Welcome to The Middleby Fourth Quarter 2020 Conference Call. We will begin with remarks from management, followed by a question and answer session. Present today from management are Chief Executive Officer Tim FitzGerald, Chief Financial Officer Bryan Mittelman, Chief Operating Officer David Brewer, Chief Technology and Operations Officer James Pool, and Chief Commercial Officer Steve Spittle. Now I will hand the call over to Mr. FitzGerald for his opening comments. Please proceed.

Thank you, everybody, for joining us today on our fourth quarter conference call. As we begin, please note there are slides to accompany this call on our investor page. I am very pleased to welcome James Pool and Steve Spittle on the call this morning. As recently announced, James and Steve have been appointed as officers of the company, expanding and greatly enhancing our leadership team. James and Steve each bring tremendous experience in the foodservice industry, along with a long tenure at Middleby. They have successfully been leading a number of our core brands, such as TurboChef, Pitco, Blodgett, and Middleby Marshall. James and Steve have also been executing on key initiatives over the past several years that are critical to our business as we accelerate the pace of technology advancement, innovate the customer experience, and differentiate Middleby in the marketplace. In addition to their officer roles, James and Steve will oversee the portfolio of cooking brands within our Commercial Foodservice segment. I'm also very excited to have announced Korey Kohl to lead our Middleby Beverage Group and Najib Maalouf to lead our Residential Kitchen Equipment business. Korey and Najib bring deep foodservice industry experience and are long-time Middleby executives. Both have successfully led integration efforts across many businesses we have onboarded through acquisition. The Beverage Group and our Residential Kitchen Equipment business have expanded rapidly since their inception and present exciting continued growth opportunities for Middleby. Korey and Najib, in their new roles, joined Mark Salman, our President, who has been leading the Food Processing Group. This expanded team provides leadership for each of our business segments, ensuring the continued execution of growth initiatives and bolsters our efforts to realize synergies across each of our segments. I'm very excited about the deep bench of talent that we continue to develop at all levels and across the entire organization. The broad team of highly capable leaders is working in collaboration as we leverage our strengths and capabilities across all of Middleby. I believe our people are our most important asset and provide us a true competitive advantage, and the Middleby team is stronger than ever. As I'm sure most of you have also seen, Dave Brewer recently announced his plans to retire at the end of this year. Dave has provided tremendous leadership to the organization for more than a decade. Dave has been a driving force at Middleby, while we have substantially grown our business many times over through business acquisition, customer acquisition, and product development. He has been a mentor to many across our company, a committed advocate for all of our customers, a positive lasting imprint on the culture of the company, and a true partner and friend through our journey together. I'm very happy that he will be continuing with us throughout 2021 as we have a very exciting year ahead. And lastly, I would like to once again thank our entire Middleby team around the world. The quick actions, creativity, and dedication of the entire team was on display over the past year as we navigated the uncertainty and challenges of COVID. The efforts and commitment of our team have allowed us to maintain the priority at our customers while we also delivered the achievements of 2020. And to this team, I am grateful. As we look back at 2020, I am proud of what we accomplished. Financially, we ended the year in a great position. We reported record operating cash flows in 2020, realized strong profitability across all three of our business segments, and developed a record backlog, providing momentum as we head into 2021. Despite the impact of COVID, we remain committed to our long-term strategy as we invested in the reinvention of our business. We advanced our technology initiatives, particularly in areas such as controls, IoT, and automation to capture rapidly changing market dynamics. We expanded our sales capabilities with the development of digital sales programs, improved upon the effectiveness of our sales organization, and strengthened the relationships with our strategic channel partners. We bolstered our capital structure, enabling us to reengage our acquisition strategy and completed acquisitions to further extend our Beverage business, add to our portfolio of innovative technologies, and expand our global manufacturing capabilities. We also continued to invest in showrooms for our Residential and Commercial businesses. And just this past week, we announced the opening of our Middleby Innovation Kitchens in Dallas. These innovation centers allow us to engage with designers, channel partners, and customers as we promote the latest technologies, product innovations, and integrated solutions we carry across our entire portfolio of Middleby brands. In 2020, we also continued to execute upon important initiatives to improve our profitability as we emerge from COVID. We progressed manufacturing, supply chain, and acquisition integration efforts across the business. This will result in improved profit margins at each of our business segments in the upcoming year. As we move into 2021, we are optimistic about improving market conditions and the strength of our positioning at each of the business segments. At Commercial Foodservice, while the industry has been significantly disrupted, it has also proven resilient. Even though the foodservice industry in 2021 is not expected to recover to 2019 levels, it is anticipated to improve meaningfully from 2020. Our customers that quickly adapted business models during COVID are making strategic investments in their foodservice operations, leading to new kitchen layouts and the adoption of new technologies. We are actively engaged with customers to address rapidly changing needs. And the many investments we have made leading into 2021 are now more relevant than ever. At our Residential business, new home starts and existing home sales continue to be robust, while increased time spent at home is resulting in kitchen remodels. This presents a favorable backdrop to our business for the upcoming year. We're also benefiting from the many new product launches and investments in our sales and service capabilities made over the past several years. All of this has positioned us to capture a growing market share. At Food Processing, travel restrictions continue to be a challenge to customer demonstrations and the installation of equipment. This is particularly impactful due to the amount of cross-border business we have. Despite these challenges, the engagement with customers and the project pipeline remains strong. As COVID restrictions lift, opportunities exist for our products in growing market segments such as cured meats and alternative protein, and we are prepared with solutions to meet increased demand for automation to address labor and employee safety concerns at our customers. In summary, we are proud of the team that successfully navigated the challenges over the past year, and we are confident the actions taken have successfully positioned us for the year ahead and toward our vision for the future. I'd like to now turn it over to Bryan for the financial discussion.

