Good morning and welcome to JBT Corporation's Third Quarter 2020 Earnings Conference Call. My name is Laura and I will be your conference operator today. [Operator Instructions]. I would now like to turn the call over to JBT's Vice President of Investor Relations, Megan Rattigan, to begin today's conference. Ma'am, please go ahead..

Thank you, Laura. Good morning, everyone, and welcome to our third quarter 2020 conference call. With me on the call is Brian Deck, Interim Chief Executive Officer; and Matt Meister, Interim Chief Financial Officer. Also joining us this morning is JBT's Chairman of the Board, Alan Feldman.

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 references certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found in the press release on our website. Now I'd like to turn the call over to Brian..

Thanks Megan, and good morning, everyone. I cannot start without saying a few words about our former CEO, Tom Giacomini. He was our friend, mentor and an inspirational leader who transformed JBT and established a culture, strategy and operational fitness that accelerated growth and profitability.

He fostered deep customer and employee relationships, and elevated JBT's reputation within the industry. Now it is up to the rest of us across JBT to honor Tom's legacy and continue the strategy that has enhanced JBT's competitive position, customer orientation and performance. I best Alan -- I best our Chairman, Alan Feldman, to share a few words.

Alan?.

Thanks Brian, and good morning to all of you on the call. Let me start by echoing Brian's heartfelt comments about Tom Giacomini. Over the past 7 years, the board had developed great respect for Tom and we are all deeply sad by his passing.

It's important for you to know, that the board has complete confidence in Brian Deck and the entire leadership team to keep JBT moving forward. Having said that, our search process to select a permanent CEO is well underway and moving quickly. Our hope is to name a CEO by year end.

I'll close by thanking you for your continued support and say in JBT through these challenging times. Now Brian and Matt will cover our third quarter report.

Brian?.

Thank you, Alan. JBT's third quarter exceeded our expectations from a P&L and cash flow standpoint. Moreover, we captured double-digit sequential order pickup with FoodTech outpacing expectations. A key factor in our outperformance in the quarter was improved access to customers, both at the plants and in terms of mind share.

While we are pleased with the quarter, it is too early to pronounce a restate recovery given the continued risk of pandemic effects on the economy. But the improving translation of our active pipeline into solid orders is very encouraging.

Of note, the timing of the Q3 orders received and the state of the backlog coming into the period will affect the traditional fourth quarter seasonality. Let me turn the call over to Matt Meister to provide analysis of our third quarter performance.

Matt previously served as CFO of our Protein Division and brings extensive experience in global manufacturing and operational financial leadership to the interim CFO role.

Matt?.

Thanks, Brian. Before I provide details on JBT's third quarter, let me mention that the period reflects all organic performance as we had no significant acquisitions completed over the past 12 months. FoodTech revenue declined less than 1% sequentially, outpacing our forecasted 10% to 12% contraction.

While recurring revenue continued to perform well, we exceeded guidance predominantly on the equipment side, confronting demand from our customers, especially as it relates to equipment for the production of retail center of the store products.

We also completed installations and service projects at a faster pace than expected due to improved access to our customers' facilities. FoodTech operating margins of 12.6% and adjusted EBITDA margins of 18.1% were in line with the guidance we provided on last quarter's call.

As mentioned, we realized higher than expected equipment and service revenue, which generally contribute lower margins than our recurring streams. Additionally, SG expense was up sequentially as our cost reduction efforts moderated in response to improving customer engagement.

AeroTech revenue increased 9% sequentially, just above our guidance of 6% to 8%. Operating margins of 9.6% were impacted by $1.9 million inventory write-offs associated with the rationalization of the Spain manufacturing operations. AeroTech's adjusted EBITDA margins expanded sequentially to 150 basis points.

This exceeded expectations, primarily due to the team's continued focus on cost controls. We are pleased with AeroTech's ability to maintain double-digit EBITDA margins, considering a sharp decline in airline customer activity.

Corporate expense of $13.9 million came in a little better-than-expected, after adjusting for $3.5 million of management succession costs. Now regarding the previously announced manufacturing capacity rationalizations. During the third quarter, manufacturing operations at the AeroTech facility in Spain were significantly downsized.

