Q3 2020 Middleby Corp Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience again todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
We will begin the call with comments from management and then open it up for question and answer instructions on how to get into queue will be even at that time also a presentation to accompany this discussion is available on the Middleby investor homepage at Middleby Dotcom go to the Investor tab I need to be dotcom to access. It. It is also available in the press.
Patient folder under Rightside Dusty speech.
I'd like to turn the call over to being Fitzgerald for opening comments. Please go ahead.
Thank you for joining us today on our third quarter conference call I'm as Steven said, there are slides to accompany our call that can be found on our investor page at Middleby Dotcom and these slides will not lead our discussion today are met for informational purposes, as we may refer to them well that's cool.
Before we get into earnings I would like to once again, thank our middleby team that has done a tremendous job as we navigate evolving business conditions.
We continue to be an ever changing times with the cobot pandemic and our team continues to rise and many challenges resulting from the crisis.
Adapting our business [laughter] <unk> long term success.
So again to the entire middleby team around the world. Thank you.
Now looking at the quarter. Despite ongoing business disruptions, we were pleased to improved or levels of profitability across all three business segments.
Our actions to quickly reset our cost structure with continued focus on profitability are reflected in the results posted for the quarter.
We also strengthened our capital structure with our third quarter refinancing.
We are well positioned to move forward on strategic and operating initiatives and make the critical investments as we transform our business.
As it relates to segment performance in the commercial Foodservice group, we've seen consistent improvement activity with our customers.
Our order rates were down 21% for the quarter and down 2% for the month of October we've seen improving activity across most categories and our customers are benefiting from rapid growth and drive through curbside pickup and delivery.
Although challenges remain for indoor dining the desire to dine in has grown and this is reflected in improving sales in our casual dining and fast casual chain customers.
Segment, such as quick serve Pizza C stores and retail continue to perform well and we are positioned to support these customers.
As the industry is quickly adapting the many investments weve made leading into 2020 or.
Right now, we're relevant and critical than ever before key examples such as the investments we've made in Betws automation delivery and our industry, leading open kitchen I O T platform, specifically address customer challenges labor speed of service menu flexibility and operating footprint.
Since the launch of our open kitchen, I will tee platform at the beginning of this year, we have increased our engagement with foodservice operators.
And kitchen provides the tools to simplify automate and monitor many of the challenges in the kitchen.
Very excited to report that to date, we have an excess of 5000 restaurants and retail locations operating our system.
This installed base continues to grow its open kitchen is the preferred solution given its broad capabilities to support not only all the equipment in the kitchen, but.
But all other facility operations, such as lighting HVAC and ventilation.
The kitchen is the only solution to connect literally all equipment and operations on one platform.
It is clear that the Liberty and curbside will continue to be a critical importance is this trend will continue beyond cobot. While this is benefiting the revenues of our foodservice customers. It is also presenting significant operational challenges due.
New challenges around customer satisfaction service times food quality and safety from customer employee interaction are all considerations we.
We have a variety of contact lists and automate solutions.
Including the Carter Hoffman PUC pickup pickup cabinet solution, which continues to gain interest addressing critical needs.
And as you saw yesterday in our press release, we announced the introduction of blues owned by Middleby. We're.
We're now moving into supporting employee and customer safety at the restaurant.
This solution provides the highest protection of virus killed rates to enhance safety as indoor dining returns. We're excited to introduce these this unique and patented technology.
Which has been proven with existing applications in the military hospitals and industrial foodservice operations.
Moving onto our residential kitchen group, we have seen robust order levels continue both in the U.S. and UK markets.
Order rates in Q3 increased 45% and continued into October at 44%.
New construction and home sales activities have return.
And these favorable conditions, along with consumer spending more time working schooling and cooking at home are reflected in the order rates.
We're also realizing the momentum from recently debuted products across our entire portfolio of premium brands.
Interest in Viking continues to grow with our seven series Tuscany, and virtual so product families. We.
We have growing interest from the design community as well as we leverage our showrooms and build excitement around our new product designs from brands such as luck revenue and color offerings, such as the Delta Delta Hughes from Viking.
We're also pleased with the initial interest with our USA launch of Mercury and lease ranges from rocket brand.
We continue to see growing demand of Braava, our newest brand with revolutionary Lightwave cooking technology, the interest and smart connected countertop cooking offering speed and convenience addresses a clear and growing consumer trend.
In the food processing group, we reported a very solid quarter, while our teams executed in a difficult business environment although.
Although travel restrictions have made it challenging to complete installations, we've been able to leverage our global capabilities to minimize disruption and deliver upon customer commitments try.
Travel has made it difficult to engage with customers on equipment demonstrations, which likely will affect order timing. However, we have a solid backlog and a robust pipeline with growing interest in our new product innovations such as accelerated maturing loans from our should be cooking systems from our marine Iocs and our high speed conveyor rights Turbochef oven.
By Alkar this.
These solutions are examples recently developed products that offer advantages of automation increase throughput and equipment flexibility.
Almost space savings footprint.
In summary, we anticipate continued uncertainties, resulting from the cobot pandemic.
We have taken the actions necessary to position our business to withstand these ongoing challenges, we are well positioned to benefit from new and emerging market trends.
And we continue to build upon the leadership positions across all three of our foodservice platforms.
Those are my prepared comments and I'd like to turn it over to Brian for the financial discussion.
Thanks, Tim well not seeking to turn our call into a political commentary, having a bit of fun I didn't want to ensure everyone that our financials are reflective of 100% of our divisions every reported in the results and no recounting is expected.
