Q3 2024 The Middleby Corp Earnings Call
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Speaker Change: Good day and welcome to the third quarter 2024 Middle-B Corporation earnings conference call. All participants will be an elicent-only mode. Should you need assistance, please signal conference specialists by pressing the star key follow by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone.
to which our question, please press star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Tim FitzGerald. Heo, please go ahead.
Good morning. Thank you for joining us today on our 3rd quarter earnings call. As we begin, please note there are slides to accompany the call on the investor relationship or website.
Third quarter proved to be a more challenging that expected, particularly for our commercial food service segment.
is lower restaurant traffic and a re-exaleration of already high-foot-cost or recent months. Further pressure to restaurant operators resulting in delayed investment and greater restaurant closures.
and the White House. Although we face macroeconomic headwinds across our food service businesses, the picture remains strong.
It's more favorable conditions return with pent up demand and expected multi-year recoveries for the industries in which we participate.
While we face revenue declines in the quarter, our profitability initiatives continued to take hold as we posted strong margins across our businesses.
and we reported margin expansion in comparison to the second quarter.
Speaker Change: We are also pleased to have reported another very solid quarter in operating cash flow. With here to date cash flow, a $447 million roughly 20% ahead of a record of 2023.
given the strong cash flows generated by our business.
We have rapidly reduced our leverage, which is declined from 2.7 times a year ago to just over 2 times at the end of the third quarter.
Abelchit is strong, allowing us to capitalize on market opportunities as they arise. And we continue to make critical investments in strategic and operational initiatives positioning us for the future.
at our commercial food service business, gradual improvement in ordering levels we saw throughout the first half. Drop-down as we progress through the third quarter.
RESTROD TRAPIC, which was anticipated to improve at many of our customers in Q3, declined by a reported 3.5% across the RESTROD sector for the quarter.
at the same time, Food Coss which had been improving throughout 2023. So, I'll re-exaleration of costing increases in recent months.
These factors slow execution against our customers' business plans in ordering of equipment for upgrades and new store openings.
Overall, the economic headwins for the industry have resulted in an estimated 1500 restaurant closures for 2024. As compared to originally expected unit growth of 6,000 from when we started the year.
Although conditions are challenging, our chain customer's business plans, while delayed, largely have not changed, and for the longer term, the industry is still down over 100,000 food service locations, but with forecasted net unit additions expected to return in 2025.
and we continue growth over the next five years.
As highlighted on many of our calls, we have launched a record number of industry-leading new solutions across all product categories. With a building pipeline of opportunities, tied to customers yet to be realized.
As conditions improve, we expect this pipeline to be realized.
We are well positioned to support industry trends with innovations to address the need to drive restaurant efficiencies. Save on food costs, reduce labor and enhance speed of service.
Additionally, we have made significant investments through acquisition and new proct development, expanding into large under penetrating categories for Middle B. In particular, we're realizing momentum.
and our targeted entry into the multi-billion dollar ice and beverage category. And our just in the early chapters as we further grow our offerings and penetrate into this segment.
At our residential business, the Housing Market remains challenged with low levels of existing home sales, new home starts and remiles.
Existing home sales without we originally anticipated to improve during the year, continue to further decline in Q3 against multi-decade lows.
Speaker Change: This is continuing to have a significant impact on our business today, both on the top line and our profitability. Unit vines across residential brands are down 30 to 40% in comparison to historic normalized pre-coped levels.
the expected recovery back to pre-COVID level. But my level will result in a significant profitability expansion.
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While we navigate these current market conditions, we've seen initial signs of recovery with growth in certain areas, such as our outdoor business, which is driven in large part by replacement demand.
are pretty amendor business which has a greater exposure to longer-term recovery areas of new home build and remodels we expect to follow. As the lowering of interest rates begins to take hold, leading into a multi-year recovery.
We are better positioned than ever to benefit as this recovery occurs with our leading brand portfolio, many new product launches and wide array of unique offerings and designs.
Speaker Change: The traffic at our residential showrooms continues to grow as we engage more than ever with kitchen designers and dealer partners. We are reaching a new and expanded audience, and this will provide benefit for the years to come.
and our food processing business, the conversion of opportunities into orders remains inconsistent. As customers have proceeded cautiously in recent quarters while they monitor food costs, while also measuring the impact of higher-inch rates on larger projects.
However, the pipeline of active projects continues to remain strong and has grown throughout the year.
There's a continued demand for our solutions to increase throughput, reduce labor, and minimize food waste.
As a result, we see a constructed backdrop for 2025 with expected greater conversion of orders in the pipeline occurring as interest rates decline and market conditions for food processors becoming more certain.
We continue to execute upon our strategy to become the leading provider of best and class, full line and integrate solutions for protein and bakery processors. The strategy is resonating and we are positioned to partner with our customers as they evolve their businesses and address the need for automation in their operations.