Also in the quarter, we began the process of rationalizing capacity at 2 FoodTech plants. In total, we recorded exit costs of $9 million in the third quarter and anticipate additional charges of $1 million to $2 million in the fourth quarter.

In the fourth quarter, we expect to realize $500,000 in cost savings and expect incremental savings of approximately $5 million in 2021 associated with these restructuring efforts. All told, JBT posted net income of $17.2 million and diluted earnings per share from continuing operations of $0.54.

Adjusted EPS was $0.83 and adjusted EBITDA was $59.7 million in the third quarter. Adjusted earnings and EBITDA declined sequentially as some of our short-term cost actions moderated as expected. As Brian stated, order trends were encouraging in the quarter. Sequentially, FoodTech and AeroTech orders expanded 18% and 35%, respectively.

We remain disciplined on the cash flow front. Third quarter free cash flow of $53 million resulted from continued proactive efforts on collecting outstanding receivables and customer deposits, as well as improved inventory performance. With our strong cash flow, we've been able to deleverage our balance sheet.

At $548 million, net debt declined $42 million in the third quarter and $112 million through the first 3 quarters of 2020. Total liquidity stood at $448 million at the end of the third quarter. Our bank leverage ratio stood at 2.2x, which is at the low end of our target range of 2.0x to 3.0x. Looking ahead to the fourth quarter.

At FoodTech, we anticipate a 3% to 5% increase in fourth quarter revenue on a sequential basis. With better than anticipated shipments and timing of orders in the third quarter, we do not expect a typical seasonal improvement.

Margins within FoodTech are expected to improve sequentially to operating margins of 13% to 14% and adjusted EBITDA margins in the 18% to 19% range. On the AeroTech side, we expect a 7% to 8% decline in sequential revenue. Due to a shorter deicer season, shipments will not flow into the fourth quarter.

Additionally, despite extraordinary end-market shipping demand, cargo customers have largely delayed airfreight capital investments into 2021. Operating profit margin should be approximately 10%, while adjusted EBITDA margins are expected to be in 11% to 12% range.

For the fourth quarter, we anticipate corporate expense of $11 million to $12 million, which includes approximately $1 million in depreciation. Separately, we expect $2 million to $3 million in restructuring, management succession and M&A costs. Interest and pension expense should be about $4.5 million and a tax rate of approximately 25%.

That puts our earnings per share guidance for the fourth quarter at $0.75 to $0.85 and adjusted EPS guidance at $0.80 to $0.90. With that, let me turn the call back to Brian..

improving food safety, increasing yield and efficiency, reducing environmental impact and lowering labor costs. As we discussed last quarter, we are particularly optimistic about the need for automation in food production as the reduction of labor density remains an imperative.

The discussions we are having with customers around these intermediate strategic priorities are beginning to translate the orders with more expected to come over the next several quarters.

Regarding AeroTech, as you know, direct sales to passenger airlines and ground handlers, which accounted for roughly 40% of AeroTech pre-COVID, collapsed suddenly with the pandemic. With minimal orders from this customer segment at this time, we don't see this getting worse.

At the same time, the roughly 45% of sales to airport authorities for infrastructure work remains very strong in 2020 and is expected to remain solid in 2021. On the air cargo side, based on conversations with customers, we expect that business to accelerate in 2021.

And we are very enthusiastic about the opportunities on the military side, where we have invested heavily in new product development that positions us for notable growth in that market in 2021 and beyond. And we will continue to manage the cost structure within AeroTech commensurate with the level of business activity.

Broadly speaking, while access to customers has improved, the worsening of COVID trends throughout the globe remains a risk to JBT and the world's economy in general.

Operationally, we continue to manage the impact of the pandemic, including within our workforce as we remain diligent on our safety protocols and actively trace and communicate any open cases. Currently, all JBT plants remain open and are able to serve our customers.

But we remain cautious with potential implications for customers, suppliers and our own operations. Finally, regarding JBT's M&A strategy.

With appropriate leverage and strong liquidity and cash flow, we do have the financial flexibility to continue to pursue targets that meet our financial and strategic criteria and advance JBT's competitive position. We continue to cultivate proprietary relationships that we anticipate will lead to future transactions.

