The Middleby - Earnings Call - Q1 2020

Transcript

Speaker 0

Hello and welcome to the Middleby Corporation First Quarter twenty twenty Conference Call. With us today from management are Tim FitzGerald, Chief Executive Officer Ryan Mittleman, Chief Financial Officer and David Brewer, Chief Operating Officer. Please note there are slides in the Investors section at middlebee.com to accompany today's call. We will start the call with comments from management and then open for Q and A. Instructions will be given at the time on how to get in for the queue.

Now I'd like to turn the call over to Mr. Fitzgerald. Please go ahead, sir.

Speaker 1

Good morning, and thank you all for joining us on the call this morning. Please note that in addition to our press release, we have posted slides for today's call for reference purposes, which can be found at the Investor Relations section of the Middleby website. I would like to start the call by recognizing and thanking our employees across the entire Middleby organization as they have responded to the crisis of COVID-nineteen. Our Middleby team has worked around the clock from the onset of the pandemic to ensure the safety of our employees, meet continued customer needs and assure the continuity of our business. Our people around the globe have demonstrated a can do attitude and have taken quick action to address the multitude of issues that have surfaced on a daily and hourly basis.

I'm very grateful for their commitment. I'm also appreciative of the personal sacrifices made by our employees as it has been necessary to adjust personal work schedules, salaries, reduced work hours and in many cases, on furlough until we begin to see business recovery. In response to this crisis, our management team swiftly assessed the situation, identified the risks and implemented actions to first and foremost ensure our employees' safety, which included travel restrictions, social distancing, staggered shifts, work at home protocols for those able to be out of the office, enhanced sanitation standards, and protection of at risk employees. Our teams have also moved quickly to importantly ensure the continuity of service and product availability to our customers. We have infrastructure in place across our business to continue customer support, technical service, shipping of service parts and finished goods.

Our supply chain team moved to identify and mitigate issues that could result in production or service disruption. Despite the challenges with potential business interruption across the globe, we've been able to maintain uninterrupted service to our customers with only brief and limited periods of exception. I'm also proud to note that the teams across our businesses took initiative to very quickly introduce new products to address the safety needs arising from COVID-nineteen. In the slide deck, you can find a number of these products, which include sterilization units for N95 masks, mobile and touchless handwashing stations, plexiglass safety shields for restaurants and retail locations, mobile food service stations, and hand and cleaning sanitizer produced at our most recent acquired company, Deutsche. As for the immediate impact on our business, we outlined in the press release that we have seen a sharp decline in orders during the month of April across all In total, our incoming orders declined 57% during April in comparison to the prior year.

However, all three of our business segments remain operational as we continue to serve our customers in the global foodservice industry as essential businesses. In supporting the industry, we have seen sequential improvement in orders each week over the past month from the trough in early April as customers begin to reengage after the initial wave of disruption and changes to working conditions. In our residential group, incoming orders for April were down 53%. The large part of our revenues are generated through retail locations that were significantly shut down during the month of April, both in The USA and UK markets as shelter at home provisions were put in place. We are now seeing reopenings starting and expect orders to stabilize and perhaps continue to improve as a result.

Builder business has been impacted over the past month. However, we anticipate that activities will further come back online as construction projects are rescheduled. At our Food Processing Group, we entered the year with a record backlog and the strength of incoming orders continued throughout the first quarter with a strong pipeline of projects for the year. COVID-nineteen has impacted ongoing projects and in some cases, our ability to complete installations given travel restrictions and inability to access customer sites. Our customers expectedly were focused on the impact of COVID-nineteen on their employees and operations.

And as a result, this has disrupted activities, which is reflected in the April order decline of 28%. Despite this disruption, the strong backlog provides for stability of this segment for the next several quarters. Additionally, we continue to see strong demand and requirements for our equipment across food processing customers, particularly in the meat processing, which we anticipate will support ongoing activity at this segment. At the Commercial Foodservice segment, we saw the largest impact with a 65% decline in incoming orders in April as restaurants and other foodservice establishments were mandated to close starting in mid March. Over the following weeks, our customers adapted as delivery, curbside pickup and drive thru business continued to expand.

Our customers have also adapted with streamlined delivery focused menus to enhance profitability. Accordingly, restaurant sales have improved sequentially each week through April and into early May as reported by industry analysts such as Miller Pulse, Technomic and Baird Research. Average check size has increased reflecting delivery and takeout with orders for families or larger groups as people are eating out at home. Sectors that have fared better during this period include healthcare, retail, C stores and restaurants offering drive through or delivery such as quick serve and pizza. We've also seen school systems and government less affected as they continue with budgeted programs.

Many of our school system and university customers appear to be continuing with programs to refresh their foodservice operations and in certain cases have started those activities early during the shutdown. Our independent casual dining and fine dining customers have been hit the hardest. While some dine in locations have started to offer curbside pickup, they are largely closed and in many cases, unfortunately, may not reopen. Internationally, the impact and responses to our customers across the globe are very similar to what we have seen in The U. S.

