The Middleby Corporation

Good day and welcome to the third quarter 2024 Middleby Corporation earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tim Fitzgerald, CEO. Please go ahead.

Good morning. Thank you for joining us today on our third quarter earnings call. As we begin, please note there are slides to accompany the call on the investor relations page of our website. Third quarter proved to be more challenging than expected, particularly for our commercial food service segment as lower restaurant traffic and a re-acceleration of already high food costs in recent months further pressured restaurant operators, resulting in delayed investment and greater restaurant closures. Although we face macroeconomic headwinds across our food service businesses, the picture remains strong as more favorable conditions return with pent-up demand and expected multi-year recoveries for the industries in which we participate. While we faced revenue declines in the quarter, our profitability initiatives continued to take hold as we posted strong margins across our businesses, and we reported margin expansion in comparison to the second quarter. We were also pleased to have reported another very solid quarter in operating cash flow, with year-to-date cash flow of $447 million, roughly 20 percent ahead of a record 2023. Given the strong cash flows generated by our business, we have rapidly reduced our leverage, which has declined from 2.7 times a year ago to just over two times at the end of the third quarter. Our balance sheet is strong, allowing us to capitalize on market opportunities as they arise. And we continue to make critical investments in strategic and operational initiatives, positioning us for the future. At our commercial food service business, gradual improvement in ordering levels we saw throughout the first half dropped off as we progressed through the third quarter. Restaurant traffic, which was anticipated to improve at many of our customers in Q3, declined by a reported 3.5% across the restaurant sector for the quarter. At the same time, food costs, which had been improving throughout 2023, saw a re-acceleration of cost increases in recent months. These factors slowed execution against our customers' business plans in ordering, of equipment for upgrades and new store openings. Overall, the economic headwinds for the industry have resulted in an estimated 1,500 restaurant closures for 2024, as compared to originally expected unit growth of 6,000 from when we started the year. Although conditions are challenging, our chain customers' business plans, while delayed, largely have not changed. And for the longer term, The industry is still down over 100,000 food service locations, but with forecasted net unit additions expected to return in 2025 and with continued growth over the next five years. As highlighted on many of our calls, we have launched a record number of industry-leading new solutions across all product categories, with a building pipeline of opportunities tied to customers yet to be realized. As conditions improve, we expect this pipeline to be realized. We are well-positioned to support industry trends with innovations to address the need to drive restaurant efficiencies, save on food costs, reduce labor, and enhance speed of service. Additionally, we have made significant investments through acquisition and new product development, expanding into large under-penetrated categories for Middleby. In particular, we are realizing momentum and our targeted entry into the multibillion-dollar ice and beverage category, and are just in the early chapters as we further grow our offerings and penetrate into this segment. At our residential business, the housing market remains challenged with low levels of existing home sales, new home starts, and remodels. Existing home sales that we originally anticipated to improve during the year continue to further decline in Q3 against multi-decade lows. This is continuing to have a significant impact on our business today, both on the top line and our profitability. Unit volumes across our residential brands are down 30% to 40% in comparison to historic normalized pre-COVID levels. The expected recovery back to pre-COVID volume levels will result in a significant profitability expansion back to our historic norms. While operationally, we are actively making investments in our manufacturing capabilities that are benefiting our efficiencies and quality, supporting our efforts to achieve our long-term profitability targets. While we navigate these current market conditions, we've seen initial signs of recovery with growth in certain areas, such as our outdoor business, which is driven in large part by replacement demand. Our premium indoor business, which has a greater exposure to longer-term recovery areas of new home build and remodels, we expect to follow as the lowering of interest rates begins to take hold leading into a multi-year recovery. We are better positioned than ever to benefit as this recovery occurs with our leading brand portfolio, many new product launches, and wide array of unique offerings and designs. The traffic at our residential showrooms continues to grow as we engage more than ever with kitchen designers and dealer partners. We are reaching a new and expanded audience, and this will provide benefit for the years to come. At our food processing business, the conversion of opportunities into orders remains inconsistent. As customers have proceeded cautiously in recent quarters while they monitor food costs, while also measuring the impact of higher interest rates on larger projects. However, the pipeline of active projects continues to remain strong and has grown throughout the year. There is a continued demand for our solutions to increase throughput, reduce labor, and minimize food waste. As a result, we see a constructive backdrop for 2025 with expected greater conversion of orders in the pipeline occurring as interest rates decline and market conditions for food processors are becoming more certain. We continue to execute upon our strategy to become the leading provider of best in class, full line, and integrated solutions for protein and bakery processors. This 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. As we continue to grow our best in class solutions, we are also continuing to expand into new applications such as poultry and snack foods, expanding our addressable market and providing for continued future growth opportunities. While we navigate near-term market conditions, we continue to focus on the execution of 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. Now I'll pass the call over to James to highlight some of our strategic investments in service and also spotlight some of the recent exciting new product innovations providing tangible cost savings and operational efficiencies to our customers. James?

