MIDDLEBY Corp Q3 FY2021 Earnings Call

Welcome to The Middleby Corporation third quarter conference call. Joining us from management are Chief Executive Officer Tim FitzGerald, Chief Financial Officer Bryan Mittelman, Chief Technology and Operations Officer James Pool, and Chief Commercial Officer Steve Spittle. We will start with opening comments from management and then we will open the lines for questions. Now I'd like to turn the call over to Tim FitzGerald for his opening remarks. Please go ahead, sir.

Great. Thank you for joining us today on our third quarter earnings call. As we begin, please note there are slides to accompany this call on the Investor page of our website. During the quarter, we continued to build upon the positive momentum across all three of our segments: investing in technology and product innovations, addressing the current dynamic market trends, furthering our strategic sales initiatives and expanding our brand portfolio with the recent strategic acquisitions of Novy and Imperial Range. As we invest for the future, we also continue to execute on our long-term financial goals. For the third quarter, we reported record net sales and earnings. And once again, we posted EBITDA margins at all three of our segments in excess of 20% despite significant headwinds from supply chain challenges. These supply chain challenges meaningfully accelerated during the third quarter, impacting our ability to produce and substantially inflating our material and shipping costs. We've responded quickly, taking multiple price increases in the recent months at each of our three business segments. However, given our record backlog, these price increases are taking longer to realize than in ordinary periods. As a result, the third quarter reflected minimal benefit from our price increases. We will see the impact of both our price increases and continued rising costs in the upcoming quarter, and we expect to realize a net price benefit as we enter 2022, which should further improve as we continue throughout next year. While we manage the disruptive impact of near-term supply chain challenges, we remain committed to our long-term profitability targets. As we drive profit improvement through acquisition integration, strategic manufacturing initiatives, and evolving the mix of our product by promoting higher technology solutions that provide greater returns to our customers. Customer demand remained strong in the quarter as our orders continue to outpace shipments. Incoming orders were not only ahead of 2020, but continue to outpace 2019 pre-COVID levels by more than 30%, both for the third quarter and for the full year. Given the continued order strength, our backlog has grown from $400 million a year ago to $1.2 billion at the end of the third quarter. While this presents substantial operating challenges, it also presents significant visibility and momentum as we exit the current year and move into 2022. As we look toward next year, we are optimistic about the continued market demand and the strong position we hold in each business segment. For our Commercial Foodservice business, the restaurant industry is in recovery across all segments. Categories such as casual dining, institutional and travel and lodging are joining the recovery we have already seen in categories such as quick serve, pizza and fast casual. And more importantly, our customers are looking to make strategic investments in their foodservice operations, leading to greater acceptance of new technologies. The foodservice industry is rapidly changing, responding to evolving consumer trends, the emergence of new business models and with an urgent need to address significant operating challenges, most importantly, the availability of labor. The strategic investments we have made over the past several years and throughout COVID position us at the forefront of an evolving industry. This is evidenced by customer activity we've had at our Middleby Innovation Kitchens. We are experiencing increased engagement on our latest technologies, offering labor savings, automation, greater speed of service, menu flexibility and reduced operating footprint. We're excited about the pipeline developing with new customers and with our latest product launches. At our Residential business, new home starts continue to be robust while existing home sales also remained strong and well ahead of 2019 pre-COVID levels. These favorable housing dynamics, along with increased time spent at home, is supporting the design and build of new kitchens and remodels. These conditions support a favorable backdrop to our business carrying into 2022. In the third quarter, we were excited to have debuted our residential showroom in Dallas. This showroom is connected to our Middleby Innovation Kitchens, demonstrating the crossover of product and innovation between our Commercial and Residential businesses, and bringing to life our differentiated ability to offer professional restaurant innovations in the home. Our showrooms are proving to be an outstanding investment and strategic asset. We are increasing our engagement with end users, dealer partners and designers. We're expanding our events, training support programs and marketing from these showrooms, further increasing the awareness and demand for our premium portfolio of brands. At Food Processing, the effect of COVID and the related travel restrictions that have impacted demonstrations, installations and the timing of large projects is beginning to subside, providing for an expected improvement to the operating environment as we begin next year. Despite the operating challenges encountered during the year, demand has proven to be strong as our food processing customers are facing the challenges of labor, rising food costs, safety concerns and sustainability. We are positioned to address these demands with our many new product innovations and full-line solutions. Our entry and strategic investment into areas such as bacon, dried meats, pet foods and alternative protein is also paying off, and we're increasing our available solutions in these growing categories. Now I'll pass the call over to James to spotlight one of our many recent product innovations highlighted in our investor slides.

