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.

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…

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…

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…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Saree Boroditsky of Jefferies. Please go ahead.

Hi, good morning. So residential, it took another step down this quarter. Can you just break out the performance in grills versus the remainder of the business? How do you think about underlying demand versus destocking? And lastly, is there any benefit from lapping the destock as we think about growth next year?

Thanks, Saree. This is Bryan. At this point, I would say that, grills are not really a, I'll call it, a differentiated performer versus the other product lines we have. There are challenges in a variety of them and some bright spots as well. But as we've noted before, Q3 is always the low point of the year for that Grill business. And given where stocks are and such, we're not expecting much, much growth there. And we've noted that, our customers are expected to order in, in a different manner. And with different timing, I would say, for this upcoming growth season that's -- or the one that's really kind of just starting than in the past where they're going to order a little bit later in the season and restocking probably for more domestic shipments than from the direct plant sources. So Q4 will still be a bit of a challenge then given that we're in these trying times, and we were still in the last year. And we think things really improve as we move into the back half of the year, and then have the easier comps, obviously, to lap. I know, there was another part of your question in there, but you threw a bunch. I mean, can you remind me what I'm missing there?

Yeah. Just how are you thinking about underlying the destocking and then just the benefit of that destock as we think about next year?

Yes. So Saree, I mean, I think the destock turns into a tailwind at some point, right, because the sell-through is higher, obviously, than what our incoming order rates are as inventories coming out of the channel. And then as Bryan alluded to, people are also less reticent to stock back up, because a couple of reasons not only the market outlook, but our lead times are much shorter than they were before as well. So I think as you play that out and you go through next year, the destock, which is a negative even if it's neutral, that's a positive for us. So -- and then also on the orders, I mean, we've seen them kind of trough out, so to speak, as well. So I mean I think they're starting to albeit at much lower levels, they're starting to normalize and inflect back up. So I think we're getting close to the -- the turn, but again, a lot of uncertainty and market conditions going into next year.

I appreciate the additional color. Can you just talk about what you're seeing from an order perspective in food processing? You talked about growing next year. But how do we think about the benefit of incoming backlog on this year? And does that create a challenging comp for organic growth in 2024?

Yes. This is Bryan. We certainly had very strong backlogs entering this year. But a lot of these projects take a while. And I would say we still have very healthy backlogs today. That is part of the reason that gives us confidence looking into next year, again, looking at what's in the backlog and knowing when those projects continue. The orders have been steady the past couple of quarters, albeit not at the highest levels that we had seen, let's say, maybe the middle end of last year, again, given the interest rate environment and what's going on with underlying food costs. But there still is a lot of interest out there. We still are engaging with our customers. We are still winning opportunities, and they're also looking at, they believe inflection point on some of the food costs, which we hope can open up to more robust ordering times. And then we'll also see how interest rates play out. I think Tim might add.

The only other thing I'll add to our pipeline is very strong. So that's one of the things that we track. So that has actually grown. I think what we're seeing is that there's a bit of seeing a little bit longer to place orders, right, given where interest rates are and kind of understanding the outlook for next year with input prices for them, which is largely food. But I think we're -- what is promising is the level of activity, quoting, what is that pipeline, just a little bit longer for that to convert right now in this period. But I think that right now, given we've got a strong backlog coming in and a solid pipeline, we feel pretty good about next year. The baking part of our business seems to be stronger right now. We just came off a trade show, which was an industry trade show, and we have got a very strong activity at that show. So that was promising as well. And I would say across the platform, we have made a lot of new products that are there and certainly built out the full-line solution. So those are really of interest to our customers because they're hitting on all the -- I'll say, key pain points for their business right now.

Appreciate all the color and I’ll pass it on.

The next question is from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey good morning guys.

Good morning.

Good morning, Jeff.

John, welcome aboard. Just I guess, on Commercial Foodservice, I'm just trying to parse out kind of this continued destocking versus demand weakening, wherein particularly, are you seeing demand weakness, any cracks in new store development as you look into next year? And just maybe lastly, how far along are we in this -- with this destock? Thanks.

