Participants

Timothy Fitzgerald; Chief Executive Officer, Director; Middleby Corp

James Pool; Chief Technology and Operations Officer; Middleby Corp

Bryan Mittelman; Chief Financial Officer; Middleby Corp

Steven Spittle; Chief Compliance Officer; Middleby Corp

Saree Boroditsky; Analyst; Jefferies

Mig Dobre; Analyst; Baird

Brian McNamara; Analyst; Canaccord Genuity

Jeff Hammond; Analyst; Keybanc Capital Markets

Tami Zakaria; Analyst; JP Morgan

Walt Liptak; Analyst; Seaport Global

Presentation

Operator

Good day, and welcome to the third-quarter 2024 Middleby Corporation earnings conference call.
(Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Tim Fitzgerald, CEO. Please go ahead.

Timothy Fitzgerald

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. Third-quarter proved to be more challenging than expected, particularly for our commercial food service segment is lower restaurant traffic and are acceleration of already high food costs in recent months, further pressured restaurant operators resulting in delayed investment in greater restaurant closures.
Although we face macroeconomic headwinds across our food service businesses, the picture remains strong as more favorable conditions return with pent up demand and expected multi-year recoveries for the industries in which we participate.
While we face 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're 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 two 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 a commercial food service 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 a reported 3.5% across the restaurant sector for the quarter.
At the same time, food costs which have been improving throughout 2023, saw re acceleration 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 food service locations. But with forecasted net unit editions 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 under penetrated categories for Middleby.
In particular, we're realizing momentum in our targeted entry into the multi-billion 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 continue 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're 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 at 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 and in the pipeline occurring as interest rates decline and market conditions for food processors are becoming 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. The 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 food service businesses.
Now I'll pass the call over to James to highlight some of our strategic investments and service and also spotlight some of the recent exciting new product innovations, providing tangible cost savings and operational efficiencies to our customers. James.

James Pool

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 chain 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 saves a typical BK operator approximately $6000 a year on energy and reduced maintenance cost. Congratulations 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 frame 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 has an energy saving feature that allows the operator to shut down 50% of the broiler during non-peak times. These features qualify the broiler for meaningful energy baits across the United States. Lastly, the Nieco broiler is open kitchen IOT ready and utilizes the middle be 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 food service beverage brand. The Marco Milk pal 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 microfilming.
Additionally, 20% of the coffee shops, milk is wasted through overproduction and 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 milk pal addresses each one of these challenges by automating milk dispense, the milk pal is a must for every coffee shop and is well suited for seat stores, restaurants and business and industry locations.
The milk pal can dispense up to 25 unique milk accompaniments such as cold foam, hot foam, 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 a steam wand.
The milk pal is also a perfect accompaniment for the fast growing cold beverage market. Milk Pal dispenses each accompaniment with a single push of a button. Thus, automating the art of microphoning with near zero waste, given its precise portion control, it also produces the highest quality microphone without using any steam or barista art.
So the consumer tastes a richer, more flavourful, creamier and more consistent microphone in their espresso beverage, whether it be hot or cold. Lastly, unlike other milk dispensing systems, the milk pal is plumbed. This allows the system to rinse itself between dispenses, thus improving drink to drink, quality and consistency. It also allows the system to utilize middle beats, 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 mick.
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 technician on 20 of our highest technology brand. 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 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 fix 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 the North American food equipment manufacturers show, NAFEM, February 26 through the 28 in Atlanta, Georgia. Please put this on your calendar and we look forward to seeing you there. Thank you and over to you, Brian.

Bryan Mittelman

Thanks, James, and good morning everyone. This is Bryan Mittelman, CFO here at Middleby. I'll go through our financial results and a little bit of a outlook perspective for all of you. For the third-quarter, we generated revenue of $943 million which is a 5% decrease. Sequentially from Q2, a 4% decrease versus the prior year.
Our adjusted EBITA 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 food service 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 in revenues we considerably as we progress through the quarter. Given the top line challenge, we're 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 remains 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. It 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 high into the 10s 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, 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 clearly be 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 multi-year outlook remains positive. Our innovations along with our strength and operational execution will power improved results. We're looking forward to returning to growth in 2025.
Thank you, and we will now take your questions.

