Q1 2023 The Middleby Corporation Earnings Call
[music].
Good day and welcome to the Middleby Corporation first quarter 2023 conference call with Us with US today from management are Tim Fitzgerald, CEO , Bryan Mittelman, CFO , James Poole, Chief Technology, and operations Officer and Mr. Steve Spittle, Chief Commercial Officer management will begin with opening comments and then we will open the call for question.
Instructions to enter the queue will be given at that time now I would like to turn the call over to Mr. Mr. Fitzgerald for his opening remarks. Please go ahead Sir.
Good morning, and thank you for joining us today at our first quarter earnings call.
As we begin please note there are slides to accompany the call.
The investor page of our website.
We are pleased to have posted solid results to begin the year reporting a first quarter with strong performance both of our commercial and food processing businesses.
While our residential business was expected to be impacted by challenging market conditions and destocking of inventories at our retail partners.
In the quarter, we drove improved profitability and we continue to make progress towards our longer term margin targets through focus on the profitability of our sales mix and with further improvements yet to come through efficiency gains and supply chain initiatives.
During the quarter. We were pleased to have also realized meaningful reduction in production lead times across most of our businesses.
Benefit from improvements in our supply chain and through the investments made across our manufacturing operations.
We're now in a significantly improved position to better serve our customers and take advantage of market opportunities.
To start the year, we continue to have strong engagement with our channel partners and customers across all three of our foodservice businesses with interest in our latest products and innovations offering benefits focused on energy.
Speed and sustainability.
The investments made in our innovation centers demonstrating these latest solutions have proven to be a strategic asset for our businesses.
Traffic in these jobs continues to increase as we invest heavily in training with our channel partners as a world class culinary teams engage hands on with customers looking to evolve kitchen.
Foodservice operations.
We're excited to have recently opened our latest Middleby innovation kitchen in Spain, now, providing a resource to our partners and customers throughout Europe .
In the quarter. We also continued to make strategic and financial investments in our business investing 25 billion in our manufacturing operations as we continue to retool our operations to support new product as much as it creates capacity and advanced the automation within our operations.
We repurchased $48 million of Middleton shares during the quarter.
We were also excited to complete the acquisitions of flavor and Blue spark.
Innovation at our beverage portfolio and expanding our in house controls development capabilities.
As we progressed into 2023 economic conditions continue to present challenges and uncertainty, particularly as it relates to our residential segment.
But we remain excited about the direction of long term goals.
And the investments in strategic initiatives underway.
That are enhancing the competitive positioning for each of our three foodservice businesses.
Now I'll pass it over to James to spotlight, our exciting recent product innovations, which are also highlighted in the investor slides James.
We have a few items so I'll jump in.
<unk> heard on other calls.
I'm talking about the digital embedded and collaborative automation, that's driving innovation across the middle East.
Bob Burton pieced together in a complete and that'll be solution. It is the only automated prior designs manufactures and integrated steel company.
The collaborative robot Spencer prior holding in spite spot.
<unk> is 100% of metal.
The Batesville robot as shown its capable honestly dispensing fry safely choose.
Two unique items at rates hitting 60 bucks athletes per hour depending on products.
While with ease of installation.
Can easily be rolled out to new but most importantly existing restaurants.
Before I bought its currently attached.
Whereas we look forward to continued pride body installation and.
In test locations in 2023.
With fried body hitting revenue producing stores in 2024 and 2025.
If you'd like to see in case, the fried bought an action it'll be unfolds, while at the NRA show in May and the Middleby automated Burger and chicken bar as well.
Alright kitchen innovation pavilions.
That's nothing to show this past February the Fry bought flawlessly delivered over 1500.
The fried chicken and just over two days.
And our ratio.
Bob will be accompanied by catalyst.
Our concept by John featured an all electric and all there'll be kitchen.
Middleby Cafe concept expensing, the highest quality espresso.
Coffee from the Middleby coffee.
That's <unk>, that's <unk> in the Chicago area.
Okay.
Nah Enterprise Iot platform.
Middleby electrified innovation.
We will showcase the latest electric product designed for the efficient electrified kitchen.
Lastly, please look for the hydro rates and the pressure into.
Additional award winners in the Kitchen Innovation Awards Pavilion, you had a ratio.
Hydro automates the cleaning the most thoughtful machines.
By Washington Redskins and satisfied.
Satisfy different machines, while sushi or still have some.
What's her into is the latest modular and rapid.
And it's already cooking platform.
I would like to close by talking a little bit about where spark our latest acquisition.
That's the middle East common control strategy by Hilton brands develop and launch control faster than ever before thus accelerating new product development across commercial residential and food processing groups with industry recognized capabilities in the area UX UI design.
And embedded for where you work.
What it also brings back <unk>.
You see the board manufacturing, while also being able to support volume production.
We are excited to work with spark developing for Middleby.
<unk> you Brian .
Thank you James.
2023 started out strong.
We posted another quarter with revenues over $1 billion with exceptional growth in two of our segments.
Our adjusted EBITDA exceeded $210 million, resulting in an organic adjusted EBITDA margin of over 21%.
While our total revenue growth was rather modest given challenges in residential we were still able to grow adjusted EBITDA as a percent over the prior year.
