Q2 2023 The Middleby Corporation Earnings Call
Okay.
Thank you for joining the Middleby second quarter 2023 conference call with US today from management are CEO , Tim Fitzgerald, CFO , Bryan Mittelman, Chief operating and Technology Officer, James Pool, and Chief Commercial Officer, Steve Spittle, We will open the call with me.
My comments and then open the lines for questions directions on entering the queue will be given at that time now I'd like to turn the call over to Tim Fitzgerald. Please go ahead Sir.
Okay.
Good morning, and thank you all for joining us today on our second quarter earnings call. As we begin. Please note there are slides to accompany the call on the Investor page for website.
We're pleased to have posted solid results reporting a record second quarter with strong performance at both our commercial and food processing businesses and we continue to progress our residential business. While it is impacted by the challenging market conditions and destocking of inventory at our channel partners.
We posted overall improved profitability during the quarter and continued to make progress towards our longer towards margin targets are.
Our profitability is benefiting from our focus on new product innovation to drive improved sales mix.
We are realizing efficiency gains, reflecting the impact from our manufacturing investments.
And we are focused on longer term supply chain opportunities with ongoing product design and sourcing initiatives, providing for greater improvements over the next year.
While market conditions have proven to be challenging, particularly in the residential segment the inventory Destocking, which has impacted the first half for our commercial and residential businesses.
Believe will largely be normalized by the end of the third quarter.
And we continue to have strong engagement with our customers across all three of our foodservice businesses.
Our new product introductions have accelerated over the past several years as we target growing market trends and launched game changing innovations addressing customer challenges of labor speed energy food waste and sustainability.
New and exciting ice and beverage offerings, and a large addressable market and.
And establish Middleby is the leader in controls Iot and automation solutions.
Positioning ourselves to capture the future of the industry.
Our residential we have significantly broadened our portfolio of indoor and outdoor premium brands with industry, leading designs a pipeline of innovation addressing the growing demand for energy efficient electrified products.
And with initial launches of connected equipment with more to come.
At food processing, we've executed on our strategy of becoming a leading provider of full line integrated and automated solutions for the protein and bakery markets, while successfully expanding into new markets such as Bacon cured.
Cured meats alternative protein in pet food food.
Through our substantial go to market investments, we're creating greater awareness for our brands product portfolio and the latest innovations.
With a growing pipeline of customer opportunities.
The investments we have made in our innovation centers have proven to be a strategic asset for our businesses.
Traffic at our commercial residential and food processing showrooms continues to increase.
We now have a total of eight innovation centers.
We have invested heavily in training with our channel partners and our World class culinary teams are engaged daily with hands on customer demonstrations. We are realizing the benefits from deepen relationships with our sales partners and have developed important new customer wins.
Demonstrating the value of these strategic investments.
We're excited to have most recently opened our flagship residential showroom in Chicago, featuring the latest designs and innovations across our entire indoor and outdoor but it'll be brand portfolio.
Since our June opening we have quickly both the calendar with customers discovering all that that'll be residential has to offer.
We're confident these investments are today are translating into the early chapters of a long term impact and growth trajectory for all our foodservice brands.
In the quarter, we also completed several acquisitions.
With the additions of Blue spark and filtration automation.
<unk> expands our software development and in house controls manufacturing capabilities, extending our lead in digital controls and Iot and area. We're confident will provide <unk> with a clear competitive advantage is automated digital solutions are implemented in the commercial kitchen.
While filtration automation furthers our strategy of developing best in class Bolide automated solutions.
Adding a patented oil filtration technology, providing our customers with operating cost savings and improved food quality with our now expanded frying solution.
In early July we also completed the acquisition of <unk> water solutions, the Terry chemical free biodegradable water filter solution provides for improved equipment performance reduce maintenance and consistency and food quality.
Along with ice and beverage the combination of the Terry water solution with our portfolio of food and beverage equipment provides for a better customer experience along with significant growth opportunity and a sizable and attractive after sales market.
And just last week, we announced our most recent acquisition of trade when a manufacturer of residential ventilation complementing our portfolio of indoor and outdoor cooking brands with an expanded offering of unique designs and custom ventilation solutions.
A critical strategic investments in innovation go to market capabilities and acquisitions continue to build upon our competitive positioning in the marketplace.
Further strengthen each of our three industry, leading foodservice businesses.
Now I'll pass over the call to James to spotlight more on some of our most recent product launches that address the growing electrification trends.
And the demand for automation in the kitchen.
These new product innovations are also highlighted in our investor slide deck.
James Thank you Tim.
We've got some exciting developments in our product lineup focusing on sustainability in electrification in the residential space locker, new rangemaster AGA novae in Viking have recently launched or are launching a full suite of induction products for homes. These offerings provide a residential customers with the <unk>.
Same benefits that our commercial customers rely on today.
