Good day, and welcome to the Third Quarter 2024 Middleby Corporation Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tim FitzGerald, CEO. Please go ahead.

Good morning. Thank you for joining us today on our third quarter earnings call. As we begin, please note there are slides to accompany the call on the Investor Relations page of our website. The third quarter proved to be more challenging than expected, particularly for our Commercial Foodservice segment as lower restaurant traffic and a reacceleration of already high food costs in recent months further pressured restaurant operators, resulting in a delayed investment in greater restaurant closures. Although we faced macroeconomic headwinds across our foodservice businesses, the picture remains strong as more favorable conditions return with pent-up demand and expected multiyear recoveries for the industries in which we participate. While we faced revenue declines in the quarter, our profitability initiatives continued to take hold as we posted strong margins across our businesses, and we reported margin expansion in comparison to the second quarter. We are also pleased to have reported another very solid quarter in operating cash flow, with year-to-date cash flow of $447 million, roughly 20% ahead of a record 2023. Given the strong cash flows generated by our business, we have rapidly reduced our leverage, which has declined from 2.7 times a year ago to just over 2 times at the end of the third quarter. Our balance sheet is strong, allowing us to capitalize on market opportunities as they arise. And we continue to make critical investments in strategic and operational initiatives positioning us for the future. At our Commercial Foodservice business, gradual improvement in ordering levels we saw throughout the first half dropped off as we progressed through the third quarter. Restaurant traffic, which was anticipated to improve at many of our customers in Q3, declined by reported 3.5% across the restaurant sector for the quarter. At the same time, food costs, which have been improving throughout 2023, saw a reacceleration of cost increases in recent months. These factors slowed execution against our customers' business plans and ordering of equipment for upgrades and new store openings. Overall, the economic headwinds for the industry have resulted in an estimated 1,500 restaurant closures for 2024 as compared to originally expected unit growth of 6,000 from when we started the year. Although conditions are challenging, our chain customers’ business plans, while delayed, largely have not changed. And for the longer term, the industry is still down over 100,000 foodservice locations, but with forecasted net unit additions expected to return in 2025 and with continued growth over the next five years. As highlighted on many of our calls, we have launched a record number of industry-leading new solutions across all product categories, with a building pipeline of opportunities tied to customers yet to be realized. As conditions improve, we expect this pipeline to be realized. We are well positioned to support industry trends with innovations to address the need to drive restaurant efficiencies, save on food costs, reduce labor, and enhance speed of service. Additionally, we have made significant investments through acquisition and new product development, expanding into large underpenetrated categories for Middleby. In particular, we are realizing momentum in our targeted entry into the multibillion dollar ice and beverage category and are just in the early chapters as we further grow our offerings and penetrate into this segment. At our residential business, the housing market remains challenged with low levels of existing home sales, new home starts, and remodels. Existing home sales that we originally anticipated to improve during the year continued to further decline in Q3 against multi-decade lows. This is continuing to have a significant impact on our business today, both on the top line and our profitability. Unit volumes across our residential brands are down 30% to 40% in comparison to historic normalized pre-COVID levels. The expected recovery back to pre-COVID volume levels will result in a significant profitability expansion back to our historic norms. While operationally, we are actively making investments in our manufacturing capabilities that are benefiting our efficiencies and quality, supporting our efforts to achieve our long-term profitability targets. While we navigate these current market conditions, we've seen initial signs of recovery with growth in certain areas, such as our outdoor business, which is driven in large part by replacement demand. Our premium indoor business, which has a greater exposure to longer-term recovery areas of new home build and remodels, we expect to follow as the lowering of interest rates begins to take hold, leading into a multiyear recovery. We are better positioned than ever to benefit as this recovery occurs with our leading brand portfolio, many new product launches, and wide array of unique offerings and designs. The traffic at our residential showrooms continues to grow as we engage more than ever with kitchen designers and dealer partners. We are reaching a new and expanded audience, and this will provide benefit for the years to come. In our Food Processing business, the conversion of opportunities into orders remains inconsistent as customers have proceeded cautiously in recent quarters while they monitor food costs, while also measuring the impact of higher interest rates on larger projects. However, the pipeline of active projects continues to remain strong and has grown throughout the year. There is a continued demand for our solutions to increase throughput, reduce labor, and minimize food waste. As a result, we see a constructive backdrop for 2025 with expected greater conversion of orders in the pipeline occurring as interest rates decline and market conditions for food processors become more certain. We continue to execute upon our strategy to become the leading provider of best-in-class full line and integrated solutions for protein and bakery processors. This strategy is resonating, and we are positioned to partner with our customers as they evolve their businesses and address the need for automation in their operations. As we continue to grow our best-in-class solutions, we are also continuing to expand into new applications such as poultry and snack foods, expanding our addressable market and providing for continued future growth opportunities. While we navigate near-term market conditions, we continue to focus on the execution of our strategic business initiatives, expanding our profitability and growing our cash flow while building upon our competitive advantage at each of our three industry-leading foodservice businesses. Now I'll pass the call over to James to highlight some of our strategic investments in service and also spotlight some of the recent exciting new product innovations providing tangible cost savings and operational efficiencies to our customers.

