The Middleby Corporation

Good day, and thank you for joining us for the Middleby second 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 the opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Mr. Fitzgerald. Please go ahead.

Good morning, and thank you for joining us today on our second quarter earnings call. As we begin, please note there are slides to accompany the call on the investor relations page of our website. We're pleased with the performance of our second quarter as we posted strong profitability despite revenue declines versus 2023, reporting margin expansion at both our commercial food service, and our food processing businesses. At our residential business, we demonstrated margin improvement from the first quarter while we continued to navigate the disrupted housing market, which remains at near all-time lows. We were also pleased to report another record quarter in operating cash flow, both for the quarter and the first half of 2024. Cash flows generated by our business have normalized following the disruption from supply chain, and we have rapidly reduced our leverage over the past year, while at the same time making investments in critical strategic and operational initiatives positioning us for the future. Although we reported Q2 revenue declines versus the prior year, orders trended positive in the quarter, and we realized order growth at all three businesses in comparison to the prior year. Activity levels have generally improved with the order quoting and projects in the pipeline. We're also excited to see the interest in our many new product innovations across all our businesses. Although we are well positioned, we remain cautious given macroeconomic factors, including high interest rates and the impact of inflation on the consumer, which continues to present a challenging backdrop carrying into the second half of the year. At our commercial food service business, we've seen gradual improvement in ordering levels throughout the first half. with a slow ramp up given continued longer lead times for permitting and construction, along with longer deliberation on customer business plans given current economics of higher restaurant operating costs and monitoring of restaurant traffic levels. While conditions are challenging, our channel partners have built backlogs weighted to the second half of the year, and our chain customers have plans for operational upgrades and store openings. These plans have slowed in comparison to our original expectations at the start of the year, but continue to remain stronger in the second half versus the first half. We also continue to focus on new market share opportunities, expanding into under-penetrated categories for middle B, such as beverage and ice. We're making progress in these areas and see future growth coming from new categories we have targeted for expansions. And we are well positioned with our launches of many new products in our core product categories, with innovations to address the need to drive restaurant efficiencies, labor reduction, and enhanced speed of service. As highlighted on prior calls, we have launched a record number of industry-leading new solutions across all product categories, both hot and cold. We also continue to invest and progress our forward-looking technology initiatives that will pay off in the longer term. Middleby is positioned to lead in areas of automation, digital, and IoT, innovation that we believe will shape the future of the restaurant industry. At a residential business, the housing market remains challenging with very low levels of existing home sales, new home starts, and remodels. While this is having a significant impact to our business today, We believe it will ultimately lead to pent-up demand with the benefits of recovery in the years ahead. And while the residential market will take time to fully recover, the luxury end of the market has shown recent improvement. We realized ordered growth in the second quarter and expect that will continue to progress through the balance of the year. Despite the challenging market, we are better positioned than ever with our industry-leading brand portfolio. and exciting launches of many new products with a wide breadth of designs and innovations. Operationally, we've made investments that will benefit our efficiencies and quality and are confident this will also support our efforts to achieve our profitability targets as normalized volumes return. At our food processing business, the pipeline of active projects continues to remain strong for expansion and needed upgrades with requirements from customers to increase throughput reduce labor, minimize food waste, and with a growing focus on sustainability. Automation remains in great demand. Our customers are proceeding cautiously as they monitor food costs and the interest rate impacts on larger projects. However, as market dynamics have become more stable, we have seen improved conversion to orders in the second quarter and continue to see a constructive backdrop for the second half. We continue to execute on our strategy to become the leading provider of best in class, full line and integrated solutions for the protein and bakery processors. We believe the strategy is resonating and we are positioned to partner with our customers as they evolve their businesses and address the need for automation in their operations. In closing, while we navigate the near term market conditions, we continue to focus on executing our strategic business initiatives expanding our profitability, and growing our cash flow, while building upon our competitive advantage at each of our three industry-leading food service businesses. And we are confident this is setting us apart for the long term. Now I'll pass the call over to James to spotlight some of the exciting new solutions we have introduced in our food processing group. As we continue to expand our best-in-class solutions at this segment, we're also extending into new applications and categories, expanding our addressable market and providing for continued future growth opportunities. James?

