Good morning, and welcome to JBT Corporation's third quarter 2021 earnings conference call. My name is Maddie, and I'll be your conference operator today. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedric Meredith to begin today's conference.
Thank you, Maddie. Good morning, everyone, and welcome to our third quarter 2021 conference call. With me on the call is our Chief Executive Officer, Brian Deck, and Chief Financial Officer, Matthew 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. Finally, I encourage you to review the earnings call presentation which can be found in the investor relations section of our website.
In it, we provide analysis of our current performance, including a bridge between projected and actual third quarter results. Now I'll turn the call over to Brian.
Thanks, Kedric, and good morning, everyone. While JBT continued to enjoy robust demand across our FoodTech business and are firmly on the path to recovery at AeroTech, unprecedented challenges associated with the confluence of supply chain disruptions, inflation pressure, and labor shortages hurt our top and bottom line performance in the third quarter, particularly at AeroTech. Specifically, shortages of critical materials, components, and labor impeded our ability to build and deliver equipment.
While FoodTech was more successful at absorbing the impact of the current environment, we experienced extended delivery and installation lead times which tempered top-line growth and the unavailability of parts impacted our aftermarket business and production efficiency. Across the board, rising labor costs and labor shortages were more pronounced, and metal and logistics costs have skyrocketed. We have been taking all actions to offset these operational pressures.
Specifically, we are working with suppliers to increase supply lead time visibility, secure delivery, order earlier, and identify alternative sources for parts. We have implemented price increases across FoodTech and AeroTech where possible and will continue to pursue increases to offset higher costs. Additionally, we are constantly communicating with our customers to keep them abreast of how these challenges might affect their orders. Our customers are facing similar supply chain disruptions as well as their own labor challenges which can also delay our delivery and installation.
We're responding by remaining as flexible as possible in supporting our customers' day-to-day operations by optimizing uptime and productivity of their existing equipment. This is an important part of building long-term customer partnerships and delivering on JBT's brand promise. I'll talk more about the great demand environment in a few minutes.
First, Matt will provide more detailed analysis of the third quarter results and walk you through updated guidance for the year.
Thanks, Brian. Starting with FoodTech, third quarter revenue was $359 million, a 19.3% year-over-year increase and in line with guidance. While EBIT margins of 13.6% and adjusted EBITDA margins of 18.7% were slightly below the guidance that we provided last quarter, the margins were ahead of the prior year period and we believe reflect the ability of the business to mitigate some of the supply chain and inflationary impacts that we, along with others, are experiencing right now.
At AeroTech, the challenges Brian outlined had a more significant impact on the business, limiting our ability to ship equipment, reducing operating efficiency, and increasing the cost of manufacturing. As we have previously discussed, the longer sales cycle and customer contract terms means that pricing adjustments take more time to realize.
While AeroTech is typically well-situated to handle normal cost fluctuations, the business is more challenged given the current extremes. Consequently, for the third quarter, AeroTech revenue was $118 million, which was flat year-over-year and far short of our expectations. AeroTech's margins were also well short of expectations with EBIT margins of 5.9% and adjusted EBITDA margins of 6.9%. Corporate costs, including M&A and restructuring, came in less than expected, primarily due to lower variable incentive compensation.
Additionally, interest expense and our effective tax rate came in slightly better than our guidance. In total, third quarter GAAP EPS was $0.91, with adjusted EPS of $1.02. Earnings improved versus the third quarter last year, with adjusted EPS up 23% and adjusted EBITDA up 9% to $65 million.
Third quarter free cash flow, which excludes pension contributions of $12 million, remained strong at $32 million, representing a conversion rate of 108%. With healthy orders on the FoodTech side, customer deposits continued to benefit our cash flow performance. Year-to-date through September, free cash flow conversion was 166%. For the full year, we expect to be above 125%. Given the earnings results in the third quarter and expectations of continued labor and supply chain challenges, we have revised full-year 2021 guidance.
