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spk02: Thank you for joining us today for the Middleby Corporation first quarter 2022 conference call. With us today for management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Commercial Officer Steve Spittel, and Chief Technology and Operations Officer James Poole. We will begin the call with opening comments, then open the lines for questions. Introductions on how to get into the queue will be given at that time. Also, please be aware that a presentation to accompany the earnings announcement is available on the investor page of Middleby.com. Now I'd like to turn the call over to Tim Fitzgerald. Please go ahead, sir.
spk08: Great. Thank you, Andrea. And thank you, everybody, for joining us today on our first quarter earnings call. We started the year with momentum, building upon the progress we made in 2021 and continuing to execute upon our financial and strategic initiatives. Financially, we posted record sales and earnings for the first quarter, and we were able to largely maintain our profitability while facing unprecedented inflationary impacts. Supply chain disruption and the related cost impacts have become increasingly challenging as a result of the recent COVID shutdowns in China and the impact of warm Ukraine. Operationally, we remain focused on increasing our production to support our significant backlog, which again increased in the first quarter with incoming orders outpacing revenues. Our teams continue to execute in the face of daily challenges affecting parts availability, with concerted efforts to work with our strategic vendor partners to minimize disruption to operations. And we also continue to make investments in manufacturing equipment, facility expansions, and people, all in an effort to increase production capacity. While the additional recent disruptions to supply chain have placed further challenges on our operations, we increased shipments to a record level in Q1, and we are committed to continuing improvement as we progress through the year. As we continue to manage operating challenges and the related margin pressures, we are not losing sight of our long-term profitability goals set forth for each of our three business segments. We continue to invest in R&D and launch new product innovations with a focus on increasing profitability of our sales mix. While pricing actions already enacted early in the second quarter should offset the most recent wave of supply chain cost increases with a benefit realized in the second half of this year. While overall market conditions generally have become more uncertain over the past 90 days, we continue to see underlying trends and factors driving demand across all three of our business segments. At our commercial food service segment, the industry is still in long-term recovery. While traffic is moderated in the QSR and fast casual categories, We continue to see our customers invest in solutions to address pervasive challenges of labor, speed of service, energy, and food costs. Other segments such as casual dining, institutional, and travel and lodging are still in recovery with increasing investment activities. At our residential business, rising interest rates and inflationary pressures present a risk to what has been favorable market dynamics in the housing market. However, new home starts continue to be robust, and while existing home sales have softened in recent weeks, they continue to remain ahead of 2019 pre-COVID levels. The housing market at the higher price segment of the end continues to perform, and time spent at home also continues to drive new kitchens and remodels. In the food processing segment of our business, we see stable demand with the need for equipment to increase capacity, address labor challenges, and rising food costs. We're poised to capture new trends in faster growth categories and provide unique offerings with our full-line automated solutions. And we continue to see a strong pipeline of opportunities ahead. In summary, the start of 2022 has presented new and evolving challenges impacting supply chain, with additional inflationary impacts and greater uncertainty in certain markets. Despite these challenges, we are confident in our market positioning, continued strategic investments, and our ability to execute. The favorable factors driving demand for our equipment to address challenges facing our customers continues to grow, and we are best positioned to support their needs. Now I'll pass the call over to James to comment on some of our continued technology initiatives and spotlight another recent product innovation also highlighted in our investor slides.
spk00: Thanks, Tim. I'm happy to introduce Middleby OneTouch, Middleby's new control system that spans our brands, segments, and our customers. The OneTouch is a culmination of two years of effort to standardize Middleby's control platform. One of the many strengths of Middleby is our brand individuality. But when it comes to controls, the need for a singular middle B control system was ever so obvious, especially as we continue to acquire brands. To do this, we focused on several key areas of development. First, we wanted to provide a lightning fast and fluid control environment with seamless connectivity to our open kitchen IoT platform to satisfy our Gen Z to our Gen X customers. Expanding on connectivity, the Middleby OneTouch controllers are open kitchen ready. This allows our customer base the ability to purchase open kitchen connectivity at the point of equipment sale, thus providing our customers a straightforward, hassle-free way to connect and onboard their equipment, while also providing them a future-proof IoT platform for the additional Middleby equipment purchases. Next, we focus on the user experience. which is timely given the current state of labor within our industry and the struggles around training. Our work on the Middleby user experience yielded a single user experience that works across all Middleby products, whether a Pitco fryer, a FireX, a Turbo Chef rapid cook oven, a Middleby Marshall conveyor oven, a CTX, a Taylor soft serve machine, to name a few. Once a customer uses a Middleby OneTouch control, they will forever become a power user for any Middleby one-touch product. Lastly, and most importantly in today's environment, supply chain. The effort focused on reducing the number of control SKUs across the brands to essentially three different one-touch controls, one for