MIDDLEBY Corp Q3 FY2022 Earnings Call

Thank you for joining us for The Middleby Third Quarter Conference Call. With us today from management are Tim Fitzgerald, CEO; Bryan Mittelman, CFO; James Pool, Chief Technology Officer; and Steve Spittle, Chief Commercial Officer. After the company’s prepared remarks there will be a question-and-answer session and instructions will be given at that time. Please note this event is being recorded. I would now like to turn the conference over to Mr. Fitzgerald. Please go ahead, sir.

Great. Thank you. And thanks, everybody, for joining us today on our third quarter earnings call. As we begin, please note, we have posted slides to accompany the call on our Investor page of the website. We are pleased to have posted another record quarter, reporting 14% growth in organic sales and 23% growth in adjusted EBITDA. During the quarter, we also reported strong profitability with improvement in EBITDA margins to 26.5% at our Commercial Foodservice business, 23.9% at our Food Processing segment, and 20.6% at our Residential business when excluding the impact of recent acquisitions. The supply chain impacts continued to weigh heavily on the quarter, both in terms of disruption to our manufacturing operations and increased costs. However, our focus on selling our latest product innovations is favorably impacting the profitability of our sales mix across our businesses, while pricing actions enacted earlier this year have partly offset the dilutive impact of material cost increases, with further pricing benefits expected to be realized in the quarters ahead. Operationally, the significant investments we have made in the past quarters in automated production equipment and facility expansions are delivering benefits of greater capacity, production efficiencies, and profitability at many of our operations. These investments also position us to support our new product launches and growth initiatives in the quarters ahead. While economic conditions have become more uncertain and more challenging in the third quarter, we continue to have a positive outlook given the pipeline of new product launches, customer opportunities, and the competitive positioning for each of our three foodservice businesses. In the Commercial Foodservice segment, our customers are investing in solutions to evolve their operations and address pervasive challenges of labor, speed of service, energy, and food costs. Our latest innovations are in demand, and we are engaged with customers on solutions to solve problems like never before. The investments we have made in our digital sales capabilities, consultant services team, channel partnerships, and the Middleby culinary teams are connecting end users with our latest technologies. And our Middleby Innovation Kitchens continue to be a home run success with now over 7,000 customers visiting with us in Dallas since the opening during the middle of last year. This transformation of our sales processes is developing a new pipeline of opportunities moving into next year. The backdrop is also favorable with the industry in early stages of longer-term recovery. Over 100,000 foodservice locations in the U.S. market closed during the pandemic, with only a projected 5,000 units added back in 2022. New openings are projected to accelerate into 2023 and future years, providing a long runway for recovery. We are engaged with many of our chain customers on store opening plans for next year, while many segments such as institutional, travel and lodging, and fast casual are starting to recover with increased activity from a year ago. Our Food Processing business, demand continues with the need for equipment to increase throughput, address the lack of skilled labor through automation, address rising food costs, and save on energy and utility costs. Over the past several years, our teams have made significant strides with an objective to expand our automated full-line solutions. We have done this with the launch of exciting new product innovations and also by completing a number of strategic acquisitions. Our most recent acquisitions of Proxaut, CP Packaging, and Colussi further extend our automated solutions and advanced washing technologies and high-speed packaging to our portfolio. Our full-line and automated solutions are providing customers with a greater payback, and this has translated to consistent order growth and a strong pipeline of opportunities ahead. In our Residential business, rising interest rates, inflation, and economic uncertainty have slowed existing home sales and new home starts, and made for a more challenging condition for the Residential segment. While we continue to have a larger than normal backlog, recent order demand has weakened, and we expect those difficult conditions to remain in the first half of 2023. Although we are facing difficult market conditions, we remain excited about the opportunities across our Residential platform. The strength of our brands, product designs, and product innovation is stronger than ever. Our new showrooms, sales and design services teams, and culinary staff have been busy as we engage with designers, dealer partners, and end users to create greater awareness for the Middleby Residential brands. The work done to leverage the capabilities of our entire platform and realize synergies across the brands present revenue and profit opportunities, offsetting some of the headwinds as we move into the year. In summary, I am proud of our teams that continue to navigate the operating challenges and evolving market dynamics while executing on our strategic initiatives as we transform our selling processes and continue to bring industry-leading innovation to market. I am confident these efforts are adding to our competitive differentiation in the marketplace, which are reflected in the results we have delivered for the year and that are also progressing us towards our longer-term financial goals. Now I will pass the call over to James to spotlight more of our exciting recent product innovations, which are also highlighted in our investor slides. James?

