Q4 2021 John Bean Technologies Corp Earnings Call
Moreover, our new product introductions have been well received and are contributing to outperformance on the demand front.
At Aerotech, we see solid and improving demand environment and are well positioned with market leading products.
Airline orders are continuing their measured recovery.
All the infrastructure and cargo segments remain strong.
We also believe the infrastructure investment and jobs Act.
Signed into law in the fourth quarter will support continued airport investment over the next several years.
On the other hand.
The unprecedented unprecedented challenges we've talked about through most of 2021 associated with supply chain disruptions high inflation and labor availability, we have been more challenging than we guided for.
As a result, Gbt's financial performance fell short of our expectations for the quarter and the year.
In terms of inflation, while JBT has implemented various price increases to offset rising input costs.
The inflation, we are experiencing is persistent.
We will continue to work through previously priced backlog through the first half of 2022, particularly for fixed equipment at aerotech.
In terms of a material availability.
Additionally, worsened for it for JBT in Q4 in a few categories, particularly related to electronics and.
In hydraulics.
On the labor front conditions were tighter in the fourth quarter as well and entering 2022, it became even more challenging with a very tight labor market and absenteeism associated with army con, which affects us and our vendor base further stressing the supply chain.
Given all this we are maintaining modest margin expectations in 2022.
Yet as we look ahead with Jbt's record orders healthy backlog and continued strong commercial pipeline entering 2022, we're optimistic about generating mid to high teen revenue growth and improving margins as the year progresses off the expected low in the first quarter.
And given our well positioned portfolio of solutions and the continued robust robust demand environment.
Combined with the future benefits of a digital transformation work.
We're excited about the prospects beyond 2022.
I will turn the call over to Matt who will provide an analysis of our 2021 results.
And our outlook for 2022.
Thank you Brian .
For full year 2021, JBT generated high single digit top line growth of more than 8%.
At the same time external challenges took a greater toll and anticipated in the fourth quarter, which is reflected in our full year shortfall.
The most significant impact was on productivity, we're component and labor shortages forced us to stop and restart production as we waited for materials to be delivered increasing the cost of manufacturing.
In addition, customer access and travel restrictions continue to play a role in delaying some installations.
Food Tech posted double digit revenue growth of more than 13% in 2021 composed of 9% organic.
Two 5% from acquisitions and 2% from foreign exchange translation.
EBIT margins for the year with 13, 4% and adjusted EBITDA margins were 18, 4%.
Both slightly below our guidance range.
At Aerotech full year revenue declined approximately 5% with EBIT margins of 7% and adjusted EBITDA margin of seven 9%.
In the fourth quarter, we continued to have difficulty getting equipment out the door at Aerotech two primary manufacturing locations.
Corporate costs interest expense and a tax rate excluding discrete items.
Were all slightly better than expected.
With that we posted GAAP earnings per share of $3 69.
Up from prior year earnings of $3 39 per share.
Adjusted EPS was $4 three.
Compared with $3 94.
GAAP earnings per share in the fourth quarter of 2021 benefited from a $4 6 million deferred tax liability re measurement.
Our benefit deducted from our calculation of adjusted earnings.
Full year free cash flow exceeded expectations at $190 million.
Presenting a conversion rate of 161%.
This outperformance was largely driven by advanced customer payments on extremely strong food textures.
And even without those deposits free cash flow conversion was about 115% for the year demonstrating the organizations proactive management of working capital.
Speaking of orders full year orders at food Tech increased 29% with record fourth quarter orders of 455 million far exceeding expectations.
Aerotech orders were up 16% for the full year 2021, representing.
Representing continued recovery of its end markets.
Due to the outstanding order trends, we ended the year with record backlog of $1 billion.
An indication of Jbt's momentum entering 2022.
However, given the uncertainty associated with the current macro environment and the impact of Hearts and labor availability challenges have had on our business units. We are not providing full earnings guidance at this time.
We will provide some high level assumptions for the year and first quarter to help with modeling.
Starting with the top line.
With our record backlog and ongoing strength of recurring revenue, we anticipate extremely robust full year 2022 revenue growth in the mid to high teens.
At food Tech that includes organic growth of 12% to 15%, it's another 3% from acquisitions.
We expect aerotech to grow at a slightly higher rate of 15% to 20% as we ship some delayed backlog and our customers continue to ramp up their activity.
We expect the previously mentioned macro challenges and continued inflation pressure will continue to constrain margin improvement, especially in the first half of 2022.
As those challenges begin to subside and incremental pricing actions implemented in the second half of 2021 in early 2020 to flow through the P&L. We believe margins will improve sequentially for both food Tech in aerotech as we move through the year.
For the full year, we expect <unk> EBITDA margins to be up.
About 75 to 100 basis points with stronger improvement at Aerotech.
Corporate costs will be higher in 2022 due to rising labor costs, a return to a normalized level of incentive compensation and a significant investment of approximately $14 million to $15 million to accelerate our digital strategy.