And we are focused on opportunities that support our customers' priorities. Notably, whether through acquisition or organic innovation, we're looking beyond the metal box as JBT continues its evolution from an equipment supplier to a solutions partner. And in doing so, make better use of the world's precious resources.

Before I open the call to questions, I'd like to thank all JBT team members. With dedication to maintaining safe operations, exceptional customer service in the face of many challenges has been remarkable.

Operator?.

[Operator Instructions]. And our first question comes from Lawrence De Maria of William Blair..

Of course, our deepest condolences for Tom's passing. I just wanted to check, so you mentioned AeroTech not getting worse, some solid signals and positive signals out there in cargo infrastructure, et cetera. Obviously, passenger is still challenged.

Is it safe to say that the outlook into '21, that the messaging is that was hit bottom and flat to organic growth and EBITDA growth next year, all things being equal, obviously not a major negative change to the macro environment, et cetera, that that's the path of least resistance that was hit bottom and at least some degree of positive growth in top and bottom line for AeroTech next year?.

Yes. So with AeroTech, I think we've definitely seen the bottom in terms of customer activity and engagement and starting to see some improvement there. Keep in mind, as it relates to the financials that Q1 of 2020 was very strong for AeroTech. And Q1 is typically our seasonal worst quarter.

So there is a seasonal effect there, and kind of I'll call it a bit of a carryover effect from that strong first quarter. So it's a little bit early to know precisely how 2020 in its entirety will compare to 2020 considering that I will call little bit of that drag on the first quarter of 2021 versus first quarter of 2020.

But longer term, if you start looking at the things that are going to happen for us, as I mentioned, the infrastructure side is pretty solid. There's a lot of projects out there. The replacement -- we're still not even keeping pace at the replacement cycle on the bridges. And we do see lots of good projects going into 2021.

That's why we mentioned it's still solid. Beyond that, we'll need to see. But there is a lot of airports that still need improvement. And on the services side, we're still doing really well, actually better-than-expected in the quarter.

That was actually -- the services side was actually the primary source of the better-than-expected performance in the third quarter, which services the infrastructure airports. On the military side, as I mentioned, things are generally looking pretty good. There's a lot of programs out there that we are going to be participating in.

As you know, we've been investing in R&D for the last several years. And some of those things are going to start to come to fruition for the next couple of years. So I'm not going to be totally over-focused on 2021. I think we're going to continue to manage the things that we can manage.

And over the longer term, in the intermediate term, we do think we're really well positioned for when the airlines do start spending. And in the meantime, we really have this nice diversified part of revenue stream from the other -- the other customer segments..

And I want to ask a little bit more about FoodTech. Historically, we thought of your business as fairly agnostic to where people eat, right, as long as people are eating and changing diets, et cetera, is positive. So the first part is I'm curious why QSR is doing well.

I get Proseal on the packaging side, but kind of curious why the QSR changes are occurring and what that direct impact is to you guys. And then the second part is hearing about JBS, Tyson, et cetera, investing quite a bit more money around automation.

I was curious if that's flowing directly to you guys? Or if that's more on the primary side, which is where I see that don't play as much on the primary side, processing side.

So I'm just curious if you're able to capture this next wave of automation in those factors that are focused on safety or if that's somebody else?.

Sure. Yes, the QSR trend is really starting to heat up. And we do participate that -- in that in a couple of different areas and that was actually nice order strength in the third quarter.

Specifically, what we do on the -- for the QSRs, we do portioning and we -- which is -- also an automation play, as well as we do batter bread bakeries, all the things that ultimately go into the QSRs because they're not battering breading in the store.

They're doing all of that in a few factories and then heating them up or frying them or however they're cooking, and ate frozen foods, et cetera, for our equipment. So that's really been the strong push as all those, I'll call it, what we call a further processing type activity. So that's been the strength there.

On the automation side, certainly the primary side is going to -- I'll call it, see some of the first benefits from the automation play. And we marginally play in on the primary side, we play in every -- our CAT business, as well as our prime equipment business.

So we will see some of that, but we play in the secondary processing, which is all the things once after the primal cuts, which is a lot of portioning is automation, x-ray scanning, and then ultimately down the line on packaging, and then some of the further processing that I already mentioned.