As we continue to grow our best-in-class solutions, we are also continuing to expand into new applications such as poultry and stack foods, expanding our addressable market and providing for continued future growth opportunities.
While when navigate near term market conditions we continue to focus on the execution of our strategic business initiatives, expanding our profitability and growing our cash flow. While building upon our competitive advantage at each of our three industry leading food service businesses.
Now I'll pass the call over to James to highlight some of our strategic investments in service and also spotlight some of the recent exciting new product innovations providing tangible cost savings and operational efficiency to our customers.
James. Thank you, Tim. Before I get into my discussion for the quarter, I'd like to recognize Nico, one of our commercial brands, best known for producing an automated change-urven flame broiler.
2 nights ago, Nico was awarded Vendor of the Year by Burger King for their latest boiler innovation and their outstanding customer service.
Our Brewer says a typical BK operator approximately $6,000 a year on energy and reduced maintenance cost. Congratulations, Team Nico. Great job. As Tim mentioned, you can find slides, referencing my discussion and the earnings deck.
Speaker Change: Nico's next generation flame broiler continues to be the benchmark for automated frame broilers as it has been for the past 50 years.
The Nico Boiler feature size efficiency gas burners and is 50% faster than competitive models. It also has an energy saving feature that allows the operators shut down 50% of the boilers during non-peak times.
These features qualify the broiler for meaningful energy rebrit baits across the United States. Lastly, the Nico Broiler is open kitchen IOT ready and utilizes the middle-be one touch controller.
Since Nico set the theme around automation, I'm going to stick with it and discuss another innovation from Marco, a commercial food service beverage brand.
The Marco Milkpal addresses the most significant product challenge that I've re-cauty shop and briefed a face at Milk.
I'm sure most of you are surprised to hear this, that milk impacts fetus service, for example, up to 80% of a latte service time is tied to milk for coffee, otherwise known as Microsoft me.
Additionally, 20% of the coffee shops milk is wasted through overproduction and or inconsistent product quality.
Speaker Change: Frequent handling of milk jugs also leads to corporal tunnel syndrome and finally, cleaning as milk is always a major food safety concern.
The Marko Milk Pal addresses each one of these challenges by automating milk dispense.
The milk pellet, the muts for every coffee shop in his well-suited for seat stores, restaurants.
and Business and Industry locations.
The Milk Pal can dispense up to 25 unique milk accompaniments such as cold foam, hot foam, cold and hot milk, for example.
The system is designed to sit next to any traditional semi-automated espresso machine, such as our Sneso MVP Hydra, or any semi-automatic espresso machine without a steam wand.
Speaker Change: The Milk Palace is also a perfect accompaniment for the fast-growing cold beverage market.
Milkpal dispenses each accompaniment with a single push of a button that's automating the art of microphomine with near zero waste given its precise portion control. It also produces the highest quality microphone without using any steam or barista art.
So the consumer tastes a richer, more flavorful, creamier and more consistent microphone in the espresso beverage, whether it be hot or cold.
Speaker Change: Lastly, unlike other milk dispensing systems, the milk palace plumbed, this allows the system to rinse itself between dispenses that's improving drink to drink quality and consistency.
and also Lows.
The system utilized Middlebeats Clean and Place Technologies, reducing daily labor required to clean the system. Now I'd like to circle back to touch on one of the reasons why Nico won Vinter of the Year, customer service. Service presents one of our largest opportunities in the industry.
As we lost thousands of qualified technicians during the pandemic.
To combat this, we built a state-of-the-art service training facility at our Middle-Bee Innovations Kitchens, aka the MEC.
Since opening and Q2 of this year, the training facilities become a major focus of our commercial brands.
and the short time has been open. We've trained and certified over 600 technician on 20 of our highest technology brand.
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Our focus is on creating a network of highly trained Middle-Bee Advantage branded service technicians. These technicians will become our first line of the sense in the field, and ultimately one of our best sales tools as speed of service.
and an industry leading first time fixed rate drives organic sales and replacement business.
I would like to end with a quick mention that these products and all other new Middle-Bee products highlighting.
Digital, Embedded and Robotic Automation will be on display as an North American Food Equipment Manufacturers Show or an FM, February 26 through the 28th and Atlanta, Georgia.
Please put this on your calendar and we look forward to seeing you there.
Thank you and over to you Bryan. Thanks James and good morning everyone. This is Bryan Mittelman, CFO here at Middlebeat.
Bryan Mittelman: I'll go through our financial results in a little bit of a outlook perspective for all of you. For the third quarter we generated revenue of $943 million, which is a 5% decrease sequentially from Q2 and a 4% decrease versus the prior year.
are adjusted EBITDA was $213 million at a margin of 22.6% which was up 80 basis points from Q2.
and Spide of the Challenging Market Conditions that impacted our top line. Our focus on innovative products, operational excellence, and cost control, allowed us to improve our profitability sequentially.