Our margins expanded 100 basis points.
All the margin values I will discuss thereafter are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts.
GAAP earnings per share, whereas the other 82.
Adjusted EPS, which excludes.
The amortization expense nonoperating pension income as well as other items noted in the reconciliation at the back of a press release was $2 19.
I will walk through our segment results in a moment.
But first I wanted to briefly note that we are real we Oman, some small operations internally, which in turn had a small impact on the composition of our center.
Nonetheless, I know some people will see differences in their models. So here are the details.
We have moved approximately $4 million.
Quarterly revenue from the commercial segment to food cost.
We have restated prior periods in our press release and the call.
Scott here.
It's been basis.
<unk> will be approximately $4 million per quarter as well for the remainder of the year, but back to our model.
Commercial foodservice revenues were up over 11% organically over the prior year with north of 14% international regions growing lots of them so that the adjusted.
EBITDA margin was 26, 5% to 30 basis points ahead of the prior year.
In residential we saw net revenue decline of 32% versus 2022.
The adjusted EBITDA margin was 13%.
Good.
Can use to perform extremely well.
Total revenues exceeded $173 million, an increase of 24% organically.
Our adjusted EBITDA was 24% up over 500 basis points over the prior year as I've noted before our.
Full line solutions continue to resonate with customers.
Our operating cash flow generation of $90 million with Iraq first Horton.
During the quarter as Tim noted we invested.
$25 million in capital expenditures and had $10 million of acquisitions, we utilized $48 million for open market stock buyback.
After giving effect to all of this activity.
Little leverage ratio moved down slightly to just under three times.
I remind folks that our covenant limit is five four times. So we currently have over $2 billion of borrowing capacity.
It was not an easy quarter, but we still delivered strong results.
You had noted that supply chain has improved.
Just to add that it does remain a constraint numerous areas, especially around legacy chips and controls.
Inventory levels present, a short term headwind as well in our residential and to some extent in commercial too.
In terms of the near term outlook.
Residential.
Demand in the marketplace, obviously remains off from the peak level in a year ago.
However, our revenues have been relatively consistent for the past three quarters.
I discuss results last week.
Notice that residential revenues for this Q1 might be slightly below Q4.
We ended up actually exceeding Q4, a few million dollars.
So given the timing of some shipments in comp and level.
With soft unexpected conditions in the U K.
Q2 will see realm, we will see revenues relatively flat to what we just posted for Q1.
Lots of would be similar to Q1.
And thinking about all of 2023 for this segment.
It is hard to offer a very clear view given all the dynamics impacting is currently.
Nonetheless, our current assessment, which is a fair amount of risk is still sequential improvements over Q2 in the back half of the year. This often means year over year growth for the second half of 'twenty three.
For food processing, we obviously posted a very strong quarter. This business will continue to exhibit strength.
I expect Q2 to look similar to Q1, and we should continue to grow and improve from there over the back half of the year.
For commercial.
When comparing Q2 to Q1 sequentially.
Revenue should be up modestly with slightly better margins.
Each of them with customers remains incredibly positive and they were continuing to invest.
But gene activity is somewhat backend loaded for the year, so consistent with what I hope will create a quarter ago each.
Each quarter through the year should improve sequentially.
Just the improvements from Q1 Q2 will be modest.
But in the three segments together.
When looking at the total company potentially Q2 performance.
Revenue and EBITDA look like you show single digit growth when comparing either back to Q1 of 'twenty three or Q2 of 'twenty two.
Thinking about her 23 will shape up for all our Uber remains consistent with what I noted last theater.
We continue to expect full year gross margin expansion in commercial and food processing.
Z holding the line in Q2, you'd likely see year over year growth in the second half of 'twenty three.
Reiterating reiterating this means for full year 'twenty three we should see total company revenues up modestly and growth in EBITDA dollars and well.
And true Middle style, we look to continue to deliver solid results.
And have another good year.
And with that we will now open up to your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then two and our first question will come from John Joyner with BMO. Please go ahead.
Good morning, definitely definitely solid start Brian I was just waiting for your.
For your stories there but.
So you've got kind of let me down.
Okay.
Anyway, well, let your taste buds work rather than have to hear me me tell stories.
Okay excellent I look forward to it so I guess for the commercial business. I mean are there any particular areas that are that you would call out I mean, it's definitely a strong quarter, but any areas that you'd call out as being stronger than others or ones that maybe are performing better than kind of your internal expectations and then and.
Also kind of based on conversations that you're having right now.
Would you say that capex intentions by your customers lately have actually taken a step higher.
Oh, Yeah, good morning, Josh Steve maybe I'll take a first pass at it. So I think what I would maybe call out you know over the last quarter or two.
Talked about on prior calls you know of the progression of how different segments are more or less recovered since COVID-19 and obviously, we've spent a lot of time talking on the big <unk> change what you have done so while you're on these last couple of years I think what I would call out or maybe some of the other areas that are you just kind of getting back to two <unk>.
I would call out probably more of the independent restaurants than some of the casual dining restaurants.
I think you know what I'm excited about there is a lot of those customers are served by our dealer partners in the U S. I think we've spent a lot of time over the last two years getting closer to those dealer partners, giving them tools to help navigate.
