Good day! And welcome to the Middleby Corporation First Quarter 2023 Conference Call. With us today from management are Tim FitzGerald, CEO; Bryan Mittelman, CFO; James Pool, Chief Technology and Operations Officer; and Mr. Steven Spittle, Chief Commercial Officer. Management will begin with opening comments and then we will open the call for questions. Instructions to enter the queue will be given at that time. Now I’d like to turn the call over to Mr. FitzGerald for his opening remarks. Please go ahead sir.

Good morning, and thank you for joining us today on our first quarter earnings call. As we begin, please note there are slides to accompany the call on the investor page of our website. We are pleased to have posted solid results to begin the year, reporting a first quarter with strong performance, both at our commercial and food processing businesses, while our residential business was expectedly impacted by challenging market conditions and destocking of inventories at our retail partners. In the quarter we drove improved profitability and we continue to make progress towards our longer-term margin targets through focus on profitability of our sales mix and with further improvements yet to come through efficiency gains and supply chain initiatives. During the quarter we were pleased to have also realized meaningful reduction in production lead times across most of our businesses, as we benefit from improvements in our supply chain and through the investments made across our manufacturing operations. We're now in a significantly improved position to better serve our customers and take advantage of market opportunities. To start the year, we continue to have strong engagement with our channel partners and customers across all three of our food service businesses, with interest in our latest products and innovations offering benefits focused on energy, labor, speed and sustainability. The investments made in our innovation centers demonstrating these latest solutions have proven to be a strategic asset for our businesses. The traffic in these showrooms continues to increase as we invest heavily in training with our channel partners as our world class culinary teams engage hands-on with customers looking to evolve kitchen and food service operations. We're excited to have recently opened our latest Middleby Innovation Kitchen in Spain, now providing a resource to our partners and customers throughout Europe. In the quarter, we also continue to make strategic and financial investments in our business, investing $25 million in our manufacturing operations as we continue to retool our operations to support new product launches, increased capacity, and advance the automation within our operations. We repurchased $48 million of Middleby shares during the quarter, and we're also excited to complete the acquisitions of Flavor Burst and Blue Sparq, adding to the innovation in our beverage portfolio and expanding our in-house controls development capabilities. As we've progressed into 2023, economic conditions continue to present challenges and uncertainty, particularly as it relates to our residential segment, but we remain excited about the direction and long-term goals and confidence in the investments and strategic initiatives underway that are enhancing the competitive positioning for each of our three food service businesses. Now, I'll pass it over to James to spotlight some of our exciting recent product innovations, which are also highlighted in our investor slides. James.

Thanks, Tim. We have a few items to cover. So I'll jump in today with the FryBot. If you've heard me speak on other calls, you know that I'll often talk about the digital embedded, and collaborative automation that's driving innovation across Middleby. FryBot brings these together in a complete Middleby solution. It is the only automated fryer designed, manufactured and integrated by a single company. From the collaborative robot to the dispenser, fryer, holding and Spice Bot, the FryBot is 100% Middleby. The base FryBot as shown, is capable of autonomously dispensing, frying and seasoning two unique items at rates hitting 65 baskets per hour, depending on products. The FryBot was designed with ease of installation, meaning it can easily be rolled out to new, but most importantly, existing restaurants. The FryBot is currently in test with leading brands. We look forward to continued FryBot installations and test locations in 2023, with FryBot hitting revenue producing stores in 2024 and 2025. If you'd like to see and taste the FryBot in action, it'll be on full display at the NRA show in May in the Middleby Automated Burger and Chicken Bar, as well as in the NRA Kitchen Innovation Pavilion. At the NAFEM Show this past February, the FryBot flawlessly delivered over 1,500 orders of fries and chicken in just over two days. Continuing with the NRA show, the FryBot will be accompanied by Taffer's Tavern, a concept created by Jon Taffer featured an all-electric and [inaudible] Middleby Kitchen. The Middleby Cafe, a concept dispensing the highest quality espressos and drip coffees from the Middleby Coffee Brewery, the best baristas and best roosters in the Chicago area. Open Kitchen, Middleby Enterprise IoT platform, Middleby Electrified Innovation Alley, where we will showcase the latest electric products designed for the efficient electrified kitchen. And lastly, please look for the Hydro Rinse and the Plexor M2, additional KI Award winners in the Kitchen Innovation Awards pavilion at the NRA show. Hydro Rinse automates the cleaning of most software machines by washing, rinsing and sanitizing the machines while the machines are still assembled. The Plexor M2 is the latest modular and rapid cook and accelerated cooking platform from TurboChef. I would like to close by talking a little bit about Blue Sparq, our latest acquisition. Blue Sparq adds to Middleby’s common control strategy by helping our brands develop and launch controls faster than ever before, thus accelerating new product development across commercial, residential and food processing groups with their industry recognized capabilities in the area of UX, UI design, and embedded firmware and firmware development. Blue Sparq also brings fast PCB board manufacturing, while also being able to support volume production. We are excited to have Blue Sparq developing for Middleby. Thank you, and over to you Bryan.

