The Middleby Corporation (NASDAQ:MIDD) Q1 2023 Earnings Call Transcript

The Middleby Corporation (NASDAQ:MIDD) Q1 2023 Earnings Call Transcript May 10, 2023

The Middleby Corporation beats earnings expectations. Reported EPS is $2.19, expectations were $1.95.

Operator: Good day! And welcome to the Middleby Corporation First Quarter 2023 Conference Call. With us today from management are Tim FitzGerald, CEO; Bryan Mittelman, CFO; James Pool, Chief Technology and Operations Officer; and Mr. Steven Spittle, Chief Commercial Officer. Management will begin with opening comments and then we will open the call for questions. Instructions to enter the queue will be given at that time. Now I’d like to turn the call over to Mr. FitzGerald for his opening remarks. Please go ahead sir.

Tim FitzGerald: 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. We are pleased to have posted solid results to begin the year, reporting a first quarter with strong performance, both at our commercial and food processing businesses, while our residential business was expectedly impacted by challenging market conditions and destocking of inventories at our retail partners. In the quarter we drove improved profitability and we continue to make progress towards our longer-term margin targets through focus on profitability of our sales mix and with further improvements yet to come through efficiency gains and supply chain initiatives.

During the quarter we were pleased to have also realized meaningful reduction in production lead times across most of our businesses, as we benefit from improvements in our supply chain and through the investments made across our manufacturing operations. We’re now in a significantly improved position to better serve our customers and take advantage of market opportunities. To start the year, we continue to have strong engagement with our channel partners and customers across all three of our food service businesses, with interest in our latest products and innovations offering benefits focused on energy, labor, speed and sustainability. The investments made in our innovation centers demonstrating these latest solutions have proven to be a strategic asset for our businesses.

The traffic in these showrooms continues to increase as we invest heavily in training with our channel partners as our world class culinary teams engage hands-on with customers looking to evolve kitchen and food service operations. We’re excited to have recently opened our latest Middleby Innovation Kitchen in Spain, now providing a resource to our partners and customers throughout Europe. In the quarter, we also continue to make strategic and financial investments in our business, investing $25 million in our manufacturing operations as we continue to retool our operations to support new product launches, increased capacity, and advance the automation within our operations. We repurchased $48 million of Middleby shares during the quarter, and we’re also excited to complete the acquisitions of Flavor Burst and Blue Sparq, adding to the innovation in our beverage portfolio and expanding our in-house controls development capabilities.

As we’ve progressed into 2023, economic conditions continue to present challenges and uncertainty, particularly as it relates to our residential segment, but we remain excited about the direction and long-term goals and confidence in the investments and strategic initiatives underway that are enhancing the competitive positioning for each of our three food service businesses. Now, I’ll pass it over to James to spotlight some of our exciting recent product innovations, which are also highlighted in our investor slides. James.

James Pool : Thanks, Tim. We have a few items to cover. So I’ll jump in today with the FryBot. If you’ve heard me speak on other calls, you know that I’ll often talk about the digital embedded, and collaborative automation that’s driving innovation across Middleby. FryBot brings these together in a complete Middleby solution. It is the only automated fryer designed, manufactured and integrated by a single company. From the collaborative robot to the dispenser, fryer, holding and Spice Bot, the FryBot is 100% Middleby. The base FryBot as shown, is capable of autonomously dispensing, frying and seasoning two unique items at rates hitting 65 baskets per hour, depending on products. The FryBot was designed with ease of installation, meaning it can easily be rolled out to new, but most importantly, existing restaurants.

The FryBot is currently in test with leading brands. We look forward to continued FryBot installations and test locations in 2023, with FryBot hitting revenue producing stores in 2024 and 2025. If you’d like to see and taste the FryBot in action, it’ll be on full display at the NRA show in May in the Middleby Automated Burger and Chicken Bar, as well as in the NRA Kitchen Innovation Pavilion. At the NAFEM Show this past February, the FryBot flawlessly delivered over 1,500 orders of fries and chicken in just over two days. Continuing with the NRA show, the FryBot will be accompanied by Taffer’s Tavern, a concept created by Jon Taffer featured an all-electric and [inaudible] Middleby Kitchen. The Middleby Cafe, a concept dispensing the highest quality espressos and drip coffees from the Middleby Coffee Brewery, the best baristas and best roosters in the Chicago area.

Open Kitchen, Middleby Enterprise IoT platform, Middleby Electrified Innovation Alley, where we will showcase the latest electric products designed for the efficient electrified kitchen. And lastly, please look for the Hydro Rinse and the Plexor M2, additional KI Award winners in the Kitchen Innovation Awards pavilion at the NRA show. Hydro Rinse automates the cleaning of most software machines by washing, rinsing and sanitizing the machines while the machines are still assembled. The Plexor M2 is the latest modular and rapid cook and accelerated cooking platform from TurboChef. I would like to close by talking a little bit about Blue Sparq, our latest acquisition. Blue Sparq adds to Middleby’s common control strategy by helping our brands develop and launch controls faster than ever before, thus accelerating new product development across commercial, residential and food processing groups with their industry recognized capabilities in the area of UX, UI design, and embedded firmware and firmware development.

