Middleby Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

Key Takeaways

  • Margin Expansion Despite YoY Revenue Decline: Q2 saw sequential revenue growth and expanded EBITDA margins across Commercial Foodservice and Food Processing, even with a year-over-year sales decline.
  • Record Operating Cash Flow and Deleveraging: Generated $150 million in Q2 operating cash flow (best second quarter ever) and reduced leverage to under 2.3×, bolstering financial flexibility.
  • Strong Order Momentum: Q2 orders rose over 15% year-over-year and 9% sequentially, with all segments seeing improved pipelines and projected year-over-year revenue growth in H2.
  • Commercial Foodservice Outlook Improves: Dealer backlogs are weighted to the second half, and expansion into under-penetrated categories like beverage and ice—with new innovations—drives future growth prospects.
  • Residential Challenges Persist Amid Margin Gains: The housing market remains near lows, but residential orders grew in Q2 and luxury products showed strength, supporting sequential margin improvement.
AI Generated. May Contain Errors.
Earnings Conference Call
Middleby Q2 2024
00:00 / 00:00

There are 11 speakers on the call.

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, Brian Mittelman Chief Technology and Operations Officer, James Poole Chief Commercial Officer, Steve Spittel and Vice President of Investor Relations, John Joyner. We will begin the call with the opening remarks, then open the lines for questions. Instructions on how to join the queue will be given at that time. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Mr. Fitzgerald. Please go ahead.

Speaker 1

Good morning, and thank you for joining us today on our Q2 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 Q2 as we posted strong profitability despite revenue declines versus 2023, reporting margin expansion at both our commercial foodservice and our food processing businesses. At our residential business, we demonstrated margin improvement from the Q1, 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 twenty twenty four.

Speaker 1

Cash flows generated by our business have normalized following the disruption from supply chain, and we have rapidly reduced our leverage over the past year, while at the same time making investments in critical strategic and operational initiatives positioning us for the future. Although we reported Q2 revenue declines versus the prior year, orders trended positive in the quarter and we realized order growth at all three businesses in comparison to the prior year. Activity levels have generally improved with the order quoting and projects in the pipeline. We're also excited to see the interest in our many new product innovations across all our businesses. Although we are well positioned, we remain cautious given macroeconomic factors including high interest rates and the impact of inflation on the consumer, which continues to present a challenging backdrop carrying into the second half of the year.

Speaker 1

At our commercial foodservice business, we've seen gradual improvement in ordering levels throughout the first half with a slow ramp up given continued longer lead times for permitting and construction, along with longer deliberation on customer business plans given current economics of higher restaurant operating costs and monitoring of restaurant traffic levels. While conditions are challenging, our channel partners have built backlogs weighted to the second half of the year and our chain customers have plans for operational upgrades and store openings. These plans have slowed in comparison to our original expectations at the start of the year, but continue to remain stronger in the second half versus the first half. We also continue to focus on new market share opportunities, expanding into 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.

Speaker 1

And we're 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.

Speaker 1

While this is having a significant impact to our business today, we believe it will ultimately lead to pent up demand with the benefits of recovery in the years ahead. And while the residential market will take time to fully recover, the luxury end of the market has shown recent improvement. We realized order growth in the Q2 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.

Speaker 1

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 Q2 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.

Speaker 1

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 foodservice 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.

Speaker 1

James?

Speaker 2

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 Bass Show. In Q3 of 2023, I went deep into ICE and all the opportunities that are happening at Follett and ICE Tro and that we expect to see an additional $50,000,000 of incremental revenue between these brands in 2024.

Speaker 2

And finally, in Q2 of 2023, I discussed the Taylor Double Sided Grill and the operational benefits it brings are burger and steak chains. And most excitingly, the work that we continue to do at a fast casual Mexican food chain. For this quarter, I'm going to dive into our food processing group to highlight the full line solutions that Middleby has built organically and through acquisition. These solutions range from full line bakery systems to full line protein systems. But for today, I'm going to discuss our solutions for precooked bacon and poultry as these represent a significant area of growth and opportunity for growth respectively.

Speaker 2

And as always, the products I discuss 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 in retail processors. At the heart of each line is the TurboChef by Middleby or the TurboChef by Alcar, which I've discussed on previous calls, for those that remember, the TurboChef produces the highest product yields, best tasting and visually appealing precooked bacon by injecting microwave impingement and steam into the cooking process. The TurboChef nets a 2% yield gain when compared to other thermal and 915 megahertz microwave systems. Another in line solution by Middleby improves yields up to 7% with Tern's IBS 4,600 Spicer, which uses 4 independent lanes with 4 independent vision systems to ensure every slice of bacon is the same weight and thickness regardless of belly variation.

