Middleby Corp (MIDD) 2022 Q1 法說會逐字稿

Thank you for joining us today for The Middleby Corporation First Quarter 2022 Conference Call. With us today from management are CEO, Tim FitzGerald; CFO, Bryan Mittelman; Chief Commercial Officer, Steve Spittle; Chief Technology and Operations Officer, James Pool. We will begin the call with opening comments, then open the lines for questions. (Operator Instructions). Also, please be aware that a presentation to accompany the earnings announcement is available on the investor page of middleby.com.

Now I'd like to turn the call over to Tim FitzGerald. Please go ahead, sir.

Great. Thank you, (inaudible), and thank you, everybody, for joining us today on our first quarter earnings call. We started the year with momentum, building upon the progress we made in 2021 and continuing to execute upon our financial and strategic initiatives. Financially, we posted record sales and earnings for the first quarter, and we were able to largely maintain our profitability while facing unprecedented inflationary impacts.

Supply chain disruption and the related cost impacts have become increasingly challenging as a result of the recent COVID shutdowns in China and the impact of war in Ukraine. Operationally, we remain focused on increasing our production to support our significant backlog, which again increased in the first quarter with incoming orders outpacing revenues.

Our teams continue to execute in the face of daily challenges affecting parts availability with concerted efforts to work with our strategic vendor partners to minimize disruption to operations. And we also continue to make investments in manufacturing equipment, facility expansions and people all in an effort to increase production capacity.

While the additional recent disruptions to supply chain have placed further challenges on our operations, we increased shipments to a record level in Q1, and we are committed to continuing improvement as we progress through the year. As we continue to manage operating challenges and the related margin pressures, we are not losing sight of our long-term profitability goals set forth for each of our 3 business segments.

We continue to invest in R&D and launched new product innovations with a focus on increasing profitability of our sales mix. While pricing actions already enacted early in the second quarter should offset the most recent wave of supply chain cost increases with a benefit realized in the second half of this year. While overall market conditions generally have become more uncertain over the past 90 days, we continue to see underlying trends and factors driving demand across all 3 of our business segments.

At our Commercial Foodservice segment, the industry is still in long-term recovery. While traffic has moderated in the QSR and fast-casual categories, we continue to see our customers invest in solutions to address pervasive challenges of labor, speed of service, energy and food costs. Other segments such as casual dining, institutional and travel and lodging are still in recovery with increasing investment activities.

At our Residential business, rising interest rates and inflationary pressures present a risk to what has been favorable market dynamics in the housing market. However, new home starts continue to be robust. And while existing home sales have softened in recent weeks, they continue to remain ahead of 2019 pre-COVID levels. The housing market at the higher priced segment of the end continues to perform and time spent at home also continues to drive new kitchens and remodels.

In the Food Processing segment of our business, we see stable demand with the need for equipment to increase capacity, address labor challenges and rising food costs. We're poised to capture new trends in faster-growth categories and provide unique offerings with our full-line automated solutions, and we continue to see a strong pipeline of opportunities ahead.

In summary, the start of 2022 has presented new and evolving challenges impacting supply chain with additional inflationary impacts and greater uncertainty in certain markets. Despite these challenges, we are confident in our market positioning, continued strategic investments and our ability to execute. The favorable factors driving demand for our equipment to address challenges facing our customers continues to grow, and we are best positioned to support their needs.

Now I'll pass the call over to James to comment on some of our continued technology initiatives and spotlight another recent product innovation, also highlighted in our investor slides.

Thanks, Tim. I'm happy to introduce Middleby One Touch, Middleby's new control system that spans our brands, segments and our customers. The One Touch is a combination of 2 years of effort to standardize Middleby's control platform. One of the many strengths of Middleby is our brand individuality. But when it comes to controls, the need for a singular Middleby control system was ever so obvious, especially as we continue to acquire brands.

To do this, we focused on several key areas of development. First, we wanted to provide a lightning fast and fluid control environment with seamless connectivity to our Open Kitchen IoT platform to satisfy our Gen Z to our Gen X customers.

Expanding on connectivity, the Middleby One Touch controllers are Open Kitchen ready. This allows our customer base the ability to purchase Open Kitchen connectivity at the point of equipment sale, thus providing our customers a straightforward, hassle-free way to connect and onboard their equipment, while also providing them a future-proof IoT platform for the additional Middleby equipment purchases.

