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spk01: Welcome to the Middleby second quarter conference call. My name is Jenny. I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touch-tone phone. I will now turn the call over to Tim Fitzgerald. You may begin.
spk09: Thank you for joining us today on our second quarter earnings call. As we begin, please note there are slides to accompany the call on our investor page of the website. We continue to execute on our financial plans and strategic initiatives, building upon our positive momentum. During the quarter, the already existing inflationary pressures further accelerated as we saw a spike in costs following the war in Ukraine. Supply chain disruption also became increasingly challenging to our operations following the COVID shutdowns in China. But our teams continue to react quickly, making adjustments to minimize disruption to our business and our customers. And despite the operating disruptions and cost increases, we posted another quarter of record sales and earnings. And we also were able to advance our profitability with realized margin improvement at all three of our business segments. Our focus on the sale of our latest technologies and product innovations is favorably impacting the profitability of our sales mix. And pricing actions enacted earlier this year have partially offset the most recent wave of material cost increases, with greater benefits still expected to be realized in the second half of 2022. Operationally, we continue to invest in our manufacturing footprint with facility expansions to support growth of new product launches. And in the past 18 months, we've also committed over $75 million of investments in automated fabrication equipment which will increase throughput and efficiencies across our businesses. Under the first half of 2022, we have added over 700 production team members at our factories as we increase production capacity to support higher rates, higher order rates and ship record backlogs. While inflationary pressures are impacting the overall economy, we continue to be positioned to capture favorable underlying trends driving demand across all three of our business segments. At our commercial food service segment, our customers are investing in solutions to evolve their operations and address pervasive challenges of labor, speed of service, energy, and food costs. And the industry remains in long-term recovery, with projected new location openings remaining intact, while many segments such as institutional, travel and lodging, and casual dining still in recovery with increased activity from just a year ago. Our technology solutions are in demand, and we are engaged with end users and our channel partners like never before. The strategic investments in our sales capabilities, including our Middleby Innovation Kitchens in Dallas, has proven to be a success, with over 5,000 customers visiting us in Dallas since the opening last year. We've been continually engaging with our customers and partners with hands-on experiences, resulting in the development of new business opportunities and enabling us to accelerate the introduction of new product innovations to market. At our residential business, rising interest rates and economic uncertainty has slowed existing home sales and new home starts. However, existing home sales for home values over half a million are expectedly proving more resilient, and the backlog of new home construction yet to be completed remains strong. We expect recent trends, including greater levels of relocation, along with increased amount of work from home, will persist, and this will present a long-term favorable backdrop for our business. We're excited about the growing portfolio of our residential brands. The breadth of our unique offerings is unmatched. Our new showrooms, design teams, and culinary staff have been busy as we engage with designers, dealer partners, and end users in an effort to create greater awareness for Middleby residential, which is leading to new opportunities and greater market penetration. For our recently acquired outdoor grill companies, the headwinds emerged in the quarter, as production in China was disrupted for more than half of the quarter. This significantly impacted revenue and profitability during the quarter. Near-term demand has also softened, with retailers focused on reducing levels of stock in the channel of competitor products. Although delayed, we are very confident in our ability to capture market share as end users and channel partners adopt our exciting new charcoal cooking innovations. We believe favorable trends in charcoal cooking paired with our pipeline of new digital and automated cooking innovations position us as a category leader and sustain growth in the years ahead. And we made significant progress integrating the new outdoor grill businesses within our residential platform. While these businesses will essentially break even in the second and third quarters of 2022 as a result of the supply chain and market disruptions, we expect fourth quarter will return to double-digit EBITDA margins as we realize the results of already completed actions to improve profitability. And we are positioned for growth and sales and profitability headed into 2023. In the food processing business, demand continues with the need for equipment to increase throughput, address lack of skilled labor through automation, save on utilities, and address rising food costs. Over the past several years, we've made significant strides to enhance our industry-leading platform through new product introductions and strategic acquisitions. These efforts are paying off. Our full-line automated solutions are presenting customers with greater payback and this has translated to consistent growth in orders along with a continued pipeline of opportunities ahead. On the acquisition front, we continue to build upon our three industry-leading food service businesses with a number of strategic acquisitions. We added to our food processing equipment group the acquisitions of Proxout, CP Packaging, and Colossi. These acquisitions add fully automated transport and handling washing solutions, and high-speed packaging technologies that complement our existing brands and further extend our offerings of integrated full-line solutions. Our acquisitions of Kloppenburg and South Korean-based Icetro further extend our product lineup in ice baking equipment and in cubed and flaked ice offerings, along with greater solutions for countertop frozen beverage and dessert equipment. We're excited about the meaningful sales opportunities and operational synergies that exist within our beverage platform for these new Middleby brands in what is a large market opportunity. In summary, similar to the past several years, 2022 continues to challenge with new dynamics. Our proven team continues to navigate these near-term challenges while making critical investments and continue to execute on our strategic initiatives which we are confident will provide a competitive differentiation in the years ahead. We are progressing our long-term profitability goals set forth in each of our three business segments. Our drive to bring industry-leading technology solutions to market, the ongoing initiatives to transform our selling processes, and the strategic investments we are making in manufacturing all form our roadmap to long-term growth and higher levels of profitability. Now I'll pass the call over to James to spotlight more of our exciting recent product innovations, which are also highlighted in our investor slide.