Thanks, Tim. I am pleased to talk about two new products for Middleby. They couldn’t be more dissimilar in design and use, but they are both engineered to deliver meaningful environmental and sustainability benefits for our customers. As Tim mentioned, overviews of these products can be found in our investor deck. The first product is Baker Thermal Solutions RapidBake Oven, a first of its kind for the Food Processing side of our business. The RapidBake Oven combines direct-fired gas combustion impingement and RF heating to accelerate the baking process. While these technologies have been combined for decades in products such as TurboChef, it’s the first application for high-volume baking or size, speed, throughput in an energy-efficient manner. The technology deployed in this oven makes it ideal for customers producing fruit-filled, cheese-filled, and meat-filled dough products as the RF energy is able to heat volumetrically, and the impingement air is able to heat and bake, and rapidly brown the exterior from the outside in. By using these two independent energy vectors, it yields the process that has proven to be 30% to 40% faster than conventional baking technology. This speed boosts production rates up to 5,000 tons per year. As it relates to sustainability, we split the energy between electric and natural gas for the RapidBake. With this, we have been able to balance the energy required so that the operator can appreciate a 7% to 19% reduction in cost per ton of production depending on where the oven is deployed. And with less dependency on natural gas, we save 57 metric tons of CO2 equivalent, which equates to about 12 cars on the road per year. And we now allow the operator to take advantage of renewable and green energy to power the electric portion of the oven. Moving from Food Processing to Commercial yields a similar story with CookTek’s new high-efficiency induction system, Helios. The induction uses electromagnetic energy to couple with the pan, thus making induction the fastest, most precise, and efficient way to cook. CookTek has long been the anchor of induction for the Commercial Foodservice industry, producing inductive heating for warming and holding technologies. The Helios features the new Middleby One-Touch Control, along with the speed knob and a newly designed power supply to optimize its performance. The Helios control can also measure a pan’s efficiency to let the operator know when they are using substandard induction cookware. The Helios, which is the only American-made system on the market, has a cooking efficiency as high as 95%. This means that 95% of the power coming from the wall is going into the food. When compared to electric or gas-operated hobs, CookTek induction is approximately 45% and 62% more efficient, respectively. As for the environmental impact, a typical circuit for an induction range uses 25 pounds less copper than a conventional range since the current requirement allows us to run much smaller wire. Now scale this up and you are looking to save 1 million to 2 million pounds of copper per year in the United States alone by moving to highly efficient products like Helios, and that’s only one piece of the kitchen. The timing for high-efficiency cooking systems like Helios couldn’t be better as more and more of our customers are reporting that utility costs have had an adverse impact on their Q3 returns. This further illustrates the immediate need for new and innovative, efficient electric cooking equipment. Lastly, many of our customers are talking about their successes opening smaller and more efficient restaurants. Again, products like Helios will unlock additional value for these locations by reducing building costs, less copper, utility, lower amps, HVAC costs, no radiant heat load and hood expense, less CFM, and in some cases, supply an entire ventless kitchen. With products such as RapidBake and Helios, Middleby is delivering on its sustainability promise. Thank you, and over to you, Bryan.

