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spk00: 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.
spk12: 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.
spk11: 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.
spk12: Thanks, Brian. As we open the call, I would like to remind everybody that our Q&A will be focused on the quarter, our business, and Brian's personal culinary preferences. We remain excited about the pending merger acquisition with Wellbuilt, but we will not be commenting on their results, nor are we able to comment on plans with a business post-acquisition, and we refer everyone to our presentation and call from a couple of weeks ago. With that, I'd like to open up the call. Rebecca, if you could open the line now.
spk00: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. And your first question comes from the line of John Joyner with BMO.
spk10: Pretty good. Brian, I can only imagine what a long Middleman family road trip is like.
spk11: Two times.
spk10: Two good times, yes. So can we focus a bit on just free cash generation? I know you touched on this, Brian, and it's something that you've talked about. um, you know, over the past few years, but you know, it was certainly quite impressive, particularly for a first quarter. Um, and, but you know, maybe how would you kind of grade yourself on this metric? And, and you did say that, you know, you kind of expect strong cash generation this year, but do you feel more comfortable today projecting whether you will convert a hundred percent of net income and into cash for the year?
spk11: You know, um, um, I think it's more appropriate given how our, you know, balance sheet has changed and how working capital has evolved. I've really kind of looked at that collectively, you know, 20 and 21 together because, you know, our historical average is around 100 percent, right? Some years it's down a little bit from that. Some years it's up, right? And last year it was up so much. So, I'm holding that percentage in my mind as I put the two years together, 20 and 21, right, which then implies, you know, less than that. potentially for 21 in isolation.
spk10: Okay, got it. And then maybe just a follow-up. I mean, you know, I don't want to get into, like, kind of order cadence and all that stuff, but maybe talk about powerhouse dynamics. And, you know, I've read some new technologies that they've kind of have rolled out, like ConnectWare and things like that. But maybe talk about that business, because I feel like when it comes to connected kitchens, people – probably don't fully grasp maybe what this potentially could be in terms of like how meaningful it could be for, you know, for Middleby in the future and the stickiness of customers and things like that. So could you just at least kind of touch on what's going on there and, and how that business is performing and just kind of the connected business overall?
spk11: Yep, I'll turn that one over to James, but I appreciate you calling out the stickiness of it, right? So that's something that's certainly very important to us about that, but that's to James.
spk05: Yeah, we continue to invest heavily in powerhouse dynamics, and we are seeing the adoption of the platform technology. across our customer base, whether it be chains adopting it or franchisees adopting it across multiple chains that they have under their portfolio of brands. You are right, the stickiness of Open Kitchen is... is a key factor of it when tying Open Kitchen to the various Middleby brands and other pieces of equipment. It certainly helps draw sales of equipment into a chain to support the connectivity initiatives. Relative to what we've introduced with ConnectWare, ConnectWare is a supporting technology that that we introduced a few weeks ago and that's really around always having the right connectivity for our customer. What we have learned is that there is not one connectivity solution that works across the board. Some want 2G, some want 5G, some want cellular, some want LAN, some want MyWi, and just to build a product with a Wi-Fi chip is inadequate, and that's where we really came up with the innovation around ConnectWare and our products in the In the future, we'll basically not ship with connectivity, but we'll ship with connectivity capability, and when the customer decides what they truly want to connect with, we will provide them with the right connectivity platform with the right data dictionaries such that they can get the right data out of their equipment to their open kitchen dashboard.
spk10: Okay, excellent. I'll leave it there. Thank you. Well done. Thank you.
spk00: Our next question comes from the line of Meg Dobre with Baird.
spk02: Yes, good morning, everyone. Thank you for taking a question here. And, Brian, I think both Biggie and Pac agreed that critical size are the best. So, you know, there's agreement there for sure. Now, my question is really around your margin outlook in CFS. um you know you you talked about revenue ramping sequentially you obviously have good backlog but we know that there is cost inflation here so as you think about incremental margins um can you maybe help us understand how you see the year progressing in terms of ability for pricing to kind of catch up with material inflation should we be thinking q2 maybe has a little more pressure than the rest of the year um It sounds like you still have 2019 margins as a target that can be achievable, or at least that's kind of what I understood from your prepared remarks. So I'll start there. Thank you.
