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spk04: Thank you for joining the Middleby Second Quarter 2023 conference call. With us today from management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Operating and Technology Officer James Poole, and Chief Commercial Officer Steve Spittel. We will open the call with management comments and then open the lines for questions. Directions on entering the queue will be given at that time. Now I'd like to turn the call over to Tim Fitzgerald. Please go ahead, sir.
spk13: Good morning, and thank you all for joining us today on our second quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. We're pleased to have posted solid results, reporting a record second quarter with strong performance at both our commercial and food processing businesses. And we continue to progress our residential business while it is impacted by the challenging market conditions and destocking of inventory at our channel partners. We posted overall improved profitability during the quarter and continue to make progress towards our longer towards margin targets. Our profitability is benefiting from our focus on new product innovation to drive improved sales mix. We are realizing efficiency gains reflecting the impact from our manufacturing investments and we are focused on longer term supply chain opportunities with ongoing product design and sourcing initiatives providing for greater improvements over the next year. While market conditions have proven to be challenging, particularly in the residential segment, the inventory destocking, which has impacted the first half for our commercial and residential businesses, we believe will largely be normalized by the end of the third quarter. And we continue to have strong engagement with our customers across all three of our food service businesses. Our new product introductions have accelerated over the past several years as we target growing market trends and launch game-changing innovations addressing customer challenges of labor, speed, energy, food waste, and sustainability. In our commercial food service segment, we've expanded our electrified and bentless cooking solutions, developed new and exciting ice and beverage offerings in a large addressable market, and established Middleby as a leader in controls, IoT, and automation solutions, positioning ourselves to capture the future of the industry. At residential, we have significantly broadened our portfolio of indoor and outdoor premium brands with industry-leading designs, a pipeline of innovation addressing the growing demand for energy-efficient electrified products, and with initial launches of connected equipment with more to come. At food processing, we have executed on our strategy of becoming a leading provider of full-line integrated and automated solutions. for the protein and bakery markets while successfully expanding in new markets such as bacon, cured meats, alternative protein, and pet food. Through our substantial go-to-market investments, we're creating greater awareness for our brands, product portfolio, and the latest innovations with a growing pipeline of customer opportunities. The investments we have made in our innovation centers have proven to be a strategic asset for our businesses The traffic at our commercial, residential, and food processing showrooms continues to increase. We now have a total of eight innovation centers. We have invested heavily in training with our channel partners, and our world-class culinary teams are engaged daily with hands-on customer demonstrations. We are realizing the benefits from deepened relationships with our sales partners and have developed important new customer wins, demonstrating the value of these strategic investments. We're excited to have most recently opened our flagship residential showroom in Chicago, featuring the latest designs and innovations across our entire indoor and outdoor Middleby brand portfolio. Since our June opening, we have quickly booked the calendar with customers discovering all that Middleby Residential has to offer. We're confident these investments of today are translating into the early chapters of a long-term impact and growth trajectory for all our food service brands. In the quarter, we also completed several acquisitions with the additions of BlueSpark and Filtration Automation. BlueSpark expands our software development and in-house controls manufacturing capabilities, extending our lead in digital controls and IoT, an area we're confident will provide Middleby with a clear competitive advantage as automated digital solutions are implemented in the commercial kitchen. While filtration automation furthers our strategy of developing best-in-class full-line automated solutions, adding a patented oil filtration technology providing our customers with operating cost savings and improved food quality with our now expanded frying solution. In early July, we also completed the acquisition of Terry Water Solutions. The Terry chemical-free biodegradable water filter solution provides for improved equipment performance reduced maintenance, and consistency in food quality, along with ice and beverage. The combination of the Terry water solution with our portfolio of food, ice, and beverage equipment provides for a better customer experience along with significant growth opportunity in a sizable and attractive after-sales market. And just last week, we announced our most recent acquisition of Tradewind, a manufacturer of residential ventilation complementing our portfolio of indoor and outdoor cooking brands with an expanded offering of unique designs and custom ventilation solutions. Our critical strategic investments in innovation go to market capabilities and acquisitions, continue to build upon our competitive positioning in the marketplace, and further strengthen each of our three industry-leading food service businesses. Now I'll pass over the call to James to spotlight more on some of our most recent product launches that address the growing electrification trends and the demand for automation in the kitchen. These new product innovations are also highlighted in our investor slide deck. James.
