MIDDLEBY Corp Q3 2025 earnings call

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 a planned spin-off of our Food Processing business targeted for 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 three 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 non-cash 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.

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 three segments 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.

We are particularly excited about the growing pipeline of opportunities of our ice and beverage solutions. At the residential segment, we have 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. 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 resumed 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 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 are making targeted strategic investments in new and growing addressable markets such as ice and beverage. We are leading in next-generation automation and IoT capabilities that position us ahead of competitors for the years ahead. Most importantly, we have a world-class team around the globe whose commitment and execution continue to drive our success. While we are 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 comp. For Commercial Foodservice, despite market conditions that continue to be challenging, we delivered 1.6% organic revenue growth. Positive impacts were seen 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 remained 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 products' 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 brand 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. 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. We estimate that the Q4 impact will be $5-$10 million. This continues to be a subject where tariffs—this continues to be subject to where tariffs finally land—and is also 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 2.3 times.

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-$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 to 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. 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. For Q4, we expect to achieve the following. Total company revenue of $990 million-$1,020 million. By segment, this is comprised of Commercial Foodservice at $570-$580 million, Residential Kitchen at $180-$190 million, and Food Processing at $240-$250 million. Adjusted EBITDA is forecasted to be between $200 million and $210 million.

Adjusted EPS is projected to be in the range of $2.19-$2.34, assuming approximately 50.4 million weighted average shares outstanding. For the full year, we expect to achieve the following: total revenues of $3.85-$3.89 billion, adjusted EBITDA of $779-$789 million, and adjusted EPS of $8.99-$9.14 based on the sum of four individual quarters. Please refer to slide 7 of the presentation we have posted online at 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 in that we expect to complete the spinoff in the first half of 2026. 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. It 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.

Thank you for taking the question, and good morning, everyone.

Morning, Mick.

Morning. Gosh. There's a whole lot to talk about here, I guess. Maybe where I would start is with a question on just the strategic evaluation of the company more broadly. You obviously told us that residential is now part of this review process. I understand you don't want to comment further, but the way I interpreted your statement, Tim, is to suggest that there's more to it than just the spin of processing, maybe strategic evaluation of Rezi. Is there something going on in Commercial Foodservice as well that maybe you're working on or that shareholders need to be aware of? For Food Processing specifically, appreciate the timeline. I'm curious as to how you're thinking about the management team that will be running this business.

Anything that you can share with us procedurally in terms of the things that you have accomplished thus far in anticipation of this spin? Thank you.

Yeah. I'll take the second one first. As Bryan just kind of mentioned in his remarks, we have made significant progress, I'll say, in separating, standing up the company. We feel like we are on track. I know that we've made kind of limited announcements thus far, but we do anticipate in the fourth quarter that we'd start shedding light on some of the things that we've already accomplished and the plans going forward, kind of along with maybe a little bit more details around the timeline of execution of the spin in the first half of next year. We do feel like we are in good shape and have line of sight of separating the companies and remain excited about that. Yeah. I mean, I think, as I've said in my comments and said probably for a long time, we have three industry-leading portfolios.

We think they're best in class. They have highest margins, and they're well-positioned with a lot of the strategic investments that we've made in each of those portfolios. Really, as we've kind of undergone this exercise, which started last year, it's really how do we maximize the value of those portfolios for the long term, make sure they all reach their full potential, and we think there's a lot of shareholder value creation there. It's really a continuation of that process and kind of our long-term vision for each of those segments. I mean, you shouldn't read anything into commercial. Commercial is our core business. It's a phenomenal business. I think as we kind of go through this process, that will allow us to ensure that we've got greater focus on that segment and each of those segments. I think the strategic review aligns with.

The journey that we've been on in each of those platforms for a long period of time.

Okay. Okay. That's helpful. My follow-up on Commercial Foodservice. I'm looking at the fourth quarter guidance, and there is, if I'm doing the math right, it seems to imply an organic decline of somewhere around mid-single digit on a year-over-year basis and the business down sequentially. I mean, from a seasonal standpoint, this is a departure from what we normally see in the fourth quarter being down, called a mid-single digit sequentially. I guess I'm curious as to what's driving that. It sounds like QSR is driving that. The point here is that while we're looking at Q3, and we saw a bit of a recovery, that's not carrying into Q4. Was Q3 unique in any way? Was there some demand pulled forward or stocking or anything of the sort? How do you assess the broader trends in this business.

Especially as we start thinking about 2026? Is that going to be yet another year of erosion based on what we know thus far? Or is there any reason to be more optimistic? Thank you.

I think Bryan can comment on the numbers. I'll start off and then kick it to Steve. I mean, the markets are volatile, right? I mean, I think as we mentioned in the comments, we are seeing strength in certain areas, and we're performing well in those areas. The general market with our dealers, I think we're doing well there. Some of that is because of the investments that we've made over time. Other areas of growth, the emerging chains, retail. QSR has been tougher, right? I mean, I think you can look across the segment and what's been reported over the course of the year, not just this quarter with traffic, etc. We feel we're very well positioned in the QSR segment. I think our relationships are stronger.

