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 K. Pool III, 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. Should you need operator assistance during the call, please press star then zero. 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. Thanks, everybody, for joining us today on our third quarter earnings call. As we begin, please note, we've 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 food service business, 23.9% at our food processing segment, and 20.6% at our residential business when excluding the impact of recent acquisitions. 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 food service 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. 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 food service 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. At 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 add 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. At our residential business, rising interest rates, inflation, and economic uncertainty have 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 innovations 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'm 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'll 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'm pleased to talk about two new products from 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, high 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 where size, speed, throughput, and energy matter.
The technology deployed in this oven makes 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 air is able to heat and bake and rapidly brown the exterior from the outside in. By using these two independent energy vectors, it yields a process that has proven to be 30%-40% faster than conventional baking technology. This speed boosts production rates up to 5,000 tons per year. As it relates to sustainability, we've split the energy between electric and natural gas for the RapidBake. With this, we've been able to balance the energy required such that the operator can appreciate a 7%-19% reduction in cost per ton of production depending on where the oven is deployed.
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. 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 to 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 food service industry, producing inductive heating for warming and holding technologies. The Helios features the new Middleby one-touch controller, along with a speed knob and a newly designed power supply to optimize its performance.
The Helios control can also measure a pan's efficiency to let the operator know when they are using substandard induction cookware. The Helios, which is the only American-made induction 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's 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're looking to save 1-2 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 be better, 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 radiant heat load, and hood expense, less CFM, and in some cases, Middleby can 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 Pool. 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 rate 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. Looking back at our individual segments performances for Q3, starting with commercial food service, 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, this 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 3x. 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 meet demand levels. Inflation continues to impact the cost of goods and labor. Labor availability only very recently began to improve. 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 customers' 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, or 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 foregoing a traditional slice and enjoying the Grandma style at Sofia Pizza Shoppe. Their recipe and a Marsal 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-themed 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.
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'm sure that would greatly improve our already tasty future. In 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 a 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. In food processing, with high demand levels, our typical seasonality, with 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 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 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 improve 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 improve profits over the long term. For food processing, customer demand for our full line solutions position 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. With Thanksgiving just around the corner, as I wrap up, I wanted to offer up a few thanks. I'm 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. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily for the first question. Our first question today will come from Saree Boroditsky with Jefferies. Please go ahead.
Hey, thanks for taking my question. Can you just talk through what you're seeing from an order perspective in commercial foodservice? How are lead times today? Just any comments on inventory in the channel?
Okay. Hi, Saree. Good morning. The you know inventory you know in the channel is you know this has never been a channel with, I'll say, overly robust inventory levels. I'll let Steve jump in on that you know in a second. You know I think on orders here I mean you know this is certainly an interesting you know dynamic. You know we've commented before that we were at you know extremely high order levels last year and I think there's a lot of desire for everyone to try and pinpoint you know what were yesterday's orders to predict you know precisely tomorrow's revenues. You know we see a lot of you know month to month and quarter to quarter variability in orders.
you know, I will offer you know that the important you know takeaway here you know is that our customers have changed their order placing patterns with us. We've seen that for the past two years now, and they remain you know committed to all their growth plans, which is why you know we feel good about you know Q4 you know into and through all of 2023, I'd say.
Yes, Saree, this is Steve, but maybe just some additional context as we think through our, you know, various customer base. I know we spend a lot of time focusing on, you know, the bigger chain customers. I mean, I think the highlight there, as we've talked about on prior calls, is, you know, they've had great year really so far the last couple of quarters in opening new stores. That's a change, certainly compared to, you know, pre-COVID. I think in many ways we've gotten closer to those customers through this period, and one of the, you know, positive byproducts of being closer to them going through the challenges we all have is they're a lot more transparent about plans, you know, well into the future like they haven't been before.
You know, the chains especially, I think, have committed even more so to their new store openings, you know, for next year. 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, you know, kind of our dealer channel, specifically in the U.S. Again, I think we've gotten closer to them than we ever have before through the last couple of years, and you know, having more and more of those, you know, critical dealers to us through the MIC strategically planning for next year, many of them would tell you they're 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. This is an area for Middleby that we were frankly not very good at, you know, three to five years ago and investing in the right people, investing in, you know, digital solutions. Something we track very carefully within the consultant community is our, you know, specifications on projects. If you look at our year-over-year specifications on projects, not only the items we're getting specified on, but the number of projects we're specified on, you know, we're up, you know, approximately 30% in specifications year-over-year.
