The Middleby Corporation (NASDAQ:MIDD) Q1 2024 Earnings Call Transcript

The Middleby Corporation (NASDAQ:MIDD) Q1 2024 Earnings Call Transcript May 8, 2024

The Middleby Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for joining us for The Middleby Corporation First Quarter 2024 Conference Call. With us today from management are CEO, Tim FitzGerald; CFO, Bryan Mittelman; Chief Technology and Operations Officer, James Pool; Chief Commercial Officer, Steve Spittle and Vice President of Investor Relations, John Joyner. We will begin the call with opening remarks then open the lines for questions. Instructions on how to join the queue will be given at that time. Now I would like to turn the call over to Mr. FitzGerald. Please go ahead.

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. First quarter proved to be challenging with the backdrop of the housing market, interest rate environment and price cost pressures at our restaurant and food processing customers, weighing out our businesses as we started the year. Even though challenges persist, we are seeing improving order activity and expect this to continue as we move through the year, as customers execute on state of business plans and as opportunities in the pipeline begin to convert. While customers are slow to restock inventories, given shorter lead times and higher carrying costs, inventories in the channel have returned to normalized levels and now provide a tailwind, as end user sell-through occurs and this bodes well for the later part of the year.

At our Commercial Foodservice business, customer execution has been slow, starting the year, given continued longer lead times for permitting and construction along with longer deliberation on their business plans, given economics of higher restaurant operating costs. However, our channel partners are building backlogs weighted to the second half of the year and our chain customers continue to maintain their plans for operational upgrades and store openings, which are also weighed to the second half. We are gaining market share in new and large product categories, such as beverage and ice and we are well positioned to capitalize on our market-leading positions, capturing growing trends in ventless and electrified cooking. And we have early-stage traction with some of our game-changing innovations as we lead the future of automation, digital and IoT.

At our business – at our residential business, the housing market remains very challenged in terms of existing home sales, new home starts and remodels. While the residential market will take time to fully recover, it has stabilized with the luxury end of the market showing improvement over the past several quarters. We’re now seeing growth in order rates and we expect that will continue as we progress through the year. And we are well positioned to benefit from the many investments that we have made in new product innovation, as we move beyond the current market conditions. Many of these new product innovations were on display at the recent Kitchen and Bath show. We are proud to receive a best of Best of KBIS award at Viking for our new Reveal series and we’re also awarded Best of KBIS at Middleby, one of our newest Middleby residential brands, which we are now launching into the US market, featuring state-of-the-art induction cooking, integrated ventilation and unique accent lighting.

Our industry-leading brand portfolio with launches of new colors, new designs and new technologies, generated tons of excitement with builders our dealer partners and the design community at the show, leading to new business opportunities coming out of the show and a much greater awareness for all the Middleby residential portfolio has to offer. In our Food Processing business, our customers are proceedings somewhat cautiously as they monitor food cost, demand levels and the interest rate impact on larger projects. Still the pipeline of active projects continues to build for expansions and needed upgrades with requirements to increase throughput, reduce labor, minimize food waste, and with a growing focus on sustainability. Automation remains in great demand.

Our backlog remains healthy and as market dynamics have become more stable, we’re expecting the pipeline will convert into orders. Our strategy to become the leading provider of best-in-class full-line integrated solutions for the protein and bakery markets is resonating, and we are best positioned to offer our customers state-of-the-art automation to address their operational and efficiency challenges. We posted continued overall strong profitability at our Commercial and Food Processing segments in the quarter despite revenue declines, while residential margins were significantly challenged, given the more significant market conditions and our strategic decision to invest in KBIS. We expect to return to the path of longer-term margin expansion as we benefit not only from revenue recovery but also as we realize greater benefits from profitability initiatives, including investments made at our factories to realize greater production efficiencies along with the impact of favorable profitability on our newer product innovations.

Supply chain also provides a continuing opportunity as we have moved away from the crisis management over the past several years and are now focused on leveraging our scale and realizing synergies across our businesses. While we navigate the near-term market conditions, we continue to focus on the execution of our business strategies, expanding profitability and growing our cash flow, while building upon our competitive advantage at each of our three industry-leading foodservice businesses that we are confident in setting us apart in the long-term. Now, I’ll pass the call over to James to spotlight some of our exciting award-winning products we’ll be unveiling at the National Restaurant Association Show in Chicago later this month. Again, highlighting the results of our strategic focus to invest in and accelerate the pace of innovation.

James?

