Q3 2021 Middleby Corp Earnings Call

November 9, 2021

Later today at the conference is scheduled to begin momentarily until that time your lines will again be placed on hold.

For your patience.

[music].

Welcome to the Middleby Corporation third quarter Conference call.

Else from management are Chief Executive Officer, Tim Fitzgerald, Chief Financial Officer, Bryan Mittelman Chief.

Technology and operations Officer, James Paul and Chief Commercial officer, he's been all that.

The call will begin with opening comments from management.

And then we will open the lines for questions.

Instructions on how to enter the queue will be given at that time.

Now I'd like to turn the call over to Tim Fitzgerald.

Opening remarks. Please go ahead Sir.

Great.

Thank you for joining us today on our third quarter earnings call.

We begin please note there are slides to accompany this call on the Investor page of our website.

During the quarter, we continued to build upon the positive momentum across all three of our segments.

Vesting of technology and product innovations.

Dressing the current dynamic market trends.

Furthering our strategic sales initiatives and by expanding our brand portfolio with the recent strategic acquisitions of Novi and Imperial range.

As we invest for the future. We also continue to execute on our long term financial goals.

For the third quarter, we reported record net sales and earnings and once again, we posted EBITDA margins at all three of our segments in excess of 20% despite significant headwinds from supply chain challenges.

These supply chain challenges meaningfully accelerated during the third quarter impacting our ability to produce and substantially inflating our material and shipping costs.

We have responded quickly taking multiple price increases in the recent months at each of our three business segments. However.

However, given our record backlog these price increases are taking longer to realize than an ordinary periods.

As a result, the third quarter reflected minimal benefit from our price increases we.

We will see the impact of both our price increases and continued rising costs in the upcoming quarter.

And we expect to realize a net price benefit as we enter 2022, which should further improve as we continue throughout next year.

While we manage the disruptive impact of near term supply chain challenges, we remain committed to our long term profitability targets because.

As we drive profit improvement through acquisition integration strategic manufacturing initiatives and evolving the mix of our product by promoting higher technology solutions that provide greater returns to our customers.

Customer demand remained strong in the quarter.

Orders continue to outpace shipments.

Incoming orders, we're not only ahead of 2020, but continued to outpace 2019 pre COVID-19 levels by more than 30%.

For the third quarter and for the full year.

Given the continued order strength, our backlog has grown from $400 billion a year ago to $1 2 billion at the end of the third quarter.

While this presents substantial operating challenges. It also presents significant visibility and momentum as we exit the current year and move into 2022.

As we look towards next year, we are optimistic about the continued market demand and the strong position we hold in each business segment.

For our commercial foodservice business, the restaurant industry isn't recovery across all segments.

Categories, such as casual dining institutional and travel and lodging are joining the recovery we've already seen in categories, such as quick serve pizza and fast casual.

And more importantly, our customers are looking to make strategic investments in their foodservice operations.

Leading to greater acceptance of new technologies. The foodservice industry is rapidly changing responding to evolving consumer trends the emergence of new business models and with an urgent need to address significant operating challenges. Most importantly, the availability of labor.

The strategic investments, we've made over the past several years and throughout Covid positioned us at the forefront of evolving industry.

This is evidenced by customer activity, we've had at our Middleby innovation kitchens.

We are experiencing increased engagement on our latest technologies offering labor savings automation gray.

Greater speed of service menu flexibility and our reduced operating footprint.

We're excited about the pipeline developing with new customers and with our latest product launches.

At our residential business new home starts continued to be robust while existing home sales also remained strong and well ahead of 2019 pre COVID-19 levels.

These favorable housing dynamics, along with increased time spent at home is supporting the design and build a new kitchens and remodels.

These conditions support a favorable backdrop to our business carrying into 2022.

In the third quarter, we were excited to have debuted our residential showroom in Dallas.

This showroom is connected to our Middleby innovation kitchens, demonstrating the crossover of product and innovation between our commercial and residential businesses and bring to life, our differentiated ability to offer professional restaurant innovations in the home.

Our showrooms are providing to be and are proving to be an outstanding investment and strategic asset.

We are increasing our engagement with end users dealer partners and designers, we're expanding our events training support programs and marketing from these showrooms further increasing the awareness and demand for our premium portfolio of brands.

At food processing, the effect of Covid and the related travel restrictions that has impacted demonstrations installations and the timing of large projects.

Is beginning to subside and providing for an expected improvement to the operating environment as we begin next year.

