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Middleby Corp (NASDAQ:MIDD)
Q3 2020 Earnings Call
Nov 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for joining us today for The Middleby Corporation Third Quarter Conference Call. With us today from the management are CEO, Tim FitzGerald; CFO, Bryan Mittelman; and COO, David Brewer. We will begin the call with comments from management and then open it up for question and answer. Instructions on how to get in the queue will be given at that time. Also, a presentation to accompany this discussion is available on the Middleby Investor homepage at middleby.com. Go to the Investor tab on middleby.com to access it. It is also available in the presentation folder on the right side of this page.

Now I'd like to turn the call over to Tim FitzGerald for opening comments. Please go ahead.

Timothy J. FitzGerald -- Chief Executive Officer And Director

Thank you for joining us today on our third quarter conference call. As Stephen said, there are slides to accompany our call. They can be found on our Investor page at middleby.com, and these slides will not lead our discussion today, but are meant for informational purposes as we may refer to them while on the call. Before we get into earnings, I would like to once again thank our Middleby team that has done a tremendous job as we navigate evolving business conditions. We continue to be in ever-changing times with the COVID pandemic, and our team continues to rise to many challenges resulting from the crisis, while adapting our business to position for long-term success. So again, to the entire Middleby team around the world, thank you. Now looking at the quarter. Despite ongoing business disruptions, we were pleased to have improved our levels of profitability across all three business segments.

Our actions to quickly reset our cost structure with continued focus on profitability are reflected in the results posted for the quarter. We also strengthened our capital structure with our third quarter refinancing. We are well positioned to move forward on strategic and operating initiatives and make the critical investments as we transform our business. As it relates to segment performance, in the Commercial Foodservice Group, we have seen consistent improvement activity with our customers. Our order rates were down 21% for the quarter and down 2% for the month of October. We have seen improving activity across most categories, and our customers are benefiting from rapid growth in drive-through, curbside pickup and delivery. Although challenges remain for indoor dining, the desire to dine-in has grown and is reflected in improving sales at our casual dining and fast casual chain customers.

Segments such as quick-serve, pizza, c-stores and retail continue to perform well, and we are positioned to support these customers. As the industry is quickly adapting, the many investments we've made leading into 2020 and are now more relevant and critical than ever before. Key examples such as the investments we've made in ventless, automation, delivery and our industry-leading Open Kitchen IoT platform specifically address customer challenges of labor, speed of service, menu flexibility and operating footprint. Since the launch of our Open Kitchen IoT platform at the beginning of this year, we have increased our engagement with foodservice operators. Open Kitchen provides the tools to simplify, automate and monitor many of the challenges in the kitchen. I'm very excited to report that to date, we have in excess of 5,000 restaurants and retail locations operating in our system. This installed base continues to grow as Open Kitchen is the preferred solution, given its broad capabilities to support not only all equipment in the kitchen, but all other facility operations such as lighting, HVAC and ventilation.

Open Kitchen is the only solution to connect literally all equipment in operations on one platform. It is clear that delivery and curbside will continue to be of critical importance as this trend will continue beyond COVID. While this is benefiting the revenues of our foodservice customers, it is also presenting significant operational challenges. New challenges around customer satisfaction, service times, food quality and safety from customer-employee interaction are all considerations. We have a variety of contactless and automated solutions including the Carter-Hoffmann PUC, pick-up cabinet solution, which continues to gain interest addressing critical needs. And as you saw yesterday in our press release, we announced the introduction of Bluezone by Middleby. We are now moving into supporting employee and customer safety at the restaurant.

This solution provides the highest protection of virus kill rates to enhance safety as indoor dining returns. We are excited to introduce this unique and patented technology, which has been proven with existing applications in the military, hospitals and industrial foodservice operations. Moving on to our Residential Kitchen Group. We have seen robust order levels continue both in the U.S. and U.K. markets. Order rates in Q3 increased 45% and continued into October at 44%. New construction and home sales activities have returned. And these favorable conditions along with consumers spending more time working, schooling and cooking at home are reflected in the order rates. We're also realizing the momentum from recently debuted products across our entire portfolio of premium brands. Interest in Viking continues to grow with our 7-series, Tuscany and Virtuoso product families.

We have growing interest from the design community as well as we leverage our showrooms and build excitement around our new product designs from brands such as La Cornue and color offerings such as The Delta Hues from Viking. We're also pleased with the initial interest with our USA launch of Mercury and Lynx ranges from our AGA brand. We continue to see growing demand at Brava, our newest brand with revolutionary light wave cooking technology. The interest in smart connected countertop cooking offering speed and convenience addresses a clear and growing consumer trend. In the Food Processing Group, we reported a very solid quarter, while our teams executed in a difficult business environment. Although travel restrictions have made it challenging to complete installations, we've been able to leverage our global capabilities to minimize disruption and deliver upon customer commitments.

Travel has made it difficult to engage with customers on equipment demonstrations, which likely will affect order timing. However, we have a solid backlog and a robust pipeline with growing interest in our new product innovations such as accelerated maturing rooms from sous vide cooking systems from Armor Inox and our high-speed conveyorized TurboChef Oven by Alkar. These solutions are examples of recently developed products that offer advantages of automation, increased throughput and equipment flexibility on the space savings footprint. In summary, we anticipate continued uncertainties resulting from the COVID pandemic. We have taken the actions necessary to position our business to withstand these ongoing challenges. We're well positioned to benefit from new and emerging market trends. And we continue to build upon the leadership positions across all three of our foodservice platforms. Those are my prepared comments,

And now I'd like to turn it over to Bryan for the financial discussion.