For the third quarter, our GAAP earnings per share were $1.10 cents, 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 $1.34 cents, which was negatively impacted by five cents from acquisitions.
I'd say it was a very successful quarter for us while addressing the challenges presented by the pandemic. We generated record operating cash flows delivered very strong margins and enhanced our capital structure.
Let me start with a brief overview of revenues and segment performance and then come back to cash flows and liquidity.
On a consolidated basis revenues declined 12.4% or 14.1% organically as cobot significantly impacted our results.
Across the company, we were able to deliver gross margin of 35%.
Total company adjusted EBITDA was $126 million and represented nearly 20% of revenues, a 25% increase or 410 basis points improvement from the second quarter of 2020.
We achieved this while also investing nearly $5 million in technology initiatives during the quarter.
We continue to benefit from the Swift an aggressive actions, we took in the spring as well as additional actions taken more recently.
We entered this period with leading margins and we're continuing to execute programs to maintain this profitability position.
Commercial foodservice revenue globally were down 27% organically and when looking just at North America decline was approximately 24%.
Gross margins were over 34% and we delivered organic adjusted EBITDA of 22.6%.
While the margin values I will discuss on an organic basis, meaning excluding any acquisitions and FX impacts.
In residential we saw revenue up over 11% its strong demand exists for premium appliances and outdoor cooking platform.
This led to gross margins over 36% and adjusted EBITDA of over 20%.
Additionally, if we exclude non core businesses, our operating margin is over 100 basis points higher.
In food processing revenues increased 22% organically gross margins exceeded 36% and the adjusted EBITDA margin was 23.7%.
While the revenue for the quarter did come in somewhat higher than previously expected in the prior year period was at a relatively low revenue level as I have discussed before margins here see variability based on mix between bakery in protein as well as within brands in those two groups. This quarter did benefit from relatively higher margin contribution.
Funds from the protein related products.
I will come back to some outlook comments on all the segments shortly.
In terms of SGN expenses, when excluding $6 million from acquisitions, we saved over $20 million or over 15% compared to Q3 of 2019 from our cost control and head count reduction actions restructuring charges were approximately $7 million for the quarter, which will provide annual costs.
Saving benefits of over $20 million.
Interest expense was down over 3 million from Q2.
You'd like we recall that we issued convertible notes in August.
US GAAP currently requires a bifurcation of such notes into a debt and equity portion along with the noncash interest charge for the difference between the 1% coupon we are paying and a hypothetical yield on a note without a conversion feature.
Provide solid returns over the long term.
I'm very proud of being a very experienced management team that continues to deliver these industry leading results all our segments expanded their margins considerably from Q2 into Q3 commercial was up over 400 basis points and residential was up over 600 basis points. The total company adjusted EBITDA percentage was.
Nearly 20%.
While executing plans to maintain our operations and control costs. We were also working tirelessly to drive cash flow.
Having reviewed Q3 I do want to provide some insights on the upcoming quarter.
In order to do so I'll be referencing order rates, which we have shared in the presentation available at the Investor Relations section of our website.
By the way our intention is to cease providing monthly order rates going forward.
But before discussing the markets broadly I thought I'd start with some insights on how my family's household is impacting Q4 demand with some dining restrictions having come back into place around Chicago land I am making sure we're doing our part to support local restaurants, and especially ones that are middleby customers a few of our favorite restaurants.
About a 25 mile drive from our house, but it wasn't going to let that get in the way of satisfying my Taco cravings. This past weekend. So a quick shout out to Lula Cafe, which is a truly exceptional and must visit as well as Robert's Pizza Endo company, who has a few marcel ovens cooking their amazing pies.
Once home with all my Great food I put it in my beloved Braava into service for some reheating now you May ask who is my favorite Pizza Colo is it my wife with what she masterfully creates an end cooks in our links Napoli oven or is it the crude Roberts.
Well.
Driven ever so slightly by my dining contributions for commercial foodservice, we continue to see improvements throughout the quarter orders were down 31% in August then down 18% in September and October was down only 2% now.
Now I've commented previously that our risk of looking at monthly data is the variability that can exist over.
Overall, the trend has obviously been consistently positive as we look all the way back to the beginning of Q2.
October was an exceptional month, but I need to offer some caution on the interpretation of this data.
Ultimate fulfillment timing of these orders is key to keep in mind as it includes some longer term program sales that we would expect to be fulfilled in the first half of next year. So it would not be appropriate to expect the September and October order data points to be reflective of the Q4 revenue result, as well.
Any of you seek to Modeler said Q4 expectations I believe would be more appropriate to consider somewhere between August and September, especially given seasonal weather changes and emerging dining restrictions, we are not losing our focus on margin and cost control. Nonetheless, as we have started to bring some cost back into the business.
There could be minor degradation in our EBITDA for Q4, we continue to monitor our costs and additional profit improvement plans in place for the year ahead, we remain committed committed to delivering higher margins and 21 than we have this quarter.
Residential has seen a tremendous resurgence with recent months order rates of over 40% as we consider our production environment focused on ensuring employee safety and evaluate staffing levels and fill rates as well as the effect of prior year comps, we expect the Q4 rate growth rate to.
The marginally better than that of Q3.
Given backlogs and consumer demand, we do expect growth to persist into 21. The production environment matters. Previously noted, we'll also keep sequential margin expansion low.
