This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Thank you for joining us for the Middleby First Quarter 2024 conference call. With us today from management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Technology and Operations Officer James Poole, Chief Commercial Officer Steve Spittel, and Vice President of Investor Relations John Joyner. We will begin the call with opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Now, I would like to turn the call over to Mr. Fitzgerald. Please go ahead.
spk21: Good morning, and thank you for joining us today on our first quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. First quarter proved to be challenging with a backdrop of the housing market, interest rate environment, and price-cost pressures at our restaurant and food processing customers weighing out our businesses as we started the year. Even though challenges persist, we are seeing improving order activity and expect this to continue as we move through the year, as customers execute on stated business plans and as opportunities in the pipeline begin to convert. While customers are slow to restock inventories given shorter lead times and higher carrying costs, Inventories in the channel have returned to normalized levels and now provide a tailwind as end-user sell-through occurs, and this bodes well for the later part of the year. At our commercial food service business, customer execution has been slow starting the year, given continued longer lead times for permitting and construction, along with longer deliberation on their business plans, given economics of higher restaurant operating costs. However, our channel partners are building backlogs weighted to the second half of the year, and our chain customers continue to maintain their plans for operational upgrades and store openings, which are also weighted to the second half. We are gaining market share in new and large product categories such as beverage and ice, and we are well-positioned to capitalize on our market-leading positions, capturing growing trends in vetless and electrified cooking. And we have early-stage traction with some of our game-changing innovations as we lead the future of automation, digital, and IoT. At our residential business, the housing market remains very challenged in terms of existing home sales, new home starts, and remodels. While the residential market will take time to fully recover, it has stabilized, with a luxury end to the market showing improvement over the past several quarters. We're now seeing growth in order rates, and we expect that will continue as we progress through the year. And we are well positioned to benefit from the many investments that we have made in new product innovation as we move beyond the current market conditions. Many of these new product innovations were on display at the recent Kitchen and Bath Show. We are proud to receive a Best of KBiz award at Viking for our new reveal series, And we're also awarded Best of KBiz at Novi, one of our newest Middleby residential brands, which we're now launching into the U.S. market, featuring state-of-the-art induction cooking, integrated ventilation, and unique accent lighting. Our industry-leading brand portfolio with launches of new colors, new designs, and new technologies generated tons of excitement with builders, our dealer partners, and the design community at the show. leading to new business opportunities coming out of the show and a much greater awareness for all the Middleby residential portfolio has to offer. Our food processing business, our customers are proceeding somewhat cautiously as they monitor food costs, demand levels, and the interest rate impact on larger projects. Still, the pipeline of active projects continues to build for expansions and needed upgrades. with requirements to increase throughput, reduce labor, minimize food waste, and with a growing focus on sustainability. Automation remains in great demand. Our backlog remains healthy, and as market dynamics have become more stable, we're expecting the pipeline will convert into orders. Our strategy to become the leading provider of best-in-class full-line integrated solutions for the protein and bakery markets is resonating. and we are best positioned to offer our customers state-of-the-art automation to address their operational and efficiency challenges. We posted continued overall strong profitability at our commercial and food processing segments in the quarter, despite revenue declines, while residential margins were significantly challenged given the more significant market conditions and our strategic decision to invest in KBiz. We expect to return to the path of longer-term margin expansion as we benefit not only from revenue recovery, but also as we realize greater benefits from profitability initiatives, including investments made at our factories to realize greater production efficiencies, along with the impact of favorable profitability on our newer product innovations. Supply chain also provides a continuing opportunity as we have moved away from the crisis management of the past several years and are now focused on leveraging our scale and realizing synergies across our businesses. While we navigate the near-term market conditions, we continue to focus on the execution of our business strategies, expanding profitability, and growing our cash flow, while building upon our competitive advantage at each of our three industry-leading food service businesses that we are confident is setting us apart in the long term. Now I'll pass the call over to James to spotlight some of our exciting award-winning products we'll be unveiling at the National Restaurant Association show in Chicago later this month. Again, highlighting the results of our strategic focus to invest in and accelerate the pace of innovation. James?
spk04: Thanks, Tim. Last quarter, I remarked that Middleby had won eight of the 28 coveted Kitchen Innovation Award honors. But because of the timing, I couldn't say which Middleby brands won. Well, with a little more than one week to go before the NRA show in Chicago, we are excited to introduce the great eight. Blodgett, Pitco, Evo, Newton, Wonder Bar, Wild Goose Filling, Very Mixer, and L2F, now known as Middleby Automation. These eight brands are the National Restaurant Show Association's KI winners. If you are attending the show May 18th through 21st, please make sure you visit the Kitchen Innovation Awards Pavilion to see and experience these new products from the Grade 8. And then come check out Middleby to experience our latest solutions around digital, embedded, and robotic automation, as well as beverage solutions and the launch of our newest combi, the Invoke, a Red Dot Design Award winner. We couldn't be happier with these new products. These innovations are as diverse as our brands, but they were all developed with our customers' daily challenges in mind. Labor reduction and simplification, consistency of product, throughput, all aimed to maximize our customers' profitability. In the interest of time, I won't go through each innovation, but you can find each in the deck that Tim referenced. The first is the Pitco Torque Fryer. The torque introduces continuous filtration and convective frying. With continuous filtration and auto oil top off, the torque essentially provides infinite oil life for the operator. And the continuous filtration comes forced convection as oil is forced to circulate around the food on its way to being filtered. This forced circulation reduces are cook times up to 10%. While we are talking about numbers, let's cover a few more. The torque is 10% more efficient than the typical ROV fryer and boasts flue temperatures 60% lower than the typical gas fryer, thus substantially reducing your kitchen ventilation requirements. Lastly, the torque reduces labor needed to filter a traditional fryer by up to 90%. By the numbers, This fryer stands to obsolete most fryers in the market today. Moving on to the Blodgett Invection Oven, this is a first-of-its-kind oven, allowing the operators to select between a high-heat transfer accelerated cook oven or a gentle convection oven by simply selecting a menu item from its Middleby OneTouch controller. Once the operator selects the menu item, the Invection's mechanic can figure the oven for the optimal cooking profile, whether it be high velocity impingement air or gentle convection. This innovation enables a multi-cavity convection oven, typically found in the back of the house, to also function in the front of the house as an accelerated cooking oven, thus offering our customers the ability to cook a la minute. So, whether you need to cook delicate laminated pastries in 20 minutes, or you need to cook 16 inch pizzas in three minutes and 30 seconds, the Invection is your solution. Now on to beverage dispensing. We have three brands introducing beverage dispensing products aimed at reducing waste while improving speed of service and delivering a better tasting, highly consistent product. I've spoken about Newton CFV valves in the past. But now we have two new products that feature the valve's patent design that enable the consistent, precise delivery of beverage and or ingredients regardless of the factors that plague traditional valves, the Newton Discrete Valve and the Wonder Bar M5 Bar Gun. With these innovations, our customers now have confidence that they are serving bottle-quality beverage or dispensing individual ingredients without the expense of consistently calibrating their systems, or wondering if their systems are in calibration. The Newton discrete valve and the Wonder Bar M5 bar gun eliminate calibration, waste, reduce service calls, and improve customer satisfaction through consistent delivery of product. The Newton CFV valve is also being used throughout Middleby to control mixing and dispensing of highly concentrated ingredients, such as individual flavors, even cleaners. These concentrations can be as high as 500 to 1, which unlocks our customers' ability to change how they distribute and dispense ingredients or even clean their equipment, say, with Newton's new clean-in-place technologies. The final dispensing solution that I'll discuss is a Wild Goose Cerveci, which utilizes the same filling systems to dispense beer that Wild Goose uses in its industry-leading high-speed canning lines. Cervizi turns anyone pouring their first beer into a seasoned bartender by automatically dispensing beer twice as fast as a normal tap system while also minimizing waste by precisely controlling the pour volume to the nearest fraction of an ounce or just a few milliliters, all with no training. Cervizi also improves keg yield from 75% to 95% by controlling the pour volume in the beer's serving conditions. While I didn't get a chance to cover the other products, such as the Pizza Bot 2.0, Evo Event, the Very Mixer Ergo, we will hit those in later calls, or again, you can see them at the NRA show. But know they share the same traits as the other innovations I described today. They all reduce waste, increase throughput, maximize consistency, decrease simplified labor, all of which improve our customers' profitability. Thank you, and over to you, Brian.