Which by itself translates to a headwind of about 35 per share.
The tax rate for the year is expected to be between 23% to 24% with interest expense of approximately $10 million.
Capex will be between $90 to $95 million, which includes about 45 million of capitalized investment in our digital strategy and total depreciation and amortization will be about $85 million to $90 million.
Free cash flow conversion will be below 100% due to the higher capital expenditures and investment in working capital to support strong revenue growth.
For the first quarter of 2022 labor availability issues have intensified for both JBT and our suppliers with the spread the omicron variant.
Limiting output and hurting our productivity on the shop floor.
As a result, we expect total JBT revenue to decline at a low double digit rate compared to the fourth quarter of 2021.
Consolidated consolidated segment margins are expected to contract sequentially, while corporate costs will increase by about $3 million, primarily due to higher incentive compensation and costs associated with our digital investment.
On a segment basis.
We expect food tech revenue to be down in the high single digits.
Sequentially with lower margins due to the inefficiencies as previously mentioned.
Aerotech, while we expect sequential revenue to decline in the high teens margins should improve slightly.
We will continue to refine our outlook and provide more information on expectations for 2022 as the year progresses, particularly on margins.
Finally in the fourth quarter, we successfully completed the renewal of our credit facility, which we upsize by 30% to $1 three.
We also negotiated changes in the terms that increase our capacity liquidity and flexibility to pursue M&A and other strategic investment opportunities now.
Now, let me turn the call back to Brian .
Thanks, Matt.
During the fourth quarter JBT acquired <unk>, a provider of food and vegetable processing solutions.
<unk> expands and complements our offering and a very attractive and growing end market.
We're particularly excited about the opportunities to leverage Jbt's global presence.
And expand <unk> geographic reach beyond its current focus on southern Europe .
Additionally, we can capture cross selling opportunities that leverage our great freezing franchise, which sits immediately adjacent to <unk> product line.
Looking ahead, our M&A pipeline remains active with attractive opportunities that complement gbt's portfolio enhance our automation capabilities and position JBT, even closer to customers day to day operations.
As Matt mentioned, we have the financial capacity to be active in the market while of course.
Remaining committed to our disciplined approach to assessing strategic fit and creating shareholder value.
Okay.
Let me switch gears and provide some color on demand trends by geography and end market.
<unk> orders in the fourth quarter.
Which frankly blew away expectations in any prior record.
Were propelled by customers need for capacity and labor saving automation.
We enjoyed strength in orders from the poultry Red Mark Red meat fruit plant based proteins tray seal packaging in the pharmaceutical and nutraceutical markets.
And we captured tremendous order expansion at our automated guided vehicle business, otherwise known as <unk>, which is at the center of warehouse automation.
Geographically other than continued linked the order cycles in Asia, we're experiencing across the board strength led by activity in the U S.
Okay.
We're pleased to announce that we have set a date and agenda for Jbt's 2022 Investor day.
Which will be held on March 24th in New York City.
At that time, we will introduce our elevate two point strategy is.
<unk> details of our digital transformation.
By creating an integrated digital platform that provides full lifecycle support we can enhance customer engagement.
Specifically, we can unlock the benefits of system connectivity well beyond our current <unk> capability.
To monitor performance and provide preventative maintenance further optimizing customers' production uptime yield food quality and safety.
We're also building a new user interface integrating digital equipment drawings, and a streamlined e-commerce platform.
Together this will provide a seamless parts and service ordering system, allowing JBT JBT to capture a larger wallet share of customer care spend.
While providing incremental value to the customer's bottom line.
We will also detailed jbt's innovated automation solutions lay out our multi year framework for growth and profitability.
Provide perspective on our portfolio strategy.
Finally, I'd like to speak about our social and sustainability initiatives.
JBT plans to issue our first ESG report in the first half of 2022.
This report will highlight how JBT supports our customers' sustainability journey with solutions that reduce water usage energy consumption food waste as well as enhanced food safety.
Together with our customers, we are striving to make better use of the world's precious resources.
The report also speaks to our equity and inclusion initiatives that make JBT a great place to work.
Before we open the call to questions I would like to extend my most sincere thanks to all our employees at GBT and partners around the world.
Through this extremely challenging macro environment, our people have taken extraordinary steps to support and deliver for our customers.
And with that I'll take your questions operator.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Yeah.
Okay.
Your first question comes from Michael Mcginn of Wells Fargo. Please go ahead. Your line is open.
Hey, good morning, everybody good morning, Mike.
I wanted to touch on I guess, the guidance and the confidence in the back half outlook. So.
If I'm looking at the financials and going back to the quarterly filings you had last quarter.
You mentioned you alluded to some start stop nature of production, but you haven't really built a lot of finished good inventories and inventory stepped up again.
Again, this quarter, but not as much I guess is what you're.
Kind of you would expect in this high growth environment. So.
Understanding that do you have the product or the in hand or is there stuff waiting to be shipped maybe give us a sense of what's waiting to be shipped within the quarter that net.
