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spk16: Thank you for joining us for the Middleby Corporation fourth quarter earnings conference call. With us today from management are Tim Fitzgerald, CEO, Brian Middleman, CFO, James Pohl, Chief Technology and Operations Officer, Steve Spittel, Chief Commercial Officer, and John Joyner, Vice President of Investor Relations. We will begin the call with comments from management, then open the line for questions. Instructions on how to get into the queue will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Tim Fitzgerald. Please go ahead.
spk05: Good morning. Thank you for joining us today on our fourth quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. We are proud of the accomplishments the Middleby team delivered across the business in 2023. The year proved to once again be challenging, marked by supply chain disruptions, inflationary costs, and the impact of interest rates, presenting operational challenges across all three businesses and materially affecting the demand at our residential business. Our teams focused on delivering every day for our customers while executing on our long-term strategic growth initiatives and delivering the strong financial results we reported for the year. We are pleased to have closed 2023 with a record EBITDA eclipsing $900 million, record operating cash flows exceeding $600 million, and made significant progress toward the long-term profitability goals we have set out, achieving combined company margins, which expanded to over 22%. While delivering the financial performance for the year, we have continued to remain focused on investing in and advancing our strategic initiatives. launching industry-leading innovations and customer-focused solutions, developing our highly differentiated go-to-market capabilities, and investing in our operational capabilities to support profitability and growth. In 2023, we brought to market an exciting pipeline of innovations addressing operator needs and customer demand for automation, energy savings, labor reduction, speed, simplicity, and flexibility. We expanded our offerings of electrified, energy-efficient, and beltless equipment. We launched our middle B1 touch control, now across many of our commercial products. We furthered our lineup of integrated full-line solutions, providing for the latest in automation for customers of our food processing group. And we made significant strides expanding our offerings of IoT-enabled products, now launching in the marketplace. Across all three of our food service businesses, we entered 2024 with a portfolio of customer-focused solutions, positioning Middleby as the innovation leader with offerings to address the current and future trends of the market. In 2023, we continue to invest heavily in our go-to-market capabilities that we believe are uniquely positioning us for the long term. We've made great progress developing our digital sales and marketing capabilities, We expanded our culinary and food science teams that engage with our customers on a daily basis. And we have deepened the partnerships with our strategic channel partners. The investments we have made in our innovation centers continue to prove to be a strategic asset for our businesses. With successful new additions in 2023 of our Middleby Innovation Kitchen in Madrid, serving our commercial customers internationally, and our Middleby Residential Showroom in Chicago, featuring the exciting offerings across our residential brands. Engagement at our innovation centers continues to be meaningful and is providing benefits across our commercial, residential, and food processing businesses. In 2023, we continue to make smart investments in our operations with over $80 million invested in factory automation and facility expansion to bolster profitability initiatives across our businesses and support growth opportunities in our brands. In 2023, we were pleased with the improvements in our overall profitability as we progressed towards our longer-term margin targets. We are benefiting from our focus on new product innovation to drive improved profitability in our sales mix. We are realizing efficiency gains reflecting the impact from our manufacturing investments. and we're focused on long-term supply chain opportunities with ongoing product design and sourcing initiatives providing for additional improvements over the course of the next year. Market conditions remain challenging as we begin 2024, and while inventory to stocking is largely behind us, the housing market remains difficult, and customers in our commercial and food processing segments are cautious, giving uncertain uncertainty in macro conditions and challenges facing their businesses as we start the year. Despite what may be a slow start, we are optimistic on the year as we expect improving market conditions for the residential market as we progress through the year, with significant long-term growth opportunities ahead as the market recovers from the current disrupted lows and returns to normalized levels. and we have a building pipeline of opportunities with our commercial and food processing customers, which we expect will gain momentum as they execute against their established growth plans as we continue through the year. As we start 2024, we'll continue to focus on business execution, driving profitability and cash flow, while executing on our strategic initiatives that we continue to build upon our growing competitive advantage at each of our three industry-leading food service businesses. Now I'll pass the call over to James to spotlight some of the exciting things that we have in store at the upcoming Kitchen and Bath Show, which is at the end of this month in Las Vegas. It's a great opportunity to see all our latest in products, designs, and technologies across our entire portfolio of leading indoor and outdoor brands. will be featuring a record number of innovative product launches and demonstrating all the exciting things we have to offer across the portfolio of our residential brands. James?
spk32: Thank you, Tim. I'm proud to start off the call with an affirmation of Middle East's commitment to innovation. Each year, the National Restaurant Association solicits applications for manufacturers for their best innovations in commercial food service launching in 2024. The awards are known as the Kitchen Innovation Awards, and the winners are displayed each year at the NRA show. The NRA show is May 18th through 21st. Without giving too much away, I'm pleased to announce that Middleby has garnered a large percentage of the 25 honorees, aka winners, and while I'd like to share all the Middleby product honorees, I must wait for the National Restaurant Association to publicly announce the awards tomorrow. Please check Middleby's various social media channels for a list of all Middleby's winning innovations upon announcement. Now, per Tim, let's shift our focus to the Kitchen and Bath Industry Show, which happens next week in Las Vegas, where Middleby Residential is set to make a statement. Referring to our slide deck, you will see a selection of new design and innovations Middleby Residential is showcasing. Our expansive booth will display 250 Middleby appliances representing 16 different Middleby brands. It's worth noting that the majority of these 250 pieces will be seen for the first time at KBITS. From indoor to outdoor cooking, grills, ventilation, ice, and refrigeration, Middleby Residential has the most comprehensive lineup of premium appliances in the industry. We are also excited to announce two entrants to the U.S. market from our well-known European brands, Novi and Josper. Novi's elegant and highly innovative induction, surface cooking, and ventilation products bring a modern European design to Middleby Residential's U.S. lineup, while the Josper Casa brings the ultimate Michelin star cooking experience to Middleby outdoors and your backyard with their Spanish charcoal ovens. While I can't go into every product in the deck or on display at KBiz, I'd like to highlight some of the design and technology themes that will be on display. First and foremost, color has become an integral part of Middleby's DNA. We are expanding our color offerings across Middleby Residential with the introduction of 20 luxury colors from Viking Range, eight colors from Lynx Grills, as well as the introduction of Lynx's premium outdoor kitchen cabinetry, will be offered in the same colors. While our iconic brands, such as AGA and La Crenue, have always celebrated a rich history of color, Viking and Lynx's new colors offer designers and architects the ultimate palette of expression for their clients. Lastly, we are unveiling the AGA Era, which is a complete modern makeover of our classic AGA cast iron cooker, which has been a staple in European homes for centuries. From a technology standpoint, induction will share the stage at the Middleby food. Each Middleby cooking brand will showcase their newest induction products, demonstrating Middleby's commitment to electrification. We firmly believe our induction cooking will be rapidly adopted by consumers, With Middleby's commitment to high quality and high design, people will experience a remarkable speed, precision, and efficiency that our induction appliances bring, allowing them to rapidly embrace electrification in the most positive of ways. Continuing on with our innovations, connectivity remains a focus for Middleby. In our outdoor section, we are displaying our full line of connected digital charcoal products from Kamado Joe and Masterbuilt, including the new premium connected Masterbuilt Gravity Series Grill, the XT. At Viking Indoors, we are introducing our new contemporary reveal line, which I had previously discussed on past calls. The reveal single and double wall ovens feature our new connected and guided cooking platform, Viking Cloud. By simply connecting your Reveal Oven to the Viking Cloud app, you can enjoy a connected culinary journey. The Viking Cloud provides complete control of your Reveal Oven. You can browse through a wide range of recipes, select your favorite, and the app will guide you step by step through the cooking process while sending instructions to your oven along the way. The app will turn your oven on, will notify you when you would when your oven is preheated, and of course, when your food is perfectly cooked. Moreover, our AI-powered tool in the app allows you to transform any recipe on the web into a step-by-step guided cooking experience, just like the recipes from Viapy. This innovative feature lets you take control of the internet for a never-ending culinary journey with the reveal. I encourage you to visit the Middleby booth at the Kitchen and Bath Innovation Show at industry show to witness these market leading designs and innovations firsthand. Thank you and over to you, Brian.
