The Middleby Corporation (MIDD) Q4 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Middleby Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] With us today from management are, Tim FitzGerald, Chief Executive Officer; Bryan Mittelman, Chief Financial Officer; James Pool, Chief Technology and Operations Officer; and Steven Spittle, Chief Commercial Officer. Please note today's call is being recorded. Now I'll turn the conference over to Mr. FitzGerald. Please go ahead.

Thank you for joining us today on our fourth 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 finished the year with strong results in the fourth quarter, along with the close to another record year in 2022. For the year, we surpassed a milestone eclipsing $4 billion in revenues, while adding approximately $140 million to our earnings for the year, reporting just over $850 million of EBITDA. We realized sustainable improvements in profitability over the course of the year as our investments in manufacturing and our initiatives to evolve our product portfolio to focus on innovation is taking hold. These efforts are offsetting the significant inflationary and supply chain headwinds we faced throughout the entire year and these efforts will continue to provide momentum as we move through 2023. In 2022, we continue to make critical strategic investments in innovation, go-to-market capabilities and acquisitions, strengthening each of our three industry-leading foodservice businesses and bolstering our competitive positioning in the marketplace. In 2022, we developed and introduced a record number of new products across our brands and significantly furthered our company-wide technology initiatives pertaining to digital controls, IoT and automation. In 2022, we continued to take steps forward on our go-to-market initiatives, investing in our innovation kitchens, adding to our culinary teams, expanding our digital sales capabilities and deepening our strategic channel partnerships with a focus on strengthening engagement and support to our end-user customers. In 2022, we also continued to execute on our long-standing track record with smart and strategic acquisitions, adding eight new brands to our portfolio and further extending offerings with exciting new product innovations in each of our three foodservice segments. As we close 2022, these efforts have us well positioned to capture rapidly evolving market trends, address real-world operator challenges and offer the sustainable solutions our customers are looking for. As we look forward into 2023, economic conditions continue to be uncertain. However, we continue to have a positive outlook given the pipeline of new product innovations developing customer opportunities and the competitive positioning in each of our three foodservice businesses. At our 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 cost. Our latest innovations are in demand and we are engaged with customers to solve challenges in the kitchen like never before. Recent attendance at the NAFEM trade show, the largest in our industry, further reinforces this. Activity at the NAFEM show was strong and attendance of over 20,000 was ahead of pre-COVID levels. We were heavily engaged with new and existing customers seeking out the latest innovations to transform their food service operations. The longer-term backdrop is also favorable with the restaurant industry still in early stages of recovery. It is estimated that over 100,000 foodservice locations in the U.S. market closed during the pandemic, while only an approximate 5,000 units were added back in 2022, leaving a long runway for new store development. This opportunity is confirmed as we are engaged with many of our chain customers on new store opening plans. In many segments, such as schools, travel and lodging and casual dining are still in early stages of recovery with only more recent return to travel, increasing in-person attendance at work and school and a return in dining out. We are confident we are well positioned for this long-term recovery. At our Food Processing business, there is a need for equipment to increase throughput, software labor challenges through automation, address rising food cost and reduce energy, water and utility costs and our customers are increasingly looking to address sustainability concerns. Over the past several years, we've introduced exciting new innovations addressing these customer needs. We have also made significant strides expanding our automated full-line solutions, while also broadening our offerings into new food applications such as pet food, bacon and alternative protein. We are seeing the benefits of our strategy through increased partnerships with customers on projects and increased business in new categories. At our residential business, rising interest rates, a slowing housing market and destocking of channel inventory at our outdoor grill business, all present headwinds and uncertainty with expected order declines in 2023. Despite these challenges, we continue to remain excited for the developing opportunities with our new product launches, investments in our showroom and sales capabilities and further development to leverage the strength of our platform. Our product offerings position us to capture new market trends, such as growing demand for electric and induction products and engagements at our residential showrooms with our culinary and designer teams better position us to capture the imagination and market share. We expect to maintain industry-leading profitability as we navigate the current environment and we'll continue to invest as we position for growth in sales and profitability as the market recoveries. In summary, I am thankful for the effort of our entire Middleby team, as we continue to deliver another disruptive and challenging year in 2022 and are proud of the progress we have made as we continue to execute our strategy and transform our business, positioning us for the future. I am confident the efforts of our team is adding to our competitive differentiation in the marketplace, which will also progress us towards our longer-term financial goals. Now I'll pass the call over to James to spotlight more of our exciting recent product introductions.

