MIDDLEBY Corp Q3 FY2025 Earnings Call

Good day, everyone, and welcome to today's Third Quarter 2025 Middleby Corp. Earnings Call. Please note today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to CEO, Tim FitzGerald. Please go ahead.

Good morning, and thank you for joining today's call. I'll begin this morning with an overview of the announced strategic review of our Residential Kitchen business before discussing highlights of the third quarter and for each of our business segments. As part of our efforts to drive long-term shareholder value, we've been undertaking a strategic review of our overall business portfolio. We continue to believe that our shares are significantly undervalued, and we're taking deliberate steps to close that gap, including with the planned spin-off of our Food Processing business targeted for the completion in the second quarter of 2026 and also through our significant share repurchasing activities. As we further continue to evaluate opportunities to unlock the value at each of our 3 industry-leading segments, we have embarked on a review of options to maximize the value of our Residential Kitchen business. This includes an evaluation of a range of options, one of which is a potential separation of our Residential Kitchen business. During the quarter, in connection with that review, we recorded a noncash impairment charge of $709 million. This is an accounting-driven valuation adjustment and does not reflect any change in our confidence in the segment's underlying strength. In fact, we believe our Residential business is positioned better than ever. We have a portfolio of iconic brands. We have invested in new state-of-the-art manufacturing centers of excellence. We are introducing new products with exciting features, and we have strengthened our team across the platform. While the residential market remains challenging, our business is positioned to benefit from a recovery. We intend to pursue options that will maximize shareholder value while benefiting our customers and employees. But please note, we will not be making any further comments on the status of this strategic review on the call. As for the third quarter, we are pleased with our results, which once again demonstrate the strength of our business and our team's disciplined execution. Total revenue of $980 million exceeded the top end of our guidance range. Each of our 3 segments met or surpassed expectations. This top-line performance drove adjusted EBITDA of $196 million and adjusted EPS of $2.37, both exceeding the upper end of our guidance. These results reflect the benefits of our strategic investments over the past several years, expanding our go-to-market strategy, strengthening local sales support, advancing digital marketing, and enhancing after-sales service capabilities. We continue to invest in innovative technologies that help customers address labor and training challenges and operate more efficiently. Our ice and beverage platform remains a core area of opportunity and is expected to be a meaningful growth driver in the years ahead. While broader market conditions remain mixed, our long-term strategic focus has positioned Middleby to capture outsized growth when markets normalize. At our Commercial Foodservice segment, we returned to positive organic growth in sales for the first time since the third quarter of 2023. Growth was driven by the general market, institutional customers, and with emerging restaurant chains, offset in part by ongoing softness among large QSR customers facing lower traffic and cost pressures. We are encouraged by the traction we're seeing from investments made with key U.S. channel partners. By partnering and educating our dealer base on the performance advantages of our technologies, we are capturing market share and outpacing overall industry growth in this area. And we're particularly excited about the growing pipeline of opportunities of our ice and beverage solutions. At the Residential segment, we've continued to make significant progress, both strategically and operationally. During the quarter, we saw healthy growth with our premium indoor brands. This growth was offset by tariff-related headwinds impacting our outdoor product sales. Additionally, we experienced temporary shipment delays tied to the consolidation of operations, actions that will ultimately drive greater efficiency and profitability across the portfolio. A major milestone was the opening of our new state-of-the-art facility in Greenville, Michigan, which serves as a Center of Excellence for all our residential refrigeration brands. This facility will enable scaling of manufacturing, engineering, and logistics, resulting in enhanced customer service and long-term margin benefits. Third, in food processing, improving international markets offset continued softness in the U.S. During the quarter, we realized a strong order rate, which inflected positive after a soft start to the year as customers resume deferred capital projects. Our ability to deliver comprehensive full-line solutions positions us to capture these opportunities. We also expanded our global network of innovation centers with the opening of the Middleby Innovation Center in Venice, Italy, a flagship hub for the Food Processing Group focused on accelerating customer collaboration and technology development. This new innovation center is unique for the industry, and it will transform how we engage with our customers for years to come. Our strong financial results and conviction in Middleby's future underpin our capital allocation priorities. We expect to continue repurchasing shares using the substantial cash flow we generate. This reflects our belief that Middleby's current share price undervalues the long-term earnings potential of our company. By investing in share repurchases today, we are positioned to drive sustained shareholder value as our end markets recover. In parallel, we will continue to evaluate strategic alternatives across our portfolio to ensure we are optimizing Middleby's overall value creation potential. Now looking beyond the near-term conditions, our competitive advantages are compounding. We have an unmatched portfolio of brands. We have the industry's strongest innovation pipeline. We're making targeted strategic investments in new and growing addressable markets such as ice and beverage, and we are leading in next-generation automation and IoT capabilities that position us ahead of competitors for the years ahead. And most importantly, we have a world-class team around the globe whose commitment and execution continue to drive our success. While we're navigating some market volatility, Middleby is stronger today than any point in our history. The foundation we've built positions us exceptionally well to capitalize when markets fully normalize. With that, now I'll turn it over to Bryan to discuss our financial performance in greater detail and guidance for the fourth quarter.