spk11: Yeah, no, I do think, you know, you have that right that, you know, Q2 is, you know, going to be, you know, somewhat, you know, challenged. You know, obviously we're sitting right close to that 25% level, and that's what you're trying to overachieve. We have taken pricing. As I said, more pricing will be coming, and we're working hard to make sure that that at least covers the cost impacts that are very real. I've also kept my you know, revenue outlook, I'd say kind of, you know, in check, moderate, modest, you know, pick kind of a middle-of-the-road, you know, viewpoint there, right? So that has, you know, has an impact of somewhat limiting the, you know, margin expansion from, you know, kind of call it the leverage benefit if there were, you know, higher revenue levels behind, you know, our analysis. So I think that's, you know, a potential, you know, benefit out there as well.
spk02: So if I understand this correctly, you were saying sequentially margins are going to be, you know, maybe flattish and then things get better in the back half of the year as you sort of catch up.
spk11: Right. We get some pricing benefit there, and then, you know, again, I've kept, you know, kind of incremental impacts from volumes, you know, out of the commentary or the outlook at this point.
spk12: Yeah. Meg, I guess a couple of things. One, I'll just say that, hey, you know, we've got longer-term margin targets which remain, you know, intact. I mean, beyond just kind of the immediacy of of what's going on with supply chain, which again is very significant, which is why I think we want to make sure everybody understands it. I mean, we certainly are doing a lot of things operationally and strategic to drive to those longer margin targets, and we will still execute against those this year. So that will definitely be something that will offset that in part. you know, the supply chain challenges are very volatile and uncertain right now, right? So, I mean, it's not like we have it all measured because it is changing, you know, week to week. You know, we are being very thoughtful and proactive about it, and that will kind of lead us to passing on some of these cost increases in the second half. The reality of it is, you know, a lot of the pricing actions that we're contemplating probably won't be fully realized until the fourth quarter. So I think the more near-term impact of it will be in Q2 and perhaps even more in Q3 in terms of the way I view it.
spk02: Okay, that's helpful. And then lastly, at least to me, the thing that really stood out in the quarter relative to my own expectations were residential margins. You know, seeing this business now north of 21% EBITDA margin, which is pretty remarkable versus what we were thinking even a couple years ago. So I guess the question is, how sustainable is this margin? How should we think about not just the rest of the year, but maybe beyond 2021? And again, I'm kind of leaving any incremental M&A that might be diluted to the side, just based on what you currently have on the portfolio, can we sustain this level of performance? Thank you.
spk11: You know, the quick answer is yes. I'd also, you know, remind you in your reference, you know, going back a couple years ago, you know, a couple years ago, we didn't have Brava in the mix. And we certainly, you know, own it, and it is part of our numbers. But, you know, if you exclude that, you know, just to kind of get an apples-to-apples basis to what might have been set in your mind, you know, there's another, let's say, 150 basis points, you know, you know, drag a little bit from that, right? So, you know, where we've come, X that, just trying to toot our horn a little bit more, right? But, you know, we've been putting in a lot of hard work and investing on, you know, getting the business and the cost structure and the production processes, you know, moving in the manner to get to that, you know, 25%, right? That is still the number that is out there for us. We're having, you know, some challenges, you know, currently given, you know, the environment to, you know, do more than right now. We continue to invest, you know, in the businesses and, you know, are undertaking some meaningful investments, especially on, you know, the AGA side to continue on that you know, longer-term, medium-term, I should say, you know, journey. So, sustaining, yes, I'm comfortable in. And, again, you know, obviously speaking here that, you know, we feel like we can, you know, over the medium-term continue to improve as well. Great. Thank you.
spk00: Your next question comes from the line of Sari Boroditsky with Jefferies. Good morning.
spk01: So based on some other companies reporting, it seems like you might have outperformed the market in commercial food service. Could you just highlight if there's any large projects or anything that you think maybe allows you to outperform the general market?
