Middleby Corp

NASDAQ:MIDD

Earnings Call Analysis

Middleby Touts Record 2023 Results, Innovation

In 2023, Middleby faced operational challenges from supply chain issues and inflation, impacting the residential business. Despite this, they reported record EBITDA over $900 million and operating cash flow above $600 million. Investments in strategic initiatives yielded a pipeline of industry-leading innovations enhancing automation, energy savings, and customer experience, including IoT product launches. Over $80 million was allocated to operations for factory automation and expansion, enhancing profitability and brand growth. With optimism for residential market recovery in 2024 and a strong commercial customer pipeline, Middleby is focused on driving profitability and leveraging their strategic advantages. They are unveiling new appliance designs and color options, showcasing their commitment to electrification and connectivity at industry shows.

Middleby's Strong Financial Performance Despite Market Headwinds

Middleby Corporation faced a challenging 2023, with supply chain issues, inflation, and interest rate impacts influencing operational dynamics, particularly in the residential sector. Despite these obstacles, the company is proud to have delivered strong financial outcomes, reflected in record sales, earnings, and cash flows for the year. Spurred by a commitment to strategic growth initiatives and customer satisfaction, Middleby reported revenue exceeding $4 billion, with an EBITDA margin over 22%, marking a year of robust profitability and financial health.

Continued Investment in Innovation and Market Leadership

Middleby's success can be attributed to a continuous effort in innovation and market expansion. In 2023, the company launched an array of new products including efficient, automated, and IoT-enabled solutions, strengthening its position as an innovation leader. Their strategic investments in innovation centers, digital sales, marketing capabilities, and relationships with channel partners underline a forward-thinking approach geared towards long-term growth and a keen focus on meeting evolving market demands.

Operational Investments Enhancing Profitability

With over $80 million invested in factory automation and facility expansion in 2023, Middleby aims to enhance operational efficiency and bolster profitability across its brands. The company reaped productivity gains from these investments, which alongside new product innovation, has led to an improved sales mix and profitability. Ongoing initiatives in product design and supply chain management are set to bring further improvements in the upcoming year.

Navigating a Challenging Market Landscape into 2024

The start of 2024 remains challenging with inventory destocking largely behind, yet the housing market and cautious customer sentiment in the commercial and food processing sectors continue to pose challenges. However, the company maintains optimism, expecting improvement throughout the year, particularly in the residential market, which anticipates more favorable conditions as progress is made.

Showcasing Innovation at the Kitchen & Bath Show

To highlight its advancements and commitment to innovation, Middleby is set to feature a record number of new product launches at the upcoming Kitchen at Bath Show. This event presents an opportunity to showcase the company's latest products, designs, and technologies, demonstrating Middleby's strong value proposition in the residential segment.

Financial Outlook and Expectations for 2024

While 2023 ended with a noteworthy performance including record adjusted EPS growth exceeding 6.5%, 2024 begins with more muted expectations, particularly in the residential segment. The first quarter is anticipated to see a revenue decline due to the diminishing backlog from prior orders and the impact of the KBIS show attendance costs. Conversely, food processing and commercial foodservice segments are projected to remain flat or grow organically, supporting overall company stability. Moving ahead, Middleby expects sequential improvements across all segments, with potential for significant gains in the latter half of 2024 or into 2025, despite present market uncertainties.

Looking Forward: Growth, Innovation, and Capital Allocation

Middleby expresses confidence in its future, highlighting the strength of its cash flows and leverage position, with a leverage ratio now below 2.5x. The company anticipates another year of robust operating cash flow and solid free cash flow conversion, maintaining a strong balance sheet. Investments in innovation centers and operational automation will continue to boost margins, and Middleby is poised to grow its market share further, increase revenues, and expand margins over the long term.

Earnings Call Transcript 2023-Q4

[Operator]

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 Joiner, Vice President of Investor Relations.

We will begin the call with comments from management and then open the line for questions. Instructions on how to get in 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.

[Timothy FitzGerald, executive]

Good morning. Thank you for joining us today on our fourth quarter earnings call. As we begin, please note 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 to once again be challenging, marked by supply chain disruptions, inflationary costs and the impact of interest rates, presenting operational challenges across all 3 businesses, materially affecting the demand at our residential business.

Our team is 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 flow exceeding $600 million and it made significant progress toward the long-term profitability goals we have 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 and customer-focused solutions, developing our highly differentiated go-to-market capabilities and investing in our operational capabilities to support profitability and growth.