Thanks, Tim. Looking back at the third quarter, we were pleased to see revenue, adjusted EBITDA, and adjusted EPS performance all exceeding the guidance we initiated last quarter. I note that adjusted EPS was positively impacted by $0.15 related to stock compensation. For commercial foodservice, despite market conditions that continue to be challenging, we delivered 1.6% organic revenue growth. Positive impacts we're seeing from general market, institutional, and fast-casual customer segments. We delivered $606 million of revenue and a solid EBITDA margin of nearly 27%. This would have exceeded 28% if not for tariff impacts. Customer engagement and interest in our leading technologies remain strong, especially in beverage dispense and ice products. At residential, on a year-over-year basis, we saw growth across our premium indoor businesses. Tariff impacts had a rather detrimental impact on outdoor product revenues and also pressured margins. Revenues were nearly $175 million, and our EBITDA margin was slightly below 10%. The cost impact of tariffs was a drag of more than 150 basis points on margins. At food processing, Q3 revenues exceeded $201 million, and our organic EBITDA margin was 21%. This would have been nearly 22% if not for tariff impacts. Margins were further impacted by geographic mix. The Q3 performance exhibited some of the short-term lumpiness that can sometimes be seen in this business ahead of what will be a rather strong Q4, especially across our brands serving the protein space and in automation solutions. We are experiencing a strengthening order rate and growing backlog. On a consolidated basis, total company adjusted EBITDA for Q3 was over $196 million, and adjusted EPS was $2.37. As noted in our earnings release today, we recorded impairment charges of $709 million during the quarter to write down the book value of the Residential segment to its estimated fair market value. Regarding tariffs, the adverse net impact to EBITDA in Q3 was approximately $12 million, and we estimate that the Q4 impact will be $5 million to $10 million. This continues to be a subject where tariffs are subject to risks, particularly in key supply chain markets of China and India, which continue to be especially volatile. The benefits of pricing and operational actions we have taken are expected to fully offset tariff impacts as we begin 2026. Q3 operating cash flow exceeded $176 million, up 12.5% year-over-year, and free cash flow was over $156 million. Our leverage ratio per our credit agreement at quarter's end was 2.3x. Please recall that on September 1, our convertible notes matured. Accordingly, borrowings on our revolving credit facility have increased, and our interest expense will be higher in Q4, estimated at $28 million to $30 million. Regarding capital allocation, earlier this year, we communicated the decision to deploy the vast majority of our free cash flow to share repurchases. Year-to-date, our free cash flow is $365 million, yet we have used $500 million to repurchase over 3.5 million shares at an average price of $144.55 per share. We've reduced our share count by 6.4% during 2025. Looking ahead to the coming quarters, we will continue to be opportunistic as we have excess capital to deploy. We will do so while maintaining the financial flexibility needed for strategic growth investments. Regarding today's updated outlook for the remainder of the year, I offer the following perspectives. At commercial foodservice, we are seeing pressure at a few of our largest QSR customers, which is constraining delivering sequential revenue growth. For food processing, with improving order activity, the fourth quarter will be the strongest of the year as is the normal pattern for this unit. Lastly, in the Residential segment, I characterize market conditions as fairly stable. And for Q4, which will also be our strongest revenue quarter of the year, we are forecasting a typical yet modest seasonal step-up in revenues. So for Q4, we expect to achieve the following: total company revenue of $990 million to $1,020 million. And by segment, this is comprised of commercial foodservice at $570 million to $580 million, residential kitchen at $180 million to $190 million, and food processing at $240 million to $250 million. Adjusted EBITDA is forecasted to be between $200 million and $210 million, and adjusted EPS is projected to be in the range of $2.19 to $2.34, assuming approximately 50.4 million weighted average shares outstanding. Then for the full year, we expect to achieve the following: total revenues of $3.85 billion to $3.89 billion, adjusted EBITDA of $779 million to $789 million, and adjusted EPS of $8.99 to $9.14 based on the sum of the four individual quarters. Please refer to Slide 7 of the presentation we have posted online on our website for all those details. We will provide guidance for 2026 in conjunction with our release of fourth-quarter results. I will conclude my comments with a quick update on the food processing spin-off. We remain confident in our ability to execute the necessary actions to have a successful transaction. Activities to ensure the spin company will be operating effectively, efficiently, and independently at inception remain on track. I reiterate what I noted last quarter and that we expect to complete the spin-off in the first half of 2026, and more specific information about timelines and business matters will be provided later in the year. In the meantime, I do note that as part of the registration process with the SEC, we will first need to complete the 2025 financial statements audit. This will happen by the beginning of March of 2026 and will be quickly followed by a filing of a registration statement. Potential transaction effectiveness then is currently anticipated in May of 2026. That concludes our prepared remarks, and we are now ready to take your questions.