spk12: I'll start and then kick it over to Steve. So, I mean, I just remind, you know, it's kind of a more volatile market right now. So, I mean, I think as you kind of look across the industry, there'll probably be you know, different geographies that are performing stronger, you know, or weaker in different segments of the, you know, the market. And then obviously there's kind of what's going on at the customer level. So, I mean, I think you'll probably see a little bit more, you know, difference from quarter to quarter, even with our own, you know, orders and certainly, you know, from, you know, business to business. So, but, you know, I mean, I think the positioning that, you know, that we have in, you know, various segments, as well as the, you know, the trends that we've been you know, targeting on is we really want to make sure that we're, you know, focused on what, you know, are the solutions that customers are, you know, looking for. You know, we feel that, you know, that's, you know, well here and we're, you know, really positioned in those areas that are, you know, that are growing. And, you know, Steve can probably add on to that.
spk07: Yeah, I would specifically call out, you know, kind of two areas where we've made a lot of investments over the last couple years, last year especially, that I think are starting to pay off. So the first I guess we've talked about before is certainly the retail segment. It was a positive growth segment for us last year and is a segment that is off to a very good start again for us this year. Why I think it's important to know why this could be a reason why we are doing a little bit better is this is still a very new segment for Middle D. If you go back three or four years ago, we were really not holistically in the retail space like we are today. And so now today, again, having a very dedicated team with the right products, As retail continues to grow as a market, I think we've been very well positioned. That, I think, is a key driver for certainly last year and the quarter that we just finished. The second thing I would say is, especially last year, we spent a lot of time and were very intentional in getting closer to our dealer partners. and our channel partners. I know we talked a lot about the different chain segments on these calls, but we really spent a lot of time coming up with specific tools, resources, trainings for our dealer partners to help them and their partners navigate the pandemic last year. And so I think we made a lot of short-term investments last year playing the long game when the market would start to come back. So I think we're starting to see that in very early stages in the first quarter as more of that general market, smaller chain business that the dealers historically focus on starts to come back. I think we're starting to take some business in that area.
spk01: That's helpful. Thanks. And you talked a lot about the supply chain issues maybe from a cost side, but could you provide any color on what you're seeing there, any impact on sales in the quarter or upcoming quarters? And what are the lead times today on some of your equipment versus normal lead times?
spk11: Yeah. Its impact on revenues, I'd say It has been not overly limiting yet. There's probably a couple of areas that we could have done a little bit more in the revenues. I was cautious a little bit starting there. I'd probably stick with the comment I've said before, and it hasn't you know, I'll call it, you know, shut us down, you know, in meaningful ways, you know, anywhere. But each day, you know, the list gets longer, it gets a little bit harder. So, you know, it certainly is in my mind, or more than in my mind, you know, as we put together you know, the outlook, right? So it's a, you know, it is somewhat of a limiting, you know, factor, you know, for us in a couple of areas. You know, and then, you know, lead times, you know, is a little bit of a tougher one to answer given we have 100 brands, you know, out there. You know, in residential, it is probably, you know, a If you had to generalize, you know, probably two months or more across commercial, you know, again, it varies. I mean, certainly, you know, given our backlog and such, they are higher, you know, now than they were, I'll just say two years ago, like compared to a pre-COVID environment. But I don't think I have a quick, you know, rule of thumb to throw out on that one.
spk12: I would say just generally our lead times are two to three times longer. That's really across every one of those brands, but at a significant portion. That's one of the things that we've been working hard is increasing the capacity as we're moving through the year. Although Brian said we haven't been, quote unquote, maybe disrupted in terms of shutting down production, and that's credit to our supply chain team, which did a tremendous job throughout all of last year and continues to do that this year. It does maybe somewhat cap our production in certain cases because we do have limitations in terms of what supply is out there. I will also say that as we talk about margins, and this is embedded in the first quarter margin, there's some inefficiencies in there as well because the parts Availability doesn't always line up with our production, so we're doing quite a bit to rearrange production. Sometimes you've got a product that you've got to stop halfway down the line and finish it the next week. So that's one of the other things that we're dealing with right now, and I'm sure that'll continue for a bit. But, I mean, I think we're being pretty proactive in managing that and very focused on trying to take care of our customers best we can. And we will be increasing our capacity at a number of our businesses as we move through the year.
spk00: I appreciate the call, Eric. Thanks, guys. Your next question comes from the line of Jeff Heyman with KeyBank Capital.