Speaker 2

By combining the other 6 brands, VMAC, Thern, Danfotek, MP, Equipment, Scanaco and Rapid Vision Pack into the total full line solution, we improved yields another 4%, thus driving towards a total yield improvement of 13% with our full line solution. Continuing with the precooked bacon line, less shift from yield improvements to labor savings. The Middleby full line solution saves approximately 6 FTEs per line. In looking at the brands contributing to the labor reduction, VMAX Auto Comber and Pack Pro's underleaving and stacking systems work together to reduce manual labor by automatically combing and decobbing 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 $1,300,000 per line per shift over a year.

Speaker 2

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 5th generation water cutting machine, so stay tuned.

Speaker 2

Okay, back to it. From trimming and portioning, these pieces move into MP's new thoroughbreder, 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 change over times by 45%, thus allowing for incremental capacity gains that net approximately $1,000,000 per year. Combining our savings and capacity improvements, our customers can expect a 6 month payback on MP's new thoroughbreder.

Speaker 2

Progressing down the line, we move into MP's fryer with Filter Automation's newly integrated filtration system. By combining the MP fryer and Filtration Automation's Micron Pro filtration system, we can extend oil life from 36 hours typically to over 4 80 hours typically, thus reducing oil expense by 13 times, which saves approximately $500,000 per year in oil for a typical 2,000 gallon fryer. It is important to note that since the MP breading system, the thoroughbreder improves breading adhesion, we lose less breading into the fryer, which improves oil life as well. The Micron Pro filtration system is completely autonomous and filters nearly continuously only stopping 4 minutes per hour to expel the filtered material, I. E.

Speaker 2

The filter cake from the system. By doing this, we reduce the amount of free fatty acids and prevent the formation of polar compound. These are the chemical species that denature oil. Lastly, the Micron Pro uses no consumables or accessories and since the filter cake has very little residual oil, less than 2%, the cake can be used for pet food, animal feed and fertilizer, making it the most economical sustainable solution for frying. Middleby will continue to invest and acquire technologies to make our full line processing solutions the most advanced and economical for our customers to operate.

Speaker 2

I look forward to discussing further advancements in the Middleby processing group on later calls. Thank you and over to you, Brian.

Speaker 3

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 Q2, we generated revenue of $992,000,000 which is a 7% increase sequentially over Q1. Our adjusted EBITDA was $216,000,000 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.

Speaker 3

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. Recall that this is the toughest comp we will face given record revenues for this segment in Q2 last year. Our recent trends are positive as we grew revenues 5% sequentially. We expanded margins slightly over the prior year on lower revenues and over Q1 by 200 basis points. In Food Processing, revenues for the 2nd quarter were over $179,000,000 We were also facing a tough comp here.

Speaker 3

While we did see a 5.7% decline organically, this was our 2nd best Q2 ever for this segment. Our recent trends are positive for Food Processing as well. We grew 9% sequentially. Our adjusted EBITDA margin remains 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.

Speaker 3

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 $150,000,000 for Q2. It was our best second quarter ever. Operating cash flows are over $765,000,000 for the trailing 4 quarters.

Speaker 3

Our free cash flow over the past 12 months exceeds $700,000,000 and our total leverage ratio is now down to under 2.3 times. Before I get into discussing our outlook, I want to remind everyone what I noted when speaking to you 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.

Speaker 3

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.

Speaker 3

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 their best order quarter ever. While Q3 orders have started a little bit slower, which is typical seasonality for us as we often see this metric being lighter than Q2, we still should see sequential revenue growth for the company during the back half of the year as well as year over year revenue growth. To provide greater insights, I will separately address each segment for you.

Speaker 3

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.

Speaker 3

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 European based manufactured brands. But segment revenues will probably be flat to the prior year level.

Speaker 3

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 2024. We look forward to Q3 being stronger than Q2 and anticipate revenues to again achieve at least $1,000,000,000 and then reaching even higher levels in Q4. We continue to believe at this time that for the 3rd and 4th quarters, we will also deliver year over year growth.

Speaker 3

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.

Speaker 3

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

And the first question will come from Mig Dobre with Baird. Please go ahead.

Speaker 4

Good morning, everyone. Thank you

Speaker 5

for taking the question and great to hear that things seem to be getting better on the order front. I want to start with food processing and 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.