Question and Answer Session

Operator

We will now begin the question-and-answer session.
(Operator Instructions)
Saree Boroditsky, Jefferies.

Saree Boroditsky

Thanks for taking the question. Just starting with commercial obviously 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.

Timothy Fitzgerald

I mean, I just got the mention the order trends. We came into the quarter and they were pretty good. That gave us kind of a kind of some thought that the engines had started and we've seen that the orders coming through, we spent a lot of time with customers, both dealers as well as chains and them kind of reiterated a lot of their growth plans for the back half of the year and their outlook. But that, that seemed to weaken as we went through as I think just projects, whether it is upgrades new stores or some of the institutional projects just did not happen.
So I think they're still out there. But you know that I think the execution has been tough and I think a lot of that is because of the backdrop of the market and some of the, you know, the pressures that the restaurant operators are facing.
So yeah, I think that's kind of what we saw through the quarter. We still engaged with a lot of those customers. The pipeline is out there, they still have are talking about store opening and certainly over the longer term have some pretty large targets out there for expanding and that's both the larger chains as well as fast casual chains.
But I think they're kind of, I'll say clearing the underbrush with maybe some of the non-operating stores reassessing kind of the plans that they have. But we, you know, we do believe that some of that will, you know, resurface and pick up as we kind of as we go into 2025.

Saree Boroditsky

Appreciate that.

Steven Spittle

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

Saree Boroditsky

Thanks. 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 we see from an incremental margin perspective?

Timothy Fitzgerald

I think the -- you know, the big step up frankly just gets to back to where we were pre COVID. You know, as I mentioned in the opening comments, we are at significantly for our, you know, for our legacy business if you want, you know, think about it that way, the indoor, you know, it's operating at much lower levels today.
Fundamentally, those businesses are stronger than they were pre COVID in terms, of you know, structurally new products, quality, et cetera. And we continue to invest on that. So just getting back to where we were pre COVID, which, you know, we foresee will happen, that is a meaningful step up in the margins that gets us something to closer to the 20%.
So, you know, timing of when that's going to happen is obviously the big question, but, you know, it is a very difficult housing market right now as everybody knows, it's not going to hold forever interest rates starting to come down.
Certainly, you know, boats well, so, I mean, I think at, at some point, we're going to have that as a, as a tailwind, but just kind of getting back to normalized margins or normalized volumes is kind of the big driver. But on top of that, I would say, you know, we've had significant investments in the platform and new products that lay on top of that, which will get us to what we, we've kind of laid out as longer term market.

Saree Boroditsky

Appreciate the color, thank you.

Operator

Mig Dobre, Baird.

Mig Dobre

Yes, good morning everyone. I want to start with commercial food as well. I mean, your, your implied outlook here in the fourth-quarter or 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's been some push outs on new store additions. But I'm wondering, what, what you're seeing as far as your distributors, the normal kind of year end demand or stocking that these guys do.
And what that implies for where the channel inventory lies and really kind of how that might progress into '25.