Despite the operating challenges encountered during the year demand has proven to be strong as our food processing customers are facing the challenges of labor rising food costs safety concerns and sustainability. We are positioned to address these demands with our many new product innovations and full line solutions.

Our entry and strategic investment into areas, such as Bacon dried meats pet foods and alternative protein is also paying off.

And we are increasing our available solutions in these growing categories.

Now I'll pass the call over to James to spotlight one of our many recent product innovations highlighted in our investor slides. Thanks, Tim it's not everyday when advancements come to <unk> technology, but with 11 patents pending I'm excited to share with you. The latest development from Taylor for 2022, the tailored Nextgen grill.

This product delivers precisely on what the industry needs automation and labor savings. The Nextgen Griddle is a great example, how embedded automation can augment traditional technologies to improve speed.

Throughput and quality, while reducing the amount of labor and skill required to operate the grille.

Compared to other grid also next generation grill seemed a little bit non conventional.

This is because it's the first of its kind vertically adjust the bottom flattened to the food once the top flattened closes.

True innovation that gives the griddle a superior advantage over other hurdles that attempt to continuously just the top Latin geostationary bottom plateau.

Top adjusting flattened struggle as the amount of torque and accuracy required to achieve this task is beyond their current mechanics.

The last slide in the deck as a summary, the features and benefits of the double sided grill, but having worked hands on with the griddle for the past week at the Middleby innovation kitchen, I can say that there is nothing like it on the market today.

With a single touch of a button the grid will can execute a simple or a complex multi step cooking profile that is designed to accelerate and optimize cooking from the vertically opposed flattens all while continuously adjusting the bottom flattened to account for the foods ever changing properties, thus ensuring the Saar.

<unk> compression has maintained during the cook.

This is a terrific product introduction for Middleby in 2022 and is on full display at the mic.

Brian over to you. Thanks, James and I think you forgot to mention how delicious and juicy. The burgers are that we're coming off of it but we'll save that for <unk> for other times for.

For the third quarter, we generated record results with revenue of over $817 million and adjusted EBITDA of over $172 million.

GAAP earnings per share were $3 nine.

And included the net benefit of $77 million from the deal termination fee we received.

Adjusted EPS, which excludes the <unk> impact and also 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 92.

The negative impact from acquisitions was <unk> for the quarter.

Operationally in spite of the mounting supply chain challenges. It was another strong quarter for us robustness in orders persists, we again exceeded $1 billion for the quarter.

For revenue on a year over year basis, we grew 29% or 22% organically as we continue to benefit from improving conditions in commercial foodservice, which is now ahead of 2019 on inorganic basis and robust demand in residential as well as food processing.

And we continue to generate strong cash flows.

Our profitability remained solid we delivered 21% adjusted EBITDA overall and increased over the prior year level.

Total company adjusted EBITDA at $172 million as I mentioned this represents approximately 36% growth from the prior year.

We are consistently growing our bottom line faster than our top line, even while we continue to make meaningful investments in technology initiatives.

Commercial foodservice revenues globally were up 32% organically and was fairly even between North America and international markets.

The adjusted EBITDA margin was 24, 5% an increase of approximately 210 basis points from the comparable prior year period.

By the way all the margin values I will discuss are on an organic basis, as well, meaning excluding any acquisitions and FX impacts.

In residential we saw revenue up 14% with international growth at nearly 45%, including the impact of an acquisition.

Strong demand persists across all our major product areas. The adjusted EBITDA margin was 21% an increase of over 230 basis points from the comparable prior year period.

In food processing revenues increased approximately 1% and the adjusted EBITDA margin was 22%.

Our operating cash flows were nearly $174 million.

When excluding the benefit of the termination fee net of expenses and taxes, we still generated nearly $100 million.

Our free cash flows were over 90% of net income for the quarter.

The current business environment is also impacting our working capital levels, which increased $80 million during the quarter.

Our total leverage ratio is two four times, while our covenant limit is five five times, we have over $2 3 billion of current borrowing capacity.

We refinanced our debt last month, which provides us increased financial flexibility and extends the credit facility's maturity date out to October of 2026.

The facility size has been increased from $3 1 billion to $4 5 billion.

Subject to an increased secured leverage covenant of 425 times pro forma EBITDA.

Our total leverage covenant is unchanged at five five times and thus would allow for up to $2 3 billion of additional borrowings currently.

These are really large numbers I'd like to talk about some smaller numbers actually much smaller numbers that are also very important and that I found quite interesting.