All the margin values I will discuss are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts.
Q3 Gap earnings per share were $2.11 and are adjusted EPS was $2.33.
Commercial Food Service revenues were down 4% organically versus the prior year, and the adjusted EBITDA margin was nearly 27.5%.
While we are facing tough comps, order trends and thus revenues.
In Revenue, we consider Belize who progressed through the quarter. Given the top line challenge, we are generally pleased with our ability to preserve margins.
Bryan Mittelman: Infoode processing, revenues with a quarter were nearly $170 million, up nearly 1% over the prior year. We also saw orders weekend over the quarter and some projects were pushed out.
are adjusted even to our gym remains healthy at over 24.5%, which is an increase of over 50 basis points from Q2.
In residential, we saw an organic revenue to climb to 4.5% versus 2023. Yet we were able to expand the adjusted EBITDA margin to nearly 12%.
We delivered strong operating cash flows at $157 million for Q3, up nearly 5% over Q2.
Operating cash flows are over $700 million for the trailing forequarters.
and our free cash flow over the past 12 months exceeds $650 million, with a corresponding yield on revenue of nearly 17%.
Also, on a last 12 months basis, conversion on net income when excluding the prior year impairment charge is over 140%.
Our total leverage ratio is now down to 2.2 times.
Bryan Mittelman: Cashflow generation clearly remains a strong point for us. As I look to Q4, as as typical of our results, I expect that quarter to be our strongest one of the year.
The amount of free cash flow we expect to generate should exceed that of Q3. Also, our full year, 2024 free cash flow should exceed that from 2023.
Speaker Change: Continuing with some near-term outlook thoughts.
Given the conditions we are facing, my tone will be relatively cautious. Nonetheless, we still believe we will see sequential growth in Q4 over Q3.
For the total company, I do expect Q4 to be our best quarter of the year and revenue could again achieve $1 billion.
Speaker Change: This would represent 6% sequential growth and be close to flat to the prior year. This outlook is not without risk, but it is achievable. Even at that dollars and margins would also step up from Q3, it would likely be similar to prior year levels.
Speaker Change: Pivoting to offering some perspective on each of these segments, starting with commercial, for Q4, we anticipate revenues to be approximately flat to Q3 given the macroeconomic conditions impacting our customers ordering activity.
The resumpetential for slight growth, but that would require customer activity to reflect off from current rates. Moving on to food processing, and spite of the weaker than expected Q3, this segment remains in a relatively strong position.
Q4 revenues could exceed $200 million for the first time ever, which represents sequential growth high into the teens.
as well as about mid-singled Ditchick Rove on a year-over-year basis.
In residential, we anticipate revenues could be a high single digit sequentially and be around the prior year level.
Well, market conditions are creating revenue challenges. We've been for forrociously managing costs.
to preserve or expand our margins. For each segment, I expect Q4 EBITDA margins to be at least at Q3 levels with food processing, likely achieving the most sequential expansion.
Our enthusiasm and expectation for longer-term revenue growth and margin expansion remain in place.
In the face of clearly suboptimal market conditions, our focus on operational excellence can clearly be seen as we've probably delivered strong margins and solid cash flows.
Speaker Change: Our customer engagement remains strong and we expect increasing adoption of our solutions.
are multi-year outlook remains positive.
are innovations.
Along with our strength and operational execution, we'll power improved results. We're looking forward to returning to growth in 2025.
We will now begin the question and answer session to ask a question you would press star then one on a touch tone phone. If you are using a speaker phone please pick up your hands up before pressing the keys. If at any time your question has been pressed and you would like to withdraw your question please press star then two.
Speaker Change: The first question comes from Siri.
Bradis, from Jeffrey's Please Go ahead.
Thank you for taking the question. I'm just starting with commercial. Obviously, it came in a week or the next start in the quarter. You highlighted some challenges you're seeing in the restaurant space. Could just talk about what you need to see to have a pick-up and growth in the segment. And then, may just comment on the overall visibility in order trends as you went through the quarter.
Get the, I mean, let's kind of mention the order trends. We came into the corridor and they were pretty good.
and I give this kind of way.
I've thought that the engines had started and we've seen that the orders coming through, we've spent a lot of time with customers, both dealers, as well as chains and they kind of reiterated a lot of their plans for the back.
and the last couple of years of the year in their outlook. But that scene do weaken as we went through as I think just projects, whether it is upgrades, new stores, or some of the institutional projects just did not.
Happen. So I think they're still out there, but I think the execution has been tough. And I think a lot of that is because of the backdrop of the market and some of the, you know, the pressures that the restaurant operators are facing.
So...
