The Middleby Corporation

Welcome to the Middleby second quarter conference call. My name is Jenny. I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touch-tone phone. I will now turn the call over to Tim Fitzgerald. You may begin.

Thank you for joining us today on our second quarter earnings call. As we begin, please note there are slides to accompany the call on our investor page of the website. We continue to execute on our financial plans and strategic initiatives, building upon our positive momentum. During the quarter, the already existing inflationary pressures further accelerated as we saw a spike in costs following the war in Ukraine. Supply chain disruption also became increasingly challenging to our operations following the COVID shutdowns in China. But our teams continue to react quickly, making adjustments to minimize disruption to our business and our customers. And despite the operating disruptions and cost increases, we posted another quarter of record sales and earnings. And we also were able to advance our profitability with realized margin improvement at all three of our business segments. Our focus on the sale of our latest technologies and product innovations is favorably impacting the profitability of our sales mix. And pricing actions enacted earlier this year have partially offset the most recent wave of material cost increases, with greater benefits still expected to be realized in the second half of 2022. Operationally, we continue to invest in our manufacturing footprint with facility expansions to support growth of new product launches. And in the past 18 months, we've also committed over $75 million of investments in automated fabrication equipment which will increase throughput and efficiencies across our businesses. Under the first half of 2022, we have added over 700 production team members at our factories as we increase production capacity to support higher rates, higher order rates and ship record backlogs. While inflationary pressures are impacting the overall economy, we continue to be positioned to capture favorable underlying trends driving demand across all three of our business segments. At our commercial food service segment, our customers are investing in solutions to evolve their operations and address pervasive challenges of labor, speed of service, energy, and food costs. And the industry remains in long-term recovery, with projected new location openings remaining intact, while many segments such as institutional, travel and lodging, and casual dining still in recovery with increased activity from just a year ago. Our technology solutions are in demand, and we are engaged with end users and our channel partners like never before. The strategic investments in our sales capabilities, including our Middleby Innovation Kitchens in Dallas, has proven to be a success, with over 5,000 customers visiting us in Dallas since the opening last year. We've been continually engaging with our customers and partners with hands-on experiences, resulting in the development of new business opportunities and enabling us to accelerate the introduction of new product innovations to market. At our residential business, rising interest rates and economic uncertainty has slowed existing home sales and new home starts. However, existing home sales for home values over half a million are expectedly proving more resilient, and the backlog of new home construction yet to be completed remains strong. We expect recent trends, including greater levels of relocation, along with increased amount of work from home, will persist, and this will present a long-term favorable backdrop for our business. We're excited about the growing portfolio of our residential brands. The breadth of our unique offerings is unmatched. Our new showrooms, design teams, and culinary staff have been busy as we engage with designers, dealer partners, and end users in an effort to create greater awareness for Middleby residential, which is leading to new opportunities and greater market penetration. For our recently acquired outdoor grill companies, the headwinds emerged in the quarter, as production in China was disrupted for more than half of the quarter. This significantly impacted revenue and profitability during the quarter. Near-term demand has also softened, with retailers focused on reducing levels of stock in the channel of competitor products. Although delayed, we are very confident in our ability to capture market share as end users and channel partners adopt our exciting new charcoal cooking innovations. We believe favorable trends in charcoal cooking paired with our pipeline of new digital and automated cooking innovations position us as a category leader and sustain growth in the years ahead. And we made significant progress integrating the new outdoor grill businesses within our residential platform. While these businesses will essentially break even in the second and third quarters of 2022 as a result of the supply chain and market disruptions, we expect fourth quarter will return to double-digit EBITDA margins as we realize the results of already completed actions to improve profitability. And we are positioned for growth and sales and profitability headed into 2023. In the food processing business, demand continues with the need for equipment to increase throughput, address lack of skilled labor through automation, save on utilities, and address rising food costs. Over the past several years, we've made significant strides to enhance our industry-leading platform through new product introductions and strategic acquisitions. These efforts are paying off. Our full-line automated solutions are presenting customers with greater payback and this has translated to consistent growth in orders along with a continued pipeline of opportunities ahead. On the acquisition front, we continue to build upon our three industry-leading food service businesses with a number of strategic acquisitions. We added to our food processing equipment group the acquisitions of Proxout, CP Packaging, and Colossi. These acquisitions add fully automated transport and handling washing solutions, and high-speed packaging technologies that complement our existing brands and further extend our offerings of integrated full-line solutions. Our acquisitions of Kloppenburg and South Korean-based Icetro further extend our product lineup in ice baking equipment and in cubed and flaked ice offerings, along with greater solutions for countertop frozen beverage and dessert equipment. We're excited about the meaningful sales opportunities and operational synergies that exist within our beverage platform for these new Middleby brands in what is a large market opportunity. In summary, similar to the past several years, 2022 continues to challenge with new dynamics. Our proven team continues to navigate these near-term challenges while making critical investments and continue to execute on our strategic initiatives which we are confident will provide a competitive differentiation in the years ahead. We are progressing our long-term profitability goals set forth in each of our three business segments. Our drive to bring industry-leading technology solutions to market, the ongoing initiatives to transform our selling processes, and the strategic investments we are making in manufacturing all form our roadmap to long-term growth and higher levels of profitability. Now I'll pass the call over to James to spotlight more of our exciting recent product innovations, which are also highlighted in our investor slide.