spk26: Thanks, James. One year ago, I noted that when I thought about 22, one word came to mind and that was records. I also reminded everyone that records are meant to be broken and we plan to make that happen in 23. Well, mission accomplished. For 2023, we delivered record sales, record earnings, and record cash flows. And we plan to do more in 24. While I think that could sum it up very well, I won't refrain from digging a little deeper into 23 and touching on 24 as well. For 2023, we generated record revenues that exceeded $4 billion. Our adjusted EBITDA exceeded $900 million, representing a profit margin of over 22%. Our margins expanded over 100 basis points from 22. GAAP earnings per share were $7.41. Adjusted EPS, which excludes amortization expense and impairment charges, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $9.70. up over 6.5% versus 2022. We achieved this while facing especially challenging market conditions in the residential segment. While I don't enjoy talking about red numbers, but I believe doing so here helps put in context how much we have accomplished. We delivered solid results even while residential saw a nearly 25% decline in revenues. As a result, our top-line growth for the company was nominal, yet we grew our adjusted EBITDA 5.5%. We also more than doubled our free cash flow. We are focused on operational excellence. We are focused on innovation. We are focused on our customers' needs. We have invested and will continue to do so in all these areas. These investments are generating returns. You can see that in our results. But even while we invest, we also focus on driving strong cash flows and continually expanding our margins. We earn these margins by being leaders in innovation and having best-in-class solutions across our entire company. We manage costs well, we have a deep understanding of our customers' needs, and have deep relationships with them. All this drives our differentiated results. And we plan to do more in 24. You've seen that for the fourth quarter, we generated revenue of over $1 billion and record adjusted EBITDA at over $235 million, with a profit margin of 23.3% or 23.6% on an organic basis. Q4 GAAP earnings per share were $1.42. Adjusted EPS was $2.65. In residential, we saw an organic revenue decline of nearly 15% versus 2022. The adjusted EBITDA margin was 10%. Commercial food service revenues globally were down 2% organically over the prior year, yet the adjusted EBITDA margin was over 29%. By the way, all the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. Given the volatility that can exist when looking at quarter-to-quarter results, I find it more insightful to examine where our businesses stand by looking at full-year results. Organic revenue growth for this year was almost 3%. Nonetheless, we expanded our organic margins by approximately 200 basis points to over 28% in commercial. In food processing, total record revenues for a quarter were nearly $192 million. Our adjusted EBITDA margin was 27.6%. Looking at the full year, our organic revenue growth of nearly 11% helped expand margins by over 300 basis points to over 25%. That looks like success to me. and we will not be stopping here. We will continue to reach higher. I've hopefully made it clear that in the face of rather challenging market conditions impacting residential, and we're not facing an easy environment by any means in any segment, we are delivering some of our best results ever. You can see this in our cash flow too. Our operating cash flows were over $255 million for Q4, and nearly $629 million for all of 23. Our free cash flow conversion was around 180% for Q4 and 120% for the year. Looking forward, we expect that our cash flow generation should grow and likely achieve at least the same level of conversion again in 24. Our total leverage ratio is now below 2.5 times. So to sum it up, strong P&L, strong cash flows, strong balance sheet. So where do we take the powerful Middleby culinary universe from here? Let me start with a quick view on Q1 and then provide some commentary on our outlook for 24 in whole. Taking a historical perspective, recall the Q1 results overall typically take a step down sequentially from Q4 across all our segments. I know there is much attention on the challenges residential is facing, and as we look to the start of 24, we unfortunately do not yet see improving market conditions in this segment. Looking at Q1 of 24 versus the prior year, we will see a revenue decline in residential. In the beginning of 23, we were still benefiting from fulfilling orders and the then larger backlog. Our margins will also be a little challenged to start 24, given the impact of attending the KBiz show this year. For the other two segments, results of Q1 of 24 will likely be similar to those seen in the prior year quarter. When you put this all together from a total company perspective, Q1 of 24 will be behind Q1 of 23 due to declines in residential and relatively flat performance in the other two segments. As we progress through 24, across all the segments, I expect to see sequential improvements. Let me expand on those thoughts for the full year 24. Starting at residential, as James noted, we are innovating and expanding our product offerings. We have built an outstanding product portfolio. We are positioned well for long-term growth and thus will return to and ultimately exceed prior profitability levels. But given what we are seeing in the economies where we operate, it is hard to offer a specific outlook, but there are some signs of potential improvement that we hope can materialize in the second half of 24, but we may not see progress until 25. We will have to see how housing markets, mortgage rates, and remodeling activity progress. I will reinforce that we remain profitable and at levels well ahead of other public appliance companies. We are poised to continue to grow our market share and thus grow our revenues and expand our margins. Across food processing and commercial food service, looking at full year 24, we expect to see organic revenue growth over 23. Food processing had an amazing year in 23. Total revenue growth of over 22%, and we jumped our revenue to above $700 million. We have delivered our target margin. The opportunity set in front of us remains very large, really as big as it has ever been. You have seen over the past few years how our best-in-class individual solutions have become integrated, full-line solutions that resonate with our customers. These customers are facing labor shortages and margin pressure. They need highly efficient and reliable equipment. our automation benefits them greatly. And as we help them improve their operations and profitability, we will see continued growth in our revenues, hopefully at least mid-single digits as we look across 24, and the potential for modest margin expansion as well. On to commercial, where our growth is a result of our strategic investments in broad capabilities. We are targeting higher organic growth in 24 over the almost 3% we saw in 23. We should also get closer to our target margin of 30%. We've often talked about how our beverage and dispensing platform is still relatively new to Middleby, yet represents about a third of the segment. It will drive outsized growth in 24. Some of my favorite drinks from a large coffee chain are now being served over Follett's Nugget Newton and its revolutionary valve may be small, but they're definitely mighty. They are making a difference in many ways. And I could go on about Wonder Bar as well as Marco and our coffee solutions group. But come see us at the Mic or at the specialty coffee show in Chicago in April to see and taste for yourself. But 24 and beyond are looking strong. And our stalwart, the hot side, is not cooling off. Our customers are growing their operations, and they need our newest solutions. Just flip through our quarterly presentations to remind yourself of what we have been up to. But automated, energy efficient, easy to control, internet connected, fast solutions abound. So take your pick. Are we cool? Are we hot? I like to think we have it all. For 24, we intend to deliver organic revenue growth, higher margins, and profitability growth at rates in excess of our revenue growth. We will continue to improve our working capital management and have strong cash conversion. Free cash flow will be up too. We are doing all we can do to earn the trading multiples we deserve. So while 23 was another year full of challenges for Middleby, and our most successful year yet in many respects, EBITDA over $900 million, Operating cash flow over $600 million. Leverage now below two and a half times. But we are never satisfied. We are constantly pushing. But we are also extremely proud of what we have built and what we deliver. And we plan to do more in 24. Andrea, will you please now open the line for questions?
spk16: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster.
spk15: And our first question will come from Meg Dobre of Baird.
spk16: Please go ahead.
spk10: Thank you for taking the question. Good morning, everyone. Good morning, Meg. I guess my first question is on commercial food service. If I understand, and I guess there's two parts to it. If I understand the guidance commentary, we're starting a little bit slower here, maybe flat year over year in terms of revenue. But if you expect to outgrow relative to 23 for the full year, that implies pretty significant acceleration in growth, maybe like 5% or thereabouts, if my math is right, for the rest of the year. So I guess I'm curious, what gives you the confidence that we'll be able to see that kind of growth? for the remainder of 24. And related to all of this, I know we're going to get this in a 10K, but can you talk a little bit about your backlog in this business exiting 23?
spk22: Mig, good morning. It's Steve.
spk02: Maybe I'll take the first crack at your question. What gives us confidence in the year overall? I come back to three things, I think, specifically that we've talked about in the past. So If you look at the big chain customers, especially getting back to the new store development, which was certainly lacking going into COVID, was pretty weak. So we've seen that pick up, obviously, the last, I'll call it two years. I do expect new store openings to continue this year. The chains that we work very closely with have all reiterated, recommitted, you know, to their new store opening plan. Still working through challenges around, you know, some construction labor permitting. But by and large, their total new store, net new store openings for the year, they've committed to. So in my opinion, that is, as you roll that up, is ahead of, you know, 23 from a new store development pipeline. So that's kind of point number one. Point number two, you know, all the challenges that we've talked about over these last several years, whether it's labor, dealing with utility costs, speed of service, consistency, take your pick on challenges, you know, they still have to solve all these. And you're seeing the chains, especially, I think, being very focused on their franchisee efficiency and franchisee profitability. So you're seeing the chains invest more and more in these areas, knowing they have to keep the other franchisee community happy. So I think you're going to see that continued investment in those areas. And then point number three is, which we've talked about in the past, I still think we're substantially behind on a replacement cycle. The chain's been so focused on new store openings after trying to get through COVID, they have really not focused on going back and replacing and upgrading equipment in their locations. I think that's true. Obviously, we focus a lot on chains, but you go through a number of the segments. It's true in all those areas that I think we're So when you kind of layer those three together, Meg, you know, again, new store openings, still have to solve for all the challenges of what's going on in the store and a deferred replacement cycle. I think that's what gives us confidence in the market and growing it for this year and certainly in the years to come.
spk26: This is Brian. Regarding the backlog, obviously we have consumed a good amount of it this year. We'll be disclosing that next week in the 10K. As you noted, we'd say the backlog is pretty much at what I'll consider normalized levels now. We also have seen some positive trends over the past I'll say over the back half of last year and even in the start of this year on orders and backlog is trending modestly, but even up a little bit to start the year. When you put all that together, what Steve was talking about, what we've seen in some of the data points I've noted, what we're engaging with customers on, what we have underway with them is what gives us the confidence that has underlined our comments.
spk05: Just to round it out, as you kind of think about the year and the backlog, we came in with a lot of backlogs, so there's a lot of shipments in the first quarter. We're talking about the inventory destocking, so that is our channel partners really worked down their inventory in the back half of the year. That's been a little bit of a headwind in Q3 and Q4, but that goes away quickly. as we kind of look at comparatives in the back half of the year. So one of the reasons, I think, with just the underlying activities Steve talked about and then the lack of the headwinds in the back half of the year. Because our orders on a commercial were actually up in Q3 and Q4, but that's obviously not how revenues were as we continue to kind of face the destocking.
spk10: Okay, that's helpful. Thank you. Then my follow-up is on residential. And, you know, just the way you kind of framed 24, I don't know, maybe a little bit slower than what I was hoping for or what I was thinking. And, you know, back to the question here, also, you know, on visibility and sort of what needs to happen here, it sounds like you actually need to see more of a recovery in the housing market and lower interest rates in order for this segment to start growing. And maybe the question on margin here, more so than anything else, what sort of volume do you think or revenue do you think you need in this segment in order to be able to achieve your 25% target? Thank you.