Speaker Change: I think that's what we saw through the corridor. We still engage with a lot of those customers. The pipeline is out there. They still have part-time involved. Store opening and certainly over the longer term have some pretty large targets out there for expanding. And that's both a larger change as well as fast casual change.
Speaker Change: I think they're kind of also clearing the underbrush with maybe some of the non-operating stores reassessing how the plans that they have. But we do believe that some of that will resurface and pick up this. This is going to 2025.
Speaker Change: I would also add, even though we're seeing this push of primarily new store openings from obviously the third quarter and probably some from the fourth quarter.
The vast majority of our chain customers have really reiterated the total number of new stores still sticking to the plan.
Speaker Change: New stores for 25 playing catch up for the stores they didn't open in 24. So there's very few that actually reduce their number of stores in their pipeline. It's more just been the push out to the right that Tim referenced.
I think the big step up frankly just gets to back to where we're pre-cultiv. You know, as I mentioned in the opening comments,
We are at significantly for legacy business, you know, think about it that way, the indoor, you know, it's operating at much lower levels today. Fundamentally those businesses are stronger than they were pre-COVID in terms of.
Speaker Change: Structurally new products.
Quality, et cetera. And we continue to invest on that. So just getting back.
2, where we were pre-COVID, which we foresee will happen. That is a meaningful step up in the margins. It gets us something to closer to the 20%.
So, you know, time being a one that's going to happen is obviously the big question, but you know, it is a very difficult housing market right now is everybody knows it's not going to hold forever, which is where it's starting to come down.
Speaker Change: certainly votes well. So I'm going to think at some point we're going to have that as a tailwind.
is going to get back to normalized margins or normalized vines is kind of the big driver but on top of that I would say we've had significant investments in the platform in new products that lay on top of that which will get us to what we've kind of laid out as long longer term market products.
Speaker Change: I appreciate the color, thank you.
Speaker Change: The next question comes from Meg Dobry from Bears, since Go ahead.
Meg Dobry: Yes, good morning everyone.
Meg Dobry: I want to start with commercial food as well. I mean, your implied outlook here in the 4th quarter for flat revenues.
Meg Dobry: That diverges a bit from normal seasonality, right? I mean typically you do see several percentage point increases into your end. In your clear about the fact that there's been some pushouts on new story additions, but I'm wondering what you're seeing as far as your distributor is the normal kind of year end demand we're stocking that these guys do.
and what that implies for where the channel inventory lies and really kind of how that might progress into 25.
Yeah, good morning, Meg. It's Steve. Very good question. So I think historically you're correct the fourth quarter you would normally see actually both in chain development historically, fourth quarter would be the busiest quarter of the year and then as you're referencing more on our dealer and distributor part of our business, the fourth quarter historically you do see that bump.
Meg Dobry: I think this is over the last several years you've seen obviously a change in ordering patterns.
I think you will not see that historical bump from distributors for a couple of different reasons.
They're carrying less inventory than they have for a long time. I think we are well past.
Meg Dobry: and the Excess Immintory in the channel.
but they're also less willing to bring it inventory as they would say in historical years. Primarily driven by higher interest rates, the carrying cost of inventory is certainly higher than has been for a long time.
are lead times are also in a much better place so they can order in certainly much more real time. So they're trying to close that gap between order period and the time that the end user customer actually needs.
Meg Dobry: The product.
are also say it's a little bit of a nuance as well. You know, historically, you know, January 1 would be a common time to have price increases.
Meg Dobry: We've been going with price increases in a more frequent cadence over the last several years during different parts of the year. We don't have one planned this time for January 1. So I think there's just some different nuances this time where I don't expect.
the traditional or historical bump from distributors bringing inventory at year-end if that makes sense.
Does these stockings sort of extend or the headwinds that you kind of talked about? Does that extend into 2025?
I think these stocking mag is...
For the most part behind us.
Speaker Change: I think the nuance is as hopefully interest rates come down. I do expect that you could see dealer start to be more open to bring an inventory back to, I would say, more pre-COVID.
Speaker Change: Levels, so I think these talkings behind us, so that I think is...
A tailwind I think it's going to be a little bit wait and see as interest rates unfold next year. Again, the carrying cost of inventory is to you have the others will think about stock levels for next year.
Speaker Change: I think it's probably into the middle part of next year until you start to see probably the earlier starting to ramp back up from an inventory standpoint.
Okay. You mentioned that there's not going to be a price increase for 25.
How do you think about the...
The cost that are embedded in this segment, there's obviously materials but a whole host of other items as well, of freight wages that wherever zoom you do have some inflation. And given the fact that we are in the environment that we're in today,
Speaker Change: I guess one of the things that I find a little bit surprising is that we have seen some kind of a formal, either restructuring or cost savings initiative that investors can consider as they think about next year.
