Earnings Call Transcript - MIDD Q4 2024

Operator, Operator

Good day and welcome to the Fourth Quarter 2024 Middleby Corporation Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. On today's call are Mr. Tim FitzGerald, CEO; Mr. Bryan Mittelman, CFO; Mr. James Pool, CTO and COO; and Mr. Steve Spittle, CCO. I would now like to turn the conference over to Mr. Tim FitzGerald, Chief Executive Officer. Please go ahead, sir.

Tim FitzGerald, CEO

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 our decision to separate the Middleby Food Processing business into a standalone public company. Additionally, we are pleased to announce the addition of two new Board members to our Board of Directors. Please note that there are two separate slide presentations covering our quarterly earnings and the Food Processing spin transaction on the Investor page of our website. As we've shared over the past several quarters, our Board and management team have been conducting a comprehensive review of our business portfolio to realize Middleby's full value potential. Our Board has unanimously approved a plan to separate our food processing business into a standalone public company. This move will create two independent industry leaders: the Middleby Corporation, which will consist 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, and this exciting next step in the company's evolution is expected to unlock further value and growth opportunities for both Middleby Food Processing and our remaining Kitchen Equipment businesses. The separation will ensure greater strategic and operational focus for each entity, allowing them to implement optimized capital structures and policies to support growth opportunities while enhancing the strategic and financial impact of M&A activities for each business. Middleby Food Processing, with its strong growth and margin profile, will be valued in line with key food processing peers. Now I'll discuss what this means for Middleby Food Processing. As highlighted in our investor deck, it is well positioned as a top equipment provider to the bakery and protein industries. We are poised for organic growth as we execute our strategy to enhance the ROI and value delivered to our customers. We see market expansion opportunities by extending into attractive adjacent segments like poultry, pet, and snack food, leveraging our current competencies. With a solid track record in M&A, we plan to scale quickly through strategic acquisitions, which will be more impactful financially on a standalone basis and better understood by shareholders. Our Middleby remains focused on the Commercial and Residential Kitchen Equipment business, where we will continue to capture market opportunities with an even greater focus on executing our strategic growth initiatives. We are leading in innovation and positioned to benefit from increasing demand for automation, ventless kitchens, electrification, digital technologies, and IoT connectivity in the kitchen. We anticipate exciting growth opportunities through our expansion into new categories of ice and beverage, with recent innovative launches that resonate well with our customers and market trends. We expect to leverage the differentiated go-to-market strategies we've implemented over the past few years, which are creating a foundation for long-term organic growth. We are well prepared to benefit from a recovery in our Residential business, which has been bolstered during the market downturn through strategic investments in sales, marketing, new product launches, and initiatives aimed at driving profitability and growth. We plan to execute the separation of the food processing business through a tax-free spinoff, expected to be completed by early 2026. I'm also excited to announce the additions of Julie Bauman and Ed Garden to our Board of Directors. They bring significant relevant experience as we work on our growth strategies, implement our portfolio evolution with the announced spin transaction, and create value for our shareholders. I'm confident they will be strong additions to our board as we focus on shareholder value, and I'm thrilled to welcome them to the Middleby Board. Their appointments continue our Board refreshment process that began last year with the additions of Steve Scherger and Tejas Shah. Throughout this process, our goal has been to enhance our Board's capabilities and incorporate fresh perspectives. We also announced that long-time director Jack Miller has chosen to retire from our Board. Jack has been pivotal to our success, contributing to our growth from $25 million in revenues to a global foodservice leader today. We are deeply grateful to Jack for his service to Middleby and our shareholders. Lastly, I want to comment briefly on our fourth quarter results. We ended 2024 with our strongest margins of the year, as all three businesses posted solid results despite the respective challenges in their industries. We are making progress on our profitability initiatives while optimizing our supply chain, driving operational efficiencies, and strategically repositioning our sales mix towards higher-margin product innovations. Macro conditions remained challenging for our commercial and residential businesses but are showing signs of improvement as we move ahead. The food processing business finished the year on a strong note, and we look forward to continued growth as we enter 2025, supported by favorable long-term drivers. We are navigating near-term market conditions and are committed to executing our strategic initiatives focused on sustainable long-term organic growth through new product innovations and developed go-to-market capabilities. We are competitively positioned across all three businesses to expand and realize growth as we progress through 2025. Bryan, I'll turn it over to you for further comments on the quarter.

