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spk05: Good day, and welcome to the Middleby Corporation first quarter 2023 conference call. With us today from management are Tim Fitzgerald, CEO, Brian Middleman, CFO, James Poole, Chief Technology and Operations Officer, and Mr. Steve Spittel, Chief Commercial Officer. Management will begin with opening comments, and then we will open the call for questions. Instructions to enter 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.
spk02: Good morning, and thank you for joining us today on our first quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. We are pleased to have posted solid results to begin the year, reporting a first quarter with strong performance both at our commercial and food processing businesses. While our residential business was expectedly impacted by challenging market conditions and destocking of inventories at our retail partners, In the quarter, we drove improved profitability, and we continued to make progress towards our longer-term margin targets through focus on profitability of our sales mix and with further improvements yet to come through efficiency gains and supply chain initiatives. During the quarter, we were pleased to have also realized meaningful reduction in production lead times across most of our businesses as we benefit from improvements in our supply chain and through the investments made across our manufacturing operations. We are now in a significantly improved position to better serve our customers and take advantage of market opportunities. To start the year, we continue to have strong engagement with our channel partners and customers across all three of our food service businesses with interest in our latest products and innovations offering benefits focused on energy, labor, speed, and sustainability. The investments made in our innovation centers demonstrating these latest solutions have proven to be a strategic asset for our businesses. The traffic in these showrooms continues to increase as we invest heavily in training with our channel partners as our world-class culinary teams engage hands-on with customers looking to evolve kitchen and food service operations. We're excited to have recently opened our latest Middleby Innovation Kitchen in Spain, now providing a resource to our partners and customers throughout Europe. In the quarter, we also continue to make strategic and financial investments in our business, investing $25 million in our manufacturing operations as we continue to retool our operations to support new product launches, increase capacity, and advance the automation within our operations. We repurchased $48 million of Middleby shares during the quarter, and we're also excited to complete the acquisitions of Flavours and BlueSpark. adding to the innovation in our beverage portfolio and expanding our in-house controls development capabilities. As we've progressed into 2023, economic conditions continue to present challenges and uncertainty, particularly as it relates to our residential segment. But we remain excited about the direction and long-term goals and confidence in the investments and strategic initiatives underway that are enhancing the competitive positioning for each of our three food service businesses. Now I'll pass it over to James to spotlight our exciting recent product innovations, which are also highlighted in our investor slides. James.
spk10: Thanks, Tim. We have a few items to cover, so I'll jump in today with the FryBot. If you've heard me speak on other calls, you know that I'll often talk about the digital, embedded, and collaborative automation that's driving innovation across Middle Beach. FryBot brings these together in a complete Middle Beach solution. It is the only automated fryer designed, manufactured, and integrated by a single company. From the collaborative robot to the dispenser fryer, holding, and spice bot, the FryBot is 100% middleweight. The base FryBot, as shown, is capable of autonomously dispensing, frying, and seasoning two unique items at rates hitting 65 baskets per hour, depending on product. The Frybot will align with ease of installation, meaning it can easily be rolled out to new, but most importantly, existing restaurants. The Frybot is currently in test with leading brands. We look forward to continued Frybot installations and test locations in 2023, with Frybot hitting revenue-producing stores in 2024 and 2025. If you'd like to see and taste the Frybot in action, It will be on full display at the NRA show in May in the Middleby Automated Burger and Chicken Bar, as well as in the NRA's Kitchen Innovation Pavilion. At the NAPIM show this past February, the FryBot flawlessly delivered over 1,500 orders of fries and chicken in just over two days. Continuing with the NRA show, the FryBot will be accompanied by Catfish Tavern, a concept created by John Tapper that features an all-electric and all-needless Middleby kitchen. The Middleby Cafe, a concept that's fencing the highest quality espressos and drip coffees from the Middleby Coffee Group, the best baristas and best roosters in the Chicago area. Open Kitchen, Middleby's enterprise IoT platform. Middleby's electrified innovation alley. where we will showcase the latest electric products designed for the efficient electrified kitchen. And lastly, please look for the Hydro Rinse and the Pressure M2, additional KI award winners in the Kitchen Innovation Awards Pavilion at the NRA show. Hydro Rinse automates the cleaning of most soft-serve machines by washing, rinsing, and sanitizing the machines while the machines are still assembled. The Plextor M2 is the latest modular and rapid cook and accelerated cooking platform from Turbo Chef. I would like to close by talking a little bit about Blue Spark, our latest acquisition. Blue Spark adds to Middle Beach's common control strategy by helping our brands develop and launch controls faster than ever before, thus accelerating new product development across commercial, residential, and food processing groups with industry-recognized capabilities in the area of UX, UI design, and embedded firmware and firmware development. BlueSpark also brings fast PCB board manufacturing while also being able to support volume production. We are excited to have BlueSpark developing for Middleby. Thank you, and over to you, Brian.