Next, we focus on the user experience, which is timely given the current state of labor within our industry and the struggles around training. Our work on the Middleby user experience yielded a single user experience that works across all Middleby products whether a Pitco fryer, a Firex, a TurboChef rapid-cook oven, a Middleby Marshall conveyor oven, a CTX, a tailored soft-serve machine, to name a few. Once a customer uses the Middleby One Touch control, they will forever become a power user for any Middleby One Touch product.

Lastly, and most importantly, in today's environment, supply chain. The effort focused on reducing the number of control SKUs across the brands to essentially 3 different One-Touch controls, one for high-touch high-use products, one for mid-touch high-use products and one for our very simple products that require little interaction. Each of these 3 controllers rely on 2 different designs, utilizing unique MCU chips while also providing -- or while also being produced by 2 independent manufacturers. This affords us the ability to utilize alternate controls with only a modest amount of effort should a supply chain issue arise due to a chip shortage or a manufacturing issue.

Our new control strategy was born from the goal of having 1 control, 1 user experience and 1 learning curve for our products and our customers. We will be debuting the Middleby One Touch at the (inaudible) later this month, and we'll have approximately 50 new products and/or platforms going live by the end of 2022.

But before I kick it over to Bryan, I would also like to give a strong mention to our new One Group Espresso machine, the Synesso es.1. While Synesso was known for building some of the best and most elegant espresso machines in the market, this is our first machine designed and built for the home and commercial use. If you ever get the opportunity to own, use or see why are these machines being built, you will quickly realize this is a multiuse commercial espresso machine that happens to work in the home.

The es.1 brings to life Middleby One Touch control, combining Synesso's signature engineering approach and flawless temperature stability plus Synesso's on-screen graphical brewing data, which is used to dial in the multiple stages of brewing, pre-infusion, full extraction and post infusion. This on-demand feature allows users to visually understand how to adjust the brewery process to yield the ideal balance between acidity, sweetness, intensity of flavor and the desirable bitterness.

The es.1 incorporates REACT technology that adapts to multiple espresso blends quickly making it your most trusted barista. We are excited to add this to our residential platform for our Synesso and espresso enthusiasts and those seeking the best appointment.

Thank you, and over to you, Bryan.

Thanks, James. For the quarter, we again generated record results with revenue over $995 million and adjusted EBITDA of $197 million. GAAP earnings per share were $1.52. Adjusted EPS, which excludes amortization expense and nonoperating pension income as well as other items noted in the reconciliation at the back of our press release, was $2.13. Year-over-year revenues grew over 31% or nearly 12% organically. Adjusted EBITDA of $197 million reflects growth of over 22% compared to the prior year or 9% on an organic basis. Our margin was nearly 20% of revenues.

Commercial Foodservice revenues globally were up 11% organically over the prior year. The adjusted EBITDA margin was just over 24%. 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 16% versus 2021. The adjusted EBITDA margin was nearly 22%. Please note that this excludes the late December acquisitions of the Outdoor Grill companies. As you are reviewing our reported results, please keep in mind a few additional key points. At this time, the acquired businesses have a lower margin profile than the remainder of the segment. Also, purchase accounting impacts from valuing acquired inventory negatively impacted reported gross margin and operating income by over $14 million for the quarter. This accounting nuance, however, is excluded from our adjusted EBITDA metrics.

In Food Processing, organic revenues increased to 8.4% and the adjusted EBITDA margin was 19.4%. Across the company, we continue to face supply chain and inflationary challenges as well as the impacts of COVID, which in turn impacted operations and production efficiency. These factors all affect our margins and hinder our ability to produce at higher levels. For the past quarter, these challenges most dramatically affected margins in the Food Processing segment.

As we aggressively manage through these market conditions, including seeking to improve product mix and control costs, we had rather positive results in residential as well as successfully delivering results generally as we expected in commercial. Cash flows used by operations were over $15 million. The current business environment is influencing our working capital levels, especially as it relates to inventory, where we are addressing very strong demand levels while facing rising costs and many supply chain hurdles. Increasing sales levels are also generating higher accounts receivable.

Also, the recently acquired businesses have some seasonality that contributes to working capital increases earlier in the year. Overall, working capital changes in the first quarter negatively impacted cash flows by over $140 million, about 2/3 from inventory and the remainder from AR. Even with the volatility being experienced, we anticipate generating positive operating cash flows for Q2.

Our total leverage ratio came in at just over 3x. We continue to have over $2 billion of borrowing capacity. These figures are after having expended over $250 million for capital and share-related actions over the past 2 quarters. During the first quarter alone, we used over $155 million for stock buybacks in open market transactions.