For food processing, the third quarter did come in somewhat ahead of expectations. We've also seen some near term recovery in the backlog as we are now at levels slightly below where we started the year. We have ahead and as we head into admittedly easier comp for Q3. So if you look back at 2019 Q4 revenues grew over 32.
Million or 36% sequentially for this year, we only expect modest at best sequential growth from Q3 to Q4 also the Q4 project mix may contribute to lower sequential margins.
We are seeing continued disruption in our customers' businesses and some difficulty is being encountered with installations, especially outside of the U.S, although laser occurring only limited cancellations have arisen as I had noted that backlog is back to levels close to even with the beginning of the year, so near term expectations or rather modest but the.
Outlook is seemingly stable income.
In conclusion Q3 performance was extremely solid, especially as we look at margins and cash flows the challenges and volatility in the current environment presents some risk for Q4. Nonetheless, we are confident in our medium and long term positioning.
In Q3, we continued to insure employee safety maintain continuity of operations to meet customer demand customer demands and took actions to cut costs. These efforts persist and we will also continue to invest in technology and product innovation.
Our leading technologies will help drive further growth as we enter 21.
With that Stephen Please open the call to questions.
Thank you for those who would like to ask a question. Please press. The Star then the number one on your telephone keypad again. Please press. The Star then the number one on your telephone keypad with all your question. Please press the pound.
Our first question will come from the line of Mig Dobre from Baird. Your line is now open.
Thank you and good morning, everyone.
Amex good morning.
I am looking at this October order number in your slides and frankly my.
My head is spinning a bit and I understand that.
Your your comment in terms of how these orders get converted to revenue and that some of this conversion to revenue might go into 2021.
But to be down 2% in October I guess.
Looking for a little a little more color here and maybe the way I would ask the question really is this way.
In the past you've given us a breakdown of your various verticals that that you've got exposure to.
My recollection is that kind of casual dining trends, then travel and leisure independent restaurants, so arguably seeking the areas that have been really impacted by the pandemic that was about 20% of your business.
Yes.
You Shanel QSR pins.
Really kind of accounted for the right. So I guess I'm wondering as we're looking at is order trend can you parse out what you're seeing in.
QSR pizza relative to casual dining relative to.
Institutional or retail.
And then what level of visibility do you think you have at this point with some of your more important customers to kind of help us and help you create some kind of an outlook for us maybe if you would beyond the next.
One to two months thank you.
Okay. So there there's a lot to impact there.
And we.
So I'll give some color I mean, certainly we're not tracking this really order.
Which by those those segments I mean, I'll first start off by saying that just general business conditions are improving and certainly there's.
Theres restaurants that are shutting down or we know the seasonal.
Shutting down because of restrictions and the seasonal impact, but I think by and large we're bullish.
Things are.
Improving the foodservice dollar spent outside the home.
It was increasing and we're kind of all boats are are rising certainly casual dining is is lagging quick serve pizza emerging chains, but we're seeing improvement in.
In all categories.
Yes, I would say in particular, we've done well in and pizza.
We do have included that October number some I would say, Brian mentioned program, but if you want to call. It a rollout activities, which typically just don't come in and out in a two week period.
They tend to be tied to a program and hence that's why we expect some of that to be in next year and we see that at.
Some of the fast casual chains, we see that at some of our convenience store customers as well so.
So again, you know the parts of the market that we've talked about before.
And I just mentioned C store pizza quick serve retail.
Our performing well casual dining is has has come up.
So and I'd say the one other element.
That youd see probably a little bit in that October number I was just service because our service business, which you know there was kind of disruption back in Q2.
Really didn't pick up all that much in Q3 until late in the quarter.
Early in Q3, so you know that kind of bodes well also as restaurants are back operating and hence they need to service or their equipment.
I see.
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I mean.
It strikes me that the only way we could be looking at the order number as to what we're having here is it's for you to have outright growth and portions of your business.
So can you maybe be.
More specific as to where you are outright in growth and do you have a sense that there is.
There's enough going on in terms of what Youd now with these customers and I know some of your customers are essentially talking about unit expansion in 2021, and they are gaining share.
Consumer wallet share. So are you getting the sense that theres enough momentum that built up with these customers that can potentially sustain into 2021.
Okay.
Meg I'm not sure I fully under understood I made out maybe I'll take another.
Right. So first of all let me rephrase there.
Yes I.
No let me rephrase that if there are portions of your business that that are still obviously experiencing some some stress, but your orders are only down call. It 2% then I would imagine that there are portions of your business that are up to actually to.
Offset some of that erosion that you havent and customers are still struggling so I guess I'm wondering if you can tell US who is who is up year over year at this point and what.
You might have into 21.
Yes. So so we are seeing with us and again, there's some rollouts in the October number I mean, we've kind of wanted to be transparent through this period so people understood.
Going on under the coverage here should we have confidence in the business and on recovering, but when you see kind of an October number you know who knows what November will will bring but in as we've seen improvement in September and October.
The segments that are above right because your point is a if your 1% something's probably positive there. So some of the program activities of C stores.
With the emerging chains and pizza are doing well, meaning there. They are in the black right and that I think is quick serve is also you know impact.
Improve to be actually I'm not sure if it's positive or.
Negative, but it's probably getting close to about where it was before casual dining fine dining institutionals schools.
Which obviously.
Obviously, not a bridge back to.
To be in the classroom.
We are down but improving so I think that would be kind of the way I would bucket there and then I'm going to go back to surface again, which service also is kind of back to.
Last year level.
But again, it's very volatile it's very uncertain.
So I.
We hate to talk about monthly orders I think well again, where we wanted to get was and what are the trends that we're seeing I was middleby performing.
