The Middleby - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Thank you for joining the Middleby Second Quarter 2023 Conference Call. With us today from management are CEO, Tim FitzGerald, CFO, Bryan Mittelman, Chief Operating and Technology Officer, James Pool, and Chief Commercial Officer, Steve Spittle. We will open the call with management comments and then open the lines for questions. Directions on entering the queue will be given at that time. Now I'd like to turn the call over to Tim FitzGerald. Please go ahead, sir.
Tim FitzGerald (CEO)
Good morning, thank you all 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 page of our website. We're pleased to have posted solid results, reporting a record second quarter with strong performance at both our commercial and food processing businesses, and we continue to progress our residential business, while it is impacted by the challenging market conditions and destocking of inventory at our channel partners. We posted overall improved profitability during the quarter and continue to make progress towards our longer towards margin targets. Our profitability is benefiting from our focus on new product innovation to drive improved sales mix.
We are realizing efficiency gains reflecting the impact from our manufacturing investments, and we are focused on longer-term supply chain opportunities, with ongoing product design and sourcing initiatives, providing for greater improvements over the next year. While market conditions have proven to be challenging, particularly in the residential segment, the inventory destocking, which has impacted the first half for our commercial and residential businesses, we believe, will largely be normalized by the end of the third quarter, and we continue to have strong engagement with our customers across all three of our foodservice businesses. Our new product introductions have accelerated over the past several years as we target growing market trends and launch game-changing innovations, addressing customer challenges of labor, speed, energy, food waste, and sustainability.
In our commercial food service segment, we've expanded our electrified and ventless cooking solutions, developed new and exciting ice and beverage offerings in a large addressable market, and established Middleby as a leader in controls, IoT, and automation solutions, positioning ourselves to capture the future of the industry. At Residential, we have significantly broadened our portfolio of indoor and outdoor premium brands with industry-leading designs, a pipeline of innovation addressing the growing demand for energy-efficient electrified products, and with initial launches of connected equipment, with more to come. At Food Processing, we have executed on our strategy of becoming a leading provider of full-line integrated and automated solutions for the protein and bakery markets, while successfully expanding into new markets such as bacon, cured meats, alternative protein, and pet food.
Through our substantial go-to-market investments, we're creating greater awareness for our brands, product portfolio, and the latest innovations with a growing pipeline of customer opportunities. The investments we have made in our innovation centers have proven to be a strategic asset for our businesses. The traffic at our commercial, residential, and food processing showrooms continues to increase. We now have a total of eight innovation centers. We have invested heavily in training with our channel partners, and our world-class culinary teams are engaged daily with hands-on customer demonstrations. We are realizing the benefits from deepened relationships with our sales partners and have developed important new customer wins, demonstrating the value of these strategic investments. We're excited to have most recently opened our flagship residential showroom in Chicago, featuring the latest designs and innovations across our entire indoor and outdoor Middleby brand portfolio.
Since our June opening, we have quickly booked the calendar with customers discovering all that Middleby Residential has to offer. We're confident these investments of today are translating into the early chapters of a long-term impact and growth trajectory for all our food service brands. In the quarter, we also completed several acquisitions with the additions of Blue Spark and Filtration Automation. Blue Spark expands our software development and in-house controls manufacturing capabilities, extending our lead in digital controls and IoT, an area we're confident will provide Middleby with a clear competitive advantage as automated digital solutions are implemented in the commercial kitchen. While Filtration Automation furthers our strategy of developing best-in-class, full-line automated solutions, adding a patented oil filtration technology, providing our customers with operating cost savings and improved food quality with our now expanded frying solution. In early July, we also completed the acquisition of TERRY Water Solutions.
The TERRY chemical-free, biodegradable water filter solution provides for improved equipment performance, reduced maintenance, and consistency in food quality, along with ice and beverage. The combination of the TERRY Water Solution with our portfolio of food, ice, and beverage equipment provides for a better customer experience, along with significant growth opportunity in a sizable and attractive after-sales market. Just last week, we announced our most recent acquisition of Trade-Wind, a manufacturer of residential ventilation, complementing our portfolio of indoor and outdoor cooking brands with an expanded offering of unique designs and custom ventilation solutions. Our critical strategic investments in innovation, go-to-market capabilities, and acquisitions continue to build upon our competitive positioning in the marketplace and further strengthen each of our three industry-leading foodservice businesses.
Now I'll pass over the call to James to spotlight more on some of our most recent product launches that address the growing electrification trends and the demand for automation in the kitchen. These new product innovations are also highlighted in our investor slide deck. James?
James Pool (Chief Operating and Technology Office)
Thank you, Tim. Today, I'll discuss some exciting developments in our product lineup, focusing on sustainability and electrification in the residential space. La Cornue, Rangemaster, AGA, Novy, and Viking have recently launched or are launching a full suite of induction products for homes. These offerings provide our residential customers with the same benefits that our commercial customers rely on today: safety, speed, precision, performance, and sustainability. Additionally, CookTek, one of our commercial brands, is introducing a few unique products for the residential use, such as a drop-in induction wok. Middleby is also proud to bring the most extensive lineup of induction range tops and ranges to the market, with designs ranging from classic French to strong American commercial. Novy is introducing an innovative undercounter product called the Invisible Hob, which allows users to cook directly on their countertops.
