Q2 2020 Middleby Corp Earnings Call
Thank you for your patience.
[music].
Well that's today, good management, I, Chief Executive Officer, Tim Fitzgerald Chief.
Financial Officer, Brian Middle Man, and Chief operating Officer, David grew or we will start the call with common management.
Question.
Instructions on how to get into Q will be given at that time now I'd like to turn the call over to Mr. Fitzgerald for opening remarks. Please go ahead.
Thank you everyone for joining us today for our second quarter 2020 conference call.
As we begin I want to.
But you know that there are slides to accompany our call today. They can be found on our investor page at Middleby Dotcom in the center of the home page.
Clicking on the Webcasts and presentations link on the right side of the page.
The slides will not lead our discussion today, but are met for informational purposes, and we may refer to them during the car.
We continue to be an ever changing times with a cobot pandemic before we get into earnings I'd like to start this call by thanking our employees will continue to support our operations around the world.
The safety has been an remains our top priority.
Teams quickly adapted to the new business conditions and changes to the workplace environment.
During this transition for customer support and technical service was there for our customers while product depart shipping was virtually on the interrupted over the past few months I.
I'm grateful for the extraordinary efforts during this difficult period.
And to the entire Middleby team around the world I'd like to say thank you.
Now looking at the quarter. We were pleased to have maintained very strong levels of profitability across all three business segments. Despite the ongoing disruption to our business operations and the sharp decline in revenues or actions to quickly reset our cost structure and put profitability measures into place are reflected in the results.
Adjusted for the quarter.
The business environment remains uncertain, we remain confident in our ability to navigate business conditions.
We'll carry our financial discipline in our profitability initiatives into future quarters, which should allow for margin expansion as we see business levels improve off what we believe is the trough of the second quarter.
As it relates to our segment performance and the commercial Foodservice group, we have seen consistent improvement in the order rate throughout the quarter and into July.
Worried in July was down 17% as compared to the prior year confirming improvement and market conditions.
Pizza and quick serve concepts continue to do well.
We've also had strong activity in other areas, including health care convenience stores and retail operations.
Challenges will remain for travel related outlets and dine in only concepts.
Matured in July demonstrated some improvement in casual dining as indoor and outdoor dining restrictions were lessened in many states.
We expect to see volatility in orders and perhaps greater future order declines than reported in July however trends of improvement remain and we do expect third quarter will improve as compared to the second.
Many of the investments we made before call, but have proven to be even more relevant and critical.
Over the past year, we've invested heavily in technologies to drive operational efficiency in the kitchen.
We are addressing emerging trends such as mobile ordering delivery.
Most modular and mobile kitchens and.
We have product innovation supporting delivery and carry out.
The broadest line of belt was cooking solutions supporting foodservice and nontraditional locations.
The industry, leading aiotv platform for the commercial kitchen and develop solutions for could kitchen automation.
Despite the challenges of cobot, we're committed to continuing the investment in targeted strategic product and technology initiatives and trends. We expect will further accelerate as we emerge from this period.
Delivering carry out is now critical importance to operators, who have seen significant demand increases through this revenue driver.
We offer a variety of solutions, including the Carter Hoffman pickup cabinet, a contact list station for food pick up by customers.
We're delivery drivers curbside pickup stations and delivery systems that keep food significantly hotter during delivery.
The activities around kitchen automation and goes kitchens has grown significantly with operator seeking nontraditional locations with equipment solutions to support a flexible menu for delivery and carry out.
Our team at L. C. L. Two of our automation company is continuing to work with customers develop to develop solutions to reduce labor and increase restaurant operation efficiency.
We remain fully committed to our investments in data analytics and I O T.
More than ever operators have a need to understand a measure what is happening in their kitchen.
Our I O T kit, our our open kitchen, Aiotv solution remotely monitors and controls all brands of equipment and the commercial kitchen.
It also automates food safety processes and drives energy savings through active each back in lighting automation.
Open kitchen provides operators a comprehensive hardware and software platform to control monitor and measure their entire restaurant in a single cloud based application.
We also continue to invest in our beverage platform.
Most recently, we announced the formation of the Middleby coffee solutions group in Seattle, and the Seattle area to bring our coffee brands together and better serve our customers as they add or enhance their existing coffee programs.
We have a unique portfolio of caustic coffee solution supporting the most current trends such as automated being the cup.
Nitrile brew cold brew and traditional espresso machines.
Coffee continues to be popular worldwide and we have a dedicated sales team down place to take our innovative product lineup to market.
Moving onto the residential kitchen group.
We have seen recent order levels returned to growth both in the U.S. and UK markets recovering from a low point in April when most retail locations worldwide, we're close for business.
In July our order rate was up 20, b, 28% from the previous year. Following the three months of decline during the initial onset of Kobin.
Well cobot continues to cause disruption the housing market appears to be quickly recovering both in terms of existing home sales.
New home construction.
Demand is increasing as consumers are making investments to upgrade their indoor and outdoor kitchens as their spending more time, working schooling and cooking with family at home.
We have seen increased demand in our refrigeration offerings as well.
With an increase need for cold storage for food and beverage recent product introductions, including or biking built in.
Machines in under counter beverage stations have been well received supporting this growing demand.
During the quarter, we successfully launched our virtual showroom initiative with high levels of activity as customers are researching our brands for their kitchen.
We are well positioned with the products introduced over the past several years offering design performance and technology features they are looking for.
Customers and kitchen designers can go to Viking range Dot com and secure their virtual appointment well they will get a personal tour of the Chicago show room, and the full attention of our staff for 101 can consultation with the chef Jamie and our residential team.
In the Preprocessing group travel restrictions have made it challenging to complete installations and engage with customers to demonstrate equipment.
Despite the near term disruptive effects, resulting from coal bid.
Backlog remains strong and provide stability for the upcoming quarters.
The overall demand drivers remain healthy and we're continuing to see demand and recent orders from our new product innovations and as we continue to develop business opportunities as we entered into new market segments.
We're also seeing growing interest for automation and food production facilities to address employee safety and labor availability issues, resulting from Kobin.