Thank you, James. 2023, it started out strong for us. We posted another quarter with revenues over $1 billion, with exceptional growth in two of our segments. Our adjusted EBITDA exceeded $210 million, resulting in an organic adjusted EBITDA margin of over 21%. While our total revenue growth was rather modest given challenges in residential, we were still able to grow our adjusted EBITDA 6% over the prior year. Our margins expanded 100 basis points. 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 $1.82. Adjusted EPS, which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation at the back of the press release was $2.19. I will go through our segment results in a moment, but first I wanted to briefly note that we realigned some small operations internally, which in turn had a small impact on the composition of our segments. Nonetheless, I know some people will see differences in their models, so here are the details. We have moved approximately $4 million of quarterly revenue from the commercial segment to food processing. We restated prior periods in our press release, and the growth figures I will discuss here are based on a consistent basis. The impact will be approximately $4 million per quarter as well for the remainder of the year. But back to our segment results. Commercial food service revenues were up over 11.5% organically over the prior year, with North America up 14% and international regions growing at 5%. The adjusted EBITDA margin was 26.5%, 230 basis points ahead of the prior year. In residential, we saw an economic revenue decline of 32% versus 2022. The adjusted EBITDA margin was 13%.…

[Operator Instructions]. And our first question will come from John Joyner with BMO. Please go ahead.

Good morning. Definitely a solid start. Bryan, I was just waiting for your stories there, but they kind of let me down.

Okay. Just [inaudible] you need to let your taste buds work rather than have to hear me tell stories.

Okay, excellent. I look forward to it. So, I guess for the commercial business, I mean, are there any particular areas that you would call out? I mean it's definitely a strong quarter, but any areas that you would call out as being stronger than others or ones that maybe are performing better than kind of your internal expectations. And then, also kind of based on the conversations that you're having, right, I mean would you say that CapEx intentions by your customers lately have actually taken a step higher?

Yeah. Good morning, John. It's Steve. Maybe I'll take a first pass at it. So I think what I would maybe call out over the last quarter or two, you had talked about on prior calls, the progression of how different segments have more or less recovered since COVID. And obviously we've spent a lot of time talking on the big QSR chains, which have done so well over these last couple of years. I think what I would call out are maybe some of the other areas that are just kind of getting back to recovery. I would call out probably more the independent restaurants than some of the casual dining restaurants. And I think what I'm excited about there is, a lot of those customers are served by our dealer partners in the U.S., and I think we've spent a lot of time over the last two years getting closer to those dealer partners, giving them tools to help navigate the dynamic that we're all faced with. We spent a lot of time training a lot of those dealer customers at the MEC and so I think you're starting to see that pay off. And I think actually if you go to the pie charts there in the deck, it's an interesting nuance that you see the independence and casual dining changes tick up as a part of the overall revenue mix. And I think it's a direct correlation to what I was saying about just being closer to the dealers, but also really just seeing those segments kind of start to pick up on the recovery, if that makes sense.

Okay. Yeah, thank you, that’s helpful. And then maybe just one more on the food processing business. Bryan, I believe you highlighted that you expect 2Q to be more or less flattish with 1Q and similar to commercial. I mean the results there were probably even more impressive. But when you think about the EBITDA margins for the year, right, I mean starting at a higher level than probably most anticipated, do you expect margins there to progress? I mean, maybe you answered this already, I don't know. But do you progress sequentially higher as the year unfolds?

As you said, well thinking about food processing here, Q1 certainly was a big step up from where we had been in the prior year and to your point, was strong and higher than we may have expected. So that's why I think Q2 looks like Q1, and we can see some expansion in the back half of the year, just given how strong we’ve started. I'd say that needs to temper expectations on how much they grow from here. But obviously we have our target margin now well within sight, and again, as we especially think about the back half of the year, I think we can move up a little bit from what we – where we started the year.