As before, you can find these new products in our investor deck. I've also included a slide that compares the benefits of induction versus electric and gas cooktops, highlighting the near perfect efficiency that induction yields, along with a brief explanation on how induction works. Now, let's revisit a highly successful product that continues to gain traction in the commercial space, the Taylor NexGen Grill. While it has been the grill of choice for a few high-volume quick service restaurants for the past couple years, the general market introduction of the NexGen Grill continues to generate strong interest and adoption among our customers, especially those who have had the chance to come experience the grill's capabilities firsthand at our Middleby Innovations Kitchens automation pod at NAFEM and the NRA shows. The NexGen Grill brings embedded automation through active compression cooking, allowing for cooking from both sides simultaneously.
With its continuously variable gap control, this innovative cooking method offers next-generation precision. The NexGen Grill can control its platen gap or compression with an accuracy of 0.005 in and a platen parallelism within 0.010 in. This level of precision enables our customers to achieve consistent cooking back to front and side to side, dramatically improving consistency and reducing cook times up to 80%. Furthermore, this automation significantly improves food quality by reducing instances of over or under cooking, thereby ensuring safer offerings and minimizing food waste, ultimately enhancing our customer profitability and consumer satisfaction. Before I conclude, I'd like to give you a glimpse of what's coming up. In the next quarter, we will focus on new products slated for launch in Q4 and Q1 of 2024.
Expect exciting introductions such as a rapid cook oven from TurboChef, a groundbreaking frying innovation from Pitco, and a new residential platform from Viking, consisting of cooking, refrigeration, dishwashing, and built-in accessories. Thank you. Now I'll pass it over to Bryan.
Bryan Mittelman (CFO)
Thank you, James. I'm excited to be reporting these record results from our Blodgett facilities. Before I get to discussing the past quarter and some record results, I'd like to look back a lot longer. During this past quarter, Blodgett celebrated its 175th year of making ovens right here in Vermont. This is certainly our oldest domestic company, and I have not attempted to estimate how many pizzas and cookies have come out of their ovens, but I know they are responsible for my favorites. Also, when Tim began executing our M&A strategy at the beginning of this century, the process began here. As we look forward, Blodgett innovations are helping to lead the way, so I want to thank the entire Blodgett family for helping build the foundation of Middleby and for leading the charge as we reach new heights.
Speaking of new heights, Q2 was a record quarter, our highest revenues ever. They well exceeded $1 billion. In spite of continued challenging market conditions, our organic adjusted EBITDA margin was 22%, with nearly $229 million of adjusted EBITDA having been generated. On a last twelve-month basis, we are at $885 million of adjusted EBITDA. While our total organic revenue was down slightly, given the residential headwinds, we were still able to grow our adjusted EBITDA dollars 4% over the prior year. Our total company margins expanded 130 basis points, and all the margin values I will discuss hereafter are on an organic basis, meaning excluding any acquisitions and foreign exchange impacts. GAAP earnings per share were $2.16.
Adjusted EPS, which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation in the back of our press release, was $2.47. Commercial food service revenues were up nearly 3% organically over the prior year. The adjusted EBITDA margin was 28%, over 250 basis points ahead of the prior year. We are very pleased with how margins have continued to evolve as we see benefits from an improved product mix, from our capital investments, from our operational improvements as we integrate acquired businesses, as well as our constant focus on costs and driving pricing in response to inflationary pressures. In residential, we saw an organic revenue decline of 27% versus 2022. The adjusted EBITDA margin was nearly 14%. Food processing continues to perform very well.
Total record revenues were nearly $189 million, an increase of nearly 27% organically. Our adjusted EBITDA margin was almost 22% for the quarter, up 270 basis points over the prior year, and we are at just about 23% for the year. Our operating cash flow generation was $62 million for the quarter, and a rather strong $154 million for the first half of the year, a $64 million year-over-year increase. During the quarter, we invested approximately $23 million in capital expenditures and $26 million on acquisitions. Looking at the past 12 months, our cash flows were approaching $400 million. Seasonally, second half cash flows are even stronger for us.
We look forward to continued strength in cash flows in the back half of the year, driving higher cash conversion rates as we realize further working capital improvements. This should result in, for the full year, having operating cash flows exceeding net income. As we closed Q2, our total leverage ratio moved down to 2.9x. Our covenant limit is 5.5x, we currently have over $2.3 billion of borrowing capacity. While we are very pleased with how we performed in the first half, especially given notable, notable headwinds, we anticipate that the second half of 2023 can be better than the first half. Even more importantly, we remain bullish as we look out, look out over the next few years and tirelessly work to increase shareholder value. Let me spend a little time on the very near-term outlook.
Starting with residential. Demand in the marketplace obviously remains well off the peak values or the peak levels seen in the first half of last year. Challenging market conditions persist, and these extend beyond the U.S. The U.K. is a meaningful market for us, where inflation, interest rates, and the resulting consumer behavior are headwinds. Q2 should hopefully be the trough for resi. As we consider the recent positive momentum in order trends, we think the business can hit an inflection point coming out of Q3. Nonetheless, looking at Q3 sequentially, we see sales down modestly from Q2. Seasonality and absorption impacts will challenge margins, but they should remain at least double digits. To finish the year, we do believe the fourth quarter should be stronger than the third and should deliver year-over-year growth.
For food processing, we obviously posted a very strong second quarter, revenues were higher than we had anticipated when we discussed this segment three months ago. Our backlog remains strong. We are seeing strength in many markets we serve, including cured meats and buns and breads. However, some areas are facing headwinds, especially in poultry and bacon, where the underlying food costs are high, we expect this may improve in the short term. As we look at these factors, delivery schedules, seasonal impact on operations, as well as product mix, Q3 performance will be down from Q2 and likely around Q1 levels. Nonetheless, Q3 will deliver year-over-year revenue growth and margin expansion. Q4 will be stronger than both Q3 and the prior year, 2023's second half should be better than the first half.