high-touch, high-use products, one for mid-touch, high-use products, and one for our very simple products that require little interaction. Each of these three controllers rely on two different designs utilizing unique MCU chips while also being produced by two independent manufacturers. This affords us the ability to utilize alternate controls with only a modest amount of effort should a supply chain issue arise due to a chip shortage or a manufacturing issue. Our new control strategy was born from the goal of having one control one user experience, and one learning curve for our products and our customers. We will be debuting the Middleby OneTouch at the NRA show later this month, and we'll have approximately 50 new products and or platforms going live by the end of 2022. But before I kick it over to Brian, I would also like to give a strong mention to our new one-group espresso machine, the Sineso ES01. While Seneso is known for building some of the best and most elegant espresso machines on the market, this is our first machine designed and built for the home and commercial use. If you ever get the opportunity to own, use, or see one of these machines being built, you will quickly realize this is a multi-use commercial espresso machine that happens to work in the home. The ES01 brings to life Middleby One Touch Control combining Cineso's signature engineering approach and flawless temperature stability, plus Cineso's on-screen graphical brewing data, which is used to dial in the multiple stages of brewing, pre-infusion, full extraction, and post-infusion. This on-demand feature allows users to visually understand how to adjust the brewing process to yield the ideal balance between acidity, sweetness, intensity of flavor, and the desirable bitterness. The ES01 incorporates React technology that adapts to multiple espresso blends, quickly making it your most trusted barista. We are excited to add this to our residential platform for our Cineso and espresso enthusiasts and those seeking the best equipment. Thank you, and over to you, Brian.
spk09: Thanks, James. For the quarter, we again generated record results with revenue over $995 million and adjusted EBITDA of $197 million. GAAP earnings per share were $1.52. 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 $2.13. Year-over-year revenues grew over 31%, or nearly 12% organically. Adjusted EBITDA of $197 million reflects growth of over 22% compared to the prior year, or 9% on an organic basis. Our margin was nearly 20% of revenues. Commercial food service revenues globally were up 11% organically over the prior year. The adjusted EBITDA margin was just over 24%. All the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. In residential, we saw organic revenue growth of 16% versus 2021. The adjusted EBITDA margin was nearly 22%. Please note that this excludes the late December acquisitions of the outdoor grill companies. As you are reviewing our reported results, please keep in mind a few additional key points. At this time, the acquired businesses have a lower margin profile than the remainder of the segment. Also, purchase accounting impacts from valuing acquired inventory negatively impacted reported gross margin and operating income by over $14 million for the quarter. This accounting nuance, however, is excluded from our adjusted EBITDA metrics. In food processing, Organic revenues increased 8.4%, and the adjusted EBITDA margin was 19.4%. Across the company, we continue to face supply chain and inflationary challenges, as well as the impacts of COVID, which in turn impacted operations and production efficiency. These factors all affect our margins and hinder our ability to produce at higher levels. For the past quarter, these challenges most dramatically affected margins in the food processing segment. As we aggressively managed through these market conditions, including seeking to improve product mix and control costs, we had rather positive results in residential, as well as successfully delivering results generally as we expected in commercial. Cash flows used by operations were over $15 million. The current business environment is influencing our working capital levels, especially as it relates to inventory, where we are addressing very strong demand levels while facing rising costs and many supply chain hurdles. Increasing sales levels are also generating higher accounts receivable. Also, the recently acquired businesses have some seasonality that contributes to working capital increases earlier in the year. Overall, Working capital changes in the first quarter negatively impacted cash flows by over $140 million, about two-thirds from inventory and the remainder from AR. Even with the volatility being experienced, we anticipate generating positive operating cash flows for Q2. Our total leverage ratio came in at just over three times. We continue to have over $2 billion of borrowing capacity. These figures are after having expended over $250 million for capital and share-related actions over the past two quarters. During the first quarter alone, we used over $155 million per stock buybacks in open market transactions. As we evaluated the environment to develop our outlook, I took some time to reflect on these strange times and the multiverse of madness that we appear to be operating in. seemingly endless obstacles continue to appear with no portals offering relief as our resilience is tested while we fight to achieve our long-term goals. And I pondered why did I eagerly join the middle of the culinary universe and why do our teams demonstrate their superhuman abilities in tackling any challenge? Is it done for the satisfaction of a job well done or to help drive customer success or to generate strong returns for investors? or for the pride felt from mentoring and developing our people. These are all great reasons, but for me, it was not about glory. It was about the promise of free pizza. After all, why else would one take a job in an oven factory? Over the past few years, besides getting to learn about pizza solutions, I've also had the opportunity to become familiar with other great products, and most importantly, taste the output. Chef Andrew has taught me much about the amazing CTX. an automated conveyorized cooking platform. It is self-cleaning and can run on electricity. Well, it is thus easy to use and environmentally friendly. I wasn't truly impressed, though, until last week's Cinco de Mayo celebration. If you follow us on social