The Middleby Corporation (MIDD) Q4 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for joining us for The Middleby Corporation Fourth Quarter 2021 Earnings Conference Call. With us today from management are Tim FitzGerald, CEO; Chief Executive Officer, Tim FitzGerald; Bryan Mittelman, Chief Financial Officer; James Pool, Chief Technology and Operations Officer; and Steve Spittle, Chief Commercial Officer. We will begin the call with commentary from management and then open the lines for Q&A. [Operator Instructions] Now I would like to turn the call over to Mr. FitzGerald for his opening remarks. Please go ahead, sir.

Thank you for joining us today on our fourth quarter earnings call. As we begin, please note there are slides to accompany this call on the Investor page of our Web site. I'm proud of the results our team delivered to finish the year. Financially we posted all-time records in revenues and earnings for 2021, returning us to our trend of consistent growth, following the pandemic year of 2020. I'm particularly proud of the effort it took to deliver those results. While the effects of COVID have continued, we have also faced the challenges of inflationary pressures along with the extraordinary supply chain disruptions that have impacted our business on a daily basis. Our Middleby teams have made a tremendous effort in 2021 to navigate these challenges, and strive to do the best every day for our customer. Thank you to all our team members across Middleby for these efforts, and all that you delivered in 2021. We are in exciting times for the foodservice industry as customers are looking for new challenges. Labor availability, rising food costs, rapidly-changing consumer trends, the increased focus on sustainability, and an evolving digital world all present a changing landscape and future opportunities for our business. And we are investing for this future. In 2021, we have had many new innovative product launches addressing the evolving needs of our customers. Some of these launches we have previewed in prior quarter calls, such as our next-gen Taylor-automated grill, the PLEXOR rapid cook platform, and the Alkar high-speed oven with TurboChef technology for food processing operations. In 2021, we've also significantly progressed company-wide technology initiatives focused on controls, automation, and our open kitchen IoT platform. These strategic investments will benefit all three of our foodservice business, and uniquely position Middleby to support the growing demand for minimized labor, operational efficiency, and utilizing data in the kitchen. As we bring new technologies to market, it is more important than ever to evolve our engagement with our customers to educate, demonstrate, and validate the operational benefits of these solutions. The investments we have made in our innovation centers, supporting all three of our segments, are providing to be invaluable resources, and enabling us to accelerate the introduction of our latest innovations into the marketplace. And despite COVID, in 2021, we have had a record number of hands-on engagements with customers and channel partners. In 2021, we also made great strides progressing our digital strategies to increase awareness for our brands, products, and latest innovations. Our investments in digital marketing and sales tools are allowing us to reach new customers, rapidly educate our sales partners, and expand interest for the many solutions across our Middleby brands. In 2021, we also continued our long-stand track record of strategic acquisitions, building upon our three industry-leading platforms. We furthered our commercial foodservice platform with the addition of Imperial range, a leading brand of cooking equipment, and Newton, a highly innovative dispensing technology, bolstering our growing beverage platform. We furthered our automation initiatives, investing in productive robotics, supporting the launch of our FryBot and PizzaBot solutions. And we added four new exciting brands to our residential platform, including Novy, Kamado Joe, Masterbuilt, and Chartbroiler, expanding both our indoor and outdoor offerings, while almost doubling the size of our residential business. Operationally, we remain focused on delivering for our customers. We answered the year with a record backlog, and continued supply chain challenges. To address this, we have invested in inventory, people, manufacturing equipment, and facility expansions. And our supply chain teams continue to work actively to minimize disruption and increase supply. It remains difficult to predict the cadence of our increase in production capacity, but we expect consistent improvement as we progress through this year. While we address the challenges of the current operating environment, we continue to execute on the initiatives to expand margins, and remain committed to our long-term profitability goals. We are pleased with the strong levels of profitability we achieved across all three of our business segments this year, as we navigated the dynamics of the current inflationary environment. We continue to progress our initiatives to realize platform synergies, and evolve our portfolio of sales as we shift mix to higher technology offerings. As we look forwards, we're optimistic about the landscape for our markets in the year ahead. The restaurant industry is in recovery. Categories such as casual dining, institutional, and travel and lodging are joining the recovery we have seen in categories such as quick serve, pizza, and fast casual. And our customers in all segments are making strategic investments in their foodservice operations like never before. At our Residential business, well, new home starts and existing home sales continue to be robust, and well ahead of 2019 pre-COVID levels. These favorable housing dynamics, along with increased time spent at home continue to support new kitchens and remodels, presenting a favorable backdrop to the market in 2022. The food processing industry is in a period investment with need for equipment to increase capacity, address operating challenges, and launch new food items. And we are poised to capture new trends in faster growth categories, and provide unique offerings with our full-line in automated solutions. Now, I'll pass the call over to James to comment on some of the technology initiatives and spotlight another recent product innovation highlight in our Investor slides.

