The Middleby Corporation

Good day, and thank you for joining us for the Middleby second quarter 2024 conference call. With us today from management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Technology and Operations Officer James Poole, Chief Commercial Officer Steve Spittel, and Vice President of Investor Relations John Joyner. We will begin the call with the opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Mr. Fitzgerald. Please go ahead.

Good morning, and 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 the investor relations page of our website. We're pleased with the performance of our second quarter as we posted strong profitability despite revenue declines versus 2023, reporting margin expansion at both our commercial food service, and our food processing businesses. At our residential business, we demonstrated margin improvement from the first quarter while we continued to navigate the disrupted housing market, which remains at near all-time lows. We were also pleased to report another record quarter in operating cash flow, both for the quarter and the first half of 2024. Cash flows generated by our business have normalized following the disruption from supply chain, and we have rapidly reduced our leverage over the past year, while at the same time making investments in critical strategic and operational initiatives positioning us for the future. Although we reported Q2 revenue declines versus the prior year, orders trended positive in the quarter, and we realized order growth at all three businesses in comparison to the prior year. Activity levels have generally improved with the order quoting and projects in the pipeline. We're also excited to see the interest in our many new product innovations across all our businesses. Although we are well positioned, we remain cautious given macroeconomic factors, including high interest rates and the impact of inflation on the consumer, which continues to present a challenging backdrop carrying into the second half of the year. At our commercial food service business, we've seen gradual improvement in ordering levels throughout the first half. with a slow ramp up given continued longer lead times for permitting and construction, along with longer deliberation on customer business plans given current economics of higher restaurant operating costs and monitoring of restaurant traffic levels. While conditions are challenging, our channel partners have built backlogs weighted to the second half of the year, and our chain customers have plans for operational upgrades and store openings. These plans have slowed in comparison to our original expectations at the start of the year, but continue to remain stronger in the second half versus the first half. We also continue to focus on new market share opportunities, expanding into under-penetrated categories for middle B, such as beverage and ice. We're making progress in these areas and see future growth coming from new categories we have targeted for expansions. And we are well positioned with our launches of many new products in our core product categories, with innovations to address the need to drive restaurant efficiencies, labor reduction, and enhanced speed of service. As highlighted on prior calls, we have launched a record number of industry-leading new solutions across all product categories, both hot and cold. We also continue to invest and progress our forward-looking technology initiatives that will pay off in the longer term. Middleby is positioned to lead in areas of automation, digital, and IoT, innovation that we believe will shape the future of the restaurant industry. At a residential business, the housing market remains challenging with very low levels of existing home sales, new home starts, and remodels. While this is having a significant impact to our business today, We believe it will ultimately lead to pent-up demand with the benefits of recovery in the years ahead. And while the residential market will take time to fully recover, the luxury end of the market has shown recent improvement. We realized ordered growth in the second quarter and expect that will continue to progress through the balance of the year. Despite the challenging market, we are better positioned than ever with our industry-leading brand portfolio. and exciting launches of many new products with a wide breadth of designs and innovations. Operationally, we've made investments that will benefit our efficiencies and quality and are confident this will also support our efforts to achieve our profitability targets as normalized volumes return. At our food processing business, the pipeline of active projects continues to remain strong for expansion and needed upgrades with requirements from customers to increase throughput reduce labor, minimize food waste, and with a growing focus on sustainability. Automation remains in great demand. Our customers are proceeding cautiously as they monitor food costs and the interest rate impacts on larger projects. However, as market dynamics have become more stable, we have seen improved conversion to orders in the second quarter and continue to see a constructive backdrop for the second half. We continue to execute on our strategy to become the leading provider of best in class, full line and integrated solutions for the protein and bakery processors. We believe the strategy is resonating and we are positioned to partner with our customers as they evolve their businesses and address the need for automation in their operations. In closing, while we navigate the near term market conditions, we continue to focus on executing our strategic business initiatives expanding our profitability, and growing our cash flow, while building upon our competitive advantage at each of our three industry-leading food service businesses. And we are confident this is setting us apart for the long term. Now I'll pass the call over to James to spotlight some of the exciting new solutions we have introduced in our food processing group. As we continue to expand our best-in-class solutions at this segment, we're also extending into new applications and categories, expanding our addressable market and providing for continued future growth opportunities. James?

Thank you, Tim. Over the past four quarters, I've talked exclusively about the innovations in our commercial and residential brands. For example, last quarter I covered the great eight innovations as recognized by the National Restaurant Association. In Q4, I highlighted all the Middleby residential products that were debuted at the 2024 Kitchen and Bath Show. In Q3 of 23, I went deep into ice and all the opportunities that are happening at Follett and IceTro, and that we expect to see an additional $50 million of incremental revenue between these brands in 24. And finally, in Q2 of 23, I discussed the Taylor Double-Sided Grill and the operational benefit it brings our burger and steak chains. and most excitingly, the work that we continue to do at a fast, casual Mexican food chain. For this quarter, I'm going to dive into our food processing group to highlight the full-line solutions that Middleby has built organically and through acquisition. These solutions range from full-line bakery systems to full-line protein systems, but for today, I'm going to discuss our solutions for precooked bacon and poultry, as these represent a significant area of growth and opportunity for growth, respectively. And as always, the products I discuss can be found in the investor deck that Tim referenced. Our precooked bacon line comprises of eight Middleby brands working to deliver the best tasting, visually appealing, and most profitable bacon lines for our QSR and retail processors. At the heart of each line is the Turbo Chef by Alcar, which I've discussed on previous calls. For those that remember, the TurboChef produces the highest product yields, best tasting and visually appealing precooked bacon by injecting microwave impingement and steam into the cooking process. The TurboChef nets a 2% yield gain when compared to other thermal and 915 megahertz microwave systems. Another inline solution by Middleby improves yields up to 7% with Thern's IBS4600 slicer, which uses four independent lanes with four independent vision systems to ensure every slice of bacon is the same weight and thickness, regardless of belly variation. By combining the other six brands, VMAC, Thern, Danfotec, MP Equipment, Scanico, and Rapid Vision Pack into the total full-line solution, we improved yields another 4% thus driving towards a total yield improvement of 13% with our full line solution. Continuing with the precooked bacon line, let's shift from yield improvements to labor savings. The Middleby full line solution saves approximately six FTEs per line. In looking at the brands contributing to the labor reduction, VMAX Auto Comber and PacPro's under-leaving and stacking systems work together to reduce manual labor by automatically combing and decombing bacon bellies and stacking full bacon sheets without human hands. By combining the yield and labor improvements on Middleby precooked bacon lines, our customers can expect to save $1.3 million per line per shift over a year. Beyond bacon, Middleby Processing is making big improvements to its full-line poultry systems with a focus on trimming, breading, and frying technologies. At the heart of our poultry line is MP equipment. They produce an industry-leading water jet cutter that optically measures and then trims and portions poultry cuts by utilizing our onboard vision and algorithms to minimize waste. As an aside, this is how we do it today, and it works exceptionally well. But in a subsequent call, I will discuss some radical improvements to our fifth-generation water cutting machine, so stay tuned. Okay, back to it. From trimming and portioning, these pieces move into MP's new thoroughbredder, where we are off to the races. Their advancements in bredding coverage and improved bredding recovery improved material utilization by 10%, which nets approximately $900,000 per year in material savings. Additionally, its design allows a processor to run multiple breading types without having to physically reconfigure the breader, which reduces changeover times by 45%, thus allowing for incremental capacity gains that net approximately $1 million per year. Combining our savings and capacity improvements, our customers can expect a six-month payback on MP's new Thoroughbredder. Progressing down the line, we move into MP's fryer with Filter Automation's newly integrated filtration system. By combining the MP fryer and Filtration Automation's Micron Pro filtration system, we can extend oil life from 36 hours typically to over 480 hours typically, thus reducing oil expense by 13 times, which saves approximately $500,000 per year in oil for a typical 2,000-gallon fryer. It is important to note that since the MP breading system, the Thoroughbredder, improves breading adhesion, we lose less breading into the fryer, which improves oil life as well. The Micron Pro filtration system is completely autonomous and filters nearly continuously, only stopping four minutes per hour to expel the filtered material, i.e., the filtered cake from the system. By doing this, we reduce the amount of free fatty acids and prevent the formation of polar compound. These are the chemical species that denature oil. Lastly, the Micron Pro uses no consumables or accessories, and since the filter cake has very little residual oil, less than 2%, the cake can be used for pet food, animal feed, and fertilizer, making it the most economical, sustainable solution for frying. Middleby will continue to invest and acquire technologies to make our full-line processing solutions the most advanced and economical for our customers to operate. I look forward to discussing further advancements in the Middleby Processing Group on later calls. Thank you, and over to you, Brian.