spk09: Hey, good morning, guys. Good morning, Jeff. Good morning. You called out retail, and I know a lot of the chains are kind of back getting busy again, but just maybe speak to what you're seeing in the laggard markets, hospitality, travel leisure, casual education, and kind of how you see that forming in terms of recovery as you go through the year.
spk07: Yeah, Jeff, good question. I would say, I mean, certainly still a fair bit of uncertainty in many of those markets. I mean, I think, you know, just calling out a couple that you mentioned. I mean, casual dining, I would say, is getting better, obviously, as more and more restaurants can have, you know, in-store seating. You know, coming back online, most states, I think, are back to having some form of in-restaurant seating. So I think that certainly helps. But I still think it's a little uncertain for the next couple quarters. You know, education specifically will be interesting. I mean, this is historically we're coming into the period where you would normally start to see, you know, K through 12 colleges and universities start their purchasing cycle. It would be kind of this normal cadence of second quarter purchase, you know, delivery and install over the summer to obviously get ready for, for the fall session. So, I mean, we're starting to see some of that start to pick up, and obviously as kids, you know, go back from being remote to in-person more and more, I would expect the educational, you know, segment to probably, I wouldn't say get back to traditional levels, but certainly improve, I would think, over the next quarter or two as kids come back, you know, in-person in the fall.
spk09: Okay, great. And then, just a couple more. One, you know, any comment on order momentum, you know, into April? And then just on the res kitchen, kind of, is the confidence on the out year just, you know, you're not, you're still out, orders are still outstripping, you know, your ability to produce, and you'll come into 2022 with a big backlog?
spk12: Yeah, I think, you know, on residential, some of the trends that, you know, we're seeing, you know, they're going to sustain, you know, for a bit, or at least that's our You know, our view, I mean, certainly, you know, part of that has to do with the backlog, not only in our business, but really, you know, the residential industry more, you know, broadly in terms of construction and contractors, you know, and availability of materials, you know, et cetera. But, you know, certainly the housing market remains strong, and we, you know, foresee, you know, not only, you know, building and sales, but also the remodels really to you know, carried through for the remainder of the year. So, certainly, I think, you know, we feel pretty good about how we enter 2022. But, I mean, you know, again, we also feel good about what we are doing. So, you know, that's a great backdrop. But we continue to invest in that business. I know, you know, Brian just talked about the margins and, you know, the outlook. But, you know, as we are increasing profitability, you know, all the way along, we've been reinvesting in that that business and we continue to, you know, plan to do that. So we see still a lot of opportunity in terms of, you know, sales channel as well as new products, you know, coming online so that that kind of bodes to our longer term outlook for the, you know, the business. I'm sorry, I know, Jeff, you had another question there.
spk11: Yeah, in terms of order rates, order momentum, you know, actually I could bring my family back into it. I've been talking to my younger son about slope a lot recently. So I'd say that the slope continues. I'm not going to get into specific, you know, numbers for April, but, you know, what we've been, you know, seeing and reporting hasn't been any, you know, changes in the trajectories for April.
spk09: Okay, great. Thanks, guys.
spk12: Yeah, but maybe just to say, like, you know, we feel good about, I mean, the business recovery and how we're positioned, and we just talked about that. You know, it is hard to say what a trend in orders is going to be this year, right? So I also want to just underline that. We certainly will be up over last year, given it was the, you know, the COVID year, but, you know, difficult to know what the – The week-to-week, month-to-month, and quarter-to-quarter will be over the next few quarters, and I suspect that's true of our industry generally.
spk00: Our next question comes from the line of Larry DeMaria with William Blair.
spk04: Thanks. Good afternoon, everyone. Good morning.
spk02: Hi, Larry.
spk04: Hey, guys. So CFS orders up 21%. I would imply they're up over 1Q19 as well. We look at last year's orders. So I'm kind of, I'm trying to understand is, you know, how sustainable this are and if this is kind of, can we look at this as a real number or it sounds like, uh, partially not because there's some, um, no longer lead time orders in there. So can you just kind of talk about how you see where we are versus 2019 and how much of this is inventory stock catch up demand, et cetera. And then can you give the backlog number for 1Q19 so we can understand how that 941 compares to 2019?
