The Middleby Corporation

Good day and welcome to the fourth quarter 2024 Middleby Corporation earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded On today's call are Mr. Tim Fitzgerald, CEO, Mr. Brian Middleman, CFO, Mr. James Poole, CTO and COO, and Mr. Steve Spittel, CCO. I would now like to turn the conference over to Mr. Tim Fitzgerald, Chief Executive Officer. Please go ahead, sir.

Good morning. Thank you for joining us today on our fourth quarter earnings call. This morning we have made several important announcements alongside our 2024 fourth quarter earnings. These announcements include the decision to separate our Middleby food processing business into a separate standalone public company. Additionally, we are pleased to announce the addition of two new board members to our board of directors. Please note there are two separate slide presentations covering our quarterly earnings and the food processing spend transaction on the investor page of our website. As we've shared over the past several quarters, our board of directors and management team have been conducting a comprehensive review of our business portfolio with the goal of realizing Middleby's full value potential. As part of this process, our board has unanimously approved a plan to separate our food processing business into a standalone, separate public company. This action will create two independent, innovative industry leaders, the Middleby Corporation, which will be comprised of the commercial and residential kitchen equipment businesses and Middleby Food Processing. Our team has successfully built a premier food processing business with the necessary scale that now enables us to take this exciting next step in the evolution of the company, which we expect will unlock further value and growth opportunities for both Middleby Food Processing and our remaining Middleby Kitchen Equipment businesses. As two market-leading but separate businesses, this separation will assure greater strategic and operational focus at each standalone entity, allowing each business to implement an optimized capital structure and capital allocation policy to best support growth opportunities, while greatly enhancing the strategic and financial impact from M&A opportunities for each standalone business, and enabling Middleby Food Processing with its best-in-class growth and margin profile to be valued in line with key food processing peers. Now, to get into the specifics of each company, I'll first start with what this means for Middleby Food Processing. As highlighted in our investor deck, Middleby Food Processing is well positioned as a best-in-class equipment provider to the bakery and protein industries. We are posed for organic growth as we continue to execute on our strategy to be the full-line solutions provider of choice by enhancing the ROI and value delivered to our customers. We see market expansion opportunities as we extend into attractive adjacent market segments such as poultry, pet and snack food, leveraging our existing competencies. And with a strong track record of M&A, we expect to quickly scale the platform through continued strategic acquisition which on a standalone basis will be more impactful financially and better understood by shareholders. Our Middleby RemainCo commercial and residential kitchen equipment business, we are positioned to capture market opportunities and will continue with an even greater focus executing on our strategic growth initiatives. We are leading in innovation and are positioned to benefit from accelerating demand for automation, beltless kitchens, electrification, digital technologies, and IoT connectivity in the kitchen. We have exciting growth opportunities through our expansion into new categories of ice and beverage, with recent launches of new innovations highly relevant to our customers and current market trends. We expect to benefit from the differentiated go-to-market investments we have made over the past several years as we are creating an engine to drive long-term organic growth. and we are well-positioned to benefit from a recovery at our residential business, which has been strengthened during the market downturn through strategic investments in sales and marketing, new product launches, and operational initiatives driving profitability and growth opportunities. We intend to execute the separation of the food processing business through a tax-free spinoff, which is expected to be completed by early 2026. Separately, I'm very excited to announce the additions of Julie Bowerman and Ed Garden to our board of directors. Julie and Ed bring a wealth of relevant operating and director experience to Middleby as we implement our forward-focused growth strategies, execute on our portfolio evolution with the announced spin transaction, and drive value for our shareholders. I am confident that Julie and Ed will be strong additions to our boardroom as we drive value for shareholders, and I could not be more pleased to welcome them to the Middleby Board. Julian Ed's appointments are a continuation of our board refreshment process, which started last year with the additions of Steve Scherger and Tejas Shah to our director group. Throughout this process, we have continued to focus on extending the capabilities of our board and bringing out fresh perspectives. We also announced that longstanding director Jack Miller has elected to retire from our board. Jack has been instrumental to the success of the company, greatly contributing to the growth of Middleby from its small beginnings when the company was only $25 million in revenues and throughout the journey into the global food service leader that we have become today. Our management team and board are incredibly grateful to Jack for his service to Middleby and our shareholders. Lastly, I would like to briefly comment on our fourth quarter results. We closed 2024 by delivering our strongest margins of the year, with all three businesses posting strong results given the respective backdrop for each industry. We continue to make progress on our profitability initiatives across the businesses as we execute on supply chain, take action to drive operational efficiencies, and strategically reposition sales mix to our latest higher margin product innovations. Macro conditions in the quarter remain challenged for our commercial and residential business, but are showing signs of gradual improvement as we move through the quarters ahead. While the food processing business finished the year exceptionally strong, and we look to realize continued growth as we head into 2025 with favorable long-term drivers. We are navigating near-term market conditions and we continue to execute on our strategic initiatives focused on driving sustainable long-term organic growth with recent launches of transformative product innovations across all three businesses and the development of our differentiated go-to-market capabilities. We're competitively well-positioned across all three businesses to expand and realize growth in each segment as we progress through 2025. Brian, I'll turn it over to you now for further comment on the quarter.