Market. In China, the first market to experience the pandemic, we have seen restaurants reopen, including dine in, although traffic remains considerably impacted. Our order rates in this market, which were sharply down starting in January by approximately 70%, improved late in Q1 and remained down approximately 25% in April. Given the large installed base in The U. S.

A. And around the world, much of our business is generated from existing restaurants through service, replacement, menu changes and operating initiatives comprising approximately 75% of our equipment revenues. As a result, we are positioned to withstand the impact of a downturn. As we emerge from the crisis, it is expected that operators will enact new safety protocols for both employees and customers. We will see many of the trends existing prior to the crisis accelerate.

This likely will include added focus on off premise dining, delivery and drive thru, a continued increase in mobile ordering, efforts to simplify menu, greater focus on space utilization and throughput along with smaller dining rooms and kitchens, continued development in nontraditional foodservice locations, including retail and C store, along with the emergence of new foodservice models, including modular and ghost kitchens. Labor will continue to be a primary challenge of operators, and there will be a greater use of IoT, data analytics, remote monitoring and restaurant operation through automation. Middleby is well positioned for these emerging trends given our decision to focus on technology, solutions and growth trends. The significant investments that we have made in R and D during the course of twenty nineteen and into 2020 positioned us with broad based offerings for our customers. With the recent launch of our Open Kitchen IoT platform by Powerhouse Dynamics, we addressed many of the issues our customers face through our cloud based platform by connecting equipment, adding labor savings functionality, food safety automation, energy monitoring, and operations automation, while providing exception analytics to better capture meaningful data and provide a real time understanding of what is happening in their kitchen.

Open Kitchen has a proven record of saving users millions of dollars and is the only IoT platform that bring together all elements of the open connected kitchen, whether it be connecting any cooking equipment, any refrigeration, any HVAC system, any lighting control, any handheld probes, and any other connectable device. With the continued introduction of our Middleby Control and Middleby ConnectWare this year, connectivity will be enhanced and equipment operation will be simplified, reducing training requirements, user error, and increasing process automation. Our process automation team at L2F has been working hard over the past year developing automated ghost kitchen solutions, utilizing the leading equipment technologies across Middleby and integrating those utilizing robotics and data analytics. We can provide a more flexible and connected kitchen utilizing less labor in a smaller footprint. We have also invested in our ventless kitchen platform.

We have the broadest portfolio of ventless kitchen equipment solutions. No longer is ventilation required as we can provide all aspects of cooking and kitchen operations without a hood. This provides a smaller, less expensive operation that can be opened anywhere and suited to support nontraditional food service locations. Our delivery system solutions include the Puck cabinet, which provides our customers with a touchless solution to stage delivery orders that can be accessed utilizing a QR code received via text on a mobile device. This significantly simplifies complications associated with pickup operations and increases food quality.

And importantly, no longer does the customer or DoorDasher need to interact with restaurant staff, resulting in greater safety for our customers and employees. As we move through this uncertain period, we do so with a strong financial position. We are pleased to have recently completed the refinancing of our credit facility just prior to the onset of COVID-nineteen. Although the impact of COVID-nineteen will have significant effect in the upcoming period, the actions we have taken to reshape our business and respond to the current environment, we expect will allow us to maintain profitability and generate positive cash flow throughout the downturn. I will now turn it over to Brian to comment further on the financials in Q1 results.

Thanks, Tim. For the

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first quarter, we generated GAAP earnings per share of 1.33 versus $1.24 in the prior year. As you likely recall, for the last two quarters, we have been reporting adjusted EPS as well. For Q1, it was $1.46 versus $1.51 in the prior year. The GAAP to non GAAP reconciliation is included in the tables that are part of the press release we issued this morning. When evaluating the impact of recent acquisitions on earnings, the ongoing operational impact primarily from the brands acquired over the past year, including the most recently acquired businesses of Ram and Deutsche in Q1, was a $03 drag for the quarter.

This excludes the impact from restructuring activities and inventory purchase accounting. For Q1, revenues declined 1.4% or 5.9% organically. Total company adjusted EBITDA was relatively flat compared to the prior year at $138,000,000 Our EBITDA margin improved slightly to 20.3% from 20.1% the face of addressing the challenges of mostly declining markets. While managing through these conditions that existed even before the global pandemic, we continued our investments in the business to ensure our leadership position for the future. More recently, we have taken aggressive measures to cut costs across the company.

I will comment further on these later. When reviewing Q1 results, please note that SG and A expenses from acquisitions added over $11,000,000 for the quarter. However, this was offset from revenue decline impacts and cost control efforts. Restructuring charges and associated transition costs, which do not qualify as restructuring under GAAP, were approximately $1,000,000 in total. This represents largely the culmination of efforts initiated in 2019.

Charges from our actions related to the global pandemic will start to be seen in the second quarter. I will seek to keep my segment comments about Q1 performance shorter today than in prior calls. Within our press release, you can find information about the year over year changes in revenues on a geographic basis for each segment. The tables to the press release also provide the reported organic sales analyses. We've also included in the slides on our Investor Relations website that share additional information and commentary on the quarter.

