The Middleby Corporation

Good day and welcome to the Middleby Corporation's second 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. On today's call are Mr. Tim Fitzgerald, CEO, Mr. Brian Meadowman, CFO, Mr. James Poole, CTO and COO, and Mr. Steve Spittel, CCO. 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 is being recorded. I would now like to turn the conference over to Tim Fitzgerald, CEO. Please go ahead.

Good morning and thank you for joining today's call. While this quarter's results reflect the economic challenges our customers are navigating in key end markets, they don't appropriately capture the fundamental transformation we've achieved across our business to drive long-term growth. The strategic investments we've made over the past three years across innovation, -to-market capabilities and operational excellence have created an unmatched platform that is poised for growth as market conditions normalize. Given our confidence in Middleby's trajectory, earlier this year, we chose to allocate the vast majority of our free cash flow towards share repurchases. As we do not believe, our current market valuation reflects the opportunities ahead of us. This isn't just optimism. It's conviction rooted in measurable progress and wins we are experiencing across our business. That is an overarching thought. I'll discuss what we're seeing in the current marketplace across our business segments. At our commercial food service business, we experience growth with our dealer partners in the general market, along with sales increases and better performing segments such as our institutional business and with emerging fast casual chains. We're also penetrating product categories such as ice and beverage. However, our revenues reflect the reduction in demand from our largest chain customers that are experiencing challenges with lower traffic and cost pressures, resulting in deferred replacement business and revisions down in restaurant openings. While facing these near-term headwinds, our business is fundamentally stronger than at any point in our history. We've invested heavily over the past three years building the preeminent commercial food service business in the industry. We've revolutionized our innovation engine, resold our selling organization, and we've dramatically strengthened our positioning with top customers. We also have strategically targeted and expanded into attractive new market adjacencies. Our ice and beverage platforms deserve special attention as they represent transformational growth opportunities. While we are still in early stages with ice, we've already grown our market position. As a new entrant in the faster growing beverage category, we are positioned to take share from established competitors as we disrupt the segment with automation and game-changing innovations. We're realizing early benefits of strategic investments in automation, controls, and IoT, investments that are long-term in nature that we know will separate us from the competition in the years ahead. Turning to our residential business, we're seeing encouraging signs and increased sales at our indoor categories with momentum at our core Viking, Lac Grenouille, and Aga Rangemaster brands. Product introductions over the past 12 months have been well received. New designs, colors, and induction offerings are gaining the attention of designers, builders, and channel partners. And we have additional new products coming to market over the next six months, including the next generation Viking reveal. Our new digitally connected product line with contemporary features capturing a new audience for Viking. Refrigeration in ice is another residential platform we're making great progress with exciting things ahead. We'll be completing the construction and move into our new manufacturing center of excellence in Michigan in the third quarter. All of our refrigeration in ice brands will consolidate manufacturing operations into this -the-art facility. Along with the manufacturing investment, we'll be launching an entirely new product lineup under our Marvell ULINE and Viking brands, all coming to market in the second half of this year. This major initiative has impacted our sales in the first half as we transition manufacturing. While new product launches will take some time to ramp, we expect to build momentum in the second half and gain traction as we move into next year. Finally, within residential, the outdoor segment is faced with significant challenges from tariff-related pressures, causing our channel partners to reduce inventories. That said, we do believe this segment is at the bottom of a challenging cycle and it'll be as well positioned to benefit once the market returns. As innovation becomes in greater demand to the outdoor space, we have already invested. Moving to food processing, we are pleased with the improvement in sales and orders from the first quarter. Order conversion has been slow in the first half, driven by uncertainties from tariff and food costs, impacting the timing of orders, particularly for larger projects. However, we've seen our order pipeline build, with conditions improving in both our protein and bakery segments. And the snack category, which is a new market for Middleby, is growing rapidly, with a large market opportunity ahead. Our strategy to offer -in-class, full-line solutions is continuing to differentiate us in the marketplace. And we're confident this strategy has positioned us for sustained long-term growth, both organic and through strategic M&A. Across all three of our business segments, we're building stronger competitive positions that will drive growth when market conditions improve. We have confidence in our strategy and optimism about our business in the future. With that, I will turn it over to Brian to break down the quarter and talk about our outlook before I provide some final thoughts ahead of Q&A.

