Earnings Call Transcript - MIDD Q2 2024

Operator, 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; 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. Please note this event is being recorded. I would now like to turn the conference over to Mr. FitzGerald. Please go ahead.

Timothy FitzGerald, CEO

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 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. 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 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 under-penetrated 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. 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 on our business today, we believe it will ultimately lead to pent-up demand with the benefits of a recovery in the years ahead. 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 three 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.

James Pool, Chief Technology and Operations Officer

Thank you, Tim. Over the last four quarters, I've focused on the innovations within our commercial and residential brands. Last quarter, I discussed the Great 8 innovations recognized by the National Restaurant Association. In Q4, I showcased all the Middleby residential products launched at the 2024 Kitchen and Bath show. In Q3 of '23, I explored the Ice opportunities at Follett and ICETRO and projected an additional $50 million in revenue between these brands in '24. In Q2 of '23, I reviewed the Taylor double-sided grill and its operational benefits for burger chains, as well as our ongoing projects with a fast-casual Mexican food chain. For this quarter, I'll delve into our food processing group and the full-line solutions that Middleby has created both organically and through acquisitions. Today, I’ll focus on our solutions for precooked bacon and poultry, as these areas offer significant growth potential. The products I mention can be found in the investor deck referenced by Tim. Our precooked bacon line, which includes eight Middleby brands, aims to provide the best tasting, most visually appealing, and profitable bacon options for our QSR and retail processors. Central to each line is the TurboChef by Middleby or the TurboChef by Alkar, which provides outstanding product yields and quality by integrating microwave impingement and steam into the cooking process. The TurboChef achieves a 2% yield gain over other thermal and microwave systems. Another Middleby solution, the Thurne's IBS 4600 Slicer, enhances yield by up to 7% through its four independent blades and vision systems that ensure uniformity in weight and thickness. By integrating the six other brands—Vemac, Thurne, DanfoTec, MP Equipment, Scanico, and Rapid VisionPak—we can boost the yield another 4%, aiming for a total yield improvement of 13% with our complete solution. Shifting from yield boosts to labor savings, the Middleby full-line solution effectively saves about six full-time equivalents per line, with Vemac's autocomber and Pacpro's underleaving and stacking systems automating the combing and stacking of bacon. By optimizing yield and reducing labor needs, our customers can save approximately $1.3 million per line per shift annually. In terms of poultry, Middleby Processing is enhancing its full-line systems focused on trimming, breading, and frying technologies. At the core of our poultry line is MP Equipment, with its advanced water jet cutter that accurately trims poultry by using onboard vision and algorithms to minimize waste. In an upcoming call, I’ll reveal some exciting developments regarding our fifth-generation water cutting machine. Now, from trimming to the MP's new Thoroughbreader, we see improvements in breading coverage, recovery, and material utilization by 10%, resulting in about $900,000 in annual material savings. Its design enables running multiple breading types without extensive reconfiguration, thus reducing changeover times by 45% and allowing for incremental capacity gains worth about $1 million per year. Moving further along, we reach MP's fryer equipped with an automated filtration system. This integration allows us to extend the oil life significantly, yielding a reduction in expenses by 13 times, which translates to around $500,000 in annual oil savings for a standard 2,000-gallon fryer. Importantly, the Thoroughbreader enhances breading adhesion, resulting in less waste during frying, which in turn improves oil longevity. The MicronPro Filtration system operates autonomously and continuously filters, only stopping briefly to remove waste. This efficiently reduces free fatty acids and prevents oil degradation. Furthermore, the MicronPro requires no consumables, and since the filter cake retains minimal oil, it can be repurposed for pet food, animal feed, and fertilizer, making it an economical and sustainable frying solution. Middleby remains committed to investing in and acquiring technologies to ensure our processing solutions are the most advanced and cost-effective for our customers. I look forward to discussing additional advancements in the Middleby Processing Group in future calls. Thank you, and now I'll hand it over to you, Bryan.