Safety speed precision performance and sustainability. Additionally, Cook <unk> one of our commercial brand is introducing a few new products for the residential use such as the drop and induction walk.
Middleby is also proud to bring the most extensive lineup of injunction range tops and ranges to the market with designs ranging from classic fridge too.
Strong American commercial.
And nobody is introducing an innovative under counter product called the invisible hub, which allows users to directly on their countertops as before you can find these new products in our investor deck. I've also included a slide that compares the benefits of induction versus electric and gas.
Cook tops, highlighting the near perfect deficiency that induction yields along with a brief explanation on how induction works.
Now, let's revisit our highly successful product that continues to gain traction in the commercial space.
Taylor Nextgen grill widest in the Gorilla choice for a few high volume quick service restaurants for the past couple of years. The general market introduction of the Nextgen Grill continues to generate strong interest and adoption among our customers, especially those who have had the chance to come.
Experienced the grilles capabilities firsthand at our Middleby innovation kitchen automation pod.
At Night, then Andy NRA shows.
The Nexgen girl brings embedded automation through active compression cooking, allowing for cooking from both sides simultaneously.
With its continuously variable GAAP control this.
Innovation.
This innovative cooking method offers next generation precision the Nextgen grill can control its platinum gap or compression with an accuracy of five seven inch and a flattened parallelism within 10 thousands of an inch this level precision enables our customers to achieve.
Consistent cooking.
Back to front and side to side dramatically, improving consistency and reducing cook times up to 80%. Furthermore, this automation significantly improved food quality by reducing instances of over or under cooking, thereby ensuring safer offerings and minimizing food waste.
Ultimately enhancing our customer.
Profitability and consumer satisfaction.
Before I conclude I'd like to give you a glimpse of what's coming up in the next quarter, we will focus on new products slated for launch in Q4, and Q1 of 2024 expect exciting introductions such as the rapid Cook oven from turboshaft.
Breaking frying innovation from Petco, and a new residential platform from Viking consisting of cooking refrigeration dishwashing and built in accessories.
And now I'll pass it over to Brian . Thank you James I'm excited to be reporting these record results from our <unk> facilities.
And before I get to discussing the past quarter and some record results I'd like to look back a lot longer during this past quarter <unk> celebrated its 175th year of making ovens right here in Vermont. This is certainly our oldest domestic company and I have not attempted to estimate.
How many pieces in cookies have come out of their ovens, but I know they are responsible for my favorites also.
When Tim began executing our M&A strategy at the beginning of this century the process began here.
As we look forward blodgett innovations are helping to lead the way so I want to thank the entire blodgett family for helping build the foundation of Middleby and for leading the charge as we reached new Heights.
Speaking of New Heights, Q2 was a record quarter, our highest revenues ever a well exceeded $1 billion.
And in spite of continued challenging market conditions, our organic adjusted EBITDA margin was 22% with nearly $229 million of adjusted EBITDA, having been generated on a last 12 months basis, we are at $885 million of adjusted EBITDA.
<unk>.
While our total organic revenue was down slightly given the residential headwinds we were still able to grow our adjusted EBITDA $1, 4% over the prior year.
Our total company margins expanded 130 basis points and all of the margin values I will discuss hereafter R.
On an organic basis, meaning excluding any acquisitions and foreign exchange impacts.
GAAP earnings per share were $2 16.
Adjusted EPS, which excludes amortization expense and non operating pension income as well as other items noted in the reconciliation in the back of our press release was $2 47.
<unk>.
Commercial foodservice revenues were up nearly 3% organically over the prior year.
The adjusted EBITDA margin was 28% over 250 basis points ahead of the prior year.
We are very pleased with how margins have continued to evolve as we see benefits from an improved product mix from our capital investments from our operational improvements as we integrate acquired businesses.
As well as our constant focus on costs and driving pricing in response to inflationary pressures in residential we saw an organic revenue decline of 27% versus 2022.
The adjusted EBITDA margin was nearly 14%.
Food processing continues to perform very well.
Total record revenues were nearly $189 million, an increase of nearly 27% organically.
Our adjusted EBITDA margin was almost 22% for the quarter up 270 basis points over the prior year and we are at just about 23% for the year.
Our operating cash flow generation was $62 million for the quarter and a rather strong $154 million for the first half of the year at $64 million year over year increase.
During the quarter, we invested approximately $23 million in capital expenditures and $26 million on acquisitions.
But looking at the past 12 months, our cash flows were approaching $400 million season.
Seasonally second half cash flows are even stronger for us. Thus, we look forward to continued strength in cash flows in the back half of the year driving higher cash conversion rates as we realize further working capital improvements. This venn should result in for the full year, having operating cash flows exceeding net income.
As we closed Q2, our total leverage ratio moved down to two nine times and our covenant limit is five five times. So we currently have over $2 3 billion of borrowing capacity.