Okay, all right. Well done. Thank you.

The next question will come from Saree Boroditsky with Jefferies. Please go ahead.

Hi. Good morning. Congrats on the results. So within residential, can you just strip out the performance you saw in grills versus the legacy business? How do you see channel inventory currently? And how should we think about the cadence of destocking through the remainder of the year? I believe you have much easier comps as we get to the second half.

Yeah, this is Tim. I'll kick off and then Bryan can maybe break it out a little bit. I mean, this definitely is kind of – I commented the inventory levels are higher, right. So they continue to come down. There is still inventory in the channel. Sell-through is probably a little bit lighter at the start of the year, given I'll say weather and other market dynamics. But I mean, I think it still holds true that we'll be in a much better position from an inventory standpoint in the back half of the year as it relates to grills. We are excited about a lot of the new product introductions that we've got coming out right now that digital, Kamado Joe or Konnected Joe that we've talked about in the past and James has highlighted as well, has continued promotion and penetration of the Masterbuilt Gravity Series. So, I mean I think we feel pretty good about the long-term momentum that we've got, that we think will build as we go through the back half of the year. But certainly we'll still see some of the – probably the de-stocking in the second quarter, but improvement as we go through the back half of the year. And definitely, I mean, as you look at the overall residential results, the grills had an oversized impact on residential, which was expected and certainly seen across that whole category, not only by us.

As we talked about in the last year – I mean, I'm sorry last quarter, but last year in Q1 really was really was the peak of the performance for the grills company. We talked about revenues I think being in excess of $110 million then and we're obviously down quite significantly from that. Excluding grills, residential had probably been down more along the order of 20%. We still are expecting, as we think about the grill season, I would say Q2 is right still a part of this year's grill season. And so we will – again, this is consistent with what we've talked about before, you know see certainly challenges year-over-year if you were to look at grills alone. And then you're right, the comps are certainly much easier in the back half of the year, right, because in the back half of ‘22, where it was still part of this destocking phenomena we're dealing with and so that's why we do believe grills will be better in the back half of ‘23 than the back half of ‘22. And that really gets after our comments of, as you think about residential overall as well, second half of ‘23 being better than second half of ‘22.

I appreciate the color. Then just one more, obviously commercial food service had another strong quarter. How do you see underlying demand as you might be working down some backlog here? And are you seeing any headwinds from more challenging financing conditions, especially on the franchise side?

So Saree, I would say demand more or less across the customer segments. Again, talk a little bit about the dealer side, the independent side, nice to see that coming back, but also the chains that we talked about, the QSRs continue to do well. And so I see the demand, continue there both from a new store standpoint and also starting to see some new replacement business come back, which we've talked about before. So yeah, from that standpoint I believe we're in a good position. And I'm sorry Saree, your second question.

Yeah. Just are you seeing headwinds from the challenging financing conditions?

Yeah. So it's interesting that we have had a lot of discussions with the bigger QSRs, really focused on what I'll call unit economics of making sure the ROI on the new stores for their franchisees is where it needs to be. And it's critically important for – I think for two or three reasons. If you look at the big QSRs that have aggressive growth plans, which many of them do and many of them are in international markets, how are you growing? You're growing with either the existing franchisee groups, taking on more locations, signing up for more locations or you're going out and finding new franchisee groups to expand into new markets. And so the ROI of those new stores when you're trying to attract those franchisees is more important than ever, obviously as your financing has become more expensive over the last year or two. Again, the equipment that is going into those locations, it's not necessarily about, ‘hey, what is the upfront cost?’ It's always important, but actually it's more about the ROI to open those stores and have an attractive package to the franchisees if that makes sense. So it's a very active conversation that we've had, I would say the last six or eight months with the change specific to this question and an issue, and just it supports the other plans for, pretty aggressive growth, especially in some of those international markets over the next two, three, four years.

Thanks. I appreciate the color and we'll see you at the NRA Show.

Yeah, we look forward to it.

The next question will come from Mig Dobre with Baird. Please go ahead.

Thank you for taking the questions and good morning. I wanted to go back to residential for maybe some clarification. What I heard just moments ago was that they are leaving grills to decide the core, call it Viking Aga business was down maybe 20% in a quarter. And maybe can you confirm that? And, as you talk about the business getting better overall, the segment getting better from a revenue standpoint overall, what sort of assumptions do you have embedded for Viking Aga as the year progresses, because presumably the comparisons are not nearly as easy there as they are on the grill side.