Bryan Mittelman, CFO

Thanks, James. I'm feeling a bit hungry, so I'll keep this brief so I can grab a quick meal. In the second quarter, we generated revenue of $992 million, which is a 7% increase compared to Q1. Our adjusted EBITDA was $216 million, with a margin of nearly 22%, up 180 basis points from Q1. All margin figures discussed today are on an organic basis, excluding acquisitions and foreign exchange impacts. For Q2, GAAP earnings per share were $2.13 and adjusted EPS was $2.39. Commercial Foodservice revenues declined 3.9% organically compared to last year, but the adjusted EBITDA margin of 28% slightly exceeded the prior year. This segment faced tough comparisons due to record revenues in Q2 last year. However, recent trends are encouraging, with a 5% sequential revenue growth. Margins expanded slightly over the prior year and up 200 basis points from Q1, despite lower revenues. In Food Processing, revenues surpassed $179 million. We also faced a challenging comparison here, experiencing a 5.7% organic decline, yet it was the second-best Q2 in this segment's history. Recent trends are favorable for food processing too, with a 9% sequential growth and a strong adjusted EBITDA margin of 24%, which is a slight increase from Q1 and 200 basis points above the prior year. In residential, we noted a 6.7% organic revenue decline compared to 2023. The adjusted EBITDA margin stood at 9%. Revenues were actually higher than anticipated entering the quarter, representing nearly 11% sequential growth. We delivered strong operating cash flows of $150 million for Q2, marking our best second quarter ever, with operating cash flows over the past four quarters exceeding $765 million. Our free cash flow for the last 12 months is over $700 million, and our total leverage ratio is now below 2.3 times. Before discussing our outlook, I want to remind you of what I shared last quarter. We anticipated total Q2 revenues would increase at least in the mid-single digits sequentially from Q1 but expected it to fall short compared to the previous year due to challenging comparisons. We delivered on that expectation, achieving a 7% growth across all segments and record cash flows, despite difficult market conditions. Order trends have been encouraging, resulting in Q2 being the best quarter for orders in the past two years for the company and each individual segment. Orders were up 9% sequentially and over 15% compared to the previous year. Food Processing achieved its best order quarter ever. While Q3 orders have started a bit slower, which is typical for the season, we expect to see sequential revenue growth in the latter half of the year, along with year-over-year growth. Specifically, for Q3 in commercial, we expect revenues to grow low single digits sequentially and be generally flat compared to the previous year. Looking ahead to Q4, with improving order rates and sustained positive trends, we anticipate mid-single-digit revenue growth both sequentially and year-over-year. In food processing, we expect second-half revenues to surpass first-half and previous year levels, with Q3 and Q4 potentially seeing double-digit year-over-year increases. In residential, we are pleased to see an upward trend in orders, with Q2 outperforming Q1 and previous year levels. Though Q3 revenues may decline compared to Q2 due to seasonal impacts, we expect them to be flat relative to the prior year. For Q4, we forecast both sequential and year-over-year growth and anticipate that cost reduction measures will enhance margins to double digits in the second half of the year. Overall, consistent with our previous message, we expect to build momentum as we move through '24. We look forward to Q3 being stronger than Q2 and predict revenues will again exceed $1 billion and continue to increase in Q4. We also believe we will achieve year-over-year growth for the third and fourth quarters. We are growing revenues with solid margins and generating strong cash flow, demonstrating our ability to deliver robust results even in challenging market conditions. Reiterating my prior remarks, we remain focused on operational efficiency and resource management. We are committed to controlling and reducing costs while expanding our margins. Our customers are increasingly adopting our solutions, and our innovations and operational strengths are driving our improved results. We look forward to returning to growth in the latter half of the year and beyond. Thank you, and we will now take your questions.