spk04: Thank you, James. 2023, it started out strong. We posted another quarter with revenues over $1 billion, with exceptional growth in two of our segments. Our adjusted EBITDA exceeded $210 million, resulting in an organic adjusted EBITDA margin of over 21%. While our total revenue growth was rather modest given challenges in residential, We were still able to grow or adjusted EBITDA 6% over the prior year. Our margins expanded 100 basis points. All the margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. GAAP earnings per share were $1.82. 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 $2.19. I will go through our segment resulting moment, but first I wanted to briefly note that we realigned some small operations internally, which in turn had a small impact on the composition of our segments. Nonetheless, I know some people will see differences in their models, so here are the details. We have moved approximately $4 million of quarterly revenue from the commercial segment to food processing. We have restated prior periods in our post-release, and the growth figures I will discuss here are based on a consistent basis. The impact will be approximately $4 million per quarter as well for the remainder of the year. But back to our small results. Commercial food service revenues were up over 11.5% organically over the prior year, with North America up 14% and international regions growing at 5%. The adjusted EBITDA margin was 26.5%, 230 basis points ahead of the prior year. In residential, we saw an organic revenue decline of 32% versus 2022. The adjusted EBITDA margin was 13%. Food processing continues to perform extremely well. Total revenues exceeded $173 million, an increase of over 24% organically. Our adjusted EBITDA margin was 24%, up over 500 basis points over the prior year. As I've noted before, our full-line solutions continue to resonate with customers. Our operating cash flow generation of $92 million was a record for the first quarter. During the quarter, as Tim noted, we invested approximately $25 million in capital expenditures and had $10 million on acquisitions. We utilized $48 million for open market stock buybacks. After giving effect to all this activity, our total leverage ratio moved down slightly to just under three times. I remind folks that our covenant limit is five and a half times, so we currently have over $2.3 billion of borrowing capacity. It was not an easy quarter, but we still delivered strong results. While we have noted that supply chain has improved, I do need to add that it does remain a constraint in numerous areas, especially around legacy chips and controls. Customer inventory levels present a short-term headwind as well, in residential and to some extent in commercial too. In terms of near-term outlook, I will start with residential. Demand in the marketplace obviously remains off from the peak levels seen a year ago. However, our revenues have been relatively consistent for the past three quarters. When I discussed results last quarter, I noted that residential revenues for this Q1 might be slightly below Q4. We ended up actually exceeding Q4 by a few million dollars. Thus, given the timing of some shipments and current demand levels, with soft unexpected conditions in the UK, I expect Q2 will see revenues relatively flat to what we just posted for Q1, and margins should also be similar to Q1. And thinking about all of 2023 for this segment, it is hard to offer a very clear view given all the dynamics impacting us currently. Nonetheless, Our current assessment, which is subject to a fair amount of risk, is still sequential improvements over Q2 in the back half of the year. This also means year-over-year growth for the second half of 23. For food processing, we obviously posted a very strong first quarter. This business will continue to exhibit strength. I expect Q2 to look fairly similar to Q1, and we should continue to grow and improve from there over the back end of the year. For commercial, when comparing Q2 to Q1 sequentially, revenue should be up modestly with slightly better margins. Our engagement with customers remains incredibly positive, and they are continuing to invest, but chain activity is probably somewhat back-end loaded for the year. So consistent with what I had portrayed a quarter ago, Each quarter through the year should improve sequentially. Just the improvements from Q1 to Q2 will be modest. Putting the three segments together, when looking at the total company potential Q2 performance, revenue and EBITDA levels are likely to show single-digit growth when comparing either back to Q1 of 23 or Q2 of 22. Thinking about how 23 will shape up overall, Our food remains consistent with what I noted last quarter. We continue to expect full year-over-year growth, margin expansion in commercial and food processing. Resi, after holding the line in Q2, should likely see year-over-year growth in the second half of 23. Reiterating that this means for full year 23, we should see total company revenues up honestly and growth in EBITDA dollars and income. In true Middle East style, We look to continue to deliver solid results and have another record year. Thanks. And with that, we will now open up to your questions.
spk05: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And our first question will come from John Joyner with BMO. Please go ahead.
spk03: Good morning. Definitely a solid start. Brian, I was just waiting for your stories there, but you kind of let me down.
spk04: You know, just come to NRA and we'll let your taste buds work rather than have to hear me tell stories.
spk03: Okay, excellent. I look forward to it. I guess for the commercial business, I mean, are there any particular areas that you would call out? I mean, it's definitely a strong quarter, but any areas that you would call out as being stronger than others or ones that maybe are performing better than kind of your internal expectations? And also kind of based on the conversations that you're having, right? I mean, would you say that CapEx intentions by your customers lately have actually taken a step higher?
spk11: Yeah, good morning, John. Steve, maybe I'll take a first pass at it. So I think what I would maybe call out, you know, over the last, you know, quarter or two, we've talked about on prior calls, you know, the progression of how different segments have more or less recovered, you know, since COVID. And obviously, we've spent a lot of time talking on the big, you know, QSR change, which have done so well, you know, these last couple years, I think what I would call out are maybe some of the other areas that are just kind of getting back to recovery, I would call out probably more the independent restaurants than some of the casual dining restaurants. And I think what I'm excited about there is a lot of those customers are served by our dealer partners in the U.S. And I think we've spent a lot of time over the last two years getting closer to those dealer partners, giving them tools to help navigate the dynamic that we're all faced with. We spent a lot of time training a lot of those dealer customers at the MEC. And so I think you're starting to see that pay off. And I think, actually, if you go to the pie charts that are in the deck, it's an interesting nuance that you see the independence and casual dining changes tick up as a part of the overall revenue mix. And I think it's a direct correlation to us not just being closer to the dealers, but also really just seeing those segments kind of start to pick up on the recovery, if that makes sense.