Thanks, Tim. Over the past year, we shared some great examples of NPIs that Middleby launched in 2021. As a reminder, these products can be found in supplemental deck provided for this call. We introduced technologies from our automated frying solution, the FryBot, through our latest highly-efficient multi-zone food processing oven, the TurboChef by Alkar to recall a couple. Middleby continues to deliver meaningful innovations at the brand level, and collaboratively across the brands. As we look at new product introductions, NPI, our brand's focus on more than making the best and efficient coffee, espresso, ice-cream, burger, pizza et cetera, they focus on the best possible platform with sustainability at the forefront of the innovation. Greenhouse neutral materials, packaging, water, gas, electrical consumption, food waste, automation, operator safety, to name a few, are all facets of the design that our engineers continue to focus on. The CiBO Plus [indiscernible] is no exception. The CiBO Plus is Middleby's latest cooking innovation. The CiBo Plus was developed to deliver a new and highly flexible sustainable cooking platform to address all market segments looking for a flexible green cooking solution. The CiBO Plus has enjoyed much success in U.K. from retail chains to pub chains, and many more general market venues. The CiBO Plus is ready to launch internationally, where we will target emerging markets due to its very low energy consumption and low input power. At the core of the innovation are four unique heating mechanisms that work independently to maximize cooking flexibility. Convection, radiant, microwave, and conduction define this technology, and are at the root of this new innovation. In particular, the radiant conductive base is the first of its kind and provides unique finishing capabilities. And with all new Middleby innovations, the CiBO Plus is compatible with open [indiscernible]. We look forward to the great growth that the CiBO Plus will bring Lincat and Middleby. And now, I'll turn it over to Bryan.