spk12: Well, I'll start and then I'll kick it to Brian to clean up whatever I say here. So I think, so it is up over Q1 of 19. So, you know, we've had order growth, as I kind of said in the initial comments, not only over first quarter of 2020, which was, you know, largely, you know, pre-COVID, although, you know, COVID started bleeding through there, but we're up somewhat over 2019. And we feel good about that, obviously. So, I mean, I think some of that has to do with, you know, again, the investments we've made, the segments, you know, that we're in and speaks to, you know, somewhat the recovery of the, you know, industry included in there probably is also some pent up demand as restaurants are, you know, starting to open up. I mean, I think we see some strategic investment from the chains. And I would say not only the QSRs, but fast casual coming online more so. I mean, I think that is, some of the things that we saw last year and continue into this year. And as some of the other segments, probably not back online, but start to open, such as maybe some of the casual dining, there's probably some pent-up demand in there. So that's harder to say what is sustainable in there. And I'll kind of kick it over to Brian now.
spk11: Yeah, in terms of backlog, I'm not going to go back to Q1 of 19, but we have... in our, go back a few years, in the 10K, you know, we have at the end of 18, and that backlog was around, you know, $280 million, and I would offer that, you know, the difference between where we entered 19, that number I just gave, and where we were at the Q1, you know, things didn't meaningfully change in that one quarter, right? So, you know, the backlog is is tremendously different. It's not quite up threefold from that amount, but it's getting close to that. It's probably worth thinking about it in terms of each segment as as well. Back in that timeframe, food processing was around $100 million backlog. We've talked how that's in the $150 million neighborhood these days. Residential used to not carry a very large backlog given the size of their business, and that one is up tremendously. And then obviously commercial being the largest is one that probably, you know, starts getting up to, again, being, you know, not quite, but starts, you know, getting closer to, you know, three times where it was, you know, back then.
spk04: Okay. No, that's fair and super helpful. I could just follow up on that then. In your opening comments, you said that the industry is not expected to recover until 2025, but... I don't think that implies that your sales won't get back to those levels, right? I mean, is it fair to think that 22, 23 timeframe, given how you guys can pivot in the end markets is a fair timeframe to think about getting back to those?
spk12: Yeah, that's right. And so just to clarify, so my comments, and that's based on some industry data that comes out of Technomic, and that really speaks to the restaurant sales. So our customers and what they're, you know, and when are they going to, And I think, you know, that's across all the, you know, the different segments. So you've got, you know, QSR and retail recovering, you know, more quickly. And then other areas, you know, such as casual dining may be taking a little bit longer and travel and leisure, you know, perhaps maybe a little bit longer than that. So that is really speaking to the food service industry and markets recovering. I mean, I think our view, as you just said, Larry, is, you know, 2022, 2023 is where, you know, we'd be, you know, I think we'd be back to 2019 levels.
spk04: Thank you very much. Good luck.
spk12: Thanks. Thank you.
spk00: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. And your next question comes from Tom Semenich with J.P. Morgan.
spk06: Hi, thanks. Good afternoon, everyone. Good afternoon, Tom. Hi. How are you thinking about food processing demand in the near to medium term? Do you expect to see year-on-year growth in that business in the back half of 21 against tougher comps?
spk11: Yeah, you know, this is a business where, you know, we do expect, you know, growth. Obviously, my comments here were also, you know, positive, I would say, obviously, at, you know, modest levels. You know, there is a little bit of, you know, lumpiness from quarter to quarter. Like if you, you know, you asked about, you know, the back half of the year, right, you know, Q3, was a little lower quarter you know q4 you know jumped up right and so we I think there's often a little bit of danger in looking at this business on just a quarter to quarter basis because you can get some you know lumpiness in terms of you know fulfilling you know large orders and the like right so I think it's important to look at it is kind of you know collectively over over a period of time But, you know, I did – so my comments, again, have – thinking about it, you know, sequentially and, you know, Q2 should be, you know, a little bit better than, you know, Q1. And, you know, we have a pretty good backlog and, you know, pipeline continues. to be, you know, pretty strong. So I think we should be able to, you know, at least sustain, you know, that Q2 level then for the, you know, remainder of the year, which would imply growth overall.
spk06: That's very helpful. Thank you. And can you clarify the timing of general pricing actions you've taken and maybe comment on how much of the backlog is covered by new prices, if at all?