spk03: Okay. Uh, that, that, yeah, thank you. See, that's helpful. Um, and then just maybe just one more on the, uh, food processing business, Brian, uh, I believe highlighted that the, uh, you expect two Q to be more or less flattish with, uh, with one Q and, and similar to commercial. I mean, the results there were probably even more impressive, but when you think about the EBITDA margins for the year, right? I mean, starting at a higher level than probably most anticipated, Do you expect margins there to progress? I mean, maybe you answered this already, I don't know, but to progress sequentially higher as the year unfolds?
spk04: You know, as you said, well, thinking about, you know, food processing here, Q1 certainly was a big step up from where we had been in the prior year and, to your point, you know, was strong and, you know, higher than we may have expected. So that's why I think, you know, Q2 looks like Q1. And we can see some expansion in the back half of the year, just given how strong we started. I'd say that needs to temper expectations on how much they grow from here. But obviously we have our target margin now well within sight. And again, as we especially think about the back half of the year, I think we can move up a little bit from where we started the year.
spk03: Okay. All right. Well done. Thank you.
spk05: The next question will come from Sarah Boroditsky with Jefferies. Please go ahead.
spk07: Hi. Good morning. Congrats on the results. So within residential, can you just strip out the performance you saw in grills versus the legacy business? How do you see channel inventory currently, and how should we think about the cadence of destocking through the remainder of the year? Because I believe you have much easier comps as we get to the second half.
spk02: Yeah, this is Tim. I'll kick off, and then Brian can maybe break it out a little bit. I mean, definitely, as I commented, the inventory levels are high, right? So they continue to come down. There is still inventory in the channel. Sell-through is probably a little bit lighter to start the year, given, I'll say, weather and other factors. market dynamics, but I mean, I think, you know, it still holds true that we'll be in a much better position from an inventory standpoint in the back half of the year as it relates to grills. We are, you know, excited about a lot of the new product introductions that we've got coming out right now that, you know, digital Kamado Joe or Connected Joe that we've talked about in the past and James has highlighted as well as, you know, continued promotion and penetration of the master built gravity series. So I think we feel pretty good about the long-term momentum that we've got that we think we'll build as we go through the back half of the year. But certainly we'll still see some of the probably the stocking in the second quarter, but improvement as we go through the back half of the year. And definitely, as you look at the overall residential results, the grills had an oversized impact on residential, which was expected and certainly seen across that whole category, not only by us.
spk04: As we talked about in the last year, I'm sorry, last quarter. But last year in Q1 really was, you know, the peak of the performance for the, you know, the grills company. We talked about, you know, revenues, I think, being in excess of $110 million, you know, then. And, you know, we're obviously down, you know, quite significantly, you know, from that, you know, excluding grills. would have probably been, you know, down, you know, more along, you know, the order of, you know, of 20%. You know, we still are expecting, as we think about, you know, the grill season, I would say, you know, Q2 is, right, still part of, you know, this year's grill season. And so we will, you know, again, this is consistent with what we've talked about before, you know, see certainly challenges year over year if you were to look at, you know, grills alone. And then you're right, you know, the comps, you know, are certainly, you know, much easier in the back half of the year, right? Because in the back half of 22, we're, you know, we're still part of this, you know, destocking phenomenon we're dealing with. And so that's why we do believe, you know, grills will be better in the back half of 23 than the back half of 22. And that really gets after our comments of, As you think about residential overall as well, second half of 23 being better than second half of 22.
spk07: Appreciate the color. Then just one more. Obviously, commercial food service had another strong quarter. How do you see underlying demand as you might be working down some backlog here? And are you seeing any headwinds from more challenging financing conditions, especially on the franchise side?
spk11: So, Sarah, I would say demand more or less across the customer segments. Again, talked a little bit about the dealer side, the independent side. Nice to see that coming back. But also the chains that we talked about, the QSRs, continue to do well. And so I see the demand continue there both from a new store standpoint and also starting to see some replacement business come back, which we've talked about before. So, yeah, from that standpoint, I believe we're in a good position. And I'm sorry, Sarah, your second question?
spk07: Yeah, just are you seeing headwinds from the challenging financing conditions?
spk11: Yeah, so it's interesting that we have had a lot of discussions with the bigger QSRs really focused on what I'll call unit economics of making sure the ROI on the new stores for their franchisees is where it needs to be. And it's critically important for, I think, for two or three reasons. If you look at the big QSRs that have aggressive growth plans, which many of them do, and many of them are in international markets, how are you growing? You're growing with either existing franchisee groups taking on more locations, signing up for more locations, or you're going out and finding new franchisee groups to expand into new markets. And so the ROI of those new stores, when you're trying to attract those franchisees, is more important than ever. Obviously, as financing has become more expensive over the last year or two, again, the equipment that is going into those locations is not necessarily about, hey, what is the upfront cost? It's always important, but actually it's more about the ROI to open those stores and have an attractive package to the franchisees. If that makes sense. So it's a very active conversation that we've had, I would say, the last six or eight months with the chain specific to this question and issue. And it supports their plans for pretty aggressive growth, especially in some of those international markets over the next two, three, four years.
spk07: Thanks. I appreciate the call, and we'll see you at the NRA show.
