Middleby Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 12 speakers on the call.

Operator

Thank you for joining us for the Miglobee Third Quarter Conference Call. With us today from management are CEO, Tim Fitzgerald CFO, Brian Mittelman Chief Commercial Officer, Steve Spittle and Chief Technology and Operations Officer, James Poole as well as Vice President of Investor Relations, John Joyner. We will begin the call with opening remarks from management and then in the call for questions. Instructions on how to get into the queue will be given at that time. Please note this call is being recorded.

Operator

Now, I'd like to turn the call over to Mr. Fitzgerald. Please go ahead.

Speaker 1

Thank you and good morning.

Speaker 2

Thanks for joining us today on our Q3 earnings call. As we begin, please note there are slides to accompany the call on the Investor We're very excited to have joining us on today's call, John Joyner, our new Head of Investor Relations for Middleby. As many of you may know, John is joining us from BMO, where he did a tremendous job covering Middleby for many years. So he has a deep understanding of our industry with a passion for Middleby. Given the recent expansion and significant expansion in the scope and scale of our business over recent years, It was the right time to establish a dedicated leader for Investor Relations and we are excited to have John as the first to step into this role for Middleby.

Speaker 2

I know John's presence will significantly benefit all of our current and future shareholders and we're fortunate to have John now on the Middleby team. Now onto the quarter, we are pleased to have posted solid results, reporting record earnings and cash flows in the quarter And for the year, driven by strong execution at both our commercial and our food processing businesses. We continue to make significant progress at our residential business, Positioning for growth and a return to higher levels of profitability when the market recovers, while at the same time managing the near term impacts of the challenging market conditions. We again posted overall improved profitability and are realizing the benefit of our profit actions as we progress toward our longer term margin targets. We're benefiting from our focus on new product innovation to drive Improved profitability in our sales mix.

Speaker 2

We're realizing efficiency gains reflecting the impact from our manufacturing investments And we are focused on the long term supply chain opportunities with ongoing product design and sourcing While market conditions have proven to be increasingly challenging, The inventory destocking which has impacted our commercial and residential businesses will largely be normalized as we enter 2024 and we will start the year Competitively positioned better than ever. At Commercial Foodservice, we've extended our leadership in electrified, energy efficient and Ventless Cooking Solutions. We have rapidly developed an innovative platform of exciting ice and beverage products in a large and growing market. And we're well on our way to establishing Middleby as the leader in controls, IoT and automated solutions, positioning us to capture the future of the commercial foodservice industry. At residential, we have the broadest portfolio of indoor and outdoor premium brands With a pipeline of innovation addressing the growing demand for energy efficient electrified products and with initial launches of connected equipment now in the marketplace with more to come.

Speaker 2

At Food Processing, we have executed on our strategy of becoming a leading provider of best in class full line integrated solutions for the protein and bakery markets. We are offering state of the art automation to address growing labor and efficiency challenges. And we have developed a portfolio of equipment to support our customers' efforts to achieve the sustainability goals for their operations. We've successfully expanded in new markets such as bacon, cured meats, alternative proteins and pet foods With additional targeted applications providing further growth opportunities ahead. Our substantial go to market investments We are uniquely positioning us for long term sustainable growth.

Speaker 2

With great progress made in establishing our digital sales and marketing capabilities, Developing our industry leading culinary teams and in the alignment of our sales channel and strategic partners. The investments we have made in our innovation centers continues to prove to be a strategic asset for our businesses. Engagement at these innovation centers Continues to be meaningful and is providing benefits across our commercial, residential and food processing businesses. We're confident these investments of today are translating into a pipeline of opportunities ahead and we're in the early chapters of realizing the impact for all of our foodservice brands. While market conditions are undoubtedly more challenging across our businesses given the effects of interest rates and macro conditions, We're continuing to focus on our business execution while building upon our growing competitive advantage at each of our 3 Industry leading foodservice businesses that we are confident will set us apart in the long term.

Speaker 2

Now I'll pass the call over to James to spotlight our ICE businesses. It's a great fast growing part of our exciting beverage platform and a great example of recent strategic investments that we have made both through acquisition and new product innovation that have positioned us for a growth opportunity in a large and addressable market. James?