Thanks, James. For the fourth quarter, we generated record results with revenue of over $866 million and adjusted EBITDA of $193 million. GAAP earnings per share were $1.80. Adjusted EPS, which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $2.11. This amount of adjusted EPS includes a negative impact from the recent [indiscernible] acquisitions of [4 Cents] [Ph]. Given the scale of the deals we closed as Q4 ended, this acquisitions impact figure includes the third-party costs associated with executing the transactions. While supply chain challenges persist, year-over-year revenues grew nearly 19% or 12.6% organically. I am pleased to note once again that robustness in orders persists. Orders have again exceeded $1 billion for the quarter. Adjusted EBITDA of $193 million reflects growth of 33% over the prior year. Our margin exceeded 22% of revenues. Sequentially, we expanded margins in all three segments. As I enjoy reminding you, we are consistently growing our bottom line faster than our top line even while we are making meaningful investments in technology initiatives, are bringing differentiated products to the market, and are expanding our platforms. Commercial foodservice revenues globally were up 18% organically over the prior year. The adjusted EBITDA margin was 26%, an increase of approximately 150 basis points sequentially from the third quarter. By the way, all the margin values I will discuss are on an organic basis as well meaning excluding any acquisitions and FX impacts. The margin results were seemingly better than I predicted after the third quarter. Supply chain challenges and inflationary pressures do persist, but we benefited from mix, integration actions, and some pricing. In residential, we saw revenues up 4% versus 2021. The adjusted EBITDA margin was 21%, which was marginally above Q3. In food processing, revenues increased approximately 5% and the adjusted EBITDA margin was a little under 24%. Across all our segments, we're seeing positive results from both our concerted efforts to shift product mix to our best solutions, and from our mid-year pricing actions. Our operating cash flows were over $77 million. The current business environment is impacting our working capital levels, especially as it relates to inventory where we're addressing very strong demand levels, while facing increasing costs and many supply chain related challenges. Our total leverage ratio is 2.8 times. Our covenant limit is 5.5 times. So, we currently have over $2.2 billion of power and capacity. These figures are after giving effect to the nearly $600 million we recently deployed in acquisitions. One brand that we acquired is Kamado Joe about which one of my sons commented, "Kamado Joe sounds like a Superhero." And that got me thinking, we have a whole universe of super products, I'd argue they're Superheroes for our customers. So, I would like to introduce you to The Middleby Universe. Kamado Joe with the strength of a five-piece ceramic shield, a smooth hinge and countless accessories is out to save the world from spoiled green eggs. And as he battles next to him is Masterbuilt, a lover of the outdoors, who fights with smoking heat, which are controlled with amazing precision. Also on the outdoor crew are there charcoal power twins, Char the Griller and Char the Gritler and speaking of griddles, which is the fastest growing category of outdoor cooking applications, lurking on patios as EVO who always gathers a crowd, take a bite of a delicacy prepared on this flat top grill, and you will immediately be transported anywhere you choose. And I know this firsthand. After a few bites of Chef Chris's Bulgogi Beef by me, I was transported to Vietnam, seeking out more chef [indiscernible]. By the way, stop by any of our not so secret hideouts, I mean showrooms, to start your own journey. And The Middleby region does not stop there. Moving indoors, Brava can electrify a situation with 1,800 watts of power, ready to instantaneously strike and known for sheer strength in walks biking, burners of blazing, who fights off subzero temperatures while out hunting to keep us safe from wolves. And that's just the North American Crew. Leaving our European allies is a lot Cornu who brings some elegance to the battlefield and with the new racing, inspired costumes, I mean, colors by Martyn Lawrence Bullard. She has camouflage for all settings and we have our own Iron Man 2, Aga. While I potentially am getting a little more than carried away here, my son told me this was quite clever. And that was incredible praise. And it made me quite happy. But I will admit to being a little disappointed. He doesn't equally appreciate all my spreadsheet skills. But bringing it back to finances, what I really think is clever is that when we are not acquiring superheroes and building super products, we also may be acquiring stock. During the fourth quarter, we used over $80 million on capital and share related actions. Firstly, we purchased $25 million of stock under our existing buyback program. We continue to make purchases in 2022 for an additional $75 million. Secondly, we took actions to address future dilution risk associated with the convertible debt we issued in August of 2020. We spent nearly $55 million in Q4 on capped calls to increase the effective conversion price on the convertible debt from under $208 up to $225. The potential benefit of this transaction is as follows, assuming our stock is trading above $225, when the convertible notes mature in 2025, we will receive nearly $100 million of stock for which our after-tax cost was around $40 million. Transitioning to nearer-term outlook commentary, I will start by discussing our backlog in order trends. As a reminder, we have included details in the presentation that is available at the Investor section of our Web site. We will be refraining from sharing this information going forward, as we believe we have recovered from the depths of the COVID impacts, such that comparisons back to pre-COVID periods are not as relevant. For food processing, I will remind you this segment is prone to more volatility than our other businesses. Orders were up over 2020 levels, but admittedly we're down modestly versus 2019. It is important to note that Q4 of 2019 was exceptionally strong. It was the highest order quarter ever for this segment. The second highest quarter ever was Q3 of 2021 then followed by just ended Q4 of 2021 in third place, so the business remained strong. We closed out 2021 with a backlog of nearly $190 million, which had grown 40% during the year. 2022 has started off well. The backlog is up a further 20% so far, reinforcing our positive outlook. Commercial foodservice order growth for the fourth quarter over 2019 was 40%. This is the highest quarterly increase during 2021. Orders have exceeded $700 million for three quarters in a row now, and the start of 2022 has continued to be just as strong, our backlog at year-end was under $900 million. It has grown over 15% to-date in 2022. Residential order intake for Q4 exceeded 35% over 2019. As is typically the case Q4 was seasonally stronger than Q3. This segment closed the year with an organic backlog of over $290 million and this has grown modestly in 2022. I will reiterate however what I shared last quarter, we are keeping our expectations at modest levels for the near-term given the supply chain limitations and significantly expanding revenues. As I mentioned last quarter, we did take pricing actions during Q4 and additional increases will be implemented at the start of Q2. This is all necessitated as inflationary pressures on costs for materials, freight, and labor persisted through the fourth quarter and had continued into 2022. We do not see near-term relief on any of these factors. Also, the Omicron surge impacted productivity for us and our suppliers as we started 2022 and will have an impact on Q1 margins. So, looking at Q1 for commercial foodservice, we expect nominal top line growth sequentially, and margins likely back at levels more similar to Q3, given increasing cost pressures and the COVID disruptions. For residential organically, which excludes the significant and exciting Q4 acquisitions. We also expect modest top line growth sequentially. Given the profitability levels associated with our recent acquisitions, the full segment revenues will be coming down. However, as outlined in the slides we posted we obviously have a strong track record of growing margins at acquire businesses. We are beginning that journey with our expanded outdoor platform. For food processing, as is typically the pattern for this segment, Q1 revenues and margins will be a little softer than Q4. Nonetheless, given our backlog and the investment activity in the markets we serve, we are expecting strong growth along with margin expansion as we progress through 2022. So, thinking about margins across our businesses, while we have been regularly taking pricing actions, given the persistent inflation impacts, and backlog levels, near-term margin pressure will remain. A comment to the Q1 looks likely looks similar to Q3. The benefits of pricing actions will continue to build through 2022. But margin expansion from price cost favorability probably takes a little longer than we'd previously hoped. We believe improvements will begin to build in the second half of '22. Every day we are working hard to address inflationary pressures and the supply chain issues that limit productivity, availability and impact our volumes. Nonetheless, are focused on innovation and delivering value to our customers is unwavering. And they have continued to show a healthy appetite for our products. We closed out a challenging and amazing year with a record quarter. Even with the challenges that are present, we are looking forward to an even stronger '22. Our entire organization is excited to deliver more record setting results. And with that, we are open for your questions.