spk19: Thanks, James. For the first quarter, we generated revenue of $927 million and adjusted EBITDA of $186 million at a margin of 20%. Q1 gap earnings per share were $1.59, and adjusted EPS was $1.89. Commercial food service revenues globally were down 4% organically over the prior year, Yet, the adjusted EBITDA margin was consistent with the prior year at 26%. All the margin values I will go through are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. In food processing, revenues for the first quarter were nearly $163 million. This was our second best Q1 ever for this segment, with a tough comp given the Q1 record was set last year. our adjusted EBITDA margin held strong and was also consistent with the prior year at nearly 24%. In residential, we saw an organic revenue decline of 22% versus 2023. The adjusted EBITDA margin was over 6% and was negatively impacted by our investment to attend the kitchen and bath show for the first time since 2016. We've seen a recent inflection in order rates, which is driving our view that the residential revenues have hopefully started to move off their low point. A high point for the quarter was our exceptionally strong operating cash flows of nearly $141 million for the quarter and nearly $678 million for the trailing four quarters. It was our best first quarter ever, and our free cash flow conversion was around 135% for the trailing four quarters. Our total leverage ratio is now down to 2.4 times. Despite the challenging quarter we faced from a revenue perspective, our business model demonstrated that we have resilient margins and continually generate strong cash flows. Nonetheless, in Q2, you will see some further restructuring charges as we continue to take actions to appropriately manage the business given market conditions. As we work to protect our margins, we are also aggressively controlling costs. In terms of an outlook, I will start by reminding everyone that the second quarter of 2023 was our strongest revenue quarter ever. So given recent order rates and demand for innovation, we expect total Q2 revenues to be up at least mid-single digits sequentially from Q1. But given the tough comp, we anticipate falling a little short of the prior year revenue level overall. To provide greater insights, I will separately address each segment. In commercial, the year-over-year comparison for Q2 is especially tough given the all-time record revenue for us in 2023. While we may fall a little short of the prior year revenue in Q2, sequentially, revenues could be up high single digits as compared to Q1. Our viewpoint is based on our backlog, which is currently up slightly from year end, and that order rates have been improving over the past three quarters. Orders through April of this year are up 15% over the back half of 2023. We also expect margins to be in line with prior year levels. Looking into the back half of the year, at this time we expect revenues to continue to grow sequentially and be at least mid-single digits above prior year levels. Moving on to food processing, recall that the Q2 of 23 was our second highest revenue quarter ever for that segment. And while I expect us to fall short of that revenue level in Q2 of 24, margins should be up over the prior year. And then on a sequential basis, Q2 revenues and margins should be up meaningfully versus what we just posted for Q1. So recall that lumpy is a word used to describe this business sometimes. As I look back to last year, we did see a big drop in revenues when we moved from Q2 to Q3, but that is not our expectation for Q3 of this year. We continue to see strength in this business overall. Orders in the past two quarters have been amongst our strongest intake periods for the segment. Thus, we are expecting that the second half revenues for this year will be above the first half of this year and above prior year levels. In residential, the good news is that the order trend is moving slightly upward. Looking at the past couple of quarters and extrapolating on the start of Q2, we are trending above the first three quarters of 2023. Revenues for Q2 of 24 will likely not be ahead of the prior year, and this is due to a year ago our domestic premium indoor appliances having posted a relatively strong quarter. Nonetheless, we are anticipating stable conditions in our European businesses when comparing Q2 of this year back to 23, and we should see growth in the outdoor market in Q2. So, this all results in that Q2 revenues should be above Q1. Visibility to the second half of the year in residential is certainly limited, but given recent trends, revenue comps, and building upon our showing at KBiz and the overall strength of our portfolio, our view for the second half of 24 is currently for growth, both as compared to the prior year and over the first half of this year. We are also working to maintain double-digit profit margins for the year. bringing it back all together for the total company we should continue to build and strengthen as we progress through 24. We look forward to Q2 being stronger than Q1, and we continue to firmly believe at this time that for the second half of this year, we will deliver sequential and year-over-year growth. We remain focused on operational efficiency and optimally managing our resources. We are sharply focused on controlling and reducing our costs. We remain committed to improving our margins. These actions should drive year-over-year growth in cash generated and consistently high levels of free cash flow conversion as well. So to further understand how we will achieve this, along with enjoying many tasty creations from both humans and cobots, Please come and see our people and products in action at the National Restaurant Association show later this month here in Chicago. Please reach out to us to arrange a visit so you can deeply understand how we are solving the needs of our customers, which will drive our growth in 24 and beyond. We remain committed to our mantra, more in 24.
spk15: Thank you, and we will now take your questions.
spk12: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Mig Dobre with Baird. Please go ahead.
spk09: Thank you for taking the question. Good morning, everyone. Good morning, Mig. So if I understand your guidance commentary correctly, it sounds like book to bill in commercial food service was above one because backlog went up a little bit in the quarter. When you sort of think about the outlook that you've laid out for Q2 and the rest of the year, are you essentially baking in stable backlog and just sort of orders ramping relative to Q1 and that flowing through? Or is there still sort of a backlog conversion element here that comes to sort of help us in the back half of 2024?
spk21: Yeah, so I think we are thinking it's not converting. We're not reducing our backlog further. That's not the assumption if that's the question. That is the question. Yeah, I mean, I think we see order improvement as we go through the year. So I think backlog has come down, you know, as we had a lot, you know, backlog, I would say orders that were pulled ahead. We've kind of gone, I'll say, maybe to a certain extent the other way where inventory is not only at normalized levels, but a lot of our partners are slow to place orders because they know lead times are short. They don't want to carry inventory. And our channel partners, they see kind of their end users, a lot of the projects are geared towards the half of the year or so. They're not going to buy the product right now. They're going to buy it closer to execution. So when we started the year, January was pretty slow, not unexpectedly for a whole variety of reasons, some of it even weather-driven. And then we saw progressively improve as we went through the first quarter. And then it's improved a fair bit more as we've kind of gone into the early part, the second quarter. So that kind of lines up. with a lot of the commentary that we get from our channel partners along with the discussions that we have with our chain customers. I think a lot of the view and the confidence we have is based on the transparent discussions that we have with them, including what they see as the outlook, where the inventory is in the channel, and then kind of line that up with the order trends that we've had as we've progressed through the first four months of the year.
spk09: Understood. Thank you for that. My follow-up, sticking with this segment, is on the margin side. Comparisons are tougher in the back half of the year, so how do you encourage us to think about margins, especially on a year-over-year basis, And maybe related to all of this, are you seeing any sort of signs of price erosion or changing competitive dynamics in North America specifically?
spk20: Thank you. Yes, I'll contact you with Steve here.
spk21: I would say not necessarily. Not wholesale changes. I think the mix out there in the marketplace was a little bit different to start the year. I think some of the kind of more immediate replacement type business that tends to be more economy driven was a little bit more, you know, prevalent. So I don't think that's more of a pricing element as it is a mix element. And that was, we kind of get back to more of, I'll say specified, you know, Project driven and chain chain driven we expect some of the mix to improve as we go through the year So I think that that's a little bit of the of the dynamic That we saw at the beginning of the year and then maybe you want to touch on pricing.
spk11: Yeah, maybe with Steve We actually just recently announced a price increase that will be upcoming in commercial going into effect in mid-june and Our approach there was making sure our divisions were really going skew by skew, customer by customer, to make sure that we had captured all the price-cost dynamics that we've obviously all gone through over the past several years. So it'll be a, I'll call it a relatively minimal increase or a little single-digit increase as compared to prior year increases, but Still want to make sure we're being very thoughtful about it. I think pricing, again, has been one of the more strategic initiatives in the company the last couple of years to make sure we're capturing costs, but also making sure we're certainly in a good place from a competitive standpoint. So that, again, was recently announced a couple weeks ago and goes into effect in mid-June for commercial.
spk19: And then I'll bring it around, this is Brian, to the margin side of the question. Obviously, you saw in Q1 that even with Lower revenues, we're able to protect the margins, and that's coming from a variety of things. There's some commodities impacts in there. There's the impact of investments we've made in the business. There's impacts of, I'll call it ongoing, striving for greater efficiency, cost control, headcount control actions in there. And so as we look forward, as volumes grow, we'll also have greater absorption in I think we'll have some modest pricing benefits. As Tim was getting after, we believe mix will improve as well. So we put that all together. And as I think about how the segment will operate for the entire year, I do think we will be slightly, modestly above the prior year. Obviously, there's some challenges always to overcome with cost of inputs and supply chain and the like. But nonetheless, I think it is, so we'll be, you know, a positive year over year.
spk29: Super. Thanks for the call.
spk12: The next question comes from Jeff Hammond with KeyBank Capital Markets. Please go ahead.
spk24: Hey, good morning, everyone. Morning, Jeff. Morning. Just want to stay on commercial food. I think you mentioned, you know, some permitting delays, you know, customers kind of contemplating strategy. It was interesting that you said, you know, you think for the year you're up mid-single digits in commercial food, and that kind of implies, you know, high single-digit, low double-digit growth in the back half. And so just wanted to get a better handle on, you know, if you're seeing some of these delays kind of move forward and what gives you the confidence in that second-half growth rate.
