The Middleby Corporation (NASDAQ:MIDD) Q4 2023 Earnings Call Transcript
The Middleby Corporation (NASDAQ:MIDD) Q4 2023 Earnings Call Transcript February 20, 2024
The Middleby Corporation beats earnings expectations. Reported EPS is $2.65, expectations were $2.44. The Middleby Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for joining us for The Middleby Corporation Fourth Quarter Earnings Conference Call. With us today from management are Tim FitzGerald, CEO; Bryan Mittelman, CFO; James Pool, Chief Technology and Operations Officer; Steve Spittle, Chief Commercial Officer; and John Joyner, Vice President of Investor Relations. We will begin the call with comments from management, then open the line for questions. Instructions on how to get into the queue will be given at that time. Please note, this event is being recorded. I would now like to turn the conference over to Tim FitzGerald. Please go ahead.
Tim FitzGerald: Good morning. Thank you for joining us today on our fourth quarter earnings call. As we begin, please note, there are slides to accompany the call on the Investor page of our website. We are proud of the accomplishments The Middleby team delivered across the business in 2023. The year proved once again to be challenging marked by supply chain disruptions, inflationary costs, and the impact of interest rates, presenting operational challenges across all three businesses, and materially affecting the demand in our Residential business. Our teams focused on delivering every day for our customers while executing on our long-term strategic growth initiatives and delivering the strong financial results we reported for the year.
We're pleased to have closed 2023 with a record EBITDA eclipsing $900 million, record operating cash flows exceeding $600 million, and significant -- made significant progress towards the long-term profitability goals we've set out, achieving combined Company margins which expanded to over 22%. While delivering the financial performance for the year, we have continued to remain focused on investing in and advancing our strategic initiatives, launching industry-leading innovations in customer-focused solutions, developing our highly differentiated go-to-market capabilities, and investing in our operational capability to support profitability and growth. In 2023, we brought to market an exciting pipeline of innovations addressing operator needs and customer demand for automation, energy savings, labor reduction, speed, simplicity, and flexibility.
We expanded our offerings of electrified energy-efficient and ventless equipment. We launched our Middleby OneTouch control now across many of our commercial products. We furthered our lineup of integrated full-line solutions providing for the latest in automation for customers of our Food Processing Group. And we made significant strides expanding our offerings of IoT-enabled products now launching in the marketplace. Across all three of our Foodservice businesses, we enter 2024 with a portfolio of customer-focused solutions, positioning Middleby as the innovation leader with offerings to address the current and future trends of the market. In 2023, we continued to invest heavily in our go-to-market capabilities that we believe are uniquely positioning us for the long term.
We've made great progress developing our digital sales and marketing capabilities. We've expanded our Culinary and Food Science teams that engage with our customers on a daily basis, and we have deepened the partnerships with our strategic channel partners. The investments we have made in our innovation centers continue to prove to be a strategic asset for our businesses. With successful new additions in 2023 of our Middleby Innovation Kitchen in Madrid, serving our commercial customers internationally, and our Middleby Residential Showroom in Chicago, featuring exciting offerings across our Residential brands. Engagement at our innovation centers continues to be meaningful and is providing benefits across our Commercial, Residential, and Food Processing businesses.
In 2023, we continued to make smart investments in our operations with over $80 million invested in factory automation and facility expansion to bolster profitability initiatives across our businesses and support growth opportunities in our brands. In 2023, we were pleased with the improvements in our overall profitability as we progressed towards our longer-term margin targets. We are benefiting from our focus on new product innovation to drive improved profitability in our sales mix. We are realizing efficiency gains reflecting the impact from our manufacturing investments, and we are focused on long-term supply chain opportunities with ongoing product design and sourcing initiatives, providing for additional Op improvements over the course of the next year.