Thanks, Tim. And for this discussion, please refer to slides 9, 10, and 11. I'm excited to talk about Middleby's new products. Over the next several quarters, we will be discussing automation and what we will be bringing to restaurants, food processing facilities, and homes. Last quarter, we featured the SNESO ES1, a single-group espresso machine. Today, I'm going to continue within Middle Beach Coffee Group by talking about Concordia's Ascent Touch bean-to-cup brewer. The Ascent Touch has all the makings of a fully automatic espresso machine, but it isn't. It's a true bean-to-cup brewer. The AT holds four different roasts and brews your favorite drift coffee per order through Concordia's proprietary accelerated low-pressure extraction process. Through this, we control the coffee's particle size, water temperature, pressure, dwell time, flow, and turbulence during the brewing cycle. In all, the Ascent Touch allows the operator to precisely control 10 discrete variables via its controller. When optimized, the Ascent Touch delivers a gold standard brew as determined by the Specialty Coffee Association, which means we extract 18 to 22% of the coffee bean solids into the water. Any more or any less results in a weak or bitter cup of coffee. This brewing process rapidly automates the French press technique of extraction while allowing us the ability to rapidly brew at a rate of one ounce per second for a 32 ounce cup of coffee, making the AT one of the fastest, if not the fastest bean to cup on the market when the coffee enthusiast matters. The Ascent Touch is on Open Kitchen, our IoT platform. Open Kitchen provides real-time alerts via our app, email, and or text, as do the machine status, errors, and number of brew cycles, while also allowing the user the ability to push new recipes via the cloud. Automation, connectivity, quality, and speed make the Ascent Touch ideal for high-end coffee shops, yes, high-end coffee shops, C-stores, quick serve and fast casual restaurants, to name a few. Moving from coffee to charcoal, our grilling companies are doing some exciting things in the backyard to make your food taste better, but more importantly, they're making it rewarding for everybody by automating what many find intimidating. One of our brands, Masterbuilt, is developing a lineup of digitally connected, gravity-fed charcoal grills. Because these grills are digital, connected, i.e. automated, and use authentic real fuel, charcoal, they are expanding the outdoor grilling market to all enthusiasts regardless of their grilling experience. Consumer trends show that the backyard cooks are disconnecting their gas grills in search of flavored heat and an authentic grilling experience, but they are still looking for convenience, meaning the simplicity of gas. Pellet grills have gained market share by offering just this, convenience to the novice and pro grillers. Master Built's Gravity Series brings new fire to this market, sorry for the pun, by controlling the heat and flavor of natural lump charcoal through deployment of an MCU-controlled combustion fan. Note, if you want to see a great representation of what's going on inside this grill, please refer to slide 11. With charcoal-fueled forced and natural convection circulating through the grill, users can now smoke and properly sear their food. This is all because of the heating value of natural charcoal releases more heat and combustion than manufactured fuels. Personally, the Masterbuilt Gravity Series is my no-brainer my new go-to when it comes to outdoor smoking or grilling in my backyard, and I have many choices. So download your app, light a fire, and let's get grilling. Thank you, and over to you, Brian.