Thank you, Tim. Before I get into my discussion for the quarter, I'd like to recognize Nikko, one of our commercial brands best known for producing an automated chain-driven flame broiler. Two nights ago, Nikko was awarded Vendor of the Year by Burger King for their latest broiler innovation and their outstanding customer service. Our broiler saves a typical BK operator approximately $6,000 a year on energy and reduced maintenance cost. Congratulations, Team Nikko. Great job. As Tim mentioned, you can find slides referencing my discussion in the earnings deck. NECO's next-generation flame broiler continues to be the benchmark for automated frame broilers, as it has been for the past 50 years. The NECO broiler features high-efficiency gas burners and is 50% faster than competitive models. It also has an energy-saving feature that allows the operator to shut down 50% of the broiler during non-peak times. These features qualify the broiler for meaningful energy rebates across the United States. Lastly, the Nikko broiler is open kitchen IoT ready and utilizes the Middleby OneTouch controller. Since Nikko set the theme around automation, I'm going to stick with it and discuss another innovation from Marko, a commercial food service beverage brand. The Marko MilkPal addresses the most significant product challenge that every coffee shop and barista faces, milk. I'm sure most of you are surprised to hear this, But milk impacts speed of service. For example, up to 80% of a latte's service time is tied to milk frothing, otherwise known as micro-foaming. Additionally, 20% of the coffee shop's milk is wasted through overproduction and or inconsistent product quality. Frequent handling of milk jugs also leads to corporal tunnel syndrome, and finally, Cleaning, as milk is always a major food safety concern. The Marco MilkPal addresses each one of these challenges by automating milk dispense. The MilkPal is a must for every coffee shop and is well suited for C-stores, restaurants, and business and industry locations. The MilkPal can dispense up to 25 unique milk accompaniments, such as cold foam, hot foam, cold and hot milk, for example. The system is designed to sit next to any traditional semi-automated espresso machine, such as our Cineso MVP Hydra, or any semi-automatic espresso machine without a steam wand. The MilkPal is also a perfect accompaniment for the fast-growing cold beverage market. MilkPAL dispenses each accompaniment with a single push of a button, thus automating the art of micro-foaming with near zero waste, given its precise portion control. It also produces the highest quality micro-foam without using any steam or barista art, so the consumer tastes a richer, more flavorful, creamier, and more consistent micro-foam in their espresso beverage, whether it be hot or cold. Lastly, unlike other milk dispensing systems, the milk pail is plumbed. This allows the system to rinse itself between dispenses, thus improving drink-to-drink quality and consistency. It also allows the system to utilize Middle Beach's clean-in-place technologies, reducing daily labor required to clean the system. Now I'd like to circle back to touch on one of the reasons why NECO won Vendor of the Year, customer services. Service presents one of our largest opportunities in the industry, as we lost thousands of qualified technicians during the pandemic. To combat this, we built a state-of-the-art service training facility at our Middleby Innovations Kitchens, a.k.a. the MIC. Since opening in Q2 of this year, the training facility has become a major focus of our commercial brands. In the short time it has been open, we've trained and certified over 600 technicians on 20 of our highest technology brand. These technicians come from our authorized service partners and our large chain operators and franchisees, as they have their own service technicians servicing Middleby products today. Our focus is on creating a network of highly trained Middleby Advantage branded service technicians. These technicians will become our first line of defense in the field and ultimately one of our best sales tools as speed of service and an industry-leading first-time fix rate drives organic sales and replacement business. I would like to end with a quick mention that these products and all other new Middleby products highlighting Digital, embedded, and robotic automation will be on display at the North American Food Equipment Manufacturers Show, or NFM, February 26th through the 28th in Atlanta, Georgia. Please put this on your calendar, and we look forward to seeing you there. Thank you, and over to you, Brian.