So in referencing him, we're not having a January 1 pricing increase, that I should have clarified that it's not me, we will not take pricing, we're appropriate.
Speaker Change: in 25. I think we over the last several years I've mentioned on several calls I think pricing.
Speaker Change: fought fullness around mix has been one of the most strategic initiatives.
in the company, I'll hit this plight chain sign just second, but from a pricing standpoint, I think we've been very good over the last several years going back to when inflation really was spiking of taking.
Speaker Change: Price of Central Price increases to play catch up.
Speaker Change: We did catch up.
Speaker Change: But now you still do see pockets of inflation, whether it's in specific components, whether it is in labor, whether you have transportation when there were, you know, the port issues going on on on the coasts.
Speaker Change: Container, Cost, Continue to Evan Flow. I think we remain very thoughtful about that. And there are specific prox that have taken pricing even as late as the last several months just to make sure we're staying on top of it.
Speaker Change: I think from a supply chain standpoint, again I said before one of the best things that has happened is a by-product of COVID is I think our supply chain really acts and things more as middle-be across all three of our platforms.
Speaker Change: and so I do think you see savings behind the scenes, whether it's on steel or some materials, whether actually it's on logistics.
Thank you more as Middle B, and I think that continues in the next year. So I guess I would say we're trying to hit from both sides, continue to be thoughtful about pricing. We're not afraid to take pricing next year if we feel like it's warranted being mindful of...
Certainly compared to backdrop while also, I think, contained a leverage and there will be supply chains for savings from our suppliers and logistics partners.
Let me address the restructuring side of things. We have actually been consistently taking restructuring actions throughout the year and I'll say it's...
You know, it's add over the course of the year in terms of, you know, which of the segments maybe have had more, you know, impact.
Speaker Change: you know from that but we have reduced head count.
Speaker Change: by hundreds of people.
We've put in a lot of actions regarding what we would call in the more manageable or discretionary types of expenses. And you are seeing the results of that in our...
Speaker Change: in our margins, right? We've been able to, you know, I'll say, have strong maintain some expansion in margins, you know, even given the top line challenges. So the restructuring has been, you know.
Acted and Unfortunately, but again, we're reactive to market conditions, consistent over the course of really the past two years. Let's say again, residential is probably more leading on that earlier in the phase.
expanded more into commercial and food processing has not been exempt from actions either.
Make those run over about 50 million so that's something that we...
We did it now, but we started to put in place in...
The second quarter, but a lot of that.
So, certainly, you know, was starting the belt which we've always, you know, do kind of managing the current.
Environment, but a lot of that is also accelerating.
Speaker Change: in some of the long-term structural initiatives that we have to get to higher profit margins. Some of that is what's allowing us to deliver.
Speaker Change: the strong margins which will bind returns to real full turn and due to banning the margins. That includes investments in new factories, world consulting, manufacturing.
Speaker Change: and some of the investments that you've seen in capital equipment as well as we're driving the fiscities in the factories. So I think that's kind of all embedded in a lot of things. That's so aligned to maintain margins and on a long-term basis expand them.
Speaker Change: If I may want final question, it pertains to the SGNA line item.
Speaker Change: More notable decline, almost 9% is quarter.
Speaker Change: Can you comment at all as to how you see that in the fourth quarter and as we think about next year is there room to continue to work on this line item particularly if volumes remain relatively weak. Thank you.
Speaker Change: Yeah, so I'd expect, you know, cue for, again, be relatively consistent with cue three as we've talked about how results are likely shake out. You know, certainly I just mentioned that we've been taking, you know, headcount and cost control actions. There was certainly, you know, lower, you know, compensation, incentive compensation, relating costs.
and this year, and professional fees have been down. I mean, to a certain extent, is the business recovers? I'm going to especially as it relates to...
Speaker Change: you know incentive compensation at you know a cross-art tire organization you know that could happen up tick but again you know where
in general, you know, don't expect dramatic shifts in our overall SGANA. We know we tend to be pretty frugal to start with and again, I think we've laid out that we've been addressing the costs pretty, you know, actively over the past, you know, couple of years.
Thank you.
The next question comes from Bryan, McNamara of Canacore Genuity. Please go ahead.
Bryan McNamara: Good morning guys, thanks for taking the question.
Hey, to be the dead horse on commercial here, but I'm curious if you could drill that on what restaurant concepts are driving this dynamic on closures. Is it contained in the pendants? I believe they're like a little double the different set of second sales. And what gives you confidence the market will return to Unic Growth next year out of some openings being pushed out? Is that just change strength?
Yeah, I think there's probably two things that we looked to. I mean certainly it's the conversations that we're having with our chain customers and what they're restaurant expansion plans are both in the near term as well as a lot of their longer term goals that they've set out which many of them are public.
Bryan McNamara: The other is industry forecast, so there are forecasts out there for the industry. Certainly a lot of the closure situation mentioned happen more on.