Drove the miss versus what hasn't been built yet.
At risk for the second half of 2022 guidance.
Sure absolutely so the equipment in terms of both the fourth quarter, Miss and as our expectations for the first quarter is largely been built and it would sit in either work in process or with on our balance sheet.
<unk>.
In a separate line item for our.
For our in process accounting.
So there is a lot of equipment that is 90% 90% built.
And as we go through the year, we're going to see the same challenges of mostly built equipment with the with the challenge in particular being electronic components. That's the big issue as we wait for a final assembly of certain parts. So we do have to put that equipment aside wait for those final parts to come in.
And then and then allows us to ship. So it's one of those issues with the lowest common denominator, where you have to have the electronics in order to complete the control panels and the other electronic components.
Audi within the equipment. So it's not so much an issue of major parts missing we're doing a pretty good job.
Acquiring all the things we need but the electronics components issue is the biggest open item.
We do expect that to abate somewhat in the back half, but more than anything what we've done in terms of the color that we've given for the year.
As given the backlog, we would normally see about between our backlog and our.
And our recurring revenue expectations, we would normally have about 65% in the bag so to speak with a 35% go get as we sit here today given.
Given the color that we've given on revenues.
That's more like 75% to 80% in the back. So we've been we've tried to be really conservative as it relates to what we can actually get out the door given those constraints.
Certainly if everything improved significantly we actually see upside on that revenue number but given the constraints that we're living in we do feel confident in our ability to deliver what we've put in front of in.
Front of the group.
Okay great.
And then it's.
Just wanted to switch gears to the digital investments.
You are making.
Can you talk about some of the.
Drivers.
For putting this in place now.
And then kind of how what does this do for your recurring revenue as a percent of total sales kind of the margin differential that you expect to pick up between the aftermarket OEM business and then is this something that youre going to be leaning on internal.
End of <unk>.
Maintenance network or is this going to be outsourced to a third party kind of asset light model that maybe a contracted thats already doing the work any color there would be helpful.
Sure Lat-lon unpack there in that question, so first and foremost what we've seen over the last two years, particularly driven by Covid is our customers more and more willingness to engage deeper on the digital front.
<unk> culture of changed as people have gotten more religion about productivity and information.
Frankly, if you talk about with our most sophisticated customers.
They are really interested in data they are interested in a digital AI sustainability automation in all of these things can be readily addressed by a digital platform that we have so.
So we continue to see that demand and frankly as we built this.
Product out as we're building this product out.
We're actually not doing it in a lab so to speak and just handing it out to our customers. We are doing in hand in hand with several key customers.
Iterating back and forth as to what's important to them and we've made some shifts along the ways. We thought was important to them.
<unk> has shifted to something that we found even more important is.
The food safety data on the comparability of the equipment the.
The throughput the yield.
The connectivity of the various pieces of equipment. So we've really seen.
And enhanced engagement and willingness for them our customers to really capture this information and data and more importantly.
Allowing JBT to be an easier company to do business with so this is why we've added that the e-commerce .
As they go along with a preventative and predictive maintenance and the parts packages. So the ability for them to on the fly automatically order things from us where in the past you would have to pull out the PDF annual look at it put in a phone call or E mail now thats going to be all digital.
The doubleclick all the way through the equipment into the actual parts on the machine itself and then right then and there either put forth a purchase order or will have an order part by credit card. So that's really exciting to us in terms of again, making it easier to do business with but also providing them more visibility on their data and enhancing.
Our uptime in yield so and we can demonstrate that that increased uptime and the impact on their bottom line.
And that's what's pretty exciting about the value proposition to us and our customer.
In terms of the flow.
The way, we're going about the execution on it we do have partners that are helping us out in 2022 to put on a project basis.
Thereafter, we would expect it to be a fully in sourced in terms of how we manage the product going forward, but in 2022 were using partners to help.
At this point, so it's a big Blitz of investment in 2022.
With attractive.
ROIC on the project itself it will take.
We'll start to see the benefits in 2023, and then continue to ramp up 2020 for 2025, we'll get some more specifics to you at Investor day, but we're looking at attractive ROIC.
Just on the uplift of the aftermarket parts and service.
When you think about our wallet share, which depending on the product line is anywhere from 20% to 40% of wallet share by products, so lots of opportunity.
For upside that justifies the investment on itself, let alone any benefits that we see on having a more connected offering with our customers.
Start to see the benefit of working with a.
Larger company like JBT that can provide that that not only the full line capabilities, but also the visibility to how those pieces are interconnected and working so it's a very exciting opportunity looking forward to it and just as a reminder, when you think about JBT and all of this equipment that we're putting out in the field.
In 2021, and 2022 and in all likelihood given the commercial strength 2023.
All of that adds to the aftermarket baseline the installed base that's out there.
And as a reminder, for each piece of equipment that we put out there the lifecycle of that piece of equipment results in usually two to four times.
