Middleby Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 11 speakers on the call.

Operator

Thank you for joining us for the Middleby First Quarter 2024 Conference Call. With us today from management are CEO, Tim Fitzgerald CFO, Brian Mittelman Chief Technology and Operations Officer, James Poole Chief Commercial Officer, Steve Spittle and Vice President of Investor Relations, John Joyner. We will begin the call with opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Now, I would like to turn the call over to Mr.

Operator

Fitzgerald. Please go ahead.

Speaker 1

Good morning and thank you for joining us today on our Q1 earnings call. As we begin, please note there are slides to accompany the call on the Investor page of our website. The Q1 proved to be challenging with the backdrop of the housing market, interest rate environment and price cost pressures at our restaurant and food processing customers weighing out our businesses as we started the year. Even though execute on stated business plans and as opportunities in the pipeline begin to convert. While customers are slow to restock inventories given shorter lead times and higher carrying costs, inventories in the channel have returned to normalized levels and now provide a tailwind as end users sell through occurs and this bodes well for the later part of the year.

Speaker 1

At our commercial foodservice business, customer execution has been slow starting the year given continued longer lead times for permitting and construction along with longer deliberation on their business plans given economics of higher restaurant operating costs. However, our channel partners are building backlogs weighted to the second half of the year and our chain customers continue to maintain their plans for operational upgrades and store openings, which are also way through the second half. We are gaining market share in new and large product categories such as beverage and ice, and we are well positioned to capitalize on our market leading positions capturing growing trends in ventless and electrified cooking. And we have early stage traction with some of our game changing innovations as we lead the future of automation, digital and IoT. At our business at our residential business, the housing market remains very challenged in terms of existing home sales, new home starts and remodels.

Speaker 1

While the residential market will take time to fully recover, it has stabilized with the luxurand of the market showing improvement over the past several quarters. We're now seeing growth in order rates and we expect that will continue as we progress through the year. And we are well positioned to benefit from the many investments that we have made in new product innovation as we move beyond the current market conditions. Many of these new product innovations were on display at the recent Kitchen and Bath Show. We are proud to receive a Best of KBIS Award at Viking for our new Reveal series and we're also awarded Best of KBIS at Novi, one of our newest Middleby Residential Brands, which we're now launching into the U.

Speaker 1

S. Market featuring state of the art induction cooking, integrated ventilation and unique accent lighting. Our industry leading brand portfolio with launches of new colors, new designs and new technologies generated tons of excitement with builders, our dealer partners and the design community at the show, leaning to new business opportunities coming out of the show and a much greater awareness for all the Middleby Residential portfolio has to offer. Our food processing business, our customers are proceeding somewhat cautiously as they monitor food costs, demand levels and the interest rate impact on larger projects. Still the pipeline of active projects continues to build for expansions and needed upgrades with requirements to increase throughput, reduce labor, minimize food waste and with a growing focus on sustainability.

Speaker 1

Automation remains in great demand. Our backlog remains healthy and as market dynamics have become more stable, we're expecting the pipeline will convert into orders. Our strategy to become the leading provider of best in class full line integrated solutions for the protein and bakery markets is resonating and we are best positioned to offer our customers state of the art automation to address their operational and efficiency challenges. We posted continued overall strong profitability at our commercial and food processing segments in the quarter despite revenue declines, while residential margins were significantly challenged given the more significant market conditions and our strategic decision to invest in KBIS. We expect to return to the path of longer term margin expansion we benefit not only from revenue recovery, but also as we realize greater benefits from profitability initiatives, including investments made at our factories to realize greater production efficiencies, along with the impact of favorable profitability on our newer product innovations.

Speaker 1

Supply chain also provides a continuing opportunity as we have moved away from the crisis management of the past several years and are now focused on leveraging our scale and realizing synergies across our businesses. While we navigate the near term market conditions, we continue to focus on the execution of our business strategies, expanding profitability and growing our cash flow, while building upon our competitive advantage at each of our 3 industry leading food service businesses that we are confident is setting us apart in the long term. Now I'll pass the call over to James to spotlight some of our exciting award winning products we'll be unveiling at the National Restaurant Association Show in Chicago later this month. Again, highlighting the results of our strategic focus to invest in and accelerate the pace of innovation.

Speaker 2

James? Thanks, Tim. Last quarter, I remarked that Middleby had won 8 of the 28 Covenant Kitchen Innovation Award Honors. But because of timing, I couldn't say which Middleby brands won. Well, with a little more than 1 week ago before the NRA show in Chicago, we are excited to introduce the Grade 8, Logic, Pintco, EVO, Newton, Wonder Bar, Wild Goose Filling, Verimixer and L2S, now known as Middleby Automation.