Speaker 3

Thank you, Tim. I'm going to deviate from peer NPI and technical discussion this quarter to talk about one of our fastest growing segments, ICE. With the acquisition of Ice Tro over a year ago, Middleby is more than a nugget or tubelite ice company. By the way, Hublot is Follett's proprietary and trademarked name for its nugget ice. We have the ability to satisfy demand for all types of ice, Whether it's Jugelit, Nugget from Ice Tro, Cubed, HAPS Cubed or Shaved Ice, our ice portfolio has been one of the fastest growing segments And commercial foodservice in 2023 and with the trends in the addition of 2 new ICETRO products, We believe we'll see growth in the range of $50,000,000 in 2024 with the growth continuing in the following years.

Speaker 3

This growth is fueled by new trade marketplace trends around Chulwood ICE as well as ICECRO's growth In the U. S. And international markets as we go after ICE's $1,750,000,000 to $2,000,000,000 global market space. Now on to trends. It's no secret cold beverages are growing at a very fast rate.

Speaker 3

In 2022 cold beverage sales increased 15% over hot beverages, while a leading coffee chain sees as much as 75% of their beverage mix being cold. This growth has led our customers to focus on more than just ingredients to craft their best beverage. They now appreciate ICE's role In making the best iced coffee, iced craft beverages, blended beverages and fountain drinks. Follett's Chumulate Ice produces the highest quality and highest margin drink for our customers. This is for several reasons.

Speaker 3

First, tubeless ice chills the beverage faster due to its total surface area. It dilutes the beverage less as it has a higher percentage of frozen water Compared to regular ice and it allows the ice to absorb the flavor extending the beverage experience once your soda Our coffee is long gone, thus giving you a beverage that keeps on giving. Follett's chubalit Ice is also safer and more sanitary. It follows proprietary extrusion making process allows us to extrude, I. E.

Speaker 3

Pump the ice up to 75 feet from the ice maker to 2 remote locations within the restaurant without employees having to carry Buckets of ice or handle ice. With everything I've said, you would be surprised that Nuggets ice is only around 20% of the global ice business. The other 80% is cubed ice. With the introduction of our latest machines from ICETRO, the 1700 pound and 2,000 pound machines, Which now complete ICERO's full production lineup, ICERO now has the ability to compete and take global market share as we look to expand and our Cubed ICE business. ICE Trove machines have a proven track record of reliability globally And have many features that benefited from our competition, such as multi ingress and egress cooling, split panel access for sanitary servicing and the proprietary planning process to name a few.

Speaker 3

And the last comment before I turn it over to Brian, all Middleby products require water use filters from Terry Water Filtration. And when it comes to ice, we believe that Terry's H2O citrine water filter provides our customers with the best tasting ice. Thank you. And over to you, Brian.

Speaker 1

Thanks, James. I'm torn now. Do I leave my tubelet ice in my drink to keep it working so my drink stays colder longer? Or do I chew it as I also enjoyed it. I don't know.

Speaker 1

I'm really torn. But more importantly, Q3 gave us a lot to be excited about. Our performance was at record profitability levels and we also had record for operating cash flows for a quarter. We are on track for our best year ever in terms of EBITDA and operating cash flow generation and we are achieving this while facing challenging market conditions. Despite these challenges, we still delivered growth in 2 of our segments, while achieving $981,000,000 of revenue And an organic adjusted EBIT margin of 23%, up 100 basis points from Q2 and up even more over the prior year.

Speaker 1

With nearly $224,000,000 of adjusted EBITDA in the quarter, Over the last 12 months, we are at nearly $900,000,000 an increase of over 10% from the prior LTM period. We continue to increase our profitability, EBITDA and cash flow generation even while in the midst of especially tough times for one of our segments. This demonstrates the resilience of our business model, which drives exceptional profitability and cash flows even in tough times. Amongst our strengths is our ability to execute In all conditions, while our total organic revenue was down due to the residential headwinds, We were still able to grow our adjusted EBITDA dollars for the quarter 5% over the prior year. Our total company margins expanded 140 basis points or 160 basis points organically over the prior year as well.

