MIDDLEBY Corp Q3 FY2020 Earnings Call

Thank you for joining us today for The Middleby Corporation Third Quarter Conference Call. With us today from the management are CEO, Tim FitzGerald; CFO, Bryan Mittelman; and COO, David Brewer. We will begin the call with comments from management and then open it up for question and answer. Instructions on how to get in the queue will be given at that time. Also, a presentation to accompany this discussion is available on the Middleby Investor homepage at middleby.com. Go to the Investor tab on middleby.com to access it. It is also available in the presentation folder on the right side of this page. Now I'd like to turn the call over to Tim FitzGerald for opening comments. Please go ahead.

Thank you for joining us today on our third quarter conference call. As Stephen said, there are slides to accompany our call. They can be found on our Investor page at middleby.com, and these slides will not lead our discussion today, but are meant for informational purposes as we may refer to them while on the call. Before we get into earnings, I would like to once again thank our Middleby team that has done a tremendous job as we navigate evolving business conditions. We continue to be in ever-changing times with the COVID pandemic, and our team continues to rise to many challenges resulting from the crisis, while adapting our business to position for long-term success. So again, to the entire Middleby team around the world, thank you. Now looking at the quarter. Despite ongoing business disruptions, we were pleased to have improved our levels of profitability across all three business segments. Our actions to quickly reset our cost structure with continued focus on profitability are reflected in the results posted for the quarter. We also strengthened our capital structure with our third quarter refinancing. We are well-positioned to move forward on strategic and operating initiatives and make the critical investments as we transform our business. As it relates to segment performance, in the Commercial Foodservice Group, we have seen consistent improvement activity with our customers. Our order rates were down 21% for the quarter and down 2% for the month of October. We have seen improving activity across most categories, and our customers are benefiting from rapid growth in drive-through, curbside pickup, and delivery. Although challenges remain for indoor dining, the desire to dine in has grown and is reflected in improving sales at our casual dining and fast casual chain customers. Segments such as quick-serve, pizza, c-stores, and retail continue to perform well, and we are positioned to support these customers. As the industry is quickly adapting, the many investments we've made leading into 2020 are now more relevant and critical than ever before. Key examples such as the investments we've made in ventless technology, automation, delivery, and our industry-leading Open Kitchen IoT platform specifically address customer challenges such as labor, speed of service, menu flexibility, and operating footprint. Since the launch of our Open Kitchen IoT platform at the beginning of this year, we have increased our engagement with foodservice operators. Open Kitchen provides the tools to simplify, automate, and monitor many of the challenges in the kitchen. I'm very excited to report that to date, we have in excess of 5,000 restaurants and retail locations operating in our system. This installed base continues to grow as Open Kitchen is the preferred solution, given its broad capabilities to support not only all equipment in the kitchen but also all other facility operations such as lighting, HVAC, and ventilation. Open Kitchen is the only solution to connect all equipment in operations on one platform. It is clear that delivery and curbside will continue to be of critical importance as this trend will continue beyond COVID. While this is benefiting the revenues of our foodservice customers, it is also presenting significant operational challenges. New challenges around customer satisfaction, service times, food quality, and safety from customer-employee interaction are all considerations. We have a variety of contactless and automated solutions including the Carter-Hoffmann PUC, pick-up cabinet solution, which continues to gain interest addressing critical needs. And as you saw yesterday in our press release, we announced the introduction of Bluezone by Middleby. We are now moving into supporting employee and customer safety at the restaurant. This solution provides the highest protection of virus kill rates to enhance safety as indoor dining returns. We are excited to introduce this unique and patented technology, which has been proven to have existing applications in the military, hospitals, and industrial foodservice operations. Moving on to our Residential Kitchen Group. We have seen robust order levels continue both in the U.S. and U.K. markets. Order rates in Q3 increased 45% and continued into October at 44%. New construction and home sales activities have returned. These favorable conditions, along with consumers spending more time working, schooling, and cooking at home, are reflected in the order rates. We're also realizing momentum from recently debuted products across our entire portfolio of premium brands. Interest in Viking continues to grow with our 7-series, Tuscany, and Virtuoso product families. We have growing interest from the design community as we leverage our showrooms and build excitement around our new product designs from brands such as La Cornue and color offerings such as The Delta Hues from Viking. We're also pleased with the initial interest with our USA launch of Mercury and Lynx ranges from our AGA brand. We continue to see growing demand at Brava, our newest brand with revolutionary light wave cooking technology. The interest in smart connected countertop cooking offering speed and convenience addresses a clear and growing consumer trend. In the Food Processing Group, we reported a very solid quarter while our teams executed in a difficult business environment. Although travel restrictions have made it challenging to complete installations, we've been able to leverage our global capabilities to minimize disruption and deliver upon customer commitments. Travel has made it difficult to engage with customers on equipment demonstrations, which likely will affect order timing. However, we have a solid backlog and a robust pipeline with growing interest in our new product innovations such as accelerated maturing rooms from sous vide cooking systems from Armor Inox and our high-speed conveyorized TurboChef Oven by Alkar. These solutions are examples of recently developed products that offer advantages of automation, increased throughput, and equipment flexibility on the space savings footprint. In summary, we anticipate continued uncertainties resulting from the COVID pandemic. We have taken the actions necessary to position our business to withstand these ongoing challenges. We're well-positioned to benefit from new and emerging market trends, and we continue to build upon the leadership positions across all three of our foodservice platforms. Those are my prepared comments, and now I'd like to turn it over to Bryan for the financial discussion.