spk05: I'll start off and then I'll let Brian kind of hit that second part. Yeah, I mean, I think certainly we were hoping that the housing market would start to be a little bit more robust. And I think the good news is we've bottomed out. It's a pretty low bottom, right? I mean, relative to, you know, the last decade plus, I mean, it's pretty much the worst housing market that anybody's seen in a long time. You know, and obviously the interest rate hikes were very significant in the middle of last year. So that's not that really long ago for the market to change. you know, absorb all that. You know, we saw a little bit of, you know, signs late in the year. The beginning of the year, you know, is a bit softer, so we're kind of bouncing around the bottom. Our residential orders also were positive in Q3 and Q4 relative to last year, but again, we had worked, you know, down the backlog from a revenue, you know, standpoint. So, I mean, I think, you know, we are seeing improvements. It's just that, you know, we're looking for a big step up in improvement where things kind of move, you know, start to, you know, back to more normalized levels as kind of, you know, versus slight improvements off of the low. So I think we're confident that we are going to see improvement as we go through the year. I guess the question is when is that, you know, better inflection, you know, point happen. But, you know, we do think that we will see, you know, some more meaningful step up in the, you know, the back half of the year based on industry stats that we look at.
spk26: So, Brian, maybe. Yep. Hey, it's Brian. Regarding the margin, you know, side of things, you know, if I look back to, you know, 22 when we were, you know, over a billion dollars revenue and our margins were in the high teens and you know we had a fully benefited from you know the cost actions and again so I think you know if you put that all together and we'd hope to you know start to be again you know closer to the you know high teens or 20% around a billion again that's just using you know, past results as an indication of, you know, things going forward. And then, you know, we're making ongoing improvements in our businesses in a variety of ways. But, you know, I think the short answer is, you know, that first digit of the revenues needs to be, you know, a one. We'd like to, you know, be over the billion dollars level to start really seeing things, you know, jump up nicely from the volume contribution of Argent's.
spk05: Maybe just to kind of add some color and pick it apart, I mean, you've got a lot of bigger pieces there. I mean, Viking had, you know, historically we'd gotten it well into the 20% margin, so it's certainly fallen below there, but we had been operating at a long point in time, you know, well into the 20s. AGA, which when we bought the company, it was at, you know, 3%. We had We're just coming on to 20% and we've made significant investments at AGA over the last three years as we've gone through COVID. So as it emerges, we have not only better, exciting products, but we have a much better cost base. So I mean, there's kind of a built-in margin improvement for AGA. And outdoor, obviously, which has been challenged like all the rest of residential, the team there has made significant progress in consolidating the platform around logistics and we have a lot of new exciting products that James touched on you know in the past and even in this call they're coming out that that brings to higher price points into the specialty market so kind of structurally so a we're getting back to what we've already proven in the past and then structure we've made improvements and to the business while we've kind of gone through this period. So I'm pretty confident that margins get to be to a pretty attractive place in a normalized market.
spk09: All right. Appreciate it. Thank you. All right. Appreciate it. Thank you.
spk16: The next question comes from Sari Boroditsky of Jefferies. Please go ahead.
spk13: Hi. This is James. I'm for Sari. Thanks for taking questions. So I just wanted to kind of stick to inventory destocking that you talked about in the commercial food service again. So you noted that the orders were actually up in 3Q and 4Q. So can you kind of quantify or give some level of magnitude on the headwind from destocking in 2023? And do you expect destocking to continue into 1Q or is the destocking done in 4Q 2023? Thank you.
spk05: I think it's very difficult for us to quantify. I mean, I think we would venture to guess it's tens of millions, but we know from discussing with our channel partners, they had a lot of inventory. It was not only Middleby inventory. A lot of dealers were trying to get, with long lead times in the industry, any product they could get. And then there was concerted effort across many of the partners to work that inventory down in the back half of the year. So we know it impacted us, and it's really hard to quantify it. I mean, I think, you know, the indications that we've had, you know, by and large is that it is out of the system now. I mean, certainly there may be, you know, some minor pockets left, but we don't view it to be in the same vein of the headwind that we had in the back half.
spk13: Got it. And kind of sticking to commercial food service again. So one of your competitors talked about the like weak restaurant performance. So can you talk about what you're seeing in the restaurant market and your expectation to 2024? And can you kind of give us an update on your progress in growing the institutional side of the business? Thank you.
spk02: Again, going back to large QSRs, opening new locations like they haven't done in the last 10 years, so I think that's very encouraging. I think, again, you see a lot of large chains being very focused on helping their franchisees with profitability, grow their unit economics. That will always come back to be very favorable for us because everything we do for them from an equipment standpoint helps solve those I think the institutional side of our business, whether it's schools, healthcare, those have been good areas for us. Schools primarily have been a good area, but it's not as predominant as the large chains, pizza, C-stores, retail, when you think about segments of our customer base. The institutional side just isn't quite as big as some of the other areas. I guess to answer your question, fundamentally, I think we're probably more positive on the end-user restaurant business for this year and really years to come based on those two or three backdrops driving demand.
spk05: I think, as Steve said, with the QSRs, it's a little bit more visible. You can see some of the targets that they've laid out. But the fast casual segment also has continued to do very well. So we see a lot of new entrants coming to market and the ones that are out there expanding. So we do pretty well in that segment. And convenience stores is also another area where they continue to push into food and beverage. And now we're a stronger player with greater offerings in beverages. We've kind of identified that as a growth opportunity for us. I think those are some other things to kind of round out. I'd also mention international, particularly Asia. I mean, as you look at some of the long-term growth opportunities and plans there, you know, whether that gets executed to this year or in the future years, we feel pretty good about our positioning. You know, as we talk about a lot of the investments we've made with our strategic initiatives, we really have also bolstered our
spk26: internationally you know particularly China as well as India so we're better positioned to serve the local markets there and I'd also note that you know as we say satisfied the demands you know across the areas that you know Tim and Steve noted we've also been able to you know manage our portfolio and you know we're delivering the innovations and that are also earning us higher margins at the current levels. And as we grow, that obviously offers an additional tailwind to us, too.
spk13: Got it. I appreciate the call.
spk22: I will leave it there. Thanks.
spk15: The next question comes from Larry B. Maria of William Blair.
spk16: Please go ahead.
spk08: Thanks. Good morning, everybody. Appreciate the comments on CFS and 24 on the outlook. Obviously, we've gone from strong growth coming out of COVID to kind of a slowdown, negative growth, and then a recovery here. So I kind of wanted to follow up on where we think we are in the cycle in the industry. So, in other words, are we back towards this sort of long-term low to mid-single-digit industry growth from here? And secondly, you know, if that is the case, you know, what do you think you can outgrow the market on a sort of annual basis from here?
spk21: Thank you.
spk02: I will say, I think we've gone through a period of, I'll call it normalization, and not to keep hitting on how customers have ordered and working through inventory in the channel. We have gone through this period. So I do think as we start this year, I do think we're back to, I'll call it, a more normalized rate of how customers order from us, engage with us going forward. I do think if Brian had, you know, in his comments, you know, getting back to kind of that low mid-single-digit growth for the year, we are confident about. Again, I think it goes back to everything we've already kind of hit on this call. You know, maybe I would take a little bit different view because we've talked a lot about chains, but we obviously have a lot of other types of customers. You know, I think we're starting to see the benefit, too, of a lot of the investment we've made in our channel partners throughout the last, to invest in us. One of the dynamics that is relatively new is there's a lot of new people in our channel in terms of the dealer segment. So the more we're investing in training, the more we're bringing people through the mix, I think we're really starting to see that pay off. So I know, again, we talk a lot about change that gives us confidence and growth, but really investing and being closer to our key channel partners on the schools to, you know, large stadium projects to your local restaurant. And I think the more, and we can see it very clearly, the specs that we're driving that show up, you know, if you're speccing something a day, it's probably showing up in a job, you know, the back half of this year into next year. So, again, just trying to give you color on a couple different areas beyond just the change where I feel like we're doing well. But I do think we will take market share and kind of outpace
spk08: call it two to three years okay thanks for the color on that then just secondly can you talk about price and volume with uh you know in 23 with everything you know how did it shake out any pockets of negativity and then as we're looking at the 24 outlook any pockets of negative price or just overall comments on pricing in general i think we've uh i mean i i would say broadly obviously pricing i thought
spk02: one of the most strategic initiatives to make sure we're being very thoughtful, knowing what costs have done. Obviously, there's been a lot of pricing over the last several years. So I think it's enabled us to be in a very good and strategic position as we move into this year. I do think that there's always going to be products where I think we have to continue to be very thoughtful about where costs are. And so I would say we're not necessarily done With taking pricing, I think there's still some pockets where we will look to improve.
spk21: Okay, so in other words, positive pricing on the three segments in 24?
spk22: Several years, and we focus heavily on mix.
spk05: I mean, I think as we technology, so we're not saying we're taking I think we're kind of at a pause point, and I would say it's more of a fine-tuning, right, because there's been a lot of cost disruption with inflation kind of across labor material shipping. So, I mean, I think now we're going back through the portfolio and making adjustments where it makes sense. And, you know, I'll say having the accounting and finance catch up to all this disruption over the last couple of years. So it's more of a fine-tuning.
spk02: I think the other thing that I would point out as a reminder is we've been very intentional over the last two years about moving away and out of products on the lower side of the marketplace. We canceled a lot of SKUs throughout the last several years. That's why when you think about price, volume, dynamic, it is a little bit difficult to triangulate everything just knowing the products we cut, the pricing we took. from a volume standpoint in the next couple of years.
spk00: Okay, thank you.
spk05: I think it is, we're kind of pointing out and reminding them, we did cancel a lot of products as we went through the last three years. So even as you kind of look at our revenues and organic growth and everything, it's hard to determine as you go through periods with kind of whipsaw demand effect. We intentionally got out of a lot of SKUs, so we've, you know, canceled what would have been tens of thousands of products that would have been shipped over the last several years to really reinvest and focus on new products that we were launching into the market at the higher end of the innovation scale.
spk21: Okay, thank you.
spk15: Once again, if you would like to ask a question, please press star, then one.
spk16: And our next question comes from Walt Lipkak of Seaport Research. Please go ahead.
spk18: Hi, thank you. Good morning, guys. One last question about CFS and just, you know, if you were talking about the new store openings, I wonder if you could talk a little bit about, you know, where you're seeing them geographically as, you know, international markets. I think you talked about Asia. What about Europe? And when you're talking about the new store openings, are you talking about North America as well?