Thank you, Tim. Before I get into my discussion for the quarter, I'd like to recognize Nieco, one of our commercial brands best known for producing an automated change-driven flame broiler. Two nights ago, Nieco was awarded Vendor of the Year by Burger King for their latest broiler innovation and their outstanding customer service. Our broiler saved a typical BK operator approximately $6,000 a year on energy and reduced maintenance costs. Congratulations to team Nieco. Great job. As Tim mentioned, you can find slides referencing my discussion in the earnings deck. Nieco's next-generation flame broiler continues to be the benchmark for automated flame broilers as it has been for the past 50 years. The Nieco broiler features high-efficiency gas burners and is 50% faster than competitive models. It also adds an energy-saving feature that allows the operator to shut down 50% of the broiler during non-peak times. These features qualified the broiler for meaningful energy rebates across the United States. Lastly, the Nieco broiler is Open Kitchen IoT ready and utilizes the Middleby One Touch Controller. Since Nieco set the theme around automation, I'm going to stick with it and discuss another innovation from Marco, a commercial foodservice beverage brand. The Marco MilkPal addresses the most significant product challenge that every coffee shop and barista faces - milk. I'm sure most of you are surprised to hear this, that milk impacts speed of service; for example, up to 80% of a latte service time is tied to milk frothing, otherwise known as microfoaming. Additionally, 20% of the coffee shop's milk is wasted through overproduction or inconsistent product quality. Frequent handling of milk jugs also leads to carpal tunnel syndrome, and finally, cleaning as milk is always a major food safety concern. The Marco MilkPal addresses each one of these challenges by automating milk dispense. The MilkPal is a must for every coffee shop and is well suited for c-stores, restaurants, and business and industry locations. The MilkPal can dispense up to 25 unique milk accompaniments such as cold foam, hot foam, and cold and hot milk, for example. The system is designed to sit next to any traditional semi-automated espresso machine such as our Synesso MVP Hydra or any semi-automatic espresso machine without steam. The MilkPal is also a perfect accompaniment for the fast-growing cold beverage market. MilkPal dispenses each accompaniment with a single push of a button, thus automating the art of microfoaming with near-zero waste given its precise portion control. It also produces the highest quality microfoam without using any steam or barista art, so the consumer takes a richer, more flavorful, creamier, and more consistent microfoam in their espresso beverage, whether it be hot or cold. Lastly, unlike other milk dispensing systems, the MilkPal is plumbed, which allows the system to rinse itself between dispensers, thus improving drink-to-drink quality and consistency. It also utilizes Middleby's clean-in-place technologies, reducing daily labor required to clean the system. Now I'd like to circle back to touch on one of the reasons why Nieco won Vendor of the Year: customer service. Service presents one of our largest opportunities in the industry. As we lost thousands of qualified technicians during the pandemic, to combat this, we built a state-of-the-art service training facility at our Middleby Innovations Kitchens, aka the MIK. Since opening in Q2 of this year, the training facility has become a major focus of our commercial brands. In the short time it has been open, we've trained and certified over 600 technicians on 20 of our highest technology brands. These technicians come from our authorized service partners and our large chain operators and franchisees as they have their own service technicians servicing Middleby products today. Our focus is on creating a network of highly trained Middleby Advantage branded service technicians. These technicians will become our first line of defense in the field and ultimately one of our best sales tools as speed of service and an industry-leading first-time fixed rate drives organic sales and replacement business. I would like to end with a quick mention that these products and all other new Middleby products highlighting digital, embedded, and robotic automation will be on display at the North American Food Equipment Manufacturers show, or NAFEM, February 26 through the 28th in Atlanta, Georgia. Please put this on your calendar, and we look forward to seeing you there. Thank you, and over to you, Bryan.