Thanks, Tim. While not seeking to turn our call into political commentary, having a bit of fun, I did want to ensure everyone that our financials are reflective of 100% of our divisions having reported in the results and no recounting is expected. For the third quarter, our GAAP earnings per share were $1.10. 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 $1.34, which was negatively impacted by $0.05 from acquisitions. I'd say it was a very successful quarter for us. While addressing the challenges presented by the pandemic, we generated record operating cash flows, delivered very strong margins, and enhanced our capital structure. Let me start with a brief overview of revenues and segment performance, then come back to cash flows and liquidity. On a consolidated basis, revenues declined 12.4% or 14.1% organically, as COVID significantly impacted our results. Across the company, we were able to deliver a gross margin of 35%. Total company adjusted EBITDA was $126 million and represented nearly 20% of revenues, a 25% increase or 410 basis points improvement from the second quarter of 2020. We achieved this while also investing nearly $5 million in technology initiatives during the quarter. We continue to benefit from the swift and aggressive actions we took in the spring as well as additional actions taken more recently. We entered this period with leading margins, and we are continuing to execute programs to maintain this profitability position. Commercial Foodservice revenues globally were down 27% organically; and when looking just at North America, the decline was approximately 24%. Gross margins were over 34%, and we delivered organic adjusted EBITDA of 22.6%. All the margin values I will discuss are on an organic basis, meaning excluding any acquisitions and FX impacts. In Residential, we saw revenue up over 11% as strong demand exists for premium appliances and outdoor cooking platforms. This led to a gross margin of over 36% and adjusted EBITDA of over 20%. Additionally, if we exclude non-core businesses, our operating margin is over 100 basis points higher. In Food Processing, revenues increased 22% organically, gross margins exceeded 36%, and the adjusted EBITDA margin was 23.7%. While the revenue for the quarter did come in somewhat higher than previously expected and the prior year period was at a relatively low revenue level. As I have discussed before, margins here see variability based on the mix between bakery and protein as well as within brands in those two groups. This quarter did benefit from relatively higher margin contributions from the protein-related products. I will come back to some outlook comments on all the segments shortly. In terms of SG&A expenses, when excluding $6 million from acquisitions, we saved over $20 million or over 15% compared to Q3 of 2019 from our cost control and headcount reduction actions. Restructuring charges were approximately $7 million for the quarter, which will provide annual cost-saving benefits of over $20 million. Interest expense was down over $3 million from Q2. You'll likely recall that we issued convertible notes in August. U.S. GAAP currently requires a bifurcation of such notes into a debt and equity portion, along with a non-cash interest charge for the difference between the 1% coupon we are paying and a hypothetical yield on a note without a conversion feature. This resulted in nearly $2 million of non-cash interest expense in Q3. In Q4, this charge will be nearly $6 million. The increase is due to the notes having only been outstanding for less than half of Q2. We generated strong cash flows, $151 million from operations with over $55 million in benefit from reduced inventory levels. For the past 12 months, free cash flow is $430 million, a record level for us. Over that period, EBITDA, as defined in the credit agreement, is over $563 million. So our total leverage ratio is now just below 3.2 times, while our covenant limit is set at 5.5 times. We also have over $1.3 billion of current borrowing capacity under our credit agreement. These figures capture the impacts of having issued the convertible notes, amending our credit agreement, reducing our cash on hand to $220 million, and paying down $400 million against our term loan during the quarter. We delivered on our promise that any solution we implemented around our capital structure would provide financial flexibility and allow us to make strategic investments. We are very comfortable with the existing headroom under our financial covenants, and we will continue to responsibly deploy capital to provide solid returns over the long term. I'm very proud of being part of a very experienced management team that continues to deliver these industry-leading results. All our segments expanded their margins considerably from Q2 into Q3. Commercial is up over 400 basis points and Residential was up over 600 basis