The Middleby Corporation

Good day and welcome to the Middleby Corporation first quarter 2025 earnings conference call. All participants will be in 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 telephone keypad. To withdraw your question, please press star then two. Please note this event has been recorded. I would now like to turn the conference over to Mr. Timothy Fitzgerald, CEO. Please go ahead.

Thank you for joining today's call. I'd like to begin by highlighting several key developments that underscore our commitment to driving shareholder value. As announced this morning, we've authorized an additional 7.5 billion shares under our accelerated buyback program. We plan to deploy the vast majority of our free cash flow towards repurchasing shares, reflecting our confidence in the business. We believe our current share price does not fully capture the strength of our business. By prioritizing share repurchases, we aim to bridge that gap and deliver superior returns to shareholders while maintaining our strategic growth investments. This decision follows our February 2025 announcement to separate the food processing business into a standalone public company, a strategic move designed to unlock value and sharpen our focus. Middleby's consistent operational excellence, strong cash flow generation, and disciplined capital allocation provide a sound foundation for this enhanced buyback initiative. The total authorized shares for repurchase represent 21% of our outstanding equity. Now, as it relates to the separation of our food processing group, we remain on track to complete the spinoff in early 2026. We are confident that creating a standalone food processing company will unlock significant shareholder value by enabling focused growth strategies and operational agility. As outlined in our February call, The creation of two market-leading but separate businesses will ensure 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 and enabling Middleby Food Processing, with its best-in-class growth and margin profile, to be valued in line with key food processing and industrial peers. We are excited about the prospects of food processing as this business is poised for long-term growth as we continue to execute on our strategy to be the supplier of choice with our full-line solutions enhancing the value delivered to our customers. And we see market expansion opportunities as we extend into attractive adjacent markets such as poultry, pet, and snack foods, leveraging existing competencies. In the coming quarters, we'll provide more information on standalone financials, the leadership team, and cost structures. We also plan to have a dedicated shareholder day in the fourth quarter to present further details on the strategic roadmap and growth outlook for the food processing business as an independent entity. Now turning to tariffs, we are actively working to mitigate the cost impact of tariffs through targeted operational actions and pricing adjustments. Our preliminary estimate of tariff-related costs is expected to increase our annual expenses by approximately $150 to $200 million. We're highly confident in our ability to navigate this new challenge. And while we see the negative impact in the next several quarters, we anticipate our ongoing actions will offset these cost impacts by end of the year. While we address the cost side of the tariff equation, we are heavily focused on leveraging the strength of our manufacturing footprint. The strength we believe provides us competitive advantage and unique opportunity to gain market share in a number of key product categories. We fully expect to not only manage the current market dynamics, but emerge stronger. Before I turn it to Brian, I would also like to reemphasize the strategic investments we have outlined and invested in over the past several years to drive sustainable long-term growth. We have been consistent and intentional through market disruptions to execute against our stated key priorities to accelerate the development of market-leading innovations and to transform our go-to-market sales strategies. We put these two strategic priorities in place several years ago, and we've been building an engine to drive sustainable long-term organic growth. Market conditions may be challenged, but we are a better position than ever. Middleby is the established leader for the future trends of automation, beltless cooking, electrification, digital technologies, and IoT connectivity in the kitchen. This is the result of our execution on this strategy. And we have been strategic in our approach to identify and enter new complimentary and attractive markets, including ice and beverage, which has broadened our addressable market, providing an expanded runway for growth. We're excited about the many new game-changing innovations we have delivered, which James has discussed with enthusiasm on many of our past calls. We are proud that many of these products have been recognized with recent industry awards. We see these innovations gaining traction with customers and interest broadening in the marketplace. While the pipeline takes time to develop, the future is bright. Along with our acceleration of innovation, we have made major steps in transforming our go-to-market capabilities. From investments innovation centers, establishment of leading culinary teams, launch of unique digital sales tools, and the creation of a dedicated sales team, focused on marketing our industry-leading solutions, we have made strategic and incremental investments to recreate how we do business. This is all providing our customers a better experience from Middleby. We are at early stages of realizing benefits from these long-term growth strategies with recent wins and with more on the horizon. We're confident Middleby is better positioned than ever, and we're extending this leading position It is the reason we're confident Middleby is a great investment. Brian, I'll turn it over to you now for further comments on the quarter and outlook.