In summary, this was a challenging quarter for every one for us our customers suppliers and partners.
However, we remain optimistic as history has demonstrated the foodservice centers industry to be resilient.
We have taken the immediate actions necessary to manage through the current environment and as a result, we're positioned to respond to market opportunities. During this period.
We are confident the investments leading into this period position us well and we remain committed to advancing our long term growth strategies.
Those are my prepared comments I'd like to turn the call over to Brian for the financial discussion.
Thanks, Tim.
For the second quarter, our GAAP earnings per share with 39 cents versus $1.66 in the prior year.
Adjusted EPS, which excludes amortization expense and non operating pension income as well as other items noted in the reconciliation at the back of our press release was 55 cents, which was negatively impacted by two cents from acquisitions.
I'm proud to report for Q2, each segment exceeded the profitability expectations. We set at the beginning of the pandemic. We also delivered on our commitment to reduce net debt having done so by $80 million.
Revenues declined 38% or nearly 40% organically as cobot significantly impacted our results.
Total company adjusted EBITDA was over $74 million and represented nearly 16% of revenues a sequential decline of only 450 basis points from the first quarter of 2020.
We are clearly benefiting from the Swift and aggressive actions. We took we entered this period of strong margins and we are still executing programs to maintain our leading profitability position.
Commercial foodservice revenues were down a little less than 50% organically, but we still generated over 18% organic adjusted EBITDA.
In revenue in residential we saw revenue down over 30%, but generated EBITDA of 14% when excluding the impact of a recent acquisition.
In food processing revenues declined nominally and the adjusted EBITDA margin expanded by over 100 basis points to 22.6%.
We are able to deliver gross margin of nearly 33%, excluding the impact of FX rates and acquisitions.
In terms of SGN, a expenses when excluding 8 million.
Dollars from acquisitions, we save approximately $40 million compared to either Q2 of 2019 or Q1 of this year.
The large this large decrease was net of incurring approximately 3 million of higher bad debt expense to increase our reserves and also having 5 million of higher stock comp expense as it was virtually zero in the prior year, given the timing of equity program implementations.
Restructuring charges are relatively low for the quarter at approximately $2 million as we leveraged furlough options in various government programs globally.
More meaningful charges will be seen in the third quarter as we conclude on the necessary permanent steps to be taken.
As you know we have a very experienced management team.
Well the pandemic is presenting unique challenges we've successfully managed through crises before the team. Once again is demonstrating that we have the skills to maximize profitability and cash flows when facing adversity and having to make difficult decisions.
And managing through this crisis, we immediately reduced our cost structure.
Redeveloping plans to further tweak our manufacturing footprint. We also continue to analyze our portfolio of products customers and investment areas to ensure our focus is on the most profitable opportunities for growth.
We will emerge from this environment stronger than ever.
We've also posted a presentation as Tim noted to our website the chairs additional information about the quarter along with our press release, you'll be able to find information about year over year changes in revenue on a geographic basis for each segment as well as the reported organic sales analyses. So I'll speak to keep my comments relatively brief on the segment details.
As it relates to Q2 performance for commercial foodservice in spite of the topline challenges, we delivered gross margins of over 32% and EBITDA up 18%, excluding FX an acquisition impacts.
These levels of profitability were achieved while revenues declined almost 50% organically.
Moving on to the residential segment and on organic basis, we experienced a sales decline of over 32% with high levels of decline in the UK, yet again, we delivered gross margins of over 32% in organic adjusted EBITDA was 14%.
No as I've done before.
Whenever I talk about residential I cannot resist mentioning our awesome products as most of you know my family has a borderline infatuation with our braava cooking device, but given the good weather in Chicago land, we're now enjoying outdoor cooking the braava still sees daily usage, However, a challenger.
For family favorite has emerged we also love to link Snappily out than well it can do much more than pizza I do admit that is our most frequent menu item.
While I am pondering, having socially distance visits with all of you to my backyard virtual appointments are available through all of our residential showrooms our brand ambassadors and sets are amazing, including Jackie ROP onto well spoiler alert was victorious on southwest night.
Very much missing being able to sample all their accretions currently I definitely cannot keep up with them. So please go visit them virtually also I probably to procure some additional refrigeration capacity and assess butech products before personally hosting in any case onto the food processing segment, where we saw modest organic decline of one.
Percent, while we expanded adjusted EBITDA margins margins here see variability based on mix between Bay Green protein as well as within brands in those two groups.
Having briefly review Q2, I did want to provide some insights on the upcoming quarter in order to do so I think is beneficial to start with discussing order rates, which we've shared in the presentation available at the Investor Relations section of our web site.
For commercial foodservice, we saw improvements throughout the quarter, we started to by being down 65% in April to down 39% in June and July orders were only down 17%.
Order rates were rather consistently improving week to week, but the trend has moderated more recently.
Recall that while the lag between orders and revenue is relatively short for this segment order rates will not perfectly aligned with the revenues for instance backlog changes have an impact.
We expect volatility to continue and there are still tremendous.
Given market conditions. Nonetheless, we expect Q3 revenues to see a decline in between June and July order rates, we have disclosed while EBITDA margins will improve over Q2 levels.
Residential has seen a tremendous resurgence Ethel after April orders being down 55% June showed a 9% decline and as Tim noted July orders were up 28%.
Volatility is the key word to keep in mind again, as we expected to persist.
July orders were positively impacted by pent up demand after the disruption earlier in Q2, but we do believe we are on a path to strong recovery.
As we consider our product environment fill rates and backlogs, we don't expect revenue levels to be up as much as July orders were nonetheless, there is the possibility for growth, but our prudent expectation is to be thinking about nominal declines margins will expand as revenues increase from Q2 levels and recall that our acquisition has impact.
The reported adjusted EBITDA.
I've mentioned volatility a few times and is having even greater impact in food processing.
For the past four months order rates were minus 28% minus 1% minus 66% and now of 83% in July I shared this to demonstrate the lumpiness of the business it would not be appropriate to make a forecast determination from any one or two months sample.