Bryan E. Mittelman -- Chief Financial Officer

Thanks, Tim. While not seeking to turn our call into a political commentary, having a bit of fun, I did want to ensure everyone that our financials are reflective of 100% of our divisions having reported in the results and no recounting is expected. For the third quarter, our GAAP earnings per share were $1.10. Adjusted EPS, which excludes amortization expense and nonoperating pension income as well as other items noted in the reconciliation at the back of our press release, was $1.34, which was negatively impacted by $0.05 from acquisitions. I'd say it was a very successful quarter for us. While addressing the challenges presented by the pandemic, we generated record operating cash flows, delivered very strong margins and enhanced our capital structure. Let me start with a brief overview of revenues and segment performance and then come back to cash flows and liquidity. On a consolidated basis, revenues declined 12.4% or 14.1% organically, as COVID significantly impacted our results. Across the company, we were able to deliver gross margin of 35%. Total company adjusted EBITDA was $126 million and represented nearly 20% of revenues, a 25% increase or 410 basis points improvement from the second quarter of 2020. We achieved this while also investing nearly $5 million in technology initiatives during the quarter. We continue to benefit from the swift and aggressive actions we took in the spring as well as additional actions taken more recently. We entered this period with leading margins, and we are continuing to execute programs to maintain this profitability position. Commercial Foodservice revenues globally were down 27% organically; and when looking just at North America, the decline was approximately 24%. Gross margins were over 34%, and we delivered organic adjusted EBITDA of 22.6%.

All the margin values I will discuss are on an organic basis, meaning excluding any acquisitions and FX impacts. In Residential, we saw revenue up over 11%, as strong demand exists for premium appliances and outdoor cooking platform. This led to gross margin of over 36% and adjusted EBITDA of over 20%. Additionally, if we exclude noncore businesses, our operating margin is over 100 basis points higher. In Food Processing, revenues increased 22% organically, gross margins exceeded 36% and the adjusted EBITDA margin was 23.7%. While the revenue for the quarter did come in somewhat higher than previously expected and the prior year period was at a relatively low revenue level. As I have discussed before, margins here see variability based on mix between bakery and protein as well as within brands in those two groups. This quarter did benefit from relatively higher margin contributions from the protein-related products. I will come back to some outlook comments on all the segments shortly. In terms of SG&A expenses, when excluding $6 million from acquisitions, we saved over $20 million or over 15% compared to Q3 of 2019 from our cost control and headcount reduction actions. Restructuring charges were approximately $7 million for the quarter, which will provide annual cost saving benefits of over $20 million. Interest expense was down over $3 million from Q2. You'll likely recall that we issued convertible notes in August. U.S. GAAP currently requires a bifurcation of such notes into a debt and equity portion, along with a noncash interest charge for the difference between the 1% coupon we are paying and a hypothetical yield on a note without a conversion feature. This resulted in nearly $2 million of noncash interest expense in Q3. In Q4, this charge will be nearly $6 million. The increase is due to the notes having only been outstanding for less than half of Q2. We generated strong cash flows, $151 million from operations with over $55 million in benefit from reduced inventory levels. For the past 12 months, free cash flow is $430 million, a record level for us.

Over that period, EBITDA, as defined in the credit agreement, is over $563 million. So our total leverage ratio is now just below 3.2 times, while our covenant limit is set at 5.5 times. We also have over $1.3 billion of current borrowing capacity under our credit agreement. These figures capture the impacts of having issued the convertible notes, amending our credit agreement, reducing our cash on hand to $220 million and paying down $400 million against our term loan during the quarter. We delivered on our promise that any solution we implemented around our capital structure would provide financial flexibility and allow us to make strategic investments. We are very comfortable with the existing headroom under our financial covenants, and we will continue to responsibly deploy capital to provide solid returns over the long term. I'm very proud of being in a very experienced management team that continues to deliver these industry-leading results. All our segments expanded their margins considerably from Q2 into Q3. Commercial is up over 400 basis points and Residential was up over 600 basis points. The total company adjusted EBITDA percentage was nearly 20%. While executing plans to maintain our operations and control costs, we were also working tirelessly to drive cash flow.

Having reviewed Q3, I do want to provide some insights on the upcoming quarter. In order to do so, I will be referencing order rates, which we have shared in the presentation available at the Investor Relations section of our website. By the way, our intention is to cease providing monthly order rates going forward. But before discussing the markets broadly, I thought I'd start with some insights on how my family's household is impacting Q4 demand. With some dining restrictions having come back into place around Chicagoland, I am making sure we are doing our part to support local restaurants and especially ones that are Middleby customers. A few of our favorite restaurants are about a 25-mile drive from our house, but I wasn't going to let that get in the way of satisfying my takeout cravings this past weekend. So a quick shout out to Lula Cafe, which is a truly exceptional and must-visit as well as Robert's Pizza and Dough Company, who has a few Marshall ovens cooking their amazing pies. Once I'm with all my great food, I put it in my beloved Brava into servers for some reheating. Now you may ask, who's my favorite [Indecipherable], is it my wife with what she masterfully creates and then cooks in our Lynx Napoli Oven or is it the crew at Robert's. Well, driven ever so slightly by my dining contributions, for Commercial Foodservice, we continue to see improvements throughout the quarter. Orders were down 31% in August, then down 18% in September, and October was down only 2%. Now I've commented previously that a risk of looking at monthly data is the variability that can exist.

Overall, the trend has obviously been consistently positive as we look all the way back to the beginning of Q2. October was an exceptional month, but I need to offer some caution on the interpretation of this data. The ultimate fulfillment timing of these orders is key to keep in mind as it includes some longer-term program sales that we would expect to be fulfilled in the first half of next year. So It would not be appropriate to expect the September and October order data points to be reflective of the Q4 revenue result. As many of you seek to model or set Q4 expectations, I believe, it would be more appropriate to consider somewhere between August and September, especially given seasonal weather changes and emerging dining restrictions. We are not losing our focus on margin and cost control. Nonetheless, as we have started to bring some costs back into the business, there could be minor degradation in our EBITDA for Q4. We continue to monitor our costs and additional profit improvement plans in place for the year ahead. We remain committed to delivering higher margins in '21 than we had this quarter. Residential has seen a tremendous resurgence with recent months' order rates up over 40%. As we consider our production environment, focus on ensuring employee safety and evaluate staffing levels and fill rates as well as the effect of prior year comps, we expect the Q4 rate -- growth rate to be marginally better than that of Q3. Given backlogs and consumer demand, we do expect growth to persist into '21. The production environment matters previously noted will also keep sequential margin expansion low. For Food Processing, the third quarter did come in somewhat ahead of expectations. We've also seen some near-term recovery in the backlog, as we are now at levels slightly below where we started the year.