While we are very pleased with how we performed in the first half, especially given notice notable headwinds we anticipate that the second half 'twenty three can be better than the first half even more importantly, we remain bullish as we look out look out over the next few years and tirelessly work to increase shareholder value.
But let me spend a little time in the very near term outlook.
Starting with residential.
Demand in the marketplace, obviously remains well off the peak values or the peak levels seen in the first half of last year.
Challenging market conditions persist and these extend beyond the U S. The U.
He has a meaningful market for us where inflation interest rates and the resulting consumer behavior are headwinds Q.
Q2 should hopefully be the trough for resi.
As we consider the recent.
Positive momentum and order trends, we think the business can hit an inflection points coming out of Q3 Nonetheless.
Nonetheless, looking at Q3 sequentially, we see sales down modestly from Q2.
Seasonality and absorption impacts will challenge margins, but they should remain at least double digits to finish the year. We do believe that fourth quarter should be stronger than the third and should deliver year over year growth for food processing. We obviously posted a very strong second quarter and revenues were higher than we had anticipated when we discuss this.
<unk> three months ago, our backlog remains strong we are seeing strength in many markets, we serve including cured meats and funds and breads. However, some areas are facing headwinds, especially in poultry and bacon, where the underlying food costs are high but we exist. We expect this may improve in the short term.
As we look at these factors delivery schedules seasonal impact on operations as well as product mix Q3 performance will be down from Q2, and Luckily around Q1 levels.
Nonetheless, Q3 will deliver year over year revenue growth and margin expansion Q.
Q4 will be stronger than both Q3 and the prior year. So 2023 second half should be better than the first half for.
For our commercial when thinking about near term performance. We believe it is important to note that Q2 revenue and profitability also exceeded our expectations based on our outlook from a quarter ago. Accordingly, I expect Q3 to be fairly consistent with Q2.
We expect the inventory Destocking that we mentioned during the call last quarter to be behind us. After Q3 than Q4 should be even stronger than Q3. This to result in a better second half of the year.
Putting the three segments together then when looking at the total company potential Q3 performance revenue and earnings will be lower than Q2 due to the lumpiness in SPG and the anticipated bottoming out and ROTC before an anticipated stronger fourth quarter for all segments and the company in total.
We iterate then on a total company basis, we expect Q4 to be stronger than both Q2 and Q3. This would result in total company growth for fiscal 'twenty for over 23, despite the challenges in residential markets.
As I look across our entire organization I see innovation being delivered and we are uniquely addressing customer needs our profitability and cash flows continue to drive our unmatched ability to innovate to add new capabilities to develop stronger sales and go to market price.
Surcease to improve our systems and modernized manufacturing to enhance and expand our service and to grow our reach globally from.
From Vermont to California from the UK to China. Our teams are fully committed to continue delivering strong results. We all come to work every day hungry and thirsty for greater success.
We remain excited about our prospects for a long time to come we have all the confidence in the world that we will continue to reach new Heights.
Thank you and we'll now take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.
First question is from.
Gerry O'hara of Jefferies. Please go ahead.
Thanks, Good morning.
I wanted to see if you could quantify the impact of Destocking on the quarter and then how youre thinking about it.
Yes for both segments and I think we could argue that in a flat demand environment. This destocking should really be a tailwind into next year. So if you could help us size that I think would be very helpful. Paul.
Hey, Siri, it's it's Brian .
Given the Middleby way I'm not going to offer you specific numbers.
To size that but I think it's important to consider.
Overall, what's happening in the market and the results we put out there right. So Q3, I'm, sorry, Q2 was really strong.
And I commented that we expect Q3 to be similar to Q2.
Starting with commercial here.
Given what's happening.
In the market with our dealers and customers about their about their levels, but then Q4 does improve and as we've noted based on the trends and the customer needs.
We do think it does.
Does present a tailwind.
Beyond when we get past.
The third the third quarter as you think about the residential markets.
Obviously, there are challenging these days in a variety of product categories and certainly.
Our our customers the dealers the retailers are being.
Cautious in managing their balance sheets as well.
Q3 is often a.
Seasonally somewhat weaker.
The quarter as well for a variety of our products within the residential segment, but thats, where we think things do start to pick up in Q4.
For us.
Maybe phrasing the question a different way could you go through what Youre seeing from Michelle out perspective in commercial foodservice and then residential.
Sure.
Yes.
Sorry, I think we're going to have a hard time quantifying it the way the way you would like.
I would say the impact is more significant in residential and commercial.
Certainly we think that the.
That our channel partners.
As a headwind that will go away and then I think the channel partners will be a little bit more cautious in terms of how they reload stock and going to next year. So that'll be kind of become more neutral and then I think as you're alluding to become more of a tailwind as we kind of move into next year, particularly in the.
In the back half.
The we don't have there's a lot of brands.
Cutting across those two segments.
We have engaged with our partners on commercial.
There is pretty strong sell through so I think that's one of the things that gives us.
<unk>.
As we are closer to them than ever and really understanding.
What is selling through and how we kind of fit into their business plans and then certainly I think there's two aspects. There one is kind of the general market and then theres the chain. So the general market I mean, we kind of understand where inventory levels are with our channel partners and we think we're kind of nearing the end of that as I said in the comments at the end of the third quarter.
With the change of I think Theres a lot of public information out there where you can see store openings and plans are pretty strong so so.
So there's a little bit of inventory in the channel as they wanted to make sure that.
They had the equipment to mature that they could execute on those plans so.
So I think we feel pretty good about the end markets in commercial and certainly where we're situated there.
Residential I mean, certainly as you kind of pull it apart.
The biggest impact is on the outdoor.
The outdoor group brands so.
We think that.
There will be we'll be in a much better position as we exit the year.
We do.
I actually believe we turned positive and outdoor grows as we hit the fourth quarter, because we really started to see a lot of the impact in the.
The grill category at the end of last year and some of the dynamics there.
So.
There's a little bit of color around that I know thats not quantifying it.
Specifically certainly.
Feel like we finished the year at a pretty good place and it kind of sets a.
A pretty good.
Backdrop for 2024.
I appreciate the color I'll leave it there thanks.
The next question is from Mig <unk> of Baird. Please.
Please go ahead.
Yes, good morning.
I'm going to stick with this topic.
Sorry brought up.
Destocking.
Just to be clear here.
Is the destocking occurring.
In the general market with distributors and such.
Or is it happening.
Yes, our customers this kind of sounded like it's happening with both.
I'm not clear as to how much visibility you have in terms of where it is.
Inventories are and whether or not you.
Can be firm in your assessment that yeah by the end of Q3.
So when he solved.
Yes.
<unk>.
We don't have perfect visibility right like we don't have the inventory that's in the channel, but we're.
We're heavily engaged with the channels. So I think we get a lot of indications and sharing of certain numbers, particularly with <unk>.
And the larger areas. So I mean, I think we do have some pretty good visibility and yes. The issue was has been both in the general market. It tends not to be our product I think.
As we kind of went through supply chain.
A lot of the channel will get their hands on anything that they could right. So I think much like.
Much like our business people want to normalize their inventory so as they work through the inventory and maybe destocking some other.
Products that they wouldn't have bought it under ordinary situations that will kind of get.
That will start to drop those orders back with us and then perhaps.
Moving to some normalized level of stock with us so that is kind of what we've seen in the.
Marketplace. So.
And yet with the change so I mean, I think they are carrying a little bit more of inventory that they had in the past, but I think given where we see their growth plans versus what we think is in the channel of it I think we do have a pretty high level of confidence that this is.
By and large all moved through certainly by the end of the year, but.
But largely by the end of the third quarter.
We think we've got one more quarter to go here and then certainly.
Comes.
Nominal.
Headwind versus what it's been in Q2, and what we think will still have at the beginning of Q3.
Okay.
You are talking about a headwind here.
Is this destocking resulted in a headwind to your shipments. So your realized revenues in the quarter or is this a headwind to your bookings and orders.
I would say full.
Yes.
So we didn't touch on lead times, but I think again, we've got a lot of brands in the world.
It's still resettled link to normalization, if you kind of look across much of our portfolio.
We're back to very normal or reasonable lead times.
There is still a little bit in a few.
Categories, So, but lets say for 80% of the portfolio orders has started to equal sales.
Sales kind of a normalized basis.
Alright, and Thats kind of what I was trying to get at because if I'm looking at the last reported backlog data you've given us for commercial food service at the end of 'twenty, two that was call it $755 million.
Pre COVID-19 when lead times with normalized backlog was less than 200 million. So I'm sort of curious as to how you think about this dynamic for 2023, where backlog is going to be exiting 'twenty three.
Lead times have normalized and related to that.
This backlog burn then become a headwind for production because you have to normalize your own production into 2024.
Yes. This is Brian I mean, obviously are.
While our backlog continues to be I'll call. It as an elevated level when you make those comparisons too.
Pre Covid times.
I don't think I think youre getting after you know what's going to be the absorption impact from bringing down the backlog to what I would kind of say Eric quota a normal level is and we don't think that will have a meaningful negative impact on absorptions.
Certainly we expect the new.
Normal to be higher than it was pre.
Pre Covid times.
Given.
Inflation, given our business is larger.
And how our relationships have changed with the customers given the.
The growth that they are still going through over the next coming years in terms of expansion just leads to ordering patterns that are more ahead of their needed delivery date than it used to be right. So we're.
Our backlog again focused on commercial here used to be closer to a quarter of a quarter.
We will still see with the new normal is I'm not sure that we have.
No exactly yet, but I will say I would expect it to potentially be closer to half of a quarter in the backlog and again given our current.
Backlog levels given some.
Pie chain challenges in.
And a few narrow areas.
I don't think were ready to get to say we are.
<unk> in normal times, but that's a little bit of an indication how I think things will play out over the next 12 months to 24 months.
One final question and I apologize for insisting on this but.
I get this question a lot from investors.
If I if I take what you just mentioned a moment ago. It sounds to me like by the end of 2023, clearly backlog is going to come down relative to where it exited 22.
What that means is that youre shifting your shipments have exceeded your.
Order intake for 2023.
So.
Is it fair for us to assume that demand catches back up in 2024, and you won't have an impact on production or will you have to adjust production into 2024 again, if nothing else changes.
Thank you and I'll finish there.
Yes, I think.
It's the effect of normalization. So we are going to have a lower backlog as we exit 2023% in 2022, there was a lot of orders that.
Got pulled ahead and you would have had periods where order rates significantly outpaced our shipments as you went through the last several years right. So but I think some of this has been I'll say normalized by our production rates. So as you kind of go through the back half of this year.
<unk>.
Normalize the inventory in the channel will normalize the order patterns will normalize and I think we will fundamentally.
See order patterns and shipments that will kind of batch to the demand. So I mean, I think thats, where we look at what's happening in the marketplace and the strength of what we see with us in the dealer channel, where we're at with the chains certainly some of the business opportunities that we are <unk>.
Developing with new customer wins, new products et cetera, So I think thats, where we are.
And obviously you mentioned the changes are healthy with their store opening plan, so I think that.
We believe.
Yes, there are all these moving pieces thats kind of the world of disruption in supply chain that we've all lived through in the last several years.
We see that kind of being in a much healthier normalized situation going into 2024. So I think the backlog coming down is not necessarily a headwind for us and I think that backlog is still a healthy backlog relative to where we would've been in a pre COVID-19 period.
Appreciate the color. Thank you.
The next question is from Jeff Hammond of Keybanc. Please go ahead.
Hey, guys.
Good morning.
Good morning, just wanted to I guess cutting through the <unk>.
Destock noise I'm, just trying to get a better sense of underlying business momentum the <unk> have kind of been blowing and going on on new store growth.
Talk about Rollouts.
So maybe maybe update us on what Youre seeing in real business no momentum and then.
Again, I think concerns over tightening lending standards, what youre seeing on the smaller independent side around that.
Yeah. Good morning, Jeff It's Steve So maybe I'll give you a couple of areas of what we're seeing just the underlying demand market. So you touched upon the large <unk>.
Before.
As Tim said earlier, we've been very close to them and again, we've been very transparent around their new store opening pipeline, obviously in the back half of this year and even into the first half of next year. So they've really recommitted to those plans and so continue to see that really.
B are strong.
Point of demand for US also seem to change certainly still trying to solve for all the challenges that we've talked about over the last couple of years, whether it's labor whether it be a service.
Et cetera, and I think that is driving adoption of new technologies, which I do think it will lead to some rollouts as we get into the back half of this year and into next year, especially.
Tim also talked about just the general dealer side of the business, which has been I think an area of focus more so than ever.
The last year or two you are a big part of that has been we have more dealer trainings and dealer events coming through the innovation kitchen in Dallas, which I think has been a huge success for us so allow us to get closer to the dealer market, which I think does continue to do well for us, which I guess would lead into the last comment you asked about.
The smaller independent restaurants, which really does fall probably more in the dealer side of the business I would say by and large Jeff we have not seen a lot of issues from a lending standpoint.
Causing issues and equipment demand.
So have not really run into that.
And I would just say maybe the last thing I've touched upon before but I think it's important to note we talk about change we talked about.
The dealer business the consultant side of our business as well I think as always a very good indicator of both short term, but actually the next 12 to 18 months of demand whether it's around schools institutions. I think that is a segment, especially in the last several months that we can track project specific.
<unk>.
Give us some some some pretty good visibility into demand in those specific areas, especially for <unk>.
2024.
Okay really helpful. Steve.
On.
The Rajiv it seems like maybe that does the snapback or the bottoming process has taken a little bit longer and I'm just wondering if.
If that's destocking being deeper or is it something in the order rates.
I think you mentioned.
Okay.
On the grille side trigger was kind of out declaring victory on destock and.
And their stock is bouncing just just maybe frame what's what's different.
Maybe previous expectations.
Yes, I think.
The residential market has been tougher this year right I mean, I think interest rates.
Continued to rise housing market, it's been a bit challenging so, but I think generally.
Not that we were expecting a robust market, but I think I think some of the.
The headwinds there have been a little bit more challenging as you kind of thinking about the pace of interest rates in particular as you went through the front half of the year. So.
I think that.
And the UK.
Which is a big piece of our business and residential.
Has.
Probably been even a little bit more challenged than the U S market. So I mean, I think those are some of the things.
That we've seen as we've gone through the front half along with the Destocking, which is again hits the grill business.
More than some of her other.
Businesses, which tend to have a little bit more of a.
<unk> two.
To order aspect to it so.
So that being said I'd.
Do think we've seen.
Things start to what we think bottom.
I think anytime there is a lot of uncertainty and disruption things kind of a slow of them.
Place and Thats been the case with.
With residential.
We've seen I'll say, some improving order.
Trends as of late.
<unk>, our core cooking categories. So.
And also I'll say.
The electric or electric products.
As long with the market overall and you can see we've got a lot of investment there.
With an exciting portfolio and certainly bringing some of the technology from commercial to residential there as well I mean those are.
Areas of even some some tepid growth so.
So I think it's.
It's been a little bit more challenging, but I think we're also at the beginning of <unk>.
Flexion healthier inventories in outdoor.
Hitting the trough.
<unk>, so I'm going to do.
Feel like Q3.
Certainly is growing.
Is the challenge, but I mean I think.
We.
Kind of see what's coming in Q4, a little bit as well, so I feel like with the.
Approaching the turn there.
Okay. Thanks, guys.
The next question is from Tami Zakaria of Jpmorgan. Please go ahead.
Hi, Good morning, Tim and Brian Hope you're doing well.
So my first question is.
For the food processing segment margin I think it was lower sequentially on higher revenues.
Anything unexpected happened.
How should we think about margins for food processing for the next two quarters.
Yes. This is Brian .
The second quarter margins are just impacted by some of the nature of the mix and the projects that we delivered.
I do think the <unk>.
Second half of the year will be.
At least in line and then as we get into the fourth quarter trending better than we did in in the first half of the year. So I think if you look at the first half of the year as a proxy.
For Q3 that makes more sense, and then Q4 always is stronger than the third quarter.
Got it that's very helpful and then I'm not sure if I missed it but.
Where does your backlog stand for the commercial fluid ends with trusted and segment today.
Yes that isn't a specific number where we were regularly disclosing.
Okay fair enough. Thank you so much you bet.
The next question is from Larry.
Hey, Maria from William Blair. Please go ahead.
Thanks, Good morning, everybody.
I wanted to follow up on processing I know you don't want to give an absolute backlog number but can you maybe talk to year over year or sequential processing orders, specifically, obviously there were some weakness in the market others are calling out you mentioned some of it so.
Curious about the order levels and what kind of coverage do you think you have over the next few quarters.
And since you called out that you think that.
Weakness is temporary so I just wanted to get some confidence that.
That's kind of look better into 2024 or not.
Yes, the <unk>.
Backlog remains strong I'll say within on a percentage basis still within single digits.
Of the peak rate so I feel like we have very good coverage.
In many areas for the rest of the year into next year, but it is a business that I will say that as is mixed right. We have some orders that come in that are for products that get delivered in.
One to three months and then we have other projects that live in the backlog.
12 to 24 months so certainly.
Last year and maybe into the beginning of this year were periods of very robust orders.
And things with the interest rate environment have moderated if I want to be careful with my comments here. It isn't like what we've gone from I'll say good to that I think we've gone from <unk>.
Great to still very very good but again there are some pockets in there that are that are challenging as we look at the underlying besides the interest rates the underlying food cost and what that means for customer margins and caused a couple of areas as I noted to be a little bit weaker than others, but I guess.
To put it altogether backlog is still at what I'll call very high very strong.
<unk>, we talked about some of the Lumpiness of the business that causes me to say Q3 won't be the strongest Q2, but again Q4 will be stronger and again.
Don't think anything has fundamentally changed.
As I said, it's kind of a general health of the business.
Thanks, Brian and then I guess, maybe second question on processing would be are there larger and potentially actual.
M&A deals came processing out there I know you're trying to get that up to $1 billion business, but is there a potential for larger M&A there or is it more likely to continue to pursue some of these smaller ones that you've done and have grown nicely.
Yes, so so.
So Larry we're really not going to.
Comment.
Certainly we work on.
M&A that's been.
20, plus year history, So I mean, I think just.
Say that we see significant.
Opportunities to continue to grow the platform both through acquisition and Inorganically, So feel like Theres still a long long runway there.
Okay fair enough, Okay, if I could just sneak one more in here just yet.
Just to clarify <unk>.
In commercial.
We've seen more concerns around Destocking next year, but in the second half are you under producing versus retail.
I guess, mostly if so in the third quarter I'm, just trying to understand how you're planning on getting that.
Dealing with the Destocking versus the big backlog et cetera, where we actually under producing versus retail.
To get there thanks.
Can you clarify what you mean by.
Retail I mean do you mean by.
Right now I mean does your dealer inventory and then their sell through into the retail dealer selling into the end user and are you going to underproduce versus retail or b potentially if we don't then potentially pushing the inventory issue out further right.
Yes, so I think the answer to that is yes. We are I mean, I would say in both Q, the first half as well as kind of or.
Talking about here in Q3 is that.
The sell through if you want to call it that whether those dealers selling to end users or maybe some of the supply chain. That's in the channel that goes to the change we are under producing and.
Our revenues will be less than what we.
Can you believe as is being sold to the end market.
Some of the Destocking.
And the channels.
Again, if you have a question. Please press Star then one.
Next question is from Walter Liptak of Seaport. Please go ahead.
Hi, Thanks, Good morning, guys.
I wanted to ask about the in the resi business.
Some of your comments about the outdoor.
Destocking and the seasonality and I wanted to make sure that I understand this so.
It sounded to me like.
That's where you think some of the Destocking has ended.
And then if that's right what.
Whats the seasonality here.
Orders have picked up a little bit.
To fill in how does third quarter looking at.
Does the seasonality impact the fourth quarter.
Yes.
Okay. So.
Yes, the sell through.
Ben.
Great, but the Destocking.
<unk>.
As a greater impact to our revenue right. So like both of our headwinds so.
But but the inventory is continuing to come down.
The the.
The seasonality you start to get an initial load in typically in the in the fourth quarter and then you then you kind of get into the.
They have a part of the grille seasons.
In the spring so I mean, as we've kind of gone through this year I mean, everybody has been a little bit off their.
Their inventory levels. So that's all got to get to a normal level. So we've got to think that by and large.
As the case as you get to the back end of the year than in the fourth quarter, then you get into some load in for the grille season going into the next year now we do think that retailers will be more conservative and that loaded going into next year. So you may not be quite back to.
Let's say, where it was in the <unk>.
But as you start thinking about our comparative.
We really started getting hit with the Grilles in the fourth quarter of last year. So.
Meaning there was massive there wasn't a loaded and there was destocking right. So I think we're going to be.
Largely worked through the inventory maybe.
100% because you've got.
Different brands different retailers different skus out there.
You will have.
A lion's share of that behind you and then you will kind of move into I'll say, maybe a conservative.
Stocking season, and then that will kind of lead you to do.
You've seen what the growth season for 2024 looks like and probably.
Healthier orders and sales in that period, if you have a more normalized season.
Susan.
So that being said also just we've had a lot of great new product launches and they've been well received I mean, the connected Joe.
Wish.
James highlighted a.
A couple of times here.
Ben.
Kind of sold through.
Trying to keep up with it right now so I mean, I think we've got the gravity.
Connected series on vascular built as well, which we're very excited about I mean, I think we believe that we're the the.
The innovators with.
The charcoal category, which we.
Believe is a category that will have.
<unk> has some some growth in the years to come and we've got.
Really.
<unk> suite of products with some added launches when we go into next year. So I mean I think.
We've got some added floor space there.
Sure.
With some.
Deepening partnerships there.
And we've also.
<unk> been expanding some of our.
Digital marketing capabilities. There. So I mean, I think as you kind of look forward to.
Getting into a more normalized.
Grill.
Environment, we're very excited about the portfolio that we have.
We think we've got a long runway there.
Okay. That's great. Okay. Thanks, very much that helps.
And then Brian .
Sure.
Presentation, you called out the risk of of Europe , pretty clearly, but I wonder if you could just help us size of <unk>.
Europe like how much is the U K.
Versus the rest of Europe .
Yes.
K as.
As a strong majority of that I don't have the breakdown.
Right at my fingertips for the past quarter, but I'm sure it's in excess of half of the.
The.
Europe's revenue for residential.
Okay, Great alright, thank you.
And the next question is from Todd Brooks of the Benchmark Company. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
First is on commercial I'm just wondering.
And you've talked in the past about how the cycles now is very driven by it.
The new unit builds.
It's on our.
Discussions with the customer with.
These larger chain customers largely being in a much better stock position from a labor standpoint.
And we had commodity costs rapidly easing some of the urgency for either specific pieces of equipment that would attack.
Labor food waste or more broadly.
Great appetite.
Does it get slowed in the environment that we're in or do you think the appetite still a strong when you get to the.
Great.
Model phase for the existing fleet.
Yes, good morning, Todd It's Steve So I don't think there has been any slowdown in.
Customers need upgrade to solve for the challenges will specifically call callout labor.
Think I, maybe give you a nuance when we think about labor challenges in restaurants dealers in a number of areas to think about one it is finding great employees, which has gotten.
I'd say, a little bit better over the last six months for restaurants for the cost of those employees, which continues to be elevated I think the third thing I would call out where we're actually seeing.
The adoption of some of these new technologies is actually the ease of actually doing the job and the training that comes around with it James hit the tailored double side Grill I think it's a great example of this because youre working a grill traditionally is probably one of the least fun jobs on the back of the kitchen right its nuance.
Do you is there is a little bit more of an art to it another piece of equipment. So it's a higher level of training and obviously you want to make sure Youre cutting your you are checking your stake whatever it may be coming off the grill appropriately and Thats also a very hot increase the position.
So when you can move to something like the Taylor grill, where you're putting the product out pushing a button and walking away you're eliminating the training and now it becomes one of the easiest jobs in the kitchen. So I'm, giving you that is a nuance of even though parts of labor.
Maybe getting better there are still major challenges that every restaurant faces in terms of labor and training so.
And I think to answer maybe your second question, we still do see.
The new store builds I think continuing on a strong pace back half of this year into next year and I do I do think you still have that pent up demand that we've talked about both in replacement and upgrade that I do think you start to see more of that kick in certainly the first half and well into into next year.
That's great. Thanks, Steve.
I think Steve answered it well, but I'm, sorry, I'm just going to add.
So even though staffing has improved dramatically turnover is a big issue, which kind of leads to Steve's point right because you bring people in and they are.
There are trained right.
It was always a major challenge, it's even it's even a bigger challenge today and I don't think most of the restaurant customers believe that has gone away. So thats again, where you need to have smarter easier to use automated equipment. The other thing which is maybe.
Todd.
Add to that as you get.
Challenging.
If you have labor the speed of service, which has always been something we've.
<unk> talked about has come back in spades right I mean.
As you think about delivery.
Drive through more throughput and smaller footprint.
That is a.
A major issue that a lot of a lot of customers today. So I mean, I think a lot of the solutions that we have sulfur that problem as well so that's there.
So we need to seek out the <unk>.
Automation.
That's great. Thanks to you both and then just a final question.
As Youre looking forward at your commodity basket.
What's the picture look like for a availability through the supply chain would be are you seeing any early signs.
You'd want to point us towards it can be margin enhancing as we can see.
Thanks.
Hi.
It's James I think by and large.
We still see pockets of.
Issues in supply chain and they typically are around electrical items. Some motors here and there, but also just kind of around the legacy controls, where you've got kind of a 10 20 year old silicon on the on the board those tend to be the items that.
Slow us down the general availability of <unk>.
<unk> copper things like that have been.
Fairly fairly strong we don't see that as a headwind anymore. It's just kind of these these nagging legacy.
Components or specialty products that are kind of highly customized motors contend to be.
A challenge so that's kind of our guy.
Guidance on how we see supply chain affecting us in kind of 24 pockets here or there, but generally good availability.
And any outlook on kind of cost for the core metals things that become more readily available as we headed into 2004.
I think we continue to see them at the levels they are or.
Going down slightly.
Perfect. Thanks James.
Yes.
The next question is from Brian Mcnamara of Canaccord Genuity. Please go ahead.
Hey, good morning, Thanks for taking the question.
Wanted to circle back on Grilles I know, Brian you had mentioned I guess.
One is a little bit below kind of what you were expecting yourself through.
I'm just curious do you think thats, just primarily driven by simply brand awareness.
The checks that we perform you talked to some of your retail partners and growth in half of the associates uneven.
The brands are now that they are in the store.
I'm curious.
To me that sounds like an opportunity, but I love to hear your thoughts on that thanks.
That was this is Brian .
As Tim is talking about the sell through before I think on the Grilles.
Overall, I mean, certainly we are.
A smaller brand and some of the other ones that are out there we think that gives us tons of <unk>.
Growth opportunity I mean, we do look at stats around.
Impressions in Internet traffic to our sites and we are seeing really great trajectory.
Trajectory.
All of our brands is as Tim noted the connected Camacho is selling through really really well, but I think you you get after dare I say part of the reason.
We are in this space that there there is still growth opportunities out there there is still.
Positive trends around charcoal and all the benefits.
That comes through that so I mean again there.
This gets after why we are bullish for things for for a long.
Period of time to come separate from how to manage inventory levels over a relatively short period of time.
Yes, I mean I think the.
The comment is I think it has been a softer growth season. If you if you listen to a lot of the major retailers in their calls regimen I think thats true for.
A lot of product categories right, it's not just.
The.
The girls so.
We are a relatively new brand right and we are.
Expanding.
The awareness and we do think that there is a greater attraction for innovation and.
And some of the the charcoal category. So I mean, certainly you could talk to one or two and we may be new on the floor and we're not in every door yet as well. So I mean, I think thats part of the growth opportunities as we're coming into retailers, where we may not be across the whole system, but we do expect that we will.
We will show up in more and more locations in that system.
Kind of as the inventories normalizing in that kind of provides an opportunity for them to display kind of what they would.
What to do on a go forward basis.
Okay. Thanks, a lot guys best of luck.
Thank you.
And our last question quick one now I would like to turn the call back to management for closing remarks.
I'd just like to once again, thanks, everybody for joining us.
Today's call and we look forward to speaking to you after the end of third quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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