Blue Sparq also brings fast PCB board manufacturing, while also being able to support volume production. We are excited to have Blue Sparq developing for Middleby. Thank you, and over to you Bryan.

Bryan Mittelman: Thank you, James. 2023, it started out strong for us. We posted another quarter with revenues over $1 billion, with exceptional growth in two of our segments. Our adjusted EBITDA exceeded $210 million, resulting in an organic adjusted EBITDA margin of over 21%. While our total revenue growth was rather modest given challenges in residential, we were still able to grow our adjusted EBITDA 6% over the prior year. Our margins expanded 100 basis points. All the margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. GAAP earnings per share were $1.82. Adjusted EPS, which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation at the back of the press release was $2.19.

I will go through our segment results in a moment, but first I wanted to briefly note that we realigned some small operations internally, which in turn had a small impact on the composition of our segments. Nonetheless, I know some people will see differences in their models, so here are the details. We have moved approximately $4 million of quarterly revenue from the commercial segment to food processing. We restated prior periods in our press release, and the growth figures I will discuss here are based on a consistent basis. The impact will be approximately $4 million per quarter as well for the remainder of the year. But back to our segment results. Commercial food service revenues were up over 11.5% organically over the prior year, with North America up 14% and international regions growing at 5%.

The adjusted EBITDA margin was 26.5%, 230 basis points ahead of the prior year. In residential, we saw an economic revenue decline of 32% versus 2022. The adjusted EBITDA margin was 13%. Food processing continues to perform extremely well. Total revenues exceeded $173 million, an increase of over 24% organically. Our adjusted EBITDA margin was 24%, up over 500 basis points over the prior year. As I’ve noted before, our full line solutions continue to resonate with customers. Our operating cash flow generation of $92 million was a record for the first quarter. During the quarter, as Tim noted, we invested approximately $25 million in capital expenditures and had $10 million on acquisitions. We utilized $48 million for open market stock buybacks.

After giving effect to all this activity, our total leverage ratio moved down slightly to just under 3x. I remind folks that our covenant limit is 5.5x, so we currently have over $2.3 billion of borrowing capacity. It was not an easy quarter, but we still delivered strong results. While we have noted that supply chain has improved, I do want to add that it does remain a constraint in numerous areas, especially around legacy chips and controls. Customer inventory levels present a short-term headwind as well in residential and to some extent in commercial too. In terms of the near-term outlook, I will start with residential. Demand in the marketplace obviously remains off from the peak levels seen a year ago. However, our revenues have been relatively consistent for the past three quarters.

When I discussed results last quarter, I noted that residential revenues for this Q1 might be slightly below Q4. We ended up actually exceeding Q4 by a few million dollars. Thus, given the timing of some shipments and current demand levels, with softer than expected conditions in the U.K., I think Q2 will see revenues relatively flat to what we just posted for Q1, and margins should also be similar to Q1. In thinking about all of 2023 for this segment, it’s hard to offer a very clear view given all the dynamics impacting us currently. Nonetheless, our current assessment, which is subject to a fair amount of risk, is still seeing sequential improvements over Q2 in the back half of the year. This also means year-over-year growth for the second half of 2023.

For food processing, we obviously posted a very strong first quarter. This business will continue to exhibit strength. I expect Q2 to look very similar to Q1, and we should continue to grow and improve from there over the back half of the year. For commercial, when comparing Q2 to Q1 sequentially, revenues should be up modestly with slightly better margins. Our engagement with customers remains incredibly positive, and they are continuing to invest, but chain activity is probably somewhat back-end loaded for the year. So consistent with what I had portrayed a quarter ago, each quarter through the year should improve sequentially. Just the improvements from Q1 to Q2 will be modest. Putting the three segments together, when looking at the total company potential Q2 performance, revenue and EBITDA levels are likely to show single-digit growth when comparing either back to Q1 of 2023 or Q2 of 2022.

Thinking about how 2023 will shape up overall, our view remains consistent with what I noted last quarter. We continue to expect full year-over-year growth in margin expansion in commercial and food processing. Resi, after holding the line in Q2, should likely see year-over-year growth in the second half of 2023. Reiterating that this means for full year 2023, we should see total company revenues up modestly and growth in EBITDA dollars and margin. In true Middle East style, we look to continue to deliver solid results and have another record year. Thanks. And with that, we will now open up to your questions.

Q&A Session

Operator: [Operator Instructions]. And our first question will come from John Joyner with BMO. Please go ahead.

Operator: The next question will come from Saree Boroditsky with Jefferies. Please go ahead.

Operator: The next question will come from Mig Dobre with Baird. Please go ahead.

