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.
Thank you for joining us today on our third quarter conference call. As Steve said, there are slides to accompany our call. They can be found on our investor page at middleby.com. 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 up to the many challenges resulting from the crisis while adapting our business as we position for long-term success. 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-thru, 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-s tores, 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 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 on our system. This installed base continues to grow as Open Kitchen is the preferred solution, given its broad capabilities to support not only all the 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 and 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. 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're excited to introduce this unique and patented technology, which has been proven with existing applications in the military, hospitals, and industrial Foodservice operations. Moving out to 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 are also realizing the momentum from recently debuted products across our entire portfolio Brava, our newest brand 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 U.S.A. launch of Mercury and Elise 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 Maurer, 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, all in a 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.
Thanks, Tim. While not seeking to turn our call into a political commentary, I'm having a bit of fun, I did want to ensure everyone that our financials are reflective of 100% of our divisions having reported in their 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 non-operating 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 our premium appliances and outdoor cooking platform. This led to gross margins of over 36% and adjusted EBITDA of over 20%. Additionally, if we exclude non-core 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 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 non-cash 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 non-cash 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. Our total leverage ratio is now just below 3.2x while our covenant limit is set at 5.5 x. 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 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 was 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'll 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. 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 mi drive from our house, I wasn't going to let that get in the way of satisfying my takeout cravings this past weekend.
A quick shout-out to Lula Café, which is a truly exceptional and must-visit, as well as Robert's Pizza & Dough Company, who has a few Marsal ovens cooking their amazing pies. Once home with all my great food, I put it in my beloved Brava into service for some reheating. You may ask, who's my favorite pizzaiolo? Is it my wife with what she masterfully creates and then cooks in her Lynx Napoli oven? Is it the crew at Robert's? Hmm. Driven ever so slightly by my dining contributions, for Commercial Foodservice, we continued to see improvements throughout the quarter. Orders were down 31% in August, then down 18% in September, and October was down only 2%. 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. It would not be appropriate to expect the September and October order data points to be reflective of a 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 2021 than we have 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 in consumer demand, we do expect growth to persist into 2021. 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. 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. The Q4 project mix may contribute to lower sequential margins. We are seeing continued disruption in our customers' businesses and some difficulties being encountered with installations, especially outside of the U.S. While the delays are 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. 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 and volatility in the current environment present some risk for Q4. Nonetheless, we are confident in our medium and long-term positioning. In Q3, we continued to ensure employee safety, maintained 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 2021. With that, Stephen, please open the call to questions.
Thank you. For those who would like to ask a question, please press star then the number one on your telephone keypad. Again, please press star then the number one on your telephone keypad. To withdraw your question, please press the pound key. Our first question will come from the line of Mig Dobre from Baird. The line is now open.
Thank you, and good morning, everyone.
Hey, Mig. Good morning.
I am looking at this October order number in your slides. Frankly, my head is spinning a bit. 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. To be down 2% in October, I guess I'm looking for a little more color here. 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. Arguably speaking, the areas that have been really impacted by the pandemic, that was about 20% of your business. Institutional QSR p izza, really kind of accounted for the rest.
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? 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? Thank you.
Okay. There's a lot to unpack there. I'll give some color. Certainly, we're not tracking necessarily order rates by those segments. I'll first start off by saying that just general business conditions are improving. Certainly, there's restaurants that are shutting down because of restrictions and the seasonal impact. I think by and large, we're bullish on things are improving. The Foodservice dollar spent outside the home is increasing, and 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, 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 two-week period.
Hence, that's why we expect some of that to be in next year, and we see that at some of the fast casual chains. We see that at some of our convenience store customers as well. 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. I'd say the one other element that you'd see probably a little bit in that October number is 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. That kind of bodes well. Also, as restaurants are back operating, hence they need to service their equipment.