James Pool: Thanks Tim. Last quarter, I remarked that Middleby had won eight of the 28 coveted Kitchen Innovation Awards products. But because of the timing, I couldn’t say which Middleby brands won. Well, with a little more than one week ago before the NRA show in Chicago, we are excited to introduce the Grade A Blodgett, PITCO, EVO, Newton, Wunder-Bar, while good selling Varimixer and L2F now known as Middleby automation. These eight brands are the National Restaurant Show associations KI winners. If you were attending the show May 18 through 21, please make sure you visit the Kitchen Innovation Awards Pavilion to see and experience these new products from the Grade A and then come checkout Middleby to experience our latest solutions around digital, embedded and robotic automation as well as beverage solutions and the launch of our newest combi the Invoq, a Red Dot Design award winner.

We couldn’t be happier with these new products. These innovations are as diverse as their brands but they were all developed with our customers’ daily challenges in mind, labor reduction and simplification, consistency of product, throughput all aimed to maximize our customers’ profitability. In the interest of time I won’t go through each innovation, but you can find each in the deck that Tim referenced. The first is the Pitco Torque fryer. The Torque introduces continuous filtration and conductive frying with continuous filtration and auto oil top off. The Torque essentially provides infinite oil life for the operator. And the continuous filtration comes forced convection as oil is forced to circulate around the food on its way to being filtered.

This forced circulation reduces our cook times up to 10%. While we are talking about numbers, let’s cover a few more. The Torque is 10% more efficient than the typical ROB fryer and goes temperatures 60% lower than the typical gas fryer, thus substantially reducing your kitchen ventilation requirements. Lastly, the Torque reduces labor needed to filter a traditional fryer by up to 90%. By the numbers, this fryer stands to obsolete most fryers in the market today. Moving on to the Blodgett induction oven. This is the first of its kind oven allowing the operators to select between a high heat transfer accelerated cook oven or a gentle convection oven by simply selecting a menu item from its Middleby One Touch controller. Once the operator touch the menu item, the induction mechanic can figure the oven for the optimal cooking profile whether it be high velocity impingement air or gentle convection.

This innovation enables a multi-cavity convection oven typically found in the back of the house to also function in the front of the house as an accelerated cooking oven thus offering our customers the ability to cook [indiscernible]. So, whether you need to cook delicate lemonade pastries in 20 minutes or we need to cook 16-inch pizzas in three minutes and 30 seconds, the induction is your solution. Now, on to beverage dispensing. We have three brands introducing beverage dispensing products aimed at reducing waste, while improving speed of service and delivering a better tasting highly consistent product. I’ve spoken about Newton CFB valves in the past, but now we have two new products that feature the valves patent design that enable the consistent precise delivery of beverage and/or ingredients regardless of the factors that play traditional valves; the Newton discrete valve and the Wunder-Bar M5 Bargun.

With these innovations our customers now have confidence that they are serving bottle quality beverage or dispensing individual ingredients with the out the expense of consistently calibrating their systems or wondering if their systems are in calibration. The Newton Discrete Valve and the Wunder-Bar M5 Bargun eliminate calibration, waste, reduce service costs, and improved customer satisfaction through consistent delivery of product. The Newton CFV valve is also being used throughout Middleby to control mixing and dispensing of highly concentrated ingredients such as individual flavors even cleaners. These concentrations can be as high as 501, which unlocks our customers’ ability to change how they distribute and dispense ingredients or even clean their equipment say with Newton’s new clean-in-place technologies.

The final dispensing solution that I’ll discuss is a Wild Goose CERVIZI, which utilizes the same filling systems to dispense beer, the Wild Goose uses and its industry-leading high-speed canning lines. CERVIZI turns anyone pouring their first beer into seasoned bar tender by automatically dispensing beer twice as fast as a normal tap system, while also minimizing waste by precisely controlling the poor volume to the nearest fraction of an ounce or just a few milliliters all with no training. Service also improves [indiscernible] from 75% to 95%, by controlling the pour volume and the beer serving conditions. Why didn’t get a chance to cover the other products such as the PizzaBot 2.0, EVO EVent, The Berry Mix or Logo. We will hit those in later calls or again you can see them at the NR Show.

But now they share the same traits as the other innovations, I described today. They all reduce waste, increase throughput, maximize consistency, decrease simplified labor all of which improve our customers’ profitability. Thank you, and over to you Bryan.