So we will participate -- the primary side might be a little bit early. But frankly, we are starting to already see orders, and we would expect that to continue to improve through the fourth quarter and into 2021..

Okay. So it's not a function of the primary -- the capital directly going to only the primary guys. It's also flowing to you guys, it sounds like..

No, especially in the secondary operations, which I mentioned, which is that kind of bridge between primary and further. We're a really strong player in the secondary process..

Our next question is Mig Dobre of Robert W. Baird & Company..

This is Joe Grabowski in for Mig this morning. We were all also very sorry to hear of Tom's passing. I just wanted to make sure you guys can know that..

Thank you..

I guess, maybe kind of building on Larry's questions, starting with maybe the Q4 guidance in FoodTech implies a decline of about 12% at the midpoint, a little worse than the prior two quarters even though the orders were pretty solid in 3Q.

So maybe kind of talk about how that -- how the orders that you saw in 3Q are going to flow through and how that impacted your guidance for 4Q?.

Yes. There's a couple of things affecting the fourth quarter typical seasonality. Normally, we would see kind of a 10-ish, maybe 11%, 12% sequential pickup. Instead, we're seeing 3% to 5%, and there's 2 things that happen.

One, with -- I would say pent-up demand, we really got some imperatives from our customers in the third quarter to deliver some systems earlier than we had expected and we had been scheduled for the fourth quarter and since stuff got pushed in, about $15 million or so.

So about that about -- I'll call about 5 points of what we would otherwise would have expected. Because obviously we exceeded our revenue guided significantly in the third quarter. So the back -- it's really a function of the backlog.

The backlog is the backlog, right, and if some gets pushed in a little bit earlier into third quarter, it doesn't hit in the fourth quarter. So that's the first part of it. The second part is, the quarter actually started off relatively weak on the order front in the month of July, and then it accelerated it into August and September.

And given our lead times, et cetera, it takes a solid 3, 4 months typically for FoodTech equipment orders to translate into shipments and installations. So that means we're missing a little bit of a window and some of that's pushing into 2021 compared to what I would say is a normal seasonal pattern.

And all told, that's kind of how the quarter is going to shake out. But what's more important and what I'm really enthused about is the development of the pipeline. That did improve in the third quarter. And we did see some improving conversions of that pipeline.

We'd like -- it's still below kind of where we need to ultimately be to get back to a full recovery. But we're still kind of below that mid-level of what I would expect as a strong quarter. But that said, the pace of improvement was nice from the second quarter to the third quarter. Hopefully, we'll see that continue.

I obviously have my concerns with COVID and that remains an issue. But that said, what we do know is that the demand is out there. At the consumer level, at our customer level, the trends on QSR, the eat-at-home thing is a really strong play, right? It's just going to continue.

The center of the store activity and our customers are finally getting some dedication around making some investments in those areas, we think are going to continue to play out. So I'm not overly focused on the impact of the fourth quarter.

What I'm really focused on is how we are setting ourselves up for 2021 and beyond, along with that automation play that we talked about..

And I guess, my follow-up question would be on the FoodTech decremental margins. I know you touched upon this briefly in the prepared remarks.

I've been kind of bouncing around a little bit, below 20% in the second quarter and then the midpoint -- I'm sorry, below 20% in the second quarter and 35% in the third quarter, and then the midpoint of the guidance implies 25% in the fourth quarter. So maybe just talk a little bit about what's been driving the decrementals in FoodTech..

Yes. Going from one quarter to another quarter is a little bit tricky because you've got some of the short-term cost actions making noise and in the third quarter, some of the return of those short-term cost actions.

So yes, the decrementals in Q2 were really low, which is good given that decline in the volume, but that's a lot of the some of that short-term cost savings, which are starting to creep back in as we see increased customer engagements, et cetera.

So I think the better way to look at it is instead of one quarter or another quarter, looking at it kind of a year-to-date basis or a full year basis. And as we've talked about in the past, FoodTech generally you should be thinking about kind of high-20s contribution margins, kind of absent any specific investments or specific cost savings.

And then on the AeroTech and the more in the low-20s contribution margins..

Our next question is from Todd Brooks of C.L. King & Associates.

And I'd like to add my condolences as well for Tom's passing.

