Hello, and welcome to the Middleby Corporation First Quarter 2020 Conference Call. With us today from management are Tim FitzGerald, Chief Executive Officer; Bryan Mittelman, Chief Financial Officer; and David Brewer, Chief Operating Officer. Please note, there are slides in the investors section middleby.com to accompany today's call. We will start the call with comments from management and then open for Q&A. [Operator Instructions] Now I'd like to turn the call over to Mr. FitzGerald. Please go ahead, sir. Timothy J. FitzGerald

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 the organization as they have responded to the crisis of COVID-19. 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, be 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 employee 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…

Thanks Tim. For the first quarter, we generated GAAP earnings per share of $1.33 versus $1.24 in the prior year. As you'll 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. 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 $3.10 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 million. Our EBITDA margin improved slightly to 20.3% from 20.1% in 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&A expenses from acquisitions added over $11 million 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 million 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…

[Operator Instructions] Your first question comes from the line of Jeff Hammond with Keybanc Capital Markets.

Hey, good morning guys.

Good morning, Jeff.

Thanks 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 Bryan, but as you look into the 2Q and given all the cost actions you’re taking, how do you think decrementals flush out? If you can give any color by segment, that’d be helpful. And then, also as you kind of get into the second half and things start to normalize a little bit, what would those look like?

Obviously, we shared order indications or information, 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. 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 a specific commentary two and three quarters out at this point in time.

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

Again, I’m not going to get extremely specific on that, we don’t offer exact guidance. But it would – 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 I’ll leave it to everyone to come up with their best model, but hopefully it is no worse than that.

Okay. And then just one more. I mean, certainly you give 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 which were sharply down.

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 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 when we did see consistent climb, our trough was in – the week of ending April 3rd and 10th and then 17th, 24th through even last week we’d seen a consistent step up. So look, 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? I mean, everybody was dealing with the pandemic, jesting 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. Again, we’re reporting orders here, not sales. So we came in with a bit better of a backlog going into to 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 had shared as well as just kind of activities behind that.

Okay. That’s very helpful. Thanks, Bryan.

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

Thank you very much. Good morning, everyone. I think I want to ask Jeff’s margin question maybe a little bit different. Bryan, when you were sort of thinking of all the buckets of costs that you’ve taken action on, can you maybe talk about the dollar figure associated with some of these buckets? I know you had roughly $20 million 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.

Yes. The $20 million 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&A side, I mean, we are certainly targeting an excess of $25 million, 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 fixed versus variable and given the decrements we’re seeing in the business now, it really causes you to challenge, what you thought may have been fixed or semi-fixed. So I don’t have the specific number yet or kind of run rate or plan on what is the new level of costs, whether it’d be on other cost of support production or in SG&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 some of them are going to turn into let’s call them semi-permanent. So I put out kind of a number there on the SG&A side, again, not sure that – I’m not going to 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&A side, even though, we certainly attack them with the same figure.

All right, that’s helpful color. And maybe going back to demand and looking at April, I’ve asked this same question of one of your peers the other day. But obviously, demand is down 60% in April, but it’s not down a 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, and as you think about this base – that you still have a business how do you expect this set of customers or type of demand to progress going forward as the economy reopened?

So Mig, if it’s helpful, we – there’s a slide deck out there. Page 9, 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 – different segments out there. And 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 businesses kind of continued to creep up. And a lot of places I go to and I hit multiple restaurants today and the drive-throughs are busy. My daughter is at DoorDash and she’s booked all day. And so there’s – those segments are turned down retail, which – and C stores, which were 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 it’s a good time to continue to invest in that. So we’re – so again, retail, C store, healthcare – our healthcare business is held in a 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 that goes into hospitals. And as I mentioned in the kind of the opening comments to even institutional on the school system side, I…

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 a quarter of 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.

Yes. The collections have continue 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, as a 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.

Thank you.

Your next question comes from the line of Saree Boroditsky [Jefferies].

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

Yes. The – 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 down. 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 foodservice 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.

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’ll be more opportunities in the pipeline, as smaller players may not be able to weather the lower sales as well as you guys?