points. The total company adjusted EBITDA percentage was nearly 20%. While executing plans to maintain our operations and control costs, we were also working tirelessly to drive cash flow. Having reviewed Q3, I do want to provide some insights on the upcoming quarter. In order to do so, I will be referencing order rates, which we have shared in the presentation available at the Investor Relations section of our website. By the way, our intention is to cease providing monthly order rates going forward. But before discussing the markets broadly, I thought I'd start with some insights on how my family's household is impacting Q4 demand. With some dining restrictions having come back into place around Chicagoland, I am making sure we are doing our part to support local restaurants and especially ones that are Middleby customers. A few of our favorite restaurants are about a 25-mile drive from our house, but I wasn't going to let that get in the way of satisfying my takeout cravings this past weekend. So a quick shout out to Lula Cafe, which is a truly exceptional and must-visit as well as Robert's Pizza and Dough Company, who has a few Marshall ovens cooking their amazing pies. Once I'm with all my great food, I put it in my beloved Brava into servers for some reheating. Now you may ask, who's my favorite cook? Is it my wife with what she masterfully creates and then cooks in our Lynx Napoli Oven or is it the crew at Robert's? Well, driven ever so slightly by my dining contributions, for Commercial Foodservice, we continue to see improvements throughout the quarter. Orders were down 31% in August, then down 18% in September, and October was down only 2%. Now I've commented previously that a risk of looking at monthly data is the variability that can exist. Overall, the trend has obviously been consistently positive as we look all the way back to the beginning of Q2. October was an exceptional month, but I need to offer some caution on the interpretation of this data. The ultimate fulfillment timing of these orders is key to keep in mind as it includes some longer-term program sales that we would expect to be fulfilled in the first half of next year. So it would not be appropriate to expect the September and October order data points to be reflective of the Q4 revenue result. As many of you seek to model or set Q4 expectations, I believe, it would be more appropriate to consider somewhere between August and September, especially given seasonal weather changes and emerging dining restrictions. We are not losing our focus on margin and cost control. Nonetheless, as we have started to bring some costs back into the business, there could be minor degradation in our EBITDA for Q4. We continue to monitor our costs and additional profit improvement plans in place for the year ahead. We remain committed to delivering higher margins in '21 than we had this quarter. Residential has seen a tremendous resurgence with recent months' order rates up over 40%. As we consider our production environment, focus on ensuring employee safety and evaluate staffing levels and fill rates, as well as the effect of prior year comps, we expect the Q4 growth rate to be marginally better than that of Q3. Given backlogs and consumer demand, we do expect growth to persist into '21. The production environment matters previously noted will also keep sequential margin expansion low. For Food Processing, the third quarter did come in somewhat ahead of expectations. We've also seen some near-term recovery in the backlog, as we are now at levels slightly below where we started the year. We had an admittedly easier comp for Q3. So if you look back at 2019, Q4 revenues grew over $32 million or 36% sequentially. For this year, we only expect modest, at best, sequential growth from Q3 to Q4. Also, the Q4 project mix may contribute to lower sequential margins. We are seeing continued disruption in our customers' businesses and some difficulty is being encountered with installations, especially outside of the U.S. While the laser transitions are occurring, only limited cancellations have arisen. As I had noted, the backlog is back to levels close to even with the beginning of the year. So near-term expectations are rather modest, but the outlook is seemingly stable. In conclusion, Q3 performance was extremely solid, especially as we look at margins and cash flows. The challenges in volatility in the current environment presents some risk for Q4. Nonetheless, we are confident in our medium and long-term positioning. In Q3, we continued to ensure employee safety, maintain continuity of operations to meet customer demands, and took actions to cut costs. These efforts persist, and we will also continue to invest in technology and product innovation. Our leading technologies will help drive further growth as we enter '21. With that, Stephen, please open the call to questions.