spk11: Yeah, we look forward to it.
spk05: The next question will come from Meg Dobre with Beard. Please go ahead.
spk15: Thank you for taking the questions and good morning. I wanted to go back to residential for maybe some clarification. What I heard just moments ago was that leaving grills to the side, the core, call it Viking Aga business, was down maybe 20% and a quarter. Maybe can you confirm that? And As you talk about business getting better overall, the segment getting better from a revenue standpoint overall, what sort of assumptions do you have embedded for Viking and Aga as the year progresses? Because presumably the comparisons are not nearly as easy there as they are on the growth side.
spk04: Yes. So, Meg, you did hear me correctly on the residential side. I'll say it kind of within – with and without grills. As we look at the rest of the year, the outlook, I would say, if I had to pick one word and then I will expand on it, is kind of flat from here. We feel like we've kind of are at a bottom. Q2, I said, will be similar to Q1. Same neighborhood. I was very specific in pointing out that we've been at a relatively consistent level for the past three quarters. I think what we're not seeing yet is outside of grills where there really are some unique circumstances with the destocking, You know, we're not really ticking up our expectations, you know, specifically yet, right? I don't have, you know, exact indicators that, okay, all of a sudden, you know, next quarter is going to really change the trajectory.
spk12: I appreciate that.
spk02: I would say, I mean, I think uncertain is the word, unfortunately, you know, right now. I mean, we've seen, you know, obviously the housing market being, you know, challenged all in the back half of last year. There was maybe a little bit of signs here at the, you know, at the beginning. But, you know, the world, you know, continues to be, you know, a bit tough with rates going up. I think we also feel like we're kind of stabilized at a lower level. So I think that, you know, I think the question is when does it inflect up as opposed to, you know, it's going to continue to, to, to come down. So, I mean, I think if you look at a lot of the housing stats, you know, it was expected to maybe bottom out in the, you know, the middle of the year and then start, you know, seeing things, you know, pick up. So, I mean, I think those are, you know, larger macroeconomic, you know, trends that we can kind of take a look at, and I think we would expect our, you know, business to follow. But, I mean, I think that we feel like, you know, we're stable here at the bottom, and then we'll kind of see how the, you know, the year goes, you know. Now, you know, beyond that, you know, we can continue to be investing in our business, right? Like, we have a lot of new products coming out. I would say our electric, you know, products are doing – fairly well. That includes a lot of the products that we've been launching over the last several years, such as the products that have come into the U.S. Those are growing, you know, right now, you know, despite the market being done. You know, brands like LaCarnou, you know, are doing very well. We've got other new products that are coming out that are induction-based as we kind of go through the back half of the year. And kind of, you know, along, you know, the comments also about the investments that we're you know, making it go to, you know, market activities. We've had a lot of great, you know, traffic at our showrooms, bringing our dealer partners, our designers through that really have not seen the, you know, the portfolio that Realby has to offer. So, I mean, a lot of that stuff has been, you know, exposed to a broad audience over the last, Yeah, and we see some traction of that, and we expect that to continue. We're excited about opening a new showroom in Chicago, which will really be kind of the, you know, I'll say that, you know, really state-of-the-art for us kind of in the middle of the year to really capture the expanded product, you know, portfolio that has grown over the last year. You know, we acquired Novi. about a year ago plus, which has got some great technology, induction, hobs, ventilation, et cetera. So I think we're very excited about the product portfolio. So again, the market's going to do what the market is going to do, but I think there's a lot of great things going on as we go through the back half of the year and into 2024.
spk15: Let me maybe clarify what I was trying to get at. My impression was that Viking was still operating with longer lead times and a fair amount of backlog for much of last year. As you're running that backlog down, my question is, do you have to essentially reduce production or have a sequential headwind in a back half of 23 relative to the current run rate?
spk12: I don't know if you want to.
spk04: Yeah, I mean, as Tim noted, the backlogs have come down. Our lead times are much closer to what I'll call normal levels. There's some pockets there. But again, given... I'll say the modest amount of backlog that remains as well as just the baseline day-to-day demand from customers is why we're kind of calling the year the way we are.
spk15: Understood. I would like to ask a question on the FryBot and I guess a question in three parts. You know, you're saying here that this is a modular design, but, you know, I'm sort of curious when you're trying to sell this product, are you seeing customers looking to essentially buy the entire set or is it just, you know, maybe the robot arm and they're keeping the existing equipment? I guess that would be question number one. The second thing is how big of an investment is this for a customer? And lastly, you know, what is the payback in terms of what you guys have seen or calculated thus far?
spk10: I think when we look at our customers and they see, you know, kind of the advancements with, you know, fryers today, the advancements that the fry bot brings, you know, the customer is typically going to want to upgrade, you know, the frying solutions they have in their stores with kind of the latest, you know, frying to take advantage of, automatic filtration, smart oil sensing, and various other features that are built into the fryers to help you with profitability around oil management and oil quality. So we really do see the majority of customers buying kind of everything that you see on the page from the RAND dispenser to the fryers, to the robot, and to the holding and the spice bot. Now, there could be some situations where we are integrating in with existing fryers, but I would say that's not really what we expect to do day-to-day. When I think of modularity, I'm really thinking that our fry bot doesn't require customized engineering to go into the storage mills. a structure in the store to, you know, burden off, you know, space in the store to put something, you know, behind a shield or any sort of, you know, protective, you know, cover. You know, our FryBot's kind of designed to work out in the middle of the restaurant with the employees in a collaborative fashion. So it's modular in that it's going to kind of roll up an interface with our products and roll away if you need to deinstall it for any reason. I think when we look at kind of the ROI on it, and I think this will probably kind of get into the cost, really talking about the cost. But we really do see the ROI kind of being slightly over a year for the Frybot solution and the equipment package.