Steven Spittle

Yeah, good morning, Mig, it's Steve, a very, very good question. So I think historically, you're correct the fourth quarter, you would normally see actually both in chain development. Historically, fourth-quarter would be the busiest quarter of the year. And then as you're referencing more on our dealer and distributor, part of our business the fourth quarter. Historically, you do see that bump.
I think this is, over the last several years, you've seen obviously a change in ordering patterns. I, I think you will not see that historical bump from distributors for a couple of different reasons. They're carrying less inventory than they have for a long time.
I think we are well past the excess inventory in the channel, but they're also less willing to bring in inventory, as they would say in historical years, primarily driven by higher interest rates. The carrying cost of inventory is certainly higher than it has been for a long time. Our lead times are also in a much better place so they can order in certainly much more real time.
So they're trying to close that GAAP between order period and the time that the end user customer actually needs the product. I also say it's a little bit of a nuance as well. You know, historically, you know, January 1, would be a common time to have price increases. We've been going with price increases in a more frequent cadence over the last several years during different parts of the year.
We don't have one planned this time for January 1. So I think there's just some different nuances this time where I don't expect the traditional or historical bump from distributors bringing in inventory at the year end. If that makes sense.

Mig Dobre

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

Steven Spittle

I think the stocking 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, you know, be more open to bringing inventory back to, I would say more pre COVID levels.
So I think these stockings behind us so that I think is a tailwind, I think it's going to be a little bit of wait and see as interest rates unfold next year. Again, the carrying cost of inventory as to, you know, how dealers will think about, you know, 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.

Mig Dobre

Okay. You mentioned that there's not going to be a price increase for '25. How do you think about the, the costs that are embedded in this segment? There's obviously materials but a whole host of other items as well, freight wages that 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.

Steven Spittle

So in referencing, hey, we're not having a January 1 pricing increase that I should have clarified, that does not mean we will not take pricing where appropriate in '25. I think we over the last several years, I've mentioned on several calls. I think pricing thoughtfulness around mix has been one of the most strategic initiatives in the company.
I'll hit the supply chain signs a second. But from a pricing standpoint, I mean, I think we've been very good over the last several years.
Going back to when inflation really was spiking of taking pretty substantial price increases to play catch up. We did catch up. But now you still do see pockets of inflation, whether it's in specific components, whether it is in labor, whether you know transportation when there were, you know, the port issues going on the coasts, container costs continue to, you know, ebb and flow.
I think we remain very thoughtful about that and there are specific products that have taken pricing even as late as the last several months just to make sure we're staying on top of it. I think from a supply chain standpoint again, I said before, one of the best things that has happened as a byproduct of COVID is I think our supply chain really acts and thinks more as Middleby across all three of our platforms.
And so I do think you see savings behind the scenes, whether it's on steel, whether it's on materials, whether it actually is on logistics, thinking more is it'll be. And I think that continues in the next year.
So I guess I would say we're trying to hit it from both sides continue to be thoughtful about pricing. We're not afraid to take pricing next year if we feel like it's warranted, being mindful of certainly a competitive backdrop. While also I think continue to leverage the Middleby supply chain for savings from our suppliers and logistics partners.

Bryan Mittelman

This is Bryan, you know, let me address the restructuring side of things. We have actually been consistently taking restructuring, you know, actions throughout the year and I'll say it's, you know, it's over the course of the year in terms of, you know, which of the segments maybe have had more, you know, impact you know, from that.
But, you know, we, we have reduced head count by, you know, hundreds of people. We've put in a lot of actions regarding what, you know, we would call the more manageable or discretionary types of you know, expenses and, you know, you are seeing the results of that, you know, in our, you know, in our margins, right, we've been able to, you know, I'll have strong maintain some expansion in margins, you know, even given the, the top line challenges.
So the restructuring has been, you know, active and unfortunately, but again, we're being, you know, reactive to market conditions, you know, assistant over the course of really, you know, the past, you know, two years, let's say, again, residential is probably more leading on that, you know, earlier in the phase and it's expanded, you know, more into a commercial and, you know, food processing has not been exempt from actions either.