Got to give us some color to the confidence.
In the what we have in the business and what.
While we'll have uncertainty in the near term the company. So we have the business that you know with the recovery in the long term and how we're positioned.
But we'll probably get away from.
The the monthly order rate reporting just as Brian said, because it otherwise we'll get into kind of ballpark the.
The October orders and again, we get some some rollouts there, but so just on the visibility next year.
Also I mean, I think that we do expect.
Foodservice is going to continue to improve it doesn't mean that it's going to be backward where it was before.
The.
Stats for.
That are out there but by technology.
Technomic and others is that the.
Restaurants will still be down or foodservice largely be down 5% to 10% next year relative to 2019.
And so we expect that we'll still have you know underperforming segments going into the year that being said, there's confidence I think in a lot of the categories and that is allowing them to.
Not only move forward with programs that they had.
Pretty cold, but they are also thinking about how do they transform their business in the current environment right. So that is where there may be some accelerated spending opportunities that that we could see coming into next year.
That's great color, that's what I was looking for thank you and then my final question, Brian for you just a clarification.
I thought I heard you say that.
If we're looking at commercial foodservice margin for the third quarter that in 2021, you should be able to do better than that.
Looking at clarify that comment is that common pertaining to the third quarter 21 or the full year. Thank you.
Yes, no it would be for the for the full year.
Right I mean, you've got to see how the ebbs and flows go a little bit with as the.
As the business recovers right, so theres going to be a variety of things driving our margin performance for next year right cost, we cost weve costs, what we lead back in and where we you know copper tweak further.
What volumes do.
What what pricing actions become what mix becomes.
Some of the acceptance and adoption of our newer technologies right. So theres a whole variety of things that are poised to be positives.
I guess time will tell a little bit to the right Oh, we all feel comfortable that you know well standards, maybe just to complete that Q2 was the low point as we get through Q3 right. We're all trying to assess is this the new kind of floor and.
Assuming it is then things continue to get better better from here.
Okay. Thanks for the color and good luck.
Yep. Thanks makes me.
Our next question will come from the line of thought Brooks from C.L. King. Your line is now open.
Hey, good morning, everyone. Thanks for the questions and great job on the quarter.
Just two quick questions one on open kitchen, you talked about.
5000 installed sites now can we talk.
About kind of appetite and front of sales funnel.
For the connected products given how much operational change. So many of these operators have gone through during the pandemic and the fact that that.
Historically has triggered.
Valuation of new equipment and new solutions.
Going forward.
Yes, so I mean as I said.
We are seeing increased engagement.
Aiotv has been around for a while but I think it's one of those things that.
Becomes in the.
It's the right inflection point and then.
Because of industry factors.
Various other things so I mean would that we're we're seeing the restaurants.
Realizes this can have a meaningful impact on our other business. So I mean, I mentioned the numbers I mean, our adoption rate.
Is increasing we have a number of.
Large restaurant customers that are adopting it across their their brands right now we kind of have a pipeline of.
Let's say up to a dozen customers that are significantly looking at it. So I mean, I think we see.
Growing interest.
You know as it Scott a kind of proven ROI right now and that our eyes going.
Up for all the reasons mentioned.
Labour automation safety the ability to ensure.
Operating in service of the equipment food costs with.
The advent here a blue zone that we're launching will be tying that into our I O T platform as well. So I mean, I think we kind of think of these as different modules of how do you reduce and manager facility costs, how do you improve the.
Operations in your kitchen and have visibility into it how do you ensure food safety and I don't want to really go after the play.
Playing customer safety as well so I mean, all these things are.
Meaningful.
Both from a.
From a cost and competitive dynamics so.
So feel pretty good about where we're at and.
I'll I'll ask Steve to maybe add some further color here as well yeah Thats a good question around open kitchen.
Strategically open kitchen from our perspective.
I see it going through center, and what I mean by going to centers. We were presenting this we presented it internationally.
Year and a half ago, we're now getting calls the customers are calling us on that.
Especially in the commercial food business.
Customers are very leery of unproven technology and now that we're in over.
6000 plus locations.
It has a proven ROI.
And it's more than just a standardized controller you know, it's not just a a pretty face. It is a total system. It includes the control systems for gas wells as sensors around temperature and Ben It connects to the controller and then it goes to the cloud and then it generates data that is meaningful to the restaurant operator.
And Thats, a proven systems, which then they use that data to lower their labor costs lower their maintenance costs improve their efficiencies improve their speed of service.
And frankly, I think it's perfect timing because as you look at the generational trends of people that are now running restaurants. The people that are general managers of restaurants in the one level above restaurant management, they're very comfortable with data management and making operational changes based upon data. So open kitchen generates data that's meaningful to the rest.
Operator, and it's a platform it's not just a standardized control system. It is truly an integrated.
The next.
Operational system.
I'm very proud of it the team this running it has done a great job and I just see strategically now that customers can see it in operation other customers can see it other big chains feel like they're falling behind that need to catch up because they see it and other large chains.
It's it's extremely exciting and its proven and it works in over 500 restaurants.
That's great. Thanks, Thanks, and then just a second question and.
And I know, you're you're pointing out the.
The vagaries around monthly order data, but with the strength that we saw in orders and residential kitchen.
Kind of in the in the third quarter versus the 14%.
Sales growth rate can we talk about.
Production levels to meet the demand have we built a backlog that carries into Q4 and into fiscal 21 and just in general what you. What you see is the set up as far as the duration of.