spk05: Thanks, Tim. And for this discussion, please refer to slides 9, 10, and 11. I'm excited to talk about Middleby's new products. Over the next several quarters, we will be discussing automation and what we will be bringing to restaurants, food processing facilities, and homes. Last quarter, we featured the SNESO ES1, a single-group espresso machine. Today, I'm going to continue within Middle Beach Coffee Group by talking about Concordia's Ascent Touch bean-to-cup brewer. The Ascent Touch has all the makings of a fully automatic espresso machine, but it isn't. It's a true bean-to-cup brewer. The AT holds four different roasts and brews your favorite drift coffee per order through Concordia's proprietary accelerated low-pressure extraction process. Through this, we control the coffee's particle size, water temperature, pressure, dwell time, flow, and turbulence during the brewing cycle. In all, the Ascent Touch allows the operator to precisely control 10 discrete variables via its controller. When optimized, the Ascent Touch delivers a gold standard brew as determined by the Specialty Coffee Association, which means we extract 18 to 22% of the coffee bean solids into the water. Any more or any less results in a weak or bitter cup of coffee. This brewing process rapidly automates the French press technique of extraction while allowing us the ability to rapidly brew at a rate of one ounce per second for a 32 ounce cup of coffee, making the AT one of the fastest, if not the fastest bean to cup on the market when the coffee enthusiast matters. The Ascent Touch is on Open Kitchen, our IoT platform. Open Kitchen provides real-time alerts via our app, email, and or text, as do the machine status, errors, and number of brew cycles, while also allowing the user the ability to push new recipes via the cloud. Automation, connectivity, quality, and speed make the Ascent Touch ideal for high-end coffee shops, yes, high-end coffee shops, C-stores, quick serve and fast casual restaurants, to name a few. Moving from coffee to charcoal, our grilling companies are doing some exciting things in the backyard to make your food taste better, but more importantly, they're making it rewarding for everybody by automating what many find intimidating. One of our brands, Masterbuilt, is developing a lineup of digitally connected, gravity-fed charcoal grills. Because these grills are digital, connected, i.e. automated, and use authentic real fuel, charcoal, they are expanding the outdoor grilling market to all enthusiasts regardless of their grilling experience. Consumer trends show that the backyard cooks are disconnecting their gas grills in search of flavored heat and an authentic grilling experience, but they are still looking for convenience, meaning the simplicity of gas. Pellet grills have gained market share by offering just this, convenience to the novice and pro grillers. Master Built's Gravity Series brings new fire to this market, sorry for the pun, by controlling the heat and flavor of natural lump charcoal through deployment of an MCU-controlled combustion fan. Note, if you want to see a great representation of what's going on inside this grill, please refer to slide 11. With charcoal-fueled forced and natural convection circulating through the grill, users can now smoke and properly sear their food. This is all because of the heating value of natural charcoal releases more heat and combustion than manufactured fuels. Personally, the Masterbuilt Gravity Series is my no-brainer my new go-to when it comes to outdoor smoking or grilling in my backyard, and I have many choices. So download your app, light a fire, and let's get grilling. Thank you, and over to you, Brian.
spk10: Thanks, James. For the second quarter, I get to repeat a phrase that I am not tired of saying. We again generated record results. Our quarterly revenues exceeded $1 billion for the first time and our adjusted EBITDA exceeded $200 million. GAAP earnings per share were $2.07. 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 $2.23. FX impacts are included in these results and were a headwind of $0.08. Our revenues of a little over $1 billion grew over 25 percent compared to the prior year and over 13 percent organically. Adjusted EBITDA of $210 million reflects growth of nearly 13 percent compared to the prior year or 7 percent on an organic basis. FX rates negatively impacted EBITDA by $5 million. Our margin was nearly 21 percent of revenues. Commercial food service revenues globally were up 18% organically over the prior year. The adjusted EBITDA margin was 25.2%. 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 11% versus 2021. The record adjusted EBITDA margin exceeded 23%. In food processing, organic revenues were down a very modest 1%, and the adjusted EBITDA margin was 19.6%. We continue to face challenging conditions across the world which are impacting all parts of the company. Nonetheless, while our ability to produce at even higher levels has been constrained, I'm very excited about what we have delivered this past quarter. COVID restrictions in China ended up having a bigger impact than we anticipated one quarter ago, specifically on the grilling products within the resi segment. Despite the challenges, sequentially, we were able to expand our organic EBITDA margins across all three segments. Commercial food service saw a 110 basis point improvement, and the legacy residential divisions delivered record margins after growing 140 basis points. The food processing segment continues to have incredibly strong order intake, voting well for future margin expansion and improving revenue levels. We are also continuously focused on managing our balance sheet. We generated cash flows from operations of nearly $105 million. We expect our quarterly cash flow generation to grow sequentially for the remainder of the year. We anticipate free cash flows exceeding net income over the second half of 2022. We're using our cash flows to continue to invest in the business as well as to periodically purchase treasury stock and make acquisitions. After exceeding $150 million of treasury stock transactions in Q1, in Q2 we spent nearly $70 million more. The cash