Thanks, James, and good morning, everyone. This is Brian Middleman, CFO here at Middleby. I'll go through our financial results and a little bit of an outlook perspective for all of you. For the third quarter, we generated revenue of $943 million, which is a 5% decrease sequentially from Q2 and a 4% decrease versus the prior year. Our adjusted EBITDA was $213 million at a margin of 22.6%, which was up 80 basis points from Q2. In spite of the challenging market conditions that impacted our top line, our focus on innovative products operational excellence, and cost control allowed us to improve our profitability sequentially. All the margin values I will discuss are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. Q3 GAAP earnings per share were $2.11, and our adjusted EPS was $2.33. Commercial food service revenues were down 4% organically versus the prior year, and the adjusted EBITDA margin was nearly 27.5%. While we are facing tough comps, order trends, and thus revenues, in revenues we can considerably as we progress through the quarter. Given the top-line challenge, we are generally pleased with our ability to preserve margins. In food processing, revenues for the quarter were nearly $170 million, up nearly 1% over the prior year. We also saw orders weaken over the quarter, and some projects were pushed out. Our adjusted EBITDA margin remains healthy at over 24.5%, which is an increase of over 50 basis points from Q2. In residential, we saw an organic revenue decline of 4.5% versus 2023, yet we were able to expand the adjusted EBITDA margin to nearly 12%. We delivered strong operating cash flows at $157 million for Q3, up nearly 5% over Q2. Operating cash flows are over $700 million for the trailing four quarters, and our free cash flow over the past 12 months exceeds $650 million, with a corresponding yield on revenue of nearly 17 percent. Also, on a last 12-month basis, conversion on net income when excluding the prior year impairment charge is over 140 percent. Our total leverage ratio is now down to 2.2 times. Cash flow generation clearly remains a strong point for us. As I look to Q4, as is typical of our results, I expect that quarter to be our strongest one of the year. The amount of free cash flow we expect to generate should exceed that of Q3. Also, our full year 2024 free cash flow should exceed that from 2023. Continuing with some near-term outlook thoughts, given the conditions we are facing, my tone will be relatively cautious. Nonetheless, we still believe we will see sequential growth in Q4 over Q3. For the total company, I do expect Q4 to be our best quarter of the year, and revenue could again achieve $1 billion. This would represent 6% sequential growth and be close to flat to the prior year. This outlook is not without risk, but it is achievable. EBITDA dollars and margins would also step up from Q3 and would likely be similar to prior year levels. Pivoting to offering some perspective on each of these segments, starting with commercial, for Q4, we anticipate revenues to be approximately flat to Q3 given the macroeconomic conditions impacting our customers' ordering activity. There is some potential for slight growth, but that would require customer activity to inflate up from current rates. Moving on to food processing, in spite of the weaker than expected Q3, this segment remains in a relatively strong position. Q4 revenues could exceed $200 million for the first time ever, which represents sequential growth high into the teens, as well as about mid-single-digit growth on a year-over-year basis. In residential, we anticipate revenues could be up high single-digit sequentially and be around the prior year level. While market conditions are creating revenue challenges, we've been ferociously managing costs to preserve or expand our margins. For each segment, I expect Q4 EBITDA margins to be at least at Q3 levels with food processing likely achieving the most sequential expansion. Our enthusiasm and expectation for longer-term revenue growth and margin expansion remain in place. In the face of clearly suboptimal market conditions, our focus on operational excellence can clearly be seen as we proudly deliver strong margins and solid cash flows. Our customer engagement remains strong, and we expect increasing adoption of our solutions. Our multi-year outlook remains positive. Our innovations, along with our strength in operational execution, will power improved results. We are looking forward to returning to growth in 2025.

Thank you, and we will now take your questions.

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. The first question comes from Siri from Jefferies. Please go ahead.

Thanks for taking the question. Just starting with commercial, obviously came in weaker than expected in the quarter. You highlighted some challenges you're seeing in the restaurant space. Could you just talk about what you need to see to have a pickup and growth in this segment? And then maybe just comment on the overall visibility and order trends as you went through the quarter.

I mean, I just kind of mentioned the order trends. We came into the quarter, and they were pretty good. That gave us kind of some thought that the engines had started, and we'd seen the orders coming through. We'd spent a lot of time with customers, both dealers as well as chains, and they kind of reiterated a lot of their growth plans for the back end. half of the year in their outlook. But that seemed to weaken as we went through as, I think, just projects, whether it is upgrades, new stores, or some of the institutional projects just did not happen. So, I think they are still out there, but, you know, I think the execution has been tough, and I think a lot of that is because of the backdrop of the market and some of the, you know, the pressures that the restaurant operators are facing. So, you know, I think that's kind of what we saw through the quarter. We still engage with a lot of those customers. The pipeline is out there. They still are talking about store opening and certainly over the longer term have some pretty large targets out there for expanding, and that's both at larger chains as well as fast casual chains. But I think they're kind of, I'll say, clearing the underbrush with maybe some of the non-operating stores reassessing kind of the plans that they they have. Uh, but we, you know, we do believe that some of that will, you know, resurface and pick up as we kind of, as we go into 2025.