Bryan Mittelman, CFO

Thanks, Tim. Market conditions persisted throughout 2024 driving margins and cash flow continue to be demonstrated strength 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%. GAAP earnings per share were $7.90, adjusted EPS which excludes amortization expense and impairment charges, nonoperating 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 1.5 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 focus on reducing inventory levels which have declined by over $250 million in 2 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 2x. Our balance sheet is strong. Share repurchases in the fourth quarter were $16 million and we have repurchased an additional $20 million 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 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 '25 will be back up to more typical levels, around 2% of revenues. We continue to actively manage our 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. 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 & 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, we call that the baseline and 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 incurred to support the food processing spend we have announced today. We will provide updates on those activities throughout the year. I will now turn it over to James for an NAFEM 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 selling but I like it and hopefully so will you.

James Pool, CTO and COO

Thank you, Bryan. Today, I'd like to take a moment to extend a special invitation to our shareholders, analysts, and prospective investors to come experience Middleby's Commercial Foodservice 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 NAFEM setup and insight into what's cooking at Middleby. This year marks our most ambitious presentation for this show. We are featuring 9 live cooking vignettes, including two fully operational high-volume restaurants, one dedicated to smash burgers and fried chicken and the other to pizza and wings. Both concepts will be powered by our kitchen embedded, digital robotic automation solutions. Additionally, we will unveil and showcase our latest beverage dispensing technologies from Newton CFV, as Bryan mentioned the Newton Gravity and Wild Goose Filling the Cervici, along with a comprehensive lineup of ice solutions from bullet ice and ice cream. Be sure to opt to check out our new innovative ice quarter by 1.25 by 1.25 craft cube solution. Beyond these innovations, our full-service coffee cafe will highlight various solutions for Middleby Coffee and Marco, including the Marco milk pouch, I discussed on our last earnings call. Our enterprise IoT solution, Open Kitchen, will feature seamlessly connecting all live equipment at the booth. We invite you to discover how we can quickly transform your kitchen operations from the front of the house with EMS, HVA toll, the middle of the house with cold chain monitoring asset reporting, and labor tracking, and the back of the house with equipment connectivity. Open Kitchen is quickly driving to become the IoT for the Commercial Foodservice industry. Within Open Kitchen, we are also introducing a new prior profitability tool to drive prior connectivity sales and differentiation for Middleby. 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 7 innovative products selected for the What's Hot! What's Cool Innovation section in NAFEM. Middleby is one that has received more selections than any other manufacturer. The magnificent 7 will be showcased live and will feature the new Pitco Torq fryer, the first commercial line continuously filtering high-efficiency fryer at the bar, and the new evolved combi which will 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.

Operator, Operator

And the first question will come from Saree Boroditsky with Jefferies.

Saree Boroditsky, Analyst

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 stand-alone cash generation of Food Processing and the ability to sustain the acquisition pipeline?

Tim FitzGerald, CEO

We’ve been evaluating this for some time. Each year, the Board continuously reviews the portfolio to determine the best ways to enhance shareholder value and support the growth of all three businesses. As I mentioned earlier, we've been developing the food processing platform over several years, and that effort has significantly accelerated over the last decade. Looking back five years, it wasn't substantial enough, and at that time, it wasn’t viable to operate as an independent business. However, we now believe we have reached that stage. Being part of Middleby has helped us reach this point, but we also think that remaining within Middleby may limit growth, and separating will help accelerate it. We’re genuinely excited about this change. The management team will have a stronger focus without the distraction of managing three businesses, and as demonstrated in the slides this morning, we have a proven track record in mergers and acquisitions that we expect will not only continue but potentially accelerate. We believe the platform can scale more quickly as a separate, independent company.

Saree Boroditsky, Analyst

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?

Bryan Mittelman, CFO

Yes. I mean it's a little early we have provided, I'll call it, specific long-range guidance certainly for the Food Processing company but I do think that a fair assumption. All our businesses really have somewhat similar cash flow characteristics.