Operator: The next question will come from [Cross Talk] – go ahead sir.

Operator: The next question will come from Tami Zakaria with JP Morgan. Please go ahead.

A – Bryan Mittelman: Because I think, it’s – our business is always a little bit difficult to focus, just because there are so many moving pieces and mix that has a lot to do with it. I think as we’re working through the backlogs, there still is a little bit of like, I’ll say older backlog out there that we’re kind of pushing through the, you know the system as we go through the second quarter and that is, I’ll say older pricing. So that is still a little bit left to get out of the system so to speak, as we kind of move to a more current pricing in the back half of the year.

Operator: The next question will come from Tim Thein with Citi. Please go ahead.

A – Tim FitzGerald: Yeah, I’ll make a couple of comments and then Bryan can clean it up. So, again the mix of our portfolio as we focus on higher technology categories, say it could be product, it could be brands, I mean that’s the underlying theme and that’s always – that may be difficult to forecast on a quarter-to-quarter basis, but I think we continue to make progress towards with the mix of the portfolio and that’s something that I think is reflected right now, but continues to be something that I think we’ll see improvement as we go through the – as we make progress, the year going into 2024. As those other factors, we still from a supply chain standpoint, just make two comments. One, there are some commodity areas that we’ll see improvement as we get to the latter part of the year.

Like we still have higher priced steel. Steel’s come down, but we haven’t seen the benefit of that yet, because we do have some – a lot of that in our inventory still. So we’ll get some of the supply chain – a little bit of the supply chain relief as we go through the latter part of the year as well, so those are two things. And I guess maybe the third is also production efficiencies. There’s still a lot of trash that we have in our operations right now. I think as lead times normalize, order rates kind of normalize, with customers and how they are placing orders with us, with our lead times, as we can better utilize some of the investments that we’ve made in the factory. So a lot of that stuff is on the floor operating, but I wouldn’t say that we’re getting all the benefit yet, because we’re working through thrashing, touching equipment still, sometimes – a couple of times before it goes out the door, we really get into better cadence.

I think that’s kind of the color behind some of the comment I made about some of the manufacturing efficiencies. So I think, those are the things that we’ll be working on as we go through the latter part of the year that is part of the bridge to get us to the higher margins, so. There’s still some headwinds out there as well, because I will tell you supply chain, ‘let’s keep this Bryan. No, it’s not done.’ I mean, now we’ve got some parts that’s harder to get, but there’s still increases out there that we’re, you know our teams are fighting hard to push back out and think about how we – we’ve kind of got through a period of fire drills, right, let’s make sure we get product out the door and now as we kind of start thinking about that as a lever again, and I think that that’s something over the next several years.

But I mean, I think we’ve been a price taker to this point and I think we’ll kind of this year be a little bit inflection for that as well. So I think we’re still getting price increases as we go into 2024. I think the supply chain teams will be focused on driving consistency there as well.

A – Steve Spittle: Yeah, I believe Bryan actually touched on it briefly, so. Tim I’ll just say, I think there is some inventory in the channel and commercial, both for the general market and for chains, and the chain side especially, and I would say we would have gone through such an odd period of time the last year or two of you how our customers have ordered with the long early times, placing orders – you know go back a year ago, but placing orders farther out than they ever have before and our dealer partners, the KS’s services changed. Their job was to get as much equipment in place to support new store openings and replacement. So I think you’re seeing a byproduct of that. There was so much ordering that took place, just to make sure everybody was in a good place to support new store openings and replacement, and so we’re going back to “normalizing” lead times, normalizing how our customers order from us, kind of back to how it was pre-COVID.

And so I think again, the inventory that’s in the channel right now is a byproduct of just the longer lead times and ordering process. I do think that normalizes as this quarter unfolds and certainly the back half of the year unfolds and we get back to again, more of a normalized cadence of ordering in the channel.

Operator: The next question will come from Larry De Maria with William Blair. Please go ahead.

A – Tim FitzGerald: Yeah, no, we do expect margins to be increasing in the back half of the year as well, with the increases in revenue, given the dynamics of the grill business. We do get nice leverage incrementals as those revenues improve. And in terms of the benefits of the manufacturing, that really – especially given current demand levels really isn’t something that has a meaningful impact this year, but it’s certainly a meaningful driver as we get into next year, as we hopefully look forward to better revenue levels and again, it’s one of those drivers in bringing us back towards the target margin levels. But specifically to the stuff we’ve talked about for Aga in the U.K. This is a long-term project that really comes together over the remainder of this year, thus my benefits start accruing much more so next year.

Operator: The next question will come from Brian McNamara with Canaccord Genuity. Please go ahead.

Operator: The next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Operator: The final question we have time for today will come from Todd Brooks with the Benchmark Company. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Tim FitzGerald : Thanks everybody for attending the call today and we look forward to speaking to you next quarter. Thanks.

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