Yeah, thanks, Tim. Last quarter, I discussed a couple products aimed at electrification. In hindsight, my comments were well timed with current events around banning of gas-fired appliances. Middleby has continued to building electric cooking and processing equipment that exceed the demands of the electrification push and as I discussed, it's just not about being electric, it's about being highly efficient and electric at the same time. From combi ovens to our next generation of electric hobs, Middleby is well positioned in the future to deliver products that meet the electrification needs moving forward. Today, I am going to talk about three new products launching in 2023. The first is Konnected Joe. If you've heard me talk on prior calls about Digital Connected Charcoal, the Konnected Joe is a continuation of our digital charcoal strategy. The Konnected Joe brings digital controls and app-controlled cooking and content to the Kamado Joe lineup in the same way that we brought digital and connectivity to the Masterbuilt series of Gravity Charcoal Grills. With the Konnected control, the Konnected Joe addresses the friction points associated with outdoor grilling and Kamado cooking. Smoking and grilling has never been easier, simply low charcoal in the Konnected Kamado and press the light button, that's it. The auto ignition system takes care of lighting the Kamado, from there, the digital controller takes over to precisely regulate the Kamado's temperature. The Konnected Joe will embolden the growing novice and will allow the grilling master time to enjoy their favorite beverage or four. And should this digital control scare off the grilling purist? The Kamado Joe can also run in a pure manual mode, making this the most versatile and usable Kamado on the market. The second new product scheduled to launch in the first half of 2023 is the Invoq, it’s our new line of high-efficiency electric and gas commercial combis. Our engineering teams have designed to Invoq for connectivity and sustainability. And given that this is an earnings call, we should talk about some numbers. The Invoq is built on a half-sized combi footprint while still being a full-size combi capable of fitting full-size hotel and sheet pans. This affords us a 32% size advantage versus competitive combis, while increasing our cooking capacity by 17%. This smaller footprint reduces our wood spacing load by 13% for vented combis. The smaller footprint and innovations around steam generation and cleaning make this a very efficient combi with 38% less power required for operation, which means less copper going into the building and 27% less water during cleaning. This is our best combi yet and by the numbers, this is a best-in-class combi delivering on our customer sustainability and environmental initiatives. The Invoq was designed for the Middle by OneTouch Control and it is Open Kitchen ready, Middleby's IoT platform. And finally, the third featured new product is the Pitco Smart Solstice Fryer. Before we talk about the SmartSolstice Fryer, I am going to make some background comments about the two most common types of fryers marketed today, Traditional; or full oil volume fryers and ROV or reduced oil volume fryers. ROV fryers have become the preferred choice of fryers due to the benefits they deliver by automating oil filtering and oil top-off. These features lead to reduced oil consumption versus traditional fryers. However, even with all the benefits of ROV fryers, they tend to struggle when it comes to heavy-duty frying tasks, such as frying chicken and heavily breaded products. Said differently, if a traditional fryer could deliver the same automation and oil savings as an ROV fryer, our customers will continue to use traditional fryers to take advantage of their full oil volume. The Smart Solstice is the first and only full oil volume fryer that deploys automated filtering, oil top-off, connectivity and smart oil sensing, which measures and reports oil quality and life in real-time through the Middleby One Touch Control and Open Kitchen. These features make the Smart Solstice the best all-around fryer for our chain customers and really all customers and while it requires more to fill with that, the cold zone and filtering process combined to extend oil life beyond the point of an ROVfryer as it takes longer for threshold levels of Total Polar Compounds, TPCs, to form in the larger oil volume, thus requiring less oil changes. Note concentration of TPCs determine when an oil should be disposed. Finally, the Smart Solstice uses the Middleby One Touch Control and is Open Kitchen ready. And before we move over to Bryan, I would like to mention that we made two acquisitions as we concluded Q4, Marco Beverage Systems and Escher Mixers. These companies are synergistic with the beverage platform and food processing group, respectively. Marco brings a lineup of well-engineered and beautifully designed coffee brewing and dispensing products, along with water dispensing capable of dispensing hot, chilled and sparkling water. These additions help round out Middleby's already robust beverage platform. Escher Mixers bring large-scale spiral and planetary and automated mixing lines to our Food Processing group. These mixers afford our customers the ability to specify Middleby mixers as part of a Middleby full-line bakery solution. Thank you, and over to you, Bryan.