Saree Boroditsky, Analyst

I appreciate that. And just one last one on resi, just give the positive influctio pipeline. How are you thinking about that recovery? And what are the incremental margins on that business given some of the factory investment in recent years?

Tim FitzGerald, CEO

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

Bryan Mittelman, CFO

And sorry, this is Bryan, spanning that a little bit as you think about the incrementals, certainly, I would say this business will have the largest incremental benefits as revenues grow compared to the other segments given 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 over 40% going forward. And to echo what Tim noted, as we achieve, I'll say, revenue levels consistent with those that we have posted in the past, we will have higher levels of profitability than we achieved in the past because of the investments and improvements that have been made in the business.

Operator, Operator

Next question will come from Ross Sparenblek with William Blair.

Ross Sparenblek, Analyst

Sticking with the spin, can we put a finer point on some of the moving parts as we think about onetime and ongoing dissynergies and maybe the expectations of the tax benefit versus an outright sale of food processing?

Tim FitzGerald, CEO

Yes. It's not beneficial for the corporation, but rather a way to avoid taxes if we were to consider other options. However, we do see long-term growth potential in this business. We truly believe that shareholders benefit from it being a separate public company due to its profile with margins and growth characteristics. We think it aligns with higher industrial companies in that competitive set. From a synergy and dis-synergy perspective, one of the core philosophies of Middleby is operating in a decentralized manner, which has been fundamental to us for a long time. We are certainly positioned to drive growth with many of our strategies and our core company culture. We believe these aspects can be replicated, and we see this as Middleby 2.0 while maintaining much of the best operating practices from the business that will carry over. Since our operations are largely centralized or decentralized, there aren't significant dis-synergies involved. Therefore, it’s quite clear from an operational perspective for us to separate the business.

Bryan Mittelman, CFO

We're not prepared to specifically quantify those things to that in future quarters; we will get into more levels of granularity around onetime and such.

Ross Sparenblek, Analyst

Yes, I appreciate that. Well, previously with one of the expectation that food processing is more of the M&A engine here, just kind of given the fragmented white space. But with the strong free cash flow profile for RemainCo, can you maybe just update us on what the M&A line looks like within Commercial and kind of your early capital allocations for the RemainCo business?

Tim FitzGerald, CEO

Yes. M&A has always been a key focus for us and continues to be, although the size and scale have evolved. Recently, food processing has gained more attention in M&A as it remains fragmented and in the early stages. We are excited about the progress, especially as our cash flow has increased, allowing us to pursue M&A while also returning capital to shareholders through stock repurchases. Our approach will be more balanced now that we have a larger cash flow to work with. The RemainCo platform has expanded, and while there are still significant opportunities, we plan to concentrate more on the ice and beverage segment, which has shown substantial growth and profitability over the past few years. We believe this will provide further organic growth opportunities with various products and technologies. Additionally, we have positioned ourselves as a leader in automation, controls, and IoT, with a mix of our internal investments and M&A activities. We aim to stay ahead of the competition and are optimistic about driving growth in the next 3 to 5 years, which will continue to be a focus for us.

Operator, Operator

The next question will come from Mig Dobre with Baird.

Mig Dobre, Analyst

Just maybe to start with a clarification in this strategic review process. Where are you on the 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. So an update here would be helpful.

Tim FitzGerald, CEO

Yes. So I mean, look, I think we're continuously reviewing the portfolio, right? I mean just this announcement is part of taking action on something that we think makes compelling strategic and financial sets for that business at this point in time but we always review where we're at with all the businesses and what is the best opportunity to continue to grow those businesses considering where they're at in the life cycle, what we see upcoming opportunities in the future and so I think right now, 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 Commercial Foodservice 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, right? So those are things that we are considering for where we're at with the journey of residential, right? 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.

Mig Dobre, Analyst

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 all carries an inherent degree of cyclicality that arguably speaking, you do not have in Commercial Foodservice? 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 RemainCo longer term and how that would be additive to shareholder value?