Thanks, Tim. It's not every day when advancements come to grilling technology. But with 11 patents pending, I'm excited to share with you the latest development from Taylor for 2022, the Taylor NextGen Grill. This product delivers precisely on what the industry needs: automation and labor savings. The next-gen griddle is a great example of how embedded automation can augment traditional technologies to improve speed, throughput and quality while reducing the amount of labor and skill required to operate the griddle. Compared to other griddles, the next-generation grill seems a little bit non-conventional. This is because it's the first of its kind to vertically adjust the bottom platen to the food once the top platen closes, a true innovation that gives a griddle a superior advantage over other griddles that attempt to continuously adjust the top platen to a stationary bottom platen. Top-adjusting platens struggle as the amount of torque and accuracy required to achieve this task is beyond their current mechanics. The last slide in the deck is a summary of the features and benefits of the double-sided grill, but having worked hands-on with the grill for the past week at the Middleby Innovation Kitchens, I can say that there's nothing like it on the market today. With a single touch of a button, the griddle can execute a simple or a complex multi-step cooking profile that is designed to accelerate and optimize cooking from the vertically imposed platens all while continuously adjusting the bottom platen to account for the food's ever-changing properties, thus ensuring the desired compression is maintained during the cook. This is a terrific product introduction for Middleby in 2022 and is on full display at the MIK. Bryan, over to you.