199 is where I will start.

You can come to the mic and meet our Q, greater Jennifer which means our knowledge of all things coffee is off the charts. Besides learning about our automated brewing systems from Concordia and how you'll be delighted with our sonesta machines, you can learn about beans, roasting grinding brewing and so much more also.

Perfect Cup of coffee is brewed at 199 degrees.

Getting even smaller now 60.

The countertop vent lists mini combi by Blodgett is an incredible oven.

April will impress you with seemingly unlimited ways. This truly unique piece of equipment and make any kitchen more efficient with a small footprint that can be placed anywhere as it is vents.

I do have a fondness for breakfast egg sandwiches. So I was amazed to learn that this powerhouse can cook 60 eggs at one time.

And lastly, too.

And a brief discussion of beer.

Two is the number of brewing divisions, we have <unk> <unk> <unk>.

<unk> is also the number of Canning and bottling brands, we have with wild goose and inline filling solutions.

But it is also interesting for another reason.

Nick you can meet our brewer extraordinaire, Brad not only can you see and taste with he is concocted.

Can tap into as vessels of knowledge as he personally built systems and is run breweries.

He is one more example of someone who has experience and passion will certainly impressed and one tidbit I came away with there are truly only two types of beers and lagers for.

Those looking to learn more Brad is ready to educate Youtube.

Now, let me get back to some bigger numbers, our order and backlog data.

We have again shared details in the presentation that is available at the investors section of our website.

We will share this information through our fourth quarter reporting with macys to do so over 2022.

Commercial foodservice order growth for the third quarter over 2019.

Was again, 30%.

Residential order intake was strong at 34% and.

In food processing was up 45%.

Given these order rates and the supply chain challenges that limited our ability to generate higher revenue levels. Our backlog has continued to grow up 19% from the end of Q2 and more than double where they were at the beginning of the year.

These trends have persisted in October as well.

So I will reiterate what I shared last quarter as we look forward that we are keeping our expectations at modest levels for the near term given the supply chain limitations on significantly expanding revenue levels.

We are obviously seeing great order trends and the building acceptance of our new products and we continue to invest in innovation automation and robotics. So as we look to Q4, when considering our backlog pricing actions and inflationary pressures, we expect nominal topline growth sequentially from Q.

Three.

And mark and margins likely at levels consistent with Q3 before starting to see margin expansion in Q1 of 'twenty, two and likely than growing.

And into and through Q2 as well.

We invested not only in the mix, but also for residential experience centers and within food processing. We also have our bakery innovation center in Dallas, and our protein and innovation Center just outside Chicago.

I always look forward to trips to any of these spots and not just because of the great food and drink I get to enjoy while they're witnessing how we serve our customers the passion and the knowledge of all of all of that represents our brands is amazing the energy one feels as you witnessed customers designers consultants or other partners interacting with our people.

Products is powerful our products innovations and our people will continue to deliver solutions that will drive growth for years to come.

That concludes all our comments for today and operator, if you can now open up the line for questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

We have our first question coming from the line of <unk> <unk> with Jefferies. Your line is open.

Good morning, Thanks for taking my question.

Just given the strong backlog figures could you help quantify the impact of the supply chain in the quarter on sales and are you seeing customers place orders earlier than usual given the longer lead times.

Hi, Sherri so.

It is hard to quantify honestly I mean, obviously, we're very restrained and what we can ship how much more we can ship I mean, obviously the backlog is up 30%.

More than what we're we're shipping.

I think if we had unconstrained supply chain and labor issues would be chipping frankly that much more.

So yes.

I think thats, probably about all I can say to quantify I think more importantly, we're trying to build capacity as we go into next year I mean, the supply chain challenges continue to be very.

Very dynamic.

Have a phenomenal supply chain team around the company. They are working everyday to secure availability. So we can deliver.

To our customers and we're trying to do.

Increase that as we move into next year.

Great. Thank you talked about some of the investments you're making in automation, especially in commercial foodservice could you quantify that spend and how we should think about those costs going forward.

I'll, let Brian maybe touch on that from a number standpoint, I mean, I just think we.

You heard in our comments when we talk about a lot we're very committed to.

Two investing for growth in the future I mean, we're doing that with investments in technology, but certainly with our sales.

Initiatives as well, which certainly there's a lot we're doing on the digital front as well and investing in our channels and channel partners.

But kind of the hands on experience is really a critical one as well so that's been a very significant commitment.

Made and Thats been increasing as we've been going through the year and Thats kind of.