For commercial, when thinking about near-term performance, we believe it is important to note that Q2 revenue and profitability also exceeded our expectations based on our outlook from a quarter ago. Accordingly, I expect Q3 to be fairly consistent with Q2. We expect the inventory destocking that we mentioned during the call last quarter to be behind us after Q3. Q4 should be even stronger than Q3. This, too, results in a better second half of the year. Putting the three segments together then, when looking at the total company potential Q3 performance, revenue and earnings will be lower than Q2 due to the lumpiness in FPG and the anticipated bottoming out in resi, before an anticipated stronger fourth quarter for all segments and the company in total. I reiterate that on a total company basis, we expect Q4 to be stronger than both Q2 and Q3.
This would result in total company growth for fiscal 2024 over 2023, despite the challenges in residential markets. As I look across our entire organization, I see innovations being delivered, and we are uniquely addressing customer needs. Our profitability and cash flows continue to drive our unmatched ability to innovate, to add new capabilities, to develop stronger sales and go-to-market processes, to improve our systems and modernize manufacturing, to enhance and expand our service, and to grow our reach globally. From Vermont to California, from the U.K. to China, our teams are fully committed to continue delivering strong results. We all come to work every day hungry and thirsty for greater success.
We remain excited about our prospects for a long time to come. We have all the confidence in the world that we will continue to reach new heights. Thank you, and we'll now take your questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question is from Saree Boroditsky of Jefferies. Please go ahead.
Saree Boroditsky (SVP of Multi-Industrials)
Thanks. Good morning. I wanted to see if we could quantify the impact of destocking on the quarter and then how you're thinking about it for the full year for both segments. I think we could argue that in a flat demand environment, this destocking should really be a tailwind into next year. If you could help us size that, I think it'd be very helpful for people. Thanks.
Bryan Mittelman (CFO)
Hey, Saree, it's Bryan. You know, given the Middleby way, I'm not gonna offer you, you know, specific numbers, you know, to size that. You know, I think it's important to consider, you know, as you know, overall what's happening in the market and the results, you know, we put out there, right? Q3, I'm sorry, Q2 is really strong. You know, and I commented that, you know, we expect, you know, Q3 to be, you know, similar to, to Q2, and I'm starting with commercial here, you know, given what's happening, you know, in the market with our, our dealers and customers about their, about their levels. Then, you know, Q4 does improve.
You know, as we've noted, based on the trends and the customer needs, you know, we do think it does present a, you know, a tailwind, beyond when we get past the third, the third quarter. As you think about the, you know, the residential markets, obviously, they're challenging these days and, you know, in a variety of, of product, you know, categories. Certainly, you know, our customers, the dealers, the retailers are being, you know, cautious in managing their balance sheets as well. Q3 is often, a seasonally, you know, somewhat weaker, quarter as well for a variety of our products within the, you know, residential, segment. That's where we think, you know, things do start to pick up in Q4, you know, for us.
Saree Boroditsky (SVP of Multi-Industrials)
Maybe phrasing the question a different way, could you go through what you're seeing from a sellout perspective in commercial foodservice and in residential?
Tim FitzGerald (CEO)
Yeah, I, Saree, I think we're gonna have a hard time quantifying it the way, the way you would like. I would say, you know, the impact is more significant in residential than commercial. Certainly, we, we think that the, that our channel partners it's a headwind that will go away, and then I think the channel partners will be a little bit more cautious in terms of how they reload stock in going to, to next year, so then it'll be kind of, become more neutral. I think as you're alluding to, it'll become more of a tailwind as we kind of, you know, move into next year, particularly in the, you know, in the back half. We don't have, you know, there's a lot of brands and, and you're kind of across those, you know, those two segments.
You know, when we have, you know, engaged with the partners on commercial, there's pretty strong sell-through. I mean, I think that's one of the things that gives us, you know, confidence, as we're closer to them than ever, and really understanding what is selling through and how we kind of fit into their business plans. Certainly, I think there's two aspects there. One is kind of the general market, and then there's the chain. The general market, I mean, we, we kind of understand where inventory levels are with our, our channel partners, and we think we're, we're kind of nearing the end of that, as I kind of said in the comments at the end of the third quarter.
With the chains, I mean, I think there's a lot of public information out there where you can see store openings and plans are pretty strong. There's a little bit of inventory, you know, in the channel as they wanted to make sure that, that, they had the equipment to ensure that they could execute on those plans. You know, so I think we, we feel pretty good about the end markets and commercial and certainly where we're situated there. You know, residential, I mean, certainly as you kind of, you know, pull it apart, you know, the biggest impact is on the outdoor, you know, the outdoor grill brands. You know, we, we think that we'll be in a much better position as we exit the year.
We do, you know, actually, believe we turn positive in outdoor grills as we, we hit the, the fourth quarter because we really started to see a lot of the impact in the, you know, the grill category, at the end of, of last year and some of the dynamics there. There's, there's a little bit of color around that. I know it's not quantifying it, you know, specifically. Certainly, you know, feel like we finished the year in a, in a pretty good place, and it kind of sets a, a pretty good, you know, backdrop for 2024.
Saree Boroditsky (SVP of Multi-Industrials)
Appreciate the color. I'll leave it there. Thanks.
Operator (participant)
The next question is from Mig Dobre of Baird. Please go ahead.
Mig Dobre (Associate Director of Research)
Yes, good morning. I wanna stick with this topic that Saree brought up, destocking. Just to be clear here, is the destocking occurring, you know, in the general market with distributors and such, or is it happening with some of the QSR customers? It's kind of sounded like it's happening with both. I'm not clear as to how much visibility you have in terms of where these inventories are and whether or not, you know, you can be firm in your assessment that, yeah, by the end of Q3, this problem is really solved.