The pipeline of opportunities, the products that we've got approved were a meaningful part of what we think is the future. Plans that they have for, I'll say, operational efficiencies and menu development. Because of the market backdrop, you see different purchasing patterns across those chains, right? I think that's what we've been challenged with and creates some volatility from quarter to quarter. It does give us optimism as we go into next year because of how we are positioned. I think some of the things that we see them executing on strategically today are benefits I think that they will see in their business next year, and we're kind of part of those plans. I'll say that's kind of a broader comment. Steve, I think, why don't you?

Yeah. Mick, 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. As Tim said, I think the relationships that we have there continue to be strong. I think as traffic in that space continues to be tough, it remains obviously a challenge 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. 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 under-penetrated 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. 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. 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. 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.

I think QSRs, as we get into next year, to answer the question, trend better. I also think there's so much underlying demand in the other segments that we're just starting to see our investments pay off. I think that's why we feel good about next year, even though fourth quarter with the QSRs remains somewhat challenged.

All right. Good luck, guys.

Thanks, Mick.

Yeah, James, this is Steve again. Good question. I do think traffic is certainly a major driver. I think as traffic starts to inflect, I think that's when you start to see the QSRs pick back up, whether it's on new store openings or investment in the kitchen. I think one of the trends that we have spoken about that we're really seeing in the QSR space is as they are challenged on, I would say, traditional traffic through the restaurant, they're all looking at how do I drive additional day parts. A big trend there has been the emphasis around beverage. I think you're seeing in the QSR space concepts that you would never expect to have a premium beverage offering in their portfolio are moving towards that. That is 100% to drive new day parts.

Breakfast challenge, how do I get people coming in in the afternoon between lunch and dinner as an example. That is very well. We're very well positioned from that front because there's really no other company that can offer a full beverage solution that goes anywhere from ice to dispense, coffee, beer, water. If you're incorporating a new beverage platform as a QSR, to be able to go one company that can give you the whole solution. Support from a global standpoint is, we think, a very powerful proposition for our customers. That's how I think the QSRs are trying to overcome the traffic challenges is by looking at additional day parts for traffic.

Got it. That's very helpful. I guess on the guidance here, on EBITDA guidance, can you kind of please walk us through the contribution by each segment for Q, how you think about 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.

Got it. Thank you.

Hey, this is Alton Guire. I'm for Tommy. Thanks for taking my questions. 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. If there's any additional color on how the customer reception on pricing has been in the industry across the board, that'd be much appreciated. Thanks.

Yeah, good morning. This is Steve. Maybe I'll take the first pass and pass it around. Specific in Commercial Foodservice, again, our approach when tariffs first broke in the beginning of the year was to take a little bit more of a wait-and-see approach before we went and announcing massive potential price increases as so many of our competitors did. I think we tried to be very thoughtful to get as many facts and data to support pricing initiatives to offset the tariff. We did announce and execute a July 1 price increase within commercial that has, as this back half of the year has unfolded, obviously, come through more and more. We've additionally spent a lot of time focused on operational initiatives, whether insourcing more and more into the U.S. or leveraging.

Capabilities we have in facilities like Nogales, Mexico, where we have some in-house manufacturing, coupled with supply chain, just our overall supply chain leverage that we have from a broad base. As this fourth quarter finishes up, we have expected to be covering the tariff impact from a cost standpoint through pricing and those other initiatives by the end of the year. As you go through the other two platforms, residential is slightly more impacted than Food Processing just because of the grill platform and the China space. Food processing does not source as many components from the China space as well. That is why they are a little bit less impacted. Really, still across all three platforms, we have said since the middle of this year that our expectation was to be.

Neutral in terms of covering the tariff cost impact through pricing, supply chain initiatives, and operational initiatives. We remain on target to do so.

Honestly, just a quick follow-up. I think FP appears to be seeing some improved market dynamics, realizing solid order growth in the quarter. 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. Thanks.

If this is Bryan, I will address that one. As I noted, it is skewing a little bit more to the protein side of things as well as automation and washing type of solutions. We have, I will call it, adjacencies to just handling the proteins. You may also understand that we tend to be a little bit more exposed to red meats and dry-cured meats and the like. We are just seeing some greater investments coming together there. Having said that, there are a little bit of signs of some improvements on the bakery side as well. I will say we have seen good strength in snacks and are very happy with the performance that we are seeing in acquisitions made over the past year that address positive trends in things related to tortilla chips and prepared cakes and the like. Again, it is.

Seeing further investments and I think some of our customers' confidence in the protein markets that we serve. Also benefiting some in poultry too. Obviously, our exposure there is not significant, and that is an area we've noted for desire for growth and expanding our capabilities.

Understood. Thanks. I'll pass it on.

Yeah. Hi. Good morning, guys.

Hey, Jeff.

Hey, Jeff.

I guess just on Res Kitchen, just I think when you did the Food Processing spin, you got a lot of questions on why not Res Kitchen. Just from your view, what's changed to kind of revisit that? Then just on the grill business, around tariffs, just what are you doing or thinking about to structurally change your footprint going forward to kind of manage that tariff issue? Thanks.