Thanks, Tim. While challenging market conditions persisted throughout 2024, driving margins and cash flow continue to be demonstrated strengths of ours. With free cash flows of $229 million in the fourth quarter, we concluded the year with a new record, having delivered over $640 million. Revenues in 2024 declined modestly to around $3.9 billion. Adjusted EBITDA of $866 million at a 22.4% margin, which was slightly ahead of last year, showed the power of our overall system with particularly impressive performance by the food processing segment at 25.6%. Gap earnings per share were $7.90. Adjusted EPS, which excludes amortization expense and impairment charges, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $9.49. Looking at Q4, quarterly revenue returned to a level above $1 billion. Our adjusted EBITDA of over $251 million was a record at a margin of 24.8%. Q4 GAAP earnings per share were $2.07. Adjusted EPS was $2.88. Food processing was really cooking. 4.7% organic revenue growth in the quarter led to revenues of over $219 million. The adjusted EBITDA margin was 29.6%, up 200 basis points versus the prior year. With organic growth over the back half of the year, we finished 2024 with $731 million of total revenue and expanded margins by 70 basis points to 25.6%. Now, considering the impact of fourth quarter acquisitions, the segment run rate revenues now exceed $800 million with a run rate margin of around 24%. In residential, looking at Q4, $185 million of revenue was a sequential increase from Q3. This was down a modest 2.4% versus 2023 and was the slowest decline of the year. Adjusted EBITDA margin was 13%, the highest level in one and a half years. For 2024 in total, revenues were $725 million at roughly 10% margins. In commercial, Q4 revenues of over $609 million were up sequentially, with organic revenues down 2.8% year over year, the slowest decline of the year. Margins remain healthy at over 28%. For 2024, revenues of $2.4 billion were supported by strong and fairly consistent margins of 27.4%. Given our strong cost control, moderated CapEx, and focused on reducing inventory levels, which have declined by over $250 million in two years, we delivered record cash flows. Operating cash flows were $687 million for the year, with free cash flow conversion of 140%. Our total year-end leverage ratio is two times. Our balance sheet is strong. Share repurchases in the fourth quarter were $16 million, and we have repurchased an additional $20 million in the open market in the first quarter to date. We are planning further buyback activity at this pace for 2025, and thus would potentially utilize around 20% of our free cash flow in this manner. With respect to 2025 cash generation, We expect free cash flow to again exceed operational net income. Capital spending in 2025 will be back up to more typical levels, around 2% of revenues. We continue to actively manage overall working capital levels. However, we may have a lower inventory reduction this year. Nonetheless, cash flow generation will remain a real strength for the business. Taking a look into the Q1 P&L, I will share a few perspectives. On a year-over-year basis and looking at total company revenue, we expect modest revenue growth benefiting from the impact of acquisitions in food processing, along with having slight margin expansion. Shifting to an organic view for Q1 on a year-over-year basis, revenues in total are likely generally flat. The commercial business will have a slow start to the year with the timing of chain orders, so revenues will be down slightly for the quarter. For food processing, the timing of project completion was strong in Q4. Q1 will not be as robust, so organic revenue will be slightly down. In our residential business, we expect to continue to see positive momentum, resulting in meaningful year-over-year growth. Now, considering performance on a sequential basis, please recall that seasonality in our business is such that Q1 results across our entire portfolio typically take a modest step down from Q4. Residential, however, could be a positive exception to that trend this year, as they may demonstrate sequential as well as year-over-year growth. Now taking a look at 25 for the full year, In commercial and residential, we are expecting at least low single digit organic revenue growth rates with modest margin expansion. For food processing, organic revenue growth is expected to be in the mid single digits for the year. As I noted earlier, recall that the baseline on food processing margins is now in the 24% range due to recent acquisitions. Margins here will likely fall below last year's strong level as the integration processes are just beginning with two acquisitions having been completed late in 2024. Summing it up, for 25 for the total company, we expect to deliver organic revenue growth in the low single digits with profitability growth at rates in excess of our organic revenue growth. Our view is also that revenues are growing sequentially over the course of the year for all of the segments. Please note that this outlook excludes costs, which may be encouraged to support the food processing spin we have announced today. We will provide updates on those activities throughout the year. I will now turn it over to James for a NAFM overview. If you come and see us there, you might find me serving ice cream. And I'm hoping to get adventurous and combine that with soda from our absolutely incredible new beverage dispensing platform by Newton to create ice cream floats. Innovation tastes great, but maybe isn't less filling. But I like it, and hopefully so will you. James?