media, you have seen the spread that Chef Andrew put together, about which it is hard for me to not ramble on endlessly. So suffice it to say that the carne asada tacos were excellent. Then I got to thinking, is it the oven or is it the chef? I found the answer in something I learned years ago back in college. It takes two to make a thing go right. Across Middleby, we have super chefs who protect our customers with exceptional equipment and serve amazing creations. It takes a culinary artist and great equipment. It takes a good recipe along with good food. While to some, the CTX, like my musical preferences, may be old school, It still makes my taste buds dance and lets me enjoy a lot more than pizza. Work with any of our chefs, and you, too, will see how it takes two to make it out of sight. By the way, I came here for the pizza, but I am staying for the tacos. So where will all these tasty treats take us? As I share our nearer-term outlook, I remind you that what we have been stating during our past calls, we are discontinuing the disclosure of orders details. Nonetheless, I will quickly note that for Q1, orders continued at generally similar levels as we had seen in the recent prior quarters, and they did grow overall when compared to 2021. Accordingly, our backlog continues to grow. However, with the overhang of the many economic and geopolitical risks, some slowing in order trends has occurred more recently. Even so, we do anticipate orders continuing to well exceed 2019 and 2020 levels. For food processing, while the year admittedly did start a little soft, which is not entirely atypical for this segment, we had record orders in Q1. We continue to obtain some large orders, which will be fulfilled into 2023. This helps set the stage for a solid back half of 22 as well. In the near term, I'd expect Q2 to generate higher revenues and EBITDA margin as compared to Q1. Residential will likely face the most notable headwinds as we look at Q2. Price costs will be a bigger headwind in Q2 before likely improving in the back half of the year. Supply chain challenges will have a meaningful impact on our volumes and revenues for Q2, especially with the COVID situation in China. While we do remain optimistic for the back half of the year and demand remains well above pre-COVID levels, with current market dynamics, risks do remain. Commercial food service will benefit from a large backlog, but price-cost pressures will persist in the near term before we see more meaningful improvements in the back half of the year. Across our portfolio, we have a positive outlook overall. Customers remain committed to robust expansion plans. Our leading solutions are being adopted and I'd offer that numerous positive economic and social factors indicate meaningful demand can persist. As such, we continue to invest in our infrastructure. Net capital expenditures for the past six months represent the highest investments we have made. Our operational improvements and integration efforts are ongoing. Putting all this together, the actions we are taking and overcoming The actions we are taking in overcoming the negative price-cost scenario bode well for the back half of 22 and into 23. On a total company basis, looking at Q2 as compared to Q1, there will be some ups and downs across the segments, but I suspect that our overall results will be fairly consistent with Q1. For years, we have demonstrated that we have a resilient business and a strong business model. and an experienced and capable management team that has been successful in turbulent times. We are poised for continued and greater success in the second half and beyond. And with that, we look forward to your questions. Andrea, you can open up the line, please. Thank you.
spk02: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Mick Dobre from Baird.
spk06: Yes, good morning, everyone. I also appreciate Taco Tuesdays, so thanks for that commentary. Maybe I'm, Brian, I'm looking to maybe clarify things a little bit. I kind of heard two conflicting things personally. I heard that Q2 revenue and margin, maybe they were going to be better sequentially relative to Q1, but then You kind of talked about Q2 being in line with Q1. So, you know, which is it?
spk09: Total company in line, right? It's, you know, residential will be challenged. Food processing, you know, a little bit better. Commercial likely a little bit better as well, right? And so when you kind of add them up, it gets to my comment of overall quality. Q2 similar to Q1, you know, for consolidated results.
spk06: Consolidated results. Okay. That's helpful. And then, of course, you highlighted that some slowing has occurred. So additional context there would be helpful. Maybe the geographies where this might have happened, you know, segments, product lines, really anything that you can mention there would be helpful. Okay.
spk08: Yeah, so I think China, as you might expect given some of the lockdowns, is kind of a market that's been affected not only in terms of supply chain, which is an obvious one, but also in terms of orders in that region that's had some effect. I think as you look across the segments, the one that we've seen have more impact is on the residential sector. As Brian mentioned, we still remain, you know, and this is a more recent phenomenon. Obviously, there's been a lot of disruption in the market, so we'll see how things evolve. But even as things have slowed there a bit, it remains ahead of 2019. So those are really two of the areas to call out. Obviously, there's some disruption in Europe as well, you know, but that's probably to a lesser extent.
spk06: Understood. On the residential side, you know, your business there has grown and you've made some acquisitions of late as well. The revenue contribution, I think, from acquisitions in residential was higher than we were initially modeling. So I guess my question, twofold here, from a seasonal standpoint, I am presuming that the likes of Kamado Joe and Char Griller and so on normally see like an inventory stock that kind of happens in Q1. How do you assess inventories in a channel? And then the second part of the question is on what I would consider to be the core portion of the business, you know, Viking and AGA and such. you talk about a bit of a slowdown, but, you know, how are you kind of defining that? Is it in terms of inquiries that you see in your stores, or is it something else that you're using to kind of sort of define those market dynamics?