Thanks, Tim. For the fourth quarter, our GAAP earnings per share were $0.94. Adjusted EPS, which excludes amortization expense and non-operating pension income, was $1.62, negatively impacted by $0.04 from acquisitions. Operationally, it was a strong quarter for us. We achieved record sales and earnings in the Residential segment; Food Processing closed 2020 with their strongest revenue quarter of the year, and earnings were the highest percentage level in three years. Commercial Foodservice grew its revenue by approximately 15% sequentially over Q3, with a similar increase in EBITDA. Our free cash flow exceeded $200 million for the quarter. Notably, our total free cash flow for all of 2020 reached $504 million. We have shown our ability to manage costs while investing in innovation and providing excellent customer service. On a consolidated basis, revenues declined 7% or 9% organically due to the impact of COVID. We delivered a gross margin of just over 35%, consistent with Q3. For the company, adjusted EBITDA totaled $145 million, representing over 20% of revenues. We achieved this while investing about $5 million quarterly in technology initiatives. Commercial Foodservice revenues globally were down nearly 19% organically, with North America experiencing a decline of approximately 9% and an international decline of 32%. In the Residential segment, revenue increased by 15% due to strong demand for our premium appliances and outdoor cooking platforms, resulting in gross margins of 37% and adjusted EBITDA of over 20%. In the quarter, we took a charge related to the impairment from the sale of our Fired Earth tile business, which contributed around $20 million in revenues in 2020; this move will enhance profitability going forward. In Food Processing, revenues rose about 9% sequentially and were nearly flat organically compared to the previous year. Gross margins were 36%, with an adjusted EBITDA margin exceeding 23%. Interest expense for the quarter was nearly $23 million. This quarter marks the first with our improved capital structure since issuing convertible notes in August. There was $5 million of noncash interest expense attributed to these notes, but under new GAAP rules in 2021, this will not affect our future results. For the past 12 months, we generated a record level of free cash flow at $504 million. Although we expect some reversal of working capital impacts due to the pandemic, we remain disciplined in cash management, particularly around inventory. In Q4, we paid down $109 million in debt, reducing our net debt level by $203 million for the year. Our total leverage ratio stands at 3.1 times, well below our covenant limit of 5.5 times, and we have over $1.3 billion in current borrowing capacity. 2020 was a dynamic year for us, and we took actions to strengthen our capital structure, including refinancing our bank credit agreement twice. We also bought back over $85 million in stock and made acquisitions and investments totaling over $100 million. As we resumed acquisitions in Q4, we expanded our offerings in Asia and introduced new products to meet market demands. Looking ahead to 2021, we are optimistic about order and backlog data. Order rates in Commercial Foodservice saw a decline of 22% in Q3, but only 5% in Q4; this upward trend has continued into 2021. Our year-end backlog rose 84% from the previous year, and we expect modest revenue growth in Q1 approaching last year’s levels, although supply chain risks may dampen short-term expectations. Residential growth is also promising, with Q4 order rates increasing over 50% year-on-year, and we anticipate double-digit growth for the first half of the year. However, Q1 revenues might slightly dip due to several factors, including the impact of disposed business and seasonal shifts. We are also focusing on employee safety and labor availability while navigating recent operational challenges from weather disruptions. For Food Processing, we exited 2020 with a strong backlog and anticipate Q1 revenues below Q4 levels, which is typical for this season, yet slight growth over the previous year's first quarter is expected. While Q1 margins are usually lower, we expect them to be significantly above last year's figures. As I conclude, I want to express gratitude for our incredible teams who navigated this challenging year. We look forward to better times ahead and are committed to delivering industry-leading results. Thank you for your dedication and commitment. I'm particularly grateful to Dave for his guidance and support; it's been a privilege to learn from him. I look forward to celebrating our success together in the future.