Thank you, Brian. Today I'd like to take a moment to extend a special invitation to to our shareholders, analysts, and prospective investors to come experience Middle Beach commercial food service equipment at the North American Food Equipment Manufacturers Show in Atlanta, Georgia. The show runs tomorrow through Friday. You may refer to the accompanying earnings presentation for a detailed overview of our NAFM setup and insight to what's cooking at Middle Beach. This year marks our most ambitious presentation For any show, we are featuring nine live cooking vignettes, including two fully operational high-volume restaurants, one dedicated to smashed burgers and fried chicken, and the other to pizza and wings. Both concepts will be powered by our cutting-edge embedded digital robotic automation solutions. Additionally, we will unveil and showcase our latest beverage dispensing technologies from Newton CFV as Brian mentioned, the Newton Gravity, and Wild Juice Filling, the Cervici, along with a comprehensive lineup of ice solutions from Volodice and IceTro. Be sure to also check out our new innovative ice, which is one and a quarter by one and a quarter by one and a quarter craft cube solution. Beyond these innovations, our full-service coffee cafe will highlight various solutions for Middleby Coffee and Marco, including the Marco Milk Pal, which I discussed on our last earnings call. Our enterprise IoT solution, Open Kitchen, will be predominantly featured, seamlessly connecting all live equipment at the booth. We invite you to discover how we can quickly transform your kitchen operation from the front of the house with EMS, HVAC, and lighting control, the middle of the house with cold chain monitoring, HACCP reporting, and labor tracking, and the back of the house with equipment connectivity. Open Kitchen is quickly driving to become the IoT standard for the commercial food service industry. Within Open Kitchen, we are also introducing a new fryer profitability tool to drive fryer connectivity sales and differentiation for middle beef. The tool is designed to help restaurant operators understand and optimize their frying processes by providing insights into oil usage per pound of food cooked, oil quality, efficiency, and waste through Open Kitchen's real-time analytics. I'd like to conclude by acknowledging the Magnificent Seven, seven innovative products selected for the What's Hot, What's Cool, Innovation section at NAFN. Middleby is honored to have received more selections than any other manufacturer. The Magnificent Seven will be showcased live and will feature the new Pitco Pork Fryer, the first commercialized, continuously filtering, high-efficiency fryer at the Vitlis Nacho Bar, and the new Invoke Kombi, which we'll be preparing some delicious bites within the center of the booth. Thank you, and we look forward to seeing you at the show. We will now open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And at this time, we'll pause momentarily to listen to our roster. And the first question will come from Siri Boroditsky with Jefferies. Please go ahead.

Good morning. Thanks for taking the question. I mean, I think we have to start with the decision to separate food processing. So could you just walk us through that decision process? What are the benefits of having the segment operate separately? And then how do you think about the standalone cash generation of food processing and the ability to sustain the acquisition pipeline? Thank you.

Yeah, good morning, Suri. We've been considering it for a while. I mean, every year, continuously, the board is always reviewing the portfolio and what we think makes most sense to maximize shareholder value and really support the growth of all three of those businesses. So I think, you know, we've been building, you know, as I said in the comments, the food processing platform, you know, for a while now and really over the last decade, you know, that's accelerated. I think if you were to go back five years ago, it was not large enough. And I will say it wasn't in the part of the life cycle of the journey where we could stand it up as a separate standalone business. But now we feel that we're at that point. And I think it's benefited from being part of Middleby for a long time to get to this point. But now I think as a separate company – being part of Middleby will hold back the growth and separating it will accelerate the growth. So we think, you know, it's really, we're excited about it. I mean, I think, you know, the things that I commented on the greater, you know, focus with the management team not being one of three businesses. And as you can see in some of the slides that we had, you know, this morning, there's a very strong track record of M&A over a long period of time, which we think will continue on and perhaps even accelerate. So we think the platform will further scale on a more rapid basis outside of Middleby as a separate standalone company.

Thank you. And then should we think about the free cash flow conversion of both separate businesses as being 100% or greater? How do we think about that?

Yeah, I mean, it's a little early. We haven't provided, you know, I'll call it specific long-range guidance certainly for the food processing company, but I do think that's, you know, a fair assumption. You know, all our businesses really have somewhat similar, you know, cash flow generating characteristics.

I appreciate that. And then just one last one on Rezzy, just given the positive inflection, you know, how are you thinking about that recovery and what are the incremental margins on that business given some of the factory investments you've made in recent years?