spk08: Well, I guess kind of, you know, the slowing, we're just kind of talking about recent order activity over the last, you know, handful of weeks. Again, ahead of 2019, but obviously we've had significant growth over the last, you know, year and a half. So, I think we're seeing that come off a little bit right now, but again, ahead of 2019. There's not much inventory in the channel, right? Like, I mean, I think that's pretty much true across all segments, right? We haven't had the ability to catch up to our backlog, so that is still true. Certainly, we have a large backlog in residential which we'll be catching up to as we continue to move through the year, hence a lot of the comments that we make about investing in our operations. You can see our CapEx has gone up over the last handful of quarters as we've really invested in fabrication equipment and really expanding production, et cetera. On the grill companies, there is a seasonal. It's a little bit different across the brands depending on you know, geographies, but typically you have a build for grill season, so, you know, you tend to be a bit heavier in the first, you know, quarter and kind of into, you know, and that starts typically in the fourth quarter, into the first quarter, and, you know, in early parts of the second quarter. I'll just, you know, mention there, I mean, as we kind of look forward, you know, because obviously the world changed a fair bit as we left the quarter going into Q2. You know, China will affect some of those new grill companies more than the, I'll say, the broader residential, you know, platform because, you know, we're largely localized and U.S.-based manufacturing. But, you know, in that business, we get, you know, more of the product is getting shipped there. So, So, from a production standpoint, as you kind of think about mix going into the second quarter, you know, those new grill companies will be, you know, likely more, you know, affected with production and, you know, given the recent shutdowns that have been headline news. Of course, you know, that depends on how things progress through the quarter. But I would like to, you know, point out, you know, for the first quarter, You know, under Middleby with the acquisitions, you know, we were, you know, started off, as Brian said, you know, dilutive to the overall, you know, margins. But, you know, we were about 12% EBITDA for those businesses to start the year. So, I mean, I think we, you know, felt kind of good about, you know, how we posted in the, you know, the first quarter. And I'll say that, you know, I mean, we've got, you know, multi-year strategy here, you know, investing in the, you know, the platform innovation route to market. But, you know, we feel, you know, continue to be, you know, despite the disruption early on, you know, very excited about that platform and the growth opportunities as well as the, you know, the targets that we had mentioned earlier. about the journey to 20% EBITDA margins over the next three years.
spk06: Okay. If I may, one final question. On the slides that you put out this morning on slide eight, you've got a pie chart there talking about revenue by demand requirement that I, for one, find really interesting. And in here, you cite that replacement and upgrade, which is more than a third of your business, is still down or was down 13% relative to pre-COVID in 2021. I'm sort of curious to get more context from you as to why you think that is the case, why replacement has lagged as much as it has, and what are some of the implications here as we're thinking about 22 or 23? Thank you.
spk04: Yeah, good morning, Meg. It's Steve. So I would read into it maybe a little bit of a different take, not as much replacement being down. I think it's more that new builds have just increased as much as they have. So again, it's primarily driven by the QSR segments over the last six to 12 months, having such aggressive new build plans that we saw last year, they have not taken a foot off the gas for this year and still pretty strong in what they've shared with us going into next year. So I think it's more of a function of the focus on the bigger change on new builds, not as much, hey, we're seeing replacements shifting away. I just think it's the new build emphasis. I still think once we get through this new build period that we're in, again, I think based on the feedback from QSRs that last the next 12 to 18 months, I do think you see a replacement cycle pick back up again as we get into probably next year and 24. So that's how I would think about the breakdown and the change in the pie chart from 2019. Yep, very helpful. Thank you.
spk02: Our next question comes from Tammy Zakaria with JP Morgan.
spk03: Hi, good morning. Thank you so much for taking my question. So my first question is, I think you mentioned you're expecting results to improve from the back half of this year and into next year. Just wanted to clarify, do you expect sequential improvement in both the top line and EBITDA margins in each segment as you going to the back half?
spk09: Yes. I mean, that really is, you know, the simple take on it, right? You know, given our backlogs, you know, given pricing actions, you know, and then, you know, that sets us up for those improvements. And then we will see, you know, the risk remains on, you know, supply chain and, you know, input availability. You know, should that improve, right, that becomes, you know, the tailwind we're waiting to pick up influence.
spk03: Got it. Thank you so much. And my other question is, can you comment, how did orders trend throughout the quarter by segment? And I think you took a price increase in April. Did that have any meaningful impact, pre-buy effect on orders?