Thanks, James. When I think about 2022, one word comes to mind, records, record sales, record earnings, record quarter, record year and we delivered this while attacking the challenges from supply chains, logistics, inflation, labor and the residential market conditions. To think about records is that they are meant to be broken. We plan to make that happen in '23. More on that later, but let me start by briefly reviewing our recent performance. For fiscal 2022, we generated record revenues of over $4 billion. Our adjusted EBITDA exceeded $853 million and was nearly $874 million, when considering the impacts from year-over-year changes in foreign exchange rates. GAAP earnings per share were $7.95 and adjusted EPS, which excludes amortization expense and non-operating pension income, as well as other items noted in the reconciliation in the back of our press release was $9.10. For the fourth quarter, we generated records in revenue at over $1 billion and adjusted EBITDA at over $233.5million. Q4 GAAP earnings per share were $2.45 with adjusted EPS at $2.57. For the year – sorry, for the quarter, year-over-year revenues grew over 19% or 14% organically. Adjusted EBITDA grew 21% over the prior year. Our margins expanded over 100 basis points from Q3 and were 22.6% or 23.8% organically. By the way, all margin values I will discuss hereafter are on an organic basis as well, meaning excluding any acquisitions and FX impacts. Commercial Foodservice revenues were up over 19% organically over the prior year. The adjusted EBITDA margin was over 28%. While we work through some operational hurdles, we did have a rather favorable sales mix. In residential, we saw an organic revenue decline of 9% versus 2021. The adjusted EBITDA margin was 16%. In Food Processing, total revenues exceeded a whopping $180 million and increased approximately 29% organically. Our adjusted EBITDA margin was 29%, our full-line solutions are resonating with customers. Even though we delivered record results, it was not an easy quarter, supply chain and labor matters still impact operations, but we drove volume and did our best to maximize mix, the results show where our innovation is taking us that we are providing compelling solutions and marching towards our margin goals. Our operating cash flows were over $159 million. The working capital impacts from inflation and supply chain challenges, while still present, were less impactful this quarter and our free cash flow conversion exceeded100%, which is the best it has been over the past two years. Looking forward, we expect that our cash flow generation should return to pre-COVID levels, where we had been seeing free cash flow to net income of at least 90% for our fiscal year. Our total leverage ratio was 3.0x. Our covenant limit is 5.5x, so we currently have over $2.2 billion borrowing capacity. These figures are after giving effect to the nearly $100 million we deployed in Q4 on acquisitions and stock buybacks. For the year, we had operating cash flows of nearly $333 million and used $67 million for capital expenditures, thus generating over $265 million of free cash flow. We invested almost $290 million in acquisitions and we also deployed $274 million on stock or capital-related transactions. Had we not made these capital transactions, our leverage would have been around 0.3 turns lower. While we are exceptionally proud of what we delivered in '22, we are fully committed to delivering new profitability records in 2023. How will we do this? The answer may be founded in alley amongst wizards and with a little help from spells and magic. In February, Orlando was home to two very popular alleys. Diagon Alley, as made famous by Harry Potter, and the even more impressive innovation alley at our NAFEM trade show booth. I was in Florida with my son and it turns out he was more interested in one over the other. The two of us were walking down Diagon Alley on an unseasonably cold day, where mobiles wearing heavy coats, scarves and gloves. However, the line around Florean Fortescue's ice cream parlor was long and winding, stretching down the block. As we entered the shop, I discovered a secret. Their treats are not entirely magically produced. They come from a tailor freezer with a special boost from the most recent acquisition. Imagine a machine that starts out its existence dispensing only two flavors. Grab your wand if you have one and cast a spell of flavor burst, you instantly are serving 16 flavors. Our beverage magic does not stop with ice cream as my son soon learned. At one meal, he was playing with the ice in his drink, I asked him why, and he told me he wanted to chew it. This brought a huge smile to my face, apply the chewblet spell and your glass will fill with [Indiscernible] delectable ice. exactly what he was looking for and as a bonus, with its larger surface area, it keeps your drink colder longer too. But if chewing ice is not your thing, we have a spell for that, too. ICETRO, will make endless nuggets appear. And we know dispensing Magic, too, looking for butter beer, but need it faster and consistently poured, S-Tap delivers every time or has the bricks and curse been affixed to you. To quickly dispense perfectly formulated fountain beverages every time, one special word can remove the curse, Newton, constant flow valves appear and will revolutionize your dispensing, or are you looking bigger? Are you afraid of ghosts, but want to have a restaurant pop out of nowhere. The easy combination of Nikko Solstice EVO will have your grilling and frying needs ventlessly addressed. While my son may now believe that I work at the Ministry of Magic, the truth is that my favorite place to be found is that the MIC, the Ministry of Incredible Kitchens. Journey there and you can transform from muggle to culinary Wizard. Our talented chefs don't have wands. They have the One Touch control, which may seem like magic. It puts all our spells at your fingertips. And what keeps this