Speaker 2

These eight brands are the National Restaurant Show Association's KI Winners. If you are attending the show May 18 through 21, please make sure you visit the Kitchen Innovation Awards Pavilion to see and experience these new products from the Grade 8 and then come check out Middleby to experience our latest solutions around digital, embedded and robotic automation as well as beverage solutions and the launch of our newest combi, the Invoke, a Red Dot Design Award winner. We couldn't be happier with these new products. These innovations are as diverse as our brands, but they were all developed with our customers' daily challenges in mind. Labor reduction and simplification, consistency of product, throughput, all aimed to maximize our customers' profitability.

Speaker 2

In the interest of time, I won't go through each innovation, but you can find each in the deck that Tim referenced. The first is the PIKCO torque fryer. The torque introduces continuous filtration and convective frying. With continuous filtration and auto oil top off, the torque essentially provides infinite oil life for the operator. And the continuous filtration comes forced convection as oil is forced to circulate around the food on its way to being filtered.

Speaker 2

This forced circulation reduces our cook times up to 10%. While we are talking about numbers, let's cover a few more. The torque is 10% more efficient than the typical ROV fryer and both flew temperatures 60% lower than the typical gas fryer, thus substantially reducing your kitchen ventilation requirements. Lastly, the torque reduces labor needed to filter a traditional fryer by up to 90%. By the numbers, this fryer stands to obsolete most fryers in the market today.

Speaker 2

Moving on to the Blodgett infection oven, this is a first of its kind oven allowing the operators to select between a high heat transfer accelerated cook oven or a gentle convection oven by simply selecting a menu item from its MillView One Touch controller. Once the operator selects a menu item, the Invections mechanic configure the oven for the optimal cooking profile, whether it be high velocity impingement air or gentle convection. This innovation enables a multi cavity convection oven typically found in the back of the house to also function in the front of the house as an accelerated cooking oven, thus offering our customers the ability to cook a la Menette. So whether you need to cook delicate laminated pastries in 20 minutes or you need to cook 16 inches pizzas in 3 minutes and 30 seconds, the Invection is your solution. Now on to beverage dispensing.

Speaker 2

We have 3 brands introducing beverage dispensing products aimed at reducing waste while improving speed of service and delivering a better tasting highly consistent product. I've spoken about Newton CFV valves in the past, but now we have 2 new products that feature the valves patent design that enable the consistent precise delivery of beverage and or ingredients regardless of the factors that play traditional valves. The Newton Discrete Valve and the Wonder Bar M5 Bar Gun. With these innovations, our customers now have confidence that they are serving bottle quality beverage or dispensing individual ingredients without the expense of consistently calibrating their systems or wondering if their systems are in calibration. The Knewton Discrete Valve and the WonderBar M5 bar gun eliminate calibration, waste, reduce service calls and improve customer satisfaction through consistent delivery of product.

Speaker 2

The Newton CFV valve is also being used throughout Middleby to control mixing and dispensing of highly concentrated ingredients such as individual flavors, even cleaners. These concentrations can be as high as 500:one, which unlocks our customers' ability to change how they distribute and dispense ingredients or even clean their equipment, say, with Knewton's new clean to place technologies. The final dispensing solution I'll discuss is a Wild Goose Surbisi, which utilizes the same filling systems to dispense beer that Wild Goose uses in its industry leading high speed canning lines. Surbiti turns anyone pouring their first beer into a seasoned bartender by automatically dispensing beer twice as fast as a normal tap system, while also minimizing waste by precisely controlling the poor volume to the nearest fraction of an ounce or just a few milliliters, all with no training. Servici also improves keg yield from 75% to 95% by controlling the poor volume in the beer serving conditions.

Speaker 2

While they get a chance to cover the other products such as the PizzaBot 2.0, EVO eVent, the Vari Mixer Ergo, we will hit those in later calls or again you can see them at the NRA show. But know they share the same traits as the other innovations I described today. They all reduce waste, increase throughput, maximize consistency, decrease simplify labor, all of which improve our customers' profitability. Thank you and over to you, Brian.

Speaker 3

Thanks, James. For the Q1, we generated revenue of $927,000,000 and adjusted EBITDA of $186,000,000 at a margin of 20%. Q1 GAAP earnings per share were 1 0.59 and adjusted EPS was $1.89 Commercial Foodservice revenues globally were down 4% organically over the prior year, yet the adjusted EBITDA margin was consistent with the prior year at 26%. All the margin values I will go through are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. In food processing, revenues for the Q1 were nearly $163,000,000 This was our 2nd best Q1 ever for this segment with a tough comp given the Q1 record was set last year.