Yeah, so I mean, I think, you know, we're clearly at a long term cyclical trough, kind of put a bit of that in the deck as well. So I mean, I think there are significant opportunities and unrealized shareholders, we kind of go through the next several years. So it's hard to tell what the inflection is going to be on the backdrop of the market with housing, but it is positive. And we're, you know, we've got a significant, I'll say, tailwinds through the next several years. So we think it'll be kind of gradual as we go through 2025 with some recovery. But, you know, that will pick up steam, we think, in the years going forward. You know, we have been operating the business into the, you know, the mid to high teens, kind of if you were to go back pre-COVID. And the business fundamentally is much stronger today in terms you know, what is really a tough period relative to what it was in those years. We've certainly taken a lot of actions to improve the operation of the business, which, you know, drives margins higher. And also commercially, we've made a lot of investments around new product as well as kind of our sales and marketing capabilities. So, you know, as we kind of get to more normalized levels, we think that that is all an exciting part of the story that shows up in the years ahead.

Yeah, and, Sari, this is Brian, expanding on that a little bit. As you think about the, you know, incremental, certainly I would say this business will have, you know, the largest incremental benefits as revenues grow, you know, compared to the other segments, given, you know, the low operating leverage we're seeing right now, right? And you've seen that in our gross profit reporting. So I think the incrementals here can be, you know, over 40% going forward. And to echo what Tim noted, you know, as we achieve, I'll say revenue levels, you know, consistent with those that we have posted in the past, you know, we will have higher levels of profitability than we achieved in the past because of, you know, the investments and improvements that have been made in the business.

Appreciate the color. Thank you.

The next question will come from Ross Barenbleck with William Blair. Please go ahead.

Good morning, gentlemen.

Good morning. Good morning.

Hey, guys, just sticking with the spin, can we put a finer point on some of the moving parts as we think about, you know, one-time and ongoing disenergies and maybe the expectations of the tax benefit versus an outright sale of food processing?

Yeah, so, I mean, it's tax-free, so it's not a benefit for a corporate. It's tax-avoidant if we were to, you know, contemplate, you know, other options. But, you know, we do see... long-term upside in this business, so we really think shareholders benefit it being a separate public company trading on its profile with the margins, the growth characteristic. We think it trades in line with higher industrial companies and that kind of comp set. You know, from a dis-energy slash synergy standpoint, I mean, I think one of the, you know, philosophies of Middleby is running decentralized. That's been very core to us over a long period of time. So certainly we're an engine for accelerating growth with kind of a lot of our strategies and our core company culture. I mean, I think those things are exportable. And we think, you know, this is kind of Middleby 2.0 as we, you know, think about it with, you know, continuing, you know, with the culture, a lot of the best practices and operating philosophies of the business that we'll port over. But because the operations are largely, you know, central or decentralized, there's not a whole lot of disenergies here. So I think, you know, that makes it fairly clear from us, you know, from an operational standpoint for us to separate the business.

And, Rob, this is Brian from We're not prepared to specifically quantify those things today, but in future quarters, we will get into more levels of granularity around one-time costs and such.

Yeah, I can appreciate that. Well, previously, it was under the expectation that food processing is more of the M&A engine here, just kind of given the fragment of white space. But with a strong free cash flow profile from RemainCo, can you maybe just update us on what the M&A landscape looks like within commercial markets? kind of, you know, your early capital allocation expectations for the Rumanco business?

Yeah, I guess, so definitely M&A is the core that, you know, for a long period of time that continues. However, we're at a different size and scale today. I mean, I think as you've kind of just noted, you know, for more recent periods, food processing is still in early stages, so it's very fragmented, so it's gotten a bit more of the attention on M&A. And I think, you know, as a separate company, that's going to become even more clear and more focused. So I think that's one of the things that we're excited about. As cash flow has grown over time, you know, we've also, you know, kind of contemplated and built into really more recent actions, being able to execute on M&A while at the same time really start taking action to return shareholder to capital shareholders through stock repurchases, which is, you know, what we've been doing in the, you know, fourth quarter and the first quarter, and Brian alluded to in, you know, in his comments. So I think it'll be a little bit more, you know, of a balanced, you know, approach as given we've got much larger, you know, cash flow to deploy today. I think, you know, as you kind of look at RemainCo, the, you know, the platform is built out larger, but however, there still are significant opportunities out there. I think you'll see them be a bit more focused, particularly on the ice and beverage platform. I think that's something that we've also been excited to have built and scaled relatively quickly here. If you kind of think about the last five to seven years, it is a larger market. I continue to say we're still a new player, but you can see it's meaningful to our revenues. It's already a very highly profitable business, so we're pretty happy with the portfolio that we've got right now. We think that portfolio has significant organic growth opportunities given the different products, technologies, and kind of backdrop of what's going on in beverage, but there are additional opportunities to further build that ice and beverage platform. So I think that's one of the areas that we'll continue to be focused on. And then just technology overall. I mean, I think we've really positioned ourselves as kind of the leader in automation controls, IoT controls, A lot of that has been a combination of our organic investments as well as some of the M&A activities that we've had. So I think we want to ensure that we're gapping the competition, and I think we've positioned ourselves very nicely there for what we think is going to be driving growth over the next three to five years. So that's certainly an area that we'll continue to focus on opportunistically.

