The Middleby Corporation

Welcome to the Middleby fourth quarter 2020 conference call. We will start today's call with comments from management, then open the lines up for questions. We will give instructions on how to get in the queue at that time. With us today from management are Chief Executive Officer, Tim Fitzgerald, Chief Financial Officer, Brian Middleman, Chief Operating Officer, David Brewer, Chief Technology and Operations Officer, James Poole, and Chief Commercial Officer, Steve Spittel. Now I'd like to turn the call over to Mr. Fitzgerald for opening comments. Please go ahead.

Thank you, everybody, for joining us today on our fourth quarter conference call. As we begin, please note there are slides to accompany this call on our investor page. I am very pleased to welcome James Poole and Steve Spittel on the call this morning. As recently announced, James and Steve have been appointed as officers of the company, expanding and greatly enhancing our leadership team. James and Steve each bring tremendous experience in the food service industry, along with a long tenure at Middleby. They have successfully been leading a number of our core brands, such as Turbo Chef, Pitco, Blodgett, and Middleby Marshall. James and Steve have also been executing on key initiatives over the past several years that are critical to our business. As we accelerate the pace of technology advancement, innovate the customer experience, and differentiate Middleby in the marketplace. In addition to their officer roles, James and Steve will oversee the portfolio of cooking brands within our commercial food service segment. I'm also very excited to have announced Corey Cole to lead our Middleby beverage group and Najeeb Malouf to lead our residential kitchen equipment business. Corey and Najeeb bring a deep food service industry experience and are longtime Middleby executives. Both have successfully led integration efforts across many businesses we have onboarded through acquisition. The beverage group and our residential kitchen equipment business have expanded rapidly since their inception and present exciting continued growth opportunities for Middleby. Corey and Najeeb, in their new roles, join Mark Solomon, our president that has been leading the food processing group. This expanded team provides leadership for each of our business segments, ensuring the continued execution of growth initiatives and bolsters our efforts to realize synergies across each of our segments. I'm very excited about the deep bench of talent that we continue to develop at all levels and across the entire organization. The broad team of highly capable leaders is working in collaboration as we leverage our strengths and capabilities across all of Middleby. I believe our people are our most important asset and provide us a true competitive advantage. and the Middleby team is stronger than ever. As I'm sure most of you have also seen, Dave Brewer recently announced his plans to retire at the end of this year. Dave has provided tremendous leadership to the organization for more than a decade. Dave has been a driving force at Middleby while we have substantially grown our business many times over through business acquisition, customer acquisition, and product development. He's been a mentor to many across our company a committed advocate for all of our customers, a positive lasting imprint on the culture of the company, and a true partner and friend through our journey together. I'm very happy that he will be continuing with us throughout 2021 as we have a very exciting year ahead. And lastly, I would like to once again thank our entire Middleby team around the world. The quick actions, creativity, and dedication of the entire team was on display over the past year as we navigated the uncertainty and challenges of COVID. The efforts and commitment of our team have allowed us to maintain the priority on our customers while we also delivered the achievements of 2020. And to this team, I am grateful. As we look back at 2020, I am proud of what we accomplished. Financially, we ended the year in a great position. We reported record operating cash flows in 2020, realized strong profitability across all three of our business segments, and we developed a record backlog, providing momentum as we head into 2021. Despite the impact of COVID, we remained committed to our long-term strategy as we invested in the reinvention of our business. We advanced our technology initiatives, particularly in areas such as controls, IoT, and automation, to capture rapidly changing market dynamics. We expanded our sales capabilities with the development of digital sales programs, improved upon the effectiveness of our sales organization, and strengthened the relationships with our strategic channel partners. We bolstered our capital structure, enabling us to reengage our acquisition strategy and completed acquisitions to further extend our beverage business, add to our portfolio of innovative technologies, and expand our global manufacturing capabilities. We also continue to invest in showrooms for our residential and commercial businesses, and just this past week announced the opening of our Middleby Innovation Kitchens in Dallas. These innovation centers allow us to engage with designers, channel partners, and customers as we promote the latest technologies, product innovations, and integrated solutions we carry across our entire portfolio of Middleby brands. In 2020, we also continue to execute upon important initiatives to improve our profitability as we emerge from COVID. We've progressed manufacturing, supply chain, and acquisition integration efforts across the business. This will result in improved profit margins at each of our business segments in the upcoming year. As we move into 2021, we are optimistic about improving market conditions and the strength of our positioning at each of the business segments. At commercial food service, while the industry has been significantly disrupted, it has also proven resilient. Even though the food service industry in 2021 is not expected to recover to 2019 levels, it is anticipated to improve meaningfully from 2020. Our customers that quickly adapted business models during COVID are making strategic investments in their food service operations. leading to new kitchen layouts and the adoption of new technologies. We're actively engaged with customers to address rapidly changing needs, and the many investments we've made leading into 2021 are now more relevant than ever. At our residential business, new home starts and existing home sales continue to be robust, while increased time spent at home is resulting in kitchen remodels. This presents a favorable backdrop to our business for the upcoming year. We're also benefiting from the many new product launches and investments in our sales and service capabilities made over the past several years. All of this has positioned us to capture a growing market share. At food processing, travel restrictions continue to be a challenge to customer demonstrations and the installation of equipment. This is particularly impactful due to the amount of cross-border business we have. Despite these challenges, the engagement with customers and the project pipeline remains strong. As COVID restrictions lift, opportunities exist for our products in growing market segments such as cured meats and alternative protein, and we are prepared with solutions to meet increased demand for automation to address labor and employee safety concerns at our customers. In summary, we are proud of the team that successfully navigated the challenges of the past year, And we are confident the actions taken have successfully positioned us for the year ahead and toward our vision for the future. I'd like to now turn it over to Brian for the financial discussion.