As we evaluated the environment to develop our outlook, I took some time to reflect on these strange times and the multiverse of madness that we appear to be operating in. Seemingly, endless obstacles continue to appear with no portals offering relief as our resilience is tested while we fight to achieve our long-term goals.

And I pondered why did I eagerly join the Middleby culinary universe and why do our teams demonstrate their superhuman abilities in tackling any challenge? Is it done for the satisfaction of the job well done or to help drive customer success or to generate strong returns for investors or for the pride felt for mentoring and developing our people? These are all great reasons, but for me, it was not about glory, it was about the promise of free pizza. After all, why else would one take a job in an oven factory.

Over the past few years, besides getting to learn about pizza solutions, I've also had the opportunity to become familiar with other great products and most importantly, taste the output. Chef Andrew has taught me much about the amazing CTX, an automated conveyorized cooking platform. It is self-cleaning and can run on electricity, while, is thus easy to use and environmentally friendly.

I wasn't truly impressed though until last week's Cinco de Mayo celebration. If you follow us on social media, you have seen the spread that Chef Andrew put together, about which it is hard for me to not ramble on endlessly. So suffice it to say that the Carne Asada Tacos were excellent. Then I got to thinking, is it the oven or is it the chef? I found the answer and something I learned years ago back in college. It takes 2 to make a thing go right.

Across Middleby, we have super chefs who protect our customers with exceptional equipment and serve amazing creations. It takes a culinary artist and great equipment. It takes a good recipe along with good food. While to some, the CTX like my musical preferences may be old school, it still makes my taste buds dance and lets me enjoy a lot more than pizza. Work with any of our chefs and you too will see how it takes 2 to make it out of sight. By the way, I came here for the pizza, but I'm staying for the tacos.

So where will all these tasty treats take us? As I share our nearer-term outlook, I remind you that we have been -- what we have been stating during our past calls, we are discontinuing the disclosure of orders details. Nonetheless, I will quickly note that for Q1, orders continued at generally similar levels as we had seen in the recent prior quarters, and they did grow overall when compared to 2021. Accordingly, our backlog continues to grow. However, with the overhang of the many economic and geopolitical risks, some slowing in order trends has occurred more recently. Even so, we do anticipate orders continuing to well exceed 2019 and 2020 levels.

For Food Processing, while the year admittedly did start a little soft, which is not entirely atypical for this segment, we had record orders in Q1. We continue to obtain some large orders, which will be fulfilled into 2023. This helps set the stage for a solid back half of '22 as well. In the near term, I'd expect Q2 to generate higher revenues and EBITDA margin as compared to Q1.

Residential will likely face the most notable headwinds as we look at Q2. Price cost will be a bigger headwind in Q2 before likely improving in the back half of the year. Supply chain challenges will have a meaningful impact on our volumes and revenues for Q2, especially with the COVID situation in China. While we do remain optimistic for the back half of the year and demand remains well above pre-COVID levels with current market dynamics, risks do remain.

Commercial Foodservice will benefit from a large backlog, but price cost pressures will persist in the near term before we see more meaningful improvements in the back half of the year. Across our portfolio, we have a positive outlook overall. Customers remain committed to robust expansion plans, our leading solutions are being adopted and that offer that numerous positive economic and social factors indicate meaningful demand can persist. As such, we continue to invest in our infrastructure. Net capital expenditures for the past 6 months represent the highest investments we have made. Our operational improvements and integration efforts are ongoing.

Putting all this together, the actions we are taking in overcoming the negative price/cost scenario bode well for the back half of '22 and into '23. On a total company basis, looking at Q2 as compared to Q1, there will be some ups and downs across the segments, but I suspect that our overall results will be fairly consistent with Q1.

For years, we have demonstrated that we have a resilient business and a strong business model and an experienced and capable management team that has been successful in turbulent times. We are poised for continued and greater success in the second half and beyond.

And with that, we look forward to your questions. (inaudible), you can open up the line, please. Thank you.

(Operator Instructions) Our first question comes from Mig Dobre from Baird.

I also appreciate Taco Tuesday, so thanks for that commentary. Maybe I'm -- Bryan, I'm looking to maybe clarify things a little bit. I kind of heard 2 conflicting things personally. I heard that Q2 revenue and margin, maybe they were going to be better sequentially relative to Q1, but then you kind of talked about Q2 being in line with Q1. So which is it?