But the dynamic that we're all faced with a we spent a lot of time training a lot of those dealer customers.
And so I think youre, starting to see that pay off and I think actually if you go to the Pie chart there in the deck.
It's an interesting nuance that you see the independence and casual dining chains, just tick up as a part of the overall revenue next I think it's a direct correlation to try something about just being closer to the dealers, but also really just seen those segments.
Start to pick up on the recovery if that makes sense.
Okay.
Thank you Sir that's helpful. And then just maybe just one more on the food processing business Brian .
And I believe highlighted that the do you expect <unk> to be more or less flattish with <unk> with <unk>.
And similar to commercial being the results there were probably even more impressive but.
Yeah.
When you think about the EBITDA margins for the year right I mean, you're starting at a higher level than probably most anticipated do you expect margins there to progress me maybe you answered this already I don't know, but the progress sequentially higher.
As the year unfolds.
As you said, we're thinking about you know food processing here Q1, certainly was a big step up from where we'd been in the prior year and to your point you know was strong and higher than we may have expected.
So that's why I think Q2 looks like Q1, and we can see some expansion in the back half of the year just given how strong we started.
You know I'd say that needs to temper expectations on how much they grow from here, but you know obviously, we have our target margin.
Now well within sight and again as we especially think about the back half of the year I think we can move up.
A little bit from what we where we started the year.
Okay, Alright, well done thank you.
Okay.
The next question will come from <unk> <unk> with Jefferies. Please go ahead.
Hi, good morning, Congrats on the results.
So within residential can you just strip out the performance you saw in Gorilla first the legacy business. How do you see channel inventory currently and how should we think about the cadence of destocking through the remainder of the year because I believe you have much easier comps.
Yes.
Yeah. This is Tim.
I'll kick off and then Brian can maybe break it out a little bit.
There definitely is kind of.
At Cabot.
Inventory levels are high right. So they continue to come down there is still inventory in the channel sell through is probably a little bit lighter to start the year, given I'll say whether in other.
Market dynamics, but I mean, I think it still holds true that will be in a much better position from an inventory standpoint in the back half of the year as it relates to the growth.
We are excited about a lot of the new product introductions that we've got coming out right now.
Digital.
Corrado, Joe or connected Joe.
Talked about in the past and as James has highlighted as well as.
Continued.
Proportionate and penetration of the basketball.
Gravity series, so, but I think we feel pretty good about the long term both medicine that we've got that we think will build as we go through the back half of the year, but certainly we'll still see some of that probably that the destocking.
In the second quarter, but the proof.
But as we go through the back half of the year.
Definitely I mean as you look at the overall residential results that the girls headed or size impact on the rest of that George was expected certainly seen.
Across that whole category not only by us.
As we talked about last year I mean.
I'm, sorry last quarter, but last year in Q1 really was the peak of the performance for the you know the gross company. We talked about you know revenues I think being in excess of $110 million, you know that and we're obviously down quite significantly from that you know excluding grills residential would probably been.
You know more along the order of.
Up 20%.
We still are expecting as we think about the grill season, I would say you know Q2 is right still part of this year's grill season, and so we will do again. This is consistent what we've talked about before.
C certainly challenges year over year, if you were to look at grills alone.
And then you're right the comps are certainly much easier in the back half of the year right because in the back half of 'twenty, two where it was still part of this destocking phenomenon, we're dealing with and so that's why we do believe grill.
Grills will be better in the back half of 'twenty three than the back half of 'twenty, two and that really gets after our comments of as you think about residential overall as well second half of 'twenty, three being better than second half of 'twenty two.
I appreciate the color then just one more obviously commercial foodservice had another strong quarter, how do you see underlying demand as you might be working down some backlog here and are you seeing any headwinds from a challenging financing conditions, especially on the franchise side.
So sorry, I would say demand more or less across the customer segments again talk a little bit about the dealer side of the end of the independent side nice to see that coming back but also the change that we talked about the <unk>.
Continue to do well and so I see the demand continue there both from a new store standpoint, and also starting to see some replacement business come back, which we've talked about before.
So yes from that standpoint believe we're in a good position and I am sorry, sorry, your second question.
Yeah, I, just think I see any headwinds from the challenging financing conditions.
So it's interesting that there we have had a lot of discussions with the bigger Qf's Sars.
We focused on well call it unit economics of making sure the ROI on the new stores for their franchisees.
Where it needs to be and it's critically important for I think for two or three reasons. If you look at the big <unk> that have a progressive growth plants, which many of them do.
And many of them are in international markets. How are you growing your growing with either existing franchisee groups, taking on more locations signed up for more locations more youre going out and finding new franchisee groups to expand into new markets.
So the ROI of those new stores when Youre trying to attract those franchisees is more important than ever and obviously as youre financing has become more expensive over the last year, a year or two again the equipment is going inflows locations, it's not necessarily about hey, what is the upfront cost.
Always important but actually it's more about the ROI.
To open those stores and have an attractive package to the franchisees if that makes sense. So it's a very active conversation that we've had I would say the last six or eight months worth of change specific to your other question and an issue and just it supports the other plants for pretty aggressive growth, especially in some of those international markets over the next.