spk08: I think we gave some pretty, you know, I mean, obviously we've been given order outlook, you know, for a while. I don't think we, you know, in terms of, you know, by segment, I think we're going to probably start moving away from that, you know, a bit. I mean, I think they were pretty solid, you know, throughout the, you know, the quarter. We made some comments really as we kind of entered, you know, early April here. I mean, I think as we, you know, mentioned earlier, We continue to have overall double-digit increase in orders in Q1. We haven't posted that, but we saw continued trends at the beginning of the year. But as we've kind of moved into the April period, that's where we've seen it slow a bit. The pricing, as we went through the The dynamics had changed quite a bit. This is not a surprise to anybody. The impacts of the war, as well as China, I would say had incremental inflationary impacts that started to affect us in March. A lot of what we saw coming out of those Those issues were pretty quick responses of cost increases from our supply base. And that was kind of new and incremental to the year. We were implementing a price increase in April already. So one of the things that we've done is capture those price increases very quickly. And the price increase that we took in the beginning of April was, you know, significantly larger than we were originally, you know, anticipating. So, I just want to kind of, you know, set, you know, a little bit of a perspective here. I mean, I think we saw, we were expecting to have kind of an inflection point in Q2 of where we would see, you know, margins start to expand. But now we've got a new wave of price increases, which we've addressed, that kind of pushes things, you know, for another, let's say, you know, quarter to two, given our, you know, significant backlog. But we are confident that the price increases that we've taken already capture what we've experienced so far with a lot of the recent cost increases that certainly we didn't anticipate at the beginning of the year given what the drivers for those increases have been. That kind of, you know, bakes into the comments that you hear, you know, on margins. So, you know, the story remains of we're expanding margins, so pricing to capture the inflationary costs, operational issues, you know, operational actions, you know, as well as kind of the investments we're making in R&D and, you know, products that are also evolving our sales mix to, you know, expand our margins, which, you know, hence, That story is intact, pushed a little bit to the right, you know, but, you know, hence our expectations for, you know, growing margins in the back half of the year.
spk03: Got it. If I can squeeze in one quick one. Do you have any other price increases planned for the rest of the year?
spk04: Tammy, as of right now, nothing planned. currently, but as we continue to monitor the ongoing dynamic of cost pressures we see on our side and just the overall market, if we have to go back to the marketplace with additional pricing, we certainly will. But at this point, there's nothing planned for the back half of the year.
spk02: Got it. Thank you so much.
spk08: Thank you.
spk02: Our next question comes from Sari Boroditsky with Jefferies.
spk11: Thanks for taking my questions. So just staying on the price topic, given the price cost headwinds expected in the second quarter, could you just talk about your ability to price for inflation across the segments, particularly if you see more challenges pricing in the residential to consumers versus the other segments?
spk08: You know, we've taken action in all three. I mean, I think, you know, our, you know, portfolio and leadership in each one. I mean, I think, you know, you know, pricing has been sticky, you know, thus far we've been able to, you know, pass those, you know, costs on. I mean, certainly we are probably, you know, most sensitive to the residential, you know, part of the market, but I just, you know, also kind of point out that the premium end that we play in is, you know, not only the housing markets, you know, It's shown to be a little bit more resilient, but that demographic, the customers, let's say there's a little bit more ability to cover the price in that segment of the market.
spk11: Great. And then just on food processing, you highlighted large protein projects. Could you talk about the cadence of those projects as we think about the remainder of the year and into 2023? And then what's driving that demand? I believe there's been less investment in some of those categories, such as hot dogs in recent years.
spk09: Yeah. I mean, I think you can look at a lot of large protein producers, and they actually have a good number of investment projects going on. We do a lot more than hot dogs, and there's a lot of you know, trends, you know, dried and cured meats, you know, alternative proteins. All of a sudden, other things are escaping me at the moment. But again, a variety of our customers have talked about, you know, expansion plans. And those, you know, are items that, you know, we will see more impact as we, you know, build the equipment. Really, back half of this year, you know, front half of next year and, you know, some of them, you know, might even go beyond that, right? So that's why it's, you know, these are projects that generally take, you know, over a year to, you know, to get done. So, you know, certain things come in and out of our, you know, food processing orders and backlog very quickly. And others, like the large projects, again, you know, can sit in the backlog for, you know, 6, 9, 12, 18 months, right?
spk11: Appreciate the call. And then one last one for me. Just talk about the M&A pipeline and if you've seen a pickup in the competition for some of these assets more recently.
spk08: So, obviously, you know, it's one of the hallmarks of Middleby. We've been doing acquisitions for a long time. And I think, you know, posted in the slide, you can see we even in the first quarter, you know, a couple of, you know, additional, I would say, you know, product line and technology, you know, add-ons. The pipeline remains strong. Certainly, as we broaden the portfolio, we have lots of different strategic ideas and themes that we continue to pursue and anticipate that we'll have another busy year with acquisitions. Over time, competition for acquisitions has always been there. Certainly, It ebbs and flows, but I think typically when there's strategic assets that we kind of are very focused on, we've had a high hit rate of bringing those in. So I would expect us to continue as we have done historically.