Thanks, James, and good morning, everyone. This is Bryan Mittelman, CFO here at Middleby. I'll go through our financial results in a little bit of an outlook perspective for all of you. For the third quarter, we generated revenue of $943 million, which is a 5% decrease sequentially from Q2 and a 4% decrease versus the prior year. Our adjusted EBITDA was $213 million at a margin of 22.6%, which was up 80 basis points from Q2. In spite of the challenging market conditions that impacted our top line, our focus on innovative products, operational excellence and cost control allowed us to improve our profitability sequentially. All the margin values I will discuss are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. Q3 GAAP earnings per share were $2.11, and our adjusted EPS was $2.33. Commercial Foodservice revenues were down 4% organically versus the prior year, and the adjusted EBITDA margin was nearly 27.5%. While we are facing tough comps, order trends and thus revenues weakened considerably as we progressed through the quarter. Given the top line challenge, we are generally pleased with our ability to preserve margins. In Food Processing, revenues for the quarter were nearly $170 million, up nearly 1% over the prior year. We also saw orders weaken over the quarter and some projects were pushed out. Our adjusted EBITDA margin remained healthy at over 24.5%, which is an increase of over 50 basis points from Q2. In residential, we saw an organic revenue decline of 4.5% versus 2023, yet we were able to expand the adjusted EBITDA margin to nearly 12%. We delivered strong operating cash flows at $157 million for Q3, up nearly 5% over Q2. Operating cash flows are over $700 million for the trailing four quarters, and our free cash flow over the past 12 months exceeds $650 million with a corresponding yield on revenue of nearly 17%. Also on a last 12-month basis, conversion on net income, when excluding the prior year impairment charge, is over 140%. Our total leverage ratio is now down to 2.2 times. Cash flow generation clearly remains a strong point for us. As I look to Q4, as is typical of our results, I expect that quarter to be our strongest one of the year. The amount of free cash flow we expect to generate should exceed that of Q3. Also, our full year 2024 free cash flow should exceed that from 2023. Continuing with some near-term outlook thoughts, given the conditions we are facing, my tone will be relatively cautious. Nonetheless, we still believe we will see sequential growth in Q4 over Q3. For the total company, I do expect Q4 to be our best quarter of the year and revenue could again achieve $1 billion. This would represent 6% sequential growth and be close to flat to the prior year. This outlook is not without risk, but it is achievable. EBITDA dollars and margins would also step up from Q3 and would likely be similar to prior year levels. Pivoting to offering some perspective on each of the segments. Starting with commercial. For Q4, we anticipate revenues to be approximately flat to Q3 given the macroeconomic conditions impacting our customers' ordering activity. There is some potential for slight growth, but that would require customer activity to inflect up from current rates. Moving on to food processing. In spite of the weaker-than-expected Q3, this segment remains in a relatively strong position. Q4 revenues could exceed $200 million for the first time ever, which represents sequential growth of high into the teens as well as about mid-single-digit growth on a year-over-year basis. In residential, we anticipate revenues could be up high single digits sequentially and be around the prior year level. While market conditions are creating revenue challenges, we've been ferociously managing costs to preserve or expand our margins. For each segment, I expect Q4 EBITDA margins to be at least at Q3 levels with food processing likely achieving the most sequential expansion. Our enthusiasm and expectation for longer-term revenue growth and margin expansion remain in place. In the face of clearly suboptimal market conditions, our focus on operational excellence can be clearly seen as we proudly deliver strong margins and solid cash flows. Our customer engagement remains strong, and we expect increasing adoption of our solutions. Our multiyear outlook remains positive. Our innovations, along with our strength in operational execution, will power improved results. We are looking forward to returning to growth in 2025. Thank you, and we will now take your questions.