Market conditions remain challenging as we begin 2024, and while inventory destocking is largely behind us, the housing market remains difficult, and customers in our Commercial and Food Processing segments are cautious given uncertain -- uncertainty and macro conditions and challenges facing their businesses in the start of the year. Despite what may be a slow start, we are optimistic on the year as we expect improving market conditions for the residential market as we progress through the year, with significant long-term growth opportunities ahead as the market recovers from the current disrupted lows and returns to normalized levels. And we have a building pipeline of opportunities with our Commercial and Food Processing customers, which we expect will gain momentum as they execute against their established growth plans as we continue through the year.
As we start 2024, we'll continue to focus on business execution, driving profitability and cash flow, while executing on our strategic initiatives that we continue to build upon our growing competitive advantage at each of our three industry-leading Foodservice businesses. Now I'll pass the call over to James to spotlight some of the exciting things that we have in store at the upcoming Kitchen and Bath show which is at the end of this month in Las Vegas. It's a great opportunity to see all our latest in products, designs, and technologies across our entire portfolio of leading indoor and outdoor brands. We'll be featuring a record number of innovative product launches and some -- and demonstrating all the exciting things we have to offer across the portfolio of our Residential brands.
James?
James Pool: Thank you, Tim. I'm proud to start off the call with an affirmation of Middleby's commitment to innovation. Each year, the National Restaurant Association with applications for manufacturers for their best innovations in Commercial Foodservice launching in 2024. The awards are known as The Kitchen Innovation Awards, and the winners are displayed each year at the NRA show. The NRA show is May 18 through 21st. Without giving too much away, I'm pleased to announce that Middleby has garnered a large percentage of the 25 honorees, aka, winners. And while I'd like to share all the Middleby product honorees, I must wait for the National Restaurant Association to publicly announce the awards tomorrow. Please check Middleby's various social media channels for a list of all Middleby's winning innovations upon announcement.
Now, per Tim, let's shift our focus to the Kitchen and Bath industry show which happens next week in Las Vegas where Middleby Residential is set to make a statement. Referring to our slide deck, you will see a selection of new design and innovations Middleby Residential is showcasing. Our expansive booth will display 250 Middleby appliances representing 16 different Middleby brands. It's worth noting that the majority of these 250 pieces will be seen for the first time in KBIS. From indoor to outdoor cooking, grills, ventilation, ice, and refrigeration, Middleby Residential has the most comprehensive lineup of premium appliances in the industry. We are also excited to announce two entrants to the U.S. market from our well-known European brands Novy and Josper.
Novy's elegant and highly innovative induction, surface cooking, and ventilation products, bringing modern European design to Middleby's Residential U.S. lineup, while the Josper Casa brings the ultimate Michelin Star cooking experience to Middleby outdoors in your backyard with their Spanish charcoal ovens. While I can't go into every product in the deck or on display KBIS, I'd like to highlight some of the design and technology themes that will be on display. First and foremost, color has become an integral part in Middleby's DNA. We are expanding our color offerings across Middleby Residential with the introduction of 20 luxury colors from Viking range, eight colors from Lynx grills, as well as the introduction of Lynx's premium outdoor kitchen cabinetry will be offered in the same colors.
While our iconic brands such as AGA and La Cornue have always celebrated a rich history of color. Viking and Lynx's new colors offer designers and architects the ultimate power of expression for their clients. Lastly, we are unveiling the AGA ERA which is a complete modern makeover of our classic AGA cast-iron cooker which has been a staple in European homes for centuries. From a technology standpoint, induction will share the stages and Middleby booth. Each Middleby cooking brand will showcase their newest induction products, demonstrating Middleby's commitment to electrification. We firmly believe our induction cooking will be rapidly adopted by consumers. With Middleby's commitment to high quality and high design, people will experience the remarkable speed, precision, and efficiency that our induction appliances bring, allowing them to rapidly embrace electrification in the most positive of ways.
Continuing on with our innovations, connectivity remains a focus for Middleby. In our outdoor section, we will -- we are displaying our full line of connected digital charcoal products from Kamado Joe and Masterbuilt, including the new premium connected Masterbuilt's Gravity Series grill, the XT. At Viking Indoors, we are introducing our new contemporary REVEAL line, which I previously discussed on past calls. The REVEAL single and double wall ovens feature our new connected and guided cooking platform, VikingCloud. By simply connecting the REVEAL oven to the VikingCloud app, you can enjoy a connected culinary journey. The VikingCloud provides complete control of your REVEAL oven. You can browse through a wide range of recipes, select your favorite, and the app will guide you step-by-step for the cooking process while sending instructions to your oven along the way.