spk08: Thank you, Tim. Today we'll discuss some exciting developments in our product lineup, focusing on sustainability and electrification in the residential space. Locker New, Rangemaster, AGA, Novi, and Viking have recently launched or are launching a full suite of induction products for homes. These offerings provide our residential customers with the same benefits that our commercial customers rely on today, safety, speed, precision, performance, and sustainability. Additionally, Cook Tech, one of our commercial brands, is introducing a few unique products for the residential use, such as a drop-in induction walk. Middleby is also proud to bring the most extensive lineup of induction range tops and ranges to the market with designs ranging from classic French to strong American commercial. And Novi is introducing an innovative undercounter product called the Invisible Hob, which allows users to cook directly on their countertops. As before, you can find these new products in our investor deck. I've also included a slide that compares the benefits of induction versus electric and gas cooktops, highlighting the near-perfect efficiency that induction yields, along with a brief explanation on how induction works. Now, let's revisit a highly successful product that continues to gain traction in the commercial space, the Taylor Next Gen Grill. While it has been the griddle of choice for a few high-volume, quick-service restaurants for the past couple years, the general market introduction of the next-gen grill continues to generate strong interest and adoption among our customers, especially those who have had the chance to come experience the grill's capabilities firsthand at our Middleby Innovations Kitchens automation pod at NAFM and the NRA shows. The next-gen grill brings embedded automation through active compression cooking, allowing for cooking from both sides simultaneously. With its continuously variable gap control, this innovation, this innovative cooking method offers next-generation precision. The next-gen grill can control its platen gap or compression with an accuracy of five thousandths of an inch and a platen parallelism within 10,000ths of an inch. This level of precision enables our customers to achieve consistent cooking back to front and side to side, dramatically improving consistency and reducing cook times up to 80%. Furthermore, this automation significantly improves food quality by reducing instances of over or under cooking, thereby ensuring safer offerings and minimizing food waste. ultimately enhancing our customer profitability and consumer satisfaction. Before I conclude, I'd like to give you a glimpse of what's coming up. In the next quarter, we will focus on new products slated for launch in Q4 and Q1 of 2024. Expect exciting introductions such as a rapid-cook oven from TurboChef, a groundbreaking frying innovation from Pitco, and a new residential platform from Viking consisting of cooking, refrigeration, dishwashing, and built-in accessories. Thank you, and now I'll pass it over to Brian.
spk02: Thank you, James. I'm excited to be reporting these record results from our Blodgett facilities. And before I get to discussing the past quarter and some record results, I'd like to look back a lot longer. During this past quarter, Blodgett celebrated its 175th year of making ovens right here in Vermont. This is certainly our oldest domestic company, and I have not attempted to estimate how many pizzas and cookies have come out of their ovens, but I know they are responsible for my favorites. Also, when Tim began executing our M&A strategy at the beginning of this century, the process began here. As we look forward, Blodgett Innovations are helping to lead the way. So I want to thank the entire Blodgett family for helping build the foundation of Middleby and for leading the charge as we reach new heights. Speaking of new heights, Q2 was a record quarter, our highest revenues ever. They well exceeded $1 billion. And in spite of continued challenging market conditions, our organic adjusted EBITDA margin was 22%, with nearly $229 million of adjusted EBITDA having been generated. On a last 12-month basis, we are at $885 million of adjusted EBITDA. While our total organic revenue was down slightly given the residential headwinds, we were still able to grow our adjusted EBITDA dollars 4% over the prior year. our total company margins expanded 130 basis points. And all the margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. GAAP earnings per share were $2.16. Adjusted EPS, which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation in the back of our press release, was $2.47. Commercial food service revenues were up nearly 3% organically over the prior year. The adjusted EBITDA margin was 28%, over 250 basis points ahead of the prior year. We are very pleased with how margins have continued to evolve as we see benefits from an improved product mix, from our capital investments, from our operational improvements as we integrate acquired businesses, as well as our constant focus on costs and driving pricing response to inflationary pressures. In residential, we saw an organic revenue decline of 27% versus 2022. The adjusted EBITDA margin was nearly 14%. Food processing continues to perform very well. Total record revenues were nearly $189 million an increase of nearly 27% organically. Our adjusted EBITDA margin was almost 22% for the quarter, up 270 basis points over the prior year, and we were at just about 23% for the year. Our operating cash flow generation was 62 million for the quarter, and a rather strong $154 million for the first half of the year, a $64 million year-over-year increase. During the quarter, we invested approximately $23 million in capital expenditures and $26 million on acquisitions. But looking at the past 12 months, our cash flows were approaching $400 million. Seasonally, second-half cash flows are even stronger for us. Thus, we look forward to continued strength in cash flows in the back half of the year, driving higher cash conversion rates as we realize further working capital improvements. This then should result in, for the full year, having operating cash flows exceeding that income. As we closed Q2, our total leverage ratio moved down to 2.9 times. Our covenant limit is 5.5 times, so we currently have over $2.3 billion of borrowing capacity. While we are very pleased with how we performed in the first half, especially given notable headwinds, we anticipate that the second half of 23 can be better than the first half. Even more importantly, we remain bullish as we look out over the next few years and tirelessly work to increase shareholder value. But let me spend a little time on the very near-term outlook, starting with residential. Demand in the marketplace obviously remains well off the peak values or the peak levels seen in the first half of last year. Challenging market conditions persist, and these extend beyond the U.S., The UK is a meaningful market for us, where inflation, interest rates, and the resulting consumer behavior are headwinds. Q2 should hopefully be the trough for RESI. As we consider the recent positive momentum in order trends, we