Speaker 5

So I'd love to hear about that. Or is this just something that's idiosyncratic to the things that you've been doing on the new product front? And related to this, Brian, how should we think about margin if you're going to be seeing that kind of growth in the back half for food processing?

Speaker 3

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.

Speaker 3

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.

Speaker 3

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, it's probably our strongest now. Hot dogs and such have been also recovering and doing well in certain parts of the world.

Speaker 3

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 our 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 one particular quarter. We had in and I got the question bunch in the last quarter or 2 about upping the targets.

Speaker 3

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 and market leading performance.

Speaker 5

Okay. But you're

Speaker 4

saying at least

Speaker 5

as good as what we had last year, right?

Speaker 3

Yes. Just

Speaker 1

to maybe repeat or add on a little bit to Brian, I

Speaker 3

mean, I think a lot of

Speaker 1

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're still in earlier stage.

Speaker 1

So I mean, I think that's the excitement as he went through that as we look at breadters to water jet gutters to frying lines and even an outdoor which can play in that area. So we have a lot of solutions we did not have before that 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'll say, the mega projects this year. So kind of the good news is we're seeing pretty decent demand without some of the bigger greenfield projects come through.

Speaker 1

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 situation. We hope to get some of those bigger projects, but we've been able to continue to grow without some of those coming through.

Speaker 3

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 have 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 Great. If I may, one follow-up then on Commercial Foodservice.

Speaker 5

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?

Speaker 5

Thank you.

Speaker 6

Yes. Good morning, Mig. 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.

Speaker 6

We believe that is largely behind us. You do see orders more lining up with when demand is needed 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 outs, just with a slower start to the year for some of the chains, still working through permitting issues, labor issues that they're facing.

Speaker 6

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 a dealer channel, which Tim talked about briefly in his opening comments. Their strengthening backlog with their end user customers has been positive. And I think you're starting to see that come through a bit. And I do believe that actually comes through the back half of the year.

Speaker 6

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.

Speaker 5

Great. Thank you so much.

Operator

The next question will come from Brian McNamara with Canaccord Genuity. Please go ahead.

Speaker 7

Good morning, guys. Thanks for taking the questions. First off, Lamb Weston is an important supplier to QSRs. They gave some pretty negative guidance last week. McDonald's call earlier this week was all focused on getting value right to combat traffic weakness.

Speaker 7

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?

Speaker 6

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, it actually brings them even more and more to the forefront. So all the challenges we've talked about, whether it's around the cost of labor which is more challenging than ever, utility costs, 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 that Middleby can offer.

Speaker 6

So even in spite of some of those challenges that you're referencing, I would say the discussions and the pipeline of products that we have with our, in this case, QSR customers remains very strong. I would also say, even though QSR are a big part of our overall end user segment. You see strength in other segments like fast casual right now. There's a lot of successes in those segments. And those are a lot of customers that I think have been a little bit earlier to adopt some of the new technologies in our pipeline.

Speaker 6

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 remain strong in spite of some of the challenges that they've faced so far.

Speaker 7

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

Speaker 5

should look I guess by category there?

Speaker 3

Yes, this is Brian. I'll take that one. It was pretty consistent across the board as I think about the geographies. We have noted before that we are seeing good progress with some of the European products that we've been importing to the U. S.

Speaker 3

And those continue to grow and we look forward to more of that as we have more products that we'll 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 stuff.

Speaker 3

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.

Speaker 7

Great. Thanks a lot.

Operator

Your next question will come from Jeff Hammond with KeyBanc. Please go ahead.

Speaker 8

Hey, good morning guys.

Speaker 1

Good morning, Jeff.

Speaker 6

Good morning.

Speaker 8

Hey, just want to come at kind of the restaurant and consumer weakness we're hearing about maybe in a little different way. 1, 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 or again if maybe some of this restaurant weakness maybe pushes that out as well?

Speaker 6

Good morning, Jeff. Good questions. Again, back to new store openings, do I think that there is a part of the overall macro environment that is causing some push out of the new store openings? Yes, I certainly do along with what we've referenced along the permitting and labor challenges of just getting restaurants open. Again, I said before, I think one of the best byproducts of the last several years is we do have a lot more visibility and transparency into new store openings with our big chain customers.

Speaker 6

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 and 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 for 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 and then this focus on new store openings I think has pushed it a little bit further out.