spk02: Yeah, it's a great question. I think what has been exciting is the big change or back to opening new store locations. It predominantly is in international locations. So when I'm talking about new store openings overall, I'm speaking from a global perspective. So if you look at most of the bigger chains, there is new store opening growth in North America, but it's actually predominantly coming from international markets. So Tim hit on Asia. I mean, I think all the big chains have been and have pretty substantial growth plans for Asia in general. I think as you go through Europe, I mean, countries, Spain, France, actually Germany has been a good performing market for us. You see pockets in areas like India, Brazil, that I think the chain of global new store openings, I would say it's probably skewed something that 60-70% are coming from international markets.
spk18: Okay, great. Thank you for that. Just switching gears to residential, I wonder if you can just talk about if things are going to get slightly better throughout the year, where do you think the bigger inflection could come first? Would it be in the Resi Outdoor or in Resi Kitchen, if you have a guess on that?
spk05: Yeah, so it's a bit hard to say, right? I mean, I think with the crystal ball that nobody has, so... I think as we think about our indoor platform, that's going to be kind of more of a radical step up as we go through the year. Again, probably starting a bit challenged. Outdoor does have the ability to inflect a bit more, and it could just because of the nature of the grill season and load-ins, et cetera. So I think as we go through this year, You know, a lot of the channel partners and customers are still trying to work down some inventory, and they're reticent to load in for a, you know, a growth season. So I think there will be a little bit more of a real-time demand of what happens in the spring, and then I think that we get to the, you know, the end of the year where people start thinking about 2025. We've got a lot of... new exciting, you know, products that are taking more floor space, you know, in 2024. And so, you know, that could have significant impact in the end of 2024 as people are starting to look at 2025 and what the, you know, the outlook is and what the sell-through has, you know, has been and what the confidence, you know, level has been. So, I mean, I think that's one that could take a, you know, a big, you know, a bigger, it's got a bigger beta to it, let's put it that way. But it doesn't have a beta down. It's only a beta up.
spk18: Okay. All right, great. Thanks for that.
spk22: Good luck with the year.
spk15: The next question comes from Brian McNamara of Canaccord Genuity.
spk16: Please go ahead.
spk11: Hey, good morning, guys. Thanks for taking the questions. On this stocking, could you guys expand on where this has been an issue in particular? Is it the dealer channel, distributor level, or somewhere else? And can you remind us of your rough sales in the segment by channel and CFS, whether it be dealer, distributor, or direct?
spk22: I'll take a pass to the first part of the question.
spk02: I think the destocking phenomenon has hit pretty much every segment. I think it hit the general dealer segment just, again, going back over the last couple years when they were ordering just to find products, whether it was hopefully from us, but from other manufacturers in the segment. So I think general dealer business did have excess inventory. I think the chain side, the dealers that carried inventory for chains, you also saw inventory show up there. And that really is a function of all the chains replacing orders, say, a year out, going back 12 to 18 months ago, two years ago. And as we started to catch up from a manufacturing standpoint, obviously, we started to fulfill more and more. And that inventory ended up in the dealer channel or distributor channel. Now, it still lines up against a lot of the new store openings and replacement that the chains are looking for.
spk34: the chain business as well.
spk11: Got it. Thanks. And then secondly, it looks like commercial food service revenues were down significantly in pizza, casual dining, and independent restaurants in 2023. Is this the stocking or is there anything else worth calling out in any of these customer segments? And would you expect any of this weakness to continue in 2024? Thanks.
spk26: So those percentages, you know, aren't the revenue decline. but the change in the percentage of our total composition of, you know, of revenues that they each represent?
spk02: Yeah, I wouldn't read necessarily too much into some of the nuances. I think it's just how they've been flowed, obviously. You know, I read more, you know, QSRs continue to do very well, so you see why that's up. Fast casual continues to do very well, so I think that's why that's up. So I think it's more you know, certain areas doing just better than others, more than, you know, some areas being significantly down overall, if that makes sense. So, I mean, if you go back, you know, pizza has had a great run, you know, really starting in COVID for the last couple of years. It was inevitable that at some point it might slow a bit and you just see the other segments, you know, pick up. So that's how I would interpret it more than, you know, certain segments being way down.
spk22: Got it. All right. Thank you.
spk15: The next question comes from Tammy Zachariah of JP Morgan.
spk16: Please go ahead.
spk14: Hi. Good morning, Team Middleby. Hope you're doing well. So my first question is on the cash flow. Very nice cash flow last year. You expect good conversion this year too. I think you have some convertible debt coming due in 2025. So overall, can you update us on the capital allocation priorities from here on, given the very strong cash generation?
spk05: Yeah, so I'll touch on that. I'm not sure how the convert ties into that, and obviously we're pretty well positioned from a capital structure with a lot of availability.
spk22: It really hasn't changed.
spk05: I mean, we may have done a little bit less from an M&A perspective as of late, but that continues to be a core competency and focus of ours. We see continued significant opportunities across all three business platforms to grow them both organically and through acquisition, as we've done that for a long time, to build into the three platforms that we have today. I think as we've gone through the last year, the market being disrupted with buyers and sellers thinking about what are appropriate multiple, whereas market growth, is it going up, down, et cetera, and expectations, I would say they were not as aligned. So as I think as we kind of move into a more normalized environment in 2024 and beyond, I think you'll see us continue to do smart acquisitions to continue to build out our platform.
spk26: And this is Brian thinking about the convert. It obviously doesn't come due for a little over a year and a half from now, so I do not have a specific answer to precisely what we'll be doing at that point in time. But we obviously are generating cash, so we could stockpile cash in advance of a coming due. We have availability under our bank facilities. We could roll it into our bank facilities. There's a variety of other obviously debt instruments out there that we could pursue to use. you know, as well. So we're certainly keeping an eye on all those options and, you know, balancing things, you know, based on the factors Tim talked about as well, but certainly, you know, don't have a specifically defined course of action that, you know, we will be, you know, employing a year and a half from now. Again, we have a lot of flexibility, I believe, you know, available to us.
spk14: Wonderful. That's great to know.
spk05: As Brian said also, I mean, I think we do see another strong year of operating cash flow ahead, which is great, obviously, as we reinvest in the business and execute on M&A and, you know, D-Lover, which we were happy to kind of bring down, you know, below two and a half times. I will also kind of just touch on repeat comments. I mean, we have made significant investments this year and last year back into the the business from a CapEx standpoint, so that it's gone into innovation centers, it's gone into some really great investments in our factories, thinking about ice, coffee, packaging. We've really kind of moved forward some of our businesses to position for growth, and we've brought a lot of automation into our factories as well. So, I mean, that is part of the story of the margin expansion And, you know, as we've mapped that out over the last couple of years, which is coming into fruition and, you know, continues to position us forward into next year.
spk14: Got it. If I may ask one more, the Novi and Josper launches, what's the total time or opportunity you see from these two brands in the U.S. over time? I'm essentially trying to gauge the potential revenue lift, let's say, over the next couple of years that we might expect.
spk26: Tammy, you probably know that we don't often quote a lot of TAM numbers out there. I mean, the JOSPR is an amazing product. It is certainly a very you know, premium product for us, so we're excited about, you know, what it can do, but, you know, by itself. It probably is not, you know, large needle moving. I think Novi is, you know, could certainly be of the two, you know, the bigger difference, you know, maker. They have a lot of really great technology, a lot of, you know, induction, and, you know, we see trends, you know, moving that way.
spk15: Got it. Thank you so much. Our last question comes from Jeff Hammond of KeyBank Capital Markets.
spk16: Please go ahead.
spk17: Hey, good morning, guys. Morning, Jeff. Just on Rezzy, you know, on the 1Q, seasonally I think that business actually is up 4Q to 1Q. I'm just wondering how you're thinking about that sequentially.
spk26: Well, I mean, sequentially, obviously, things have been a little bit challenging, right, in this, you know, in this segment. So, and Q4 is, you know, is typically though, I'll say a bump up from Q3, you know, and it was this quarter, you know, even with tough market conditions overall, there's still some higher, you know, seasonal spending. So, you know, I do expect that, you know, Q1, you know, could be you know, below, you know, Q4 levels. But, you know, I think if you look at the past three quarters, you can kind of establish, you know, a band in which we've been operating. And, you know, our outlook is that that, you know, band doesn't stretch down and hopefully it starts to, you know, stretch up.
spk17: Okay. And then, Steve, you mentioned one of the growth drivers being kind of this pent-up replacement cycle. And I'm just wondering what you hear from customers on that and, you know, what it really takes to kind of get some of that, you know, catch up on the replacement cycle going.
spk02: Yeah, no, for sure. So, again, my perspective on the replacement cycle is I think we are due for a replacement cycle going into COVID. Obviously, COVID kind of kicked the can. through supply chain and then you know a lot of the focus from the chain customers again have been on new stores um and so you know i think as we get into this period now where yes new stores are still important um they do realize that they have to you know go back into local from both a new store and replacement cycle so I think that was a big dynamic the last couple years of they were just prioritizing getting new stores open knowing you know what the equipment was you have had longer lead time so customers are definitely engaging you know with us on replacement conversations making sure that we have products ready to go for them at any time. So I do think you see our demand mix of, you know, we've shared it, you know, between replacement and new stores shift back to be more and more predominantly driven by replacement and upgrade. I want to just hit on some nuance of it's not just replacing a light for light. What I think you're going to see them do is predominantly upgrade to, you know, newer technology, technology that's able to be connected new controls, so that gets kind of lumped into replacement and upgrade as well. So I think that starts to get back to being, it's historically been 50% of demand for us overall. I think as you go out the next two or three years, I think it gets back to kind of those levels overall.