Nesting trend, that's gone into kind of top gear here and.
In fiscal 20 during the pandemic and with good housing macro numbers.
Behind.
Kinda underpinning strengthen the segment that would be helpful. Thanks.
Yes.
So certainly when Kerry yes.
Dick carry backlog into Q4, and certainly we will carry a backlog.
That's growing into it into Q1.
We are adjusting.
Adjusting production levels, increasing demand, but I mean, I think we're also.
Try to do that in a smart way.
Particularly thinking about employee safety and what should be kind of a mid to long term appropriate.
Capacity.
In terms of what the the top line dynamics is going to be obviously, we go through a unique period, certainly we're not projecting we're going to be at 40%.
Incoming order.
Growth.
For for a long period of time, but.
You know because of the immediate dynamics, but we do feel like there's a pretty good backdrop set up coming into the year. I mean, we saw the housing market stronger that has has returned.
While you know.
The dynamic dynamic to be at home.
Probably will recede and maybe there was some pent up demand and what we've seen in the last few months I do think there is elements and longer term trends that are built in there as well that can really bode well for us for us.
Throughout next year.
And absent that we've done a lot of work on that that platform right I mean, as I mentioned in the comments, but we have a lot of new exciting.
Designs, a lot of new exciting products.
I would say beyond just even the product innovations.
Innovations our sales team has done a great job, it's been an area that we've invested in for.
A number of years of service team has done a phenomenal job and that that also gives confidence to our channel partners and.
I think those things that we've been working hard on for.
A long time.
Also kind of bolster the numbers and we feel good about pre cope with that that we were going to have kind of a sustainable long.
Longer run.
You know as we were going to gain market share and maybe expand the market a little bit over the next few years. So I would say again think 40% is not going to last forever, but I mean, I think we do think about double digit growth for period for that for that market and look and we're also investing in.
Sales tools.
Tools and processes as well I mean, I think as everybody knows weve been opening up showrooms even during covert.
We've opened up.
Southern California, and we are investing in our Dallas showroom was well, which is really a combine show for both commercial foodservice as well as.
Residential and I think that's going to be exciting.
For us as well.
Okay, and I would add to that I agree with everything Tim said the other the other thing is we are set up going into Covance as he said with new products and like the Braava acquisition. It really shows off this technology and that as these folks in their homes are looking for kitchens outdoor kitchens.
New products, the innovations and the acquisitions that we've done just a tracks that buyer that's looking for connectivity lightwave cooking, new technology and it sets us apart and then I just need to emphasize tim's point about backing up and creating confidence in the channel with after sales service and support and then.
Durability of design.
The leadership and the people at Viking AGA and all the all the residential brands have done an excellent job on product design and then supporting that after the sale it really does create confidence.
Great. Thank you.
Our next question will come from the line of John join or from BMO. Your line is now open.
Bunge or well done.
Sure sure.
So first.
I know that.
You put more emphasis internally on managing working capital.
And your free cash flows been quite impressive so far this year clearly the inventory reductions in the face of sharp volume declines.
So looking ahead are there other opportunities to release cash.
Tied up in working capital and are you comfortable with inventory levels.
And each of your segments.
Yes so.
There is certainly.
More work to be done in inventory.
I'd say take the second part of your.
A question I don't know that there's much actions to be taken to free up other areas in terms of a aren't in a p. rate.
Our dsos are aging are in good shape and.
I don't think its on our near term priority list to look at.
Monetizing that and such so on inventory. It does vary by segment, obviously, we're seeing a lot of tremendous successes in residential right now so our inventory levels there.
Our certainly at the low end of where we would like.
Given current demand levels.
That isn't likely to go up too much in the in the short term.
Food processing is kind of been stable through all of this.
Where we see ebbs and flows as orders come in and some of them are long delivery time long on projects. So then that leaves us with a commercial where there still is opportunity now we're proud of what we've done.
In the short term given the.
Volume challenges, but I certainly think there's addition.
Additional opportunities at a at a modest modest pace.
Yeah, Let me, let me add to that I would.
Take it just one step further.
I think what Brian was talking about and the opportunities that exist both in commercial and residential and food processing I think I would strategically to finding of excellence and leadership, Brian because we understand the business that some very aggressive goals that are achievable by six month ago for the.
Operations and supply chain and purchasing people around the world that middleby.
And then that team and I'm proud to say every Saturday Sunday and Monday, we talked to 150 200 people across all the divisions and.
Weve restructured.
In a very short period of time and taken advantage.
Of inventory levels through supply chain and purchasing and operations.
I Hope you can hear in Brian's voice, he's holding me accountable to achieving more.
But I couldn't be more proud because I know, there's a lot of the team members on this call of the team the engineers and the operational leaders in the purchasing people and achievements, we've done to not only lower costs, but to lower inventory in an aggressive way and we're going to continue to work on it.
I just add one other thing I mean, we have not talked about business disruption because of supply chain. I mean, the team has done a phenomenal job really not only of going after cost and inventory reduction, but really sustaining.
In operations has been obviously critically important to make sure that that we can deliver for our customers and kind of given the.
Mobile neighbor nature.
Nature of our operation and supply chain, that's been pretty impressive and that's really been a daily if not hourly.
Focus that that team has had around the world to ensure that our operations are up at all times, Yeah. That's a great point to you know, especially from a customer's perspective, a lot of our competitors are doing a lot of our competitors are doing rolling shutdowns and.
We didn't do that and we maintained supply to our customers. Thanks to this team of leaders.
Leaders.