The amount of the equipment investment in aftermarket parts and service. So we're really excited about one just getting this installed base increased but then also putting this great platform in place for us to be able to continue to monetize and do better for our customers as we go from here.
Yeah.
So just to put a bow on this conversation to make sure I understand it you already had the.
The implant remote monitoring with your most sophisticated customers and youre considering this as.
Additional opportunity to add odds that and with the aftermarket procurement to kind of drive that higher.
Aftermarket Tam is what youre alluding to correct.
Essentially yes, but I would say even for our current <unk> program, which is our Iot solution. It takes brings another level of sophistication to it.
In terms of the user interface and the usability of that data and the information and allows that information to be coordinated across multiple pieces of equipment and align as well. So it does take our current iaf's offering to the next level and then as those other components that you mentioned.
Got it I appreciate the time sure.
Your next question is from Lawrence de Maria of William Blair. Please go ahead. Your line is open.
Yes.
Hi, Thanks, Good morning, Hey, Larry Hey.
Hey, Brian so as it relates to that discussion.
We fundamentally change your profit pull through expectations are we entering a period of higher cost because of the divestments or the trail off and we can get back to more normal Incrementals and then secondly.
Obviously, there's no EPS guide, but can you maybe just give us a little color on the cadence first half for second half could be like 30, 70 is that much of a jump.
Sure.
Yes in terms of the Incrementals and changing the business model.
So much other than 2021 with some pretty meaningful fixed investments that we see that will benefit from there there will be some ongoing investment as part of maintaining the system and all that but we consider that part of the general operating costs within that I would say historical contribution margins on.
On aftermarket parts and services, which are north of 30% historically, so we should be able to capture within that contribution margin ongoing maintenance cost and people in supply chain developments that we need so I don't see the model changing meaningfully once we get pass.
Last season investments in 2021.
In terms of cadence Larry it's Matt.
I'd say certainly in Q1.
That is definitely the low point in terms of both revenue and margins for both the food Tech business and the Aerotech business.
But we do.
<unk> margins to.
Certainly improve starting in Q2 for food Tech and the mobile equipment part of the Aerotech business.
And.
We should expect ramping back to a more normalized incremental margins by the by sort of the second half of the year. So there'll be challenged certainly in the first quarter it will be better than Q2, and certainly back to more normalized levels as we get into Q3 for the fixed equipment part of the Aerotech business.
Those incremental margins will remain significantly off.
Historical rates through Q2.
We've talked about in previous conversations.
Backlog is got a longer.
Lead time and delivery window than our other parts of our business and so it will take us a little longer to work through some of the previously priced backlog that we currently have.
Yes.
Got it.
Larry I was going to say second half run rate is a more normalized run rate after that kind of first half.
Absolutely and in fact Q1 is it.
Q1 is going to be a tough quarter.
Aerie.
Particularly because of the January labor situation, just to give you some color on omnicom and the impact on GBT.
Look at the cumulative we track our cases.
Our COVID-19 cases.
And if you look at the cumulative cases over the last two years.
30% of them occurred in the month of January <unk>.
That's how impactful army chrome wise and we are looking at really significant absentee rates.
<unk> all through January on top of the open positions, we already had because of that.
Tight labor market. So January was a really really difficult month, and you can't get those hours back right and so that makes for a really tough.
Q1, which is when we tried to give you.
The heads up obviously with the color we provided that it's going to be tough first quarter, but then progressively gets better from there as Matt laid out, particularly the back half.
Looks pretty solid.
In that regard.
And by the way just to correct something I said, a moment ago I kept referring to 2021 as our investments in 2022 for those those onetime investments right.
One more follow up if I may obviously, the lead times are getting extended.
Definitely now rich.
Risk to either a losing orders that you have in backlog or D. Not getting the jump borders does it go to somebody else that can deliver or is this just a pervasive in the industry.
On the first part got so much right I think.
People recognize the challenges that the world has with regard to lead times.
And frankly, if anything there.
They're making sure they get they get in the queue.
I do think we always continue to monitor where we see lead times with our competition and I would say, we're there to still slightly better. We are seeing for example on ovens and freezers lead times from some of our competition well beyond a year at this point.
We're still within a year or so.
I do feel that we are still competitive in that regard even with the elongated.
Elongated lead times.
It's a risk right at some point to customers, saying when it gets beyond a year do they make those investments so that would be my one concern.
But the fact is the commercial pipeline that we're working under is very very strong even with the huge conversion in the fourth quarter that we saw the general pipeline is quite strong the demand is.
As strong at the consumer level for <unk>.
Go to the grocery store you see the empty shelves et cetera. So the demand is still there our customers need the automation they've got the same labor problems.
So the general environment is good.
So we see that continuing through 2022.
And I think the good news is when you think about what I mentioned earlier about.
The strength of the backlog end of the book to Bill the small book to Bill that we need it does look like we're going to have a solid backlog as we go through the year as well.
Thank you.
Your next question comes from Mig <unk> of Baird. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning.