spk19: Okay, thanks a lot.
spk15: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk05: Thanks, everybody, for joining us on today's call, and we look forward to speaking to you next quarter.
spk16: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect. Thank you. you Thank you. Thank you. Bye. Thank you. Thank you for joining us for the Middleby Corporation fourth quarter earnings conference call. With us today from management are Tim Fitzgerald, CEO, Brian Middleman, CFO, James Pohl, Chief Technology and Operations Officer, Steve Spittel, Chief Commercial Officer, and John Joyner, Vice President of Investor Relations. We will begin the call with comments from management, then open the line for questions. Instructions on how to get into the queue will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Tim Fitzgerald. Please go ahead.
spk05: Good morning. Thank you for joining us today on our fourth quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. We are proud of the accomplishments the Middleby team delivered across the business in 2023. The year proved to once again be challenging, marked by supply chain disruptions, inflationary costs, and the impact of interest rates, presenting operational challenges across all three businesses and materially affecting the demand at our residential business. Our teams focused on delivering every day for our customers while executing on our long-term strategic growth initiatives and delivering the strong financial results we reported for the year. We are pleased to have closed 2023 with a record EBITDA eclipsing $900 million, record operating cash flows exceeding $600 million, and made significant progress toward the long-term profitability goals we have set out, achieving combined company margins, which expanded to over 22%. While delivering the financial performance for the year, we have continued to remain focused on investing in and advancing our strategic initiatives. launching industry-leading innovations and customer-focused solutions, developing our highly differentiated go-to-market capabilities, and investing in our operational capabilities to support profitability and growth. In 2023, we brought to market an exciting pipeline of innovations addressing operator needs and customer demand for automation, energy savings, labor reduction, speed, simplicity, and flexibility. We expanded our offerings of electrified, energy-efficient, and ventless equipment. We launched our middle B1 touch control, now across many of our commercial products. We furthered our lineup of integrated full-line solutions, providing for the latest in automation for customers of our food processing group. And we made significant strides expanding our offerings of IoT-enabled products, now launching in the marketplace. Across all three of our food service businesses, we entered 2024 with a portfolio of customer-focused solutions, positioning Middleby as the innovation leader with offerings to address the current and future trends of the market. In 2023, we continue to invest heavily in our go-to-market capabilities that we believe are uniquely positioning us for the long term. We've made great progress developing our digital sales and marketing capabilities, We've expanded our culinary and food science teams that engage with our customers on a daily basis. And we have deepened the partnerships with our strategic channel partners. The investments we have made in our innovation centers continue to prove to be a strategic asset for our businesses. With successful new additions in 2023 of our Middleby Innovation Kitchen in Madrid, serving our commercial customers internationally, and our Middleby Residential Showroom in Chicago, featuring the exciting offerings across our residential brands. Engagement at our innovation centers continues to be meaningful and is providing benefits across our commercial, residential, and food processing businesses. In 2023, we continue to make smart investments in our operations with over $80 million invested in factory automation and facility expansion to bolster profitability initiatives across our businesses and support growth opportunities at our brands. In 2023, we were pleased with the improvements in our overall profitability as we progressed towards our longer-term margin targets. We are benefiting from our focus on new product innovation to drive improved profitability in our sales mix. We are realizing efficiency gains reflecting the impact from our manufacturing investments. and we're focused on long-term supply chain opportunities with ongoing product design and sourcing initiatives providing for additional improvements over the course of the next year. Market conditions remain challenging as we begin 2024, and while inventory to stocking is largely behind us, the housing market remains difficult, and customers in our commercial and food processing segments are cautious, giving uncertain uncertainty in macro conditions and challenges facing their businesses as we start the year. Despite what may be a slow start, we are optimistic on the year as we expect improving market conditions for the residential market as we progress through the year, with significant long-term growth opportunities ahead as the market recovers from the current disrupted lows and returns to normalized levels. and we have a building pipeline of opportunities with our commercial and food processing customers, which we expect will gain momentum as they execute against their established growth plans as we continue through the year. As we start 2024, we'll continue to focus on business execution, driving profitability and cash flow, while executing on our strategic initiatives that we continue to build upon our growing competitive advantage at each of our three industry-leading food service businesses. Now I'll pass the call over to James to spotlight some of the exciting things that we have in store at the upcoming Kitchen and Bath Show, which is at the end of this month in Las Vegas. It's a great opportunity to see all our latest in products, designs, and technologies across our entire portfolio of leading indoor and outdoor brands. will be featuring a record number of innovative product launches and demonstrating all the exciting things we have to offer across the portfolio of our residential brands. James?
spk32: Thank you, Tim. I'm proud to start off the call with an affirmation of Middleby's commitment to innovation. Each year, the National Restaurant Association solicits applications for manufacturers for their best innovations in commercial food service launching in 2024. The awards are known as the Kitchen Innovation Awards, and the winners are displayed each year at the NRA show. The NRA show is May 18th through 21st. Without giving too much away, I'm pleased to announce that Middleby has garnered a large percentage of the 25 honorees, aka winners, and while I'd like to share all the Middleby product honorees, I must wait for the National Restaurant Association to publicly announce the awards tomorrow. Please check Middleby's various social media channels for a list of all Middleby's winning innovations upon announcement. Now, per Tim, let's shift our focus to the Kitchen and Bath Industry Show, which happens next week in Las Vegas, where Middleby Residential is set to make a statement. Referring to our slide deck, you will see a selection of new design and innovations Middleby Residential is showcasing. Our expansive booth will display 250 Middleby appliances representing 16 different Middleby brands. It's worth noting that the majority of these 250 pieces will be seen for the first time at KBITS. From indoor to outdoor cooking, grills, ventilation, ice, and refrigeration, Middleby Residential has the most comprehensive lineup of premium appliances in the industry. We are also excited to announce two entrants to the U.S. market from our well-known European brands, Novi and Josper. Novi's elegant and highly innovative induction, surface cooking, and ventilation products bring a modern European design to Middleby Residential's U.S. lineup, while the Josper Casa brings the ultimate Michelin star cooking experience to Middleby outdoors and your backyard with their Spanish charcoal ovens. While I can't go into every product in the deck or on display at KBiz, I'd like to highlight some of the design and technology themes that will be on display. First and foremost, color has become an integral part of Middleby's DNA. We are expanding our color offerings across Middleby Residential with the introduction of 20 luxury colors from Viking Range, eight colors from Lynx Grills, as well as the introduction of Lynx's premium outdoor kitchen cabinetry will be offered in the same colors. While our iconic brands, such as AGA and La Crenue, have always celebrated a rich history of color, Viking and Lynx's new colors offer designers and architects the ultimate palette of expression for their clients. Lastly, we are unveiling the AGA Era, which is a complete modern makeover of our classic AGA cast iron cooker, which has been a staple in European homes for centuries. From a technology standpoint, induction will share the stage at the Middleby food. Each Middleby cooking brand will showcase their newest induction products, demonstrating Middleby's commitment to electrification. We firmly believe our induction cooking will be rapidly adopted by consumers, With Middleby's commitment to high quality and high design, people will experience remarkable speed, precision, and efficiency that our induction appliances bring, allowing them to rapidly embrace electrification in the most positive of ways. Continuing on with our innovations, connectivity remains a focus for Middleby. In our outdoor section, we are displaying our full line of connected digital charcoal products from Kamado Joe and Masterbuilt, including the new premium connected Masterbuilt Gravity Series Grill, the XT. At Viking Indoors, we are introducing our new contemporary reveal line, which I had previously discussed on past calls. The reveal single and double wall ovens feature our new connected and guided cooking platform, Viking Cloud. By simply connecting your Reveal Oven to the Viking Cloud app, you can enjoy a connected culinary journey. The Viking Cloud provides complete control of your Reveal Oven. You can browse through a wide range of recipes, select your favorite, and the app will guide you step-by-step through the cooking process while sending instructions to your oven along the way. The app will turn your oven on, will notify you when you would when your oven is preheated, and of course, when your food is perfectly cooked. Moreover, our AI-powered tool in the app allows you to transform any recipe on the web into a step-by-step guided cooking experience, just like the recipes from Viapy. This innovative feature lets you take control of the internet for a never-ending culinary journey with the reveal. I encourage you to visit the Middleby booth at the Kitchen and Bath Innovation Show on Industry Show to witness these market-leading designs and innovations firsthand. Thank you, and over to you, Brian.