spk12: So we took a price increase, you know, generally coming into the year. So, you know, not all of our brands take it on the same day by any means. But generally, we had a first quarter price increase. So let's say it's, you know, mid quarter. And then, you know, anticipated that we'll have a second price increase broadly in, you know, in early to mid third quarter, as you said, because we are Carrying a heavier backlog, you know, some of the pricing actions that we would anticipate, you know, upcoming, you know, that's why, you know, we don't anticipate that those would really start going into effect or be realized in the P&L until the latter part of the year. Perfect.
spk06: Thanks very much, Apostolo. Thanks.
spk00: Your next question comes from the line of Tim Thain with Citigroup.
spk03: Thanks. Good morning. The first question was on channel inventory in the commercial business and implications for middle B volumes as you go through the balance of the year. And so, you know, obviously a lot of discussion on supply chain issues and how that's limiting your production. and I assume there's some prioritization towards retail orders. But how should we think about, you know, as dealers start to also see the improving in markets and start to see orders inflect, is there an opportunity for some kind of channel fill in 21, or do you think that's more likely a 22 event?
spk12: Well, I'll kind of pass it back and forth with Steve here. I mean, they're obviously with longer lead times. I mean, I think coming into COVID, there was destocking generally, right? So I think cash was king as most businesses. So certainly our channel partners were not loading up on inventory at the time. And frankly, we were depleting inventory a bit ourselves. So I think now, given the dynamic, even if they wanted to stock, there's probably not as much of an opportunity to stock. So I think in terms of when does that happen, I think maybe as you alluded to, that probably becomes more of an opportunity later in the year or into 2022 if they start to stock again. I will say the industry stocks less than they did if you were to go back five to 10 years ago for a variety of reasons. So I would say the inventory of the channel is probably more efficient than it used to be, but certainly there is less stock in the channel right now.
spk03: Got it. That's helpful. Then maybe, Tim, just on the pricing backdrop in commercial, and I guess this more perspective question, but and really kind of the interplay between replacement business versus more project or spec kind of business where, you know, historically I tend to think of it maybe rightly or wrongly as the larger projects are where you tend to get more or kind of sharper elbows and where, you know, price competition tends to be. greater than more of that traditional kind of break-fix business, and I would imagine thus far the majority has been in the latter, just in terms of more replacement-type business. As you start to see, presumably, you start to see project backlogs improve, do you think that, and again, it's a difficult one to kind of forecast, but does the competition, price competition, potentially maybe less pronounced in considering a backdrop in which, you know, we have seen this level of inflation in quite some time. Do you think that kind of mitigates the pricing competition or not? Just curious your thoughts on that.
spk12: Yeah, you know, I mean, there's a lot to unpack there, and I'm not even sure I can answer the question, frankly, all that good. I mean, I would say, you know, we operate in, you know, pretty efficient market. Pricing's always, you know, generally, you know, competitive. And I'm not so sure that it's always all that, you know, differentiated, you know, based on all the different, you know, scenarios, you know, that you, you know, laid out. I mean, even as we've kind of gone through this period, I mean, I'm not so sure that, you know, the biggest impact of pricing is really the, you know, us passing along costs, right, as we've seen, you know, steel and, you know, components and compressors, foaming, electronics, et cetera, you know, all go up. I mean, I think the, you know, the focus for us has really been, you know, moving to higher technology, right? I mean, I think that's where, you know, having, you know, a better ROI, you know, for the customer to address labor needs, energy needs, sustainability, speed of service, you know, footprint, you know, et cetera. And as we can, you know, do that, everybody, you know, wins along the way, including our, you know, channel partners. So I think that's really our, you know, focus is on the, you know, ROI to the customer. And, you know, probably, you know, that probably doesn't fully answer your question because you kind of hit, you know, a lot there, but I'll probably leave it there. really there with kind of our approach and the major areas that we're trying to focus on.
spk03: I've got it. Thanks a lot.
spk00: Your next question comes from the line of Todd Brooks with CL King and Associates.
spk08: Just a couple quick questions here at the end. If we look at the supply chain issues and the constraints on current production capacity, does COVID separately, is that still a restraint on capacity as well with shift changes and employee densities or have we really passed the baton to the supply chain? And when we do work those issues through the COVID related kind of detriment to capacity should be behind middleweight?