Thanks, Bryan. I want to express my appreciation for the organization and discipline we maintain in preparing for these calls. Your last comments were unexpected for me, so thank you. As I transition out of my role over the next ten months to explore some strategic opportunities, I wanted to take a moment to express my gratitude. I would like to begin by congratulating James and Steve on their new roles as officers of a global company. They have clearly shown their capacity, capability, and leadership skills over the years, and I couldn’t be happier with these choices. I'm very excited for Middleby. Many people within Middleby listen to this call, and I want to recognize the relentless dedication of our supply chain, purchasing, operations, engineering, and sales teams around the globe. They are an exceptional group, and I enjoy collaborating with them regularly. I often engage with many of them during conference calls and various processes, and I am consistently impressed with the talent we have. Tim and I have also brought forth some excellent group presidents like Najib, George, Korey, Jeremy, and John. I encourage you to look at their resumes on LinkedIn; their capabilities are impressive. Although I was surprised by Bryan's comments, I must say he is an outstanding CFO. I admire how hands-on he is. He truly engages with our equipment and always seeks to dig deeper into the financials, which enhances our understanding of the business. Martin Lindsay, as a fellow officer, is also exceptional, though he doesn’t always receive the recognition he deserves. His leadership during COVID and his outstanding work in managing banking relations have been remarkable. I am grateful for the Board of Directors at Middleby, whom I’ve worked with for 13 years, as they are challenging, diverse, wise, humble, and personally invested in the business. On a personal note, I’ve had the chance to work in various countries and with some of the most transformational CEOs in the industry, such as Roger Enrico, Steve Reinemund, and the Lindner family, among others. I want to express special gratitude to Tim FitzGerald, who I consider one of the best CEOs in the industry. He is a transformational thinker, skilled in understanding technology, customers, and how to enhance shareholder value through the quality of our products and our interactions with end users. He truly exemplifies humility and ethics while prioritizing people, and I have had the pleasure of working alongside him for 13 years. Lastly, I want to acknowledge the analysts on this call. Your tough questions during trade shows, investor conferences, and earnings calls have sharpened our leadership. Your inquiries about competition and customers have made Tim, Bryan, and me better leaders. I truly appreciate your challenging questions and the growth they have fostered within this company. Thank you to everyone on this call. I’ll now hand it back to the operator for questions.

Our first question comes from Mig Dobre with Baird.

Dave, congrats to you on a fantastic career and all the best of luck going forward. And you mentioned great folks in Middleby that are listening on the call, congrats to them as well for the way they managed through 2020, definitely an unprecedented year for the industry. I guess my first question, Bryan, I appreciate all the context and detail you've provided on Commercial Foodservice and all the other segments into Q1. I'm sort of curious here, you're building backlog and demand is getting better. So two things. One, can you maybe parse out how much of this demand improvement is really sort of driven by the end markets and how much might simply come from different product initiatives that you guys have had through 2020? I mean, you've introduced a lot of new products that I'm presuming is starting to result in incremental revenues for you. And then as you've built up this backlog, how should we think about your ability to convert this backlog? Are there any issues beyond the weather that you mentioned, right, in terms of supply chain constraints? Or should we start to see revenues kind of approximate order intake as we get to Q2 and beyond? So maybe we can start there.