Thank you, Tim. Over the past four quarters, I've talked exclusively about the innovations in our commercial and residential brands. For example, last quarter I covered the great eight innovations as recognized by the National Restaurant Association. In Q4, I highlighted all the Middleby residential products that were debuted at the 2024 Kitchen and Bath Show. In Q3 of 23, I went deep into ice and all the opportunities that are happening at Follett and IceTro, and that we expect to see an additional $50 million of incremental revenue between these brands in 24. And finally, in Q2 of 23, I discussed the Taylor Double-Sided Grill and the operational benefit it brings our burger and steak chains. and most excitingly, the work that we continue to do at a fast, casual Mexican food chain. For this quarter, I'm going to dive into our food processing group to highlight the full-line solutions that Middleby has built organically and through acquisition. These solutions range from full-line bakery systems to full-line protein systems, but for today, I'm going to discuss our solutions for precooked bacon and poultry, as these represent a significant area of growth and opportunity for growth, respectively. And as always, the products I discuss can be found in the investor deck that Tim referenced. Our precooked bacon line comprises of eight Middleby brands working to deliver the best tasting, visually appealing, and most profitable bacon lines for our QSR and retail processors. At the heart of each line is the Turbo Chef by Alcar, which I've discussed on previous calls. For those that remember, the TurboChef produces the highest product yields, best tasting and visually appealing precooked bacon by injecting microwave impingement and steam into the cooking process. The TurboChef nets a 2% yield gain when compared to other thermal and 915 megahertz microwave systems. Another inline solution by Middleby improves yields up to 7% with Thern's IBS4600 slicer, which uses four independent lanes with four independent vision systems to ensure every slice of bacon is the same weight and thickness, regardless of belly variation. By combining the other six brands, VMAC, Thern, Danfotec, MP Equipment, Scanico, and Rapid Vision Pack into the total full-line solution, we improved yields another 4% thus driving towards a total yield improvement of 13% with our full line solution. Continuing with the precooked bacon line, let's shift from yield improvements to labor savings. The Middleby full line solution saves approximately six FTEs per line. In looking at the brands contributing to the labor reduction, VMAX Auto Comber and PacPro's under-leaving and stacking systems work together to reduce manual labor by automatically combing and decombing bacon bellies and stacking full bacon sheets without human hands. By combining the yield and labor improvements on Middleby precooked bacon lines, our customers can expect to save $1.3 million per line per shift over a year. Beyond bacon, Middleby Processing is making big improvements to its full-line poultry systems with a focus on trimming, breading, and frying technologies. At the heart of our poultry line is MP equipment. They produce an industry-leading water jet cutter that optically measures and then trims and portions poultry cuts by utilizing our onboard vision and algorithms to minimize waste. As an aside, this is how we do it today, and it works exceptionally well. But in a subsequent call, I will discuss some radical improvements to our fifth-generation water cutting machine, so stay tuned. Okay, back to it. From trimming and portioning, these pieces move into MP's new thoroughbredder, where we are off to the races. Their advancements in bredding coverage and improved bredding recovery improved material utilization by 10%, which nets approximately $900,000 per year in material savings. Additionally, its design allows a processor to run multiple breading types without having to physically reconfigure the breader, which reduces changeover times by 45%, thus allowing for incremental capacity gains that net approximately $1 million per year. Combining our savings and capacity improvements, our customers can expect a six-month payback on MP's new Thoroughbredder. Progressing down the line, we move into MP's fryer with Filter Automation's newly integrated filtration system. By combining the MP fryer and Filtration Automation's Micron Pro filtration system, we can extend oil life from 36 hours typically to over 480 hours typically, thus reducing oil expense by 13 times, which saves approximately $500,000 per year in oil for a typical 2,000-gallon fryer. It is important to note that since the MP breading system, the Thoroughbredder, improves breading adhesion, we lose less breading into the fryer, which improves oil life as well. The Micron Pro filtration system is completely autonomous and filters nearly continuously, only stopping four minutes per hour to expel the filtered material, i.e., the filtered cake from the system. By doing this, we reduce the amount of free fatty acids and prevent the formation of polar compound. These are the chemical species that denature oil. Lastly, the Micron Pro uses no consumables or accessories, and since the filter cake has very little residual oil, less than 2%, the cake can be used for pet food, animal feed, and fertilizer, making it the most economical, sustainable solution for frying. Middleby will continue to invest and acquire technologies to make our full-line processing solutions the most advanced and economical for our customers to operate. I look forward to discussing further advancements in the Middleby Processing Group on later calls. Thank you, and over to you, Brian.