All right. That makes sense. Well, thank you, Tim. Thank you, Brian. I'll leave it there.

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

Thank you. Just maybe start with a clarification in this strategic review process. Where are you on this? Is it complete? Is it still ongoing? Maybe to ask this question more pointedly, is residential also being evaluated for strategic alternatives? with something potentially happening down the line. Are there portions of your CFS portfolio that are being considered for divestiture? I know that you've acquired a lot of businesses over time, and I do wonder if all those brands are as successful as you hoped or if you might find some better owners for some of those out there. So an update here would be helpful.

Yeah, so, I mean, look, I think we're continuously reviewing the portfolio, right? I mean, just, you know, this announcement is part of, you know, taking action on something that we think makes compelling strategic and financial sense for that business at this point in time. But we always review, you know, where we're at with all the businesses and what is the best opportunity to continue to grow those businesses you know, considering where they're at in their life cycle, you know, what we see, you know, upcoming opportunities, you know, in the future. And, you know, so I think right now, you know, food processing is in a great place for us to take that next step, right? I mean, I think it will accelerate growth and be a continuation of the journey that we've been on for a long period of time. I mean, I think as we think about residential, It's a phenomenal platform. I mean, we have assembled industry-leading brands. Even at what is now the trough, we're at very respectable margins. I would argue the margins that we have right now are in line with some of our peers on commercial food service and some of the food processing companies out there. And so we see significant margin expansion, knowing that we've been to much higher levels in the past. and it's a stronger platform today. So those are things that we are considering for where we're at with the journey of residential. So we're always going to be thinking about what is best for that business to reach its full potential and to maximize shareholder value.

But just to press you a little bit on residential, I guess in a theoretical recovery here, what I've heard from you in the past is that When this business is operating in normal volumes, this is maybe a 20% EBITDA margin business. So in many ways, this business is dilutive to the overall portfolio from a margin standpoint, and it also carries an inherent degree of cyclicality that, arguably speaking, you do not have in commercial food service. The customers are also different. The way you go to market is different. So what I'm trying to understand here is other than where we are in the cycle, why this business would fit with the Remain Co. longer term and how that would be additive to shareholder value.

Well, I think we had similar conversations with food processing for many years, right? So I would say it's not so different, right? I think, you know, we've kind of, you know, taken a long-term approach to build out that business and then take appropriate action when it was at, you know, it was an opportune time and we were at kind of an appropriate, you know, chapter, you know, of its cycle, right? So we're not saying that residential maybe at some point in time may be in a, you know, a similar junction, but it's, you know, it's not today. We see significant opportunity for, you know, improvement. And because food processing, you know, had been a very lumpy and cyclical business, we had been told by shareholders for many years, and it would have also had lower margins, right? So I, and, you know, we've kind of built it to the point that that is today that I think now we're excited to unlock a lot of shareholder value and continue on, you know, the journey. So I would say, you know, residential has its own timing and cycle and life of where it is within the middle of your portfolio.

Understood. Last question for me. Just on your outlook in commercial food service, if I heard you correctly, we're starting a little bit slow, maybe slightly negative organic growth. Implicitly, things get much better in the back half to get to low single-digit growth. So I guess I'm curious, do you expect to inflict positive from an organic growth in Q2, or is this all a second-half story? And what gives you the visibility that growth here can actually improve? And maybe you can comment in terms of what the headwinds have been in recent years and what gets better. Thank you.