Speaker 1

All the margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and FX impacts. GAAP earnings per share were $2.01 Adjusted EPS, which excludes amortization expense and non operating pension income as well as other items noted in the reconciliation at the back of our press release was $2.35 an 8% increase over the prior year. Commercial Foodservice revenues were up Slightly organically over the prior year, their adjusted EBITDA margin was 28.7%, up 200 basis points over the prior year. We are very pleased with how margins have continued to evolve as we see benefits from improved product mix, from our capital investments, from operational improvements as we integrate acquired businesses as well as from our constant focus on costs. In residential, we saw organic revenue decline of 21% versus 2022.

Speaker 1

The adjusted EBITDA margin was a little over 10%. For Food Processing, revenues of nearly $167,000,000 represents an increase of a little over 1% organically with year to date growth of over 16%. Our adjusted EBITDA margin was 26.6% for the quarter, Up 4.40 basis points over the prior year and we are just above 24% for the year. Our operating cash flow generation was a record at $219,000,000 for the quarter. Over the past two quarters, We've reduced inventory levels by nearly $100,000,000 Over the last 12 months, our operating cash flows amounted to $532,000,000 In terms of cash conversion, our free cash flow for the last 12 months is at 97% of net income and I expect it to be over 100% for fiscal 2023.

Speaker 1

As we closed Q3, our total leverage ratio moved down to 2.75 times. Looking forward, If we were not to make any acquisitions or stock buybacks, our leverage could move down to around 2x by the end of 2024. And we currently have over $2,500,000,000 of borrowing capacity. While market conditions are a revenue headwind, our focus on operational excellence, differentiated products and technologies and deep connectivity with our customers are driving our strong results. Middleby has always been known for healthy margins and cash flows.

Speaker 1

We are consistently growing them and the trend will continue. We remain bullish on our outlook over the coming years. Our actual margins are near our medium term targets for commercial and food processing. We anticipate achieving our target margins for these two segments on a full year basis within the next two fiscal years. Residential continues to be profitable at levels well above peers.

Speaker 1

We've been taking actions to manage costs, while still investing in go to market strategies, production improvements, Developing new products and entering new markets. These efforts, along with the benefits that will come from improved market conditions, will keep us on track to reach our long term goal of 25%, albeit taking longer and being harder to predict when given the current economic conditions. Nonetheless, given we do anticipate a period of high growth as housing and economic conditions improve, I will speculate that we can reach our target in 3 to 4 years. Bringing it back to the near term, here are some quick thoughts and how we think 'twenty three will conclude. Starting with resi.

Speaker 1

Last quarter, I noted that we expected Q3 to hopefully be the trough And our results obviously reflect the challenging market conditions. Nonetheless, we do expect that Q4 can produce higher revenues than Q3 And at least maintain double digit EBITDA margins. For Food Processing, Q4 will see higher revenues than Q3 and likely at least similar margins. For commercial, I expect Q4 to overall be fairly consistent with Q3 given current demand and the tail end of dealer destocking. Putting the 3 segments together, when looking at the total company potential Q4 performance, Revenue and earnings should be on par or slightly higher than Q3.

Speaker 1

Looking beyond the 4th quarter, It's obviously hard to know with great certainty what 2024 will look like. However, I will share that our expectation is for modest top line growth and expanding margins across all our segments. For residential, our belief is generally based on the view that Current market conditions will persist through the first half of the year and we remain optimistic in believing there can be some improvements in the second half of the year. For food processing, interest rates in food costs continue to be a headwind. Nonetheless, given our backlog, pending opportunities and the benefits our full line solutions offer including addressing the demand for automation, food processing should see growth.

Speaker 1

Lastly, in commercial, while buying patterns have been somewhat volatile, when considering our customers' ongoing build plans, Rollout activities, increasing customer engagement with our leading technologies and a bit of elevated backlog, we also believe And while these comments have been revenue focused, we also expect to deliver more margin expansion. We've updated our view on that journey within the slides posted today. And regardless of market conditions, we remain focused on improving our sales mix. This has been a big contributor to the improvements seen to date as our best solutions solve our customers' most pressing needs. Furthermore, we are relentless in attacking costs, integration projects and driving operational efficiencies.

Speaker 1

Managing all these areas keeps us moving forward toward our targets. In conclusion, we are being disciplined, We are managing costs. We are focused on operational excellence. We are also continuing to make strategic investments to drive differentiated products and best in class go to market capabilities. Our technical strengths, Strong customer relationships and leading innovations will continue to drive success.