Yeah.

I mean, I would also add, you know, even though we're seeing this push of primarily new store openings from obviously the third quarter and probably some from the fourth quarter, The vast majority of our chain customers have really reiterated the total number of new stores still sticking to the plan. So new stores for 25 playing catch up for the stores they didn't open in 24. So there's very few that have actually reduced their number of stores in their pipeline. It's more just been the push out to the right that Tim referenced.

Thanks. Then maybe switching to residential, the margins came in better than expectations, I believe, despite the lower sales. So how do you think about margin improvement there as you go through 2025, and what should we see from an incremental margin perspective?

I think the big step up, frankly, just gets back to where we were pre-COVID. As I mentioned in the opening comments, We are at significantly for our, you know, for our legacy business, if you want to, you know, think about it that way, the indoor, you know, it's operating at much lower levels today. Fundamentally, those businesses are stronger than they were pre-COVID in terms of, you know, structurally, new products, quality, et cetera, and we continue to invest on that. So, just getting back to where we were pre-COVID, which, you know, we foresee will happen. That is a meaningful step up in the margins that gets us something to closer to the 20 percent. So, you know, timing of when that's going to happen is obviously the big question. But, you know, it is a very difficult housing market right now. As everybody knows, that's not going to hold forever. Interest rates are starting to come down. Certainly, you know, boats well. So, I mean, I think at some point we're going to have that as a tailwind. But just kind of getting back to normalized margins or normalized volumes is kind of the big driver. But on top of that, I would say, you know, we've had significant investments in the platform and new products that lay on top of that, which will get us to what we've kind of laid out as longer-term marketing targets.

I appreciate the caller. Thank you.

The next question comes from Meg Dobry from Baird. Please go ahead.

Yes, good morning, everyone. I want to start with commercial food as well. I mean, your implied outlook here in the fourth quarter for flat revenues, that diverges a bit from normal seasonality, right? I mean, typically you do see several percentage point increases into year end. And you were clear about the fact that there's been some push-outs on new store additions, but I'm wondering what you're seeing as far as your distributors, the normal kind of year-end demand or stocking that these guys do, and what that implies for where the channel inventory lies and really kind of how that might progress into 25.

Yeah, good morning, Meg. It's Steve. Very good question. So, I think historically you are correct. The fourth quarter you would normally see, actually both in chain development, historically a fourth quarter would be the busiest quarter of the year. And then as you're referencing more on our dealer and distributor part of our business, the fourth quarter historically you do see that bump. I think this is over the last several years, you've seen obviously a change in ordering patterns. I think you will not see that historical bump from distributors for a couple of different reasons. They're carrying less inventory than they have for a long time. I think we are well past. the excess inventory in the channel, but they're also less willing to bring in inventory as they would say in historical years, primarily driven by higher interest rates. The carrying cost of inventory is certainly higher than it has been for a long time. Our lead times are also in a much better place, so they can order in certainly much more real time. So they're trying to close that gap between order period and the time that the end user customer actually needs the product. I'd also say it's a little bit of a nuance as well. Historically, January 1 would be a common time to have price increases. We've been going with price increases in a more frequent cadence over the last several years during different parts of the year. We don't have one planned this time for January 1. So I think there's just some different nuances this time where I don't expect the traditional or historical bump from distributors bringing in inventory at year end, if that makes sense.

Does destocking sort of extend, or the headwinds that you kind of talked about, does that extend into 2025?

I think destocking, Meg, is... for the most part, behind us. I think the nuance is, as hopefully interest rates come down, I do expect that you could see dealers start to be more open to bringing an inventory back to, I would say, more pre-COVID levels. So I think destocking is behind us. So that, I think, is A tailwind, I think it's going to be a little bit of wait and see as interest rates unfold next year. Again, the carrying cost of inventory as to how dealers will think about stock levels for next year. So I think it's probably into the middle part of next year until you start to see probably dealers starting to ramp back up from an inventory standpoint.

Okay. You mentioned that there's not going to be a price increase for 25. How do you think about the The costs that are embedded in this segment, there's obviously materials, but a whole host of other items as well, freight, wages, where I presume you do have some inflation. And given the fact that we are in the environment that we're in today, I guess one of the things that I find a little bit surprising is that we haven't seen some kind of a formal either restructuring or cost-saving initiative that investors can sort of consider as they think about next year?

