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?