wonderful culinary world running smoothly, even while we battle those whose names cannot be spoken, just like Hogwarts, Middleby is led by a soft-spoken distinguished gentlemen of Irish descent. So, whether at Hogwarts or the MIC, there is much to learn, explore and experience. We want to share all our powers with you, and we are using all our powers to grow in '23. While it may seem like magic, we will actually grow because of innovation and excellence in execution. In 2023, we look to expand margins for the total company and in two of our three segments as we work towards our medium-term targets. As a reminder, our annual adjusted EBITDA margin targets are 30% for Commercial Foodservice and 25% for food processing and the residential platform. I know there is much focus in the market on the challenges residential is facing. I will get to that. It's important to understand that across our entire portfolio on a daily basis, we are still tackling supply chain challenges and facing inflationary pressures. Labor is proving to still be problematic in areas. Nonetheless, we are not slowing down investing in new capabilities and growing our presence in new markets. What will this mean for '23? It should be an even greater year. It is just that Q1 will step back from the great fourth quarter we recently completed, keeping in mind that Q4 was exceptional in two segments. We benefited from a favorable product mix and delivery of full-line solutions. So, I'd like to think we're now living in a post-COVID world, seemingly getting back to some pre-COVID norms. This means, we are back to having some seasonality patterns where Q4 is usually our peak quarter and then Q1 is not quite as strong when comparing sequentially. Over the course of '23, we look to be improving top and bottom-line sequentially for all of the segments. Comparing our Q1 '23 outlook versus our performance for the first quarter of '22, for commercial and food processing, we are looking to see revenue growth and modest margin expansion at both. What should not be unexpected is that residential will see meaningful revenue declines on a year-over-year basis. Recall that Q1 of '22 was the Resi's highest revenue quarter ever, which included over $110 million of outdoor grill company revenues. The decline for '23 is being driven largely from the impact of retail destocking of grills, along with generally challenging conditions around the residential housing market. Nonetheless, our Q1 '23 residential revenues are probably down just slightly from Q4. Overall, as '23 progresses, I reiterate that we currently expect to be delivering sequential growth across the board. For the year in total, we plan to see organic revenue growth in commercial and food processing with margin expansion. Supporting this are our backlog levels. I won't make you wait for our 10-K filing next week to get this info. As we ended the year, our total backlog was nearly $1.25 billion. For commercial, it was over $750 million, at Food Processing, it was over $310 million and Residential came in at $175 million, which does help buoy the segment even though for the total year, Resi will likely be seeing revenue declines. In spite of that, we look to have decent margins, meaning expected to see them in the mid-teens and reminding anyone who has not yet fully understood this about our operations, we have industry-leading margins. Given customer buying patterns, the destocking impacts will be much less after Q1. As a result, on a year-over-year basis, we currently anticipate seeing growth in the second half for Resi. Looking at '23 for Food Processing, we are poised for solid growth. We have a very strong backlog and we continue to land large orders. As is typical for this segment, margins start out the year low, but build across the year. Year-over-year margins should expand. We plan to see growth in commercial too, our leading technology, customers' development plans and our backlog are amongst the growth drivers, piecing this all together, for the year with full year-over-year growth and margin expansion in two segments and with resi likely seeing second half year-over-year growth, we currently see total companies - total company revenues up modestly and growth in EBITDA dollars and margins. We are delivering what Middleby is known for. Before I close, I want to cover one technical area as it will impact our GAAP results when comparing '23 to '22, please bear with me while I spend just a little time on the impact of our pension plans and what they will have on our '23 GAAP earnings. Again, within our GAAP results, we have a non-operating and non-cash benefit generated by the accounting for pension plans. This totaled over $42 million in 2022. Note that we exclude this from our non-GAAP adjusted earnings. The amount is determined at the beginning of the year as part of an actuarial valuation process. This amount is most impacted by interest rates and asset values. For 2023, this amount will be much lower at approximately $10 million due to the increase in interest rates and a decline in asset values in the pension plan over the past year. Given our largest pension plans benefits are frozen, we make only a modest amount of cash contributions to the plan each year and that will not change for 2023. By the way, while the P&L will not see as large a benefit in '23 due to changes I just noted, we have seen a large benefit on our balance sheet. The actuarial determined unfunded liability that at the end of '21 stood at approximately $200 million has nearly – has been nearly eliminated at the end of '22. Again, this will not impact our cash flows or non-GAAP metrics. In conclusion, '22 was an exceptional year, '23 will be even better. Being a Chicagoan, when I think of '23, I automatically think of greatness, Ryan Sandberg, Michael Jordan, I probably wear their jerseys all year, as a reminder that '23 will be Middleby's greatest year yet. And with that, we are open for your questions.

