The Middleby Corporation (MIDD) Earnings Call Transcript

Good day, and welcome to The Middleby Corporation's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] On today's call are Tim FitzGerald, CEO; and Brittany Cerwin, CFO. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tim FitzGerald. Please go ahead.

Good morning, and thank you for joining today's call. Early last year, we set out to separate our 3 leading foodservice businesses into independent companies to best position each business for long-term growth and to unlock value for all of our shareholders. We completed the first step in Q1 of this year, selling a controlling stake in the Residential Kitchen business to 26North. And on July 6, we completed the spin-off of our Food Processing business, launching Midera as a separately publicly traded company. Midera now as a stand-alone business, is extremely well positioned as a best-in-class leader in the growing food processing equipment industry, and we are confident that business and the Midera team has a very bright future ahead. With that, the transformation is complete. I'm proud of how our teams work together and in the execution. It is a significant milestone and achievement in the history of our company. In parallel with our business transformation, we returned $1.3 billion to shareholders through repurchases, including $200 million in the second quarter, reducing our outstanding share count by 16% over the past 6 quarters. We are very pleased with the strategic allocation of capital that we believe has delivered substantial value to our shareholders during a pivotal time. We are now embarking on a new exciting chapter for Middleby. Middleby now moves forward as a focused solutions provider and the innovation leader in commercial foodservice. We're extremely well positioned with our leading brands, best-in-class innovations and momentum in equipment categories that deliver the highest ROI for our customers. The strategic investments we have made in our business are gaining traction, and we are seeing the benefits in our top line. We continue to set the pace in the industry, bring next-generation solutions that have practical application and meaningful impact to our customers. Our go-to-market strategy that has been underway for the past several years as is closer to our customers than ever before, and we are viewed as a strategic partner. And our more recent investments in our operational capabilities are at early stages but are starting to take hold, and we're confident these initiatives will drive margin expansion and operational excellence over the next several years. Taken together, these investments are what underpin the 3-year targets we have laid out at our Investor Day in May: net sales organic growth of 3% to 6%; adjusted EBITDA growth of 6% to 9%; and adjusted EPS growth of 10% to 15%. And we are confident in our ability to deliver against these targets. Turning to our Q2 results for Commercial Foodservice. The quarter reflected strong execution against our strategy as we delivered over 8% organic revenue growth. This marked the second consecutive quarter of organic sales growth in a challenging macro backdrop, a trend we expect to continue in the third and fourth quarters. This also represented the second largest quarter for revenue in the history of Middleby Commercial Foodservice. The growth in the quarter was broad-based as we saw strength across channels and customer types, including with our chain customers and also in the general market with our dealer partners. We were pleased also to realize growth across geographies with increases in both North America and International. We continue to make inroads on the back of our go-to-market investments and new product innovations. And we're seeing the benefits of targeting newer markets, including ice and beverage, where we have an even greater pipeline geared towards next year. The current industry backdrop is not ideal. However, Middleby has continued to drive year-over-year organic revenue growth. Turning to our second half outlook. Industry conditions remain challenging, particularly with traffic at the QSR segment and customers are being more selective on their capital plans for the back half of the year. Within that, we are seeing replacement spend stable relative to our prior thoughts with unit growth being pushed out modestly by some larger chains. That said, we are carrying momentum into the second half with global chains, and we have visibility into the pipeline of opportunities into 2027. This momentum gives us confidence to raise our revenue guidance expectations for the second half of the year. We also saw year-over-year EBITDA growth in the quarter, although our margin percentage was below our expectations, driven by a few key areas. The revenue growth included better-than-expected strength in our ice and beverage platform, which has margins approximately 400 basis points lower than our longer established cooking platform. Additionally, inflationary costs, particularly ocean freight shipping and steel surcharges accelerated faster than anticipated, driven by the recent broader macro. And our investments in the ice and beverage platform weigh on margins in the near term as we ramp production for new product launches to support 2027 customer demand in the pipeline. Although we anticipate these margin pressures to persist through the second half, we expect to see sequential margin improvements in both the third and the fourth quarters. We have a number of operating initiatives currently in progress, including product simplification, lean manufacturing and mixed profitability. While these are longer-term initiatives, they will partly offset recent accelerated inflationary pressures and support sequential improvement in margins ahead of larger benefits as we move into 2027. In addition, we are confident of increased margins at our ice and beverage platform, particularly as we move beyond the initial investment phase in 2026. We're excited about this new chapter for Middleby. With a portfolio transformation now behind us, we will benefit from greater focus on the execution of our strategic plans, both top line and bottom line. Our team has a lot of momentum, and we are looking forward to accelerating it. With that, now I'll turn it over to Brit to discuss our financial performance in greater detail and guidance for the third quarter and full year.

