The Middleby Corporation (MIDD) Q3 2022 Earnings Report, Transcript and Summary

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

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

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

Thanks, James. For the third quarter, our quarterly revenues were nearly $1 billion and our adjusted EBITDA again well exceeded $200 million. GAAP earnings per share were $1.92. Adjusted EPS which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation at the back of our press release was $2.18. FX impacts are included in these results and were a headwind of $0.12. Our revenues of $993 million grew 21.5% compared to the prior year and over 14% organically. Adjusted EBITDA of $212 million reflects growth of over 23% compared to the prior year or over 22% on an organic basis. Here, FX rates negatively impacted EBITDA by nearly $7 million. Our EBITDA margin was over 21% of revenues. This was our best quarter of the year in terms of both EBITDA dollars generated and the profitability percentage. By the way, briefly looking forward, we hope to generate even better results in the fourth quarter. But looking back at our individual segments performances for Q3, starting with Commercial Foodservice, revenues globally were up 17% organically over the prior year. We expanded margins 230 basis points over the prior year and 130 basis points over Q2. The adjusted organic EBITDA margin grew to a three-year high of 26.5%. By the way, all the margin values I will discuss are on an organic basis as well, meaning excluding any acquisitions and FX impacts. In Residential, we saw organic revenue growth of 2% versus 2021, with adjusted organic EBITDA margins exceeding 20%. Food Processing saw organic revenues up nearly 22% and the adjusted organic EBITDA margin was 24%. This was our strongest quarter ever in terms of revenue and EBITDA dollars. Also, we expanded organic margins over 200 basis points over the prior year and over 400 basis points sequentially thus versus Q2. Operating cash flows were $84 million for the quarter. Inflationary cost impacts, supply chain disruption and higher demand resulted in inventory growth. We anticipate working capital investment from the past several quarters will stabilize and begin to reverse in the fourth quarter. We continue to use cash flows to invest in the business. The cash cost of acquisitions was over $131 million in Q3 and CapEx were nearly $19 million. Additionally, capital expenditures for the past nine months represent the highest investments we have made. These drive operational improvements and help deliver those stronger margins. Our total leverage ratio came in at a little over 3 times. This is after having invested over $450 million this year on acquisitions and capital or stock transactions. As of quarter end, we continue to have nearly $2 billion of borrowing capacity. In trying to dissect our performance relatively quickly, I offer the following. We continue to juggle many challenges while still delivering these at or near-record level results. From an operating perspective, supply chain issues continue to constrain our ability to produce to meet demand levels. Inflation continues to impact the cost of goods and labor. Labor availability only very recently began to improve. And also, COVID still occasionally impacts our manufacturing productivity. Nonetheless, all our segments continue to perform very well. Looking at Commercial and Food Processing, we have delivered better results when looking at Q3 on either a sequential or year-over-year basis. We knew the third quarter would be challenging for Residential and constraints on our outdoor grill customer’s ability to inventory more of our product has detrimentally impacted our performance as compared to expectations. Nonetheless, organically, we delivered growth and consistent profitability as compared to the prior year. Over the past year -- over the past quarter, I should say, I have spent time visiting plants, engaging with the investor community and admittedly partaking in my favorite professional activity, evaluating customer usage of Middleby equipment. I also regularly spend time reflecting on our business and strategizing for the future. I find that when engaging my mind in deep thinking, having pizza nearby provides relevant inspiration as pizza is the key part of the foundation on which Middleby has been built. I found two great spots to satisfy my taste buds. When in New York, I recommend for going a traditional slice and enjoying the Grand Marseille [ph] at Sofia Pizza Shop. Their recipe and the Marseille Oven create incredible flavors and textures. Also not to be missed is a West Coast Take on the Detroit Style. PI LA has created the Los Angeles style, which puts our Bakers Pride ovens to great use. Their menu also won me over with their automobile theme creations. The classic Little Red Corvette will more than satisfy traditionalists while the IMPALA Lowrider with Mole Chicken and Roasted Pumpkin was exceptional. I love seeing our customers, but there is plenty to be said for home cooking. So while these pizzas were great, getting back to the Midwest, the best thing I have eaten recently is pancakes off of the Char-Griller Griddle expertly prepared by my wife. I have to see about getting her added to our culinary team as I am sure that would greatly improve our already tasty future. And further assessing our future, given the trends Tim has discussed and considering all the innovations we continue to deliver to our customers, our long-term outlook is very strong. In terms of the short-term outlook, this is also positive. The quick take on Q4 is thus. For Commercial, we have shown a strong improvement in margins for Q3. When considering the timing of pricing actions and backlog levels, supply chain and inflationary factors, as well as labor matters, Q4 overall will likely see revenues relatively similar to Q3 and well ahead of the prior year with further expansion of margins, albeit with a more modest sequential improvement than we saw in this quarter versus Q2. For Residential, a lot of factors go into evaluating Q4. Beyond those noted for Commercial, which certainly apply here as well, seasonality patterns and economic conditions will be more impactful to this segment. Nonetheless, we believe that Q4 results will be relatively similar to Q3. And in Food Processing, with high demand levels, our typical seasonality where the fourth quarter being the strongest one, we plan to have stronger results as compared to both Q3 and the prior year. We expect to deliver another record quarter for the segment. As we think about next year and the longer term, I would like to reiterate our medium-term EBITDA targets, which are 30% for Commercial and 25% for the other two segments. We plan on achieving these over the next two years to four years. Our confidence to reach these levels is based on numerous factors. You are already seeing margins expand as we make operational improvements, execute on go-to-market strategies, improve our product mix, deliver innovation to our customers, manage supply chain challenge -- challenges and vigorously manage costs, all while also investing in new technologies and capabilities. All this reiterates our positive outlook for the business for the coming years. Our Residential platform will continue to generate strong levels of profitability even with a challenging market backdrop. Being a manufacturer of premium products, our business demonstrates resiliency. We continue to invest in new products and technologies across all our product lines, we are expanding our distribution globally, we are capitalizing on favorable customer preferences, and we are improving our operations. We will deliver growth and improved profits over the long-term. For Commercial, our customers are committed to their growth plans. Our leading technology solutions address their top challenges. Our products deliver great value to them. Our sales approach and service capabilities make us the vendor of choice. We will continue to manage price cost dynamics, improve operations and grow our platforms. We have been investing in new technologies and are seeing increasing benefits from the growing adoption of them. We will deliver growth and improved profits over the long-term. For Food Processing, customer demand for our full-line solutions positioned us for robust near- and long-term growth. As with all our segments, innovation, service and value are our differentiators. Our future is bright here too. And with Thanksgiving just around the corner, as I wrap up, I wanted to offer up a few things. I am thankful for having the privilege to be part of this great organization, and thank you to our customers and vendors for partnering with us to drive our collective successes. Thank you to our employees for tirelessly working to drive Middleby forward every day. I hope everyone has a great holiday season enjoyed with delicious food prepared, of course, on Middleby products. We are now open to take your questions.