spk11: Great. Thanks for your time today.
spk02: Again, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our next question comes from Jeff Hammond with KeyBank Capital.
spk05: Hey, good morning. Good morning, Jeff. Just on commercial food service, I'm wondering if you can just give us a sense of that 11% organic in the quarter, how much was price, how much was volume?
spk09: We don't break that out specifically, Jeff.
spk05: Okay, and I guess as you go forward, I guess there's two levers. One, you're pushing more price, so I'm assuming that the price component kicks higher, but just as you think of people ads, capacity ads, obviously this huge backlog, just how we should think about you know, volume sequentially in the commercial food service business?
spk09: Yeah, I think, you know, in the short term, as I said, you know, we're, you know, somewhat or not somewhat, you know, we have been volume constrained, you know, by a variety of, you know, of components, right? And it's, you know, product So we are certainly eager for the volumes to be stepping up more meaningfully. And some of those things are you know, we'll take time to improve, right? There's a lot of speculation on when, you know, controls and chips, you know, the backlogs will alleviate. Nonetheless, you know, each day we're doing a variety of things with our supply chain folks and across our divisions, you know, to address the problems, you know, that come up. So I'd say, you know, volumes have been up, you know, modestly. And, you know, we obviously still have, you know, a ways to go, you know, there.
spk08: Okay, and then in – oh, go ahead. Yeah, hey, Jeff. So I just kind of remind. So, I mean, we started seeing inflation back in the kind of third quarter. So we took a price increase in August. That was probably the smallest one we've taken, which I would say that's coming through at the beginning of the year. We took a more meaningful one in, let's say, the November timeframe. which, you know, we may have seen some of the initial benefits of that, but that will probably start to flow more in Q2. And then, obviously, we just kind of talked about this, you know, April price increase that we took, which was, you know, originally capturing a lot of the cost increases that we saw in the, you know, December, January, you know, February timeframe, and now it stepped up to, you know, pick up a lot of the cost increases from, you know, from Q2. China COVID and war impacts. So that'll come in, let's say, the back half of the year. So I'm just kind of reminding you the sequence relative to pricing. So some of the benefits of pricing that we've taken even last year has not shown up yet. So that'll start in the second quarter. Okay. And maybe just a little bit more color on shipments. I mean, I just kind of put it in two categories. One, we have disruption every day, which our teams do a tremendous job, you know, dealing with, which, you know, affects, you know, what's going down the, you know, the line, and you think you're getting things out the door, and then you kind of need to hold up, you know, production. So those are kind of uncertainties that, you know, pop up all the time. Then there is just kind of the, let's say – key components which are limiting our production, right? Like we can ship a lot more if we can get more of a certain control, certain electronic component, maybe some key other components. And so we've been working with a wide variety of suppliers to have them increase their production as well, right? So So our expectation is some of that will start to turn on in the back half of the year, and hence that will allow us to increase some of the throughput in the factories. Now, we say that with a lot of uncertainty and a lot of hard work that's being done, but I think those are the efforts that have been under-reported. for a while, and that's where we work closely with a lot of our strategic suppliers to make sure they're making the proper investments in their businesses as well.
spk05: Okay, and is the supply chain issues related to COVID in China isolated to residential kitchen or more broad than that, and then the weaker revenue in res kitchen and 2Q and Is that purely a function of supply chain, or is there, you know, some of that demand weakness that flows through?
spk09: Yeah, so none of the demand weakness, and you know what? I shouldn't even use that word. I mean, the demand is still very strong. It's just that residential demand was amazingly strong in the first half of last year. And again, you know, we are still well above pre-COVID, you know, levels. Again, we just had really, really strong demand the first half of next year. So I'm not going to use that W word. But in terms of coming out of China, it certainly has a dramatic impact on some of the businesses in China. But for the rest of residential, yes, it is overall supply chain impacts that are limiting our ability to get more volume out across the segment.
spk05: Okay, thanks so much.
spk09: Yeah.
spk02: Our next question comes from Larry Demaria from William Blair.
spk01: Hi, thanks, good morning. We've obviously talked a lot about orders and stuff without the specifics, but as it relates to first quarter orders and orders since close, say April into May, Is price and volume both up for orders, including current, or are we starting to see volume slip maybe in residential in the orders?
spk09: As compared to what periods?
spk01: Year-over-year growth. Year-over-growth in organic orders, they're up year-over-year, as you guys said. Yep. But I'm curious as to how much of that is, let's say, from a high level, price versus volume, to understand if volume is continuing to contribute or if volume is softening.
spk09: No, we don't think overall that, you know, that volume is, you know, is softening.
spk01: And that's fair.
spk09: I mean, I don't think we're going to, you know, get into, you know, orders by segment versus last year, right? That's what we said we're moving away from.