Bryan Mittelman: Thanks James. For the first quarter, we generated revenue of $927 million and adjusted EBITDA of $186 million at a margin of 20%. The Q1 GAAP earnings per share were $1.59 and adjusted EPS was $1.89. Commercial Foodservice revenues globally were down 4% organically over the prior year yet the adjusted EBITDA margin was consistent with the prior year at 26%. All the margin values I will go through are on an organic basis meaning excluding any acquisitions and foreign exchange impacts. In Food Processing, revenues for the first quarter were nearly $163 million. This was our second best Q1 ever for this segment with a tough comp given the Q1 record was set last year. Our adjusted EBITDA margin held strong and was also consistent with the prior year and nearly 24%.

In residential, we saw an organic revenue decline of 22% versus 2023. The adjusted EBITDA margin was over 6% and was negatively impacted by our investment to attend the Kitchen and Bath Show for the first time since 2016. We’ve seen a recent inflection in order rates which is driving our view that the residential revenues have hopefully started to move off their low point. A high point for the quarter was our exceptionally strong operating cash flows of nearly $141 million for the quarter and nearly $678 million for the trailing four quarters. It was our best first quarter ever and our free cash flow conversion was around 135% for the trailing four quarters. Our total leverage ratio is now down to 2.4 times. Despite the challenging quarter we faced from a revenue perspective, our business model demonstrated that we have resilient margins and continually generate strong cash flows.

Nonetheless, in Q2, you will see some further restructuring charges as we continue to take actions to appropriately manage the business given market conditions. As we work to protect our margins we are also aggressively controlling costs. In terms of an outlook, I will start by reminding everyone that the second quarter of 2023 was our strongest revenue quarter ever. So given recent order rates and demand for our innovation we expect total Q2 revenues to be up at least mid-single digits sequentially from Q1. But given the tough comp we anticipate falling a little short of the prior year revenue level overall. To provide greater insights I will separately address each segment. In commercial, the year-over-year comparison for Q2 is especially tough given the all-time record revenue for us in 2023.

While we may fall a little short of the prior year revenue in Q2, sequentially revenues could be up high single digits as compared to Q1. Our viewpoint is based on our backlog, which is currently up slightly from year-end, and that order rates have been improving over the past three quarters. Orders through April of this year are up 15% over the back half of 2023. We also expect margins to be in line with prior year levels. Looking into the back half of the year. At this time, we expect revenues to continue to grow sequentially and be at least mid-single digits above prior year levels. Moving on to food processing. Recall that the Q2 of 2023 was our second highest revenue quarter ever for that segment. And while I expect us to fall short of that revenue level in Q2 of 2024, margins should be — margin should be up over the prior year.

And then on a sequential basis, Q2 revenues and margins should be up meaningfully versus what we just posted for Q1. So we call that lumpy is a word use to describe this business sometimes. As I look back to last year, we did see a big drop in revenues when we move from Q2 to Q3, but that is not our expectation for Q3 of this year. We continue to see strength in this business overall. Orders in the past two quarters have been amongst our strongest intake periods for the segment. Thus, we are expecting that the second half revenue for this year will be above the first half of this year and above prior year levels. In residential, the good news is that the order trend is moving slightly upward. Looking at the past couple of quarters and extrapolating on the start of Q2.

We are trending above the first three quarters of 2023. Revenues for Q2 of 2024 will likely not be ahead of the prior year. And this is due to a year ago, our domestic premium indoor appliances having posted a relatively strong quarter. Nonetheless, we are anticipating stable conditions in our European businesses when comparing Q2 of this year back to 2023, and we should see growth in the outdoor market in Q2. So this all results in a Q2 revenues should be above Q1. Visibility to the second half of the year in residential is certainly limited, but given recent trends, revenue comps and building upon our showing at KBIS and the overall strength of our portfolio, our view for the second half of 2024 is currently for growth, both as compared to the prior year and over the first half of this year.

We are also working to maintain double-digit profit margins for the year. Bringing it back all together for the total company, we should continue to build and strengthen as we progress through 2024. We look forward to Q2 being stronger than Q1, and we continue to firmly believe at this time that for the second half of this year, we will deliver sequential and year-over-year growth. We remain focused on operational efficiency and optimally managing our resources. We are sharply focused on controlling and reducing our costs. We remain committed to improving our margins. These actions should drive year-over-year growth in cash generated and consistently high levels of free cash flow conversion as well. So, to further understand how we will achieve this along with enjoying many tasty creations from both humans and cobots.