Is there any detail that you can give us on the mix of recurring to nonrecurring revenues in both FoodTech and AeroTech in the quarter and maybe talk about the nature of each of those streams?.

Yes. This is Matt, Todd. For recurring revenue in Q3 for all of JBT was 45%, which is up from about 42% in Q3 of last year and up about -- and up about 1 percentage point from Q2. For FoodTech specifically, recurring revenue is about 50%, which is up about 45% from Q3 last year and again up about 1 point sequentially from Q2.

And for AeroTech, recurring revenue was approximately 31% in this past quarter, which is down slightly from 34% last year, but flat sequentially from Q2..

And to put a little bit of more color on that, one of the things that -- I wouldn't say -- we had 18.1% or 2% EBITDA margins in FoodTech in the third quarter. And given the revenue contribution in excess of expectations, we might have otherwise expected that 18% to exceed our guidance on that.

But basically what we saw was the mix within the aftermarket was actually much more skewed towards service and -- and on the product side, on the installations, which is -- tends to carry a little bit lower margins. And then as you know, equipment in general provides lower contribution margin than the recurring revenue side.

So all of those things combined kind of held us in that low 18% EBITDA range for the third quarter..

And then just -- and this is more a qualitative question, but you talked about what your thoughts were sequentially coming into the quarter, and that North America, obviously, stronger-than-expected in FoodTech, and Europe, initial signs of maybe some life. But then, a little bit more fragility, maybe as the quarter goes on.

I guess qualitatively, if you look at July entry versus September exit as the pandemic is flaring a bit again, thoughts on access, customer focus on actually placing orders, getting orders through the pipeline versus -- I'm just wondering how fragile you feel it is when you're talking to your customers as far as things that did open up in the third quarter for you?.

Yes. It does see. So North America definitely was the driver of the order strength in the quarter. And as I mentioned, orders started off weak in the quarter in July. And then kind of mid-August, it seems like people really got conviction about, okay, this isn't going away, QSR demand is strong, retail demand is strong.

We really need to get the stuff going here and these projects going. So I would say it was a notable kind of shift in patterns midway through the quarter. And hopefully, that will continue into the fourth quarter. Specifically I'm talking about North America.

Europe, on the other hand, I would say it was a little bit ahead of the pace in North America when we -- as we entered the quarter. And we actually -- from a revenue perspective, we did pretty good in Europe in the third quarter and actually was one of the main drivers of the outperformance on the revenue side, but that depleted backlog a little bit.

And then I would say some of the conversions to orders that we expected in Europe weren't quite at the -- it did improve from third quarter to second quarter, but not quite at the pace we had anticipated. So we're hoping to see that improve a little bit. We think some of that is COVID-related.

Europe was a little bit ahead of the curve in terms of some of these, I'll call it, new flare-ups in certain economies in Europe. And so, we're just a little bit cautious there, but it is improving, just not quite at the pace. And then Asia basically is essentially has improved as expected.

It's 10%, 15% of our revenue, it's a little bit smaller, but they seem to be recovering, particularly in China specific a little bit faster with their COVID environment is pretty good. So that looks like it's in decent shaping. And Latin America just seems to really still be struggling in terms of their recovery on the economy side..

Mr. Baumann, your line is opened..

Can you hear me?.

Yes. Now we can..

Yes. I'm sorry. It all being done over rightly and sometimes a little bit choppy. So good morning. Thanks for taking my questions. And just start with [indiscernible] I give our condolences with the passing. Just terrible news. I want to wish he and his family -- his family the best..

Thank you..

Can you talk about this year about the mix of business and kind of pressure, and in the air pasture arena, air handlers, et cetera. And I think you said it's 40% of the [indiscernible] and you've got [indiscernible] and 15% in cargo.

If you were to kind of look at this year and kind of reset that mix, what does it look like heading into 2021 in terms of percentage of the business exposed to each of those areas?.

Sure. I can tell you, it's kind of in that passenger air travel is more like 20%, 25% based on the declines in that market. Infrastructure is more like 60%, in military and cargo, 15% or maybe even approaching 20%..

And then in terms of the orders, for that piece that's seen the pressure, are you getting any orders right now? Or are they like close to 0?.