[Operator Instructions] And the first question will be from John Joyner from BMO Capital Markets. Please go ahead.

Hi, great. Thank you for taking my questions and Bryan, you might need to cut back there on the flavor verse for a few days, just a suggestion. But anyway, so first on your EBITDA margins, I mean, which definitely showed a solid progression throughout the year, I mean, in both commercial and processing and I know you mentioned modest margin expansion is expected for the commercial business for this year, which probably makes the -- I guess, the exit margin rate a bit that we had in 4Q, a bit optimistic for 2023. But is there any more kind of quantification that you can offer around full year EBITDA margins kind of by the businesses or in particularly commercial?

Yes, as I look at commercial, I would say I start by looking at the second half of the year kind of combined, obviously, as you look through the year, we are expanding and we're having more pricing come through as we go through each quarter, as well as continuing to face inflation pressures and such. So if you look at the back half of the year that probably is closer to like 27% and I did say, Q1 will be a step down from Q4. But I think we get to that 27% and then we'll build to that level or a little bit better for the year than we did for '22. But again, it has a building progression from the year. There is always peak in Q4 and again, the takeaway is, as you look at it on a full year basis, we do expect '23 to be higher than '22, right? I think we're on our path of marching towards that target we have out there.

Okay. Excellent and maybe just one more, if I could. Just with regard to overall demand, I mean, again, on the commercial business, and Tim kind of talked about some of these end-markets that are, I guess, coming back a bit. But – has there been any shifts by end-markets versus, say, a quarter ago, positive or negative? And would you say that commercial customers really haven't stepped back and are really sticking with their expansion plans?

I am kind of trade off here with Steve, but I mean, I think we've continued to see strong activity levels. I think quarter patterns have kind of been all over the places you've gone through supply chain issues, but I think what's been constant is really kind of the activity that we've got in the marketplace, particularly with our large chains. But as I mentioned, also in the comments, I mean, there are other segments that we see turning on that had not been there 18 months ago. So it's kind of broadening out as time is going on here.

Okay. Great. Thanks so much.

And the next question will be from Saree Boroditsky with Jefferies. Please go ahead.

Hi, thanks for taking my question. It looks like just kind of focusing on resi looks like you start the year maybe down 40% year-over-year, if you're down sequentially. Is this the right way to think about it? And given this decline, how do we think about margins for the first quarter? And then, just to follow that up, how do we think about some margin offsets to volume maybe from price cost or investments in this segment?

You say, what did you call the revenue number for Q1?

Maybe down 40%.

Yeah, I think that, that could be right. We did 3.30 plus last year Q1. I talked about it being a little bit less than [Indiscernible] that kind of 35 to 40 range, if you do the math. So, I think that's – you did captured my comments appropriately.