Yes, we are seeing adoption of our new products, particularly some of the headline offerings highlighted in our presentations. However, the current impact on our short-term success is limited. The benefits are still forthcoming, as many of our products are under evaluation or testing, resulting in minor revenue contributions at this stage. The success of our current orders and backlog stems from our existing pipeline, not outdated products, but innovations from the last year or two that address customer needs. I expect the headline products will add incrementally as we move into the second quarter and later in the year. Regarding supply chain issues, we are monitoring the situation daily and, fortunately, haven't missed significant customer opportunities so far, which gives us confidence for Q1. However, I acknowledge the challenges posed by component availability, costs, and logistics. These factors are real, and my margin comments reflect these considerations, particularly for the next three months. We are actively prepared to manage these issues and do not wish to downplay their significance.

So I want to make sure that I understand your comment correctly. It seems that you are indicating that demand has continued to improve in the first quarter compared to the fourth quarter. From what I gather, your order intake is up compared to last year. However, you are still building backlog, which is why you're suggesting that your revenue may be relatively flat. Is that correct?

As we evaluate our order rates by quarter, we observed a decline of 22% in Q3, while our revenue was slightly better than that. In Q4, we reported a decline of 5% in order rates, indicating we've shifted to a more favorable position. This puts us on track for flat performance in Q1. The backlog is contributing to my optimism for the first half of the year, along with potential improvements in the market, such as better vaccination rates. I'm cautious about predicting the second half of the year. For Q1, I expect it to be around flat, and Q2 could potentially exceed Q1 levels, especially since Q2 of last year was particularly weak.

That's a good color. Then my final question. And we talked about this in prior calls as well. As you're sort of looking at your customer mix, right, I'm curious of the moving pieces here, QSRs and some of the pizza and fast casual guys versus maybe some of the casual dining and even your institutional exposure. How you kind of see that play out through the year? Because you sound better about the casual dining component. And to me, that's a little bit surprising, right, because you've gone through a quarter with a spike in COVID cases that we've never quite seen before. And obviously, a lot of the outdoor dining was closed in areas with cold temperatures. So it's a little counter to what I personally expected out of the quarter. Any color there would be helpful.

I will pass it over to Steve shortly, but let me clarify. I wouldn't say that I expect casual dining to be a major contributor to the positive comments I've made looking ahead. I'm sure Steve will discuss the areas where we have seen strength, which are really continuations of trends that have been performing well and are enhancing. I believe this is where we are headed with casual dining and related segments, probably more so in the latter half of the year. Q2 has favorable weather months, and we will see how vaccinations progress. However, I believe casual dining, along with travel and entertainment, presents potential upsides yet to materialize. Now, I'll turn it over to Steve to share his insights on what we are experiencing and what lies ahead.

Yes. Thanks, Bryan. Mig, just to build on that, again, certainly, the QSR segment is where we've seen, obviously, let them hold in through the back half of this year. And I think what's changing recently for many of these QSRs is really getting back to new builds. I mean, that obviously was muted last year delayed. Many of the QSRs are really saying, 'Hey, they're going to be back to '19 new build levels, if not ahead of '19 new build levels.' So I think we're starting to see that in some of our orders to certainly start this year. The other segments, again, we've talked about retail and c-stores continue to be very strong, expect them to really continue throughout this year. Again, retail is a great pickup, I think, for us, just knowing retail was for Middleby, relatively new in the last 2 or 3 years as a segment and having a dedicated team, dedicated products focused on retail. So that's a big benefit. As far as that casual dining segment goes, I mean, I do think we've seen them hang in there okay, the ones that have adopted things like virtual brands that had allowed them to pivot to kind of new revenue streams. I agree with Bryan, I think it's just a lag behind the other segments. Hopefully, in the back half of the year, you start to see, again, people coming back to in-store dining, vaccinations, weather gets better. And obviously, we could see casual dining really start to pick back up as this year progresses. But it's still the QSR, retail, c-store, pizza segments that I think are driving right now, and that certainly continues throughout the year.

Our next question comes from the line of Todd Brooks with CL King & Associates.

And congrats Dave, and also congrats to Steve and James on your promotions as well, well deserved. First question, Bryan, if we can just walk through, I mean, the working capital performance was amazing this year. And you kind of qualitatively talked about some of that benefit unwinding as we do recover here. But maybe if we could talk about opportunities and learnings from how efficient you got during the pandemic and how much of that savings generated in '20, do you see coming back onto the balance sheet in a recovery scenario towards 2019 volumes?