I know the comp to Q3 of 2019 is easy on a relative basis. However that is admittedly a dangerous word to use in these markets. We are seeing disruption in our customers businesses and some difficulties being a countered with installations, especially outside of the U.S. delays are occurring but only limited cancellations have.
Isn't.
Backlog is back to levels about even with the beginning of the year. So my near term expectation is for sequential quarters to be relatively flat to Q2 for the remainder of the year.
So having covered the three segments I do want to elaborate on cash flow leverage and liquidity.
We generated strong cash flows 78 million from operations with benefits from lower accounts receivable levels as well some other net benefits from working capital changes.
Optimizing our working capital in the current environment remains a key focal point.
We will continue to manage capital expenditures well below prior year levels overall positive free cash flow generation will persist.
For the past 12 months free cash flow has exceeded $400 million a record level for us over that period EBITDA as defined in the credit agreement just nearly $600 million. Our leverage ratio is now just below three times, we also have over $600 million and borrowing capacity under our credit under our credit to.
Agreement.
Well, we generate industry, leading margins and cash flows leverage will exceed three times for the upcoming quarter given the year over year revenue declines recall that we're currently able to borrow up to four times bank EBITDA, we expect to be below that level for the remainder of the year.
We closely monitor our current and projected cash and debt levels, ensuring we have sufficient availability and flexibility within our credit arrangements and overall capital structure.
We were confident in our ability to demonstrate strong Q2 results and believe this would afford us better options than what the credit markets. It previously offered.
We've obviously not yet formalized any new arrangements. However, our financial strength also afforded us the opportunity to be patient having delivered strong financial performance, we will benefit from improved capital markets and are ready to take advantage of better options currently available to us we will have sufficient access to capital.
And you solution, we implement will provide financial flexibility and allow us to make strategic investments. It is not solely about a financial covenant, we will continue to responsibly deploy capital and to provide solid returns over the long term.
In conclusion, as we work through the second quarter Reinsured employee safety maintain continuity of operations to meet customer demands and took actions to cut costs. Additionally, we invested innovation to further our development of leading technologies.
So along with Tim and I know the same holds true for Dave who is sitting here six feet away from me I also would like to thank our employees for their relentless efforts to achieve positive outcomes. We have incredible teams that rise to the challenge and generate industry leading results. During these unprecedented unprecedented times, we will continue to deliver.
Best in class results.
With that Joelle. Please open the call two questions.
Thank you to ask a question you would need to press star one on your telephone to withdraw your question touched upon key.
Please stand by all the capacity coming to a roster.
Our first question comes from Joel Tiss with BMO. Your line is now open.
I'm not used to be in Paris.
So.
I wondered if.
Just one I guess I don't know anyway, you're seeing any signs of distress or or inventory dumping or anything coming out of the deal a distributor channel.
That would cause you know maybe the recovery to be delayed a little bit.
You know so we're pretty well positioned with I would say you know our strongest partners are the larger.
You know more stable dealers or at least that's where our revenues or are you I guess more concentrated.
And I think they're pretty well positioned as we go through this period I think there will capitalize that got broad businesses and we really have not seen that I mean, certainly they've got challenges much like we do and their adjusting to the you know the new business environment, but.
Certainly they are managing through this much like we are we don't really see.
Kind of distressed actions that you might.
Kind of be describing their including credit risk.
So I know that that would be a concerted some view, but that really hasn't been.
An issue from our perspective.
And then as you guys think about emerging from this period you now with.
Some momentum.
Ability to maybe takes a little bit share a play a little bit offense can you give us a couple of maybe a couple of examples are directionally, you're thinking in that you could.
You could really come out of this in a much better market share position.
Three years.
Well, so certainly one of the things that that.
On the prepared comments and those are those are not new commits because we've been talking about it for a long time as but certainly our investment in.
You know differentiated technology is right I mean, so certainly across the brands in the portfolio. We feel that we've got leadership positions there and are continually investing in innovation, but you know as we brought a number of these other broad based initiatives on which is kind of the.
The brains of the kitchen, which as you know controls I have tea.
Automation.
Hi solutions to address growing trends again talking about things such as delivery.
Solutions and beverage you know those are things that we're continuing to invest in right and we do view those as higher growth opportunities that are emerging trends, but in many cases, there that are higher ROI to our customers. So this should help us expand margins. So those are really sort of things that we've been playing for.
The long term and we've we've put dollars against them I mean last year, we had a $15 million to $20 million budget, which I would say is incremental.
We've we've carried that through to this year I mean that was.
Really the run rate that we had in Q1 and although we adjusted our cost structure, we've really been committed to not shutting that down I mean, because we do see that that is not all of the future, but that is really where features getting accelerated right now and they all those things are starting to come come online.
Probably more quickly as our customers are kind of rethinking.
What does their operation need to look like what is the demand driver you know delivery right now so if you look at the restaurant.
Revenues right now and this period, 90% of it is order ahead delivery drive through or carry out. So some of that trend is here to stay at our customers are adjusting for that so we're pretty well.
You know uniquely positioned for that I would say the other thing and Didnt mentioned that in this call but in other calls me, we've really been evolving our sales processes as well so I mean.
Investments in digital marketing.
Training and support tools. So we can better engage with end users and educate those customers that's very important to us so.
That is something that we were doing last year.
Continue do through the second quarter and as it's more difficult to get on airplanes and see customers face to face.
The communication.
Our increasingly important and I think we've been very effective with that so you know so those are things that are going to helpless.
Dolly get through this period, but really accelerate where we wanted to be in and how we were thinking about the world.
Even last year coming into this year.
And then one last one I don't want to take up all the time I just.
It's all year your decades of wisdom can you give us a sense of what you think over like same thing like next three to five years. The you think theres going to be a lot of menu changes, where maybe more of the quick serve guys are seeing an opportunity to take some share from casual space or you know any any thing there that that could we.
Early lead maybe a little more of a surge of business a couple of years out.
Yes, so I.
So I'll kick it to Dave in the second because he has got even more decades of wisdom than I do but.
But.