spk21: Yeah, maybe just add a little bit of color around delays. I mean, I think the world is not fully recovered from supply chain in some regards. I mean, I think as customers have tried to identify locations, open locations, right, they've got to get through construction, documentation, permitting. Those things have taken a bit longer. We saw that in the back half of the year. So, I mean, I think you know, those things are improving in terms of, you know, just the world normalizing, you know, but that is one of the things that we know that they've, you know, a lot of our customers have struggled and that's, you know, delayed. So I think those things get better. I think there's a little bit of muscle memory as well as customers. The world has kind of gone from, you know, from crisis management, you know, back to a strategic execution of, you know, business plans and So I think we're in a little bit of a restart, and I think some of those things cause slowness coming out of the gates, plus there's a lot of just dynamics that people were absorbing. Again, interest costs, while they've been up for a bit here, people have been monitoring it, and interest rates have been higher for that long. and then just, you know, where was pricing on menus because I think a lot of our customers had very favorable overlaps to the pricing that they had, you know, put through and were absorbing, you know, what was that impact to the consumer, what has been the traffic at the end of the year, at the beginning of the year, where food costs. So I think they've been absorbing a lot of that relative to the plans they had coming into the year and then re-auditing, you know, those plans. And I think those plans, by and large, held up, you know, and I think it's just taking a little bit more time to make sure, hey, are we doing the right thing and how are we, you know, working with, you know, our operators, et cetera. So I think, you know, we still see, you know, the strategies out there, you know, what they want to execute to. So, again, I think that's where maybe they weren't ready to go on January 1. But I think, you know, those things are still ongoing. progressing, and I think that kind of gives us some of the, you know, the confidence and the visibility. So, again, while maybe things were, the engine was slow to start, not entirely surprisingly, but, you know, while we think that, you know, the engine will be, you know, it will be stepping on the gas pedal as we kind of progress through the next couple quarters.
spk11: Yeah, please go ahead. Jeff, this is Steve. I just add on to that. I mean, I've talked about it before. I think one of the nice byproducts of the last several years is a lot more transparency from the chains in terms of new store opening plans. And I'll just say, even though, as Tim alluded to, a little bit slower start from a new store order or a new store build perspective, they pretty much all recommitted several times to their overall plans for the year. So I think that's what gives us confidence in more of the back half of the year. I think the other thing, too, I would point out, I know we've talked about before the dynamic between new store orders and the replacement orders that we feel like have been deferred over the last three, five, seven years. What's been exciting is there's been a number of the large chains that have announced initiatives where the corporate entity is going to help franchisees do you know, refreshes to build, you know, their stores and help them in that replacement cycle. So I think that's a relatively new nuance. So we think new store builds, you know, pick up the back half of the year, and we're still very bullish on, you know, this replacement cycle that we feel is going to really kick in over the next couple of years specific to the chain customers.
spk24: Okay, that's great, Keller. And then just A couple on Res Kitchen. One, can you quantify the kind of one-time KBiz investment? And then it seems like you're, you know, maybe the D-stock's done finally in outdoor grills, and you feel a little bit better about that, but that, you know, kind of the U.S., you know, indoor kitchen is still, you know, maybe one of the choppier areas. Is that correct?
spk19: Yeah, on the KBiz investment, I'd put it, you know, 150 to 200 basis points. of drag in the quarter? And do you want to address the market commentary?
spk21: Yeah, so, yeah, no, I think that's right. I mean, we're, you know, the inventory in the channel is, you know, far less of an issue. I mean, that was true in commercial as well as residential start in the year. So it really starts coming down to end user, you know, demand. So sell-through probably on outdoor has not been very strong, so it's kind of, I'll say, a neutral factor so far. But we're early in the grill season, right? So I think it is what has yet to come as we start moving into spring and summer months. So I think our revenues there will be highly dependent on how grill season performs, not only through that, but then that will lead into how do we think about you know, the restocking going into 2025, and we do feel like they're, you know, we're winning in some areas, you know, picking up floor space, and the way the grill market works is some of those floor planning that happens right now really, you know, is geared toward next year, not even this year, so we don't get some of those benefits until later in the year. With the indoor market, yeah, I mean, I think, again, we're kind of, you know, bouncing along you know, at the trough. While we think, you know, a lot of our consumers are really geared, obviously, to that upper, you know, echelon in the luxury market, and we see some, you know, improvement. Some of that is a little bit longer, you know, lead time. So we've seen improvement in order rates, and sometimes, you know, the remodels and the new builds, they don't need that product next week like they may in the replacement market. So we're We see some of that starting to pick up. I think this show was very good for us because, again, it was a large investment, but we've really transformed the portfolio over the last number of years, adding new brands, new products, innovations, colors. So it was a very exciting show, not only for us as a company, but for our channel partners, the builders, the dealers that came through. So I think that was really exciting. the intent is to kind of take the world a little bit by surprise of how far we've come in the last five years and now start funneling them to our residential showrooms that we've also invested in over the last couple of years with our Chicago showroom opening in the middle of last year. So I think those are the things that help pick up traffic there and build kind of a long-term pipeline of opportunities as people start converting Over to the middle B portfolio. So I think we see the gears turning there and then we start seeing the housing Improve, but I think it's going to be modest improvement. That's going to you know, take some time here So but I think that's where directionally, you know, we're at the beginning of kind of those Those sides and and I think it'll just it'll kind of you know, we would like it to be v-shaped I think it's a little bit more u-shaped and But, you know, I think we will, you know, see progression as we move through the year.
spk22: Okay. Appreciate it, guys.
spk12: The next question comes from Sari Boroditsky from Jefferies. Please go ahead.
spk25: Hi. Good morning. I just kind of wanted to build a little bit more on the residential questions. Can you just quantify the performance in Resi, you know, in grills versus Viking versus Saga? And then when you talked about the improving order rates, it sounded like that was largely driven by the industry show, or if not, where did you see that uptick in demand come from?
spk19: Sarah, this is Brian. I'm sorry. Could you repeat the first part of your question?
spk25: Just the performance in the quarter of grills versus Viking versus AGA.
spk19: Okay. Got you. Yeah, I mean, it was a challenging quarter across – across the board in terms of the year-over-year comps. I noted that Q2 last year was really strong for domestic premium or mostly Viking, but we have other brands as well. But we started the year there last year strong as well. So certainly, that market has been down. AGA and also the European markets have been continuing to be in challenging environments. We haven't seen things, relief or improvement in the UK housing market. I'll say on the continent, we've been maybe faring a little bit better given how Novi's product offerings are resonating. And on grills, we've seen a different buying pattern this season as compared into the past with later load-in by our customers, albeit also they're being reserved in their buying. So Q1 did see weakness in grills, but we're actually looking forward to much improvement there should trends continue in the second quarter.
spk25: Great. And then, you know, obviously residential margins were weighed down by the show. What do you need to see to support double-digit margins in that segment? Is it just volume or anything else? And then how do you think about incremental margins when you do see volumes turn positive there? Thank you.
spk19: You know, I think, you know, once you strip out some of the show impacts, you know, recent history, you know, has been you know, a good indicator of, right, where the business, you know, can and does perform. So, you know, as we start getting, you know, closer to, you know, 200 million or even 190 million, you know, we're likely to see closer to the double-digit margins. You know, we continue to evaluate, you know, costs, you know, in this business and You've seen, obviously, we've been taking charges continually to address that. So we will do more of that to make sure we are right-sized for the current environment. But operationally, we've been making significant investments in these operations, and that really does drive really positive increments. And I've noted to some before, Our factories in this segment tend to have more throughput than in commercial. We have fewer yet larger factories in terms of the volumes they run. So I'm not trying to minimize at all our focus on, again, looking at all the current costs and actions. But dare I say, as the volumes come back, the margins will come racing back as well.
spk25: I appreciate the call, and I'll see you at the NRA show. Thank you.
spk18: We'll see you next week. Thanks.
spk12: The next question comes from Tammy Zakaria with J.P. Morgan. Please go ahead. Hi.
spk01: Good morning. Thank you so much. I have two questions regarding the commercial food services segment. So first of all, can you comment on the price realization you saw in that segment in in the first quarter. I'm hoping to learn whether the negative organic growth was purely volume driven or there is a mix of both price and volume.
spk19: This is Brian. It is mostly volume driven. We haven't taken many price actions recently. Obviously, Steve noted that we'll be taking one, a modest one currently. So it's fair to assume that that is Very highly dominated by volume.
spk21: Yeah, maybe I'll just we did not have a price reduction right so it really is volume and We did not take a I'll say a typical price increase at the end of the year We've taken significant price increases over the last several, you know supply chain related I think as we went into this year we were monitoring, you know where we're at with the price cost standpoint and And we did see some cost increases, not only labor-related, but, you know, even a little bit of supply chains as we went through the year, hence, you know, the evaluation as we went through Q1 to why, you know, Steve's taken a price increase down on Q2. But as you kind of think about Q1, we got, you know, didn't go backwards on price, but we didn't get a benefit, and we probably had a little bit of weight of supply chains still coming into the year.
spk01: Got it. That's very helpful. So I wanted to follow up on that. So in June, you're taking some price increase. I think you mentioned low single digit. Again, I'm trying to understand whether the price increase might actually stick or face some resistance given demand is weak. And you just mentioned there's some price cost pressure in the industry right now. So can you speak to the rationale for the June increase and how distributors are reacting to it if you have already communicated to them about it?
spk11: Hey, Tammy, this is Steve. It has been communicated out to the marketplace at this point. And I do believe it will be relatively sticky. I mean, obviously, it's always a task to make sure it does come through. But I think given the thoughtfulness the team has put behind, again, I keep coming back to it's not an across-the-board kind of peanut butter approach. It really is being thoughtful on a skew-by-skew approach. customer-by-customer approach, so it's hitting both general market and chain customers. So we do believe it mostly holds, or it is sticky and certainly comes through in early third quarter.