You know two or three or four years.
Thanks, I appreciate the color and I'll see you at the NRA show.
We look forward to it.
The next question will come from Mig <unk> with Baird. Please go ahead.
Thank you for taking the questions and good morning.
Wanted to go back to residential for maybe some clarification.
Well, what I heard just moments ago was that.
Leaving gross to decide.
Core, calling Viking AGA business was down maybe 20% in the quarter.
Can you confirm that.
As you talk about the business getting bought our overall the cycle getting better from a revenue standpoint overall.
What sort of assumptions do you have embedded for for Viking AGA as the year progresses, because presumably the comparisons are not nearly as easy there as they are on the growth side.
Yes.
You did hear me correctly on the on the residential side I'll say it kind of.
Within with <unk>.
And.
Without grills.
As we look at.
It's the rest of the year.
The outlook I would say if I had to pick one word and then it works.
And on it.
It's kind of flat from here, we feel like we've kind of.
<unk>.
Or at a bottom Q2, I said will be similar to Q1.
At the same you know same neighborhood right I was very specific in pointing out that we've been at a relatively consistent level for the past three quarters I think what we're not seeing yet is outside of grill, where they really are.
Are some unique circumstances with the destocking.
We're not really picking up our expectations, specifically, yet right I don't have.
You know exact indicators that okay. All of a sudden you're next quarter, it's going to really change the trajectory.
I appreciate it.
I would say I mean.
Uncertain as the.
The word unfortunately right now.
We've seen obviously the housing market being challenged all in the back half of last year. There was maybe a little bit of science you are at the at the beginning.
But you know that.
The world continues to be a bit tough and shirts, you went up I think.
We also feel like we're kind of stabilized at a lower level, so I think that.
I think the question is when does it inflect up as opposed to this.
It's going to continue to come down so I mean, I think if you look at a lot of the housing stats.
Yes, it was expected maybe bought them out.
In the middle of the year, and then start seeing things pick up so I mean I think those are.
Larger macro economic trends that are going to get to kind of take a look at it I think we would expect our.
Business to follow up with them and I think.
We feel like we're we're stable here at the at the bottom and then we'll kind of see how the.
The year goes.
No.
Beyond that.
We can continue to be investing in our business right looking at a lot of new products coming out of I'll say, our electric products are doing.
Fairly well that includes a lot of D. A.
Production will be launching over the last several years such as the AGA products that have come into the U S. Those are growing right now.
Despite the market being done.
Lockhart, who are doing very well we've got other new products that are that are coming out of that reduction basis. We've got to go through the back half of the year. It got along.
The comments also about the investments that we're making.
Making a go to market activities, we've got a lot of great.
Traffic at our showrooms are bringing.
Bringing our dealer partners.
Our designers through that really have not seen.
The portfolio.
That will be has to offer so I mean, a lot of that stuff has been exposed to a broad audience over the last year.
And we see some traction yet and we expect that to continue we're excited about opening a new show on mix, Chicago, which will really be the Oh, yes, I'll say that.
Really state of the art for us.
Got it in the middle of the year.
Really capture the expanded product portfolio that has grown over the last year.
We acquired novae.
You know about a year ago plus.
Which has got some great technology induction.
Hubs ventilation et cetera. So I think we're very excited about the product portfolio. So again the market is going to do what the market is going to do but I mean I think we.
I think there's a lot of great things going on as we go through the back half of the year and into 2024.
Let me maybe qualify what I was trying to get out.
My impression was that Viking was still operating with longer lead times and a fair amount of backlog.
So much.
Last year, yes.
As long as Youre running that backlog down. My question is do you have to essentially reduce production or having a sequential headwind.
Half of 'twenty three relative to the current run rate.
Sure.
I don't know if you want to.
Yeah I mean.
As Tim noted the backlogs.
Have come down our lead times are.
Much closer to.
What I'll call normal levels, there are some pockets there.
<unk>.
But again given.
I'll say the modest amount of backlog that remains as well as just the.
Baseline day to day demand from our customers I mean is it.
Is why we're kind of calling the year the way we are.
Understood.
I would like to ask a question on a fried bot.
And I guess.
Question in three parts.
You were saying here that this is a modular modular design.
I'm sort of curious when you're when you're trying to sell this product are you are you seeing customers looking to essentially buy the entire set or is it just.
Maybe the robot arm and they are keeping the existing equipment I guess that'll be question number one.
The second thing is how big of an investment is this poor for a customer and lastly.
What is the payback in terms of what you guys have seen our calculated thus far.
Yes, I think when we look at our customers and they see kind of the advancements with <unk>.
Priors today, the advancements that.
<unk> brings.
Our customers typically going to want to upgrade.
The Frankfurt as they have in their in their stores with kind of the latest Bryan to take advantage of automatic filtration smart oil sensing and various other.
Features that are built into the priors too.
To help you with profitability around.
Oil management and oil cooperate so we really do see the majority of customers buying kind of everything that you see on the page from the Rand dispenser.
Two the prior to the robot into the holding in the despite spot.
Now there could be some.
Situations, where we are integrating in with existing priors, but I would say that's not really what we expect to do.
Hey, today, when I think of modularity.
I'm really thinking that.