Holding workplace safety as the number one priority second to that we said never never ever fail to customer and we have yet to fail the customer we never shut down our operations due to lack of supply and so the team has done a great job and that's made a difference that's showing up in a small way into that some of the numbers that you're seeing.
Now recently in sales and going forward because of that reliability and durability of our corporation. Thanks to these guys. So it's a great point Tim.
Okay excellent. Thank you for the color and maybe if I can squeeze one more in just.
With regard to kobe's related products.
You mentioned Blue zone.
But it seems as though that youve been able to quickly launch new solutions targeted at Covisint and I realize that biden will get biggie getting rid of covered sometime soon but nonetheless are there any products, whether qual serves our braava as are others, where demand has actually been stronger than you anticipated internally.
Uh huh.
So I just as you mentioned I mean, I think we're keenly interested in how we can help our restaurant customers right. So I mean, I think we as a team have thought about all the different things.
You know that could help them I mean, you just mentioned qual serve which is really flex.
Plexiglas shields.
Sanitation.
Hand dispensers hand.
Hand, washing stations et cetera, we were actually producing and distributing.
Hand, sanitizer self cleaning supplies, we've done a whole lot, but we also focus on kind of higher technology products Braava came.
Came out with a heavy up in that we were working to help sanitize, you thinking and 95 mass, but certainly blues on is the one that were.
I'm very excited about because we really do think that indoor dining.
Room safety is going to be a critically important.
As we go through the next year here and so.
I would say we're at the early stage I mean, certainly some of these things came online I'm not going to say, it's a meaningful part of our revenue. We just want to do our part I think in the case of Blue zone. It could be a meaningful part of the revenue as we go forward. So I think thats one of the things that we think.
Could be one of those kind of game changing technologies and pretty excited about that but I would say early stages on.
Most all this.
Yes, Tim I think it showed the agility of our company I think Cory and his team had hand sanitizers.
Produced within 30 days, you know three or four months ago and achieve and his team internationally to enhancing first in Europe and in Australia that we brought to us through closer in.
In fact, 30 days, we had a product that was usable.
To those teams thanks to those teams.
And Blue Zone is.
As a big winner and my personal line itself.
It's a proven technology.
Been around for over 10 years, it's tried and true it's installed in every U.S. aircraft carrier, we've been using it in our residential so we appliances refrigeration for a long time years and years and years if achieved the U.S. Army Achievement Award it's in it's in Steelcase furniture.
Sure and we're installing it in the in the corner Institute of America. All their campuses are going to have a blue zone installed it's a proven technology reapply to foodservice.
And it's amazing technology and its differentiated and then you both add on to our ability to connect with the customer and supported after the sale.
Through our through our organization through our channel partners.
Using technology.
Okay excellent. Thank thank you again appreciate the time.
Our next question will come from the line of sorry vary a bit from Jefferies. Your line is now open.
Good morning, congratulations on the quarter.
Yes.
Hi, guys.
Hello.
Yes, hi drought.
Hi.
So you cited volatile like ours, but a solid backdrop I'm getting a good pricing could you just provide some more color on what you're seeing on Atlanta basis, including the mix of protein versus bakery, and what the backlog up year over year there.
Yes, I noted the backlog is is down nominally at this point versus where we.
Started.
Started the year.
Started the year strong.
It it came down through the middle part of the year as we had.
Is there some fulfillment and I said cancellations is limited, but it's rebounded nicely in the funnel is feeling good certainly.
Protein is seeing.
Use of disruption as well as demand drivers behind it and Thats also.
Become a little bit larger part of our business in the past I've kind of said it was one third bakery to third protein thats, probably getting more too.
37 de at this point or a little bit.
Above that but again it will given the size of orders, though you see.
You can certainly see those numbers jump around but again, it's feeling a little bit.
Heavier than two thirds proteins like currently.
Okay.
Okay, and then you obviously have more flexibility.
The converse is possible.
Hi, Blaine I see more opportunities given the stress that some of the niche players might be under in commercial foodservice.
So.
We always have a robust pipeline.
Things obviously.
The hibernate it a little bit as we kind of went through the Q2 period, but since the financing we started to be active in that area as well I would say most of the things that we're focused on really are not because of financial distress. I mean, certainly there may be some things out there.
Really a lot of what we are spending time on is really is driving.
Areas that we think are critical technology initiatives.
So.
But I can tell you I mean, certainly we're kind of back to similar activities that we had pretty confident in terms of our our business development.
Great. Thanks for taking my questions.
Thanks, Eric.
Hi, Dan for those would like to ask questions. Please press. The Star then the number one on your telephone keypad again, that's star then the number one on your telephone keypad.
Our next question will come from the line of Jeff Hammond from Keybanc. Your line is now open.
Hey, good morning, guys.
Hey, Jeff.
Thank Megan I want to recount on your orders.
They were surprisingly good.
No no we stand behind it we counted.
Every one of them.
Hey, just on commercial food and you know and.
And I want to focus too much on October but just in general if you look over the past couple of months on these rollouts you're getting is this more stuff that was delayed because of Cove. It and then just now coming back or are we starting to see.
Actual you know some of these winners in the marketplace kind of go and try to plan for new builds and take share from maybe some of the other customers that are that are struggling a little bit more.
So I would say the things that came in kind of in that September October period were pre existing cove. It right. So again customers have confidence as theyre moving forward.
In some cases those programs do allow them to take advantage of that frankly that the current market conditions and where they.
They intersect with were consumers are spending a dollar now so it's really what we're seeing now is new activities that.