Thanks, Tim. Looking back at the second quarter, we were pleased to see sequential revenue improvements across all three segments, including the significant step-up in food processing revenues relative to the first quarter. For commercial food service, while market conditions kept our Q2 revenues below prior year levels, demand for our leading technologies generated sequential top-line growth. We delivered over $580 million of revenue and a strong 27% EBITDA margin. At residential, tariffs significantly affected some of our outdoor products. Nonetheless, revenues grew sequentially to over $181 million and our EBITDA margin continued to exceed 10%. Notably, we saw improvements in our U.S. and United Kingdom indoor appliance markets. At food processing, we delivered a large sequential increase coming out of Q1, with Q2 revenue exceeding $216 million and an EBITDA margin of over 21%. Margins were below our expectations, owing to both tariffs and fewer large products that didn't yet materialize but do remain in the pipeline. The latter was driven by market uncertainty that impacted customer decision-making. Sequentially, we saw improvements across the majority of our platforms. Moreover, the businesses we acquired over the past year that have expanded our reach in snack foods continue to perform very well. On a consolidated basis, total company-adjusted EBITDA for Q2 was $200 million and adjusted EPS was $2.35. Regarding tariffs, which, by the way, are the driver of our -over-year decrease in EBITDA, this situation remains fluid. We currently estimate that the incremental cost impact will be approximately $150 million on an annualized basis. This does not include adverse impacts to sales, which we saw in the first half across all three segments, with the biggest hit to the residential outdoor business. While the adverse net impact to EBITDA in Q2 was approximately $10 million, we estimate that the costs will increase in Q3 due to the timing of tariff implementation and inventory flow through. Price increases will somewhat offset this, so we expect a $10-15 million net negative impact to EBITDA in Q3. As pricing actions take greater hold in Q4, the tariff headwind should be further offset. As of now, we estimate an adverse net impact of $5-10 million. As you can imagine, all of this is subject to where tariffs finally land and is subject to risks, particularly in key supply chain markets of China and India. Q2 free cash flow was $101 million. Our leverage ratio per our credit agreement at quarter's end was 2.3 times comfortably within our long-term target of 2 to 2.5 times. Please recall that our convertible notes will mature on September 1. We intend to pay them off in approximate terms by using $250 million of cash on hand and drawing $500 million on our revolving bank facility. Accordingly, our interest expense will be higher in the second half compared with current run rates. We expect interest expense in Q3 of $23-25 million and then $28-30 million in Q4. As far as capital allocation, earlier this year we made the decision to deploy the vast majority of our free cash flow to share repurchases. During Q2, we repurchased over 2.2 million shares for nearly $323 million at an average price of about $145 per share. At the end of the quarter, we had 9.4 million shares remaining under our share repurchase authorization. We've continued to buy back shares with July purchases of $97 million for over 650,000 shares. Looking ahead, we will continue to be opportunistic and we will do so while maintaining the financial flexibility needed for strategic growth investments. As you can see in our earnings release and quarterly presentation, we issued quantitative guidance this quarter. Our plan going forward is to provide you an outlook for the upcoming quarter as well as providing an initial annual outlook in conjunction with reporting year-end results. Regarding today's outlook, I offer the following additional perspectives. For food processing, there can be volatility on a -to-quarter basis for our results. This is often driven by the timing of completing medium to large-sized projects that may not repair with the same regularity as other parts of the business. After a stronger than anticipated Q2, Q3 is currently expected to take a small step back compared to Q2 revenue. We still expect the fourth quarter to be the strongest of the year and a stronger second half versus the first half. Overall, I would characterize the market conditions for our food processing segment as modestly improving. In the residential segment, I would characterize market conditions as fairly stable. For the third quarter, we are forecasting a typical seasonal step down in addition to the impact of tariffs. We do see our strongest quarter of the year in Q4. Lastly, thinking about commercial food service, we are seeing pressure at many of our large QSR customers, which represents a significant share of our business. We expect slight sequential increases in revenues over the coming two quarters, largely due to pricing benefits mitigated by tariffs and the impact of current consumer sentiment and industry-wide traffic challenges. Overall, this thoughtful view of the coming quarters in no way diminishes the greater level of optimism for the years ahead. So for Q3, we expect to achieve the following. Total revenue of $950 to $975 million. And by segment, this is comprised of commercial food service at $580 to $590 million. Residential kitchen at $170 to $180 million. And food processing at $195 to $205 million. Adjusted EBITDA is forecasted to be between $185 and $195 million. And adjusted EPS is projected to be in the range of $2.02 to $2.16, assuming approximately $50.8 million weighted average shares outstanding. Then for full year 2025, we expect to achieve the following. Total revenue of $3.81 to $3.87 billion. With adjusted EBITDA of $770 to $800 million. And adjusted EPS of $8.60 to $9.00. Based on, I'm sorry, $9.05. Let me correct that. Adjusted EPS of $8.65 to $9.05. Based on the sum of four individual quarters. This also assumes 51 million weighted average shares outstanding for the fourth quarter. Please refer to slide eight of the presentation we have posted on our website for these details. Taking a longer term, more general view with our new capital allocation philosophy and assuming more normalized market conditions, we believe we can deliver annual earnings per share growth in the high single to low double-digit range. In some years, we could certainly be higher or lower than this range due to unforeseen circumstances. But on average, we believe this is reasonable and achievable goal given our market position and positive outlook. I will conclude my comments with a quick update on the food processing spinoff, which we expect to complete in the first half of 2026. We are confident in our ability to execute the necessary actions to have a successful transaction. Activities to ensure the spin company will be operating efficiently and independently at inception remain on track. We had previously mentioned in investor day plan for Q4. But having it in the new year will be more meaningful. As we get closer to the spin, we will cover matters such as leadership team, cost to complete the spin, and stand-alone corporate costs. With that, I will pass the call back to Tim.