Timothy Fitzgerald

Maybe those were on order of about $50 million. So that's something that we, you know, we didn't announce, but we started to put in place in the second-quarter. But a lot of that, some of it certainly, you know, was tightening the belt, which we will always, you know, do kind of managing the current environment. But a lot of that is also accelerating, you know, some of the long term structural initiatives that we have to get to higher profit margins.
So some of that is what's allowing us to deliver, you know, the strong, the strong margins which when buying returns will, will turn into expanding the margins. And you know, that, that includes investments in new factories where we're consolidating manufacturing. You know, and some of the investments that, that you've seen in capital equipment as well as we're driving efficiencies in the factory.
So I think that's kind of all embedded in a lot of things that's allowing us to, to maintain margins and on a longer term basis, expand them.

Mig Dobre

If I may one final question. It pertains to the SG&A line item. A 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. Thank you.

Bryan Mittelman

Yeah. You know, so, I'd expect, you know, Q4 to again be relatively consistent with Q3 as we, you know, talked about how results will likely shake out. You know, certainly I just mentioned, you know, that we've been taking, you know, head count and cost control actions.
There is certainly, you know, lower, you know, compensation incentive compensation relating costs this year. And, you know, professional fees have been down, I mean, to a certain extent as the business recovers again, especially as it relates to you know, incentive compensation that, you know, across our entire organization, you know, that could have an uptick.
But again, you know, we're in general, you know, don't expect dramatic shifts in our overall SG&A we know, we tend to be you know, pretty frugal to start with. And again, I think we've laid out that we've been addressing the cost pretty, you know, actively over the past, you know, couple of years.

Mig Dobre

Thank you.

Operator

Brian McNamara, Canaccord Genuity.

Brian McNamara

Good morning guys. Thanks for taking the questions. Hate to beat a 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 to independence 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. Is that just change strength?

Timothy Fitzgerald

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, they've set out which many of them are public. You know, the other is industry forecast.
So there are forecasts out there for the industry. Certainly a lot of the closures, as you mentioned, have 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, than some of the quick serve chains.
So, we think, you know, a lot of what's happening, you know, there is, you've got some of the, the less healthy concepts that either, you know, they those locations are, are getting closed and perhaps reopen in other spots. And that kind of, you know, resets the table for the better chains to expand from, you know, from a stronger base.
So, really, it's the industry forecasts and the, and the comments that we're getting from our chain customers, we're engaged with their plans.

Steven Spittle

Brian, if I could just add, I know we spend a lot of time focusing on obviously new, new store openings and that, that is a big part of our growth primarily with, you know, the QSRs and the past casual, you know, 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, you know, the unit economics of opening up restaurants continue to bring on franchisees, expand into international markets. Again, that can be labor can be utility costs via service consistency.
You know, 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, you know, 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.

Brian McNamara

Great, and then just secondly, on the lack of a [Jan] one 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, 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. Thanks.

Bryan Mittelman

Yeah. You know, especially around -- this is Bryan Mittelman here, especially as we look over, you know, I'll say the past year where, you know, pricing actions have been more muted, right? I, I think it's fair to assume that, you know, volume is largely aligning with, you know, what you're seeing in the, in the revenue line overall.

Steven Spittle

I would also Brian, this is Steve again, I would just a reminder that over the last several years, we have been very mindful and thoughtful about our mix. And as part of that, we did exit a number of low margin, you know, tough to build skews in that process.
So, yes, I do think there are volume challenges that you're referencing, but we also used the time to be very thoughtful about, you know, getting out of, you know, low margin products that we're not obviously positively contributing to the overall, you know, margins for the company. So I don't want to lose sight of that. There still is a dynamic that you're referencing, but there also is this element of products that we did exit over the last two or three years.

Brian McNamara

Very helpful. Thanks.

Operator

Jeff Hammond, Keybanc Capital Markets.