Yes, much of this will depend on volume. I tend to focus mainly on accounts receivable and inventory since they are the largest components on our books and have a significant impact. We manage accounts receivable well and are lucky to have a strong credit risk profile. In simple terms, I believe accounts receivable will fluctuate with sales. We've successfully reduced days sales outstanding recently and have benefited from excellent programs with our dealers and distributors, which helps us mitigate risk. So generally, accounts receivable will align with sales trends. Inventory has been a strong area for us regarding working capital management, and I expect to recover some of it next year—approximately 75% due to volume. We have been actively working, particularly in CSG, to decrease our inventory levels and refine safety stocks and the products we hold. We’ve also focused on optimizing our product mix by eliminating lower-profit items. This approach explains why we won’t revert the full inventory levels back on the balance sheet as market conditions improve. Currently, in the Residential sector, I would accept more inventory if it were available, but I must admit I wasn’t prepared for the 50% growth we've experienced. This is a positive dilemma for us, and we are continually enhancing our operations. To summarize, accounts receivable will increase as sales do, and we expect to lower days inventory on hand, especially in the commercial segment.

That's great. I have one final question. It was nice to see the summary of deals in the presentation, particularly the six acquisitions. Can we discuss the incremental revenue from the class of 2020 from an acquisition perspective? Additionally, any insights on the M&A pipeline as we come out of the pandemic would be valuable. I believe the gap between offerings from companies in commercial foodservice, food processing, and even residential sectors is widening, which could provide a competitive advantage for Middleby.

I'll take the first one, and then Bryan can maybe add up the numbers in a second. So certainly, acquisitions have always been a core competency of Middleby. We worked really hard throughout the year to get our balance sheet back, hence, the financing. And as you can see in the deck with the cash flow and availability, we're really well positioned to bring the acquisitions back online and in fact, have brought the acquisitions back online. You could see, as you referenced there. We've done quite a bit, really including, I think, about four at the back end of COVID here. So we always have a great view of, I would say, a strategic pipeline of targets that we have that really adds to the long-term value of the company, and we're actively working on those. So I'm anticipating that 2021 is going to be back online, and really is already back online. So we're pretty excited about the pipeline that we've got going into the year. More and more, we're investing in, I would say, technology companies that cut across all brands, certainly. Historically, we've always gone after key brands and product categories that are new and complementary to us, but really we're accelerating things just like you've seen with L2F powerhouse dynamics that really cut across the platform. So excited about the opportunities there.

Yes. In terms of the numbers, we have shared some of this information. The Wild Goose acquisition was about $35 million, and Deutsche was around $40 million, which indicates that a store on our product page or United Foodservice was around $10 million. So that's a total of $85 million. RAM was definitely smaller, and Bluezone presents more opportunities as an investment, although we haven't provided specific figures for that one or for VeMA. However, when you consider the other acquisitions together, it likely adds up to approximately $90 million.

And welcome, James, Steve. And congratulations, Dave, on your retirement. So you talked about getting to 25 EBITDA margins in Commercial Foodservice in 2021 despite the lower sales in 2019. Just given the structurally higher margins, could you just update us on how you're thinking about the long-term potential for EBITDA margins in this segment?

I mean, yes, I'll say that's an easy question. We put out the 30% there as the goal, and that still is the goal and still what we're marching towards, right? The hard part of that question is to tell you exactly when that hits, right? But it's still just probably a couple of years out. The hardest part for me to get more specific on that is the pace of recovery, right? So we probably have debates around the table here, whether it's 2 to 3 years out or so. But hopefully, it's in that, I'll call it, small single-digit range of years to get there. We talked more extensively about margins at some point before COVID and how I'll say our mature cooking businesses were really already at that level, and I'll call it our larger and kind of the beverage cold-type businesses that we had, were also there. And what we were working on was the continued integration and growth at more of the more recently acquired businesses, both having them mature from a revenue-generating wise as well as taking the cost action. So COVID, obviously, gave us a bit of a step back there. But the goal is still the same goal and is certainly extremely achievable in our views. It just became a matter of the timing setback here this year. And I'll actually say, I'll put one more a little bit positive spin on it. Nothing like a little bit of hardship to cause you to get a little bit more introspective on things. So I think we'll actually get further benefits from all the deep dives and belt-tightening we did on the mature side of things for us.