spk15: Understood. My final question is on your CapEx. Significant investment. Maybe you can talk a little bit about what was unique about the quarter. Certainly that's the biggest Q1 CapEx that I think I've ever seen. And what sort of payback are you hoping to achieve here? Is there a segment that is getting maybe more investment than others? And how do you think about free cash flow for the year? Thank you.
spk04: Certainly, this was our highest CapEx quarter. I mean, some of the timing of payments and projects have come together. I don't expect we will be at... four times, you know, Q1, you know, for the year. You know, Tim has noted, and we've talked about, you know, we're actually making fairly sizable investments in residential. I've talked before, really, a lot of, you know, retooling of the AGA Rangemaster plants. And, you know, much like our customers, you know, We see challenges with labor availability and cost, and we've been adding fabrication equipment across the board. But our residential plants, if you think about it, I'll call it revenue per plant, tend to be larger facilities, and thus tend to get larger investments. But we really have been spreading it around. The paybacks really do vary. I mean, obviously when we're making investments in buildings, that's something we have a longer expectation on than when we're doing something more modest around, you know, welders or small equipment. But usually, if I focus on fabrication equipment, it tends to be, I'll say, two to three or four years in terms of payback for us.
spk12: And free cash flow? Yes, free cash flow.
spk04: I have... I'll have to echo what I said at year end, where I think we start being much closer in terms of a margin plus or minus of our income for the year.
spk12: Okay, thank you.
spk02: Yeah, I mean, I think if you look at the last couple years, obviously supply chain has been a big challenge. It's been hard to balance inventory and probably I'll say sometimes difficult forecasting, demand levels, et cetera. So I think one of the benefits that we have as we go through this year is we do expect inventory to decline as opposed to kind of being a cash use over the last several years. So I think we've got a little bit of a tailwind from a cash flow perspective coming into the year.
spk12: So it should be solid from that perspective. The next question will come from... Go ahead, sir. Go ahead.
spk05: The next question will come from Tammy Zachariah with JP Morgan. Please go ahead.
spk01: Hi, good morning. Congrats on excellent results. I have a couple of quick questions. The first one is, I think you mentioned that lead times have normalized for most part of your business because of increased capacity and also supply chain getting better. So can you just remind us which segments you saw or had the most increased manufacturing capacity and at what capacity are your facilities currently running on average right now?
spk02: Yeah, that's kind of tough to answer given we got 115 brands, I'll be honest with you, because we run decentralized, right? So it's going to vary significantly across the platform. I think the way I think about it is, you know, our backlog is still at a fairly healthy level, but certainly it's, you know, it's come down from a lead time, you know, and I would say about 90% of our factories now are at a a normalized lead time. It may not be every SKU, but by and large. There still is a percentage of our factories, about 10% that remain a bit challenged, and that's usually because of one of two reasons, or maybe two of two reasons. One, we have very strong demand for those product categories. In some cases, those are more automated products or newer lines. The other The other area, and Brian touched on it, is where we've got controls and some of the electronic components continues to be a challenge, particularly if it's legacy controls. We've done a lot to invest in our next-generation control, and James talked about that in the past with Mobi. One touch, we're excited about moving a lot of our new brands and products over to that, which we will continue to do through the year, which is also connected to our open kitchen platform, but we still have a lot of, you know, legacy controls, you see, boards, and it's hard to move everything quickly. So I think that's where, you know, we still see, you know, challenges at about, you know, 10%, but the good news is about 90%, you're going to get within a, you know, window that's kind of more normalized. And I think that's an opportunity for us, you know, also as we go through the year, because I think there's been some business, And also, we went through last year, which we were really not in a position to serve our customers. So I think as that kind of comes back in, there's some areas that we'll be able to accommodate and really take some orders where we had to walk with them last year. So I kind of think of it as a 90-10 situation, if that's helpful. And lead time is very, you know, depending on the, you know, product category. That's, you know, what I'm seeing is true for really those comments relate to restaurants and like commercial, you know, predominantly.
spk01: Got it. That's very helpful. It seems like things are looking up. That's great to hear. And then my second question is on, I think if I heard you correctly, you're saying that the commercial food segment margin should be modestly higher quarter over quarter. When we were speaking last quarter, I think the expectation was like a 26%, 27%, 28%, 29% sort of margin cadence for the four quarters of this year. So is that sort of still the expectation, or are you saying 2Q should be somewhere between 26% and 27% and not really like the 27% range we talked about last time in the last quarter?
spk04: Yeah, I mean, I think those numbers represent, I'll call it a general trend. You know, I'm not going to comment to whether we're going to specifically, you know, hit 27 or be above it next quarter. I think the appropriate modeling is, you know, as you just kind of noted, you know, somewhere between 26 and 27. Got it, got it. The back half of the year, we'll see improvements from there, right? But I try and be very specific about not offering point guidance, but I'll call it general trend expectations, let's say.