think the business can hit an inflection point coming out of Q3. Nonetheless, looking at Q3 sequentially, we see sales down modestly from Q2. Seasonality and absorption impacts will challenge margins, but they should remain at least double digits. To finish the year, we do believe the fourth quarter should be stronger than the third and should deliver year-over-year growth. For food processing, we obviously posted a very strong second quarter, and revenues were higher than we had anticipated when we discussed this segment three months ago. Our backlog remains strong. We are seeing strength in many markets we serve, including cured meats and buns and breads. However, some areas are facing headwinds, especially in poultry and bacon, where the underlying food costs are high, but we expect this may improve in the short term. As we look at these factors, delivery schedules, seasonal impact on operations, as well as product mix, Q3 performance will be down from Q2 and likely around Q1 levels. Nonetheless, Q3 will deliver year-over-year revenue growth and margin expansion. Q4 will be stronger than both Q3 and the prior year, so 2023's second half should be better than the first half. For commercial, when thinking about near-term performance, we believe it is important to note that Q2 revenue and profitability also exceeded our expectations based on our outlook from a quarter ago. Accordingly, I expect Q3 to be fairly consistent with Q2. Also, we expect the inventory destocking that we mentioned during the call last quarter to be behind us after Q3. Then, Q4 should be even stronger than Q3. This, too, results in a better second half of the year. Putting the three segments together, then, when looking at the total company potential Q3 performance, revenue and earnings will be lower than Q2 due to the lumpiness in FPG and the anticipated bottoming out in RESI before an anticipated stronger fourth quarter for all segments and the company in total. I reiterate that on a total company basis, we expect Q4 to be stronger than both Q2 and Q3. This would result in total company growth for fiscal 24 over 23, despite the challenges in residential markets. As I look across our entire organization, I see innovations being delivered and we are uniquely addressing customer needs. Our profitability and cash flows continue to drive our unmatched ability to innovate, to add new capabilities, to develop stronger sales and go-to-market processes, to improve our systems and modernize manufacturing, to enhance and expand our service, and to grow our reach globally. From Vermont to California, from the UK to China, our teams are fully committed to continue delivering strong results. We all come to work every day hungry and thirsty for greater success. We remain excited about our prospects for a long time to come. We have all the confidence in the world that we will continue to reach new heights. Thank you, and we'll now take your questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question is from Siri Boroditsky of Jefferies. Please go ahead.
spk03: Thanks. Good morning. I wanted to see if we could quantify the impact of the stocking on the quarter and then how you're thinking about it for the full year for both segments. And I think we could argue that in a flat demand environment, this destocking should really be a tailwind into next year. So if you could help us size that, I think it would be very helpful for people. Thanks.
spk02: Hey, Siri. It's Brian. You know, given the Middleby way, I'm not going to offer you specific numbers to size that. But I think it's important to consider, you know, is, you know, overall what's happening in the market and the results, you know, we put out there, right? So Q3, I'm sorry, Q2 is really strong. And, you know, and I commented that, you know, we expect, you know, Q3 to be, you know, similar to Q2. And I'm starting with commercial here, you know, given what's happening, you know, in the market with our dealers and customers about their levels. But then, you know, Q4 does improve and, As we've noted, based on the trends and the customer needs, we do think it does present a tailwind beyond when we get past the third quarter. As you think about the residential markets, obviously they're challenging these days in a variety of of product categories and certainly our customers, the dealers, the retailers are being cautious in managing their balance sheets as well. Q3 is often a seasonally somewhat weaker quarter as well for a variety of our products within the residential segment. But that's where we think things do start to pick up in Q4 for us.
spk03: Maybe phrasing the question a different way, could you go through what you're seeing from a sell-out perspective in commercial food service and in residential?
spk13: Yeah, so, Siri, I think we're going to have a hard time quantifying it the way you would like. I would say, you know, the impact is more significant in residential than commercial, certainly. We think that the that our channel partners, it's a headwind that will go away, and then I think the channel partners will be a little bit more cautious in terms of how they reload stock in going to next year, so then it'll become more neutral, and then I think as you're alluding to, it'll become more of a tailwind as we move into next year, particularly in the back half. The we don't have, you know, there's a lot of brands, and then you're cutting across, you know, those two segments. You know, when we have, you know, engaged with the partners on commercial, there's pretty strong sell-through. So, I mean, I think that's one of the things that gives us, you know, confidence as we're closer to them than ever and really understanding what is selling through and how we kind of fit into their business plans, and then certainly, I think there's two aspects there. One is kind of the general market, and then there's the chain. So the general market, I mean, we kind of understand where inventory levels are with our channel partners, and we think we're kind of nearing the end of that, as I kind of said in the comments at the end of the third quarter. With the chains, I mean, I think there's a lot of public information out there where you can see store openings and plans are pretty strong. So there's a little bit of inventory in the channel as they wanted to make sure that they had the equipment to ensure that they could execute on those plans. So I think we feel pretty good about the end markets in commercial and certainly where we're situated there. Residential, I mean, certainly as you kind of pull it apart, the biggest impact is on the outdoor grill brands. You know we think that there will be will be in a much better position as we exit the year We do you know actually we turn positive and outdoor grills as we we hit the fourth quarter because we really started to see a lot of the impact in the You know the grill category at the end of last year and some of the dynamics there so There's there's a little bit of color around that. I know it's not quantifying it. You know specifically certainly I feel like we finished the year in a pretty good place, and it kind of sets a pretty good backdrop for 2024.