Thanks, James. Now, you've made me a little hungry here, so I'm going to have to try and get quickly through this so I can get to a second breakfast. But in the meantime, for the second quarter, we generated revenue of $992 million, which is a 7% increase sequentially over Q1. Our adjusted EBITDA was $216 million at a margin of almost 22%, which was up 180 basis points from Q1. All the margin values I will discuss today are on an organic basis, meaning excluding any acquisitions and FX impacts. Q2 GAAP earnings per share were $2.13, and our adjusted EPS was $2.39. Commercial food service revenues were down 3.9% organically versus the prior year, yet the adjusted EBITDA margin of 28% was slightly above the prior year. Recall that this is the toughest comp we will face given record revenues for this segment in Q2 last year. Our recent trends are positive as we grew revenues 5% sequentially. We expanded margins slightly over the prior year on lower revenues and over Q1 by 200 basis points. In food processing, revenues for the second quarter were over $179 million. We were also facing a tough comp here. While we did see a 5.7% decline organically, this was our second best Q2 ever for this segment. Our recent trends are positive for food processing as well. We grew 9% sequentially. Our adjusted EBITDA margin remained strong at 24%, which is a slight increase over Q1 and 200 basis points above the prior year. In residential, we saw an organic revenue decline of 6.7% versus 2023. The adjusted EBITDA margin was 9%. These revenues were actually higher than what was expected entering the quarter and represent nearly 11% sequential growth. We delivered exceptionally strong operating cash flows at $150 million for Q2. It was our best second quarter ever. Operating cash flows are over $765 million for the trailing four quarters. Our free cash flow over the past 12 months exceeds $700 million, and our total leverage ratio is now down to under 2.3 times. Before I get into discussing our outlook, I want to remind everyone what I noted when speaking to you one quarter ago. At that time, our expectation of total Q2 revenues was to be up at least mid-single digits sequentially from Q1, but given the tough comps, we also expected to fall short of the prior year. We delivered as expected. Sequentially, we had growth in all our segments. We were up 7% for the entire company. We expanded margins. We had record cash flows. Market conditions are not easy, but we continue to deliver solid results. Order trends have been positive. Q2 was our best quarter for orders over the past two years for the total company and for each segment individually. Orders were up 9% sequentially and over 15% versus the prior year. Food processing had their best order quarter ever. While Q3 orders have started a little bit slower, which is typical seasonality for us, as we often see this metric being lighter than Q2, we still should see sequential revenue growth for the company during the back half of the year, as well as year-over-year revenue growth. To provide greater insights, I will separately address each segment for you. In commercial, for Q3, We anticipate revenues will grow low single digits sequentially and be generally flat to the prior year. Looking out to Q4, with order rates improving over the past four quarters and assuming positive trends persist, we would see mid single digit revenue growth both sequentially and year over year. Moving out to food processing, we continue to see strength in this business. we expect second half revenues will be above first half and above prior year levels. Q3 and Q4 could see double-digit year-over-year increases. In residential, the good news is that the order trend is continuing to move upward, with Q2 being up over Q1 and above prior year levels. Q2 orders were the best we have seen in two years. Nonetheless, Q3 revenues Q3 revenues will be down from Q2, mostly due to seasonality impacts, both in outdoor products and our European-based manufactured brands. But segment revenues will probably be flat to the prior year level. And out to Q4, we expect sequential and year-over-year growth. We also anticipate that the cost reduction actions will help boost the business to double digit margins over the second half of this year. Bringing it all together, consistent with what I messaged last quarter, for the total company, we should build and strengthen as we progress through 24. We look forward to Q3 being stronger than Q2 and anticipate revenues to again achieve at least $1 billion. and then reaching even higher levels in Q4. We continue to believe at this time that for the third and fourth quarters, we will also deliver year-over-year growth. We are growing revenues with solid margins and have strong cash flow generation. This stands as proof that we can deliver tasty results even in tough market conditions. Further reiterating what I said last quarter, We remain focused on operational efficiency and optimally managing resources. We are sharply focused on controlling and reducing our costs. We remain committed to expanding our margins. Our customers are adopting our solutions. Our innovations, along with our strength in operational execution, are powering our improving results. We look forward to returning to growth in the second half of the year and beyond. Thank you, and we will now take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Mick Dobre with Baird. Please go ahead.

Good morning, everyone. Thank you for taking the question. And great to hear that things seem to be getting better on the order front. I want to start with food processing. And, you know, the strength that you're talking about here in terms of having record orders and the way you're kind of talking about revenue year over year in the back half, really kind of stood out to me. So I'd love to hear a little bit more about what's driving this. I do wonder if you perceive this to be kind of a cyclical inflection within some of your key markets here. I know like poultry, maybe bacon struggled a little bit. Maybe that's getting better. So I'd love to hear about that. Or is this just something that's idiosyncratic to the things that you've been doing on the new product front? And related to this, Brian, how should we think about margin if you're going to be seeing that kind of growth in the back half for food processing?

Yeah, thanks, Meg. Things are overall good in food processing, right? But we compete in about 15, I'll say, full-line solution areas. So there are a variety of stories in there. I know you asked about protein, but let me briefly – and a touch on bakery, and then I will pivot over to protein. You know, bakery overall has been, I'll say, steady after a really strong year. You know, last year, you know, buns continued to do, you know, really, really well for us. You know, bread might be, you know, slightly weaker, but overall, you know, still performing, you know, pretty darn, you know, steadily, again, after a really strong year last year. And then thinking about, you know, the meat side of things, you know, meat costs have been, you know, going up and such. Things have been improving in poultry for us. We have been, you know, performing strong there. And as we look at, you know, I'll say like the red meat And pork side of things, I think we view those, you know, improving over time, right? It takes a little bit more time, I'll say, for, you know, the supply, you know, to react there just given, you know, the cycles involved with, you know, developing the inputs, you know, there. So, you know, poultry has been rebounding as probably our strongest now. Hot dogs and such have been also rebounding. you know, recovering and doing well in certain parts of the world. And I think as you look at our, you know, overall order trends, it really does get after, you know, beyond the impacts of, you know, individual product, you know, segments that, you know, our full-line solutions and our ability to solve problems and drive efficiency and, you know, deliver on all those metrics, you know, many of which James noted, you know, are coming through. On the margin side, we made tremendous progress last year, and I think we will have some progress this year. Certainly, we're generally at our target levels overall, as I think about multiple quarters, not just one particular quarter. We hadn't, and I got the question a bunch in the last quarter or two, about upping the targets. You know, as we look at, you know, market dynamics and such, you know, I think we will continue to expand a little bit as we progress through the year. But, you know, again, given all those dynamics, are not necessarily expecting, you know, large jumps over what is already, I'll say, pretty healthy in market-leading performance.

Okay, but at least you're saying at least as good as what we had last year, right?

Yes. Just to maybe repeat or add on a little bit to Brian, I mean, I think a lot of the new products are doing well, full-line solutions and how we come together with customers to provide a better broad-based solution. I mean, that has been effective and it's also getting us into new markets. I mean, James just went through it, right? Bacon, we were not really a player many years ago and now we're You know, we're very strong, you know, given the solutions and the technology we've built out. Poultry, we're still in earlier stage. So, I mean, I think that's the excitement, you know, as he went through that, as we look at breaders to water jet cutters to frying lines and even, you know, our turbo chef oven, which can play in that area. So, we have a lot of solutions we did not have before, which allows us to get into new applications. So, I think that is, you know, part of what we are seeing. show up. The other thing is we haven't really gotten, I'll say, the mega projects this year. So kind of the good news is we're seeing pretty decent demand without some of the bigger greenfield projects come through. And I think that's just kind of been given the cautious backdrop of interest rates and making sure with our customers understanding the dynamics of end-user demand and product costs. So, I mean, I think that's just notable from our standpoint because usually some of those projects are really what drives growth in a year. So, I think that's a good and a bad situation. We hope to get some of those bigger projects, but we've been able to continue to grow without some of those coming through.

And just to clarify also on margins, I mean, things will ebb and flow, you know, quarter to quarter based on mix and You know, Tim noted, you know, the really large projects are a little bit slower, you know, this year than last year. And those, you know, where we do add great value to our customers probably have a little bit higher margins. So I'd say as I look at the year overall, I expect, you know, margins to be at least as, you know, prior year levels. But, again, it may have inflow a little bit from quarter to quarter.

Great. If I may, one follow-up then on commercial food service. You know, you talked about orders getting better. but your messaging, as I understood, is a little bit mixed in terms of what's going on with customers and in-market trends. So I guess from your perspective, the improvement in orders, is this just a function of some of the channel destocking running its course and we're starting to comp against prior period destock, or is there something else going on here in terms of in-market momentum that we need to understand? Thank you.

Yeah, good morning, Meg. This is Steve. So it is a function to some extent of I'll call it a period of normalization of orders, right? We had to work through inventory that we've talked about being in the channel. We believe that is largely behind us. You do see orders. More lining up with when demand is needed, right? With our shorter lead times, with our backlog coming down, you know, customers and our dealers are ordering, I would say, more in real time versus what they have in the past. So I think you see that lining up. I still think you see, you know, our chain customers, you know, ordering to fulfill new store demand, even though it has, you know, ebbed and flowed and there's been some push outs. Just with a slower start to the year for some of the chains, still working through permitting issues, labor issues that they're facing. So you see new store openings push out a bit, but the chains have really still committed to their overall pipeline over the next 6, 12, 18 months, which we're encouraged by. I still think you have the dealer channel, which Tim talked about briefly in his opening comments. Their strengthening backlog with their end-user customers has been positive, and I think you're starting to see that come through a bit. I do believe that actually comes through the back half of the year. The timing of how that comes through is maybe a little bit up in the air as we go through the back half of the year. But I think the encouraging point is that the backlog that our dealer channel partners have in our communication with them is certainly stronger than it was at the beginning of this year and certainly stronger than it was, you know, the back half of last year.

All right. Thank you so much. The next question will come from Brian McNamara with Canaccord Genuity. Please go ahead.

Good morning, guys. Thanks for taking the questions. First off, Lamb Weston is an important supplier to QSRs. They gave some pretty negative guidance last week. McDonald's call earlier this week was all focused on getting value right to combat traffic weakness. So with QSRs and restaurants overall, obviously a large portion of your commercial food service business, how do we think about any potential impact or hesitation from these customers to invest in the equipment you offer when this traffic is challenged? And can you remind us how long order lead times are typically in that business?