spk26: Thanks, James. One year ago, I noted that when I thought about 22, one word came to mind, and that was records. I also reminded everyone that records are meant to be broken, and we plan to make that happen in 23. Well, mission accomplished. For 2023, we delivered record sales record earnings, and record cash flows. And we plan to do more in 24. While I think that could sum it up very well, I won't refrain from digging a little deeper into 23 and touching on 24 as well. For 2023, we generated record revenues that exceeded $4 billion. Our adjusted EBITDA exceeded $900 million, representing a profit margin of over 22%. Our margins expanded over 100 basis points from 22. GAAP earnings per share were $7.41. Adjusted EPS, which excludes amortization expense and impairment charges, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $9.70. up over 6.5% versus 2022. We achieved this while facing especially challenging market conditions in the residential segment. While I don't enjoy talking about red numbers, but I believe doing so here helps put in context how much we have accomplished. We delivered solid results even while residential saw a nearly 25% decline in revenues. As a result, our top-line growth for the company was nominal, yet we grew our adjusted EBITDA 5.5%. We also more than doubled our free cash flow. We are focused on operational excellence. We are focused on innovation. We are focused on our customers' needs. We have invested and will continue to do so in all these areas. These investments are generating returns. You can see that in our results. But even while we invest, we also focus on driving strong cash flows and continually expanding our margins. We earn these margins by being leaders in innovation and having best-in-class solutions across our entire company. We manage costs well, we have a deep understanding of our customers' needs, and have deep relationships with them. All this drives our differentiated results. And we plan to do more in 24. You've seen that for the fourth quarter, we generated revenue of over $1 billion and record adjusted EBITDA at over $235 million, with a profit margin of 23.3% or 23.6% on an organic basis. Q4 GAAP earnings per share were $1.42. Adjusted EPS was $2.65. In residential, we saw an organic revenue decline of nearly 15% versus 2022. The adjusted EBITDA margin was 10%. Commercial food service revenues globally were down 2% organically over the prior year, yet the adjusted EBITDA margin was over 29%. By the way, all the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. Given the volatility that can exist when looking at quarter-to-quarter results, I find it more insightful to examine where our businesses stand by looking at full-year results. Organic revenue growth for this year was almost 3%. Nonetheless, we expanded our organic margins by approximately 200 basis points to over 28% in commercial. In food processing, total record revenues for a quarter were nearly $192 million. Our adjusted EBITDA margin was 27.6%. Looking at the full year, our organic revenue growth of nearly 11% helped expand margins by over 300 basis points to over 25%. That looks like success to me. and we will not be stopping here. We will continue to reach higher. I've hopefully made it clear that in the face of rather challenging market conditions impacting residential, and we're not facing an easy environment by any means in any segment, we are delivering some of our best results ever. You can see this in our cash flow too. Our operating cash flows were over $255 million for Q4, and nearly $629 million for all of 23. Our free cash flow conversion was around 180% for Q4 and 120% for the year. Looking forward, we expect that our cash flow generation should grow and likely achieve at least the same level of conversion again in 24. Our total leverage ratio is now below 2.5 times. So to sum it up, strong P&L, strong cash flows, strong balance sheet. So where do we take the powerful Middleby culinary universe from here? Let me start with a quick view on Q1 and then provide some commentary on our outlook for 24 in whole. Taking a historical perspective, recall the Q1 results overall typically take a step down sequentially from Q4 across all our segments. I know there is much attention on the challenges residential is facing, and as we look to the start of 24, we unfortunately do not yet see improving market conditions in this segment. Looking at Q1 of 24 versus the prior year, we will see a revenue decline in residential. In the beginning of 23, we were still benefiting from fulfilling orders and the then larger backlog. Our margins will also be a little challenged to start 24, given the impact of attending the KBiz show this year. For the other two segments, results of Q1 of 24 will likely be similar to those seen in the prior year quarter. When you put this all together from a total company perspective, Q1 of 24 will be behind Q1 of 23 due to declines in residential and relatively flat performance in the other two segments. As we progress through 24, across all the segments, I expect to see sequential improvements. Let me expand on those thoughts for the full year 24. Starting at residential, as James noted, we are innovating and expanding our product offerings. We have built an outstanding product portfolio. We are positioned well for long-term growth and thus will return to and ultimately exceed prior profitability levels. But given what we are seeing in the economies where we operate, it is hard to offer a specific outlook, but there are some signs of potential improvement that we hope can materialize in the second half of 24, but we may not see progress until 25. We will have to see how housing markets, mortgage rates, and remodeling activity progress. I will reinforce that we remain profitable and at levels well ahead of other public appliance companies. We are poised to continue to grow our market share and thus grow our revenues and expand our margins. Across food processing and commercial food service, looking at full year 24, we expect to see organic revenue growth over 23. Food processing had an amazing year in 23. Total revenue growth of over 22%, and we jumped our revenue to above $700 million. We have delivered our target margin. The opportunity set in front of us remains very large, really as big as it has ever been. You have seen over the past few years how our best-in-class individual solutions have become integrated, full-line solutions that resonate with our customers. These customers are facing labor shortages and margin pressure. They need highly efficient and reliable equipment. our automation benefits them greatly. And as we help them improve their operations and profitability, we will see continued growth in our revenues, hopefully at least mid-single digits as we look across 24, and the potential for modest margin expansion as well. On to commercial, where our growth is a result of our strategic investments in broad capabilities. We are targeting higher organic growth in 24 over the almost 3% we saw in 23. We should also get closer to our target margin of 30%. We've often talked about how our beverage and dispensing platform is still relatively new to Middleby, yet represents about a third of the segment. It will drive outsized growth in 24. Some of my favorite drinks from a large coffee chain are now being served over Follett's Nugget Newton and its revolutionary valve may be small, but they're definitely mighty. They are making a difference in many ways. And I could go on about Wonder Bar as well as Marco and our coffee solutions group. But come see us at the Mic or at the specialty coffee show in Chicago in April to see and taste for yourself. But 24 and beyond are looking strong. And our stalwart, the hot side, is not cooling off. Our customers are growing their operations, and they need our newest solutions. Just flip through our quarterly presentations to remind yourself of what we have been up to. But automated, energy efficient, easy to control, internet connected, fast solutions abound. So take your pick. Are we cool? Are we hot? I like to think we have it all. For 24, we intend to deliver organic revenue growth, higher margins, and profitability growth at rates in excess of our revenue growth. We will continue to improve our working capital management and have strong cash conversion. Free cash flow will be up too. We are doing all we can do to earn the trading multiples we deserve. So while 23 was another year full of challenges for Middleby, and our most successful year yet in many respects, EBITDA over $900 million, operating cash flow over $600 million, leverage now below two and a half times, but we are never satisfied. We are constantly pushing, but we are also extremely proud of what we have built and what we deliver, and we plan to do more in 24. Andrea, will you please now open the line for questions?
spk16: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster.
spk15: And our first question will come from Meg Dobre of Baird.
spk16: Please go ahead.
spk10: Thank you for taking the question. Good morning everyone. I guess my first question is on commercial food service. If I understand, and I guess there's two parts to it. If I understand the guidance commentary, we're starting a little bit slower here, maybe flat year over year in terms of revenue. But if you expect to outgrow relative to 23 for the full year, that implies pretty significant acceleration and growth, maybe like 5% or thereabouts, if my math is right, for the rest of the year. So I guess I'm curious, what gives you the confidence that we'll be able to see that kind of growth for the remainder of 24? And related to all of this, I know we're going to get this in the 10K, but Can you talk a little bit about your backlog in this business exiting 23?
spk22: Big good morning. It's Steve.
spk02: Maybe I'll take the first crack at your question, just what gives us confidence in the year overall. I come back to three things, I think, specifically that we've talked about in the past. So if you look at the big chain customers especially, you know, getting back to the new store development, which was, you know, certainly lacking going into COVID, you know, was pretty weak. So we've seen that pick up, obviously, the last, you know, I'll call it two years. I do expect new store openings to continue this year. You know, the chains that we worked very closely with have all, you know, reiterated and recommitted, you know, to their new store opening plan. Still working through challenges around, you know, some construction labor permitting. But by and large, their total new store, net new store openings for the year, they've committed to. So in my opinion, that is, as you roll that up, is ahead of 23 from a new store development pipeline. So that's kind of point number one. Point number two, all the challenges that we've talked about over these last several years, whether it's labor, dealing with utility costs, speed of service, consistency, take your pick on the challenges, they still have to solve all these. And you're seeing the chains especially, I think, being very focused on their franchisee efficiency and franchisee profitability. So you're seeing the chains invest more and more in these areas, knowing they have to keep the other franchisee community happy. So I think you're going to see that continued investment in those areas. And then point number three, which we've talked about in the past, I still think we're substantially behind on a replacement cycle. The chain's been so focused on new store openings after trying to get through COVID, you know, they have really not focused on going back and replacing and upgrading equipment in their locations. I think that's true. Obviously, we focus a lot on chains, but you go through a number of the segments. It's true in all those areas that I think we're way past due on just a general replacement upgrade cycle. So when you kind of layer those three together, Meg, you know, again, new store openings, still have to solve for all the challenges of what's going on in the store and a deferred replacement cycle. I think that's what gives us confidence in the market and growing it for this year and certainly in the years to come.
spk26: This is Brian. Regarding the backlog, obviously we have consumed a good amount of it this year and we'll be disclosing that next week in the 10K. As you noted, You know, we'd say that, you know, the backlog is pretty much at what I'll consider, you know, normalized levels now. But we also have, you know, seen some, you know, positive trends over the past, you know, I'll say over the back half of last year and even in the start of this year on orders. And, you know, backlog is, you know, trending, you know, modestly, but even up a little bit, you know, to start the year. So when you put all that together, what Steve was talking about, what we've seen in some of the data points I've noted, what we're engaging with customers on, what we have underway with them is what gives us the confidence that has underlined our comments.
spk05: Just to round it out, as you kind of think about the year and the backlog, we came in with a lot of backlogs, so there's a lot of shipments in the first quarter. We're talking about the inventory destocking, so that is our channel partners really worked down their inventory in the back half of the year. That's been a little bit of a headwind in Q3 and Q4, but that goes away as we kind of look at comparatives in the back half of the year. So one of the reasons I think with just the underlying activities Steve talked about and then the lack of the headwinds in the back half, commercial we're actually up in Q3 and Q4 but that's obviously not how revenues were as we continue to kind of face the destocking okay that's helpful thank you then my my follow-up is on residential and you know just the way you kind of frame 24
spk10: I don't know, maybe a little bit slower than what I was hoping for or what I was thinking. And back to the question here, also on visibility and sort of what needs to happen here, it sounds like you actually need to see more of a recovery in the housing market and lower interest rates in order for this segment to start growing. And maybe the question on margin here, more so than anything else, What sort of volume do you think or revenue do you think you need in this segment in order to be able to achieve your 25% target?