Yes. So that’s a good question. So as always, we had plenty of ideas in activities coming into the year. Obviously, this is a significant disruption like the – 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 the better understanding of the outlook. But look, I mean, acquisition and business development ideas are core to Middleby and certainly, there was a lot of strategic initiatives that we had to expand a certain piece 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 fair 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, we – a lot of our most transformational acquisitions came in and around disruptive periods like this. Certainly, we 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 shut off of kind of what is a core tenant of Middleby.

That’s really helpful color. Thank you.

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

Hey, guys, how’s it going?

Good. How are you, Joel?

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 disrupted 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 2021 or 2022?

So look, again, it’s very early. We had a number of initiatives that we had been executing on last year. Bryan outlined a number of those in the comments, which were some wind in our sales coming into this year. Certainly, there are some other items which might relate to recent acquisitions or other synergy opportunities around the company that certainly we’re – 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.

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 had been throwing it around that that’s going to be an issue. But it seems that historically that 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?

Yes. I’ll start, and then I’ll pass to 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 shutdown 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 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 and 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 a used laptop from another company and wipe it clean and kind of start over. You kind of want the latest and greatest that'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 over take the industry. I mean, even as we, Middleby have looked at, should we buy used equipment refurbishing it, put it back out in the market. Our conclusion was that it – and I would say conclusion, we have done this in the past. It was more costly to refurb equipment then 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 needed customer. So Dave, why don't you…

Okay. Great.

Yes, Tim, I'd only add, build on that. That 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 where – and it wasn't profitable, and it wasn't really did not generate good pieces of equipment that will 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 markets, 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, re-install it versus a new piece of equipment. It hasn't worked in the past. It hasn't worked for the last 20 years. And while it surely will be looked at. I don't think it's going to work in the future, frankly.

That's great. Thank you very much.

Thanks, Joel.

Your next question comes from the line of Jamie Clement from [indiscernible] Advisory.

Good morning, everybody.

Good morning, Jamie.

Tim, if you, or Dave if you look back over the last five to 10 years, the percentage of your business in commercial food service 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?

So I'll start on this one too, and then I'll kick that over to Dave to add onto it. So clearly in the recent periods, it has been greater internationally, right? So you've got, as we focused on emerging markets, clearly that's where the 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 in. 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.

Okay. Great. Dave, any comments?

No, I would say exactly the same thing. I'm actually pretty excited about the international markets and especially what we've been focused on with new store development internationally. I think it’s going to pay dividends next year in 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.

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

Thanks, Jamie.

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

Hi. Thanks. Good morning, guys.

Hey, Walter.

I just got a couple of follow-ups. One on the M&A discussion, you're a bigger company now at this point. I wonder if there's a view that you have on M&A versus buybacks, with the stock down here, once things start to stabilize. Would you look at one or the other, do you still prefer M&A over buybacks?

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 hoped, it is 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 weighed 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 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 out view on – positive look on how we perform in the long run.

Okay. All right. And then I wanted to 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, are more aftermarket parts and service to get the restaurants up and running again?

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 and the comments were probably eight to 10 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.

Okay. All right. Great. Thank you. Good luck guys.

Thank you.

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

Hi, thanks. Good morning, everybody.

Good morning.

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 detailed restructuring? Obviously and structurally different CFS markets may be in order now with some of the closures that may be more permanent. So 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.

So Larry, I would just say it's probably too early. I mean, clearly the utilization factor is very low right now, right? So 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, we're – 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 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 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.

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 costs and improved our quality and 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 through 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 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 costs 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.

Thanks. And then you guys discussed about obviously buyback versus acquisitions, et cetera. And obviously, we all think it's pretty early to deploying much capital. But are you having some of the larger 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 and having those discussions yet? And are you thinking about diversifying the portfolio in that way at all?

So, 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 through the restaurants or whether it is, preparing food at home, which we've continued to expand on. And in commercial and in 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 food service operation, whether it's a restaurant, a 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 that frankly is a – fundamentally, it's foodservice. So there 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 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.

Okay. Thank you and good luck.

Thank you.

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

Okay. Well, I 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.

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