We'll move first to Mig Dobre with Baird.

There's a lot to discuss here. I'll start with a question about the broader strategic evaluation of the company. You've mentioned that residential is now part of the review process. While I understand you may not want to elaborate further, my interpretation of your statement, Tim, is that there might be more involved than just the spin of processing, perhaps regarding the strategic evaluation of residential. Is there any activity related to commercial foodservice that you might be working on or that shareholders should be aware of? Regarding food processing, I appreciate the timeline. I'm interested in how you're approaching the management team that will be overseeing this business. Can you share any details about what you've accomplished so far in preparation for this spin?

I’ll address the second question first. As Bryan mentioned, we have made significant progress in establishing the company. We believe we are on track. Although we have made limited announcements so far, we expect to share more in the fourth quarter regarding our accomplishments and future plans, including additional details about the timeline for the spin-off in the first half of next year. We feel confident about the separation of the companies and are excited about it. As I’ve mentioned previously, we have three industry-leading portfolios that we believe are best-in-class, with the highest margins and strategic investments that position them well. Our focus has been on maximizing the long-term value of those portfolios and ensuring they reach their full potential, which we believe will create significant shareholder value. This is a continuation of our long-term vision for each segment. There’s nothing to be concerned about regarding the commercial side; it's our core business and exceptionally strong. This process will allow us to maintain a sharper focus on that segment and the others as well. I believe the strategic review aligns with the direction we have been pursuing for an extended period across all platforms.

Okay. That's helpful. For my follow-up regarding commercial foodservice, I'm reviewing the fourth quarter guidance, and it appears to suggest an organic decline of approximately mid-single digits year-over-year, along with a sequential decline in the business. This seems unusual for the fourth quarter, as we typically observe a sequential decrease in mid-single digits. I'm curious about what is causing this shift. It seems like QSR is a contributing factor. However, while we noticed some recovery in Q3, that momentum does not seem to be extending into Q4. Was there something exceptional about Q3? Did we see a demand pull forward, stocking, or something similar? Additionally, how do you view the overall trends in this business, particularly as we look ahead to 2026? Do you anticipate another year of decline based on current insights, or is there reason for optimism?

I believe Bryan can provide insights on the numbers. I'll begin and then hand it over to Steve. The markets are indeed volatile. As we've noted, we are seeing strength in certain areas where we are performing well. Overall, with our dealers, I think we're doing well; some of this is due to our long-term investments. We are also seeing growth in emerging chains and retail. However, the quick-service restaurant segment has been more challenging. If you look across this segment, the data from throughout the year indicates difficulties, especially with traffic trends. We feel well-positioned in the QSR segment; our relationships are stronger, and we have a solid pipeline of opportunities. The products we have approved are significant to their future plans for operational efficiencies and menu development. Yet, due to the current market situation, we're witnessing varying purchasing patterns among these chains. This has posed challenges for us and has introduced some volatility from quarter to quarter. Nonetheless, it gives us optimism for the upcoming year because of how we are positioned. We believe that the strategic actions they are taking today will translate into benefits for their business next year, and we are part of those plans. That summarizes my thoughts. Steve, why don't you continue?