The answer that is yes, right I mean, if you look through this period, 75% of the traffic.
It's going through limited service locations right. So it is kind of the not traditional I mean, certainly quick serve fast casual C stores.
The the retail offering so.
There's a shift in that direction, because they really are geared towards that that delivery drive through.
And take out.
So I mean, I think is as dine in his rethought the.
The pile probably.
Shifted a bit and yeah, we think that bodes well for us because that is where we're positioned those customers are looking for.
Technology solutions and things that I mentioned really that kind of goes into those segments.
And.
Yes.
Add to that thanks for the comment on the decades of experience over counting the years as you said there 40 years.
This business you know about.
Three quarters of that running food processing and beverage plants, and then restaurant operation Engineering restaurant development outside the United States. So thanks for that comment the last 13 years I would say here at Middleby.
You know I've watched as we've pushed technology for the adoption of speeding up speed of service and food ordering food costs and lowering labor costs.
During this crisis, if I was just in a restaurant a couple weeks ago and they've reset their drive through menu.
For speed of service for customer convenience and for profitability and so the franchisees are the 10 franchisees different franchisees I've talked to over the past three weeks are making more money per dollar sold than ever before and so while the operators in this business love to serve food and take care of their customers, They love, making money more than anything.
And what is going to change permanently is their ability to think through operationally, how the kitchen operates and how they can safely take care of their employees and increase their profitability. Thanks to the learnings that have occurred in the last six months there on the quick service side through.
Drive thru and carry out.
And delivery of these guys are making more money per dollar sold than ever before and they are not going to let that learning go that learning translates right into the what Tim talked about in the last answer about the automation that we've been developing over the past three years or four years, you know I remember the PUC the delivery carry out solution to.
Two years ago, we were so far ahead of the marketplace well guess, what that's a huge success right now everybody is attracted to that and adoption.
You know ghosts kitchens, commissary kitchens dark kitchens, we had that two years ago were promoting it at NAFEM and guess what now everybody. All our competitors are saying, they're coming up with the new original idea they weren't even thinking about a year ago.
So it's exciting right now, but see the change we're bringing the future to the present and it reeks of automation and technology around controls systems and processes to improve improve profitability of the restaurant operator, it's probably one of them as exciting times I've ever seen.
And that's 40 years.
That's awesome. Thank you.
And if you want me to talk about food processing I can tell you the same story.
But let's go I don't want to take up all the time.
All right. Thanks, Joe appreciate it.
Our next question comes from make debate with Baird. Your line is now open.
Yes, good morning, guys. Thanks, they've taken a question.
So I'm looking at slide deck.
By the way thanks for all the detail in there.
Looking at the slide with recent order trends.
So the 17% decline that we've seen in July I'm I'm looking to get a little more context around that can you.
Maybe first and foremost tell us a little bit as to what you're seeing on a part side of the business worth is just outright equipment I'm wondering if maybe there was some variance here that that would kind of explained.
The sequential improvement.
And then related to this.
I guess my question.
You're sort of looking at your distributors around the country.
Have you noticed any variance in demand trends in July between say the post our operating down and.
The states that have been harder hit with the virus, you know like a Texas, Florida, California versus kind of the rest of the country and also across the various verticals that you have.
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Are there some that are getting to the point that they're operating closer to pre cobot levels from a demand standpoint, because I would imagine within your mix things like travel and leisure and the casual dining I would imagine that thats still flat on its back so.
It'd be helpful to understand kind of some of the moving pieces here I realize that kind of a lot, but thank you for Humoring me here, Brian sort through it I think parts, where we're yes. So I as you kept going I started to the jot some of the down because I'm sure I'll forget it so maybe kind of unpacking. It. So the first thing is parts right. So we we did.
See demand drop in Q2, which might it be counterintuitive given you would think people be servicing equipment, but as you kind of think back too.
April restaurants are really entirely shut down that was kind of the original mandate. So people are not turning on their equipment and even where service was discretionary things such as preventive maintenance programs.
Restaurants were cutting their business expenses much like we were so those things were kind of coming off.
We're in a period of uncertainty.
So as we went through the quarter and that's certainly as we kind of look into Q3 restaurants are opening I mean, certainly on the the quick serve some of the.
Theres lot of restaurants that are that are fairly busy right now so yes services kind of come back onto.
The plate I mean, it so I would say it was really a.
A little bit of blip of there's no service then be.
The channel was de stocking relative to demand levels on a particularly service agents didnt want to refill their trucks when they really weren't sure what was going to happen in the world. So kind of getting ended to July in Q3, we anticipate that you know that service.
We'll be back to levels that are kind of similar to the to pre cobot, it's hard to say, maybe maybe not up.
But it will be less down right. So it was down as much as equipment in the quarter. So I think that kind of there's a little bit of a tailwind as we come and.
In Q2 Q3.
So I'm sorry, just to clarify just to clarify your stand up parts were down as much as equipment in a quarter and.
Maybe better than that down 17 number in July.
So I did not know the July parts numbers I'm, giving you kind of a macro view of parts were down more than you would expect in Q2, but can do what equipment was you typically say hey.
I just can be resilient, we had de stocking in the channel an immediate disruption it will be back on in Q3, maybe not the pre pre cobot levels, but it is going to be in a much better situation in Q3 that it was in Q2, so thats a.
That's a positive.
All right, so kind of already forgetting graphic distribution at the geographic yes, yes. So as you look at that yeah. There is a.
Dichotomy.
There and so not all regions are performed the same so maybe you know surprising the northeast is actually the down the one that's down the most but as you kind of think about you know week to week in month to month, what we are seeing.
Is that when you have restaurants that are retrenching because of the shutdown of the the dine in.
California, obviously in some added restrictions are hot spots and places like Florida.
At Dallas, yet, we are seeing that kind of.
Move move up and down I mean, so, California couple of weeks shopped back down so governor put new restrictions into place.
It actually started to improve again, even as much as a week later, so I mean, I think that take away from that is.
We're going to be kind of in a period of whack a mole here for a while as we go through.