Operator, Operator

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

Mig Dobre, Analyst

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, CFO

Thank you, Mig. Overall, things are going well in food processing. We operate in about 15 full-line solution areas, so there are various situations to consider. You mentioned protein, but I want to quickly touch on bakery before moving to protein. Bakery has been consistent after a strong previous year. Buns have performed very well, although bread may be a bit weaker. Overall, performance remains steady following last year's strong results. On the meat side, costs have been rising, but we've seen improvements in poultry. We're doing well there, and we expect red meat and pork to gradually improve over time. It takes longer for supply to adjust due to the cycles involved. Poultry is currently our strongest sector, and we've also seen hot dogs recovering well in certain regions. Looking at our overall order trends, they reflect not just individual product segments but also our capability to solve problems and enhance efficiency, as highlighted by James. We made significant progress on margins last year and anticipate further improvements this year. We're generally meeting our target levels, considering a multi-quarter perspective rather than focusing on just one. Many have asked about raising targets; as we analyze market dynamics, we expect continued expansion throughout the year, but we're not predicting major jumps beyond the already strong performance.

Mig Dobre, Analyst

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

Timothy FitzGerald, CEO

To add on to what Bryan mentioned, I believe many of our new products are performing well, particularly our full-line solutions and our collaboration with customers to offer improved comprehensive solutions. This approach has proven effective and is helping us penetrate new markets. As James highlighted, in the bacon segment, we were not significant players years ago, but now we have a strong position due to the solutions and technology we've developed. In poultry, we're still in the early stages, which generates excitement as we consider our range of products from shredders to water jet cutters to frying lines, as well as our TurboChef, which fits into these offerings. We now have numerous solutions that allow us to explore new applications. Another point is that we haven't really secured the large projects this year. The positive aspect is that we are seeing considerable demand even in the absence of these substantial greenfield projects. This situation stems from the cautious environment concerning interest rates and ensuring our customers understand the dynamics of end-user demand and product costs. This observation is noteworthy for us because such projects usually drive significant growth in a year. It presents both a good and a challenging situation; while we hope to land some of those larger projects, we have managed to continue growing without them.

Bryan Mittelman, CFO

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 will 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 prior year levels. But again, it may ebb and flow a little bit from quarter-to-quarter.

Mig Dobre, Analyst

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 there something else going on here in terms of end market momentum that we need to understand?

Steven Spittle, Chief Commercial Officer

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 six, 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 in 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, Operator

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

Brian McNamara, Analyst

First off, Lamb Weston is an important supplier to QSRs. They gave some pretty negative guidance for last week. McDonald's 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, Chief Commercial Officer

Yes, Brian, that's a good question. Despite some challenges facing a few of the Quick Service Restaurants at the beginning of the year, the issues they encounter haven't disappeared. In fact, they seem to be more prominent than ever. The challenges we've discussed, such as rising labor costs, utility expenses, service fees, product consistency, and franchisee profitability, are still very relevant. These factors point to the solutions that Middleby can provide. Even with these challenges, I can say that our discussions and the pipeline of products we have with our QSR customers remain very strong. Additionally, while QSRs are a significant part of our overall end-user segment, we are also seeing strength in other areas like fast casual dining, where many customers have been quicker to adopt some of the new technologies we have. Overall, there have been fluctuations at the beginning of the year with the QSRs, but it's important to note that they remain committed to opening new stores, and the products in our pipeline continue to be robust despite the challenges they have encountered.

Brian McNamara, Analyst

Great, that's helpful. It was encouraging to see significant sequential improvement in residential, and the directional guidance indicates we should see a return to growth in Q4. Could you provide more details on that improvement, specifically whether it came from kitchen appliances or grills, and what we can expect in the second half by category?

Bryan Mittelman, CFO

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, Operator

Your next question will come from Jeff Hammond with KeyBanc.

Jeff Hammond, Analyst

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, Chief Commercial Officer

Jeff, you asked great questions. Regarding new store openings, I do believe that certain macroeconomic factors are contributing to delays in these openings. This is compounded by permitting and labor challenges involved in getting restaurants operational. I have mentioned previously that we now have much better visibility and transparency regarding new store openings with our major chain customers. While there may be delays in some chains pushing openings to future quarters, I think the overall pipeline remains robust, with many stores still aiming to open both domestically and internationally. It's important to remember that prior to COVID, there were no new store openings with these major chains, making this a relatively new development over the last couple of years. Concerning the pent-up replacement cycle you referred to, I believe we are beginning to see some of that emerge. I expect this will continue to drive demand into next year and possibly into 2026, particularly considering that we had pent-up demand before COVID, which was delayed due to the pandemic and supply chain issues. The emphasis on new store openings has also pushed some of this demand further out. We are noticing some impact in order pickups during the second quarter, but I believe it will be a more significant factor in the latter half of the year and definitely into next year.