Yeah, Brian, again, Steve, good question. I would say in spite of some of the challenges we've seen within a couple of the QSRs to start the year, the challenges that they still face in their restaurants have not come away in many cases, it actually brings them even more and more to the forefront. So all the challenges we've talked about, whether it's around the cost of labor, which is more challenging than ever, utility costs, be a service, consistency of product, focus on profitability of their franchisees, those are all still extremely relevant, and those all still point to solutions that Middleby can offer. So even in spite of some of those challenges that you're referencing, I would say the discussions and the pipeline of products that we have with our, in this case, QSR customers remains very strong. I would also say even though QSR are a big part of our overall end user segment, you see strength in other segments like fast casual right now. There's a lot of successes in those segments, and those are a lot of customers that I think have been a little bit earlier to adopt some of the new technologies in our pipeline. I guess my point overall is there's been some ebbs and flows to start the year with the QSRs, no question. Just a reminder, those QSRs remain committed to new start openings. Again, you know, the product in our pipeline I think remains strong in spite of some of the challenges that they've faced so far.

Great. That's helpful. And then I guess secondly, it was nice to see some material sequential improvement in residential and the directional guidance suggesting we'll get back to growth in Q4. Can you provide a little more context or color on that improvement, whether it was in kitchen and appliances or grills and how H2 should look, I guess, by category there?

Yeah, this is Brian. I'll take that one. It was pretty consistent across the board as I think about the geographies. We have noted before that we are seeing good progress with some of the European products that we've been importing to the U.S., and those continue to grow, and we look forward to you know, more of that as we have more products that will be, you know, certifying for, you know, for the US. I previously talked about how, I'll say within some of the outdoor products, the ordering pattern was feeling a little different this year. And in our outdoor products, we did have a bigger Q2 than Q1. And I'll remind folks again, while it's still feeling like summer in probably many of the places we're all calling from, Q3 does become a slower quarter. for our sales to, you know, the retailers and, you know, and SUP. So that becomes part of, you know, the story I noted for how things will evolve into Q3 over Q2. But I'd say, you know, the other North American-based premium brands had a good Q2. You know, some of the other European brands in their home markets were probably a little bit more you know, modest, but we, you know, believe those will also, you know, pick up as we move through the back half of the year.

Great. Thanks a lot. The next question will come from Jeff Hammond with KeyBank. Please go ahead. Hey, good morning, guys.

Morning, Jeff. Hey, just want to come at kind of the you know, the restaurant and consumer weakness, you know, we're hearing about maybe in a little different way. One, you know, the new store growth, you seem to be characterizing kind of slow start and more labor permitting than kind of the macro, but just wondering in past macro cycles, you know, if that informs anything about either continued deferrals or people backing off some of the store growth and then, I think, Steve, you've talked about kind of this pent-up aftermarket opportunity, and I'm wondering if you're seeing anything there or, again, if maybe some of this restaurant weakness maybe pushes that out as well. Good morning, Jeff.

Good questions. Again, back to new store openings, do I think that there is – A part of the overall macro environment that is causing some push out of the new store openings, yes, I certainly do, along with what we've referenced along the permitting and labor challenges of just getting restaurants open. Again, I've said before, I think one of the best byproducts of the last several years is we do have a lot more visibility and transparency into new store openings with our big chain customers. So even though I think, as I've said, you know, you see the push out in some, in some chains to future quarters, I think the overall pipeline in the number of stores, they're still trying to open both domestically and especially on the global front remains, you know, I think strong from, from that perspective, again, a reminder that new store openings were not hope happening at all going into COVID with these big chain customers. So this is still a relatively new nuance the last couple of years. In terms of the pent-up replacement cycle, which I believe is what you're referencing, I think we're starting to see a little bit of that come through. I still believe that that will be a primary driver of demand certainly into next year and probably into 26, just knowing Again, as I've talked before, we had pent-up replacement going into COVID, got pushed to the right during COVID, and then through supply chain, then this focus on new store openings, I think, has pushed it a little bit further out. I do think that is still there to come through. We're seeing it maybe a little bit in some of the order pick up in the second quarter, but I actually think it's a bigger driver the back half of the year and certainly into next year as we go forward.

Okay, great. And then You guys have been kind of quieter on M&A, and I'm just wondering if this is more on purpose to kind of focus on the core and get the balance sheet in good shape, or if it's just a harder environment to get stuff to the finish line. It seems like in general we're starting to see M&A activity move again.

Yeah, I think it was a little bit of both. I mean, I think it was where we're looking at. You know, we've got a very strong pipeline of deals, so that's never really changed for a long period of time. So certainly we think that's a huge continued opportunity going forward. So I think, you know, we expect it probably will start picking up here. I think as we went through the last year or two, multiples got a bit out of whack on one side. And on the other side, I think it was very hard. for, there's a gap, I would say, with our projections of the businesses of the companies we were talking to and their projections of those businesses. So I think a lot of that is now starting to come back in line. And I think, you know, at the same time, you know, we did about 30 acquisitions in the last, you know, three to four years. So it's not like we haven't done quite a bit over a recent period, but that allowed us to bring those into the fold, focus on those operationally. We continue to see opportunities there with synergies, both top line and bottom line, and that de-lover a little bit. So I think, you know, we think we're in a very good position now, kind of given the backdrop, the strength of the balance sheet, the cash flow generation, as well as where some of our competitors, you know, are positioned. So likely you'll see us to be a little bit more active than maybe we were over the last 12 months.

Okay. Thanks so much.

The next question will come from Tim Thine with Citigroup. Please go ahead.

A creature of habit is no longer there, but apologies for that. And I did join late. Oh, yes.

Sorry.

Raymond James, just to clarify for the record, right?

Raymond James asking us a question. All right. Make sure we got the right Tim. Proceed, Tim. Thanks.

I'm sure a lot of people really care, but yeah.

Well, we do. So we appreciate that you're still covering us, that you moved it. So thank you for that.

The apology that I did join a second late, so apologies if this is redundant, but I have two on the commercial business. And the first is just regarding the competitive dynamics around the whole kind of technology and an activity space. And I ask that with the view that it seems like one of your larger competitors seems to be kind of backing away from that. And I'm curious, I guess, one, is that, do you think, a reflection of what the customers are demanding or not demanding, i.e., has there been, you know, lower movements or kind of, I don't know, acceptance of that, what have you. And then I guess B is that, if not, presumably that may be giving you some opportunity. So maybe just your thoughts around kind of the connected kitchen arena and what you're seeing on that front. And I have a follow-up after that.

Yeah, I mean, I think it's more the latter, right? Like the more game-changing innovation in technology is the longer it is to – bring into the market space, right? So, I mean, I think we've doubled down, made significant progress over the last 12 months, bringing more and more products online tied to the middle B1 touch control that James has launched, which has also been pretty transformational, right? I mean, I think it's come on so many new products as we started at the beginning of this year. And now you've got IoT out of the box, right? So those are significant investments we've made, which, again, we kind of talk about a lot. But, I mean, those are things that we're looking, you know, three years ahead, not just what's, you know, out there for the quarter. Technology is going to make its way, you know, more and more to the restaurants. And we see it, you know, now today. And our customers do want that. We're having more and more adoptions. We engage with a lot of customers down at our innovation centers. And we've had a lot that frankly say, hey, we're not going to buy the product unless it's connected, right? So that takes time where you go through an evolution, and we're spending a lot of time educating end users, educating our channel partners, kind of fine-tuning the pitch on ROI, getting more experiences out there. So it is getting traction, and we believe in it, and I think the good news is as you said, as this role, you know, as we kind of think about where we're at, you know, three years from now, relative today, you know, we're the game in town, right? Because I think others haven't had the, you know, the staying power and made the investments and also have the scope and scale of the products and solutions that we have. So, again, I think we think that remains a big competitive advantage that will show up over time and a big part of shareholder value that we'll be creating. There is a lot of innovation for today also. I think kind of going back to the chains and the replacement cycle, a lot of them are spending more time adopting the next generation of technology. Sometimes that slows things up as well, but we see kind of, you know, a lot of the fruits of what James talks about with a lot of the new products coming out from automated grills to ovens to induction, et cetera, that we get more and more, you know, uptake here.

Can I just also add, this is Steve, I think one of the reasons also, Tim, why I think you see some others dropping off and we're getting momentum is the end user customer wants to deal with very few but proven suppliers. And so there's nobody else out there that has can supply the technology of the underlying equipment, layering in the controls, layering in an IoT solution that connects the entire kitchen, utilities, safety, et cetera, and then also can add in our own robots or automation on top of it. So Middleby can truly provide all aspects of the kitchen. There's nobody else that can do that. So that's why I think you're seeing kind of a one-off here or there that have popped up drop away because they are reliant on other suppliers' to provide the equipment, to provide the IoT, and I think that's why you're seeing our end-user customers move away from that and continue to move towards us.

Interesting. Okay. And then just on pricing, as you think about the – I don't imagine there – I could be wrong, but I'm just curious as to that. I don't think that the magnitude would – of the – proposed price increase that I think we're aiming for mid-June would be worthy of a pre-buy. But I'm just curious if you think that flattered the order growth in the quarter at all. And then I guess part B is how should we think about a realization of that in terms of the second half revenue and margins for the commercial business?

Tim, the increase did, as we announced, go forward in June. As announced, it was a – I'll call it a low single-digit increase – Again, I think I'll keep saying it. I think we've been very thoughtful, tried to be very thoughtful about how we've addressed pricing in a competitive market, also knowing that there still are inflationary challenges that we're faced with. So, you know, we go, as opposed to just taking a broad increase, a certain percent across the board, it really has been a SKU by SKU, customer by customer, you know, approach in terms of the increase. I do not believe we saw a real big buy ahead in terms of driving orders in June. It maybe happened to a very minor extent, but I do not believe given it wasn't as significant as an increase as prior years. So I do not believe we saw that. Again, your pricing is a dynamic and, you know, forward-thinking evolution. So it will continue to, again, look at SKUs and look at customers as even the rest of this year unfolds. So you will see a minor impact, I would say, in top-line revenue and, you know, margin progression in the back half of the year coming from, you know, the price increase that went live at the end of the second quarter.