Thanks, James. And I think you forgot to mention how delicious and juicy the burgers are that we're coming off of it, but we'll save that for other times. For the third quarter, we generated record results with revenue of over $817 million and adjusted EBITDA of over $172 million. GAAP earnings per share were $3.09 and included the net benefit of $77 million from the deal termination fee we received. Adjusted EPS, which excludes the deal fee impact and also 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 $1.92. The negative impact from acquisitions was $0.05 for the quarter. Operationally, in spite of the mounting supply chain challenges, it was another strong quarter for us. Robustness in orders persists, and we again exceeded $1 billion for the quarter. For revenue, on a year-over-year basis, we grew 29% or 22% organically as we continue to benefit from improving conditions in Commercial Foodservice, which is now ahead of 2019 on an organic basis, along with robust demand in Residential as well as Food Processing. And we continue to generate strong cash flows. Our profitability remains solid. We delivered 21% adjusted EBITDA overall, an increase over the prior year level. Total company adjusted EBITDA at $172 million, as I mentioned. This represents approximately 36% growth from the prior year. We are consistently growing our bottom line faster than our top line, even while we continue to make meaningful investments in technology initiatives. Commercial Foodservice revenues globally were up 32% organically and were fairly even between the North America and international markets. The adjusted EBITDA margin was 24.5%, an increase of approximately 210 basis points from the comparable prior year period. By the way, all the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. In Residential, we saw revenue up 14%, with international growth at nearly 45%, including the impact of an acquisition. Strong demand persists across all our major product areas. The adjusted EBITDA margin was 21%, an increase of over 230 basis points from the comparable prior year period. In Food Processing, revenues increased approximately 1% and the adjusted EBITDA margin was 22%. Our operating cash flows were nearly $174 million. When excluding the benefit of the termination fee, net of expenses and taxes, we still generated nearly $100 million. Our free cash flows were over 90% of net income for the quarter. The current business environment is also impacting our working capital levels, which increased $80 million during the quarter. Our total leverage ratio is 2.4 times while our covenant limit is 5.5 times. We have over $2.3 billion of current borrowing capacity. We refinanced our debt last month, which provides us increased financial flexibility and extends the credit facility's maturity date out to October of 2026. The facility size has been increased from $3.1 billion to $4.5 billion, subject to an increased secured leverage covenant of 4.25 times pro forma EBITDA. Our total leverage covenant is unchanged at 5.5 times and thus would allow for up to $2.3 billion of additional borrowings currently. These are really large numbers. I'd like to talk about some smaller numbers, actually much smaller numbers that are also very important and that I found quite interesting. 199 is where I will start. You can come to the MIK and meet our cube grater, Jennifer, which means our knowledge of all things coffee is off the charts. Besides learning about our automated brewing systems from Concordia and how you will be delighted with our Synesso machines, you can learn about beans, roasting, grinding, brewing and so much more. Also, the perfect cup of coffee is brewed at 199 degrees. Getting even smaller now, 60. The countertop ventless mini combi by Blodgett is an incredible oven. Chef April will impress you with the seemingly unlimited ways this truly unique piece of equipment can make any kitchen more efficient, with a small footprint that can be placed anywhere as it is ventless. I do have a fondness for breakfast egg sandwiches, so I was amazed to learn that this powerhouse can cook 60 eggs at one time. And lastly, 2, and a brief discussion of beer. Two is the number of brewing divisions we have, Ss Brewtech and Deutsche. Two is also the number of canning and bottling brands we have with Wild Goose and Inline Filling solutions. But it is also interesting for another reason. At the MIK, you can meet our brew extraordinaire, Brad. Not only can you see and taste what he has concocted, but you can tap into his vessels of knowledge as he personally built systems and has run breweries. He is one more example of someone whose experience and passion will certainly impress. And one tip that I came away with, there are truly only two types of beers: ales and lagers. For those looking to learn more, Brad is ready to educate you, too. Now let me get back to some bigger numbers, our order and backlog data. We have again shared details in the presentation that is available at the Investors section of our website. We will share this information through our fourth quarter reporting, but may cease to do so over 2022. Commercial Foodservice order growth for the third quarter over 2019 was again 30%; Residential's order intake was strong at 34%; and Food Processing was up 45%. Given these order rates and the supply chain challenges that limited our ability to generate higher revenue levels, our backlogs continue to grow, up 19% from the end of Q2 and more than double where they were at the beginning of the year. These trends have persisted in October as well. So I will reiterate what I shared last quarter as we look forward, that we are keeping our expectations at modest levels for the near term given the supply chain limitations on significantly expanding revenue levels. We are obviously seeing great order trends and the building acceptance of our new products, and we continue to invest in innovation, automation and robotics. So as we look to Q4, when considering our backlog, pricing actions and inflationary pressures, we expect nominal top line growth sequentially from Q3 and margins likely at levels consistent with Q3 before starting to see margin expansion in Q1 of '22 and likely then growing into and through Q2 as well. We invested not only in the MIK but also in four residential experience centers. And within Food Processing, we also have our Bakery Innovation Center in Dallas and our Protein and Innovation Center just outside Chicago. I always look forward to trips to any of these spots, and not just because of the great food and drink I get to enjoy while there. Witnessing how we serve our customers, the passion and the knowledge of all that represents our brands is amazing. The energy one feels as one witnesses customers, designers, consultants or other partners interacting with our people and products is powerful. Our products, innovations and our people will continue to deliver solutions that will drive growth for years to come. Thanks. That concludes all our comments for today. And operator, if you can now open up the line for questions.

We have our first question coming from the line of Saree Boroditsky with Jefferies. Your line is open.

Good morning and thanks for taking my question. So just given the strong backlog figures, could you help quantify the impact of the supply chain in the quarter on sales? And are you seeing customers place orders earlier than usual given the longer lead times?

It's hard to quantify, honestly, I mean obviously, we're very restrained in what we can ship, how much more we can ship. I mean obviously, the backlog is up 30% more than what we're shipping. I think if we had unconstrained supply chain and labor issues, we would be shipping frankly, that much more. So I think that's probably about all I can say to quantify. I think more importantly, we're trying to build capacity as we go into next year. I mean the supply chain challenges continue to be very dynamic. We have phenomenal supply chain team around the company. They're working every day to secure availability so we can deliver to our customers, and we're trying to increase that as we move into next year.

