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Earnings call: Middleby reports strong cash flow amid revenue dips

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-05, 06:40 a/m
© Reuters.
MIDD
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The Middleby (NASDAQ:MIDD) Corporation (NASDAQ: MIDD) has reported a mix of challenges and growth in its second-quarter earnings call for 2024. Despite a revenue decline compared to the previous year, the company achieved strong profitability with margin expansion in its commercial foodservice and food processing businesses. Middleby also recorded record operating cash flow for the quarter and the first half of the year.

With a reported revenue of $992 million for the second quarter, the company saw a 7% sequential increase from the first quarter and an almost 22% adjusted EBITDA margin. Middleby remains cautiously optimistic about its growth opportunities and operational efficiency amid a disrupted housing market and macroeconomic pressures.

Key Takeaways

  • Middleby recorded Q2 revenue of $992 million, a 7% increase from Q1.
  • Adjusted EBITDA margin reached nearly 22%, up 180 basis points from the previous quarter.
  • Commercial Foodservice and Residential segments saw revenue declines, but positive order trends and growth in all three business areas.
  • Food Processing business is focused on automation, sustainability, and opportunities in precooked bacon and poultry lines.
  • Middleby expects sequential and year-over-year revenue growth in the second half of the year.
  • The company maintains a focus on operational efficiency, cost reduction, and margin expansion.

Company Outlook

  • Anticipates low single-digit revenue growth in Q3 and mid-single-digit growth in Q4, both sequentially and year-over-year.
  • Expects second-half Food Processing revenues to exceed first-half and prior-year levels.
  • Residential segment Q3 revenues to be down from Q2 due to seasonality but flat year-over-year, with growth returning in Q4.

Bearish Highlights

  • Commercial Foodservice revenues down 3.9% organically from the previous year.
  • Residential organic revenue declined by 6.7% compared to 2023.
  • Macroeconomic factors such as high interest rates and inflation remain a concern.

Bullish Highlights

  • Record operating cash flows with strong free cash flow and reduced leverage.
  • Positive trends in orders, with Q2 being the best quarter in two years for Middleby.
  • Strong pipeline of active projects in Food Processing, with potential for double-digit year-over-year increases in Q3 and Q4.

Misses

  • Revenue declines in Commercial Foodservice and Residential businesses compared to the previous year.
  • Tough comparison for Food Processing business despite sequential growth in revenues.

Q&A Highlights

  • Large projects in Commercial Foodservice offer higher margins; backlog with dealer channel partners stronger than before.
  • Residential segment improvement in Q2, especially with European products, and expected growth in Q4.
  • Positive discussions and pipeline with QSR customers despite restaurant industry weaknesses.
  • Strong pipeline of M&A deals expected to be more active in the coming months.
  • Investments in IoT and connectivity in the connected kitchen space have been well-received by customers.

Middleby's strategic initiatives and focus on new product innovations, particularly in the technology and connectivity space, have positioned the company well amidst a challenging market. With a cautious but growth-oriented outlook, Middleby continues to leverage its competitive advantages and aims to deliver solid results in the upcoming quarters.

InvestingPro Insights

Middleby Corporation's (NASDAQ: MIDD) second-quarter performance demonstrates resilience in a challenging economic environment, with a focus on profitability and operational efficiency. To further analyze Middleby's financial health and stock performance, InvestingPro provides additional insights:

InvestingPro Data highlights a market capitalization of $7.57 billion, indicating a substantial presence in the industry. The company's P/E ratio stands at 19.47, suggesting investor confidence in its earnings potential. Notably, the company's stock price has shown strong performance over the last month, with a 16.06% total return, reflecting positive market sentiment.

Two InvestingPro Tips shed light on the company's financial position and stock behavior. Firstly, Middleby's liquid assets surpass its short-term obligations, providing financial stability and the ability to meet immediate liabilities. This is a reassuring sign for investors concerned about the company's liquidity amidst economic uncertainties. Secondly, despite the stock's volatility, analysts predict Middleby will be profitable this year, which aligns with the company's own optimistic outlook for revenue growth in the latter half of the year.

For readers interested in deeper analysis, there are additional InvestingPro Tips available, which can be accessed at https://www.investing.com/pro/MIDD. These tips offer valuable insights for investors looking to make informed decisions about Middleby's stock and its future prospects.

Full transcript - The middleby corp (MIDD) Q2 2024:

Operator: 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, Bryan Mittelman; Chief Technology and Operations Officer, James Pool (NASDAQ:POOL); Chief Commercial Officer, Steve Spittle; and Vice President of Investor Relations, John Joyner. We will begin the call with the opening remarks, then open the lines for questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. FitzGerald. Please go ahead.