Thanks, Tim. For the fourth quarter, our GAAP earnings per share were 94 cents. 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 $1.62. which was negatively impacted by $0.04 from acquisitions. Operationally, it was a strong quarter for us. We generated all-time record sales and earnings in the residential segment. Food processing closed 2020 with their strongest revenue quarter of the year, and earnings were at the highest percentage level in three years. Commercial food service grew their top line approximately 15% sequentially over Q3, and nearly the same on EBITDA. our free cash flow exceeded $200 million for the quarter. I've been especially excited to report one number in particular, $500 million. Actually, $504 million. That represents our free cash flow for all of 2020. Being disciplined about cash flows is core to running the business for us. We have demonstrated our ability to manage costs and cash while also investing driving innovation and providing excellent service to our customers. Now jumping into revenues and segment performance. On a consolidated basis, revenues declined 7% or 9% organically as COVID significantly impacted our results. Across the company, we were able to deliver gross margin of just over 35%, which was in line with Q3. By the way, all margin values I will discuss are on an organic basis as well, meaning excluding acquisitions and FX impacts. Total company adjusted EBITDA was $145 million and represented over 20% of revenues, which was also generally in line with Q3. We achieved this while continuing to invest around $5 million in technology initiatives quarterly. Commercial food service revenues globally were down under 19% organically, and when looking At just North America, the decline was approximately 9%. The international decline was 32%. In residential, we saw revenue up 15% as strong demand persists for our premium appliances and outdoor cooking platform. This led to gross margins of 37% and adjusted EBITDA of over 20%. In the quarter, We did take a charge, which is a component of the impairment shown on the income statement, for the sale of our fired earth tile business, which contributed around $20 million of revenues in 2020. This action will improve profitability of the segment going forward. In food processing, revenues increased approximately 9% sequentially and were almost flat organically compared to the prior year. Gross margins were 36%, and the adjusted EBITDA margin was over 23%. As is typically the case for the segment, Q4 was the strongest quarter of the year. Interest expense was nearly $23 million. This was our first full quarter with our improved current capital structure in place, having issued our convertible notes back in August. Beyond the 1% coupon, these notes did have $5 million of non-cash interest expense attributed to them in Q4. However, we are to adopt the new GAAP rules on convertibles accounting in 2021. As such, this non-cash interest expense will not be required in our future results. And one more 21 item that I want to briefly address, the non-cash pension benefit that is depicted in the non-operating section of our income statement is expected to be at relatively consistent levels in 21 as compared to 20 based on current exchange rates. So, as I mentioned earlier, for the quarter, we generated strong cash flows, $209 million from operations, with $70 million in benefit from reduced working capital levels from inventory and other cash management efforts. For the past 12 months, as I said, free cash flow is $504 million, a record level for us. Working capital changes as a result of the pandemic did positively impact cash flows by over $170 million. We do expect some future reversal of this, so reported 2021 cash flows will likely beat a lower amount as working capital adjusts to changing revenue levels. Nonetheless, Our discipline remains, and this is a key focus area, especially around inventory. During Q4, we paid down debt by $109 million, and over the full year, we have reduced our net debt level by $203 million. Our total leverage ratio is 3.1 times, while our covenant limit is 5.5 times. We also have over $1.3 billion of current borrowing capacity under our credit agreement. As with all parts of the business, 2020 was a dynamic year for us from a Treasury perspective. We took deliberate actions to improve our capital structure. We refinanced our bank credit agreement twice. Once was to expand the facility as we began the year. We increased capacity and benefited from the relatively low rates we earned given our profitability levels and cash flow generating abilities. The second time was when we further enhanced our capital structure in conjunction with the issuance of the convertible notes back in August. With our banking partners, we were able to put in place the flexibility and availability to continue our strategic priorities. During the year, we also bought back over $85 million of stock. We made acquisitions and investments with a total value over $100 million, which included $86 million in cash and $16 million in equity issuances. As we resumed making acquisitions and investments in Q4, we expanded our offerings in Asia and have accelerated new product introductions into this receptive market. We also expanded our product offerings of beverage products with the acquisition of wild goose filling. We continue to demonstrate our ability to innovate and bring complete solutions to our customers. I also find it interesting in how our innovation leads to further innovation by our customers. To this point, Another personal reflection. In the past, I've talked about my family's favorite Middleby products. For this quarter, I'm being a bit self-centered. Rather than including my boys, I will focus on the beverage products that I enjoy from time to time. My favorite local restaurant, like many, has added cocktails to their takeout menus to help survive during these crazy times. They have partnered with a local Chicago area company, Blue Blazer Cocktails, which utilizes our SS BrewTech products to bring the bottled drinks to market. By the way, beyond beer and