I won't focus extensively on market share, as the appliance sector is quite vast and we are a relatively small player within it. However, we are certainly engaged in the premium market. We believe there is a significant opportunity for us to increase our market share in the coming years. Our efforts over the past several years, including new product launches and the development of our sales and distribution infrastructure, are key to this. We're beginning to leverage our showrooms, especially as we target the designer market, which is a new area for us that we're starting to invest in. The sales process is evolving across all our business segments, particularly in residential, with changes in digital marketing and how we connect with end users. We believe we are at an important turning point and have a favorable environment to support our growth in the coming years. While quantifying market share at this stage is challenging, I believe there is an increasing demand for premium and high-technology products, and that is where we are directing our investments. We feel confident about our current position in the market.

I just wonder if you can talk a little more deeply around the strength in the commercial business or kind of what's driving the backlog? Just a little more granularity. There's been a couple of questions around the edges. And I just wondered if we could try to maybe get a little deeper into that.

Can I take that one?

Yes, go ahead.

I would like to highlight two points. First, Steve did an excellent job discussing our relationship with the customer and our engagement on new products, service speed, menu variety, flexibility, cost, and labor. This engagement is largely driven by our technology, including various individual technologies. I’ll ask James to elaborate on how technology is enhancing our customer interaction in numerous ways, from our Open Kitchen platform to specific equipment. This applies to both foodservice and residential sectors. I see a strong link between technology, our backlog, and our customer-facing capabilities. James, could you share your insights on technology?

Yes, Dave, I think I would approach it a little bit differently. But first thing I want to talk about is the new Middleby Innovation Kitchens that we just opened. If everybody hasn't gone out there yet, go to www.middleby.com/mik to see all about the new Middleby Innovation Kitchens, which we opened in the Dallas area. It's been about two years in the making. The idea for us was to have a single point of access for our customers and our channel partners to come and have chef-led demonstrations to focus our customers and channel partners on all the great innovations that we do daily at Middleby from baking to frying to speed cooking to conveyors and automation to IoT. All those innovations are on display in the Middleby Innovation Kitchens. And since we've opened the Middleby Innovation Kitchens, in about the last 1.5 months, we've had nine segments tour the innovation kitchen, so very high-profile customers. I won't give their names, but they represent QSR, c-store, pizza, GOS kitchens, buying groups, dealers, casual dining, foodservice consultants, and even on-premise brewing. So we've had just a tremendous amount of volume and great customer interaction through the Middleby Innovation Kitchens. Beyond that, automation continues to be a focal point at Middleby through our advancements in the high-level User interface that we are developing. Also, the advancements of Open Kitchen, which continues to be the single platform for our customers to really automate their entire restaurant whether it be HVAC, lighting controls, whether it be management reporting, food safety measurement up to equipment connectivity. Open Kitchen truly is the only platform in the industry that brings all that together to allow our customers a single point of basically access to all the data in their kitchen. So we're continuing to drive innovations on open kitchen, automation, and among other products such as pizza, where we continue great innovation, such as the world's largest ventless conveyor oven.

Okay. And that was my next question. But if you guys are going to cut us off at exactly at 12:00, then maybe I'll let someone else ask, and I can ask on a follow up.

We'll run a little bit longer, Joel. So if you get a follow-up there, please. Yes, please ask.

Okay. You guys keep mentioning sort of the reinvention of the company. And I wondered across anybody there if you could give us a little sense of where you see this industry in five years and kind of what capabilities you've got to build today to get to that eventuality?

Yes, it’s an evolution, and we have been investing significantly in technology and sales processes over the past few years. We believe our customers are beginning to pivot, and the challenges posed by COVID have highlighted the need for changes. The automation of kitchens, the flexibility of kitchen labor, and the power of data and automation through digital means are now more critical than ever. The foodservice industry has been slower to adapt compared to others, but we are reaching a turning point where technology is becoming essential. This is why we have been making these investments for some time; it's not a new initiative. We’ve previously discussed our incremental spending in these areas, including acquiring automation and IoT companies. While driving profitability, we are reinvesting in these capabilities within our financial operations. Our focus extends beyond just kitchen equipment; we are also rethinking our sales processes. We are increasingly committed to educating our customers through a digital sales process, which we have heavily invested in over the last year. Our channel partners have become crucial in helping us provide solutions to customers. Additionally, James has done an outstanding job creating the Middleby Innovation Kitchens, which offer an interactive experience for our customers to envision the future of their kitchens. We have many solutions available that can significantly enhance that experience. This journey is more tangible than ever, and we will continue to increase our investments as we move through this year. Having strong leaders like James and Steve is key to accelerating our progress at Middleby. It’s an exciting time as we see many of these initiatives take shape. Regarding what’s driving our business, it includes these innovations and a solid performance across various segments. We feel confident that we are succeeding with our established customers while also making headway into new market segments where we previously had limited presence. Do you feel like you're kind of pulling ahead of the competition like now is the critical time to put the foot on the gas? Or it's just the natural evolution of how the business is going? Well, we have been trying to differentiate ourselves, and we've been committed to it for the last couple of years, and again, why we've been making those investments. We hope those investments are starting to pay off now. And so that is our objective is, again, really to be differentiated and have unique solutions to our customers that really are beyond what others in the industry might have.