Jeff Hammond

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

Timothy Fitzgerald

I think it's hard to have the crystal ball to be honest with you. I think they've been pushing to the right for a while. So I think that's one thing and so at some point, they just really need to pull the trigger and replace and upgrade some and I think that's, that is one dynamic Steve just touching on it, right? Like the, the they've been looking at a lot of these solutions for a long time.
Some of our customers talk about it regularly on, on calls, you know, things that they're looking at to do that transform their operations as you, you kind of go through dynamic periods like this with uncertain air traffic, food costs moving into different place, interest rates where they land and difficulty in terms of getting, you know, terms of getting permits which do take a lot longer. Things have just have, have extended but I mean, I think the fundamental issues that they're dealing with and also the comments that we're getting, you know, lead to, hey, they're going to move forward on some of the stuff.
A lot of our customers come to us and their concerns are we're going to be able to produce enough to keep up with their demand. We actually had, you know, a lot of pressure on that coming into the third quarter. So I think, you know, ultimately they are going to, you know, they really need to pull the trigger on some of these things to kind of move forward in their business. So, you know, we think that is going to start showing up, you know, as we move into next year.

Jeff Hammond

Okay. And then couple you know, cash flow balance sheet items, just your working capital, turn that 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, you know, back into check and, and maybe what the opportunity is for, you know, working capital is a source of cash and then just talk about your plans for the convert that come due next year.

Bryan Mittelman

Hi, Jeff, this is Bryan. You know, as we think about working capital, inventory remains the key focus is I think about, you know, across AR, AP and inventory and, you know, we have been continuing to bring down inventory levels this year. Certainly, you know, the somewhat muted top line has impacted our ability to achieve all the inventory reductions we would like. And, you know, we have changed our, our management philosophy, you know, around that or I should say evolved it, you know, we have incentive plans specifically address that in place.
So it really is, you know, a key focus, I wouldn't say, you know, ARs we look at the quality of the aging or the day sales outstanding has really degraded. But certainly we keep, you know, a watchful eye on that, especially given what's happening in the market. You know, the good news a little bit here is that, you know, where there are some customer risks that actually tends to reside a little bit more, you know with the dealers that are in between us and the end user then, you know, directly with us.
But again, we're not completely insulated from that So inventory will, you know, remain, you know, a focus and, and I think there's, you know, well over, you know, $100 million of, you know, opportunity over the next year or two, at least to continue to bring that down. Or also, I'll say, you know, as revenues improve to maybe inventory levels don't come down.
But anyway, the overall, you know, net metric really, there is the day's inventory on hand. So there, you know, there still is a good amount of improvement we expect to drive in that over the next year or two.
And then, you know, pivoting to your question on the you know, converts. You know, we, we have a variety of options, you know, available you know, to us, certainly we have, you know, capacity under our you know, credit facility to I'll say, you know, refinance that you know, we have a healthy amount of cash on our, on our balance sheet, which we you know, can use to address that as well.
We also expect to be continuing to do M&A and then there are obviously, you know, other debt markets available to us, whether it's, you know, converts high yields, you know, term B. So, you know, we will you know, we do regularly look at that, you know, given where the convert, what the convert is currently costing us, which is you know, a 1% interest rate.
We have not been in a hurry to take that off our books, but we'll again continue to evaluate what are our cash level and what are the, you know, the best debt options as that gets closer to maturity.

Jeff Hammond

Okay, thank you.

Operator

Tami Zakaria, JP Morgan.

Tami Zakaria

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

Timothy Fitzgerald

Well, service has been a challenge for many industries. Certainly we've really seen it across all, all three of ours is 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, 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, 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.

Tami Zakaria

Got it. Thank you. That was my question.

Operator

Walt Liptak, Seaport.

Walt Liptak

Hi, thanks. It could work on the margin and it sounds like you've got things in place to continue to improve the margins.
You know, in the past, you talked about getting to a 30% commercial margin over the next couple of years. Is that still -- you know, the target?