Tim FitzGerald (CEO)
Yeah, we, we, we don't have perfect visibility, right? Like, we don't, you know, have the inventory that's in the channel, but we're, you know, we're heavily engaged with the channel. I think we, we, we get a lot of indications and, you know, sharing of, of certain numbers, particularly within the larger areas. I mean, I think we do have some pretty good visibility. Yes, the issue is, you know, has been in both. In the general market, it tends not to be our product. I mean, I think they, they, you know, as we-- you kinda went through supply chain, a lot of, the channel would get their hands on anything that they could, right?
I think it, you know, much like, much like our business, you know, people, people want to normalize their, their inventory. As they work through, you know, the inventory and maybe destocking, you know, some other products that they wouldn't have, you know, bought under ordinary situations, that'll kind of get, you know, they'll start, they'll start to kind of drop those orders back with us and then, you know, perhaps, you know, move to some normalized level of stock with us. That is kind of what we've seen in the, you know, the marketplace.
Yeah, with the chains, I mean, I think they're carrying a little bit more of inventory that they, they had in the past, but I think, you know, given where we see their growth plans versus what we think is in the, the channel, I mean, I think we do have a pretty high level of confidence that this, this is, you know, by and large, all moved through, certainly by the end of the year, but, you know, largely by the end of the third quarter. I mean, it'll, it'll. You know, we think we got one more quarter to go here, and then certainly, becomes, you know, a nominal, you know, headwind versus what, what it's been in Q2 and think we'll still have at the beginning of Q3.
Mig Dobre (Associate Director of Research)
When, when you're talking about a headwind here, you know, has this destocking resulted in a headwind to your shipments, so your realized revenues in the quarter, or is this a headwind to your bookings and orders?
Tim FitzGerald (CEO)
I, I would say both. Yeah, because, I mean, I think, you know, we didn't touch on lead times, but, I mean, I think, you know, again, we've got a lot of brands and, you know, the world is still resettling to normalization. If you, if you kind of look across much of our portfolio, we're back to very normal or reasonable lead times. That is, they're still out a little bit in a few categories, so, you know, but, you know, let's say for 80% of the portfolio, orders is starting to equal, you know, sales kind of on a normalized basis.
Mig Dobre (Associate Director of Research)
Right. That's kind of what I was trying to get at, because if, if, if I'm looking at the last reported backlog data that you've given us for commercial foodservice at the end of 2022, that was, call it, $755 million. Pre-COVID, when lead times were normalized, I mean, backlog was less than $200 million. I'm sort of curious as to how you think about this dynamic for 2023, where backlog is going to be exiting 2023 as, as these lead times have normalized. Related to this, does this backlog burn then become a headwind for production because you have to normalize your own production into 2024?
Bryan Mittelman (CFO)
Yeah, you know, this, this is Bryan. I mean, obviously, our. Well, our backlog continues to be, I'll call it as, you know, an elevated level when you make those comparisons to pre-COVID times. You know, I, I, I don't think, I think you're getting after, you know, what's gonna be, you know, the absorption impacts from bringing down the backlog to what I would kind of say, and, you know, air quotes, "a normal level is." We don't think that will have a, a meaningful, you know, negative impact on absorptions.
rtainly we expect, you know, the new, you know, normal to be higher than it was pre-COVID, you know, times. You know, given inflation, given our, our, our business is larger, and, you know, how our relationships have changed with the customers, given the, the growth that they are still, you know, going through over the next, you know, coming years in terms of expansion, just leads to ordering patterns that are, you know, more ahead of their needed delivery date than it used to be, right? We're, you know, a backlog for, again, focused on commercial here, used to be closer to a quarter of a quarter. You know, we'll still see where the new normal is.
I'm not sure that we've, you know, know exactly yet, but I'll say I'd expect it to potentially be closer to, you know, half of a quarter in the backlog. And again, given our current backlog levels, given, you know, some, you know, supply chain challenges in a few narrow areas, you know, I, I don't think we're ready to yet say we are, you know, completely in, in normal times, but that's a little bit of an indication how I think things will, you know, play out over the next, you know, 12-24 months.
Mig Dobre (Associate Director of Research)
One, one final question. I, I apologize for insisting on this. I, you know, I get this question a lot from investors. If, if I, if I take what you just mentioned a moment ago, it sounds to me like by the end of 2023, clearly backlog is going to come down relative to where it exited 2022. Implicitly, what that means is that your shipments have exceeded your order intake for 2023. Is it fair for us to assume that demand just catches back up in 2024, and you won't have an impact on production? Will you have to adjust production into 2024? Again, if, if nothing else changes. Thank you. I'll, I'll finish there.
Tim FitzGerald (CEO)
Yeah, I, I think, it's the effect of normalization. We are gonna have a lower backlog as we exit 2023 than 2022. There was a lot of orders that, you know, got pulled ahead, and you would have had periods where our order rates significantly outpaced our shipments as you went through the last several years, right? I mean, I think, you know, some of this has been, I'll say, normalized by our production rates. As you kinda go through the, you know, the back half of this year, you know, backlog will, you know, normalize. The inventory in the channel will normalize, the order patterns will normalize, and I think we'll, you know, fundamentally, see order patterns and shipments that will kind of match the, you know, the demand.
I mean, I think that's where we look at what's happening in the marketplace and the, the strength of what we see with us in the dealer channel, where we're at with the chains, you know, certainly some of the, the business opportunities that we are developing with new customer wins, new products, et cetera. I mean, I think that's where we're, you know, and obviously, you know, as mentioned, you know, the, the chains are healthy with their store opening, you know, plans. I mean, I think that, you know, we believe, you know, yes, there are all these moving, you know, pieces. That's kind of the world of disruption and supply chain that we've all lived through in the last several years.