In 2023, we brought to market an exciting pipeline of innovation 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 beltless equipment. We launched our Middleby One Touch control, now across many of our commercial products. We further 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 IoT-enabled products now launching in the marketplace.

Across all 3 of our foodservice businesses, we entered 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 continue to invest heavily in our go-to-market capabilities that we believe are uniquely positioning us for the long term. We have made great progress developing our digital sales and marketing capabilities. We 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 shareroom in Chicago, featuring the 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 continue 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 the growth opportunities in our brands. In 2023, we were pleased with the improvements in our overall profitability as we progress 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're focused on long-term supply chain opportunities with ongoing product design and sourcing initiatives, providing for additional 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, the customers in our commercial and food processing segments are cautious, given uncertainty in macro conditions and challenges facing their businesses at start of the year. Despite what may be a slow start, we are optimistic on 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 we continue to build upon our growing competitive advantage at each of our 3 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 at Bath Show, which is at the end of this month in Las Vegas. It's a great opportunity to see all our latest in 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?

[James K. Pool, executive]

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 slips applications for manufacturers for their best innovations in commercial food service 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 made 18 through 21. 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 the Middleby 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, less shipper focus to the Kitchen and Bath Industry Show, which happens next week in Las Vegas or 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 and 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, drills, ventilation, ice, and refrigeration, Middleby Residential has the most comprehensive lineup of premium appliances in the industry.

We are also excited to announce 2 entrants to the U.S. market from our well-known European brands, Novy and Josper. Novy is elegant and highly innovative induction surface cookie and ventilation products bring modern European design to Middleby Residential U.S. lineup, while the Josper Casa brings the ultimate Michelin Star cooking experience to Middleby outdoors and your backyard with their Spanish Turco 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 in Middleby's DNA. We are expanding our color offerings across Middleby Residential with the introduction of 20 luxury colors from Viking range, 8 colors from Lynx grills as well as the introduction of Lynx premium outdoor kitchen cabinetry will be offered in the same colors. While our iconic brands such as AGA and Lachen, have always celebrated a rich history of color, Viking and Lake's new colors offer designers and architects, the ultimate palatine expression for their clients.

Lastly, we are unveiling the AGA era, which is a complete modern makeover of our classic AGA's iron cooker, which has been a staple in European homes for centuries. From a technology standpoint, induction will share the stage at the Middleby food. 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 remarkable speed, precision and efficiency that our induction appliances bring, allowing them to rapidly embrace electrification and 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, DXT. 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, Viking Cloud. By simply connecting your [indiscernible] of into the Viking Cloud app, you can enjoy a connected culinary journey. The Viking Cloud provides complete control, a very real oven, you can browse through a wide range of recipes select your favorite and the Apple guide you step-by-step through the cooking process while sending instructions year oven along the way. The Apple turn your oven on and will notify when you would when your oven is preheated 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 [ BKI ]. 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 -- Industry Show to witness these market-leading design and innovation firsthand.

Thank you, and over to you, Brian.

[Bryan Mittelman, executive]

Thanks, James. One year ago, I noted that when I thought about '22, one word cadence 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 '23. 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 could sum it up very well, I won't refrain from digging a little deeper into '23 and 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, nonoperating 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 about talking about red numbers, but 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 days. 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 as 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%. The 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%. 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 2.5x.

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 that 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 in the then larger backlog. Our margins will also be a little challenged as of '24 given the impact of attending the KBIS show this year.

For the other 2 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 2 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 will 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 can materialize in the second half of '24. 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 food service, 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 about $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 have seen over the past few years how our best-in-class individual solutions has 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.

On to 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 1/3 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 Follets nugget ice. Newton and its revolutionary valve may be small, but they are definitely mighty. They're 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.

And 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 to. 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.

EBITDA over $900 million, operating cash flow over $600 million, leverage now below 2.5x, 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.

Andrea, will you please now open the line for questions.

[Operator]

[Operator Instructions] Our first question will come from Mircea Dobre of Baird.

[Mircea Dobre, analyst]

I guess my first question is on commercial foodservice. If I understand -- and I guess there's 2 parts to it. If I understand the guidance commentary, we're starting a little bit slower here and maybe flat year-over-year in terms of revenue. But if you expect to outgrow relative to '23 for the full year, that implies a pretty significant acceleration in growth, maybe like 5% or thereabouts, if my math is right, for the rest of the year. So I guess I'm curious, what gives you the confidence that we'll be able to see that kind of growth for the remainder of '24? And related to all of this, I know we're going to get this in the 10-K, but can you talk a little bit about your backlog in this business exiting 23?