The app will turn your oven on, will notify you when you would -- when you're oven is pre-heated and of course when your food is perfectly cooked. Moreover, our AI-powered tool in the app allows you to transform any recipe on the web into a step-by-step guided cooking experience, just like the recipes from Viking. This innovative feature let you take control of the Internet for a never-ending culinary journey with the REVEAL. I encourage you to visit the Middleby booth at the Kitchen and Bath Innovation Show -- Industry Show to witness these market-leading designs and innovations first hand. Thank you, and over to you Bryan.
Bryan Mittelman: Thanks, James. One year ago, I noted that when I thought about 2022, one word came to mind and that was records. I also reminded everyone that records are meant to be broken, and we plan to make that happen in 2023. Well, mission accomplished. For 2023, we delivered record sales, record earnings, and record cash flows, and we plan to do more in '24. While I think that could to sum it up very well, I won't refrain from digging a little deeper into '23 and touching on '24 as well. For 2023, we generated record revenues that exceeded $4 billion. Our adjusted EBITDA exceeded $900 million, representing a profit margin of over 22%. Our margins expanded over 100 basis points from '22. GAAP earnings per share were $7.41.
Adjusted EPS, which excludes amortization expense and impairment charges, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $9.70, up over 6.5% versus 2022. We achieved this while facing especially challenging market conditions in the Residential segment. While I don't enjoy about -- talking about red numbers, but I believe doing so here helps put in context how much we have accomplished. We delivered solid results, even while Residential saw a nearly 25% decline in revenues. As a result, our top-line growth for the Company was nominal yet we grew our adjusted EBITDA 5.5%. We also more than doubled our free cash flow. We are focused on operational excellence. We are focused on innovation.
We are focused on our customers' needs. We have invested and we'll continue to do so in all these areas. These investments are generating returns. You can see that in our results. But even while we invest, we also focus on driving strong cash flows and continually expanding our margins. We earn these margins by being leaders in innovation and having best-in-class solutions across our entire Company. We manage costs well. We have a deep understanding of our customers' needs and have deep relationships with them. All this drives our differentiated results. And we plan to do more in '24. You've seen that for the fourth quarter, we generated revenue of over $1 billion and record adjusted EBITDA at over $235 million with a profit margin of 23.3% or 23.6% on an organic basis.
Q4 GAAP earnings per share were $1.42. Adjusted EPS was $2.65. In Residential, we saw an organic revenue decline of nearly 15% versus 2022. The adjusted EBITDA margin was 10%. Commercial Foodservice revenues globally were down 2% organically over the prior year, yet the adjusted EBITDA margin was over 29%. By the way, all the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. Given the volatility that can exist when looking at quarter-to-quarter results, I find it more insightful to examine where our businesses stand by looking at full year results. Organic revenue growth for this year was almost 3%. Nonetheless, we expanded our organic margins by approximately 200 basis points to over 28% in Commercial.
In Food Processing, total record revenues for a quarter were nearly $192 million. Our adjusted EBITDA margin was 27.6%. Looking at the full year, our organic revenue growth of nearly 11% helped expand margins by over 300 basis points to over 25%. And that looks like success to me, and we will not be stopping here, we will continue to reach higher. I've hopefully made it clear that in the face of rather challenging market conditions impacting Residential, and we are not facing an easy environment by any means in any segment, we are delivering some of our best results ever. You can see this in our cash flow too. Our operating cash flows were over $255 million for Q4, and nearly $629 million for all of '23. Our free cash flow conversion was around 180% for Q4 and 120% for the year.