Third quarter, because I think we've got to come up to a level because people want to eat out.
They're finding ways to do that and whether that.
Through all the different avenues, we talked about.
But I do think we're going to have volatility here driven by the dynamics of if cobot hotspots going on and think about school system, starting to open up and what the implications of that can be so I think.
That's where as we think about July because that was your other question.
We don't necessarily think a were.
It's very difficult to predict the business right now we should have been very transparent, giving you know month over month order rates. So we can kind of in real time tell you what's happening.
Our expectation is that you know July it's not the order trend doesn't kind of continue at a positive fashion from July we think that we've seen the lows in.
Q2, and we probably stay better than what we've seen in you know it as recently as June.
But then I think we kind of get to this period, where we start to.
Bounce around at levels that are you know in the.
That are better than June.
Certainly perhaps is.
As good as July although we'll see what happens so the other thing I'll just mentioned in July.
We are seeing some of the pre co vid activities that looks.
We were working on kind of strategic initiatives, what our customers start coming online. So the I mean, there was no new menu development.
You know that.
In product adoptions of some of our more recent technologies that have gone into.
Some customers that have had confidence levels that kind of bring those back on and those have happened in.
We've had been C stores, we've had been retail we've had some and fast casual.
And the other thing that's in there as we've had some some restaurant remodels. So there are customers who are taking this opportunity to refreshing and remodel their store in some cases or can be elements of of thinking about dining rooms, and employee safety in there as well.
So those were activities in July that certainly we did not have in.
April and May and I'll. Just also kind of say April may was again the initial shock as went through June and into July so even though.
We've got a slide in the deck of where we're at with dine in I've, even remember that that was all shutdown in April right. So even though it's not great across the country dining is you know has really opened everywhere except for a couple of states.
You know and see pretty much have outdoor seating available and then you've got anything from.
Six foot restrictions to capacity of 25% to full capacity so.
Although that is not great, it's allowing our casual dining customers that are also looking at offering more and more.
Curbside pickup, it's allowing them to really start.
Driving revenues.
You know.
That dine in and that was not there.
90 days ago.
Right.
That's great color. Thank you for that then my follow up.
Maybe for you Brian on a gross margin side, maybe you can help us think about the progression going forward I mean looking at the quarter here you had call. It 510 basis points of compression on a 40% decline in volume.
Obviously the declined in volume are getting better going forward.
They're a good way to kind of link the year over year change in volume to the year over year margin compression in the back half. Thank you.
Yes, no I mean, so margins will improve slightly from here right, but the.
Impact.
Of each.
Better.
Performance going forward from where we are.
Should be slightly better than what we've seen right I'd say like the contribution margin for each dollar of better from the trough should get slightly better right. So I would.
I guess I'd start with modeling it kind of what we've seen a ready and if you want to kind of.
With that to the slightly better side, then how the Q2 math worked out that would make sense to me.
So lower decremental margins on a gross margin side going forward.
Right.
Yes, great. Thank you for that good luck.
Thanks, Mike.
Thank you and next question comes from Jeff Hammond with Keybanc capital markets. Your line is now open.
Hey, good morning, guys, Hey, Jeff to.
Great Great color underperformance here, so just want to come back to the July orders here is there was there anything in terms of Lumpiness that kind of makes you feel that it's it's on sustainable because what we were hearing in the channel was that.
We are getting this plateau, but clearly July it was a.
Step function up and just want to understand and you're putting a little better caution around that so just want to understand it better.
Okay, Yes, I mean, maybe to just reiterate I mean, where you're thinking that you know, we probably see some retrenchment and volatility from July but certainly we stay.
North of June and again.
Mentioning some of those activities that did with.
C stores retails fast casual remark I mean, those that is real business that came through.
You know the month of July and again those were initiatives and Rollouts that we were anticipating pre cobot. So again, we were pleased to see those come through but that you know that gave us a little bit of boost in July fewer to back that out we still would have been ahead at June so I think thats maybe.
Gives you a little bit more color, it's hard to put a number on that but.
But that was one of the reasons why we think that as we go through August and September by retracted that plus some of the the dine in locations.
There there are closing down.
However, we are so you know some of the things that we saw on July doesn't mean, it's not going to happen again. There are other projects that are out there and we're engaging with customers who will kind of more broadly we are seeing some of the pre cope and things come back on line and Dave you want to.
Add some color further yeah, I think it's going to be.
Listen three of US love, beating your expectations I think we'll continue to do that but it's going to be took business over the next three to six to nine months and it's our financial discipline in our operations in our connectivity to the customer that allows us to outperform the competition, but it's going to be month by month because people are starting we're very.
He conducted one of the great positive.
Have come out of this terrible situation is our connectivity to the customer and we're seeing customers start and stop start and stop but the bottom line is they're buying into our solutions. So I think it's going to be lumpy, it's going to be tough business is can be very aggressive business.
Well, clearly outperformer competition, but it's going to be that's going to be tough for the next six to nine months of Lumpiness.
Yes.
So just on the I think you said 40 million a cost saves in the quarter can you can you just confirm that and then split out what you think is structural versus temporary and when you start to think some of that temporary stuff starts to leak backend.
Yes the.
Yes, it will leak back in as you know revenues in business levels justify it.
You will see of that 40 million and again thats after increasing area reserves and taking some stock comp around your 25 million or so of it was from comp and commission. So kind of feeling you know people related and such and probably 10 to 15 million of you know apt is actions around.
Around travel in advertising and professional services and trade shows in the light and then there are additional pieces about other things that were just.
Changing in.
In the business so.
It certainly feels like again most of it is is structural and I'll call. It semi permanent I say semi permanent because the people side has a variable component to that.
Also as.
I noted in my comments.
We know our levels going forward on the exact same as they were before so.
More will be forthcoming about how much of that.
Becomes permanent versus how much of it becomes I'll call. It short term variable.
Okay, Great and then just final one on unrest kitchen.
Theres theres been all of us talking a lot of investment home and home as kind of a sanctuary and just can you talk about how that's resonating then.