Domestically for airlines, I think we might have gotten an order for one piece of equipment in the third quarter. However, we do get some orders for equipment out of Asia, specifically China on some deicers and some loaders. So the airlines will defer. Obviously, they're just not spending any money at this point.

We are getting -- we do business with them on the services side -- airport services side. So most of our airport services is with the airport authorities, et cetera, itself, but we do work with them on sometimes with airlines specifically.

And those are coming through, I would say, at a normal pace, just slightly below normal pace because that's where we keep the lights on, et cetera, maintenance for the airports themselves. The parts business is still weak, that started to improve, I would say, just slightly as we exited the quarter, but not so much that we're pleased.

It's still very disappointing. And I don't see much in the way of orders in the fourth quarter as well. We hopefully start to see some improvement in 2021. But as you know, this is going to be really dependent upon the profitability of the airlines, the return of air travel. Ideally, we get some kind of a vaccine.

So we just don't know the pace of improvement on airlines and their profitability and what that means for their investments. So -- but that remains to be seen, but that's kind of what the landscape looks like as I sit here today..

Yes. Makes sense. And then just to clarify, that 20% -- 20% or 25% of sales this year, that's the area with the pressure that the air travel -- the passenger business. Yes, so you're just mentioning you service and parts in there. I mean, that's like going to zero.

There is some part of that that's sustainable, right?.

Yes, that's right, that's -- yes, exactly. Because otherwise it would have gone down to like 15% with just equipment..

Okay. So but there's some equipment in there, I guess, from the first part of the year maybe? And so, there could be a little pressure there next year just because of the comp you're seeing in the first quarter..

That's correct..

Okay..

That's correct..

Just wanted to make sure, I got the numbers right on. So I appreciate that. Then on FoodTech, you mentioned -- you've mentioned a couple of times strengthening in North America orders around QSR and labor automation.

What are you hearing from customers on those trends outside the U.S.? I'd imagine, you're seeing some demand for that as well, but it sounds like you're mentioning more in North America.

Just curious outside the U.S.?.

Yes. It is similar outside. It is similar. The QSR trend is not as a strong in Europe. It's just -- it's not as prevalent as a food source in Europe as it is in the U.S. So it's a little bit more about the center of the store. Freezing is pretty strong, supporting the stores, canning and other sterilization type equipment.

So QSR not quite as strong outside the U.S., but Asia is doing is -- we're getting some good activity out of Asia and some good activity out of Europe, but the QSR trend is particularly strong in North America..

And that's -- and when you're talking about demand for those areas, that's within like your -- that's more in the protein business than the liquid food side?.

On the QSR side, it's more on the protein business. On the center of the store side, it's a little bit more skewed towards the liquid food business, their sterilization and canning businesses..

Any notable differences in trends you're seeing in those two sides of your business then FoodTech?.

In the third quarter specific, so if you recall, from the last call, second quarter protein orders were really pretty low. They disappointed where liquid foods is a little bit more stable. And then going into the third quarter, protein accelerated faster than -- it is kind of more of a -- I don't want to say V shape, but it's certainly quicker.

They went down faster and they came up faster from close in Q2 to Q3. And liquid foods has just been a little bit more stable with slight improvement from Q2 to Q3..

[Operator Instructions]. Our next question is from Andrew Obin of Bank of America. .

It's Emily on for Andrew Obin. Yes. And it's my deepest condolences to Tom. Just a question on free cash flow. So free cash flow this quarter was very strong. And I think a lot of inventory was released sequentially.

Was that a function of just demand improving or good inventory management? And then, as a follow-up, any puts and takes on fourth quarter free cash flow?.

Yes. I think the inventory improvement we saw in -- actually since Q1 has been predominantly the businesses being hyper-focused on cash flow and being very cognizant of the investment that they are making in inventory, given the lower volume that we're seeing coming out of Q1. So I think the businesses have gotten a lot tighter on their purchases.

And we've put a lot more effort around reviewing open POs and safety stocks in order to improve our overall inventory management, which has been a great progress for the business. And I would expect to see that to continue into Q4 and even going forward, because I think the teams have gotten a lot smarter about the inventory management side.

Obviously, as orders improve and demand improves as we're seeing, there will be investment inventory, but we think it will be moderated somewhat than maybe what we've seen in the past, because of just our focus on free cash flow.