Yes. So Mig, you did hear me correctly on the residential side. I'll say it’s kind of within with and without grills. As we look at the rest of the year, the outlook I would say, if I had to pick one word and then I will expand on it, you know is kind of flat from here. We feel like we’re kind of are at a bottom. Q2 I said will be similar to Q1, same neighborhood, right. I was very specific in pointing out that we've been at a relatively consistent level for the past three quarters. I think what we're not seeing yet is outside of grills, whether really are some unique circumstances with the destocking. We're not really kicking up our expectations specifically yet, right. I don't have exact indicators that are, okay, all of a sudden next quarter is going to really change the trajectory.

I appreciate that.

I would say, I mean I think uncertain is the word unfortunately right now. I mean, we'd seen obviously the housing market being challenged all in the back half of last year. There was maybe a little bit of science here at the beginning, but the world continues to be a bit tough when rates went up. I think we also feel like we are kind of stabilized at a lower level. So I think that – I think the question is, when does it inflect up as opposed to, you know is going to continue to come down. So I mean, I think if you look at a lot of the housing stats, you know it’s expected to maybe bottom out in the middle of the year and then start seeing things pick up. So I mean, I think those were larger macro-economic trends that we can kind of take a look at and I think we would expect our business to follow. But I mean, I think we feel like we're stable here at the bottom and then we’ll kind of see how the year goes. Beyond that, we continue to be investing in our business, right. I think we have a lot of new products coming out. I would say our electric products are doing fairly well. That includes a lot of the products in the launching over the last several years, such as the Aga products that have come into the U.S., those are growing. Right now, despite the market being done, brands like La Cornue are doing very well. We've got other new products that are coming out, that are reduction based as we kind of go through the back half of the year. And kind of along the comments also about the investments that we're making in go-to-market activities. We've had a lot of great traffic at our showrooms, bringing our dealer partners, our designers through that, really have not seen the portfolio that Middleby has to offer. So I mean a lot of that stuff has been exposed to a broader audience over the last year and we see some traction to that and we expect that to continue. We're excited about opening a new showroom in Chicago, which will really be kind of the – I'll say really state of the art for us kind of in the middle of the year. We really capture the expanded product portfolio that has grown over the last year. We acquired Novy about a year ago plus, which has got some great technology induction, the Hobbes ventilation, etc. So I think we're very excited about the product portfolio. So I get the market is going to do what the market is going to do, but I think we’re – I think there's a lot of great things going on as we go through the back half of the year and into 2024.

Let me maybe clarify what I was trying to get out. My impression was that Viking was still operating with longer lead times and a fair amount of backlog for much of last year. You're running that backlog down. My question is, do you have to essentially reduce production or have a sequential headwind in the back half of ‘23 relative to the current run rate.

Yeah, I mean as Tim noted, the backlogs have come down. Our lead times are much closer to what I'll call normal levels. There's some pockets there, but again given the modest amount of backlog that remains, as well as just the baseline day-to-day demand from customers I mean is why we're kind of calling the year the way we are.

Understood. Then I would like to ask a question on the FryBot and I guess a question in three parts. You were saying here that this is a modular design, but I'm sort of curious when you are trying to sell this product, are you seeing customers looking to essentially buy the entire set or is it just maybe the robot arm and they are keeping the existing equipment. I guess that'd be question number one. The second thing is, how big of an investment is this for a customer? And lastly, what is the payback in terms of what you guys have seen or calculated thus far?

Yeah, I think when we look at our customers and they see kind of the advancements with fryers today. The advancements that the FryBot brings, the customer is typically going to want to upgrade the frying solutions they have in their stores with kind of the latest frying to take advantage of automatic filtration, smart oil sensing and various other features that are built into the fryers to help you with profitability around oil management and oil quality. So we really do see the majority of customers buying kind of everything that you see on the page from the RAM dispenser, to the fryers, to the robot and to the holding and the SpiceBot. Now there could be some situations where we are integrating in with existing fryers, but I would say, that's not really what we expect to do day-to-day. When I think of modularity, I'm really thinking that our FryBot doesn't require kind of customized engineering to go into the store, to build a structure in the store to clean off space in the store, to put something behind a shield or any sort of protective cover. Our FryBot is kind of designed to work out in the middle of the restaurant with the employees in a collaborative fashion. So it's modular and that it's going to kind of roll up and interface with our products and roll away if you need to deinstall it for any reason. I think when we look at kind of the ROI on it, and I think this will probably kind of get into the cost and really talking about the cost, but we really do see the ROI kind of being slightly over a year for the FryBot solution and the equipment package.