spk01: Understood.
spk23: Thank you. The next question comes from Brian McSmarra with Canaccord Genuity.
spk12: Please go ahead.
spk05: Hey, good morning. Thanks for taking the questions. I guess two for me on residential. First, a question we often get from investors is the breakdown in sales and grills versus the rest of residential kitchen. I don't expect you to quantify, but can you give us maybe a qualitative picture of kind of how grills look today relative to when you first acquired them?
spk15: This is Brian.
spk19: Obviously, the grills are down quite significantly from when we bought them. I think we've said before, over 50%, and I'll probably leave it at that at this time. I think it's fair to, in general terms, I think about the segment in fourths. I'd say you think about, I'll call it, U.S. domestic indoor premium, European, or I should say the U.K. business, the outdoor business, and then all else, which would primarily be, I'll call it the European, continental European businesses.
spk05: Got it. That's helpful. And then secondly, on grills, again, I'm curious what you're seeing currently with your retail partners in the category. Are they willing to either add to or at least hold floor space for the category? And if not, how do you break in given your relatively small size and brand recognition compared to the bigger players? Thanks.
spk20: I'm not sure with the holding floor space if that was specific to us or
spk21: or grills overall.
spk05: I mean, it's specific to the category, but, I mean, presumably you would need to be a part of that just given your relative size at the moment.
spk21: Yeah, I mean, I think, you know, we've focused kind of on, you know, product differentiation, some of the new technologies that we've had, and I think, you know, one of the items that we've highlighted here is our connected platform, you know, both for Masterbuilt, as well as Kamado Joe. That's definitely something that we think we've got a lot of innovation that you don't see across the grill platform. Also, we've had the heavy focus on charcoal, which is differentiated, particularly with the vertical charcoal, the Masterbuilt. So I think there's things that we offer that some of the other players out there do not have, and we think we follow some of the trends of the fuel type, which ties to flavor, and digital, which ties to convenience and culinary. I think those are some of the things that we think some of the retail partners recognize also, and I think we've had some success with Certain partners there with picking up floor space over the last 12 months there and probably going into 2025 as well.
spk12: As a reminder, if you would like to ask a question, please press star, then 1 to be joined into the question queue. The next question comes from Walt Liptock with Seaport Res. Please go ahead.
spk14: Hi, thanks. Good morning, guys. I wanted to just back up to Brian when he gave the guidance. And can you just repeat the sales guidance for the year? I think you said the sales, you were expecting sales to decrease. go higher, you know, to grow this year, and margins as well as cash flow to be higher, is that correct?
spk19: Yes, let me find my place in the script here. Yeah, so on the total company basis, you know, I started with that Q2 will be stronger than Q1, right, and that as we look at the second half of the year, we will grow sequentially, you know, so Q3 above Q2, Q4 above Q3, as well as for Q3 and Q4 being above prior year levels. I did note that for Q2, we will be a little bit of a challenge to achieve the prior year revenue level. So Q2, better than Q1, maybe a little short of prior year. Q3 and Q4, ahead of prior year and also sequentially improving as we move through this year. And with that, and so those comments are very specific to revenues, but they do also generally apply to margins as well. I do expect total company margin to improve You know, sequentially as we move, you know, through the year, obviously we demonstrate we have a business that really gets nice increments and has, you know, nice leverage. And, you know, I'd expect to see that in the, you know, the segments individually as well.
spk14: Okay. And just to make sure I'm totally clear on this, so the revenue, you're expecting revenue to go up this year even with the tougher first quarter?
spk19: Yeah, you know, and I think, you know, I know you're, you know, when you tear it apart and that you do look at things, you know, by segment. So, total company revenue, we do expect up. Obviously, the most challenging segment and the one where I'd say we have, you know, some of the lesser visibility right now is exactly how, you know, residential, you know, will play out, you know, where we have started weaker. So... you know, higher conviction in the other two segments, I think, you know, in terms of the year-over-year, and I think we do end up, you know, still total company up year-over-year.
spk14: Okay. Okay, good. And then just to follow up, when you guys were talking about the CFS segment and some of the strategic changes or, you know, maybe strategy normalizing from crisis, I noticed that Shake Shack commented that they were decreasing some investments this year. Was that what you guys were referring to, or is there something else out there in the market that you were referring to?
spk15: You're talking about the overall building new stores and the strength of what's happening out there.
spk19: Our comments are not specific to OneChain, certainly not specific to Shake Shack. I think as you look at the print across the board from the very large QSRs that they have started the year slower in terms of completion of projects. There was weather and permitting and such. So again, I think it's a pretty consistent comment we've seen across the large QSRs that no one, they're all still committed to their build plans. It just did not start off the first quarter is probably exceeding any of their internal benchmarks for the total number of new doors to be opened.
spk14: Okay, great. And maybe just one final one on the NRA show. I think you guys mentioned the Invoke Combi Oven that we've heard some things about. I wonder if you could tell us a little bit about the features and what you're expecting as you commercialize that product.
spk04: Yeah, so I'll jump in and talk about the invoke. So we've spent the last several years designing the invoke and finally have it out on the market. We think there's a ton of novel features in the invoke. One of the first things that I like to talk about is the fact that You know, we've developed a half-size combi oven that fits full-size, you know, combi pans. That means that, you know, if you think of a traditional full-size combi oven, it's got, you know, kind of X dimension. If you look at a half-size combi oven, it's about a third less in volume than a full-size, you know, combi. So what does that mean for the kitchen? That means more space. For other equipment in the kitchen, that means less hood requirement. It means lower energy input rate into the product, more efficient product. A couple other features we've done is that we've really spent a lot of time on the wash cycle, reduce the amount of power going into the wash cycle. We have a steam on-demand feature that is incredibly efficient using 17% less energy for the steam on-demand. And then I will say the last cool feature that we've done is we've been able to add another shelf in the oven. So traditionally, your combis are either six- or ten-pan ovens. Here we have combis that have 7 or 11 pans, so we've been able to increase the production capacity in the oven. By doing that, we improve the efficiency of the oven as well. We're pretty excited about it. Our combi has a middle B1 touch control. It is open kitchen control. So it's really one of the more advanced pieces of technology that we've got coming out at Middleby. And I think, you know, when you compare it to the other combis in the marketplace, you know, this puts us right up at the number one, number two, you know, combi on the global market.
spk17: Okay, great. Thank you.
spk21: Yeah. I mean, I just, you know, I think I'm glad you asked the question because, I mean, I think we are excited about it. I think it's a good example of a lot. We talk about innovation a lot. James goes through it. These are significant investments that we've made over a number of years on a lot of different products that we think some of them are the future of, you know, innovation where the restaurant is going, which a lot of that has yet to be realized. And some of it are Existing large markets copy is clearly one of those it's a large market You know, we lead in a lot of categories copy has not not been one and this was a multi-year Development project to make sure that we had the best in class features James just went through a mob at water energy space throughput and again that the the ease of use with the control and that also James and team have developed over multiple years and connected to IoT, which we think is the future. So it does have a lot of legs here, and I think it's gonna be one of the things that helps us grow. And we have a lot of expectations for it over the next several years, and we have a lot of channel partners that are highly, not only intrigued, but engaged right now as we start bringing it to market. So I think just another great example of a lot of things that we talk about. And I think this one will gain traction much like, you know, last quarter James talked about, you know, ice, right? Like, again, another large market of similar size. We had not necessarily been a player as you kind of went back a number of years ago. And we are gaining a lot of, you know, traction in that. We've got a full lineup of solutions there. And so whether that's success with some channel partners and some chains, we're starting to see that. early this year, and again, I think one of the things that bodes well for us growing in certain targeted product categories as we go through the next several years.
spk04: I'll just add one more point. The InvoCombi is shipping now, so we've been distributing the product in Europe now for a number of months, and now we have just started distributing the product in the U.S., so it is actively being sold.
spk07: Thanks, Walt.
spk12: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk21: Yeah, no, I'd like to thank everybody for being on the call. I just got one final comment, which is a little bit more of a follow-up to some of the questions on residential. So I'll say it's an answer to a question earlier. Just as we think about margins, fundamentally, our residential business is much stronger today than it's ever been from new products, manufacturing efficiencies, quality, the investments that we have made in distribution and some of the capabilities, things that are, you know, our design team, showrooms, you know, etc. So Brian made a comment of margins come racing back. We're operating at volumes that are far less than normalized periods. So pre-COVID, if you look at the number of units that are going through a factory. So just kind of re-answering a little bit of the question of what gives us confidence for the margins in that platform and why it is a great platform. You're seeing it at its worst right now. but it's actually the strongest it's ever been right now. So a normalized period, we're pretty excited about all that residential has to offer. So certainly we've got a couple quarters still here of rocky road ahead, but we see it inflecting and just something that I wanted to hammer home given that question that was put to Brian earlier. So with that, we'll wrap it up and Thanks everybody for attending the call today.