Speaker 1

This means even better cash flows and expanding margins. We are all hungry for the higher stock price we deserve based on the level of earnings, profitability and cash flow we have delivered. In the meantime, I'm off to our amazing new residential showroom in Chicago to see what our newest chefs, Kristen and Amy, have created. Please stop by to experience our amazing platform for yourselves. And with that, thank you for listening and we will now take your questions.

Operator

We will now begin the question and answer session. The first question is from Saree Boroditsky of Jefferies. Please go ahead.

Speaker 4

Hi, good morning. So residential took another step down this quarter. Could you just break out the performance in Grille versus the remainder of the business? How do you think about underlying demand versus destocking? And lastly, is there any benefit from in the destock as we think about growth next year.

Speaker 1

Thanks, Terry. This is Brian. At this point, I would say that grills are not really a, I'll call it, a differentiated performer versus the other Product lines we have, there are challenges in a variety of them and some bright spots As well. But as we've noted before, Q3 is always the low point of the year for that Grille business and given where stocks are and such, we were not expecting Much growth there. And we've noted that our customers Are expected to order in, in a different manner and with different timing, I would say, for this upcoming growth season that's or the one that's really Kind of just starting than in the past where they're going to order a little bit later in the season and destocking probably for more domestic shipments than from the direct Plant sources.

Speaker 1

So Q4 will still be a bit of a challenge then given that we're in These trying times and we're still in them last year and we think things really improve as we move into the back half of the year and then have the easier comps obviously to lap. I know there was another part of your question in there, but you threw a bunch at me. Can you remind me what I missed in there?

Speaker 4

Yes. Just how are you thinking about underlying the inventory destocking and then just the benefit of that destock as we think about next year?

Speaker 2

Yes. So, Terry, I

Speaker 1

mean, I think the destock

Speaker 2

turns into a tailwind at some point, right, because the sell through is higher obviously That what our incoming order rates are as inventories coming out of the channel. And then as Brian alluded to, people are also less Reticent to stock back up because of a couple of reasons, not only the market outlook, but our lead times are much shorter than they were Before as well. So I think as you play that out and you go through next year, the destock, which is a negative, Even if it's neutral, that's a positive for us. So, and then also on the orders, I mean, we've seen them kind of trough out, so to speak, as well. So I mean, I think they're starting to albeit at much lower levels, they're Starting to normalize and inflect back up.

Speaker 2

So I think we're getting close to the turn, but Again, a lot of uncertainty in market conditions going into next year.

Speaker 4

I appreciate the additional color. Can you just talk about what you're seeing from an order You talked about growing next year, but how do we think about the benefit of incoming backlog had on this year and does that create a challenging comps for organic growth in 2024.

Speaker 1

Yes. This is Brian. We certainly had very strong Backlogs entering this year, but a lot of these projects take a while and I would say we still have very healthy backlogs today. So that is part of the reason that gives us confidence looking into next year again, looking what's in the backlog And knowing when those projects continue. The orders have been steady the past couple of quarters, Albeit not at the highest levels that we had seen, let's say, maybe the middle and end of last year, again, given the interest Great environment and what's going on with underlying food costs.

Speaker 1

But there still is a lot of interest out there. We still are Engaging with our customers, we are still winning opportunities and they're also looking at, they believe inflection point on some of the food costs, which we hope can open up to more Robust ordering times and then we'll also see how interest rates play out. I think Tim might add. Yes.

Speaker 2

So the only other thing I'll add, so our pipeline is very strong. So that's one of the things that we track. So that has actually grown. I think what we're seeing is that there's a bit of it's taking a little bit longer to place orders, right, given where Interest rates aren't kind of understanding the outlook for next year with input prices for them, which is largely Food, but I think we're what is promising is the level of activity quoting, What is that pipeline? It's just a little bit longer for that to convert right now in this period.

Speaker 2

But I think that Right now, given we've got a strong backlog coming in and a solid pipeline, we feel pretty good about next year. The baking Part of our business seems to be stronger right now. We just came off a trade show, which was an industry trade show. We had Very strong activity at that show, so that was promising as well. And I would say across the platform, we have a lot of new to our customers because they're hitting on all the, I'll say, key pain points for their business right now.

Speaker 4

Appreciate all the color and I'll pass it on.