cost of acquisitions was over 66 million in Q2 and we're nearly $150 million in July. Additionally, capital expenditures for the past six months represent the highest investments we have made. These drive operational improvements and help deliver stronger margins. Our total leverage ratio came in at just over 3.1 times. As of quarter end, we continue to have nearly $2 billion of borrowing capacity. We have the financial flexibility to add great brands and technologies to our portfolio. And as I was pondering where to potentially invest next, and was also reflecting on a variety of exceptional products that are part of Middleby, I thought I would seek inspiration in the rolling hills of Western North Carolina. I ventured to Asheville with my wife, and not knowing how to unplug very well, and given that we would be in Deutsche's backyard, that being the brewing equipment manufacturer we acquired in 2019, I was targeting to responsibly evaluate a few of our customers' creations. My wife undertook ensuring that we had tasty meals while on this important journey. Archetype Brewing and Ginger's Revenge have created some great offerings with our brewing systems. I highly recommend them or stop by the MIT to taste what we are doing ourselves. What came as a surprise to me is that my wife is potentially more in tune with Middleby equipment than even I am. The first three restaurants we visited all had Imperial equipment. So I also recommend the Hatch and Hickory for great mac and cheese, as well as their inventive sandwiches, especially the pork banh mi, although not quite as good as what chefs Chris and Keith do at the Dallas Middleby Residential Showroom. When in Asheville, Plant has an especially creative and tasty menu, which for us culminated in a smoked oyster mushroom mole. I also find it hard to pass on chicken and waffles, and Tupelo honey does them well. But most importantly, happy anniversary to Imperial. Next month will be one year as part of Middleby. Beyond all that you have contributed to Middleby, thanks for making my trip a culinary success. We continue to have a positive outlook on our business for the back half of 2022. As shown with our Q2 results, we are expanding margins while facing headwinds from the supply chain, recurring COVID disruptions, and labor availability. Despite these meaningful challenges, we do expect to expand margins sequentially for the total company for the remainder of the year. As I offer a view into the second half in trying to help with comparability, my comments will exclude the contributions that will come from the acquisitions completed in June and July. For CSG, we obviously just posted a very strong quarter in terms of revenue and margin expansion. Sequentially, margins will continue to expand over the back half of the year and revenues will grow modestly. For RESI, a key item to understand is that grills have a seasonality pattern where Q3 is always the weakest quarter. This thus impacts the total segment where Q3 results will take a step back from Q2 while Q4 will see the top line and margins ahead of Q2 levels. For food processing, the overall outlook is strong as we continue to see customers adopt our full-line solutions. The larger projects we are booking have a longer delivery time, so they take a little longer to impact results. I expect Q3 to see modest revenue growth as compared to Q2, with margins up a bit as well, and then Q4 will be stronger than Q3. In summary, Looking at Q3 as compared to Q2, there will be two segments up and one down. Our total revenues will be fairly consistent with Q2 with higher profitability in total for the company. And looking further out, based on current conditions, Q4 results are likely to exceed Q3 in terms of both revenue and profitability for each segment and thus for the company in total as well. As I've noted before, we have demonstrated that we have a resilient business and a strong business model. We are looking forward to delivering higher profits and cash flows to shareholders in the near and long term. We are now ready for your questions.
spk01: Thank you. If you have a question, please press 01 on your touch-tone phone. If you wish to be removed from the queue, please press 02. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touch-tone phone. And our first question comes from John Joyner from BMO Capital Markets. Please go ahead.
spk11: Hey, good morning, and thank you for taking my questions. So, hey, I guess the market doesn't appreciate solid results. Anyway, um, so, you know, Tim and Brian, you both kind of commented on this and, you know, with price costs getting better and, and Brian, I appreciate the commentary on the back half, but is there anything that, you know, if we go back three months, right. Has your perception of the back half changed at all? Um, today versus where it was then, you know, with regards to, you know, the three segments.
spk09: Well, three months is a long time ago in today's world with crisis hitting us each day. I think by and large, no. I mean, certainly, you know, supply chain disruption changes week to week. I think we've had, you know, things soften in some areas and accelerate, you know, in others. But I mean, in terms of The comments that Brian just made, we expected to continue to drive the profitability as we got ahead of the cost, so that's kind of one of the big underlying themes, so that remains intact. Certainly, market backdrop, and I'm talking about the world as a whole, has become a bit more uncertain, but as I said in our comments, food processing remains very robust. The You know, the restaurant industry is very resilient, and we really see a lot of activity, you know, with us. And I think, you know, with residential, we have a lot of positive, you know, things going on, despite, you know, the housing market getting a little bit softer. So, I mean, I would say that the housing market's, you know, a bit softer, obviously, than it was, you know, a quarter plus ago. But, you know, overall, I think all the strategic themes and the things that we're executing on we remain very excited about and feel like we're well positioned for the second half and certainly going into 2023.