Tim, just to add on that, our dealers are very focused on working capital and the costs given the higher interest rates right now. So in the past, we probably would have seen a little bit of a pull ahead. Absolutely, they did not do that this time because that would have been offset by kind of the carrying costs, how they look at that. And as we've kind of gone through the second quarter, you know, and again, lots of discussions we had over the quarters of destocking, they're kind of at a We've heard from many dealers that they are carrying less stock than they were in COVID. So, really, I think we've gotten, you know, that not only out of the system, but if they are to move back to normalized stocking levels, we're kind of a little bit under the average from the last several years.

Got it. Got it. All right. Thank you for the time. Thanks, Tim.

The next question will come from Tammy Zakaria with J.P. Morgan. Please go ahead.

Hey, good morning. Thank you so much for taking my question. So I have a follow up on the residential kitchen segment comment. So I think you're expecting sales to be relatively in line versus last year. So does that mean, what does that mean for sequential growth? And then similarly, how should we think about margin for this segment? sequentially versus the 9.1% we saw in the second quarter.

Hey, Tammy, it's Brian. I'm sorry if my prepared comments weren't clear enough, so let me take another shot at it. As I think about residential quarter to quarter, Q3 revenues are anticipated to be below Q2, but consistent with prior year residential, prior year quarter. And again, some of that is due to the seasonality of buying patterns of, let's say, the retailers in the outdoor space, as well as what happens with production and I'll say consumer buying levels for the European-based brands. And The size of our European businesses have also increased over time if you go back to the NOVI acquisition. We do think margins get back to double-digit levels in Q3 and Q4, and we'll see if that also comes out to that having generated double-digit margins for the year in total. as we are expecting more benefits from the cost actions we have taken and also the mixed impacts of the underlying brands as it relates to the total segments. So hopefully that clarifies things.

Got it. Yeah, that does. Thank you. So basically sequentially margin would be down, but sorry, sequentially would be down, but margin would be up.

Yeah, Q3 margins, I'm sorry, Q3 revenues below Q2 revenues, but the margin percentage for Q3 should be above Q2. Got it. You know, mixed within the segment and benefits of our cost takeout activities.

Got it. That's helpful. And then a second question from me. Are you able to share any comments on what you're seeing in terms of promotions in the commercial segment? We've heard from some players that there's some elevated discounts by some other players in the market. So curious about your take on promotional trends you're seeing for the CFS segment.

Before I turn it over to Steve, and I know you're referencing others out there, I suspect it is. you know, one, you know, large company that has, you know, a segment that has some overlap, you know, and competes with us. And, you know, I know they had, you know, revenue growth, but margins down. So that seemed like, you know, to us, you know, not the way, you know, that we typically operate our business where we're trying to increase the dollars. So, I mean, I think that's some of what you're seeing in the differentiated results, but I'll let, you know, Steve comment more directly address the customer dynamics in the marketplace on a day-to-day basis.

Yeah, thank you, Brian. Tammy, I would say we've seen the competitive landscape from a promotional standpoint. It's at levels that I would say are normalized compared to pre-COVID. So I don't think it's anything that's crazy going on out there. I think it is a normalized market at this point. Again, I think we have always been very focused on driving margins, moving customers to better technologies, very focused on mix. And that, you know, yes, pricing is always going to be a dynamic, but I think our teams have been so focused on those couple areas. And I think you're seeing that come through, you know, in the margins in the quarter and going forward. So I think we'll remain very diligent. Obviously, we want to be competitive in the marketplace, but we're always, always very thoughtful about making sure we're thinking about margins, we're thinking about mix, and we're thinking about, most importantly, moving our customers to our best technology products.

I think one other comment is we kind of went through the last several years. I mean, we're very intentional about cutting some of the SKUs of our lowest margin products for things that were not as profitable as we kind of moved to a higher mix, which, again, is part of the strategy to expand our margins to those targets out there. So those are some of the categories that you might see a little bit more price discounting. So those are a lesser part of our portfolio today than they were several years ago.

Wonderful. Thank you.

The next question will come from Walt Liptick with Seaport. Please go ahead.

Hey, thanks, guys. I wanted to ask first about, you know, what you're seeing in the international markets versus the U.S. markets. So the growth rates, again, were strong or international. And, you know, why is that? And we're talking about the commercial food service segment.

Well, it's a good question. I would point to, I think we have made a lot of good inroads. Specifically, I would call out the European markets, the Middle East, and India and Asia. I think specific to Europe, I would say we've gone through a complete change in terms of people strategy over the last several years, investments in new markets like Germany. We opened our Innovation Kitchen in Madrid, Spain last year, which I think has paid dividends. We've had thousands of customers through that Innovation Kitchen, obviously playing off all the success we've had out of the Dallas facility. So I think you're starting to see those benefits come through as well. I think when you look into Asia specifically, investments in your manufacturing facilities, whether it's in China, whether it's in the Philippines, whether it's in Australia, I think you're starting to see that really come through as well. So to answer your question, I think it's more a reflection of work we've put in over the last several years to grow our brands, grow our people, and obviously grow our customer base in those specific markets.

Okay, great. And when you guys talk about sequential growth in CFS, you're talking about for both, you know, all regions, I guess, of the world, all geographic regions. Is that right?

The comments were for the segment overall. I'm not – I think we've been a little bit – obviously more guidance providing, but I have not broken it down at the regional level.

Okay. All right. No problem. So, and in CFS as well as in RESI, you know, it sounds like the channel inventories are pretty lean. Are you And are you still seeing any kind of drawdown, I guess, especially in residential? Or is it, you know, maybe another way to say it, are you starting to see, like, you know, a second round of channel refresh in residential as we get further into the year?

Yeah, you know, a lot of our products are, you know, outstanding. Outdoors is where, you know, we tend to have more in the channel, right? So a lot of the indoor products are more specified and, you know, and not stocked. In fact, you know, we're moving more and more to, you know, made-to-order. So really the channel inventories has been around outdoor. Those have largely reset, and I would say kind of similar to the comment on commercial, I think – Our channel partners are cautious. The grill season, you know, has been slower or maybe not, you know, as strong as some of our customers and us would, you know, would hope. So I think there's – and they're also kind of watching the P's and Q's with inventory levels and cost of capital. So – They're in a good stocking position. So I think from that standpoint, we're positioned as we do go into restocking. So it's kind of a healthy level right now. There is an opportunity as we kind of go later into the year to see how they're better positioned going into the fourth quarter this year than last year in terms of stocking levels. And we are, you know, we are continuing to launch new products there. I mean, both indoor and outdoor, which, you know, we're excited about. I think that is some of the things that we think will help us in the back half of the year as we've got lots of new products, colors, designs, induction systems. we've got quite a bit that has come out in the first part of the year that's available in the second part of the year. The European brands continue to grow in the domestic market as well. So those are some of the things that even with the challenging backdrop, we're still continuing to make some headway on.

Okay, great.

One last point, just to make sure, you know, to clarify, I mean, because you did ask about outdoor, even though it's, I'll call it a modest part of the you know, the total segment, but our order trends, you know, being up have included, you know, the, you know, the outdoor brands as, you know, as well. So, you know, I think we have seen positive evolution of, you know, the inventory that's stocked for that, you know, I'll call it subcategory within residential.

Okay, great. So outdoor should be up in the third quarter too, quarter of quarter.

No, I mean, you mean, yeah. I'm talking about what we've seen over the past year, year over year in order trends. Again, the third quarter is always the challenging one for you know, for outdoor. I mean, we do think, you know, Q3 of, you know, will be, I'll say at least at similar levels till last year, but that really isn't the quarter that matters, right? It gets a little bit more interesting as we're getting to, you know, Q4s as we, you know, then are, you know, starting to load in for next grill season. But I was just trying to clarify your question where you were asking about channel inventories that we think the de-stocking, which as Tim tried to clarify, was probably most relevant of a question to the outdoor side of things is not the headwind that it was going back a year and two ago.

Okay, great. Thanks for that. And if I can ask one more just on Solid Ice had a win with Starbucks. And I wonder, you know, how that's going, you know, what the opportunity is there, if there are other near-term opportunities with Starbucks.

Yeah, we try to refrain from discussing any kind of specific, you know, customers, et cetera. But, you know, Follett and our ICE platform overall continues to grow. And, again, you know, we've tried to – Point out that we've got a great, very exciting beverage and ice platform where we've got a lot of new products and technologies coming out, which also address speed of service throughput, labor, et cetera. So I think there's a lot of growth opportunity there. The nugget ice platform for Follett, which has got significant operating advantages, as well as I'll say preference with customers is doing very well. And that's part of the platform that's growing alongside ice troll which was one of the acquisitions we did in the last several years we've been able to expand the platform here in the us as the us needs larger ice capacities so we've had a couple of new products that came out just really at the beginning of this year which we've been gaining you know traction both with our channel partners and with with chains so um so again we uh remain pretty excited about that that platform and beverage overall with more to come.

Let me just, you know, add to that, if I can, you know, for a second, because, you know, I often, you know, get compared to others, you know, out there. I mean, this is an area that has been growing for us. You know, over time, it grew last year. And, you know, I think we are seeing, and I can base this on, you know, other comments of other public companies as it thinks about ICE. You know, we are outperforming the competition here. And it isn't just due to, you know, one customer. I mean, the amount of growth we're having is due to you know, broad adoption of, you know, our multiple ICE solutions across, you know, numerous customers, right? So this is why we capitalize on trends, have brought in, you know, the product portfolio across, you know, commercial. So, you know, it's an area of great strength for us, and we do see that, you know, continuing, again, across a wide number of customers.

Okay, great. Okay, thanks much.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Thank you, everybody, for joining the call today. We appreciate the questions and look forward to speaking to everybody next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Good day, and thank you for joining us for the Middleby second quarter 2024 conference call. With us today from management are CEO Tim Fitzgerald, CFO Brian Middleman, Chief Technology and Operations Officer James Poole, Chief Commercial Officer Steve Spittel, and Vice President of Investor Relations John Joyner. We will begin the call with the opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Mr. Fitzgerald. Please go ahead.

Good morning, and 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 the investor relations page of our website. We're pleased with the performance of our second quarter as we posted strong profitability despite revenue declines versus 2023, reporting margin expansion at both our commercial food service, and our food processing businesses. At our residential business, we demonstrated margin improvement from the first quarter, while we continued to navigate the disrupted housing market, which remains at near all-time lows. We were also pleased to report another record quarter in operating cash flow, both for the quarter and the first half of 2024. Cash flows generated by our business have normalized following the disruption from supply chain, and we have rapidly reduced our leverage over the past year, while at the same time making investments in critical strategic and operational initiatives positioning us for the future. Although we reported Q2 revenue declines versus the prior year, orders trended positive in the quarter, and we realized order growth at all three businesses in comparison to the prior year. Activity levels have generally improved with the order quoting and projects in the pipeline. We're also excited to see the interest in our many new product innovations across all our businesses. Although we are well-positioned, we remain cautious given macroeconomic factors, including high interest rates and the impact of inflation on the consumer, which continues to present a challenging backdrop carrying into the second half of the year. At our commercial food service business, we've seen gradual improvement in ordering levels throughout the first half. with a slow ramp up given continued longer lead times for permitting and construction, along with longer deliberation on customer business plans given current economics of higher restaurant operating costs and monitoring of restaurant traffic levels. While conditions are challenging, our channel partners have built backlogs weighted to the second half of the year, and our chain customers have plans for operational upgrades and store openings. These plans have slowed in comparison to our original expectations at the start of the year, but continue to remain stronger in the second half versus the first half. We also continue to focus on new market share opportunities, expanding into under-penetrated categories for middle B, such as beverage and ice. We're making progress in these areas and see future growth coming from new categories we have targeted for expansion. And we are well-positioned with our launches of many new products in our core product categories, with innovations to address the need to drive restaurant efficiencies, labor reduction, and enhanced speed of service. As highlighted on prior calls, we have launched a record number of industry-leading new solutions across all product categories, both hot and cold. We also continue to invest and progress our forward-looking technology initiatives that will pay off in the longer term. Middleby is positioned to lead in areas of automation, digital, and IoT, innovation that we believe will shape the future of the restaurant industry. At a residential business, the housing market remains challenging with very low levels of existing home sales, new home starts, and remodels. While this is having a significant impact to our business today, We believe it will ultimately lead to pent-up demand with the benefits of recovery in the years ahead. And while the residential market will take time to fully recover, the luxury end of the market has shown recent improvement. We realized ordered growth in the second quarter and expect that will continue to progress through the balance of the year. Despite the challenging market, we are better positioned than ever with our industry-leading brand portfolio. and exciting launches of many new products with a wide breadth of designs and innovations. Operationally, we've made investments that will benefit our efficiencies and quality and are confident this will also support our efforts to achieve our profitability targets as normalized volumes return. At our food processing business, the pipeline of active projects continues to remain strong for expansion and needed upgrades with requirements from customers to increase throughput reduce labor, minimize food waste, and with a growing focus on sustainability. Automation remains in great demand. Our customers are proceeding cautiously as they monitor food costs and the interest rate impacts on larger projects. However, as market dynamics have become more stable, we have seen improved conversion to orders in the second quarter and continue to see a constructive backdrop for the second half. We continue to execute on our strategy to become the leading provider of vesting class, full line, and integrated solutions for the protein and bakery processors. We believe the strategy is resonating and we are positioned to partner with our customers as they evolve their businesses and address the need for automation in their operations. In closing, while we navigate the near-term market conditions, we continue to focus on executing our strategic business initiatives expanding our profitability, and growing our cash flow, while building upon our competitive advantage at each of our three industry-leading food service businesses. And we are confident this is setting us apart for the long term. Now I'll pass the call over to James to spotlight some of the exciting new solutions we have introduced in our food processing group. As we continue to expand our best-in-class solutions at this segment, we're also extending into new applications and categories, expanding our addressable market and providing for continued future growth opportunities. James?

Thank you, Tim. Over the past four quarters, I've talked exclusively about the innovations in our commercial and residential brands. For example, last quarter I covered the great eight innovations as recognized by the National Restaurant Association. In Q4, I highlighted all the Middleby residential products that were debuted at the 2024 Kitchen and Bash Show. In Q3 of 23, I went deep into ice and all the opportunities that are happening at Follett and IceTro, and that we expect to see an additional $50 million of incremental revenue between these brands in 24. And finally, in Q2 of 23, I discussed the Taylor Double-Sided Grill and the operational benefit it brings our burger and steak chains. and most excitingly, the work that we continue to do at a fast, casual Mexican food chain. For this quarter, I'm going to dive into our food processing group to highlight the full-line solutions that Middleby has built organically and through acquisition. These solutions range from full-line bakery systems to full-line protein systems. But for today, I'm going to discuss our solutions for precooked bacon and poultry, as these represent a significant area of growth and opportunity for growth, respectively. And as always, the products I discuss can be found in the investor deck that Tim referenced. Our precooked bacon line comprises of eight Middleby brands working to deliver the best tasting, visually appealing, and most profitable bacon lines for our QSR and retail processors. At the heart of each line is the Turbo Chef by Alcar, which I've discussed on previous calls. For those that remember, the TurboChef produces the highest product yields, best tasting and visually appealing precooked bacon by injecting microwave impingement and steam into the cooking process. The TurboChef nets a 2% yield gain when compared to other thermal and 915 megahertz microwave systems. Another inline solution by Middleby improves yields up to 7% with Thern's IBS4600 slicer, which uses four independent lanes with four independent vision systems to ensure every slice of bacon is the same weight and thickness, regardless of belly variation. By combining the other six brands, VMAC, Thern, Danfotec, MP Equipment, Scanico, and Rapid Vision Pack into the total full-line solution, we improved yields another 4% thus driving towards a total yield improvement of 13% with our full line solution. Continuing with the precooked bacon line, let's shift from yield improvements to labor savings. The Middleby full line solution saves approximately six FTEs per line. In looking at the brands contributing to the labor reduction, VMAX Auto Comber and PacPro's underleaving and stacking systems work together to reduce manual labor by automatically combing and decombing bacon bellies and stacking full bacon sheets without human hands. By combining the yield and labor improvements on Middleby precooked bacon lines, our customers can expect to save $1.3 million per line per shift over a year. Beyond bacon, middle B processing is making big improvements to its full line poultry systems with a focus on trimming, breading, and frying technologies. At the heart of our poultry line is MP equipment. They produce an industry leading water jet cutter that optically measures and then trims and portions poultry cuts by utilizing our onboard vision and algorithms to minimize waste. As an aside, this is how we do it today, and it works exceptionally well. But in a subsequent call, I will discuss some radical improvements to our fifth-generation water cutting machine, so stay tuned. Okay, back to it. From trimming and portioning, these pieces move into MP's new thoroughbredder, where we are off to the races. Their advancements in bredding coverage and improved bredding recovery improved material utilization by 10%, which nets approximately $900,000 per year in material savings. Additionally, its design allows a processor to run multiple breading types without having to physically reconfigure the breader, which reduces changeover times by 45%, thus allowing for incremental capacity gains that net approximately $1 million per year. Combining our savings and capacity improvements, our customers can expect a six-month payback on MP's new Thoroughbredder. Progressing down the line, we move into MP's fryer with Filter Automation's newly integrated filtration system. By combining the MP fryer and Filtration Automation's Micron Pro filtration system, we can extend oil life from 36 hours typically to over 480 hours typically, thus reducing oil expense by 13 times, which saves approximately $500,000 per year in oil for a typical 2,000-gallon fryer. It is important to note that since the MP breading system, the Thoroughbredder, improves breading adhesion, we lose less breading into the fryer, which improves oil life as well. The Micron Pro filtration system is completely autonomous and filters nearly continuously, only stopping four minutes per hour to expel the filtered material, i.e., the filter cake from the system. By doing this, we reduce the amount of free fatty acids and prevent the formation of polar compound. These are the chemical species that denature oil. Lastly, the Micron Pro uses no consumables or accessories, and since the filter cake has very little residual oil, less than 2%, the cake can be used for pet food, animal feed, and fertilizer, making it the most economical, sustainable solution for frying. Middleby will continue to invest and acquire technologies to make our full-line processing solutions the most advanced and economical for our customers to operate. I look forward to discussing further advancements in the Middleby Processing Group on later calls. Thank you, and over to you, Brian.

Thanks, James. Now, you've made me a little hungry here, so I'm going to have to try and get quickly through this so I can get to a second breakfast. But in the meantime, for the second quarter, we generated revenue of $992 million, which is a 7% increase sequentially over Q1. Our adjusted EBITDA was $216 million at a margin of almost 22%, which was up 180 basis points from Q1. All the margin values I will discuss today are on an organic basis, meaning excluding any acquisitions and FX impacts. Q2 GAAP earnings per share were $2.13, and our adjusted EPS was $2.39. Commercial food service revenues were down 3.9% organically versus the prior year, yet the adjusted EBITDA margin of 28% was slightly above the prior year. Recall that this is the toughest comp we will face given record revenues for this segment in Q2 last year. Our recent trends are positive as we grew revenues 5% sequentially. We expanded margins slightly over the prior year on lower revenues and over Q1 by 200 basis points. In food processing, revenues for the second quarter were over $179 million. We were also facing a tough comp here. While we did see a 5.7% decline organically, this was our second best Q2 ever for this segment. Our recent trends are positive for food processing as well. We grew 9% sequentially. Our adjusted EBITDA margin remained strong at 24%, which is a slight increase over Q1 and 200 basis points above the prior year. In residential, we saw an organic revenue decline of 6.7% versus 2023. The adjusted EBITDA margin was 9%. These revenues were actually higher than what was expected entering the quarter and represent nearly 11% sequential growth. We delivered exceptionally strong operating cash flows at $150 million for Q2. It was our best second quarter ever. Operating cash flows are over $765 million for the trailing four quarters. Our free cash flow over the past 12 months exceeds $700 million, and our total leverage ratio is now down to under 2.3 times. Before I get into discussing our outlook, I want to remind everyone what I noted when speaking to you one quarter ago. At that time, our expectation of total Q2 revenues was to be up at least mid-single digits sequentially from Q1, but given the tough comps, we also expected to fall short of the prior year. We delivered as expected. Sequentially, we had growth in all our segments. We were up 7% for the entire company. We expanded margins. We had record cash flows. Market conditions are not easy, but we continue to deliver solid results. Order trends have been positive. Q2 was our best quarter for orders over the past two years for the total company and for each segment individually. Orders were up 9% sequentially and over 15% versus the prior year. Food processing had their best order quarter ever. While Q3 orders have started a little bit slower, which is typical seasonality for us, as we often see this metric being lighter than Q2, we still should see sequential revenue growth for the company during the back half of the year, as well as year-over-year revenue growth. To provide greater insights, I will separately address each segment for you. In commercial, for Q3, We anticipate revenues will grow low single digits sequentially and be generally flat to the prior year. Looking out to Q4, with order rates improving over the past four quarters and assuming positive trends persist, we would see mid single digit revenue growth both sequentially and year over year. Moving out to food processing, we continue to see strength in this business. we expect second half revenues will be above first half and above prior year levels. Q3 and Q4 could see double-digit year-over-year increases. In residential, the good news is that the order trend is continuing to move upward, with Q2 being up over Q1 and above prior year levels. Q2 orders were the best we have seen in two years. Nonetheless, Q3 revenues Q3 revenues will be down from Q2, mostly due to seasonality impacts, both in outdoor products and our European-based manufactured brands. But segment revenues will probably be flat to the prior year level. And out to Q4, we expect sequential and year-over-year growth. We also anticipate that the cost reduction actions will help boost the business to double digit margins over the second half of this year. Bringing it all together, consistent with what I messaged last quarter, for the total company, we should build and strengthen as we progress through 24. We look forward to Q3 being stronger than Q2 and anticipate revenues to again achieve at least $1 billion. and then reaching even higher levels in Q4. We continue to believe at this time that for the third and fourth quarters, we will also deliver year-over-year growth. We are growing revenues with solid margins and have strong cash flow generation. This stands as proof that we can deliver tasty results even in tough market conditions. Further reiterating what I said last quarter, We remain focused on operational efficiency and optimally managing resources. We are sharply focused on controlling and reducing our costs. We remain committed to expanding our margins. Our customers are adopting our solutions. Our innovations, along with our strength in operational execution, are powering our improving results. We look forward to returning to growth in the second half of the year and beyond. Thank you, and we will now take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Mick Dobre with Beard. Please go ahead.

Good morning, everyone. Thank you for taking the question. And great to hear that things seem to be getting better on the order front. I want to start with food processing. And, you know, the strength that you're talking about here in terms of having record orders and the way you're kind of talking about revenue year over year in the back half, really kind of stood out to me. So I'd love to hear a little bit more about what's driving this. I do wonder if you perceive this to be kind of a cyclical inflection within some of your key markets here. I know like poultry, maybe bacon struggled a little bit. Maybe that's getting better. So I'd love to hear about that. Or is this just something that's idiosyncratic to the things that you've been doing on the new product front? And related to this, Brian, how should we think about margin if you're going to be seeing that kind of growth in the back half for food processing?

Yeah, thanks, Meg. Things are overall good in food processing, right? But we compete in about 15, I'll say, full-line solution areas. So there are a variety of stories in there. I know you asked about protein, but let me briefly – and a touch on bakery, and then I will pivot over to protein. You know, bakery overall has been, I'll say, steady after a really strong year. You know, last year, you know, buns continued to do, you know, really well for us. You know, bread might be, you know, slightly weaker, but overall, you know, still performing, you know, pretty darn, you know, steadily, again, after a really strong year. year last year. And then thinking about the meat side of things, meat costs have been going up and such. Things have been improving in poultry for us. We have been performing strong there. And as we look at, I'll say, the red meat and pork side of things, I think we view those improving over time. It takes a little bit more time I'll say, for the supply to react there, just given the cycles involved with developing the inputs there. So, poultry has been rebounding as probably our strongest now. Hot dogs and such have been also you know, recovering and doing well in certain parts of the world. And I think as you look at our, you know, overall order trends, it really does get after, you know, beyond the impacts of, you know, individual product, you know, segments that, you know, our full-line solutions and our ability to solve problems and drive efficiency and, you know, deliver on all those metrics, you know, many of which James noted, you know, are coming through. On the margin side, we made tremendous progress last year, and I think we will have some progress this year. Certainly, we're generally at our target levels overall, as I think about multiple quarters, not just one. you know, particular quarter. You know, we hadn't, you know, and I got the question a bunch, you know, in the last quarter or two about upping the targets. You know, as we look at, you know, market dynamics and such, you know, I think we will continue to expand a little bit as we progress through the year. But, you know, again, given all those dynamics, are not necessarily expecting, you know, large jumps over what is already, I'll say, pretty healthy in market leading performance.

Okay, but at least you're saying at least as good as what we had last year, right?

Yes. Just to maybe repeat or add on a little bit to Brian, I mean, I think a lot of the new products are doing well, full-line solutions and how we come together with customers to provide a better broad-based solution. I mean, those – that has been effective and it's also getting us into new markets. I mean, James just went through it, right? Bacon, we were not really a player many years ago and now we're, you know, we're very strong, you know, given the solutions, the technology we've built out. Poultry, we're still in earlier stage. So, I mean, I think that's the excitement, you know, as he went through that, as we look at breaders to water jet cutters to frying lines and even which can play in that area. So we have a lot of solutions we did not have before, which allows us to get into new applications. So I think that is, you know, part of what we are seeing show up. The other thing is we haven't really gotten, I'll say, the mega projects this year. So kind of the good news is we're seeing, you know, pretty decent demand without some of the bigger greenfield, you know, projects come through. And I think, you know, that's just kind of been given the cautious backdrop of interest rates and making sure with our customers understanding the dynamics of end-user demand and product costs. So, I mean, I think that's just notable from our standpoint because usually some of those projects are really what drives growth in a year. So, I think that's a good and a bad situation. We hope to get some of those bigger projects, but we've been able to continue to grow without some of those coming through.

And just to clarify also on margins, I mean, things will ebb and flow, you know, quarter to quarter based on mix. And, you know, Tim noted, you know, the really large projects are a little bit slower, you know, this year than last year. And those, you know, where we do add great value to our customers probably have a little bit higher margins. So I'd say as I look at the year overall, I expect, you know, margins to be at least as, you know, prior year levels. But, again, it may ebb and flow a little bit from quarter to quarter. Okay.

Great. If I may, one follow-up then on commercial food service. You know, you talk about orders getting better, but your messaging, as I understood, is a little bit mixed in terms of what's going on with customers and in-market trends. So I guess from your perspective, the improvement in orders, is this just a function of, you know, some of the channel destocking running its course and we're starting to comp against, you know, prior period destock, or is this... Is there something else going on here in terms of in terms of end market momentum that we need to understand?

Thank you Yeah, good morning Meg, this is Steve so it is a function to some extent of I'll call a period of normalization of orders, right? We had to work through inventory that we've talked about being in the channel. We believe as largely behind us You do see orders more lining up with when demand is needed, right? With our shorter lead times, with our backlog coming down, you know, customers and our dealers are ordering, I would say more in real time versus what they have in the past. So I think you see that lining up. I still think you see, you know, our chain customers, you know, ordering to fulfill new store demands, even though it has, you know, ebbed and flowed and there's been some push outs just with a slower start to the year for some of the chains. still working through permitting issues, labor issues that they're facing. So you see new store openings push out a bit, but the chains have really still committed to their overall pipeline over the next six, 12, 18 months, which we're encouraged by. I still think you have the dealer channel, which Tim talked about briefly in his opening comments. Their strengthening backlog with their end-user customers has been positive, and I think you're starting to see that come through a bit. I do believe that actually comes through the back half of the year. The timing of how that comes through is maybe a little bit up in the air as we go through the back half of the year. But I think the encouraging point is that the backlog that our dealer channel partners have in our communication with them is certainly stronger than it was at the beginning of this year and certainly stronger than it was, you know, the back half of last year.

All right. Thank you so much. The next question will come from Brian McNamara with Canaccord Genuity. Please go ahead.

Good morning, guys. Thanks for taking the questions. First off, Lamb Weston is an important supplier to QSRs. They gave some pretty negative guidance last week. McDonald's call earlier this week was all focused on getting value right to combat traffic weakness. So with QSRs and restaurants overall, obviously a large portion of your commercial food service business, how do we think about any potential impact or hesitation from these customers to invest in the equipment you offer when this traffic is challenged? And can you remind us how long order lead times are typically in that business?

Yeah, Brian, again, Steve, good question. I would say in spite of some of the challenges we've seen within a couple of the QSRs to start the year, the challenges that they still face in their restaurants have not gone away. In many cases, it actually brings them even more and more to the forefront. So all the challenges we've talked about, whether it's around the cost of labor, which is more challenging than ever, utility costs, be a service, consistency of product, focus on profitability of their franchisees, those are all still extremely relevant, and those all still point to solutions that Middleby can offer. So even in spite of some of those challenges that you're referencing, I would say the discussions and the pipeline of products that we have with our, in this case, QSR customers remains very strong and I would also say even though QSR are a big part of our overall end user segment, you see strength in other segments like fast casual right now. There's a lot of successes in those segments, and those are a lot of customers that I think have been a little bit earlier to adopt some of the new technologies in our pipeline. I guess my point overall is there's been some ebbs and flows to start the year with the QSRs, no question. Just a reminder, those QSRs remain committed to new start openings. Again, you know, the product in our pipeline I think remains strong in spite of some of the challenges that they've faced so far.

Great. That's helpful. And then I guess secondly, it was nice to see some material sequential improvement in residential and the directional guidance suggesting we'll get back to growth in Q4. Can you provide a little more context or color on that improvement, whether it was in kitchen and appliances or grills, and how H2 should look, I guess, by category there?

Yeah, this is Brian. You know, I'll take that one. It was, you know, pretty consistent, you know, across the board, you know, as I think about, you know, the geographies. You know, we have noted before that we are, you know, seeing good progress with some of the European products that we've been importing to the U.S. and those continue, you know, to grow and we look, you know, look forward to you know, more of that as we have more products that will be, you know, certifying for, you know, for the US. I previously talked about how, I'll say within some of the outdoor products, the ordering pattern was feeling a little different this year. And in our outdoor products, we did have a bigger Q2 than Q1. And I'll remind folks again, while it's still feeling like summer in probably many of the places we're all calling from, Q3 does become a slower quarter. for our sales to, you know, the retailers and, you know, and SUP. So that becomes part of, you know, the story I noted for how things will evolve into Q3 over Q2. But I'd say, you know, the other North American-based premium brands had a good Q2. You know, some of the other European brands in their home markets were probably a little bit more you know, modest, but we, you know, believe those will also, you know, pick up as we move through the back half of the year.

Great. Thanks a lot. The next question will come from Jeff Hammond with KeyBank. Please go ahead. Hey, good morning, guys.

Morning, Jeff.

Morning.

Hey, just want to come at kind of the you know, the restaurant and consumer weakness, you know, we're hearing about maybe in a little different way. One, you know, the new store growth, you seem to be characterizing kind of slow start and more labor permitting than kind of the macro, but just wondering in past macro cycles, you know, if that informs anything about either continued deferrals or people backing off some of the store growth and then, I think, Steve, you've talked about kind of this pent-up aftermarket opportunity. And I'm wondering, you know, if you're seeing anything there or, again, if maybe some of this restaurant weakness maybe pushes that out as well.

Yeah, good morning, Jeff. Good questions. Again, back to new store openings, do I think that there is – A part of the overall macro environment that is causing some push out of the new store openings, yes, I certainly do, along with what we've referenced along the permitting and labor challenges of just getting restaurants open. Again, I've said before, I think one of the best byproducts of the last several years is we do have a lot more visibility and transparency into new store openings with our big chain customers. So even though I think, as I've said, you know, you see the push out in some, in some chains to future quarters, I think the overall pipeline in the number of stores, they're still trying to open both domestically and especially on the global front remains, you know, I think strong from, from that perspective, again, a reminder that new store openings were not hope happening at all going into COVID with these big chain customers. So this is still a relatively new nuance the last couple of years. In terms of the pent-up replacement cycle, which I believe is what you're referencing, I think we're starting to see a little bit of that come through. I still believe that that will be a primary driver of demand certainly into next year and probably into 26, just knowing Again, as I've talked before, we had pent-up replacement going into COVID, got pushed to the right during COVID, and then through supply chain, then this focus on new store openings, I think, has pushed it a little bit further out. I do think that is still there to come through. We're seeing it maybe a little bit in some of the order pickup in the second quarter, but I actually think it's a bigger driver the back half of the year and certainly into next year as we go forward.

Okay, great. And then You guys have been kind of quieter on M&A, and I'm just wondering if this is more on purpose to kind of focus on the core and get the balance sheet in good shape, or if it's just a harder environment to get stuff to the finish line. It seems like in general we're starting to see M&A activity move again.

Yeah, I think it was a little bit of both. I mean, I think, you know, as we were looking at, You know, we've got a very strong pipeline of deals, so that's never really changed for a long period of time. So certainly we think that's a huge continued opportunity going forward. So I think, you know, we expect it probably will start picking up here. I think as we went through the last year or two, multiples got a bit out of whack on one side. And on the other side, I think it was very hard. for there's a gap, I would say, with our projections of the businesses of the companies we were talking to and their projections of those businesses. So I think a lot of that is now starting to come back in line. And I think, you know, at the same time, you know, we did about 30 acquisitions in the last, you know, three to four years. So it's not like we haven't done quite a bit over a recent period, but that allowed us to bring those into the fold, focus on those operationally. We continue to see opportunities there with synergies, both top line and bottom line, and that deliver a little bit. So I think, you know, we think we're in a very good position now, kind of given the backdrop, the strength of the balance sheet, the cash flow generation, as well as where some of our competitors, you know, are positioned. So likely you'll see us going to be a little bit more active than maybe we were over the last 12 months.

Okay. Thanks so much.

The next question will come from Tim Thine with Citigroup. Please go ahead.

A creature of habit is no longer there, but apologies for that. And I did join late. Oh, yes.

Sorry.

Raymond James, just to clarify for the record, right? Raymond James asking us a question. All right. Make sure we got the right Tim. Proceed, Tim. Thanks.

I'm sure a lot of people really care. But, yeah.

Well, we do. So we appreciate that you're still covering us, that you moved. So thank you for that.

The apologies that I did join a second late. So apologies if this is redundant. But I have two on the commercial business. And the first is just regarding the competitive dynamics around the whole kind of technology and an activity space. And I ask that with the view that it seems like one of your larger competitors seems to be kind of backing away from that. And I'm curious, I guess, one, is that, do you think, a reflection of what the customers are demanding or not demanding, i.e., has there been lower movement or kind of, I don't know, acceptance of that, what have you. And then I guess B is that, if not, presumably that may be giving you some opportunity. So maybe just your thoughts around kind of the connected kitchen arena and what you're seeing on that front. And I have a follow-up after that.

Yeah, I mean, I think it's more the latter, right? Like the more game-changing innovation in technology is the longer it is to – bring it into the market space, right? So, I mean, I think we've doubled down, made significant progress over the last 12 months, bringing more and more products online tied to the middle B1 touch control that James has launched, which has also been pretty transformational, right? I mean, I think it's come on so many new products as we started at the beginning of this year. And now you've got IoT out of the box, right? So those are significant investments we've made, which, again, we kind of talk about a lot. But, I mean, those are things that we're looking, you know, three years ahead, not just what's, you know, out there for the quarter. Technology is going to make its way, you know, more and more to the restaurants. And we see it, you know, now today. And our customers do want that. We're having more and more adoptions. We engage with a lot of customers down at our innovation centers. And we've had a lot that, frankly, say, hey, we're not going to buy the product unless it's connected, right? So that takes time where you go through an evolution, and we're spending a lot of time educating end users, educating our channel partners, kind of fine-tuning the pitch on ROI, getting more experiences out there. So it is getting traction, and we believe in it, and I think the good news is as you said, as this role, you know, as we kind of think about where we're at, you know, three years from now, relative today, you know, we're the game in town, right? Because I think others haven't had the, you know, the staying power and made the investments and also have the scope and scale of the products and solutions that we have. So, again, I think we think that remains a big competitive advantage that will show up over time and a big part of shareholder value that we'll be creating. There is a lot of innovation for today also. I think kind of going back to the chains and the replacement cycle, a lot of them are spending more time adopting the next generation of technology. Sometimes that slows things up as well, but we see kind of, you know, a lot of the fruits of what James talks about with a lot of the new products coming out from automated grills to ovens to induction, et cetera, that we get more and more, you know, uptake here.

Can I just also add, this is Steve, I think one of the reasons also, Tim, why I think you see some others dropping off and we're getting momentum is, you know, the end user customer wants to deal with very few but proven suppliers. And so there's nobody else out there that has can supply the technology of the underlying equipment, layering in the controls, layering in an IoT solution that connects the entire kitchen, utilities, safety, et cetera, and then also can add in our own robots or automation on top of it. So Middleby can truly provide all aspects of the kitchen. There's nobody else that can do that. So that's why I think you're seeing kind of a one-off here or there that have popped up drop away because they are reliant on other suppliers' to provide the equipment, to provide the IoT, and I think that's why you're seeing our end-user customers, you know, move away from that and continue to move towards us.

Interesting. Okay. And then just on pricing, as you think about the – I don't imagine there – I could be wrong, but I'm just curious as to that. I don't think that the magnitude would – of the – proposed price increase that I think we're aiming for mid-June would be worthy of a pre-buy. But I'm just curious if you think that flattered the order growth in the quarter at all. And then I guess part B is how should we think about a realization of that in terms of the second half revenue and margins for the commercial business?

Tim, the increase did, as we announced, go forward in June. As announced, it was a – I'll call it a low single-digit increase – Again, I think I'll keep saying it. I think we've been very thoughtful, tried to be very thoughtful about how we've addressed pricing in a competitive market, also knowing that there still are inflationary challenges that we're faced with. So, you know, we go, as opposed to just taking a broad increase, a certain percent across the board, it really has been a SKU by SKU, customer by customer, you know, approach in terms of the increase. I do not believe we saw a real big buy ahead in terms of driving orders in June. It maybe happened to a very minor extent, but I do not believe given it wasn't as significant as an increase as prior years. So I do not believe we saw that. Again, your pricing is a dynamic and, you know, forward-thinking evolution. So it will continue to, again, look at SKUs and look at customers as even the rest of this year unfolds. So you will see a minor impact, I would say, in top-line revenue and, you know, margin progression in the back half of the year coming from, you know, the price increase that went live at the end of the second quarter.

Tim, just to add on that, our dealers are very focused on working capital and the costs given the higher interest rates right now. So in the past, we probably would have seen a little bit of a pull ahead. Absolutely, they did not do that this time because that would have been offset by kind of the carrying costs, how they look at that. And as we've kind of gone through the second quarter, you know, and again, lots of discussions we had over the quarters of destocking, they're kind of at a We've heard from many dealers that they are carrying less stock than they were in COVID. So, really, I think we've gotten, you know, that not only out of the system, but if they are to move back to normalized stocking levels, we're kind of a little bit under the average from the last several years.

Got it. Got it. All right. Thank you for the time. Thanks, Tim.

The next question will come from Tammy Zakaria with JP Morgan. Please go ahead.

Hey, good morning. Thank you so much for taking my question. So I have a follow up on the residential kitchen segment comments. So I think you're expecting sales to be relatively in line versus last year. So does that mean, what does that mean for sequential growth? And then similarly, how should we think about margin for this segment? sequentially versus the 9.1% we saw in the second quarter.

Hey Tammy, it's Brian. I'm sorry if my prepared comments weren't clear enough, so let me take another shot at it. As I think about residential quarter to quarter, Q3 revenues are anticipated to be below Q2. but consistent with prior year residential, prior year quarter. And, again, some of that, you know, is due to the seasonality of buying patterns of, you know, let's say the retailers in the outdoor space, as well as what happens with production and I'll say consumer buying levels for the European-based brands. And, you know, the size of our European businesses have also increased over time if you go back to the, you know, Novi market. We do think margins get back to double-digit levels in Q3 and Q4, and we'll see if that also comes out to that having generated double-digit margins for the year in total. as we are expecting more benefits from the cost actions we have taken and also the mixed impacts of the underlying brands as it relates to the total segments. So hopefully that clarifies things.

Got it. Yeah, that does. Thank you. So basically sequentially margin would be down, but sorry, sequentially would be down, but margin would be up.

Yeah, Q3 revenues below Q2 revenues, but the margin percentage for Q3 should be above Q2. Got it. You know, mixed within the segment and benefits of our cost takeout activities.

Got it. That's helpful. And then a second question from me. Are you able to share any comments on what you're seeing in terms of promotions in the commercial segment? We've heard from some players that there's some elevated discounts by some other players in the market. So curious about your take on promotional trends you're seeing for the CFS segment.

Before I turn it over to Steve, and I know you're referencing others out there, I suspect it is. you know, one, you know, large company that has, you know, a segment that has some overlap, you know, and competes with us. And, you know, I know they had, you know, revenue growth, but margins down. So that seemed like, you know, to us, you know, not the way, you know, that we typically operate our business where we're trying to increase the dollars. So, I mean, I think that's some of what you're seeing in the differentiated results, but I'll let, you know, Steve comment more directly address the customer dynamics in the marketplace on a day-to-day basis.

Yeah, thank you, Brian. Tammy, I would say we've seen the competitive landscape from a promotional standpoint. It's at levels that I would say are normalized compared to pre-COVID. So I don't think it's anything that's crazy going on out there. I think it is a normalized market at this point. Again, I think we have always been very focused on driving margins, moving customers to better technologies, very focused on mechs. And that, you know, yes, pricing is always going to be a dynamic, but I think our teams have been so focused on those couple areas. And I think you're seeing that come through, you know, in the margins in the quarter and going forward. So I think we'll remain very diligent. Obviously, we want to be competitive in the marketplace, but we're always, always very thoughtful about making sure we're thinking about margins, we're thinking about mix, and we're thinking about, most importantly, moving our customers to our best technology products.

I think one other comment is we kind of went through the last several years. I mean, we're very intentional about cutting some of the SKUs of our lowest margin products for things that were not as profitable as we kind of moved to a higher mix, which, again, is part of the strategy to expand our margins to those targets out there. So those are some of the categories that you might see a little bit more price discounting. So those are a lesser part of our portfolio today than they were several years ago.

Wonderful. Thank you.

The next question will come from Walt Liptick with Seaport. Please go ahead.

Hey, thanks, guys. I wanted to ask first about, you know, what you're seeing in the international markets versus the U.S. markets. So the growth rates, again, were strong or international. And, you know, why is that? And we're talking about the commercial food service segment.

Well, it's a good question. I would point to, I think we have made a lot of good inroads. Specifically, I would call out the European markets, the Middle East, and India and Asia. I think specific to Europe, I would say we've gone through a complete change in terms of people strategy over the last several years, investments in new markets like Germany. We opened our innovation kitchen in Madrid, Spain last year, which I think has paid dividends. We've had thousands of customers through that innovation kitchen, obviously playing off all the success we've had out of the Dallas facility. So I think you're starting to see those benefits come through as well. I think when you look into Asia specifically, investments in your manufacturing facilities, whether it's in China, whether it's in the Philippines, whether it's in Australia, I think you're starting to see that really come through as well. So to answer your question, I think it's more a reflection of work we've put in over the last several years to grow our brands, grow our people, and obviously grow our customer base in those specific markets.

Okay, great. And when you guys talk about sequential growth in CFS, you're talking about for both, you know, all regions, I guess, of the world, all geographic regions. Is that right?

The comments were for the segment overall. I'm not, I think we've been a little bit, obviously more guidance providing, but I have not broken it down at the regional level.

Okay. All right. No problem. So, and in CFS as well as in RSI, you know, it sounds like the channel inventories are pretty lean. And are you still seeing any kind of drawdown, I guess, especially in residential? Or is it, you know, maybe another way to say it, are you starting to see, like, you know, a second round of channel refresh in residential as we get further into the year?

You know, a lot of our products are, you know, outstanding. Outdoors is where, you know, we tend to have more in the channel, right? So a lot of the indoor products are more specified and, you know, and not stocked. In fact, you know, we're moving more and more to, you know, made-to-order. So really the channel inventories has been around outdoor. Those have largely reset, and I would say kind of similar to the comment on commercial, I think – Our channel partners are cautious. The grill season, you know, has been slower or maybe not, you know, as strong as some of our customers and us would, you know, would hope. So I think there's – and they're also kind of watching the P's and Q's with inventory levels and cost of capital. So – They're in a good stocking position. So I think from that standpoint, we're positioned as we do go into restocking. So it's kind of a healthy level right now. There is an opportunity as we kind of go later into the year to see how they're better positioned going into the fourth quarter this year than last year in terms of stocking levels. And we are, you know, we are continuing to launch new products there. I mean, both indoor and outdoor, which, you know, we're excited about. I think that is some of the things that we think will help us in the back half of the year as we've got lots of new products, colors, designs, induction systems. we've got quite a bit that has come out in the first part of the year that's available in the second part of the year. The European brands continue to grow in the domestic market as well. So those are some of the things that even with the challenging backdrop, we're still continuing to make some headway on.

Okay, great.

One last point, just to make sure, you know, to clarify, I mean, because you did ask about outdoor, even though it's, I'll call it a modest part of the you know, the total segment, but our order trends, you know, being up have included, you know, the, you know, the outdoor brands as, you know, as well. So, you know, I think we have seen positive evolution of, you know, the inventory that's stocked for that, you know, I'll call it subcategory within residential.

Okay, great. So outdoor should be up in the third quarter too, quarter of quarter.

No, I mean, you mean, yeah. I'm talking about what we've seen over the past year, year over year in order trends. Again, the third quarter is always the challenging one for You know, for for outdoor, I mean, we do think, you know, Q3 of, you know, will be, I'll say, at least at similar levels till till last year. But that really isn't the quarter that matters, right? It gets a little bit more interesting as we're getting to, you know, Q4 as we, you know, that are low, you know, starting to load in for next for next growth season. But I was just trying to clarify your question where you were asking about. you know channel inventories that you know we we think the the d stocking which is tim tried to clarify was probably most relevant of a question to uh the outdoor side of things is not uh you know not the headwind uh you know that it was going back a year going back a year and two ago okay great thanks for that and if i can ask one more just on uh followed i had a win with uh starbucks

And I wonder, you know, how that's going, you know, what the opportunities there, if there are other near-term opportunities with Starbucks.

Yeah, we try to refrain from discussing any kind of specific, you know, customers, et cetera. But, you know, Follett and our ICE platform overall continues to grow. And, again, you know, we've tried to – Point out that we've got a great, very exciting beverage and ice platform where we've got a lot of new products and technologies coming out, which also address speed of service throughput, labor, et cetera. So I think there's a lot of growth opportunity there. The nugget ice platform for Follett, which has got significant operating advantages, as well as I'll say preference with customers is doing very well. And that's part of the platform that's growing Alongside IceTroll, which was one of the acquisitions we did in the last several years, we've been able to expand the platform here in the U.S. The U.S. needs larger ice capacities, so we've had a couple of new products that came out just really at the beginning of this year, which we've been gaining, you know, traction both with our channel partners and with Chain. So, again, we remain pretty excited about that platform. and beverage overall with more to come.

Let me just add to that, if I can, for a second, because I often get compared to others out there. I mean, this is an area that has been growing for us. You know, over time, it grew last year. And, you know, I think we are seeing, and I can base this on, you know, other comments of other public companies as it thinks about ICE. You know, we are outperforming the competition here. And it isn't just due to, you know, one customer. I mean, the amount of growth we're having is due to, you know, broad adoption of, you know, our multiple ICE solutions across, you know, numerous customers, right? So this is why we capitalized on trends, have brought in, you know, the product portfolio across, you know, commercial. So, you know, it's an area of great strength for us, and we do see that, you know, continuing, again, across a wide number of customers.

Okay, great. Okay, thanks much.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Thank you, everybody, for joining the call today. We appreciate the questions and look forward to speaking to everybody next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.