We see that kind of being in a, a much healthier, normalized, you know, situation going into 2024. I think the, the backlog coming down is not necessarily a headwind for us, and I think that backlog is still a healthy backlog relative to where we would've been in a pre-COVID period.
Mig Dobre (Associate Director of Research)
Appreciate the color. Thank you.
Operator (participant)
The next question is from Jeff Hammond of KeyBanc. Please go ahead.
Jeff Hammond (Managing Director and Equity Research Analyst)
Hey, guys, good morning.
Tim FitzGerald (CEO)
Good morning.
Jeff Hammond (Managing Director and Equity Research Analyst)
Just wanna... I, I, I guess, cutting through the, you know, the destock noise, I'm just trying to get a better sense of underlying business momentum. You know, the QSRs have kind of been blowing and going on, on new store growth and, you know, talk about, you know, rollouts. Just, you know, maybe, maybe update us on, on what you're seeing in real business, you know, momentum. Then, you know, again, I think, you know, concerns over tightening lending standards, what you're seeing on the, the smaller independent side around that.
Steve Spittle (Chief Commercial Officer)
Yeah. Good morning, Jeff, it's Steve. Maybe I give you a couple areas of what we're seeing, just the underlying, you know, demand market. You, you touched upon, you know, the large QSRs, which we've hit before. As Tim said earlier, you know, we've been very close to them, and again, they've been very transparent around their new store opening pipeline, obviously, the back half of this year and even into the first half of next year. They've really recommitted to those plans, and so continue to see that, you know, really, you know, be a strong, you know, point of demand for us. Also, seeing the change, certainly still trying to solve for all the challenges that we've talked about over the last couple years, whether it's labor, whether it's via service, et cetera.
I think that is driving adoption of new technologies, which I do think will lead to some rollouts, you know, as we get into the back half of this year and into next year, especially. You know, Tim also talked about just the, the general dealer side of the business, which has been, I think, an area of focus more so than ever, the last year or two. You know, a big part of that has been, you know, we have more dealer, you know, trainings and dealer events coming through the Innovation Kitchen in Dallas, which I think has been a huge success for us.
Allows us to get closer to the dealer market, which again, I, I think does continue to do well for us, which I, I guess, would lead into the last comment you asked about the smaller, you know, independent restaurants, which really does fall probably more in that dealer side of the business. You know, I would say by and large, Jeff, we have not seen a lot of, you know, issues from a lending standpoint, you know, causing issues in, you know, equipment demand, so have not really run into that. Then I would just say maybe the last thing I've touched upon before, but I think it's an important one to note. You know, we talked about change, we talked about, you know, the dealer business.
The consultant side of our business as well, I, I think, is always a very good indicator of, you know, both short term, but actually the next 12-18 months of demand, whether it's around schools, institutions. I, I think that is a segment, especially the last several months, that we can track projects specifically, that I think give us some, some, some pretty good visibility into demand in those specific areas, especially for, you know, 2024.
Jeff Hammond (Managing Director and Equity Research Analyst)
Okay, real helpful, Steve. Just on, you know, the resi, i- it seems like maybe that the, the snapback or the bottoming process is taking a little bit longer. I'm just wondering if that's, you know, destocking being deeper, or is it, you know, something in the order rates? I think you mentioned, you know, U.K. I know on the grill side, Traeger was kind of out declaring victory on destock, and their stock is bouncing. Just, just maybe frame what's, what's different, versus maybe previous expectations?
Tim FitzGerald (CEO)
Yeah, I, I think, you know, the residential market has been tougher this year, right? I mean, I think interest rates, you know, continued to rise. Housing market has been a bit challenging. I mean, I think generally, you know, not that we were expecting a robust market, but I think, I think, you know, some of the headwinds there have been a little bit more, you know, challenging as you kind of, you know, again, think about the pace of interest rates in particular as you went through the front half of the year. I think that, you know, in the U.K., which is a big piece of our business in residential, has probably been even a little bit more challenged than the U.S. market.
I mean, I think those are some of the things, that we've seen as we've gone through the front half, along with the, you know, the destocking, which is, again, hits the grill business, you know, more than, you know, some of our other, businesses, which tend to have a little bit more of a, of, you know, make to, to order, aspect to it. You know, that, so that, that being said, I do think, you know, we've seen, things start to what we think bottom out. I think, you know, anytime there's a lot of uncertainty and disruption, things kind of slow in a place, and that's been the case with, with residential.
We, we've seen, you know, I'll say, some improving order trends as of, you know, late, you know, particularly in our core cooking categories. Also, I'll say, you know, the electric our electric products are, you know, as, you know, along with the market overall, and you can see we've got a lot of investment there with an exciting, you know, portfolio and certainly bringing some of the technology from commercial into residential there as well. I mean, those are areas of, you know, even some, you know, some type of growth.
I, I think, you know, it's been a little bit more challenging, but I think we're also, you know, at the beginning of, you know, inflection, healthier inventories and outdoor, a little bit of, hitting the trough and, you know, improvement. I mean, I do feel like, you know, Q3 certainly is going. You know, is the challenge, but I mean, I think we're, we, you know, kind of see what's coming in Q4 a little bit as well. I feel like we're at the, you know, approaching the turn there.
Jeff Hammond (Managing Director and Equity Research Analyst)
Okay. Thanks, guys.
Operator (participant)
The next question is from Tami Zakaria of JPMorgan. Please go ahead.