Jeff Hammond, Analyst

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, CEO

Yes, I believe it was a combination of factors. We have a very strong pipeline of deals that hasn't changed for quite some time, which presents significant opportunities moving forward. We expect to see activity increase in this area. Over the past year or two, valuations became misaligned, and there was a disconnect between our business projections and those of the companies we were engaging with. However, that discrepancy is now beginning to align. Additionally, we've completed about 30 acquisitions in the past three to four years, which has allowed us to focus operationally on those integrations. We continue to identify synergies that could positively impact both our revenue and bottom line, and we are in a strong position given our balance sheet strength and cash flow generation, along with the current positioning of some competitors. Consequently, we anticipate being more active in acquisitions than we have been in the last year.

Operator, Operator

Next question will come from Tim Thein with Citigroup.

Tim Thein, Analyst

I apologize for joining late and for any confusion caused.

Timothy FitzGerald, CEO

Sorry, just to clarify from the right. Raymond James is asking us a question. All right, make sure we got the right one, Tim. Proceed, Tim, thanks.

Tim Thein, Analyst

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

Timothy FitzGerald, CEO

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

Tim Thein, Analyst

I apologize if I joined a second line, so I hope this isn't redundant. I have two questions regarding the commercial business. The first pertains to the competitive dynamics in the technology and connectivity space. It seems that one of your larger competitors is backing away, and I’m curious if you believe this reflects customer demands or lack thereof. Has there been a decline in movement or acceptance in that area? If not, could this perhaps provide you with some opportunities? I would like to hear your thoughts on the connected kitchen segment and what you are observing there. I have a follow-up after that.

Timothy FitzGerald, CEO

Yes, I believe it's more about the latter. The more revolutionary the innovation in technology, the longer it typically takes to enter the market. We've made significant progress over the past year, particularly in launching more products connected to The Middleby One Touch control that James introduced, which has been quite transformative. We've seen a surge of new products since the start of this year, and now we have IoT ready to go right out of the box. These are substantial investments, and we often discuss them, but we are looking three years ahead, rather than just focusing on the current quarter. Technology is increasingly being integrated into restaurants, and our customers are actively seeking it. We're experiencing greater adoption rates, especially as we engage with customers at our innovation centers. Many have stated they won't purchase a product unless it is connected, which means we need to invest time in educating end users and our channel partners, while refining our ROI presentations and providing more hands-on experiences. This is gaining traction, and we believe in its potential. Looking three years ahead, we see ourselves as the leading player because other companies lack the persistence, investments, and breadth of products and solutions that we offer. This presents a significant competitive advantage that will enhance shareholder value over time. Moreover, there is a lot of current innovation as chains are focusing on adopting next-generation technology. This occasional slowdown is offset by the new products being released, such as automated grills, ovens, and induction solutions, for which we anticipate increased market uptake.

Steven Spittle, Chief Commercial Officer

Can I just also add this is Steve. One of the reasons, Tim, that I believe some others are dropping off while we are gaining momentum is that the end-user customer prefers to work with a limited number of reliable suppliers. There is no one else that can provide the technology behind the essential equipment, integrate the controls, offer an IoT solution that connects the entire kitchen, utilities, and safety, and also incorporate our own robotics or automation. Middleby can genuinely deliver all aspects of the kitchen. No one else can do that. This is why I think you're noticing a few entities that have emerged and then disappeared, as they depend on other suppliers for equipment and IoT. I believe this is driving our end-user customers to shift away from those suppliers and increasingly towards us.

Tim Thein, Analyst

Interesting. Okay. On pricing, as you consider the proposed price increase that we're aiming for in mid-June, do you think it might justify a prebuy? I'm curious if you think that influenced the order growth in the quarter at all. Additionally, how should we consider the realization of that in terms of second half revenue and margins for the commercial business?