[Operator Instructions] And our first question is coming from the line of Mig Dobre with Baird. Your line is open.

Thank you, and good morning, everyone.

Hey, Mig, morning.

Morning.

So, I guess where I'd like to start is on what you're seeing on a cost side and the supply chain, the fourth quarter here was better than kind of what we were expecting, and what we heard from other folks in the industry, I think. And I'm curious as to what do you see and what allowed the quarter to be better than expected? And it sounds like you're seeing additional challenges as you look into the early part of '22. Can you be a little more specific as to what those are and how that kind of plays into the margin guidance that you just provided us?

Well, I think for the time we had the last call, the inflationary pressures have continued, right, so we didn't just kind get them all hit in Q3, but then we've seen steel continue to rise, labor is certainly going up, freight has continued to be a challenge. So, the reality is the cost side of the business actually took a pretty bit step up as we went through the quarter as well, and we'll perhaps talk about some pricing as well. So, I mean, we've continued to be pretty proactive in making sure that we address it with pricing challenges. But I mean I think the comments that Bryan reflected are some of the increases in cost, really across the board that we've seen kind of a -- particularly on the material and shipping side.

And as I think about Q4, we also did have some mix benefits in there, and we hope to work to sustain that. And as we think about Q1, and I've read some of the notes that came up this morning, Omicron wasn't as impactful to us in Q4 as it was in Q1, where we had disruption at many of our divisions. So, while there might've been more expectation about that impact in Q4, again, I think we started off okay there. But certainly, our having productivity losses in Q1, and it impacted both us and our suppliers.

I see. Okay, that makes sense. You talked about another price increase that is coming in the second quarter. And I guess what I'm wondering here is, are you getting any sense that some of your channel partners, customers, and so on are potentially trying to [front-run] [Ph] some of these price increases, because they've been quite meaningful in 2021. And given what you're experiencing, from a cost standpoint relative to sort of three months ago, what is a fair expectation for the sort of price increases that we should be thinking about in Q2?

So, I might ask Steve to jump in here, but when you say front-run, you mean bring orders in at price increases?

Yes, that's what I meant, yes.

Yes. Yes, I mean, I think there's - there is always some of that dynamic. I think the challenge that we've had is just we have such a large backlog, right, and we're not going back and re-pricing all of that backlog right now. So, I mean, I think one of the things, as you look at the margins right now, we feel like we've taken a lot of the appropriate actions. And so, maybe we'll have some margins that are a little bit challenged in the first quarter. But as we kind of think about our underlying business, we get kind of through this kind of, let's say, the price lagging the cost. We feel pretty good about where our margins are as we come out of that period. But I think - but it'd be helpful, also, to kind of walk through what the cadence is. So, Steve can probably touch on that better than me.

Yes, good morning, Meg. So, again, just going back to the second-half of last year, so, again, we really hit our first round of pricing in the back-half of the year, in August. And then, went with another round in November. And as a frame of reference, the November increase was a bigger increase than the August increase. And as Tim commented on, obviously with the costs continue to go up as we finished up last year into this year, we did announce another increase that would go into effect on April 1. And I would say that April 1 increase would be in line with increase from a side standpoint to the November increase. And so the way I would think about how that pricing is flowing through is, again, the August increase, you really would probably would start to see -- we pick up maybe a little bit in the fourth quarter, but you really would start to see that flow in the first quarter. I think the November increase, you start to see float through in the second quarter, third quarter. And then the April 1 increase, I think you're maybe tail-end of third quarter really coming through in the fourth quarter. So, this is kind of how I would think about the cadence and flow-through of pricing as the year unfolds. I would say we've also been very intentional going after chain customers as well, so I mean kind of speaking to those increases for more general marketable to more broadly, but also being very intentional, [indiscernible] chain customers, which is, obviously, where a lot of growth we're seeing right now is coming from.