Yes. Mig, I would just add on a couple of thoughts to comment on what Tim just said. Again, I think the chains, the QSR specifically that Tim said, obviously, have been challenged the last really 12 to 18 months. And as Tim said, I think the relationships that we have there continue to be strong. And I think as traffic in that space continues to be tough, it remains obviously challenged for the fourth quarter and probably into early next year. I think the positive is what you're seeing in the third quarter is investments we've made in other segments beyond just the QSR space that are starting to come through, the dealer segment, which Tim talked about. But I also want to highlight, as we think about emerging chains, there's a lot of focus in the U.S. There's a lot of focus internationally as well for us. It's a completely new white space that I feel like we're very underpenetrated in, and we've made a lot of investments in our people, in our innovation kitchens we've opened in Europe, both now in Munich and in Spain. And I think there's so many emerging chains in those spaces that probably many of us in the U.S. have not heard of that are big opportunities for us. So I think as we think about how next year unfolds, I think the dealer business, the emerging chain business, a lot of the fast-casual space is very positive next year. And I think even though the QSR space remains challenged, I do think you're starting to see some of the QSRs even this quarter as they've reported start to see some trend in the right direction. So I think QSRs as we get into next year, to answer the question, trend better. But I also think there's so much underlying demand in the other segments that we're just starting to see our investments pay off. And so I think that's why we feel good about next year, even though the fourth quarter with the QSRs remains somewhat challenged.

We'll move next to Saree Boroditsky with Jefferies.

This is James on for Saree. I guess sticking with the commercial foodservice here, you just talked about QSR traffic remaining a headwind. And based on the data, that's kind of weakening further as of the latest data available. And in this backdrop, like what are the non-traffic levers that can still drive sales among QSRs? Or is traffic the sole driver here? And how many periods of traffic recovery would you need to see before chains kind of step up investment here?

Yes, James, this is Steve again. Good question. I believe traffic is certainly a major factor. As traffic begins to improve, that’s when we will see the quick-service restaurants start to rebound, whether through new store openings or kitchen investments. One trend we have discussed in the quick-service restaurant sector is how they are addressing challenges to traditional restaurant traffic by exploring ways to boost sales during additional dayparts. A significant trend has been the focus on beverages. We are seeing quick-service restaurants, which you wouldn’t expect to offer premium beverages, gradually move in that direction. This shift is aimed at attracting customers during different times of the day. For example, if breakfast sales are struggling, they are looking for ways to encourage guests to visit during the afternoon between lunch and dinner. We are particularly well positioned in this area as we can provide a complete beverage solution, ranging from ice and dispense drinks to coffee, beer, and water. When quick-service restaurants incorporate a new beverage platform, having one company that can deliver the entire solution and support on a global scale is a significant advantage for our clients. This is how I see quick-service restaurants tackling the traffic issues—by targeting additional dayparts.

Got it. That's very helpful. Regarding the EBITDA guidance, can you walk us through the contribution from each segment for the fourth quarter and how you anticipate it?

We've provided the level of guidance that we're going to provide for now. So I don't have specific numbers for each segment. But I think if you do the math, I mean, there's not going to be significant deviations from where we've been currently.

We'll move next to Tami Zakaria with JPMorgan.

This is Alec McGuire on for Tami. So my first one is on the tariff front. I was wondering if you're taking any incremental pricing for the latest Section 232 tariff announced back in, I think it was August. And if there's any additional color on how the customer reception on pricing has been in the industry across the board? That would be much appreciated.

Yes, this is Steve. I'll start and then pass it on. Regarding commercial foodservice, our initial response to the tariffs at the beginning of the year was to adopt a cautious stance before implementing significant price increases like many competitors did. We aimed to gather substantial facts and data to support our pricing strategies to counterbalance the tariffs. Consequently, we announced and executed a price increase on July 1, which has become increasingly apparent as the second half of the year progressed. We've also dedicated significant effort to operational initiatives, such as increasing in-sourcing in the U.S. and utilizing our facilities in Nogales, Mexico, where we have some in-house manufacturing, alongside leveraging our overall supply chain capabilities. As we complete the fourth quarter, we anticipate covering the tariff cost impact through pricing and these other initiatives by year-end. In terms of the other platforms, residential is somewhat more affected than food processing due to the grill platform's reliance on China, whereas food processing sources fewer components from there. Overall, since mid-year, we have maintained that our goal is to neutralize the tariff cost impact through pricing, supply chain efforts, and operational initiatives, and we are on track to achieve that.

Understood. And just a quick follow-up. I think FP appears to be seeing some improved market dynamics, realizing solid order growth in the quarter. But I was wondering if you could, I guess, share some additional color on what the key drivers were for improved conversion of some of those larger projects that are out there?

This is Bryan. I'll take that question. As I mentioned, we're seeing a stronger focus on protein along with advancements in automation and washing solutions. We have some related areas that enhance our handling of proteins. Additionally, we are more involved with red meats and dry cured meats, where we are noticing increased investments. On a related note, there are tentative signs of improvement in the bakery sector as well. We have observed robust performance in snacks, and we're pleased with how recent acquisitions align with positive trends in tortilla chips and prepared cakes. Overall, we're witnessing more investments and an uptick in our customers' confidence in the protein markets we cater to, and this is also positively affecting poultry, although our involvement there is limited. We've identified that area as one for potential growth and are looking to expand our capabilities.

We'll take our next question from Jeff Hammond with KeyBanc Capital Markets.

I wanted to ask about the residential kitchen segment. When you spun off food processing, there were many inquiries about why residential wasn't included. From your perspective, what has prompted a reconsideration of that segment? Additionally, regarding the grill business and the tariff situation, what strategies are you exploring or implementing to adapt your business model for better management of those tariffs?

Yes. So we did start moving some of our production from China to other parts of Asia and elsewhere. So that was something that we mentioned last quarter. So that actually is underway and being executed in the fourth quarter. So that will better position the platform going into next year. The slight reduction also kind of announced in tariffs here recently in China does help that platform as well. So we pick up a bit on the bottom line, but it also better positions us on the top line from a pricing standpoint going forward. Part of the outdoor platform is manufactured in the U.S. as well kind of on the premium end of things with the Lynx Grills. And certainly, we're continuing to evaluate opportunities to onshore some of the products there. Yes, I'm sorry. So Jeff, your first question, I mean I think that's been an ongoing review of the portfolio. And I'll say I'll probably just be repetitive with the comments I made earlier. I think we were looking at the portfolio holistically even as of last year that kind of led us to the sequence of activities and announcements, which has led to most recently, the announced review of residential.

Okay. That's helpful. And then just on food processing, margins have stepped down quite a bit year-to-year, and I think you mentioned mix and tariff and maybe you can spike that out a little more. But as you look at the pipeline and you look at maybe some of the incoming orders, how are you thinking about margins as we go into 4Q and as we go into '26 and the spin?

Yes, this is Bryan. As I share my thoughts, I'm focusing on organic growth since there's always an impact from improving operations after acquisitions. Regarding the year-over-year margin pressure we're experiencing, I believe Q3 and Q4 will be relatively similar, despite slightly less operating leverage in Q3 due to volume and varying factory work patterns in Europe during that quarter. We noted around 100 basis points of tariff impacts that we will continue to address cost-wise. Additionally, there are market dynamics influencing our pricing strategy. Looking ahead to Q4, with the improving revenue trends, we anticipate better performance compared to Q3. In the medium term, with larger orders and our focus on returns and customer benefits, we expect to enhance our margins. We're taking steps to adjust pricing on parts and services while also being responsive in contract pricing. I believe these initiatives, combined with improving orders and backlogs, should lead to a positive margin trend as we consider the outlook for 2026 compared to 2025.

I believe we are currently seeing a shift in our spending patterns. There is a positive momentum as we move through the latter part of this year and the early part of next year. Our pipeline remains robust, and as orders start to convert, we find ourselves in a solid position. Typically, this will be the main factor influencing our margins. Additionally, as Steve mentioned, we will have navigated some of the tariff challenges. Overall, we feel optimistic about the first half of next year as we begin to implement our spending strategies.