Yes, Jeff, good morning, it's Steve. I would say maybe we'll start with kind of what the end user we're seeing. I think we've talked about on prior calls, obviously, the bigger chains have had a pretty healthy new store build plan really in the last year or two, I do think that continues. But what we have seen is some shifting around of that pipeline moving out a bit just with challenges they're having on whether it's permitting or construction, still some supply chain issues that are faced on construction. So in interest rates, pushing some of those stores out into next year at this point. So I would say they haven't reduced any of their kind -- overall pipeline. It's just more of a timing that's pushed out. That pushout does play a role then into the destocking side of it because a lot of where we've seen the excess inventory in the channel show up has actually been for chain customers, right? Think about the last year or two with longer lead times, the dealers or the KS is replacing orders far out trying to bring in inventory to keep up with the chain demand. And as we've caught up on our side and then some of the stores pushing out, that's what's creating this excess inventory in the channel. So I do think we are on definitely the back side of it. I mean, again, I think the positive is being very close with a lot of our dealer channel partners. They're seeing the sell-through on their side to become more and more positive. I think it's just a matter of time, obviously, I think over the next quarter or two where the destock becomes less of a headwind than we kind of get back to "more of a normal ordering pattern.'' Does that make sense.

Yes, that's very helpful. Just on the margin targets. I understand Res Kitchen probably need some volume help. But as you look at commercial food and food processing. I guess if we were to have kind of a flattish demand environment in the next two years, do you see yourself being able to get to those margin targets within that time frame? Just kind of how much does self-help and how much needs to come from kind of volume tailwind?

This is Bryan. There is not, I'll call it, an overweighted amount of that comes from volume. I mean volume is somewhat of a contributor because I think the volume also gets after customers adopting more of that leading technologies and such. But I think if you look at -- we'll actually post some bar chart, some waterfall charts on it by tomorrow morning as we'll be attending a conference. And you'll see, I'll say, three quarters of the driver of it are from mix or self-help type measures, whether it's improving costs, the integration activities and the like.

Okay. Appreciate it.

You bet.

The next question is from Tim Thein of Citi.

Thanks. Good morning. I think, Bryan, I think you're touching on this, but just going back to a year ago, being down in Dallas, you outlined some of the drivers for commercial to get to that journey to 30% plus margins and price cost and sales mix were two big drivers of that. You've touched a lot on the sales mix. Where are we in terms of price cost and obviously, the market outlook isn't quite as robust as it was a year ago. I'm just curious as to your confidence level in terms of that being significant of a tailwind for Middleby looking out to 2024 and beyond?

Yes. As I look at it, I'll say in commercial that we're operating, let's call it, around 27.5% or so, right? And we need to get to 30% over the next couple of years. How we've gotten to the 27.5% over the past couple of years? Obviously, there's been some price/cost in there as well as the self-help and a bunch of mix. As we look at what's left to be done, I would say price cost is a good chunk of it. But a lot of that at this point, I will say, it's more of the cost side of it as opposed to the price side of it because we think pricing will be more moderate going forward. But we do have some cost benefit coming through as we work down inventory and as we manage our costs and look at what's happening in commodities, as well. So, again, fortunately, this journey is not just dependent on volume or it isn't just dependent on, again, taking price. And again, you'll see by tomorrow that price piece of it is not as much. But we still have operating efficiencies and acquisition integration, maturing of businesses we had a little bit of volume of some undersized businesses helps as well. And again, mix is not one to be, I'll say, underappreciated either.

Got it. Okay. And then I don't know if it's for you or Steve. Where would you to the extent you can get at this, where revenues for commercial will be, call it, 30% higher than pre-COVID or since 2019. Where do you think volumes for that business are relative to 2019? I'm just curious how much -- where we sit just from a throughput standpoint compared to that time.

This is Bryan. I'll start with it, and then Steve can jump in. Volumes are a tough one to put out there just given how many different brands we have out there. But I think as you look to correlate that also with looking at, I'll say, the number of establishments that are out there, there is building going on. But I wouldn't say that volumes are up appreciably, obviously, we've had a good amount of pricing coming in over that period and then are starting -- have been seeing some of the benefits from, I'll call it, the unit expansion, but we believe there's more volume gains to be had as build-out plans continue. And as people trade into higher technology solutions.

Yes, this is Steve. I would just add on to that. I agree with all the comments. Obviously, we've had the benefit of pricing over the last year or two, which certainly gets a little bit tougher from a pricing standpoint going into the next couple of years. So it definitely shifts back to volume. I fundamentally come back to probably three key initiatives Tim, and what's driving that. Again, we talked about new store development that continues. I do think I've said before in prior calls, the replacement cycle that has been kicked down the road from going into COVID, got kicked down the road going through supply chain, new store priority. So I still think you have that underlying replacement cycle that has to take place And then you still have all the issues that all of our customers still have to address whether it's labor, whether it's utilities going up more and more. So I think when you kind of think about those three underlying demand drivers, that's where I think you really still see the volumes start to pick back up, call it, over the next year or two and away from, obviously, the pricing benefit we've seen in the last 12 to 18 months.

Got it. Okay. Thank you.

[Operator Instructions] Next question is from Tami Zakaria of JPMorgan. Please go ahead.

