Yahoo Finance The Middleby Corporation (NASDAQ:MIDD) Q3 2023 Earnings Call Transcript
The Middleby Corporation (NASDAQ:MIDD) Q3 2023 Earnings Call Transcript November 8, 2023
The Middleby Corporation beats earnings expectations. Reported EPS is $2.35, expectations were $2.3.
Operator: Thank you for joining The Middleby Third Quarter Conference Call. With us today from management are CEO, Tim FitzGerald; CFO, Bryan Mittelman, Chief Commercial Officer, Steve Spittle; and Chief Technology and Operations Officer, James Pool, as well Vice President of Investor Relations, John Joyner. We will begin the call with opening remarks from management and then open the call for questions. Instructions on how to get into the queue will be given at that time. Please note this call is being recorded. Now, I’d like to turn the call over to Mr. FitzGerald. Please go ahead, sir.
Tim FitzGerald: Thank you, and good morning. Thanks for joining us today on our third quarter earnings call. As we begin, please note there are slides to accompany the call on the Investor page of our website. We're very excited to have joining us on today's call, John Joyner, our new Head of Investor Relations for Middleby. As many of you may know, John is joining us from BMO, where he did a tremendous job covering Middleby for many years. So he has a deep understanding of our industry with a passion for Middleby. Given the recent expansion and significant expansion and scale of our business over recent years, it was the right time to establish a dedicated leader for Investor Relations, and we are excited to have John, as the first to step into this role for Middleby.
I know John's presence will significantly benefit all of our current and future shareholders, and we are fortunate to have John now in the Middleby team. Now on to the quarter, we are pleased to have posted solid results reported -- reporting record earnings and cash flows in the quarter and for the year, driven by strong execution at both our commercial and our food processing businesses. We continue to make significant progress at our residential business, positioning for growth and a return to higher levels of profitability when the market recovers, while at the same time managing the near-term impacts of the challenging market conditions. We again posted overall improved profitability and are realizing the benefit of our profit actions as we progress toward our longer-term margin targets.
We are benefiting from our focus on new product innovation to drive improved profitability in our sales mix. We're realizing efficiency gains, reflecting the impact from our manufacturing investments, and we are focused on the long-term supply chain opportunities with ongoing product design and sourcing initiatives, providing for greater improvements over the next year. While market conditions have proven to be increasingly challenging, the inventory destocking, which has impacted our commercial and residential businesses will largely be normalized as we enter 2024 and we will start the year competitively positioned better than ever. At Commercial Foodservice, we have extended our leadership in electrified energy-efficient and ventless cooking solutions.
We have rapidly developed an innovative platform with exciting ice and beverage products in a large and growing market, and we are well on our way to establishing Middleby as the leader in controls, IoT and automated solutions, positioning us to capture the future of the commercial foodservice industry. At residential, we have the broadest portfolio of indoor and outdoor premium brands with a pipeline of innovation addressing the growing demand for energy-efficient electrified products and with initial launches of connected equipment now in the marketplace with more to come. At Food Processing, we have executed on our strategy of becoming a leading provider of best-in-class full-line integrated solutions for the protein and bakery markets. We are offering state-of-the-art automation to address growing labor and efficiency challenges and we have developed a portfolio of equipment to support our customers' efforts to achieve the sustainability goals for their operations.
We have successfully expanded in new markets such as bacon, cured meats, alternative protein and pet foods with additional targeted applications providing further growth opportunities ahead. Our substantial go-to-market investments, we believe are uniquely positioning us for long-term sustainable growth. With great progress made in establishing our digital sales and marketing capabilities, developing our industry leading culinary teams and the alignment of our sales channel and strategic partners. The investments we have made in our innovation centers continues to prove to be a strategic asset for our businesses, engagement at these innovation centers continues to be meaningful and is providing benefits across our commercial, residential and food processing businesses.
We are confident these investments of today are translating into a pipeline of opportunities ahead and we are in the early chapters of realizing the impact for all of our foodservice brands. While market conditions are undoubtedly more challenging across our businesses, given the effects of interest rates and macro conditions, we're continuing to focus on our business execution, while building upon our growing competitive advantage at each of our three industry-leading food service businesses that we are confident will set us apart in the long-term. Now I'll pass the call over to James to spotlight our ice businesses. It's a great fast-growing part of our exciting beverage platform, and a great example of recent strategic investments that we have made both through acquisition and new product innovation that have positioned us for a growth opportunity in a large and addressable market.