Understood. My final question is on your CapEx, significant investment. Maybe you can talk a little bit about what was unique about the quarter. Certainly that's the biggest Q1 CapEx that I think I've ever seen. And what sort of payback are you hoping to achieve here? Is there a segment that is getting maybe more investment than others? And how do you think about free cash flow for the year? Thank you.

Certainly, this was our highest CapEx quarter. I mean some of it, just kind of the timing of payments and projects have come together. I don't expect we will be at 4x Q1 for the year. Tim has noted and we’ve talked about, we're actually making fairly sizable investments in residential, for really a lot of retooling of the Aga range master plants. And much like our customers, we see challenges with labor availability and costs, and we've been adding fabrication equipment across the board, but our residential plants, if you think about it, I'll call it revenue per plant tend to be larger facilities and thus to get larger investments, but we really have been spreading it around. The paybacks really do vary. I mean, obviously when we're making investments in buildings, that's something we have a longer expectation on than when we're doing something more modest around welders or small equipment. But usually, if I focus on fabrication equipment, it tends to be, I'll say two to three or four years in terms of payback for us.

And free cash flow?

Yep. Free cash flow, I’ll have to echo what I said at year end, where I think we start to being much closer in terms of a margin plus or minus of our income for the year.

Okay, thank you.

Yeah. I mean, I think if you look at the last couple of years, obviously supply chain has been a big challenge. It's been hard to balance inventory properly and I'll say sometimes difficult forecasting demand levels, etc. So I mean, I think one of the benefits that we have as we go through this year is we do expect inventory to decline as opposed to kind of being a cash use over the last several years. So I think we've got a little bit of a tailwind from a cash flow perspective coming into the year, so it should solid from that perspective.

The next question will come from [Cross Talk] – go ahead sir.

Go ahead.

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

Hi, good morning. Congrats on excellent results. I have a couple of quick questions. The first one is, I think you mentioned that lead times have normalized for most part of your business, because of increased capacity and also supply chain getting better. So can you just remind us, which segments you saw or had the most increased manufacturing capacity and at what capacity are your facilities currently running on average right now?

Yeah, that's kind of tough to answer given we got 115 brands, I'll be honest with you, because we run decentralized, right. So it's going to vary significantly across the platform. I think the way I think about it is, our backlog is still at a fairly healthy level, but certainly it's come down from a lead time and I would say about 90% of our factories now are at a normalized lead time. It may not be every SKU, but by and large. There still is 8% of our factories, about 10% that remain a bit challenged. That's usually because of one of two reasons or maybe two of two reasons. One, we have very strong demand for those product categories. In some cases those are more automated products or newer lines. The other area and Bryan touched on it is where we've got controls, and some of the electronic components continues to be challenged, particularly as its legacy controls. So I mean, we’ve done a lot to invest in our next generation control and James talked about that in the past with Middleby. One touch and we're excited about a lot of our new brands and products over to that, which we’ll continue to do through the year, which is also connected to our open kitchen platform. But we still have a lot of legacy controls, Z-boards [ph] and it's hard to move everything quickly. So I think that's where we still see challenges of about 10%. But the good news is about 90%, you're going to get within a window that's kind of more normalized, and I think that's one opportunity for us also as we go through the year, because I think there's been some business. Also, we went through last year, which we were really not in a position to serve our customers. So I think as that kind of comes back in, there's some areas that we'll be able to accommodate and really take some orders where we had to walk through them last year. So I kind of think of it as a 90%, a 90%-10% situation if that’s helpful. And lead time is free depending on the product category and that one thing is true to – really, those comments relate to questions from our commercial predominantly.

Got it, that's very helpful. It seems like things are looking up. That's great to hear. And then my second question is on, I think if I heard you correctly, you're saying that the commercial food segment margin should be modestly higher quarter-over-quarter. When I – when we were speaking last quarter, I think the expectation was like a 26%, 27%, 28%, 29% sort of margin cadence for the four quarters of this year. So is that sort of still the expectation or you think 2Q should be somewhere between 26% and 27% and not really like a 27% range we talked about last time in the last quarter.

Yeah. I mean I think those numbers represent, I'll call it a general trend. I'm not going to comment to whether we're going to specifically hit 27% or be above it next quarter. I think the – I'd say the appropriate modeling is as you just kind of noted, somewhere between 26% and 27%.