Thanks, Tim. Today's conversation will be focused on Commercial Foodservice. Given the spin-off of Midera did not occur until July 6, food processing results are included in our continuing operations for Q2. For details on Food Processing, we invite you to join Midera's inaugural earnings call on Thursday, August 13. Turning to the results. For Commercial Foodservice, second quarter revenues were approximately $631 million, driven by organic revenue growth of 8.3%. As Tim mentioned, positive impacts were broad-based and seen across all channels in both domestically and internationally. Organic adjusted EBITDA margins were 25.8%. In terms of margins, Tim laid out the drivers to our second quarter results and the implications for the remainder of the year. During the second quarter, we experienced a total margin headwind of nearly 100 basis points, which is driven by the higher-than-expected inflationary impacts, partially offset by the benefit of a tariff refund of approximately $5 million. For the remainder of the year, we expect incremental inflationary margin pressures of approximately $10 million to $15 million relative to our prior expectations. From a margin percentage perspective, we expect sequential improvement in the back half as we begin to benefit from the operational improvements Tim laid out, including product simplification, mix and lean manufacturing. On a consolidated basis, total company adjusted EBITDA for the second quarter was approximately $193 million and adjusted EPS from continuing operations was $2.35. Adjusted EPS expansion was achieved primarily through organic EPS growth, 2026 share repurchase activity, share repurchases utilizing the proceeds from the residential transaction and carryover from the 2025 share repurchase activity. This was offset by increased interest costs associated with the maturity of our convertible notes and a higher tax rate associated with discrete foreign tax items and nondeductible expenses as compared to the prior year. Adjusted EPS, excluding Food Processing, for the second quarter is estimated to be $1.74 as compared to the prior year of $1.40. This presentation of adjusted EPS is aligned with how we expect to report Middleby results on a post-spin basis with Food Processing as discontinued operations starting in the third quarter. Please refer to Slide 11 of the presentation we have posted online for a complete adjusted EPS bridge for the second quarter as reported and Slide 17 and 18 for post-spin adjusted EPS bridges for Q1 and Q2. Second quarter operating cash flow was approximately $100 million, and free cash flow was approximately $89 million. Our leverage ratio per our credit agreement at quarter's end was 2.4x. At spin, our estimated pro forma leverage ratio was 2.7x. As stated at our Investor Day in May, we expect to delever to approximately 2.5x by the end of the year and anticipate debt paydown will be the primary use of excess capital in the second half of the year. Regarding capital allocation during the second quarter, we repurchased 1.4 million shares or approximately 3% of our outstanding shares for $200 million or an average purchase price of approximately $142 per share on a pre-spin basis. Let me walk you through our third quarter and full year outlook, starting with the third quarter. For the third quarter, on a post-spin total company basis, we expect to achieve the following: revenue of $620 million to $640 million, equating to organic revenue growth, of approximately 4%; adjusted EBITDA is forecasted to be between $143 million and $150 million; adjusted EPS is projected to be in the range of $1.67 to $1.83 assuming approximately 45.2 million weighted average shares outstanding. For the full year, on a post-spin total company basis, we expect to achieve the following: revenues of $2.48 billion to $2.53 billion, equating to organic revenue growth of approximately 7%; adjusted EBITDA of $572 million to $588 million; adjusted EPS is projected to be in the range of $6.73 to $6.89, assuming approximately 45.8 million weighted average shares outstanding. Please refer to Slide 14 and 15 of the presentation we have posted online at our Investor Relations website for full details. That concludes our prepared remarks, and we are now ready to take your questions.