Thanks, Tim. Looking back at Q1, we are pleased to have driven margins and generated strong cash flows. Operating cash flows of just over $141 million are our highest for a first quarter. Free cash flows were $107 million for the quarter, and totaled $620 million for the trailing 12 months. Over the past two years, we have consistently demonstrated our ability to deliberately delever from three times to a modest two times today. Our balance sheet remains strong and our cash flows are resilient. After year-to-date open market stock repurchases of nearly $50 million, we are now substantially accelerating our share repurchasing. From a reporting standpoint, I want to call out that we have made a small adjustment in our segment's composition, as discussed in the footnotes in our press release. We've moved one operating division from being part of the commercial segment into food processing. This change has an impact of around $10 million per quarter of revenue. We have restated all periods presented for this change. For Q1, we had growth in the residential segment, strong cost control actions, and managing leverage led to higher operating income and net earnings. Regardless of market conditions, we have delivered robust cash flows and driven margin performance. Our commercial food service business is seeing success thanks to our investments in the ice and beverage platform, as well as chain wins with cooking and refrigeration brands. However, muted buying levels by our largest chain customers across a few of our brands are offsetting these wins. Nonetheless, margins expanded, benefiting from our continued cost control actions and favorable mix. Food processing after a very strong fourth quarter and having seen some customer-driven delivery delays in Q1 did see a drop in revenues. Given the lower volumes and some unfavorable mix, margins were challenged. However, we have near-term opportunities to engage directly with many customers at two very large trade shows in Q2, one focused on protein and one on bakery, which provide additional opportunities to improve the order trends. The residential segment growth was primarily attributable to outdoor products. margins held in well given the product mix and production levels. Looking forward, in commercial, we do acknowledge the challenging market conditions facing our largest chain customers and the resulting impacts on their buying decisions around our products. Nonetheless, we remain optimistic that over the year we could see consistent sequential revenue increases as customers continue to adopt our leading technologies with rollouts and store build plans. Tariffs are impacting this business in a few ways. Positively, we have a strong U.S. manufacturing footprint compared to our competition, and the geographies of our revenues and where we manufacture are generally aligned. Meanwhile, the level of Asian finished goods we import is negligible. Conversely, The associated uncertainty contributes to a continuation of marketplace dynamics where the spending level by customers remains rather muted, although there are some areas where we are seeing rollouts advancing. The biggest operational tariff challenge we face is around the costs of foreign-sourced componentry, mainly from China. We are implementing pricing actions to address this exposure, as well as taking operational actions and continuing supply chain activities. Our current view is that the margin pressures in Q2 may likely grow in the back half of the year. We expect to have offset these higher costs by the end of the year. Our long-term outlook for this segment remains unchanged. Our leading innovative solutions address our customers' challenges. This will drive organic growth, strong margins, and increasing cash flow. For food processing, I do view Q1 as a bit of anomaly. We expect meaningfully higher revenues sequentially into Q2. Margins will also improve from Q1. These views are supported by the impacts of Q1 delayed deliveries, backlog levels, and order activity. For the full year, areas of stronger performance include snack foods and some protein product lines. Uncertainty around trade and consumer behavior creates delays in converting an opportunity into an order and then into revenue. This may challenge us to deliver growth for the year, but as with our typical pattern, margins should sequentially improve as we proceed through the year. The magnitude may be a little lower than prior years given revenue levels and tariff cost impacts. Looking beyond 25, we remain completely bullish on this segment. Our multibillion-dollar pipeline is as robust as ever. Our strengths will drive growth over the coming years. Our full-line solutions resonate with customers and provide strong returns on their investments. We are expanding our capabilities into growing markets of poultry, pet foods, and snacks. We provide automated and innovative products across our portfolio, We remain very well positioned to capitalize on the opportunities ahead. Lastly, residential may be the strongest performing segment this year. We are seeing stability and even potential growth in some of the premium indoor brands. Tariffs may have quite a negative impact on most outdoor products revenue. However, we continue to introduce new products across our brands and our geographies. A cautiously optimistic view sees 25 revenues flat to the prior year. We are taking actions to maintain at least double-digit margins and realize that our views are highly dependent on consumer sentiment and spending, so there certainly is some risk associated with this outlook. But overall, we have full confidence in our long-term outlook. We expect cash flows to remain strong. We will continue to deliver value to shareholders through our innovation, operational excellence, and significantly heightened share buyback levels. We've consistently demonstrated our ability to manage our business effectively, maintain a strong balance sheet, and preserve margins under challenging market conditions. We are leaders in innovation. Our solutions address our customers' pressing business challenges. The current environment makes it a little hard to predict the next two to three quarters, but our confidence in the next two to three years remains high. Thank you, and we will now take your questions.