At FoodTech, we have lowered our expectations slightly as we are now forecasting year-over-year revenue growth of 13.5%-14.5%. That breaks down into approximately 10%-11% organic growth, 1%-2% from foreign exchange, and 1%-2% from acquisitions.
We are projecting full year FoodTech segment operating margins of 13.75%-14% and adjusted EBITDA margins of 18.75%-19%. At AeroTech, we have more significantly revised our expectations. We are now projecting AeroTech's full year revenue to be down approximately 3% for 2020 from 2019. With operating margins of 7.75%-8.25%. Adjusted EBITDA margins of 8.75%-9.25%. Corporate costs for the full year are expected to be about 2.6% of sales with interest expense of about $9 million. Our estimate for the full year tax rate is 24.5%.
That brings full year 2021 earnings per share guidance to $3.70-$3.80 on a GAAP basis, and $4.15-$4.25 as adjusted. Now, let me turn the call back to Brian.
Thanks, Matt. As I stated at the top of the call, JBT is enjoying a robust commercial environment across most of our businesses. FoodTech orders for the third quarter of $382 million nearly rivaled the record second quarter and beat our expectations. On a year-over-year basis, FoodTech orders were up 23% with robust demand from customers serving retail markets and continued recovery on the food service side. Year-to-date, FoodTech orders are up almost 30% organically.
Geographically, commercial activity in North America remains robust across FoodTech. In Europe, orders continue to improve while some easing of travel and COVID restrictions are making it easier to do service work. We also experienced improved order activity in Asia, although COVID-related travel restrictions there remain a challenge.
In terms of FoodTech's end markets, we are enjoying particular strength in poultry, premium dairy, plant-based foods, and pet food applications, as well as center-of-the-store products. At AeroTech, orders for the quarter of $139 million were up 25% year over year. While down sequentially from the second quarter, which included a few very large orders, it met our expectations and reflected healthy conditions for business serving the infrastructure, cargo, and defense markets and incremental improvement from commercial airlines.
Within these favorable order trends, we are particularly excited about customer interest in automation solutions that increase output with less labor. At FoodTech, anything that automates material handling and processing, such as our robotic harvester and produce decorers, automated case packing systems, DSI waterjet portioners, and automated guided vehicles are all enjoying tremendous demand.
On the AeroTech side, automated docking for fixed and mobile equipment has become a competitive differentiator and is generating strong interest. Across both businesses, we continue to develop and market products that address our customers' critical needs for environmentally friendly solutions. At FoodTech, we're working hand in hand with customers to reduce food waste, energy, and water consumption to support a more sustainable food industry.
As an example, Proseal, one of our fastest-growing businesses, provides an environmentally friendly packaging solution that reduces plastic usage 30%-40% while cutting food waste. Earlier this month, AeroTech introduced three new solutions that advance our customers' sustainability goals, including new electrified cargo loaders and aircraft pushback tractors, which reduce diesel usage at airports. We've also introduced PowerShare, which allows better deployment of electrified airport vehicles by utilizing JBT's passenger boarding bridges as a readily accessible source of power.
These solutions generated a lot of excitement at a recent GSE industry show as our customers are under intense pressure to reduce emissions. Of course, we understand that you wanna know how all this might translate to performance in 2022. While we do not provide guidance for the following year until the fourth quarter call, I'll comment on a few key drivers. On the demand side, FoodTech orders are well above pre-COVID levels.
On a trailing 4-quarter basis, FoodTech orders are ahead of 2019 by 20% with a record backlog. We continue to see all the benefits of strong secular growth and demand for our food systems. All in all, 2022 has an attractive revenue set up for FoodTech.