For Commercial Foodservice, the decline in revenues was impacted late in the quarter as the COVID-nineteen impact spread globally. What had started out impacting us as weakness in China as well as Asia and then in certain pockets of Europe obviously expanded greatly in a quick manner. This led to rapid declines in sales and orders as well as some limited disruptions in operations within our organization. In spite of top line challenges, we continue to improve margins over the prior year. Adjusted EBITDA for Commercial Foodservice amounted to $108,000,000 representing 24.3% of sales or 25.2% when excluding the impacts from foreign exchange and recent acquisitions.

This compares to 24.8% in the prior year quarter. We were pleased to be delivering improvements in various businesses acquired in recent years. Moving on to the Residential segment. On an organic basis, we experienced a sales decline of 5%. In The U.

S, we're able to generate modest growth of 0.8%, driven by our imported super premium products, while headwinds persisted impacting under counter refrigeration sales. Internationally, we have not seen improved market conditions in the face of Brexit and are also experiencing additional impacts from the pandemic. We saw weakness across all our regions for a total decline of 14.2% internationally. Margins were impacted by lower sales levels and the manufacturing transition that we noted would be ongoing and from our acquisition of Brava, which alone is a drag of under 2%. By the way, this is the spot where I'd otherwise like to talk about my other son's favorite Middleby product.

However, I will have to keep you wondering about that until a future call, although I will say we are excited for the arrival of outdoor cooking season here in the Midwest, but more on that in a future quarter. So on to the Food Processing segment, where we did generate organic growth of 6% for the quarter, largely in our protein product offerings. EBITDA margins improved slightly to 17.8% as compared to 17.5% in the prior year period when adjusting for foreign exchange and acquisitions. Looking forward, the existing backlog provides stability for this business segment for the upcoming quarters in terms of revenues and margins. Having briefly gone through the three segments for Q1, I do want to elaborate on the changes made to our borrowing agreement during the quarter.

In January, we amended our credit agreement, which provides us excellent liquidity currently. The facility has a five year term and is comprised of a $750,000,000 term loan, which is essentially fully drawn, and a $2,750,000,000 revolver. The term loan has minimal annual required principal payments during the life of the facility of less than $20,000,000 annually. Actual availability under the facility is generally at four times EBITDA, as defined in the credit agreement, and may expand to 4.5 times EBITDA in certain situations after acquisitions. I also note that EBITDA, as defined under the credit agreement, is generally higher than our otherwise reported adjusted EBITDA.

This is mostly due to us not including the benefit from the noncash pension income in our management results. So the relevant trailing twelve month EBITDA from a bank perspective is $683,000,000 This results in gross availability of over $2,700,000,000 to us at the end of Q1. Based on our net debt at that time, we had nearly $850,000,000 of availability. During the quarter, we did increase our borrowings to build our cash balance up to $381,000,000 However, as we maintain this additional cash in The U. S, it actually does not impact our net debt, which was at $1,800,000,000 at quarter's end.

We've continued to build cash as a prudent measure in the current environment. Our balance as of today is over $575,000,000 The increase since the March is from $175,000,000 of additional borrowings with the remainder as a result of our ongoing positive operating cash flows. Please realize that our interest expense in future quarters will be higher due to the increased amount of gross borrowings. I would also point out that our overall interest cost is approximately 3.3%. While we are certainly being deeply impacted by this global pandemic, we remain profitable and are generating positive operating cash flows.

It is our strong current belief that we will continue to execute in this manner and be able to actually reduce our net debt over the coming months. I've commented on operating cash flows numerous times. The same positive comments I have made applies to free cash flow as well. As we look forward for the remainder of the year, our plans would be to reduce capital expenditures by at least 50% compared to 2019 spending levels. This brings me to a short but important discussion on leverage.

We are typically limited to borrowings of four times EBITDA, as I noted. At the end of Q1, we were at 2.76 times. As I noted earlier, while at this level of leverage, we have availability of nearly eight fifty million dollars The combination of our cash generating business model, low interest rates, the availability under the facility, all leave us very strongly positioned in the current environment. We will also see benefits from our aggressive cost cutting actions that I'll come back to momentarily. We did generate record operating cash flows for our first quarter of $87,000,000 Our free cash flow was $78,000,000 compared to $26,000,000 in the prior year.

This improvement was driven by favorable collections activity, a more modest seasonal increase in inventory, offset by the timing and amount of various payments as compared to the prior year for compensation matters and rebates. While the current environment will certainly present business challenges, we do expect to continue to monetize our working capital over the coming months. Last quarter, I noted three factors that are key to our approach to improving margins over the long term. While we are currently facing different conditions, these same factors help drive the benefits from cost control actions and ensure continuity of operations during this pandemic. We achieved this through: one, integration efforts at recent acquisitions two, continuing to execute on supply chain initiatives that leverage our scale and three, harnessing our capabilities and best practices to improve business processes.