spk12: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. Thank you. you Thank you. You can also use it as a tool to create a new project. Thank you. Thank you for joining us for the Middleby First Quarter 2024 conference call. With us today from management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Technology and Operations Officer James Poole, Chief Commercial Officer Steve Spittel, and Vice President of Investor Relations John Joyner. We will begin the call with opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Now, I would like to turn the call over to Mr. Fitzgerald. Please go ahead.
spk21: Good morning, and thank you for joining us today on our first quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. The first quarter proved to be challenging with a backdrop of the housing market, interest rate environment, and price cost pressures at our restaurant and food processing customers weighing out our businesses as we started the year. Even though challenges persist, we are seeing improving order activity and expect this to continue as we move through the year. As customers execute on stated business plans and as opportunities in the pipeline begin to convert. While customers are slow to restock inventories given shorter lead times and higher carrying costs, Inventories in the channel have returned to normalized levels and now provide a tailwind as end-user sell-through occurs, and this bodes well for the later part of the year. At our commercial food service business, customer execution has been slow starting the year, given continued longer lead times for permitting and construction, along with longer deliberation on their business plans, given economics of higher restaurant operating costs. However, our channel partners are building backlogs weighted to the second half of the year, and our chain customers continue to maintain their plans for operational upgrades and store openings, which are also weighted to the second half. We are gaining market share in new and large product categories, such as beverage and ice, and we are well-positioned to capitalize on our market-leading positions, capturing growing trends in ventless and electrified cooking. And we have early-stage traction with some of our game-changing innovations as we lead the future of automation, digital, and IoT. At our residential business, the housing market remains very challenged in terms of existing home sales, new home starts, and remodels. While the residential market will take time to fully recover, it has stabilized with a luxury end to the market showing improvement over the past several quarters. We're now seeing growth in order rates, and we expect that will continue as we progress through the year. And we are well positioned to benefit from the many investments that we have made in new product innovation as we move beyond the current market conditions. Many of these new product innovations were on display at the recent kitchen and bath show. We are proud to receive a Best of KBiz award at Viking for our new reveal series, And we're also awarded Best of KBiz at Novi, one of our newest Middleby residential brands, which we're now launching into the U.S. market, featuring state-of-the-art induction cooking, integrated ventilation, and unique accent lighting. Our industry-leading brand portfolio with launches of new colors, new designs, and new technologies generated tons of excitement with builders, our dealer partners, and the design community at the show. leaning to new business opportunities coming out of the show and a much greater awareness for all the Middleby residential portfolio has to offer. Our food processing business, our customers are proceeding somewhat cautiously as they monitor food costs, demand levels, and the interest rate impact on larger projects. Still, the pipeline of active projects continues to build for expansions and needed upgrades. with requirements to increase throughput, reduce labor, minimize food waste, and with a growing focus on sustainability. Automation remains in great demand. Our backlog remains healthy, and as market dynamics have become more stable, we're expecting the pipeline will convert into orders. Our strategy to become the leading provider of best-in-class full-line integrated solutions for the protein and bakery markets is resonating. and we are best positioned to offer our customers state-of-the-art automation to address their operational and efficiency challenges. We posted continued overall strong profitability at our commercial and food processing segments in the quarter, despite revenue declines, while residential margins were significantly challenged given the more significant market conditions and our strategic decision to invest in KBiz. We expect to return to the path of longer-term margin expansion as we benefit not only from revenue recovery, but also as we realize greater benefits from profitability initiatives, including investments made at our factories to realize greater production efficiencies, along with the impact of favorable profitability on our newer product innovations. Supply chain also provides a continuing opportunity as we have moved away from the crisis management of the past several years and are now focused on leveraging our scale and realizing synergies across our businesses. While we navigate the near-term market conditions, we continue to focus on the execution of our business strategies, expanding profitability, and growing our cash flow, while building upon our competitive advantage at each of our three industry-leading food service businesses that we are confident is setting us apart in the long term. Now I'll pass the call over to James to spotlight some of our exciting award-winning products we'll be unveiling at the National Restaurant Association show in Chicago later this month. Again, highlighting the results of our strategic focus to invest in and accelerate the pace of innovation. James?
spk04: Thanks, Tim. Last quarter, I remarked that Middleby had won eight of the 28 coveted Kitchen Innovation Award honors. But because of timing, I couldn't say which Middleby brands won. Well, with a little more than one week to go before the NRA show in Chicago, we are excited to introduce the great eight. Blodgett, Pitco, Evo, Newton, Wonder Bar, Wild Goose Filling, Very Mixer, and L2F, now known as Middleby Automation. These eight brands are the National Restaurant Show Association's KI winners. If you are attending the show May 18th through 21st, please make sure you visit the Kitchen Innovation Awards Pavilion to see and experience these new products from the Grade 8. And then come check out Middleby to experience our latest solutions around digital, embedded, and robotic automation, as well as beverage solutions and the launch of our newest combi, the Invoke, a Red Dot Design Award winner. We couldn't be happier with these new products. These innovations are as diverse as our brands, but they were all developed with our customers' daily challenges in mind. Labor reduction and simplification, consistency of product, throughput, all aimed to maximize our customers' profitability. In the interest of time, I won't go through each innovation, but you can find each in the deck that Tim referenced. The first is the Pitco Torque Fryer. The torque introduces continuous filtration and convective frying. With continuous filtration and auto oil top off, the torque essentially provides infinite oil life for the operator. And the continuous filtration comes forced convection as oil is forced to circulate around the food on its way to being filtered. This forced circulation reduces are cook times up to 10%. While we are talking about numbers, let's cover a few more. The torque is 10% more efficient than the typical ROV fryer and boasts flue temperatures 60% lower than the typical gas fryer, thus substantially reducing your kitchen ventilation requirements. Lastly, the torque reduces labor needed to filter a traditional fryer by up to 90%. By the numbers, This fryer stands to obsolete most fryers in the market today. Moving on to the Blodgett Invection Oven, this is a first-of-its-kind oven, allowing the operators to select between a high heat transfer accelerated cook oven or a gentle convection oven by simply selecting a menu item from its Middleby OneTouch controller. Once the operator selects the menu item, the Invection's mechanic can figure the oven for the optimal cooking profile, whether it be high velocity impingement air or gentle convection. This innovation enables a multi-cavity convection oven, typically found in the back of the house, to also function in the front of the house as an accelerated cooking oven, thus offering our customers the ability to cook a la minute. So, whether you need to cook delicate laminated pastries in 20 minutes, or you need to cook 16 inch pizzas in three minutes and 30 seconds, the Invection is your solution. Now on to beverage dispensing. We have three brands introducing beverage dispensing products aimed at reducing waste while improving speed of service and delivering a better tasting, highly consistent product. I've spoken about Newton CFV valves in the past, But now we have two new products that feature the valve's patent design that enable the consistent, precise delivery of beverage and or ingredients regardless of the factors that plague traditional valves, the Newton Discrete Valve and the Wonder Bar M5 Bar Gun. With these innovations, our customers now have confidence that they are serving bottle-quality beverage or dispensing individual ingredients without the expense of consistently calibrating their systems, or wondering if their systems are in calibration. The Newton Discrete Valve and the Wonder Bar M5 Bar Gun eliminate calibration, waste, reduce service calls, and improve customer satisfaction through consistent delivery of product. The Newton CFV Valve is also being used throughout Middleby to control mixing and dispensing of highly concentrated ingredients, such as individual flavors, even cleaners. These concentrations can be as high as 500 to 1, which unlocks our customers' ability to change how they distribute and dispense ingredients or even clean their equipment, say, with Newton's new clean-in-place technologies. The final dispensing solution that I'll discuss is a Wild Goose Cervici, which utilizes the same filling systems to dispense beer that Wild Goose uses in its industry-leading high-speed canning lines. Servizi turns anyone pouring their first beer into a seasoned bartender by automatically dispensing beer twice as fast as a normal tap system while also minimizing waste by precisely controlling the pour volume to the nearest fraction of an ounce or just a few milliliters, all with no training. Servizi also improves keg yield from 75% to 95% by controlling the pour volume in the beer's serving conditions. While I didn't get a chance to cover the other products, such as the Pizza Bot 2.0, Evo Event, the Very Mixer Ergo, we will hit those in later calls, or again, you can see them at the NRA show. But know they share the same traits as the other innovations I described today. They all reduce waste, increase throughput, maximize consistency, decrease simplified labor, all of which improve our customers' profitability. Thank you, and over to you, Brian.