Just maybe – and I think this is in Bryan's comments as well, just wanted to frame it up. The outdoor grills, probably not surprisingly is driving an outsized decline given that we did well north of $110 million in the year. So you're seeing a much larger decline as you got the destocking of the grill. So the rest of the platform is not down as much. So certainly, it's down double-digit, but it's kind of weighted very heavily towards the growth. Yes. I mean, over – more than half. The majority of the decline is from those recently acquired grill businesses.

And then, can you just talk about the margin expectations in the first quarter? And then, just the rest of the year as you think about volume headwinds maybe being offset by some price costs or investments in that segment?

Yeah, with the revenue decline in Q1 kind of Q4 and looking at the impact of, call it, not having the leverage that comes with higher revenue levels, margins will step down in Q1 from Q4. But as I said, build from there, so it's – we still expect to be [Audio Gap] for the quarter. Obviously, I talked about being in the teens for the year. Q1 is, I would say, is more pressure on it than the full year number, given I talked about revenues growing from there, right? And so we get more leverage benefits as we work through the year, right, thus helping that margin improvement as well.

And if I could just squeeze one more in commercial filters, obviously, another very strong quarter of growth. Can you just talk about the demand you're seeing in 2023 from a domestic versus international perspective?

Commercial.

Saree, I think when you think about the larger chain customers, again, we have talked about in prior calls. One, I think it's great. They've really reiterated you all at their build plans for 2023 and again, most of our big chains, you had record new store openings in 2022. And again, I've talked about before, one of the great things, I think, has come from the last couple of years. So working through supply chain disruptions, we've gotten a lot closer in terms of understanding plans for the upcoming year. So I think we have a very good view for this year. I will tell you, I mean, if you look at where the chains are growing especially it is in many international markets. You think of markets like India, Brazil, definitely parts where you see a lot of the chains actually growing - perspective, will be positive year-over-year from a new store build perspective. But I actually do think the international market again, going back to some of those key markets is where you will see some pretty substantial new store opening growth. I think when you think of just some of the other segments, not primarily in chains, I do think you'll see domestic growth in kind of more of the general market. I think we put a library work into our consultants. I talked about in the prior call, which is driving specifications schools, your B&I, et cetera. So I do think that will show up in the domestic segment. So I think both are positive for the year. But I do think, again, going back to the change, you will see some pretty substantial international growth for 2023.

Great. Congrats on the quarter and thanks for taking my question.

Thank you. And our next question is from Tami Zakaria from JPMorgan. Please go ahead.

Hi, good morning. So going back to that margin expansion comment for both commercial food and food processing, so is that primarily driven by – going to be driven by price/cost finally turning into a tailwind? Or would there be some other drivers like mix or operating leverage? So like what are your price cost assumptions for this year?

So, it's really all the above. I mean I think a lot of the margin expansion that we've seen across the platform really is driven by our strategic initiatives. So we are definitely evolving the mix of the products. I would say that's number one. And then, really investing in our manufacturing platform. So I think you've seen a lot of that coming through. Price cost has been a headwind and it continues to be a headwind. So I mean, I think as we've continued to take pricing, inflation has continued to come through even in the back half of the year, you see some of the commodity items going down, but as you kind of dig through things like electronic controls and another. I'd say, more specific components, they've continued to go up. So, the way we have kind of trended here is the gap of price/cost is closing. So I think we saw some progress in the fourth quarter. So we are still behind the curve where cost is higher than the price. We did take some pricing going into 2023 that will further close that gap. So it is a – it's a tailwind from the perspective that we're closing the gap between pricing cost. But it will still probably be a couple of quarters before we get the parity here.

Got it. That's very helpful. And just a quick follow-up on the pricing comment you made. Can you remind us what incremental pricing action you are taking across the three segments this year?

Well, it's we didn't take pricing across the board, right? Like we've got 110 brands. So, it's brand-by-brand, and we've been very thoughtful relative to the cost that they have seen in the marketplace and passing them around it, also contemplating what the competitive market position is. I'll just also remind, we've launched so many new products. So a lot of times, we're bringing products to the market that we really didn't have an existing price out there. So that is also a factor. Kind of as you look at the segments overall, we took, I'll say, mid-single-digit price increases in commercial going into the year. It's probably somewhat similar on food processing, although a lot of those are projects that were kind of quoting on a very specific basis depending on what the customer needs. It's been lesser on residential where we took some significant step-ups last year.