The independent side, but certainly that has also happened with some of the chains. Casual dying chains have been hit a bit harder than...
and some of the quickserve chains.
We think a lot of what's happening there is you've got some of the less healthy concepts that either, you know, those locations are getting closed and perhaps to reopen in other spots.
Speaker Change: and that kind of recess the table for the better chains to expand from a stronger base. So really it's the industry forecast and the comments that we're getting from our chain customers and we're engaged with their plans.
If I could just add, I know we spent a lot of time focusing on obviously new store openings and that is a big part.
of our growth primarily with the QSRs and the past casual, the Ocecments.
I think to put the new Star openings aside for just a moment which we are still positive on for next year.
Speaker Change: I keep saying all challenges that all the restaurant's face still remain and they're looking to us more and more as they think about the uniconomics of opening up restaurants continue to bring on French, A.C. is expanding to international markets.
Again, that can be labor, to be utility cost, be a service consistency. You take your pick. I think James Highlighting, the Neacabroiler is a great example of that. Here's a piece of equipment actually. It's more expensive, but it pays for itself in such a short period of time when you look at the utility costs.
and you look at the maintenance costs. I think we're focusing on this call a lot on new store openings, but the fundamentals.
of what our customers are facing every day. They're really not a part of the restaurant that I think can impact. So positively those challenges with their faces. So I think that's another reason why we continue to be so positive about the next couple of years.
Speaker Change: No matter what happens from a new store opening, kind of, Evan Flow, they still have to solve those challenges and we're well positioned to help them do so.
And then just secondly, on the lack of a gen, one pricing, increasing commercial, I don't think you break out pricing versus volumes in that segment. But it's based on its own volumes that have been materially down the last couple of years. We've heard some franchises in the market, oh pine, that's some of the bigger players taking too much pricing and we're wondering if that's factoring into some of the weakness you're experiencing.
Speaker Change: Thanks.
Yeah, um...
especially Bryan Mittelman here especially as we look over, you know, I'll say the past year where, you know, pricing, actions have been more muted, right? I think it's fair to assume that, you know, volume is largely aligning with, you know, what you're seeing in the revenue line overall.
I would also run a Steve again. I would just a reminder that over the last several years we have been very mindful and thoughtful about our mix and as part of that we did exit a number of low margin, you know, tough to build, skews.
Speaker Change: in that process. So, yes, I do think there are volume challenges that you're referencing, but we also use the time to be very thoughtful about getting out of low margin products.
Speaker Change: that we're not obviously positively contributing to the overall margins for the company. So I don't want to lose sight of that. There's still a dynamic that you're referencing, but there also is this element of Prox that we did exit over the last two or three years.
Speaker Change: Very helpful, thanks guys.
The next question comes from Jeff Hammond from Keybank. Please go ahead.
Jeff Hammond: Hey, good morning guys.
Jeff Hammond: Just back on the score opening, you know, kind of deferral delay. Yeah, I'm just trying to get a better sense of, you know, how much of this is kind of permitting delays versus just, you know, uncertainty freees and...
Jeff Hammond: and what gives you the confidence, you know, they just don't keep pushing to the right versus kind of this ketchup, you know, thesis in 2025.
Speaker Change: I think it's hard to have the crystal ball to be honest with you. I think they've been pushing through the right for a while.
So I think that's one thing. At some point they just really need to pull the trigger and replace and upgrade. I think that's...
that is one dynamic, Steve just touching on it, right? Like they've been looking at a lot of these solutions for a long time. Some of our customers talk about it regularly, I'm calls, you know, things that they're looking at to do that transform their...
you know, the operations, as you kind of go through dynamic periods like this with uncertain and traffic, food cost moving into different places, such as rates where they land.
Speaker Change: and difficulty in terms of getting, you know, like the getting permits, which do take a lot longer. Things have just have extended, but I think the fundamental...
Issues that they're dealing with and also the comments that we're getting.
Lee to hey, they're going to move forward on some of this. A lot of our customers come to us and their concerns are going to be able to.
Producing up to keep up with their demand. We actually had a lot of pressure on that coming into third quarter. I think ultimately they really need to pull the trigger on some of these things to move forward in their business.
So we think that is going to start showing up as we move in the next year.
Speaker Change: Okay then.
Cable, you know, cash will balance you, and I'm just, you're working capital turns it kind of extended, free cash will seems to be a little bit better, but just maybe talk about it.
What you're doing to kind of bring working capital turns back into check and maybe what the opportunity is for working capital source of cash. Then I'll just talk about your plans for the convert, the come-do next year.
Thanks for watching!