Yes. Total company in line, right, it's -- Residential will be challenged; Food Processing a little bit better; Commercial, likely a little bit better as well, right? And so when you kind of add them up, it gets to my comment of overall Q2 similar to Q1, for consolidated results.

(inaudible). Okay. That's helpful. And then, of course, you highlighted that some slowing has occurred. So additional context there would be helpful, maybe the geographies that -- where this might have happened, segments, product lines, really anything that you can mention there would be helpful.

Yes. So I think China, as you might expect, given some of the lockdowns is kind of a market that's been affected not only in terms of supply chain, which is an obvious one, but also in terms of orders in that region that's had some effect. I think as you look across the segments, the one that we've seen have more impact is on the residential as Bryan mentioned, we still remain -- and this is a more recent phenomenon. Obviously, there's been a lot of disruption in the market, so we'll see how things evolve. But even as things have slowed there a bit. It remains ahead of 2019. So that -- those are really 2 of the areas to call out. Obviously, there's some disruption in Europe as well, but that's probably to a lesser extent.

Understood. On the Residential side, your business there has grown and you've made some acquisitions of late as well. The revenue contribution, I think, from acquisitions in residential was higher than what we were initially modeling. So I guess my question, twofold here. From a seasonal standpoint, I am presuming that the likes of Kamado Joe and Char-Griller and so on normally see like an inventory stock that kind of happens in Q1. How do you assess inventories in the channel?

And then the second part of the question is on the -- what I would consider to be the core portion of the business, Viking and AGA and such, from a -- you talked about a bit of a slowdown, but how are you kind of defining that? Is it in terms of inquiries that you're seeing in your stores? Or is it something else that you're using to kind of sort of define those market dynamics?

Well, I guess kind of the slowing -- we're just kind of talking about recent order activity over the last handful of weeks, again, ahead of 2019, but obviously, we've had significant growth over the last 1.5 years. So I think we're seeing that come off a little bit right now, but again, ahead of 2019.

There's not much inventory in the channel, right? Like, I mean, I think we've -- and that's pretty much true across all segments, right? We haven't had the ability to catch up to our backlog. So that is still true. Certainly, we have a very large backlog in Residential, which we'll be catching up to as we continue to move through the year, hence, a lot of the comments that we make about investing in our operations.

You can see our CapEx has gone up over the last handful of quarters as we've really invested in fabrication equipment and really expanding production, et cetera. on the Grill companies, there is a seasonal -- it's a little bit different across the brands depending on geographies. But typically, you have a build for Grill season. So you tend to be a bit heavier in the first quarter (inaudible), and that starts typically in the fourth quarter into the first quarter and early parts of the second quarter.

I'll just mention there. I mean as we kind of look forward, because obviously, the world changed a fair bit as we left the quarter going into Q2. So China will affect some of those new Grill companies more than the, I'll say, the broader residential platform because we're largely localized in U.S.-based manufacturing. But in that business, we get, more of the product is getting shipped there.

So from a production standpoint, as you kind of think about mix going into the second quarter, those new growth companies will be likely more affected with production and given the recent shutdowns that have been headline news. Of course, that depends on how things progress through the quarter.

But I would like to point out, for the first quarter under Middleby with the acquisitions, we were started off. And as Bryan said, dilutive to the overall margins, but we were about 12% EBITDA of those businesses to start the year. So I mean, I think we felt kind of good about how we posted in the first quarter.

And I'll say that, I mean, we've got multiyear strategy here, investing in the platform innovation graph to market. We feel -- continue to be despite the disruption early on, very excited about that platform and the growth opportunities as well as the targets that we had mentioned about the journey to 20% EBITDA margins over the next 3 years.

Okay. If I may, one final question. On the slides that you put out this morning, on Slide 8, you've got a pie chart there talking about revenue by demand requirement that, I for one, find really interesting. And in here, you said that replacement and upgrade, which is more than 1/3 your business, is still down or was down 13% relative to pre-COVID in 2021.

I'm sort of curious to get more context from you as to why you think that is the case? Why replacement has lagged as much as it has? And what are some of the implications here as we're thinking about '22 or '23?

Yes, Mig, it's Steve. So I would read into it maybe a little bit of a different take, not as much replacement being down just -- I think it's more the new builds have just increased as much as they have. So again, it's primarily driven by the QSR segments. Over the last 6 to 12 months, you're having such aggressive, you've new build plans that we saw last year, they have not taken a foot off the gas for this year and still pretty strong in what they've shared with us going into next year.