This is Brian. I'll start, I'll call it on the number side a little bit and turn it over to Steve for some of the market commentary. We do think things improve sequentially throughout the year. In terms of, I'll say, doing some math, the one nuance we have as we will compare 25 to 24 is that Q2 24 was the high point. So I'm not going to yet note specifically whether we'll eclipse Q2 of 24 and 25. Obviously the comps get a little bit easier in the back half of the year. Having said that, we're really looking at things over the perspective of a year and do expect generally improving conditions and hopefully delivering that revenue

I noted, but Steve, I'll give it to you for some market perspectives. Yeah, thank you, Brian. Good morning, Meg. I would call out maybe three specific areas, Meg, that gives us confidence in really the year progressing in a positive direction. We talk a lot about new store openings with our bigger chain customers, which they've gone back to the last couple years. I think, unfortunately, we have seen the last couple quarters of those new store openings being pushed out for a number of different reasons. ranges from everything from weather to obviously the fires out west, snow, flooding, et cetera, has certainly impacted construction. It's been allocation of personnel to actually build restaurants and just some of the broad macro challenges that the larger restaurant chains are facing. I think the positive there is if we look at our collective group of top chain customers, and we compare their 25 build plans holistically for the entire year, knowing stuff does push and move from quarter to quarter, that the 25 build plans are up over 24. So I think we're pretty confident in our chain customers in their new store build plans for this year over 24. I think the other thing we're seeing with our chain customers is knowing that opening stores has been more challenging. I do think you're seeing them add in sales layers to their existing footprints to try and capture market share. So that's where we're seeing beverage really start to pick up. That's going from being a concept to being actual reality in Anglia. So that's the view on chains. I would say just two more things. When we look at more of the general market in the U.S., MOSI, which is our association of reps here in the U.S., TRAXX, every quarter. They're quoting consultant activity. If you look at their progression from the fourth quarter to the first quarter already, they see a very positive uptick in consultant and quoting activity to the general market, which aligns with what we're seeing from our reps and our dealers. So I think you're seeing that pipeline more or less build in the general market. And I think the third thing I would call out, if you picked up on the international markets that we talked about, I think we're very positive on what we've seen in our European divisions, knowing that there are some challenges in that market, but we've seen more and more people throw innovation kitchens in both Madrid and in the UK. We're opening a new innovation kitchen in Munich this summer, so see Germany as a big opportunity for us. So really see Europe actually with a lot of momentum as we go into this year. So it's really the change with the new stores, it's the quoting and consulting activity, and I think some of the international markets will give us the confidence for the rest of this year, Meg. And we did grow in Q4 internationally?

Correct. All right. Thank you.

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

Hey, good morning. Morning, Jeff. This last one I had on the SPIN chart, Can you just talk about what you think the leverage profiles of each of the businesses are going to be? Do you lean more leverage on Remain Co. and leave the balance sheet dry for acquisitions, or is it more balanced?

Yeah, so we're still a year out from executing the spin, right? So I think things will evolve during the course of the year, but on balance, we would expect less leverage less leverage on the food processing business kind of given the M&A opportunities, you know, post-spend.

Okay. And then in terms of adding Edgarden to the board, can you maybe just – I didn't see the 8K. I don't know if it's out yet. Something – I think you mentioned cooperation agreement, maybe some of the key tenants in there, and if there's any kind of you know, early feedback you've gotten, you know, from him or his group, you know, that have kind of been built into this strategic plan. Thanks.

Yeah, so maybe I'll just kind of start with the board refreshment overall because that's been a process we've been going through for a couple of years. We had brought on two new board members with Steve Scherger and Deja Shaw. which has been tremendous. So we've been excited about that, and they've contributed greatly to our board. That process continued on as we kind of moved through the back half of last year. So I think we had a robust process that we were going through, thinking about the capabilities that we wanted to have to expand the board and, again, bring out fresh perspectives. So we were kind of in later stages of bringing on two new members alongside Jack Miller's announced retirement, who had been a tremendous board member over many years. And so, you know, as Ed kind of came into the fold, we've had very constructive uh, conversations, uh, sharing of, uh, perspective. Um, so, you know, truly we are very excited to have Ed joined the board. Um, I think he's going to add a lot of, uh, you know, financial, um, investor, operational, um, expertise inside, um, you know, capabilities. So, uh, that's just kind of, you know, aligned, um, You know, there is a cooperation agreement that's out there on an AK, but it's got, I would say, kind of standard, you know, standstill confidentiality provisions in it.

Okay, thanks.

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

Good morning, guys. Thanks for taking the questions. I know you mentioned you regularly review the portfolio, but when was the official strategic review launched? Did that date back to the JBT Morrell transaction last April? And is holding on to the residential business at this point just a function of nursing that business back to health before you contemplate a separation or sale?