Speaker 6

I do think that is still there to come through. We're seeing it maybe a little bit in some of the order pickup in the Q2, So I actually think it's a bigger driver the back half of the year and certainly into next year as we go forward.

Speaker 8

Okay, great. And then you guys have been kind of quieter on M and 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

Speaker 5

if

Speaker 8

it's just a harder environment to get stuff to the finish line? It seems like in general, we're starting to see M and A activity move again.

Speaker 1

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 it 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.

Speaker 1

And on the other side, I think it was very hard for there's a gap, I would say, with our projections of the businesses of the companies we're talking to and their projections of did about 30 acquisitions in the last 3 to 4 years. So it's not like 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 fold, 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.

Speaker 1

So likely you'll see us kind of be a little bit more active than maybe we were over the last 12 months.

Speaker 8

Okay. Thanks so much.

Operator

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

Speaker 4

I'm a creature I have it. It's no longer there, but apologies for that. And I did join late.

Speaker 1

Yes. Sorry, yes.

Speaker 6

You're in the comment.

Speaker 1

Yes. Raymond James, just to clarify for the record, right? This

Speaker 4

Tim from

Speaker 3

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

Speaker 5

I'm sure a lot of

Speaker 4

people really care, but yes.

Speaker 1

No, we do. So we appreciate that you're still covering us that you moved it. So thank you for that.

Speaker 4

The apology that I did join a second late, so apologies if this is redundant. But I have 2 on the commercial business. And 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 do you think a reflection of what the customers are demanding or not demanding, I.

Speaker 4

E. Has there been lower movement or kind of acceptance of that, what have you? And then I guess B, is that if not presumably that maybe 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 then I have a follow-up after that.

Speaker 1

Yes. I mean, I think it's more of the latter, right? Like the more game changing innovation and technology is the longer it is to bring it into the market space, right? So I mean, I think we've doubled down, made significant progress over the last 12 months, bringing more and more products online, tied to the 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.

Speaker 1

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 engage with a lot of customers down in our innovation centers.

Speaker 1

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 here 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 and getting more experiences out there. So it is getting traction and we believe in it. And I think the good news is, as you said, as this role as we kind of think about where we're at 3 years from now relative 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.

Speaker 1

So again, I think we think that remains a big competitive advantage that will show up over time in a big part of shareholder value that we'll be creating. There is a lot of innovation for today also. I think kind of going back to the chains and the replacement cycle, a lot of them are spending more time adopting the next generation of technology, sometimes that slows things up as well. But we see kind of 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, etcetera, that we get more and more uptake here.

Speaker 6

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 gaining 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, etcetera, and then also can add in our own robots or automation on top of it. So Middleby can truly provide all aspects of the kitchen. There's nobody else that can do that.

Speaker 6

So that's why I think you're seeing kind of a one off here or there that have popped up, drop away because they are reliant on other suppliers to provide the equipment, to provide the IoT. And I think that's why you're seeing our end user customers move away from that and continue to move towards us.

Speaker 4

Interesting. Okay. And then just on pricing, as you think about the I don't imagine there or 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 what would be worthy of a pre buy? 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 kind of realization of that in terms of the second half revenue and margins for the commercial business?

Speaker 6

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. We've 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.

Speaker 6

I do not believe we saw a real big buy ahead in terms of driving orders in June. It may be 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 and forward thinking evolution. So it will continue to again look at SKUs and look at customers as even the rest of this year unfolds.

Speaker 6

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?

Speaker 1

Yes. Tim, just to add on that, our dealers are very focused on working capital and the costs given the higher interest rates right now. So in the past, we probably would have seen a little bit of a pull ahead. Absolutely, they did not do that 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 Q2, 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're carrying less stock than they were in COVID.

Speaker 1

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.

Speaker 4

Got it. Got it. All right. Thank you for the time.

Speaker 5

Thanks, Tim.

Operator

The next question will come from Tami Zakaria with JPMorgan. Please go ahead.

Speaker 9

Hey, good morning. Thank you so much for taking my questions. So I have a follow-up on the residential kitchen segment comments. So I think you're expecting sales to be relatively in line versus last year. So does that mean what does that mean for Sequans show growth?

Speaker 9

And then similarly, how should we think about margin for this segment sequentially versus the 9.1% we saw in the 2nd quarter?

Speaker 3

Hey, Tammy, it's Brian. I'm sorry if my prepared 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.