AeroTech's backlog is at near record levels, in part due to delivery challenges in the current year, but also reflecting the improving commercial environment. Based on that order and backlog expansion in 2021 and the expected recovery of shipment schedules. We anticipate AeroTech revenue growth in the low double-digit to mid-teens range in 2022. As 2022 progresses, AeroTech margins should reflect our ability to realize higher prices and capture operating leverage, albeit with tough comps in the first half.
The primary risk at this point revolves around supply chain and labor constraints. At present, it looks like the supply chain of the equation will remain difficult at least through the first half of 2022. On the labor side, it's likely to get even tighter in the fourth quarter and not expected to ease next year.
JBT continues to focus on cultivating an inclusive work environment and position ourselves as an employer of choice. What we are certain about regarding 2022 is our plan to accelerate investment in our digital strategy and iOPS platform. With it, we believe JBT can reinforce and further its competitive advantage as the preferred uptime solutions partner.
By furthering intelligence into all our equipment and systems and connecting machines digitally, we can provide better real-time machine monitoring to enable preventative maintenance, enable more efficient use of water and energy resources, and improve food yield, safety, and quality. We also aim to support our customers' system uptime by providing frictionless order and delivery of parts and service. To do so, we're building a fully digitally enabled customer interface experience.
We plan to host a JBT Investor Day in the first half of 2022, at which point we'll provide more detail about our enhanced digital strategy. Finally, I'd like to thank all our employees who have taken extraordinary steps to satisfy customers in this challenging environment. With that, let's turn the call to your questions. Operator?
Yes, sir. As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. All right, your first question comes from the line of Walt Liptak with Seaport Research.
Hi, Walt.
Hi, thanks. Hi, good morning, guys. Yeah, congratulations on getting through the quarter as well as you did. I guess my first question is, you know, there seems to be more problems with supply chain in the AeroTech versus FoodTech. I wonder if you could talk a little bit more about, you know, the problems that, you know, you're having in AeroTech versus FoodTech, and why does FoodTech supply chain labor, you know, inflation issues, you know, look a little bit better than how things are going with AeroTech?
Sure. Thanks, Walt. Yeah, certainly both FoodTech and AeroTech are experiencing challenges on the supply chain side and labor side. However, there are differences between the businesses. First, probably worth mentioning is that AeroTech's production is less diversified. As you may know, we operate out of really two major factories in North America, whereas FoodTech is more diversified across about 25 factories across the world.
As a result of that, the labor challenges, particularly in one of the facilities, is more constrained. We do see higher absenteeism and constraints because of COVID restrictions, et cetera, as well as just a tight labor market and having to use more overtime. There's upper limits to how much overtime you can use.
There was a real labor constraint in AeroTech in the quarter. Similarly, AeroTech's product lines are more concentrated as well. Where FoodTech, as you know, is really, really diverse product line. Because of that lack of diversification relative to FoodTech, you do see more concentration of things like metal fabrications, which is particularly tight right now, electronics, PLCs. The things that AeroTech really relies on for production are more constrained than some of the other things.
When you consider that metal costs as a percentage of cost of goods sold as a total are higher for AeroTech. As you know, we've seen steel costs go from about $700 a ton 9-10 months ago to nearly $2,000 a ton.
That creates an inflation impact as well. We did kind of get hit with all three, supply chain, labor, and inflation at AeroTech. That's the main reason, if that helps.
Okay. Yeah, that does. Thank you for that. Do we think that those, you know, it sounds like labor issues, inflation, supply chain are gonna be with us for a while. Do you think the trend continues that FoodTech has, I'm not gonna say easier, but less impact than AeroTech, you know, as we get into 2022 and you ship the backlog?
Yeah, certainly, easy is not the right word because nothing is easy in this environment. That said, FoodTech does have more capability on the pricing side given the configure to order, engineer to order way it works with our customers. We can do a little bit more real-time matching of cost to price. We should be able to see that continue. We did pull down margins a little bit at the back in the fourth quarter to FoodTech and the revenue a little bit for FoodTech just given the environment because they are still constrained, so we did make some adjustments there. Pretty minimal in the grand scheme of things.