We had an admittedly easier comp for Q3. So if you look back at 2019, Q4 revenues grew over $32 million or 36% sequentially. For this year, we only expect modest, at best, sequential growth from Q3 to Q4. Also, the Q4 project mix may contribute to lower sequential margins. We are seeing continued disruption in our customers' businesses and some difficulty is being encountered with installations, especially outside of the U.S. While the occurring, only limited cancellations have arisen. As I had noted, the backlog is back to levels close to even with the beginning of the year. So near-term expectations are rather modest, but the outlook is seemingly stable. In conclusion, Q3 performance was extremely solid, especially as we look at margins and cash flows. The challenges in volatility in the current environment presents some risk for Q4. Nonetheless, we are confident in our medium- and long-term positioning. In Q3, we continued to ensure employee safety, maintain continuity of operations to meet customer demands and took actions to cut costs. These efforts persist, and we will also continue to invest in technology and product innovation. Our leading technologies will help drive further growth as we enter '21. With that, Stephen, please open the call to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from the line of Mig Dobre from Baird. The line is now open.

Mircea Dobre -- Robert W. Baird -- Analyst

I am looking at this October order number in your slides, and frankly, my head is spinning a bit. And I understand that your comment in terms of how these orders get converted to revenue and that some of this conversion to revenue might go into 2021. But to be down 2% in October, I guess, I'm looking for a little more color here. And maybe the way I would ask the question really is this way. In the past, you've given us a breakdown of your various verticals that you've got exposure to. My recollection is that casual dining, for instance, travel and leisure, independent restaurants. So arguably speaking the areas that have been really impacted by the pandemic, that was about 20% of your business. Institutional, QSR, pizza really kind of accounted for the rest. So I guess I'm wondering, as we're looking at these order trends, can you parse out what you're seeing in QSR pizza relative to casual dining relative to institutional or retail? And then what level of visibility do you think you have at this point with some of your more important customers to kind of help us and help you create some kind of an outlook for us maybe, if you would, beyond the next one to two months?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Okay. So there's a lot to unpack there. And we -- so I'll give some color. I mean certainly, we're not tracking necessarily order rates by those segments. I mean, I'll first start off by saying that just general business conditions are improving. And certainly, there's restaurants that are shutting down, and we know the seasonal -- shutting down because of restrictions and the seasonal impact. But I think by and large, we're bullish on things are improving. The foodservice dollar spent outside the home is increasing. And we're -- kind of all boats are rising. Certainly, casual dining is lagging quick-serve pizza emerging chains, but we're seeing improvement in all categories. I would say, in particular, we've done well in pizza. We do have included in that October number, some, I would say -- Bryan mentioned program, but if you want to call it, rollout activities, which typically just don't come in and out in a 2-week period. They tend to be tied to a program, and hence, that's why we expect some of that to be in next year. And we see that at some of the fast casual change. We see that at some of our convenience store customers as well. So again, the parts of the market that we've talked about before, and I just mentioned c-store, pizza, quick-serve, retail are performing well. Casual dining has come up. So -- and I'd say one other element that you'd see probably a little bit in that October number, it's just service. Because our service business, which there was kind of disruption back in Q2, really didn't pick up all that much in Q3 until late in the quarter and early in Q3. So that kind of bodes well also as restaurants are back operating, and hence, they need to service their equipment.

Mircea Dobre -- Robert W. Baird -- Analyst

I see. I mean it strikes me that the only way we could be looking at an order number as to what we're having here is for you to have outright growth in portions of your business. So can you maybe be more specific as to where you are outright seeing growth? And do you have a sense that there is enough going on in terms of what you know with these customers? I know some of your customers are essentially talking about unit expansion in 2021, and they're gaining share -- consumer wallet share. So are you getting the sense that there's enough momentum that's built up with these customers that can potentially sustain into 2021?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Okay. Mig, I'm not sure I fully understood it. I mean maybe I'll take another. So first of all, October...

Mircea Dobre -- Robert W. Baird -- Analyst

Let me rephrase this. If there are portions of your business that are still obviously experiencing some stress, but your orders are only down, call it, 2%, then I would imagine that there are portions of your business that are up to actually -- to offset some of the erosion that you have in customers that are still struggling. So I guess I'm wondering if you can tell us who's up year-over-year at this point and what visibility you might have into '21.