Given the current circumstances, our efforts have gone beyond these types of actions. We've reviewed every expense within the company and have aggressively reduced all controllable and discretionary costs. We have extremely tight controls in place on expenditures. We measure receipts and disbursements daily. We've reduced our workforce, both in terms of production personnel and all other functions across the company in response to the near term decreased demand levels.

This has been achieved largely through furloughing actions. We've also made permanent reductions. Personnel costs have been reduced in excess of 35%. We also continue to evaluate the appropriate staffing levels for various future forecasted scenarios. We've reduced cash compensation to executives and hundreds of additional employees for the remainder of the year.

Given challenges in sharing reliable forecasts with a high degree of confidence currently, I can only comment broadly on some future scenarios. Even if we realize sales decreases of 50% and EBITDA margins are cut in half as well, through reducing SG and A expenses by approximately 30% and ensuring tight control over our production costs, as a company, we should still generate double digit EBITDA margins and positive net earnings and cash flows. The challenges we face are numerous. However, we are positioned for long term success. Our management team is highly experienced.

Most

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of

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our leaders have been in this industry for multiple decades. Beyond the dedication of our people, we have an existing cost structure that generates industry leading profitability, which leads to strong cash flows. While every crisis is different, we have a track record of managing through them with vigor and decisiveness, and we emerge from them stronger. With that, Tiffany, please open the call to questions.

Speaker 0

Your first question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Speaker 3

Hey, good morning, guys.

Speaker 1

Good

Speaker 3

for all the great detail in the presentation. That was really, really helpful. If you could just first maybe touch on how you think decrementals look. You gave some framework, I think, Brian. But as you look into the 2Q and given all the cost actions you're taking, how do you think decrementals flush out?

And if you can give any color by segment, that'd be helpful. And then you know, also as you kind of get into the second half and things start to normalize a little bit, what would those look like?

Speaker 2

You know, obviously we shared order indications, order information as the best indications. And I would say that's where we start our modeling scenarios. The one caveat I'll add to that obviously we are seeing orders down in food processing. But that's a little bit of a different dynamics there where we have backlog. So I'm not suggesting that we are going to see a 28% decrease in revenues there for the quarter.

So it's hard for me to offer a very specific answer beyond again using the orders as a proxy. And even in that situation we will see operating margins, whether it's the gross profit or the EBITDA level declining. And really those comments apply to commercial and residential. You know, we have lots of scenarios out there. I think we're all starting to see slow but positive momentum in the marketplace.

So we see things picking up from there. But it's really hard for me to offer specific commentary two and three quarters out at this point in time.

Speaker 3

Yes. I guess my question was on decremental margins. So if you saw declines similar to the order rates for 2Q, what would decremental margins look like?

Speaker 2

Again, I'm not going to get extremely specific on that, as we don't offer exact guidance. But we still anticipate being double digit EBITDA margins for the company. There will be decreases. I don't as I said in my comments, could EBITDA margins be cut in half? Obviously that will depend primarily on the extent of either the revenue decline or the revenue recovery.

But you know, I'll leave it to everyone to come up with their best model. But hopefully it is no worse than that.

Speaker 3

Okay. And then just one more on I mean certainly you gave great color on the April orders. But talked about kind of improvement through the month. Is there any way to give us a sense of like what the exit rate for orders were as you exited April and into May versus kind of those total numbers, were sharply down?

Speaker 1

So we're obviously trying to provide as much information as possible so people get a sense of it. I'll caveat that weekly orders can be variable even in normal circumstances. But I mean, I think certainly the 57% that I mentioned was for the entire month. I would say we were 10% to 15% better than the average exiting the month. So we did see consistent climb.

Trough was in the week ending April, and then seventeenth, twenty fourth through even last week, we'd seen a consistent step up. So look, mean, I think that our we are prepared for all types of outcomes here. But I think a potential assumption is that April is the toughest, right? Because it is people were just turned off for a while, including us, right? Mean, everybody was dealing

Speaker 4

with

Speaker 1

the pandemic, adjusting their business, getting their head around what was that going to look like, work at home situations, not only for us, for our customers. So our belief and again, everybody can kind of have a view of the world is that April was probably going to be the toughest incoming order month for the period. And again, we're reporting orders here, not sales. So we came in with a bit better of a backlog going into April. So our revenues outpace what incoming orders will be.

And we think that there's likely we'll see improvement as we move through the next couple of months based on some of these indicators that we have shared as well as just kind of activities behind that.

Speaker 3

Okay. That's very helpful. Thanks, Brian.

Speaker 0

Your next question comes from the line of Mig Dobre with Baird.

Speaker 5

Thank you very much. Good morning, everyone. I think I want to ask Jeff's margin question maybe a little bit different. Brian, when you're sort of thinking of all the buckets of cost that you've taken action on, Can you maybe talk about the dollar figure associated with some of these buckets? I know you had a roughly $20,000,000 cost savings plan that was supposed to help you this year.