As you saw from the guidance, we did pull down AeroTech more significantly given we do think that their challenges will continue certainly in the fourth quarter and into the first quarter and likely into the second quarter. Then as they reprice their contracts and they get through some of the constrained backlog, we should start to see some of the improvements not only on the operating leverage but also on the whole price cost conversation.
Okay. All right. Thanks. Good luck with the rest of the year.
Thanks.
Your next question comes from the line of Andrew Obin with Bank of America.
Good morning. This is David Ridley-Lane in for Andrew Obin.
Morning.
Curious about the tone of the conversations you're having with FoodTech customers around 2022 budget. It's clearly a good environment here in 2021. How do you see that sort of developing, and what are some of the early conversations you're having there?
Yeah, the pipeline is solid. We do have visibility into the pipeline beyond what's in our backlog. I can tell you that as we sit here today, it's pretty solid. Our customers are facing challenges on the retail side, meaning demand. You know, if you've been to a retail store lately, you see a lot of empty shelves, frankly. There's still a fair amount of demand to keep up. Then as the food service side picks up, as it has been, we do see generally a good demand environment. It's hard to say precisely what's gonna be the full demand environment for next year.
As we sit here today in the nature of the conversations, we do seem to be in a good point in the cycle.
Heard the positive commentary around the automated guided vehicles and other automated systems you have. Just for background, how large is that business today inside FoodTech? When you say, you know, you're seeing very strong demand, are we? You know, the overall average for FoodTech is pretty strong orders growth. Are we talking like 50% plus orders growth for some of these automated solutions?
Right. When you think about automated solutions, it's pretty broad within JBT. North of 50% of our portfolio has some type of automation. We obviously sell beyond pure automation. We sell on yield. We sell on all those other things that I mentioned in terms of cost savings and productivity for our customers. Our portfolio as a whole is kind of 50% plus of our portfolio. No, it wouldn't be 50% kind of growth rates, but it would be north of kind of the baseline average, I'll call it, for the whole business.
The AGV or Automated Guided Vehicle business is a relatively small percentage of the overall FoodTech business, probably in the 5% range of revenue.
Of JBT. Of FoodTech.
Of FoodTech.
Thank you very much.
Sure.
As a reminder to ask a question, you only need-- you only need to press star one on your telephone. Again, that is pr- star one on your telephone if you want to ask a question.
Yeah, I'll just throw in some incremental comments here, while we wait for any other questions. I know it's been a difficult quarter for AeroTech. Certainly we see the challenges of the supply chain and the labor, and then the inflation, and we'll get through that. It's a tough time.
Stepping back, AeroTech is a very good business for us, and we take a step back and look at the quality of the investments we've made in new product development on the electrification, which helps our customers on the sustainability side, on the automation side, and really on the productivity that we provide and the quality of our name within the marketplace. Frankly, over the last year or so, we've really helped our customers work through these challenges that we've seen.
We feel really good about the prospects of AeroTech. It is a tough time right now, but we do look forward to seeing them improve over the next year or so.
We do have a question lined up. Walt Liptak with Seaport Research.
Hi. Thanks. I'll try asking a couple others. So I mean, yeah, the backlog is very high. You know, it looks like you've got a lot of next year booked. Are... What's the sequence of installations on the FoodTech side? Is it front-end loaded to the first half of the year, or is it spread throughout the year? You mentioned the funnel was solid. I mean, at what point do you start booking into 2023?
Yeah. Well, on the FoodTech backlog, you know, our lead times for equipment right now are in that 3-6 months, maybe pushing out a little bit further given some of the supply chain constraints that we're seeing.
You know, I would say for right now, the backlog is sort of on the front end loaded. We will get more book-to-bill throughout Q4 and into 2022. To your point, we do have a decent amount of the first half of the year in FoodTech business booked into our backlog.