Great. And then you talked about some of the investments you're making in automation, especially in Commercial Foodservice. Could you quantify that spend? And how we should think about those costs going forward?

I'll let Bryan maybe touch on that from a number standpoint. I mean I just think, as you heard in our comments, we talk about a lot, we're very committed to investing for growth in the future. I mean we're doing that with investments in technology, but certainly with our sales initiatives as well, which certainly there's a lot we're doing on the digital front as well investing in our channels and channel partners. But kind of the hands-on experience is really a critical one as well, so that's been a very significant commitment that we've made. And that's been increasing as we've been going through the year, and that's kind of fully reflected in the third quarter.

This is Bryan. In previous quarters, we discussed our ongoing investment in technology, including automation, which remains strong. It's important to note that automation encompasses more than just robotics; it includes products like the NextGen Grill and the PLEXOR, which we highlighted last quarter. Alongside previously mentioned figures, our routine research and development efforts continue to focus on new product development. Thus, when considering our spending, it includes both earlier figures and additional investments integrated into all our business activities aimed at fostering innovation. You can observe our robotic solutions in action on social media. However, automation extends beyond that; it's about all the advancements James has been highlighting in this call and previous ones.

We have mentioned an incremental R&D expenditure of $5 million per quarter, totaling over $20 million annually. Additionally, we are making a significant investment in sales initiatives. I want to highlight that these are separate items. This investment will be evident in our profit and loss statement and has been gradually increasing over the past couple of years as we plan for our future over the next two to three years.

I appreciate the color. Thanks, guys, congratulations on the quarter.

Thanks.

Thank you. We have our next question coming from the line of Joel Tiss with BMO. Your line is open.

Hey, guys. Good morning.

Good morning, Joe.

The first one maybe is a James question, I'm not sure. But is there any way for you to give us a sense of how far away from the level of what the customers want in terms of automation? Like where is the industry or where are you guys versus what the customers are asking for? And any way to give us a sense of what your positioning, you feel like you're way ahead of everyone else or you're keeping pace? Or any characterization.

Yes. I think right now, you've got kind of two types of customers. You've got customers that are actively adopting our embedded automation today every day, the products like the PLEXOR, the products like the Taylor NextGen Grill as we see that in our backlog numbers. And then you have customers that are looking beyond embedded automation and looking for, what we'll call, kind of true robotic automation that they're looking to deploy in the kitchens. I think we are right on pace, maybe outpacing the market with our FryBot and PizzaBot solutions that we're bringing to bear on the industry for all the interrupts that we've had with our customers at the Middleby Innovation Kitchens that have seen these technologies. They seem to be in line with their expectations of what they're looking to automate within their space. It obviously impacts the different segments, slightly different, but the ones that haven't recovered as much, frankly, lead to greater pent-up demand when they do recover, which is kind of what Steve was alluding to, talking about school systems. So we feel pretty good about the trends continuing and don't really expect a disruption from an order standpoint based on COVID.

And then a bigger picture question in terms of acquisitions. Are there larger acquisitions available? And then more around your focus, you're more focused on technology? Or is it still kind of building out the product lines and filling in some areas where there's exciting growth?

Yes, I would say it's a bit of both. We have been very active in recent years as the company expands. We're really focused on building our core business across three different segments. You've seen us enter adjacent categories like beverage, where we established a leading platform, and we're acquiring technologies that help advance all companies in the group, especially our automation division such as L2F. Powerhouse Dynamics with our Open Kitchen launch has positioned us as leaders in the IoT space, impacting all of our brands. Investments in international markets are also a priority, as one-third of our business, which is over $1 billion, is currently outside of the U.S. In terms of acquisitions, we pursue opportunities of all sizes. As Middleby grows, we gain the ability to target larger acquisitions, and you've noticed the increase in our acquisition sizes over time. There are many promising ideas in the pipeline that are very strategic, and we remain as active as ever in exploring new opportunities in the current market.

That's great. And then the last one from me. Can you just give us a little characterization of some of the end markets that may be lagging? What I'm thinking in the back of my mind is more like a slingshot into 2023 and maybe hotels, airports, cafeterias, places like that? Or is there enough sort of underperformance in some key end markets still, not from you guys, just from lack or demand still being a little bit weak that we could really see kind of longer term? What I mean, like '23 and '24, we can see those end markets come back and really, really add a lot of momentum to what you guys are already doing.

Yes. I want to make a quick comment, and I'm going to pass it over to Steve here. Just the one comment is obviously, there's a lot of disruption and a lot of dynamics that are driving activity in the near term and as you go across the different segments that are at different stages. But I mean, I think we're pretty excited about what the outlook is over the long term. So despite the fact that we've had some pretty good orders here in the near term, I mean, there really are a lot of trends that are driving longer-term growth. Those are obviously things that we were positioning for going into COVID, which COVID is accelerating a lot of those trends. But I mean I think that really does set the backdrop for kind of a longer-term period in the commercial foodservice industry. So maybe kind of digging into some of the different segments.

Yes, Joel. Yes, I would just say, again, if you think of our customers in groupings of how they've gone through the last, call it, 18 months going through COVID, the group that has certainly again done the best and continues to grow, will certainly continue to grow into next year is the QSR, fast casual, pizza, retail, C-store group. I mean that's the group that's doing record new builds on their stores right now, and they've given us a lot of visibility certainly into next year and I think have some aggressive growth plans. So that's kind of group number one, which we found before. I think the group after that, which probably is getting more into what you're referring to, Joel, you certainly are into more casual dining than independent restaurants. So I think they're certainly ahead of where they were kind of pre-COVID. They're still lagging that first group. This group, I think you're seeing a lot more replacement business, right? They're not opening as many new locations. They're getting the locations that were either shut down or harder hit back up and running, and you're seeing replacement business from that segment. And then I think the last group, again, that you're probably referring to, you're into travel, leisure, healthcare, institutional segments. I think again, they're trending positive. They're just lagging those first two groups. So I would support your point of that third group certainly has runway over the next 12 to 18 months as they come back. But I really think all three segments are trending positively. It's just kind of a measure of magnitude as to where they are in that recovery cycle, if that makes sense.

That's great, thank you so much.

Yes. Thanks, Joe.

Thank you. We have our next question coming from the line of Larry De Maria with William Blair. Your line is open.

Hi thanks good morning everybody. As it relates to the $1.2 billion backlog, I know you've addressed this in prior calls, but can you discuss the timing and how long that's going to convert and if you're repricing any of it? Because obviously, you seem pretty confident that price cost gets better in 1Q, but I seem to recall, you had some orders into the spring for quite a while now, even maybe a year by the time they hit. So I'm trying to understand the confidence and obviously, the price cost is getting better and whether we repriced any of the orders out there.

We are not generally repricing the orders. We aim to do right by our customers and navigate our challenges internally without disrupting our end users, especially in the residential markets where consumers have been waiting for their products for a considerable time. This has been a headwind that affected our third quarter margins. The price increases we've implemented will take effect as we work through the backlog, but there isn't a clear cutoff since we have many companies within Middleby, each with different backlogs. I expect this to scale up as we enter the fourth quarter and continue into the second quarter of next year.

Okay. And then secondly, I don't think this has come up before, but there's an awful lot of articles and things around the Taylor ice cream machines and reliability. Can you give us a handle on what's going on with them? And maybe how much of a positive impact to Middleby, the parts and service business of Taylor is because there seems to be a lot of reliability issues and how you're addressing all that?

Yes. There is a lot of discussion around this. First, people really enjoy their ice cream from the Taylor machine, which is why it attracts so much attention. It's a vital piece of equipment that contributes significantly to our revenue and brings customers back to our restaurants. Social media can be beneficial, but not everything posted is completely accurate. Much of what is out there might be somewhat exaggerated. The equipment is indeed technical, and we have an excellent service team that keeps it operational. When complaints arise, it's often because the machine is undergoing a cleaning cycle, which is crucial for food safety. We're using technology, including IoT, and working on next-generation equipment to make sure cleaning happens at the right times, focusing on preventive maintenance so that everyone knows our operational status. I believe that much of the news may be somewhat misleading. At the same time, we are committed to ensuring that our essential equipment is equipped with the best technology possible to maximize its uptime.

Okay, thank you. We have our next question coming from Jeff Hammond with KeyBanc. Your line is open.

Hey, good morning guys. Orange already. So I know you kind of were getting away from guidance, but you did kind of give us the update kind of mid-year around the $730 million adjusted EBITDA. It seems like the revenues are kind of falling out in line, but there are some headwinds on the cost side, and I just don't know if you can frame or quantify those headwinds. It looks like certainly price cost is an issue. And then it looks like the corporate cost, maybe some deal costs in there are headwind as well.

Yes, if you examine the EBITDA reconciliation, we've recognized the benefits in costs related to the large deal that did not occur this year. So far this year, we've reported $520 million of EBITDA. I will let you and other analysts and investors estimate what Q4 might look like compared to Q3. The difference between $730 million and $520 million is $210 million, which is significant given our current status. However, as you mentioned, supply chain issues and price costs are factors we are actively addressing. I also provided insight on how we anticipate these conditions will begin to improve at the start of next year, gradually getting better throughout 2022.

Can you provide us with the price from the third quarter? Additionally, as you consider the recent price adjustments, what do you anticipate the wrap-around pricing will be for '22 based on the announcements made?

Yes. Steve, why don't you go ahead?

Sure. I'll summarize the recent changes in our pricing strategy over the past few months. We have around 100 brands, and the approach has varied slightly across our portfolio and customer base. Overall, we implemented a price increase in August for all brands. Recently, we also introduced another price increase effective November 1. The increase in November was more significant than the one in August. Looking ahead, we expect the pricing from August to start reflecting in the first quarter, while the November increase should be noticeable in the second quarter.

Okay. Yes, that's perfect. And then just on Food Processing was a lot lighter, and I just didn't know if there's anything unique there, a big shipment that got delayed or any other kind of noise around Food Processing?

No. I wouldn't say there's any noise there. I mean we did note coming out of the Q2 release that as we looked at kind of timing of deliveries and the work that Q3 was going to see a dip, and we expect Q4 to move up from here. But the orders have been strong here. The backlog is at a record level for this business as we sit here today. So we still think the outlook is very strong here. And again, the demand factors have been coming through. I think as we went back, I got to think how long we've been living through the COVID here. But if we go back six or nine months, we are certainly talking a lot about customer challenges and getting to see us and evaluate equipment and the like. That has not completely abated, especially since this really is a dynamic international business, but it has been improving. So the trends here, and again, as you can see, the orders and backlog is encouraging and positive for this business just like the other two segments.

Okay, great. I appreciate it.

Yes.

Thank you. We have our next question coming from the line of Tim Thein with Citigroup. Your line is open.

Thanks, good morning. My first question concerns how to monitor the quality of the backlog. I'm curious about the risk of double or triple ordering, especially considering the significant price increases and long lead times we are currently facing. Do you see this as a potential risk we should be aware of, or is it not something you're focused on?

I don’t see much risk of order cancellations. I believe everyone will be competing for supply as we move into next year. While there may be a few cancellations here and there, overall, I think we will maintain a solid backlog. Regarding pricing, the quality of our backlog's pricing is clearly improving each quarter. Additionally, we are focusing on the quality of the backlog mix, which has been a priority since before COVID, particularly in relation to technology and customer needs. Currently, we are beginning to see more development of new product launches that are addressing issues like labor and speed of service. This is something to keep in mind as we move forward, and we will continue to emphasize this next year.

Yes, that's interesting, Tim. The issue of labor cost and availability is a common topic in discussions among restaurant companies this quarter. We're looking for ways to save on labor and implement automation, but these decisions take time to develop. It raises the question of how we can quantify the potential impact of this situation on either Middleby or the overall industry revenue, especially if this trend towards kitchen automation continues. While it may be challenging to identify specific figures, it would be helpful to think about the potential opportunities for both Middleby and the industry.