Just wanted to start with a quick clarification in the press release on your 22 outlook, you're talking about margins to be slightly above 2021 levels and I want to make sure that that would.
There were clear are you are you talking about segment level margins or does this include incremental.
Incremental investments on the corporate line item as well.
It would include total JBT adjusted EBITA margins will be slightly better than 2021, right, okay, but but even more so at the segment level because of the investment correctly.
Okay. Thank you for that then.
A couple of questions on food Tag for me so.
If I'm looking at.
How you were talking about Q1 revenues and then put that in the context of.
Of the full year guidance right.
12% to 15% organic growth I mean, we're obviously, starting very slow and they are doing much better.
I'm kind of curious if you can comment on the cadence here.
How do you see the second quarter play out can we actually see north of $400 million of revenue in the second quarter and I ask because.
<unk> doesn't seem to be the problem here right.
All about how you are able to kind of turn product out of the factories and I understand all micron that that's an issue.
Essentially gone away.
What do you sort of get the sense that you have enough visibility in terms of electronic component availability.
Any adjustments that your supply chain teams or purchasing teams might be might be making in order to kind of.
Give us some confidence that the full year organic growth outlook is is attainable.
Yes, it's Matt I would say first I think it's appropriate for us to be a little cautious in the current environment that we're in but certainly.
For food Tech.
We should we do expect revenue to be north of $400 million in Q2, and continuing to ramp from there as we get into the second half right and as we've talked about this.
Component availability is an issue right.
It is hand to hand combat everyday that we work with their suppliers.
Ordering as early as we possibly can and Thats why were feeling confident about the timing and we certainly tried to make sure. We took that timing into consideration we moved together the guide.
The forecast and the color.
So.
We can't tell the future, obviously, but given what we see here today and the strength of that backlog.
<unk>.
One way or another and it may not be the same thing we might expect product Ada ship instead, it ends up being product B, which we would have thought with later right. So it's going to be a little bit of mixing matching depending on where we get the components, but given the strength of the backlog.
The diversified nature of our overall network for JBT and the diversified product lines that we have.
We do feel confident that somewhere somehow we're going to get stuff out the door and then again if things alleviate.
That could provide some provide some upside on the revenue but.
Frankly army worst, whereas busy can be in our factories for sure.
Okay.
I guess my follow up is.
Just on the on the way you're pricing this.
Product and I remember prior discussions that we've had here.
On the topic and you talked about the fact that oftentimes that the pricing is sort of negotiated it.
Point of purchase is not list price right. These are bigger machines theyre kind of negotiated the barrier to purchase.
<unk> associated with that.
And to be candid, we're not quite seeing that plays through in the near term margin. So I'm wondering what's kind of different here.
Other than <unk>, which you talked about.
And then as we're sort of thinking about the.
Orders that you'd be taken say in Q1 of 'twenty. Two are those at this point price to the point, where you can reach <unk>.
This cost neutrality or better as you contemplate the back half of 'twenty two.
Sure I'll answer first and I'll have Matt because some price cost conversation that I would say for food Tech, we've largely been able to capture the inflation I would say kind of on a one quarter lag basis. The problem is every single quarter. We continued to see so you are kind of always trying to catch up and youre always in a quarter about.
Quarter lag on some of the inflation, but the bigger impact for food Tech.
Not so much the price cost on the material and put it on we'll have Matt talk about that it is the productivity and the logistics right. That's hard to price for six months in advance right when you're taking the order even nine months in advance. So we're not we have not been passing that along so to speak we haven't seen the mark.
Doing that either so we do have good feel for the competition and where the price points are so there is competitive pressure, obviously so were larger.
For price cost.
Issues.
Understanding.
Some of these inefficiencies at the plant level and on the logistics side and we are effectively had been bearing the cost and Thats really what you saw in Q4.
As long as Youll see in Q1.
Yes, and again just to provide a little more detail around price cost I mean for food Tech.
For the full year, we expect to be favorable.
Throughout the year, but certainly at best flat in the first quarter.
As we've taken consistent price increases in the second half of 'twenty, one and even in the first part of 2022, we should expect to see those prices take hold in the second quarter.
And be favorable from a price cost perspective at least on input costs on the aerotech side, it's a little bit different and it's sort of yes.
Split between.
The businesses.
Overall, I would say for aerotech.
We're expecting to be essentially flat on a price cost perspective, certainly unfavorable in the first half from the previously priced backlog, especially in fixed equipment.
And as that shifts to customers, we should see meaningful improvement in the price cost ratio in the second half of the year right.
To remind everybody. So we have two large businesses in aerotech on the fixed and in mobile and fixed side. These are these are construction like contracts that we took a year ago.
We do our best to lock up the metal prices and has some escalator clauses, but these are a lot of time public bids were really difficult and then most.
95% of the environment.
There's not really an issue you got some fluctuations we tried to build in some buffer for metal cost fluctuations, but.
In the environment that we saw were metal essentially tripled there for awhile that made it really really tough and we did not properly hedged the tail risk so to speak and that's going to continue to impact us on those fixed price investment those fixed.