So I think it's more of a function of the focus on the bigger change on new builds, not as much, hey, we're seeing replacements shifting away. I just think it's the new build emphasis I still think once we get through as new build period that we're into the, again, I think based on the feedback from QSRs that last the next 12 to 18 months, I do think you see a replacement cycle pick back up again as we get into probably next year and '24. So that's how I would think about the breakdown and the change in the pie chart from 2019.

Our next question comes from Tami Zakaria with JPMorgan.

So my first question is, I think you mentioned you're expecting results to improve from the back half of this year and into next year. Just wanted to clarify, do you expect sequential improvement in both the top line and EBITDA margins in each segment as you go into the back half?

Yes. I mean that really is the simple take on it, right? Given our backlogs, given pricing actions and then that sets us up for those improvements and then we will see. The risk remains on supply chain and input availability. Should that improve, right, that becomes the tailwind we're waiting to pick up influence.

Got it. And my other question is, can you comment, how did orders trend throughout the quarter by segment? And I think you took a price increase in April. Did that have any meaningful impact -- pre-buy effect on orders?

I think we gave some pretty -- some -- I mean, obviously, we've been given order outlook for a while. I don't think we -- in terms of, by segment, I think we're going to probably start moving away from that a bit. I mean I think they were pretty solid throughout the quarter. We've made some comments really as we kind of entered early April here.

I mean, I think as we mentioned, we continue to have overall double-digit increase in orders in Q1. We haven't posted that, but I mean we saw continued trends at the beginning of the year. But as we've kind of moved into the April period, that's where we've seen it slow a bit.

The pricing, just as we went through the -- the dynamics had changed quite a bit. This is not a surprise to anybody, right? Like the impacts of the war as well as China, I would say we had incremental inflationary impacts that started to affect us in March.

A lot of the -- what we saw coming out of those issues were pretty quick responses of cost increases from our supply base. So -- and that was kind of new and incremental to the year. We were implementing a price increase in April already. So one of the things that we've done is capture those price increases very quickly. And the price increase that we took in the beginning of April was significantly larger than we originally anticipated.

So I just want to kind of set a little bit of a perspective here. I mean, I think we saw -- we were expecting to have kind of an inflection point in Q2 of where we would see margins start to expand. But now we've got a new wave of price increases, which we've addressed, that kind of pushes things for another, let's say, a quarter to 2, given our significant backlog. But we are confident that the price increases that we've taken already capture what we've experienced so far with a lot of the recent cost increases that certainly we didn't anticipate at the beginning of the year, given what the drivers for those increases have been.

So that kind of bakes into the comments that you hear on margins. So the story remains of we're expanding margins. So pricing to capture the inflationary cost, operational issues, operational actions as well as kind of the investments we're making in R&D and products that are also evolving our sales mix to expand our margins, which, hence, that story is intact, pushed a little bit to the right, but hence, our expectations for growing margins in the back half of the year.

Got it. If I can squeeze in 1 quick one. Do you have any other price increases planned for the rest of the year?

Tami, as of right now, nothing planned currently. But as we continue to monitor the ongoing dynamic of cost pressures we see on our side and just the overall market, if we have to go back to the marketplace with additional pricing, we certainly will. But at this point, there's nothing planned for the back half of the year.

Our next question comes from Saree Boroditsky with Jefferies.

So just staying on the price topic, given the price cost headwinds expected in the second quarter, could you just talk about your ability to price for inflation across the segments, particularly if you see more challenges on pricing in the residential to consumers versus the other segments?

We've taken action on all 3. I mean, I think our portfolio and leadership in each one. I mean, I think pricing has been sticky. Thus far, we've been able to pass those costs on. I mean, certainly, we are probably most sensitive to the residential part of the market, but I just also kind of point out that the premium end that we play in is not only the housing market has shown to be a little bit more resilient, but that demographic, the customers are -- let's say there's a little bit more ability to cover the price in that segment of the market.

Great. And then just on Food Processing, you highlighted large protein projects. Could you talk about the cadence of those projects as we think about the remainder of the year and into 2023? And then what's driving that demand? I believe there's been less investment in some of those categories such as hot dogs in recent years.