Speaker 3

Our adjusted EBITDA margin held strong and was also consistent with the prior year at nearly 24%. In residential, we saw an organic revenue decline of 22% versus 2023. The adjusted EBITDA margin was over 6% and was negatively impacted by our investment to attend the Kitchen and Bath show for the first time since 2016. We have seen a recent inflection in order rates, which is driving our view that the residential revenues have hopefully started to move off their low point. A high point for the quarter was our exceptionally strong operating cash flows of nearly $141,000,000 for the quarter and nearly $678,000,000 for the trailing 4 quarters.

Speaker 3

It was our best first quarter ever and our free cash flow conversion was around 135% for the trailing 4 quarters. Our total leverage ratio is now down to 2.4 times. Despite the challenging quarter we faced from a revenue perspective, our business model demonstrated that we have resilient margins and continually generate strong cash flows. Nonetheless, in Q2, you will see some further restructuring charges as we continue to take actions to appropriately manage the business given market conditions. As we work to protect our margins, we are also aggressively controlling costs.

Speaker 3

In terms of an outlook, I will start by reminding everyone that the Q2 of 2023 was our strongest revenue quarter ever. So given recent order rates and demand for our innovation, we expect total Q2 revenues to be up at least mid single digits sequentially from Q1. But given the tough comp, we anticipate falling a little short of the prior year revenue level overall. To provide greater insights, I will separately address each segment. In commercial, the year over year comparison for Q2 is especially tough given the all time record revenue for us in 2023.

Speaker 3

While we may fall a little short of the prior year revenue in Q2, sequentially revenues could be up high single digits as compared to Q1. Our viewpoint is based on our backlog, which is currently up slightly from year end and that order rates have been improving over the past 3 quarters. Orders through April of this year are up 15% over the back half of twenty twenty three. We also expect margins to be in line with prior year levels. Looking into the back half of the year, at this time, we expect revenues to continue to grow sequentially and be at least mid single digits above prior year levels.

Speaker 3

Moving on to food processing, recall that the Q2 of 2023 was our 2nd highest revenue quarter ever for that segment. And while I expect us to fall short of that revenue level in Q2 of 20 24, margin should be up over the prior year. And then on a sequential basis, Q2 revenues and margins should be up meaningfully versus what we just posted for Q1. So recall that lumpy is a word used to describe this business sometimes. As I look back to last year, we did see a big drop in revenues when we move from Q2 to Q3, but that is not our expectation for Q3 of this year.

Speaker 3

We continue to see strength in this business overall. Orders in the past two quarters have been amongst our strongest intake periods for the segment. Thus, we are expecting that the second half revenue for this year will be above the first half of this year and above prior year levels. In residential, the good news is that the order trend is moving slightly upward. Looking at the past couple of quarters and extrapolating on the start of Q2, we are trending above the 1st 3 quarters of 2023.

Speaker 3

Revenues for Q2 of 2024 will likely not be ahead of the prior year and this is due to a year ago our domestic premium indoor appliances having posted a relatively strong quarter. Nonetheless, we are anticipating stable conditions in our European businesses when comparing Q2 of this year back to 2023 and we should see growth in the outdoor market in Q2. So this all results in a Q2 revenues should be above Q1. Visibility to the second half of the year in residential is certainly limited, but given recent trends, revenue comps and building upon our showing at KBIS and the overall strength of our portfolio, our view for the second half of twenty twenty four is currently for growth both as compared to the prior year and over the first half of this year. We are also working to maintain double digit profit margins for the year.

Speaker 3

Bringing it back all together, for the total company, we should continue to build and strengthen as we progress through 2024. We look forward to Q2 being stronger than Q1 and we continue to firmly believe at this time that for the second half of this year, we will deliver sequential and year over year growth. We remain focused on operational efficiency and optimally managing our resources. We are sharply focused on controlling and reducing our costs. We remain committed to improving our margins.

Speaker 3

These actions should drive year over year growth in cash generated and consistently high levels of free cash flow conversion as well. So, to further understand how we will achieve this, along with enjoying many tasty creations from both humans and cobots, please come and see our people and products in action at the National Restaurant Association show later this month here in Chicago. Please reach out to us to arrange a visit so you can deeply understand how we are solving the needs of our customers, which will drive our growth in 2024 and beyond. We remain committed to our mantra, more in 2024. Thank you and we will now take your questions.

Operator

The first question today comes from Mig Dobre with Baird. Please go ahead.

Speaker 4

Thank you for taking the question. Good morning, everyone.

Speaker 1

Good morning, Mig.