James?
James Pool: Thank you, Tim. I'm going to deviate for peer NPI and technical discussion this quarter to talk about one of our fastest-growing segments, Ice. With the acquisition of Icetro over a year ago, Middleby is more than a nugget or cubelet ice company. By the way, cubelet is proprietary and trademark name for it's nugget ice. We have the ability to satisfy demand for all types of ice, whether it's cubelet, nugget from Icetro, cube, hex cube or shaped ice. Our Ice portfolio has been one of the fastest-growing segments and commercial food service in 2023. And with the trend and the addition of two new Icetro products, we believe we'll see growth in the range of $50 million in 2024 with the growth continuing in the following years.
This growth is fueled by new trends -- marketplace trends around cubelet ice as well as Icetro's growth in the US and international markets as we go after Ice's, $1.75 billion to $2 billion global market space. Now on to trends. It's no secret cold beverages are growing at a very fast rate. In 2022, cold beverage sales increased 15% over hot beverages, while a leading coffee chain sees as much as 75% of their beverage mix being cold. This growth has led our customers to focus on more than just ingredients to craft their best beverage. They now appreciate ice's role in making the best ice coffee, ice craft beverages, blended beverages and fountain drinks. While, it’s cubelet ice produces the highest quality and highest margin drink for our customers.
This is for several reasons. First, cubelet ice chills the beverage faster due to its total surface area. It dilutes the beverage less as it has a higher percentage of frozen water compared to regular ice, and it allows the ice to absorb the flavor extending the beverage experience your soda or coffee is long gone, thus giving you a beverage that keeps on giving. While Chewblet ice is also safer and more sanitary as follows proprietary extrusion making process allowed us to extrude, i.e. Pump the ice up to 75 feet from the ice maker to two remote locations within the restaurant without employees having to carry buckets of ice or handle ice. With everything I've said, you would be surprised that Nuggets Ice is only around 20% of the global ice business.
The other 80% is cubed ice. With the introduction of our latest machines from ICETRO, the 1700 pound and 2000 pound machines which now complete ICETRO's full production lineup. ICETRO now has the ability to compete and take global market share as we look to expand our cubed ice business. ICETRO machines have a proven track record of reliability globally and have many features that benefited from our competition such as multi ingress and egress cooling, split panel access for sanitary servicing and a proprietary planning process to name a few. In the last comment before I turn it over to Brian, all Middleby products that require water use filters from TERRY Water filtration and when it comes to ice we believe that Terry's H2O Citrine water filter provides our customers with the best tasting ice.
Thank you and over to you Bryan.
Bryan Mittelman: Thanks James. I'm torn now. Do I leave my chubelet ice in my drink to keep it working so my drink stays cold or longer or do I chew it as I also enjoyed it in? I don't know, I'm really torn, but more importantly, Q3 gave us a lot to be excited about. Our performance was at record profitability levels and we also had record for operating cash flows for a quarter. We are on track for our best year ever in terms of EBITDA and operating cash flow generation and we are achieving this while facing challenging market conditions. Despite these challenges, we still delivered growth in two of our segments while achieving $981 million of revenue and an organic adjusted EBIT margin of 23%, up 100 basis points from Q2 and up even more over the prior year.
With nearly $224 million of adjusted EBITDA in the quarter, over the last 12 months, we are at nearly $900 million, an increase of over 10% from the prior LTM period. We continue to increase our profitability, EBITDA and cash flow generation even while in the midst of especially tough times for one of our segments. This demonstrates the resilience of our business model, which drives exceptional profitability and cash flows even in tough times. Amongst our strengths is our ability to execute in all conditions. While our total organic revenue was down due to the residential headwinds, we were still able to grow our adjusted EBITDA dollars for the quarter 5% over the prior year. Our total company margins expanded 140 basis points or 160 basis points organically over the prior year as well.
All the margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and FX impacts. GAAP earnings per share were $2.01. Adjusted EPS, which excludes amortization expense and non-operating pension income as well as other items noted in the reconciliation at the back of our press release, was $2.35 and 8% increase over the prior year. Commercial Foodservice revenues were up slightly organically over the prior year. Their adjusted EBITDA margin was 28.7%, up 200 basis points over the prior year. We are very pleased with how margins have continued to evolve as we see benefits from improved product mix from our capital investments, from operational improvements as we integrate acquired businesses, as well as from our constant focus on costs.