Yes. I mean, I think you can look at a lot of large protein producers, and they actually have a good number of investment products -- investment projects going on. We do a lot more than hot dogs and there's a lot of trends driving cured meats, alternative proteins, (inaudible) things are escaping me at the moment. But again, a variety of our customers have talked about expansion plans, and those are items that we will see more impact as we build the equipment really back half of this year and front half of next year, and some of that might even go beyond that, right?

So that's why it's -- these are projects that generally take over a year to get done. So certain things come in and out of our food processing orders and backlog very quickly and others like the large projects, again, can sit in the backlog for 6, 9, 12, 18 months.

I appreciate the comment. And then 1 last one for me. Could you just talk about the M&A pipeline? And if you've seen a pickup in the competition for some of these assets more recently?

So obviously, it's one of the hallmarks at Middleby. We've been doing acquisitions for a long time. And I think posted in this slide, you can see we -- even in the first quarter, a couple of additional, I would say, product line technology add-ons. So the pipeline remains strong. Certainly, as we broaden the portfolio, we have lots of different strategic ideas and themes that we continue to pursue and anticipate that, that will have another busy year with acquisitions.

I mean, over time, competition for acquisitions has always been there. So I mean, certainly, it ebbs and flows. But I think typically, when there's strategic assets that we're -- we kind of are very focused on, we've had a high hit rate of bringing those in. So I would expect us to continue as we have done historically.

(Operator Instructions) Our next question comes from Jeff Hammond with KeyBanc Capital.

Just on Commercial Foodservice, I'm wondering if you can just give us a sense of that 11% organic in the quarter, how much was price, how much was volume?

We don't break that out specifically, Jeff.

Okay. Then I guess, as you go forward, I guess there's 2 levers. One, you're pushing more price. So I'm assuming that the price component kicks higher. But just as you think of kind of people adds, capacity adds, obviously, there's huge backlog. Just how we should think about volume sequentially in the Commercial Foodservice business?

Yes. I think in the short term, as I said, we're somewhat -- we have been volume-constrained by a variety of components, right, in its product availability. So we are certainly eager for the volumes to be stepping up more meaningfully. And some of those things are -- will take time to improve, right? There's a lot of speculation on (inaudible) controls and chips, the backlogs will alleviate. Nonetheless, each day, we're doing a variety of things with our supply chain folks and across our divisions to address the problems that come up. So I'd say the volumes have been up modestly, and we obviously still have a ways to go there.

Okay. And then in -- go ahead.

Yes. Jeff, so I just kind of remind, so I mean, we started seeing inflation back in the kind of third quarter, so we took a price increase in August. That was probably the smallest one we've taken, which I would say that's coming through at the beginning of the year. We took a more meaningful one in, let's say, the November timeframe, which we may have seen some of the initial benefits of that, but that will probably start to flow more in Q2. And then obviously, we just kind of talked about this April price increase that we took, which was originally capturing a lot of the cost increases that we saw in the December to January, February timeframe, and now it stepped up, they picked up a lot of the cost increases from China, COVID and war impact. So that will come in, let's say, the back half of the year. So I'm just kind of reminding you the sequence relative to pricing. So some of the benefits of pricing that we've taken even last year has not shown up yet. So that will start in the second quarter. And just -- and maybe just a little bit more color on shipments. I mean I'm just going to put it in 2 categories. One, we have disruption every day, which continues to do a tremendous job dealing with, which affects what's going down the line and you think you're getting things out the door that then you kind of need to hold up production. So that -- those are kind of uncertainties that pop up all the time. Then there is just kind of the, let's say, key components, which are limiting our production, right? Like we could ship a lot more if we can get more of make certain control sort of electronic component, maybe some key other components. And so we've been working with a wide variety of suppliers to have them increase their production as well, right? So our expectation is some of that will start to turn on in the back half of the year. And hence, that will allow us to increase some of the throughput in the factories. Now we say that with a lot of uncertainty and a lot of hard work that's being done. But I mean, I think those are the efforts that have been underway for a while and that's where we work closely with a lot of our strategic suppliers to make sure they're making the proper investments in their businesses as well.

Okay. And is the supply chain issues related to kind of COVID in China isolated to residential kitchen or more broad than that? And then the weaker revenue in Res Kitchen, in Q2, is that purely a function of supply chain? Or is there some of that demand weakness that flows through?

Yes. So none of the demand weakness, and you know what, I shouldn't even use that word. I mean the demand is still very strong. It's just that residential demand was amazingly strong in the first half of last year. And again, we are still well above pre-COVID levels. Again, we just had really, really strong demand in the first half of next year. So I'm not going to use that W word.