Our fried bought doesn't require kind of customized engineering to go into the store.
Structure in the store too.
Or not.
Space in the store to put something bigger.
Hi.
The shield or any.
Any sort of protective cover our freight box kind of designed to work out in the middle of the on the restaurant with the employees in a collaborative fashion. So it's modular and that it's going to kind of roll up and interface with our products and roll away if you need to.
<unk> four.
For any.
Any reason.
I think when we look at kind of the ROI on it.
<unk>.
And I think this will probably you know kind of get into the cost I'm really talking about the cost, but we really see the ROI kind of being slightly over.
Here for the <unk> solution and the and the equipment.
Packaging.
Understood.
My final question is on your on your Capex.
Significant investment made maybe you can talk a little bit about.
What was unique about the quarter certainly that's the biggest Q1 capex that I think I've ever seen.
And what sort of payback are you are you hoping to achieve here.
Is there a segment that is getting maybe more investment than than others.
How do you think about free cash flow for the year. Thank you.
Yes, certainly this was our highest capex quarter I mean, some of it just kind of the timing of payments and projects have come.
Together, you know I do.
Don't expect we will be at.
Four times Q1.
For for the year.
Tim as noted and we've talked about we're actually making fairly sizable investments in residential but before it really.
A lot of retooling of the.
AGA rangemaster plants and.
Much like our customers.
We see challenges with.
Labor availability and cost and had been adding fabrication equipment.
Across the board, but our our residential Lance.
You think about I'll call it Rev.
Revenue per plant tend to be larger facilities.
And to get.
Larger.
Larger investments, but we really have been.
Spreading it around.
The paybacks are.
Really do very I mean.
Obviously, when we're making investments and building that's something we have a longer expectation and then when we're doing something more modest around.
Well there are small small equipment, usually if I focus on fabrication equipment. It tends to be I'll say two to three or four years in terms of payback.
Payback for us.
And free cash flow.
Yes, free cash flow I I have.
I'll have to eco what I.
Said at.
At year end, where I think we start to being.
Closer in terms of a margin plus or minus.
Our income for the year.
Okay. Thank you.
Yes, I mean, I think if you look at the last couple of years, obviously supply chain has been a big challenges that heart too.
All ballots inventory.
Let's say.
Yes, sometimes difficult forecasting demand levels et cetera, so, but I think one of the.
The benefits that we have as we go through this year, we do expect inventory.
To decline as opposed to kind of be at a cash use over the last several years. So that I think we've got a little bit of a <unk>.
A tailwind from a cash flow perspective coming into the year. So it should be solid from that perspective.
The next question will come from Kent.
Go ahead, Sir go ahead.
Got it.
The next question will come from Tami Zakaria with JP Morgan. Please go ahead.
Hi, good morning, Congrats on excellent results.
I have a couple of quick questions. The first one is I think you mentioned that lead times have normalized for most part of your business because of increased capacity and also supply chain getting better. So it was so can you just remind us which segments you saw or had the most increase manufacturing capacity and at what.
<unk> are your facilities are currently running on average right now.
Okay.
Yes.
<unk>.
Kind of tough to answer given we've got 115 brands I'll be honest with you because we run decentralized right. So it's going to vary significantly across the platform I think the way I think about it is yes.
Our backlog is still at a fairly healthy level.
Certainly it's it.
It's come down from a lead time.
I would say about 90% of our factories that are at a point.
Normalized lead times may not be at risk.
But by and by and large there is still is.
Eight percentage of our factories about 10% that remains a bit.
And that's usually because of.
One of two reasons or maybe two of two reasons one.
Very strong demand for those product categories. In some cases those are more automated products or newer lines. The other the other area and Brian touched.
Is where we've got controls.
Some some some of the electronic components continues to be.
Challenge, so, particularly if its legacy controls. So I think we've done a lot to invest in our next generation controller James talked about that in the past with Adobe.
One touch and we're excited about moving a lot of our new brand.
<unk> AD products over to that which we will continue to do.
Through the year, which is also connected to our open kitchen platform, but we still have a lot of.
Legacy controls seaboard, and it's hard to move everything quickly. So I think that's where we still see.
Challenges at about 10%, but the good news about <unk>.
Percent.
We're gonna get within a window thats kind of more normalized and I think that's an opportunity for US also as we go through the year because I think there has been some business.
It also.
Yes, we went through last year, which we were really not in a position to serve the.
Customer so I think as that kind of comes back and Theres some areas.
That will be able to.
Accommodating.
Really take some orders, where we had to work.
Last year, so I kind of think of as an IV diabetes.
Situation, if that's if that's helpful and lead times vary depending on.
Product category.
No.
What I'm, saying is true for really those comments relate to residential and light commercial.
Predominantly.
Got it that's very helpful. It seems like things are looking up that's great to hear and then my second question.
Question is on I think I, if I heard you correctly, you're saying that the commercial food segment margins should be.
Modestly higher quarter over quarter.
When I when we were speaking last quarter I think the expectation was like 26, 27, 28, 29% sort of margin cadence for the four quarters of this year. So is that sort of still the expectation or or are you, saying <unk> should be somewhere between 26 and 27 than not.
B they like that 2017 range, we talked about last time in the last quarter.