Speaker 3

And the size of our European businesses have also increased over time if you go back to the Novi acquisition. We do think margins get back to double digit levels in Q3 and Q4 and we'll see if that also comes out to that having generated double digit margins for the year in total, as we are expecting more benefits from the cost actions we have taken and also the mix impacts of the underlying brands as it relates to the total segments. So hopefully that clarifies things.

Speaker 9

Got it. Yes, that does. Thank you. So basically sequentially margin would be down, but sorry sequentially, sales would be down, but margins down. Sequentially

Speaker 3

yes, yes. Q3 margins I'm sorry, Q3 revenues, below Q2 revenues, but the margin percentage for Q3 should be above Q2. Got it. And we're looking at mix within the segment and benefits of our cost takeout activities.

Speaker 9

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.

Speaker 9

So curious about your take on promotional trends you're seeing for the CFS segment?

Speaker 3

Yes. 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 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.

Speaker 6

Yes. Thank you, Brian. 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.

Speaker 6

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.

Speaker 6

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.

Speaker 1

I think one other comment as 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 and things that we're 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 those are a lesser part of our portfolio today than they were several years ago.

Speaker 9

Wonderful. Thank you.

Operator

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

Speaker 10

Hey, thanks guys. I wanted to ask first about what you're seeing in the international markets versus the U. S. Markets? So the growth rates again were stronger international.

Speaker 10

And why is that? And we're talking about the commercial foodservice segment.

Speaker 6

Well, it's a good question. I would point to I think we have made a lot of good inroads, specifically I would call out the European markets, the Middle East and India and Asia. I think specific to Europe, I would say we've gone through a complete change in terms 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 success we've had out of the Dallas facility.

Speaker 6

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, 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.

Speaker 10

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?

Speaker 3

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 to at the regional level.

Speaker 10

Okay. All right. No problem. So and in CFS as well as in resi, it sounds like the channel inventories are pretty lean. Are you still seeing any kind of drawdown, I guess, especially in residential?

Speaker 10

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?

Speaker 1

Yes. A lot of our products are outdoors where we said tend to have more in the channel, right. So a lot of the indoor products are more So So really the channel inventories has been around outdoor. Those have largely reset and I would say kind of similar to the comment on commercial, I think our channel partners are cautious. The grill season has been slower or maybe not as strong as some of our customers and us would hope.

Speaker 1

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 Q4 this year than last year in terms of stocking levels.

Speaker 1

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 2nd 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.

Speaker 10

Okay, great.

Speaker 3

And one last point, just to make sure, to clarify, 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 I think we have seen positive evolution of the inventory that's stocked for that, I'll call it, subcategory within residential.

Speaker 10

Okay, great. So outdoor should be up in the Q3 too, quarter over quarter?

Speaker 3

So I mean, I'm talking about what we've seen over the past year, year over year in order trends. Again, the Q3 is always the challenging one for outdoor. I mean, we do think Q3 will be, I'll say, at least at similar levels till last year, but that really isn't a quarter that matters, right? It gets to a little bit more interesting as we get into Q4s as we then are starting to load in for next grills season. But I was just trying to clarify your question where you were asking about channel inventories that we think the destocking, which as Tim tried to clarify, was probably most relevant of a question to the outdoor side of things is not the headwind that it was going back a year and 2 ago.

Speaker 5

Okay, great. Thanks for that. And if

Speaker 10

I can ask one more just

Speaker 5

on solid ice had a

Speaker 10

win with Starbucks. And I wonder how that's going what the opportunity is there, if there are other near term opportunities with Starbucks?

Speaker 1

Yes. We try to refrain from discussing any kind of specific customers, etcetera. But Follett in our ICE platform overall continues to grow. And again, we've tried to point out that we've got a great, very exciting beverage and ice platform that where we've got a lot of new products and technologies coming out, which also address speed of service throughput, labor, etcetera. So I think there's a lot of growth opportunity there.

Speaker 1

The NICE platform for Follett, which got significant operating advantage as well as I'll say preference with customers is doing very well and that's part of the platform that's growing. Alongside, Istro, which was one of the acquisitions we did in the last several years, we've been able to expand the platform here in the U. S. As the U. S.

Speaker 1

Needs larger ice capacity. So we've had a couple of new frocks 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.

Speaker 3

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 based this on other comments of other public companies as it thinks about ICE, we are outperforming the competition here. It isn't just due to one customer.

Speaker 3

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 capitalize 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.

Speaker 10

Okay, great. Okay, thanks so much.

Operator

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

Speaker 1

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

Speaker 9

disconnect.

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