[Steve Spittle, executive]

It's Steve. Maybe I'll take the first crack at your question just kind of what gives us confidence in the year overall. I come back to 3 things, I think, specifically that we've talked about in the past. So if you look at the big chain customers, especially getting back to the new store development, which was certainly lacking going into COVID, was pretty weak. So we've seen that pick up, obviously, in the last, I'll call it, 2 years. I do expect new store openings to continue this year. The chains that we work very closely with have all reiterated and recommitted to their new store opening plan, still working through challenges around some construction labor permitting. But by and large, their total new store -- net new store openings for the year they've committed to. So in my opinion, that is as you roll out is ahead of '23 from a new store development pipeline. So it's kind of point #1.

Point #2, all the challenges that we've talked about over the last several years, whether it's labor, dealing with the utility cost, speed of service, consistency, take or pick on challenges. They still have to solve all these and you're seeing the chains, especially, I think, being very focused on their franchisee efficiency and franchisee profitability. So you're seeing the chains invest more and more in these areas knowing they have to keep the other franchisee community happy. So I think you're going to see that continued investment in those areas.

And then point #3, which we've talked about in the past, I still think we're substantially behind on a replacement cycle. The change has been so focused on new store openings after trying to get through COVID, they have really not focused on going back and replacing and upgrading equipment in their locations. I think that's true. Obviously, we folks want to change, but you go through a number of the segments, it's true in all those areas, that I think we're way past due on just a general replacement upgrade cycle. So when you kind of layer those 3 together, Mircea, again, new store openings still have to solve for all the challenges of what's going on in the store and a deferred replacement cycle, I think that's what gives us confidence in the market and growing it for this year and certainly in the years to come.

[Bryan Mittelman, executive]

In, 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 the backlog is pretty much well consider 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 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.

[Timothy FitzGerald, executive]

Just to round it out, as you kind of think about the year and the backlog, we came in with a lot of backlog. So there's a lot of shipments in the first quarter, we talked about the inventory destocking, so that 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 kind of look at comparatives in the back half of the year. So one of the reasons I think with just the underlying activity 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 outpace the destocking.

[Mircea Dobre, analyst]

Okay. That's helpful. Then my follow-up is on residential. And just the way you kind of framed '24, I don't know, maybe a little bit slower than what I was hoping for or what I was thinking. And -- but the question here also on visibility and sort of what needs to happen here, it sounds like you actually need to see more of a recovery in the housing market and lower interest rates in order for this segment to start growing. And maybe the question on margin here more so than anything else, what sort of volume do you think or revenue do you think you need in this segment in order to be able to achieve your 25% target.

[Timothy FitzGerald, executive]

So I'll start off and then I'll let Bryan kind of add 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. I mean 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 has 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 going to move -- start to back to more normalized levels as kind of versus slight improvements off and below.

So I think we're confident that we are going to see improvement as we go through the year. I guess the question is ones 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 the industry stats that we look at. So Bryan, maybe...

[Bryan Mittelman, executive]

Yes. Mig, It's Brian. Regarding the margin side of things. If I look back to '22 when we were over $1 billion in revenue and our margins were in the high teens, and we had [Audio Gap] and fully benefited from the cost actions in [indiscernible]. So I think if you put that all together, we'd hope to start to be, again, closer to the high teens or 20%, around $1 billion. Again, that's just using past results as an indication of things going forward.

And then we're making ongoing improvements in our businesses in a variety of ways. Let's -- I think the short answer is that first digit of the revenues needs to be 1, be open to $1 billion level to start releasing things jump up nicely from the volume contribution of margins.

[Timothy FitzGerald, executive]

Maybe just to kind of add some color and pick it apart. I mean, you've got a lot of bigger pieces there. I mean, Viking had -- historically, we've gotten it well into the 20% margin. So it's certainly fallen below there, but we have been operating at a long point in time well into the 20s. AGA which when we bought the company, it was at 3%. We had -- we're just coming on to 20%, and we've made significant investments at AGA over the last 3 years as we've gone through COVID. So as it emerges -- we have not only better exciting products, but we have a much better cost base. So I mean, there's kind of a built in margin improvement for AGA in outdoor, obviously, which has been challenged like all the rest of residential would make -- the team there has made significant progress in consolidating the platform around logistics, and we have a lot of new exciting products that James touched on in the past and even in this call, they're coming out that brings to higher price points in the specialty market. So kind of structurally -- so, a, we're getting back to what we've already proven in the past. And then structurally, we've made improvements to the business while we've kind of gone through this period. So pretty confident that margins get to be to a pretty attractive place in a normalized market.