Yes, I mean, I think those numbers represent I'll call. It a general trend you know I'm not going to comment to whether we're going to have it specifically.
Hit 27 or be above it next quarter I think the.
I'd say the appropriate modeling is is as you just kind of noted somewhere between 26 and 27.
And I think that in the back half of the year, we'll see improvements from there right, but I'm trying to be very specific about not offering.
<unk> guidance, but I'll call it general.
Trend expectations, let's say.
Got it.
I think it's all of our business is always a little bit difficult to forecast just because theres. So many moving pieces and mix has a lot to do with it I think as we're working through the backlogs there still is a little bit of legacy I'll say older backlog out there that were kind of through the <unk>.
The system as we go through the second quarter that is at.
I will say older pricing so that that is still.
A little bit left to get out of the system. So to speak is we've kind of moved to.
Current pricing in the back half of the year.
Perfect. That's very helpful. Thank you.
Thank you. The next question will come from Tim Thein with Citi. Please go ahead.
Thanks, Good morning, just to continue on that discussion Tim So what should we think about the kind of the margin for just for commercial.
The exit rate.
Or a second half looking into 'twenty four or so.
As we went back to the conversation in Dallas last fall.
Outline price cost and mix.
Two drivers.
Longer term to get margins up I would imagine is it fair to assume that those does it start to become more meaningful.
Tailwind for you in the back half and then that that likely extent as we as we think about where we're exiting 'twenty three and then a fair synopsis.
Synopsys.
Okay.
But I'll make a couple comments that break in.
Can clean it up.
So.
Again, you know the mix of our portfolio as we focus on you know higher.
Technology.
Categories.
With product that'd be brands I mean that that's the underlying.
Theme.
That's always that may be difficult to forecast on a quarter to quarter basis, but I think we continue to make progress towards that.
With a mix of the portfolio and that's something that I think is reflected right now, but it continues to be something that I think we will see improvement as we go through the.
You can make progress the year going into 2024.
There's other factors.
We still from a supply chain standpoint.
Just make two comments one.
There are some.
Commodity areas that we'll see improvement as we get to the latter part of the year like we still have higher priced steel skills come down, but we haven't seen the benefit of that yet because we do have some a lot of that in our inventory.
It's still so we'll get we'll get some of the supply chain a little bit of supply chain.
Relief as we go through the.
The latter part of the year as well so those are two two things.
And I guess, maybe the third is also production efficiencies.
There's still a lot of thrash that we have in our operations right now I think as lead times normalized order rates kind of normalize with customers and how they're placing orders with us with our lead times as we can better utilize some of the investments that we've made and the.
The fact, so a lot of that stuff as you know all the floor operating but I don't I wouldn't say that we're getting all the benefit yet because we're working through.
Thrashing touching equipment still you know, sometimes a couple of times before it goes out.
The door, we really get into better cadence I think theirs.
The color behind some of the comment I made about some of the manufacturing.
Efficiencies. So I think those are the things that will be worked out as we go through the.
The latter part of the year that that is part of the bridge to get us to the higher margin. So there's still some headwinds out there as well because I will tell you supply chain.
As Brian noted, it's not thought I mean, it's not only that we got some false it's harder to get but theres still increases outdoor that were.
Our teams are fighting hard to.
<unk> pushed.
Pushed back out or think about how do we see.
Yes, we.
Kind of go through a period of.
But partly it was right like let's make sure we get product out the door.
Now as we kind of start thinking about that as a.
Lover, again, and I think that you know that that's you know.
Something over the next.
Several years, but I mean, I think we've been a you know a price.
Price take her to this this point.
And I think you know what kind of you know this year feel a bit of an inflection for.
That is you know as well so I think we're still getting price increases as we go into 2024, I think the supply chain teams.
Before I start a drug you should see there as well.
Okay. So they don't make sense. Thank you and then maybe sticking with you or Steve I forget, but there was a comment earlier about the supply or the inventory levels.
Posing.
For the.
Residential side makes perfect sense, but I was surprised I think you referenced in the commercial side as well can you maybe just touch on that as you know we've been hearing just to your point when the supply chain has been an issue for you guys to get products out the door. So it was a little surprised to hear that comment, but maybe it's just more of a one off.
Any thoughts on that.
And assuming I heard that right.
Yeah, absolutely, Brian actually touched on it briefly so yeah I.
I'd just say I think there is some inventory in the channel and commercial both for the general market and for chains and yet the change side, especially and I would say.
You would gone through such an odd period of time, the last year or two of how your customers have ordered with a longer lead times, placing orders you could go back a year ago, they're placed some orders youre farther out than they ever have before and you know our dealer partners of the chaos service change their job was to get as much.
Equipment in place to support new store openings from replacement. So I think youre seeing a byproduct of that there was so much ordering but that took places to make sure everybody was in a good place to support new store openings and replacement.
So we're going back to normal quote unquote normalizing.
Lead times normalizing, how our customers order from us coming back to how it was pre COVID-19.
I think again the inventory that's in the channel right now is a byproduct of just the longer lead times and ordering process I do think that normalizes as this quarter unfolds and certainly the back half of the year unfolds and we get back to again more of a normalized cadence of ordering in the in the channel.