Fully reflected in the third quarter.

Sure This is Brian.

Past quarters, we have talked about our level of spending we've had on <unk>.

Technology, including automation and that has not diminished.

I also think it's important that as you think about automation, it's not just.

Robotics, and the like but its light products that James has talked about the Nextgen grill, it's products like the <unk> that we highlighted.

Last quarter, so beyond the numbers I've talked about before I'll call it within our day today.

R&D run.

Run rates were always developing new products. So that's why.

Thank you think about the spend it's what we've quoted before plus additional amounts that again are embedded in what we're doing across all our businesses.

To bring out that new that new innovation so.

If you follow US again, you can on social media you can see our our robots robotic solutions in action, but again automation is more than that it's all the other things James has really been talking about on this call and prior calls as well.

We've.

Referenced five 5 million per quarter $20 million plus per year of incremental R&D spend.

So we do have a multimillion dollar investment in sales initiatives as well. So I just maybe call that out because I think those are exclusive items. There. So that is an investment that we again youll see is running through our P&L. It's actually been building over the last couple of years as we're thinking about.

Where we want to be in two or three years out from now.

I appreciate the color thanks, guys congratulations on the quarter.

Thanks, Jerry Thank you.

We have our next question coming from the line of Joseph <unk> with BMO. Your line is open.

Hey, guys How's it going.

Morning morning, Joel.

The first one maybe is it James question I'm not sure but is there any way for you to give us a sense of how far away from from the level of what the customers want in terms of automation.

Whereas the industry or where are you guys versus what the customers are asking for and any way to give us a sense of what youre positioning you feel like Youre way ahead of everyone else are you keeping pace or any characterization.

Yes.

I think right now you've got kind of two types of customers you've got customers that are actively adopting our embedded automation today every every day the products like the <unk> the products like the Taylor Nextgen grill as we see that.

Our backlog numbers.

And then you have customers that.

Are looking beyond embedded automation and looking for what we'll call kind of true robotic automation.

They're looking to deploy in the.

In the kitchens.

I think we are right on pace maybe.

Pacing in the market with our fried bought in Pizza box solutions that were <unk>.

And to bear on the industry.

Sure.

All of the interrupts that we've had with our customers at the Middleby innovation kitchen that has seen these these technologies they seem to be.

In line with their expectations of what they were looking to automate.

Within their within their states.

And then and then a bigger picture question.

The acquisitions are there larger acquisitions available and then more around your focus you more focused on technology or is it still kind of building out the product lines and filling in some areas, where there's exciting growth.

Yes, I would say, it's a bit of both.

I mean, obviously, we continue to be.

Very active over the last several years as the company expands we're really focused on <unk>.

<unk> continued to build on our core business. The three three different segments, you've seen us enter into adjacent categories, such as beverage, which where we built a leading platform and then.

Acquiring technologies that really help us.

Kind of advance all the.

Companies in the group certainly our automation.

Our vision such as <unk> is a great example, powerhouse dynamics with our open kitchen launch, where we've kind of become the.

We're leading the Iot charge and that's really key.

And across all of our brands I mean, I think those are all key areas of investments.

National is another one as well serve our business. So thats north of $1 billion today is outside of the U S. So that is another area of focus so.

In terms of size.

All shapes and sizes you can see we do large acquisitions, we do small acquisitions as middleby grows it gives us the ability to to actually go after some bigger fish out there, which you've seen.

Size of acquisitions increase overtime so.

There's a lot of great ideas in the pipeline that are very strategic and certainly.

The current market were as active as ever in terms of.

Ideas and things that we're pursuing.

That's great and then the last one from me can you just give us a little characterization of some of the end markets that may be lagging what I'm, what I'm thinking in the back of my mind is more like a slingshot into 2023, and maybe like hotels airports cafeterias places like that or is there enough.

Sort of.

Underperformance in some key end markets still not from you guys just from lack or demand still being a little bit weak that we could really see kind of longer term you know what I mean like <unk> 23, and 24, we can see those end markets come back and really really add a lot of momentum to what you guys are already doing.

Yes, I'll make a quick comment I'm going to pass it over to Steve here just.

The one comment is obviously, there's a lot of disruption.

A lot of dynamics that are driving activity in the near term.

And as you go across the different segments that are at different stages, but I mean, I think we're pretty excited about what the outlook is over the.

In the long term so despite the fact that we've had some pretty good orders here.