Got it. Thank you so much.

And the next question will be from Jeff Hammond from KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning, Jeff.

Just on – back on res Kitchen, I guess there has been kind of two issues. One, the destock and weakening and also this kind of supply chain dynamic. Just give us a sense of when you get line of sight to kind of the supply chain improving? And then, just around the destocking, I think you talked about it at your Analyst Day some new channel wins and partners and you had to get through some of their destock? And just when you think some of those new channel partners would inflect? Thanks.

Yes, so we are going to continue to see the destocking in the first part of the year and it's not only, again, our products coming up, but I mean there is inventory of other brands that they've got in the inventory, so they're not going to load up on, let's say, some of our new products until they got inventory levels overall. So, I mean, I think the way we think about it is we continue to be impacted by that in the first half of this year. The first quarter most significantly because we had a very strong first quarter last year at grills kind of over that $100 million of revenue that drops off significantly not unexpectedly, probably to a lesser effect in Q2. And then, we can't say precisely, we are inventory in the channel is going to be at that point, but I think we feel like we're in a much better situation going into the back half of the year and perhaps could see growth because inventory levels are reset and we do feel like there is some momentum in the platform. Certainly, there is a number of new products and James commented on one of them, which is a great one to Konnected Kamado and certainly, we've got the gravity series Digital Charcoal and Masterbuild as well. So, I mean, I think we see some market share gains and great demand there. So we have been having kind of some initial season load-in orders there. So I mean, we're excited about those products. So, I think as we go through growth season, we'll kind of see what the demand for those products are, but we're pretty excited about those.

And just the China supply chain dynamic?

Yeah, I mean so that's much better. I mean certainly, we still have lots of supply chain issues out there, and you can wake up and tomorrow, you could have a new story. But I mean, I think, by and large, a lot of the issues that we had from the China supply chain, which is not only manufacturing, some COVID-related, but also shipping. And as you can remember from last year, we're in a very different situation of container availability, cost some of the domestic freight, which has improved, as well. We are in a much better situation there. So I mean I think we missed a little bit of the growth season last year, because of that. So I mean, I think we'll be – we don't foresee that happening in 2023.

Okay. And just on the non-operating side, can you just update us on how you're thinking these FX losses go away or don't go away? And I think you gave an update on interest expense at your Analyst Day, I just wanted to kind of level set how you are thinking about it, if there's been any change there?

Yes. On the FX, we are constantly reviewing our folks to manage that in our hedging approach. I do feel like we will see less significant, less variability in it as we work through 2023. And then, on interest expense, see, they have been some forecasting there. I would say, based on current debt levels and current interest rates, I should say, our current interest rate swaps and probably baking in another 50 basis points of increase, interest expense stays around where it is for Q4. Again, that's based on current state. So, if we generate cash and pay down debt, then they could come down. But again, I'm viewing it as holding it relatively steady given our swap portfolio that's in place, again, subject to M&A activity and/or pay downs and/or buybacks, all those things. So and...

So, 4Q is kind of the good run rate to model absent capital? Okay. Thank you.

Yes. Exactly Yes.

Hey, just – I am going to comment on foreign exchange a little bit to just – and I know Bryan went through it pretty detailed. But I mean in local currency, I mean, it really was a big impact to us from an operating perspective this year. I mean it was $20 million of EBITDA, just translating to local currency in the U.S. dollars given the strength of the dollar relative to other currencies as compared to 2021. So, I mean, we would have been at north of $470 million of EBITDA on a like-for-like basis. So I mean that's – now that is now baked into our number, right, of the $850 million of EBITDA. Certainly, I don't think it's difficult for anybody to predict financial markets these days. But I mean I just think that currency is more stable this year. So that would not be a headwind most likely that we would incur again in 2023.

Okay. Thank you.

Thanks.

[Operator Instructions] And the next question will be from Brian McNamara from Canaccord. Please go ahead.