Thank you. Our first question will come from the line of Mig Dobre from Baird. The line is now open.

Thank you and good morning, everyone.

Hey, Mig.

Good morning.

I am looking at this October order number in your slides, and frankly, my head is spinning a bit. And I understand your comment in terms of how these orders get converted to revenue and that some of this conversion to revenue might go into 2021. But to be down 2% in October, I guess, I'm looking for a little more color here. And maybe the way I would ask the question really is this way. In the past, you've given us a breakdown of your various verticals that you've got exposure to. My recollection is that casual dining, for instance, travel and leisure, independent restaurants. So arguably speaking, the areas that have been really impacted by the pandemic, that was about 20% of your business. Institutional, QSR, pizza really kind of accounted for the rest. So I guess I'm wondering, as we're looking at these order trends, can you parse out what you're seeing in QSR pizza relative to casual dining relative to institutional or retail? And then what level of visibility do you think you have at this point with some of your more important customers to kind of help us and help you create some kind of an outlook for us maybe, if you would, beyond the next one to two months? Thank you.

There's a lot to discuss here, and I'll provide some insights. Overall, business conditions are improving. While some restaurants are closing due to restrictions and seasonal factors, we remain optimistic about the overall trend. Spending on foodservice outside the home is on the rise, and we're seeing growth across the board. Casual dining is lagging behind quick-service and emerging pizza chains, but we are observing improvements in all categories. Notably, we've performed well in the pizza sector. The October figures include some rollout activities that typically extend beyond just a two-week period and are tied to specific programs, which is why we expect some of this to carry into next year. Similar trends can be seen with fast casual chains and some of our convenience store clients. The market segments we previously mentioned—convenience stores, pizza, quick-service, and retail—are doing well, and casual dining is recovering as well. Additionally, the service aspect is reflected in the October numbers because our service business, which experienced disruptions back in Q2, did not see significant recovery until late Q3 and early in Q3. This suggests positive prospects as restaurants resume operations and require service for their equipment.

I see. I mean, it strikes me that the only way we could be looking at an order number as to what we're having here is for you to have outright growth in portions of your business. So can you maybe be more specific as to where you are outright seeing growth? And do you have a sense that there is enough going on in terms of what you know with these customers? I know some of your customers are essentially talking about unit expansion in 2021, and they're gaining share - consumer wallet share. So are you getting the sense that there's enough momentum that's built up with these customers that can potentially sustain into 2021?

Okay. Mig, I'm not sure I fully understood it. I mean maybe I'll take another. So first of all, October...

Let me rephrase this. If there are portions of your business that are still obviously experiencing some stress, but your orders are only down, call it, 2%, then I would imagine that there are portions of your business that are up to actually - to offset some of the erosion that you have in customers that are still struggling a little bit more. So I guess I'm wondering if you can tell us who's up year-over-year at this point and what visibility you might have into '21?