[Operator]

The next question comes from Saree Boroditsky of Jefferies.

[Unknown Analyst]

This is James on for Saree. So I just wanted to kind of stick to inventory destocking that you talked about in the commercial food service 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 destocking in 2023? And do you expect destocking to continue into 1Q? Or is the destocking come in 4Q 2023?

[Timothy FitzGerald, executive]

I think it's very difficult for us to quantify. I mean I think we were not sure, I guess, it's tens of millions, but -- there's -- we know from discussing with our channel partners, they had a lot of inventory. It was not only Middleby inventory, a lot but dealers are trying to get with long lead times in the industry, any product they could get. And then there was a 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 is out of the system now. I mean certainly, there may be some minor pockets up, but we don't view it to be in the same vein of the headwind that we had in the back half.

[Unknown Analyst]

Got it. And kind of sticking to commercial food service again. So One of your competitors talked about like weak restaurant performance. So can you talk about what you're seeing in the restaurant end market and your expectation to 2024. And can you kind of give us an update on your progress in going to the institutional side of the business?

[Steve Spittle, executive]

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 the 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, health care, 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 forr this year and really years to come based on kind of those 2 or 3 backdrops driving demand.

[Timothy FitzGerald, executive]

I think if -- 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 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 beverage as we've kind of identified that as a growth opportunity for us. So I think those are some other things to kind of round out. I'd also mention international, particularly Asia, I mean, as you look at some of the long-term growth opportunities and plans there, whether that gets executed to this year or the future years we feel pretty good about our positioning as we talked about a lot of the investments we've made with our strategic initiatives, we really have also bolstered our operations in internationally, particularly China as well as India. So we're better positioned to serve the local markets there.

[Bryan Mittelman, executive]

And I'd also note that as we 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, it obviously offers an additional tailwind to us, too.

[Unknown Analyst]

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

[Operator]

The next question comes from Larry De Maria of William Blair.

[Lawrence De Maria, analyst]

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 recovery here. So I kind of wanted to follow up on where we think we are in the cycle, in the industry. So in other words, are we back towards sort of long-term low to mid-single-digit industry growth from here?

And secondly, if that is the case, what do you think you can outgrow the market on a sort of annualized basis from here?

[Steve Spittle, executive]

Larry, this is Steve. I mean, I will say I think we've gone through a period of, I'll call it, normalization and not to keep hitting on how customers order and working through inventory in the channel. We have gone through this tree. So I do think as we start this year, I do think we're back to, I'll call a more normalized spread of how customers or from us engage with us going forward. So I do think and Bryan had in his comments, getting back to kind of that low mid-single-digit growth for the year. We are confident about. Again, I think it goes back to everything we've already hit on this call. Maybe I would take a little bit different to you because we've talked a lot about chains, but we obviously have a lot of other types of customers I think we're starting to see the benefit of a lot of the investment we've made in our channel partners throughout the last several years, trying to get closer to them, giving them tools to invest in us. One of the dynamics that is relatively new is there's a lot of new people in kind of our channel in terms of the dealer segment. So more we're investing in training, the more we're bringing people through the MIK, I think we're really starting to see that pay off. So I know, again, we talked a lot about change that gives us confidence in growth but really investing and being closer to our key channel partners on the dealer side domestically I think, has been a big deal for us.

And then the third area I would just highlight, I talked about in prior calls, we've made a ton of investment in the consultant community, both domestically and internationally. And it's an area that I don't think they'll be as quite strong and go back 5, 6 years ago, and I think we're the leaders in this segment state. So consultants are driving specs from anything from institutional schools to large stadium projects to your local restaurant. And I think the more -- and we can see it very clearly, the specs that we're driving that show up. If you're expecting something today, it's probably showing up in a job in the back half of this year and into next year. So again, just trying to give you color on a couple of different areas beyond just the change where I feel like we're doing well. But I do think we will take market share and kind of outpace the market overall for the next, call it, 2 to 3 years.

