The Middleby Corporation

Thank you for joining us for the Middleby first quarter earnings conference call. With us today for management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Operations and Technology Officer James Poole, and Chief Commercial Officer Steve Spittel. We will begin the call with comments from management and then open up the lines for questions. Instructions on how to get into the queue will be given at that time. Now I'd like to turn the call over to Mr. Fitzgerald for his opening remarks. Please go ahead, sir.

Thank you for joining us today on our first quarter earnings call. As we begin, please note there are slides to accompany this call on our website on the investor page. We started the year with positive momentum. In the first quarter, we reported a strong order intake, realizing growth compared to 2020-2021. and ahead of our pre-COVID 2019 levels at each of our three segments. Our backlog across our business segments also continued to climb, supporting continued strength in financial performance for upcoming quarters. We reported strong levels of profitability despite pervasive and ongoing supply chain challenges, and we posted improvements in our EBITDA margins at each of our three business segments, all exceeding 20%. reflecting the benefits of execution against our strategic and operating initiatives. We continue with these efforts and toward our long-term profitability targets through acquisition integration initiatives, manufacturing and supply chain activities, and improvement in the mix of product sales as we promote higher technology products. And we continue to invest, again in the first quarter, spending on key strategic initiatives, as we focus on evolving our business to meet rapidly changing food service industry dynamics and increasing customer expectations. We remain committed to investing in technology, customer support capabilities, digital sales and training tools, global manufacturing, and after sales service programs as we aspire to better serve our customers and support the long-term growth of our business. As we move through 2021, we are optimistic about the market conditions and the strength of our positioning in each business segment. For our commercial food service business, the restaurant industry remains significantly disrupted. However, it has proven resilient and a recovery is underway. While the food service industry is not expected to fully recover until 2025, it is anticipated to improve meaningfully in 2021 and our customers are making strategic investments in their food service operations, leading to greater acceptance of new technologies to address rapidly changing customer trends and increasing operating challenges. We are well positioned to support faster growth segments such as QSR, fast casual, convenience stores, retail, and healthcare. We are also invested in and positioned to support industry trends such as carry-out and delivery, and new operating models such as virtual brands, modular restaurants, and ghost kitchens. At a residential business, new home starts and existing home sales continue to be robust, while increased time spent at home has resulted in kitchen remodels. This presents a favorable backdrop to our business for the year, and we anticipate conditions carrying into 2022. We remain excited about the many new product launches we've introduced to the market, along with planned upcoming introductions which provide for continued momentum. And the investments in our sales and service capabilities made over the past several years has positioned us to capture market share. We continue with these investments and are excited about the summer opening of our next residential showroom in Dallas. This showroom will be tied to our Middleby innovation kitchens and demonstrate the crossover in product and technology amongst our commercial and residential businesses and bring to life our differentiated ability to offer professional restaurant innovations into the home. At food processing, travel restrictions have proven to be a challenge to customer demonstrations and the installation of equipment. As COVID will remain a challenge across the globe in 2021, we are leveraging our global teams and platform to engage with customers and serve their needs locally. Through COVID, we continued with our focus on market opportunities for areas such as cured meats, bacon, alternative protein, and pet food. Increasing demand also exists for innovations addressing operating challenges, including labor, safety, energy, and sustainability. We are positioned with solutions to address these demands and have increasing adoptions of products for many of our new technologies. And now with that, I'd like to pass it over to Brian.