So again, we continuously have been reviewing the portfolio. So that was not only last year, that was the year before. So I mean, that is something our board does regularly. I mean, I think with these things, they evolve. I mean, certainly we were looking at many different options as we entered the year last year. And then I think as we started evolving, what we thought might be the most strategic option to unlock shareholder value for the long term. You know, that was, you know, probably, you know, mid-year when we made that kind of more of a official comprehensive review, bringing on, you know, advisors in that regard. And look, the residential business, you know, I would not frame it, you know, the way, you know, you did. I mean, I think we, again, It is a tough period for residential. There's no question about it where housing, existing home sales, remodels are. It's disrupted operationally even by trying to execute in the marketplace because getting contractors, electricians, et cetera. I mean, I think that's been pressure on longer lead time products in the housing market. And when you're dealing kind of with a premium sector, we get hit you know, a bit harder, so it takes a little bit longer to start the engines, but when it comes back, it's going to come back strong. So, you know, we're confident, you know, of that. So, you know, it is an exciting platform that I think when it is not in, I won't call it a cycle, I would call it a disrupted period. I mean, kind of coming out of COVID, that's just kind of not normal, you know, macro up and down. It's a significant disruption. So, You know, we think, you know, in better days that this is a very, this is a best-in-class, highest margin, very unique, you know, portfolio of, you know, premium, you know, brands with nothing else like it. And we think there's a lot of shareholder value there. You know, that being said, you know, we always will continue to review the portfolio, what is the best opportunities for, you know, each of the businesses involved. for the long term and to create shareholder value. But we think that the residential business, again, presents probably some of the higher growth and higher margin expansion opportunities as we go through the next several years, kind of flipping it from where we are to where we think we will be.

Great. That's helpful. Secondly, on commercial food service, can you talk about your price and volume expectations for 2025 and compare that to recent years? Are volumes expected to be negative?

No. I mean, I think the pricing benefits, you know, for 2025 are modest, you know, at best. We haven't maybe had the same level of pricing actions. to start this year that we have in prior years as you look at what's kind of cumulatively, you know, happened over the past, let's say, four years or so. So I think, you know, we are in a year here where it will be more volume-driven than price-driven.

Great. And then finally, I guess for just your restaurant customers, how would you characterize the current operating environment? You have big players really leaning into value for, you know, limited time offers going from one month to one year. You said you're confident in your store's opening plans, I guess your store customers' opening plans this year. I guess what drives that confidence kind of given the mid-year surprise in 2024? Thank you.

Yes, it's a great question. I think, yes, there has been this push towards value that I think has probably been more in the traditional fast food QSR segment. I think what you're seeing, though, is I think you're seeing some of the more fast, casual dining concepts really start to thrive. I mean, I give so many of them a lot of credit for thinking creatively about adopting new operational initiatives, new technology initiatives. to help with throughput, to help drive labor costs down, to help drive food costs down. And I think you're seeing those actually thrive in this scenario. So it's a little bit of a nuance that, yes, there are challenges around value, but you're also seeing, again, those, let's say, more forward-thinking chains, again, really adopt the new technologies and try to drive their costs overall down to give a better product experience to consumers. So I think that's very positive. I think in terms of what gives us confidence is, you know, all the chains are very open with their new store plans. And I do believe that if you look at them, there's so many new markets that they're entering in, especially from an international standpoint. And so I think when you look at markets like in India, certainly parts of Europe, parts of Africa that are still new up and coming markets for these chains, They have to get there. And I think they're looking to us more and more to drive down the unit economics of opening those restaurants, which I think we're coming through for them. So I think, yes, there's been a couple quarters where things have been kind of pushed out to the right. I think what gives us confidence is nobody, for the most part in those changes, pulled their numbers down holistically for the year. So, again, things are always going to move from quarter to quarter. but really feel like they have held to their overall, you know, next 12 to 15 month bill plan.

I just, adding a couple of other things. I mean, I think some of the chains were surprised with traffic in the back half of the year. I mean, it was expected to grow, and that became a little bit more of a challenge. I think as of late or as we, you know, left the year, traffic patterns had started to improve. So, I mean, I think that gives, you know, a little bit more, confidence to the chains. Food cost was also, you know, another driver and it's kind of a whole cycle. Food costs being up, menu goes up, traffic goes down. I think, you know, and we did see inflation in food costs in the back half of the year, which I don't think a lot of our chain customers were anticipating. So I think it was kind of a function of some of those dynamics and how that worked through their operation. I think going into this year, there's more stability And food costs, which then I think allows them to think about menu pricing, which then helps drive traffic, and then traffic patterns improving. So I just think some of the issues that we saw in the third quarter have started to kind of work their way through the cycle, which then allows the chains to be a little bit more confident on executing on their plans.

Great. Thanks for the call, guys. Appreciate it. The next question will come from Tammy Zakaria with JP Morgan. Please go ahead.

Hi, good morning. Thank you so much. A question on the parts and services business. I saw in the presentation the remain quote has about 17% and the spin quote would be about 33%. Do you have any targets in mind to increase the mix of parts and services over time for either of these businesses. Is that going to be a focus or strategy going forward, or do you think this mix is pretty reasonable through the cycle?