So, in referencing, hey, we're not having a January 1 pricing increase, I should have clarified, that does not mean we will not take pricing where appropriate in 25. I think we, over the last several years, I've mentioned on several calls, I think pricing thoughtfulness around mix has been one of the most strategic initiatives in the company. I'll hit the supply chain sign in just a second, but from a pricing standpoint, I mean, I think we've been very good over the last several years going back to when inflation really was spiking of taking pretty substantial price increases to play catch up. We did catch up, but now you still do see pockets of inflation, whether it's in specific components, whether it is in labor, whether, you know, transportation, when there were You know, the port issues going on on the coasts, container costs continue to ebb and flow. I think we remain very thoughtful about that. And there are specific products that have taken pricing even as late as the last several months just to make sure we're staying on top of it. I think from a supply chain standpoint, again, I said before, one of the best things that has happened as a byproduct of COVID is I think our supply chain really acts and thinks more as middle B across all three of our platforms. And so I do think you see savings behind the scenes, whether it's on steel, whether it's on materials, whether it actually is on logistics. thinking more as middle B. And I think that continues in the next year. So I guess I would say we're trying to hit from both sides, continue to be thoughtful about pricing. We're not afraid to take pricing next year if we feel like it's warranted, being mindful of certainly a competitive backdrop, while also, I think, continue to leverage the middle B supply chain for savings from our suppliers and logistics partners.

This is Brian. Let me address the restructuring side of things. We have actually been consistently taking restructuring actions throughout the year, and I'll say it's You know, it's over the course of the year in terms of, you know, which of the segments maybe have had more, you know, impact, you know, from that. But, you know, we have reduced headcount by, you know, hundreds of people. We've put in a lot of actions regarding what, you know, we would call the more manageable or, you know, discretionary types of expenses. And you are seeing the results of that in our you know, in our margins, right? We've been able to, you know, I'll say have strong, maintain some expansion in margins, you know, even given the top-line challenges. So, the restructuring has been, you know, active and unfortunately, but again, we're being, you know, reactive to market conditions, you know, consistent over the course of really, you know, the past, you know, two years, let's say. Again, residential is probably more leading on that, you know, earlier in the phase, and it's expanded, you know, more into a commercial. And, you know, food processing has not been exempt from actions, either.

David Chambers- Maybe those were on order of about 50 million. So, that's something that we, you know, we didn't announce, but we started to put in place in the second quarter. But a lot of that, some of it certainly, you know, was tightening the belt, which we will always, you know, do kind of managing the current environment. But a lot of that is also accelerating you know, some of the long-term structural initiatives that we have to get to higher profit margins. So, some of that is what's allowing us to deliver, you know, the strong margins, which when volume returns will turn into expanding the margins. And, you know, that includes investments in new factories where we're consolidating manufacturing, you know, and some of the investments that you've seen in capital equipment as well as we're driving efficiencies in the factories. So I think that's kind of all embedded in a lot of things that's allowing us to maintain margins and on a longer-term basis expand them.

If I may, one final question. It pertains to the SG&A line item. A more notable decline, almost 9% this quarter, Can you comment at all as to how you see that in the fourth quarter? And as we think about next year, is there room to continue to work on this line item, particularly if volumes remain relatively weak? Thank you.

Yeah, you know, so I'd expect, you know, Q4 to, again, be relatively consistent with Q3 as we've, you know, talked about how results will likely shake out. You know, certainly I just mentioned, you know, that we've been taking, you know, headcount and cost control actions. There are certainly, you know, lower, you know, compensation, incentive compensation-relating costs this year, and, you know, professional fees have been down. I mean, to a certain extent, as the business recovers, again, especially as it relates to, you know, incentive compensation at, you know, across our entire organization, you know, that could have an uptick. But again, you know, we're In general, you know, don't expect dramatic shifts in our overall SG&A. We know we tend to be, you know, pretty frugal to start with. And, again, I think we've laid out that we've been addressing the costs pretty, you know, actively over the past, you know, couple of years.

Thank you.

The next question comes from Brian McNamara of Canaccord Genuity. Please go ahead.

Good morning, guys. Thanks for taking the questions. I hate to beat a dead horse on commercial here, but I'm curious if you could drill down on what restaurant concepts are driving this dynamic on closures. Is it contained to independents? I believe they're like low double-digit percent of segment sales. And what gives you confidence the market will return to unit growth next year out of some openings being pushed out? Is that just chain strength?