spk01: Got it. That's fair.
spk02: I think our business is always a little bit difficult to forecast just because there's so many moving pieces, and mix has a lot to do with it. I think as we're working through the backlogs, there still is a little bit of, I'll say, older backlog out there that we're kind of pushing through the system as we go through the second quarter. That is at, I'll say, older pricing, so that is still – you know, a little bit left to get out of the system, so to speak, as we kind of, you know, move to more current pricing in the back half of the year.
spk01: Perfect. That's very helpful. Thank you. Thank you.
spk05: The next question will come from Tim Thine with Citi. Please go ahead.
spk14: Thanks. Good morning. Just to continue on that discussion, Tim, so as we think about kind of the margin for commercial, the exit rate, you know, or a second half looking into 24. So, you know, as we went back to the conversation in Dallas last fall where we outlined, you know, price cost and mix being, you know, two drivers to longer term to get margins up, I would imagine is it fair to assume that those start to become more meaningful tailwinds for you in the back half and then that likely extends as we think about where we're exiting 23. Is that a fair kind of synopsis?
spk02: Yeah, I'll make a couple comments and then Brian can clean it up. So again, the mix of our portfolio as we focus on higher technology, second would be product, that would be brands. I mean, that's the underlying, you know, theme. And, you know, that's always – that may be difficult to forecast on a quarter-to-quarter basis, but I think we continue to make progress towards the – you know, with the mix of the portfolio. And that's something that, you know, I think is reflected right now, but, you know, continues to be, you know, something that I think we'll see improvement as we go, you know, through the – you make progress the year going into 2024. As there's other factors, you know, we still, from a supply chain standpoint, just make two comments. One, the, there are some commodity areas that we'll see improvement as we get to the latter part of the year. Like we still have higher price steel, steel's come down, but we haven't seen the benefit of that yet because, you know, we do have some, a lot of that in our, our inventory, you know, is still. So we'll get some of the supply chain, a little bit of supply chain, you know, relief as we go through the latter part of the year as well. So those are two things. And I guess maybe the third is also production, you know, efficiencies. You know, there's still a lot of thrash that we have in our operations right now. I think as lead times normalize, order rates drop, kind of normalize, you know, with customers and how they're placing orders with us, with our lead times, as we can better utilize some of the investments that we've made in the factory. So a lot of that stuff is, you know, on the floor operating, but I wouldn't say that, you know, we're getting all the benefit yet because we're working through, you know, thrashing, touching, you know, equipment still, you know, sometimes a couple times before it goes out the The dorm, we really get into better cadence. I think that's kind of the color behind the comment I made about some of the manufacturing, you know, efficiencies. So, I mean, those are the things that we'll be working on as we go through the, you know, the latter part of the year that is part of the bridge to get us to higher margins. There's still some headwinds out there as well, because I will tell you, supply chain, you know, as Brian commented, is not done. I mean, it's not only that we've got some clones that's harder to get, but there's still increases, you know, out there that we're, you know, our teams are fighting, you know, hard to, you know, push back on or think about how do we, you know, be, you know, we've kind of gone through, you know, a period of, you know, fire drills, right? Like, let's make sure we can get product out the door. And now as we kind of start thinking about that as a lever again, and I think that, you know, that's something over the next several years, but I mean, I think we've been a, you know, a price taker to this point. And I think this year will be a little bit of an inflection for that as well. So I think we're still getting price increases as we go into 2024. I think the supply chain teams will be focused on driving efficiency there as well.
spk14: Okay. That all makes sense, Jim. Thank you. And then maybe I think it was you or Steve, I forget, but there was a comment earlier about the supply or the inventory levels posing a headwind for you and the residential side makes perfect sense but I was surprised I think you referenced in the commercial side as well can you maybe just touch on that you know we've been hearing just to your point I mean supply chain has been an issue and just for you guys to get products out the door so I was a little surprised to hear that comment but maybe it's just more of a one-off any thoughts on that assuming I heard that right
spk11: Yeah, I believe Brian actually touched on it briefly. So I want to just say I think there is some inventory in the channel in commercial, both for the general market and for chains, and the chain side especially. And I would say we've gone through such an odd period of time the last year or two of how our customers have ordered with the long early times, placing orders. Go back a year ago, they're placing orders online. farther out than they ever have before. And our dealer partners, the KS's and Service of Chains, their job was to get as much equipment in place to support new store openings and replacement. So I think you're seeing a byproduct of that. There was so much ordering that took place just to make sure everybody was in a good place to support new store openings and replacement. And so we're going back to quote-unquote normalizing lead times, normalizing how our customers order from us, kind of back to how it was pre-COVID. And so I think, again, the inventory that's in the channel right now is a byproduct of just the longer lead times and ordering process. I do think that normalizes as this quarter unfolds and certainly the back half of the year unfolds and we get back to, again, more of a normalized cadence of ordering in the channel.
spk05: Interesting. Okay. All right. Thank you, Steve. The next question will come from Larry DeMaria with William Blair. Please go ahead.