Timothy FitzGerald: 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 are 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 Foodservice and our food processing businesses. In our Residential business, we demonstrated margin improvement from the first quarter while we continue 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 3 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 Foodservice business, we have 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 plants 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 underpenetrated categories for Middleby, 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 our 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 a recovery in the years ahead. And while the residential market will take time before we recover, the luxury end of the market has shown recent improvement. We realized order 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 this 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 3 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?

James Pool: Thank you, Tim. Over the past 4 quarters, I've talked exclusively about the innovations in our commercial and residential brands. For example, last quarter, I covered the Great 8 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 a 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 us burger in state 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 discussed can be found in the investor deck that Tim referenced. Our precooked bacon line comprises of 8 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 TurboChef by Middleby or the TurboChef by Alkar, 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 in-line solution by Middleby improves yield up to 7% with Thurne's IBS 4600 Slicer, which uses 4 independent blades with 4 independent vision systems to ensure every slice of bacon is the same weight and thickness regardless of belly variation. By combining the other 6 brands, Vemac, Thurne, DanfoTec, MP Equipment, Scanico and Rapid VisionPak into the total full line solution, we improved yield another 4%, thus driving towards a total yield improvement of 13% with our full-line solution. Continuing with the precooked bacon line, less shift from yield improvements to labor savings. The Middleby full-line solution saves approximately 6 FTEs per line and looking at the brands contributing to the labor reduction Vemac's autocomber 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 baking 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 Thoroughbreader, where we are off to the races -- their advancements in breading coverage and improved breading 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, in capacity improvements, our customers can expect a 6-month payback on MP's new Thoroughbreader. 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 with MicronPro Filtration system, we can extend oil life from 36 hours typically to over 480 hours typically, thus reducing oil expense by 13x and 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 Thoroughbreader improves breading adhesion, we lose less breading into the fryer, which improves oil life as well. The MicronPro Filtration system is completely autonomous and filters nearly continuously only stopping 4 minutes per hour to expel the filtered material, i.e., the filter cake from the system. By doing this, we reduced the amount of free fatty acids and prevent the formation of polar compound. These are the chemical species that denature oil. Lastly, the MicronPro 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, Bryan.

Bryan Mittelman: 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 Foodservice revenues were down 3.9% organically versus the prior year, yet the adjusted EBITDA margin of 28% was slightly above the prior year. We recall that this is the toughest comp we will face, given record revenues for the 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 4 quarters. Our free cash flow over the past 12 months exceeds $700 million and our total leverage ratio is now down to under 2.3x. Before I get into discussing our outlook, I want to remind everyone what I noted when speaking to you 1 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 expect it 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 2 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 the 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 4 quarters and assuming positive trends persist, we would see mid-single-digit revenue growth both sequentially and year-over-year. Moving on 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 2 years. Nonetheless, 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.

Operator: [Operator Instructions] And the first question will come from Mig Dobre with Baird.

Mig Dobre: Great to hear that things seem to be getting better on the order front. I want to start with Food processing. And 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, Bryan, how should we think about margin if you're going to be seeing that kind of growth in the back half for food processing?

Bryan Mittelman: Yes. Thanks, Mig. 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 touch on bakery, and then I will pivot over to protein. Bakery overall has been, I'll say, steady after a really strong year. Last year, buns continue to do really well for us. Bread might be slightly weaker. But overall, still performing pretty darn steadily again after a really strong 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 about at, I'll say, like the red meat and pork side of things, I think we view those improving over time, right? 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 is probably our strongest now. Hot dogs as such, have been also recovering and doing well in certain parts of -- in parts of the world. So -- and I think as you look at our overall order trends, it really does get after beyond the impacts of individual product segments that are full line solutions and our ability to solve problems and drive efficiency and deliver on all those metrics, many of which James noted, 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 1 particular quarter. We hadn't -- and I got the question a bunch in the last quarter too, about upping the targets. As we look at market dynamics and such, I think we will continue to expand a little bit as we progress through the year. But again, given all those dynamics are not necessarily expecting large jumps over what is already, I'll say, pretty healthy in market-leading performance.

Mig Dobre: Okay. But at least you're saying these stays good as what we had last year, right?

Bryan Mittelman: Yes.

Timothy FitzGerald: Just to maybe repeat or add on a little bit to Bryan. 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 very strong given the solutions and the technology we've built out. Poultry, we were still in earlier stage. So I mean, I think that's the excitement as you went through that as we look at [shredders] to water jet cutters to frying lines and even our TurboChef, 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 part of what we are seeing show up. The other thing is we haven't really gotten, I would 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 understand 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 situate -- we hope to get some of those bigger projects, but we've been able to continue to grow without some of those coming through.