Thank you, James. In the third quarter, our revenues approached $1 billion, and our adjusted EBITDA surpassed $200 million once more. GAAP earnings per share stood at $1.92, while adjusted EPS, excluding certain expenses and non-operating pension income, was $2.18. Foreign exchange impacts were a negative factor amounting to $0.12. We reported revenues of $993 million, marking a year-over-year growth of 21.5% and over 14% on an organic basis. Our adjusted EBITDA reached $212 million, reflecting more than 23% growth compared to the previous year, or over 22% on an organic basis, although forex rates negatively affected EBITDA by nearly $7 million. Our EBITDA margin exceeded 21% of revenues, representing our strongest quarter of the year in terms of both EBITDA dollars and profitability percentage. Looking ahead, we anticipate even more favorable results in the fourth quarter. Reviewing our individual segments for Q3, in Commercial Foodservice, global revenues increased 17% organically year-over-year, with margin expansion of 230 basis points compared to the previous year and 130 basis points sequentially from Q2. The adjusted organic EBITDA margin climbed to a three-year peak of 26.5%. In Residential, organic revenue growth was 2% compared to 2021, with adjusted organic EBITDA margins exceeding 20%. Food Processing reported nearly 22% organic revenue growth, and the adjusted organic EBITDA margin was 24%, marking our strongest quarter ever for revenue and EBITDA dollars. Additionally, we improved organic margins by over 200 basis points year-over-year, and over 400 basis points sequentially from Q2. Operating cash flows for the quarter totaled $84 million. Factors such as inflationary costs, supply chain disruptions, and heightened demand contributed to inventory growth. We expect the working capital investments from recent quarters to stabilize and begin to reverse in Q4. We’re continuing to reinvest cash flows back into the business, with acquisition costs exceeding $131 million in Q3 and capital expenditures nearing $19 million. This year, our total capital expenditures have reached historic levels, which are intended to drive operational improvements and bolster margins. Our total leverage ratio is just above 3 times, following more than $450 million in investments this year in acquisitions and capital transactions. We still have nearly $2 billion in borrowing capacity as of the quarter's end. To summarize our performance, we have navigated various challenges while delivering near-record results. On the operational front, supply chain issues have continued to hinder our production abilities compared to demand levels, and inflation has influenced the costs of goods and labor. Labor availability has only recently started to improve and COVID still occasionally affects our manufacturing productivity. Despite these challenges, all segments are performing well. In Commercial and Food Processing, we noted improved results in Q3 compared to both sequential and year-over-year metrics. In Residential, we faced challenges in the third quarter due to our outdoor grill customers' struggles to manage inventory, which impacted our performance relative to expectations. Nevertheless, we achieved organic growth and maintained profitability compared to last year. During the past quarter, I visited several plants and engaged with the investor community, while also enjoying evaluating customer usage of Middleby equipment. I often take time to reflect and strategize for the future, and I've learned that having a pizza nearby fuels my creativity, considering that pizza is fundamental to Middleby. I recently discovered two fantastic pizza places: Grand Marseille at Sofia Pizza Shop in New York, known for its impressive flavors, and PI LA on the West Coast, which showcases an innovative take on Detroit Style pizza. Meanwhile, back home in the Midwest, I recently enjoyed my wife's expertly made pancakes on our Char-Griller Griddle. I’m considering recommending her for our culinary team, as her contributions would surely enhance our gastronomic future. Looking forward, we maintain a positive long-term outlook based on trends discussed earlier and our ongoing innovations. For Q4, we expect similar overall revenues to Q3, with potential further margin expansion in the Commercial segment, albeit with a more modest sequential improvement. For Residential, we acknowledge many influencing factors, including seasonality and economic conditions, but we anticipate performance to be similar to Q3. In Food Processing, with high demand, we forecast stronger results compared to both Q3 and last year, aiming for another record quarter. As we plan for the next year and beyond, I want to emphasize our medium-term EBITDA targets of 30% for Commercial and 25% for the remaining segments within the next two to four years. Our confidence in reaching these targets stems from several factors, including the expanding margins due to operational improvements, effective go-to-market strategies, product mix optimization, innovative customer solutions, supply chain management, and cost controls, all while investing in new technologies. Our outlook for the years ahead remains optimistic. In Residential, we expect continued strong profitability despite market challenges, driven by our premium products and their inherent resilience. We are committed to investing in new products and technologies across our offerings, expanding distribution globally, capitalizing on customer preferences, and enhancing our operations. For Commercial, our customers are dedicated to their growth initiatives, and our leading technology solutions effectively address their primary challenges, providing considerable value. We will keep managing price-cost dynamics, improve operations, and expand our market presence. We are investing in new technologies and are witnessing increasing benefits from their adoption. In Food Processing, strong customer demand for our full-line solutions positions us for significant growth opportunities both near- and long-term. Innovation, value, and service remain our key differentiators across all segments, and we anticipate a bright future. As we approach Thanksgiving, I'd like to express my gratitude for the privilege of working in this exceptional organization. Thank you to our customers and vendors for collaborating with us on our joint successes. I also want to acknowledge our employees for their unwavering commitment to advancing Middleby. Wishing everyone a wonderful holiday season filled with delicious food prepared on Middleby products. We now welcome your questions.