spk09: Hi, thanks. Good morning. I know you've touched on a lot of this stuff, but I wanted to get some clarity in Rezzy second half. Flat two Q sequences, I guess, and then we expect sales up in the second half. And so shouldn't that imply we're back to mid-teens or better EBITDA margins in the second half, specifically in Rezzy? And maybe you can discuss some of the restructuring you've done in the air maybe at least even higher margins, you know, into what might be a clean year in 2024. So just some further call around second half and maybe run rate, keep down margins in resi.
spk04: Yeah, no, we do expect margins to be increasing in the back half of the year as well with the – With the increases, you know, in revenue, you know, given the dynamics of the, you know, the grill business, you know, we do get, you know, nice, you know, leverage incrementals as those, you know, revenues, you know, improve. And in terms of the benefits of the manufacturing, that really, especially given current demand levels, really isn't something that has a meaningful impact this year. but is certainly a meaningful driver as we get into next year, as we hopefully look forward to better revenue levels, and, again, is one of those drivers in bringing us back towards the target margin levels. But, you know, specifically to the stuff we've talked about for, you know, AGA in the U.K., you know, this is a, you know, long-term project that really comes together over the remainder of this year. That's why benefits start accruing much more so next year.
spk09: Okay, so thanks for that. But now if we think about second half margins, EBITDA margins, I guess obviously grills better, but you have a little bit of benefit, but maybe some mixed headwinds, not sure. So does that imply you know, mid-teens or better EBITDA margins in the second half? Or is that the way to think about it, mid to upper teens?
spk04: Yeah, I mean, you know, I talked, I think, some about some of this, you know, last quarter and back to the fall. I mean, I do feel like mid-teens is where we can get. It's just, you know, you need to take that with a little bit of, you know, caution. I mean, I've tried to use the words risk, you know, uncertainty here as we look at the back half of the year. I think that's a fair assessment, but again, I think everyone is aware of the risks and uncertainty surrounding that business, but again, I think that's probably a fair assumption.
spk09: Okay, fair enough. My second question. I want to talk about food processing, backlog and order trends. How do the orders progress through the quarter, postpones, delays, or are still strong, maybe touching some of the end markets? I know poultry might not be huge, but there's some headwinds in the market, so just give us some color to get comfortable on the duration of the processing turn.
spk12: I can't hear.
spk04: I don't know if the question was food processing orders and trajectories. Yeah, I mean, food processing, you know, has continued to do well for us. I mean, obviously last year was a really exceptional year in terms of, you know, order intake and driving up our backlog. I mean, things are still, you know, very good there. You know, again, last year was really, you know, exceptional. So maybe, you know, the current is not, you know, at the same levels, but nonetheless, you know, Orders continue to be strong. Our backlog is holding in well. The areas where we've been strong, we continue to be strong. We've seen a lot with bacon. We've seen a lot of acceptance and excitement around the Turbo Chef by Altar. We're making inroads into pet food and snacks. And so it has been, you know, fairly, you know, good across the board, I would say, you know, for us.
spk02: So, Larry, I'm sorry, I can't. We're having a speaker problem. But, yeah, I would just say, you know, the backlog is holding pretty solid. I think as we look at the orders, you know, for food processing are always going to be from one quarter to the next, depending on what projects come in. So I think we kind of look at what the pipeline of opportunities is out there. And, you know, as Brian just alluded to, I mean, I think we feel pretty good about the pipeline and the areas that we've been targeting with full-line solutions, which continue to resonate. And, again, I just kind of remind everybody we've invested a lot in automation. If you look at a lot of the acquisitions over the last year, particularly with, you know, with Proxahop, VMAC, More recently, Escher, Colossi, you know, where the teams are really working together, you know, on some, you know, bigger projects to help customers, again, with ROI and a lot of different applications that we were not in, if you kind of go back five years ago, as Brian just alluded to, a number of them. So I think, you know, we feel pretty good about the, you know, the momentum of the, you know, the business. So nothing's really changed from, you know, that perspective from what we, you know, that we're seeing last year.
spk09: Okay, thank you, guys.
spk05: The next question will come from Brian McNamara with Canaccord Genuity. Please go ahead.
spk08: Good morning. This is Madison Callanan on for Brian. Thanks for taking our questions. Just to piggyback off the previous franchisee question, with the recent high-profile bank failures, We're just curious where your restaurant customers and franchisees probably get their financing from and any additional color you can give on how that affects your commercial food service equipment business. Thanks.
spk04: You know, as we think about our commercial customers, you know, there's a few things. They're obviously our largest customers. You know, I don't have a roster where they all bank, but, you know, they tend to be, you know, large entities, and I haven't seen anything in the public domain, you know, I'd say, you know, align with our large customers about concerns about, you know, their business. you know, their financing. There's also obviously lots of really large, you know, franchisee organizations out there. You know, I would say that we haven't, you know, I understand where the question's coming from. I can't say that we've explicitly seen any, you know, slowdown or change in our activity level or, you know, negotiations with customers, you know, specific to what's happening, you know, with regional banks. you know, and the like. I think if you take it all the way down to our smallest, you know, customers, you know, kind of, you know, independent restaurants, you know, they're probably, you know, raising cash, you know, to open things up, you know, given some of the, you know, the risk profiles with really small entities. So, again, overall, we don't feel like it has been, you know, yet impacting us in a noticeable way.