This is incremental on top of that. And I guess what I'm wondering here is can you also help us understand how many, how much of this cost is purely temporary in nature versus something that's more structural that I think you might be doing with the business to sort of realign for a post COVID world? Thank you.

Speaker 2

Yes. The $20,000,000 we referred to are largely in kind of the COGS area. And it's a little harder to get after a specific cost number there because so much of it is variable. Thinking on the SG and A side, I mean we are certainly targeting in excess of 25,000,000 if not much higher than that millions of dollars on a quarterly basis on the takeout. Now obviously as you go through in cost and you think about also fixed versus variable and given the decrements we're seeing in the business now, right, it really causes you to challenge what you thought may have been fixed or semi fixed.

So I don't have a specific number yet or kind of run rate or plan on what is the new level of costs, whether it be on the cost of support production or in SG and A. Because honestly, I mean we don't yet have a solid enough definition or understanding of what the new run rate is going to be. We certainly expect that a lot of the actions we've taken are temporary. But we also expect that, you know, some of them are going to turn into, you know, let's call them semi permanent. So I put out kind of a number there on the SG and A side.

Again, not sure that I'm not going classify anything as permanent yet. And obviously on the COGS side, our goal is to be bringing down those costs as close to the decrement in revenue as possible. The extent of cutting isn't exactly at the same level on the SG and A side even though we certainly attack them with the same figure.

Speaker 5

That's helpful color. And maybe going back to demand and looking at April, I've asked the same question of one of your peers the other day. But obviously, demand is down 60% April, but it's not down 100%. So I guess I'm wondering of that, of the folks that are still buying equipment, can you give us some sense for exactly what is it that they're purchasing, what type of customers?

Speaker 6

And and, you know, as

Speaker 5

you think about this this base, this that that you still have a business, how do you expect this this, set of customers or or or type of demand to progress going forward as the economy reopens?

Speaker 1

Mig, if it's helpful, there's a slide deck out there, Page nine, which tried to break the business by the demand requirement, including what's replacement, what's new, what's our service element, parts largely. And then we've got And the different segments out so look, I think there are there is so it's kind of actually across a lot. So we've got a lot of different brands. None of them are at zero. They're all there's a variety, but they're all maintaining some level of base business.

And I think a lot of it is driven by replacement that these stores are still operating. We've got segments such as pizza and the quick serve where frankly, business is going to continue to creep up. And a lot of places I go to and I hit multiple restaurants a day and the drive throughs are busy. My daughter is a DoorDasher and she's booked all day. And so there's those segments are turned on retail with and C stores, which we're expanding their food service programs and beverage programs coming into this.

They continue to be online. We're still seeing even some rollout activity happening because they're seeing people coming in and frequenting, looking for food and that's kind of given them confidence that now is a good time to continue to invest in that. So we're so again, retail, C store, Healthcare, our Healthcare business is held in pretty strong. We do actually have a meaningful Healthcare business. We provide not only medical refrigeration, but the ice machine business that we have.

We're a leader in that segment. And as I mentioned in the kind of the opening comments to even institutional on the school system side, I obviously, there's a lot of discussion about, hey, are we going to be doing e learning or what have you, but a lot of school systems have budgets and expectations kind of going into the summer and summer started a little bit early for them. And I think, albeit there's uncertain what classrooms will look like, a lot of our schools and universities still are spending in those areas. So we are still seeing a flow of business really across our brands and across the segments. Obviously, the hardest hit are independents, the casual dining and travel and leisure, right?

I mean so and that is not an insignificant piece of our business, but represents probably about less than a quarter. In some cases, also as I mentioned, particularly with casual dining, we're seeing some curbside pickup and so forth. But certainly, they're not spending executing on big capital spend projects. So it is, again, across quite a few segments and across quite a few product lines. And look, mean, I think foodservice doesn't stop, right?

I mean, people eat out. And I think even in this period, while certainly there was the immediate shock and we're not certainly through the other side. And by no means do we think things are going to turn back on quickly here. Eating out is not going away and there is a lot of takeout, delivery, carryout and the operators that are involved in those segments are still purchasing right now. So that kind of seems like that had been showing up in what we're seeing in weekly reports.

And so that kind of gives us the confidence that the industry and our customers are adapting. And again, we're down significantly, right? So but it seems like that it will continue to turn on slowly here absent a wave two or other disruptions.

Speaker 5

Understood. Last question, if I may. Just trying to get a little bit of color as to how you think about your accounts receivable. You made a little bit of progress sequentially here in the quarter bringing that number down. But can you talk about the aging of receivables, allowances, how you're kind of thinking about the risks there?

Thank you.

Speaker 2

Yes. The collections have continued to be on pace, on trend through the month. There was a little bit of a worsening of DSO and we do expect that does not come as a surprise to us. I'm not going to say there are not risks in the current environment, but we do have some protection, let's say, is the end customers that may be viewed as having the highest risk are the customers of our dealers and distributors. So it's certainly on our watch list.