Why that's important is if you're getting spec on project today, that's really leading to your orders that you would see in next year. That's gonna cut across, you know, schools, B&I, healthcare, senior living. Just a couple additional, I guess, you know, areas of context beyond the chains that we focus on a fair bit. The last part of your question was around lead times. You know, we comment in the deck. You know, I think we've 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.
I think through the combination, again, of, you know, leveraging our supply chain team, which I think we've done a great job of across the board, still very challenged, but I think we continue to manage it as well as anybody. We've invested a ton in new automation, ourselves, new capital, which we talk about. You know, in many areas it's still challenging, but I think we've done a good job, especially the last, you know, quarter or two in hiring, you know, manufacturing employees, which is obviously tough. The other big thing which I'm 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. I'm really proud.
I think we've done a great job maintaining quality in our products, make sure we're supporting customers while adding so many employees. I think lead times have trended better, I talked about on the last call, and I think they'll continue to trend, you know, back to, you know. I don't know what 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'll just add one more item I think as we're thinking about next year to all the comments Steve had, and a little bit commented on the opening comments there. With the chains, not only kind of with what they're doing with the new store openings, we have been working with them a lot on, I think, what we would call rollouts, you know, which is either efficiency improvements or menu items. You know, a lot of those programs we have pretty good visibility, and high confidence to, and that is not in our order book, right? As we kind of think about next year, you know, some of the activity that we would see is, you know, based on, you know, where we're at with rollouts.
What's exciting, you know, there is a lot of that is tied to the, you know, the new product innovations that we've had, you know, that James highlights, you know, every quarter, that have really been coming out continuously the last several years.
Thanks for that. Just how should we think about margins in residential next year if volumes are down? Are there any offsets to that lower volume headwind?
You know, we've managed through lower, you know, volumes in the past. You can, you know, go back and look at, you know, see how we performed in the depths of COVID. I mean, certainly, you know, there are, you know, areas of variable spending that we can, you know, address. You know, without offering, you know, specific models and specific, you know, revenue levels, I don't think there's really a great generality I can offer beyond saying, you know, we already we are entering, you know, or are in this, you know, more challenging period with already, you know, very high or very respectable levels of margins. You know, we think within, you know, all, a variety of different scenarios that we certainly expect to maintain. You know, high levels of profitability.
Yeah, I'll just add a couple of comments. I mean, maybe just as Brian said, I mean, you know, we've built the portfolio to be a high margin, you know, business in good times and bad times. I mean, I think, you know, we would expect the residential platform is gonna have, you know, industry-leading, you know, margins and, you know, certainly, you know, well into double-digit, you know, teens, even if there was kind of a significant, you know, drop-off. I mean, I think, you know, it doesn't look that bad even in really bad times. You know, we talk a lot about operating initiatives, you know, Steve, you know, talked about some of the investments, you know, there in commercial.
That applies to residential, you know, as well. I'll say there's a number of initiatives that we've had through the year and really the last several years, as we kinda think about, you know, manufacturing efficiency and product designs, how products come together. That particularly applies in our U.K. business, which I think, you know, we've had a strategy to really drive margins up much higher. If the revenues drop there, you know, I think that'll help us hold serve more. You know, also, the grill business is obviously still early stage with us. We do have significant plans to expand the margins there.
That's been, you know, a drag to the all-in reported margins. You know, 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, you know, manufacturing, go-to-market. Not only within the grill platform itself, but within the residential platform overall. I mean, I think, you know, we're expecting that we'd be making, you know, margin improvement as we go into next year on the grill platform. Just, you know, a few of the things to highlight, that'll, you know, bolster margins going into next year on residential.
Appreciate the color. Thanks for taking my questions.
Once again, if you would like to ask a question, please press star then one. Our next question will come from Tami Zakaria with JPMorgan. Please go ahead.
Hi, good morning, and thanks so much for taking my questions. 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 to four years. Can you help us understand what kind of organic sales growth you would need to get there? Are these achievable if there's, let's say, a down revenue year within that two to four year timeframe?
I'll jump in. I think, you know, certainly, you know, the way we've thought about it, I mean, it is really driven, you know, based on our launching our product innovation. Sales mix is a big thing as we're kinda, you know, transforming the mix of products that we have and the ROI, you know, to our customers. We've made significant investments, you know, which is kind of why we spent a lot of time talking about sales transformation and all the tools that we've invested in, which has been dollars, you know, incremental the last several years, which we do believe is, you know, paying off.