spk08: But I think you can take from Brian's prior comment that relative to a, you know, very strong, you know, first half of last year residential volume is often, but it still remains well ahead of 2019. And 2020. So, I mean, effectively, that's what he's saying.
spk01: Okay. That's fine. And then usually you guys have a, first half, second half split, where the second half is a little bit bigger. You know, is it going to be, I mean, can you just help us understand the split, maybe for sales and EBITDA, and we know second half, there's more pressure on that now with the price increases and better price costs, et cetera, but is it going to be much more meaningful than your average first half to second half split if we go back?
spk09: So, you know, clearly we think the second half of this year is better than the first half, both in terms of you know, revenue and profitability and margins. You know, I don't think we can compare it to any, you know, historical periods before. Again, we're living through unprecedented times and, you know, have never been in a situation where we have backlog and demand where we have it now. So again, the outlook is great, right? Demand levels are higher than they've ever been. We have a lot of backlog. And so I look forward to what the back half of the year and next year and the year after that are going to be. But again, the fundamentals or the overall market dynamics we're in now are such that, you know, comparing it to prior periods, you know, is really apples and oranges.
spk08: Larry, as you go, just, you know, very simplistically, it's not a forecast, but as you think about, we have all the costs running through largely right now, right? Like we've had all the inflation before, right? You know, maybe not all what we've experienced the last three days, but we've got all the increase, and really we haven't got, you know, the pricing that we've already taken has not, we haven't gotten, you know, much of that benefit, right? So kind of hence, you know, and again, this last wave has pushed it a little bit, you know, more to the right, but I mean, just to your point, you know, fundamentally, we've got the cost now, not all the price, and we're kind of holding the line, you know, on margins until we, you know, get to the other side of that hill. You know, and I think the holding the margins, that is some of the benefit of the strategic and operating initiatives that we, you know, had been executing, you know, on that, you know, still will benefit over the next, you know, couple of years. But, I mean, I think that's kind of, you know, where we're at in this, you know, continuum of, you know, of supply chain.
spk01: Okay. Thank you very much.
spk02: Okay. Thank you. If you have a question at this time, please press the star and then the number one key on your touch-tone telephone. Our next question comes from Mig Dobre with Baird.
spk06: Hey, thanks for taking the follow-up. Just a quick one here. So interesting sort of use of cash in the quarter. You know, your operating cash flow was negative. I think we understand that. But then, you know, you've gone and you've repurchased $155 million of stock, and you also bought nearly $10 million of cap calls, right, for your converts. And I guess I'm looking for maybe some color from you guys in terms of how you're thinking about share repurchases going forward, given kind of where your leverage is, but also where your M&A pipeline stands. Taking into account the fact that, right, I mean, the stock has pulled back, it's pulling back further today. And then what's the reason behind the cap call, the additional cap call purchase? I mean, the stock is nowhere near the point where we'd be thinking about dilution from the convert.
spk09: Well, fortunately, we still have, you know, three and a half years until the converts mature and our outlook is very positive. And the cap call really is just, I'll call it up, you know, a way to use, you know, leverage to obtain stock and, you know, address problems. dilution risk, right? And obviously, we've committed much more to share repurchase than the cap call. I think as we've looked at the recent share purchases, we really have kept in mind, again, seeking to address the potential dilution risk from the convertible notes. But obviously, M&A continues to be a priority for us as we obviously haven't steered away from that at all. And I'd expect us to still be very, very committed to M&A and we'll consider if additional buyback activity is prudent along the way, to your point, as we look at leverage levels as well.
spk06: Sorry to press you on this, but should investors expect you to step in in more meaningful fashion in terms of buybacks, given the disruptions and the volatility that we're kind of seeing here near term, or is Q1 more of a one-off?
spk08: I'm sorry, is Q1 more of a what? More of a one-off in terms of the buybacks. Yeah, I mean, I think... Again, maybe encapsulating what Brian said, but that action that we took was, I'd say, very much tied to the convert and the capped call. I think we thought, again, some of the things that have occurred that have made its way into the overall market, not just our stock that was prior to that. You know, but we have very positive outlook, and we wanted to make sure that we were minimizing, you know, the cost and dilutive effect of the convert, you know, when it matures. So it was very much tied to that. You know, look, I think we're not going to say what we're, you know, going to do here, but I mean, historically, you know, we've done some share repurchases, so separate from the cap call, you know, on an opportunistic basis. you know, basis. So I wouldn't, you know, rule that out that, you know, I'm not going to say we're going to do right now from a, you know, quarter perspective, but, you know, certainly, you know, we believe in the strategic initiatives and where the company is headed. We, you know, despite some of these near-term challenges we're all, you know, working through, we've got a very confident, positive outlook where we're going in the next several years. So, you know, with that, when there are pullbacks, you know, in the stock, you know, we'll still consider to be opportunistic from time to time.