Timothy Fitzgerald

Yeah, it is still the target. Yeah, I mean, I think right now we're holding, you know what we think are very strong, respectable, you know, margins. I think we're there're, you know, by industry standards, we're, we're one of the leaders and we're doing that in a tough period. While we tightened the belt, as Bryan said, you know, a lot of the initiatives that we have you know, are strategic in nature as well.
And I just got the remind everybody that, you know, while we're tighten the belt in this period, we're kind of doubling down on a lot of the strategic investments that we think will help us drive growth for the future. And part of that is also enhancing our mix of products.
As Steve touched on, we exited a lot of low margin products, but we're really focused on growing our greatest innovations and I think we haven't really seen a lot of the benefits of that yet because a lot of that is what is in a pipeline.
Those are the solutions that have a high ROI to the customer. Again, the Nieco brother is a great example that we're working with the, with the customers and you know, as that pipeline comes through the, you know, which is an investment today that comes through with growth and higher margins. So that is part of the bridge to get to the, the 30%. And as we kind of roll through the next several years.

Walt Liptak

Okay. Makes sense. Thanks. And just a couple more one. Most of the discussion sounds like it's sort of global. I wonder if there's any, you know, delineation you can make between like, you know, North America US sales versus international.

Timothy Fitzgerald

Yeah, North America has been tougher as of late Europe. I mean, Europe, I think you'd see us as well as other companies have fared better in that market. The other thing probably to call out is Asia. Asia has been a softer spot for most, most companies there. We've got a have a lot of new products coming out in that market and there is chain expansion that is planned there.
But there are dynamics of that market too, which is kind of, you know, fed into, you know, the results for the quarter two is has been stronger, I'm sorry, weaker in the back half. But if you look at that market particularly as you expand outside of just China into other regions in Asia, as well as India, which we feel pretty strong about. We, we see some longer term growth going there, but in the near term, that's been a headwind.

Steven Spittle

I mean, I would just add in two more nuances in, in commercial specifically. I mean, I think talked about prior calls, you know, Europe has been an area of, you know, reinvestment and you know, 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 having innovation kitchen in Wigan 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 we 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 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.

Walt Liptak

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

Timothy Fitzgerald

I think we, we will let Chipotle make their comments about their plans. I would just comment that, you know, the double sided grill is a great example of automation and a new product that we've had in the market where we've had success with a number of customers.
And it demonstrates really, you know, again how we're focused on innovation. It's in a pipeline and it's delivering significant potential Roy, you know, to our customers. So, I mean, it's just a one of the great products that we've introduced over the last several years.

Walt Liptak

Okay, great. Thank you.

Operator

Mig Dobre, Baird.

Mig Dobre

Yeah, thanks. I just wanted to follow up on Jeff's balance sheet question. So, you know, 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 kind of pay down that, that, 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? Thank you.

Bryan Mittelman

This is Bryan, we are not accumulating cash with, you know, solely the intent of, you know, earmarking those dollars to, you know, directly pay off the convert. You know, we have no balance outstanding under our revolver. You know, 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 a, you know, fairly decent you know, 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 you know, cash balance grow some, you know, 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's some, you know, a little bit more utilization at times in the front half of the year.
So I think right now we're just in a point of, you know flexibility and you know we certainly do understand that, you know, interest rates today are higher than when we entered into that convert. Obviously, when you issue a convert, the total cost isn't just you know, the coupon rate and, you know, you overall have seen our leverage coming down.
So again, we'll be looking at how to best structure, you know, the debt side of things over the, you know, over the next year. Also, you know, appreciate your perspective on, you know, capital allocation. Obviously, we have been, you know, growing the amount of annual cash flow that we generate.
And you know, we are continuing to evaluate, you know, should some of that cash be allocated, you know, in a, in a matter of maybe a little different, you know, from historically where it's been a large focus on M&A and you know, are evaluating other ways to utilize the cash including, you know, different ways of return of capital to shareholders.

Mig Dobre

All right. Appreciate it.

Operator

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

Timothy Fitzgerald

Thank you again, everybody for joining us on today's call. In closing, I would like to reiterate that while we have and hoped macroeconomic conditions would be more favorable and in flux 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 position 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.

Operator

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