Tim FitzGerald, CEO

I believe we've had similar discussions about food processing for many years. It's not much different now. We've adopted a long-term approach to develop that business and have acted when the timing was right in its cycle. While we can't say residential is at a similar crossroads right now, we see substantial opportunities to demonstrate its potential. Food processing has been quite cyclical and we've heard concerns from shareholders about its lower margins over the years. We've worked to develop it to where it is today, and we're excited to unlock significant shareholder value as we continue this journey. Residential has its own timing and cycles within the Middleby portfolio.

Mig Dobre, Analyst

Understood. Last question for me. Just on your outlook in Commercial Foodservice, 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 inflect positive from an organic growth in Q2? Or is this all of 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?

Bryan Mittelman, CFO

No. I mean, I think the pricing benefits for '25 are modest at best. We haven’t maybe have the same level of pricing actions to start this year than we have in prior years as you look at what's kind of cumulatively happened over the past, let's say, 4 years or so. So I think we are in a year here where it will be more volume driven than price driven.

Steven Spittle, CCO

I would highlight three specific areas that give us confidence in the year moving in a positive direction. We have discussed new store openings with our larger chain customers, which have been delayed over the past couple of years due to various reasons including weather issues, wildfires, and flooding that have affected construction. Challenges like personnel allocation for building restaurants and broader macroeconomic obstacles faced by larger restaurant chains have also played a role. However, if we examine the full-year build plans for 2025 from our top chain customers, we can see that these plans have increased compared to 2024, indicating strong confidence in their new store openings this year. Additionally, with the challenges in opening new stores, we are observing an increase in sales within their existing locations as they strive to gain market share. This is particularly evident in the beverage sector, which is transitioning from a concept to a reality. Furthermore, when considering the U.S. market as a whole, our internal consulting division has noted a positive increase in consulting and quoting activity from the fourth quarter to the first quarter, suggesting a robust pipeline in the general market. Lastly, we are optimistic about the international markets, especially in Europe, where we're addressing some market challenges but also seeing increased engagement through our innovation kitchens in Madrid and the U.K. We plan to open a new innovation kitchen in Munich this summer, highlighting Germany as a significant opportunity. Overall, we see strong momentum in Europe as we progress through this year, driven by new store openings, increased consultant activity, and positive trends in international markets.

Bryan Mittelman, CFO

And we did grow in Q4 internationally.

Operator, Operator

Next question will come from Jeff Hammond with KeyBanc Capital Markets.

Jeff Hammond, Analyst

Just last one I had on the spin. Can you just talk about what you think the leverage profiles of each of the businesses? Is it going to be leaner, more leverage on RemainCo and lead the balance sheet drive for acquisitions? Or is it more balanced?

Tim FitzGerald, CEO

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

Jeff Hammond, Analyst

Okay. Regarding Ed Garden joining the Board, could you provide an update on the cooperation agreement and some of the key points within it? Additionally, have you received any initial feedback from him or his team that has influenced this strategic plan?

Tim FitzGerald, CEO

Yes, I'll start by discussing the overall Board refreshment process that we have been engaged in for the past couple of years. We recently welcomed two new Board members, Steve Serger and Tejash Shah, who have made significant contributions and we are thrilled to have them on board. As we progressed through the latter part of last year, our efforts continued. We conducted a thorough evaluation of the skills we wanted to add to the Board to ensure fresh perspectives. We are now in the later stages of bringing on two additional members, following Jack Miller's retirement, who has served as an exceptional Board member for many years. With Ed joining us, we have had very constructive conversations and believe he will bring valuable financial, investment, and operational expertise to the team. There is a cooperation agreement associated with this, which includes standard confidentiality and standstill provisions.

Operator, Operator

The next question will come from Brian McNamara with Canaccord Genuity.

Brian McNamara, Analyst

I know you mentioned you regularly reviewed but portfolio when was the official strategic review launch? Did that date back to the JB T 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?