We will now begin the question-and-answer session. The first question comes from Saree Boroditsky from Jefferies. Please go ahead.

Thank you so much. Just starting with commercial. Obviously, it came in weaker than expected in the quarter. You highlighted some challenges you're seeing in the restaurant space. Could you just talk about what you need to see to have a pickup in growth in this segment and then maybe just comment on the overall visibility and order trends as you went through the quarter?

We entered the quarter with positive order trends, which suggested that business was picking up, and we observed a steady flow of orders. We engaged extensively with our customers, including dealers and chains, who reiterated their growth plans for the second half of the year and shared their outlook. However, as the quarter progressed, this momentum appeared to weaken due to various projects, such as upgrades, new stores, and institutional initiatives, not materializing as expected. While these opportunities still exist, the execution has been challenging, largely due to the current market conditions and the pressures that restaurant operators are facing. Throughout the quarter, we maintained our engagement with these customers, and the pipeline remains promising. They continue to discuss store openings and have significant long-term expansion targets, particularly among larger and fast-casual chains. However, it seems they're currently focused on reassessing their plans and dealing with some non-operational stores. We believe that some of these initiatives will resurface and gain traction as we move into 2025.

Yes. Saree, I mean I would also add, even though we're seeing this push of primarily new store openings from obviously, the third quarter and probably some from the fourth quarter, the vast majority of our chain customers have really reiterated the total number of new stores still sticking to the plan. So new stores for '25 playing catch-up for the stores they didn't open in '24. So there's very few that actually reduced their number of stores in their pipeline. It's more just been the pushout to the right that Tim referenced.

And then maybe switching to residential. The margins came in better than expectations, I believe, despite the lower sales. So how do you think about margin improvement there as you go through 2025? And what should we see from an incremental margin perspective?

I believe the significant improvement will bring us back to our pre-COVID performance. As I stated earlier, our legacy business is currently operating at much lower levels. However, those businesses are fundamentally stronger now with better products, quality, and ongoing investments. We expect to return to our previous state, which will result in a significant increase in margins, bringing us closer to 20%. When this will occur is uncertain, especially given the challenging housing market, but it's not a permanent situation. As interest rates begin to decrease, we anticipate that will provide a helpful boost. The main driver is getting back to normalized volumes, but we also have made substantial investments in our platform and new products that will help us reach our long-term margin goals.

Appreciate the color. Thank you.

The next question comes from Mig Dobre from Baird.

Yes, good morning, everyone. I want to start with commercial food as well. I mean, your implied outlook here in the fourth quarter for flat revenues, that diverges a bit from normal seasonality, right? I mean, typically, you do see several percentage point increases into year-end. And you're clear about the fact that there have been some pushouts on new store additions, but I'm wondering what you're seeing as far as your distributors, the normal kind of year-end demand restocking that these guys do. And what that implies for where the channel inventory lies and really kind of how that might progress into '25.

Yes, great question. Historically, the fourth quarter has typically been the busiest time for chain development. As you pointed out, we usually see an increase in our dealer and distributor business during this period. However, in recent years, ordering patterns have changed, and I do not anticipate the usual increase in distributor orders for a few reasons. Distributors are holding less inventory than in the past and are more reluctant to stock up due to higher interest rates, which have increased the carrying costs of inventory. Our lead times have improved, allowing them to order closer to when the end-user actually needs the product. Additionally, price increases have been implemented more frequently throughout the year rather than just on January 1, and we do not have a price increase planned for this coming January. Given these factors, I don’t expect to see the traditional boost from distributors stocking up at year-end.