We'll move next to Tim Thein with Raymond James.

I have two questions regarding the commercial business. First, reflecting on the framework we discussed a couple of years ago about what drives EBITDA margins in this sector, sales mix was identified as a major lever. However, the volumes haven't quite met our expectations. I'm interested to know how the focus on technology and automation, which was mentioned earlier, has progressed as a catalyst for supporting margins. Additionally, I wonder about the strength in ice and beverage and whether this would contribute positively to sales. Given the growth in that channel, is it reasonable to assume it's beneficial for the sales mix? Let's start with that.

Yes, you are correct. Expanding our margins has indeed been part of our strategy. After COVID, we eliminated many low-margin SKUs and introduced a variety of new products. While the future impact of these products is not fully determined, we have already gained traction and made several announcements about our successes. We see this as an ongoing opportunity to enhance automation and efficiency in our core cooking categories, as well as to capture new market shares in areas where we have not been active, such as ice and beverage. We believe these categories offer attractive margins that will contribute positively over time. Although the ice and beverage segment is relatively new for us and currently has slightly lower margins compared to our hot side offerings, which are in the mid-20s, it is still appealing and growing. As we roll out more of the new products that James has mentioned, we expect these to also yield attractive margins in the future. Regarding our current situation, we are navigating several tariff challenges, which are significant, but overall, we believe we are well positioned for the coming years as these new product initiatives begin to take off with our customers, and we feel confident about this trajectory.

Can you provide an update on the backlog in that business and where you expect to finish the year? I'm curious if this supports the earlier discussion about whether 2026 could be a growth year. Additionally, could you put that order backlog in the context of your typical fiscal year operations?

I mean backlog is pretty short in that business. So I mean I think we really look at kind of the pipeline of opportunities and how we're pretty close with the customers, both our dealer partners and the chain. So backlog is really not the measurement for the commercial business.

We will take a follow-up from Mig Dobre with Baird.

I want to revisit the commercial foodservice segment. You've mentioned some growth areas, particularly internationally. However, certain parts of your business seem to be facing challenges. As you conduct these strategic reviews and consider growth over time, how do you differentiate between what is cyclical and affecting growth in this segment versus what might be more fundamentally structural? Also, how do you approach adjusting your portfolio? Do you have the right mix in this segment to support a return to sustainable long-term growth? If adjustments are necessary, what options are you considering?

Yes, Mig, this is Steve. I'll take a first crack at it. I think about the portfolio in two ways. First, the core part of the commercial portfolio consists of the core brands that have been integral to our success for the last 15 to 20 years, supporting the growth that has shaped Middleby Commercial Foodservice. This core platform has the potential to sustain growth during challenging times like COVID and supply chain issues, as well as current tariff situations, allowing for quarter-over-quarter growth. Secondly, as we expand the portfolio into new categories, I believe that's where the real potential for growth lies. These categories, including beverage, ice, and automation, are still in their early stages. I feel we have the right portfolio because we uniquely combine both the core business and the innovative products and technologies needed for significant growth in the future. While I may not have fully answered your question, I can confidently say that we have the right products in our portfolio. Over the past five years, despite various disruptions, we've strategically added the right products for when market conditions become more favorable.

I believe many of the innovations and new investments we've discussed are centered on longer-term growth drivers in food service. In cooking, we are focusing on ventless options and electrification, as we see the industry transitioning to digital solutions. We’ve invested in a control platform across our offerings, integrating it with IoT, which we anticipate will provide significant long-term advantages. This approach spans our core cooking portfolio. We aim to align with long-term trends and growth while expanding into faster-growing categories, such as ice and beverage, which is evident in our customer trends. We have been specific in our investment areas, which is why we feel our portfolio is well positioned, and we will continue to refine our strategy. It's essential to review our entire portfolio regularly, but the primary themes and levers we've targeted are the reasons we believe our unique portfolio is well set for the next three to five years.

And it does appear that there are no further questions at this time. I would now like to hand it back to management for any additional or closing remarks.

Thank you, everybody, for joining today's call. We appreciate it, and we will speak to you next quarter.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.