But in terms of coming out of China, it is -- it certainly has a dramatic impact on some of the businesses in China. And then -- but for the rest of residential, yes, it is overall supply chain impacts that are limiting our ability to get more volume out across the segment.

Our next question comes from Larry De Maria from William Blair.

You've obviously talked a lot about orders and stuff without the specifics. But as it relates to second quarter -- or first quarter orders and orders since close, say, April into May, is price and volume both up for orders, including current or are we starting to see volumes slip maybe in residential in the orders?

As compared to what periods? Because I think I just...

The year-over growth in organic orders, they're up year-over-year, as you guys said, but I'm curious of how much of that is, let's say, from a high level, price versus volume? I'm trying to understand if volume is continuing to contribute or volume is softening?

We don't think overall the volume is softening.

And that's fair. I mean would you say for all of them...

Yes, I don't think we're going to get into orders by segment versus last year, right? That's what we said we're moving away from. But I think you can take from Bryan's prior comment that relative to a very strong first half of last year, residential volume has softened, but it still remains well ahead of 2019.

And 2020.

So I mean, effectively, that's what he's saying.

Okay. Fine. And then usually, you guys have a first half, second half split where the second half is a little bit bigger. Is it going to be -- can you just help us understand the split maybe for sales and EBITDA? And we know if I can have there's more pressure on that now with the price increases and better price costs, et cetera. But is it going to be much more meaningful than your average first half to second half split if you go back?

So clearly, we think the second half of this year is better than the first half, both in terms of revenue and profitability and margins. I don't think we can compare it to any historical periods before. Again, we're living through unprecedented times and have never been in a situation where we have backlog and demand where we have it now.

So again, the outlook is great, right? Demand levels are higher than they've ever been. We have a lot of backlog. And so I look forward to at the back half of the year and next year and the year after that are going to be. But again, the fundamentals or the overall market dynamics we're in now are such that comparing it to prior periods is really apples and oranges.

Larry, as you go just very simplistically, it's not a forecast, but as you think about -- we have all the costs running through largely right now, right? We've had all the inflation, maybe not all we've experienced in the last 3 days, we've got all the increase. And really, we haven't yet -- the pricing that we've already taken has not -- we haven't gotten much of that benefit, right?

So kind of, hence -- and again, this last wave has pushed it a little bit more to the right, but I mean just to your point, fundamentally, we've got the cost down, not all the price, and we're kind of holding the line on margins until we get to the other side of that hill. And I think the holding the margins, that is some of the benefit of the strategic and operating initiatives that we had been executing on that still will benefit over the next couple of years. But I mean, I think that's kind of where we're at in this continuum of supply chain.

(Operator Instructions) Our next question comes from Mig Dobre with Baird.

Just a quick one here. So interesting sort of use of cash in the quarter, your operating cash flow was negative. I think we understand that. But then you've gone and you repurchased $155 million of stock and you also bought nearly $10 million of capped calls, right, for your converts. And I guess I'm looking for maybe some color from you guys in terms of how you're thinking about share repurchases going forward, given kind of where your leverage is, but also where your M&A pipeline stands. Taking into account the fact that, right, I mean the stock has pulled back, it's pulling back further today. And then what's the reason behind the capped call, the additional capped call purchase? I mean the stock is nowhere near the point where we'd be thinking about dilution from the converts.

Well, fortunately, we still have 3.5 years until the converts mature, and our outlook is very positive. And the capped call really is just, I'll call it, a way to use leverage to obtain stock and address dilution risk, right? And obviously, we've committed much more to share repurchase than the capped call.

I think as we've looked at in the recent share purchases, we really have kept in mind, again, seeking to address the potential dilution risk from the convertible notes. But obviously, M&A continues to be a priority for us as we obviously haven't steered away from that at all. And I'd expect us to still be very, very committed to M&A and will consider if additional buyback activity is prudent along the way, to your point, as we look at leverage levels as well.

But -- sorry to press you on this, but just to be clear, should investors expect you to step in, in a more meaningful fashion in terms of buybacks given the disruptions and the volatility that we're kind of seeing here in near term? Or is Q1 more of a one-off?

I'm sorry, is Q1 more of a what?

One-off in terms of staffing.

More of one-off in terms of the buybacks?