Operator

The next question is and Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Speaker 5

Hey, good morning, guys.

Speaker 2

Good morning. Good morning, Jeff.

Speaker 5

John, welcome aboard. Just I guess on Commercial Foodservice, I'm just trying to parse out kind of this continued destocking versus Demand weakening, where in particularly are you seeing demand weakness? Any cracks in new store development as you look into next year? And just Maybe lastly, how far along are we in this with this destock? Thanks.

Speaker 6

Yes, Jeff. Good morning. It's Steve. I would say maybe we'll start with kind of what the end user we're seeing. I think we've talked about On prior calls, obviously, the bigger chains have had a pretty healthy new store build plan really the last year or 2.

Speaker 6

I do think that continues, But what we have seen is some shifting around of that pipeline moving out a bit just with challenges they're having on Well, it's permitting or construction, still some supply chain issues that are based on construction. So in interest rates, pushing some of those Your stores out into next year at this point. So I would say they haven't reduced any of their overall pipeline. It's just more of a timing that's pushed out. That push out does play a role then into the destocking side of it because a lot of where we've seen the excess And the channel show up has actually been for chain customers, right?

Speaker 6

Think about the last year or 2 with longer lead times, the dealers or the KESs who's replacing orders far out trying to bring in inventory to keep up with the chain demand. As we've caught up on our side and then some of the stores pushing out that's what's creating this Invest inventory in the channel. So I do think we are on definitely the backside of it. I mean, again, I think the positive is Being very close with a lot of our dealer channel partners, they're seeing the sell through on their side become more and more positive. I think it's just a matter of I'm obviously, I think over the next quarter or 2 where the destock becomes less of a headwind and we kind of get back to more of a normal Your ordering patterns, does that make sense?

Speaker 5

Yes, that's very helpful. Hey, just on the margin targets, I understand res kitchen probably needs some volume help. But as you look at Commercial food and food processing, I guess if we were to have kind of a flattish demand environment the next 2 years, Do you see yourself being able to get to those margin targets within that timeframe? Kind of how much is self help and How much needs to come from kind of volume tailwind?

Speaker 1

Yes. This is Brian. There is not an, I'll call it, an overweighted Amount of that comes from volume. I mean volume is somewhat of a contributor because I think the volume also gets after Customers adopting more of that leading technologies and such. But I think if you look at We'll actually post some bar charts, some waterfall charts on it by tomorrow morning as we'll be attending a conference and you'll see, I'll say, 3 quarters of the driver of it are from mix or self help type measures, whether it's Improving costs, the integration activities, and the like.

Speaker 7

Okay. Appreciate it.

Speaker 1

You bet.

Operator

The next question is from Tim Thein of Citi. Please go ahead.

Speaker 8

Thanks. Good morning. I think Brian, I think you were touching on this, but just going back to a year ago Being down in Dallas, you outlined some of the drivers

Speaker 9

for commercial

Speaker 8

to get to that journey to 30 And price cost and sales mix were 2 big drivers of that. You've touched a lot on the sales Where are we in terms of price cost? And obviously, the market outlook isn't quite as robust As it was a year ago, I'm just curious as to your confidence level in terms of that being significant of a tailwind from Middleby looking out to 'twenty four and beyond.

Speaker 1

Yes. As I look at it, I'll say in commercial that we're operating, Let's call it around 27.5% or so, right, and we need to get to 30% over the next couple of years. How we've gotten to the 27.5% over the past couple of years. Obviously, there's been some price cost in there as well as the self help And a bunch of mix. As we look at what gets what's left to be done, I would say Price cost is a good chunk of it, but a lot of that at this point, I will say, is more of the cost side of it as opposed to the price side of it, because we think pricing will be more moderate going forward, but we do have some cost benefit coming through As we work down inventory and as we manage our costs and look what's happening in commodities as well.

Speaker 1

So again, fortunately, this journey is not just dependent on Volume or isn't just dependent on again taking price and again you'll see by tomorrow that the price piece Piece of it is not as much, but we still have operating efficiencies and acquisition, integration, maturing of businesses we had, A little bit of volume on some undersized businesses helps as well. And again, mix is not one to be, I'll say, Underappreciated either.