Thank you. And our first question today will come from Saree Boroditsky with Jefferies. Please go ahead.

Hey. Thanks for taking my questions. So can you just talk through what you are seeing from an order perspective in Commercial Foodservice? And then how are lead times today, and then just any comments on inventory in the channel?

Bryan, go ahead.

Hi, Saree. Good morning. The inventory in the channel has never been particularly robust, and I'll let Steve elaborate on that shortly. Regarding orders, this is definitely an intriguing situation. We've mentioned before that we had extremely high order levels last year, and there's a strong interest in trying to correlate past orders to forecast future revenues. However, we notice significant month-to-month and quarter-to-quarter fluctuations in orders. The key point here is that our customers have adjusted their ordering patterns over the past two years, yet they remain dedicated to their growth plans, which gives us confidence about Q4 and into 2023.

Yes, this is Steve. I want to provide some additional context regarding our various customer bases. While we often focus on larger chain customers, I want to highlight that they have had a fantastic year so far, particularly in opening new stores, which is a significant shift compared to before COVID. We have grown closer to these customers during this period, and as a result, they are more open about their long-term plans than ever before. The chains, in particular, have committed even more to their new store openings for next year, positioning us well in that segment. Additionally, I want to mention our dealer channel in the U.S., where we have also strengthened our relationships over the past couple of years. Many critical dealers are telling us they are busier than ever, thanks to our strategic initiatives like the Middleby Innovation Kitchens. Another area worth noting is our engagement with the consultant community, both domestically and internationally, an area where we have seen significant improvement in the last few years by investing in the right people and digital solutions. We track our specifications on projects carefully, and we are experiencing approximately 30% growth in specifications year-over-year, which is crucial as it leads to future orders across various sectors such as schools, business and industry, healthcare, and senior living. Regarding lead times, we have made significant progress in expanding capacity in our manufacturing facilities, which has been one of our most critical initiatives this year. Although we still face challenges in our supply chain, we're managing it effectively. We’ve invested in new automation and capital, and we've recently been successful in hiring manufacturing employees despite the difficulty in the job market. I’m particularly proud that we've maintained product quality during this rapid hiring phase. Consequently, lead times have improved, and I expect them to return to pre-COVID levels across most of our manufacturing divisions as we move into next year.

I think you got a lot there, Saree. But I will just add one more item. I think as we are thinking about next year to all the comments Steve had and a little bit commented on the opening comments there. But with the chains, not only kind of with what they are doing with the new store openings, we have been working with them a lot on, I think, what we call rollouts, which is either efficiency improvements or menu items, and a lot of those programs, we have pretty good visibility and have confidence too, and that is not in our order book, right? So as we kind of think about next year, some of the activity that we would see is based on rollouts. And what’s exciting there is a lot of that is tied to the new product innovations that we have had that James highlights every quarter that have really been coming out continuously in the last several years.

Thanks for that. And then just how should we think about margins in Residential next year if volumes are down? Are there any offsets that can lower volume headwind?

We have successfully navigated lower volumes before, as demonstrated during the peak of COVID. While there are aspects of variable spending we can manage, I can't provide specific models or revenue targets at this moment. However, I can say that we're entering this tougher period with strong margins, and we anticipate maintaining high profitability across various scenarios.