spk11: Okay. I appreciate that, Tim. And maybe you mentioned this, but I know processing can be lumpy. I get it. It does sound like the underlying fundamentals there are strong for the business, but the results were lighter than I expected, which I know probably doesn't mean much, but Is there any additional color that you can provide on the quarter itself for processing?
spk09: Yeah, so, I mean, our orders have outpaced revenues. I mean, I think, you know, as you kind of dig through a lot of the things that are affecting our orders, results and ability to ship is, you know, we continue to add labor, right? There's not enough labor, otherwise we'd get more out the door. Supply chain challenges also, you know, hamper us, right? So, you know, certainly we could ship at higher levels and be more efficient if we had more parts and if we had more labor. You know, certainly, you know, food processing also felt the impacts of costs as well. There was a spike, you know, as I said, right after the Ukraine war and a lot of what we're shipping in the second quarter, you know, are projects that were priced, you know, last year, right? So, you know, as we kind of move through backlog to higher prices, you know, that benefits food pricing as well. As you kind of go dig into it a little bit more, I mean, we've also made, you know, some, there's a lot of great strategic things that are going on in our packaging group. We moved into a new facility. The team there's done a, unbelievable job of relocating three brands during the second quarter. You know, as we're doing things like that, you ship less and you've got disruption. That was done in a pretty accelerated way and it kind of moved to the back half of the year and going into the next year, we'll get the benefits of that move to a larger facility to support growth and realize some of the synergies across the packaging group when we continue to invest in packaging. We've also had a lot of new product launches. One that James has talked about in the past we've had in slides is the Turbo Chef oven from, you know, from Alcar. We've had tremendous market interest and orders there. It is a new product line. So as we are, you know, shipping for the, you know, first time that the product, there's a kind of learning curve. And, you know, so it'll be one of the faster, grown products in the portfolio. And we think also, you know, we'll be a favorable sales mix. But, you know, we're kind of at the early stages where we're, you know, we're, I'll say, investing as we're getting out of the gates. So, you know, so some of the things that you're seeing in the second quarter are disruptions. Some of it is investments that will kind of flip as we, you know, reap the benefits of new products and investments in manufacturing.
spk11: Okay. Uh, excellent. And if I can just squeeze one, one more in, um, I think this is a quick one, but on the recent acquisitions, um, particularly, uh, Colusi air maze, which, you know, decently sized business, uh, in terms of, you know, uh, what you've added to the food processing segment, I get that it's focused on food processing, but is there an appetite to move? Maybe there's like a throwaway question. I don't know, but is there an appetite to move into where washing on the commercial side, And then maybe if you could offer some color on ISTROs and Colossi's geographic sales footprint and what the opportunities are there to build out their geographic reach.
spk09: Yeah, so Colossi is phenomenal in terms of the products, the technologies, and the solutions offering the customers, which are pretty impressive. broad kind of as you're alluding to. Certainly, you know, we acquired it for their, you know, for their expertise in, you know, in food processing. As you put in the release, you know, they are in a lot of projects that we're involved in already. So, you know, we have been working alongside the team prior to becoming, you know, part of the same team, you know, all together. So, you know, definitely together that will accelerate some of the market expansion and It is a global brand, I mean, much like many of our food processing customers. So, I mean, you will find them in a lot of markets, and certainly the U.S. is a strong market for them. But, I mean, I think as we have continued to focus on integrated full-line solutions and leveraging our structure international, we would anticipate that we would pull them into more projects. They certainly do some great automated washing systems that are outside of food processing as well as it relates to bringing that into commercial. I mean, the machines are substantially larger, more automated, so you would not see them in a restaurant application, but we also have more and more customers that are bridging into central commissaries, ghost kitchens, et cetera. So we have, with food processing, unlocked some opportunities there over the last year or so. There potentially could be something there, but certainly that's kind of more tangent than down the middle of the fairway of the opportunities. On iStraw, I'm not sure I'm capturing the question there, but I mean, you know, IceTro has a really great product portfolio of ice. I mean, we are a leader in nugget ice, and that business has been growing, you know, very nice over the last handful years. years both in terms of top line and in profitability you know the nugget ice category is expanding just because of the consumer kind of preference for for nugget ice but also with there's a lot of efficiencies to how we can transport ice well we're not in cubed and we're not inflate and that is one of the things that I stroke you know brings to us and they've got very robust and kind of advanced So that was one of the things that really attracted us to iStro and the synergies really across the platform with Follett and also some of our residential companies as well, such as Marvell and Uline that are in the The ICE business, they're located in South Korea. You know, the entry into the U.S. market is more recent for them, but they've had some success, and certainly with Middleby, you know, that opportunity expands, you know, dramatically. So, I mean, I think, you know, we'll be working with the team there, you know, closely to introduce their, you know, their solutions into the market. So, I mean, I think, you know, ICE is a large market, so now we've got really a very complete portfolio, so that's all. Okay, excellent.
spk11: I really appreciate the time. Yeah, the stock should be up on these results, so I really appreciate it. Thanks.
spk09: We agree with that comment.
spk01: And our next question comes from from Jeffrey. Please go ahead.