Yeah. So we're seeing with us - and again, there's some rollouts in the October number. I mean, we've kind of wanted to be transparent through this period so people understood what's going on under the covers here, because we have confidence in the business and recovering. But when you see kind of an October number, who knows what November will bring. But as we've seen improvement in September and October, the segments that are above, right, to your point, say, if you're 1%, something is probably positive there. So some of the program activities of c-stores with the emerging chains and pizza are doing well, meaning they're in the black. And then I think as quick-serve has also improved, to be honest with you, I'm not sure if it's positive or negative, but it's probably getting close to about where it was before. Casual dining, fine dining, institutional, schools, which obviously will be back to being in the classroom, are down but improving. So I think that would be kind of the way I would bucket there. And then I'll kind of go back to service again, which service also is kind of back to last year level. And again, it's very volatile. It's very uncertain. So we - we hate to talk about monthly orders. I think, again, where we wanted to get was what are the trends that we're seeing, how is Middleby performing. It kind of gives some color to the confidence in what we have in the business and what - while we'll have uncertainty in the near term, the confidence that we have in the business that - with the recovery in the long term and how we're positioned, but we'll probably get away from the monthly order rate reporting, just as Bryan said, because otherwise, we'll get into kind of pulling apart the October orders. And again, we have some rollouts there. But - so just on the visibility next year, also, I mean, I think we do expect foodservice is going to continue to improve. It doesn't mean that it's going to be back where it was before. The stats that are out there by Technomic and others are that the restaurants will still be down or foodservice largely will be down 5% to 10% next year relative to 2019. And so we expect that we'll still have underperforming segments going into the year. That being said, there's confidence, I think, in a lot of the categories, and that is allowing them to not only move forward with programs that they had pre-COVID, but they're also thinking about how do they transform their business in the current environment, right? So that is where there may be some accelerated spending opportunities that we could see coming into next year.

That's great color. That's what I was looking for. Thank you. And then my final question, Bryan, for you, just a clarification. I thought I heard you say that if we're looking at Commercial Foodservice margin for the third quarter, that in 2021, you should be able to do better than that. So I'm looking to clarify that comment. And is that timing pertaining to the third quarter of '21 or the full year? Thank you.

Yes, it would be for the full year. We can see how the business recovers, which will involve a variety of factors influencing our margin performance for next year. This includes the costs we've reduced, what we decide to reinvest, potential further adjustments, volume fluctuations, pricing strategies, product mix, and the acceptance of our newer technologies. There are many elements that could lead to positive outcomes. Time will reveal more, and while it may be risky to assert completely, we believe Q2 was the low point. As we progress through Q3, we are evaluating if this represents a new baseline, and if so, we expect improvements moving forward.

Okay. Thanks for the color and good luck.

Thanks, Mig.

Our next question will come from the line of Todd Brooks from CL King. The line is now open.

Hey. Good morning, everyone. Thanks for the questions and great job on the quarter. Just two quick questions. One on Open Kitchen, you talked about 5,000 installed sites. Now can we talk about kind of appetite and front of sales funnel for the connected products, given how much operational change so many of these operators have gone through during the pandemic and the fact that, that historically has triggered evaluation of new equipment and new solutions going forward?

Yes. As I mentioned, we're experiencing increased engagement. IoT has been present for some time, but we are now at a pivotal moment due to various industry factors. We're witnessing restaurants recognize the significant impact this can have on their operations. Our adoption rate is steadily rising, with several large restaurant customers currently implementing it across their brands. We have a pipeline of up to a dozen customers showing considerable interest. The proven ROI is driving this growing interest, particularly regarding challenges like labor, automation, safety, and managing food costs. With the upcoming launch of Bluezone, we will integrate it into our IoT platform. We view these as different modules to help reduce facility costs, enhance kitchen operations and visibility, ensure food safety, and improve customer safety. All of these factors are important in terms of cost and competitiveness. Overall, we feel positive about our position. I'll let Steve provide additional insights.