Right. Now, that said, we also do typically experience normal seasonality with the back half stronger, given kind of just our normal seasonal patterns. That does require some, obviously, continued building of the backlog. The other thing I would mention is, kind of in underlying all of this is really that strength of that recurring revenue model that we have. There's very little in the backlog for recurring revenue, as you know, Walt. That's been a real source of strength for us throughout COVID and post-COVID.
We actually, if you dig down into our margins, you guys can't see it, but our margins on Aero on aftermarket held up in the quarter and have been quite strong throughout this entire process.
What really excites me about the deployment of this equipment in the marketplace over the last few months and last few quarters and into next year is it creates this great installed base for continuing growth and capture that recurring revenue base that we are so proud of and in support of our customers.
Okay, great. Just staying on this idea of shipments and installations. You commented that there was some revenue in the third quarter that slipped because of labor issues with your customers. I wonder if you can help us kind of quantify that. Does that revenue shift in the fourth quarter, or does some of it push into 2022?
Right. On the AeroTech side, it was fairly pronounced, somewhere in that range of $15 million-$20 million of revenue that otherwise would should have been in the quarter that is shifting. Then you've got some of the fourth quarter revenue that's now gonna shift into the first quarter. We understand the constraints that we're under, and that's why we did pull down the fourth quarter guidance as well, kind of knowing that some of this is gonna move into the first quarter of next year.
As I said, we're sitting on near record backlog for AeroTech. Some of it is because of these shipment delays, partially on our customers and their delays, partially on us and our labor constraints and supply constraints.
It does set up well, as I mentioned in the prepared remarks, you know, that double-digit to mid-teens kind of growth for AeroTech next year. We're pretty well positioned. I think the thing that makes me feel best is, as I mentioned, we had a GSE show just recently, and I had the opportunity to meet with some of our larger customers, and they're really pleased with the work that we've been doing for them. They're really pleased with the investment and the quality of our products.
AeroTech is really well positioned from here. We just need to get through some of these price-cost issues in our backlog and then make sure we effectuate some price increases on our annual contracts.
It sounds like shipment delays is largely on the AeroTech side and
Yeah.
Not FoodTech.
I think we were positioned to outperform in the third quarter on FoodTech. We did not. I think we're appropriately conservative as it turns out on FoodTech. Frankly, I was hoping for some upside, but given the constraints, we kinda came right in. Aftermarket parts actually came in a little bit lower than expected, and equipment kinda hit expectations.
Okay, maybe a last one for me. Just a, you know, the M&A question. You know, how is the funnel looking? You know, is it, you know. Are valuations looking okay? You know, what are you thinking about for future M&As?
Yes. It is a robust environment in general, and our pipeline is pretty full. The pricing is pretty high, but as you know, we really work hard to have a good amount of our pipeline on these proprietary deals, and we do have some in the pipeline. Hopefully, we'll be in a position to get one more done here by the end of the year. Otherwise, we're active. There is a lot of competition on these deals. FoodTech is an attractive space for private equity, given all the things that, you know, we all like about the JBT investment thesis in terms of the recurring revenue model, where we sit from a cycle perspective and a secular perspective.
There's lots to like about the ability to continue to provide automation to our customers. It is an attractive space but I do think we have a real great value proposition for these businesses to fold in into the JBT network and really globalize some good technology that we see that's out there. There's lots of opportunity to add on the some of the holes within our product offering.
As I've mentioned in the past, go down the path of investing in what we would call OpEx type investments, meaning things like Prevenio, where we're not just investing in areas where our customers are spending CapEx, but also OpEx in order to get closer to them on their day-to-day operations.
That is a big part of the strategy from an M&A perspective.
Okay, got it. Okay, good luck with that. Thank you.
Thank you.
Your next question comes from the line of Mircea Dobre with Robert W. Baird.
Hey, Mig.
Hi, all. This is Amy Teske on for Mig this morning.