Fixed airport investments through the first half as Matt said on the ground support side there.
More there is more kind of places you go but there are also large contracts with some of the major.
Our customers on the airline side as well as on the cargo side.
And we do tend to renegotiate those every year and so those negotiations have occurred and are occurring and again, we would expect those new pricing arrangements to kick in here during the second quarter.
And again for the benefit of the third and fourth quarter.
Okay I appreciate the color. Thank you.
Your next question comes from Walter Liptak of Seaport Research. Please go ahead. Your line is open.
Yes.
Okay well.
Okay.
Apologies. Your next question is from Steve.
Tusa of Jpmorgan. Please go ahead your line is open.
Hey, guys good morning.
Steve.
Can you just talk about like the cash dynamics around.
Kind of the front end of the op. So like when you take the order.
Yeah.
I assume youre getting some sort of a down payment because it's a bit of a.
In a project for a lot of these guys and then on the backend when youre kind of ordering.
These components, specifically, what I'm thinking about is kind of on the electronics side some of the more kind of automation related.
Embedded components that you may be buying.
Do you have to.
Is there a down payment for that you mentioned you were kind of trying to order. This stuff early and so im curious a is there a down payment for that stuff.
Kind of how early are you ordering this stuff versus.
What you have what you would normally do.
Things weren't this crazy.
Sure Steve It's Matt on the order side on a customer order side, we definitely are getting advanced deposits, usually in the 25% to 30% at.
At the time, we take the order for food Tech for food Tech to secure sorry for food taxes, yes, you're the position in the manufacturing and for us to be able to start the engineering and start ordering the material.
And then that sort of as we go through the process of production will get other potential payments along the way depending on the contract.
On the Aerotech side, certainly less there's a little bit on the fixed equipment side, but it's certainly on a lower percentage of orders that we get those deposits upfront on the purchasing side.
Especially for high value components. There are instances, where we are putting deposits down ahead of time in order to secure.
Bots and secure supply.
But it's not to the same level that we get deposits on the customer side and what are those are those like are those some of the more complex kind of bigger ticket assemblies or.
I'm really kind of thinking about like where where the bottleneck will be maybe on the electronics side like some of the automation guys have talked about not being able to ship and they put out some really big orders. So I'm, just trying to kind of triangulate around around that as well to understand.
The cash moving around in your on your of statements.
Kind of in your ecosystem, if you will.
Yes, it's certainly an electronic components like like controls.
In capacitors and things like that we are struggling to really get those in so we are trying to to try to.
Secure slots for those particular manufacturing components, that's probably the biggest one that we're experiencing those are the biggest ones.
And we're trying to shifting I don't know that we had a tremendous amount of deposits prior to August , but we're trying to shift some more so that we can try to secure.
We are ordering earlier for sure in order to do that.
The challenges we are kind of a high mix low volume environment. So we're talking about we're not buying 10000 of the same thing, we're buying 100 or 200 or something and then we're accepting parcel shipments. So hey, I can suddenly 25, now or I can send you. Another 25, and so we are literally kind of waiting at the door for the next one to come.
In often but and then more generally looking at the cash flow forecast.
<unk> forecast for the year, we do expect to see some investments in the balance sheet in the front half of the year and more cash flow positive in the back half of the year given what we are.
What we just talked about where we're at.
We obviously got a lot of cash flow from our customers in the fourth quarter and throughout 2021.
But now we expect to have to invest in inventory and then obviously how that converts to receivables, but we are trying to buy as much inventory honestly as we can in order to secure the shipments in the back half of the year in particular.
So with that sorry, just wanted to follow up because I think it's super interesting.
Could you guys seem to have a very visible front end backlog like right, if they're giving you a 25% to 30% down payment they are not going to come back and cancel and they can't like.
Double order or pull forward something but on the back end you guys do have the data.
That kind of ability to.
We're a bit earlier, when you say you're ordering earlier or is that usually like still within the quarter or is it hey, we would've order two months in advance.
Before all this happened now ordering four months in advance of any idea of like.
The magnitude of kind of what you would at what means ordering early what does that actually mean, yes. It would be an extra couple of months earlier, if we can at least historically because you are trying to manage your inventory historically through your investment and your inventory turns you would order.
Lead times, which suggests from your vendor and if its a 45 day lead time, you're ordering 50.
<unk> 50 days beforehand with expansion.
The intention of getting it on time now with lead times, we see lead times six 912 months right now on electronics.
At the moment, we take an order from a customer.
Get through the engineering drawings, and sometimes before we get through the engineering drawings, we're ordering equipment.
Parts, just because we generally know what we're going to need historically the earliest we would order will be once we get through the engineering drawings that we knew all the specs, but even now with particularly with more now.
Standard to the extent that we can call. It that we're ordering as soon as we can and that's what we're doing now in order to secure those positions as we go through the year.
Sorry, one more quick one on that.