Does destocking sort of extend or the headwinds that you kind of talked about, does that extend into 2025?

I think destocking, Mig, is for the most part behind us. I think the nuance is, as hopefully, interest rates come down, I do expect that you could see dealers start to be more open to bringing in inventory back to, I would say, more pre-COVID levels. So I think destocking is behind us. So that, I think, is a tailwind; I think it's going to be a little bit wait and see as interest rates unfold next year. Again, the carrying cost of inventory as to how dealers will think about stock levels for next year. So I think it's probably into the middle part of next year until you start to see probably dealers starting to ramp back up from an inventory standpoint.

Okay. You mentioned that there's not going to be a price increase for '25. How do you think about the costs that are embedded in this segment? There's obviously materials, but a whole host of other items as well, freight wages that is where I presume you do have some inflation. And given the fact that we are in the environment that we're in today, I guess one of the things that I find a little bit surprising is that we haven't seen some kind of a formal either restructuring or cost savings initiative that investors can sort of consider as they think about next year?

So to clarify, we're not planning a January 1 price increase, but that doesn't mean we won't adjust pricing where necessary in 2025. Over the years, I've emphasized that pricing strategy and product mix have been crucial to our company. On the supply chain side, while inflation has surged, we've been successful in implementing significant price increases to keep pace. Although we've made progress, some areas still experience inflation, including specific components, labor, and transportation costs, which have been fluctuating due to previous port issues. We're still committed to monitoring these factors carefully, and we have adjusted prices for certain products in recent months to remain competitive. Regarding our supply chain, one positive outcome of COVID is that it has encouraged a more unified approach across all three of our platforms. This shift has led to cost savings in steel, materials, and logistics as we operate more cohesively. We plan to continue addressing costs from both the pricing side and leveraging our supply chain for savings with our suppliers and logistics partners, while being aware of the competitive landscape.

Mig, this is Bryan. Let me talk about the restructuring. We have been consistently implementing restructuring actions throughout the year, and it's had varying impacts across different segments. We have reduced our workforce by hundreds of employees and have taken significant measures regarding manageable or discretionary expenses. You can see the positive effects of this on our margins; we've been able to maintain some margin expansion despite challenges on the revenue side. The restructuring has been ongoing and, unfortunately, necessary due to market conditions over the past two years. Residential efforts have led this trend, and it has extended into commercial sectors, with food processing also facing similar actions.

Mig, those orders were approximately $50 million. We hadn't announced this before, but we began implementing it in the second quarter. A portion of that involved cost-cutting measures, which we always undertake to navigate the current environment. However, much of it also pertains to accelerating some of our long-term initiatives aimed at achieving higher profit margins. This strategy is contributing to our ability to maintain strong margins, which will further expand when volume increases. This includes investments in new factories as we consolidate manufacturing, along with investments in capital equipment, and our efforts to enhance efficiencies in the factories. Overall, these factors are crucial in helping us sustain and eventually expand our margins in the long run.

If I may, one final question. It pertains to the SG&A line item, more notable decline, almost 9% this quarter. Can you comment at all as to how you see that in the fourth quarter? And as we think about next year, is there room to continue to work on this line item, particularly if volumes remain relatively weak?

I expect Q4 to be similar to Q3 regarding our results. We've taken measures to manage headcount and control costs, which has led to lower incentive compensation expenses and a decrease in professional fees. As the business recovers, particularly concerning incentive compensation across the organization, we may see a slight increase. However, I don't anticipate significant changes in our overall SG&A, as we are typically quite frugal. We've been addressing costs actively over the past couple of years.

Thank you.

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

Good morning, guys. Thanks for taking the question. I hate to be the dead horse on commercial here, but I'm curious if you could drill down on what restaurant concepts are driving this dynamic on closures. Is it contained in independents? I believe they're like low double-digit percent of segment sales. And what gives you confidence the market will return to unit growth next year out of some openings being pushed out? Has that just changed strength?