spk19: Thanks, James. For the first quarter, we generated revenue of $927 million and adjusted EBITDA of $186 million at a margin of 20%. Q1 gap earnings per share were $1.59, and adjusted EPS was $1.89. Commercial food service revenues globally were down 4% organically over the prior year, Yet, the adjusted EBITDA margin was consistent with the prior year at 26%. All the margin values I will go through are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. In food processing, revenues for the first quarter were nearly $163 million. This was our second best Q1 ever for this segment, with a tough comp given the Q1 record was set last year. our adjusted EBITDA margin held strong and was also consistent with the prior year at nearly 24%. In residential, we saw an organic revenue decline of 22% versus 2023. The adjusted EBITDA margin was over 6% and was negatively impacted by our investment to attend the kitchen and bath show for the first time since 2016. We've seen a recent inflection in order rates, which is driving our view that the residential revenues have hopefully started to move off their low point. A high point for the quarter was our exceptionally strong operating cash flows of nearly $141 million for the quarter and nearly $678 million for the trailing four quarters. It was our best first quarter ever, and our free cash flow conversion was around 135% for the trailing four quarters. Our total leverage ratio is now down to 2.4 times. Despite the challenging quarter we faced from a revenue perspective, our business model demonstrated that we have resilient margins and continually generate strong cash flows. Nonetheless, in Q2, you will see some further restructuring charges as we continue to take actions to appropriately manage the business given market conditions. As we work to protect our margins, we are also aggressively controlling costs. In terms of an outlook, I will start by reminding everyone that the second quarter of 2023 was our strongest revenue quarter ever. So given recent order rates and demand for innovation, we expect total Q2 revenues to be up at least mid-single digits sequentially from Q1. But given the tough comp, we anticipate falling a little short of the prior year revenue level overall. To provide greater insights, I will separately address each segment. In commercial, the year-over-year comparison for Q2 is especially tough given the all-time record revenue for us in 2023. While we may fall a little short of the prior year revenue in Q2, sequentially, revenues could be up high single digits as compared to Q1. Our viewpoint is based on our backlog, which is currently up slightly from year end, and that order rates have been improving over the past three quarters. Orders through April of this year are up 15% over the back half of 2023. We also expect margins to be in line with prior year levels. Looking into the back half of the year, at this time we expect revenues to continue to grow sequentially and be at least mid-single digits above prior year levels. Moving on to food processing, recall that the Q2 of 23 was our second highest revenue quarter ever for that segment. And while I expect us to fall short of that revenue level in Q2 of 24, margins should be up over the prior year. And then on a sequential basis, Q2 revenues and margins should be up meaningfully versus what we just posted for Q1. So recall that lumpy is a word used to describe this business sometimes. As I look back to last year, we did see a big drop in revenues when we moved from Q2 to Q3, but that is not our expectation for Q3 of this year. We continue to see strength in this business overall. Orders in the past two quarters have been amongst our strongest intake periods for the segment, Thus, we are expecting that the second half revenues for this year will be above the first half of this year and above prior year levels. In residential, the good news is that the order trend is moving slightly upward. Looking at the past couple of quarters and extrapolating on the start of Q2, we are trending above the first three quarters of 2023. Revenues for Q2 of 24 will likely not be ahead of the prior year. And this is due to a year ago, our domestic premium indoor appliances having posted a relatively strong quarter. Nonetheless, we're anticipating stable conditions in our European businesses when comparing Q2 of this year back to 23, and we should see growth in the outdoor market in Q2. So this all results in a Q2 revenues should be above Q1. Visibility to the second half of the year in residential is certainly limited, but given recent trends, revenue comps, and building upon our showing at KBiz and the overall strength of our portfolio, our view for the second half of 24 is currently for growth, both as compared to the prior year and over the first half of this year. We are also working to maintain double-digit profit margins for the year. bringing it back all together for the total company we should continue to build and strengthen as we progress through 24. We look forward to Q2 being stronger than Q1, and we continue to firmly believe at this time that for the second half of this year, we will deliver sequential and year-over-year growth. We remain focused on operational efficiency and optimally managing our resources. We are sharply focused on controlling and reducing our costs. We remain committed to improving our margins. These actions should drive year-over-year growth in cash generated and consistently high levels of free cash flow conversion as well. So to further understand how we will achieve this, along with enjoying many tasty creations from both humans and cobots, Please come and see our people and products in action at the National Restaurant Association show later this month here in Chicago. Please reach out to us to arrange a visit so you can deeply understand how we are solving the needs of our customers, which will drive our growth in 24 and beyond. We remain committed to our mantra, more in 24. Thank you, and we will now take your questions.
spk12: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Mig Dobre with Baird. Please go ahead.
spk09: Thank you for taking the question. Good morning, everyone. Good morning, Mig. So if I understand your guidance commentary correctly, it sounds like book to bill in commercial food service was above one because backlog went up a little bit in a quarter. When you sort of think about the outlook that you've laid out for Q2 and the rest of the year, are you essentially baking in stable backlog and just sort of orders ramping relative to Q1 and that flowing through? Or is there still sort of a backlog conversion element here that comes to sort of help us in the back half of 2024?
spk21: Yeah, so I think we are thinking it's not converting. We're not reducing our backlog further. That's not the assumption if that's the question. That is the question. Yeah, I mean, I think we see order improvement as we go through the year. So I think backlog has come down as we had a lot of backlog, I would say, orders that were pulled ahead. We've kind of gone, I'll say, maybe to a certain extent the other way where inventory is not only at normalized levels, but a lot of our partners are slow to place orders because they know lead times are short. They don't want to carry inventory. And our channel partners, they see kind of their end users. A lot of the projects are geared towards the half of the year. They're not going to buy the product right now. They're going to buy it closer to execution. So when we started the year, January was pretty slow, not unexpectedly for a whole variety of reasons, some of it even weather-driven. And then we saw progressively improve as we went through the first quarter, and then it's improved a fair bit more as we've kind of gone into the early part, the second quarter. So that kind of lines up. with a lot of the commentary that we get from our channel partners along with the discussions that we have with our chain customers. I think a lot of the view and the confidence we have is based on the transparent discussions that we have with them, including what they see as the outlook, where the inventory is in the channel, and then kind of line that up with the order trends that we've had as we've progressed through the first four months of the year.
spk09: Understood. Thank you for that. My follow-up, sticking with this segment, is on the margin side. Comparisons are tougher in the back half of the year, so how do you encourage us to think about margins, especially on a year-over-year basis, And maybe related to all of this, are you seeing any sort of signs of price erosion or changing competitive dynamics in North America specifically?
spk20: Thank you. Yes, I'll contact you with Steve here.
spk21: I would say not necessarily. Not wholesale changes. I think the mix out there in the marketplace was a little bit different to start the year. I think some of the kind of more immediate replacement type business that tends to be more economy driven was a little bit more, you know, prevalent. So I don't think that's more of a pricing element as it is a mix element. And that was, we kind of get back to more of, I'll say specified, you know, Project driven and chain chain driven we expect some of the mix to improve as we go through the year so I think that that's a little bit of the of the dynamic That we saw at the beginning of the year and then maybe you want to touch on pricing.
spk11: Yeah, maybe with Steve We actually just recently announced a price increase that will be upcoming in commercial going into effect in mid-june and Our approach there was making sure our divisions were really going skew by skew, customer by customer, to make sure that we had captured all the price-cost dynamics that we've obviously all gone through over the past several years. So it'll be a, I'll call it a relatively minimal increase or a little single-digit increase as compared to prior year increases. Still want to make sure we're being very thoughtful about it. I think pricing, again, has been one of the more strategic initiatives in the company the last couple of years to make sure we're capturing costs, but also making sure we're certainly in a good place from a competitive standpoint. So that, again, was recently announced a couple weeks ago and goes into effect in mid-June for commercial.
spk19: And then I'll bring it around, this is Brian, to the margin side of the question. Obviously, you saw in Q1 that even with Lower revenues, we're able to protect the margins, and that's coming from a variety of things. There's some commodities impacts in there. There's the impact of investments we've made in the business. There's impacts of, I'll call it ongoing, striving for greater efficiency, cost control, headcount control actions in there. And so as we look forward, as volumes grow, we'll also have greater absorption. I think we'll have some modest pricing benefits. As Tim was getting after, we believe mix will improve as well. So we put that all together. And as I think about how the segment will operate for the entire year, I do think we will be slightly, modestly above the prior year. Obviously, there's some challenges always to overcome with cost of inputs and supply chain and the like. But nonetheless, I think it is, so will be, you know, a positive year over year.
spk29: Super. Thanks for the call.
spk12: The next question comes from Jeff Hammond with KeyBank Capital Markets. Please go ahead.
spk24: Hey, good morning, everyone. Morning, Jeff. Morning. Just want to stay on commercial food. I think you mentioned, you know, some permitting delays, you know, customers kind of contemplating strategy. It was interesting that you said, you know, you think for the year you're up mid-single digits in commercial food, and that kind of implies, you know, high single-digit, low double-digit growth in the back half. And so just wanted to get a better handle on, you know, if you're seeing some of these delays kind of move forward and what gives you the confidence in that second-half growth rate.