Do you sense your customers are doing the same thing I mean, my guess is they have like they're more kind of real time demand based.
But maybe they're kind of converting quicker saying.
Hey, we have this project, let's take a quick look okay. We can do it so like let's get in the queue with these guys. I mean do you do you see that from your customers at all.
We there is certainly a bit of a sense of urgency from our customers to get into the queue. Knowing the lead times are long and known that they've got the volume needs for sure and the good news is we still have this great underlying commercial.
Opportunity set that hasnt, even converted to the backlog. So the good news is the demand is still kind of seems to be ongoing despite kind of what could have been maybe some acceleration in the last quarter or two.
And then going back to what you said before.
Back to mix question I think it was customers don't cancel rate, mainly because as you suggest they lose those deposits and therefore, our contracts are written in fact, they would in all likelihood OLED for the amount of work that's done to date, that's generally how our contracts are written so it's quite punitive for.
We very rarely ever if ever see contract cancellations.
On the customer side.
Yes.
Great color.
Best of luck kind of operating through this crazy environment. Thanks, a lot for all the color. Thanks, Steve.
Your next question is from Walter Liptak Seaport Research. Please go ahead, Hey, Ross opened.
Alright, Okay. Thanks, Scott, Yeah, and same thing here.
Through.
The supply chain issues.
I wanted to ask the same question kind of in this way it seemed like supply chain was hitting you guys.
In aerotech more than food Tech.
The second and third quarter of last year.
And I want.
So I guess the question is what changed in the fourth quarter or was it just.
The.
Maybe some of these electronic controllers or electronic components your inventories.
Yeah.
We're lower.
And the cycle times were stretching out and so I wonder if you could just provide a little bit more detail about.
Just what changed in the fourth quarter around supply chain.
Yes.
Nailed it really was that incremental tightening on the electronics side.
I mean, we're effectively sitting on zero inventory on electronics.
That's the big one and then the other thing is logistics continued to get worse and productivity and labor tightness.
And open positions on the factory floor continued to get worse because of the turnover on the shop floor etcetera. So you kind of had that the triple whammy of the you don't have those parts of the house you have less labor in order to process. It and then you've got higher costs and logistics for when you do get it.
And that did get worse both labor.
Electronics got worst labor got worse, the productivity and logistics covers.
Okay are there any data points regarding the electronics and when that.
Maybe when the cycle times.
Loosening up a little bit.
You were able to get more electronics in no not really that's why we're just ordering a lot earlier honestly so.
We're just really ordering months earlier than we otherwise would were.
One of the things that we're doing a good mentioned at this point is we are doing kind of some on the fly reengineering and kind of figure out what different parts that we can use in order to secure supply. So hey can we use this one instead of this one do a little bit.
By reengineering, that's very costly we've seen examples where a supplier well known electronics supplier.
Hey, guys. If we can't get I know, we said we're going to send you three.
300 of these things in Q2, it's going to be like Q2 of next year, instead, right and so we get an alternate supply and instead of paying 500 per piece, we're paying $2000 per piece. That's why you see some of the inflation embedded into there as well. So we've seen a lot of that is like I said, it is hand to hand combat and trim.
The securing supply.
And but we're just doing a lot earlier as early as we possibly can and being creative on smaller shipments.
Alternate suppliers doing a little bit of reengineering and everything you could possibly do to us to secure that.
Supply.
You got supply.
Okay Alright.
Right, Great and then.
Kind of along the same lines when youre thinking about M&A.
Does the supply chain issue, that's hitting everybody into the your competitors is going to be hitting some of these acquisition targets as well.
How do you deal with that with trying to figure out valuation or even.
The timing of when you do these deals.
Fortunately because we are experts in this supply chain challenges world, We know what questions to ask when you look at.
Same thing when we look at our own businesses, which are backlog, which you betted.
Inflation <unk> inefficiencies embedded into your backlog.
We ask the right questions on.
What are the what are the bottlenecks is linked to your supply chain.
And how that backlog is going to convert to revenue and where are the risks. So yes, it's a huge issue.
We have seen.
Targets have it's a similar situation where were seeing the high demand environment with the M&A targets, but struggled with on the margins.
And the question is always that we asked is when you're going to get back to normalized margins.
And we are generally giving folks the benefit of the doubt.
Kind of like we're giving ourselves and looking forward to to what the margin profile of this kind of should be.
When it comes to valuation et cetera.
Okay, I guess I guess, what I mean by this.
This is a supply chain issue would mean that some deals might get delayed.
While they are trying to sort it out I would tell you some deals in the marketplace did get delayed.
For sure it's stuff that we started looking at the fourth quarter.
Last year, even in the third quarter started to get delayed because they were experiencing challenges and now that they're kind of.
Getting behind some of these things we saw some stuff.
It popped up six months ago that are starting to reemerge, especially with the higher backlog.
Okay, Alright, great and then last one for me I think you may have talked about this but in 2022, what is the incremental dollar spend.
For the digital.