spk05: Thank you. I'll start off and then I'll let Brian kind of hit that second part. Yeah, I mean, I think certainly we were hoping that the housing market would start to be a little bit more robust. And I think the good news is we've bottomed out. It's a pretty low bottom, right? I mean, relative to You know, the last decade plus, I mean, it's pretty much the worst housing market that anybody's seen in a long time. You know, and obviously the interest rate hikes were very significant in the middle of last year. So that's not that really long ago for the market to, you know, absorb all that. You know, we saw a little bit of, you know, signs late in the year. The beginning of the year, you know, is a bit softer. So we're kind of bouncing around the bottom here. Our residential orders also were positive in Q3 and Q4 relative to last year, but again, we had worked, you know, down the backlog from a revenue, you know, standpoint. So, I mean, I think, you know, we are seeing improvements. It's just that, you know, we're looking for a big step up and an improvement where things kind of move, you know, start to, you know, back to more normalized levels as kind of, you know, versus slight improvements off of the low. So I think we're confident that we are going to see improvement as we go through the year. I guess the question is when is that, you know, better inflection, you know, point happen. But, you know, we do think that we will see, you know, some more meaningful step up in the, you know, the back half of the year based on industry stats that we look at.
spk26: So, Brian, maybe. Yep. It's Brian. Regarding the the margin side of things. If I look back to 22 when we were over a billion dollars in revenue and our margins were in the high teens and we had a fully benefited from the cost actions and so I think if you put that all together we'd hope to start to be again closer to the high teens or 20% around a billion. Again, that's just using past results as an indication of things going forward. And then we're making ongoing improvements in our businesses in a variety of ways. But let's... I think the short answer is, you know, that first digit of the revenues needs to be, you know, a one. We'd like to, you know, be over the billion dollars level to start releasing things, you know, jump up nicely from the volume contribution of margins.
spk05: Maybe just to kind of add some color and pick it apart, I mean, you've got a lot of bigger pieces there. I mean, biking had, you know, historically we'd gotten it well into the 20% margin, so it's certainly Falling below there, but we've been operating at a long point in time, well into the 20s. AGA, which we bought the company, it was at 3%. We're just coming on to 20%, and we've made significant investments at AGA over the last three years as we've gone through COVID. So as it emerges, we have not only better, exciting products, but we have a much better better cost base. So, I mean, there's kind of a built-in margin improvement for AGA. And Outdoor, obviously, which has been challenged like all the rest of, you know, residential, you know, the team there has made significant progress in consolidating the platform around logistics. And we have a lot of new, exciting products that James touched on. you know, in the past and even in this call they're coming out that brings the higher price points into the specialty market. So kind of structurally, so A, we're getting back to what we've already proven in the past, and then structurally we've made improvements to the business while we've kind of gone through this period. So we're pretty confident that margins get to be to a pretty attractive place in a normalized market.
spk09: I appreciate it. Thank you.
spk16: The next question comes from Sari Boroditsky of Jefferies. Please go ahead.
spk13: Hi. This is James. I'm for Sari. Thanks for taking questions. So I just wanted to kind of stick to inventory stocking that you talked about in the commercial food service again. So you noted that the orders were actually up in 3Q and 4Q. So can you kind of quantify or give some level of magnitude on the headwind from destocking in 2023? And do you expect destocking to continue into 1Q, or is the destocking done in 4Q 2023? Thank you.
spk05: I think it's very difficult for us to quantify. I mean, I think we would venture to guess it's, you know, You know, there's, you know, we know from discussing with our channel partners, they had a lot of inventory. It was not only Middleby inventory. A lot of dealers were trying to get, with long lead times in the industry, any product they could get. And then there was, you know, concerted effort across many of the partners to work that inventory down in the back half of the year. So we know it impacted us, and it's really hard to, I think the indications that we've had by and large is that it is out of the system now. Certainly, there may be some minor pockets left, but we don't view it to be in the same vein of the headwind that we had in the back half.
spk13: Got it. Sticking to commercial food service again, one of your competitors talked about weak restaurant performance. Can you talk about what you're seeing in the restaurant market and your expectation into 2024? And can you kind of give us an update on your progress in growing the institutional side of the business? Thank you.
spk02: Again, going back to large QSRs, opening new locations like they haven't done in the last 10 years, so I think that's very encouraging. I think, again, you see a lot of large chains being very focused on helping their franchisees with profitability, grow their unit economics. That will always come back to be very favorable for us because everything we do for them from an equipment standpoint helps solve those I think the institutional side of our business, whether it's schools, healthcare, those have been good areas for us. Schools primarily have been a good area, but it's not as predominant as the large chains, pizza, C-stores, retail, when you think about segments of our customer base. The institutional side just isn't quite as big as some of the other areas. I guess to answer your question, fundamentally, I think we're probably more positive on the end-user restaurant business for this year and really years to come based on those two or three backdrops driving demand.
spk05: I think, as Steve said, with the QSRs, it's a little bit more visible. You can see some of the targets that they've laid out. But the fast casual segment also has continued to do very well. So we see a lot of new entrants coming to market and the ones that are out there expanding. So we do pretty well in that segment. And convenience stores is also another area where they continue to push into food and beverage. And now we're a stronger player with greater offerings in beverages. We've kind of identified that as a growth opportunity for us. I think those are some other things to kind of round out. I'd also mention international, particularly Asia. I mean, as you look at some of the long-term growth opportunities and plans there, you know, whether that gets executed to this year or in the future years, we feel pretty good about our positioning. You know, as we talk about a lot of the investments we've made with our strategic initiatives, we really have also bolstered our internationally, you know, particularly China as well as India, so we're better positioned to serve the local markets there.
spk26: And I'd also note that, you know, as we, you know, I'll say satisfied the demands, you know, across the areas that, you know, Tim and Steve noted, we've also been able to, you know, manage our portfolio and, you know, we're delivering the innovations and that are also earning us higher margins at the current levels. And as we grow, that obviously offers an additional tailwind to us, too.
spk13: Got it. I appreciate the call. I will leave it there.
spk22: Thanks.
spk15: The next question comes from Larry B. Maria of William Blair.
spk16: Please go ahead.
spk08: Thanks. Good morning, everybody. Appreciate the comments on CFS and 24 on the outlook. Obviously, we've gone from strong growth coming out of COVID to kind of a slowdown, negative growth, and then recovery here. So I kind of wanted to follow up on where we think we are in the cycle in the industry. So, in other words, are we back towards this sort of long-term low to mid-single-digit industry growth from here? And secondly, you know, if that is the case, you know, what do you think you can outgrow the market on a sort of annual basis from here?
spk21: Thank you.
spk02: I will say, I think we've gone through a period of, I'll call it normalization, and not to keep hitting on how customers have ordered and working through inventory in the channel. We have gone through this period. So I do think as we start this year, I do think we're back to, I'll call it, a more normalized rate of how customers order from us, engage with us going forward. I do think if Brian had, you know, in his comments, you know, getting back to kind of that low mid-single-digit growth for the year, we are confident about. Again, I think it goes back to everything we've already kind of hit on this call. You know, maybe I would take a little bit different view because we've talked a lot about chains, but we obviously have a lot of other types of customers. You know, I think we're starting to see the benefit, too, of a lot of the investment we've made in our channel partners throughout the last you know, to invest in us. You know, one of the dynamics that is relatively new is there's a lot of new people in kind of our channel in terms of the dealer segment. So the more we're investing in training, the more we're bringing people through the mix, I think we're really starting to see that pay off. So I know, again, we talked a lot about change that gives us confidence and growth, but really investing and being closer to our key channel partners on the large stadium projects to your local restaurant and I think the more and we can see it very clearly the specs that we're driving that show up if you're speccing something a day it's probably showing up in a job the back half of this year into next year so again just trying to give you color on a couple different areas beyond just the change where I feel like we're doing well but I do think we will take market share and kind of outpace the market overall for the next I'll call it two to three years
spk08: Okay, thanks for the call on that. Then just secondly, can you talk about price and volume with, you know, in 23 with everything, you know, how did it shake out? Any pockets of negativity? And then as we're looking at the 24 outlook, any pockets of negative price or just overall comments on pricing in general?
spk02: I think we've, I mean, I would say broadly, obviously pricing I talked about on prior calls has been one of the most strategic initiatives. to make sure we're being very thoughtful, knowing what costs have done. Obviously, there's been a lot of pricing over the last several years. So I think it's enabled us to be in a very good and strategic position as we move into this year. I do think that there's always going to be products where I think we where we will look to improve.
spk21: Okay, so in other words, positive pricing on the three segments in 24?
spk22: Several years, and we focus heavily on mix.
spk05: I mean, I think as we technology, so we're not saying we're taking, I think we're kind of at a pause point, and I would say it's more of a fine-tuning, right, because there's been a lot of cost disruption with inflation cut across labor, material, shipping. So, I mean, I think now we're going back through the portfolio and making adjustments to where it makes sense and, you know, I'll say having the accounting and finance catch up to all this disruption over the last couple of years. So it's more of a fine-tuning.
spk02: I think the other thing that I would point out as a reminder is we've been very intentional over the last two years about moving away and out of products on the lower side of the marketplace. So we canceled the last use throughout the last several years. So that's why when you think about kind of price, volume, dynamic, it is a little bit difficult to kind of triangulate everything just knowing the products we cut, the pricing we took, point in the next couple years.
spk00: Okay, thank you.
spk05: I think it is, we're kind of pointing out, reminding them, we did cancel a lot of products as we went through the last three years, so even as you kind of look at our revenues and organic growth and everything, it's hard to determine as you go through periods with kind of whipsaw demand effect. We intentionally got out of a lot of SKUs, so we've, you know, canceled a what would have been tens of thousands of products that would have been shipped over the last several years to really reinvest and focus on new products that we were launching into the market at the higher end of the innovation scale.
spk21: Okay, thank you.
spk15: Once again, if you would like to ask a question, please press star, then one.
spk16: And our next question comes from Walt Lipkack of Seaport Research. Please go ahead.