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. So we're seeing with us -- and again, there's some rollouts in the October number. I mean, we've kind of wanted to be transparent through this period, so people understood what's going on under the covers here, because we have confidence in the business and recovering. But when you see kind of an October number, who knows what November will bring. But as we've seen improvement in September and October, the segments that are above, right, to your point, say, if you're 1%, something is probably positive there. So some of the program activities of c-stores with the emerging chains and pizza are doing well, meaning they're in the black. And then I think as quick-serve has also improved, to be honest with you, I'm not sure if it's positive or negative, but it's probably getting close to about where it was before. Casual dining, fine dining, institutional, schools, which obviously back to being in the classroom, are down but improving. So I think that would be kind of the way I would bucket there. And then I'll kind of go back to service again, which service also is kind of back to last year level. And again, it's very volatile. It's very uncertain. So I -- we hate to talk about monthly orders. I think, again, where we wanted to get was what are the trends that we're seeing, how is Middleby performing. Kind of gives some color to the confidence in what we have in the business and what -- while we'll have uncertainty in the near term, the confidence that we have the business that -- with the recovery in the long term and how we're positioned, but we'll probably get away from the monthly order rate reporting, just as Bryan said, because otherwise, we'll get into kind of pulling apart the October orders. And again, we got some rollouts there. But -- so just on the visibility next year, also, I mean, I think we do expect foodservice is going to continue to improve. It doesn't mean that it's going to be back where it was before. The stats for -- that are out there by Technomic and others is that the restaurants will still be down or foodservice largely will be down 5% to 10% next year relative to 2019. And so we expect that we'll still have underperforming segments going into the year. That being said, there's confidence, I think, in a lot of the categories, and that is allowing them to not only move forward with programs that they had pre-COVID, but they're also thinking about how do they transform their business in the current environment, right? So that is where there may be some accelerated spending opportunities that we could see coming into next year.

Mircea Dobre -- Robert W. Baird -- Analyst

That's great color. That's what I was looking for. And then my final question, Bryan, for you, just a clarification. I thought I heard you say that if we're looking at Commercial Foodservice margin for the third quarter, that in 2021, you should be able to do better than that. So I'm looking to clarify that comment. And is that timing pertaining to the third quarter of '21 or the full year?

Bryan E. Mittelman -- Chief Financial Officer

Yes. No, it would be for the full year, right? I mean we see how the ebbs and flows go a little bit with -- as the business recovers, right? So there's going to be a variety of things driving our margin performance for next year, right? The costs we've cut, what we knit back in and where we cut or tweak further, what volumes do, what pricing actions become, what mix becomes, some of the acceptance and adoption of our newer technologies, right, so there's a whole variety of things that are poised to be positives. I guess time will tell a little bit, right? We all feel comfortable that -- well, it's dangerous maybe to say completely -- Q2 was the low point. As we get through Q3, right, we're all trying to assess, is this the new kind of floor. And assuming it is, then things continue to get better from here.

Mircea Dobre -- Robert W. Baird -- Analyst

Okay. Thanks for the color and good luck.

Bryan E. Mittelman -- Chief Financial Officer

Yeah. Thanks.

Operator

Our next question will come from the line of Todd Brooks from CL King. The line is now open.

Todd Morrison Brooks -- CL King & Associates -- Analyst

Great job on the quarter. Just two quick questions. One on Open Kitchen, you talked about 5,000 installed sites. Now can we talk about kind of appetite and front of sales funnel for the connected products, given how much operational change so many of these operators have gone through during the pandemic and the fact that, that historically has triggered evaluation of new equipment and new solutions going forward?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. So I mean, as I said, we're seeing increased engagement. IoT has been around for a while, but I think it's one of those things that becomes -- it's the right inflection point and then because of industry factors and various other things. So I mean, with that, we're seeing the restaurants realize this can have meaningful impact on their business. So I mean, I mentioned the numbers. I mean our adoption rate is increasing. We have a number of large restaurant customers that are adopting it across their brands right now. We kind of have a pipeline of, let's say, up to a dozen customers that are significantly looking at it. So I mean I think we see growing interest as it's got a kind of proven ROI right now. And that ROI is going up for the reasons mentioned: labor, automation, safety, the ability to ensure operating and service of the equipment, food costs. With the advent here of Bluezone that we're launching, we'll be tying that into our IoT platform as well. So I mean I think we kind of think of these as different modules of how do you reduce and manage your facility costs, how do you improve the operations in your kitchen and have visibility into it, how do you ensure food safety. And now we want to really go after employing customer safety as well. So I mean all these things are meaningful, both from a cost and competitive dynamic. So we feel pretty good about where we're at. And I'll ask Steve to maybe add some further color here as well.

David Brewer -- The Middleby Corp.

Yes, Tom, it's a good question around Open Kitchen. Strategically, Open Kitchen, from our perspective, I see it going through center. And what I mean by going through center is we were presenting this. We presented it internationally 1.5 years ago. We're now getting calls. The customers are calling us, especially in the commercial food business. Our customers are very wary of unproven technology. And now that we're in over 6,000-plus locations, it has a proven ROI. And it's more than just a standardized controller. It's not just a pretty face. It is a total system. It includes the control systems for gas valves. It has sensors around temperature. And then it connects to the controller, and then it goes to the cloud. And then it generates data that is meaningful to the restaurant operator. And that's a proven system, which then they use that data to lower their labor costs, lower their maintenance costs, improve their efficiencies, improve their speed of service. And Frankly, I think it's perfect timing, because as you look at the generational trends of people that are now running restaurants, the people that are general managers of restaurants in the one level above restaurant management, they're very comfortable with data management and making operational changes based upon data. So Open Kitchen generates data that's meaningful to the restaurant operator. And it's a platform. It's not just a standardized control system. It is truly an integrated soup-to-nuts operational system. And I'm very proud of it. The team that's running it, it's doing a great job. And I just see strategically now that customers can see it in operation. Other customers can see it. Other big chains feel like they're falling behind. They need to catch up, because they see it in other large chains. It's extremely exciting and it's proven. And it works in over 5,000 restaurants.

Todd Morrison Brooks -- CL King & Associates -- Analyst

That's great. And then just a second question. And I know you're pointing out the vagaries around monthly order data. But with the strength that we saw in orders in Residential Kitchen kind of in the third quarter versus the 14% sales growth rate, can we talk about production levels to meet the demand? Have we built a backlog that carries into Q4 and into fiscal '21? And just in general, what you see is the setup as far as the duration of this nesting trend that's gone into kind of top gear here in fiscal '20 during the pandemic and with good housing macro numbers behind the kind of underpinning strength in the segment, that would be helpful.