Speaker 8

Got it. Okay. And then I don't know if it's for you or Steve. Where would you To the extent you can get at this, revenues for commercial will be, call it, 30% higher than pre COVID or Since 2019, where do you think your volumes for that business are relative to 2019. I'm just curious how much we've where we sit just from a throughput standpoint

Speaker 1

This is Brian. I'll start with it and then Steve can jump in. Volumes are a tough one to put out there, just given how many different brands, we have out there. But I think as Look to correlate that also with looking at, I'll say, the number of establishments that are out there, there is building going on. But But I wouldn't say that volumes are up appreciably.

Speaker 1

Obviously, we've had a good amount of pricing coming in over that and then are starting have been seeing some of the benefits from, I'll call it, the unit Expansion, but we believe there's more volume gains to be had as build out plans continue and as people Trade into higher technology solutions.

Speaker 6

Yes. This is Steve. I would just add on to that agree with all the comments. Obviously, we've had the benefit of pricing over the last year or 2, which certainly gets a little bit tougher Pricing standpoint going into the next couple of years. So it does definitely shift back to volume.

Speaker 6

I fundamentally come back to probably 3 key initiatives, Tim, and what's driving that. Again, we talked about new store development that continues. I do think, I've Said before on prior calls, the replacement cycle that has been kicked down the road from going into COVID got kicked down the road going through Supply Chain, new store priority. So I still think you have that underlying replacement cycle that has to take And then you still have all the issues that all of our customers still have to address whether it's labor or whether it's utilities going up More and more. So I think when you kind of think about those 3 underlying demand drivers that's where I think you really still see the volume start to pick back up Call it over the next year or 2 and away from obviously the pricing benefit we've seen in the last 12 to 18 months.

Speaker 8

Got it. Okay. Thank you.

Operator

The next question is from Tami Zakaria of JPMorgan. Please go ahead.

Speaker 10

Hi, good morning. Thank you so much. So on Slide 9 of your presentation, I think there are some targets for EBITDA margin for the year That would suggest both Commercial Foodservice and Food Processing EBITDA margins down sequentially. And so could you walk us through some of the puts and takes behind that sequential step down?

Speaker 1

I'm going to unfortunately this is Brian, by the way. I have to disagree with you. I don't think we are seeing A step down in Q4 versus Q3. I think as I noted, food processing should at least be the same As Q3 and commercial is also expected to be In a similar neighborhood, I mean the numbers in the 23 column there is a rough forecast, A rough estimate for the year in total, not for specifically the 4th quarter. So I don't know if that makes a difference in how you are viewing the numbers versus how we believe they will come to be.

Speaker 10

For sure, for sure. Great. And then my second question is, I think we have heard some home appliance companies in recent weeks talk about some higher promotional activity, especially in North America. Is that does that also relate to the high end segment that you service as part of the that you service as part of the residential kitchen segment. And how are you thinking about price versus price realization in the Q4 or even for next year as we prepare for the next spring selling season.

Speaker 2

Yes. So there's definitely some promotional pricing that's going on at, I'll Say lower levels. I mean, I think one of the reasons we've put together the portfolio that we have is, it's premium performance. We sit in a different category versus the I'll say the white goods guys. So on the margins, we're trying to be very Smart and tactical pricing.

Speaker 2

Pricing has moved around a lot in the last couple of years given all the inflationary In packs and so we will look at that tactically, but it's more resilient at that top Luxury and the appliance market. So I mean, I think we're not seeing quite the same impact that the other guys would.

Speaker 10

Got it. Great. Thank you so much.

Operator

The next question is from Brian McNamara of Canaccord Genuity. Please go ahead.

Speaker 9

Hey, good morning guys. Thanks for taking our questions. First, we're wondering if you're seeing any change in your restaurant customers' order behaviors given the recent Popularity in these GLP-one drugs, it feels like several restaurant stocks along with your own have reacted negatively to the news flow over the last couple of months.

Speaker 2

Yes. So it's very early on. I mean, I don't think anybody has seen any impact to actual behaviors of Orders, business, people walking in, if you listen to the CEOs of other restaurant chains, etcetera. So obviously, it's getting a lot of head It's too early to indicate what the long term ramifications are of that. But I mean, I think we don't Expect that there would be really any significant long term impact to our business at this

Speaker 7

Great. And secondly, can you confirm that your Taylor double Tiete grills are being trialed with a popular Mexican fast casual grill chain and if so how is that testing phase going? Thanks.