Yes. I mean, I think -- again, maybe encapsulate what Bryan said. But that action that we took was, I'd say, very much tied to the convert and the capped call, right? I mean I think we thought again, some of the things that have occurred that have made its way into the overall market not to start our stock that was prior to that. But we have a very positive outlook, and we wanted to make sure that we were minimizing the cost and dilutive effect of the convert when it matures. So it was very much tied to that.

Look, I think we're not going to say we're going to do it here, but I mean, historically, we've done some share repurchases. So separate from the capped call on an opportunistic basis. So I wouldn't roll that out. I'm not going to say we're going to do it right now from a quarter perspective. But certainly, we believe in the strategic initiatives and where the company is headed, we -- despite some of these near-term challenges, we're all working through. We've got a very confident positive outlook of where we're going in the next several years. So with that, when there are pullbacks in the stock, we'll still consider to be opportunistic from time to time.

Our next question comes from John Joyner with BMO.

So can we go back again to the comments about 2Q being similar to 1Q? I mean, are you referring to sales or EBITDA dollars on the segment level? And I guess with Commercial and Processing, you mentioned forecast to be better, maybe slightly better and Residential worse. How much worse are you assuming for Residential?

So just to clarify, right, the comments, Q2 similar to Q1 is the overall total company consolidated outlook, right? And you heard it right, Commercial up, Food Processing up, Residential challenged. I don't know that I want to get into much more granularity about that. But I do note that the China lockdowns, right, are having a significant impact on portions of our business to have product available to us, and we believe that will hopefully be a relatively short timeframe phenomenon.

Now we've talked about that we're not able to sequentially take huge jumps right now. So I mean I'll let you do your modeling on how much the other twos kind of up would need to be to offset down in one. But hopefully, a little bit of my comments there maybe are able to let you put some size, the magnitude of the swings a little bit.

Okay. All right, Bryan. And then for Processing, the margins -- I mean, the margins there are good, but with the business not being affected by drags from acquisitions, and you highlight large protein projects, which I believe generally carry higher margins. And it's good to know that it's not just hot dogs. Is there something structural that would prevent, I guess, processing EBITDA profitability from getting back into the mid-20s?

I mean, no. I mean that is certainly the goal, right. And where I used the word soft and had a more modest tone about the business, obviously, we are disappointed, even though we have industry-leading margins in that segment. So thanks for noting that. The first digit wasn't a 2. But where it is a business that works on large product projects where you do have absentees and issues, right?

And it seems like a long time ago, but let's not forget the impact on COVID on employees and workforce back in January and February. So the impacts of COVID, how much steel we could bend and put together and then also when you start operating at lower levels, what that means to coverage of fixed cost is where even admittedly where we came in Q1, while, again, I appreciate you noting is good, it wasn't great for Middleby standards, and we do expect to be better than that for the remainder of the year.

The large projects, again, take some time to happen. So it's not like all of a sudden, you're going to see a huge jump in revenues and margins in Q2. But as we get into the back half of the year and into '23, as we start delivering on more of these projects is why I feel comfortable agreeing to what you believe the outlook could and should be.

All right. And then maybe just one more. On the -- with -- I guess what was the organic growth? Do you have that available for the domestic and international businesses for the Commercial segment?

I do. It was, I think, 7% in North America and 21% outside of North America.

Okay. Excellent. And can you maybe give any color around any of the targeted markets, I guess, for the international piece? And I guess, for some of the countries on the international side, do you have a good feel for like the currency effects for this year?

We don't specifically forecast currency effects. Obviously, the dollar is strengthening. But I'm sorry, I don't have a specific kind of modeling commentary to offer there.

Okay. Any color around, like any specific markets on the international side that were (inaudible) or not?

Yes. I mean, obviously, China has been weak for us. Europe's been a little bit more modest. I would say the good thing is it has certainly not fallen off a cliff. Obviously, right, there are a lot of concerns about what is the impact on the European economy with the war that's going on, right, but the consumers have proven to be, I guess, using my favorite words, a little bit resilient. So we're still seeing some positivity there, right? It hasn't moved towards the negative direction.

That's all the time we have for questions. I'd like to turn it back over to management for closing remarks.

Well, we'd just like to thank everybody for joining us on the call today and just reiterate that we're very excited and optimistic about the business right now. So despite the challenges in the supply chain that we've obviously spent a fair bit of time talking about this call, certainly, a lot of the long-term initiatives that we continue to execute on with new products, innovation, route to market, which we are very confident are going to allow us to expand margins in the long run and drive our business (inaudible) intact.

So -- but I appreciate everybody's participation in the call, and we look forward to speaking to you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.