Yes, Tom, it's a good question around Open Kitchen. Strategically, Open Kitchen, from our perspective, I see it going through center. And what I mean by going through center is we were presenting this. We presented it internationally 1.5 years ago. We're now getting calls. The customers are calling us, especially in the commercial food business. Our customers are very wary of unproven technology. And now that we're in over 6,000-plus locations, it has a proven ROI. And it's more than just a standardized controller. It's not just a pretty face. It is a total system. It includes the control systems for gas valves. It has sensors around temperature. And then it connects to the controller, and then it goes to the cloud. And then it generates data that is meaningful to the restaurant operator. And that's a proven system, which then they use that data to lower their labor costs, lower their maintenance costs, improve their efficiencies, improve their speed of service. And frankly, I think it's perfect timing, because as you look at the generational trends of people that are now running restaurants, the people that are general managers of restaurants in the one level above restaurant management, they're very comfortable with data management and making operational changes based upon data. So Open Kitchen generates data that's meaningful to the restaurant operator. And it's a platform. It's not just a standardized control system. It is truly an integrated soup-to-nuts operational system. And I'm very proud of it. The team that's running it is doing a great job. And I just see strategically now that customers can see it in operation. Other customers can see it. Other big chains feel like they're falling behind. They need to catch up because they see it in other large chains. It's extremely exciting, and it's proven. And it works in over 5,000 restaurants.

That's great. And then just a second question. And I know you're pointing out the vagaries around monthly order data. But with the strength that we saw in orders in Residential Kitchen kind of in the third quarter versus the 14% sales growth rate, can we talk about production levels to meet the demand? Have we built a backlog that carries into Q4 and into fiscal '21? And just in general, what you see is the setup as far as the duration of this nesting trend that's gone into kind of top gear here in fiscal '20 during the pandemic and with good housing macro numbers behind the kind of underpinning strength in the segment, that would be helpful. Thanks.

Yes, we do have a backlog that we are taking into Q4 and it will continue to grow into Q1. We are adjusting our production levels to meet the increasing demand while also prioritizing employee safety and ensuring we establish an appropriate long-term capacity. The top-line dynamics have been unique recently, and although we don’t expect to see 40% growth in incoming orders over an extended period, we believe the market has a solid foundation. This year, we noticed strengthening in the housing market, which seems to be making a comeback. While the initial surge in demand might decline as people spend less time at home, there are long-term trends that should benefit us in the coming year. Additionally, we've been working hard on our platform, introducing many new and exciting designs and products. Our sales team has significantly contributed to our success, thanks to years of investment, and our service team has excelled as well, which fosters confidence among our channel partners. We were optimistic pre-COVID about our prospects for sustainable growth and market share expansion. While we acknowledge that the 40% growth rate won’t continue indefinitely, we do anticipate double-digit growth in the market for some time. Moreover, we are investing in sales tools and processes, and during COVID, we have been opening new showrooms, including one in Southern California and a new showroom in Dallas that will serve both Commercial Foodservice and Residential markets, which is an exciting development for us.

I'd add to that. I agree with everything Tim said. The other thing is we were set up going into COVID, as you said, with new products. And like the Brava acquisition, it really shows off this technology. And as these folks and their homes are looking for kitchens, outdoor kitchens, new products, the innovations and the acquisitions that we've done just attract that buyer that's looking for connectivity, light wave cooking, new technology. And it sets us apart. And then I just need to emphasize Tim's point about backing up and creating confidence in the channel with after-sales service and support and then durability of design, the leadership and the people at Viking and AGA. And all the Residential brands have done an excellent job on product design and then supporting it after the sale. It really does create confidence.

Great. Thank you.

Our next question will come from the line of John Joyner from BMO. Your line is now open.

Bonjour, well done. I recognize that you've focused more on managing working capital, and your free cash flow has been impressive this year, especially with the inventory reductions despite significant volume declines. Looking ahead, are there additional opportunities to free up cash that’s tied up in working capital? Also, are you satisfied with the inventory levels in each of your segments?

Yes. So there is certainly more work to be done in inventory. I'd say, taking the second part of your question, I don't know that there's much actions to be taken to free up other areas in terms of AR and AP, right? Our DSO and AT are in good shape. And I don't think it's on our near-term priority list to look at monetizing that and such. So on inventory, it does vary by segment. Obviously, we're seeing a lot of tremendous successes in residential right now. So our inventory levels there are certainly at the low end of where we'd like. Given current demand levels, that isn't likely to go up too much in the short term. Food Processing has kind of been stable through all of this. There, we see ebbs and flows as orders come in and some of them are long delivery time, long projects. So then that leaves us with Commercial, where there still is opportunity. Now we are proud of what we've done in the short term, given the volume challenges. But I certainly think there's additional opportunities at a modest pace.