spk03: Appreciate the color. I'll leave it there. Thanks.
spk04: The next question is from Mig Dobre of Baird. Please go ahead.
spk12: Yes, good morning. I want to stick with this topic that Sari brought up, destocking. Just to be clear here, is the destocking occurring in the general market with distributors and such, or is it happening with some of the QSR customers? It kind of sounded like it's happening with both, but I'm not clear as to how much visibility you have in terms of where these inventories are and whether or not, you know, you can be firm in your assessment that, yeah, but in Q3, this problem is really solved.
spk13: You know, we don't have perfect visibility, right? Like we don't, you know, have the inventory that's in the channel, but we're, you know, we're heavily engaged with the channel. So I think we get a lot of indications and, you know, sharing of certain numbers, particularly with, in the larger areas. So, I mean, I think we do have some pretty good visibility. And, yes, the issue is, you know, has been in both. Now, in the general market, it tends not to be our product. I mean, I think they, you know, as we kind of went through supply chain, a lot of the channel would get their hands on anything that they could, right? So, I think it, you know, much like much like our business, you know, people want to normalize their inventory. So as they work through, you know, the inventory and maybe destocking, you know, some other products that they wouldn't have, you know, bought under ordinary situations that'll kind of get, you know, they'll start to kind of drop those orders back with us and then, you know, perhaps, you know, move to some normalized level of stock with us. So that is kind of what we've seen in the, you know, the marketplace. So And yeah, with the change, I mean, I think they're carrying a little bit more of inventory that they had in the past. But I think, you know, given where we see their growth plans versus what we think is in the channel, I mean, I think we do have a pretty high level of confidence that this is, you know, by and large, all moved through, certainly by the end of the year, but, you know, largely by the end of the third quarter. So, I mean, it'll, you know, we think we got one more quarter to go here and then certainly becomes a nominal headwind versus what it's been in Q2 and what we think we'll still have at the beginning of Q3.
spk12: When you're talking about a headwind here, has this destocking resulted in a headwind to your shipments, so your realized revenues in a quarter? Or is this a headwind to your bookings and orders?
spk13: I would say both. Yeah, because I think so, you know, we didn't touch on lead times, but I mean, I think, you know, again, we've got a lot of brands and, you know, the world is still resettling to normalization. If you kind of look across much of our portfolio, We're back to very normal or reasonable lead times. They're still out a little bit in a few categories, but let's say for 80% of the portfolio, orders are starting to equal sales kind of on a normalized basis.
spk12: Right, and that's kind of what I was trying to get at because if I'm looking at the last reported backlog data that you've given us for commercial food service at the end of 22, that was call it $755 million, pre-COVID when lead times were normalized, the backlog was less than $200 million. So I'm sort of curious as to how you think about this dynamic for 2023, where backlog is going to be exiting 2023 as these lead times have normalized. And related to this, Does this backlog burn then become a headwind for production because you have to normalize your own production into 2024?
spk02: This is Brian. I mean, obviously, our backlog continues to be, I'll call it as an elevated level when you make those comparisons to pre-COVID times. You know, I don't think, I think you're getting after, you know, what's going to be, you know, the absorption impacts from bringing down the backlog to what I would kind of say, and, you know, Eric quotes a normal level is, and we don't think that will have a meaningful, you know, negative impact on absorptions. You know, certainly we expect, you know, the new, you know, normal to be higher than it was pre-COVID, you know, times, you know, given inflation, given our business is larger, and how our relationships have changed with the customers, given the growth that they are still going through over the next coming years in terms of expansion, just leads to ordering patterns that are more ahead of their needed delivery date than it used to be, right? So we're know a backlog for again focused on commercial here used to be closer to a quarter of a quarter you know we'll still see where the new normal is I'm not sure that we've you know know exactly yet but I'll say I'd expect it to potentially be closer to you know half of a quarter in the backlog and again given our current backlog levels given you know some you know supply chain challenges in a few narrow areas. I don't think we're ready to yet say we are completely in normal times, but that's a little bit of an indication how I think things will play out over the next 12 to 24 months.
spk12: One final question, and I apologize for insisting on this, but I get this question a lot from investors. If I take what you just mentioned a moment ago It sounds to me like by the end of 2023, clearly backlog is going to come down relative to where it exited 22. Implicitly, what that means is that your shipments have exceeded your order intake for 2023. So is it fair for us to assume that demand just catches back up in 2024 and you won't have an impact on production? Or will you have to adjust production into 2024, again, if nothing else changes? Thank you, and I'll finish there.
spk13: Yeah, I think it's the effect of normalization. So we are going to have a lower backlog as we exit 2023 than 2022. There was a lot of orders that, you know, got pulled ahead, and you would have had periods where our order rates significantly decreased. Outpaced our shipments as you went through the last several years, right? So I think you know some of this has been I'll say normalized by our production Rates, so as you kind of go through the you know, the back half of this year, you know backlog will You know normalize the inventory in the channel will normalize the order patterns will normalize and I think we'll you know fundamentally see order patterns and shipments that will kind of match the demand. So I mean, I think that's where we look at what's happening in the marketplace and the strength of what we see with us in the dealer channel, where we're at with the chains, certainly some of the business opportunities that we are developing with new customer wins, new products, et cetera. So I mean, I think that's where we're And obviously, as you mentioned, the chains are healthy with their store opening plan. So I think that we believe, yes, there are all these moving pieces. That's kind of the world of disruption and supply chain that we've all lived through in the last several years. We see that kind of being in a much healthier, normalized situation going into 2024. So I think the backlog coming down is not necessarily... headwind for us. And I think that backlog is still a healthy backlog relative to where we would have been in a pre-COVID period.
spk12: Appreciate the call. Thank you.
spk04: The next question is from Jeff Hammond of KeyBank. Please go ahead.
spk01: Hey, guys. Good morning. Just want to, I guess, cutting through the you know, the deep stock noise. I'm just trying to get a better sense of underlying business momentum. You know, the QSRs have kind of been blowing and going on new store growth and, you know, talk about, you know, rollouts, just, you know, maybe update us on what you're seeing in real business momentum. And then, you know, again, I think, you know, concerns over tightening lending standards, what you're seeing on the smaller independent side around that.
spk06: Yeah, good morning, Jeff. It's Steve. So maybe I'll give you a couple areas of what we're seeing, just the underlying demand market. So you touched upon the large QSRs, which we've hit before. As Tim said earlier, we've been very close to them. And again, they've been very transparent around their new store opening pipeline, obviously the back half of this year and even into the first half of next year. So they've really recommitted to those plans and so continue to see that really be a strong point of demand for us. Also seeing the change, certainly still trying to solve for all the challenges that we've talked about over the last couple of years, whether it's labor, whether it's via service. et cetera, and I think that is driving adoption of new technologies, which I do think will lead to some rollouts, you know, as we get into the back half of this year and into next year especially. You know, Tim also talked about just the general dealer side of the business, which has been, I think, an area of focus more so than ever the last year or two. A big part of that has been we have more dealer trainings and dealer events coming through the Innovation Kitchen in Dallas, which I think has been a huge success for us. So it allows us to get closer to the dealer market, which, again, I think does continue to do well for us, which I guess would lead into the last comment you asked about the smaller independent restaurants, which really does fall probably more in that dealer side of the business. I would say, by and large, Jeff, we have not seen a lot of issues from a lending standpoint, causing issues in equipment demand, so have not really run into that. And I would just say maybe the last thing I've touched upon before, but I think it's an important one to note, we talk about change, we talk about the dealer business, the consultant side of our business as well, I think is always a very good indicator of both short-term, but actually the next 12 to 18 months of demand, whether it's around schools, institutions, and I think that is a segment, especially the last several months, that we can track projects specifically that I think give us some pretty good visibility into demand in those specific areas, especially for 2024.
spk01: Okay, real helpful, Steve. Just on the resi It seems like maybe that the snapback or the bottoming process is taking a little bit longer. I'm just wondering if that's, you know, destocking being deeper or is it, you know, something in the order rates? I think you mentioned, you know, UK. I know on the grill side, Traeger was kind of out declaring victory on destock and their stock is bouncing. Just maybe frame what's different versus maybe previous expectations.
spk13: Yeah, I think, you know, the residential market has been tougher this year, right? I mean, I think interest rates, you know, continue to rise. Housing market has been a bit challenging. So I think generally, you know, not that we were expecting a robust market, but I think, you know, some of the headwinds there have been a little bit more, you know, challenging as you kind of, you know, again, think about the pace of interest rates in particular as you went through the front half of the year. I think that in the U.K., which is a big piece of our business and residential, has probably been even a little bit more challenged than the U.S. market. So I think those are some of the things that we've seen as we've gone through the front half, along with the destocking, which is, again, hits the grill business more than some of our other businesses. businesses which tend to have a little bit more of a make to order aspect to it. So that being said, I do think we've seen things start to what we think bottom out. I think anytime there's a lot of uncertainty and disruption, things kind of slow in a place, and that's been the case with residential. We've seen, I'll say, some improving order trends as of, you know, late, you know, particularly in our core cooking categories. So, and also, I'll say, you know, the electric, our electric products are, you know, as, you know, along with the market overall, and you can see we've got a lot of investment there with an exciting, you know, portfolio and certainly bringing some of the technology from commercial into residential there as well. I mean, those are areas of, you know, of even some, you know, some type of growth. So I think, you know, it's been a little bit more challenging, but I think we're also, you know, at the beginning of, you know, inflection, healthier inventories and outdoor, a little bit of, you know, you know, hitting the trough and, you know, improvement. So, I mean, I do feel like, you know, Q3... certainly is the challenge, but I think we kind of see what's coming in Q4 a little bit as well. So I feel like we're approaching the turn there.
spk01: Okay, thanks, guys.
spk04: The next question is from Tammy Zachariah of J.P. Morgan. Please go ahead.
spk05: Hi, good morning, Tim and Brian. Hope you're doing well. So my first question is, for the food processing segment margin, I think it was lower sequentially on the higher revenues. Anything unexpected happen there? How should we think about margins for food processing for the next two quarters?
spk02: Yeah, this is Brian. The second quarter margins are just impacted by just some of the nature of the mix and the projects that we delivered. You know, I do think the second half of the year will be, you know, at least in line. And then as we get into the fourth quarter, you know, trending better than we did in the first half of the year. So I think if you look at the first half of the year as a proxy for Q3, that makes more sense. And then, you know, Q4 always is stronger than the third quarter. Okay.
spk05: Got it. That's very helpful. And then I'm not sure I missed it, but where does your backlog stand for the commercial food and food processing segments today?
spk02: Yeah, that isn't a specific number where we're regularly disclosing.
spk05: Okay, fair enough. Thank you so much.
spk02: You bet.
spk04: The next question is from Larry DeMaria. from William Blair. Please go ahead.
spk07: Thanks. Good morning, everybody. I wanted to follow up on processing. I know you don't want to give an absolute backlog number, but can you maybe talk to your sequential processing orders specifically? Obviously, there's some weakness in the market. Others are calling out. You mentioned some of it. So I'm curious about the order levels and what kind of coverage you think you have over the next few quarters. And since you, I think, called out that you think that the weakness is temporary. So I just wanted to get some confidence that, you know, that's going to look better into 2024 or not.
spk02: Yeah, you know, the backlog remains, you know, strong, I'll say within, you know, on a percentage basis still, you know, within, you know, single digits of the peak, right? So I feel like we have, you know, very good coverage in many areas for the rest of the year into next year. But it is, you know, a business that I'll say that is, is mixed, right? We have some orders that come in that are for products that get delivered in, you know, one to three months, and then we have other projects, you know, that live in the backlog for 12 to 24 months. So certainly, you know, last year and maybe into the beginning of this year were periods of very robust orders and things, you know, with the interest rate environment to have moderated. If I want to be careful with my, you know, comments here, it isn't like what we've gone from, I'll say, you know, good to bad. I think it's, we've gone from, you know, you know, great to still, you know, very, you know, very good. But again, there are some pockets in there that are, you know, that are challenging as, you know, we look at the underlying, besides the interest rates, you know, the underlying, you know, food costs and what that means for customer margins have caused a couple areas, as I noted, to be a little bit weaker than others. But I guess to put it all together, backlog still at what I'll call very high, very strong levels. We talked about some of the lumpiness of the business that caused me to say Q3 won't be as strong as Q2. But again, Q4 will be stronger. And again, don't think anything has fundamentally changed for, as I said, kind of a general health of the business.
spk07: Thanks, Brian. And then I guess maybe a second question on processing would be, you know, are there larger and potentially actionable, you know, M&A deals in processing out there? I know you're trying to get that up to a billion-dollar business, but is there potential for larger M&A there, or is it more likely to continue to pursue some of these smaller ones that you've done and have grown nicely?
spk13: Yeah, so Larry, we're really not going to, I'd say, comment on, I mean, you know, certainly we work on M&A, that's been a 20-plus year history. So, I mean, I think I would just say that we see, you know, significant opportunities to continue to grow the platform both through acquisition and organically. So, I feel like there's still a long, long runway there.
spk07: Okay. Fair enough. If I could just sneak one more in here. Just to clarify, in commercial, you know, we're seeing more concerns around destocking next year, but In the second half, are you underproducing versus retail, specifically, I guess, mostly, if so, in the third quarter? I'm just trying to understand how you're planning on getting that, you know, dealing with the destocking versus the big backlog, et cetera. So are we actually underproducing versus retail? And I'll leave it there. Thanks.
spk02: Can you clarify what you mean by retail? I mean, do you mean by dealer inventory?
spk07: I mean, the dealer inventory and then their sell-through inventory. into the retail, you know, the dealer selling it to the end user? And are you going to underproduce versus the retail? Or potentially, if we don't, then potentially pushing the inventory issue out further, right?
spk13: Yes. So I think the answer to that is yes, we are. I mean, I would say in both Q, you know, the first half as well as kind of what we're talking about here in Q3 is that the sell-through, if you want to call it that, whether that is dealers selling to end users or maybe some of the supply chain that's in the channel that goes to the chains, we are underproducing and our revenues would be less than what we can believe is being sold to the end market and hence some of the destocking in the channel.
spk04: Again, if you have a question, please press star then one. The next question is from Walter Listak of Seaport. Please go ahead.
spk09: Hi, thanks. Good morning, guys. I wanted to ask about the, in the residency business, you know, some of your comments about the outdoor, you know, destocking and the seasonality. I want to make sure that I understand this. So, it sounded to me like that's where you think some of the destocking has ended. And then if that's right, you know, what's the seasonality here? You know, like if the orders have picked up a little bit to fill in, you know, how does third quarter look? And then how does the seasonality impact the fourth quarter?
spk13: Okay, so, yeah, the sell-through has not been great, but the destocking, you know, is – you know, is a greater impact, right, to our revenue, right? So, like, both are headwinds, so, but, you know, but the inventory is continuing to come down. This, you know, the seasonality, you know, you start to get an initial load in, typically in the, you know, in the fourth quarter, and then you kind of get into the, you know, the heavy part of the grill season in the you know, in the spring. So, I mean, as we've kind of gone through it this year, I mean, everybody's been a little bit off of their, you know, their inventory levels. So that's all got to get to a normal, you know, level. So we kind of think that, that by and large, you know, is the case as you get to the back end of the year. And then in the fourth quarter, then you get into some load in for the grill season going into the next year. Now, We do think that retailers will be more conservative in that load-in going into next year. So you may not be quite back to, you know, let's say where it was in the past, but as you start thinking about our comparatives, you know, we really started getting hit with the grills in the fourth quarter of last year. So meaning, you know, there was massive, there wasn't a load-in, there was destocking, right? So I think we're gonna be, you know, largely work through the inventory, maybe not, you know, 100% because you got, you know, different brands, different retailers, different SKUs out there. But you'll have, you know, a lion's share of that behind you. And then you will kind of move into, I'll say, maybe a conservative, you know, stocking season. And then that will kind of lead you to seeing what the growth season for 2024 looks you know, looks like and probably, you know, healthier orders and sales in that period if you have a more normalized season. So, you know, that being said, also, I just, you know, we've had a lot of great new product launches, and they've been, you know, well-received. I mean, they connected Joe, which, you know, James has highlighted, you know, a couple times here. I mean, that's been... sold through. We're trying to keep up with it right now. I think we've got the Gravity Connected Series on Masterbuilt as well, which we're very excited about. I think we believe that we're the innovators in the charcoal category, which we believe is a category that will have some growth in the years to come. We've got really a great suite of products with, you know, some added launches as we go into next year. So, I mean, I think, you know, we've got some added floor space there, you know, with some deepening, you know, partnerships there. And we've also been expanding, you know, some of our, you know, I'll say, you know, digital marketing capabilities there. So, I mean, I think as you kind of look forward to getting into a more normalized, you know, real environment, we're very excited about the portfolio that we have. So we think we've got a long runway there.
spk09: Okay, that's great. Okay, thanks very much. That helps. And then, you know, Brian, you know, during your presentation, you called out the risk of Europe, you know, pretty clearly. But I wonder if you could just help us size, you know, of Europe, like how much is the U.K. versus the rest of Europe?
spk02: Yeah, the UK is a strong majority of it. I don't have the breakdown right at my fingertips for the past quarter, but I'm sure it's in excess of half of Europe's revenue for residential.
spk09: Okay, great. All right, thank you.
spk04: And the next question is from Todd Brooks of the Benchmark Company. Please go ahead.
spk10: Hey, good morning, everyone. Thanks for taking my questions. First is on commercial. I'm just wondering, and you've talked in the past about how the cycle now is very driven by the new unit builds. I'm talking more from the chain customer scaled player standpoint. We're new build driven now, but eventually we shift to an upgrade replacement cycle. Just wondering if you have any thoughts on or from discussions with the customer with these larger chain customers largely being in a much better staffed position from a labor standpoint and with commodity costs rapidly easing, is some of the urgency for either specific pieces of equipment that would attack labor or food waste or more broadly the upgrade appetite Does it get slowed in the environment that we're in, or do you think that the appetite still is strong when you get to the upgrade remodel phase for the existing fleet?
spk06: Yeah, good morning, Todd. It's Steve. So I don't think there has been any slowdown in customers need to upgrade to solve for challenges, specifically call out labor. I think I maybe give you a nuance. When we think about labor challenges in restaurants, there's a number of areas to think about. One, it is finding great employees, which has gotten, I would say, a little bit better over the last six months for restaurants. The cost of those employees, which continues to be elevated, I think the third thing I would call out where we're actually seeing the adoption of some of these new technologies is actually the ease of actually doing the job and the training that comes around with it. You know, James hit the, you know, Taylor double-side grill. I think it's a great example of this because, you know, working a grill, you know, traditionally is probably one of the least fun, you know, jobs in the back of the kitchen, right? It's nuanced. There's a little bit more of an art to it. another piece of equipment. So it's a high level of training. And obviously you want to make sure you're cooking your, your chicken, your steak, whatever may be coming off the grill appropriately. And that's also a very hot and greasy position. So when you can move to something like the Taylor grill where you're, you know, putting the product down, pushing a button and walking away, you know, you're eliminating, you know, the training and now it becomes one of the easiest jobs in the kitchen. So I'm giving you that as a nuance of even though parts of labor are maybe getting better, there are still major challenges that every restaurant faces in terms of labor and training. And I think to answer maybe your second question, we still do see the new store builds, I think, continuing on a strong pace back half of this year into next year. And I do think you still have that pent-up demand that we've talked about, both in replacement stores and upgrade that I do think you start to see more of that kick in, you know, certainly, you know, the first half and well into into next year.
spk13: That's great. I think Steve answered it well, but I'm sorry, I'm just going to add it. So even though staffing is improved dramatically, turnover is a big issue, which kind of leads to Steve's point, right? Because you bring people in and they're untrained, right? And so it was always a major challenge. It's even a bigger challenge today. And I don't think most of the restaurant customers believe that is going away. So that's, again, where you need to have smarter, easier to use, automated equipment. The other thing, which is maybe tied to that and you're challenging you really need if you have labor. The speed of service, which has always been something we've talked about, has come back in spades. As you think about delivery, drive-through, more throughput in smaller footprint, that is a major issue at a lot of customers today. I think a lot of the solutions that we have sell for that problem as well. So, you know, hence they're continuing to seek out the automation.
spk10: That's great. Thanks to you both. And then just a final question. As you're looking forward at your commodity basket, what's the picture look like for A, availability through the supply chain, but B, are you seeing any early signs of relief that you'd want to point us towards that could be margin enhancing as we go through the back half of the year? Thanks.
spk08: Hi, it's James. I think by and large, you know, we still see pockets of, you know, issues in supply chain, and they typically are around, you know, electrical items, you know, some motors here and there, but also just kind of around the legacy controls where you've got, you know, kind of 10-, 20-year-old, you know, silicon on the board. Those tend to be, you know, the items that, you know, slow us down. The general availability of steel, copper, things like that have been fairly strong. We don't see that as a headwind anymore. It's just these nagging legacy components or specialty products that are highly customized motors can tend to be a challenge. That's our guidance on how we see supply chain affecting us in, you know, kind of 24 pockets here and there, but generally, you know, good availability.
spk10: And any outlook on kind of cost for the core metals, things that have become more readily available as we are headed into 24?
spk08: You know, I think we, you know, continue to see them at the levels they are or, you know, going down, you know, slightly.
spk10: Perfect. Thanks, James.
spk04: The next question is from Brian McNamara of Canaccord Genuity. Please go ahead.
spk11: Hey, good morning. Thanks for taking the question. I just want to circle back on grills. I know, Brian, I think you had mentioned, I guess, sell-ins a little bit below kind of what you were expecting or sell-through. I'm just curious, do you think that's just primarily driven by simply brand awareness? The checks that we perform, you talk to some of your retail partners and grills, and half of the associates don't even know of the brand or know that they're in the store. I'm curious. To me, that sounds like an opportunity, but I'd love to hear your thoughts on that.
spk02: Thanks. This is Brian now. Tim was talking about the sell-through before. I think on the grills, overall, I mean, certainly we are a smaller brand than some of the other ones that are out there. We think that gives us tons of growth opportunity. I mean, we do look at stats around impressions and internet traffic to our sites, and we are seeing really great trajectory of our brands as As Tim noted, you know, the connected, you know, Kamado is selling through, you know, really, really well. But, you know, I think you get after, dare I say, you know, part of the reason, you know, we're in this space that there is still growth opportunities out there. There's still, you know, positive trends around, you know, charcoal and all the benefits that comes through that. So, I mean, again, this gets after why we are, you know, bullish for things for, you for a long period of time to come, separate from how to manage inventory levels over a relatively short period of time.
spk13: I think the comment is, I think it has been a softer grill season. If you listen to a lot of the major retailers and their calls, I think that's true for a lot of product categories. It's not just the grills. We are a relatively new brand, and we are expanding the awareness, and we do think that there's a greater attraction for innovation in some of the charcoal categories. So, I mean, certainly you could talk to one or two, and we may be new on the floor, and we're not in every door yet as well. So, I mean, I think that's part of the growth opportunity as we're coming into the You know, retailers, we may not be across the whole system, but we do expect that, you know, we'll show up in more and more locations in that system, kind of as the inventories normalize, and then that kind of, you know, provides an opportunity for them to display kind of what they would want to do on a go-forward basis.
spk11: Thanks a lot, guys. Best of luck. Thank you.
spk04: That is our last question for today. Now I'd like to turn the call back to management for closing remarks.
spk13: I'd just like to, once again, thanks everybody for joining us on today's call, and we look forward to speaking to you after the end of third quarter.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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