[Lawrence De Maria, analyst]

Okay. And then just secondly, can you talk about price and volume in '23, was everything and how does it shake out? Any pockets of activity? And then as we're looking at the '24 outlook, any pockets of negative price or just overall comments on pricing in general?

[Steve Spittle, executive]

I think we've -- I mean I would say broadly, obviously, pricing, I talked about in prior calls has been one of the most strategic initiatives to make sure we're being very thoughtful, knowing what costs have done. And obviously, there's been a lot of pricing over the last several years. So I think it's enabled us to be in a very good and strategic position as we move into this year.

I do think that there's always going to be products where I think we have to continue to be very helpful about where costs are. And so I would say we're not necessarily done with taking pricing, I think there are still some pockets where we will look to improve.

[Lawrence De Maria, analyst]

Okay. So in other words, it Positive pricing on the 3 segments in '24?

[Timothy FitzGerald, executive]

[Technical Difficulty] several years, and we focus heavily on MIK. I mean, I think as we [indiscernible] technology. So we're not saying we're taking -- I think we're kind of at a pause point and I would say it's more of a fine-tuning, right, because there's been a lot of cost disruption with inflation cutting across labor material shipping. So I mean I think now we're going back through the portfolio and making adjustments where it makes sense and, I'll say, having the accounting and finance catch up to all this disruption over the last couple of years. So it's more of a fine-tuning.

[Steve Spittle, executive]

I think the other thing that I would point out as a reminder, is very intentional over the last 2 years about moving away and out of products on the lower side of the marketplace. So we canceled the last SKUs throughout the last several years. So that's why when you think about kind of price volume dynamic. It is a little bit difficult to kind of triangulate everything, just knowing the the products we cut the pricing we took, so that's why whole tricky to answer the question. But I do feel like to support Tim's point, we've done a very job controlling mix overall, and I think are in a better position to kind of build going forward from a volume standpoint in the next couple of years.

[Timothy FitzGerald, executive]

I think it is worth kind of pointing out reminding we did cancel a lot of products as we went through the last 3 years. So even as you kind of look at our revenues, and organic growth and everything is 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're launching into the market at the higher end of the innovation scale.

[Operator]

[Operator Instructions] And our next question comes from Walt Liptak of Seaport Research.

[Walter Liptak, analyst]

One last 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 international markets? I think you talked about Asia, what about Europe? And when you're talking about the new store openings, are you talking about North America as well?

[Steve Spittle, executive]

Yes, 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 on Asia. I mean, I think all the big chains are -- 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 when we think of global new store openings, I would say it's probably skewed something that 60% to 70% are coming from international markets.

[Walter Liptak, analyst]

Okay. Great. And just switching gears to residential. I wonder if you can just talk about if things are maybe slightly -- or going to get slightly better throughout the year. Where do you think the bigger inflection could come first would be in the resi outdoor or in resi kitchen, if you have a guess on that.

[Timothy FitzGerald, executive]

Yes. So it's a bit hard to say, right, I mean, I think with the crystal ball that nobody has. So I think as we think about our indoor platform, that's going to be kind of more of a ratable step up as we go through the year, again, probably starting a bit challenged. Outdoor does have the ability to inflect a bit more, and it could -- just because of the nature of the grill season and load-ins, et cetera. So I think as we go through this year, the -- a lot of the channel partners and customers [indiscernible] so trying to work down some inventory and they're reticent to load in for a grill season. So I think there will be a little bit more of a real-time demand of what happens in the spring.

And then I think then we get to the end of the year where people start thinking about 2025. We've got a lot of new exciting products that are taking more floor space in 2024, and so that could have a significant impact in the end of 2024 as people are starting to look at 2025 and what the outlook is and what the sell-through has been and what the confidence level has been. So I mean I think that's 1 that could take a bigger just got a bigger beta to it, let's put it that way. But it doesn't have a beta down. It's only a beta up.

[Operator]

The next question comes from Brian McNamara of Canaccord Genuity.

[Brian McNamara, analyst]

On destocking, 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?

[Steve Spittle, executive]

Well, I'll take it past the first part of the question. I think the destocking 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 general dealer business did have excess inventory. I think the chain side and the dealers that carry inventory for chains, you also saw inventory show up there. And that really is a function of all the chains replacing orders, say, a year out going back 12, 18 months ago, 2 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 a backup 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 the business to answer your question, both in the, I'll call it the general market dealing business and definitely in the chain business as well.