Yeah, I think there's probably two things that we look to. I mean, certainly it's the conversations that we're having with our chain customers and what their restaurant expansion plans are, both in the near term as well as a lot of their longer-term goals that they've set out, which many of them are public. The other is industry forecasts. So there are forecasts out there for the industry. Certainly a lot of the closures, as you mentioned, happen more on – the independent side, but certainly that has also happened with some of the, some of the chains, casual dine chains have been hit a bit harder than, than some of the quick serve chains. So, um, we think, you know, a lot of what's happening, you know, there is you've got some of the, the less healthy, uh, concepts that either, you know, they're, those locations are, are getting closed and perhaps reopened in other, uh, other spots. Um, And that kind of resets the table for the better chains to expand from a stronger base. So really, it's the industry forecasts and the comments that we're getting from our chain customers who are engaged with their plans.

Brian, if I could just add, I know we spend a lot of time focusing on, obviously, new store openings. And that is a big part of our growth, primarily with the QSRs and the fast casual segments. I think to put the new store openings aside for just a moment, which we are still positive on for next year, I keep saying all the challenges that all the restaurants face still remain, and they're looking to us more and more as they think about the unit economics of opening up restaurants, continue to bring on franchisees, expand into international markets. Again, that can be labor, it can be utility costs, via service consistency, you know, take your pick. I think James highlighting the NECA broiler is a great example of that. Here's a piece of equipment that actually is more expensive, but it pays for itself in such a short period of time when you look at the utility costs, when you look at the maintenance costs. And so I think we're focusing on this call a lot on new store openings, but the fundamentals – of what our customers are facing every day, there really is not a part of the restaurant that I think can impact so positively those challenges that they're facing. So I think that's another reason why we continue to be so positive about the next couple years. No matter what happens from a new store opening ebb and flow, they still have to solve those challenges, and we're well-positioned to help them do so.

Great, and then just secondly, on the lack of a Gen 1 price increase in commercial, I don't think you break out pricing versus volumes in that segment, but is it safe to assume volumes have been materially down the last couple of years? We've heard from some franchisees in the market opine that some of the bigger players have taken too much pricing, and we're wondering if that's factoring into some of the weakness you're experiencing. Thanks.

Yeah. Brian, this is Brian Middleman here.

Especially as we look over, you know, I'll say the past year where, you know, pricing actions have been more muted, right? I think it's fair to assume that, you know, volume is largely aligning with, you know, what you're seeing in the revenue line overall.

I would also, Brian, this is Steve again. I would just, a reminder that over the last several years, We have been very mindful and thoughtful about our mix, and as part of that, we did exit a number of low-margin, tough-to-build SKUs in that process. So, yes, I do think there are volume challenges that you're referencing, but we also used the time to be very thoughtful about getting out of low-margin products. that we're not obviously positively contributing to the overall margins for the company. So I don't want to lose sight of that. There still is a dynamic that you're referencing, but there also is this element of products that we did exit over the last two or three years.

Very helpful. Thanks, guys.

The next question comes from Jeff Hammond from KeyBank. Please go ahead.

Hey, good morning, guys. Just back on the store opening deferral delay, I'm just trying to get a better sense of how much of this is permitting delays versus just uncertainty freeze. What gives you the confidence they just don't keep pushing to the right versus this catch-up thesis in 2025?

I think it's hard to have the crystal ball, to be honest with you. I think they've been pushing to the right for a while. So I think that's one thing. At some point, they just really need to pull the trigger and replace and upgrade. So I think that is one dynamic. Steve, just touching on it, they've been looking at a lot of these solutions for a long time. Some of our customers talk about it regularly on calls, things that they're looking at to do that transform their you know, their operations, as you kind of go through dynamic periods like this with uncertainty on traffic, food costs moving into different places, interest rates, where do they land, and difficulty in terms of getting, you know, length of getting permits, which do take a lot longer, things have just extended. But, I mean, I think the fundamental issue issues that they're dealing with and also the comments that we're getting, you know, lead to, hey, they're going to move forward on some of this stuff. A lot of our customers come to us and their concerns are, are we going to be able to produce enough to keep up with their demand? We actually had, you know, a lot of pressure on that coming into third quarter. So I think, you know, ultimately they are going to, you know, they really need to pull the trigger on some of these things to kind of move forward in their business. So, so I, you know, we think that is going to start showing up, you know, as we move into the next year.

Okay. And then a couple, you know, cashflow balance sheet items, just your working capital turns that kind of extended free cashflow seems to be a little bit better, but just maybe talk about what you're doing to kind of bring working capital turns, you know, back into check and maybe what the opportunity is for, Working capital is a source of cash. And then just talk about your plans for the convert that come due next year.