I will just add a couple of comments. We have built the portfolio to be a high margin business in good times and bad times. We expect the Residential platform to achieve industry-leading margins, well into the double-digit teens, even with a significant drop-off. It doesn’t look that bad, even in really tough times. We have discussed several operating initiatives, including investments in Commercial that also apply to Residential. There has been a focus on manufacturing efficiency and product designs, especially in our U.K. business, where our strategy aims to significantly increase margins. If revenues decline there, that will help us serve better. The grill business is still in its early stages, but we have substantial plans to enhance margins, which have been a drag on our overall reported margins. We are consolidating that platform with the three brands – Kamado Joe, Masterbuilt, and Char-Griller – to create synergies in sales, sourcing, and manufacturing. We expect to see margin improvements in the growth platform as we head into next year, which will bolster margins for Residential.

Appreciate the color. Thanks for taking my questions.

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

Hi. Good morning. Thanks so much for taking my question. So my first question is a follow-up to your earlier comment. You mentioned you target 30% EBITDA for Commercial Food and 25% for the other two over the next two years to four years. Can you help us understand what kind of organic sales growth you would need to get there, and are these achievable if there is, let’s say, a down revenue year within that two-year to four-year timeframe?

I will jump in. I think our approach is primarily driven by the launch of our product innovations and the sales mix as we transform our product offerings for customers. We have made significant investments, which is why we have dedicated considerable time discussing our sales transformation and the tools we've funded over the past several years, which we believe are yielding results. In a normal growth scenario, the mix and the efficiencies we've been concentrating on are key factors for achieving our goals without requiring excessive growth. If we experience a decline in the Residential sector, our initiatives aimed at improving margins should help mitigate any downturn. From our perspective, a four-year outlook may provide a clearer picture than a two-year view. We hold an optimistic outlook for Residential, even amidst current challenges in the housing market. This landscape is dynamic and can shift each quarter. Nevertheless, we remain a small player in the overall appliance industry and are committed to our long-term growth initiatives. We expect to see growth in this sector over an extended period and anticipate some recovery as well. Additionally, we foresee Food Processing reaching its targets first, followed by Commercial, while allowing ourselves some flexibility within our Residential platform, which includes new acquisitions that contribute to the margins.

Got it. That’s very helpful color. Thank you. And not sure if I missed it, but did you comment on what price cost was in the third quarter? Was it positive, and how should we be thinking about price cost in the fourth quarter, given some of the input prices have come down? And are you seeing any relief in costs as you are trying to purchase steel parts from, let’s say, your vendors now?

Supply chain issues vary significantly. Overall, we experienced ongoing pressure in the third quarter. Material costs faced considerable disruption earlier in the second quarter, particularly due to the war in Ukraine, and this trend persisted into the third quarter. We have been working diligently on managing pricing to stay ahead, but we haven't quite achieved that yet, as cost increases continued through the third quarter. Much of the margin expansion we've seen has been a matter of holding steady or trying to recover from rising material costs. The positive aspect is that some pricing adjustments we've made have not yet fully impacted the third quarter, so we anticipate some benefits to come. Pricing does not all materialize at once since we have 100 brands, and the impact comes at various times. We believe this trend will carry into the fourth quarter and into the first quarter of next year. We also expect to raise prices as we move into the next year since categories like controls and electronic components remain at elevated levels. There should be some relief expected next year regarding costs like steel, which will be helpful. However, we are still slightly behind in balancing the price-cost equation. Our expectation is that as we transition into next year, we will begin to catch up.

Got it. That’s very helpful. Thank you so much.

And our next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys.

Good morning.

Hi, Jeff.

I want to focus on the grill business because last quarter, the issues seemed related to COVID lockdowns affecting production in China. However, it appears that the situation has shifted to your customers possibly holding too much inventory and engaging in destocking. Could you talk about how the quarter unfolded for the growth businesses compared to expectations?