I mean, I think, you know, if you were to say, hey, kind of in a normal, you know, growth period, you know, mix, and then, efficiencies that we've been, you know, focused on is really, you know, some of the drivers to, you know, to get us there. That doesn't require like, you know, outsized growth. Certainly, you know, if we see a, you know, drop in residential, you know, that's where, you know, the kinda plus initiatives that we have on the margins kind of, you know, hold us against the, you know, the margin drop or help offset.
You know, I mean, I think our view is that that may be where the four-year view versus the two-year view comes in between. I think we do have a bullish view on residential. I know it's challenging when you look at the what's going on in housing right now. I mean, you know, certainly it's a dynamic world. It changes quarter to quarter, but if you look, we're still a small part of the overall appliance industry. You know, we do have invested in long-term growth plans, so we do think we will grow that platform over a longer period.
We think that, you know, we'll see some recovery in a longer sort of period as well. I mean, I think you might think that, you know, food processing gets there the earliest, you know, commercial somewhere in between. We've given ourselves, you know, a little bit of breathing room in kind of that range, on a residential platform, which also has, you know, some acquisitions that are new to that platform and kind of embedded in the, you know, the margins.
Got it. That's very helpful color. Thank you. Not sure if I missed it, but did you comment on what price cost was in the third quarter? Was it positive? How should we be thinking about price cost in the fourth quarter, given some of the input prices have come down? Are you seeing any relief in costs as you are trying to purchase steel parts from, let's say, your vendors now?
Yeah. You know, supply chain you know is not the same across the board. I would say overall you know the pressure continued in the third quarter, right? I mean, I think material costs you know you know there was a lot of disruption early in the second quarter if everybody you know recalls, certainly you know with the war in Ukraine kind of you know taking it to a next level. That continued you know throughout the second quarter and into you know the third quarter. I mean, I think we've been working very hard from a price cost to get ahead of it. I don't think we're you know we haven't been able to get ahead of it yet because those cost increases continued you know into the third quarter.
I mean, a lot of the margin expansion we've had has been kinda, you know, us, you know, holding serve or trying to catch back up to the, you know, the material cost. I think the, you know, the good news, you know, there is, you know, some of the pricing that we have taken isn't still fully reflected in the third quarter. We got, you know, a little bit benefit to come. It's not like it's one inflection point where on, you know, a certain date, all the pricing, you know, shows up. We've got 100 brands, so it all comes into the P&L, you know, at different, you know, points in time. We think that, you know, carries a little bit in Q4 and, you know, and also into, you know, Q1.
You know, we do anticipate, you know, taking some, you know, pricing, you know, going into next year as well. Because, I mean, I think things like controls, electronic, you know, components, you know, and some other, you know, categories are still, you know, in a highly elevated, you know, situation. So, you know, there should be some relief as we go into next year on things like steel, which will help. You know, we're still a little bit behind on the, you know, the price, you know, cost equation. I think our expectation is we kind of move into, you know, next year, we'll be catching up.
Got it. That's very helpful. Thank you so much.
Our next question will come from Jeffrey Hammond with KeyBanc Capital Markets. Please go ahead.
Hey, good morning, guys.
Good morning.
Hey. I wanna dig in on the grill business, because I think last quarter it was more of an issue of, you know, COVID lockdowns, production in China. But it seems like it's kinda shifted to your, you know, customers maybe having too much inventory and doing some destocking. Maybe just speak to, you know, how the quarter played out for the grill businesses versus expectations.
Yeah. 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 grill season. We probably had a little bit of that still at the beginning. You know, the quarter, you know, that's largely been remedied. You know, now it really is kind of where are the retailers. As you mentioned, they are destocking. You know, that is definitely affecting the demand and what we're seeing of our grill business. You know, just I know. You know, a lot of that is not them destocking our grills. They, you know, it is really what they have in inventory as a category overall.
You know, they're not gonna, you know, necessarily load on our grills if they have other, if they're overstocked in other brands. I mean, I think as we, you know, think about it, I mean, that is gonna be a period, you know, that we are going to go through, you know, as we move through the next couple quarters. You know, I will tell you know, we're very excited about the platform though, you know, even in this, you know, that period. I think what, you know, we're seeing is, you know, as we go into 2023, we're gonna have on the retailers more floor space.