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

Mig Dobre: Great. If I may, one follow-up then on Commercial Foodservice. 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 end 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 this -- is there something else going on here in terms of end market momentum that we need to understand?

Steven Spittle: Yes, 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, 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 our chain customers ordering to fulfill new store demand, even though it has ebbed and flowed and there's been some push out 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, they're 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 the back half of last year.

Operator: The next question will come from Brian McNamara with Canaccord Genuity (TSX:CF).

Brian McNamara: First off, Lamb Weston is an important supplier to QSRs. They gave some pretty negative guidance for last week. McDonald's (NYSE:MCD) 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 Foodservice business. How should 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?

Steven Spittle: Yes, 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, they 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, fee of service, consistency of product, focus on the profitability of their franchisees. Those are all still extremely relevant, and those all still point to solutions the 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'd 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. So 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 store openings again, the products in our pipeline, I think, remains strong in spite of some of the challenges that they faced so far.

Brian McNamara: 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's -- it was in kitchen and appliances or grills and how H2 should look, I guess, by category there?

Bryan Mittelman: Yes. This is Bryan. 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 more of that as we have more products that will be certifying for the U.S. 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 and probably many of the places we're all calling from, Q3 does become a slower quarter for our sales to the retailers and sub. So that becomes part of the story I noted for how things will evolve into Q3 over Q2. But I'd say the other North American-based premium brands had a good Q2, some of the other European brands in their home markets were probably a little bit more modest, but we believe those will also pick up as we move through the back half of the year.

Operator: Your next question will come from Jeff Hammond with KeyBanc.

Jeff Hammond: Just want to come at kind of the restaurant and consumer weakness we're hearing about maybe in a little different way. One, 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, 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 again, if maybe some of this restaurant weakness maybe pushes that out as well.

Steven Spittle: 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 said before, I think one of the best byproducts of the last several years is here 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 see the push out 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, I think, strong from that perspective. Again, a reminder that new store openings were not 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, is pushed 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.

Jeff Hammond: 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.

Timothy FitzGerald: Yes. I think it was a little bit of both. I mean I think as we were looking at -- 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 we expect that probably will start picking up here. I think as we went through the last year or 2 multiples got a bit out of whack on one side. And on the other side, I think it was very hard for -- there was 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 at the same time, we did about 30 acquisitions in the last 3 to 4 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 focus on those operationally. We continue to see opportunities there with synergies, both top line and bottom line and that delever a little bit. So I think 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 some -- where some of our competitors are positioned. So likely, you'll see us kind of be a little bit more active than maybe we were over the last 12 months.

Operator: Next question will come from Tim Thein with Citigroup.

Tim Thein: [indiscernible] have it, no longer there, but apologies for that. The -- and I did join late, so...

Timothy FitzGerald: Sorry -- Raymond James, just to clarify from the right. Raymond James asking us a question. All right. make sure we got the right one Tim -- proceed, Tim Thanks.

Tim Thein: I'm sure a lot of people really care. But yes...

Timothy FitzGerald: No, we do. So we appreciate that you're still covering us that you move it. So thank you for that.

Tim Thein: Apologies if I did join a second line, so apologies if this is redundant. But I have 2 on the commercial business. The first is just regarding the competitive dynamics around the whole kind of technology and connectivity 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 -- is that, 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, does that -- if not, presumably that may be giving you some opportunity. So maybe just your thoughts around the kind of the connected kitchen arena and what you're seeing on that front? And I have a follow-up after that.

Timothy FitzGerald: Yes. I mean, I think it's more of the latter, right? Like the more game-changing innovation in technology is the longer it is to bring it to 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 Middleby One 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 3 years ahead, not just what's out there for the quarter. Technology is going to make its way more and more into the restaurants, and we see it now today and our customers do want that. We're having more and more adoptions we engaged 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 we're -- 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 will -- as we kind of think about where we're at 3 years from now relative to today, we're the game in town, right? Because I think others haven't had 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 will 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 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'll get more and more uptake here.

Steven Spittle: 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 robotics 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 and there that have popped up, dropped 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.

Tim Thein: 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 you would -- I think we're aiming for mid-June would be worthy of a prebuy. And 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?

Steven Spittle: 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, I 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 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 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, pricing is a dynamic in 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 margin progression in the back half of the year coming from the price increase that went live at the end of the second quarter.