Our next question comes from the line of Jeff Hammond with KeyBanc.

Just for clarification, Bryan, regarding the Commercial Foodservice margin comparison between 2021 and 2019, is the expectation that by the end of 2021, you'll reach the levels of 2019? Or is it anticipated that you will approach those levels during the latter half of the year?

The hedge answer is that we hope to achieve that in the second half of the year. However, I believe we have a reasonable chance of accomplishing it overall this year. The reason for my caution is that estimating revenue for the second half is currently challenging. Nonetheless, reaching that goal is definitely something we are focused on.

Okay, great. And then just as we think about this kind of rebuild and recovery and certainly, you guys have introduced a lot of products, and there seems to be certainly a focus on technology shift, and but just as you look at maybe more QSR, fast casual, doing the new build and maybe less independent, just how do we think about margin mix within this kind of recovery scenario that you're thinking of?

I am really impressed with how we've managed our margins. I understand your question about whether there are lower margins from larger customers. Our results clearly demonstrate our progress, and I believe things will continue to improve as we either reduce or increase our volume in the industry. I would emphasize that the focus on innovation and offering unique products is providing value for our customers, which directly influences our current performance and what I anticipate for the future. What’s driving our current success is the emphasis on differentiated and high-performing products.

So I mean one of the things that we focused on coming into this year is having sustainably higher margins at low levels of business. And so I mean, certainly, we had opportunities starting with all the acquisitions we've acquired over the last three years. So don't forget that. I mean, we've got a slide in the deck there. And it's quite a few, and we've got a pretty core competency of bringing those companies into the fold. So that's been a key element. As the organization has grown, we've focused on how do we really leverage synergies and capabilities across the company, which helps us also bring up the margins. But then to that last piece, the mix of product again, as we are investing in technologies, we're committed to shifting the mix to those higher-end products, which have a higher ROI for our customers. We're trying to deliver more value. And those are the three key elements that we've executed on over the last year. And again, it's always difficult to predict exactly what the margin is going to be. But I mean, we're anticipating that's going to show up in 2021, and it is part of that bridge of how do we get the margins to 30% for this business segment in the long term.

Good luck to everybody. I wanted to ask, you guys mentioned, obviously, you talked about CFS orders improving still in '21. So first question is just to clarify, what the December comp was? And can you just give us the comps for January and February, which I assume were up year-over-year?

I'm not going to specify months, and we've shifted to quarters due to variability from month to month. However, we're showing positive comparisons in the first two months of 2021. There can be fluctuations from day to day and week to week, but as we look at larger time periods, it becomes more consistent. The trends for 2021 have been favorable, and we're currently in a positive position.

Okay. And then I don't think we talked too much about price cost. Could you talk about price increases, order of magnitude? And is this enough to cover, do you have net positive price versus materials for the year? Or do we think we still need to re-address at a later date, given what's going on with steel prices? So can you just give us a little discussion about that, please?

Yes. We did take pricing somewhat, I'll call it, at the modest levels. Not seeing a lot of that in the Q1 outlook just because we do have strong backlog, and some of that gets filled at, I'll call it, old prices. But I do expect there to be further pricing actions taken this year, to your point, steel, and a lot of other areas in our business are seeing inflationary pressures, and we will respond to that accordingly. So it certainly, I would say, is not a detriment in Q1, and we're going to take actions to make sure that continues to be the case for the full year.

Yes, Larry, I would just say that, I mean, this is a real issue for a lot of companies right now. I'm sure you're hearing it more and more from some of the other companies you cover, but availability of containers, shipping costs, supply shortages, and then just kind of general inflationary pressures. And I'm repeating a little bit of what Bryan says. But it's something that we're managing pretty effectively. We're keenly aware of, and we're being proactive with our thinking about what that means in the second half of the year. And I think this is an area that thanks to Dave and team that we've got a really strong competency that probably doesn't exist at the level that we have today at Middleby. And I don't know, Dave, if you want to add anything further?