Speaker 4

So if I understand your guidance commentary correctly, it sounds like book to bill in Commercial Foodservice was above 1 because backlog went up a little bit in the quarter. When you sort of think about the outlook that you've laid out for Q2 and and the rest of the year, are you essentially baking in stable backlog and just sort of orders ramping relative to Q1 and that flowing through? Or is there still sort of a backlog conversion element here that comes to sort of help us in the back half of twenty twenty four?

Speaker 1

Yes. So I think we are thinking it's not converting we're not reducing our backlog further. That's not the assumption if you're if that's the question.

Speaker 4

That is the assumption.

Speaker 1

Yes. I I think as we see order improvement as we go through the year. So I think we've backlog has come down as we had a lot backlog, I would say orders that were pulled ahead. We've kind of gone, I'll say maybe to a certain extent the other way where inventory is not only at normalized levels, but a lot of our partners are slow to place orders because they know lead times are short. They don't want to carry inventory.

Speaker 1

And our channel partners, they see kind of their end users, a lot of the projects are geared towards the half of the year. So they're not going to buy the product right now. They're going to buy closer to execution. So when we started the year, January was pretty slow, not unexpectedly for a whole variety of reasons, some of it even weather driven. And then we saw progressively improve as we went through the Q1 and then it's improved a fair bit more as we've kind of gone into the early part of the Q2.

Speaker 1

So that kind of lines up with a lot of the commentary that we get from our channel partners along with the discussions that we have with our chain customers. So I think a lot of the view and the confidence we have is based on kind of the transparent discussions that we have with them, including what they see as the outlook, where the inventory is in the channel and then kind of line that up with the order trends that we've had, as we progress through the 1st 4 months of the year.

Speaker 4

Understood. Thank you for that. And my follow-up, sticking with the segment, is on the margin side. Comparisons are tougher in the back half of the year. So how do you encourage us to think about margins, especially on a year over year basis?

Speaker 4

And maybe related to all of this, are you seeing any sort of signs of price erosion or changing competitive dynamics in North America specifically? Thank you.

Speaker 1

Yes. So I'll contact you with Steve here. I would say not wholesale changes. I think the mix out there in the marketplace was a little bit different start the year. I think some of the kind of more immediate replacement type business that tends to be more economy driven was a little bit more prevalent.

Speaker 1

So I don't think that's more of a pricing element as it is a mix element. And then as we kind of get back to more of, I'll say, specified project driven and chain driven, we expect some of the mix to improve as we go through the year. So I think that's a little bit of the dynamic that we saw at the beginning of the year. And then maybe you

Speaker 5

want to touch on pricing. Yes, Miglia, this is Steve. We actually just recently announced a price increase that will be upcoming in commercial going into effect in mid June. Our approach there was making sure our divisions were really going SKU by SKU, customer by customer to make sure that we had captured all the price cost dynamics that we've obviously all gone through over the past several years. So it will be a I'll call it a relatively minimal increase or low single digit increases compared to prior year increases, but still want to make sure we're being very thoughtful about pricing against one of the more strategic initiatives in the company the last couple of years to make sure we're capturing cost, but also making sure we're certainly in a good place from a competitive standpoint.

Speaker 5

So that again was recently announced a couple of weeks ago and goes into effect in mid June for commercial.

Speaker 3

And then I'll bring it around, this is Brian, to the margin side of the question. Obviously, you saw in Q1 that even with lower revenues, we're able to protect the margins and that's coming from a variety of things, right? There's some commodities impacts in there. There's the impact of investments we've made in the business. There's impacts of, I'll call it, ongoing striving for greater efficiency, cost control, headcount control actions in there.

Speaker 3

And so as we look forward, as volumes grow, we'll also have greater absorption. I think we'll have some modest pricing benefits. As Tim was getting after, we believe mix will improve as well. So we put that all together and as I think about how the segment will operate for the entire year, I do think we will be slightly modestly above the prior year. Obviously, there's some challenges always to overcome with cost of inputs and supply chain and the like.

Speaker 3

But nonetheless, I think it is still will be a positive year over year.

Speaker 4

Super. Thanks for the color.

Operator

The next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Hey, good morning, everyone.

Speaker 1

Good morning, Jeff. Good morning.

Speaker 6

Just want to stay at Commercial Food. I think you mentioned some permitting delays, customers kind of contemplating strategy. It was interesting that you said you think for the year you're up mid single digits in commercial food and that kind of implies high single digit, low double digit growth in the back half. And so just wanted to get a better handle on if you're seeing some of these delays kind of move forward and what gives you the confidence in that second half growth rate?