Got it. Got it.

And then thinking of the back half of the year, we'll see improvements from there, right. But I’ll try and be very specific about, not in that offering point guidance, but I'll call it general trend expectations let's say.

Got it.

Because I think, it's – our business is always a little bit difficult to focus, just because there are so many moving pieces and mix that has a lot to do with it. I think as we're working through the backlogs, there still is a little bit of like, I'll say older backlog out there that we're kind of pushing through the, you know the system as we go through the second quarter and that is, I'll say older pricing. So that is still a little bit left to get out of the system so to speak, as we kind of move to a more current pricing in the back half of the year.

Perfect. That's very helpful. Thank you.

Thank you.

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

Thanks. Good morning. Just to continue on that discussion Tim, so as we think about kind of the margin for commercial, the exit rate, the second half looking into ‘24. So as we went back to the conversation in Dallas last fall, where we outlined price cost and mix being two drivers longer term to get margins up. I would imagine, is it fair to assume that those start to become more meaningful tailwinds for you in the back half, and then that likely extends as we think about where we're exiting ‘23. Is that a fair kind of synopsis?

Yeah, I'll make a couple of comments and then Bryan can clean it up. So, again the mix of our portfolio as we focus on higher technology categories, say it could be product, it could be brands, I mean that's the underlying theme and that's always – that may be difficult to forecast on a quarter-to-quarter basis, but I think we continue to make progress towards with the mix of the portfolio and that's something that I think is reflected right now, but continues to be something that I think we'll see improvement as we go through the – as we make progress, the year going into 2024. As those other factors, we still from a supply chain standpoint, just make two comments. One, there are some commodity areas that we'll see improvement as we get to the latter part of the year. Like we still have higher priced steel. Steel's come down, but we haven't seen the benefit of that yet, because we do have some – a lot of that in our inventory still. So we'll get some of the supply chain – a little bit of the supply chain relief as we go through the latter part of the year as well, so those are two things. And I guess maybe the third is also production efficiencies. There's still a lot of trash that we have in our operations right now. I think as lead times normalize, order rates kind of normalize, with customers and how they are placing orders with us, with our lead times, as we can better utilize some of the investments that we've made in the factory. So a lot of that stuff is on the floor operating, but I wouldn't say that we're getting all the benefit yet, because we're working through…

Okay, well that all make sense Tim, thank you. And then maybe I think it was you or Steve, I forget, but there was a comment earlier about the supply or the inventory levels posing a headwind for you. The residential side makes perfect sense, but I was surprised, I think you referenced in a commercial side as well. Can you maybe just touch on that? We've been hearing just to your point, I mean supply chain has been an issue and just for you guys to get products out the door, so I was a little surprised to hear that in the comment, but maybe it's just more of a one-off. Any thoughts on that and assuming I heard that right.

Yeah, I believe Bryan actually touched on it briefly, so. Tim I’ll just say, I think there is some inventory in the channel and commercial, both for the general market and for chains, and the chain side especially, and I would say we would have gone through such an odd period of time the last year or two of you how our customers have ordered with the long early times, placing orders – you know go back a year ago, but placing orders farther out than they ever have before and our dealer partners, the KS's services changed. Their job was to get as much equipment in place to support new store openings and replacement. So I think you're seeing a byproduct of that. There was so much ordering that took place, just to make sure everybody was in a good place to support new store openings and replacement, and so we're going back to “normalizing” lead times, normalizing how our customers order from us, kind of back to how it was pre-COVID. And so I think again, the inventory that's in the channel right now is a byproduct of just the longer lead times and ordering process. I do think that normalizes as this quarter unfolds and certainly the back half of the year unfolds and we get back to again, more of a normalized cadence of ordering in the channel.

Interesting, okay. All right, thank you, Steve.

The next question will come from Larry De Maria with William Blair. Please go ahead.

Hi! Thanks. Good morning. I know you touched on a lot of this stuff, but I wanted to get some clarity in a resi second half flat to Q2 sequentially I guess and that we expect sales up in the second half. And so shouldn't that imply we are back to mid-teens or better EBITDA margins in the second half, specifically in resi and maybe you can discuss some of the restructuring you've done in there. May be at least given higher margins you know into what might be a clean year in 2024. So just some further color on second half and maybe run rate EBITDA margins in resi.