cocktails, SS BrewTech's amazing product portfolio can cold brew coffee in record time for both commercial and residential uses. Craft brewing is another area of growth for us. I've enjoyed some beers offered at Pilot Project Brewing, which utilizes systems from Deutsche Beverage Technology, which was our first acquisition of 2020. What is especially unique and innovative about Pilot Project is that they are a brewing incubator. They have addressed barriers to entry to support talented brewers in bringing their new beer recipes and styles to market. So even though while I am the one enjoying the outputs, my family has not been entirely left out of the equation. We've had discussions about the science of carbonation and the appropriate technique to generate the proper amount of foam on top of a beverage. This may not be part of the typical remote learning curriculum for most kids, but science can be taught in many practical manners. As our beverage portfolio continues to grow, now with wild goose in the fold, I have a bunch more customer spots to try in the coming weeks. More reports will follow. So having covered our 2020 business in my ongoing pandemic customer support activities, it's time to look forward to 2021. In doing so, it is helpful to refer to order and backlog data which we have shared in the presentation that is available at the investor section of our website. For commercial food service, the positive trajectory continues. After seeing order rates down 22% in Q3, for Q4 we were only down 5%, and this upward trend line has persisted into 21. The order strength put our year-end backlog up 84% from prior year levels at $238 million. Accordingly, our revenue expectation for Q1 of 21 is to see modest sequential growth from Q4, which also implies revenue close to prior year levels. I would have hoped to guide to being at least flat to prior year, but supply chain risks are having a somewhat dampening impact on our short-term expectations, and we had some operations with disrupted with recent storms, but we are working to safely recover from that. Nonetheless, I still have an optimistic viewpoint at this time. In terms of margins, we do expect to see sequential improvements from Q4 levels and should be at similar levels to prior year profitability in terms of EBITDA percentages. So wrapping up my thoughts on commercial food service, it would not yet be prudent to offer a specific guide on revenue for the full year. but we remain encouraged by recent trends and the midterm outlook considering all the factors benefiting our marketplace. We do expect this could reasonably allow us to reach 2019 profitability levels, meaning delivering above 25% as we progress through 21, in spite of revenues being below 2019 levels. There are many unknowns, but if the positive trends continue and we successfully manage through and overcome the risks, this is achievable. Residentials growth continues. The Q4 order rates up over 50% from the prior year. In terms of revenue, we clearly expect to have double-digit growth for the first half of the year. Given the many variables and risks, including the strong comparables, I'm not yet comfortable with estimating what growth in the back half of the year could be. Getting a bit more granular, Q1 revenues may be down somewhat from Q4 levels, and this is primarily due to three factors. One, the impact of the disposed business. Two, seasonal shifts in product mix, especially in the UK, has an impact. And lastly, some of our other businesses do see a holiday spike in the fourth quarter. In the production environment, we are focused on ensuring employee safety and managing through labor availability matters, as well as addressing issues from recent weather impacts on operations. This all creates some limitations on us in terms of short-term margin expansion, but nonetheless, we will be at similar levels, if not slightly above where we have been in the fourth quarter. For food processing, we entered 2020 with a record backlog and are pleased, given the disruption that impacted this segment during the year, to have exited the year at a relatively similar level. We are positioned well for 21 as conditions evolve. Q1 revenues will be below Q4 levels, as is the seasonal norm, but we do anticipate slight growth over the prior year's first quarter. Margins are typically rather depressed in the beginning of the year. However, we do expect Q1 21 margins to be well above prior year levels. In summary, modest improvements to start the year with the possibility for a stronger second half. As I wrap up, I want to come back to our people as they make these results happen. We have great teams at Middleby. We faced an incredibly difficult year together. And I know we are all proud of what we have delivered. We look forward to better times in the hopefully not too distant future. And with that, we will continue to deliver industry leading results. So thank you to everyone for working to stay safe, while at the same time continuously demonstrating your dedication, drive, and commitment. And a closing shout out to Dave, one of Purdue University's finest graduates, and he didn't even pay me to drop that in. He's a tremendous engineer, a passionate leader, someone we all trust, and a little-known secret, a pretty decent accountant, too. So, Dave, I'm so very appreciative of the time and the interest you've taken in me and in my family as well to not only ensure my accounting skills are as strong as yours, but to help me learn the industry and grow at Middleby. And you've always been someone I could count on to ensure there was room for ice cream after dinner. So I could go on and on on how great it has been to work with you, to learn from you, and to see what you give others. Your love of the industry, our company, our people, and more importantly, a family, is always inspiring. But I've probably taken too long already, so I'll close with a simple thank you, and we'll look forward to a toast with a buttery chardonnay sometime later. With that, before we turn the call open to questions, I will give it over to you, Dave, for concluding comments.