In the near term I mean, there really is a lot of trends that are driving longer term growth. Those are obviously things that we were positioning for going into COVID-19, which COVID-19 is accelerating a lot of those trends, but I mean, I think that really does set the backdrop for kind of a longer term period.

The commercial foodservice industry.

So maybe kind of digging into some of the different segments.

Yeah Joel.

Just say again, if you think of our customers and groupings of how they've gone through the last call. It 18 months going through Covid. The group that is certainly again done the best and continues to grow will certainly continue to grow into next year as the <unk> fast casual pizza retail <unk>.

Store group I mean Thats the group.

Record new builds on their stores right now and they've given us lot visibility certainly into into next year and I think have some aggressive growth plans. So that's kind of group number one and should come before I think the group after that which probably has gained more into what you are referring to Joel you certainly are into more casual dining.

And independent restaurants. So I think there are certainly ahead of where they were kind of pre COVID-19. There's still lagging that first group. This group I think youre seeing a lot more replacement business right, they're not opening as many new locations that are getting the locations that were either shut down or harder hit back up and running and youre seeing.

Replacement business from from that segment, and then I think the last group again that youre, probably referring to your into travel leisure health care institutional segments.

I think again, there theyre trending positive they're just lagging those first two groups. So I would support your point of that third group certainly has runway.

Over the next 12 to 18 months as they come back, but I really think all three segments are trending positively as just kind of a measure of magnitude as to where they are in that recovery cycle if that makes sense.

That's great. Thank you so much.

Yes, Thanks, Joe Thanks Tanya.

Thank you we have our next question coming from the line of Larry de Maria with William Blair. Your line is open.

Alright, Thanks, Good morning, everybody, Hey, Larry Hey, guys as it relates to the $1 $2 billion backlog and now you've addressed this in prior calls, but can you discuss the timing and how long that's going to convert and if you're repricing any of it obviously you seem pretty confident that price cost gets better in <unk>.

If you recall, we had some orders into this spring.

Quite a while now even maybe a year by the time they had so.

I'm trying to understand the confidence in that price cost getting better and whether we repriced any any new.

Orders out there.

So we are not <unk>.

Generally repricing the orders so I mean, I think we've kind of taken the approach that we want to.

Try to be do right by our customers and kind of make our way through advantage.

As best we can.

Kind of pulling the levers internally so were not disrupting our end users, particularly in markets such as residential where you've got.

And consumers have been waiting for their products for for a while so.

Hence that is the.

The headwind right that is what showed up in the third quarter margins.

But the price increases that we have taken I mean, as we bleed off the backlog it does roll was.

With the new pricing.

So its not like Theres, a magic line right because you've got.

Different companies within Middleby, and I think we're all of <unk>.

Fairly synchronized in pricing, but people have different backlog, so it kind of scales in.

I would say kind of a increasing basis as we start in the fourth quarter and enroll through sometime in the second quarter of next year.

Okay. Thanks, and then secondly I.

I don't think this has come up before but.

Find articles and things around the Taylor ice cream machines and reliability can you give us a handle on what's going on with them and.

Maybe how much of a positive impact if it'll be the parts and service business of Taylor is because they seem to be a lot of reliability issues and how you're addressing all of that thank you.

Yes so.

There is a lot out there.

I would say first of all people love their ice cream from.

The Taylor.

The teller machine.

One of the reasons gets spotlighted, so much should see very critical piece of equipment. It drives a lot of revenue.

And returning customers.

Two to our restaurant operations.

The.

Social media is.

A great thing and not everything in social media is.

100%.

As worthy as well so I mean, I would say that a lot of the things that you see out there.

Or kind of hyped to a certain extent I mean, it is certainly the technical piece of equipment. We've got a great service organization that keeps the equipment up and running.

There is a lot to do with cleaning cycles, which sometimes I would say more often than not when theres complaints out there. It's actually that the equipment is going through a cleaning cycle because as you might.

Think about.

Food safety is a big.

Element when you're when you're dealing with a piece of equipment like that so.

So I think.

Sure.

The we're doing a lot using technology actually with Iot and kind of our next generation.

Pieces of equipment to ensure that equipment is being claimed at the proper times kind of thinks.

Thinking about preventive.

Maintenance in equipment like that so people know, we're in an operating cycle and so forth but.

I think it's probably a lot of the news out there is really.

Sure.

Maybe a little bit misleading.

Misleading and I think we're also at the same time doing everything we can do to make sure that.

Our piece of equipment, which is highly core to our customers.

It really has the best technology in there so it's kind of Max.