spk08: awesome thank you and then just as a follow-up in terms of grills can you give any color on material distribution gains you expect for your grill brands after the wholesale channel is cleared whether they'll be deeper with current retail partners or new partners altogether thanks
spk04: With the grill companies, so we are seeing gains with our existing customers in terms of what I'll call the floor space allocated to us and really acceptance of our products for a variety of reasons, right? Charcoal gives a better cooking experience. We have awesome technology. We have different features for all these reasons. So we are seeing gains with, I'll call it, our current, you know, base of customers. But we're also, you know, making headways in terms of, you know, bringing these, you know, these grill products to, I'll call it, like, you know, specialty retailers where they may not have been carrying them before or were really able to, because of everything Middleby offers, also have them, you know, bringing customers especially Kamado Joe, you know, into their showrooms, as well as, you know, leveraging what we're doing, you know, internationally. There are a couple of pockets, I would say, you know, of new distribution, you know, in the U.S., you know, as well.
spk08: Awesome. Thank you so much.
spk04: Yep.
spk05: The next question will come from Jeff Hammond with KeyBank Capital Markets. Please go ahead.
spk00: Hey, good morning, everyone. Thanks for fitting me in. I just have one quick one. Just on, you know, the cash flow should look better this year. I noticed you guys bought back stock, which I guess was a little surprising given your pension for deals and kind of the current rates and leverage. So just kind of update us on kind of how you're thinking about capital allocation as we move through the year.
spk02: Yeah, I think it's probably unchanged for how it's been for a long time. I mean, certainly we're more conscious of the cost of capital and interest rates, et cetera. I think as we kind of think about, you know, deals, I mean, we're very strategic in our approach and how we build out the portfolio and things that we think will strengthen us, you know, for the long term and stand the test of time. So, you know, we'll be active, but we're also, you know, keenly aware of, you know, cost of capital has gone up as well as, you know, uncertainty and outlook and, you know, certain, you know, parts of the market. So just from a valuation standpoint. So, you know, we do think, you know, valuation will kind of, you know, evolve here and that'll be, you know, part of the, you know, our thought process as we look at deals. But I mean, again, M&A is a, you know, as we always put the slide up there, we've been doing this for a long time and, and I believe we're, you know, building upon three, you know, you know, industry leading, you know, platforms. So, And obviously, you know, mentioned that the two transactions, you know, start the year we're, you know, excited about. So, you know, M&A will continue to be, you know, the forefront. You know, obviously, we'll try to, you know, we will de-lever, you know, the process, you know, as well. I mean, I think, you know, stock buyback, you know, we've always said we will do that opportunistically. I think we felt that it was an opportunistic time, so I think that was something that felt it was a good timing to buy back some shares. We started that in the fourth quarter of last year, so that was kind of a continuation of something that we had put in place to finish the year and start the current.
spk12: Okay, thanks so much.
spk05: The final question we have time for today will come from Todd Brooks with the Benchmark Company. Please go ahead.
spk13: Hey, thanks for squeezing me in, and congrats on the results in the quarter. It's a three-parter, but it's all on the same topic. If we look at commercial food service, what's the mix of kind of new build versus replacement products? demand now versus what it would look like normally. And then I'm wondering, you talked about with maybe lead times normalizing, you may not get as much visibility into the new build programs with the restaurant partners. I'm just wondering about as replacement seems to be picking up based on the comment you made. Is your visibility there better than it's been historically? And then finally, the margin spread between new versus replacement demand, if there is any. Thanks.
spk11: Yeah, go ahead. So Todd, first question, you have a mix of new build versus replacement. The pie charts that are in the deck, I think, are helpful. And as you see today, new build and replacement for 2022 were pretty much the same. So historically, if you go back to, again, pre-COVID levels, I believe there's probably a chart somewhere that replacement was historically half the demand that we would normally see probably in the period of 2017 and 2019, if you will, going into COVID. So obviously the new build demand primarily from the bigger chains, really 2021, 2022, obviously is significantly higher than it was prior. So that's why you see the mix here. being different, I do think as you get into probably 24, 25, even though I do think you'll see new builds continue for a lot of the change, I do think you'll probably see some replacement business uptick and actually be maybe not back to 50%, but probably be higher than the new build mix, if that makes sense. In terms of visibility into new locations, I've talked about on prior calls, One of the very nice byproducts of this disruptive period that we've lived through is being closer to our big chain customers. They've given us more visibility than ever into their development plans, from timing, locations, et cetera, which has been extremely helpful. And that has not changed. And I actually don't think it will change a whole lot as we go forward, just because there's so many good benefits on both sides of the equation. to giving us that visibility to make sure that we're always aligned with, you know, hitting a new store opening. And then also, you know, your other question was making sure we understand the replacement demand. So again, we're in a good position to support that on that side, I think. So visibility remains, I think, very open, very transparent. And I do expect that to continue as we go forward. From a margin perspective, you know, replacement versus new build, I would say, you know, New build, I would guess, is probably higher margins, just because if you think about new builds, they're putting in the newer technology products, which historically do have higher margins. It's not a hard and fast rule, but that would be my answer, that new store builds would historically probably have better margins than replacing the business, if you're replacing kind of a like-for-like product, if that makes sense. Hopefully I answered all of your questions.
spk13: No, you did a great job. Thanks, Steve.
spk11: Thanks, Todd.
spk05: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk02: Thanks, everybody, for attending the call today, and we look forward to speaking to you next quarter. Thanks.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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