Hi. Good morning. Thank you so much. So on Slide 9 of your presentation, I think there are some targets for EBITDA margin for the year. That would suggest both commercial food service and food processing EBITDA margins down sequentially. And so could you walk us through some of the puts and takes behind that sequential step down

I'm going to -- unfortunately -- this is Bryan, by the way, I have to disagree with you. I don't think we are seeing a step down in Q4 versus Q3. I think as I noted, food processing should at least be the same as Q3, and commercial is also expected to be in a similar neighborhood. I mean, the numbers in the 2023 column there is a rough forecast, a rough estimate for the year in total, not for specifically the fourth quarter. So I don't know if that makes a difference and how are you reviewing the numbers versus how we believe they will come to be.

For sure, for sure. Great. And then my second question is, I think we've heard some home appliance companies in recent weeks talk about some higher promotional activity, especially in North America. Is that -- does that also relate to the high-end segment that you service as part of the residential kitchen segment, and how are you thinking about price versus price realization in the fourth quarter or even for next year as we prepare for the next spring selling season?

Yeah. So there's definitely some promotional pricing that's going on at, I'll say, lower levels. And I think one of the reasons we've put together the portfolio that we have is it's premium performance, we sit in a different category versus, I'll say, the white goods guide. So on the margins, we're trying to be very smart and tactical on pricing. Pricing has moved around a lot in the last couple of years given all the inflationary impacts. And so we will look at that tactically. But it's more resilient at that top luxury end of the appliance market. So I mean I think we're not seeing quite the same impact that the other guys would.

Got it, great. Thank you so much.

The next question is from Brian McNamara of Canaccord Genuity. Please go ahead.

Hey, good morning guys. Thanks for taking our questions. First, we're wondering if you're seeing any change in your restaurant customers order behaviors given the recent popularity in these GLP-1 drugs. It feels like several restaurant stocks along with your own have reacted negatively to the news flow over the last couple of months?

So it's very early on. I mean I don't think anybody has seen any impact to actual behaviors of orders, business, people walk in, if you listen to the CEOs of other restaurant chains, et cetera. So, obviously, it's getting a lot of headline news. It's too early to indicate what the long-term ramifications are of that. But I mean I think we don't expect that there would be really any significant long-term impact to our business at this point in time right now.

Great. And secondly, can you confirm that your tailored double-sided grills are being trialed with a popular Mexican fast casual grill chain? And if so, how is that testing phase going? Thanks.

So we never talk about what's been trialed out there, obviously, sometimes you can walk into a restaurant and see a brand of equipment. But I would just say that we've talked about a lot of our leading automation that we've come out with over the last number of years that are helping drive throughput, labor, small footprint, efficiency, et cetera, Taylor has been certainly one of those products that James has spotlighted some of the past calls, and it is part of a great example amongst others, such as ICE that James covered on this call that I think are going to be. We've got differentiated products that are going to be growth drivers going forward. So I'll just comment that, that is one of those exciting products.

Fair enough. Thanks, guys.

Yeah. Thank you.

The next question is from Mircea Dobre of Baird. Please go ahead.

Good morning. Thank you for taking the question. Just a quick clarification here on residential your intro comments mentioned that revenue is going to be up sequentially in Q4 versus Q3. And I'm curious as to what exactly is giving you confidence that that's going to be the case? And then as you look into 2024, recognizing that some of the macro concerns are still with us, do you expect revenue in residential to continue to build sequentially relative to Q4 or not?

This is Bryan. I'll start with the second part. Q4 for residential usually is a bigger quarter. There is some seasonality in some of the businesses where Q4 tends to be higher. We'll have to see a little bit how it plays out because while those will go away, it does start to pick up typically on the outdoor side of things across all our outdoor businesses. But obviously, there's the stocking issue. So we have not specifically mapped out a quarterly trajectory for next year. But I do put out there that Q4 tends to be stronger than Q1. But then thinking about Q4 versus Q3, really, I think your question was across the segments. Food Processing, there I say always has a strong Q4. There's a lot of deliveries that get made to customers. They want to get things in their plants. And so say, we have very high confidence there. We noted that Q4 is going to be similar to Q3 on the commercial side of things. There's just been enough I'll call it, volatility in ordering, while destocking is mitigating, there's also, I'll say, a little bit of slowness in maybe the restocking, given everyone's focus on working capital. So that makes that one a little bit harder to precisely predict. And I'd say in residential, we also feel fairly comfortable that Q4 is above Q3 as we look how order patterns have, I'll say, stabilized, steady some recently. And then again, there's some seasonal benefits in a couple of the businesses. So that's kind of the quick perspective on how we view things coming together.