Maximizing the uptime of that piece of equipment.

Okay. Thank you.

Again in order to ask a question simply press Star then the number one on your telephone keypad.

It is star then the number one on your telephone keypad.

We have our next question coming from the line of Jeff Hammond.

With Keybanc your line is open.

Hey, good morning, guys.

Morning, Jeff.

No.

You kind of were getting away from guidance, but you did you did kind of give us that.

The update kind of midyear around the 730 adjusted EBITDA. It seems like the revenues are kind of falling out in line, but there are some headwinds on the cost side and I just don't know if you can frame.

Or quantify those headwinds it looks like.

Price cost is an issue and then it looks like the corporate costs, maybe some deal costs and there are headwinds as well.

Okay.

Yes, so I mean, I think if you look at the.

EBITDA reconciliation, we have certainly.

Genocide, the benefiting cost specific to the large deal.

That didn't happen.

This year.

Obviously, we've posted $520 million of EBIT.

Year to date for this year and.

I'll leave it up to.

You and other analysts and investors and the like to plot out what Q4 can look like vis vis <unk>.

What we did in in Q3, but obviously.

There is.

The difference between 730 and $5 20 years is $210 million and that seems like a large number given where we currently are today.

But.

I think as you noted.

Supply chain and price costs are obviously the factors that we're actively addressing I think.

I gave some commentary as to how we think that will.

Continue to improve.

Starting at the beginning of next year, and then ramping up during the course of 2002.

Okay very helpful.

Can you give us what price was in third quarter and then as you think of all of these additional price actions.

What based.

Based on what you've announced what you think the wrap around pricing is into 'twenty two.

Yes, Steve while you go ahead.

So I would just maybe highlight kind of the cadence of the pricing.

Recently in the last few months so.

Again.

<unk> brands.

So, it's a little bit different across the portfolio and customer base, but for the most part we took pricing in August across all of our brands and then we just recently took a another round of pricing that went into effect November one.

I would say from a color standpoint, the November increase was a bigger increase than the August increase.

In terms of how we would think about when that pricing starts to come through I think the way I would think about is the August pricing that went into effect you would start to see come through in the first quarter.

I think the November increase that just went into effect you would start to see come through in the second quarter.

If that helps answer the question.

Okay, Yes.

Perfect.

And then just on food processing was a lot lighter and I just didn't know if there is anything unique there in a big.

Big shipment that that got delayed or.

Or any other kind of noise around two processes.

I wouldn't say, there's any noise there I mean, we did note coming out of the.

The Q2 release that as we looked at.

Kind of timing of deliveries and the work that Q3 was going to.

See a depth and we expect Q4 to move up from here.

But the orders have been strong here the backlog is at record levels for this business.

As we sit here today so.

We still think the outlook is very strong here and again.

The demand factors have been coming through I think as we went back.

I've got to think how long we've been living through the Covid here, but if we go back six or nine months, we are certainly talking a lot about.

Customer challenges.

And getting to see us and evaluate equipment and the like that.

That has not completely abated, especially since it's really is a dynamic international business.

But it has been improving so the trends here and again as you can see on the orders and backlog.

Is encouraging and positive for this business just like the other two segments.

Okay, Great I appreciate it.

Thank you we have our next question coming from the line of Tim Chiang.

With Citigroup your line is open.

Hi, Thanks. Good morning, maybe just the first question is just.

Pertain stays kind of any.

Way to monitor.

The quality of the backlog.

Just maybe.

Just curious as to.

This risk around double or triple ordering given.

Pretty unique backdrop, we're in from the standpoint of the magnitude of the price increases.

The long lead time, so im just curious do you think thats.

Much of a risk that we should be thinking about or is it not.

Not something that on your radar.

If you're talking about risk of order cancellations I don't think that as much of.

The risk I think everybody is going to be battling frankly for supply as we go through the.

The front of of next year.

So it doesn't mean that there won't be some here or there, but I mean, I think by and large.

That's going to be a pretty solid backdrop vectra backlog.

Yes.

The pricing I mean, I think obviously the.

The quality of the pricing of the backlog is improving as we go quarter quarter by quarter I think the other thing I'd just kind of threw up there which is something that we're very focused on near term and longer term is the quality of the mix of the backlog right I mean, certainly.

That was an area that we're focused on even coming into Covid and.

Through our discussion about technology.

Things that the customers are thinking about.

Today.

We're starting to see more and more development of some of these new product launches that really are addressing.