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. So certainly, we carry backlog into Q4. And certainly, we will carry a backlog that's growing into Q1. We're adjusting production levels to increasing demand. But I mean I think we're also trying to do that in a smart way, particularly thinking about employee safety and what should be kind of a mid- to long-term appropriate capacity. In terms of what the top line dynamics is going to be, obviously, we went through a unique period. Certainly, we're not projecting we're going to be at 40% incoming order growth for a long period of time. But because of the immediate dynamics -- but we do feel like there's a pretty good backdrop. So coming into the year, I mean, we saw the housing market stronger. That has returned. While kind of the dynamics of being at home probably will recede and maybe there was some pent-up demand in what we've seen in the last few months, I do think there's elements in longer-term trends that are built in there as well that can really bode well for us throughout next year. And absent that, we've done a lot of work on that platform, right? I mean I mentioned it in the comments, but we have a lot of new exciting designs, a lot of new exciting products. I would say, beyond just even the product innovations, I mean, our sales team has done a great job. It's been an area that we've invested in for a number of years. Our service team has done a phenomenal job. And that also gives confidence to our channel partners. And I think those things that we've been working hard on for a long time also kind of bolster the numbers. And we did feel good about pre-COVID that we were going to have kind of a sustainable longer run as we were going to gain market share and maybe expand the market a little bit over the next few years. So I would say, again, I think 40% is not going to last forever. But I mean I think we do think about double-digit growth for period for that market. And look, we're also investing in sales tools and processes as well. I mean I think as everybody knows, we've been opening up showrooms even during COVID. We've opened up Southern California. And we are investing in our Dallas showroom as well, which is really a combined showroom for both Commercial Foodservice as well as Residential. And I think that's going to be exciting for us as well.

Bryan E. Mittelman -- Chief Financial Officer

I'd add to that. I agree with everything Tim said. The other thing is we were set up going into COVID, as you said, with new products. And like the Brava acquisition, it really shows off this technology. And as these folks and their homes are looking for kitchens, outdoor kitchens, new products, the innovations and the acquisitions that we've done just attract that buyer that's looking for connectivity, light wave cooking, new technology. And it sets us apart. And then I just need to emphasize Tim's point about backing up and creating confidence in the channel with aftersales service and support and then durability of design, the leadership and the people at Viking and AGA. And all the Residential brands have done an excellent job on product design and then supporting it after the sale. It really does create confidence.

Todd Morrison Brooks -- CL King & Associates -- Analyst

Great. Thank you.

Operator

Our next question will come from the line of John Joyner from BMO. The line is now open.

John Phillip Joyner -- BMO Capital Markets -- Analyst

So first, I know that you put more emphasis internally on managing working capital and your free cash flow has been quite impressive so far this year, particularly the inventory reductions in the face of sharp volume declines. But -- so looking ahead, are there other opportunities to release cash kind of tied up in working capital? And are you comfortable with inventory levels in each of your segments?

Bryan E. Mittelman -- Chief Financial Officer

Yes. So there is certainly more work to be done in inventory. I'd say, taking the second part of your question, I don't know that there's much actions to be taken to free up other areas in terms of AR and AP, right? Our DSO and [AT] are in good shape. And I don't think it's on our near-term priority list to look at monetizing that and such. So on inventory, it does vary by segment. Obviously, we're seeing a lot of tremendous successes in residential right now. So our inventory levels there are certainly at the low end of where we'd like. Given current demand levels, that isn't likely to go up too much in the short term. Food Processing has kind of been stable through all of this. There, we see ebbs and flows as orders come in and some of them are long delivery time, long projects. So then that leaves us with Commercial, where there still is opportunity. Now we are proud of what we've done in the short term, given the volume challenges. But I certainly think there's additional opportunities at a modest pace.

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. Let me add to that. I would take it just one step further. I think what Bryan is talking about and the opportunities that exist both in Commercial and Residential and Food Processing. I think I would strategically define it as excellence in leadership. Bryan, because he understands the business, sets some very aggressive goals that are achievable five, six months ago for the operations and supply chain and purchasing people around the world at Middleby. And then that team, and I'm proud to say, every Saturday, Sunday and Monday, we talk to 150, 200 people across all the divisions. And we've restructured in a very short period of time and taking advantage of inventory levels through supply chain and purchasing and operations. You can hear in Bryan's voice, he's holding me accountable to achieving more. But I couldn't be more proud, because I know there's a lot of the team members on this call, the team, the engineers and the operational leaders and the purchasing people and the achievements we've done to not only lower cost, but to lower inventory in an aggressive way. And we'regoing to continue to work on it.

David Brewer -- The Middleby Corp.

I'd just add one other thing. I mean we have not talked about business disruption because of the supply chain. I mean the team has done a phenomenal job really not only going after cost and the inventory reduction, but really sustaining operations. It's been obviously critically important to make sure that we can deliver for our customers and kind of given the global major -- nature of our operation and supply chain, that's been pretty impressive and that's really been a daily, if not hourly, focus that, that team has had around the world to ensure that our operations are up at all times.

Bryan E. Mittelman -- Chief Financial Officer

Yes, that's a great point, Tim. Especially from a customer's perspective, a lot of our competitors are doing rolling shutdowns, and we didn't do that. And we maintained supply to our customers, thanks to this team of leaders, holding workplace safety as the one priority. Second to that, we said never, never ever failed a customer and we have yet to fail a customer. We never shut down our operations due to lack of supply. And so the team has done a great job. And that's made a difference. That's showing up in a small way into some of the numbers that you're seeing now recently in sales and going forward because of that reliability and durability of our corporation. Thanks to these guys. So it's a great point, Tim.

John Phillip Joyner -- BMO Capital Markets -- Analyst

Okay. Excellent. And maybe if I could squeeze one more in. Just with regard to COVID-related products, you mentioned Bluezone. But it seems as though that you've been able to quickly launch new solutions targeted at COVID. And I realize that Biden will be getting rid of COVID sometime soon. But nonetheless, are there any products whether QualServs or Bravas or others, where demand has actually been stronger than you anticipated internally.