Hi, Jeff. This is Brian. As we think about working capital, inventory remains the key focus, as I think, across AR companies. AP and inventory. And, you know, we have been continuing to bring down inventory levels this year. Certainly, you know, the somewhat muted top line has impacted our ability to achieve all the inventory reductions we would like. And, you know, we have changed our Our management philosophy around that, or I should say evolved it. We have incentive plans specifically addressing that in place, so it really is a key focus. I wouldn't say ARs. We look at the quality of the aging or the day sales. Outstanding has really degraded, but certainly we keep a watchful eye on that, especially given what's happening in the market. You know, the good news a little bit here is that, you know, where there are some customer risks, that actually tends to reside a little bit more, you know, with the dealers that are in between us and the end user than, you know, directly with us. But, again, we're not completely insulated from that. So inventory will, you know, remain, you know, a focus, and I think there's – you know, well over, you know, $100 million of, you know, opportunity over the next, you know, year or two at least to continue to bring that down. Or also, I'll say, you know, as revenues improve to maybe inventory levels don't come down. But anyways, the overall, you know, net metric really there is the day's inventory on hand. So, you know, there still is a good amount of improvement we expect to drive in that over the next year or two. And then pivoting to your question on the converts, we have a variety of options available to us. Certainly, we have capacity under our credit facility to I'll say refinance that. We have a healthy amount of cash on our balance sheet, which we can use to address that as well. We also expect to be continuing to do M&A. And then there are obviously, you know, other debt markets available to us, whether it's, you know, converts, high yields, you know, term B. So, you know, we will, you know, we do regularly look at that, you know, given where the convert, what the convert is currently costing us, which is, you know, a 1% interest rate. We have not been in a hurry to take that off our books, but we'll again continue to evaluate what are our cash level and what are the, you know, the best debt options as that gets closer to maturity.

Okay, thank you.

The next question comes from Tammy Zakaria from JP Morgan. Please go ahead.

Hi, good morning. Thanks so much for taking my questions. My first question is on the services side of the commercial food segment. What are you seeing there and do you have any plans to shore up capacity for services? We've heard some of your or peers talk about increasing the technician fleet. So curious how you're thinking about that going into next year.

Well, service has been a challenge for many industries. Certainly we've really seen it across all three of ours. A lot of service technicians went out of the industry during COVID. So we've been very focused on that. hiring back technicians into our network, and then training those technicians, because once you get them on, you really got to get them up and running. It's one of the reasons, and James called that out in his slide, that we've got significant strategies around that of how we provide, I'll say, game-changing service in the future, but I think in the near term as a pillar of that is making sure that we've got a very strong service organization, the number of service agents that we have today has grown significantly from where we were about a year or 18 months ago. And that's been in large part with the efforts that we've had to support the partners in the area. And now we're very focused on having industry-leading training for those agents, both physically and digitally. So we've been kind of well on our way to kind of address, which was an industry-wide challenge to become kind of the leader in service, not only making sure that we have enough trained technicians, but really some unique programs that we could offer across our brands in the future.

Got it. Thank you. That was my question.

The next question comes from Walt Liptak from Seaport. Please go ahead.

Hi, thanks. Hey, good work on the margin, and it sounds like you've got, you know, things in place to continue to improve the margins. You know, in the past, you talked about getting to a 30 percent commercial margin over the next couple of years. Is that still, you know, the target?

Yeah, it is still the target. Yeah. I mean, I think right now we're holding, you know, what we think are very strong, respectable, you know, margins. I think we're there, you know, by industry standards, we're one of the leaders and we're doing that in a tough period. While we've tightened the belt, as Brian said, you know, a lot of the initiatives that we have, you know, are strategic in nature as well. And I just got to remind everybody that, you know, while we're tightening the belt in this period, we're kind of doubling down on a lot of the strategic investments that we think will help us drive growth for the future. And part of that is also enhancing our mix of products. As Steve touched on, we exited a lot of low-margin products, but we're really focused on growing our greatest innovations. And I think we haven't really seen a lot of the benefits of that yet, because a lot of that is what is in A pipeline, those are the solutions that have a high ROI to the customer. Again, the Niko Brothers is a great example that we're working with the customers. And, you know, as that pipeline comes through, you know, which is an investment today, that comes through with growth and higher margins. So that is part of the bridge to get to the 30% as we kind of roll through the next several years.

Okay, makes sense. Thanks. And just a couple more. One, most of the discussion sounds like it's sort of global. I wonder if there's any delineation you can make between North America, U.S., sales versus international.