Yeah, no, that's a great question. I mean, I think we have initiatives and expectations to increase and invest in service for both food processing as well as RemainCo. One of the slides that we also put in the investor deck, a lot of the go-to-market initiatives that we have to drive organic growth, that includes service. I think we're very focused on how do we provide an enhanced and more efficient customer experience, You know, leveraging the scale of the platform, leveraging some of the new tools that we've got coming out. IoT is included in that as we start leveraging data for service. And those statements are true both for food processing as well as for commercial. So, I mean, I think over time our expectation is to increase the percentage of that piece of the pie for all the businesses respectively.

Understood. That's very helpful. So a quick follow-up to that is, would you be able to tell us what the mix was for these two businesses, call it in 2019? I'm just trying to understand how the mix has changed over time in the last five years.

Yeah, Tammy, this is Brian. I'd have to go back and see. I forget if we started breaking that out as early as this 19th. my colleagues think maybe it was around 2021, we started publishing some, I'll say, pie charts, you know, on that. I would say, you know, residential has always had, you know, the lowest portion of its business in terms of parts as you think about the three segments. I bet commercial has been probably fairly consistent in the high teens to 20-ish percent area over the last five years. Yep. And then, you know, food processing is one that we've probably been doing, you know, has seen the most, you know, growth in it as we've been really working to offer more, you know, services to our customers, and with that comes parts. And also our customers have seen how their operations have been managed, has been evolving, you know, as we've been working through, I'll call it, labor issues for the past, you know, couple of years. A lot of our large customers, I'll say, have lost some of their you know, maintenance and service abilities on their own, and it's giving us nice opportunities to be providing that level of service to them. As Tim noted, you know, in commercial, we're working on certain things strategically to be an even better and more aligned service provider, you know, with different networks out there.

Wonderful. Thank you. That's all I had.

Great.

The next question will come from Walt Littak with Seaport. Please go ahead.

Hi, thanks. Good morning. I wanted to ask about your supply chain work. I think you've been doing procurement and supply chain operations or consolidations for a number of years now, and I wonder I think I heard in the prepared remarks that there's going to be some benefits in 2025. I wonder if you could talk about if that's true and if you guys are getting some benefits in 2025 from that.

Yeah, good morning, Walt. This is Steve. I'd call out a couple things from a supply chain standpoint. I think our team really over the last four or five years has done a phenomenal job first navigating all the supply chain disruption, certainly from a couple years ago. And then, you know, as we kind of move into this new chapter with the tariffs coming through, I think we are extremely well positioned to navigate that from a competitive landscape standpoint. I think from a pure cost savings perspective, I think it's a challenge that we put in front of every one of our divisions every year to be thoughtful and creative on how we can come up with supply chain savings. And then you layer in the middle B supply chain team on top of that to leverage our brands together, to leverage the network together to come up with savings. So we do feel like there are savings that will come through this year from a supply chain standpoint. But I also really want to call out, you know, I think that we are extremely well positioned to navigate, you know, the tariffs having focused so much, obviously being predominantly domestic manufacturer across really all three of our segments. Our team has done a great job over the last couple of years, really, I'll call it nearshoring our supply chain and manufacturing in many ways. I think we've been very focused on diversifying our qualified supplier roster, if you will, to make sure that we have domestic suppliers if we had an international supplier in some aspects. And I think fundamentally, we're always leveraging the middle B global supply chain network, having 120 brands across the globe and leveraging that to really build up a more resilient supply chain. So I think that positions us uniquely. It's a great competitive advantage, I think, as we come into this year, both from a savings standpoint, but really from a competitive selling perspective as well.

Okay, great. Maybe just as a follow-up, with the food processing, are there or have there been supply chain cost savings between the other two segments, between commercial food service and residential, or are those supply chain benefits unique to each of the segments?

So we've got one supply chain team that facilitates across all three of the businesses, and there's kind of unique, I'll say, synergies, you know, depending on product by product, brand by brand. The food processing is inherently different in terms of the products, obviously size of the products and some of the components that go into it. So there are There's probably a bit less synergies there with the food processing than there is with commercial and residential, which you've got great similarity, you know, frankly, in the process and has very much an overlapping and shared supply chain.

Okay, great. All right, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tim Fitzgerald for any closing remarks. Please go ahead, sir.

Thank you, everybody, for joining us today on the call. Obviously, we're excited about all the announcements that we've made and looking forward to the future of Middleby and the food processing spin, and we think this is going to create meaningful value to all of our shareholders. And looking forward to updating everybody on those activities as we kind of move through the next several quarters. Hopefully, we'll see some of you at NAFM. As James mentioned, we've got an exciting trade show with our latest and greatest products. And otherwise, we will talk to you next quarter.

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