As we entered this quarter, we faced challenges last quarter when we couldn't ship during the peak growth season. At the start of this quarter, some of those issues lingered but have largely been resolved. Now, the focus is on the retailers, and as you've pointed out, they are destocking, which is impacting demand for our growth business. This situation isn’t just about them reducing their inventory of our products; it's more about their overall inventory levels. They are unlikely to increase orders for our grills if they have excess stock of other brands. This is something we will navigate over the next couple of quarters. Nevertheless, we are very optimistic about our platform during this time. Looking ahead to 2023, we expect to have more retail floor space available. This was part of our strategy in acquiring brands like Kamado Joe, Masterbuilt, and Char-Griller, all of which bring exciting product innovations to the market. As old inventory clears out, we anticipate gaining new floor space next year. We're also planning upcoming product launches early next year, which should spark interest among end users. Additionally, we are in the early stages of introducing these products to our specialty retail dealers. One key advantage that Middleby offers is the strong channels they bring to the growth platform, particularly with the Kamado Joe products. We’re making progress there, and Kamado Joe has some outstanding products that align well with our brands, such as Viking, in the outdoor segment. While we are facing headwinds and can't counteract all of them immediately, we believe that our growth drivers will become more apparent as the year advances. Importantly, we consider ourselves leaders in charcoal innovation, and we’re confident that this trend will continue as consumers explore alternatives to gas and shift towards charcoal, especially given the user-friendly innovation in our offerings. This backdrop will unfold over the quarters, but we remain excited about our growth potential in the coming years.

Okay. And then just on the core Residential Kitchen business, it looks like you are seeing international softness, but I am just wondering if you can speak about the core North America business. Is it just holding in working out backlog, or is the demand side hanging in or starting to slow? Just some color there.

I will provide a general overview, and if Bryan has additional comments. We are indeed observing some softening in demand across the platform, especially in the U.K. While we are also seeing some impact in the U.S., there are several factors at play, including economic conditions, governmental leadership changes, and energy costs. This has affected the U.K. market significantly. Additionally, we have faced exchange losses when converting U.S. dollars, which are substantial for that platform. Consequently, that business has declined noticeably, but we have mostly resolved the backlog. In the current quarter, the state of the U.K. market reflects present conditions. We believe we are outperforming the market, tracking statistics that show we are 5% to 10% ahead of the competition, which gives us confidence in our continued outperformance. We have also implemented effective profitability initiatives, especially regarding how we manufacture grills and our new product launches. Domestically, we have multiple brands with lead times extending into next year, some early and some midyear. Our premium products have even longer lead times. However, we expect to address the backlog as we progress into 2023.

Okay. Thanks a lot. Appreciate it.

And our next question will come from Todd Brooks with The Benchmark Company. Please go ahead.

Hey, guys. Thanks for taking my question. I have just a couple to follow up on, if I could. Commercial Foodservice and Food Processing, just thinking about the backdrop there for even accelerated CapEx trends in 2023. On the restaurant side, hearing more about maybe peak inflationary pressures in the third quarter just reported and pricing continuing to catch up with what they have seen on the commodity side, so margins should get better, but they have learned the lessons of needing efficiency. I guess as you are looking forward and talking to those partners, there are new builds, there is recovery in the industry. But can we just drill down more into the efficiency and the willingness to invest to unlock that with equipment solutions in those two segments?

Thank you, Todd. That's a great question. Looking back at how we've engaged customers over the past year to 18 months, the main topics have been focused on labor, food costs, and speed of service. Recently, there's been an added emphasis on utility costs. It's interesting to note that we've mentioned in previous calls how orders have shifted towards new stores, and there's pent-up demand for replacements. With rising utility costs, we're increasingly being approached about ways to add energy-efficient equipment. I believe this will actually speed up the pent-up demand for replacements because the return on investment is quick right now. Additionally, we have been mindful of the local jurisdictions that offer rebates for energy-efficient products, and we offer a wide range of these products. This makes it easy to talk to customers about how adding certain products can lead to faster ROI. It also gives them a strong reason to accelerate capital expenditures to replace what has been deferred since COVID. This nuance has emerged over the last six months and will likely continue to grow as we head into winter, all while still addressing their needs for labor, food costs, and service speed. I’m excited about what this means for us next year.