[Brian McNamara, analyst]

Got it. And then secondly, it looks like commercial food service revenues were down significantly in pizza casual dining and independent restaurants in 2023. Is this destocking? 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?

[Bryan Mittelman, executive]

So those percentages were -- aren't the revenue decline, but the change in the percentage of our total composition of revenues that they each represent.

[Brian McNamara, analyst]

I Understood -- yes.

[Steve Spittle, executive]

I won't read it necessarily too much into some of the nuances. I think it's just been [ flowed ] obviously, I read more QSRs continue to do very well. So you see why that's 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 [indiscernible] COVID for the last couple of years. It was inevitable that at some point, they 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 weighed down.

[Operator]

The next question comes from Tami Zakaria of JPMorgan.

[Tami Zakaria, analyst]

I 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. I think you have some convertible debt coming due in 2025. So overall, can you update us on the capital allocation priorities from here on, given the very strong cash generation.

[Timothy FitzGerald, executive]

Yes. So I'll touch on that. I'm not sure how the convert ties into that. And obviously, we're pretty well positioned from a capital structure with a lot of availability in -- it really hasn't changed I mean, we may have done a little bit less from an M&A perspective. as of late, but that continues to be a core competency and focus of ours. We see continued significant opportunities across all 3 business platforms to grow them both organically and through acquisition as we've done that for a long time to build into the 3 platforms that we have today. I think as we've gone through the last year, the market being disrupted with buyers and sellers thinking about what our appropriate multiple where's market growth is it going up, down, et cetera, but expectations, I would say they were not as aligned. So as I think as we kind of move into a more normalized environment in 2024 and beyond, I think you'll see us continue to do smart acquisitions to continue to build out our platform.

[Bryan Mittelman, executive]

And this is Bryan, thinking about the convert. It obviously doesn't come due for a little over 1.5 years 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 stock pile cash in advance of the 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 1.5 years from now. Again, we have a lot of flexibility. I believe, available to us.

[Timothy FitzGerald, executive]

As Bryan said also, 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 delever, which we were happy to kind of bring down below 2.5x. 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 to 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 going into next year.

[Tami Zakaria, analyst]

Got it. If I may ask one more, the Novy and Josper launches, what's the total TAM or opportunity you see from these 2 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.

[Bryan Mittelman, executive]

Tim, 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 large needle moving. I think Novy is -- could certainly be of the bigger difference maker. They have a lot of really great technology, a lot of induction and we see trends moving that way.

[Operator]

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

[Jeffrey Hammond, analyst]

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

[Bryan Mittelman, executive]

Well, I mean, sequentially, obviously, things have been a little bit challenging, right, in this segment. So in Q4 is typically though, I'll say, a bump up from Q3, and it was this quarter, even with tough market conditions overall, there's still some higher seasonal spending. So I do expect that Q1 could be below Q4 levels. But I think if you look at the past 3 quarters, you can kind of establish kind of a band in which we've been been operating. And our outlook is that, that band doesn't stretch down and hopefully, it starts to stretch up.

[Jeffrey Hammond, analyst]

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?

[Steve Spittle, executive]

Yes. No, for sure. So again, my perspective on the replacement cycle, as I think we're due for replacement cycle into COVID is that obviously COVID [indiscernible] our supply chain. And then a lot of the focus from the chain customers gain on new stores. And so I think as we get into this period now where, yes, new stores are still important. They do realize that they have to go back into locations where equipment has aged, making sure, again, common theme of making sure franchisees remain happy. We're also in a much better position compared to a couple of years ago is to be able to fulfill the demand from both a new store and replacement cycle.

So I think that was a big dynamic for the last couple of years of they were just prioritizing, getting new stores open, knowing the equipment was you had longer lead times. So customers are definitely engaging with us on replacement conversations, making sure that we have products ready to go for them at any time. So I do think you see our demand mix of -- we shared it between replacement and new stores shift back to be more and more predominantly driven by replacement and upgrade. I want to just hit some nuance of it, it's not just replacing a like-for-like, what I think you're going to see them do is predominantly upgrade to newer technology, technology that's able to be connected, new controls. So that gets kind of lumped into replacement and upgrade as well. So I think that starts to get back to being -- it's historically been 50% of demand for us overall. I think as you go out for the next 2 or 3 years, I think it gets back to kind of those levels overall.

[Operator]

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

[Timothy FitzGerald, executive]

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

[Operator]

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