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

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

Bryan, go ahead.

Hi, Saree. Good morning. The inventory in the channel is -- this has never been a channel with, I will say, overly robust inventory levels and I will let Steve jump in on that in a second. I think on orders here, I mean, this is certainly an interesting dynamic. And we have commented before that we have -- we are at extremely high order levels last year and I think there’s a lot of desire for everyone to try and pinpoint what were yesterday’s orders to predict precisely tomorrow’s revenues and we see a lot of month-to-month and quarter-to-quarter variability in orders. So I will offer that the important takeaway here is that, our customers have changed their order placing patterns with us, we have seen that for the past two years now. And they remain committed to all their growth plans, which is why we feel good about Q4 into and through all of Q3, I am sorry, all of 2023, I’d say.

Yes, Saree. This is Steve. Maybe just some additional context as we think through our various customer bases, I know we spend a lot of time focusing on the bigger chain customers. I mean I think the highlight there, as we have talked about in prior calls is, they have had a great year really so far the last couple of quarters in opening new stores. So that’s a change certainly compared to pre-COVID. I think, in many ways, we have gotten closer to those customers through this period and one of the positive byproducts of being closer to them going through the challenges we all have is, they are a lot more transparent about plans into the -- well into the future like they haven’t been before. So the chains especially, I think, have committed even more so to their new store openings for next year. So I think that positions us very well in the big chain segment. The two other areas I would call out that we probably haven’t talked about quite as much is more kind of our dealer channel, specifically in the U.S. And again, I think we have gone closer to them than we ever have before through the last couple of years, and having more and more of those critical dealers to us through the MIK, strategically playing for next year, many of them would tell you they are busier than ever. The third area I would highlight, which we haven’t talked a lot about on prior calls is the activity we have within the consultant community, both domestically and internationally, and a scenario for Middleby that we were, frankly, not very good at three years to five years ago and investing in the right people, investing in digital solutions. So something we track very carefully within our digital community, I am sorry, within the consultant community is our specifications on projects. And if you look at our year-over-year specifications on projects, not only the items we are getting specified on but the number of projects we are specified on, we are up approximately 30% in specifications year-over-year. And why that’s important is, if you are getting spectrum project today, that’s really leading to the orders that you would see in next year, so that’s going to cut across schools, B&I, healthcare, senior living. So just a couple of additional, I guess, areas of context beyond the chains that we focus on a fair bit. The last part of your question was around lead times. We commented in the deck. Yeah, I think, we have made a lot of great inroads in expanding capacity in our manufacturing facilities. It’s been one of the most critical initiatives in the company throughout the year. And I think through the combination, again, of leveraging our supply chain team, which I think we have done a great job of across the Board, still very challenged, but I think we continue to manage it as well as anybody. We have invested a ton in new automation ourselves, new capital, which we talk about and in many areas, it’s still challenging, but I think we have done a good job, especially the last quarter or two in hiring manufacturing employees, which is obviously tough. The other big thing, which I am proud of from a manufacturing standpoint, when you hire so many employees like we have in a relatively short period of time, it’s an easy time where your quality can slip. And I am really proud, I think, we have done a great job maintaining quality and our products make sure we are supporting customers while adding so many employees. So I think lead times have trended better. I talked about in the last call and I think they will continue to trend back to -- the new norm for lead times will be certainly back to kind of pre-COVID levels as we get into next year across the majority of our manufacturing divisions.