James Pool: Tim, just to add on that. The -- our dealers are very focused on working capital and the cost 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, and again, lots of discussions we had over the quarters of destocking, they're kind of at a point we've heard from many dealers that they are carrying less stock than they were in COVID. So really, I think we've gotten 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.

Operator: Your next question will come from Tami Zakaria with JPMorgan (NYSE:JPM).

Tami Zakaria: 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?

Bryan Mittelman: Tami, it's Bryan. I'm sorry, if my fair comments weren't clear enough. So let me take another shot at it. The -- 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 Novy acquisition. We do think margins get back to double-digit levels in Q3 and in 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 mix impacts of the underlying brands as it relates to the total segments. So hopefully, that clarifies things.

Tami Zakaria: Got it. Yes, that does. So basically, sequentially margin would be down, but sorry, sequentially sale would be down, the margin...

Bryan Mittelman: Yes. Q3 margins -- I'm sorry, Q3 revenues below Q2 revenues, but the margin percentage for Q3 should be above Q2. Mix within the segment and benefits of our cost takeout activities.

Tami Zakaria: 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.

Bryan Mittelman: Before I turn it over to Steve, and I know you're referencing others out there, I suspect it is one large company that has a segment that has some overlap and competes with us. And I know they had revenue growth, but margins down. So that you seem like to us, not the way 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 Steve more directly address the customer dynamics in the marketplace on a day-to-day basis.

Steven Spittle: Yes. Thank you, Bryan. Tami, 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 -- yes, pricing is always going to be a dynamic, but I think our teams have been so focused on those couple of areas. And I think you're seeing that come through 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.

Timothy FitzGerald: I think the 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 are things that we were not as profitable as we kind of move 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 we're -- those are a lesser part of our portfolio today than they were several years ago.

Operator: Next question will come from Walt Liptak with Seaport.

Walt Liptak: I wanted to ask first about what you're seeing in the international markets versus the U.S. market. So the growth rates, again, were stronger international. And why is that? And we're talking about the Commercial Foodservice segment.

Steven Spittle: Walt, 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, 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 our manufacturing facilities, whether it's in China or 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 it is -- 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.

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

Bryan Mittelman: 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.

Walt Liptak: Okay. All right. No problem. So -- and in CFS as well as in resi, 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 -- maybe another way to say it, are you starting to see like a second round of channel refresh in residential as we get further into the year.

Timothy FitzGerald: Yes. A lot of our products are outdoors where we tend to have more in the channel, right? So a lot of the indoor products are more specified and not stocked. In fact, we're moving more and more to made the order. So -- so really, the channel inventories has been around outdoor. Those are largely reset. And I would say kind of similarly comment on a commercial. I think our channel partners are cautious. The grill season has been slower or maybe not as strong as some of our customers and us 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'll -- they're better positioned going into the fourth quarter this year than last year in terms of stocking levels. And we are continuing to launch new products there. I mean, both indoor and outdoor, which 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, 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.

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

Walt Liptak: Okay. Great. So outdoor should be up in the third quarter to quarter-over-quarter.

Bryan Mittelman: 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 outdoor. I mean, we do think Q3 of -- will be, I'll say, at least at similar levels to last year. But that really isn't a quarter that matters or to get to a little bit more interesting as we get into Q4 as we then are -- 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 destocking, which is 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 2 ago.

Walt Liptak: Okay. Great. And if I can ask one more, just on Follett and Ice headwind with Starbucks (NASDAQ:SBUX). And I wonder how that's going, what the opportunity is there if there are other near-term opportunities with Starbucks?

Timothy FitzGerald: Yes. We try to refrain from discussing any kind of specific customers, et cetera, but Follett and our Ice platform overall continues to grow. And again, we've tried to point out that we've got a great, very exciting beverage in 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 got significant offer rating 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 ICETRO, which is one of the acquisitions we did in the last several years, we've been able to expand the platform here in the U.S. as the U.S. needs larger ice capacity. So we've got a couple of new products that came out just really at the beginning of this year, which we've been gaining traction both with our channel partners and with chains. So again, we remain pretty excited about that platform and beverage overall with more to come.

Bryan Mittelman: 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. Over time, it grew last year. And I think we are seeing and basis on other comments of other public companies as it thinks about Ice, we are outperforming the competition here. And it isn't just due to one customer. I mean, the amount of growth we're having is due to broad adoption of our multiple Ice solutions across numerous customers, right? So this is why we capitalized on trends have brought in the product portfolio across commercial. So it's an area of great strength for us, and we do see that continuing, again, across a wide number of customers.

Operator: 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.

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

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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