A lot of the, you know, the reasons we bought, you know, the Kamado Joe Masterbuilt Char-Griller, is there's a lot of, you know, product innovation there that I think, is gonna be, you know, exciting in, you know, in the marketplace. I mean, I think as old inventory comes out, kind of we know that we're gonna be, you know, picking up, some new, as I said, floor space going into next year. We also have some new product launches, that are gonna be coming out early, you know, next year. I think that is also gonna, drive some end user, interest.
One of the other things is we're kind of at early stages of launching some of these products into our specialty retail dealers. I mean, I think that's one of the benefits that Middleby brings to the grill platform, is some of the strength in channels that you know, they weren't necessarily in before, as strong before, particularly with the Kamado Joe product. So we're working on that. Kamado Joe's got you know, some unbelievable products. So that you know, lines up really well with some of our brands, you know, such as Viking and Lynx in the outdoor segment. So that's gonna be you know, another piece.
I mean, certainly it's kind of there, you know, the headwinds, we can't necessarily offset them all, you know, immediately, but those, you know, growth drivers we think will show up as the, you know, the year progresses. You know, I think just, you know, the kind of last thing is, you know, we are the, you know, we view ourselves as the, you know, the charcoal, you know, the leader in, you know, charcoal innovation. And I think we do believe that that's a longer term trend as, you know, people think about, you know, 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've got in our, you know, products.
That's kind of the, you know, the backdrop. Certainly that'll play out quarter by quarter. You know, we're still, you know, pretty excited about where grills goes over the next couple years here.
Okay. Just on the core res kitchen business, it looks like you're seeing, you know, international softness, but I'm just wondering if you can speak about You know, the core North America business, is it just holding in, working out backlog or is the demand side, you know, hanging in or starting to slow? Just some color there.
I'll give kind of a broad view, and then if Bryan's got any other comments. I mean, it is. You know, certainly, you know, we're seeing some demand, you know, softening, you know, across the platform. You know, it's the hardest in the U.K. I mean, I think if you kind of, you know, think about what's happening, you know, across the world, not that, you know, it's not, we're not seeing that in the U.S. as well. You know, there's a number of other, you know, dynamics with the economy and, you know, changes, with, you know, leadership, you know, there in the, in the government, energy, you know, costs, et cetera. You know, we've seen that market hit pretty hard.
We also have the exchange losses when just kind of converting to U.S. dollars that, you know, Bryan mentioned, which are pretty significant for that platform. You know, that business has come down pretty well. We’ve largely worked through the backlog there, so we’re really, you know, even in the current quarter, you’re seeing, you know, what the U.K. looks like, you know, in the current market, you know, environment. We do believe we are outperforming the market. We track kind of what the, you know, the market stats are there, and we’re, you know, 5%-10% better than what the, you know, the market is.
We think we'll continue to outperform, and as I mentioned before, have some pretty good profitability initiatives, you know, as we think about how we build grills with the new product launches we have there. You know, domestic, you know, we've got a number of brands. We've got lead times that do extend into, you know, next year, some of them, you know, to, you know, the early part of the year and some to middle of the next year. Our most premium products actually extend, you know, further. But certainly, we'll be catching up, you know, to some of the backlog that we have as we kind of move into 2023.
Okay. Thanks a lot. Appreciate it.
Our next question will come from Todd Brooks with The Benchmark Company. Please go ahead.
Hey guys, thanks for taking my question. Just a couple to follow up on, if I could. Commercial food service 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've seen on the commodity side. Margins should get better, but they've learned the lessons of needing efficiency. I guess, as you're 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. Great question. You know, I would say if you kind of recap the ways we've engaged customers over, I'll call it the last 12-18 months. You know, the big topics have certainly been you know, 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 quarters is you know, thinking about utility cost. I think what's interesting right now, so we've talked about on prior calls how we've seen a shift towards orders being more focused on new stores, and we have this pent-up demand in replacement.
I think what's interesting, as utility costs go up, we're being engaged more and more on what, where are easy places they can go to, you know, add pieces of equipment that are more energy efficient, as an example. 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. The other thing we've been very thoughtful about, both, especially domestically, is there's a number of, you know, local jurisdictions that offer great rebates on, you know, energy efficient products. I think we have the broadest, you know, portfolio of energy efficient products.
It makes it a very easy dialogue for us to connect with the customer and say, "Hey, you know, if you add these couple products, you add Open Kitchen in, I mean, the ROI is quicker than ever." 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, you know, throughout COVID, if that makes sense. That's a nuance that I would say has, you know, developed the last six months, I'm sure only gets accelerated as we go into the winter months. Then again, it's still on top of, you know, helping them solve for labor, food costs, speed of service, if you will.