Okay. Great. And then one follow-up...

And...

Oh! Sorry. Go ahead.

I just got in Food Processing, I mean, there’s much to echo there. But we are seeing continued engaging with our customers and really large full-line solutions because it’s addressing labor, it’s addressing their efficiency. And given when you are in an industrial setting, small improvements have big paybacks for our customers, and medium and even larger improvements have even larger paybacks for them, and so that’s why the outlook for Food Processing is very strong.

Okay. Great. Thanks. And then just a quick follow-up out of the deck, when you were talking about Commercial Foodservice, you highlighted supply chain frictions, but also staffing challenges still hitting you in the third quarter. Is that segment-specific, or is it just called out specifically there? And how do you feel about exit rates on staffing given the environment and given just the demand that you are seeing in Commercial Foodservice specifically? Thanks.

I believe labor poses a constraint across all three platforms. Each division operates in different locations with unique opportunities, so the situation isn't uniform across the board. However, it is definitely impacting manufacturing for several of our brands on all three platforms. Our HR teams and divisions have made significant progress in hiring across the platforms. As we enter the fourth quarter, I believe our staffing situation is stronger than it has been throughout the year. While we still face some challenges, our circumstances have improved, making it somewhat easier to attract and retain employees now compared to two quarters ago.

Okay. Great. Thanks.

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

Hey. Thanks. Good morning, guys. Hey. I just wanted to try and clarify on the Residential part of it. So it sounds like the Residential in the U.S. that the orders continue to come in okay just for like the indoor orders, is that right?

I think we are indicating that demand is decreasing. That's correct. It's more challenging in the U.K. compared to the U.S., but we have also seen a decline in the U.S. as well. We have noted that we have a larger backlog in the U.S. that will carry us into next year. Looking at our brands, our premium products, especially new offerings and some of the higher-end Viking items, have longer lead times, which provides us some buffer as we enter the beginning of next year.

Okay. Great. And then with the outdoor part of the business, the grill business, are you guys thinking that some of the marketing, the channel changes that you are making, consolidating those brands that you could grow that part of the business in 2023? Maybe there’s a little bit different dynamics in that outdoor versus indoor kitchen?

I believe we will experience a decline in the next few quarters due to retailer destocking. However, as we progress through the year, we anticipate that the growth drivers will have a greater impact, especially in the second half. This will be evident as retailers begin preparing for the next grill season and open new channels and floor space that weren’t utilized before. We expect to see some of this come through in the second quarter, with an acceleration in the third quarter. It's difficult to predict the exact performance of the first half compared to the second half, but our focus is on the long-term outlook. We recognize that as the current situation evolves, we are well positioned, and these growth drivers will not only be incremental but also help us gain market share.

Okay. Great. And then maybe last one on Residential. It sounds like you will continue looking for M&A deals in Residential, and I wondered if you can give us an idea of, with this air pocket that we have hit or valuations coming down at all, what does the funnel look like for any sort of Residential M&A?

I want to reiterate what I’ve said for many quarters over the past two decades: our pipeline is a core competency. We currently have about 110 outstanding brands that form three leading platforms in the industry. This strategic approach has proven effective over time. We consistently generate strategic ideas that enhance and expand our portfolio. We are also increasing our focus on innovation and technology, as demonstrated this year with the companies I've mentioned, including Proxaut, CP Packaging, Colussi, and last quarter with Icetro, as we continue to grow in the beverage sector. You can expect us to pursue smart strategic deals. We are navigating a period of changed capital costs and resetting outlooks, which makes us more cautious and disciplined. Therefore, you'll see us maintain our smart and disciplined approach while still focusing on growing our business.

Okay. Great. All right. Thank you.

And this will conclude the question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

Okay. Well, thank you everybody for joining us on today’s call, and we wish everybody a great day and talk to you next quarter.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.