Great, that's really helpful. And just to clarify if that August -- I'm sorry, rather than November price increases flowing through in the second quarter, is that enough to bring you to price-cost neutrality or is that getting pushed into the third?

Yes, I would still say we're behind, right, I mean that's why we needed to take another price increase going into the year, because I think the November price increase that we had really reflected what we were seeing in the market in the third quarter kind of, hedged around the time in the last call. But again, we've seen costs continue to go up, and that's kind of reflected in the last increase that's going into effect that Steve just mentioned around April 1, which we'll see later in the year. So, we are lagging as we go through the year. I mean, certainly, we're doing other things to expand the margin, which was kind of our longer-term plans. We'd expressed our longer-term target margin, so that's bolstering here, as well as some of the other short-term actions that we can take. But I mean I think, really, we feel good, again, about the actions we've taken, but there is just going to be this lag as we go through the year. But we should see improving margins also as we go through the year.

Understood. Final question for me --

As pricing comes on.

Okay, right. Last question for me is on automation, your comments on automation, all the new product highlights that you had. And I'm asking, specifically, for products like FryBot and PizzaBot, and I guess the question is this, as you're presenting this solution to various customers, what is the feedback? I mean are these products sort of feasible to sort of start seeing in commercial operations over the next, call it, 12 to 24 months? Or are we still at the stage where we're just talking about prototyping, and this is more of a, I don't know, longer-term 2025 and beyond-type opportunity?

So, I'm going to kick it here to James in a second, but I would think about it in really a couple of categories. I mean, we introduce products for today, and then we also continue to build for the future of what we think that is going to be a continued pipeline we're going to be developing over a period of three-plus years. So, I mean, I think as James would describe it, this kind of embedded automation, which is here and now, and then there's kind of these, let's say, more of breakthrough technologies that is part of our investing for the future, but there is interest traction, et cetera. So, I mean, these things will come on sooner in a period like we're experiencing now, where labor is obviously one of many challenges, so there's a lot greater interest in these solutions. So we do feel good about kind of the cadence of how we'll evolve over the next handful of years.

So, Mig, I'll say that we've got both the FryBot and the PizzaBot operating at the Middleby Innovation Kitchens, in Dallas, where we've been not shy about talking about the number of customer visits that we have through the [indiscernible]. I will tell you that both products are getting a very warm, great reception by the end-users. And really, I would expect to see solutions like the FryBot in the marketplace and limited volumes this year with volumes continuing in subsequent years. I mean, it is a long-term strategy today. Our customers are taking us up on the great embedded automation that we're offering today. But they are forward-looking to how do I add collaborative robotics such as other robotics that we've invested in with productive to embedded automation to further enhance the either the profitability that the equipment can bring them. So, I would say this is not [vaporware] [Ph] by any stretch and we do expect meaningful revenue from these solutions in the next few years.

Great, thank you.

Yes.

Thanks, Mig.

And our next question is coming from the line of Tami Zakaria with J.P. Morgan. Your line is open.

Hi, good morning. Thank you so much for taking my question. I think one of your slides talks about the potential for acquisitions to gradually get to Middleby's 20 plus percent EBITDA margin profiles. So, can you comment on how fast this is likely to happen for the most recent acquisitions you did in December? And can you share some examples of initiatives that help you get there for these new ones?

Sure, yes. So, I -- you're referring to the outdoor growth acquisitions presumably. So, I mean, I think the -- we are very excited about those brands and a lot of the products they're bringing to market, as we've kind of posted in the slides there north of 10% or just kind of low double-digit right now. I think, we're still in early stages, but we feel like in 3 year timeframe is about the right horizon to kind of journey from the 10% to the 20%. We also kind of commented in those slides to some of the areas of, which are synergies. So, whether that is supply chain, logistics, probably some product development part of that is organic of what they were doing, because there's some great products that all those brands and companies were bringing to market and then kind of accentuated by capabilities and technologies -- Middleby, so thinking about shift, bringing innovation to market, so those would be some of the categories that typically we would lean on and, I think we've obviously got a long track record with acquisitions, we posted a few when they're on the residential side and kind of the journey that we've had with those margins, so we feel pretty good about that. We'll certainly have more clarity as we kind of go through the course of 2022.