I see your chart on like the appliance data, but it just seems like you know as people invest more in their homes that there's no real opportunity here and just as you see this shift what's your ability to kind of ship react and shipped product on time et cetera.
Yes, that's a great question, so I mean.
You know, who we do feel pretty good about the demand environment I mean relative to this.
The situation we're in.
Certainly so orders turned up pretty significantly in July we do think theres, some pent up demand in there obviously things were.
Down in the three quarters before so whether that's projects getting completed.
Orders getting.
Placed with with dealers.
Some things that maybe it would have expected to happen in April may kind of gets pulled over that period somewhat.
However, a couple of things I mean, we've got some slides in there I mean, the you know appliance industry overall is seeing kind of.
Recovery in a forecast.
Thats on the positive side of things for the back half of the years. We went into the period you know the market was pretty good new home starts were up double digit what we were coming into the the year existing home sales activities, which kind of then.
Helps support Remodels, which is kind of the strongest piece of our business we're doing.
Pretty well so as you kind of look at the data over the that the last three months. It there's been significant improvement the existing home sales is a little bit V shaped.
I would say new construction kind of surprising in a period like this that were only down 4% in the month. The June relative to last year and new permits are actually ahead of last year. So that kind of gives you a little bit Oh look ahead of what you know what might happen. So you know that that dynamic seems pretty good gives.
Admit but then you add on that other element what what you said is the world is.
Shifting some of it may go back to where we're but a lot of the wall and people are spending time.
At home Kids are at home being school.
And we are we're eating more at home, even when we're even more ordering in and were taken delivery, we're putting the food and the refrigerator and then reheating it and certainly people are spending more time cooking again, both indoor and outdoor so we've really seen strength across the different product category. So it started first without.
Sure and then we've got indoor cooking in refrigeration, so it's pretty much.
Across.
You know the platform I don't think we're going to maintain similar to what you just said in commercial residential being up 28% by any means but we think it's possible that we would see.
Speaking on the positive ledger for the the rest of here and then kind of baked underneath that I mean, much like we talked about with commercial I mean, there has been a you know quite a bit of heavy lifting over the.
Past several years, certainly new product introductions and that continued into.
Throughout last year and into two this year.
You know really across the brands. So that's that is.
Exciting and then you know really our infrastructure investments that we've talked about for a long time, I guess onetime being three years here with our service team or sales team and we've come to light years and thanks to the you know the you know the great teams that we have there relative to where we were before.
And it really as we kind of go through this period that also.
Plays well for us because we've really been able to.
To support the.
Customer because we've got that you know much better infrastructure now the demand that you pointed out that is a challenge I just got to say that look one of the things that were.
I'll I'll caution is that we as we went into this number one.
We kind of locked down pretty hard I mean, and so we did that with residential you know, we really didnt anticipate orders to.
Recover you know as quickly so that's number one number two.
Okay safety is a real focus here and I will say, unfortunately, but some of our residential divisions, particularly.
King and links which is in Mississippi, that's been a you know hotter spot and what we have cases of co bid.
Or suspected koeppen, we locked down the factory. So I mean, we've had inefficiencies that have been running through.
Our Q2 numbers.
And you know that May continue into Q3 so.
Not only impacts our profitability, but.
So our ability to too.
To ship orders when we have good demand environment, that's actually increasing not decreasing so I think well our backlog has been building.
That area, we've been thinking very hard about how do we increased throughput you know and capacity, while ensuring that we've got employee safety because in the other factories is a bit easier when you've got less people you can distance. So thats one of the challenges that we probably have in the.
Third quarter, that's a that's a.
It's a good problem they have from an order production standpoint, not a good problem from a cobot standpoint, but thats something as I mentioned thats priority, one so that could impact.
How revenues rollout relative to incoming orders.
Okay. Thanks, guys.
Thank you and next question comes from Tim Thein with Citi. Your line is now open.
Oh. Thanks. Good morning first question is on.
Commercial margins.
Looking at that EBITDA margins there.
Compared to your global peers I think.
The gap at least from what I look at this morning. The gap is probably why this is Ben so.
Your hats off to that team I'm just curious.
Thank you call out Sam in terms of.
Maybe you talked about that cost action, but was there anything that.
Maybe help plus side.
Restructuring or engineering expenses or projects that may be got.
To the back half just anything you would you would call out.
We won't repeat as a benefit.
Well, we certainly.
Were rather aggressive in the actions, we took and we were trying to be very measured with how we did attack things in engineering given innovation is so so critical.
But.
We will continue to adjust that as the no demand the demand comes through.
Yes, I mean look I would say a couple things one we're heavily focused on profitability right. So thats kind of one of the you know the hallmarks and I think it's also you know it's not.
Only how we operate the you know the business and our you know.
Currency towards delivering the bottom line, but it also goes to the strength of the brands.
And the products and that's something that will continue to to focus on there will be some costs that we took out that's probably not sustainable and take out if we see growth happening so that will come back obviously price.
Come on relative to volumes, increasing I'll just add.
Maybe I'll, let you know.
Brian.
Got to clean this up a little bit, but I would say, although certainly there's a lot coming up we did have some.
Probably some incremental costs in the quarter relatively so there's kind of some netting there and I'll I'll kick it over to him, but particularly bad debt like I know, maybe I'll just ask you to comment on that.
So I did mentioned, we did take 3 million of bad debt expense and that doesn't mean to indicate that we had $3 million of restructurings and write offs.
But we wanted to make sure that we took a prudent.
You know position on our reserves given the risks in the market. So that's one that we did have that may not recur to Tim's point.
You know, we may be bringing back.
On line you know expenses.
That aren't you know directly immediately revenue generating in the very short term. However, with orders and then revenues improving that provides contributions where we can afford to get back to the fast in full pace. We had before now as I say that I don't want you to.
I think that we completely stopped our our efforts that wasn't the case we were just.
Looking everywhere, we could and making sure we had a balanced viewpoint of things and we think it's also probably important to think about the cost in the supply chain side of things too. So let me have a Dave add some commentary here.
Yes, Thanks, Brian.