No, I think that with supply chain, many times you believe it's revolutionary, but it's actually evolutionary. The supply chain team was built two, three, or four years ago. We have a database of suppliers across all the individual brands that we work with and share. Additionally, every week, 150 people travel around the world focusing on supply chain and engineering, addressing supply chain issues, which include more than just components. We're considering container availability, shipping availability, and port dock availability. So this is a very detailed review. It ultimately comes down to competency – do you have a process? Do you have the data? And do you have knowledgeable people? When you look at Middleby across all the brands globally, with the database and supplier base we've assembled, it's an impressive organization of skilled individuals that has been developed over the last four years. Given the situation, we are really well-prepared.

Just a follow-up, first of all, on that last question. How much of the Q4 backlog will be filled at new prices?

Yes. The backlog goes across so many companies. It's really hard to say that specifically. I don't have a point on answer on that one for you.

Okay. Fair enough. And you highlighted alternative protein as a potential bright spot for food processing. Can you elaborate on how Middleby might participate in that growth?

It is early stage. I mean, just to be clear. I think, by the way, the mature dried meats and maturation business. I mean, I think that's probably more impactful to us this year. Obviously, you see a lot of headline news, including with our QSRs of alternative protein coming on more and more significantly investments made there. So when I think that is something that we view as a long-term trend, we do believe it is here to stay, it is not a significant piece of the food processing equipment today. We are, however, uniquely positioned there. It's been something that we've spent time developing products that broadly meet a number of different applications there and do feel like that's an example of a number of trends that we're going after.

And what positions us that way on it is, I'd say, alternative proteins require kind of a combination of technologies that exist across our protein and bakery product lines. So that will be good for us. And to echo Tim's comments over the longer term, it's not just about what's being done, I'll call it, by the new names that are kind of in the headlines every day in it, but also how are some of the more well-established, older line companies thinking about it as well. And we have been partners with them for a long time. So that's what gives us, again, good vibes on this over a medium-term horizon.

Yes, Bryan, that's exactly right. We have spoken to an impressive number of start-up chains regarding alternative proteins. We have reconnected them with our food processing customers who are making these early changes, as Tim mentioned. This aligns perfectly with what James discussed regarding technology. If you get a chance to visit the innovation kitchen, you will see demonstrations specifically related to your question. We are well-positioned on both the Food Processing side and the Commercial Kitchen Equipment technology side to lead in this emerging area.

I'll keep it brief because we're kind of long in the call. But I wanted to ask one about operating leverage in 2021. Specifically, I don't think we've talked at all about any temporary costs that might be coming back that came out in 2020?

Yes. I mean, many of those costs are back/coming back in terms of the ones that are, I'll call it, volume-dependent. Certainly, our travel costs are still low. We've talked a lot about the Middleby Innovation Kitchens, and there will be some pivoting, I'll call it, from some of our trade show dollars into that area. So I do feel like, I'll call it, our Q1 structure, which is embedded in the outlook comments I gave really reflects the bringing back of what was temporary and the benefit of what was taken out semi-permanently. I only say semi-permanently for two reasons: I hope that we continue to have tremendous growth; and with that, will come making some adjustments. And again, it's not a huge number for us, but we really think about it a lot because of the impacts of employee safety and technology, and that's the travel side of things, right? And so we're all certainly embracing technology and how we work with our customers. But nonetheless, given the industry we're in, people do like interacting with our equipment. And so do expect that to creep back over time, right? But hopefully, my comments about where we expect '21 margins to be versus '19 capture the fact that a lot of those costs stay out, and that's why we will continue to advance on that margin expansion story.

Okay. Great. Yes, I can do the math on the margin discussion. But maybe more specifically in Commercial Foodservice, have you calculated the leverage number? Or is there a leverage level you’re considering as the market starts to recover or at least as your sales start to recover?

I honestly don't know the exact way you are referring to calculating leverage. I'm sorry. Perhaps we should discuss that in more detail later.

Okay. Sounds great. Thank you.

There are no further questions. I will now turn the call back over to management for closing remarks.

Okay. Well, thank you very much, everybody, today for joining us on the call, and we look forward to speaking to you next quarter.

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