Yes. But Mircea just -- maybe this is repetitive, but your question is on residential. I think to go into next year if the headwinds neutralize that starts to equal growth for us, right? And right, because I think the destocking starts to go away. There's not inventory. The typical load-ins that you would have at least on, let's say, outdoor business that are not happening because people are also tepid on that. You're going to start to see better sell-through during the grill season and then orders, albeit lower, they're kind of troughed, so we're starting to see them flick back up. So it doesn't need to be a great market to start seeing things, improving and growing. And if housing and remodel starts to pick up, then that ends up kind of being at or on top of that. So I think that's kind of how we think about it as you play out multiple quarters going through next year.

Yes. And that was really the nature of my question. I was wondering, if we could take a look at Q3 and sort of say, this is the trough point for both revenue and margin because if you're right about destocking being at an end and at least in theory, sequentially, if you should start to see some incremental benefit from the channel normalizing and maybe even potentially some restock as you go into the selling season in the spring. That's kind of what I'm getting at.

Yes. I think that's how we're thinking about it is how you are also thinking about it.

Okay. And then my last question, again, in your prepared remarks, you talked about backlog still being elevated in Commercial Foodservice. And that providing some level of support to 2024. Can you put a finer point on that? Can you comment at all as to where backlog currently is where you expect it exiting 2023 and how that expect for 2024.

Elevated at this point. I mean, I would say that we're largely back to normal. We've got a lot of brands. So as you kind of pick through it, there are still a few that we've got a larger backlog, given either level of orders along with supply chain being able to keep up with us. But I mean, I think that's more the exception to the rule, I would say, probably 90% of our companies are back to a normal lead time and backlog.

Okay. Thank you.

The next question is from Walter Liptak of Seaport. Please go ahead.

Hey, thanks. Good morning, guys. Wanted to ask sort of a follow-on from the last one on resi. And so if in the resi business, the margins are pretty low at this point. I wonder if you could talk about the cost out and operational excellence that you've done? And then if we do start to see growth in 2024, what does the volume leverage look like?

Yes. This is Bryan. We have taken restructuring charges, as you can see on our P&L and probably over half of them are in the residential area. And it -- and we do have, I'll call it, savings that are certainly a multiple of the charges we have taken. And again, those have been necessary based on the volumes we have and driving those margins. We do think things recover nicely here. Our incremental margins tend to be pretty healthy. And I think if you go back and look at where our revenue levels were, I'll call it, prior to these challenging times, if we get a couple of $100 million of revenue back, you'll start to see our margins -- getting to the upper teens again. So there's no reason they won't expand back to where they were before. And actually, we've done a variety of things, which you can't see right now to improve the businesses, improve processes, improve manufacturing, rationalize and make more efficient the distribution processes, again, you're not seeing those benefits now because we don't have the benefits of volume, right? So those are all the reasons why we still think we will drive back to 20% and above and on the path to 2025. And then, yes, on top of that, there's a variety of international market expansion opportunities, I'll say, on both sides of the pond. We've talked extensively about bringing European products into the North American market, and there's that has started and there's more to come. We’ve talked about grills expanding internationally, lots of international opportunities of expansion across all our all our brands as well in a variety of other initiatives. So certainly, we think we're at a low point. But there's a lot to be excited about in the portfolio. When -- and again, you look at the products themselves, the innovations, the expansions and all the things we've done on the cost side, right? We're really proud of what we've done with all our acquired businesses in terms of where their margins were when we bought them versus where they are today and where they are at better times. And so we know we will get back there. And again, with the portfolio and get even to higher levels than we were previously.

Okay. Great. And if I could just do another quick one.

Sure.

On pricing and specifically for commercial food service, there's still inflation out there even though it's come down. Do you plan on doing price increases at the beginning of 2024?

Yes. Walt, this is Steve. So I mean maybe just a quick recap of I think pricing broadly in commercial, again, been one of the most important strategic initiatives in the company trying to get ahead of, obviously, all the inflationary costs over the last 12 months to 24 months. So I'm very proud of the team. I think we do have good work to get the pricing through and now to a place where I think we can be a lot more thoughtful about pricing going to next year. I do think there are still products in our portfolio, Walt, where they're till more affected by certain components and supply chain, and we do still need to take a little bit of pricing on those products. But I do think, by and large, going into next year, I do not see us taking a lot of pricing further from a kind of a broad standpoint, certainly subject to any other kind of supply chain or world disruption that could cause further inflation. But I think at this point, I don't see us taking a whole lot more pricing going into the next year in commercial.

Okay. Great. Thank you.

That is all the questions we have today. I would like to turn the conference back over to management for closing remarks.

Well, thank you, everybody for joining us on today's call. And we look forward to speaking to you next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.