Yes. Let me add to that. I would take it just one step further. I think what Bryan is talking about and the opportunities that exist both in Commercial and Residential and Food Processing. I think I would strategically define it as excellence in leadership. Bryan, because he understands the business, sets some very aggressive goals that are achievable 5, six months ago for the operations and supply chain and purchasing people around the world at Middleby. And then that team, and I'm proud to say, every Saturday, Sunday, and Monday, we talk to 150, 200 people across all the divisions. And we've restructured in a very short period of time, taking advantage of inventory levels through supply chain and purchasing and operations. You can hear in Bryan's voice, he's holding me accountable to achieving more. But I couldn't be more proud because I know there are a lot of the team members on this call, the team, the engineers and the operational leaders and the purchasing people and the achievements we've done to not only lower cost but to lower inventory in an aggressive way. And we're going to continue to work on it.

I want to add that we haven't discussed the impact of supply chain disruptions on our business. The team has done an outstanding job not just in managing costs and reducing inventory, but also in maintaining operations. This has been crucial to ensuring we can meet our customers' needs. Given the global scale of our operations and supply chain, their work has been impressive, with a constant focus on keeping our operations running smoothly.

Yes, that's a great point, Tim. Especially from a customer's perspective, a lot of our competitors are doing rolling shutdowns, and we didn't do that. And we maintained supply to our customers, thanks to this team of leaders, holding workplace safety as the one priority. Second to that, we said never, never ever failed a customer, and we have yet to fail a customer. We never shut down our operations due to lack of supply. And so the team has done a great job. And that's made a difference. That's showing up in a small way into some of the numbers that you're seeing now recently in sales and going forward because of that reliability and durability of our corporation. Thanks to these guys. So it's a great point, Tim.

Okay. Excellent. And maybe if I could squeeze one more in. Just with regard to COVID-related products, you mentioned Bluezone. But it seems as though that you've been able to quickly launch new solutions targeted at COVID. And I realize that Biden will be getting rid of COVID sometime soon. But nonetheless, are there any products whether QualServs or Bravas or others, where demand has actually been stronger than you anticipated internally?

So as you mentioned, I mean, I think we're keenly interested in how we can help our restaurant customers, right? So I mean, I think we, as a team, have thought about all the different things that could help them. I mean you just mentioned QualServ, which is really plexiglass shields, sanitation or hand dispensers, hand washing stations, et cetera. We were actually producing and distributing hand sanitizer in and of itself and cleaning supplies. So we've done a whole lot, but we've also focused on kind of higher technology products. Brava came out with a UV oven that we were working to help sanitize even KN95 masks. But certainly, Bluezone is the one that we're very excited about, because we really do think that indoor dining room safety is going to be critically important as we go through the next year here. And so I would say we're at the early stage. I mean certainly, some of these things came online. I'm not going to tell you it's a meaningful part of our revenue. We just want to do our part. I think in the case of Bluezone, it could be a meaningful part of the revenue as we go forward. So I think that's one of the things that we think could be one of those kind of game-changing technologies, and we're pretty excited about that. But I would say early stages on most of all of this.

Yes. Tim, I think it shows the agility of our company. I think Korey and his team had hand sanitizers produced within 30 days, three or four months ago. Najib and his team internationally did hand sinks first in Europe, then in Australia, then we brought it into the U.S. through QualServ. And inside 30 days, we had a product that was usable to those teams. Thanks to those teams. And Bluezone is a big winner in my personal mind. It's a proven technology. It's been around for over 10 years. It's tried and true. It's installed in every U.S. aircraft carrier. We've been using it in our residential appliances, refrigeration for a long time, years and years and years. It's achieved the U.S. Army Achievement Award. It's in steel case furniture, and we're installing it in The Culinary Institute of America. All their campuses are going to have a Bluezone installed. It's a proven technology reapplied to foodservice. And it's an amazing technology, and it's differentiated. And then you bolt that on to our ability to connect with the customer and support it after the sale through our organization, through our channel partners. It's an amazing technology.