Tami Zakaria (Executive Director)
Hi, good morning, Tim and Bryan. Hope you're doing well. My first question is for the food processing segment margin, I think it was lower sequentially on higher revenues. Anything unexpected happened there? How should we think about margins for food processing for the next two quarters?
Bryan Mittelman (CFO)
Yeah, this is Bryan. You know, the second quarter margins are just impacted by just some of the nature of the mix and the projects that we delivered. You know, I, I do think the second half of the year will be, you know, at least in line, and then as we get into the fourth quarter, you know, trending better than we did in the first half of the year. I, I think if you look at the first half of the year as a proxy for Q3, that makes more sense. Then, you know, Q4 always is stronger than the third quarter.
Tami Zakaria (Executive Director)
Got it. That's very helpful. I'm not sure I missed it, but, where does your backlog stand for the commercial food and food processing segments today?
Bryan Mittelman (CFO)
Yeah, that, that isn't a specific number where, you know, we, we're regularly disclosing.
Tami Zakaria (Executive Director)
Okay, fair enough. Thank you so much.
Bryan Mittelman (CFO)
You bet.
Operator (participant)
The next question is from Larry De Maria, from William Blair. Please go ahead.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Thanks. Good morning, everybody. I wanted to follow up on processing. I know you don't want to give an absolute backlog number. Can you maybe talk to, you know, year-over-year sequential processing orders specifically? Obviously, there's some weakness in the market. Others are calling out, you mentioned some of it. Curious about the order levels and what kind of coverage you think you have over the next few quarters. Since you, I think, called out that you think the three weaknesses is temporary. Just wanted to get some confidence that, you know, that's gonna look better into 2024 or not.
Bryan Mittelman (CFO)
Yeah, you know, the, the backlog remains, you know, strong, I'll say, within, you know, on a percentage basis, still, you know, within, you know, single digits of the peak, right? I feel like we have, you know, very good coverage in many areas for the rest of the year into next year. It is, you know, a business that I'll say that is mixed, right? We have some orders that come in that are for products that they get delivered in, you know, one to three months, then we have other projects, you know, that live in the backlog for 12-24 months.
Certainly, you know, last year and maybe into the beginning of this year, were periods of very robust orders, and things, you know, with the interest rate environment have moderated. If I wanna be careful with my, you know, comments here, it isn't like what we've gone from, I'll say, you know, good to bad. I think we've gone from, you know, you know, great to still, you know, very, you know, very good. Again, there are some pockets in there that are, you know, that are challenging as, you know, we look at the underlying, besides the interest rates, you know, the underlying, you know, food costs and what that means for customer margins, have caused a couple areas, as I noted, to be a little bit weaker than others.
I guess, you know, to, to put it all together, backlog still at, you know, what I'll call very high, very strong, levels. You know, we talked about some of the lumpiness of the business that, you know, caused me to say, you know, Q3 won't be as strong as Q2, but again, you know, Q4 will be stronger. Again, you know, don't, don't think anything has fundamentally changed, for, you know, as I assess kind of a, you know, general health of the business.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Thanks, Bryan. Then I guess maybe second question on processing would be, you know, are there larger and potentially actionable, you know, M&A deals in processing out there? I know you're trying to get that up to a $1 billion business, but is there potential for larger M&A there? Or is it more likely to continue to pursue some of these smaller ones that you've done and have grown nicely?
Tim FitzGerald (CEO)
Yeah. Larry, we're really not gonna, I'd say, comment on, I mean, you know, certainly, we, we work on, M&A. That's been a 20-plus year, year history. I mean, I think I, I would just say that we see, you know, significant opportunities to continue to grow the platform, both through acquisition and organically. Feel like, there's still a long, long runway there.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Okay, fair enough. If I could just sneak one more in here.
Tim FitzGerald (CEO)
Sure.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Just to, just to clarify, in commercial, you know, we're seeing more concerns around destocking next year, but in the second half, are you underproducing versus retail as specifically, I guess, mostly, if so, in the third quarter? I'm just trying to understand how you're planning on getting that, you know, dealing with the destocking versus the big backlog, et cetera. So are we actually underproducing versus retail? And I'll leave it there. Thanks.
Tim FitzGerald (CEO)
Can you clarify what you mean by retail? I mean, do you mean by, you know, dealer inventory?
Larry De Maria (Group Head of Global Industrial Infrastructure)
[crosstalk] right? No, I mean, the dealer inventory, then there's sell-through into the retail, you know, the dealer selling into the end user. Are you gonna underproduce versus the retail, or be potentially, if we don't, then potentially pushing the inventory issue out further, right?
Tim FitzGerald (CEO)
I, I think the, the answer to that is yes, we are. I mean, I would say in both, you know, in the first half, as well as kind of what we're talking about here in Q3, is that the, the sell-through, if you wanna call it that, whether that is dealers selling to end users or maybe, you know, some of the supply chain that's in the channel that goes to the chains, we are underproducing and, and, you know, our revenues will be less than what we, you know, can, you know, believe is, is being sold to the end market, you know, and hence the, you know, some of the destocking in the channel.
Larry De Maria (Group Head of Global Industrial Infrastructure)
Clarification. Yep.
Operator (participant)
Again, if you have a question, please press star, then One. The next question is from Walter Liptak of Seaport. Please go ahead.
Walter Liptak (Managing Director and Senior Financial Analyst)
Hi. Thanks. Good morning, guys. wanted to ask about the in the resi business, you know, some of your comments about the outdoor, you know, destocking and the seasonality. I, I wanna make sure that I understand this. It's, it sounded to me like that's where you think some of the destocking has ended. If that's right, you know, what's the seasonality here? You know, like if the orders have picked up a little bit, to fill in, you know, how does third quarter look, and then how does the seasonality impact the fourth quarter?