Timothy J. FitzGerald -- Chief Executive Officer And Director

So as you mentioned, I mean, I think we're keenly interested in how we can help our restaurant customers, right? So I mean, I think we, as a team, have thought about all the different things that could help them. I mean you just mentioned QualServ, which is really plexiglass shields, sanitation or hand dispensers, hand washing stations, etc., we were actually producing and distributing hand sanitizer in and of itself and cleaning supplies. So we've done a whole lot, but we've also focused on kind of higher technology products. Brava came out with a UV oven that we were working to help sanitize even KN95 masks. But certainly, Bluezone is the one that we're very excited about, because we really do think that indoor dining room safety is going to be critically important as we go through the next year here. And so I would say we're at the early stage. I mean certainly, some of these things came online. I'm not going to tell you it's a meaningful part of our revenue. We just want to do our part. I think in the case of Bluezone, it could be a meaningful part of the revenue as we go forward. So I think that's one of the things that we think could be one of those kind of game-changing technologies, and we're pretty excited about that. But I would say early stages on most all of this.

Bryan E. Mittelman -- Chief Financial Officer

Yes. Tim, I think it shows the agility of our company. I think Korey and his team had hand sanitizers produced within 30 days, three or four months ago. Najib and his team internationally did hand sinks first in Europe, then in Australia, then we brought it into the U.S. through QualServ. And inside 30 days, we had a product that was usable to those teams. Thanks to those teams. And Bluezone is a big winner in my personal mind. It's a proven technology. It's been around for over 10 years. It's tried and true. It's installed in every U.S. aircraft carrier. We've been using it in our residential, so we -- appliances, refrigeration for a long time, years and years and years. It's achieved the U.S. Army Achievement Award. It's in steel case furniture, and we're installing it in The Culinary Institute of America. All their campuses are going to have a Bluezone installed. It's a proven technology reapplied to foodservice. And it's an amazing technology, and it's differentiated. And then you bolt that on to our ability to connect with the customer and support it after the sale through our organization, through our channel partners. It's an amazing technology.

John Phillip Joyner -- BMO Capital Markets -- Analyst

Okay, thanks and thank you again. Appreciate the time

Bryan E. Mittelman -- Chief Financial Officer

Thanks, John.

Operator

Our next question will come from the line of Saree Boroditsky from Jefferies. The line is now open.

Saree Emily Boroditsky -- Jefferies LLC -- Analyst

Congratulations on the quarter. So you cited volatile orders, but a solid backdrop, I think, in food processing. Could you just provide some more color on what you're seeing on order basis, including the mix of protein versus bakery? And what's the backlog up year-over-year there?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. I noted the backlog is down nominally at this point versus where we started the year. Started the year strong, it came down through the middle part of the year as we had -- as there's some fulfillment, and as I said, cancellations have been limited, but it's rebounded nicely and the funnel is feeling good. Certainly, protein is seeing areas of disruption as well as demand drivers behind it. And that's also become a little bit larger part of our business. In the past, I've kind of said it was 1/3 bakery, 2/3 protein. That's probably getting more to 30-70 at this point or a little bit above that. But again, it will -- given the size of orders, though, you can certainly see those numbers jump around. But again, it's feeling a little bit heavier than 2/3 protein currently.

Saree Emily Boroditsky -- Jefferies LLC -- Analyst

Great. And then you obviously have more flexibility, I think, with your leverage on with the conversion. Could you just talk about what you're seeing in the M&A pipeline. Are you seeing more opportunities, given the stress that some of the niche players might be under in commercial foodservice?

Timothy J. FitzGerald -- Chief Executive Officer And Director

So we always have a robust pipeline. Things obviously hibernated a little bit as we kind of went through the Q2 period. But since the financing, we started to be active in that area as well. I would say most of the things that we're focused on really are not because of financial distress. I mean certainly, there may be some things out there. Really a lot of what we are spending time on is really -- is driving areas that we think are critical technology initiatives. So -- but I could tell you, I mean, certainly, we're kind of back to similar activities that we had pre-COVID in terms of our business development.

Saree Emily Boroditsky -- Jefferies LLC -- Analyst

Great. Thanks for taking my questions.

Timothy J. FitzGerald -- Chief Executive Officer And Director

Okay, thanks Saree.

Operator

[Operator Instructions] Our next question will come from the line of Jeff Hammond from KeyBanc. The line is now open.

Jeffrey David Hammond -- KeyBanc Capital Markets -- Analyst

I think Mig and I want to recount on your orders. They were surprisingly good.

Timothy J. FitzGerald -- Chief Executive Officer And Director

No, we -- I'm standing behind it. We counted every one of them.

Jeffrey David Hammond -- KeyBanc Capital Markets -- Analyst

Just on commercial food, and I don't want to focus too much on October, but just in general, if you look over the past couple of months on these rollouts you're getting, is this more stuff that was delayed because of COVID and then is now coming back? Or are we starting to see actual -- some of these winners in the marketplace kind of go and try to plan for new builds and take share from maybe some of the other customers that are struggling a little bit more?

Timothy J. FitzGerald -- Chief Executive Officer And Director

So I would say the things that came in kind of in that September, October period were preexisting COVID, right? So again, customers have confidence as they're moving forward. And in some cases, those programs do allow them to take advantage of, frankly, the current market conditions and where they intersect with where consumers are spending the dollar now. So it's really what we're seeing now is new activities that have been post-COVID as they're kind of rethinking their operations. So there's kind of a new pipeline building, which we'll see how that evolves when we move into next year.