Yeah, North America has been tougher as of late. I mean, Europe, I think you'd see us as well as other companies have fared better in that market. The other thing probably to to call out is Asia. Asia's been a softer spot for most companies. We've got a, have a lot of new products coming out in that market, and there is chain expansion that is planned there, but there are dynamics in that market, too, which is kind of, you know, fed into, you know, the results for the quarter, too, as Asia's been stronger, or I'm sorry, weaker in the back half. But if you look at that market, particularly as you expand outside of Asia, just China, into other regions in Asia as well as India, which we feel pretty strong about. We see some longer-term growth going there. But in the near term, that's been a headwind.

I mean, I would just add in two more nuances in commercial specifically. I mean, I think we talked about in prior calls, Europe has been an area of reinvestment and thinking through a completely new strategy approach with the team there. I think we're really starting to see the payoff of having the innovation kitchen in Madrid. We're seeing the payoff having the innovation kitchen in Wigan in the UK and plans to continue to bring future innovation kitchens to both the Middle East and to other parts of Europe. I think we're also call out in Latin America specific to the quarter. Some of that growth is really starting to be driven by ice and beverage. And so I think it's exciting to see some adoption outside the core products in Latin America specifically. So I would say Latin America, Europe, and Middle East were certainly the positives from an international standpoint for the quarter.

Okay, great. Thanks for that, Collier. And then the last one for me, Chipotle has been, you know, testing out that double-sided grill, and it sounds like they might be moving forward with the rollout in 2025. I wonder if you can make any comments on that.

I think we will let Chipotle make their comments about their plans. I would just comment that, you know, the double-sided grill is a great example of automation and a new product that we've had in the market where we've had success with a number of customers. And it demonstrates really, you know, again, how we're focused on innovation and It's in a pipeline, and it's delivering significant potential ROI to our customers. So, I mean, it's one of the great products that we've introduced over the last several years.

Okay, great. Thank you.

And we have a follow-up question from Meg Dobry. Please go ahead.

Yeah, thanks. I just wanted to follow up on Jeff's balance sheet question. So, you know, your cash balance has been building north of $600 million now, and obviously you've got this call of $750 million bond maturing next year. Are we to sort of infer here that you're allowing this cash balance to build to potentially kind of pay down that bond? Is that the idea? Because I suspect that just purely refinancing, that generates another 50 cents of EPS drag, give or take. And then also related to this, how do you think about capital deployment going forward? Because, look, I mean, your stock multiple has continued compressing, so the valuation is looking different than it looked a few years ago. And obviously, we're kind of going through a cyclically more difficult time period. Is it fair to say that At this point, share buybacks are actually a pretty decent alternative for capital deployment relative to other things that you might do. Thank you.

This is Brian. We are not accumulating cash with solely the intent of earmarking those dollars to directly pay off the convert. We have no balance outstanding under our revolver right now. And if we were to pay off anything on the term loan, you don't have the ability to access that again. And we are, I would say, earning a fairly decent you know, rates on our cash balances as we look at that versus our incremental borrowing costs such that we have decided for now to let the, you know, cash balance grow some. You know, we do expect M&A activity to be picking up, so there will be some deployment of cash for that that we anticipate. You know, also we tend to generate more cash in the back half of the year, and then there's some, you know, a little bit more utilization at times in the front half So I think right now we're just in a point of, you know, flexibility. And, you know, we certainly do understand that, you know, interest rates today are higher than when we entered into that convert. Obviously, when you issue a convert, the total cost isn't just, you know, the coupon rate. And you overall have seen our leverage coming down. So, again, we'll be looking at how to best structure the debt side of things over the next year. Also, appreciate your perspective on capital allocation. Obviously, we have been growing the amount of annual cash flow. that we generate, and, you know, we are continuing to evaluate, you know, should some of that cash be allocated, you know, in a manner maybe a little different, you know, from historically where it's been a large focus on M&A and, you know, are evaluating other ways to, you know, utilize the cash, including, you know, different ways of return of capital to shareholders.

All right. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Tim Fitzgerald for closing remarks.

Thank you again, everybody, for joining us on today's call. In closing, I would like to reiterate that while we had hoped macroeconomic conditions would be more favorable and in flux sooner, we believe we are currently at the trough for several of our segments. We're confident the challenges we face today will turn into the tailwinds for the quarters ahead and lead into a longer-term recovery. We're poised to win as our position across all three of our businesses is stronger than ever. We're leading in technology and innovation. We're expanding into new targeted market adjacencies, opening up new growth opportunities. and we're making investments in transformational go-to-market sales and service capabilities to provide differentiated customer experiences. We're confident these strategies and investments we have made will pay dividends as the market conditions continue to improve, further extending our leadership over the next several years. That's it for today, and thank you, everybody, for attending today's call. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.