Tim FitzGerald (CEO)
Okay. Yeah, the sell-through has not been great, but the destocking, you know, is, you know, is, is a greater impact, right, to our revenue, right? Like, both are headwinds, so, but, you know, but the inventory is continuing to come, come down. This, you know, the, the seasonality, you know, you start to get an initial load in typically in the, you know, in the fourth quarter, and then you, then you kind of get into the, you know, the, the, the heavy part of the, the grill season in the, you know, in the spring. I mean, as we've kind of gone through it this year, I mean, everybody's been a little bit off of their, you know, their inventory levels, so that's all gotta get to a normal, you know, level.
We kind of think that that, by and large, you know, is the case as you get to the back end of the year, and then in the fourth quarter, then you get into some load in for the grill season going into the next year. We do think that retailers will be more conservative in that load in going into next year. You may not be quite back to, you know, let's say, where it was in the, you know, in the past. As you start thinking about our comparatives, you know, we really started getting hit with the grills in the fourth quarter of last year. Meaning, you know, there was massive. There wasn't a load in, there was destocking, right?
I think we're gonna be, you know, largely work through the inventory, maybe not, you know, 100% because you got, you know, different brands, different retailers, different SKUs out there. You'll have, you know, a, a lion's share of that behind you, and then you will kind of move into, I'll say, maybe a conservative, you know, stocking season. That will kind of lead you to, seeing what the grill season for 2024, you know, looks like and probably, you know, healthier, orders and, and sales in that period if you have a more normalized season. That being said, also, I just, you know, we've had a lot of great new product launches, and they've been, you know, well-received.
I mean, the Konnected Joe, which, you know, James has highlighted, you know, a couple times here. I mean, that's been, you know, kind of sold through. We're trying to keep up with it, you know, right now. I mean, I think, you know, we've got the Gravity, you know, connected series on Masterbuilt, you know, as well, which we're, you know, very excited about. I mean, I think we believe that we're the, the innovators within the charcoal category, which we, you know, believe is a category that will, have some, some growth in the years to, to, to come. We've got, really, a great suite of, of, of products with, with, you know, some added launches as we go into, to next year. I mean, I think.
you know, we've got some added, floor space, there, you know, with some, deepening, you know, partnerships, there. We've also, been expanding, you know, some of our, you know, I'll say, you know, digital marketing capabilities there. I mean, I think as you kind of look forward to, getting into the, a more normalized, you know, grill, environment, we're very excited about the portfolio that, that we have. We think we've got a long runway there.
Walter Liptak (Managing Director and Senior Financial Analyst)
Okay, that's great. Okay, thanks very much. That, that helps. And then, you know, Bryan, you know, during your presentation, you called out the risk of Europe, you know, pretty clearly. I wonder if you could just help us size, you know, how, of Europe, like, how much is the U.K. versus the rest of Europe?
Bryan Mittelman (CFO)
Yeah, the U.K. is a strong majority of it. I don't have the breakdown right at my fingertips for the past quarter, but I'm sure it's in excess of half of Europe's revenue for residential.
Walter Liptak (Managing Director and Senior Financial Analyst)
Okay, great. All right. Thank you.
Operator (participant)
The next question is from Todd Brooks of The Benchmark Company. Please go ahead.
Todd Brooks (Senior Analyst and Managing Director)
Hey, good morning, everyone. Thanks for taking my questions. First is on commercial. I'm just wondering, you've talked in the past about how the cycle now is very driven by the new unit builds, that we're new build driven now, but eventually, we shift to an upgrade replacement cycle.
Just wondering if you have any thoughts on, or from discussions with the customer, with these larger chain customers largely being in a much better staffed position from a labor standpoint, and with commodity costs rapidly easing, is some of the urgency for either specific pieces of equipment that would attack, labor or food waste, or more broadly, the upgrade appetite, does it get slowed in the environment that we're in, or do you think that the appetite still is strong, when you get to the upgrade, remodel phase for the existing fleet?
Steve Spittle (Chief Commercial Officer)
Yeah, good morning, Todd. It's Steve. I don't think there has been any slowdown in, you know, customers needing to upgrade to solve for, you know, challenges. We'll specifically call out labor. Yeah, I think I'd maybe give you a nuance. When we think about labor challenges in restaurants, you know, there's a number of areas to think about. One, it is finding great employees, which, you know, has gotten, I would say, a little bit better over the last six months for restaurants. The cost of those employees, which continues to be elevated. I think the third thing I would call out, where we're actually seeing the adoption of some of these new technologies, is actually the ease of actually doing the job and the training that comes around with it.
You know, James hit the, you know, Taylor double-side grill. I think it's a great example of this because, you know, working a grill, you know, traditionally, is probably one of the least fun, you know, jobs in the back of a kitchen, right? It's nuance. There's a little bit more of an art to it than other pieces of equipment, so it's a high level of training, and obviously, you wanna make sure you're cooking your, your chicken, your steak, whatever it may be, coming off the grill appropriately, and that's also a very hot and greasy position. When you can move to something like the Taylor Grill, where you're, you know, putting the product down, pushing a button, and, and walking away, you know, you're eliminating, you know, the training, and now it becomes one of the easiest jobs in the kitchen.
I'm giving you that as a nuance of, even though parts of labor, you know, may be getting better, there are still major, you know, challenges that every restaurant faces in terms of, of, of labor and training. I think to answer maybe your second question, you know, we still do see the, the new store builds, I think, continuing on a strong pace, you know, back half of this year into next year. I do, I do think you still have that pent-up demand that we've talked about, both in replacement and upgrade, that I do think you start to see more of that kick in. You'll certainly, you know, the first half and well into, into next year.