What I talked about later labor speed of service et cetera. So that is also something.

Kind of keeping the back of your mind, and we'll certainly be driving that next year.

Yes, yes, it's interesting Tim obviously that that issue around labor costs and availability, it's coming up on every restaurant companies call. It here in the quarter.

But.

Looking for ways to save labor and automate but.

Obviously those decisions get made overnight.

Yes, there is there can be kind of a long runway so how.

How do you think about I mean is.

They are a way to quantify what.

What that opportunity could mean.

<unk>, either <unk> or just industry.

Revenue potential.

Assuming this issue continues to persist.

And you do see that that greater tonnage.

<unk> towards again automation in the kitchen and again.

It's difficult to kind of pinpoint, but maybe you can just speak to what we're looking at or what we're kind of thinking about in terms of potential opportunities for again, middleby and why the industry. Yes, I mean I think this is one of the things that gets US excited right I mean, I think we've been pushing innovation for.

A while.

Making incremental investments in it and so.

That is.

We see the opportunities in the industry and some of the things that are going to drive growth in the longer run. We think it is also one of the things that is going to further differentiate middleby as we go.

Through the next handful of years those investments.

We have.

And I think we're still at the.

The early stages of it I think it does take a while for customers to adopt technologies, but those decisions are now getting compressed I mean, I think given the dynamics that our customers are facing which are in some ways a crisis mode for them right.

You cannot get labor how are you going to think that's priority one.

So a they're engaging.

Theyre looking for different solutions their operating models are changing.

That is shortening.

The periods that they would typically go through to adopt technology. So I think that is kind of the.

The period that were.

And.

And still I would say at the early stages of but I think the next couple of years will be.

Pretty exciting for us as we go through that I would say, we talked about it a lot the engagement that we have at the innovation Center.

But I mean, I think that that is not.

That's just really talking about it I mean that is really.

<unk> been very hands on and the innovation centers really been opened for.

A relatively short period of time, two to three quarters and I will just ask James to maybe give a little bit of flavor, who has come through but I mean I think we.

We've been very pleased with that investment because it really is presenting an area, where we can demonstrate and engage on all of this and our customers are engaging got it right like we're not.

Begging people to come in were pretty well booked.

Yes, I think the.

The demand at the to come to the Mec has just exceeded.

Everybody's expectations.

Around the table I think as it relates to customers that have come in Steve rattled off the segue.

Segments earlier, I think every segment that Steve rattled off.

From hotels to see stores too fast casual casual dining to fine dining.

I have been through the doors at the mic.

We do a fairly good job of tracking the traffic through the innovation kitchen.

Date, we've had probably 300 people through the innovation kitchen, representing about 160 different differ.

Different customers from <unk>.

Aman pop all the way up to the largest chains in the in the industry and at the innovation kitchens, we have.

All of our great new automation on display in the automation pod, which is featuring the Fry bought pizza box.

But also as we talk about.

How the industry is trying to solve for.

Yes.

Labor.

The depth patient automation.

All of our great embedded automation at the innovation kitchen, which are great products because they are the higher margin products that we are driving our customers to and then we also have our full digital Iot.

Iot complemented with open kitchen.

Display, which is garnering a tremendous amount of traction given the ability to automate the front of the house to the middle of the house to the back of the house.

<unk>.

I don't want to say they are beating down our doors, but it's close to it and so we were excited and we staffed up to to manage the traffic.

Very good thank you.

If anyone wants to ask a question or a follow up. Please press star then the number one on your telephone keypad.

We have our next question coming from the line of Walter Liptak with Seaport. Your line is open.

Hi, good morning, guys.

Good morning, good morning.

Wanted to ask a follow up on the.

The channel inventory it sounds like there is.

But theres not a whole lot of channel build but fourth quarters.

I think in the past had been periods, where there was sort of true up on.

Volume discounts and rebates and things like that I wondered if there's anything like that.

Mike.

Rebate payments or anything that flows through in the fourth quarter or any true ups to get to kind of target volume levels with the channel partners.

Hey, Walt.

Steve So, yes, I would agree with you and kind of quote unquote normal year, you would definitely see that dynamic in the fourth quarter with your channel partners.

Chasing yearend incentives obviously, we are operating in a not normal dynamics. So that will not happen. This year for a number of reasons I mean, there's very little inventory in the channel. So I guess, let's start there thats kind of your first question, Yes, I just think the the dynamic between.