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

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

We have managed through lower volumes in the past. You can go back and look at -- see how we performed in the depths of COVID. So, I mean, certainly, there are areas of variable spending that we can address. But without offering specific models and specific revenue levels, I don’t think there’s really a great generality I can offer. Beyond saying we already -- we are entering in this more challenging period with already very high, very respectable levels of margins and we think within all a variety of different scenarios that we certainly expect to maintain high levels of profitability.

Yeah. I will just add a couple of comments. I mean and maybe just as Bryan said, I mean, we have built the portfolio to be a high margin business in good times and bad times. So I mean, I think, our -- we would expect the Residential platform is going to have industry leading margins and certainly well into double-digit teens even if there was kind of a significant drop off. So, I mean, I think, it doesn’t look that bad even in really bad times. We talked a lot about operating initiatives. Steve talked about some of the investments there in Commercial. That applies to the Residential as well. I will say there’s a number of initiatives that we have had through the year and really the last several years as we kind of think about manufacturing efficiency and product designs, how products come together that particularly applies in our U.K. business, which I think, we have had a strategy to really drive margins up much higher and so if the revenues dropped there, I think, that will help us serve more. Also, the grill business is obviously still early stage with us and we do have significant plans to expand the margins there. So that’s been a drag to the all-in reported margins. But we have been consolidating that platform with the three brands coming together, Kamado Joe, Masterbuilt, Char-Griller. There’s a number of synergies from sales to sourcing and manufacturing go-to-market. So not only within the growth platform itself, but within the Residential platform overall. So I mean I think we are expecting that we will be making margin improvement as we go into next year on the growth platform. So, just a few things to highlight that will bolster margins going into next year on Residential.

Appreciate the color. Thanks for taking my questions.

[Operator Instructions] And our next question will come from Tami Zakaria with JPMorgan. Please go ahead.

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

I will jump in. So I think, certainly -- I think we don’t -- the way we thought about it, I mean, it is really driven based on launching our product innovation, sales mix is a big thing as we are kind of transforming the mix of products that we have in the ROI to our customers. And we have made significant investments, which is kind of why we spent a lot of time talking about sales transformation and all the tools that we have invested in, which has been dollars incremental in the last several years, which we do believe is paying off. So, I mean, I think, without -- if you were to say kind of a normal growth period, mix and then efficiencies that we have been focused on is really some of the drivers to get us there. So that doesn’t require like outsized growth. Certainly, if we see a drop in Residential, that’s where the kind of the plus initiatives that we have on the margins kind of hold us against the margin drop or help offset. I mean I think our view is that, that may be worth the four-year view versus the two-year view comes in between. And I think we do have a bullish view on Residential, I know it’s challenging in -- when you look at the -- what’s going on in the housing right now. But I mean, certainly, it’s a dynamic world, it changes quarter to quarter. But if you look, we are still a small part of the overall appliance industry and we do have invested in long-term growth plans. So we do think we will grow that platform over a longer period and we think that we will see some recovery in a longer period as well. So, I mean, I think, you would -- you might think that Food Processing gets there, the earliest Commercial somewhere in between and we have given ourselves a little bit of breathing room in kind of that range on our Residential platform, which also has some acquisitions that are new to that platform and kind of embedded in the margins.