Again, we've seen very positive but obviously the AR balance is going to come down with the revenues going down, right? So I'm not happy about that. But again the collections trajectory has held. We have not made any wholesale changes to our reserve levels at this point in time. So it will obviously stay on the watch list though.

Speaker 5

Thank you.

Speaker 2

Thanks, Phave.

Speaker 0

Your next question comes from the line of Saree Boroditsky.

Speaker 7

Thanks for taking my question. Given the strong backlog in food processing, how are you thinking about the outlook for sales there for the remainder of the year? Can you talk about April sales versus the order trends that you described? And do you expect to see positive organic growth continue?

Speaker 2

As I commented, we do not expect to see drastic declines there. I think organic revenue growth could continue. But it certainly isn't a guarantee. As Tim noted, beyond what we have had strong backlog, but the order rate has come Our customers are seeing great demand for their product. But they're also dealing with their own challenges of whether it's employee safety or transitioning from one type of let's call it a food service product to a more retail oriented product.

So I think it would be too aggressive for me to make a bold statement that we are going to see organic growth at the same level we've had. But certainly we don't expect to see declines of the magnitude of how the order rate that we quoted.

Speaker 7

Thanks. And then you mentioned in the release that you've deferred near term acquisition investments. Can you talk through how you're thinking about acquisitions as we gain more clarity on the outlook? And if you think there will be more opportunities in the pipeline smaller players may not be able to weather the lower sales as well as you guys?

Speaker 1

Yes. So that's a good question. So as always, we had plenty of ideas and activities coming into the year. Obviously this is a significant disruption like everybody else would like to get visibility in our feet under us. And so it was obviously appropriate to defer those activities until we have a better understanding of the outlook.

But look, mean, acquisition and business development ideas are core to Middleby. And certainly there was a lot of strategic initiatives that we had to expand certain pieces of our business and particularly continue with some of our technology initiatives as you've seen us invest in over the last year, which we think will position us again for organic growth as we move beyond the crisis. So look, I mean, I think at some point that will come back online at the appropriate time depending on how long this occurs. And as you said, not everybody will fare equally during a crisis such as this. And I think we that being a long term acquirer and we've been doing this Middleby was built on September 11 in a lot of ways.

That's how we started the acquisition platform. I mean, a lot of our most transformational acquisitions came in and around disruptive periods like this. Certainly, saw multiples that have climbed up over the last few years, which has been one of the challenges for us as we had been very committed to our acquisition strategy even as multiples creeped up. So I mean, I think this may be a bit of a resetting period. So I think we'll continue to think through things strategically and opportunistically as we go through the period.

But it's a deferral. It's not a shutoff of kind of what is a core tenant of Middleby.

Speaker 7

That's really helpful color. Thank you.

Speaker 2

Thanks, Sarah.

Speaker 0

Your next question comes from the line of Joel Tiss from BMO.

Speaker 6

Hey, guys. How's it going?

Speaker 1

Good. How are you, Joel?

Speaker 6

All right. So I wonder, if you can talk through you gave us little hints here and there, about opportunities to accelerate sort of the integration of the past acquisitions, like some of the activities that you've already been doing. Is it just too like everything is too disruptive right now to kind of rethink the strategies or not to kind of accelerate the strategies and pull forward some things that maybe you thought you couldn't get to till 'twenty one or 'twenty two?

Speaker 1

So look, again, it's very early. We had a number of initiatives that we had been executing on last year. Brian outlined a number of those in the comments, which were some wind in our sales coming into this year. Certainly, are some other items which might relate to recent acquisitions or other synergy opportunities around the company that certainly were again, four to eight weeks kind of into this period here and then battening down the hatches on the business kind of generally. But we will look smartly at what other opportunities there might be.

So it's really a non answer to you, but those will be things that we'll be thinking through more broadly in the upcoming weeks and months here.

Speaker 6

Okay. And one thing I think would be super helpful for everybody would be just to talk a little bit about used equipment. Some sort of industry experts or whatever have been throwing it around that that's going to be an issue. But it seems that historically, that hasn't really been you know, there hasn't really been a lot of overhang from used equipment. And it seems like a lot of the kitchens are kind of custom built and designed and installed, and it might be a little bit harder than the casual observer would think to be able to just rip equipment out and replace it into a different area.

So I just wondered, can you talk a little bit about what you've learned over the decades about used equipment and how we should think about it?

Speaker 1

Yes, I'll start and then I'll probably throw this over to Dave. I you made a couple of comments there. So used equipment is not new, right? So I mean, certainly, there's discussion about more restaurant likely being shut down during this period of 10% to 15%. As you said, usually there's a specification for chain customers.

So they're not just going to take any piece of equipment. So that's number one. Number two, the cost of equipment and refurbishing it is actually pretty expensive. So just taking a piece of equipment and then moving it to another location and the risk of, hey, it might not work, it might be a safety hazard, hey, you got to clean it up and that might require a service call, which is fairly expensive in putting in new parts. That is pretty difficult.