Interesting Okay, alright, thank you Steve.
Yep.
The next question will come from Larry de Maria with William Blair. Please go ahead.
Hi, Thanks, good morning.
And you've touched on a lot of this stuff, but I wanted to get some clarity clarity in the second half.
<unk> two <unk> sequentially I guess in it but we expect sales up in the second half and so it should not imply we back to mid teens or better EBITDA margins in the second half in particular, Reggie and you know maybe you can discuss some of the restructuring you've done in the air and maybe at least even higher margins.
And two it might be a clean year in 2024. So just some further color on second half and maybe run rate yeah.
Margins in ready.
Yeah no.
We do expect margins to be increasing in the back half of the year as well with the.
With the increases in.
In revenue.
Given the dynamics of the.
Grill business.
We do get nice.
Leverage incrementals as those revenues.
Improved and in terms of the benefits of our of the.
<unk>, you know that that really especially.
Given current demand levels really isn't something.
It has a meaningful impact this year.
But it's certainly a meaningful driver.
As we get into next year as well.
We look forward to a better revenue levels and again, it's one of those drivers and bringing us back to art.
The target margin levels, but specifically to the stuff we've talked about for AGA in the U K.
This is a.
Long term project that really.
Comes together over the remainder of this year.
Hi.
Benefits start accruing a much more so next year.
Okay. So thanks for that but now if we think about second half margins EBITDA margins I guess you know.
Obviously unreal.
Well better, but you have something a little bit of benefit.
And but maybe some mix headwinds not sure.
Does that imply you know mid teens or better EBITDA margins in the second half or is that the way to think about it in the mid to upper teens.
Yeah I mean.
No I I talked I think some about some of this last quarter and back to the fall.
<unk>.
I do feel like mid teens is where we can get it just you don't need to take that with a little bit of caution getting I mean, ive tried to use them.
The words risk Oh.
The uncertainty here as we look at the back half of the year, but I mean.
I think thats, a fair assessment, but again.
Everyone needs I think everyone is aware of the risks and uncertainties surrounding that business, but again.
I think that's probably a fair assumption, Okay fair enough and then my second question.
I wanted to talk a food processing backlog and order trends you know how did orders progressed through the quarter postpones delays are still strong maybe touch on some of the end markets I know poultry may not be huge but there are some headwinds in the market. So just give us some color to get comfortable on sort of the duration of the processing.
Right.
I'm, sorry, I can't hear I don't know if your question food processing quarters' trajectory, yes, I mean food processing has continued to do well for US I mean, obviously last year was really exceptional year in terms of order intake and driving up our our back.
Lord I mean things are still.
Good there.
Again last year was really exceptional.
Maybe if the current is not.
At the same levels, but nonetheless.
Orders continued to be strong our backlog is.
He is holding in.
Well.
The areas, where we've been strong we continue to be strong we've seen a lot with bacon, we've seen a lot of.
Acceptance and excitement around the turboshaft bye bye.
By Al car, we're making inroads into into.
Into pet food and snacks.
And so it has been fairly.
Good across the board I would say.
For us.
Yes.
So Larry.
I'm sure I could I cant wherever speaker problem, but yeah, I'd just say the backlog is.
Holding pretty solid I think as we look at the orders.
I always kind of lumpy from one quarter to the next depending on what projects come in so I think we kind of look at what the pipeline of opportunity is that for.
It's probably just alluded to I mean, I think we feel pretty good about the pipeline in the areas that we've been.
Targeting with full line solutions, which continue to resonate and they get.
Just kind of remind everybody we've invested a lot in automation. If you look at a lot of the acquisitions over the life.
Europe , particularly with.
With proxy for you Mac.
More recently Usher Claus C a R.
We're the teams are really working together.
You know on some bigger projects to help customers again with a Y in a lot of different applications that we were not and if you kind of go back five years ago as Bryan just alluded to a number of them.
So we feel pretty good about the progress.
Up the business, so nothing's really changed from.
That perspective from what we know.
Biologics, we're seeing last year.
Okay. Thank you guys.
The next question will come from Brian Mcnamara with Canaccord Genuity. Please go ahead.
Good morning. This is Madison County in answer Brian . Thank you for taking my questions.
Just to piggyback off the previous franchisee question with the recent high profile of bank failures, but just curious where you're like restaurant customers and franchisees probably get their financing from and any additional color you can give on how that effects your commercial foodservice equipment.
Yes.
Yeah.
Okay.
You know as we think about our commercial customers Theres a few things there obviously, our largest customers I don't have a roster of where they were they all bank, but they tend to be.
Large large entities and I I haven't seen anything in the public domain I'd say, you know along with our large customers about concerns about you know there are.
They are financing there's also obviously lots of really large franchisee.
Organizations.
Out there you know I would say, we Havent you know I understand where the question is coming from.
Can't say that we've explicitly seen any slowdown or change in our activity level.
Or you know negotiations with customers.
Specific to what's happening you know with with regional banks.
And the like I think if you take it all the way down to our smallest.
Customers kind of independent restaurants.
Probably you know.
Raising cash to open things up given some of the risk profiles with really small entities. So again.
So overall, we don't feel like it has been you know yet are impacting us in a in a noticeable way.