In both coasts cobot as they are kind of rethinking their their operations. So there's kind of a.
A new pipeline building.
Which we'll see how that evolves we move into next year.
Okay, and then just on unrest kitchen, you kind of get your production levels up and I know you're hearing here treading carefully there like do we see a period end of the first half where we you know we get revenue growth into the Twentys as we kind of catch up some of this backlog or.
Just how do you see kind of a catch up playing out here.
Yes, I mean, clearly going to be bringing in a.
Pretty large backlog into the year I mean, what we don't know is how order trends are going to evolve even as we exit this year.
And don't forget how for our businesses in the UK as well.
And they are they are seeing some of that.
If we gauge the cobot as well, which can affect operations as well so a lot of the.
What we're doing is kind of thinking about how we set the right cadence for our operations, we should do that bouncing with orders balancing with safety.
And so look I mean can we see a 20%.
You know topline growth, yes, it's absolutely possible, given where order orders may be going into the beginning of the year, but I don't think thats what were projecting and you.
Worlds highly uncertain right now in Q ways, a Q ones still a bit off.
Okay and then just just final one on interest expense. So if we look at this quarter I guess.
What are we back out the convert impact to kind of get to your true run rate.
That kind of a fair run rate to think about going forward I mean, you'll report something higher but.
Back out what is going to be a higher convert impact yes.
Yes, right I mean, so I would take out the almost $2 million.
There will be a slate.
Uptick so Q2 was challenged by a.
If you factor out you got that noncash in there and then also in some of our rates in such kind of reset midway through the quarter.
With with the amendment so.
Probably tends a little bit above.
The result of just pulling out that non cash number for the next two to three quarters given how the rate grid is set for.
What I'd call the elevated covenants period.
Takes us through the first half of <unk>.
Of next year, so again, we will be.
Yes little bit.
Lower but.
Still the full quarter wasn't entirely kind of reflective of the current capital structure.
Okay perfect. Thanks.
Our next question will come from the line enough Larry Demaria from William Blair. Your line is now open.
Thanks, Good morning, everybody.
Larry I guess I wanted to stay in this minus two October order print.
Obviously seems pretty good considering where the industry is.
What other companies are saying.
But correct me from wrong. It obviously includes the rollout.
But we always include Rollouts, because my understanding that usually there is a little bit less than from and they are pushed out. So I guess the question is how we always included them and we would this imply that would potentially pulling some orders that would be in subsequent going forward and then finally, what would the order could be if we did exclude the rollout.
Okay. So we're not going to kind of start bifurcated orders that were probably were reporting you know up until this period, but I would say so it. These when we're talking about a rollout.
And these order orders we have appeal right. So it's not hey, we're estimating it can be an order.
Coming in the second quarter. So we have we have appeal and then we have a production schedule a timing of those shipments are going to be in the first half of next year. So maybe some in Q1. Some in Q2. So I mean, I think thats kind of where sometimes it's difficult to read into the the order right. Now so we would not have been down minus.
You too if you back out some of the orders now look I think you know still the backdrop is seeing.
Seeing service business increase pizza was doing well.
General market improves I mean, I think we feel good generally about the trends, but certainly that the rollouts added to that and has.
The timing of those why Brian is kind of saying Hey don't don't expect that all the show up in Q4.
Because it wont and and also I mean again.
We probably wouldn't tell you that we would expect November and December to be at the same level of incoming October rates so but.
When you string together a whole bunch of quarters you to look at the backdrop of customers you think about this.
The segments that are on do you think about the technologies that we have do that apply to current market conditions. That's what I feel good about where we are positioned.
Going into next year, and really just long term for for Middleby, We think we're.
Hitting the right things in terms of investments.
Focusing our organization.
Okay. So you have a plc they'll hit next year.
Yes.
Were they in the prior month order Prince you publish what those kind of rollout b notes or is that new yes.
No I mean, we've been consistent in our processes and practices for reporting to you right in and when we get a PEO you know for a customer here and this is an order. This is you know I've talked about things before I'll call. It about how the funnels looking or pre selling activity. So by the time it becomes an order.
This is something that we've been talking about and working for.
For months or maybe many months in so we feel good that this is from.
Live in a world of all kinds of risks, but we believe the risk of it going away is certainly low.
And you know we're excited that it really shows adoption of our technologies. It shows these customer segments, maybe hadn't been spending quite yet you know that you're deciding to spend adopting our technology I mean, we're really happy with.
What our performance was especially in North America, you know in in Q3, right, which was certainly better than what.
What we said the overall rate was right and you know October did start.
Well for us as we deliver on some of it. So the good thing is you know this has a has a tail.
Tail to it right, but we we view it with a very very excitedly for all those reasons.
Okay. Thanks, and then as it relates to cost cutting I know, obviously has some temporary furloughs, which help before and I think you're doing some more permanent cost can you just give us a general sense of maybe.
Absolutely he did a run rate savings into.
Into next year from the permanent actions taken this year on the cost cutting.
Yes, I mean.
So I did quote so you know we took 7 million restructuring to drive some 20 million of benefit and so its kind of wait for the question is that you know on top of already in the numbers, we have and that's really mostly those savings are in the numbers, we have because a lot of the areas, where we took actions where.
On people that have already been furloughed right and so werent.
Contributing very much to our.
Expense number so.
Yes, I think it really ties into what I was saying about margins overall, and it's hard to be absolute with it because some of it is in caused that is more of a variable in nature. So I think we've come close to setting kind of the EBITDA floor now.