Understood, thank you. And if I could ask one follow-up along the same lines, I think, we've heard one of the outdoor bill competitors recently reduced their annual outlook against tough compares. Does that have any implications and how you're thinking about the growth potential of these new acquisitions you made late last year? Are you expecting these businesses to be -- to grow in line with a broader company or maybe touch below that given residential has -- it's coming off of a tough comparison, how are you thinking about growth with new additions this year in near-term?

Yes, so a couple of things. One, we're living in a dynamic world and certainly residential, indoor and outdoor are no exception to that. And those companies have experienced some, some nice growth, there may be a little bit of pullback in the market broadly. I think one of the things that excited us about the platform and outdoors been an area that we've wanted to expand for a long period of time and so we probably talked about outdoor over the course of a number of years. But really kind of the products and the categories that we are in particularly with these brands, we feel that there is kind of longer term growth trends as we think about in active charcoal, gravity fed and charcoal certainly kind of the Ag platform. So, we do feel that there is a lot of potential market growth over a number of years here. So, what the next 12 months brings, and we do think that the next year will be a pretty good year with those businesses. But I mean, I think we're excited about the long-term outlook of the whole outdoor platform. Q – Tami Zakaria: Great, thank you so much.

Thank you.

And our next question is coming from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys.

Good morning.

So just really want to come back to one thing on kind of the margin cadence and price cost, I think you said, it's going to take longer for kind of these pricing actions to read out, and I just want to understand what is driving that, because it seems like you guys push through some of your backlog with a strong fourth quarter, and I'm just trying to understand why that would take longer?

You want to give it a shot?

I think, Jeff, I would just say, as we continue to see orders come in as strong rates again going back to being up 40%, in commercial, over 19 for the fourth quarter. So, I mean even though I think we're doing as good a job as any keeping up with the supply chain issues and getting products out the door, your orders continue to come in at obviously, your record high rates, so it's still this continued cadence of orders really kind of outpacing units out the door. So, that's obviously it's building the backlog and the backlog continues to grow, that that's where you see the quarter to delay of having the price really flow through, if that makes sense. So, again, I've just tried to kind of lay out, if you think about where the pricing is going to affect you, you're going to have almost two quarters before you really start to see that pricing flow through maybe it's three to four months on the short side, but certainly up to five or six months, depending on the brand, the product before you really start to see that come through, again, based on just where order trends have been and continue as we start this year.

And I'll add to that, right, we have multiple variables involved there, right. So, obviously we're addressing the price side as Steve has outlined, but the cost side continues to jump around as well, right. So, we're just not getting any, no stabilization on the cost side, right. So, that just makes it a little bit harder to get the margin expansion, that we were driving towards.

Okay.

Jeff, if you just think about the price increase that Steve mentioned, which we've announced to the market, it goes into effect, none of that's in the backlog today, right. So, we've got roughly $1.4 billion, $1.5 billion backlog, that's not included in there, right. So, but the cost side is going to hit that so that hence, some of the timing.

Okay, okay. And then just, as you think of some of the component availability in your manufacturing capability, just trying to get a sense of, if you think you're going to be able to catch up any of this backlog in '22 at some point either catching up on that supply availability, or increasing production or do we exit '22 at these still really elevated backlog levels?

So, I'll start and then others can add and correct, because it's a little bit of a crystal ball, right. I mean, I think the reality is we are doing the things that we can do. I mean, we have invested in inventory, you could see that we've got roughly $200 million more of inventory, at the end of the year than I think we had at the beginning of the year. So, I mean certainly that's a cash flow investment, we've done things operationally, in challenging environment to add people, which is very difficult to add as well as well as we've invested in fabrication equipment, I mean so we're very focused on trying to expand the production and let's say, reduce lead times to catch up to our customers. And the key element is supply chain, and our teams are working very hard all year long. I mean, they've done a tremendous job and making I will say [indiscernible] on a daily basis because the number of folks, you wake up in the morning and you find out, you've got a dozen fire drills to go deal with I mean, that that is kind of the venue of the day. So, that being said, I mean, I think we've done a lot of things in terms of thinking about how can we expand the vendor base, how can we get more out of our supply partners, et cetera, right. But I think that that is the challenge that we continue to face as well as many others in the industry. We do think that we will do better as we go through the year. But I mean, I think that that is going to likely be also the continued constraint. So, hopefully, it'll be an approving situation, but likely a constraint. So, I mean it's hard to say what the end of the year is going to look like, Jeff, but I mean luckily, we're still going to have a much larger backlog at the end of 2022 than we would have historically, it's hard to envision a situation that we don't.

Okay, thanks so much, guys.