Yeah, no, we do expect margins to be increasing in the back half of the year as well, with the increases in revenue, given the dynamics of the grill business. We do get nice leverage incrementals as those revenues improve. And in terms of the benefits of the manufacturing, that really – especially given current demand levels really isn't something that has a meaningful impact this year, but it's certainly a meaningful driver as we get into next year, as we hopefully look forward to better revenue levels and again, it’s one of those drivers in bringing us back towards the target margin levels. But specifically to the stuff we've talked about for Aga in the U.K. This is a long-term project that really comes together over the remainder of this year, thus my benefits start accruing much more so next year.

Okay, so thanks for that. But now if we think about second half margins, EBITDA margins, I guess obviously grills did better, but you have a little bit of benefit, but maybe some mixed headwinds, not sure. So does that imply mid-teens or better EBITDA margins in the second half or is that the way to think about it, mid to upper teens?

Yeah, I mean, I talked I think some about some of this last quarter and back to the fall. I mean, I do feel like mid-teens is where we can get. It's just you need to take that with a little bit of caution. I mean again, I've tried to use the words risk, uncertainty here as we look at the back half of the year. But I mean, I think that's a fair assessment, but again, I just - everyone needs – I think everyone is aware of the risks and uncertainty surrounding that business, but again I think that's probably a fair assumption.

Okay, fair enough. And then my second question. I want to talk about food processing, backlog and order trends. How did orders progress through the quarter, postpones, delays they were still strong, maybe touch on some of the end markets? I know poultry might not be huge, but there's some headwinds in the market. So just give us some color to get comfortable on sort of the duration of the processing turn.

I'm sorry, I can't hear. I don't know if the question was food processing quarters in the factory.

Yeah, I mean food processing has continued to do well for us. I mean, obviously last year was a really exceptional year in terms of order intake and driving up our backlog. I mean, things are still very good there. Again, last year was really exceptional, so maybe the current it’s not at the same levels. But nonetheless, orders continue to be strong. Our backlog is holding in well. The areas where we've been strong, we continue to be strong. We've seen a lot with bacon. We've seen a lot of acceptance and excitement around the TurboChef by Alkar. We are making inroads into pet food and snacks and so it has been fairly good across the board, I would say for us.

Yeah, so Larry I'm sorry, I can't. We're having a speaker problem. But yeah, I would just say the backlog is holding pretty solid. I think as we look at the orders, food processing is always kind of lumpy from one quarter to the next, depending on what projects come in. So I think we've got to look at what the pipeline of opportunities is out there. And as Bryan just alluded to, I mean I think we feel pretty good about the pipeline and the areas that we've been targeting with full line solutions, which continue to resonate. And, again, I'm just going to remind everybody we've invested a lot in automation. If you look at a lot of the acquisitions over the last year, particularly with Proxaut, VE.MA.C., more recently Escher, Colussi where the teams are really working together on some bigger projects to help customers again with ROI and a lot of different applications that we were not in, if you kind of go back five years ago as Bryan just alluded to a number of them. So I think we feel pretty good about the momentum of the business. So nothing's really changed from that perspective from what we – by and large that we've seen last year.

Okay. Thank you, guys.

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

Good morning. This is Madison Callinan on for Brian. Thanks for taking our questions. Just the piggyback off the previous franchisee question, with the recent high-profile bank failures, we're just curious where you’re like restaurant customers and franchisees predominantly get their financing from and any additional color you can give on how that affects your commercial food service equipment business. Thanks.

You know, as we think about our commercial customers, there's a few things. They are obviously our largest customers. I don't have a roster where they all bank, but they tend to be large entities and I haven't seen anything in the public domain, I'd say align with our large customers about concerns about their financing. There's also obviously thoughts of really large franchisee organizations out there. I would say, that we haven't – you know I understand where the questions coming from. I can't say that we've explicitly seen any slowdown or change in our activity level or negotiations with customers specific to what's happening with regional banks, and the like. I think if you take it all the way down to our smallest customers, kind of independent restaurants, they're probably raising cash to open things up given some of the risk profiles with really small entities. So again, it's an overall. We don't feel like it has been yet impacting us in a noticeable way.

Awesome. Thank you and then just as a follow-up, in terms of grills, can you give any color on material distribution gains you expect for your grill brands after the wholesale channel is cleared? Whether they'll be deeper with current resale partners or new partners all together? Thanks.