spk21: Yeah, maybe just add a little bit of color around delays. I mean, I think the world is not fully recovered from supply chain in some regards. I mean, I think as customers have tried to identify locations, open locations, right, they've got to get through construction, documentation, permitting. Those things have taken a bit longer. We saw that in the back half of the year. So, I mean, I think you know, those things are improving in terms of, you know, just the world normalizing, you know, but that is one of the things that we know that they've, you know, a lot of our customers have struggled and that's, you know, delayed. So I think those things get better. I think there's a little bit of muscle memory as well as customer. The world has kind of gone from, you know, from crisis management, you know, back to a strategic execution of, you know, business plans and, you know, So I think we're in a little bit of a restart, and I think some of those things cause slowness coming out of the gates, plus there's a lot of just dynamics that people were absorbing. Again, interest costs, while they've been up for a bit here, people have been monitoring it, and interest rates have been higher for that long. and then just, you know, where was pricing on menus because I think a lot of our customers had very favorable overlaps to the pricing that they had, you know, put through and were absorbing, you know, what was that impact to the consumer, what has been the traffic at the end of the year, at the beginning of the year, where food costs. So I think they've been absorbing a lot of that relative to the plans they had coming into the year and then re-auditing, you know, those plans. And I think those plans, by and large, held up, you know, and I think it's just, you know, taking a little bit more time to make sure, hey, are we doing the right thing and how are we, you know, working with, you know, our operators, et cetera. So I think, you know, we still see, you know, the strategies out there, you know, what they want to execute to. So again, I think that's where maybe they weren't ready to go on January 1, but I think they're, you know, those things are still progressing, and I think that kind of gives us some of the confidence and the visibility. So again, while maybe things were, the engine was slow to start, not entirely surprisingly, but while we think that the engine will be stepping on the gas pedal as we kind of progress through the next couple quarters.
spk11: Yeah, please go ahead. Jeff, this is Steve. I'd just add on to that. I mean, I've talked about it before. I think one of the nice byproducts of the last several years is a lot more transparency from the chains in terms of new store opening plans. And I'll just say, even though, as Tim alluded to, a little bit slower start from a new store order or a new store build perspective, they pretty much all recommitted several times to their overall plans for the year. So I think that's what gives us confidence in more of the back half of the year. I think the other thing, too, I would point out, I know we've talked about before the dynamic between new store orders and the replacement orders that we feel like have been deferred over the last three, five, seven years. What's been exciting is there's been a number of the large chains that have announced initiatives where the corporate entity is going to help franchisees do you know, refreshes to build, you know, their stores and help them in that replacement cycle. So I think that's a relatively new nuance. So we think new store builds, you know, pick up the back half of the year and we're still very bullish on, you know, this replacement cycle that we feel is going to really kick in over the next couple of years specific to the chain customers.
spk24: Okay, that's great, Keller. And then just A couple on Res Kitchen. One, can you quantify the kind of one-time KBiz investment? And then it seems like you're, you know, maybe the D-stock's done finally in outdoor grills, and you feel a little bit better about that, but that, you know, kind of the U.S., you know, indoor kitchen is still, you know, maybe one of the choppier areas. Is that correct?
spk19: Yeah, on the KBiz investment, I'd put it, you know, 150 to 200 basis points per of drag in the quarter? And do you want to address the market commentary?
spk21: Yeah, so, yeah, no, I think that's right. I mean, we're, you know, the inventory in the channel is, you know, far less of an issue. I mean, that was true in commercial as well as residential start in the year. So it really starts coming down to end user, you know, demand. Sell-through probably on outdoor has not been very strong, so it's kind of, I'll say, a neutral factor so far. But we're early in the grill season, so I think it is what has yet to come as we start moving into spring and summer months. So I think our revenues there will be highly dependent on how grill season performs, not only through that, but then that will lead into how do we think about you know, the restocking going into 2025, and we do feel like they're, you know, we're winning in some areas, you know, picking up floor space, and the way the grill market works is some of those floor planning that happens right now really, you know, is geared toward next year, not even this year, so we don't get some of those benefits until later in the year. With the indoor market, yeah, I mean, I think, again, we're kind of, you know, bouncing along you know, at the trough, while we think that, you know, a lot of our consumers are really geared, obviously, to that upper, you know, echelon in the luxury market, and we see some, you know, improvement. Some of that is a little bit longer, you know, lead time, so we've seen improvement in order rates, and sometimes, you know, the remodels and the new builds, they don't need that product next week like they may in the replacement market, so we're We see some of that starting to pick up. I think the show was very good for us because, again, it was a large investment, but we've really transformed the portfolio over the last number of years, adding new brands, new products, innovations, colors. It was a very exciting show, not only for us as a company, but for our channel partners, the builders, the dealers that came through. I think that was really you know, the intent is to kind of take the world a little bit by surprise of how far we've come in the last, you know, five years, and now start funneling them, you know, to our residential showrooms that we've also invested in over the last, you know, couple years with our Chicago showroom opening in the middle of last year. So I think those are the things that help pick up traffic there and build kind of a long-term, you know, pipeline of opportunities as people start, you know, converting, Over to the middle B portfolio. So I think we see the gears turning there and then we start seeing the housing Improve, but I think it's going to be modest improvement. That's going to you know, take some time here So but I think that's where directionally, you know, we're at the beginning of kind of those Those signs and and I think it'll just it'll kind of you know, we would like it to be v-shaped I think it's a little bit more u-shaped and But, you know, I think we will, you know, see progression as we move through the year.
spk22: Okay. Appreciate it, guys.
spk12: The next question comes from Sari Boroditsky from Jefferies. Please go ahead.
spk25: Hi. Good morning. I just kind of wanted to build a little bit more on the residential questions. Can you just quantify the performance in resi, you know, in grills versus Viking versus Saga? And then when you talked about the improving order rates, it sounded like that was largely driven by the industry show, or if not, where did you see that uptick in demand come from?
spk19: Sarah, this is Brian. I'm sorry. Could you repeat the first part of your question?
spk25: Just the performance in the quarter of grills versus Viking versus AGA.
spk19: Okay. Got you. Yeah, I mean, it was a challenging quarter across... across the board in terms of the year-over-year comps. I noted that Q2 last year was really strong for domestic premium or mostly Viking, but we have other brands as well. But we started the year there last year strong as well. So certainly, that market has been down. AGA and also the European markets have been continuing to be in challenging environments. We haven't seen things, relief or improvement in the UK housing market. I'll say on the continent, we've been maybe faring a little bit better given how Novi's product offerings are resonating And on grills, we've seen a different buying pattern this season as compared into the past with later load-in by our customers, albeit also they're being reserved in their buying. So Q1 did see weakness in grills, but we're actually looking forward to much improvement there should trends continue in the second quarter.
spk25: Great. And then, you know, obviously residential margins were weighed down by the show. What do you need to see to support double-digit margins in that segment? Is it just volume or anything else? And then how do you think about incremental margins when you do see volumes turn positive there? Thank you.
spk19: You know, I think, you know, once you strip out some of the show impacts, you know, recent history, you know, has been you know, a good indicator of, right, where the business, you know, can and does perform. So, you know, as we start getting, you know, closer to, you know, 200 million or even 190 million, you know, we're likely to see closer to the double-digit margins. You know, we continue to evaluate, you know, costs, you know, in this business and You've seen, obviously, we've been taking charges continually to address that. So we will do more of that to make sure we are right-sized for the current environment. But operationally, we've been making significant investments in these operations, and that really does drive really positive increments. And I've noted to some before, Our factories in this segment tend to have more throughput than in commercial. We have fewer yet larger factories in terms of the volumes they run. So I'm not trying to minimize at all our focus on, again, looking at all the current costs and actions. But dare I say, as the volumes come back, the margins will come racing back as well.
spk25: I appreciate the call, and I'll see you at the NRA show. Thank you.
spk18: We'll see you next week. Thanks.
spk12: The next question comes from Tammy Zakaria with JP Morgan. Please go ahead.
spk01: Hi. Good morning. Thank you so much. I have two questions regarding the commercial food services segment. So first of all, can you comment on the price realization you saw in that segment of in the first quarter. I'm hoping to learn whether the negative organic growth was purely volume-driven or there is a mix of both price and volume.
spk19: This is Brian. It is mostly volume-driven. We haven't taken many price actions recently. Obviously, Steve noted that we'll be taking one, a modest one, currently. So it's fair to assume that that is very highly dominated by volume.
spk21: Yeah, maybe I'll just, we did not have a price reduction, right? So it really is volume. And we did not take a, I'll say, a typical price increase at the end of the year. We've taken significant price increases over the last several, you know, supply chain related. And I think as we went into this year, we were monitoring, you know, where we were at with a price cost standpoint. And we did see some cost increases, not only labor-related, but, you know, even a little bit of supply chains as we went through the year, hence, you know, the evaluation as we went through Q1 to why, you know, Steve's taken a price increase down on Q2. But as you kind of think about Q1, we got, you know, didn't go backwards on price, but we didn't get a benefit, and we probably had a little bit of weight of supply chains still coming into the year.
spk01: Got it. That's very helpful. So I wanted to follow up on that. So in June, you're taking some price increase. I think you mentioned low single digit. Again, I'm trying to understand whether the price increase might actually stick or face some resistance given demand is weak. And you just mentioned there's some price cost pressure in the industry right now. So can you speak to the rationale for the June increase and how distributors are reacting to it if you have already communicated to them about it?
spk11: Yeah, Tammy, this is Steve. It has been communicated out to the marketplace at this point. And I do believe it will be relatively sticky. I mean, obviously, it's always a task to make sure it does come through. But I think given the thoughtfulness the team has put behind, again, I keep coming back to it's not an across-the-board kind of peanut butter approach. It really is being thoughtful on a skew-by-skew approach. customer-by-customer approach, so it's hitting both general market and chain customers. So we do believe it mostly holds, or it is sticky and certainly comes through in early third quarter.