Order placement lead time supply chain, when you're actually getting your equipment being so dynamic right now that really makes that kind of fourth quarter push that you would normally see in a year pretty much go out the window at this point and we've also been very focused strictly on not doing any type of discounting.

We may have in the past to drive a year end deal like that so it's a very different year I guess to answer your question I do not see that dynamic from prior years, taking place this year and probably won't be taking place for.

For a while if not going away for for a long time.

Yeah.

Okay, Great and then the last one.

I Wonder if you could just comment on how your deal finals looking.

How competitive is the market valuations things like that.

Well it's typical.

I touched on that a little bit.

A question that Joel had I mean, I'll just kind of repeat.

We're we never run out of ideas.

Our challenge is always.

Too many ideas so the funnel has been.

Pretty active.

The.

There's been a lot going on just because I think a.

Concerned about it.

Taxes as well as kind of all the dynamics that are happening at all of the industries, but we're pretty well positioned from a deal pipeline kind of consistent with the last 20 years and well positioned from a balance sheet standpoint, as well, obviously, Brian talked about.

Our financing.

Certainly we're pleased with the team did a great job of upsizing, our credit facility that gives us a little bit more dry powder as we roll into next year as well.

Okay, great. Thank you.

Thanks.

That is all the questions. We have today I'd like to turn the call back over to management for any closing comments.

Okay. Thanks, everybody for joining the call today, and we look forward to speaking with you on the <unk>.

Quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yes.

Thanks.

[music].

Yes.

[music].

Yes.

[music].

Okay.

Yes.

Hum.

Okay.

Yes.

Okay.

Hi.

Okay.

[music].

Yes.

Right.

Yes.

[music].

Yes.

[music].

Thanks.

[music].

Okay.

Hello.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

[music].

Okay.

Yeah.

Yes.

[music].

Welcome to the Middleby Corporation third quarter Conference call.

With us from management are Chief Executive Officer, and Fitzgerald, Chief Financial Officer, Bryan Mittelman.

Technology and operations Officer, James Paul and Chief Commercial Officer, if at all.

Paul will begin with opening comments from management and then we will open the lines for questions.

Instructions on how to enter the queue will be given at that time.

Now I'd like to turn the call over to Tim Fitzgerald for opening remarks. Please go ahead Sir.

Great. Thank.

Thank you for joining us today on our third quarter earnings call.

As we begin please note there are slides to accompany this call on the Investor page of our website.

During the quarter, we continued to build upon the positive momentum across all three of our segments investing in technology and product innovations addressing the current dynamic market trends.

Furthering our strategic sales initiatives and by expanding our brand portfolio with the recent strategic acquisitions of Novi and Imperial range.

As we invest for the future. We also continue to execute on our long term financial goals.

These supply chain challenges meaningfully accelerated during the third quarter impacting our ability to produce and substantial inflating our material and shipping costs.

We have responded quickly taking multiple price increases in the recent months at each of our three business segments. However.

However, given our record backlog these price increases are taking longer to realize than an ordinary periods.

As a result, the third quarter reflected minimal benefit from our price increases we.

We will see the impact of both our price increases and continued rising costs in the upcoming quarter.

And we expect to realize a net price benefit as we enter 2022, which should further improve as we continue throughout next year.

While we manage the disruptive impact of near term supply chain challenges, we remain committed to our long term profitability targets as.

As we drive profit improvement through acquisition integration, the strategic manufacturing initiatives and evolving the mix of our product by promoting higher technology solutions that provide greater returns to our customers.

Customer demand remained strong in the quarter as our orders continue to outpace shipments.

Incoming orders, we're not only ahead of 2020, but continue to outpace 2019 pre COVID-19 levels by more than 30%.

For the third quarter and for the full year.

Given the continued order strength, our backlog has grown from $400 billion a year ago to $1 2 billion at the end of the third quarter.

While this presents substantial operating challenges. It also presents significant visibility and momentum as we exit the current year and move into 2022.

As we look toward next year, we are optimistic about the continued market demand and the strong position we hold in each business segment.

For our commercial foodservice business the restaurant industry is in recovery across all segments.

Categories, such as casual dining institutional and travel and lodging are joining the recovery we've already seen in categories, such as quick serve pizza and fast casual.

And more importantly, our customers are looking to make strategic investments in their foodservice operations.

The strategic investments, we have made over the past several years and throughout Covid positioned us at the forefront of an evolving industry.

This is evidenced by customer activity, we've had at our Middleby innovation kitchens.

We are experiencing increased engagement on our latest technologies offering labor savings automation great.