Good morning. Thanks for taking my question. For commercial foodservice demand, are you seeing signs of deferred equipment spending, whether it was deferred recover since starting to come through? And if so, what is driving that confidence for these customers to step in now with the macro picture a bit murky?

I don't think anything has been deferred. Again, going back to earlier comments, if you think about our chain customers, really continue to accelerate new store openings. So we have not seen that slowdown. I think the only thing, may have been deferred is some of the replacement business that we've talked about on prior calls. Again, if you think about where our orders historically come from pre-COVID, about half our orders traditionally do come from our replacement business and that has shifted the last year or two with just so many new store openings with the bigger chains. So their focus on new stores, I think, has deferred some replacements, first COVID then with the focus on new stores. So if anything was deferred, I think it's that replacement cycle. I do think that the new store trend continues for this year, at same level as 2022. And so I do think you see that replacement cycle maybe kick back in towards the end of this year and certainly in this '24 and '25, which is obviously exciting. And I think a big thing there, too, what's exciting about the replacement cycle having been deferred is, I think what you're going to see and replace equipment with is, obviously, all the new technology and innovation. James talked about on the call and that we talked about with our customers. So I think it sets us up for a great couple of next years within commercial.

Got it. And then, if I could squeeze another one in on residential. At least for the publicly traded grill players, H1 destocking has been signaled and should be pretty well understood. I guess, as it relates to your grill business, is the destocking worse than you had perhaps expected a few months ago?

I don't remember what we expected a few months ago. But no, I mean, I don't think there is anything here that is surprising to us, no.

Okay. Thank you.

And the next question is from Todd Brooks from the Benchmark Company. Please go ahead.

Hey, thanks for taking my questions. First one, with the capital that you invested in your own production capabilities over the past 12 months or so, where do we feel we are as far as the ability to realized backlogs more efficiently, more quickly with the investments that were made?

So, I think we've been realizing those benefits. Again, we've got a lot of brands, so there is 110 brands. We've made a lot of progress across lots of those different businesses. Some of those are – we're not just trying to respond to – we've got a lot of backlog. We need to throw a lot of capital there. I mean, these are kind of longer-term infrastructure plays as we're thinking about growing platforms. We've invested in our packaging group. We invested in our coffee solutions group. We've invested in our ICE platform, a number of our cooking platforms, particularly areas where we see large market opportunities where we think we're going to have longer-term organic growth and where we're launching new innovations across the company. So I mean, I think the investments that we're making, they certainly help us with our backlogs, but they really are longer-term strategic initiatives to grow the platform and profitability. Certainly, they are going to help us as we go through 2023 as well. So I mean I think we've been seeing the benefits as we've gone through the year, and we still have, I'll say, more equipment that's getting turned on as we speak here, particularly in the fabrication areas, we're really trying to automate our factories more and more and fabrication tends to be the pinch point. So we'll – I'll say, kind of get continual gradual improvements in our production as we go through 2023.

Okay. Fair enough. So there is not really a step function to revenue growth in '23, that's being unlocked by these investments. It's just a further enhancement as we go through the year then.

Yeah, I think that's correct.

Okay. Great. And then, two more quick ones, if I can, on the food processing side and the demand in the quarter, obviously, knowing that we typically get a seasonal build late in the calendar year. But you've talked about more large projects. Can you just talk about, maybe, within the backlog, large project mix within that and just trends that you're seeing as you put together increasingly full line production solutions for your clients?

As I think about the backlog, right, and it is up from – if I go back to pre-COVID levels, not quite 300%, but maybe 250% or so, I'd have to go do a little bit of the math. The predominant driver of that increase is large orders, right? I mean there is a good chunk of this business. I'll say that is parts and more modest equipment that is a little bit more off the shelf-ish or turns in weeks or months and such. But we've talked about the larger projects come into the backlog and they stay there longer because they take 12 to 24 months to deliver. So, again, we've seen the backlog continue to grow over the past two years. And again, I would take that increase and say it is a large percentage of it’s driven by larger projects.

Okay. Great. Thanks, Bryan.

Thanks.

Ladies and gentlemen, this concludes...

Do you see another one? Okay.

Sorry, this concludes our question-and-answer session. So I'd like to turn the conference back over to management for any closing remarks.

We'd just like to thank everybody for being on the call today and look forward to speaking to you at the end of Q1.

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