Speaker Change: I just, this is Bryan, as we think about working capital, inventory remains the key focus I think across AR, AP, and inventory. We have been continuing to bring down inventory levels this year, certainly the—
So what you did top line has impacted our ability to achieve all the inventory reductions we would like and you know, you have changed our management philosophy, you know, around that I should say a vault that you know we have incentive plans specifically addressing that in place so it really is, you know, a key focus.
I wouldn't say, you know, ARs, we look at the quality of the aging or the day sales, outstanding, has really degraded, but certainly we keep, you know, a watchful eye on that, especially given what's happening in the market.
you know the...
The good news a little bit here is that where there are some customer risks that actually tends to reside a little bit more with the dealers that are in between us and the end user than directly with us, but again we're not completely insulated from that. So inventory.
Remain a focus and I think there's well over a hundred million dollars of opportunity over the next year or two, at least.
to continue to bring that down. Or also, I'll say, as revenues improve, to maybe inventory levels don't come down. But anyways, the overall, you know, net metric really there is the days inventory on hand. So there's still a good amount of improvement we expect to drive in that over the next year or two.
and then pivoting to your question on the, you know, converts.
Speaker Change: We have a variety of options available to us.
Speaker Change: Certainly we have capacity under our credit facility to, I'll say, we finance that.
We have a healthy amount of cash on our balance sheet which we can use to...
addressed that as well. We also expect to be continuing to do M&A. And then there are obviously other debt markets available to us, whether it's converts, high yields, you know, turn B. So, you know, we will, you know, we do regular look at that, you know, given where the convert, what it convert is currently costing us, which is, you know, a 1% interest rate. We have not been in a hurry to take that off our books, but we'll continue to evaluate what are our cash level and what are the, you know, the best debt options, as that gets closer to maturity.
Speaker Change: Thank you.
Speaker Change: and the other.
The next question comes from Tammy Zicaria from JP Morgan. Please go ahead.
Hi, good morning. Thank you so much for taking my questions.
My first question is on the services side of the commercial food segment. What are you seeing there? And do you have any plans to store up capacity for services? We've heard some of your peers talk about increasing the thickness and cleat.
Speaker Change: So curious how you're thinking about that going into next year.
Well, service has been a challenge for many industries. That's certainly, we've really seen it across all.
3 of ours, a lot of service technicians went out of the industry during COVID.
We've been very focused on that hiring back technicians into our network.
Speaker Change: and then training those technicians because once you get them on, you really got to get them up and running. It's one of the reasons James called that out and is slide that.
Speaker Change: We've got significant strategies around that of how we provide, also a game-changing service in the future, but I think in the near term as a pillar of that is making sure that we've got a very strong
Service Organization, the number of service agents that we have today.
has grown significantly from where we were about a year or 18 months ago. And that's been in large part with the efforts that we've had to support.
Speaker Change: and the partners in the area and now we're very focused on having industry leading training for those agents both physically and digitally. So we've been kind of well on our way to kind of address which was an industry wide.
Challenge to become kind of the leader in service not only making sure that we have enough trained technicians but really some unique programs that we get off our cross, our brands and the future.
God, I thank you. That was my question.
Speaker Change: Next question comes from Walt Liptaque from Seaport. Please go ahead.
I think it's good work on the margin and it sounds like you've got things in place to continue to improve the margins. You know, in the past you talked about getting to a 30% commercial margin.
Over the next couple of years, is that still the target?
Speaker Change: Yeah, it didn't spill the target, yeah.
I mean I think right now we're holding, you know what we think are very strong.
Speaker Change: Respectable, you know, margins, I think were there, you know, by a few standards were one of the leaders and we're doing that need.
A tough period while we've tightened the belt as Bryan said, you know, a lot of the initiatives that we have.
is a strategic in nature as well and I just kind of remind everybody that.
Speaker Change: in a while ago.
Speaker Change: Tating the belt in the spirit were kind of doubling down on a lot of the strategic investments that we think will help us.
Drive, Grilled for the future and part of that is also...
and Hansen, our mix of products, is Steve Touchdown.
Exited a lot of low margin products, but we're really focused on growing.
are greatest innovations and I think we haven't really seen a lot of the benefits of
of that yet because a lot of that is what is in
Speaker Change: and the pipeline. Those are the solutions that have a high ROI to the customer. Again, the nickel brothers are a great example that we're working with at customers. And, you know, as that pipeline.
Speaker Change: comes through, you know, which is an investment today that comes through with growth in the higher margin. So that is part of the bridge to get to the 30% and that's what we kind of rolled through the next several years.
Okay, make sense, thanks. And just a couple more, one, most of the discussions sounds like it's sort of global. I wonder if there's any delineation you can make between, you know, Northern America, US, fails versus international.
Speaker Change: I think the North America has been tougher as a way. I mean, Europe, I think it's C.S. as well as other companies that fare better in that market. The other thing probably to...
to call out as Asia, has been a soccer spot for most companies that are at WEEV.
