freezer install. I wonder if you could talk about what that equates to in terms of an ROI. You know, how quickly can something like this pay back for your customer?
Sure. More broadly speaking, in terms of the customer feedback and acceptance and where we see that going, it's pretty exciting in the sense that when you think about kind of what we're trying to accomplish with our, our digital offering, is get closer to our customer, have a deep engagement with them, being truly invested in providing visibility for them so that they can be more profitable. And we feel that the digital investments we're making really will support a durable, competitive advantage over time as we develop those relationships and continue to support their profitability.
More specifically, as it relates to what we've seen from our customers, as I mentioned, it's on this particular case study, which was one of the early installations that we saw, an 8%-10% increase in capacity opportunity, does translate to a very attractive ROI, certainly less than a year. Because the product flow immediately is incremental to them, and relative to the cost of the software, it's a quite nice value add.
Then I'll add what, really importantly, when you think about, getting those, those digital tools in, it's again, very supportive of us getting that aftermarket parts and service uplift as they start to use the tools, on our frictionless parts and service, our e-commerce portal. As they get more confident, more used to using the tool, we'll see continued uplift. I think over time, that's gonna be quite a value driver on OmniBlu, aside from the customer stickiness, that we'll see there.
Okay, great. Are we starting to see some of that, aftermarket come through yet, or what do you think the timing is on, on when it's?
We are starting to see it. It's a little bit. We are starting to see it. It's a little bit tricky on how to measure it relative to a baseline, on a, I'll call it on a, on a line basis. But we are starting to s- for the installations that have occurred, we are starting to see it. It's just a little bit tricky in terms of the precise, is this a part that they would have otherwise not bought or not? We're working on the, the analytics with our, our data scientist, our data analyst team right now.
Okay. Okay, great. Thank you.
Thank you.
Ladies and gentlemen, just a quick reminder, star one, please, for any questions this morning. We'll go next now to Lawrence De Maria at William Blair.
Hi, thanks. Good morning. Congrats on the sale and everything, and the closure.
Thank you.
Hey, I-- Hey, Brian, I don't have much, but just kind of curious, you did talk about potentially moving more into, you know, primary end-of-line. Just sort of curious what's behind, behind that? I mean, is it just as simple as opening up TAM, or is it, you know, more necessary as the, you know, digital takes over and you wanna have more solutions across the board? Kind of curious if this is, like, a strategically imperative because the market is changing, or if it's just simply opening up more TAM and more, you know, even perhaps maybe the pipeline and secondary and further processing is just more mature, in terms of consolidation?
Sure. I, I would, I would say the primary reason is in order to provide those full-of-line solutions across an entire lines for our customers. Again, the, the more role that JBT can play in taking the headaches away from our customers and and being at the ready, because for our secondary and further processing... Because typically, investments on, when you think about a food plant, they're often making their first decisions on the primary type activities, and then, later on, they make the decisions on some of the secondary and further processing. The better that we're positioned on the front end would help us.
Now, frankly, the primary side is actually more consolidated than, than the secondary and further, which more likely wouldn't mean that some of the acquisitions in that space would be a little bit larger because it is more consolidated. That said, it's not an imperative. We do have multiple levers that we could pull within the M&A market. Again, as I mentioned, the end of line is attractive to us. We've made some investments there with Bevcorp and Proseal over the years, and that's still an attractive and largely unconsolidated space, and generally speaking, would flow nicely with our further processing side. We've got multiple levers we can pull. Obviously, there's other levers in terms of end markets that we don't have huge participation in today.
Again, as I mentioned in the prepared remarks, you know, confectionary, bakery snacks, and some others that, that is another lever. I think the good thing is that JBT is externally well-positioned with our balance sheet. The market is, is looking to be supportive as we go forward here, as, as they've kind of absorbed the impacts of the, the capital markets and the realities associated with that, and, and, the valuation, gaps are, seem to be, closing. The conversations are, are constructive.
The good news is JBT has the discipline and in terms of, you know, when we pull the trigger, but, but yet, are very capable of pulling the trigger quickly and actively and decisively when opportunities do arise, without having to worry about raising capital in a tricky debt market.
Okay, thanks for that color. Brian, just quickly. I apologize if you mentioned this already, is OmniBlu still, what, a $15 million profit headwind and break even next year, or does that change with the AeroTech divestiture?
Yeah, in terms of the expense, it's about $10 million a year, about 50% embedded into corporate and 50% embedded into the business units. It is still a drag this year. Our intent would be, kind of sometime during the course of 2024, we would cross over into profitability as, as we expand that.
Okay, perfect.
Okay.
Thank you very much, and, and good luck.
Okay, thank you.
Thank you. It appears we have no further questions this morning. Mr. Deck, I'd like to turn things back to you for any closing comments.
Great. Thank you all for joining us this morning. As always, Marley will be available if you have any follow-up questions.
Thank you, Mr. Deck. Ladies and gentlemen, that will conclude JBT Corporation's Second Quarter 2023 Earnings Call. We'd like to thank you all so much for joining us and wish you all a great day.