Steven Spittle, Chief Commercial Officer

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, Chief Technology and Operations Officer

Tim, just to add on that. 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, Operator

Your next question will come from Tami Zakaria with JPMorgan.

Tami Zakaria, Analyst

I have a follow-up regarding the residential kitchen segment comment. It seems you expect sales to be relatively consistent with last year. What does that imply for sequential growth? Also, how should we consider the margin for this segment sequentially compared to the 9.1% we observed in the second quarter?

Bryan Mittelman, CFO

Tami, it's Bryan. I apologize if my earlier comments were unclear. Let me rephrase that. When considering the residential segment quarter-to-quarter, Q3 revenues are expected to be lower than Q2 but in line with the same quarter from the previous year. This is partly due to seasonal buying patterns among retailers in the outdoor space and the production and consumer spending trends for European brands. Additionally, our European operations have grown since the Novy acquisition. We anticipate that margins will return to double-digit levels in Q3 and Q4, and we hope to achieve overall double-digit margins for the year, thanks to the cost-saving measures we've implemented and the mix of underlying brands within the different segments. I hope this provides more clarity.

Tami Zakaria, Analyst

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

Bryan Mittelman, CFO

Yes. 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.

Operator, Operator

Your next question will come from Seaport.

Walt Liptak, Analyst

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, Chief Commercial Officer

Walt, that's a great question. I believe we've made significant progress, particularly in the European markets, the Middle East, India, and Asia. Regarding Europe, we have undergone a complete transformation in our people strategy over the past few years, along with investments in new markets like Germany. Last year, we opened our Innovation Kitchen in Madrid, Spain, which I believe has proven to be beneficial. We've welcomed thousands of customers to that kitchen, leveraging the success from our facility in Dallas. As a result, we are beginning to see those advantages emerge. In Asia, we have invested in our manufacturing facilities in countries such as China, the Philippines, and Australia, and those efforts are starting to yield positive results as well. In summary, our progress reflects the hard work we've dedicated over the past several years to expanding our brands, developing our workforce, and growing our customer base in these specific markets.

Walt Liptak, Analyst

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, CFO

The comments were for the segment overall. I think we've been more focused on providing guidance, but I have not broken it down at the regional level.

Walt Liptak, Analyst

It seems that both CFS and Residential channels have relatively low inventory levels. Are you still observing any kind of declines, particularly in the residential sector? Alternatively, are you beginning to notice a second wave of inventory refresh in residential as we progress further into the year?

Timothy FitzGerald, CEO

Yes. Many of our products are designed for outdoor use, which leads to greater stock in that channel. Most indoor products are more specialized and typically not kept in inventory. We are increasingly transitioning to a made-to-order model. Consequently, the channel inventories have primarily centered around outdoor products, which have mostly been adjusted. Regarding commercial products, our channel partners are being cautious. The grilling season has not performed as well as we or our customers had hoped. They are closely monitoring their inventory levels and the cost of capital, which puts them in a favorable stocking position. Overall, we are well-positioned as we prepare for restocking, and our inventory levels are healthy at this time. There is an opportunity to see how they will position themselves better for the fourth quarter this year compared to last year concerning stock levels. We are also continuing to introduce new products, both indoor and outdoor, which we are excited about. These developments, including new products, colors, and designs, particularly induction items, launched in the first half of the year will be available in the second half as well. Additionally, European brands are growing in the domestic market. Despite the challenging environment, we are still making progress.

Bryan Mittelman, CFO

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, Analyst

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

Bryan Mittelman, CFO

I'm discussing the trends we've observed over the past year, specifically looking at year-over-year order patterns. The third quarter typically presents challenges for outdoor sales. However, we anticipate that Q3 will be at least on par with last year. That said, it's not the most critical quarter; things will become more interesting as we enter Q4 when we begin preparations for the next grill season. I wanted to address your question about channel inventories. The destocking issue, as Tim mentioned, is primarily relevant to the outdoor segment, but it is not as significant a challenge as it was one or two years ago.

Walt Liptak, Analyst

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

Timothy FitzGerald, CEO

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 operating 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, CFO

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 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, 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, CEO

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

Operator, Operator

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