Thanks, Tim. For the first quarter, our GAAP earnings per share was $1.59. Adjusted EPS, which excludes amortization expense, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $1.79. Operationally, it was another solid quarter for us. When looking at total company performance, our revenue growth persisted, and we delivered 21% adjusted EBITDA overall. With the strong demand environment, order rates are expanding, and organic commercial food service revenues moved into positive territory when comparing back to the prior year, and we continue to generate strong cash flows. On a consolidated basis, on a year-over-year basis, revenues grew 12% or over 8% organically, as we benefit from robust demand in residential, improving conditions in commercial food service, and growth in food processing as well. Our 21% adjusted EBITDA for Q1 was an increase over Q4, as well as from Q1 of 2020. By the way, all the margin values I discussed are on an organic basis, meaning excluding any acquisitions, a disposition, and FX impacts. Total company adjusted EBITDA was $161 million. This represents over 10% sequential growth from Q4 and over 15% growth from the prior year. We are growing our bottom line faster than our top line, even while we maintain our investments of around $5 million in technology initiatives quarterly. Our profitability expansion and cash flow generation come about from the actions we took to improve our business models as we managed through the pandemic. Commercial food service revenues globally were up over 3% organically, and when looking at just North America, the increase was approximately 6%. The international decline was approximately 3%. Our margins expanded sequentially again. We produced nearly 25% for Q1. In residential, we saw revenue up nearly 29%. Strong demand persists for our premium appliances and outdoor cooking platforms. Here, too, our margins have expanded sequentially. We grew to over 21% for Q1. In food processing, revenues increased around 7%, and the adjusted EBITDA margin was over 20%, an increase of over 250 basis points from the comparable prior year period. As a reminder, for this segment, Q1 usually has seasonally lower margins. Interest expense was $16 million. Effective for fiscal 2021, we have adopted the new GAAP rules on accounting for convertible debt instruments. As such, there is no longer a meaningful non-cash component of interest expense from our notes. Our operating cash flows of $60 million is another highlight when looking at our performance to start the year. This amount was rather meaningfully impacted by the increase in accounts receivable from our growing revenue base. In a pre-COVID world, I'd offer that we typically have a benefit to cash flows from AR in the first quarter. However, for 21, the impact was detrimental at $67 million. While we are certainly pleased with the revenue growth, I wanted to make sure that the impact of working capital as we continue to recover and grow is understood. As always, I am proud of our discipline around cash flow. It is core to running the business for us. We consistently demonstrate our ability to manage costs and cash while investing, driving innovation, and providing excellent service to our customers. Our total leverage ratio is 2.9 times, while our covenant limit is 5.5 times. We have over 1.4 billion of current borrowing capacity. Accordingly, we are still investing in growth initiatives and obviously have been active in M&A. When I'm not working in M&A, I do spend some time with my family. And as a parent of teenage boys, various debates often ensue around the house. Beyond topics such as Cubs versus Sox or Bears versus Packers, this is an especially frustrating one for me, East Coast versus West Coast, Mar-Vell versus Star Wars. We seemingly have lots to debate, including food topics too, like chocolate versus vanilla, chunky versus smooth, square cut pizza versus triangles. Well, what do these ramblings have to do with Middleby? My point is, whatever you want and however you want it, you do you, and we have a solution that will get the job done. I was on a recent dinner pickup run where some things came together for me. I was waiting curbside for the American classic, a cheeseburger and fries, and I nostalgically recalled all the flame-grilled burgers and shoestring fries I enjoyed as a kid. Little did I know how much more important these would be to me later in life. But back in the day, I certainly had never heard of Nikko or cared much about a flame broiler, or the same thing with a Pitco fryer for that matter. But this dinner run offered a personal growth opportunity for me too. we should always remain open to new experiences and ideas. So I was sitting there and some crispy crinkle-cut fries hot out of the Pitco fryer were sitting next to me. And there was no way they were going to make it all the way home without a sampling or two or three. So having kept an open mind, I can say that the crinkle-cut fry has won me over. It comes down to their differentiated texture. And I know the East Coast-West Coast feud was not about food. But if a grill from Sonoma and a fryer from New Hampshire can go together so well, maybe there's a larger lesson for all of us in that. And by the way, in my family, we can all agree on a cookies and cream shake. We will keep on having our debates and doing what we can to keep Middleby customers busy and ordering more equipment. Speaking of which, our Q1 order and backlog data was again shared in the presentation we posted this morning on the investor section of our webpage. And I'll seek to briefly translate that into some near-term expectations. And before diving into each segment, I will reiterate what I shared last month. Even with a solid start to the year, we are keeping our expectations at modest levels for the near term. While we're seeing good order trends, we also benefited in Q1 from some pent-up demand and rollout activity. We've considered these factors, as well as some risks in our valuation. Many variables are at play and our outlook will likely evolve over time. We're facing a variety of challenges in the supply chain and manufacturing environment. Component availability and pricing, logistics hurdles, as well as some matters around labor such as availability, cost and worker safety are all top of mind for us. We expect increasing cost impacts as we progress through Q2. While we are still generally optimistic overall, these headwinds are very much real and can't be ignored. Furthermore, it should be understood that given the backlog levels, current market dynamics, and our operational plans and challenges, we do expect the backlog to be converted to revenue over a longer timeframe than was typical in a pre-COVID environment. So, for commercial food service, the positive trajectory continues and order rates have moved well into positive territory, up 21% in Q1. As we consider how we are operating and given the current risks and challenges, Our expectation is for modest sequential growth from Q1, which means low single digits. Given the low revenue levels in Q2 of last year, it seems more appropriate to be considering sequential performance at this time. We are also aggressively addressing inflationary factors. We hope to maintain our pattern of expanding margin sequentially. but this is a meaningful headwind and we continue to actively address the risks to be able to exceed 2019 profitability levels. The supply chain issues are affecting all our segments. We monitor and manage this daily. The potential impacts are increasing, so I do remain overall somewhat cautious in our margin outlook. We are preparing to take further pricing actions across the board as we gain clarity on the impacts to our business. On the revenue side, residential growth abounds with Q4 order rates, I'm sorry, with Q1 order rates up robustly again at over 60% from the prior year. We expect to have sequential high single-digit growth for Q2, that is as compared to Q1. As I've noted repeatedly, the supply chain risk will present a challenge to further expanding margins in the short term. For food processing, as we look at the typical activity patterns in our backlog, I'd also expect to have sequential high single-digit revenue growth for Q2 as compared to Q1. Overall, we are very excited about how we have started the year, both in terms of our Q1 performance and with the future opportunities for our business and with the acquisition of Wellbuilt. Our products, innovations, and customer service are driving strong orders and a growing backlog. Our management expertise will be paramount as we manage through the disruptive factors we are encountering. Along the way, cash flow generation will remain strong. We are tackling the challenges, seizing the opportunities, and looking forward to an exciting 2021. With that, back to you, Tim.