Looking forward, we expect that our cash flow generation should grow and likely achieve at least the same level of conversion again in '24. Our total leverage ratio is now below 2.5 times. So, to sum it up, strong P&L, strong cash flows, strong balance sheet. So, where do we take the powerful Middleby culinary universe from here? Let me start with a quick view on Q1, and then provide some commentary on our outlook for '24 in whole. Taking a historical perspective, recall the Q1 results overall typically take a step down sequentially from Q4 across all our segments. I know there is much attention on the challenges Residential is facing and as we look to the start of '24, we unfortunately do not yet see improving market conditions in this segment.
Looking at Q1 of '24 versus the prior year, we will see a revenue decline in Residential. In the beginning of '23, we were still benefiting from fulfilling orders and the then larger backlog. Our margins will also be a little challenging to start '24, given the impact of attending the KBIS show this year. For the other two segments, results of Q1 '24 will likely be similar to those seen in the prior year quarter. When you put this all together, from a total Company perspective, Q1 of '24 will be behind Q1 of '23 due to declines in Residential and relatively flat performance in the other two segments. As we progress through '24, across all the segments, I expect to see sequential improvements. Let me expand on those thoughts for the full year '24.
Starting with Residential, as James noted, we are innovating and expanding our product offerings. We have built an outstanding product portfolio. We are positioned well for long-term growth and thus we'll return to and ultimately exceed prior profitability levels. But given what we are seeing in the economies where we operate, it is hard to offer a specific outlook, but there are some signs of potential improvement that we hope to materialize in the second half of '24, but we may not see progress until '25. We will have to see how housing markets, mortgage rates, and remodeling activity progress. I will reinforce that we remain profitable and at levels well ahead of other public appliance companies. We are poised to continue to grow our market share and thus grow our revenues and expand our margins.
Across Food Processing and Commercial Foodservice, looking at full year '24, we expect to see organic revenue growth over '23. Food Processing had an amazing year in '23. Total revenue growth of over 22% and we jumped our revenue to above $700 million. We have delivered our target margin. The opportunity set in front of us remains very large, really as big as it has ever been. You've seen over the past few years how our best-in-class individual solutions have become integrated full-line solutions that resonate with our customers. These customers are facing labor shortages and margin pressure. They need highly efficient and reliable equipment. Our automation benefits them greatly. And as we help them improve their operations and profitability, we will see continued growth in our revenues, hopefully at least mid-single-digits as we look across '24 and the potential for modest margin expansion as well.
Onto Commercial, where our growth is a result of our strategic investments in broad capabilities. We are targeting higher organic growth in '24 over the almost 3% we saw in '23. We should also get closer to our target margin of 30%. We've often talked about how our beverage and dispensing platform is still relatively new to Middleby, yet represents about a third of the segment. It will drive outsized growth in '24. Some of my favorite drinks from a large coffee chain are now being served over Follett's nugget ice. Newton and its revolutionary valve may be small, but they are definitely mighty. They are making a difference in many ways. And I could go on about Wonder Bar, as well as Marco and our Coffee Solutions Group. But come see us at the MIC or at the Specialty Coffee Show in Chicago in April to see and taste for yourself.
But '24 and beyond are looking strong. In our stalwart, the hot side is not cooling off. Our customers are growing their operations and they need our newest solutions. Just flip through our quarterly presentations to remind yourself of what we have been up to. But automated, energy efficient, easy to control, internet-connected, fast solutions abound. So, take your pick. Are we cool? Are we hot? I like to think we have it all. For '24, we intend to deliver organic revenue growth, higher margins, and profitability growth at rates in excess of our revenue growth. We will continue to improve our working capital management and have strong cash conversion. Free cash flow will be up too. We are doing all we can do to earn the trading multiples we deserve.
So, while '23 was another year full of challenges for Middleby and our most successful year yet in many respects, EBITDA over $900 million, operating cash flow over $600 million, leverage now below 2.5 times, but we are never satisfied. We are constantly pushing, but we are also extremely proud of what we have built and what we deliver. And we plan to do more in '24. Alright, Andrea, will you please now open the line for questions?
See also 13 High Growth Penny Stocks That Are Profitable and 15 Weakest Currencies in The World in 2024.
To continue reading the Q&A session, please click here.