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

Yeah. So supply chain is not the same across the Board. I would say, overall, the pressure continued in the third quarter, right? So, I mean, I think, material costs, there was a lot of disruption early in the second quarter if everybody recalls certainly with the war in Ukraine kind of taking it to the next level and that continued throughout the second quarter and into the third quarter. So, I mean, I think we have been working very hard from a price cost to get ahead of it. But I don’t think we are -- we haven’t been able to get ahead of it yet, because those cost increases continued into the third quarter. So I mean, a lot of the margin expansion we have had has been kind of us holding serve or trying to catch back up to the material costs. So I think the good news there is some of the pricing that we have taken isn’t still fully reflected in the third quarter. So we got little bit benefit to come. It’s not like its one inflection point where on a certain date all the pricing shows up. We have got 100 brands. So it all comes into the P&L at different points of time. We think that carries a little bit in Q4 and also into Q1 and we do anticipate taking some pricing going into next year as well, because, I mean, I think, things like controls, electronic components and some other categories are still in a highly elevated situation. So there should be some relief as we go into next year on things like steel, which will help. But we are still a little bit behind on the price cost equation. But I think our expectation is we kind of moving to next year we will be catching up.

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

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

Hey. Good morning, guys.

Good morning.

Hi, Jeff.

I think, so I want to dig in on the grill business, because I think last quarter, it was more of an issue of COVID lockdowns production in China. But it seems like it’s kind of shifted to your customers maybe having too much inventory and doing some destocking. So I just -- and maybe just speak to how the quarter played out for the growth businesses versus expectations?

Yeah. So, I think, coming into, certainly, as you mentioned last quarter, we couldn’t ship and that was kind of more at the height of the growth season. We probably had a little bit of that still at the beginning the quarter, that’s largely been remedied. So now it really is kind of where are the retailers, and as you mentioned, they are destocking. So that is definitely affecting the demand and what we are seeing of our growth business. I don’t -- a lot of that is not them destocking our growth. It is really what do they have in inventory as a category overall, they are not going to necessarily load on our grills if they have other -- if they are overstocked in other brands. So I think as we think about it, I mean, that is going to be a period that we are going to go through as we move through the next couple of quarters. I will tell you, we are very excited about the platform, though, even in that period. I think what we are seeing is, as we go into 2023, we are going to have on the retailers more floor space. So a lot of the reasons we bought the Kamado Joe, Masterbuilt, Char-Griller, there’s just a lot of product innovation there that I think is going to be exciting in the marketplace. So I mean, I think, as old inventory comes out, kind of we know that we are going to be picking up some new, as I said, floor space going into next year. We also have some new product launches that are going to be coming out early next year. So I think that is also going to drive some end user interest. And one of the other things is we are kind of at early stages of launching some of these products into our specialty retail dealers. So I mean I think that’s one of the benefits that Middleby brings to the growth platform is some of the strength in channels that they weren’t necessarily and before -- as strong before particularly with the Kamado Joe product. So we are working on that and Kamado Joe has got some unbelievable products, so that lines up really well with some of our brands, such as Viking and legs in the outdoor segment. So that’s kind of another piece. So, I mean, certainly, it’s kind of there’s the headwinds and we can’t necessarily offset them all immediately, but those growth drivers we think will show up as the year progresses. And I think just the kind of the last thing is we are the -- we view ourselves as the charcoal, the leader in charcoal innovation and I think we do believe that, that’s a longer term trend as people think about move away from gas and kind of rethink that and go to charcoal, particularly with kind of the ease-of-use and the innovation that we have got in our products. So that’s kind of the backdrop, certainly that will play out quarter by quarter, but we are still pretty excited about where growth goes over the next couple of years here.

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

I will give kind of a broad view and if Bryan has got any other comments. But I mean, it is, certainly, we are seeing some demand softening across the platform. It’s the hardest in the U.K. I mean I think if you kind of think about what’s happening across the world not that -- it’s not -- we are not seeing that in the U.S. as well. There’s a number of other dynamics with the economy and changes with leadership there in the government, energy cost, et cetera. So we have seen that market hit pretty hard. We also have the exchange losses when just kind of converting the U.S. dollars that Bryan mentioned, which are pretty significant for that platform. So that business has come down pretty well. We have largely worked through the backlog there. So we are really -- even in the current quarter, you are seeing what the U.K. looks like and the current market environment. We do believe we are outperforming the market. We track kind of what the market stats are there and we are 5% to 10% better than what the market is, so we think we will continue to outperform. And as I mentioned before, had some pretty good profitability initiatives as we think about how we build grills and some of the -- with the new product launches we have there. Domestic, we have got a number of brands. We have got lead times that do extend into next year, some of them to the early part of the year and some of them to middle of the next year. Our most premium products actually extend further. But certainly, we will be catching up to some of the backlog that we have as we kind of move into 2023.