Speaker 1

Yes, maybe just to add a little bit of color around delays. I mean, I think the world has not fully recovered from supply chain in some regards. I mean, I think as customers have tried to identify locations, open locations, right, they got to get through construction documentation permitting. Those things have taken a bit longer. We saw that in the back half of the year.

Speaker 1

So, I mean, I think those things are improving in terms of just the world normalizing, but that is one of the things that we know that they've a lot of our customers have struggled and that's delayed. So I think those things get better. I think there's a little bit of muscle memory as well as customer the world has kind of gone from crisis management back to strategic execution of business plans. And so I think there's we're in a little bit of a restart and I think some of those things cause slowness coming out of the gates, plus there's a lot of just dynamic step people were absorbing, right? Again, interest costs, while they've been up for a bit here, people have been monitoring it and its rates have been higher for that long.

Speaker 1

And then just where was pricing on menus because I think a lot of our customers had very favorable overlaps to the pricing that they had put through and were absorbing what was that impact to the consumer, what has been the traffic at the end of the year, at the beginning of the year, where food costs. So I think they've been absorbing a lot of that relative to the plans they had come into the year and then re auditing those plans. And I think those plans have by and large held up. And I think it's just taking a little bit more time to make sure, hey, are we doing the right thing and how are we working with our operators, etcetera. So I think we still see the strategies out there, what they want to execute to.

Speaker 1

So again, I think that's where maybe they weren't ready to go on January 1. But I think those things are still progressing and I think that kind of gives us some of the confidence and the visibility. So again, while maybe things were the engine will start slow to start, not entirely surprisingly and but while we think the engine will be it will be stepping on the gas pedal as we kind of progress through the next couple of quarters. Yes, please go ahead. Jeff, this

Speaker 5

is Steve. I'd just add on to that. I mean, I've talked about it before. I think one of the nice 5 products of the last several years is a lot more transparency from the chains in terms of new store opening plans. And I would just say even though as Tim alluded to a little bit slower start from a new store order or a new store build perspective, they pretty much all recommitted several times to their overall plans for the year.

Speaker 5

So I think that's what gives us confidence in more of the back half of the year. I think the other thing too I would point out, I know we've talked about before the dynamic between new store orders and the replacement orders that we feel like have been deferred over the last 3, 5, 7 years. What's been exciting is there's been a number of the large chains that have announced initiatives where the corporate entity is going to help franchisees do refreshes to build their stores and help them in that replacement cycle. So I think that's a the on this replacement cycle that we feel is going to really kick in over the next couple of years specific to the chain customers.

Speaker 6

Okay. That's great color. And then just a couple on res kitchen. 1, can you quantify the kind of one time KBIS investment? And then it seems like you're maybe the destock is done finally in outdoor grills and you feel a little bit better about that, but that kind of the U.

Speaker 6

S. Indoor kitchen is still maybe one of the choppier areas, is that correct?

Speaker 3

Yes. On the KBIS investment, I'd put it 150 to 200 basis points of drag in the quarter. And do you want to address the market commentary?

Speaker 1

Yes. So, yes, no, I think that's right. I mean, we're the inventory in the channel was far less of an issue. I mean that was true in commercial as well as residential start in the year. So it really starts coming down to end user demand.

Speaker 1

Sell through probably in outdoor has not been very strong. So it's kind of a, I'll say, neutral factor so far. But we're early in the grill season, right? So I think it is what has yet to come as we start moving into spring and summer months. So I think our revenues there will be highly dependent on how real season performs not only through that, but then that will lead into how do we think about the restocking going into 2025.

Speaker 1

And we do feel like there we're winning in some areas picking up floor space the way the growth market works is some of those floor planning that happens right now really is geared toward next year, not even this year. So we don't get some of those benefits till later in the year. With the indoor market, yes, I mean, I think, again, we're kind of bouncing along at the trough. While we think a lot of our consumers are really geared obviously to that upper echelon and the luxury market and we see some improvement. Some of that is a little bit longer lead time.

Speaker 1

So we've seen improvement in order rates and sometimes the remodels and the new builds, they don't need that product next week like they may in the replacement market. So we see some of that starting to pick up. I think the Cape this show was very good for us because again it was a large investment, but we've really transformed the portfolio over the last number of years adding new brands, new products, innovations, colors. So it was very exciting show, not only for us as a company, but for our channel partners, the builders, the dealers that came through. So I mean, I think that was really the intent is to kind of take the world a little bit by surprise of how far we've come in the last 5 years and now start funneling them to our residential showrooms that we've also invested in over the last couple of years with our Chicago showroom opening in the middle of last year.