Awesome. Thank you and then just as a follow up in terms of grills can.
Can you give any color on material distribution gains you'd expect fear girl brands. After the wholesale channel is cleared what they.
They'll be deeper with current retail partners or new partners all together. Thanks.
Alright.
With the grille company. So we are seeing gains with our existing customers in terms of what I'll call. It you know the floor space allocated to us really acceptance of our products for a variety of reasons right.
Charcoal gives a better.
Cooking experience, we have you know Austin technology, we have different features for all these reasons. So we are seeing gains with I'll call. It our current base of customers.
But we're also making headway in terms of bringing these ease.
These growth products to I'll call it like specialty retailers.
Where they may not have been carrying named before what we're really able to because of everything Middleby offers also have them.
Bringing especially come out Joe.
Into their into their showrooms as well.
Well as you know leveraging what we're doing internationally.
There are a couple of pockets I would say.
Of new distribution.
In the in the U S as well.
Awesome. Thank you so much.
Yep.
The next question will come from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, everyone. Thanks for fitting me in I just have one one quick one.
Just on the cash flows should look better this year I noticed you guys bought back stock and I guess it was a little surprising given your pension for deals in and kind of the current rates and leverage so just kind of update us on kind of how you're thinking about capital allocation as we move through the year.
Yeah, I think it's probably.
Changed for how it's been for a long time I mean, certainly we're.
A more conscious of the cost of capital and interest rates et cetera, but I think as we kind of think about deals I mean, we're very strategic in our approach in how we build out the portfolio and things that we think.
<unk> will strengthen us.
For the long term and stay on the tested tough times, so we'll be active but we're also.
Mainly where cost of capital has gone up as well as uncertainty and outlook in certain parts of the market. So just from a evaluation.
Standpoint, So you know, we do think valuation will kind of evolve.
Evolve here and that'll be part of the.
Thought process, if we look at deals because I mean again every day is a.
We always put the slide up there we've been doing this for a long time and I believe we're building upon three.
No.
Industry, leading platform so.
Obviously.
The two transactions start to the year we're excited.
Excited about so so you know M&A will continue to be.
The forefront.
Well, we try to we will delever.
Yes.
Well I mean.
I think stock buyback.
We've always said, we will do that opportunistically.
And I think we just we felt that it was opportunistic.
Time, so I think that that was.
Something that Oh, so it was a good timing.
The buyback some shares we've started that in the fourth quarter of last year. So that was kind of a continuation of.
So a fair way to put it put in place to finish the year I think that's right starting to correct.
Okay. Thanks, so much.
Yes.
The final question, we have time for today will come from Todd Brooks with the benchmark company. Please go ahead.
Hey, Thanks for squeezing me in and congrats on the results from the quarter.
Okay.
It's a three parter, but it's all on the same topic, if we look at.
Commercial foodservice.
Mix of kind of newbuild versus replacement.
Demand now versus what it would look like normally and then I'm wondering you talked about maybe lead times normalizing you may not get as much visibility into the newbuild programs with our restaurant partners I'm, just wondering about as replacement seems to be picking up based on the comment you made.
Is your visibility there better than it's been historically and then finally the margin spread between new versus replacement demand observed setting. Thanks.
Yeah go ahead.
So Todd.
To start first question.
The mix of new build.
Versus replacement you know.
The pie charts that are in the in the deck I think are helpful and as you see today, you know newbuild and replacement for 2022 where we're pretty much the same.
Historically, if you go back to again pre pre COVID-19 levels I believe it was probably a charge somewhere the replacement was historically have the demand that we would we'd normally see probably in the yeah. The period of 2017 of 2019, if you will going into to Covid. So obviously.
The new build demand primarily from the bigger chains really 2021 'twenty two obviously is significantly higher than it was prior so that's why you see the mix.
Being different I do think as you get into probably 'twenty four 'twenty five even though I do think youll see new builds continue for a lot of change I do think you'll probably see some replacement business uptick and actually be maybe not back to 50%, but probably be higher than the new build mix or if that.
Makes sense in terms of visibility into new new locations.
I've talked about on prior calls one of the very nice byproduct of this disruptive period that we've lived through is being closer to our big chain customers, they've given us more visibility than ever.
Into their development.
Yeah plants from timing locations et cetera, which has been extremely helpful and that has not changed and I actually don't think it will change a whole lot as we go forward because just because there's so many good benefits on both sides of the equation to giving us that visibility to make sure that we're always aligned with <unk>.
Hitting a new store opening and then also the.
Your other question was making sure we understand the replacement demand.
So again, we're in a good position to support that.
On that side of things so visibility remains I think very open very transparent I do expect that to continue as we go forward from a margin perspective, youll replacement versus new build I would say.
Newbuild I would guess, there's probably a higher margins just because if you think about new builds that we're putting in the newer technology products, which historically do have higher margins.
A hard and fast rule, but that that'd be my answer that new store builds with historically probably have.
Better margins than the replacement business, if if you're replacing kind of a like for like product.
If that makes sense.
Hopefully I answered Uh huh.
No you did a great job thanks, Steve.
Thanks Scott.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks, everybody for attending the call today, and we look forward to speaking to you next quarter.
Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.