Oh, hi.
Just a question on AeroTech. You know, the infrastructure bill coming down the pipeline, there's been a lot more uncertainty about what that final bill is gonna look like. Are you seeing that play out at all in your conversations with customers and how orders are coming in? Do you expect a final passage of that bill could lead to an acceleration in orders?
Right. I would tell you that no conversations yet are coming out of that infrastructure bill given where it stands. We're obviously very hopeful that it gets passed. There is $ several billion of earmarks for the airport infrastructure. That would be a nice tailwind for us. At this point, we haven't considered that in our forecast. It would be certainly some tailwinds from here. But at this point, you know, it will take time to work out, right? Because our infrastructure business is, it's a little bit longer cycle business. So if we do see passage, that would lead to conversations in 2022 and more likely revenue in 2023.
All right. Thank you.
Your next question comes from the line of Patrick M. Baumann with JP Morgan.
Hi, Pat. Good morning. How are you?
Morning.
Thanks for taking my question. Just, I know you made some comments on, you know, the first half of next year, you know, being a challenge still for, you know, some of these issues that plagued third quarter and into fourth quarter. As you sit here today in AeroTech, you have visibility at least to kind of the revenue growth. You know, assuming you deliver on that revenue growth, based on what you see now, like, what type of, you know, margin performance should we expect for the full year? Do you think you can get back to where you were in 2020?
Do you think you'll be challenged to kind of, you know, get back to that kind of level, but, you know, maybe you could expand margin a little bit? Just kind of curious. Any color directionally on that front would be helpful.
Sure. Pat, I would say given kind of what we see as we exit the third quarter into the fourth quarter, we see some of that continuing into the first quarter and possibly the second quarter, and then margin expansion and better comps in the fourth quarter. It's a little bit too early to tell whether or not for the full year we'll be at 2022 levels, which was about 12% or so. So it could approach that level. We'll certainly know a lot more over the next three months or so as we prepare guidance for next year.
I do think, however, as we exit 2022, and 2023 should be a much improved year, both on the volume side, which does contribute to the margins, right? We do need that, you know, well into the 500s in order to get that operating leverage, and we should be at more of that pace, as we go through the course of the year. It's a combination of operating leverage, supply chain, price cost improvement. I think it's the real question to me is what is the pace as the second half of 2022, and how does that set us up for a really nice year in 2023.
Got it. Okay. We should expect some improvement in margin on an annual basis that'll be driven in the second half of the year. I don't wanna put words in your mouth, but it sounds like we should expect some improvement in margin on an annual basis that'll be driven in the second half of the year. You know, maybe not back to 2020 levels, but maybe.
Too early to tell.
Too early to tell.
Yeah.
Too early.
I think you nailed it. Certainly some improvement as the year goes on and improvement kind of where we are this year. The question is kind of where we end up and what's the pace of improvement.
Right. That's helpful color. Thank you. On the FoodTech side, you know, the orders have continued to be pretty strong. How does that translate? You made some comments on a strong top-line environment for them next year. Can we put some parameters? I don't know, maybe you already mentioned this. I might have missed it. Put some parameters around that. Is that kind of a single digit increase? You know, high single digit? Is it, you know? Could it be double digit? Just kind of curious. Any parameters around that would be helpful.
Yeah. We don't have specific expectations around where revenue growth will be for 2022 yet. You know, I think kind of given where our backlog is as we exit this quarter and sort of where the pipeline is of customer projects, you know, we do expect to see revenue growth probably in the high single-digit, maybe low double-digits for FoodTech in 2022.
Once again, great color. Really appreciate the time, guys, and best of luck.
Great. Thank you.
If you'd like to ask a question, you only press star one on your telephone. There are no questions at this time, Mr. Deck.
Great. Thank you all for joining us this morning. Kedric will be available if you have any follow-up questions.
This concludes today's conference call. Thank you for participating. You may now disconnect.