Speaker 1

So I think those are the things that help pick up traffic there and build kind of long term pipeline of opportunities as people start converting over to the Middleby portfolio. So I think we see the gears turning there and we start seeing the housing improve, but I think it's going to be modest improvement that's going to take some time here. So, but I think that's where directionally we're at the beginning of kind of those signs and I think it will just kind of we would like it to be V shaped. I think it's a little bit more U shaped, but I think we will see progression as we move through the year.

Speaker 6

Okay. Appreciate it, guys.

Operator

The next question comes from Saree Boroditsky from Jefferies. Please go ahead.

Speaker 7

Hi, good morning. I just kind of wanted to build a little bit more on the residential questions. Could you just quantify the performance in resi and grills versus Viking, Versaga? And then when you talked about the improving order rates, it sounded like that was largely driven by the industry show or if not, where did you see that uptick in demand

Speaker 3

come from? Yes. Sarah, this is Brian. Sorry. Could you repeat the first part of your question?

Speaker 7

Just the performance in the quarter of Grills versus Viking versus Saga.

Speaker 3

Okay. Got you. Yes, I mean, it was a challenging quarter across the board in terms of the year over year comps. I noted that Q2 last year was really strong for domestic premium or mostly Viking, but we have other brands as well. But we started the year there last year strong as well.

Speaker 3

So certainly that market has been down. AGA and the I'll say the European markets have been continuing to be under in challenging environments. We haven't seen things relief or improvement in the U. K. Housing market.

Speaker 3

I'll say on the continent, we've been maybe faring a little bit better given how Novi's product offerings are resonating. And on grills, we've seen a different buying pattern this season as compared into the past with later load in by our customers, albeit also they're being reserved in their buying. So Q1 did see weakness in grills, but we're actually looking forward to much improvement there should trends continue in the second quarter.

Speaker 7

Great. And then, obviously, residential margins were weighed down by the show. What do you need to see to support double digit margins in that segment? Is it just volume or anything else? And then how do you think about incremental margins when you do see volumes turn positive there?

Speaker 7

Thank

Speaker 3

you. I think once you strip out some of the show impacts that recent history has been a good indicator of where the business can and does perform. So as we start getting closer to $200,000,000 or even $190,000,000 we're likely to see closer to the double digit margins. We continue to evaluate costs in this business and you've seen obviously we've been taking charges and we continually to address that. So we will do more of that to make sure we are right sized for the current environment.

Speaker 3

But operationally, we've been making significant investments in these operations and that really does drive really positive increments. And I've noted to some before, our factories in this segment tend to have more throughput than in commercial, right? We have a fewer yet larger factories in terms of the volumes they run. So, I'm not trying to minimize at all our focus on, again, looking at all the current costs and actions. But dare I say, as the volumes come back, the margins will come racing back as well.

Speaker 7

I appreciate the color and I'll see you at the NRA show. Thank you.

Speaker 1

We'll see you next week. Thanks.

Operator

The next question comes from Tami Zakaria with JPMorgan. Please go ahead.

Speaker 8

Hi, good morning. Thank you so much. I have two questions regarding the Commercial Food Services segment. So first of all, what can you comment on the price realization you saw in that segment in the Q1? I'm hoping to learn whether the negative organic growth was purely volume driven or there is a mix of both price and volume?

Speaker 3

Tammy, this is Brian. It is mostly volume driven. We haven't taken many price actions recently. Obviously, Steve noted that we'll be taking 1, a modest one currently. So it's fair to assume that is very highly dominated by volume.

Speaker 3

Yes. Maybe I'll just we did not have a price reduction, right? So it really is volume. And we did not take a I'll say a typical price increase at the end of

Speaker 1

the year. We've taken significant price increases over the last several supply chain related. And I think as And we did see some cost increases, not only labor related, but And we did see some cost increases, not only labor related, but even a little bit of supply chains we went through the year, hence, as they evaluation as we went through Q1 to why Steve has taken a price increase now in Q2. But as you kind of think about Q1, we get didn't go backwards on price, we didn't get a benefit and we probably had a little bit of a weight of supply chain still coming into the year.

Speaker 8

Got it. That's very helpful. So I wanted to follow-up on that. So in June, you're taking some price increase. I think you mentioned low single digit.

Speaker 8

Again, I'm trying to understand whether the price increase might actually stick or face some resistance given demand is weak. And you just mentioned there's some price cost pressure in the industry right now. So can you speak to the rationale for the June increase and how distributors are reacting to it, if you have already communicated to them about it?

Speaker 5

Yes, Tami, this is Steve. It has been communicated out to the marketplace at this point. And I do believe it will be relatively sticky. I mean, obviously, it's always a task to make sure it does come through. But I think given the thoughtfulness the team has put behind, again, I keep coming back to it's not an across the board kind of peanut butter approach.