I see. 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. Can you maybe be more specific as to where you are outright seeing growth? Do you have a sense that there's 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 consumer wallet share. Are you getting the sense that there's enough momentum that's built up with these customers that can potentially sustain into 2021?
Hey, Mig, I'm not sure I fully understood it. Maybe I'll take another shot.
Right.
So first of all, October—
Let me rephrase this.
Yeah. Go ahead.
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 offset some of that erosion that you have in customers that are still struggling. So I guess, I'm wondering—
Yeah.
—if you can tell us who's up year-over-year at this point?
Okay, yeah.
And what you might have into 2021?
We're seeing, with us, and again, there's some rollouts in the October number. 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. As we've seen improvement in September and October, the segments that are above, right, because your point is, hey, if you're 1%, something's probably positive there.
Some of the program activities of C-stores, with the emerging chains and pizza are doing well, meaning they're in the black, right? 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 not with respect to being in the classroom are down, but improving. I think that would be kind of the way I would bucket there. I'll kind of go back to service again, which service also is kind of back to last year level. Again, it's very volatile. It's very uncertain. We hate to talk about monthly orders.
I think, again, where we wanted to get was, "Hey, 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 while we'll have uncertainty in the near term, the confidence that we have in the business that with the recovery and the long term and how we're positioned. 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 get some rollouts there. Just on the visibility next year, also, I think that 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 that are out there by Technomic and others, is that the restaurants will still be down, or Foodservice largely will be down 5%-10% next year relative to 2019. 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? That is where there may be some accelerated spending opportunities that we could see coming into next year.
That's great color. That's what I was looking for. Thank you. 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. I'm looking to clarify that comment. Is that comment pertaining to the third quarter of 2021 or the full year? Thank you.
Yeah, no, it would be for the full year. Right?
Got it.
We'll see how the ebbs and flows go a little bit as the business recovers, right? There's going to be a variety of things driving our margin performance for next year, right? Costs we've cut, what we lead 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? There's a whole variety of things that are poised to be positives. I guess, time will tell a little bit. We all feel comfortable that, well, it's dangerous maybe to say that completely, that Q2 was the low point. As we get through Q3, 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.
Okay. Thanks for the color and good luck.
Yep, thanks Mig.
Thanks Mig.
Our next question will come from the line of Todd Brooks from C.L. King. The line is now open.
Hey, good morning, everyone. Thanks for the questions and great job on the quarter.
Yeah.
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?
Yeah. 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 hits the right inflection point, and then because of industry factors and various other things. With that, we're seeing the restaurants realize this can have meaningful impact on their business. I mentioned the numbers. 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. I think we see growing interest, as it's got a kind of proven ROI right now. That ROI is going up for all 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. 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? Now we want to really go after employee and customer safety as well. All these things are meaningful, both from a cost and a competitive dynamic. We feel pretty good about where we're at. I'll ask Dave to maybe add some further color here as well.
Yeah, Todd, that's a good question around Open Kitchen. Strategically, Open Kitchen, from our perspective, I see it going through center. What I mean by going through center is, we were presenting this, we presented it internationally a year and a half ago. We're now getting calls. The customers are calling us. Especially in the Commercial Food business, customers are very leery of unproven technology. Now that we're in over 6,000+ locations, it has a proven ROI. 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. 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.
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. 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 and the one level above restaurant management, they're very comfortable with data management and making operational changes based upon data. 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. I'm very proud of it. The team that's running it is 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.
That's great, Dave. Thanks. Just a second question. 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 2021? Just in general, what you see as the setup as far as the duration of this nesting trend that's gone into kind of top gear here in fiscal 2020 during the pandemic and with good housing macro numbers behind kind of underpinning strength in the segment, that would be helpful. Thanks.
Yeah. Certainly, did carry a 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 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're going 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. We do feel like there's a pretty good backdrop set up coming into the year. We saw the housing market stronger, t hat has returned.