In Residential, we saw organic revenue decline of 21% versus 2022. The adjusted EBITDA margin was a little over 10%. For Food Processing, revenues of nearly $167 million, represents an increase of a little over 1% organically, with year-to-date growth of over 16%. Our adjusted EBITDA margin was 26.6% for the quarter, up 440 basis points over the prior year and we are just above 24% for the year. Our operating cash flow generation was a record at $219 million for the quarter. Over the past two quarters, we have reduced inventory levels by nearly $100 million. Over the last 12 months, our operating cash flows amounted to $532 million. In terms of cash conversion, our free cash flow for the last 12 months is at 97% of net income, and I expect it to be over 100% for fiscal 2023.
As we close Q3, our total leverage ratio moved down to 2.75 times. Looking forward, if we were not to make any acquisitions or stock buybacks, our leverage could move down to around two times by the end of 2024. And we currently have over $2.5 billion of borrowing capacity. While market conditions our revenue headwind, our focus on operational excellence, differentiated products and technologies and deep connectivity with our customers are driving our strong results. Middleby has always been known for healthy margins and cash flows. We are consistently growing them and the trend will continue. We remain bullish on our outlook over the coming years. Our actual margins are near our medium-term targets for Commercial and Food Processing. We anticipate achieving our target margins for these two segments on a full year basis within the next two fiscal years.
Residential continues to be profitable at levels well above peers. We have been taking actions to manage costs, while still investing in go-to-market strategies, production improvements, developing new products and entering new markets. These efforts, along with the benefits that will come from improved market conditions will keep us on track to reach our long-term goal of 25%, albeit taking longer and being harder to predict when given the current economic conditions. Nonetheless, given we do anticipate a period of high growth as housing and economic conditions improve, I will speculate that we can reach our target in three to four years. Bringing it back to the near-term, here are some quick thoughts on what we think 2023 will conclude. Starting with Resi.
Last quarter, I noted that we expected Q3 to hopefully be the trough, and our results obviously, reflect the challenging market conditions. Nonetheless, we do expect that Q4 can produce higher revenues than Q3 and at least maintain double-digit EBITDA margins. For food processing, Q4 will see higher revenues than Q3 and likely at least similar margins. For commercial, I expect Q4 to overall be fairly consistent with Q3 given current demand and the tail end of dealer destocking. Putting the three segments together, when looking at the total company potential Q4 performance, Revenue and earnings should be on par or slightly higher than Q3. Looking beyond the fourth quarter, it is obviously hard to know with great certainty what 2024 will look like.
However, I will share that our expectation is for modest top line growth and expanding margins across all our segments. For residential, our belief is generally based on the view that current market conditions will persist through the first half of the year, and we remain optimistic in believing there can be some improvements in the second half of the year. For food processing, interest rates in food costs continue to be a headwind. Nonetheless, given our backlog, pending opportunities and the benefits our full-line solutions offer, including addressing the demand for automation, food processing should see growth. Lastly, in commercial, while buying patterns have been somewhat volatile when considering our customers' ongoing build plans, rollout activities, increasing customer engagement with our leading technologies and a bit of elevated backlog, we also believe we will grow.
And while these comments have been revenue focused, we also expect to deliver more margin expansion. We've updated our view on that journey within the slides posted today. And regardless of market conditions, we remain focused on improving our sales mix. This has been a big contributor to the improvements seen to date as our best solutions solve our customers' most pressing needs. Furthermore, we are relentless and attacking costs, integration projects and driving operational efficiencies. Managing all these areas keeps us moving forward toward our targets. In conclusion, we are being disciplined. We are managing costs, we are focused on operational excellence. We are also continuing to make strategic investments that drive differentiated products and best-in-class go-to-market capabilities.
Our technical strengths, strong customer relationships and leading innovations will continue to drive success. This means even better cash flows and expanding margins. We are all hungry for the higher stock price we deserve based on the level of earnings, profitability and cash flow we have delivered. In the meantime, I'm off to our amazing new residential showroom in Chicago to see what our newest chefs, Kristin and Amy have created. Please stop by to experience our amazing platform for yourselves. And with that, thank you for listening, and we will now take your questions.
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