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.