Speaker 5

It really is being thoughtful on SKU by SKU, customer by customer approach. So it's hitting both general market and in chain customers. So we do believe that it mostly holds or it is sticky and certainly comes through in early Q3.

Speaker 8

Understood. Thank you.

Operator

The next question comes from Brian McNamara with Canaccord Genuity. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking the questions. I guess 2 for me on residential. First, a question we often get from investors is the breakdown in sales and grills versus the rest of residential kitchen. I don't expect you to quantify, but can you give us maybe a qualitative picture of kind of how grills look today relative to when you first acquired them?

Speaker 3

This is Brian. The I mean, obviously, the krills are down quite significantly from when we bought them. I think we've said before over 50% and I'll probably leave it at that. At this time, I think it's fair to in general terms, I think about the segment in 4ths. I'd say, you think about, I'll call it, U.

Speaker 3

S. Domestic indoor premium,

Speaker 1

European

Speaker 3

or I should say, the UK business, the outdoor business and then all else, which would primarily be, I'll call it, the European Continental European Businesses.

Speaker 9

Got it. That's helpful. And then secondly, on Grills again, I'm curious what you're seeing currently with your retail partners in the category. Are they willing to either add to or at least hold floor space for the category? And if not, how do you break in given your relatively small size and brand recognition compared to the bigger players?

Speaker 9

Thanks.

Speaker 2

I'm not sure

Speaker 1

if you with the holding floor space if that was specific to us or Grille's overall.

Speaker 9

Well, I mean, it's specific to the category, but I mean, presumably, you would need to be a part of that just given your relative size at the moment?

Speaker 1

Yes. I mean I think we've focused kind of on product differentiation, some of the new technologies that we've had and I think one of the items that we've highlighted here is our connected platform both for Masterbuilt as well as Kamado Joe. That's definitely something that we think we've got a lot of innovation that you don't see across the Gro platform. Also, we've had the heavy focus on charcoal, which is differentiated, particularly with the vertical charcoal, the master built. So I mean, I think there's things that we offer that some of the other players out there do not have and we think we follow some of the trends of the fuel type which ties to flavor and digital which ties to convenience and culinary.

Speaker 1

So I mean, I think those are some of the things that we think some of the retail partners recognize also when I think we've had some success with certain partners there with picking up floor space over the last 12 months there and probably going into 2025 as well.

Operator

The next question comes from Walt Liptak with Seaport Res. Please go ahead.

Speaker 10

Hi, thanks. Good morning, guys. I want to just back up to Brian when you gave the guidance. And can you just repeat the sales guidance for the year? I think you said the sales you were expecting sales to go higher to grow this year and margins as well as cash flow to be higher.

Speaker 10

Is that correct?

Speaker 3

Yes. Let me find my place in the script here. Yes. So on the total company basis, I started with it, Q2 will be stronger than Q1, right. And that as we look at the second half of the year, we will grow sequentially, so Q3 above Q2, Q4 above Q3, as well as for Q3 and Q4 being above prior year levels.

Speaker 3

I did note that for Q2, we will be a little bit of a challenge to achieve the prior year revenue level. So Q2 better than Q1, maybe a little short of prior year. Q3 and Q4 ahead of prior year and also sequentially improving as we move through this year. And with that, and so those comments are very specific to revenues, but they do also also generally apply to margins as well. I do expect total company margin to improve sequentially as we move through the year.

Speaker 3

Obviously, we demonstrate we have a business that really gets nice increments and has nice leverage. And I'd expect to see that in the segments individually as well.

Speaker 10

Okay. And just to make sure I'm totally clear on this. So the revenue you're expecting revenue to go up this year even with the tougher Q1?

Speaker 3

Yes. And I think I know you're when you tear it apart and that you do look at things by segment. So total company revenue, we do expect up. Obviously, the challenging the most challenging segment and the one where I'd say we have some of the lesser visibility right now is exactly how residential will play out where we have started weaker. So, higher conviction in the other two segments, in terms of the year over year and I think we do end up still total company up year over year.

Speaker 10

Okay. Okay, good. And then just a follow-up, when you guys were talking about the CFS segment and some of the strategic changes or maybe strategy normalizing from crisis. I noticed that Shake Shack commented that they were decreasing some investments this year. Was that what you guys were referring to?

Speaker 10

Or is there something else out there in the market that you were referring to?

Speaker 3

Yes. And you're talking about the overall building kind of new stores in the strength of what's happening out there. I mean, our comments are not specific to OneChain, not specific to Shake Shack. I think as you look at the print across the board from the very large QSRs, right, that they have started the year slower in terms of completion of projects, right, there was weather and permitting and such. So again, I think it's a pretty consistent comment we've seen across the large QSRs that no one they're also committed to their build plans.