spk18: Hi, thank you. Good morning, guys. One last question about CFS and just, you know, as you were talking about the new store openings, I wonder if you could talk a little bit about, you know, where you're seeing them geographically as, you know, international markets. I think you talked about Asia. What about Europe? And when you're talking about the new store openings, are you talking about North America as well?
spk02: Yeah, it's a great question. You know, I think what has been exciting is, you know, is the big change or back to opening new store locations. It predominantly is in international locations. So when I'm talking about new store openings overall, I'm speaking from a global perspective. So if you look at most of, you know, the bigger chains, there is new store opening growth. in North America, but it's actually predominantly coming from international markets. So Tim Hitt on Asia, I mean, I think all the big chains have been and have pretty substantial growth plans for Asia in general. I think as you go through Europe, I mean, countries, Spain, France, actually Germany has been a good performing market force. You see pockets in areas like India, Brazil, that I think the global new store openings, I would say it's probably skewed something that 60-70% are coming from international markets.
spk18: Okay, great. Thank you for that. And just switching gears to residential, I wonder if you can just talk about if things are maybe going to get slightly better throughout the year, where do you think the bigger inflection could come first? Would it be in the resi outdoor or in resi kitchen, if you have a guess on that?
spk05: Yeah, so it's a bit hard to say, right? I mean, I think with the crystal ball that nobody has, so... I think as we think about our indoor platform, that's going to be kind of more of a radical step up as we go through the year. Again, probably starting a bit challenged. Outdoor does have the ability to inflect a bit more, just because of the nature of the grill season and load-ins, et cetera. So I think as we go through this year, You know, a lot of the channel partners and customers are still trying to work down some inventory, and they're reticent to load in for a, you know, a grill season. So I think there will be a little bit more of a real-time demand of what happens in the spring, and then I think that we get to the, you know, the end of the year where people start thinking about 2025. We've got a lot of... new exciting, you know, products that are taking more floor space, you know, in 2024. And so, you know, that could have significant impact in the end of 2024 as people are starting to look at 2025 and what the, you know, the outlook is and what the sell-through has, you know, has been and what the confidence, you know, level has been. So, I mean, I think that's one that could take a, you know, big, you know, a bigger, it's got a bigger beta to it, let's put it that way. But it doesn't have a beta down. It's only a beta up.
spk18: Okay. All right, great. Thanks for that.
spk22: Good luck with the year.
spk15: The next question comes from Brian McNamara of Canaccord Genuity.
spk16: Please go ahead.
spk11: Hey, good morning, guys. Thanks for taking the questions. On this stocking, could you guys expand on where this has been an issue in particular? Is it the dealer channel, distributor level, or somewhere else? And can you remind us of your rough sales in the segment by channel and CFS, whether it be dealer, distributor, or direct?
spk22: I'll take a pass to the first part of the question.
spk02: I think the destocking phenomenon has hit pretty much every segment. I think it hit the general dealer segment just, again, going back over the last couple years when they were, you know, ordering just to find products, whether it was hopefully from us, but from, you know, other manufacturers in the segment. So I think general dealer business did have excess inventory. I think the chain side, the dealers that carried inventory for chains, you also saw inventory show up there. And that really is a function of all the chains replacing orders, say, a year out, going back 12 to 18 months ago, two years ago. And as we started to catch up from a manufacturing standpoint, obviously, we started to fulfill more and more. And that inventory ended up in the dealer channel or distributor channel. Now, it still lines up against a lot of the new store openings and replacement that the chains are looking for.
spk11: Got it. Thanks. And then secondly, it looks like commercial food service revenues were down significantly in pizza, casual dining, and independent restaurants in 2023. Is this the stocking, or is there anything else worth calling out in any of these customer segments, and would you expect any of this weakness to continue in 2024? Thanks.
spk26: So those percentages aren't the revenue decline. but the change in the percentage of our total composition of revenues that they each represent?
spk02: Yeah, I wouldn't read necessarily too much into some of the nuances. I think it's just how ebb and flow, obviously. I read more, QSRs continue to do very well, so you see why that's up. Fast casual continues to do very well, so I think that's why that's up. So I think it's more you know, certain areas doing just better than others, more than, you know, some areas being significantly down overall, if that makes sense. So, I mean, if you go back, you know, pizza has had a great run, you know, really starting in COVID for the last couple of years. It was inevitable that at some point it might slow a bit and you just see the other segments, you know, pick up. So that's how I would interpret it more than, you know, certain segments being way down.
spk22: Got it. All right. Thank you.
spk15: The next question comes from Tammy Zachariah of JP Morgan.
spk16: Please go ahead.
spk14: Hi, good morning, Team Middleby. Hope you're doing well. So my first question is on the cash flow. Very nice cash flow last year. You expect good conversion this year, too. I think you have some convertible debt coming due in 2025. So overall, can you update us on the capital allocation priorities from here on, given the very strong cash generation?
spk05: Yeah, so I'll touch on that. I'm not sure how the convert ties into that, and obviously we're pretty well positioned from a capital structure with a lot of availability.
spk22: It really hasn't changed.
spk05: I mean, we... may have done a little bit less from an M&A perspective as of late, but that continues to be a core competency and focus of ours. We see continued significant opportunities across all three business platforms to grow them both organically and through acquisition as we've done that for a long time to build into the three platforms that we have today. I think as we've gone through The last year, you know, the market being disrupted with buyers and sellers thinking about what are appropriate multiple, whereas market growth is going up, down, et cetera. And expectations, I would say they were not as aligned. So as I think, you know, as we kind of move into a more normalized environment in 2024, And beyond, I think you'll see us continue to do smart acquisitions to continue to build out our platform.
spk26: And this is Brian thinking about the convert. It obviously doesn't come due for a little over a a year and a half from now, so I do not have a specific answer to precisely what we'll be doing at that point in time. But we obviously are generating cash, so we could stockpile cash in advance of a coming due. We have availability under our bank facilities. We could roll it into our bank facilities. There's a variety of other obviously debt instruments out there that we could pursue to use. as well. So we're certainly keeping an eye on all those options and balancing things based on the factors Tim talked about as well, but certainly don't have a specifically defined course of action that we will be employing a year and a half from now. Again, we have a lot of flexibility, I believe, available to us.
spk14: Wonderful. That's great to know.
spk05: Brian said also, I mean, I think we do see another strong year of operating cash flow, which is great, obviously, as we reinvest in the business and execute on M&A and, you know, D-Lover, which we were happy to kind of bring down, you know, below two and a half times. I will also kind of just touch on repeat comments. I mean, we have made significant investments this year and last year back into the the business from a CapEx standpoint, so that it's gone into innovation centers, it's gone into some really great investments in our factories, thinking about ice, coffee, packaging. We've really kind of moved forward some of our businesses to position for growth, and we've brought a lot of automation into our factories as well. So, I mean, that is part of the story of the margin expansion strategy. And, you know, we've mapped that out over the last couple of years, which is coming into fruition and, you know, continues to position us forward into next year.
spk14: Got it. If I may ask one more, the Novi and Josper launches, what's the total time or opportunity you see from these two brands in the U.S. over time? I'm essentially trying to gauge the potential revenue lift, let's say, over the next couple of years that we might expect.
spk26: Tammy, you probably know that we don't often quote a lot of TAM numbers out there. I mean, the JOSPR is an amazing product. It is certainly a very you know, premium product for us, so we're excited about, you know, what it can do, but, you know, by itself. It probably is not, you know, large needle moving. I think Novi is, you know, could certainly be of the two, you know, the bigger difference, you know, maker. They have a lot of really great technology, a lot of, you know, induction, and, you know, we see trends, you know, moving that way.
spk15: Got it. Thank you so much. Our last question comes from Jeff Hammond of KeyBank Capital Markets.
spk16: Please go ahead.
spk17: Hey, good morning, guys. Good morning, Jeff. Just on Rezzy, you know, on the 1Q, seasonally I think that business actually is up 4Q to 1Q. I'm just wondering how you're thinking about that sequentially.
spk26: Well, sequentially, obviously, things have been a little bit challenging in this segment. And Q4 is typically, though, I'll say a bump up from Q3. And it was this quarter. Even with tough market conditions overall, there's still some higher seasonal spending. So I do expect that Q1 could be you know, below, you know, Q4 levels. But, you know, I think if you look at the past three quarters, you can kind of establish, you know, a band in which we've been operating. And, you know, our outlook is that that, you know, band doesn't stretch down and hopefully it starts to, you know, stretch up.
spk17: Okay. And then, Steve, you mentioned one of the growth drivers being kind of this pent-up replacement cycle. And I'm just wondering what you hear from customers on that and, you know, what it really takes to kind of get some of that, you know, catch up on the replacement cycle going.
spk02: Yeah, no, for sure. So, again, my perspective on the replacement cycle is I think we are due for a replacement cycle going into COVID. Obviously, COVID kind of kicked the can. And then a lot of the focus from the chain customers, again, have been on new stores. And so I think as we get into this period now where, yes, new stores are still important, they do realize that they have to go back into locations. years of they were just prioritizing getting new stores open, knowing what the equipment was, you have had longer lead times. So customers are definitely engaging with us on replacement conversations, making sure that we have products ready to go for them at any time. So I do think you see our demand mix of we've shared it between replacement and new stores shift back to be more and more predominantly driven by replacement and upgrade. I want to just hit on some nuance of it's not just replacing a light for light. What I think you're going to see them do is predominantly upgrade to newer technology, technology that's able to be connected, new controls. So that gets kind of lumped It's historically been 50% of demand for us overall. I think as you go out the next two or three years, I think it gets back to kind of those levels overall.
spk19: Okay. Thanks a lot.
spk15: This concludes our question and answer session.
spk16: I would like to turn the conference back over to management for any closing remarks.
spk05: Thanks, everybody, for joining us on today's call, and we look forward to speaking to you next quarter.
spk16: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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