spk06: All right. Understood. Thank you.
spk02: Our next question comes from John Joyner with BMO.
spk07: Hey. Thank you for taking my questions. So can we go back again to the comments about 2Q being similar to 1Q? I mean, are you referring to sales or EBITDA dollars on the segment level? And I guess with commercial and processing, you mentioned forecast to be better, maybe slightly better, and residential worse. How much worse are you assuming for residential?
spk09: So, you know, just to clarify, right, the comments, you know, Q2, similar to Q1, is the overall total company, you know, consolidated outlook, right? And you heard it right, commercial up, food processing up, residential challenged. I don't know that I want to get into much more granularity, you know, about that, you know, but I do note, you know, that The China lockdowns, right, are having, you know, a significant impact on, you know, portions of our business to have product available, you know, to us. And we believe that, you know, will hopefully be a relatively, you know, short time frame, you know, phenomena. Now, you know, we've talked about, you know... you know, that we're not able to, you know, sequentially take, you know, huge jumps, you know, right now. So, I mean, I'll let you do your modeling on, you know, how much the other two's kind of ups would, you know, need to be to, you know, offset, you know, down in one. But, you know, hopefully a little bit of my comments there, you know, maybe are able to let you put some, you know, size, you know, the magnitude of the swings a little bit.
spk07: Okay. All right. Thank you, Brian. And then for processing, the margins, I mean, the margins there are good, but with the business not being affected by drags from acquisitions and, you know, you highlight large protein projects, which I believe, you know, generally carry higher margins. And it's good to know that it's not just hot dogs. Is there something structural that would prevent, I guess, processing from EBITDA profitability from getting back into the mid-20s?
spk09: I mean, no. I mean, that's, you know, that is certainly the goal, right? And where I use the word, you know, soft and, you know, had a more modest tone about the business, obviously we were disappointed, even though we have industry-leading margins in that segment. So thanks for noting that, you know, that the first digit, you know, wasn't a two. But, you know, where it is a business that, you know, works on large products, projects, you know, where you do have, you know, absenteeism, you know, issues, right? And it seems like a long time ago, but let's not forget, you know, the impact on COVID on, you know, employees and workforce, you know, back in January and February. So, you know, the impacts of COVID on, you know, how much, you know, steel we could bend and put together. And then also, you know, when you start operating at lower levels, what that means to, you know, coverage of fixed costs is where You know, even, you know, admittedly, where we came in Q1, while, again, appreciate you noting it as good, it wasn't great for middle B standards. And we do expect to be, you know, better than that for the remainder of the year. You know, the large projects, again, you know, take some time, you know, to happen. So it's not like all of a sudden, you know, you're going to see a huge jump in, you know, in revenues and margins in Q2. But as we get into, you know, the back half of the year and into, you know, 23 as we start you know, delivering on more of these projects is why I feel comfortable, you know, agreeing to what you, you know, believe the outlook could and should be.
spk07: All right. Thank you. And then maybe just one more on the, with, I guess, what was the organic growth? Do you have that available for the domestic and international businesses for the commercial segment?
spk09: I do. It was, I think, 7% in North America and 21% outside of North America.
spk07: Okay, excellent. Thank you. And so can you maybe give any color around any of the targeted markets, you know, I guess for the international piece? And I guess for some of the countries on the international side, do you have a good feel for, like, the currency effects for this year?
spk09: You know, we don't specifically, you know, forecast, you know, currency effects. Obviously, you know, the dollar is strengthening. But, you know, I'm sorry, I don't have specific kind of modeling commentary to offer there.
spk07: Okay. Any color around, like, you know, any specific markets on the international side that we're, you know?
spk09: Yep.
spk07: kind of jump out or not?
spk09: I mean, obviously, you know, China has been, you know, weak for us. You know, Europe's been a little bit, you know, more modest. You know, I would say, you know, the good thing is, you know, it has certainly not, you know, fallen off a cliff, obviously, right? There are a lot of, you know, concerns about what is the impact on the European economy. you know, with the war that's going on, right, but the consumers have proven to be, I guess using one of our favorite words, you know, a little bit, you know, resilient. So we're still seeing, you know, positive, you know, some positivity there, right? It hasn't, you know, moved in towards, you know, the negative direction.
spk07: Okay, excellent. Thank you very much. You bet.
spk02: That's all the time we have for questions. I'd like to turn it back over to management for closing remarks.
spk08: Well, we'd just like to thank everybody for joining us on the call today and just reiterate that we're very excited and optimistic about the business right now. So despite the challenges in supply chain that we've obviously spent a fair bit of time talking about on this call, Certainly a lot of the long-term initiatives that we continue to execute on with new products, innovation, route to market, which we are very confident are going to allow us to expand margins in the long run and drive our business, are all intact. But appreciate everybody's participation in the call, and we look forward to speaking to you next quarter.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
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