Remind you that we Q4 doesn't have some risk of going down.
A little bit as we bring in for their costs, but I.
I think as you think about your models you know kind of SGN. A is is that the floor certainly you know our our travel and our trade shows in costs like that are at low levels now sorry that would be some of the factors why SG Nay goes up a little bit and you know on things that are more cogs or.
Variable driven thing.
Things should actually be improving.
From a from a leverage of a volume perspective.
Okay. Thank you very much.
Our last question from today will come from the line enough Walter Liptak from Seaport. The line is now open.
Hey, Thanks, good morning, guys.
Well I'm learning.
Wanted to ask.
Well I guess in relation to that tobar orders.
But the trend of both kitchen seems like it's got some investment money behind it now so it's really kind of an emerging category.
Our goes kitchen, starting to place orders or are you getting full kitchens of parts a kitchen, how should we think about that.
So.
Theres a lot of new emerging trends, so I would say not only goes kitchens that you can think of.
Various.
Various models that are out there.
Certainly yes. Some dollars are out there we were engaged with Sarah.
Several dozen doesn't kind of a new industry players some of them are moving forward on initiatives. Others are you know are still planning I would say, it's very early we've gotten some business. There is no theres no doubt and there's some.
Dozens of of.
Customer opportunities that we've worked on it's not meaningful to our overall revenues today, but it is an area that we think we are going to see new business models.
Kitchens are in there and.
And we think in other solutions out again that we have right because.
They're going to be thinking about footprint, you know and Ventless thing would be thinking about throughput and automation on whether that's mechanical or whether its capturing data.
Out of open kitchen type I O T platform, they're going to be thinking about how do they engage with the customer different different so delivery systems.
Cetera.
So I think we're really well positioned as a lot of these new models.
No. We do think that it it's not going to be a large part of our overall business, but it will it next year, but it will impact potentially growth rate. So I mean, I think thats something that.
Were actively engaged with and it's also hard to see what the trajectory is because anytime that you get business startups, they're putting together business plans proving out models.
And they're doing it during a period of Cove, it but certainly there are new business models emerging.
We are engaged and think we'll we'll do pretty well.
They come about.
Yes, I would say that it is pretty insignificant.
I agree with everything Tim said I think it has a chance to show off our technology.
And I've gotten lifts in connectivity and open kitchen and.
I clearly just from a while it's insignificant from a competitive perspective, which I think three of US are very much. The competitors are talking about how many units they have installed and and goes kitchens are dark kitchens, and I think we are tracking at about a four to one versus them. So in total kitchens, so but the sales teams.
Tiny it is strategically important over the next couple of years I do believe in the concept of goes kitchens and architects for the restaurant operator.
Okay, great. Thanks for that and then Brian one for you I think in the.
In your comments about residential you talked about the fourth quarter margin the outlets being down a little bit and I Wonder if you could.
And just talk about that into the mix or inefficiencies.
Why would the margins be going.
The extension to a little bit lower.
Yep so it.
It really is a little bit of both somewhat of of Nixon, knowing what products are coming through and some of it is.
Not as much inefficiency from a production standpoint, but.
Costs, if people being brought back on and increasing some some spending levels right. Now so we do have the opportunity here you know as volume.
Volumes could offset that and hopefully you know maybe I'll be called too conservative in a couple of months from it right, but I kind of know a little bit I.
I know, what we're bringing back costs right and thats more a little bit a definitive as opposed to how volumes in revenue levels may come together. So again, it's a little bit about the cost coming in and somewhat about about mix, but again you. It is a little bit more as a potential.
Hiccup or bump and I'm not talking about dramatic.
Decreases here, but again.
You know look at technology look at trends look at overall market.
The us looking at mix and how we work with our customers and evaluating pricing for next year.
You know I am not trying to it all take us off of that the track of long term margins improvement that where we're driving on and unfortunately, its getting a little bit hidden in these current markets.
In the past, we talked a lot about our margin improvement opportunities at some of the you know relatively recently acquired businesses and we do have some businesses as you know it's kind of make was digging at earlier that are performing better than others and there's plenty of our business is making those day to day operational improvements that keep us on the track to come.
We continue to expand upon what we're very proud of this being the industry leading margins and then you know everything everything from that follows in terms of cash flows and being able to.
Continue to fund.
Investments a while we're doing all this so.
So that's my thoughts on kind of the near term in the medium term and margins and just maybe to kind of highlight a few things about his comment I mean, and Brian mentioned in his commentary we continued even through this period was investing in.
The technology initiatives that we had he highlighted $5 million in the third quarter, we really did not take that down because we really think thats.
According to where we need to be next year, where we need to be in the next.
Three years of things like controls, obviously, we've talked a lot about aiotv.
Automation those are things that are critical for us and.
So were pretty.
Committed to.
Making those investments to the extent that they slowed at all I mean, those are the types of things that are that are coming back on as well as areas around marketing sales and marketing initiatives I mean mentioned the showrooms and we continue to.
Opened up the showrooms that that may have pushed off a little bit in the second quarter, but those are things that.
We think are really important to engage with our customers as we move to higher technology products.
The things that really have an ROI to them, it's really important to engage with them different and that requires some investment and how.
However.
Approaching the market and really engaging with them and users in those sales.
Okay got it thank you.
Thank you that is all of the question we had in the queue I'd like to turn the call back over to management for any closing remarks.
No I just like to thank everybody for joining us on today's call and we look forward to speaking with everybody next quarter. Thank.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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