While 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. Absent that, we've done a lot of work on that platform, right? 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, 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. That also gives confidence to our channel partners. I think those things that we've been working hard on for a long time also kind of bolster the numbers. 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. I would say, again, I think 40% is not going to last forever. I think we do think about double-digit growth for a period for that market. Look, we're also investing in sales tools and processes as well. 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.
Okay.
I'd add to that.
Thanks.
I agree with everything Tim said. The other thing is we were set up going into COVID, as you said, with new products. Like the Brava acquisition, it really shows off this technology. As these folks in 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. Then I just need to emphasize Tim's point about backing up and creating confidence in the channel with after-sale 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.
Great. Thank you.
Our next question will come from the line of John Joyner from BMO. The line is now open.
Bonjour. Well done.
Bonjour.
Bonjour.
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. 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?
Yep. 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 our aging are in good shape, and I don't think it's on our near-term priority list to look at monetizing that and such. On inventory, it does vary by segment. Obviously, we're seeing a lot of tremendous successes in Residential right now. 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 project. That leaves us with Commercial, where there still is opportunity. We are proud of what we've done in the short term, given the volume challenges. I certainly think there's additional opportunities at a modest pace.
Yeah, let me add to that. I would take it just one step farther. 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, set 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. Then that team, and I'm proud to say every Saturday, Sunday, and Monday, we talk to 150, 200 people across all the divisions. We've restructured in a very short period of time and taken 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.
I couldn't be more proud because I know there's a lot of the team members on this call, of 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. We're going to continue to work on it.
I'd just add one other thing. We have not talked about business disruption because of supply chain. The team has done a phenomenal job, really not only of 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 nature of our operation and supply chain, that's been pretty impressive. That's really been a daily, if not hourly, focus that team has had around the world to ensure that our operations are up at all times.
Yeah, 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. We maintained supply to our customers, thanks to this team of leaders, holding workplace safety as the number one priority. Second to that, we said never ever fail the customer. We have yet to fail the customer. We never shut down our operations due to lack of supply. 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. It's a great point, Tim.
Okay. Excellent. Thank you for the color. Maybe if I can squeeze one more in.
Sure.
Just regard to COVID-related products, you mentioned Bluezone. 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 QualServ or Brava or others, where demand has actually been stronger than you anticipated internally?
As you mentioned, I think we're keenly interested in how we can help our restaurant customers, right? I think we as a team have thought about all the different things that could help them. You just mentioned QualServ, which is really plexiglass shields, sanitation, hand dispensers, hand washing stations, et cetera. We were actually producing and distributing hand sanitizer in and of itself and cleaning supplies. 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 N95 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. I would say we're at the early stage.
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. 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. I would say early stages on most all this.
Yeah, 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 them to the U.S. through QualServ. Inside 30 days, we had a product that was usable to those teams, thanks to those teams. 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 Medal. It's in Steelcase 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. It's an amazing technology, and it's differentiated, and then you bolt that onto our ability to connect with the customer and support it after the sale through our organization and through our channel partners. It's an amazing technology.
Okay. Excellent. Thank you again. Appreciate the time.
Thanks, John.
Our next question will come from the line of Saree Boroditsky from Jefferies. The line is now open.
Good morning. Congratulations on the quarter.
Thanks, Saree.
You cited volatile orders, but Hello?
Yep. Go ahead.
You're on.
Okay, sorry. 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?
Yeah. 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 sort of some fulfillment and, I said the 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. 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. Given the size of orders, though, you can certainly see those numbers jump around. Again, it's feeling a little bit heavier than 2/3 proteins currently.
Great. You obviously have more flexibility, I think, with your leverage on the converts. Can 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?
We always have a robust pipeline. Things obviously hibernated a little bit as we kind of went through the Q2 period. 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. Certainly, there may be some things out there. Really a lot of what we are spending time on is driving areas that we think are critical technology initiatives. I could tell you, certainly, we're kind of back to similar activities that we had pre-COVID in terms of our business development.
Great. Thanks for taking my questions.
Great. Thanks, Saree.
Again, for those who'd like to ask a question, please press star then the number one on your telephone keypad. Again, that's star then the number one on your telephone keypad. Our next question will come from the line of Jeff Hammond from KeyBanc. The line is now open.
Hey, good morning, guys.
Good morning, Jeff.
Good morning.
I think Mig and I want a recount on your orders. They were surprisingly good.
Nope. No, I'm standing behind it.
Okay.
We counted every one of them.
Hey, just on Commercial Food, 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 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?
I would say the things that came in kind of in that September-October period were preexisting COVID, right? Again, customers have confidence as they're moving forward. 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. Really what we're seeing now is new activities that have been post-COVID as they're kind of rethinking their operations. There's kind of a new pipeline building, which we'll see how that evolves as we move into next year.
Okay, just on Res Kitchen, as you kind of get your production levels up, and I know you're treading carefully there, 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? Just how do you see kind of the catch-up playing out here?
Yeah. Clearly, we're going to be bringing in a pretty large backlog into the year. What we don't know is how order trends are going to evolve, even as we exit this year. Don't forget, half of our business is in the U.K. as well. They're seeing some of the implications of COVID as well, which can affect operations as well. A lot of what we're doing is kind of thinking about how we set the right cadence for our operations, which will do that balancing with orders, balancing with safety. Look, can we see a 20% top-line growth? Yeah. It's absolutely possible given where orders may be going into the beginning of the year, I don't think that's what we're projecting, the world's highly uncertain right now on Q1's still a bit off.
Okay. Just final one on interest expense. If we look at this quarter, I guess, what, do we back out the convert impact to kind of get to your true run rate?
Yep.
Is that kind of a fair run rate to think about going forward? You'll report something higher, but back out what's going to be a higher convert impact.
Yeah, right. I would take out the almost $2 million. There will be a slight uptick. Q2 was challenged by a few factors, right? You got that non-cash in there, and then also some of our rates and such kind of reset midway through the quarter with the amendment. It probably tends a little bit above the result of just pulling out that non-cash 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. Again, we'll be a little bit lower, but still the full quarter wasn't entirely reflective of the current capital structure.
Okay, perfect. Thanks.
Our next question will come from the line of Larry De Maria from William Blair. The line is now open.
Thanks. Good morning, everybody.
Good morning.
Hey, guys. I wanted to stay in this [2%] October order print. Seems pretty good considering where the industry is and what other companies are seeing. Correct me if I'm wrong, it obviously includes the rollouts, but have we always included rollouts? It's my understanding that usually they're a little bit less than firm and they're pushed out. I guess the question is, have we always included them? Would this imply that we're potentially pulling some orders that would be in subsequent quarters forward? Finally, what would the orders be if we did exclude the rollouts?
Okay. We're not going to kind of start bifurcating orders that we probably weren't reporting up until this period. I would say, when we're talking about a rollout, and these orders, we have a PO, right? It's not, hey, we're estimating there's going to be an order coming in the second quarter. We have a PO and we have a production schedule. Timing of those shipments are going to be in the first half of next year. Maybe some in Q1, some in Q2. I think that's kind of where sometimes it's difficult to read into the order rate. Now, 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 Service business increase. Pizza was doing well. General market improves.
I think we feel good generally about the trends, but certainly the rollouts added to that and hence, 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. Also, again, we wouldn't tell you that we would expect November and December to be at the same level of incoming October rates. 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.
Okay. Thanks, Tim. They have a PO, so they'll hit 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?
Yeah.
Or for this month? They would. Okay.
No, we've been consistent in our processes and practices for reporting to you, right? Again, when we get a PO for a customer here, and this is an order. I've talked about things before, I'll call it about how the funnel's looking or pre-selling activity. By the time it becomes an order, this is something that we've been talking about and working for months or maybe many months. 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. We're excited that it really shows adoption of our technologies. It shows these customer segments that maybe haven't been spending quite yet, deciding to spend, adopting our technology. 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? October did start well for us as we deliver on some of it. The good thing is, this has a tail to it, right? We view it very excitedly for all those reasons.
Okay, thanks. 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?
Yeah. I did quote or say we took $7 million of restructuring and it drives $20 million of benefit. I was kind of waiting for the question, is that on top of or in the numbers we have. 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? Weren't contributing very much to our expense number. 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 that is more of a variable nature. I think we've come close to setting kind of the EBITDA floor.
Now remind you that Q4 does have some risk of going down a little bit as we bring in further costs. 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. That would be some of the factors why SG&A goes up a little bit. On things that are more COGS or variable driven, things should actually be improving from a leverage of volume perspective.
Okay. Thank you very much.
Our last question from today will come from the line of Walter Liptak from Seaport. The line is now open.
Hey, thanks. Good morning, guys.
Hi, Walt.
Good morning.
I wanted 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 whole kitchens or parts of kitchens? How should we think about that?
There's a lot of new emerging trends. 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. Ghost kitchens are in there. We think the solutions, again, that we have, because they're going to be thinking about footprint and ventless.
They're going to be thinking about throughput and automation, 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 a customer different. Delivery systems, et cetera. I think we're really well-positioned as a lot of these new models come out. We do think that it's not going to be a large part of our overall business next year, but it will impact potentially growth rates. I think that's something that we're actively engaged with. It's also hard to see what the trajectory is, because anytime that you got business startups, they're putting together business plans, proving out models. They're doing it during a period of COVID. Certainly, there are new business models emerging. We're engaged and think we'll do pretty well as they come about.
Okay. Great. Thanks.
Yeah, I would say that it is pretty insignificant. I agree with everything Tim said. I think it is a chance to show off our technology, ventless and connectivity and Open Kitchen. I clearly, while it's insignificant, from a competitive perspective, which I think the 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 a four to one versus them in total kitchens. They're 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.
Okay, great. Yeah, thanks for that. Bryan, one for you. I think in your comments about Residentially, you talked about the fourth quarter margin and the outlook being down a little bit. I wonder if you could just talk about that. Is it a mix or inefficiencies? The expectation be a little bit lower?
Yep. It really is a little bit of, well, somewhat of mix in knowing what products are coming through. Some of it is not as much inefficiency from a production standpoint, but costs of people being brought back on and increasing some spending levels. 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. I kind of know a little bit. I know where we're bringing back costs. That's more a little bit definitive as opposed to how volumes and revenue levels may come together. Again, it's a little bit about the cost coming in and somewhat about mix. Again, view it as a little bit more as a potential hiccup or bump. I'm not talking about dramatic decreases here.
Again, look at technology, look at trends, look at overall market. Us looking at mix and how we work with our customers and 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. Unfortunately, what's getting a little bit hidden in these current markets, in the past, we've talked a lot about our margin improvement opportunities at some of the relatively recently acquired businesses. We do have some businesses, as kind of Mig was digging at earlier, that are performing better than others. 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.
Everything from that follows in terms of cash flows and being able to continue to fund investments, while we're doing all this. That's my thoughts on kind of the near term and the medium term on margins.
Yeah. Just maybe to kind of highlight a few things embedded in this comment, Bryan mentioned it in his commentary, we continued even through this period with investing in the 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. Things like controls, obviously, we've 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. Those are the types of things that are coming back on. As well as areas around marketing, sales and marketing initiatives. Mentioned the showrooms. We continue to open up the showrooms.
That may have pushed off a little bit in the second quarter, but those are things that we think are really important to engage with our customers. 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.
Okay. Got it. Thank you.
Thank you. That is all of the question we had in the queue. I'd like to turn the call back over to management for any closing remarks.
No, I'd just like to thank everybody for joining us on today's call. We look forward to speaking with everybody next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.