I would say in Q4, our expectations for free cash flow, is that, it will be positive, slightly positive, not to the extent that we have seen it in Q2 and Q3. Because as I mentioned, with the improved orders and improved demand, our balance sheet will not contract like it has in the past.

And so, we expect to be positive -- slightly positive, and we're pretty confident that we should hit at the end of the year, free cash flow conversion of about 150%..

And then I just had a question on food automation equipment.

How large is that business to you today? And is there any way to size the market opportunity or potential revenue tailwind for FoodTech from food automation in 2021?.

Sure. That's a particularly tricky question, because the definition of automation is quite broad. It's -- in many regards, kind of solid half, two-thirds of what we do, arguably could be considered automation, and we continue to invest in some of those areas.

The market potential is pretty significant when you think about it, going from anywhere where there's labor within a food factory. And the pace of that change is really will dictate the size of the market.

So frankly, I'm not able to sit here and identify the size of the market, but it is quite large, and it's more than large enough for us to participate and have good growth in that area for several years, but it's not one of these things that we say, it's a $3 billion market, and we're going to participate x percent because by definition, converting from a labor-intensive business to an automated business that will take many years.

And I specifically identifying where it starts and where it stops is particularly difficult. And frankly, I don't even think about those things. But I think -- to the size of the market, I think about serving our customers, I think about meeting their needs and showing them the product offering that JBT has across our product offering.

And then let them and then helping them design lines, et cetera, that are in support of that. So as I mentioned, we're particularly bullish on that, and I think we're just well positioned..

Our next question from Lawrence De Maria of William Blair..

I just had a couple of follow-ups. Thanks for the free cash flow conversion number.

Just to clarify, is that a net income or adjusted net income?.

Regular net income..

Regular net income. Okay. Secondly, 2 questions. Can you talk about the pricing environment? I assume, it's been fairly stable, but just we're still thinking about regular at least inflationary pricing going into next year? And secondly, the M&A outlook, sounds like you're active.

Is there an urgency or -- and/or a bit of [indiscernible] spreads at a reasonable level? Or is it still kind of work in progress and see how it goes?.

Sure.

When you say pricing, do you mean on our raw material inputs or do you mean our actual pricing?.

I mean, on your actual pricing and net pricing achieved?.

Yes. Actually, there's good pricing pressure this year, as you might expect, with everybody fighting for orders, et cetera. So there has been pricing pressure. Certainly, and you can argue that's taken a little bit off of our margins. It's hard to specifically pinpoint that. But without question, we see that.

In terms of -- second question was on the M&A side, right?.

Yes, I did ask spreads, and it sounds like you guys are active. Is there kind of an urgency, you haven't done a deal in a while. Just kind of curious how the overall environment is and to actually conclude a deal if there's stuff to be done out there..

Yes. Well, we're certainly not in any urgency, but it is part of our strategy, and we'll be disciplined. And obviously, we're going to consider all the things that are important to us, particularly ROIC, which is our primary metric when we look at the acquisitions.

There are -- the market is improving in terms of people starting to have a little bit better view of where their earnings and EBITDA are kind of starting to settle in. The first half of the year, that was really difficult because what's included is really hard to know kind of where your earnings were going to end up for the year.

So as that starts to get some visibility, we're starting to get a little bit more price discovery because I think expectations have been moderated from the [indiscernible] side because a year ago, I think is pretty frothy. So I think there's been some moderation.

And I think on the buyer side, I think there's some recognition that we're getting into a more, I'll call it, predictable -- some predictability and where the economy sits here today. In terms of JBT specifically, we do continue to cultivate some of these proprietary relationships.

We are starting to see some more books from investment bankers as well. But we've got, again, a very specific strategic plan as it relates to acquisitions, investing in technologies that suit our customers and help us provide these full line solutions.

And then beyond that into, I'll call it, non-equipment type businesses that provide better service, software support, which is where we're going to continue to focus. So no urgency, but certainly a willingness to do acquisitions..

And we have no further questions. I would like to turn the call back to Mr. Brian Deck for closing remarks..

Thank you all for joining us this morning. And as always, Megan will be available if you have any follow-up questions. Good day, everyone..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect..