Thank you for joining us for The Middleby Corporation Fourth Quarter Earnings Conference Call. With us today from management are Tim FitzGerald, CEO; Bryan Mittelman, CFO; James Pool, Chief Technology and Operations Officer; Steve Spittle, Chief Commercial Officer; and John Joyner, Vice President of Investor Relations. We will begin the call with comments from management, then open the line for questions. Instructions on how to get into the queue will be given at that time. Please note, this event is being recorded. I would now like to turn the conference over to Tim FitzGerald. Please go ahead.

Good morning. Thank you for joining us today on our fourth quarter earnings call. As we begin, please note that there are slides to accompany the call on the Investor page of our website. We are proud of the accomplishments The Middleby team delivered across the business in 2023. The year proved once again to be challenging, marked by supply chain disruptions, inflationary costs, and the impact of interest rates, presenting operational challenges across all three businesses and materially affecting the demand in our Residential business. Our teams focused on delivering every day for our customers while executing on our long-term strategic growth initiatives and delivering the strong financial results we reported for the year. We're pleased to have closed 2023 with a record EBITDA eclipsing $900 million, record operating cash flows exceeding $600 million, and we made significant progress towards the long-term profitability goals we've set out, achieving combined Company margins which expanded to over 22%. While delivering the financial performance for the year, we have continued to remain focused on investing in and advancing our strategic initiatives, launching industry-leading innovations in customer-focused solutions, developing our highly differentiated go-to-market capabilities, and investing in our operational capacity to support profitability and growth. In 2023, we brought to market an exciting pipeline of innovations addressing operator needs and customer demand for automation, energy savings, labor reduction, speed, simplicity, and flexibility. We expanded our offerings of electrified energy-efficient and ventless equipment. We launched our Middleby OneTouch control now across many of our commercial products. We furthered our lineup of integrated full-line solutions providing for the latest in automation for customers of our Food Processing Group. And we made significant strides expanding our offerings of IoT-enabled products now launching in the marketplace. Across all three of our Foodservice businesses, we enter 2024 with a portfolio of customer-focused solutions, positioning Middleby as the innovation leader with offerings to address the current and future trends of the market. In 2023, we continued to invest heavily in our go-to-market capabilities that we believe are uniquely positioning us for the long term. We've made great progress developing our digital sales and marketing capabilities. We've expanded our Culinary and Food Science teams that engage with our customers on a daily basis, and we have deepened the partnerships with our strategic channel partners. The investments we have made in our innovation centers continue to prove to be a strategic asset for our businesses. With successful new additions in 2023 of our Middleby Innovation Kitchen in Madrid, serving our commercial customers internationally, and our Middleby Residential Showroom in Chicago, featuring exciting offerings across our Residential brands. Engagement at our innovation centers continues to be meaningful and is providing benefits across our Commercial, Residential, and Food Processing businesses. In 2023, we continued to make smart investments in our operations with over $80 million invested in factory automation and facility expansion to bolster profitability initiatives across our businesses and support growth opportunities in our brands. In 2023, we were pleased with the improvements in our overall profitability as we progressed towards our longer-term margin targets. We are benefiting from our focus on new product innovation to drive improved profitability in our sales mix. We are realizing efficiency gains reflecting the impact from our manufacturing investments, and we are focused on long-term supply chain opportunities with ongoing product design and sourcing initiatives, providing for additional operational improvements over the course of the next year. Market conditions remain challenging as we begin 2024, and while inventory destocking is largely behind us, the housing market remains difficult, and customers in our Commercial and Food Processing segments are cautious given uncertainty and macro conditions and challenges facing their businesses in the start of the year. Despite what may be a slow start, we are optimistic about the year as we expect improving market conditions for the residential market as we progress through the year, with significant long-term growth opportunities ahead as the market recovers from the current disrupted lows and returns to normalized levels. And we have a building pipeline of opportunities with our Commercial and Food Processing customers, which we expect will gain momentum as they execute against their established growth plans as we continue through the year. As we start 2024, we'll continue to focus on business execution, driving profitability and cash flow, while executing on our strategic initiatives that continue to build upon our growing competitive advantage at each of our three industry-leading Foodservice businesses. Now I'll pass the call over to James to spotlight some of the exciting things that we have in store at the upcoming Kitchen and Bath show, which is at the end of this month in Las Vegas. It's a great opportunity to see all our latest products, designs, and technologies across our entire portfolio of leading indoor and outdoor brands. We'll be featuring a record number of innovative product launches and demonstrating all the exciting things we have to offer across the portfolio of our Residential brands. James?

Thank you, Tim. I'm proud to start off the call with an affirmation of Middleby's commitment to innovation. Each year, the National Restaurant Association with applications for manufacturers for their best innovations in Commercial Foodservice launching in 2024. The awards are known as The Kitchen Innovation Awards, and the winners are displayed each year at the NRA show. The NRA show is May 18 through 21st. Without giving too much away, I'm pleased to announce that Middleby has garnered a large percentage of the 25 honorees, aka winners. And while I'd like to share all of Middleby's product honorees, I must wait for the National Restaurant Association to publicly announce the awards tomorrow. Please check Middleby's various social media channels for a list of all Middleby's winning innovations upon announcement. Now, per Tim, let's shift our focus to the Kitchen and Bath industry show which happens next week in Las Vegas where Middleby Residential is set to make a statement. Referring to our slide deck, you will see a selection of new design and innovations Middleby Residential is showcasing. Our expansive booth will display 250 Middleby appliances representing 16 different Middleby brands. It's worth noting that the majority of these 250 pieces will be seen for the first time at KBIS. From indoor to outdoor cooking, grills, ventilation, ice, and refrigeration, Middleby Residential has the most comprehensive lineup of premium appliances in the industry. We are also excited to announce two entrants to the U.S. market from our well-known European brands Novy and Josper. Novy's elegant and highly innovative induction surface cooking and ventilation products are bringing modern European design to Middleby's Residential U.S. lineup, while the Josper Casa brings the ultimate Michelin Star cooking experience to Middleby outdoors in your backyard with their Spanish charcoal ovens. While I can't go into every product in the deck or on display at KBIS, I'd like to highlight some of the design and technology themes that will be on display. First and foremost, color has become an integral part of Middleby's DNA. We are expanding our color offerings across Middleby Residential with the introduction of 20 luxury colors from Viking range, eight colors from Lynx grills, as well as the introduction of Lynx's premium outdoor kitchen cabinetry which will be offered in the same colors. While our iconic brands such as AGA and La Cornue have always celebrated a rich history of color, Viking and Lynx's new colors offer designers and architects the ultimate power of expression for their clients. Lastly, we are unveiling the AGA ERA, which is a complete modern makeover of our classic AGA cast-iron cooker that has been a staple in European homes for centuries. From a technology standpoint, induction will share the stage in the Middleby booth. Each Middleby cooking brand will showcase their newest induction products, demonstrating Middleby's commitment to electrification. We firmly believe our induction cooking will be rapidly adopted by consumers. With Middleby's commitment to high quality and high design, people will experience the remarkable speed, precision, and efficiency that our induction appliances bring, allowing them to rapidly embrace electrification in the most positive of ways. Continuing on with our innovations, connectivity remains a focus for Middleby. In our outdoor section, we are displaying our full line of connected digital charcoal products from Kamado Joe and Masterbuilt, including the new premium connected Masterbuilt Gravity Series grill, the XT. At Viking Indoors, we are introducing our new contemporary REVEAL line, which I previously discussed on past calls. The REVEAL single and double wall ovens feature our new connected and guided cooking platform, VikingCloud. By simply connecting the REVEAL oven to the VikingCloud app, you can enjoy a connected culinary journey. The VikingCloud provides complete control of your REVEAL oven. You can browse through a wide range of recipes, select your favorite, and the app will guide you step-by-step for the cooking process while sending instructions to your oven along the way. The app will turn your oven on and will notify you when your oven is pre-heated and, of course, when your food is perfectly cooked. Moreover, our AI-powered tool in the app allows you to transform any recipe on the web into a step-by-step guided cooking experience, just like the recipes from Viking. This innovative feature lets you take control of the Internet for a never-ending culinary journey with the REVEAL. I encourage you to visit the Middleby booth at the Kitchen and Bath Innovation Show to witness these market-leading designs and innovations firsthand. Thank you, and over to you, Bryan.

Thanks, James. One year ago, I noted that when I thought about 2022, one word came to mind and that was records. I also reminded everyone that records are meant to be broken, and we plan to make that happen in 2023. Well, mission accomplished. For 2023, we delivered record sales, record earnings, and record cash flows, and we plan to do more in '24. While I think that sums it up very well, I won't refrain from digging a little deeper into '23 and touching on '24 as well. For 2023, we generated record revenues that exceeded $4 billion. Our adjusted EBITDA exceeded $900 million, representing a profit margin of over 22%. Our margins expanded over 100 basis points from '22. GAAP earnings per share were $7.41. Adjusted EPS, which excludes amortization expense and impairment charges, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $9.70, up over 6.5% versus 2022. We achieved this while facing especially challenging market conditions in the Residential segment. While I don't enjoy talking about red numbers, I believe doing so here helps put in context how much we have accomplished. We delivered solid results, even while Residential saw a nearly 25% decline in revenues. As a result, our top-line growth for the Company was nominal, yet we grew our adjusted EBITDA 5.5%. We also more than doubled our free cash flow. We are focused on operational excellence. We are focused on innovation. We are focused on our customers' needs. We have invested and will continue to do so in all these areas. These investments are generating returns. You can see that in our results. But even while we invest, we also focus on driving strong cash flows and continually expanding our margins. We earn these margins by being leaders in innovation and having best-in-class solutions across our entire Company. We manage costs well. We have a deep understanding of our customers' needs and have deep relationships with them. All this drives our differentiated results. And we plan to do more in '24. You've seen that for the fourth quarter, we generated revenue of over $1 billion and record adjusted EBITDA at over $235 million with a profit margin of 23.3% or 23.6% on an organic basis. Q4 GAAP earnings per share were $1.42. Adjusted EPS was $2.65. In Residential, we saw an organic revenue decline of nearly 15% versus 2022. The adjusted EBITDA margin was 10%. Commercial Foodservice revenues globally were down 2% organically over the prior year, yet the adjusted EBITDA margin was over 29%. By the way, all the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. Given the volatility that can exist when looking at quarter-to-quarter results, I find it more insightful to examine where our businesses stand by looking at full year results. Organic revenue growth for this year was almost 3%. Nonetheless, we expanded our organic margins by approximately 200 basis points to over 28% in Commercial. In Food Processing, total record revenues for a quarter were nearly $192 million. Our adjusted EBITDA margin was 27.6%. Looking at the full year, our organic revenue growth of nearly 11% helped expand margins by over 300 basis points to over 25%. And that looks like success to me, and we will not be stopping here; we will continue to reach higher. I've hopefully made it clear that in the face of rather challenging market conditions impacting Residential, and we are not facing an easy environment by any means in any segment, we are delivering some of our best results ever. You can see this in our cash flow too. Our operating cash flows were over $255 million for Q4, and nearly $629 million for all of '23. Our free cash flow conversion was around 180% for Q4 and 120% for the year. Looking forward, we expect that our cash flow generation should grow and likely achieve at least the same level of conversion again in '24. Our total leverage ratio is now below 2.5 times. So, to sum it up, strong P&L, strong cash flows, strong balance sheet. So, where do we take the powerful Middleby culinary universe from here? Let me start with a quick view on Q1, and then provide some commentary on our outlook for '24 in whole. Taking a historical perspective, recall the Q1 results overall typically take a step down sequentially from Q4 across all our segments. I know there is much attention on the challenges Residential is facing and as we look to the start of '24, we unfortunately do not yet see improving market conditions in this segment. Looking at Q1 of '24 versus the prior year, we will see a revenue decline in Residential. In the beginning of '23, we were still benefiting from fulfilling orders and the then larger backlog. Our margins will also be a little challenging to start '24, given the impact of attending the KBIS show this year. For the other two segments, results of Q1 '24 will likely be similar to those seen in the prior year quarter. When you put this all together, from a total Company perspective, Q1 of '24 will be behind Q1 of '23 due to declines in Residential and relatively flat performance in the other two segments. As we progress through '24, across all the segments, I expect to see sequential improvements. Let me expand on those thoughts for the full year '24. Starting with Residential, as James noted, we are innovating and expanding our product offerings. We have built an outstanding product portfolio. We are positioned well for long-term growth and thus we'll return to and ultimately exceed prior profitability levels. But given what we are seeing in the economies where we operate, it is hard to offer a specific outlook, but there are some signs of potential improvement that we hope to materialize in the second half of '24, but we may not see progress until '25. We will have to see how housing markets, mortgage rates, and remodeling activity progress. I will reinforce that we remain profitable and at levels well ahead of other public appliance companies. We are poised to continue to grow our market share and thus grow our revenues and expand our margins. Across Food Processing and Commercial Foodservice, looking at full year '24, we expect to see organic revenue growth over '23. Food Processing had an amazing year in '23. Total revenue growth of over 22% and we jumped our revenue to above $700 million. We have delivered our target margin. The opportunity set in front of us remains very large, really as big as it has ever been. You've seen over the past few years how our best-in-class individual solutions have become integrated full-line solutions that resonate with our customers. These customers are facing labor shortages and margin pressure. They need highly efficient and reliable equipment. Our automation benefits them greatly. And as we help them improve their operations and profitability, we will see continued growth in our revenues, hopefully at least mid-single digits as we look across '24 and the potential for modest margin expansion as well. Onto Commercial, where our growth is a result of our strategic investments in broad capabilities. We are targeting higher organic growth in '24 over the almost 3% we saw in '23. We should also get closer to our target margin of 30%. We've often talked about how our beverage and dispensing platform is still relatively new to Middleby, yet represents about a third of the segment. It will drive outsized growth in '24. Some of my favorite drinks from a large coffee chain are now being served over Follett's nugget ice. Newton and its revolutionary valve may be small, but they are definitely mighty. They are making a difference in many ways. And I could go on about Wonder Bar, as well as Marco and our Coffee Solutions Group. But come see us at the MIC or at the Specialty Coffee Show in Chicago in April to see and taste for yourself. But '24 and beyond are looking strong. In our stalwart, the hot side is not cooling off. Our customers are growing their operations and they need our newest solutions. Just flip through our quarterly presentations to remind yourself of what we have been up to. But automated, energy-efficient, easy-to-control, internet-connected, fast solutions abound. So, take your pick. Are we cool? Are we hot? I like to think we have it all. For '24, we intend to deliver organic revenue growth, higher margins, and profitability growth at rates in excess of our revenue growth. We will continue to improve our working capital management and have strong cash conversion. Free cash flow will be up too. We are doing all we can do to earn the trading multiples we deserve. So, while '23 was another year full of challenges for Middleby and our most successful year yet in many respects, with EBITDA over $900 million, operating cash flow over $600 million, leverage now below 2.5 times, but we are never satisfied. We are constantly pushing, but we are also extremely proud of what we have built and what we deliver. And we plan to do more in '24. Alright, Andrea, will you please now open the line for questions?

We will now start the question-and-answer session. Our first question will come from Mig Dobre of Baird. Please proceed.

Thank you for taking the question. Good morning, everyone.

Good morning, Mig.

Good morning, Mig.

I have a question about Commercial Foodservice. If I understand the guidance correctly, we're starting off a bit slower here, possibly flat year-over-year in terms of revenue. However, if you expect to outpace '23 for the full year, that suggests a significant acceleration in growth, possibly around 5%, if my calculations are accurate for the rest of the year. I'm curious about what gives you the confidence that we will see that level of growth for the remainder of '24. Additionally, I know we will receive details in a 10-K, but could you discuss your backlog in this business as we exit '23?

Good morning, Mig. It's Steve. I'll address your question about our overall confidence this year. I want to highlight three specific points we've previously discussed. First, looking at our major chain customers, particularly in terms of new store development, which had been weak prior to COVID, we've seen improvement over the last couple of years. I expect this trend of new store openings to continue this year. The chains we collaborate with have reaffirmed their commitment to their new store opening plans, although they are still facing some challenges related to construction labor and permitting. Overall, they have committed to a higher number of net new store openings this year compared to 2023. Secondly, regarding the various challenges we've faced in recent years—like labor issues, utility costs, speed of service, and consistency—these still need to be addressed. Chains are increasingly focusing on their franchisee efficiency and profitability, leading to greater investments in these areas to maintain franchisee satisfaction. Lastly, I believe we are significantly overdue for a equipment replacement cycle. The chains have prioritized new store openings during the recovery from COVID and have neglected to upgrade equipment in their existing locations. This sentiment is evident across multiple segments, not just those we focus on. Considering these three factors—new store openings, ongoing challenges in operations, and the need for equipment upgrades—provides me with confidence in our market growth both this year and in the future.

And then Mig, this is Bryan. Regarding the backlog, obviously, we have consumed a good amount of it this year, and we'll be disclosing that next week in the 10-K. As you noted, we'd say that the backlog is pretty much at, well, considered normalized levels now. But we also have seen some positive trends over the past, I'll say over the back half of last year and even in the start of this year on orders and backlog is trending modestly, but even up a little bit to start the year. So, and when you put all that together, what Steve was talking about, what we've seen in some of the data points I've noted what we're engaging with customers on, what we have underway with them is what gives us the confidence that has underlined our comments.

And just to round it out, as you kind of think about the year and the backlog, we came in with a lot of backlogs. So there's a lot of shipments in the first quarter. We talked about the inventory destocking. So then as our channel partners really worked down their inventory in the back half of the year, that's been a little bit of a headwind in Q3 and Q4, but that goes away as we look at comparatives in the back half of the year. So one of the reasons I think was just the underlying activities Steve talked about, and then the lack of the headwinds in the back half of the year. Because our orders on Commercial were actually up in Q3 and Q4, but that's obviously not how revenues were as we continue to kind of face the destocking.

Thank you for that helpful information. My follow-up question is regarding the Residential sector. From your perspective on 2024, it seems like growth might be a bit slower than I anticipated. I am curious about the visibility in this segment and what needs to occur for it to begin growing. It appears that a recovery in the housing market and lower interest rates are necessary. Additionally, I would like to know what volume or revenue you believe is required in this segment to achieve your 25% margin target. Thank you.

So, I'll start off and then I'll let Bryan kind of hit that second part. Yes, I mean, I think certainly we were hoping that the housing market would start to be a little bit more robust. And I think the good news is we've bottomed out. It's a pretty low bottom, right? I mean, relative to the last decade-plus, I mean, it's pretty much the worst housing market that anybody's seen in a long time. And obviously, the interest rate hikes were very significant in the middle of last year. So, that's not that really long ago for the market to absorb all that. We saw a little bit of signs late in the year. The beginning of the year is a bit softer. So, we're kind of bouncing around the bottom. Our Residential orders also were positive in Q3 and Q4 relative to last year. But again, we had worked down the backlog from a revenue standpoint. So, I mean, I think we are seeing improvements. It's just that we're looking for a big step up in improvement where things kind of move, start to back to more normalized levels versus slight improvements off of the low. So, I think we're confident that we are going to see improvement as we go through the year. I guess the question is when is that better inflection point happen? But we do think that we will see some more meaningful step up in the back half of the year based on industry stats that we look at. So, Bryan, maybe?

Yes, it's Bryan. Looking at the margin side, in 2022 we had over a billion dollars in revenue with margins in the high teens after fully benefiting from cost actions. Ideally, we hope to be closer to the high teens or even 20% around a billion in revenue. This is based on past results indicating future performance. We are continuously implementing improvements across our businesses. In short, we need to see revenues in the range of one billion dollars to begin releasing improvements and increasing margins significantly from volume contributions.

To provide some additional insights, there are several significant factors at play. Historically, Viking has achieved margins well into the 20% range, though they have recently fallen below that level. For AGA, when we acquired the company, it had a margin of 3%, and we have worked hard to bring it closer to 20%. Over the past three years, particularly during COVID, we have made substantial investments in AGA. As the market improves, we not only have exciting new products but also a much stronger cost structure. This positions AGA for margin enhancement in the outdoor segment, which, like the rest of the residential sector, has faced challenges. The team has made excellent strides in optimizing logistics. We have several exciting new products, which James highlighted earlier and which are entering the market, that will command higher price points in the specialty segment. Overall, we are moving back toward the margins we have demonstrated in the past, and we have implemented structural improvements during this period. Consequently, we are confident that margins will reach an attractive level in a normalized market.

Alright, appreciate it. Thank you.

The next question comes from Saree Boroditsky of Jefferies. Please go ahead.

Hi, this is James on for Saree. Thanks for taking questions. So, I just wanted to kind of stick to inventory de-stocking that you talked about in the Commercial Foodservice again. So, you noted that the orders were actually up in 3Q and 4Q. So, can you kind of quantify or give some level of magnitude on the headwind from de-stocking in 2023? And do you expect de-stocking to continue into 1Q or is the de-stocking done in 4Q of 2023? Thank you.

I think it's very difficult for us to quantify. I mean, I think we would venture to guess it's tens of millions, but we know from discussing with our channel partners, they had a lot of inventory. It was not only Middleby inventory. A lot of dealers were trying to get with long lead times in the industry, any product they could get. And then there was concerted effort across many of the partners to work that inventory down in the back half of the year. So, I know it impacted us and it's really hard to quantify it. I mean, I think the indications that we've had by and large is that it is out of the system now. I mean, certainly, there may be some minor pockets left, but we don't view it to be in the same vein of the headwind that we had in the back half.

Got it. And kind of sticking to Commercial Foodservice again. So, one of your competitors talked about weak restaurant performance. So, can you talk about what you're seeing in the restaurant market and your expectation in 2024? And can you kind of give us an update on your progress in growing the institutional side of the business? Thank you.

Yes, this is Steve. I would go back to just kind of some of my opening comments. I'm probably more positive on what's going on in the restaurant segment broadly. Yes, there are some tough kind of market backdrops, if you will. But again, going back to large QSRs, opening new locations like they haven't done in the last 10 years. So, I think that's very encouraging. I think again, you see a lot of large chains being very focused on helping their franchisees' profitability, grow their unit economics, that will always come back to be very favorable for us because everything we do for them from an equipment standpoint helps solve those items. I think the institutional side of our business, whether it's schools, healthcare, those have been good areas for us. I mean, schools primarily have been a good area, but it's not as predominant as the large chains, pizza, C-stores, retail. When you think about segments of our customer base, the institutional side just isn't quite as big as some of the other areas. So, I guess to answer your question, fundamentally, I think we're probably more positive on the end user restaurant business for this year and really years to come based on kind of those two or three backdrops driving demand.

I think it's, as Steve said, I mean, with the QSRs, it's a little bit more visible, you can see some of the targets that they've laid out, but the fast-casual segment also has continued to do very well. So, I mean, we see a lot of new entrants coming to market and the ones that are out there expanding. So, we do pretty well in that segment. And convenience stores is also another area where they continue to push into food and beverage. And now we're a stronger player with greater offerings in beverages. We've identified that as a growth opportunity for us. I think those are some other things to kind of round out. I'd also mention international, particularly Asia, as you look at some of the long-term growth opportunities and plans there, whether that gets executed this year or in the future years, we feel pretty good about our positioning. You know, as we talk about a lot of the investments we've made with our strategic initiatives, we really have also bolstered our operations internationally, particularly in China as well as India. So, we're better positioned to serve the local markets there.

And I'd also note that as we, I'll say, satisfy the demands across the areas that Tim and Steve noted, we've also been able to manage our portfolio and we're delivering the innovations that are also earning us higher margins at the current levels. And as we grow, that obviously offers an additional tailwind to us too.

Got it. I appreciate the color. I will leave it there. Thanks.

The next question comes from Larry DeMaria of William Blair. Please go ahead.

Thanks. Good morning, everybody. Appreciate the comments on CFS in '24 on the outlook. Obviously, we've gone from strong growth coming out of COVID to kind of a slowdown, negative growth, and then a recovery here. So, I'm kind of wanting to follow up on where we think we are in the cycle and the industry. So, in other words, are we back towards this sort of long-term load and mid-single-digit industry growth from here? And secondly, if that is the case, what do you think you can outgrow the market on an annualized basis from here? Thank you.

Larry, this is Steve. I believe we have gone through a period of normalization, particularly in how customers have been ordering and managing inventory. As we begin this year, I think we are returning to a more typical rate of customer engagement and ordering. As Bryan mentioned earlier, we are confident about achieving low to mid single-digit growth for the year. While we have discussed chains extensively, it's important to note that we have a diverse range of customers. We're starting to see positive outcomes from the investments we’ve made in our channel partners over the last few years, allowing us to strengthen our relationships and provide them with necessary tools. A new dynamic is the influx of new participants in the dealer segment of our channel. Our investments in their training and our engagement through the MIC are starting to yield results. While we have focused a lot on chains, our significant efforts to connect with key channel partners on the dealer side in the domestic market have been critical for us. Additionally, as I’ve mentioned in previous calls, we have invested greatly in the consulting community both domestically and internationally. Middleby was not as strong in this area five or six years ago, but we are now leaders in this segment. Consultants are influencing specifications for everything from institutional buildings to major stadium projects and local restaurants. We can clearly see the specifications we are driving, and those projects will come to fruition in the latter half of this year and into next year. I want to emphasize that, while we have focused a lot on chains, I believe we are well-positioned to take market share and outpace overall market growth in the next two to three years.

Okay. Thanks for the color on that. Then just secondly, can you talk about price and volume in '23 with everything? How did it shake out? Any pockets of negativity? And then as we're looking at the '24 outlook, any pockets of negative price or just overall comments on pricing in general?

I believe that pricing has been a key strategic focus for us, especially considering the changes in costs. We have implemented various pricing strategies over the past few years, which have positioned us well as we enter this year. However, I recognize that we need to remain vigilant about cost management. Therefore, we are not finished with our pricing adjustments and will continue to explore areas for improvement.

Okay. So, put in other words, is it positive pricing on the three segments in '24?

I believe we've been concentrating on this for several years, particularly on the mix. As we focus on technology, we're not indicating that we're making drastic changes; rather, we're pausing to refine our approach. There has been significant cost disruption due to inflation affecting labor, materials, and shipping. Now, we're reviewing our portfolio and making adjustments where necessary. Additionally, we need our accounting and finance to catch up with all the disruptions from the past couple of years, so this is more about fine-tuning.

I think the other thing that I would point out as a reminder is, we were very intentional over the last two years about moving away and out of products on the lower side of the marketplace. So, we canceled a lot of SKUs throughout the last several years. So that's why when you think about kind of the price volume dynamic, it is a little bit difficult to triangulate everything just knowing the products we cut, the pricing we took. So, that's why it's a little bit tricky to answer the question, but do feel like to support Tim's point, we've done a very good job controlling mix overall, and I think are in a better position to kind of build going forward from a volume standpoint the next couple of years.

Okay. Thank you so much.

I think it is worth kind of pointing out and reminding everyone that we did cancel a lot of products as we went through the last three years. So, even as you kind of look at our revenues and organic growth and everything, it's hard to determine as you go through periods with kind of whipsaw demand effect. We intentionally got out of a lot of SKUs, so we've canceled what would have been tens of thousands of products that would have been shipped over the last several years to really reinvest and focus on new products that we were launching into the market at the higher end of the innovation scale.

Okay. Thank you.

And our next question comes from Walt Liptak of Seaport Research. Please go ahead.

Hi. Thank you. Good morning, guys.

Hi, Walt.

Wanted to ask a question about CFS, and just as you were talking about the new store openings, I wonder if you could talk a little bit about where you're seeing them geographically. Is it in international markets? I think you talked about Asia; what about Europe? And when you're talking about new store openings, are you talking about North America as well?

Yeah, it's a great question. I think what has been exciting is the big chains are back to opening new store locations. It predominantly is in international locations. So, I'm talking about new store openings overall. I'm speaking from a global perspective. So, if you look at most of the bigger chains, there is new store opening growth in North America, but it's actually predominantly coming from international markets. So, Tim hit on Asia, I mean I think all the big chains have been and have pretty substantial growth plans for Asia in general. I think as you go through Europe, I mean countries, Spain, France, actually Germany has been a good performing market for us. You see pockets in areas like India, Brazil, that I think the chains continue to invest in. So, yes, when we think of global new store openings, I would say it's probably skewed something to 60% to 70% are coming from international markets.

Okay. Great. Thank you for that. And just switching gears to Residential, I wonder if you can just talk about if things are maybe slightly going to get slightly better throughout the year. Where do you think the bigger inflection could come first? Would it be in the Residential Outdoor or in Residential Kitchen? If you have a guess on that.

It's difficult to predict exactly how things will unfold. As we consider our indoor platform, we expect a significant improvement as the year progresses, though we may start off a bit slow. Outdoor has the potential to change more quickly, especially with the grilling season and product load-ins approaching. Throughout the year, many of our channel partners and customers will likely focus on reducing their inventory, and they may be hesitant to stock up for grilling season. Therefore, we anticipate a more immediate response to demand as spring arrives. Moving toward the end of the year, attention will shift to 2025. We have several exciting new products that will occupy more retail space in 2024, which could greatly influence our performance as we approach 2025, based on sell-through rates and overall confidence. This situation presents a potential for larger positive shifts, though we don't foresee any negative trends.

Okay. Alright. Great. Thanks for that. Good luck with you.

The next question comes from Brian McNamara of Canaccord Genuity. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions. On de-stocking, could you guys expand on where this has been an issue in particular? Is it the dealer channel, distributor level, or somewhere else? And can you remind us of your rough sales in the segment by channel and CFS whether it be dealer, distributor, or direct?

I'll take a pass at the first part of the question. I think the de-stocking phenomenon has hit pretty much every segment. I think it hit the general dealer segment just again going back over the last couple of years when they were ordering just to find products whether it was, hopefully from us, but from other manufacturers in the segment. So I think the general dealer business did have excess inventory. I think the chain side, the dealers that carried inventory for chains, you also saw inventory show up there and that really is a function of all the chains were placing orders, say, a year out going back 12 to 18 months ago, two years ago, and as we started to catch up from a manufacturing standpoint, obviously, we started to fulfill more and more and that inventory ended up in the dealer channel or distributor channel. Now it still lines up against a lot of the new store openings and replacement that the chains are looking for; it just caused kind of back up in the channel, but I think we've, as we've said, by and large have worked through over the last couple of quarters. So, it showed up in all areas of business to answer your question, both in the, I'll call the general market dealer business and definitely in the chain business as well.

Got it. Thanks. And then secondly, it looks like Commercial Foodservice revenues were down significantly in pizza, casual dining, and independent restaurants in 2023. Is this de-stocking or is there anything else worth calling out in any of these customer segments and would you expect any of this weakness to continue in 2024? Thanks.

So, those percentages indicate the change in the proportion of our overall revenue that each segment represents, rather than a decline in revenue itself.

Yes, I wouldn't read necessarily too much into some of the nuances. I think it's just how has been flowed obviously. I read more; you have QSRs continue to do very well, so you see why that's up. Fast casual continues to do very well, so I think that's why that's up. So, I think it's more certain areas doing just better than others more than some areas being significantly down overall if that makes sense. So, I mean if you go back, pizza has had a great run, really started in COVID for the last couple of years. It was inevitable that at some point, it might slow a bit, and you just see the other segments pick up. So, that's how I would interpret it more than certain segments being way down.

Got it. Alright. Thank you.

The next question comes from Tami Zakaria of JPMorgan. Please go ahead.

Hi. Good morning, team Middleby. Hope you're doing well. So, my first question is on the cash flow, very nice cash flow last year. You expect good conversion this year too. And I think you have some convertible debt coming to you in 2025, so overall, can you update us on the capital allocation priorities from here on given the very strong cash generation?

I’ll address that. I’m not entirely sure how the convertible debt factors in, but we are in a strong position with plenty of capital available in the market. Our situation hasn’t changed significantly. We may have engaged in slightly fewer mergers and acquisitions recently, but M&A remains a key focus and strength for us. We see ongoing substantial opportunities to grow across all three business platforms, both organically and through acquisitions, as we have been doing for some time to develop our current platforms. As we navigated through the market disruptions last year, buyers and sellers were reevaluating appropriate multiples and market growth trends. Our expectations weren’t fully aligned during that time. However, as we transition into a more stable environment in 2024 and beyond, I believe we will continue to pursue strategic acquisitions to further enhance our platform.

And this is Bryan. Thinking about the convertible, obviously, it doesn't come due for a little over a year and a half from now. So I do not have a specific answer to precisely what we'll be doing at that point in time, but we obviously are generating cash so we could stockpile cash in advance of a coming due. We have availability under our bank facilities. We could roll it into our bank facilities. There's a variety of other, obviously, debt instruments out there that we could pursue to use as well. So we're certainly keeping an eye on all those options and balancing things based on the factors Tim talked about as well, but certainly, don't have a specifically defined course of action that we will be employing a year and a half from now. Again, we have a lot of flexibility I believe available to us.

Wonderful. That's good to know.

As you said, Bryan, I mean, I think we do see another strong year of operating cash flow ahead, which is great, obviously, as we reinvest in the business and execute on M&A and de-lever which we were happy to kind of bring down below 2.5 times. I will also kind of just touch on repeat comments. I mean, we have made significant investments this year and last year back into the business from a CapEx standpoint, so that has gone into innovation centers, it's gone into some really great investments in our factories thinking about ice, coffee, packaging. We've really kind of moved forward some of our businesses' position for growth, and we've brought a lot of automation into our factories as well. So, I mean that is part of the story of the margin expansion, as we've mapped that out over the last couple of years which is coming into fruition and continues to position us well into next year.

Got it. If I may ask one more. The Novy and Josper launches, what's the total TAM or opportunity you see from these two brands in the U.S. over time? I'm essentially trying to gauge the potential revenue lift, let's say over the next couple of years that we might expect.

Tami, you probably know that we don't often quote a lot of TAM numbers out there. I mean, the Josper is an amazing product. It is certainly a very premium product for us. So, we're excited about what it can do, but by itself, it probably is not a large needle-moving. I think Novy could certainly be of the two the bigger difference maker. They have a lot of really great technology, a lot of induction, and we see trends moving that way.

Our last question comes from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys.

Good morning, Jeff.

Just on Residential, on the 1Q is, seasonally I think that business actually is up 4Q to 1Q. I'm just wondering how you're thinking about that sequentially.

Sequentially, things have been a bit challenging in this segment. However, Q4 usually shows an improvement compared to Q3. This quarter, despite difficult market conditions, we saw some increased seasonal spending. I anticipate that Q1 could be lower than Q4 levels. Looking at the past three quarters, we can see a range in which we've been operating, and our outlook aligns with that range; it doesn't trend down, and we hope to see it trend up.

Okay. And then Steve, you mentioned one of the growth drivers being kind of this pent-up replacement cycle. And I'm just wondering, what you hear from customers on that, and what it really takes to kind of get some of that catch-up on the replacement cycle going?

Yes, I believe we were due for a replacement cycle before COVID, but the pandemic delayed that due to supply chain issues. Customers focused on opening new stores, but now they recognize the need to address aging equipment in existing locations, which is essential for keeping franchisees satisfied. Currently, we are better positioned than we were a couple of years ago to meet the demand for both new stores and replacements. Over the last few years, the priority was on launching new outlets, even though equipment availability had longer lead times. Customers are now actively engaging with us about replacements, ensuring we have products available when needed. I anticipate a shift in our demand mix, with a growing emphasis on replacement and upgrades instead of just like-for-like replacements. Customers are likely to upgrade to newer, connected technologies, which will also fall under replacement and upgrade. Historically, replacement has accounted for about 50% of our overall demand, and I believe that over the next two to three years, we will return to those levels.

Okay. Thanks a lot.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks, everybody, for joining us on today's call, and we look forward to speaking to you next quarter.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.