spk00: Thanks for taking the question, and I also agree with that last comment. Given some of the supply chain commentary, could you just talk about the lead times in the various businesses? If I put in an order for a commercial or residential oven today, when could I expect this? And does this give you more visibility into 2023?
spk09: Well, for you, Siri, we'll get it to you really quick. So, you know, Steve, why don't you start? Hit that one.
spk06: Yeah, I think in commercial, Sarah, if you look across the portfolio, one of our biggest goals throughout the company this year has been to try to get lead times kind of back to, I'll call it pre-COVID levels. And it's tough. Obviously, we're trying to still navigate supply chain. We're trying to find people, et cetera, et cetera. So I would say actually at the majority of our commercial divisions, we're actually sneaking up on kind of pre-COVID levels. It's not 100% across the board, but I think as we continue to, as Tim alluded to earlier, make investments in manufacturing through new automation, we've done okay in hiring new people into manufacturing. We do believe that we can be back to kind of pre-pandemic lead times in commercial, I would say the vast majority of of our manufacturing companies. So it's a great credit to your supply chain teams and our manufacturing teams to getting things back on track, still navigating a pretty uncertain backdrop. So that's where I would say it's at. So I would say lead times today compared to a year ago, even the beginning of the year, I would say for the most part, are trending exponentially better. And we continue to, as I said, you know, have that as a main goal to be back to kind of pre-pandemic lead times by the end of this year in commercial.
spk00: Great. And then, you know, you talked about investing in your manufacturing facilities. Could you help us understand the potential margin benefit from these actions?
spk10: Yeah, this is Brian. You know, I'm not going to obviously specifically, you know, quantify it, but you can see what we, you know, delivered, you know, this quarter, and, you know, we remain committed to those, you know, medium-term goals that we've, you know, put out there. So, you know, we're seeing, you know, short-term paybacks, and some of the projects that we're investing on, you know, are ones that, you know, cover a period of quarters. So, You know, I just think it is part of what you're seeing in the remainder of this year and, you know, that we'll still be able to drive, you know, further improvements in 23. Great.
spk00: Thanks for taking my questions today.
spk10: Yeah, you bet.
spk01: Our next question comes from Mig Dobre from R.W. Barrett. Please go ahead.
spk08: Hey, good morning, guys. It's Joe Grabowski. I'm from Mig this morning. Good morning. So I guess my first question is, you know, there's obviously a lot of discussion about a pending recession. Perhaps we're already in a recession. Consumer confidence is at multi-year lows. A lot of uncertainty going forward as to where the consumer is going to, the health of the consumer is going to trend. Is any of that, are you sensing any of that in your discussions with large and small customers as far as commercial food equipment, CapEx? Is there kind of some cautiousness seeping in? It's kind of hard to see it in the organic sales numbers because your backlog is so healthy, but just kind of sense of how people are thinking about CapEx spending now and going forward.
spk06: Yeah, this is Steve. Good morning. Great question. I would say by and large, we have not really seen that kind of pullback that you're alluding to. So I'd say kind of think about three different areas of where we're seeing our engagement with customers right now. Obviously, we've talked about on prior quarters, new store openings continue to be a pretty big focus of the larger chains, and they've been as transparent as ever. through this period and going into next year with their new store opening plans. I would say for most of those customers, those remain in place. I mean, that's a discussion we have with them every day. Secondly, you know, we've talked about before is they've focused on new store openings over the last 12 to 18 months. You still do have some pent-up, you know, replacement, I think, that is coming over the next couple years. So I think that continues to be a way we engage with customers. And the third and the biggest thing that I still think is why we're so excited about the next couple years in commercial is no matter the backdrop, from a macro standpoint, they still have to figure out how they're going to solve issues like labor, food costs, et cetera, both in how do you solve for the increased labor costs, how do you solve for you can't find people, and how do you make it an easy place to work in your restaurant. So it's kind of a long answer to your question. So in commercial, we do not see a pullback from our customers at this point, both from a new store opening standpoint and an investment in technologies to solve for labor, food costs, and speed of service.
spk08: Got it. That's good to hear. And then my follow-up question, kind of along the similar lines, we don't have all the numbers to kind of calculate this exactly, but it looks like in the second quarter, organic growth domestically was above 20%, and organic growth internationally was kind of single digits. And that's actually kind of a flip of where it was in the first quarter. So, you know, similar question, but specifically in commercial on, you know, international demand trends, obviously a lot of... a lot of different cross-currents internationally, what you're seeing in the different regions.
spk10: Yeah, this is Brian. A couple things. Asia is certainly impacted by the environment in China. Europe is still seeing good things and growth, but overhang of war and the impact on you know, economies and economic situation there, but again, was still positive. And, you know, Latin America actually was extremely positive. It's the smallest of the regions, but, you know, that was very good. But again, I think, you know, some of the macro global things that were happening had Europe being more modest than we had seen, you know, prior to the last quarter. And then, again, I think China impacts are fairly self-evident.
spk08: Yep. Okay, great. Thanks for taking my questions. Good luck in the third quarter. Great. Thank you.
spk01: As a reminder, if you have a question, please press 01 on your touchtone phone. Our next question comes from Jeff Hammond from KeyBank Capital Markets. Please go ahead.
spk07: Hey, good morning, guys. Morning, Jeff. So I guess, you know, interesting comments on lead times. We're hearing they're still pretty stretched, but... I'm just curious if you can talk about, you know, you talked about some of the manufacturing improvements and adding people. Just, you know, volume throughput as we look through 2Q into the back half versus, you know, 1Q, which seemed like, you know, largely a price quarter.
spk06: I mean, I think to answer the question, just briefly, As we think about volume going through our manufacturing facilities in the back half of the year, I'll say compared to the first half of the year, I will say I think a number of divisions, the volume going through the plants will be increasing over the first half of the year. Again, going back to investments in unmade capital in manufacturing, finding new great employees in manufacturing in a large number of facilities. That said, supply chain, even though in many areas it has gotten better, there's many areas where it still continues to be very stretched, and it is still a daily, I'll call it firefight, making sure we have components, et cetera, across our brand. There's still a lot of headwind, I would say, in navigating supply chain, which obviously has a direct impact on getting units out the door. I still think by and large, you know, Jeff, that from a volume standpoint, we will be ahead in most of our manufacturing facilities in the back half of the year compared to the front half.
spk09: I think, Jeff, we're expecting, and it's kind of tied to Brian's comment, I mean, I think that a lot of the investments that we're talking about, I mean, we've been making them through the year, but it takes a while to kind of realize the benefits of a lot of the manufacturing equipment that we're talking about that's being even installed as we speak. One of the other things also that we didn't comment on, but we've seen as of late in surging COVID cases as well, and it's different than before because we're not talking about people going to hospitals and kind of the life-threatening situation, but it's affecting manufacturing, and we can wake up and have 20 to 30 people out of a factory and they're out for, you know, for a week, right? So, you know, those are the things that are happening, and, you know, it impacts lead times unexpectedly, right, because you can't plan for when somebody's going to get COVID and it sets you behind. It also does drag on, you know, the profitability. I mean, I think there's a lot of headwinds that we are navigating as we're kind of, you know, posting the results and trying to get to the high level. So that's where you can, you know, another factor that's continued to to drag out the lead times a bit. And I think with Steve's comments of getting lead times back to pre-COVID levels, it's really talking about where we want to be at the end of the year. And I think we've got a path there. Certainly some of these other overhangs can still be there, but we are in a better position with our supply chain than before. We tend to Some of the areas have improved, whether it's like compressors or foaming or availability of steel. The areas that we have tightness, we've increased the throughput from our suppliers by 20%, 25%, et cetera. However, your production is only as good as kind of that last component, and that will continue to be a challenge, there's no doubt, as we go through the rest of the year, particularly in areas like controls and electronics.
spk07: Okay, good color there. Just on these deals, it looks like you did $527 million in annual sales. Just wondering how to think about the profitability of these businesses collectively, or if you want to go into a couple. Coming in, are these at fleet average already, or are these businesses like others where they come in lower and you have an opportunity to drive the margins up?
spk09: Thanks. That was a question on acquisitions. Yeah, on the acquisition EBITDA levels. Yeah, I mean, it's pretty typical, Jeff. I mean, obviously, we've done quite a few here in a short period of time, although we always, you know, that tends to happen with us. They're lower than the platform average, I would say. If you kind of go across the portfolio, by and large, they're all very respectable, you know, healthy margins, but, you know, they're certainly... Similar to the past, we'll work on synergies and commercial opportunities together to bring them up to the platform average over the next several years.
spk07: Okay. Thanks so much, guys. Thanks, Jeff.
spk01: Our next question comes from Tim Stein from Citigroup. Please go ahead.
spk03: Great. Thank you. Good morning. The first question I have, this is aimed at the commercial business, is just the kind of first half versus second half, you just outlined that the volume expectations on volume, how should we think about incremental pricing? Uh, just given the, the actions that you've taken in past months, um, the kind of the, the pickup that you get there as we begin to flow that through the PNL, is there a way to help, help just think about your first half versus second half from a pricing standpoint?
spk10: Yeah, you know, as I noted, our profitability is going to go up each quarter. We've continued to face increased, you know, costs as well, right? But on the balance, you know, we'll still be ahead, right? So we just, you know, sequentially, you know, posted, you know, 110 basis points ahead. improvement in commercial. I think things will continue to grow, again, sequentially. I think it may be a little bit of a challenge to exceed that growth amount sequentially. Again, a lot has to do with mix and supply chain levels, but it still could be around that level you know high uh uh i'll call it high double digits you know basis points uh in the next quarter or two again you know i'm not going to be uh extremely uh you know precise you know with it but we still expect to get you know what i would consider meaningful margin expansion in in the back half okay so that's helpful brian thank you and then maybe one i don't know if james or steve um
spk03: The question is, again, also aimed at commercial. Just the discussion of digital and, I guess, connected equipment or smart iron, as nebulous as that is, but how do you think about what's kind of in the backlog and from a mixed perspective? Again, I know it's not that easy to slice it, but As these products continue to gain traction, is there a way to think about, maybe it's a 23 or maybe further out, what kind of impact these higher technology solutions can potentially have from a margin standpoint?
spk05: Well, I think as we look towards the back of 22 with the adoption of the Middleby One UX and, you know, control platform, you know, these are going to go on to our, you know, higher technology, higher margin, you know, products, which, you know, by and large are what our customers are, you know, seeking day-to-day when they look for, you know, labor, you know, food waste solutions they are driving to these products. And all these products are also then tied to, you know, our open kitchen IoT, you know, automation platform for the restaurant. So, you know, we believe, we feel very strongly that, you know, coupling the connectivity platform offering with, you know, the Middleby OneTouch control and the SaaS model that we are offering along with these products will, you know, help, you know, drive, you know, the technology sale with our products, and also really making, you know, additional Middleby products more sticky as, you know, restaurants kind of one by one or one fryer or one oven at a time adopt our open kitchen platform.
spk03: Okay. I guess I didn't ask it well. Effectively, okay, distill that into what percentage of the backlog or what percentage of the portfolio could this impact or could this apply to? Just to get a sense for, is it, you know, 3% of the business or is it, you know, in the, you know.
spk09: No, I think it's substantially. And I'm not sure, you know, I mean, we've got a lot of technology solutions, but I mean, as it relates to what, you know, I think we're interpreting, you know, which is, you know, the strategy is, you know, launching a control, which James has got going on to 50 products by the end of the year, but it's going on to Pitco fryers, Turbo Chef ovens, Middleby Marshall conveyors, CTX, you know, automated conveyor systems, Nico, Concordia, coffee, Taylor, you know, grills and frozen, you know, et cetera. Right. So these are higher, technology products right so now you've got a one user experience and there's a lot of automation in there because it's simple to use intuitive training is a big issue you know in the restaurant so having that user you know experience it's going to be on a lot of products right like I don't know we have a percentage but it's not 3% that's a large percentage of our you know portfolio you know, will it be on a six burner range? Perhaps not. But, you know, it's going to be, you know, a lot of our portfolio fits into kind of this higher end technology and that is where the mix is going. And then I think, you know, one of the things that's very exciting and, you know, for us is it's kind of an out of the box solution. So when you have that middle B control, it's Wi-Fi enabled, which means, you know, as a user, would you like to have it, you know, now open kitchen connected? The answer is yes or no. And then you have the ability to say, yes, I would like to have kind of a online experience, then you can monitor, manage the equipment, and then you're talking about improving performance, increasing uptime, reducing service costs. And it's got a high ROI to our customers. So as we go into next year, kind of this out-of-the-box experience with the Middleby Control Open Kitchen enabled, you know, 2023 is really inflection. We've got, you know, right now open kitchen has over 10,000, you know, installs, but it really is going to be, you know, we'll, we continue to add, um, you know, chain accounts and larger customers, but this will really be bringing, uh, IOT, uh, to the masses. So, um, so it's going to be, you know, I don't, I don't think we're at a point where we're going to say what that, you know, percentage is, but you know, it's, you know, it's, it's kind of, uh, early chapter, and I think we're going to, you know, be having a lot of penetration over the next few years.
spk03: Good. Good stuff. Thanks for the time.
spk01: And our next question comes from Larry DeMaria from William Blair. Please go ahead.
spk02: Hey, thanks. You guys touched on this, but you gave, obviously you have backlog and a good plan for the rest of the year, and you called out incredibly strong food processing orders and shortened lead times, which is good. Can you give us some color in month-to-month inquiries, order rates, or just color, not necessarily real numbers if you don't want to provide them for CFS and RESI, which are obviously more sensitive to inflation and interest rates? Logically, there should be some near-term concerns and choppiness and an otherwise positive long-term backdrop for the reasons you mentioned, but also logical that orders would be coming down as lead times shorten. So just Can you get us comfortable that the fundamentals are still there in the near term, given the economic backdrop?
spk10: Well, I hope that my guide on what we're going to deliver on revenue ensures that we still have plenty of business in the backlog in coming in. And I would say that conviction matters. you know, continues. You know, you talk about, you know, economic, you know, backdrop and such, and I think as Steve noted, you know, as I kind of speak broadly or in generalities, right, that isn't impacting how our CSG customers are, you know, investing, right, because they're they're investing for the long term here, and we haven't seen impacts there. As I look across residential, we continue to have healthy backlog levels, healthy margins, and again, we expect to continue to improve what we've delivered on currently.
spk02: Well, sure, I mean, I get that you have backlog because you've had the long lead times and demand has been strong, but on a month-to-month basis, has there been any delineation from the trends in resi or commercial? It sounds like not in commercial, but are there any incremental concerns on the resi side? And recognize you have backlog, but obviously that gives visibility for a certain period of time.
spk09: Yeah, I mean, so, Larry, I mean, a couple things. One, we're not going to get into month-to-month trends. And I think in the world we live in, there's a lot of, you know, dynamics, and I'm not sure what you take out of it anyways. I think there's no question that, you know, residential is, you know, the piece that's, you know, closest to the consumer in a market like this. That's, you know, that's the one that's going to, you know, have the backdrop that's kind of the most, you know, quote, unquote, you know, at risk, you know. And I mean, I think certainly we, you know, if the Housing market and, you know, consumers are spending less there. Will we see some effect? You know, absolutely. I mean, I think, you know, that being said, you know, I think, you know, a couple things. One, you know, we do believe that, you know, we're positioned in the better part of the segment, kind of, you know, premium housing, et cetera. You know, even if you look at more recent statistics of, like, home sales, you know, as I mentioned, it's been up. remains up, you know, while, you know, while the lower end of the market, you know, is down. So I think, you know, we're in the, you know, intentionally, that's why we're in the, you know, the premium, you know, part of the, you know, the segment. So I think it will perform better. I think, you know, secondly, I mean, you know, we do believe we've got a lot of long-term market share opportunities, right? I mean, so, you know, we've got phenomenal brands, new product pipeline, a lot of those products are being brought to the market for the first time. We're increasing awareness. That's why we've invested in our showrooms. That is why we've created a designer team, which did not exist a year ago. And we're exposing a lot of these designs, brands, product offerings, innovations to part of the residential market that, frankly, had not seeing them several years ago. So we're kind of like a new entrant in a lot of ways there. And we're, you know, we're, I'll say we're the cool kids on the block with kind of a lot of the new eye candy. So, I mean, I think, you know, we, there's certain things that we can do to drive, you know, market share that, and, you know, hence the very intentional investments, you know, we've been making, you know, that will offset, you know, that in part, you know, but I'm not going to tell you that there's not any pressure on housing right now. Now, I also suspect if you look at a lot of the longer term trends in housing, including new home builds, which are significantly under where they were in the 90s and a lot more new households have been created, but not as many new homes. I mean, I think there's kind of a longer term backdrop. So, You know, we've got a backlog as we kind of work through kind of, you know, whatever, you know, orders may be, you know, in the back half of the year. But, I mean, I think we're excited about the growth opportunities and kind of the initiatives, you know, we're taking to expand in the marketplace. You know, I will say, you know, also, again, not, you know, month to month, but, you know, we're the, you know, including the second, you know, quarter, With some of the disruption that certainly happened as interest rates started to rise and people started talking about recession, our residential orders still were up over 2019. So we've continued to post positive trends and orders thus far across all the businesses through the first half of the year.
spk02: Okay. Thanks very much. That's real helpful.
spk01: And our next question comes from Tammy Zakaria from JP Morgan. Please go ahead. Hi, good morning.
spk04: Thank you so much for taking my question. I have a quick couple of questions. The first one on China. Are you able to quantify how much of sales headwind you think you faced in the quarter due to China's lockdowns and which segment got hurt the most?
spk10: So China really had the most impact on residential. And we had discussions a quarter ago about where we thought residential might come in this quarter, and certainly the top line was below what we'd expected. I put it at the kind of you know, mid to high, you know, single digits, you know, percentage of revenue for this segment that, you know, we felt we, you know, we lost beyond, you know, what we, you know, thought might have been the impacts.
spk04: Got it. That is super helpful. And do you see like this headwind partially being recovered in the back half or it's kind of lost sales?
spk10: Yeah, I mean, I think it is, unfortunately, largely lost sales. What's a little bit hard, what makes it hard to answer that question, though, is a couple of things, right? The overall dynamics in the grill market, as well as the seasonality of the business, right? Where Q3 tends to be the lowest quarter of the business anyway, and then things pick up in Q4 with some seasonal opportunities that actually exist then, as well as I'll call it the buildup that's happening in Q4 and Q1. you know, for the grill season as you enter the, you know, the next year. So, again, I think that, you know, if it wasn't a business that had such a seasonal pattern, it would be a little, you know, easier to see. But that's why, you know, where I did comment that Q3 is weaker than Q2, you know, I don't want that takeaway to be, you know, that that was from China. It's much more from, again, the seasonality, the patterns of that business, of that area of our business.
spk04: Got it. If I can squeeze in one quick one. Can you quantify, and I'm sorry if I missed it, but can you quantify how much price cuts headwind you've had in the quarter and what progression of that you see in 3Q and 4Q?
spk10: Yeah, no, I think what you're seeing is that, you know, we're moving to the, you know, to the other side of it, right, where we, you know, had been talking about we were behind on price cost. You know, I think, you know, Q2, we actually, you know, made more improvement than, you know, than we were, you know, anticipating in the quarter. So, you know, pleased where we are with it. The cost side is continuing to go up for us, but nonetheless, as I noted, we are going to continue, we believe at this point, to stay ahead of it.
spk04: Got it. The price-cost should be a tailwind in the back half if things stay where they are.
spk10: Correct.
spk04: Got it. Thank you so much.
spk10: You bet.
spk01: That concludes our questions for today. Now I'd like to turn the call back over to management for final comments.
spk09: Well, thank you, everybody, for joining us on the call today. We are excited about the remainder of the year and all the great things that we have going on at the company. Hopefully that came through today in today's call, and we look forward to speaking to you in the third quarter. Thanks. Bye.
spk01: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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