Okay. Thanks a lot. Appreciate it.

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

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

Yeah. Thanks, Todd. It’s a great question. I would say if you kind of recap the ways we have engaged customers over, I will call it, the last 12 months to 18 months, the big topics have certainly been how do we help on labor, how do we help on food costs, how do we help on speed of service? The wrinkle, I would say that’s a more recent nuance the last couple of quarters is, thinking about utility cost. And so I think what’s interesting right now, so we have talked about on prior calls how we have seen a shift towards orders being more focused on new stores and we have this pent-up demand in replacement. And so I think what’s interesting, as utility costs go up, we are being engaged more and more on what is -- where easy places they can go to add a piece of equipment that are more energy efficient, as an example. So I actually think it will accelerate some of the pent-up demand in replacement, because if I can go replace any piece of equipment or multiple pieces or I can add Open Kitchen to manage my utilities, the payback is so quick right now. And the other thing we have been very thoughtful about both, especially domestically, is there’s a number of local jurisdictions that offer great rebates on energy efficient products and I think we have the broadest portfolio of energy-efficient products. So it makes it a very easy dialogue for us to connect with the customer say, hey, if you add these couple of products, you had an open kitchen in, I mean, the ROI is quicker than ever. So it’s one more, I think, great case for them to accelerate CapEx to go back and do some of the replacement that I think has been put off throughout COVID, if that makes sense. So that’s a nuance that I would say has developed the last 6 months. I am sure it only gets accelerated as we go into the winter months, and then, again, it’s still on top of helping them solve for labor, food cost, speed of service, if you will. So very excited about what that leads us to for next year for sure.

Okay. Great. And then one follow-up…

And…

Oh! Sorry. Go ahead.

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

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

So I think, the labor is a constraint across all three platforms. So maybe kind of hitting that, we have got different divisions in different geographies with different opportunities. So it’s not the same across all of our platforms. But certainly, it is holding back manufacturing at a number of our brands across all three platforms. We have done a -- our HR teams and just the divisions generally have done a great job of hiring people across the platforms. I think we are in a better staffing position now kind of as we are in the fourth quarter that we have been all year, we still definitely have some challenges out there, but we are in a better position and I think it’s a little bit easier to attract and retain right now generally than it was two quarters ago.

Okay. Great. Thanks.

[Operator Instructions] Our next question will come from Walt Liptak with Seaport. Please go ahead.

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

Well, I -- so I think we are saying that demand is softening, right? I mean, we hope -- that’s correct. I think, we are saying it is harder in the U.K. than the U.S., but certainly, it softened in the U.S. as well. We are also said that we have got a longer -- a larger backlog in the U.S. that carries us into next year as you look across the brands, our premium -- our most premium brands, let’s say, a lot more new, for example, and some of the more premium Viking products, they have the longer lead times. So that kind of cushions us as we go into the beginning of next year.

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

Yeah. So look, I think, we are going to -- we are not -- we are going to shrink in the first -- in the next couple of quarters here, right? Because I think there’s going to be the retailer destocking. But I think as we move through the year, we do think some of those growth drivers will be more impactful certainly in the second half of the year as you start thinking about loading in for the following grill season, as well as opening up channels and floor space that they haven’t had before, which I think will start to show up in Q2, probably, accelerate a little bit in Q3. It’s hard to say what the front half relative to the back half will be, I mean, with the crystal ball. I mean, I think, for us, it’s really the longer term view in knowing that as kind of the backdrop in the world behind us plays out that we are well positioned and some of those growth drivers are incremental and also our kind of share gainers as well.

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

So, I mean, I kind of repeat probably similarly to what I have said for every quarter for about 20 years or so, which is, we have a -- our pipeline is a core competency. There will be -- we have added a -- we are 110 roughly phenomenal brands that make up three industry leading platforms. It’s been a very strategic approach that stands the test of time. There is always lots of great strategic ideas that further strengthen and extend the portfolio. We bring in a lot more in terms of innovation and technology and certainly including this year as you kind of think about the companies that I highlighted on this call, Proxaut, CP Packaging, Colussi, last quarter with Icetro as we continue to extend our beverage. So I think you will continue to see us do smart strategic deals. Certainly, we are going through a different period here where capital costs have changed and outlooks are being reset. So we are pretty smart about those things and also disciplined. So I mean, I think, you will see us continue to be smart and disciplined, but also continue to grow our business.

Okay. Great. All right. Thank you.

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

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

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