Speaker Change: Got a lot of new products coming out in that market and there is chain.
Speaker Change: Expansion that is planned there, but there are dynamics of that market too which is kind of fed into the results for the quarter two of his ages. It's been stronger.
and the back half. But if you look at that market, particularly as you expand outside of just China and to other regions in Asia as well as India, which we feel pretty strong about, we see some longer term growth going there. But in the near term, that's been a handwind.
I'm now just adding two more nuances in commercial specifically. I think...
Speaker Change: Talks about prior calls, Europe has been an area of reinvestment and thinking through a completely new strategy approach with the team there.
I think we're really starting to see the payoff of having the innovation kitchen and Madrid, we're seeing the payoff having the innovation kitchen and Wiggin, the UK, and plans to continue to bring future innovation kitchens to both the Middle East and to other parts of Europe.
Speaker Change: I think we're also called out in Latin America specific to the quarter.
Some of that growth is really starting to be driven by ice and beverage. So I think it's exciting to see.
Speaker Change: and some adoption outside the core products in Latin America specifically. So I would say Latin America Europe and Middle East were certainly the positive from an international standpoint for the quarter.
Okay, great. Thanks for that color. And then last one for me, Chipotle has been, you know, test the out that double-sided drill and it sounds like they might be moving forward with a rollout in 2025, I wonder if you make any comments on that.
I think we will much about Lamak, their comments about their plans. I would just comment that the double-sided growl is a great example of automation.
and a new product that we've had in the market where we've had success with a number of customers in the demonstrates. Really, you know, again how we're focused on innovation.
It's in a pipeline and it's delivering significant potential ROI to our customers. So it's one of the great products that we've introduced for the last several years.
Speaker Change: Okay, great, thank you.
We have a follow-up question from Meg Dobry. Please go ahead.
Meg Dobry: Yeah, thanks. I just wanted to follow up on Jeff's balance sheet question. So, you know, your cash balance has been building north of 600 million now.
and obviously you've got this call of 750 million bond maturing next year. Are we to sort of infer here that you're allowing this cash balance to build to potentially...
Speaker Change: and I kind of paid down that bond as that idea because...
Speaker Change: I suspect that just purely refinancing that generates another 50 cents of EPS drag give or take. And then also related to this.
How do you think about capital deployment going forward because...
Speaker Change: Look, I mean, you're...
Speaker Change: Your stock multiple has continued compressing so the valuation is looking different than it looked a few years ago And obviously we're kind of going through a cyclically more difficult time period. Is it is it fair to say that at this point?
Chair by bags are actually a pretty decent alternative for capital deployment relative to other things that you might do. Thank you.
This is Bryan. We are not a QE-related cash with solely the intent.
of you know, air-marking those dollars to you know directly.
Speaker Change: Pay off the convert. We have no balance outstanding under our revolver right now. If we were to pay off anything on the term loan, you don't have the ability to...
Axis that again and we are I would say earning a fairly decent
Rates on our cash balances as we look at that versus our incremental borrowing costs such that we have decided for now to let the...
your cash balance gross on.
Speaker Change: You know, we do expect M&A activity to be picking up so there will be some deployment of cash for that that we anticipate. You know, also we tend to generate more cash in the back half of the year and then there's some, you know, a little bit more utilization at times in the front half.
Speaker Change: of the year. So I think right now we're just an appointed of...
Speaker Change: Flexibility and
We certainly do understand that interest rates today are higher than when we entered into that convert. Obviously, when you are sure convert the total cost isn't just...
Speaker Change: you know the coupon rate and you know you overall have seen our leverage coming down. So again we will be looking at how to best structure you know the the depth side of things over the you know over the next year.
Also appreciate your perspective on capitalification. Obviously we have been growing the amount of annual cash flow that we generate and we are continuing to evaluate.
Speaker Change: should some of that cash be allocated in a matter maybe a little different from historically where it's been a large focus on.
Speaker Change: and M&A, and our evaluating other ways to utilize a cash including different ways of return of capital to shareholders.
Speaker Change: Alright, we should have.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Tim FitzGerald for closing remarks.
Thank you again everybody for joining us today's call. In closing I would like to reiterate that while we have...
Speaker Change: and Hope Macarok and Abba conditions are more favorable and in Flex sooner we believe we are currently at the trough for several of our segments.
and we're confident the challenges we face today will turn into the tailwinds.
Speaker Change: for the quarters ahead and lead into a longer-term recovery. We're poised to win as our positioning across all three of our businesses stronger than ever, leading in technology and innovation.
Speaker Change: [inaudible]
We're confident these strategies and investments we have made will pay dividends as the market conditions continue to improve further extending our leadership over the next several years. That's it for today and thank you everybody for attending today's call. Have a great day.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: and the other.
Speaker Change: [inaudible]