[Operator Instructions] Our next question is coming from the line of Walt Liptak from Seaport Global. Your line is open.

Hi, thanks. Good morning, guys.

Good morning.

Wanted to ask about the commercial foodservice, that order growth that you referenced plus 40%, plus 45%, I wonder if you can help us just, how much of that is volume growth and how much of it is price right now?

I think Steve has outlined, some of the pricing actions, right, we have taken right, so you can, I guess you know, model that into as you think about when the orders have come in, but it is much more volume than it is price.

Okay. All right, that helps. And then just we're thinking about trends, and sort of the changes that are going on in the restaurant industry, I wonder if you could help us, do you have visibility into are the machines that are getting purchased? Are they for replacement of old machines, like restaurants just doing their maintenance CapEx or do you think it's new store openings?

Yes, Walt, it's a great question. So, I think if you go back in historically, look at a "Normal year" for us usually about half of our orders are coming from replacement, right. And then the rest of the orders and they have absolutely new builds, parts, menu driven innovation that restaurant may incorporate So, but go back to it usually being 50% on replacement. I have the exact number but I will tell you, I think there's been a noticeable shift over the last six months, maybe a little bit longer. And certainly as we're for sure, going into this year, where you're seeing the new store orders take more of that overall order share. So, I think it's again, it's coming from the large QSRs, the fast casual guys. I mean, they're building stores at record levels. And so you're seeing more and more new store orders than I think you would historically have I don't quite know the mix but certainly is probably the biggest percent of new store orders as a percent of overall orders that I think we've probably seen in a long time. I think at some point that will shift back I think, I think the new store order trend continues for the majority of this year, just knowing the pipeline that a lot of those big customers have in place right now. Then at some point, next year and beyond, you probably get back to your more, the traditional replacement cycle. But right now, it's definitely more focused on new store builds from an order standpoint.

Okay, great. And then maybe just the last one in food processing, yes heard the tough comp comment and that it's a strong market for food processing. I wonder if you can help us maybe a little bit with just the order funnel for the year, is it around the meat or the baking or is it both we are seeing a good order funnel?

Yes, we're seeing a good order funnel for both, I would say that there have been a little bit lighter if you go back over the last few years on the meat side of the business and that has probably strengthened here is as of late, so maybe shifting a little bit of the mix back towards that that piece of the business, which has been a good thing.

Okay, great. Okay, thank you.

And our next question is coming from the line of John Joyner from BMO Capital Markets. Your line is now open.

All right, thank you very much for the time. So, my question is on the margins. I know there's been a few of these, but just more on the -- I guess to me the margins have been very impressive for Middleby, when you compare it with a lot of other companies that we cover a lot of industrial companies, the margins overall have held up quite well, despite the headwinds that everyone knows about. So, maybe, can you comment on just the overall structural improvements that you made internally with your cost structure? And also possibly comment, if there's anything that's left to do? And then last on the what'd you think the stickiness of the pricing actions that you've taken, once we kind of get through all this, how much do you think these pricing actions, do you believe that you'll have to get back?

So I think the margins a bit, we've got actually some of that laid out in the slide, I will say that you can see, we've done a lot of acquisitions over the last three years and frankly five years and for that, as well, but I mean, we're making constant improvements to those business, I would say part of what you're saying, when you say structural really is leveraging the platform, kind of our best practices, et cetera with some of those new companies that have come into the Fall. So that certainly was part of the journey to get to our longer-term margin targets, and there still continues to be opportunities, because we continue to add companies to the portfolio, such as the growth companies and residential we talked about. So, I mean that is a piece of it, again we talked about mix, but there really is a strategy within the company. I mean as you know James kind of gone through NPI. And it's not only those products that we've got listed, because I would say that's a small sub segment of a lot of the products that we've had come out over the last several years. So, thinking about how do we really move the organization to selling on ROI and our better solution? So, I mean, those are two levers that are reflected and will continue to be reflected as we kind of move through the next several years. And I know there's other questions embedded there, but I forgot.

We will turn it over to Steve.

John, it is the price stickiness question. I mean, it's a great question. Obviously, the goal is to hold on to it as much as possible. I do think we've tried to be very open and transparent again with our key customers about where our costs are. And I think in turn, they've been pretty flexible on the pricing coming through on the other side. So, I think it certainly holds for the upcoming years. I just think, again, as we get through this period, and then we're shifting to the higher technology products through this period and higher better mix products that Tim talked about as well. So, I think those are all very favorable for us throughout the rest of this year, and certainly probably the next year to follow.