spk23: Understood. Thank you.
spk12: The next question comes from Brian McSmarra with Canaccord Genuity. Please go ahead.
spk05: Hey, good morning. Thanks for taking the questions. I guess two for me on residential. First, a question we often get from investors is the breakdown in sales and grills versus the rest of residential kitchen. I don't expect you to quantify, but can you give us maybe a qualitative picture of kind of how grills look today relative to when you first acquired them?
spk15: This is Brian.
spk19: Obviously, the grills are down quite significantly from when we bought them. I think we've said before, over 50%, and I'll probably leave it at that at this time. I think it's fair to, in general terms, I think about the segment in fourths. I'd say you think about, I'll call it, U.S. domestic indoor premium, European, or I should say the U.K. business, the outdoor business, and then all else, which would primarily be, I'll call it the European, continental European businesses.
spk05: Yeah, that's helpful. And then secondly, on grills again, I'm curious what you're seeing currently with your retail partners in the category. Are they willing to either add to or at least hold floor space for the category? And if not, how do you break in given your relatively small size and brand recognition compared to the bigger players? Thanks.
spk20: I'm not sure with the holding floor space if that was specific to us or
spk21: or grills overall.
spk05: I mean, it's specific to the category, but I mean, presumably you would need to be a part of that just given your relative size at the moment.
spk21: Yeah, I mean, I think, you know, we've focused kind of on, you know, product differentiation, some of the new technologies that we've had, and I think, you know, one of the items that we've highlighted here is our connected platform, you know, both for Masterbuilt, as well as Kamado Joe. That's definitely something that we think we've got a lot of innovation that you don't see across the grill platform. Also, we've had the heavy focus on charcoal, which is differentiated, particularly with the vertical charcoal, the Masterbuilt. I think there's things that we offer that some of the other players out there do not have, and we think we follow some of the trends of the fuel type, which ties to flavor, and digital, which ties to convenience and culinary. I think those are some of the things that we think some of the retail partners recognize also, and I think we've had some success with you know, certain partners there with picking up, you know, floor space over the, you know, the last 12 months there and, you know, probably going into 2025 as well.
spk12: As a reminder, if you would like to ask a question, please press star then one to be joined into the question queue. The next question comes from Walt Liptock
spk14: with seaport res please go ahead hi thanks uh good morning guys yeah i wanted to uh just back up to um brian when you gave the guidance and can you just repeat the the sales guidance for the year i think you said the sales you were expecting sales to go higher you know to grow this year and margins as well as cash flow to be higher is that correct um yes um let me uh find my uh
spk19: place in the script area. On the total company basis, I started with that Q2 will be stronger than Q1. As we look at the second half of the year, we will grow sequentially. Q3 above Q2, Q4 above Q3, as well as for Q3 and Q4 being above prior year levels. I did note that for Q2, we will be a little bit of a challenge to achieve the prior year revenue level. So Q2, better than Q1, maybe a little short of prior year. Q3 and Q4, ahead of prior year, and also sequentially improving as we move through this year. And with that, and so those comments were very specific but they do also generally apply to margins as well. I do expect total company margin to improve sequentially as we move through the year. Obviously, we demonstrate we have a business that really gets nice increments and has nice leverage, and I'd expect to see that in the segments individually as well.
spk14: Okay, and just to make sure I'm totally clear on this, so the revenue, you're expecting revenue to go up this year even with the tougher first quarter?
spk19: Yeah, you know, and I think, you know, I know you're, you know, when you tear it apart and that you do look at things, you know, by segment. So total company revenue, we do expect up. Obviously, the most challenging segment and the one where I'd say we have You know, some of the lesser visibility right now is exactly how, you know, residential, you know, will play out, you know, where we have started weaker. So, you know, higher conviction in the other two segments, I think, you know, in terms of the year-over-year, and I think we do end up, you know, still total company year-over-year.
spk14: Okay. Okay. Okay, good. And then just to follow up, when you guys were talking about the CFS segment and some of the strategic changes or maybe strategy normalizing from crisis, I noticed that Shake Shack commented that they were decreasing some investments this year. Was that what you guys were referring to, or is there something else out there in the market that you were referring to?
spk15: You know, you're talking about the overall, you know, building kind of new stores in the strength of what's happening out there.
spk19: I mean, you know, our comments are not specific to OneChain, certainly not specific to ShakeShack. I think as you look at the print across the board from, you know, the very large, you know, QSRs, right, that they have, you know, started the year slower in terms of, you know, completion of projects, right? There was weather and permitting and such. So again, I think it's a pretty consistent comment we've seen across the large QSRs that no one, they're all still committed to their build plans, it just did not start off the first quarter as probably exceeding any of their internal benchmarks for the total number of new doors to be opened.
spk26: Okay, great.
spk14: And maybe just one final one on the NRA Joe, I think you guys mentioned the Invoke combi oven that we've heard some things about. I wonder if you could tell us a little bit about the features and what you're expecting as you commercialize that product.
spk04: Yeah, so I'll jump in and talk about the Invoke. So we've spent the last several years designing the Invoke and finally have it out on the market today. We think there's a ton of novel features in Vogue. One of the first things that I like to talk about is the fact that we've developed a half-size combi oven that fits full-size combi pans. That means that if you think of a traditional full-size combi oven, it's got kind of X dimension. If you look at a half-size combi oven, it's about a third bigger. less in volume than a full-size combi. So what does that mean for the kitchen? That means more space. For other equipment in the kitchen, that means less hood requirement. It means lower energy input rate into the product, more efficient product. A couple other features we've done is that we've really spent a lot of time on the wash cycle, reduce the amount of power going into the wash cycle. We have a steam on-demand, you know, feature that is incredibly efficient using 17% less energy for the steam on-demand. And then I will say, you know, the last, you know, cool feature that we've done is we've been able to, you know, add another shelf in the oven. So traditionally, you know, your combis are either six or ten pan stoves. Here we have combis that have 7 or 11 pans, so we've been able to increase the production capacity in the oven. By doing that, we improve the efficiency of the oven as well. We're pretty excited about it. Our combi has a middle B1 touch control. It is open kitchen quality. So it's really one of the more advanced pieces of technology that we've got coming out at Middleby. And I think, you know, when you compare it to the other combis in the marketplace, you know, this puts us right up at the number one, number two, you know, combi on the global market.
spk17: Okay, great. Thank you.
spk21: Yeah. I mean, I just, you know, I think I'm glad you asked the question because, I mean, I think we are excited about it. I think it's a good example of a lot. We talk about innovation a lot. James goes through it. These are significant investments that we've made over a number of years on a lot of different products that we think some of them are the future of, you know, innovation where the restaurant is going, which a lot of that has yet to be realized. And some of it are Existing large markets copy is clearly one of those. It's a large market You know, we lead in a lot of categories copy has not not been one and this was a multi-year Development project to make sure that we had the best in class features James just went through them all but water energy space throughput and again that the the ease of use with the control and that also James and team have developed over multiple years and connected to IoT, which we think is the future. So it does have a lot of legs here, and I think it's gonna be one of the things that helps us grow. And we have a lot of expectations for it over the next several years, and we have a lot of channel partners that are highly, not only intrigued, but engaged right now as we start bringing it to market. So I think just another great example of a lot of things that we talk about. And I think this one will gain traction much like, you know, last quarter James talked about, you know, ICE, right? Like, again, another large market of similar size. We had not necessarily been a player as you kind of went back a number of years ago. And we are gaining a lot of, you know, traction in that. We've got a full lineup of solutions there. And so whether that's success with some channel partners and some chains, we're starting to see that. early this year, and again, I think one of the things that bodes well for us growing in certain targeted product categories as we go through the next several years.
spk04: I'll just add one more point. The InvoCombi is shipping now, so we've been distributing the product in Europe now for a number of months, and now we have just started distributing the product in the U.S., so it is actively being sold.
spk07: Thanks, Walt.
spk12: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk21: Yeah, no, I'd like to thank everybody for being on the call. I just got one final comment, which is a little bit more of a follow-up to some of the questions on residential. So I'll say it's an answer to a question earlier. Just as we think about margins and fundamentally, our residential business is much stronger today than it's ever been from new products, manufacturing efficiencies, quality, the investments that we have made in distribution and some of the capabilities, things that are, you know, our design team, showrooms, you know, etc. So Brian made a comment of margins come racing back. We're operating at volumes that are far less than normalized periods, so pre-COVID, if you look at the number of units that are going through a factory. So just kind of re-answering a little bit of the question of what gives us confidence for the margins in that platform and why it is a great platform. You're seeing it at its worst right now. but it's actually the strongest it's ever been right now. So a normalized period, we're pretty excited about all that residential has to offer. So certainly we've got a couple quarters still here of rocky road ahead, but we see it inflecting and just something that I wanted to hammer home given that question that was put to Brian earlier. So with that, we'll wrap it up and Thanks everybody for attending the call today.
spk12: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer