Q3 2023 The Middleby Corp Earnings Call

Thank you for joining us for the Middle <unk> third quarter conference call with US today from management are CEO, Tim Fitzgerald, CFO, Bryan Mittelman, Chief Commercial Officer, Steve spent all and Chief Technology and operations Officer, James Paul as well as Vice President of Investor Relations.

<unk> John Joyner, we will begin the call with opening remarks from management and then open the call for questions instructions on how to get into the queue will be given at that time. Please note. This call is being recorded now I'd like to turn the call over to Mr. Fitzgerald. Please go ahead.

Thank you and good morning.

Thanks for joining us today on our third quarter earnings call. As we begin. Please note there are slides to accompany the call on the Investor page of our website.

We're very excited to have joining us on today's call John Joyner, our new head of Investor Relations for Middleby.

As many of you May know John is joining us from BMO.

BMO, where he did a tremendous job covering that'll be for many years. So he has a deep understanding of our industry with a passion for that'll be.

Given the recent expansion and significant expansion and the scope and scale of our business over recent years. It was the right time to establish a dedicated leader for Investor Relations and we're excited to have John is the first to step into this role from it'll be I know John's presence will significantly benefit all of our current and future shareholders.

And we're fortunate to have John now the Middleby team.

Now onto the quarter, we are pleased to have posted solid results.

Reported reporting record earnings and cash flows in the quarter and for the year driven by strong execution of both our commercial and our food processing businesses.

We continue to make significant progress at our residential business positioning for growth and a return to higher levels of profitability when the market recovers while at the same time, managing the near term impacts of the challenging market conditions.

We again posted overall improved profitability and are realizing the benefit of our profit actions as we progress towards our longer term margin targets.

We are benefiting from our focus on new product innovation to drive improved profitability in our sales mix.

We're realizing efficiency gains, reflecting the impact from our manufacturing investments.

And we're focused on the long 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 increasingly challenging the inventory destocking, which has impacted our commercial and residential businesses will largely be normalized as we enter 2024, and we will start the year, a competitively positioned better than ever.

Our commercial foodservice, we've extended our leadership in electrified energy efficient and vet, what's cooking solutions.

Rapidly developed an innovative platform is exciting and beverage products in a large and growing market and.

And we are well on our way to establishing Middleby is the leader in controls Iot and automated solutions positioning us to capture the future of the commercial foodservice industry.

At residential we have the broadest portfolio of indoor and outdoor premium brands with a pipeline of innovation addressing the growing demand for energy efficient electrified products and with initial launches of connected equipment now in the marketplace with more to come.

At food processing, we have executed on our strategy of becoming a leading provider of best in class full wide integrated solutions for the protein and bakery markets.

We are offering state of the art automation to address growing labor and efficiency challenges and we have developed a portfolio of equipment to support our customers' efforts to achieve the sustainable sustainability goals for their operations.

We have successfully expanded in new markets, such as Bacon cured meats alternative proteins and pet foods.

With additional targeted applications, providing further growth opportunities ahead.

Our substantial go to market investments, we believe are uniquely positioning us for long term sustainable growth with.

With great progress made in establishing our digital sales and marketing capabilities developing our industry, leading culinary teams and in the alignment of our sales channel and strategic partners.

The investments we have made in our innovation centers continues to prove to be a strategic asset for our businesses engagement at these innovation centers.

<unk> to be meaningful and is providing benefits across our commercial residential and food processing businesses.

Confident these investments are today are translating into a pipeline of opportunities ahead and we're in the early chapters of realizing the impact for all of our foodservice brands.

While market conditions are undoubtedly more challenging across our businesses given the effects of interest rates and macro conditions, we're continuing to focus on our business execution, while building upon our growing competitive advantage at each of our three industry, leading foodservice businesses that.

We are confidence will set us apart in the long term.

Now I'll pass the call over to James to spotlight, our ice businesses, it's a great fast growing part of our exciting beverage platform.

Right example of recent strategic investments that we've made both through acquisition and new product innovation that have positioned us for a growth opportunity in a large and addressable market.

James Thank you, Tim I'm going to deviate for appear NPI and technical discussion this quarter to talk about one of our fastest growing segments.

With the acquisition of ice true over a year ago Middleby, it's more than a nugget or cumulative based company by the way <unk>, it's volatile criteria and trademark name <unk> nugget items, we have the ability to satisfy demand for all types of ice whether it's cumulative.

And Doug it from ice.

Cube after cube or shaved ice or ice portfolio has been one of the fastest growing segments in commercial foodservice in 2023.

The trends and the addition of two new ice through products. We believe we will see growth in the range of $50 million in 2024 with the growth continuing in the following years. This growth is fueled by new train marketplace trends around <unk> as well as ice cruise growth.

In the U S and international markets as we go after ISIS 175 billion to $2 billion global market space now onto trends. It's no secret cold beverages are growing at a very fast rate and 2022 cold beverage sales increased 15% over hot beverages.

While our leading coffee chain sees as much as 75% of their beverage mix being coal.

This growth is what our customers can focus on more than just ingredients to craft their best beverage. They now I appreciate the ices role in making the best ice coffee ice craft beverages blended beverages and fountain drinks.

All its cumulative ice produces the highest quality and highest margin great for our customers. This is for several reasons first trimble at ice Chilton beverage faster due to its total surface area. It dilutes the beverage less as it is a higher percentage of frozen water compared to regular ice and.

It allows the ice to absorb the flavor extending the beverage experience once you or soda or coffee is long gone, thus, giving you a beverage that keeps on giving.

Paul it's cumulative.

This is also safer and more sanitary as follows proprietary extrusion, making process allows us to extrude IV pump the ice up to <unk>.

75 feet from the Icemaker two to remote locations within the restaurant without employees, having to carry buckets of ice or handle items.

With everything I've said, you would be surprised that Nuggets ice is only around 20% of the global ice business. The other 80% is cubed ice with the introduction of our latest machines from ice trop and 1700 pounds and 2000 pound machines, which now complete ice shows oil production lineup.

<unk> now has the ability to compete and take global market share as we look to expand our cube ice business ice curb machines have a proven track record of reliability.

Globally. It has many features that benefited from our competition such as multi ingress and egress cooling split panel access for sanitary servicing and the proprietary planning process to name a few.

And the last comment before I turn it over to Brian all Middleby products that require water use filters from Terry water filtration and when it comes to ice we believe that Terry's each kuo. So trading water filter provides our customers with the best tasting ice. Thank you and over to you Brian.

Thanks James.

Turn now to I leave my Tuplet isolate drink to keep it working so my drink stays colder longer or do I chew. It is I also enjoyed it.

I don't know I'm really torn but more importantly, Q3 gave us a lot to be excited about our performance was at record profitability levels and we also had record for operating cash flows for a quarter.

We are on track for our best year ever in terms of EBITDA and operating cash flow generation and we are achieving this while facing challenging market conditions. Despite these challenges we still delivered growth in two of our segments, while achieving $981 million of revenue and <unk>.

Organic adjusted EBIT margin of 23% up 100 basis points from Q2 and up even more over the prior year.

With nearly $224 million of adjusted EBITDA in the quarter over.

Over the last 12 months, we are at nearly $900 million, an increase of over 10% from the prior LTM period.

We continue to increase our profitability EBITDA and cash flow generation, even while in the midst of especially tough times for one of our segments. This demonstrates the resilience of our business model, which drives exceptional profitability and cash flows even in tough times.

Mongst, our strengths is our ability to execute in all conditions.

While our total organic revenue was down due to the residential headwinds we were still able to grow our adjusted EBITDA dollars for the quarter, 5% over the prior year.

Our total company margins expanded 140 basis points or 160 basis points organically over the prior year as well.

All the large margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and FX impacts.

GAAP earnings per share were $2.01, adjusted EPS, which excludes amortization expense and non operating pension income as well as other <unk> noted in the reconciliation in the back of our press release was $2 35.

An 8% increase over the prior year.

<unk> foodservice revenues were up slightly organically over the prior year.

Adjusted EBITDA margin was 28, 7% up 200 basis points over the prior year we.

We are very pleased with how margins have continued to evolve as we see benefits from improved product mix from our capital investments from operational improvements as we integrate acquired businesses as well as from our constant focus on costs and.

In residential we saw organic revenue decline of 21% versus 2022, the adjusted EBITA margin was a little over 10%.

For food processing revenues of nearly $167 million, representing an increase of a little over 1% organically with year to date growth of over 16%.

Our adjusted EBITDA margin was 26, 6% for the quarter up 440 basis points over the prior year and we are just above 24% for the year.

Our operating cash flow generation was a record at $219 million for the quarter over.

Over the past two quarters, we have reduced inventory levels by nearly $100 million.

Over the last 12 months, our operating cash flows amounted to $532 million.

In terms of cash conversion or free cash flow for the last 12 months is at 97% of net income and I expect it to be over 100% for fiscal 2023.

As we closed Q3, our total leverage ratio moved down to 275 times looking forward. If we were not to make any acquisitions or stock buybacks are leverage could move down to around two times by the end of 2024 and.

And we currently have over $2 5 billion of borrowing capacity.

While market conditions, our revenue headwind, our focus on operational excellence differentiated products and technologies and deep connectivity with our customers are driving our strong results Middleby has always been known for healthy margins and cash flows we are consistently growing them and the trend will continue.

<unk>.

We remain bullish on our outlook over the coming years, our actual margins are near or medium term targets for commercial and food processing.

We anticipate achieving our target margins for these two segments on a full year basis within the next two fiscal years.

Residential continues to be profitable at levels, well above peers, we've been taking actions to manage costs, while still investing in go to market strategies production improvements developing new products and entering new markets. These efforts along with the benefits that will come from improved market.

<unk> will keep us on track to reach our long term goal of 25%, albeit taking longer and being harder to predict when given the current economic conditions. Nonetheless, given we do anticipate a period of high growth as housing and economic conditions improve I will speculate that we can reach our target.

Three to four years.

Bringing it back to the near term here are some quick thoughts on how we think 'twenty three will conclude.

Starting with the RAC last quarter I noted that we expected Q3 to hopefully be the trough in our results obviously reflect the challenging market conditions. Nonetheless, we do expect that Q4 can produce higher revenues in Q3 and at least maintain double digit EBITDA margins.

For food processing Q4, we will see higher revenues in Q3 and likely at least similar margins.

For our commercial I expect Q4 to overall be fairly consistent with Q3, given current demand in the tail end of dealer Destocking.

Putting the three segments together when looking at the total company potential Q4 performance revenue and earnings should be on par or slightly higher than Q3.

Looking beyond the fourth quarter is obviously hard to know with great certainty. What 2024 will look like however, I will share that our expectation is for modest topline growth and expanding margins across all our segments for.

For residential our belief is generally based on the view that current market conditions will persist through the first half of the year and we remain optimistic and believing there can be some improvements in the second half of the year.

For food processing interest rates in food costs continue to be a headwind nonetheless, given our backlog pending opportunities and the benefits our full line solutions offer including addressing the demand for automation food processing should see growth.

Lastly, in commercial while buying patterns have been somewhat volatile when considering our customers' ongoing build plans rollout activities, increasing customer engagement with our leading technologies and a bit of elevated backlog. We also believe we will grow.

And while these comments have been revenue focus we also expect to deliver more margin expansion. We have updated our view on that journey within the slides posted today.

And regardless of market conditions, we remain focused on improving our sales mix. This has been a big contributor to the improvement seen to date as our best solutions solve our customers' most pressing needs.

Furthermore, we are relentless in attacking costs integration projects and driving operational efficiencies.

Managing all of these areas keeps us moving forward toward our targets.

In conclusion, we are being disciplined we are managing costs. We are focused on operational excellence. We're also continuing to make strategic investments to drive differentiated products and best in class go to market capabilities, our technical strengths strong customer relationships and leading.

<unk> will continue to drive success. This means even better cash flows and expanding margins. We are all hungry for the higher stock price, we deserve based on the level of earnings profitability and cash flow. We have delivered in the meantime, I'm off to our amazing new residential showroom in Chicago to see what.

Our newest shops, Kristen and Amy have created please.

Please stop by to experience, our amazing platform for yourselves and with that thank you for listening 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 one on your Touchtone phone.

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 so.

The first question is from Saree <unk> of Jefferies. Please go ahead.

Hi, good morning.

So residential took another step down this quarter could you just break out the performance in gorilla for the remainder of the business. How do you think about underlying demand versus Destocking and lastly is there any benefit from lapping the destock as we think about cross docks sure.

Thanks Terry.

This is Brian at this point I would say that grills are not really a call it a differentiated performer versus the other.

Product lines, we have there there are challenges in a variety of them and some.

Bright spots.

As well, but as we've noted before Q3 is always.

The low point of the year for that.

Bill business, and given where stocks are and such we were we're not expecting.

Much.

Much much growth there and we've noted that.

Our customers are expected to order in a different manner and with different timing I would say for this upcoming growth season.

Or the one that's really kind of just starting then than in the past, where theyre going to order a little bit.

Later in the season and.

Restocking probably for more domestic shipments then.

From the direct.

<unk> plant sources, so Q4 will still be.

A bit of a challenge than given that we're in these.

These trying times and we are still in them last year, and we think things really improve as we move into the back half of the year.

And then have the easier.

Comps.

Obviously too.

To lap I know there was another part of your question in there, but you threw a bunch of I mean can you can you remind me what what I'm missing there.

Yes.

Or anything you're underlying admin Christy its accurate and then just the benefit of that destock as we think about next year.

Yeah sure I mean, I think the destock turns into a tailwind at some point right because the sell through was higher obviously than.

That what our incoming order rates are as inventories coming out of the.

The channel and then as Brian alluded to people are also.

Less reticent to start back up.

Because of the couple of resolving the market outlook, but our lead times are shorter than they were before as well so I think as you.

<unk> that out as you go through next year.

Destock, which has a negative.

Even if it is if it's neutral.

Positive for us so.

And then also on the orders.

I mean, we've seen them kind of trough out so to speak as well. So I mean, I think they're starting to do.

Albeit at much lower levels are starting to normalize and flush backups I think where.

We're getting close to the.

The turn but again a lot of uncertainty in market conditions going into next year.

I appreciate the additional color.

Can you talk about what Youre seeing from an order perspective in food processing talked about growing next year, but how do we think about the benefit of incoming backlog had on this.

This year and does that create a challenging comp for organic growth in 2024.

Yes.

This is Bryan we certainly had.

Very strong backlogs and during this year, but a lot of these projects.

A while and I would say, we still have very healthy backlogs.

Today, So that is part of the reason that gives us confidence looking into next year again looking what's in the backlog in and knowing windows.

Projects.

<unk>.

Orders have been steady the past couple of quarters.

Albeit not at the highest levels that we had seen let's say, maybe the middle and end of last year again, given the interest rate environment and what's going on with underlying.

Food costs, but there still is a lot of interest out there we still are.

Engaging with our customers, we are still winning opportunities and Theyre also looking at they believe.

Inflection point on some of the food costs, which we hope can.

Open up to more.

Robust order in times and then you'll also see how how interest rates.

Play out.

I think Tim I would add.

The only other thing I'll add so our pipeline is very strong. So that's one of the things that we track. So that has actually grown I think what we're seeing is that there's a bit of.

A little bit longer to place orders rate give given where interest rates are and kind of understand the outlook for next year with input prices for them, which is largely food, but I think we're what is promising as the level of activity quoting.

What is that pipeline.

Just a little bit longer for that to convert right now this period, but I think that.

Read out with given we've got a strong backlog coming in at <unk> <unk>.

Solid pipeline, we feel pretty good about next year the baking.

Part of our business.

<unk> to be stronger right now, we just came off a trade show, which was an industry trade show with.

Very strong activity at that show so that was promising as well and I would say across the platform. We have a lot of new products.

Are there and certainly built out that full line solutions. So those are.

Really of interest to our customers because they are hitting on all the <unk>.

Also key.

Acute pain points for further business right now.

I appreciate all the color and I'll pass it on.

Sure.

The next question is from Jeff Hammond of Keybanc capital markets. Please go ahead.

Hey, good morning, guys.

Good morning, Good morning, Jeff John welcome aboard.

Just.

I guess on commercial foodservice I'm I'm, just trying to parse out kind of this continued destocking versus demand weakening where and particularly are you seeing demand weakness any cracks and new store development as you look into next year and just.

Maybe lastly.

Far along are we in this with this destock.

Yes, Jeff good morning, its Steve.

I would say, maybe we will start with kind of what the end user we're seeing I think we've talked about on prior calls obviously the bigger chains have had a pretty healthy new store.

We'll plan really the last year or two I do think that continues.

But what we have seen is some shifting around of that pipeline moving out a bit just with challenges theyre, having on whether it's permitting or construction still some supply chain issues are there faced on construction, so and interest rates youre pushing some of those stores out into next year at this point, so I would say they have.

Reduced any of their overall pipeline, it's just more of a timing that's pushed out that push out does play a role then into the destocking side of it because.

A lot of where we've seen the excess inventory in the channel show up has actually been for chain customers think about the last year or two with longer lead times. The dealers are the kers's, replacing orders for are out trying to bring in inventory to keep up with the chain demand as we've caught up on our side in that Soma stores.

<unk>, that's what's creating this excess inventory in the channel. So I do think we are on definitely the back side of it I mean again I think the positive is being very close with a lot of our dealer channel partners. They are seeing the sell through on their side to become more and more positive I think just to maritime obviously I think over the next quarter or two where the.

Destock becomes less of a headwind than we kind of get back to corn called more of a normal ordering patterns and that makes sense.

Sure.

Yeah. That's very helpful. Just on the margin targets I understand red kitchen, probably needs need some volume help.

But as you look at commercial food and food processing I guess, if we were to have kind of a flattish demand environment. The next two years.

Do you see yourself being able to.

Get to those margin targets within that time frame kind of how much is self help and how much needs to come from kind of volume tailwind.

Yes. This is Brian there has not been I'll call. It an overweighted amount of that that comes from volume I mean volume is somewhat of a contributor because I think the volume also gets after customers adopting more of that leading technologies and such but I think.

If you look at.

We'll actually post.

Some bar chart, some waterfall charts on it.

By Tomorrow morning, as we'll be attending a conference in Youll see I'll say.

Three quarters of the driver.

<unk> are from.

Mix.

Self help type measures, whether it's improving costs.

Integration activities.

And alike.

Okay I appreciate it.

You bet.

The next question is from Tim Thein of Citi. Please go ahead.

Thanks, Good morning, Brian.

You're touching on this.

Just going back to a year ago being down in Dallas, you outlined some of the drivers for commercial.

To get to that.

That journey to 30% plus margins.

And rail price cost and sales mix where are we.

The two big drivers of that.

You've touched a lot on the sales mix where are we in terms of of.

Price cost and obviously to the market outlook isn't quite as robust as it was a year ago I'm just curious as to.

Kelly.

Confidence level in terms of that being.

A significant number of a tailwind for Middleby looking out 24 and beyond.

Yes.

As I look at it I'll say in commercial that we're operating let's call it around 27, 5% or so.

You need to get to 30% over the next couple of years.

We've gotten to the $27 five over the past couple of years, obviously theres been some.

Price cost in there as well as the self help and a bunch of mix as we look at what gets what's left to be done.

I would say.

Cost is a good chunk of it but a lot of that at this point I will say it was more of the cost side of it as opposed to the price side of it because we think pricing will be.

More moderate going forward.

But we do have some cost benefit coming through as we.

Worked down inventory and as we manage our costs and we'll see what's happening in commodities.

As well so again Fortunately this journey is not just dependent on volume or is it just dependent on again, taking pricing again.

Youll see by Tomorrow.

The pricing piece of it is not as much but we still have.

Operating efficiencies and acquisition integration maturing of businesses, we had a little bit of volume on some undersized businesses helps as well and again mix is not one to be.

<unk> under under appreciated.

<unk>.

Got it Okay, and then I don't know if it's for you or Steve would you.

To the extent you can you can get at this.

Revenues for commercial will be.

Call it 30% higher than pre COVID-19 or if its 2019.

Where do you think.

Volumes for for that business on a relative to 19 I'm just curious how much grief.

Where we sit from a throughput standpoint.

Here today.

This is Bryan I'll start with it and then Steve can jump in.

Volumes are tough when we put out there just given how many different brands, we have out there, but I think as you.

Look to correlate that also with looking at I'll say the number of.

Establishment that are out there there is building going on but but I wouldn't say that volumes are up appreciably. Obviously, we've had a good amount of pricing.

Coming in over that.

Period.

And then are starting have been seeing some of the benefits from I'll call. It.

The unit expansion, but we believe there is more volume gains to be had.

As.

As Buildout plans continue and as people.

Trade into higher technology solutions.

Yeah. This is Steve I would just add onto that I agree with all our comments, obviously, we've had the benefit of.

Pricing over the last year or two which.

Certainly gets all but tougher from a pricing standpoint going into the next couple of years. So it does definitely shifts back to volume.

Fundamentally come back to probably three key initiatives.

And what's driving that again, we've talked about new store development that continues.

I do think I've said before in prior calls the replacement cycle that has been kicked down the road from going into Covid got kicked down the road going through supply chain new store.

Priority. So I still think you have the underlying replacement cycle that has to take place and then you still have all the issues that all of our customers still have to address whether it's labor whether it's utilities.

Going up more and more so I think when you kind of think about those three underlying demand.

Drivers, that's where I think he really still see the volumes start to pick back up call. It over the next year or two away from obviously the pricing benefit we've seen in the last 12 to 18 months.

Got it okay. Thank you.

Again, if you have a question. Please press Star then one.

The next question is from Tami Zakaria of Jpmorgan. Please go ahead.

Hi, good morning, Thank you so much.

So on slide nine of your presentation I think there are some targets for EBITDA margin for the year.

That would suggest both commercial foodservice and food processing EBIT margins.

Down sequentially.

And so could you walk us through some of the puts and takes.

Behind that sequential step down.

I'm going to Unfortunately, this is Brian by the way have to disagree with you.

I don't think we are seeing a step down in Q4 versus Q3, because I noted.

<unk> processing.

Should at least be the same.

As you know.

As Q3 and commercial is also expected to be in.

In a similar neighborhood.

The numbers in the 'twenty three column there is.

A rough forecast a rough estimate for the year.

In total.

Not for specifically.

The fourth quarter. So I don't know if that makes a difference in how you're viewing the numbers versus.

However, we believe they will come to be.

For sure for sure.

Great and then.

My second question is I think we have heard some home appliance companies and in recent weeks talk about some high promotional activity, especially in North America.

Is that does that also relate to the high end segment that you.

Service.

As part of the residential kitchen segment.

And how are you thinking about price versus price realization.

And in the fourth quarter or even for next year as you prepare for it.

The next spring selling season.

Yes, so there's definitely some promotional pricing that's going on at I'll say lower levels. I mean, I think one of the reasons, we've put together a portfolio that we have as yet.

Premium performance.

Sit in a different category.

Versus the I will say that what goods guys. So on the margins, we're trying to be very smart and tactical on pricing pricing has moved around a lot in the last couple of years given all the inflationary.

Impacts and so we will look at that tactically, but.

It's.

What's more resilient at that top luxury end of the appliance market. So I think we're not seeing quite the same impacted that.

The other guys.

Got it great. Thank you so much.

The next question is from Brian Mcnamara of Canaccord Genuity. Please go ahead.

Hey, good morning, guys. Thanks for taking our questions first of all wondering if youre seeing any change in your restaurant customers order behaviors given the recent popularity in these <unk> drugs.

Like several restaurant stocks along with your own have reacted negatively to the news flow over the last couple of months.

So it's very early on I mean, I don't think anybody has seen any impact to actual.

Behaviors of.

Orders business people walk in and if you listen to the Ceos of other restaurant chains et cetera. So obviously its getting a lot of headline news, it's too early to indicate what the long term.

Ratification of that but I think we.

We don't expect that there would be really any significant long term impact.

To our business.

At this point in time right now.

Alright, great and secondly can you confirm that you are tailored double sided girls are being trialed with a popular Mexican fast casual grill chain and if so how is that testing phase.

So so we never talk about.

Kind of what's been trial.

Obviously, sometimes you can walk into a restaurant and see it Brian.

So.

But I would just say that we've talked about a lot of our leading.

Leading automation that we've come out with over the last number of years that are helping drive throughput labor smaller footprint efficiency et cetera. Taylor has been certainly one of those products that James has spotlighted in.

Some of the past calls and it is part of a Great example, amongst others such as ice that James covered on this call that we think are going to be.

We've got differentiated products.

That are going to be growth drivers going forward. So I'll just comment that that's that is one of those exciting products.

Fair enough thanks, guys.

Yes. Thank you.

The next question is from Mig <unk> of Baird. Please go ahead.

Hi, Good morning, Thank you for taking my question.

Just a quick clarification here on the residential.

Your intro comments, you mentioned that revenue is going to be up sequentially in Q4 versus Q3, and I'm curious as to what exactly is giving you confidence that that's going to be the case and then as you are you looking at 2020 for recognizing that.

On the macro concerns are still with US do you expect revenue in residential to continue to build sequentially relative to Q4.

Or not.

This is this is Brian.

I'll start with the second part Q4 for residential usually is a bigger quarter. There is some seasonality in some of the businesses.

Where Q4 tends to be higher.

I'll have to see a little bit how it.

Plays out because while those will go away.

Does start to pick up typically on the outdoor side of things across all our outdoor businesses.

But obviously there is the stocking issue. So we have not specifically mapped out.

Quarterly trajectory for next year, but I do put out there that Q4 tends to be stronger than.

Then in Q1, but then thinking about Q4 versus.

Q3, really I think your question was across the segments food processing.

Dare I say it always has a strong Q4 theres a lot of deliveries that get made to customers. They want to get things in their plants and so I'd say, we are very very high confidence there.

We noted that Q4 is going to be similar to Q3.

On the commercial side of things, there's just been enough I'll call it volatility and ordering.

While destocking is mitigating Theres also I'll say a little bit of.

Slowness in maybe the restocking given everyone's focus on on working capital. So that makes that one a little bit harder to precisely predict and I'd say in residential we also feel fairly comfortable that Q4 is above Q3, as we look how order patterns.

<unk>.

I'll say stabilized steadied.

Some recently and then again.

There is some seasonal benefits in a couple of the businesses.

In there so that's kind of the say the quick perspective on.

How we how we view things coming together.

Mega.

Maybe that's a repetitive but your question's on residential I think.

As you go into next year.

If the headwinds neutralize.

That starts to equal growth for us right and.

Alright, because I think the Destocking starts to go away there's not inventory.

The typical load ins that you would have at least done let's say our <unk> business that are not happening because people are also tested that youre going to start to see better sell through.

During the grill season.

And then orders, albeit lower there kind of a trough so we're starting to see them.

Flex back up.

So.

It doesn't need to be a great market to start seeing things improving and growing it.

Housing and remodel starts to.

Pick up and that ends up kind of being at or on top of that so I think thats kind of how we think about it as you play out.

Quarters go through next year.

Yes.

It was really the nature of my question I was wondering if we could take a look at Q3 and sort of say this is the trough point for both revenue and margin because if youre right about destocking being in at least in theory sequentially you should start to see some incremental benefit from the channel normalizing and maybe even.

And potentially some <unk>.

Restock as you go into into the selling season in the spring.

That's kind of.

Getting at.

Yes.

I think that's how we're thinking about it is how you are also thinking about it.

Okay and then my last question.

Then in your prepared remarks.

You talked about backlog still being.

Elevated in commercial foodservice and that providing some level of support to 'twenty four.

Can you put a finer point on that can you comment at all as to where backlog for EMEA is where you expected exiting 'twenty.

<unk> backlog is really an elevated at this point I mean, I would say that we're largely back to normal what we've got a lot of brands. So as you kind of pick through it there are still a few that we've got a larger.

Backlog given either level of orders.

Good.

Along with.

The supply chain being able to keep up with us, but I don't think thats more the exception the role I would say.

Probably not.

90% of our companies are back to a normal lead time in backlog.

Okay. Thank you.

The next question.

Western is from Walter Liptak of Seaport. Please go ahead.

Hey, Thanks, good morning, guys.

Wanted to ask sort of a follow on from the last one on <unk> and so.

In the resi business.

The margins.

Are pretty low at this point.

I Wonder if you could talk about the cost out and operational excellence that you've done and then if we do start to see growth in 2024, what is the volume leverage look like.

Yes. This is Brian.

We have taken restructuring charges as you can see on our P&L and probably over half of them are.

In the residential.

Area and rates.

And we do have I'll call it <unk>.

Savings that are certainly a multiple of the charges, we have taken and again those have been necessary based on.

The volumes, we have in and driving those those margins we do think.

I think.

Things.

We cover.

Nicely here.

R R.

Incremental margins tend to be pretty.

Healthy and I think if you go back and look at where our revenue levels were I'll call. It prior to the.

These challenging times.

If we get a couple of hundred million dollars of of <unk>.

Revenue back Youll start to see our margins.

Getting to the to the upper teens again, so there's no reason they won't expand back to where they were before and actually.

We've done a variety of things, which you can't see right now.

To improve the businesses improve processes improve.

Manufacturing.

<unk> and make more efficient the.

Distribution processes again, youre not seeing those benefits now because we don't have the.

The benefits of volume right. So those are all the reasons why we still think we will drive back to 20% and above.

On the path.

25, and then.

On top of that there is a variety of international market expansion opportunities I'll say on on both sides of the pond, we've talked extensively about bringing European products into the North American market and there is that has started and there's more to come.

<unk> talked about grills.

Expanding internationally lots of international opportunities of expansion across all our.

All our brands as well.

And a variety of other initiatives. So certainly we think we're at a low point, but there's a lot to be excited about.

In the portfolio when again, you look at the products themselves the innovations the expansions and all the things we've done.

Done on on the cost side, we're really proud of what we've done with all of our acquired businesses in terms of where their margins were when we bought them versus where they are today and where they are at better times and so we know we will get back there and again.

The portfolio and get even to higher levels than we were previously.

Okay, great and if I can just do another quick one.

And on pricing and specifically for commercial foodservice.

There is still inflation out there even though it has come down or do you plan on doing price increases at the beginning of 2024.

Yes. This is Steve So I mean, maybe just quick quick recap of.

I think pricing broadly in commercial again its been one of the most important strategic initiatives in the company trying to get ahead of obviously all the inflationary costs over the last 12 months 12 to 24 months.

So I am very proud of the team I think we do.

Good work to get the pricing through and now to a place where I think we can be a lot more thoughtful about pricing going into next year I do think there are still products in our portfolio, Walt where theres still more effective by certain components and supply chain and what we.

And we do still need to take all of their pricing on those products, but I do think by and large going into next year I do not see us taking a lot of pricing further from a kind of a broad standpoint, certainly subject any other kind of supply chain, a world, where all disruption that could cause further infill.

<unk>, but I think at this point I don't see us taking a whole lot more pricing going into next year in commercial.

Okay, great. Thank you.

That is all the questions. We have today I would now like to turn the conference back over to management for closing remarks.

Well. Thank you everybody for joining us today's call and we look forward to speaking to you next quarter. Thank you.

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