Okay. Excellent. Thank you, again. Appreciate the time.

Our last question from today will come from the line of Walter Liptak from Seaport. The line is now open.

Hey, thanks. Good morning, guys.

Morning.

I want to ask, I guess, in relation to the October orders. The trend of ghost kitchens seems like it's got some investment money behind it now. So it's really kind of an emerging category. Are ghost kitchens starting to place orders? Are you getting full kitchens or partly kitchens? How should we think about that?

There are many emerging trends, including the concept of ghost kitchens, which encompass various business models. We are currently engaged with several new industry players. Some are advancing their initiatives, while others are still in the planning stages. It’s early days for us; we have secured some business and are exploring many customer opportunities, though they currently don't significantly contribute to our overall revenues. However, we believe this area will lead to new business models. Ghost kitchens are part of this landscape, and we have the right solutions to address their needs, considering factors like space requirements, automation, and data collection through IoT platforms. They are also focused on innovative customer engagement and delivery systems. We feel well-positioned as these new models emerge. While we don’t anticipate them being a large portion of our overall business next year, they could influence our growth rates. We are actively involved in these developments, although it’s challenging to predict the exact trajectory, especially as new businesses are formulating their plans during the COVID period. Nonetheless, we see promising new business models on the horizon and believe we will perform well as they materialize.

I would say that it is quite insignificant, as I agree with everything Tim said. I see it as an opportunity to showcase our technology, including ventless options, connectivity, and Open Kitchen. While it may not be significant from a competitive standpoint, I believe we are performing better than our competitors, who are discussing how many units they have installed in ghost kitchens or dark kitchens. We are currently tracking at about 4 to 1 compared to them in total kitchens. However, it's still very small. It is strategically important for the next couple of years, and I do believe in the concept of ghost kitchens and dark kitchens for restaurant operators.

Okay. Thanks for that. Bryan, I have a question for you. You mentioned that the fourth quarter margin and outlook for Residential are expected to decrease slightly. Could you elaborate on this? Is it due to the mix or inefficiencies? What is causing the margin to be somewhat lower?

Yes. It really is a bit of a mix when it comes to understanding the products we have coming through. Some of it isn’t necessarily due to production inefficiencies, but rather costs, as we are bringing people back on board and increasing spending levels at this time. We see an opportunity here where volumes could offset that impact, and I hope that in a couple of months I won’t be viewed as too conservative. I have a clear understanding of where we are controlling costs, which is more definitive compared to how volumes and revenue may align. So again, it’s about incoming costs and a bit of a mix. However, I consider it more of a potential hiccup rather than anything dramatic. We should look at technology, trends, and the overall market, as well as how we are collaborating with customers to evaluate pricing for the upcoming year. I am not trying to divert us from our long-term goal of improving margins. Unfortunately, the current market dynamics may obscure some of the margin improvement opportunities we previously discussed, including those from our recently acquired businesses. As mentioned earlier, some of our businesses are performing better than others, and many are making day-to-day operational improvements that keep us on track to expand the industry-leading margins we take pride in. This all contributes to cash flows and our ability to fund investments while we pursue these goals. That’s my perspective on the near-term and medium-term outlook for margins.

Yes. To highlight a few points from those comments, and as Bryan noted, we have continued to invest in our technology initiatives during this period. He mentioned $5 million in the third quarter, and we did not reduce that amount because we believe it's crucial for our goals next year and over the next three years. Investments in areas like controls, IoT, and automation are essential for us. We are committed to these investments, and any slowdown in those areas will be rectified. We are also focusing on sales and marketing initiatives, including the continued opening of showrooms. While this may have increased slightly in the second quarter, we consider it vital for engaging with our customers. As we shift toward more advanced technology products that offer a strong return on investment, it's crucial to interact differently with our customers, which requires investment in our market approach and customer engagement strategies.

Okay. Got it. Thank you.

Thank you. That is all of the questions we had in the queue. I'd like to turn the call back over to management for any closing remarks.

No, I'd just like to thank everybody for joining us on today's call. And we look forward to speaking with everybody next quarter. Thank you.

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