Jeffrey David Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just on Res Kitchen, do you kind of get your production levels up -- and I know you're treading carefully there. Like do we see a period into the first half where we get revenue growth into the 20s as we kind of catch up some of this backlog? Or just how do you see kind of the catch-up playing out here?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. I mean, clearly, we're going to be bringing in a pretty large backlog into the year. I mean what we don't know is how order trends are going to evolve even as we exit this year. And don't forget, half of our business is in the U.K. as well, and they're seeing some of the implications of COVID as well, which can affect operations as well. So a lot of the -- what we're doing is kind of thinking about how we set the right cadence for our operations, which we'll do that balancing with orders balancing with safety. And so look, I mean, can we see a 20% top line growth? Yes, it's absolutely possible, given where orders may be going into the beginning of the year. But I don't think that's what we're projecting. And world's highly uncertain right now, and Q1 is still a bit off.

Jeffrey David Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And just final one on interest expense. So if we look at this quarter, I guess, whether we back out the convert impact to kind of get to your true run rate? And is that kind of a fair run rate to think about going forward? I mean you'll report something higher, but back out, what's going to be a higher convert impact?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes, right. I mean -- so I would take out the almost $2 million. There will be a slight uptick. So Q2 was challenged by a few factors, right? You got that noncash in there and then also some of our rates and such kind of reset midway through the quarter with the amendment. So it probably tends a little bit above the result of just pulling out that noncash number for the next two to three quarters, given how the rate grid is set for what I'd call the elevated covenant period takes us through the first half of next year. So again, we'll be, yes, a little bit lower. But still the full quarter wasn't entirely kind of reflective of the current capital structure.

Jeffrey David Hammond -- KeyBanc Capital Markets -- Analyst

Okay, perfect. Thanks.

Operator

Our next question will come from the line of Larry De Maria from William Blair. The line is now open.

Lawrence Tighe De Maria -- William Blair & Company -- Analyst

I want to stay in this minus $2 million October order print. Obviously, it seems pretty good, considering where the industry is and what other companies are seeing. But correct me if I'm wrong. It obviously includes the rollouts. But have we always included rollouts? Because my understanding that usually they're a little bit less than firm and they're pushed out. So I guess the question is, have we always included them? And are we -- would this imply that we're potentially pulling some orders that would be in subsequent quarters forward? And then finally, what would the orders be if we did exclude the rollouts?

Timothy J. FitzGerald -- Chief Executive Officer And Director

Okay. So we're not going to kind of start bifurcating orders that we were probably weren't reporting up until this period. But I would say so these -- when we're talking about rollout and these orders, we have a PO, right? So it's not, hey, we're estimating there's going to be an order coming in the second quarter. So we have a PO and then we have a production schedule. Timing of those shipments are going to be in the first half of next year, so maybe some in Q1, some in Q2. So I mean, I think that's kind of where sometimes it's difficult to read into the order rate. Now so we would not have been down minus Q2 if you back out some of the orders. Now look, I think still the backdrop is we're seeing the service business increase. Pizza was doing well. General market improves. So I mean I think we feel good generally about the trends. But certainly, the rollouts added to that and -- has -- the timing of those, why Bryan is kind of saying, hey, don't expect that all to show up in Q4, because it won't. And also, I mean, again, We probably -- we wouldn't tell you that we would expect November and December to be at the same level of incoming October rates. So -- but when you string together a whole bunch of quarters, you look at the backdrop of customers, you think about the segments that are on, you think about the technologies that we have that apply to current market conditions, that's why I feel good about where we are positioned going into next year and really just long term for Middleby. We think we're hitting the right things in terms of investments and focusing our organization.

Lawrence Tighe De Maria -- William Blair & Company -- Analyst

Okay. So you have a PO next year. I guess, specifically, would they -- in the prior months, order prints that you've published, would those kind of rollouts be in those? Or is that new month? They would...

Bryan E. Mittelman -- Chief Financial Officer

Yes, I mean, we've been consistent in our processes and practices for reporting to you, right? And again, when we get a PO for a customer here, then this is an order, this is -- I've talked about things before, I'll call it about how the funnel is looking or preselling activity. So by the time it becomes an order, I mean, this is something that we've been talking about and working for months or maybe many months. And so we feel good that this is firm. We live in a world of all kinds of risks, but we believe the risk of it going away is certainly low. And we're excited that it really shows adoption of our technologies. It shows these customer segments that maybe haven't been spending quite yet. They're deciding to spend, adopting our technology. I mean we are really happy with what our performance was, especially in North America in Q3, right, which was certainly better than what we said the overall rate was, right? And October did start well for us as we deliver on some of it. So the good thing is this has a tail to it, right, but we view it with very excitedly for all those reasons.

Lawrence Tighe De Maria -- William Blair & Company -- Analyst

Okay. And then as it relates to cost cutting, I know obviously, you had some temporary furloughs, which helped before, and I think you're doing some more permanent cost cuts. Can you just give us a general sense of maybe the absolute EBITDA run rate savings into next year from the permanent actions you've taken this year on the cost cutting front?

Bryan E. Mittelman -- Chief Financial Officer

Yes. I mean -- so I did quote or say we took $7 million of restructuring and it drives $20 million of benefit. And so I was kind of waiting for the question, is that on top of or in the numbers we have. And that's really -- mostly those savings are in the numbers we have, because a lot of the areas where we took actions were on people that have already been furloughed, right, and so weren't contributing very much to our expense number. So I think it really ties into what I was saying about margins overall. It's hard to be absolute with it, because some of it is in COGS, it is more of a variable nature. So I think we've come close to setting kind of the EBITDA floor. Now remind you that we -- Q4 does have some risk of going down a little bit as we bring in further costs. But I think as you think about your models, kind of SG&A is at the floor. Certainly, our travel and our trade shows and costs like that are at low levels now, right. So that would be some of the factors why SG&A goes up a little bit. And on things that are more COGS or are variable driven, things should actually be improving from a leverage of volume perspective.

Lawrence Tighe De Maria -- William Blair & Company -- Analyst

Okay. Thank you very much.

Operator

Our last question from today will come from the line of Walter Liptak from Seaport. The line is now open.

Walter Scott Liptak -- Seaport Global Securities -- Analyst

I want to ask, I guess, in relation to the October orders. The trend of ghost kitchens seems like it's got some investment money behind it now. So it's really kind of an emerging category. Are ghost kitchens starting to place orders? Are you getting full kitchens or partly kitchens? How should we think about that?

Timothy J. FitzGerald -- Chief Executive Officer And Director

So there's a lot of emerging trends. So I would say not only ghost kitchens, and you can think of various models that are out there. Certainly, yes, some dollars are out there. We're engaged with several dozen kind of new industry players. Some of them are moving forward on initiatives. Others are still planning. I would say, it's very early. We've gotten some business, there's no doubt. And there's some dozens of customer opportunities that we've worked on. It's not meaningful to our overall revenues today, but it is an area that we think we are going to see new business models. So ghost kitchens are in there. And we think the solutions that -- again, that we have, right, because they're going to be thinking about footprint. In ventless, they're going to be thinking about throughput in automation and whether that's mechanical or whether it's capturing data out of Open Kitchen-type IoT platform. They're going to be thinking about how do they engage with the customer different. So delivery systems, etc. So we think we're really well positioned as a lot of these new models come on. We do think that it's not going to be a large part of our overall business, but it will -- next year, but it will impact potentially growth rates. So I mean I think that's something that we're actively engaged with, and it's also hard to see what the trajectory is. Because anytime that you got business start-ups, they're putting together business plans, proving out models, and they're doing that during a period of COVID. But certainly, there are new business models emerging. We're engaged and think we'll do pretty well as they come about.

David Brewer -- The Middleby Corp.

Yes. I would say that it is pretty insignificant, as -- I agree with everything Tim said. I think it is a chance to show up our technology, and got ventless and connectivity and Open Kitchen. And I clearly -- just from a -- while it's insignificant from a competitive perspective, which, I think, three of us are very much. The competitors are talking about how many units they've installed in ghost kitchens or dark kitchens. And I think we're tracking at about 4:1 versus them, so -- in total kitchens. So -- but it's still teeny tiny. It is strategically important over the next couple of years. I do believe in the concept of ghost kitchens and dark kitchens for the restaurant operator.

Walter Scott Liptak -- Seaport Global Securities -- Analyst

Okay. Great. And then, Bryan, one for you. I think in the -- in your comments about Residential, you talked about the fourth quarter margin and the outlook being down a little bit. And I wonder if you could just talk about that? Is it the mix or inefficiencies? Why would the margin be going -- the expansion a little bit lower?

Bryan E. Mittelman -- Chief Financial Officer

Yes. So it's -- it really is a little bit of somewhat of mix and knowing what products are coming through. And some of it is not as much inefficiency from a production standpoint, but costs, people being brought back on and increasing some spending levels right now. So we do have the opportunity here as volumes could offset that, and hopefully, maybe I'll be called too conservative in a couple of months from it, right? But I kind of know a little bit -- I know where we're bringing back costs. And that's more a little bit definitive as opposed to how volumes and revenue levels may come together. So again, it's a little bit about the costs coming in and somewhat about mix. But again, I view it as a little bit more as a potential hiccup or bump. And I'm not talking about dramatic decreases here. But again, look at technology, look at trends, look at overall market, us looking at mix and how we work with our customers in evaluating pricing for next year. I'm not trying to at all take us off of the track of long-term margin improvement that we're driving on. And unfortunately, what's getting a little bit hidden in these current markets -- in the past, we talked a lot about our margin improvement opportunities and some of the relatively recently acquired businesses. And we do have some businesses, as kind of Mig was digging at earlier, that are performing better than others. And there's plenty of our businesses making those day-to-day operational improvements that keep us on the track to continue to expand upon what we're very proud of as being the industry-leading margins. And then everything from that follows in terms of cash flows and being able to continue to fund investments while we're doing all this. So that's my thoughts on kind of the near term and the medium term on margins.

Timothy J. FitzGerald -- Chief Executive Officer And Director

Yes. And just maybe to kind of highlight a few things in -- to those comments, I mean -- and Bryan mentioned in his commentary, we continued even through this period with investing in technology initiatives that we had. He highlighted $5 million in the third quarter. We really did not take that down, because we really think that's important to where we need to be next year, where we need to be in the next three years. So things like controls. Obviously, we talked a lot about IoT, automation. Those are things that are critical for us. And so we're pretty committed to making those investments to the extent that they slowed at all. I mean, those are the types of things that are coming back on as well as areas around marketing -- sales and marketing initiatives. I mean I mentioned the showrooms. I mean we continue to open up the showrooms that may have pushed up a little bit in the second quarter, but those are things that we think are really important to engage with our customers. I mean as we move to higher technology products and things that really have an ROI to them, it's really important to engage with them different, and that requires some investment in how we're approaching the market and really engaging with end users in those sales.

Operator

That is all of the questions we had in the queue. I'd like to turn the call back over to management for any closing remarks.

Timothy J. FitzGerald -- Chief Executive Officer And Director

No, I'd just like to thank everybody for joining us on today's call. And we look forward to speaking with everybody next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

Timothy J. FitzGerald -- Chief Executive Officer And Director

Bryan E. Mittelman -- Chief Financial Officer

David Brewer -- The Middleby Corp.

Mircea Dobre -- Robert W. Baird -- Analyst

Todd Morrison Brooks -- CL King & Associates -- Analyst

John Phillip Joyner -- BMO Capital Markets -- Analyst

Saree Emily Boroditsky -- Jefferies LLC -- Analyst

Jeffrey David Hammond -- KeyBanc Capital Markets -- Analyst

Lawrence Tighe De Maria -- William Blair & Company -- Analyst

Walter Scott Liptak -- Seaport Global Securities -- Analyst

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