Yeah. I think there's probably two things that we look to. I mean certainly, it's the conversations that we're having with our chain customers and what their restaurant expansion plans are, both in the near term as well as a lot of their longer-term goals that they've set out, which many of them are public. The other is industry forecast. So there are forecasts out there for the industry. Certainly, a lot of the closures, as you mentioned, happened more on the independent side, but certainly, that has also happened with some of the chains; casual dining chains have been hit a bit harder than some of the quick-serve chains. So we think a lot of what's happening there is you've got some of the less healthy concepts that either those locations are getting closed and perhaps reopen in other spots. And that kind of resets the table for the better chains to expand from a stronger base. So really, it's the industry forecast and the comments that we're getting from our chain customers we're engaged with their plans.

Brian, if I could just add. I know we spend a lot of time focusing on, obviously, new store openings, and that's a big part of our growth primarily with the QSRs and the fast casual segments. I think to put the new store openings aside for just a moment, which we are still positive on for next year, I keep saying all the challenges that all the restaurants face still remain, and they're looking to us more and more as they think about the unit economics of opening up restaurants continuing to bring on franchisees, expand into international markets. Again, that can be labor, can be utility costs via service consistency, take your pick. I think James highlighting the Nieco broiler is a great example of that. Here's a piece of equipment actually it's more expensive, but it pays for itself in such a short period of time when you look at the utility costs, when you look at the maintenance costs. And so I think we're focusing on this call a lot on new store openings, but the fundamentals of what our customers are facing every day. There really is not a part of the restaurant that I think can impact. So positively, those challenges that they're facing. So I think that's another reason why we continue to be so positive about the next couple of years. No matter what happens from a new store opening kind of ebb and flow, they still have to solve those challenges, and we're well positioned to help them do so.

Great. And then just secondly, on the lack of a Jan 1 price increase in commercial, I don't think you break out pricing versus volumes in that segment. But is it safe to assume volumes have been materially down the last couple of years? We've heard for some franchisees in the market opine that some of the bigger players have taken too much pricing and we're wondering if that's factoring into some of the weakness you're experiencing.

Yeah. Especially as we look over the past year where pricing actions have been more muted, I think it's fair to assume that volume is largely aligning with what you're seeing in the revenue line overall.

I just want to remind you that over the last several years, we have been very mindful about our product mix. As part of that effort, we exited several low-margin SKUs. While I acknowledge the volume challenges you're mentioning, we've also used this time to strategically move away from low-margin products that don't significantly contribute to our overall margins. It's important to keep that in mind. There are dynamics at play, but we've also eliminated several products in the past two to three years.

Very helpful. Thanks, guys.

The next question comes from Jeff Hammond from KeyBanc. Please go ahead.

Hey, good morning, guys. Just back on the store opening kind of deferral delay, I'm just trying to get a better sense of how much of this is kind of permitting delays versus just uncertainty freeze and what gives you the confidence they just don't keep pushing to the right versus kind of this catch-up thesis in 2025?

I think it's difficult to predict the future. They've been delaying decisions for some time, and eventually, they need to make changes and upgrades. That's one aspect to consider. There has been ongoing discussion about various solutions among our customers, who frequently mention their efforts to improve operations amid uncertainty regarding traffic, fluctuating food costs, interest rates, and longer permitting processes. These delays have become more pronounced. However, the core challenges they're facing, combined with our feedback, suggest that they will move forward with some initiatives. Many customers express concern about our ability to meet their increasing demand, and we felt that pressure entering the third quarter. Ultimately, they really need to make decisions on these issues to advance their businesses, and we believe we will start seeing progress as we head into next year.

Okay. And then a couple of cash flow balance sheet items. Just your working capital turns had kind of extended free, cash flow seems to be a little bit better, but just maybe talk about what you're doing to kind of bring working capital turns back into check and maybe what the opportunity is for working capital source of cash. And then just talk about your plans for the convert that comes due next year?