And a lot of our equipment, I'll say, is kind of like a laptop for it's an operating piece of equipment for our customers. And certainly, you wouldn't buy used laptop from another company and wipe it clean and kind of start over. You kind of want the latest and greatest. It's got more energy efficiency and a better control. So it's not that there won't be equipment out there because there will be and there probably will be more of it and it probably will have some impact.

But I don't think that this is going to be a wave of a new factor that's going to overtake the industry. I mean even as we, Middleby, have looked at should we buy used equipment refurbishing and put it back out in the market, our conclusion was that it and I won't say conclusion, we have done this in the past. It was more costly to refurb equipment than build a new piece of equipment. So I think there's that just fundamental cost dynamic as well as user dynamic of what that is. And equipment, again, is usually very specific to the need of the customer.

Dave,

Speaker 8

don't Yeah. You

Speaker 9

Tim, I would would I'd only add, build on that, that I do I don't see it as a threat. Frankly, I don't see it as a threat at all. To Tim's point, a long time ago, a long time ago, I ran a refurbishing business for Yum! Brands. And so we had an internal system and it wasn't profitable and it wasn't good.

It did not generate good pieces of equipment that were practical for the operator. So I don't see any issue at all. We are obviously watching it very closely. But the trend right now with antibacterial surfaces, the technology of controllers and control technology around cooking surfaces are advancing so quickly that the refurbished market, the changes to make it more current to operate in a new production line, in a burger operation or a chicken operation, just isn't even practical financially to pull it out, recondition it, reinstall it versus a new piece of equipment. It hasn't worked in the past.

It hasn't worked for the last twenty years. And while it surely will be looked at, I don't think it's going to work in the future,

Speaker 8

That's great. Thank you very much.

Speaker 1

Thanks, Joel.

Speaker 0

The next question comes from the line of Jamie Clement from Ursus Advisory.

Speaker 8

Hey, good morning, everybody.

Speaker 1

Good morning, Jamie.

Speaker 9

Tim, if you or Dave, if

Speaker 8

you look back over the last five to ten years, the percentage of your business in commercial foodservice that you would attribute to new store openings, whatever that number is, roughly what do you think the breakdown would have been between The U. S. Versus international?

Speaker 1

So I'll start on this one too and then I'll kick that over to Dave to add on to it. So clearly, in the recent periods, has been greater internationally, right? So you've got as we focus on emerging markets, clearly, that's where investments that we've made over the last five years, markets such as India, China, Russia, Middle East, parts of Latin America. I mean those are greater new store opening markets. And The U.

S. Was a larger installed base. So kind of within what we think is about 25% of our revenue of new build, that percentage is higher for the international markets, and it's been lower for the domestic markets. And in the domestic markets, it tends to be around fast casual, nontraditional locations, right? So as you kind of move forward, again who knows what the world will bring, but likely new store openings in some of the emerging markets might turn on before they would in The U.

S. And that's kind of where our greater, if you want to call it, exposure to new builds would be.

Speaker 8

Okay. Great. Dave, any comments?

Speaker 9

No. I would say exactly the same thing. I'm actually pretty excited about the international markets and especially our what we've been focused on with new store development internationally I think is going to pay dividends next year and the year after just from a market share perspective both because we are able to be in the market for the original equipment, then the after sale service and support system, and the technology of the equipment itself. I think those three things combined just make us a dominant force in new markets internationally.

Speaker 8

Thank you all very much for your time. Appreciate it.

Speaker 5

Thanks

Speaker 0

Janet. Your next question comes from the line of Walter Liptak from Seaport.

Speaker 4

Hi, thanks. Good morning, guys.

Speaker 1

Hey, Walt. Hi.

Speaker 4

I've just got a couple of follow ups. One on the M and A discussion. You're a bigger company now at this point. And I wonder if there's a view that you have on M and A versus buybacks. With the stock down here, once things start to stabilize, would you look at one or the other?

Or do you still prefer M and A over buybacks?

Speaker 1

So look, I mean, even here in the first quarter, we did a buyback. So we had started it again kind of pre COVID onset, which we've halted as obviously we're focused on cash flow and liquidity until we have a better certainty like the rest of the world. So certainly, we are thinking about coming into this. We had been thinking about buybacks opportunistically. So look, I mean, I think we weigh the two.

Hard to talk about that right now, but clearly that was on the menu walking into this period. But I think it all depends on kind of the what the pipeline looks like, the opportunities and our buyback approach was being somewhat opportunistic in terms of where Middleby trades because obviously we've got a very positive outlook on how we perform in the long run.

Speaker 4

Okay.

Speaker 3

And then I wanted to

Speaker 4

ask about the trends in China. Are there any lessons or insights that you got from how China has started to recover that might play out in the rest of the world? And as the restaurants open, was there are more aftermarket parts and service to get the restaurants up and running again?