Yes, this is one of the aspects that really excites us. We have been focusing on innovation for some time now and making incremental investments in it. This is where we see opportunities in the industry, and these developments are going to fuel growth in the long run. We believe that these investments will set Middleby apart as we move through the coming years, even though we're still in the early phases of this process. It often takes time for customers to adopt new technologies, but we are noticing that their decision-making timelines are becoming shorter. The challenges our customers face, which can feel quite urgent for them, are influencing their priorities, especially when it comes to labor shortages. They are actively seeking different solutions, and their operating models are evolving, which is accelerating the time it takes for them to embrace new technology. While we consider ourselves still in the early stages, we anticipate that the next couple of years will be quite thrilling for us. We often discuss the engagement happening at our innovation center, which is not just talk; it has been very interactive and hands-on. The innovation center has only been operational for about two to three quarters, and I would like to ask James to share more insights about who has visited. Overall, we are really satisfied with this investment because it offers us an opportunity to showcase and interact with our customers, who are actively participating without us having to solicit their involvement. Our schedule is quite full.

Yes, I think the demand to come to the innovation kitchen has far exceeded everyone's expectations. As for the customers who have visited, Steve mentioned various segments earlier, and all of those, from hotels to convenience stores to fast casual and casual dining to fine dining, have made their way through the doors of the innovation kitchen. We do a good job tracking the traffic, and so far, we’ve had around 1,300 visitors from about 160 different customers, ranging from small businesses to the largest chains in the industry. At the innovation kitchen, we showcase our new automation technologies, including the FryBot and PizzaBot, while addressing how the industry is tackling labor challenges through automation. Our embedded automation products are high-margin and a key focus for our customers. Additionally, we display our comprehensive digital IoT solutions with open kitchen, which is gaining significant attention for its capacity to automate operations in various areas. While I wouldn’t say they’re beating down our doors, it’s very close, and we’re excited to have increased our staff to handle the demand.

Very good.

Thank you. We have our next question coming from Walt Liptak with Seaport. Your line is open.

Hi, good morning guys.

Good morning.

I wanted to ask a follow-up on the channel inventory. It sounds like that there's not a whole lot of channel build. But fourth quarters, I think in the past had been periods where there was sort of true-up on volume discounts and rebates and things like that. I wondered if there's anything like that, like rebate payments or anything that flows through in the fourth quarter or any true-ups to get to kind of target volume levels with the channel partners.

Yes. Walt, it's Steve. So yes, I would agree with you in kind of 'a normal year', you would definitely see that dynamic in the fourth quarter with your channel partners chasing year-end incentives. Obviously, we are operating in a not normal dynamic. So that will not happen this year for a number of reasons. I mean there's very little inventory in the channel. So I guess let's start there. That's kind of your first question. And I just think the dynamic between order placement, lead time, supply chain when you're actually getting your equipment being so dynamic right now, that really makes that kind of fourth quarter push that you would normally see in a year pretty much go out the window at this point. And we've also been very focused, frankly, on not doing any type of discounting that we may have in the past to drive a year-end deal like that. So it's a very different year, I guess, to answer your question, but I do not see the dynamic from prior years taking place this year and probably won't be taking place for a while, if not going away for a long time.

Okay, great. And then the last one, I wonder if you could just comment on how your deal funnel is looking, how competitive is the market valuations, things like that.

Walt, it's Tim again. I touched on this a bit with Joel's question. I'll reiterate that we never run out of ideas here. Our challenge is having too many ideas, so the deal funnel has been quite active. There's been a lot happening due to concerns about taxes and the various dynamics across industries, but we are in a solid position regarding our deal pipeline, consistent with the last 20 years, and our balance sheet is also strong. Bryan discussed our financing, and we were pleased with how the team successfully upsized our credit facility, which gives us more flexibility as we head into next year.

Okay, great. Thank you.

Thanks.

That is all the questions we have today. I'd like to turn the call back over to management for any closing comments.

Okay. Thanks, everybody, for joining the call today, and we look forward to speaking with you for the next quarter.

This concludes the conference call. Thank you for participating. You may now disconnect.