Jeff, this is Bryan. When we consider working capital, inventory is our main focus, especially in terms of accounts receivable and accounts payable. We’ve been actively working to reduce inventory levels this year. The slower sales have affected our ability to make all the inventory reductions we want. We've updated our management approach regarding this and implemented incentive plans aimed specifically at addressing it, making it a priority for us. While the quality of our accounts receivable, looking at aging and days sales outstanding, hasn’t worsened, we are attentive to it, especially given current market conditions. A positive note is that customer risks tend to be more with our dealers than directly with us. Still, we're not entirely shielded from those risks. Inventory will remain a priority, and we see over $100 million of potential to reduce it in the next year or two. Even if revenues improve, inventory levels might not decrease as much. The key metric to monitor is the days of inventory on hand, and we anticipate significant improvements in that over the next couple of years. Concerning the convertible debt, we have several options. We can refinance using our credit facility, we have sufficient cash on hand to manage this, and we have plans for ongoing mergers and acquisitions. We also have access to various debt markets like convertible bonds and high-yield notes. Given that our current convertible debt costs us a low interest rate of 1%, we've taken our time with it, but we will continue to assess our cash situation and the best options for debt management as we approach maturity.

Great. Thank you.

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

Hi, good morning. Thanks so much for taking my questions. My first question is on the services side of the Commercial Foods segment. What are you seeing there? And do you have any plans to shore up capacity for services? We've heard some of your peers talk about increasing the technician fleet. So curious how you're thinking about that going into next year?

Well, service has been a challenge for many industries. Certainly, we've really seen it across all three of ours; a lot of service technicians went out of the industry during COVID. So we've been very focused on that, hiring back technicians into our network. And then training those technicians because once you get them on, you really got to get them up and running. It's one of the reasons and James called that out in his slide that we've got significant strategies around that of how we provide, I'll say, game-changing service in the future. But I think in the near term, as a pillar of that is making sure that we've got a very strong service organization. The number of service agents that we have today has grown significantly from where we were about a year or 18 months ago. And that's been in large part with the efforts that we've had to support the partners in the area. And now we're very focused on having industry-leading training for those agents, both physically and digitally. So we've been kind of well on our way to kind of address which was an industry-wide challenge to become kind of the leader in service, not only making sure that we have enough trained technicians but really some unique programs that we could offer across our brands in the future.

Got it. Thank you. That was my question.

The next question comes from Walt Liptak from Seaport. Please go ahead.

Thanks. Good work on the margin, and it sounds like you've got things in place to continue to improve the margins. In the past, you talked about getting to 30% commercial margin over the next couple of years. Is that still the target?

Yes, that remains our target. Currently, we believe we are maintaining strong and respectable margins. By industry standards, we rank among the leaders, especially during challenging times. Although we have made some cutbacks, as Bryan mentioned, many of our initiatives are strategic. It's important to highlight that while we are tightening our expenses now, we are also increasing our investment in strategic areas that should drive future growth. This includes improving our product mix. As Steve pointed out, we have phased out many low-margin products and are concentrating on expanding our most innovative offerings. We haven't yet realized the full benefits of this strategy because much of it is still in development. These are solutions that provide a high return on investment for our customers, such as the Nieco broiler, which we are collaborating on with our customers. As this pipeline develops, it represents an investment now that will yield growth and higher margins later. This effort is part of our path to reach a 30% margin over the next several years.

Okay. Makes sense. And just a couple more. One, most of the discussion sounds like it's sort of global. I wonder if there's any delineation you can make between North America U.S. sales versus international?

North America has been challenging recently. In contrast, Europe has shown better performance for us and other companies in that region. Another point to mention is Asia, which has been a weaker area for most companies. We have many new products set to launch there, and we have plans for expansion, but there are also challenges in that market impacting our quarterly results. Although Asia has been weaker in the latter half of the year, we see potential for long-term growth, especially as we expand beyond China to other regions in Asia, including India, which we feel optimistic about. However, in the short term, that has posed challenges.