Great point, you know and I'm glad you recognized that separation versus our global competitors I think it's specifically a recognition to the people at Middleby that are making a difference in engineering in purchasing supply chain and manufacturing.
The work that's been done over the past three months is clearly showing up in the numbers.
It's separating us from our competition.
It's allowed us not to do rolling shutdowns, we've actually put the customer first and supplied products and you know I can tell you that not only have we had financial performance outpacing our competition, but our customer service is outpacing our competition and I can tell you that I've had half a dozen phone calls from Ceos and COO.
Most of our end users thanking me for the delivery of equipment, because we chose to take the customer first in at the same time. These great people in purchasing and supply chain and manufacturing engineering maintain these financial performance numbers, it's a remarkable feat that we're going to hold onto.
Okay got it maybe Dave staying with you would just.
What's that tend to our conversation that you're having with your large chain customers as they clearly been relative winners here from a traffic and volume standpoint.
And so just what are you hearing in terms of their investment plans.
I'm, assuming that new store count is not really high in the list but.
I don't what.
From a menu standpoint, just just what you're hearing from an overall.
Activity and how that plays into the pipeline of activity in the back half Yeah, Let me.
Let me give you two sides to that point.
So we are very connected.
Our sales team are.
The people on the front line up customer relations in our more connected than anybody in industrial and we're learning a lot. The customers. We're learning a lot about menu menu management and speed of service and profitability. The ones that are being successful the operators that are being successful whether it's the franchise or are the franchisee.
You know I constantly have conversations with very large franchisees and it's like you know, they're talking about making more money than they've ever made in their life and I'm like it can come on spend some of that with US since were good friends and they're like now I'm going to hold onto a pronounced I'm not sure what's going to happen in the next couple of months, but let's figure out what we're going to do when I read lease that money so that connectivity.
He is really important.
The activity around C stores is growing groceries grocery store retail are stepping up their process around food service and using more automation to deliver products to their customers. So they are in gross and shopping for groceries.
C stores the cruise lines are revamping a lot of their meaning there are kitchen equipment as their refurbishing getting ready for launches late next year, but theyre refurbishing.
Ill defined white tablecloth and the dine in.
There are act, they're not given up their businesses. These guys are not going to what they're going to re emerge better and stronger and they're going to our connectivity with them and helping them emerged stronger is better than ever but it's going to be a tough 369 months here and that's where I think the difference between us and our competitors.
It is really going to shine and our ability to run this company and stay connected to.
To the customer so that we can pull solutions through our channel partners. Our trusted channel partners are trusted dealers will pull solutions through them, we're going to deliver him to the end users that we sell directly to the big large chains globally.
So its but it is really a testimony to the people in engineering and manufacturing and purchasing.
The performance, we've gotten and our ability to stay with our customers. While they are struggling in some cases and succeeding in huge ways in other areas.
Alright, thanks for the time.
Thanks.
Thank you.
Our next question comes from top box with CL King and Associates. Your line is now open.
Hey, good afternoon, everybody just a two part question for you if you look at.
And this is on slide 11, if you look at 26% of the business typically being fueled by Newbuilds.
I've got 26% if you look back over last year.
How much of that is made up by the segments that remain currently strong so QSR pizza and maybe to a little bit lesser extent fast casual.
So we probably don't have a broken down just in that quite that detail I'll make a couple of comments one.
International which kind of think about emerging markets and we're still store growth is coming so it's not only segment, but we're in the world is that happening.
You probably have kind of an oversized piece of new stores coming from outside of the you us in the emerging market. So I think we feel confident that that's going to come back on in the longer term in the near term.
Markets such as India.
Brazil, Latin America, or more disrupted where we expect some of that would occur but.
Other markets.
Such as Asia.
In China, specifically, we're seeing some of the activity picking up so I think is you know.
Both its third lucky.
No, it's certainly greater than a third of of what our geographic mix is coming from the new stores, so but be half of our new store activities is from international So I think that bodes.
You know that bodes pretty well.
But certainly in the U. US I think you know I actually don't know how it breaks out although overtime, what's happening is you've got less independents lesson casual dining. So you really overtime you know QSR.
What was going on with C stores that those trends were kind of caused more the new store openings to be there. So look I think thats going to be more impacted clearly than the installed base, but it's not entirely off the map.
Okay, and then just the second part of the question any sort of.
If you're looking at 21, whatever the whole isn't new builds whether it's like you said casual and independence aren't back as quickly as some of the healthier segments.
Maybe some international disruption or whatever that whole looks like.
If you can talk about the combination of hi, more menu activity at once and then we've seen in the industry just due to the pandemic and how much that could drive from the menu driven sides of the business.
But also secondly, how much that whole can be filled by emerging channels and I'm thinking kind of goes to virtual.
Some of the some of the new emerging.
Locations.
Just trying to think new build.
The the put the puts and takes over the next year.
Not out the opportunities with just some balance sheet realities for some operators.
Thank you.
Yes, let me, let me think initial shock and you can wrap it up Tim the.
I think the whole will be filled frankly, and just like our customers are just just like we are at Middleby right, they're taking advantage of this.
Slow period, the reset how they operate it's it's known to everybody on this call that a lot of measurements of the restaurant industry, our new store openings and so they will come back in and fill that void in there and their performance in our business business performance I think it will be and I agree with your.
Were point that you implied is that the smart customers the smart chain customers and regional chain customers are going to think about how they.
Run their restaurants differently and whether that's the use of a commissary or goes kitchen or dark kitchen, and so they create and effectively better operating system I think that will be filled.
And thats going to happen next year in the following year, they're going to backfill that void and and fill it in with technology not only in their existing kitchens to maintain distancing for their employees safety for their employees, but better and more importantly, better customer service for their customers and so I think the Boyd will be filled.
Im seeing tons of really smart activity out there by our customers on filling that void. So they can.
Bring back that financial performance of their corporations by filling that void that you're talking about.
Yes.
That's a good answer I mean, I think it's tough to predict right now, but I agree with Dave I mean, I think what's going to happen as they are going to invest in their existing store locations right. So they're going to bring technology and that's going to be the first priority before they get to the new stores there are going to be.