Okay, excellent. And maybe just one more, pre-COVID, you're kind of thinking that organic growth would revert back to that. I believe that's the case and tell me if I'm wrong, but back to the kind of mid to high single digit range for some time, I guess do you think it's hard to tell, right because I guess everybody has these kind of huge backlogs. So, it's really hard to know. But do you think that the industry is now really primed to kind of run as in this range going forward in that kind of mid to high single digits?

I think it'd be, we probably wouldn't want to project what the percentage would be because it's an unusual period, but I do think we feel that the industry is going to be robust for a number of years because kind of all the dynamics that we've been talking about, labor, food, a lot of new trends, demographic shifts, delivery, you know, so I mean we are kind of going through a exciting and unique period. So, I mean I think that is going to cause different types of investments in existing footprints as well as a lot of new restaurant opening as well as new players in the market, right? So, I mean I think that's not going to be a pretty favorable backdrop for a number of years. Q – John Joyner: Okay, thanks. I do have another one here. And Tim, so you talked about, Tim, you are -- in the beginning you talked about some of the new product introductions including greater automation. And obviously, a lot of improvements like process times are quite impressive. You kind of go back and look at what you had in your decks or when you read about these products such as Alkar and TurboChef and such where you go from cooking from hours down to minutes, from a payback perspective, what are customers from these? Since anything less than 12 months would be kind of a no brainer. And I guess how can you better highlight each products for people to better understand because I get that, you know, there is a difference full automation and kind of that journey toward automation. And when you have these products that you do highlight, I believe that people don't probably quite appreciate what the transformation that's occurring I guess within the overall industry, well, it's processing or commercial side or I guess the residential side. I mean, if you can kind of expand on those products or what -- and the customer update that the excitement -- I know you talked you about some of that earlier in the call, but anything you could add would be helpful. A – James Pool: This is James, and I will take that. I think that's really where the end user engagement is very important. Why Middleby has been successful with a lot of these innovative products such as rapid cook, accelerated cook. Even the embedded automation is because of our selling process and being able to get in front of the customers to demonstrate the product. Can't overemphasize enough the importance of getting customers engaged in front of the products to where they are actually cooking on witnessing what their products deliver. We did kind of the first wave of that work with the consolidated reps a few years ago. And now, we've kind of reinvented the process with the Middleby innovation kitchen and our ability to get to customers through the kitchen. So, they are seeing firsthand how these technologies can benefit them from a labor -- from a transaction standpoint or to drive ticket counts and profitability. As it relates to the payback, you are kind right on there. Under a year is not atypical for these types of systems. Q – John Joyner: Okay. A – James Pool: I think I hit all your points there. If I left one out, that's because I forgot the question. But, let me know if I missed any. Q – John Joyner: No, no, no, you did. But then just maybe -- sorry to ask so many questions here. But when you -- this kind of goes along with what James was just discussing. But -- and in your commentary that the sales paradigm customer engagement with innovation kitchen that shifted, I assume that essential benefits both the independent sales reps and customers. But maybe can you give more details around that? Does that really change how the independent sales reps go about doing their business? Or anything else that you could add color around that would be helpful. A – Tim FitzGerald: Yes. I think our rep organization is a partner and really part of Middleby today. I mean I think so we spend a lot of time kind of working on how does the sales process look together and doing lot of training and education. That's still frankly a continuing process. And they have made a lot of investments along those. And by the way not only do we have this great innovation kitchen which is I would say the mother ship in Dallas, but our sales reps have also invested in their own demonstration test kitchens. And they have invested in chefs, right? So, it's really a network that we've got across the company. And so, as we kind of talk about evolving sales process, there is many aspect to that. But one of that is most important is really making sure that we fundamentally understand what are those technologies that deliver the greatest value to our customers and giving that hands on experience. So, that really is something that we are doing more and more of. I mean it really been really kind of come on in this past year. And we will continue to pick up momentum as we go through the next several. A – James Pool: I think I'll just add that the innovation kitchen is actually also a tool for the rep in one that they engage in quite frequently. The reps are bringing customers from all over the United States into the kitchens where they really do need to show the broader capabilities of Middleby, one that they might not be able to do in their test kitchens. They are frequently traveling down there with two to 20 guests at a time. A – Tim FitzGerald: Yes, great point. Q – John Joyner: Okay, excellent. Thank you so much for the time. A – Tim FitzGerald: Yes. A – James Pool: Thanks, John.

And that is all the questions we have for today. I'd now like to turn the call back over to management for closing remarks.

Thank you everybody again for joining us on the call today and we appreciate it. And we'll speak to you in the next quarter.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.