Yes. So for 2022, we're looking at about $14 million to $15 million in the P&L and about $45 million on the Capex side, so kind of in that $60 million incremental range. We spent a couple million dollars in 2020 one.
And we do expect to spend in 2023, but more on a maintenance basis there'll be some capex will be some expense.
Expense going forward as well, but nowhere near the Alex.
Project costs that we're seeing in 2022.
So for the P&L costs in 2023 that Mike.
Maybe it gets cut in half or even more than that.
There'll be a little bit of relief, yes, yes, I would hope we will get cut in half or better honestly, it's a little bit depends on how many product lines, we've rolled this out to and.
And by the way if we do an acquisition, we want to roll them into it as well right Thats one of the beautiful things about having a platform like this is not only can you do for your own product lines, but you can really help to monetize the benefit of the aftermarket businesses of these acquired businesses and then and then.
It also allows us to do things like for example, with the case of our preventive business, which is pretty.
Pretty much 100% recurring revenue business.
Allowing new business models to roll into this digital platform as well, which is the high you monetize how you measure.
Ultimately, we'd like to get to really unique business models like power by the hour or things of that which with this platform allows you to do it allows it creates an opportunity or an optionality for the art of possible, but frankly with the ways away really what we're trying to do to get here is to monetize the aftermarket, but what it does do is.
Leif provide some optionality on.
Other different ways to monetize yes, just to clarify that well I would say we will continue to invest in that into 2023, what the difference will be that it would be more embedded in the business units and sort of more track the revenue that we expect to earn on the digital growth.
I won't say, it's going to cut in half or anything it's just where it goes in the P&L and where it's identified.
To attract with revenue.
Right.
Okay.
Great. Thank you.
Your next question comes from Andrew <unk> of Bank of America. Please go ahead. Your line is open hey, guys.
Good morning.
Hey, good morning.
Just just a follow up on a bunch of questions and thanks for answering a lot of questions how much of it what's happening do you think like if you were to put it in buckets Tom out of it is structural where we're sort of moving from this disinflationary world globalization.
<unk> growth to maybe a lot more growth in the U S.
A lot more inflation less globalization, so how much of a structural and how much of it do you thing is sort of this near term spike from omicron.
Yes in terms of the supply chain challenges, specifically, yeah, and then just the overall environment correct.
<unk> pricing labor availability.
Our business model.
Yes. It is.
A really difficult question to answer I will say.
To me the vast I would say.
At least half of it is simply just because of the whipsaw effect of going from lower production lower demand to all of a sudden really high demand and nobody was was ready for that that investment level. So I. Just didn't think you saw the investments.
Underlying factories on electronics et cetera.
For the years prior and then anything that was otherwise would've been invested in in 2020 kind of delay.
Delayed so to speak just because of the uncertain future. So I do think that has a huge impact but the problem is I think it's a pretty big hole to dig out of and I do think it will take.
Categories through through 2022 to get through and we will see other categories. We are starting to see just a little bit of relief steel.
Steel and steel fabrications the prices have started to come down. So ultimately we will see some benefit of that.
Availability is improving but I do think.
Andrew that's just certain categories are just going to be more structural for another year or two yes, maybe you could take a different.
Are you on that is I think what we experienced in Q3 and Q4 and most likely after Q1 is more of a structural issues that you referenced Andrew and I think sort of the more negative impact.
Impact we're seeing in Q1, specifically sequentially from Q4, that's really what's been driven by the AMA problem for us and our vendor yet Greg.
And then just a follow up question to that.
Are you guys.
Redesigning.
That electronics is sort of really tough because all of that is in southeast Asia I get that but beyond that other opportunities to redesign the supply chain go to sort of multiple sourcing.
Kris you own automation spend redesigned the product.
Are you doing any of that and is there opportunity to do any of that going forward. Thank you.
Yes, yes, and yes, so we are.
We have expanded to more multiple sources of supply.
In smaller quantities theres, a cost impact to that obviously.
And so both.
Either within certain geography, or expanding beyond up to other geographies. We are also doing a lot of value engineering to figure out what other parts that are more widely available can be used in our designs.
Like I said, it's a little bit on the fly and tricky again and expensive.
But yes, we're certainly doing some engineering as well as expanding our vendor base.
To go along with it so we're doing literally pulling every kind of trigger weekend, we're certainly adding resources on the engineering side.
Maybe lower cost engineering locations to support some of the value added engineering that we need to do.
But that does take time.
But.
Many of the businesses are looking to also do more standardization. So we are trying to accelerate Inc. Standardization of a control panel for example.
We are going to try to accelerate that in light of some of these challenges that we've seen but unfortunately, it takes some time and the resources to Ava.
Availability to find them to be able to implement that kind of change.
How much.
Great.
We have completed the allotted time for questions I will now turn the call over to Mr. Brian <unk> for closing remarks.
Thanks, everybody for joining us this morning, Kendrick and Marley, we'll be available if you have any follow up questions. Thanks al.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yes.