Tim FitzGerald, CEO

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 I think as we started evolving what we thought might be the most strategic to unlock shareholder value for the long term. That was probably midyear when we made that kind of more of an official comprehensive review bringing on advisers in that regard. Look, the residential business I would not frame it the way 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, etcetera. I mean, I think that's been pressure on longer lead time products in the housing market. And when you're dealing with the premium sector, we get hit a bit hard first so it takes a little bit longer to start the engines. But when it comes back, it's going to come back strong. So we're confident of that. So 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 disruptive period. I mean kind of coming out of COVID that's just kind of not normal macro up and down. It's a significant disruption. So we think in better days that this is a very -- this is a best-in-class, highest margin, very unique portfolio of premium brands with nothing else like it and we think there's a lot of shareholder value there. That being said, we always will continue to review the portfolio for what is the best opportunities for each of the businesses 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.

Brian McNamara, Analyst

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

Bryan Mittelman, CFO

Brian McNamara, Analyst

Great. And then finally, I guess, for just on customers, how would you characterize the current operating environment you have there's really leaning into value for limited time offers going from 1 month to 1 year. You said and you're confident in your store opening plans, I guess you saw customers opening plans this year. I guess, what drives that confidence kind of given the midyear surprise in 2024?

Steven Spittle, CCO

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 additional fast food QSR segment. I think what you're seeing, though, is I think you're seeing some of the more fast casual, casual dining concepts really start to thrive. I mean I gave so many of them a lot of credit for and creatively about adopting new operational initiatives, to help with throughput, to help drive labor cost down, to help drive food cost 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, I'd 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 all the chains are very open with their new store plans. And I do believe that if you look at them, there are 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 are coming through for them. So I think, yes, there's been a couple of quarters where things have been kind of pushed out to the right I think what gives us confidence is nobody for the most part, those chains have 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 next 12- to 15-month build plan.

Tim FitzGerald, CEO

I want to add a few thoughts. Some of the chains seemed surprised by the traffic in the latter half of the year, which was expected to grow but turned out to be more challenging. However, as we concluded the year, traffic patterns began to improve, which instills more confidence in the chains. Food costs also played a significant role, and there’s this cycle where rising food costs lead to increased prices, which then causes traffic to decline. We did notice inflation in food costs during the latter half of the year, which many of our chain customers did not anticipate. This situation resulted from various dynamics affecting their operations. Moving into this year, there's increased stability in food costs, allowing the chains to consider menu pricing that can drive traffic, which in turn may enhance traffic patterns. We observed signs in the third quarter that these issues were beginning to resolve, enabling the chains to execute their plans with greater confidence.

Operator, Operator

The next question will come from Tami Zakaria with JPMorgan.

Tami Zakaria, Analyst

A question on the parts sensors business. I saw on the presentation, the RemainCo has about 17% and the SpinCo 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?

Tim FitzGerald, CEO

Yes, well, 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 and enhance a more efficient customer experience, kind of 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 service. I think over time, our expectation is to increase the percentage of that piece of the pie for all the businesses, respectively.

Tami Zakaria, Analyst

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 2 businesses, call it, in 2019? I'm just trying to understand how the mix has changed over time in the last 5 years?

Bryan Mittelman, CFO

Yes, Tami, this is Bryan. I need to check, as I can't recall if we began reporting that as early as 2019. My colleagues believe it might have started around 2021 when we began sharing some visual data on it. Generally, the Residential segment has always comprised the smallest portion of our business when considering the three segments. Meanwhile, the Commercial segment has likely remained relatively stable in the high teens to around 20%.

Steven Spittle, CCO

Certainly in the last 5 years.

Bryan Mittelman, CFO

Yes. And then Food Processing is one that we've probably been doing has seen the most growth in it as we've been really working to offer more services to our customers and with that come as parts. And also, our customers have seen how their operations have been managed, has been evolving as we've been working through, I'll call it, labor issues for the past couple of years. A lot of our large customers, I'll say, have lost some of their 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, in commercial, working on certain things strategically to be an even better and more aligned service provider with different networks out there.

Operator, Operator

I would like to turn the conference back over to Mr. Tim FitzGerald for any closing remarks. Please go ahead, sir.

Tim FitzGerald, CEO

Yes. No, 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 we kind of move through the next several quarters. Hopefully, we'll see some of you at NAFEM 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.

Operator, Operator

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