Very excited about what that leads us to for next year, for sure.
Okay, great.
And then in-
One follow-up. Oh, sorry. Go ahead.
In food processing, I mean, there's much to like there. We are seeing continued engaging with our customers and really large full-line solutions because it's addressing labor, it's addressing their efficiency. Given when you're in an industrial setting, small improvements have big paybacks for our customers. Medium and even larger improvements have even larger paybacks for them. That's why the outlook for food processing is very strong.
Okay, great. Thanks. Then just a quick follow-up out of the deck. When you were talking about commercial food service, 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're seeing in commercial food service specifically? Thanks.
I think the labor is a constraint across all three platforms. Maybe kind of, you know, hitting that. You know, we've got different divisions in different geographies with different, you know, opportunities. It's not the same across all of our, you know, platforms, but certainly it is holding back, you know, manufacturing at a number of our brands across all, you know, of three platforms. You know, our HR teams and just divisions generally have done a great job of hiring people across the platforms. I think we're in a better staffing position now, kind of as we're in the, you know, fourth quarter than we've been all year. We still definitely have some challenges out there, but, you know, we're in a better position, and I think, you know, it's a little bit easier to attract and retain right now generally than it was two quarters ago.
Okay, great. Thanks.
Again, if you'd like to ask a question, please press star then one. Our next question will come from Walt Liptak with Seaport. Please go ahead.
Hey, thanks. Good morning, guys. I just wanted to try and clarify on the residential part of it. It sounds like the residential in the U.S., that the orders continue to come in okay, you know, just for, like, the indoor orders. Is that right?
Well, you know, I think we're saying that, you know, demand is softening, right? I mean, I hope, you know, that was clear. I think we're saying it is harder in the U.K. than the U.S., but certainly it softened in the U.S. as well. We're also saying, you know, that, you know, we've got 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, you know, a la, let's say, La Cornue, for example, you know, and some of the more premium, you know, Viking products, they have the longer lead time. That kinda cushions us as we go into the beginning of next year.
Okay, great. With the outdoor part of the business, the grill business, are you guys thinking that some of the marketing, the channel changes that you're making, consolidating those brands that you could grow that part of the business in 2023? You know, maybe there's a little bit different dynamics in that outdoor, you know, versus indoor kitchen.
Yeah. Look, I think we're gonna shrink in the next couple quarters here, right? Because I think there's gonna be the retailer destocking. I think as, you know, as we move through the year, we do think some of those growth drivers will be more, you know, impactful, certainly in the second half of the year as you start thinking about, you know, loading in for the, you know, the following grill season as well as opening up, you know, channels and, you know, floor space that they haven't had before, which I think will, you know, start to show up in Q2, probably accelerate a little bit in Q3. It's hard to say, you know, what the front half relative to the back half will be.
I mean, you know, with the crystal ball. I mean, I think, you know, for us, it's really the longer-term view and knowing that you know, as kind of the backdrop in the world behind us, you know, plays out that we're, you know, well-positioned. You know, some of those, you know, growth drivers are incremental and also are kinda share gainers as, you know, as well.
Okay, great. Maybe a last one on residential. You know, it sounds like you'll continue looking for M&A deals in residential. I wondered if you can give us an idea of, you know, or, you know, with this air pocket that we've hit, are valuations coming down at all? You know, what does the funnel look like for any sort of residential M&A?
I mean, I'll kinda repeat probably similarly to what I've said for every quarter for about 20 years or so, which is, you know. You know, we have a pipeline is a core competency. You know, it'll be, you know, we've added, you know, we're roughly 110 phenomenal brands that make up three industry-leading platforms. It's been a very strategic approach that, you know, stands the you know the test of time. You know, there is always lots of great strategic ideas that, you know, further strengthen and extend the you know the portfolio. You know, we bring in a lot more in terms of innovation and technology, you know, and certainly including this year as you kinda think about the companies that I highlighted on this call.
You know, Proxaut, CP Packaging, Colussi, last quarter with Icetro as we continue to extend our beverage. I think you'll continue to see us do smart strategic deals. You know, certainly we're going through a different period here where capital costs have changed, you know, and outlooks are being reset. You know, we're pretty smart about those things and also disciplined. I mean, I think, you know, you'll see us continue to be smart and disciplined, but, you know, also continue to grow our business.
Okay, great. All right, thank you.
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 is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.