With the grill companies, so we are seeing gains with our existing customers in terms of what I'll call it you know the floor space allocated to us and really acceptance of our products for a variety of reasons right. Charcoal gives a better cooking experience. We have awesome technology. We have different features. For all these reasons, so we are seeing gains with, I'll call it, our current base of customers. But we're also you know making headway in terms of bringing these grill products to, I’ll call it, specialty retailers where they may not have been carrying them before or really able to because of everything Middleby offers, also have them bringing especially Kamado Joe into their showrooms as well as leveraging what we're doing internationally. There are a couple of pockets I would say of new distribution in the U.S. as well.

Awesome. Thank you so much.

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

Hey good morning everyone. Thanks for fitting me in. I just have one quick one. Just on the cash flow should look better this year. I noticed you guys bought back stock and which I guess was a little surprising given your pension for deals and kind of the current rates and leverage. So just kind of update us on kind of how you're thinking about capital allocation as we move through the year.

Yeah, I think it's probably unchanged for how it's been for a long time. I mean certainly we're more conscious of the cost of capital and interest rates etc. I think as we kind of think about deals, I mean we're very strategic in our approach and how we build out the portfolio and things that we think will strengthen us for the long term and stand the test of time. So we'll be active, but we're also keenly aware the cost of capital has gone up as well as uncertainty and outlook in certain parts of the market, so just from a valuation standpoint. So we do think valuation will kind of evolve here and that'll be part of our thought process we look at deals. But I mean again, M&A is a – as we always put the slide up there, we've been doing this for a long time and I believe we're building upon three industry leading platforms. So obviously, mentioned the two transactions at the start the year we're excited about. So M&A will continue to be the forefront. Obviously we'll try to – we will delever the process as well. I mean I think stock buyback, we've always – we will do that opportunistically. And I mean, I think we just – we felt that it was an opportunistic time. So I think that that was something that felt was a good timing to buy back some shares. We started that in the fourth quarter of last year, so that was kind of a continuation of something that we put in place to finish the year and start the current.

Okay, thanks so much.

The final question we have time for today will come from Todd Brooks with the Benchmark Company. Please go ahead.

Hey, thanks for squeeze me in, and congrats on the results in the quarter. I've got – it's a three parter, but it's all on the same topic. If we look at commercial food service, what's the mix of kind of new build versus replacement demand now versus what it would look like normally? And then I'm wondering, you talked about with maybe lead times normalizing, we may not get as much visibility into the new build programs with the restaurant partners. I'm just wondering about as replacement seems to be picking up based on the comment you made, is your visibility there better than it's been historically? And then finally, the margin spread between new versus replacement demand, if there is any. Thanks.

So Todd, so first question. You have a mix of new build versus replacement. The pie charts that are in the deck I think are helpful and as you see today, your new build and replacement for 2022 were pretty much the same. So historically, if you go back to again pre-COVID levels, I believe there's probably a chart somewhere, but replacement was historically half the demand that we would normally see, probably in the period of 2017 and 2019 if you will going into COVID. So obviously, the new build demand, primarily from the bigger chains, really ’20, ‘21, ’22, obviously is significantly higher than it was prior. So that's why you see the mix being different. I do think as you get into probably ‘24, ‘25, even though I do think you'll see new builds continue for a lot of change, I do think you'll probably see some replacement business uptick and actually be maybe not back to 50%, but probably be higher than the new build deal mix if that makes sense. In terms of visibility into new locations, I've talked about on prior calls. One of the very nice byproducts of this disruptive period that we've lived through is being closer to our big chain customers. They've given us more visibility than ever into their development plans, timing, locations, etc., which has been extremely helpful and that has not changed. And I actually don't think it will change a whole lot as we go forward. Just because there's so many good benefits on both sides of the equation, to giving us that visibility, to make sure that we're always aligned with hitting a new store opening and then also your other question was making sure we understand the replacement demand. So again, we're in good position to support that on that side I think. So visibility remains I think very open, very transparent and I do expect that to continue as we go forward. From a margin perspective, your replacement versus new build, I would say new build I would guess is probably higher margins, just because if you think about new builds, they are putting in the newer technology products, which historically do have higher margins. It's not a hard and fast rule, but that would be my answer that new store builds would historically probably have better margins than replacement business, if you're replacing kind of a like-for-like product, if that makes sense. Hopefully I answered.

Sure does. No, you did a great job. Thanks Steve.

Thanks, Todd.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks everybody for attending the call today and we look forward to speaking to you next quarter. Thanks.

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