Todd Brooks (Senior Analyst and Managing Director)
That's great. Thanks, Steve.
And then [crosstalk]
Tim FitzGerald (CEO)
I, I think Steve answered it well, but I'm sorry, I'm just gonna add. Even though staffing has improved dramatically, turnover is a big issue, which kind of leads to Steve's point, right? Because you bring people in, and they are, they're, they're untrained, right? That's, it was always a major challenge, it's even a bigger challenge today, and I don't think most of the restaurant customers believe that is going away. That's, again, where you need to have smarter, easier-to-use, automated equipment. The other thing, which is maybe tied, you know, tied to that, and you're kind of challenging today, you really need if you have labor, the speed of service, which has always been something we've talked about, has come back in spades, right?
I mean, they, you know, as you think about delivery, drive-through, more throughput in smaller footprint, that is a major issue in a lot of, a lot of customers today. I mean, I think a lot of the solutions that we have solve for that problem as well. You know, hence, they're continuing to seek out the automation.
Todd Brooks (Senior Analyst and Managing Director)
That's great. Thanks to you both. Then just a final question. As you're looking forward at your commodity basket, what's, what's the picture look like for, A, availability through the supply chain, but B, are you seeing any early signs of relief that you'd want to point us towards that could be margin-enhancing as we go through the back half of the year? Thanks.
James Pool (Chief Operating and Technology Office)
Hi, it's, it's James. I think by and large, you know, we still see pockets of, you know, issues in supply chain, and they typically are around, you know, electrical items, you know, some motors here and there. But also just kind of around the, the legacy controls, where you've got, you know, kind of 10, 20 year old, you know, silicon on the board. Those tend to be, you know, the items that, you know, slow us down. The general availability of, you know, steel, copper, things like that, have been, you know, fairly strong. We don't see that as a, as a, as a headwind anymore.
It's just kind of these, these nagging legacy, you know, components or, you know, specialty, you know, products that are kind of highly customized motors, can tend to be, you know, a, a challenge. That's kind of our, you know, guidance on, you know, how we see, supply chain affecting us and, you know, kind of 2024, pockets here and there, but generally, you know, good availability.
Todd Brooks (Senior Analyst and Managing Director)
Any outlook on kind of cost for the core metals, things that have become more readily available as we are headed into 2024?
James Pool (Chief Operating and Technology Office)
You know, yeah, I think we, you know, continue to see them at the levels they are or, you know, you know, going down, you know, slightly.
Todd Brooks (Senior Analyst and Managing Director)
Perfect. Thanks, James.
James Pool (Chief Operating and Technology Office)
Yep.
Operator (participant)
The next question is from Brian McNamara of Canaccord Genuity. Please go ahead.
Brian McNamara (Managing Director and Senior Analyst)
Hey, good morning. Thanks for taking the question. I just want to circle back on grills. I know, Bryan, I think you had mentioned, I guess, sell-ins a little bit below, kind of what you were expecting or sell through. I'm just curious, do you think that's just primarily driven by simply brand awareness? Like, you know, the are-- the checks that we perform, you, you talk to some of your retail partners and grills, and, and half of the associates don't even know of the brand or know that they're in the store. I'm curious, you know, that to me, that sounds like an opportunity, but I'd love to hear your thoughts on that. Thanks.
Bryan Mittelman (CFO)
That was, this is Bryan now, but it was Tim, who was talking about the sell-through before. You know, I, I, I think on, you know, on the grills, you know, overall, I mean, certainly, you know, we are, you know, a smaller brand than some of the other ones that are out there. We think that gives us, you know, tons of, of growth opportunity. I mean, w-we do look at stats around, you know, impressions and internet, you know, traffic to our sites, and we are seeing really great, you know, trajectory, you know, of our, of our brands. As, as Tim noted, you know, the Konnected, you know, Kamado is selling through, you know, really, really well.
I, you know, I think you, you get after, dare I say, you know, part of the reason, you know, we're in this space, that there, that there is still growth opportunities out there. There's still, you know, positive trends around, you know, charcoal and all the, the benefits that, that comes through that. I mean, again, this gets after why we are, you know, bullish for things, for, for a long, you know, period of, of time to come, you know, separate from, you know, how to manage, you know, inventory levels over a relatively short period of time.
Tim FitzGerald (CEO)
I think the comment is, you know, I mean, I think it has been a softer grill season. If you, if you listen to, you know, a lot of the major, you know, retailers in their calls, right? I mean, I think that's true for a lot of product categories, right? It's not just, you know, the, the, you know, the, the grills. We are a relatively new brand, right? And we, you know, are expanding, you know, the awareness, and we do think that there's a greater attraction for innovation and, in some of the, you know, the charcoal categories. I mean, certainly, you could talk to, you know, one or two, and we may be new on the floor, and we're not in every door yet as well.
I mean, I think that's, you know, part of the growth opportunity as as we're coming into, you know, retailers. We may not be across the whole system, but we do expect that, you know, we'll, we'll, we'll show up in more and more locations in that system, kind of as the inventories normalize, and then that kind of, you know, provides an opportunity for them to display kind of what they would, want to do on a go-forward basis.
Brian McNamara (Managing Director and Senior Analyst)
Thanks a lot, guys. Best of luck.
Bryan Mittelman (CFO)
Thank you.
Operator (participant)
That is our last question for today. Now, I'd like to turn the call back to management for closing remarks.
Tim FitzGerald (CEO)
I'd just like to, once again, thanks everybody for joining us on today's call. We look forward to speaking to you after the end of third quarter.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.