spk11: Yeah, I mean, labor challenges are not behind us. We are not immune from some of the factors there that impact a lot of you know, manufacturing, you know, environment. So, you know, we will use, you know, some, you know, over time, you know, where needed and such. But, you know, I put the, you know, the kind of parts and physical goods challenge a little bit above the labor challenge right now. But having said that, you know, the labor is still number two on the list.
spk08: Okay, fair enough. And then just, is there a metric, and I may be aggregating too much relative to individual businesses and facilities. But when you look at kind of a percentage of normalized production capacity, where are you running right now?
spk11: You know, that is a tough one in terms of we have, you know, so many, you know, operations, you know, out there, right? But it is, you know, you know, to generalize, try and give an answer. I mean, it is close to, you know, full tilt, you know, you know, where we can. Again, hard to quantify with some of the, you know, supply chain, you know, limitations, right? But, you know, if you've seen our, you know, revenue levels and our backlog, you know, levels and such, right? You know, our operations are, you know, running, you know, pretty robustly these days.
spk12: Okay.
spk11: I'll just...
spk12: Yeah, I want to maybe, we do have capacity at a number of our plants, most of our plants, you know, honestly. So, I mean, if we get, you know, as we move past supply chains, what Brian said is 100%, you know, correct, which is then we would kind of move into some labor, you know, challenges. I would say, you know, by and large, you know, labor is an issue across many industries and certainly at our customers as well, which is something that we focus on. solutions to, you know, to help them. But, you know, we do have access to labor at, you know, many of the, you know, geographies that, you know, that we're in. And, you know, but we've got capacity, you know, if you just kind of think about footprint and, you know, production line, you know, capabilities, fabrication capabilities. So, I mean, I'd say, you know, generally there's, you know, 20 to 40 percent is kind of a band at a broad set of our manufacturing facilities if we were to kind of move beyond those constraints. So I just don't want to leave you with that. We're maxed out.
spk08: Great. That's helpful. Thank you both.
spk00: At this time, there are no further questions. I'd like to turn the call back over to management for any final comments.
spk12: Yeah, so I think before we wrap it up here, one of the things that, you know, might like to do is pass it over to James, you know, a bit. We've kind of done a bunch of commercials here about the opening of our Innovation Center in Dallas, which again, now we'll expand to add on to residential. But, you know, that was something we opened here during the quarter and remain excited about. So I thought maybe giving James an opportunity to give a quick overview of some of the activities there would be good as we wrap up the call.
spk05: Yeah, thanks, Tim. So as Tim mentioned, we opened the Innovation Kitchen really the first part of January, and I think even with the fact that we are in COVID, the amount of commercial traffic through the Middleby Innovation Kitchen has kind of exceeded our expectations. To date, we've had over 70 plus high-quality brands and channel partners come tour the MIC. And these customers come for various reasons. Some come for one or two items and leave seeing over 150-plus different Middleby items, and they walk out of the door with kind of a basket of ideas and products that they didn't know they needed. So the MIC is really... driving the message of the breadth of the Middleby product to our customers who may not know how deep Middleby is in beverage and automation and hot site. From our channel partner perspective, along the same lines, they're coming in to see all the great products under one roof. They're bringing their teams in to get them, you know, trained on Middleby, not only on a handful of products, which it used to be, but literally every single product that Middleby makes. Also, we are continuing to invest in the innovation kitchen. We are here in the next month going to complete a fully automated ghost kitchen podular project. Space within the in the MIT and we are also putting in a fully automated sous vide line for our high volume commissary hotel and restaurant, you know customers to see We are excited to get more people into the kitchen as you know travel opens up and You know, there is a great landing page at Middleby.com forward slash Mick for everybody to go to to see the kitchen and also to book some time there. So I encourage everybody on the call to do that. And Tim, I will pass it back to you.
spk12: Okay, thanks. So wrapping up the call here. And again, you know, it's a great capability that, you know, thanks to James and team that we built. And it's a tool certainly for all of our channel partners and our customers. So, again, extending the invite and excited to get more and more people into the facility. But with that, I appreciate everybody joining the call with us today and look forward to speaking to everybody next quarter. Thank you.
spk00: Thank you for participating. This concludes today's conference call. You may now disconnect.
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