Speaker 1

So look, our platform is certainly Asia just in general, which China is a big piece is a market that we had been focused on expanding into. That being said, it's a relatively small piece of our business overall. So it's hard to pick through all the trends there other than that we did see orders come up. As I mentioned in the comments, we're probably eight to ten weeks behind. Restaurants are turning on.

Traffic is slow. A lot of our customers do have their store opening plans and their original business plans kind of coming into the year that they are looking to execute on in the back half of the year. So I mean, I think that gives us some optimism there. But we don't want to read too much into anything right now. So other than the orders trends that we've seen here in The U.

S. Seem to be following what we've seen in China.

Speaker 4

Okay. All right, great. Thank you. Good luck, guys. Thank you.

Speaker 0

Your next question comes from the line of Larry De Maria from William Blair.

Speaker 10

Hi, thanks. Good morning, everybody.

Speaker 1

Good morning.

Speaker 10

Hey, guys. A couple of questions. First, you detailed a lot of the short term actions you're doing to manage the business and how some of those may become more permanent. But are you guys doing anything to address potential for excess capacity or more large detail restructuring? Obviously, structurally different CFS markets may be in order now with some of the closures that may be more permanent.

Maybe you can just talk about some of how you're thinking about that and even discuss utilization in the factories now versus pre crisis, I guess?

Speaker 1

Larry, I would just say it's probably too early. Mean, clearly, the utilization factor is very low right now, right? So we're our factories are down to some cases, we're closing if we don't have enough orders for the week or certainly we're running at lower staffs or off days. So I mean, I think what we're trying to do right now is drive the greatest efficiency in our operation at much lower levels. And certainly, there's things that we are learning as we go through that, that will make us a better company, right, and help us as we come out of that and think about capacity.

But I think it's again, we're six weeks into it. So I mean, I think we're certainly not going to lay out what big changes in the business may or may not be because we'd like to understand what the business is going to look like as we come out of it. And we do we are confident that we will see some step back up. I think it's just a function of how long and how quickly. Dave has worked certainly on a lot of the operational initiatives, particularly around supply chain as we've gone through that.

So I'll probably ask him to add on to that as well.

Speaker 9

Yes. The only bit of color a little bit of color that I would add to what Tim just said is the on the supply chain management side, we've learned some really key lessons on some of our suppliers that have stepped up and helped us through this. And I think those suppliers have lowered our cost and improved our quality. Obviously they're going to reap the benefits as we ramp back out of this. The lessons we've learned in management of our suppliers and technology suppliers, it's also being applied to our customers, right?

Our customers clearly are giving us credit for stepping in and leaning into taking care of them during some tough times and getting them pieces of equipment or getting them parts and after sales service and support. So, you know, that's not going to change. Our leverage across our supply chain got accelerated during the initial weeks here, leveraging certain suppliers for better quality and lower cost. And our customers are doing the same thing to us. So that is going to pay dividends next year and the year beyond on how we look at our suppliers and how our customers are looking at their suppliers.

Speaker 10

Thanks. And then you guys discussed about, obviously, buyback versus acquisitions, etcetera. And obviously, we're all right now. It's pretty early to be deploying much capital. But are you having some of the largest strategic decisions and discussions about potentially diversifying the portfolio more and maybe getting more, let's say, into processing, which may be more insulated and more agnostic to where food is consumed?

Are we thinking into having those discussions yet? And are you thinking about diversifying the portfolio in that way at all?

Speaker 1

Larry, I would say we clearly are very focused on food service as a company, and we like the food service market, right? So I mean, I think despite that we're very disrupted right now, I mean fundamentally, it's based on people eating, right? So whether it is through our food processing operation, which we're supplying to retailers and in the home and a lot of our customers are going to the restaurants or whether it is preparing food at home, which we've continued to expand on and in commercial. And then within commercial, we've continued to broaden out from cooking then into beverage and really becoming a technology company that's going to help run a foodservice operation, whether it's a restaurant or C store, institutional operation, right? So I would say we have a very broad and diverse portfolio around food service.

I think that we have demonstrated that we continue to broaden that over time, but within very core competencies that we understand very well from a product and innovation standpoint and how we can deliver value to our customers. So I mean, I think that's kind of just our natural DNA is to continue to broaden in a place that frankly is a fundamentally that it's food service. So there's some stability behind that. Certainly not in a specific quarter, but over a long period of time. So naturally, that's how we've extended the company.

And I think that will continue to a certain extent going forward, extending into areas that are very core synergistic, we know well and fit into our strengths.

Speaker 10

Okay. Thank you and good luck.

Speaker 1

Thank you.

Speaker 0

That is our last question today. I'd now like to turn the call back over to management for any closing remarks.

Speaker 1

Okay. Well, think we covered a lot on the call, so I don't have a lot of closing remarks other than I mean, I think obviously, we're confident in the actions that we've taken to move through what is a challenging period here and ensure that we're taking care of our employees, customers and continuing to leverage the financial strength of the company. So again, appreciate the support of everybody, customers, our employees and shareholders. So thank you everybody for joining today's call. And we will talk to you on the next quarter.

Speaker 0

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.