Speaker 3

It just did not start off the Q1 as probably exceeding any of their internal benchmarks for the total number of new doors to be opened.

Speaker 10

Okay, great. And maybe just one final one on the NRA. Joe, I think the you guys mentioned the Invoke combi oven that we've heard some things about. How I wonder if you could tell us a little bit about the features and what you're expecting as you commercialize that product?

Speaker 2

Yes. So I'll jump in and talk about the Invoke. So we've spent in the last several years designing the Invoke and finally have it out on the market. We think there is a ton of novel features in the Envoke. Kind of one of the first things that I like to talk about is the fact that we've developed a half size combi oven that fits full size combi pans.

Speaker 2

That means that if you think about traditional full size combi oven, it's got kind of X dimension. If you look at a half size combi oven, it's about a third less in volume than a full size combi. So what does that mean for the kitchen that means more space for the other equipment in the kitchen that means less hood requirement, it means lower energy energy input rate into the product, more efficient product. A couple of other features we've done is that we've really spent a lot of time on the wash cycle, reducing amount of power going into the wash cycle. We have a steam on demand feature that is incredibly efficient using 17% less energy for the steam on demand.

Speaker 2

And then I will say the last cool feature we've done is we've been able to add another shelf in the oven. So traditionally, your Combis are either 6 or 10 pan. Here we have combis that have 7 or 11 pans. So we've been able to increase the production capacity in the oven. And by doing that, we improve the efficiency of the oven as well.

Speaker 2

So we're pretty excited about it. Our combi has the Middleby One Touch control. It is open kitchen ready. So it's really one of the more advanced pieces of technology that we've got coming out at Middleby. And I think when you compare it to the other comedies in the marketplace, this puts us right up at the number 1, number 2, comedy on the global market.

Speaker 10

Okay, great. Thank you.

Speaker 1

Yes. I mean, I just I think I'm glad you asked the question because I mean I think we are excited about I think it's a good example of a lot. We talk about innovation a lot. James goes through it. These are significant investments that we've made over a number of years on a lot of different products that we think some of more the future of innovation where the restaurant is going, which a lot of that has yet to be realized and some of it are existing large markets.

Speaker 1

Combi is clearly one of those. It's a large market. We lead in a lot of categories. Combi has not been one and this was a multi year development project to make sure that we had the best in class features. James just went through them all, but water, energy, space, throughput.

Speaker 1

And again, the ease of use with the control that also James and team have developed over multiple years and connected to IoT, which we think is the future. So it does have a lot of likes here, and I think it is going to be one of the things that helps us grow. And we have a lot of expectations for it over the next several years and we have a lot of channel partners that are highly not only intrigued but engaged right now as we start bringing it to market. So I think just another great example of a lot of things that we talked about. And I think this will gain traction much like last quarter James talked about ICE, right, like again another large market of similar size.

Speaker 1

We've not necessarily been a player as you kind of went back a number of years ago, and we are gaining a lot of traction in that. We've got a full lineup of solutions there. And so whether that's success with some channel partners and some chains, we're starting to see that early this year. And again, I think one of the things that bodes well for us growing in certain targeted product categories as we go through the next several years.

Speaker 2

I'll just add one more point. The Invocombi is shipping now. So we are we've been distributing the product in Europe now for a number of months and now we have just started distributing the product in the U. S. So it is actively being sold.

Speaker 2

Thanks

Speaker 1

Walt.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 1

Yes. No, I'd like to thank everybody for being on the call. I just got one final comment, which is a little bit more of a follow-up to some of the questions on residential. So I'll say it's an answer to a question earlier. Just as we think about margins, fundamentally, our residential business is much stronger today than it's ever been from new products, manufacturing efficiencies, quality, the investments that we have made in distribution and some of the capabilities, things that are our design team, showrooms, etcetera.

Speaker 1

So Brian made a comment of margins come racing back. We're operating at volumes that are far less than normalized periods. So pre COVID, if you look at the number of units that are going through a factory. So just kind of re answering a little bit of the question of what gives us confidence for the margins in that platform and why it is a great platform. You're seeing it at its worst right now, but it's actually the strongest it's ever been right now.

Speaker 1

So a normalized period, we're pretty excited about all that residential has to offer. So certainly we've got a couple quarters still here of Rocky Road ahead, but we see it inflecting, and just something that I wanted to hammer home, given that question that was put to Brian earlier. So with that, we'll wrap it up. And thanks everybody for attending the call today.

Operator

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

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Earnings Conference Call
Middleby Q1 2024
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