Please come and see our people and products in action at the National Restaurant Association Show later this month here in Chicago. Please reach out to us to arrange of visit, so you can deeply understand how we are solving the needs of our customers which will drive our growth in ’24 and beyond. We remain committed to our mantra more in ’24. Thank you and we will now take your questions.

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Mig Dobre with Baird. Please go ahead.

Mig Dobre: Thank you for taking the question. Good morning everyone. So if I understand your guidance commentary correctly, it sounds like book-to-bill in commercial foodservice was above one backlog, went up a little bit in the quarter. When you sort of think about the outlook that you’ve laid out for Q2 and the rest of the year, are you essentially baking in stable backlog and just sort of orders ramping relative to Q1 end up flowing through? Or is there still sort of a backlog conversion element here that comes sort of help us in the back half of 2024?

Tim FitzGerald: Yes. So I think we are thinking it’s not converting — we’re not reducing our backlog further. That’s not the assumption if you’re — if that’s the question.

Mig Dobre: That is the question.

Tim FitzGerald: Yes. I mean I think as we see order improvement as we go through the year. So I think we’ve — backlog has come down as we had a lot of backlog I’d say orders that were pulled ahead. We’ve kind of gone I’ll say maybe to a certain extent the other way where inventory is not only at normalized levels, but a lot of our partners are slow to place orders because they know lead times are short. They don’t want to carry inventory and our channel partners, they see kind of their end users a lot of the projects are geared towards the half of the year. So, they’re not going to buy the product right now. They’re going to buy closer to execution. So when we started the year, January was pretty slow, not unexpectedly for a whole variety of reasons some of it even weather-driven.

That we saw progressively improve as we went through the first quarter and then it’s improved a fair bit more as we’ve kind of gone into the early part of the second quarter. So that kind of lines up with a lot of the commentary that we get from our channel partners along with the discussions that we have with our chain customers. So I think a lot of the view and the confidence we have is based on kind of the transparent discussions that we have with them including what they see as the outlook, where the inventory is in the channel and then kind of line that up with the order trends that we’ve had, as we progress through the first four months of the year.

Mig Dobre: Understood. Thank you for that. And my follow-up sticking with the segment is on the margin side. Comparisons are tougher in the back half of the year. So how do you encourage us to think about margins, especially on a year-over-year basis? And maybe related to all of this, are you seeing any sort of signs of price erosion or changing competitive dynamics in North America, specifically? Thank you.

Tim FitzGerald: Yes. So I’ll contact you with Steve here. I would say, not wholesale changes. I think the mix out there in the marketplace is a little bit different to start the year. I think some of the kind of more immediate replacement type business that tends to be more economy-driven was a little bit more prevalent. So I don’t think that’s more of a pricing element as it is a mix element and then as we kind of get back to more of I’ll say specified project-driven and change driven. We expect some of the mix to improve as we go through the year. So I think that’s a little bit of the dynamic that we saw at the beginning of the year. And then maybe you want to touch on pricing.

Steve Spittle: Yes Mig, this is Steve. We actually just recently announced a price increase that will be upcoming in commercial going into effect in mid-June. Our approach there was making sure our divisions were really going SKU by SKU, customer by customer to make sure that we had captured all the price/cost, dynamics that we’ve obviously all gone through over the past several years. So it will be a – I’ll call it a relatively minimal increase or low single-digit increase as compared to prior year increases. But still want to make sure we’re being very thoughtful about and pricing against one of the more strategic initiatives in the company in the last couple of years to make sure we’re capturing costs but also making sure we’re certainly in a good place from a competitive standpoint. So that again was recently announced a couple of weeks ago and goes into effect in mid-June for commercial.

Bryan Mittelman: And then I’ll bring it around. This is Bryan to the margin side of the question. Obviously, you saw in Q1 that even with lower revenues we’re able to protect the margins and that’s coming from a variety of things, right? There are some commodities impacts in there. There’s the impact of investments we’ve made in the business. There’s impacts of I’ll call it ongoing striving for greater efficiency cost control head count control actions in there. And so as we look forward, as volumes grow we’ll also have greater absorption. I think we’ll have some modest pricing benefits. As Tim was getting after, we believe mix will improve as well. So we put that all together and as I think about how the segment will operate for the entire year, I do think we will be slightly modestly above the prior year.

Obviously, there’s some challenges always to overcome with cost of input and supply chain and the like. But nonetheless, I think it is – so will be a positive year-over-year.

Mig Dobre: Super. Thanks for the color.

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

Jeff Hammond: Hey, good morning, everyone.

Bryan Mittelman: Good morning, Jeff. Good morning.