Speaker 2

So we never talk about kind of what's being trialed and out there. Obviously, sometimes you can walk into a restaurant and CEO, Brand of Equipment. So but I would just say that we've talked about a lot of our Leading automation that we've come out with over the last number of years that are helping drive Throughput, labor, small footprint, efficiency, etcetera, Taylor has been certainly one of those products that James has spotlighted Some of the past calls and it is part of a great example amongst others such as ice that James covered on Call that we think are going to be we've got differentiated products that are going to be growth Drivers going forward. So I'll just comment that that is one of those exciting products.

Speaker 7

Fair enough. Thanks guys.

Speaker 2

Yes. Thank you.

Operator

The next question is from Mig Dobre of Baird. Please go ahead.

Speaker 9

Good morning. Thank you for taking the question. Just a quick clarification here on residential. Your intro comments, you mentioned that revenue is going to be up sequentially in Q4 versus Q3. And I'm curious as to what exactly is giving you confidence that that's going to be the case.

Speaker 9

And then as you look into 2024, Recognizing that some of the macro concerns are still with us, do you expect revenue in Is there potential to continue to build sequentially relative to Q4 or not?

Speaker 1

This is Brian. I'll start with the second part. Q4 for residential Usually is a bigger quarter. There is some seasonality in some of the businesses Where Q4 tends to be higher, we'll have to see a little bit how it plays out because while those will go away, It does start to pick up typically on the outdoor side of things across all our outdoor businesses. But obviously, there's the stocking issue.

Speaker 1

So we have not specifically mapped out A quarterly trajectory for next year, but no, I do put out there that Q4 tends to be stronger than Q1. But then thinking about Q4 versus Q3, really, I think your question was Across the segments, food processing, dare I say, always has a strong Q4. There's a lot of deliveries that get made to customers. They want to Get things in their plans and so say we have very high confidence there. We noted that Q4 It's going to be similar to Q3 on the commercial side of things.

Speaker 1

There's just been enough, I'll call it volatility in ordering, while destocking is mitigating, there's also, I'll say, a little bit of Slowness in maybe the restocking, given everyone's focus on working capital. So that makes that one a little bit harder to precisely predict. And I'd say in residential, we also feel fairly comfortable that Q4 Is above Q3 as we look how order patterns have, I'll say, stabilized, steadied Some recently and then again, there's some seasonal benefits in a couple of the businesses in there. So that's kind of the, say, the quick perspective on how we view Things coming together. Yes.

Speaker 2

But on Mig, I just maybe this is repetitive, but your question is on residential. I think As you go into next year, if the headwinds neutralize, that Starts to equal growth for us, right? And right, because I think the destocking starts to go away. There's not inventory. The typical load ins that you would have at least on, let's say, our outdoor business that are not happening Because people are also tepid on that, you're going to start to see better sell through during the grill season.

Speaker 2

And then orders, albeit lower, they're kind of trough, so we're starting to see them and flick back up. So it doesn't need to be a great market to start seeing things improving and growing. And if Housing and remodel starts to pick up, then that ends up kind of being at or on top of that. So I think that's kind of how we think about And as you play out multiple quarters going through next year.

Speaker 9

Yes. And That was really the nature of my question. I was wondering if we could take a look at Q3 and sort of say this is the trough point for both revenue and margin Because if you're right about destocking being at an end, then at least in theory, sequentially, you should start to see some incremental benefit From the channel normalizing and maybe even potentially some restock as you go into the selling season in the spring. That's kind of what I'm getting at.

Speaker 2

Yes. I think that's how we're thinking about it is how you are also thinking about it.

Speaker 9

Okay. And then my last question, again in your prepared remarks, you talked about backlog still being Elevated in commercial foodservice and that providing some level of support to 24. Can you put a final point in that? Can you comment Call as to where backlog currently is, where you expected exiting 2023 and how that backlog is going to be? Well, this is really

Speaker 2

not Elevated at this point. I mean, I would say that we're largely back to normal. We've got a lot of brands. So as you kind of pick through it, there are still a few That we've got a larger backlog given either level of orders or Along with supply chain being able to keep up with us, but I mean I think that's more the exception than the rule I would say Probably 90% of our companies are back to a normal lead time and backlog.