Some of the concepts of we're working with some of that they see this is an opportunity because they do have a unique differentiated advantage and if they're very well positioned for the trends right now that will actually accelerate some of the store openings going.
Going after that and also we're working with a at least.
Theres, a dozen ghosts kitchen mobile kitchen operators that we're engaged with very actively it's very difficult to say, how large that's going to be but the reality is it's relatively small to the overall number but it's not only those guys. It is the existing operators and Dave kind of alluded to this that are also one.
Shifting those same practices. So I think thats actually the bigger opportunity that will impact revenues year over the next year or two.
Okay, great. Thank you.
Thank you.
Next question comes from Walter Liptak. She put your line is now open.
Hey, good morning, guys. Thanks for taking my questions I'll I'll make a quick because we're running a little bit late but.
I just wanted to do a follow up on the cost reductions.
And I think it was Brian in your presentation.
Talking about how small the charge was for restructuring in the second quarter and I think alluded to some restructuring toward the back half of the I Wonder if you can provide more detail what might be going on.
The Quicken blunt answer is no I can't yes.
So.
I think I made it clear that.
We need to take some actions and it will be forthcoming, but given the necessary steps around finality of decisions in employee impacts of such on I'm not going to elaborate at this time.
Okay, and then thanks for that the.
In the process business it sounds like there's there maybe some need for some.
Some new capacity.
Theres projects out there is it possible to book orders using kind of digital sales method instead of.
You know this kind of the face to face walking around the factory.
And.
Where do you think those bookings will push out.
The into 2021, yes, I mean, so is it possible, yes, we have a lot of longstanding customers that we've had relationships. Some they are very familiar with our equipment. They know our equipment and we've got great teams that support them everyday that being said.
It is helpful. When you can test equipment, particularly if it's a new customer relationship or project, where they're putting a new technology or innovation in and we've come up with a lot of new products over the the last year and a half so that gets to be a bit of a challenge we had opened up our innovation center.
Actually our second innovation center, we added a bakery one.
We opened in 2018, followed by the protein.
Processing center in 2019 and that the yields are great tools related demonstrate the equipment the performance.
And validation to our customers. So it's tough right now.
Those customers in their says that meet all the business goes away no, but theres just kind of an element of orders that will be.
Depending on us engaging with them and.
Just kind of Brian mentioned in his comments, but that is a very global business I mean, certainly middleby overall as you kind of think about food processing.
Got systems going from the us to to Russia from France to the middle East than.
That there's also the element of being able to do the installs in the service, which is really just a function of people being able to got airplanes right. Now I mean, certainly safety is an element that that were conns considering when we do send people, but it is very hard when you've got the crop.
Last quarter, so I would chalk both of those things up to near term.
Disruption and kind of tactical matters, but rather than demand because coming into the year.
We had to an all time.
Back record backlog Q1 that continued to build.
New product innovation is being well received.
We were trying to address new markets such as.
Pet food stride tried beef.
Dr. needs.
Alternative proteins.
Bacon was an area that we were already in but we were continuing to do.
You know expand our solutions and footprint, there, including with recent acquisitions.
Such as Pat Pro that we did about a year ago. So.
You know all those things are still very relevant so I think they will come back on line.
Once the business conditions.
Settle but so we're still very.
You know positive it optimistic on the other business, but we might see a couple of quarters here were truly just the.
The disruptive factors going on the world make a tough to get some of this stuff done.
Okay.
I think I'd add to that is.
I agree with everything Tim just said, but there isn't inherent need for food manufacturing to be maintained around the world and so.
The governments and the people that are doing it do get some exceptions, when there's a need to keep a food processing plant up and running and they call us to help them bring in some new equipment or keep maintain a piece of equipment exceptions are being made so I agree with everything Tim said, but don't underestimate just the inherent need to ensure foods.
Slide to the population.
Yes, I mean, just.
Maybe to further add on that you know the demand at those customers due to generally is strong right now right I mean.
People are eating generally more by the way. So as you kind of think about all of our segments, whether it's good pricing, whether its residential or whether its commercial.
Food consumption is going up I mean, I think theres. The one of the the things up step out there is the cobot 15, I think many of US have gained 15 pounds during the the pandemic so.
So the consumption, who it is not going down it is it's going up so that demand really starts with our food processing customers and we've seen kind of resurgence and things like hotdog consumption and meat consumption generally which is good for our business and I think the other element and certainly one of the things we bring to our.
Our customers and this is true.
As we talked about in the commercial foodservice, but food processing is audit automation right I mean, we're bringing highly automated.
Systems.
And more and more complete solutions.
And thats, becoming more important not only for the reasons, we had coming into cold, but now you add the element of employee safety I mean, they've got.
It is difficult.
You know to have.
You know people in these the production facilities to the extent that you can automate and space people out.
And then also.
Theres availability of labor issues as well. So so food automation is going to continue to be more important and during this period, we are getting more inquiries.
On solutions to address that.
Which we have great interest.
And then I think that either.
Taking a question on M&A, yet I wonder if it's possible we going to deal done now you've got a pipeline.
Yes. So good question. So obviously, that's also one of the the the hallmarks of Middleby.
And we expressly said, we would be deferring that in the second quarter as we kind of locked down a mixed picture we understand.
Where the world was.
You know certainly.
We're still.
Working through current issues, but I mean, I think as we've gotten our legs under us in a better view of the trajectory.
We're keeping kind of the the pipeline of activities.
Alive, and I think our expectation is as we kind of move through the second half of the year.
Maybe possible start bringing some of the.
You know.
Prudent type of business development opportunities back on line.
Certainly our expectation is in 2021 will be back.
Into kind of.
The M&A swing.
Okay. Thank you.
Thank you.
That's all the time, we ask the questions I would now like to turn the call back over to management for any closing remarks.
Well I'll, just kind of wrap it up and say thank you everybody for attending today's call. We appreciate all the time and questions and discussion so.
We look forward to.
Can I think you with you again on the Q3 earnings call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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