I mean I would just add in two more nuances in commercial specifically. I mean I think talked about in prior calls, Europe has been an area of reinvestment, and we are thinking through a completely new strategy approach with the team there. I think we're really starting to see the payoff of having the Innovation Kitchen in Madrid. We're seeing the payoff of having Innovation Kitchen and we did in the UK and plans to continue to bring future innovation kitchens to both the Middle East and to other parts of Europe. I think I would also call out in Latin America specific to the quarter, some of that growth is really starting to be driven by ice and beverage. And so I think it's exciting to see some adoption outside the core products in Latin America specifically. So I would say Latin America, Europe, and Middle East were certainly the positives from an international standpoint for the quarter.

Okay, great. Thanks for the color. And then last one for me. Chipotle has been testing out that double-sided grill, and it sounds like they might be moving forward with rollout in 2025. So I wonder if you could make any comments on that?

I think we’ll allow Chipotle to share their plans. I just want to note that the double-sided grill is a prime example of automation and a new product we’ve successfully launched in the market, which has garnered positive feedback from several customers. It truly highlights our commitment to innovation; it’s part of our development pipeline and is generating significant potential return on investment for our customers. It's definitely one of the standout products we've introduced in recent years.

And we have a follow-up question from Mig Dobre. Please go ahead.

Yeah, thanks. I just wanted to follow up on Jeff's balance sheet question. So your cash balance has been building north of $600 million now. And obviously, you've got this, call it, $750 million bond maturing next year. Are we to sort of infer here that you're allowing this cash balance to build to potentially pay down that bond is that idea because I suspect that just purely refinancing that generates another $0.50 of EPS drag, give or take. And then also related to this, how do you think about capital deployment going forward? Because, look, I mean your stock multiple has continued compressing. So the valuation is looking different than it looked a few years ago. And obviously, we're kind of going through a cyclically more difficult time period. Is it fair to say that at this point, share buybacks are actually a pretty decent alternative for capital deployment relative to other things that you might do?

Mig, this is Bryan. We are not accumulating cash with solely the intent of earmarking those dollars to directly pay off the convert. We have no balance outstanding under our revolver right now. And if we were to pay off anything on the term loan, you don't have the ability to access that again. And we are, I would say, earning fairly decent rates on our cash balances as we look at that versus our incremental borrowing costs such that we have decided for now to let the cash balance grow some. We do expect M&A activity to be picking up. So there will be some deployment of cash for that that we anticipate. Also, we tend to generate more cash in the back half of the year. And then there is some more utilization at times in the front half of the year. So I think right now, we're just in a point of flexibility. And we certainly do understand that interest rates today are higher than when we entered into that convert. Obviously, when you issue a convert, the total cost isn't just the coupon rate, and you overall have seen our leverage coming down. So again, we'll be looking at how to best structure the debt side of things over the next year. Also appreciate your perspective on capital allocation. Obviously, we have been growing the amount of annual cash flow that we generate and we are continuing to evaluate should some of that cash be allocated in a manner maybe a little different from historically where it's been a large focus on M&A, and are evaluating other ways to utilize the cash, including different ways of return of capital to shareholders.

I appreciate it.

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

Thank you again, everybody, for joining us on today's call. In closing, I would like to reiterate that while we had hoped macroeconomic conditions would be more favorable and inflect sooner, we believe we are currently at the trough for several of our segments. We're confident the challenges we face today will turn into the tailwinds for the quarters ahead and lead into a longer-term recovery. We're poised to win as our positioning across all three of our businesses is stronger than ever. We're leading in technology and innovation. We're expanding into new targeted market adjacencies, opening up new growth opportunities, and we're making investments in transformational go-to-market sales and service capabilities to provide differentiated customer experiences. We're confident these strategies and investments we have made will pay dividends as the market conditions continue to improve, further extending our leadership over the next several years. That's it for today, and thank you, everybody, for attending today's call. Have a great day.

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