Speaker 9

Okay. Thank you.

Operator

The next question is from Walter Liptak of Seaport. Please go ahead.

Speaker 11

Hey, thanks. Good morning, guys. I wanted to ask sort of a follow on from the last one on resi. And so if In the resi business, the margins are pretty low at this point. Whenever you talk about the cost out and operational excellence that you've done and then if we do start to see growth In 2024, what does the volume leverage look like?

Speaker 1

Yes. This is Brian. We have taken restructuring charges as you can see on our P and L and probably over half of them are In the residential area and we do have, I'll call it, savings that are certainly a multiple of the charges we have taken. And again, those have been necessary based on the volumes we have In driving those margins. We do think things We cover nicely here.

Speaker 1

Our incremental margins tend to be Pretty healthy. And I think if you go back and look at where our revenue levels were, I'll call it, Prior to these challenging times, if we get a couple of $100,000,000 Revenue back, you'll start to see our margins getting to the upper teens again. And so there's no reason they won't expand back to where they were before. And actually, we've done a variety of things, which You can't see right now, to improve the businesses, improve processes, improve Manufacturing, rationalize and make more efficient the distribution processes. Again, You're not seeing those benefits now because we don't have the benefits of volume, right?

Speaker 1

So those are all the reasons why We still think we will drive back to 20% and above and on the path to 25. And then on top of that, there's a variety of international market expansion opportunities, I'll say, On both sides of the pond, we've talked extensively about bringing European products into the North American market and there's that has started and there's more to come. We've talked about Grills expanding internationally, lots of international opportunities Of expansion across all our brands as well, in a variety of other initiatives. So certainly, And we think we're at a low point, but there's a lot to be excited about in the portfolio when again, You look at the products themselves, the innovations, the expansions and all the things we've done on the cost side, right. We're really proud of What we've done with all our acquired businesses in terms of where their margins were when we bought them versus where they are today and where they are At better times.

Speaker 1

And so we know we will get back there and again with the portfolio and and get even to higher levels than we were previously.

Speaker 11

Okay, great. And if I can just do another quick one. Sure. On pricing and specifically for Commercial Foodservice, there's still inflation out there, even though it's come down, did you plan on doing price increases at the beginning of 2024?

Speaker 6

Yes, Walt, this is Steve. So I mean maybe just quick recap of I think pricing broadly in commercial again has been one of the Most important strategic initiatives in the company trying to get ahead of obviously all the inflationary costs over the last 12 months to 24 months. So I'm very proud of the team. I think we did a lot of good work to get the pricing through and now to a place where I think we We'll be a lot more thoughtful about pricing going to next year. I do think there are still products in our portfolio, Walt, where They're still more affected by certain components and supply chain and we do still need to take a little bit of pricing on those products.

Speaker 6

But I do think by and large Going into next year, I do not see us taking a lot of pricing further from a kind of a broad standpoint, certainly subject to any other kind of supply chain or world disruption that could cause further inflation. But I think at this point, I don't see us taking a whole lot more pricing going into next year in commercial.

Speaker 11

Okay, great. Thank you.

Operator

That is all the questions we have today. I would like to turn the conference back over to management for closing remarks.

Speaker 2

Well, thank you everybody for joining us on today's call and we look forward to speaking to you next quarter. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Middleby welcomed John Joyner as its first dedicated Head of Investor Relations, leveraging his deep industry knowledge to benefit current and future shareholders.
  • In Q3, the company delivered record earnings and cash flows with $981 million in revenue, a 23% organic adjusted EBIT margin, $224 million of adjusted EBITDA and $219 million of operating cash flow.
  • The ICE business is one of the fastest-growing segments, with a full suite of nugget, cubed and shaved solutions and a forecasted $50 million revenue increase in 2024 as Middleby pursues a $1.75–2 billion global ice market.
  • Strategic investments in digital sales and marketing, innovation centers, IoT and automation are positioning all three foodservice segments for sustainable profit and margin expansion.
  • Looking ahead, Middleby expects modest top-line growth and further margin improvement in 2024, aiming to reach 30% EBITDA in commercial and over 24% in food processing within two years, with residential profitability on track to hit 25% over the next 3–4 years.
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Earnings Conference Call
Middleby Q3 2023
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