[Operator Instructions] The first question comes from Jeff Hammond with KeyBanc.

So gross been quite impressive year-to-date. I mean the macro still seems pretty choppy. You do have kind of a step down, and I'm just wondering if it's less easy comps or if the first half had more kind of program, maybe beverage wins in there? Just a little more color on the cadence.

I think last year, we talked about the double-digit growth from our dealers. So we still see strength across the market, and Steve can chime on both dealers as well as chains, but there was some we're not expecting the continued double-digit growth at the dealers. So I think we see it moderating in the back half of the year, but we still have momentum and robust demand, as I mentioned kind of in the opening comments.

Yes, I would just build on that. This is Steve. I mean the growth we've seen within our dealer channel has been pretty much sustained for the last 4 quarters now. And even though, as Tim said, the comp is tougher for the back half of the year, we still expect growth within the dealer channel. So that is really the primary difference. We are seeing, and it's what we saw in the first and second quarter, pickup has really been within the chain space, specifically the QSRs. A large portion of that has been driven by new product adoption as they look to expand menu, expand dayparts and certainly, beverage and ice, as we commented on before, has been a big driver within that space. And we expect that to continue in the back half of the year, and that is actually where the predominant portion of growth we expect comes in the third and fourth quarter.

Okay. Great. And then I understand a lot of kind of inflation pressures. Can you just speak maybe unpack the -- what really drives the sequential margin improvement? Is that -- is there any mix in there? Is it just getting this price through? And then are you contemplating any additional IEEPA refunds?

Sure. This is Brittany. I can comment to that. First, in regards to the IEEPA tariffs, we mentioned $5 million in the second quarter. And we expect a similar dollar range of about $5 million potentially in the back half to be received. As it relates to the sequential margin step-up that we're expecting as we go from second quarter and into the back half. I think that's a mix of a few items. We are expecting a little bit of mix improvement. So in the second quarter, as it relates to mix. And as we mentioned, new product innovation and the launching of manufacturing around the new beverage equipment, that was a headwind in the quarter to margins of about 150 basis points which we will start to see reduce a little bit as we get into the back half, along with some improved mix, the pricing that we've mentioned primarily will not start to benefit us until the fourth quarter. So that's why we are kind of expecting some sequential as we move from Q2 to Q3 to Q4 improvement along with the operating initiatives that Tim commented on in the prepared comments.

Yes. Jeff, I would just say, we obviously laid out at Investor Day a lot of the new capabilities that we have built up over the last year plus, very similar to what we've done with innovation and go to market. So you can see that taking hold on the top line. A lot of the operating initiatives that are in flight. So we really are just starting to get traction, we think, in the back half of the year. So we feel like we've got pretty good line of sight to that 200 to 400 basis point improvement that we talked about Investor Day, we're at the very early stages of that. So some of that will bake into the year as we kind of progress particularly in the fourth quarter.

The next question is from Tim Thein with Raymond James.

Great. Just to come back, Brittany, on the comments I think you mentioned earlier, $10 million to $15 million of incremental costs that you hadn't foreseen, I guess, 90 days or so ago. Is the -- how are you expecting the yield on the pricing, how that plays through and how much that's some offset presumably that you're expecting? And I guess a lot of that comes in the fourth quarter, but I guess that's part one of the question. The second is just thoughts around the pricing strategy as you go into '27. I think normally, those pricing actions are taken around the start of the year. Does this kind of adjust that or alter that potential strategy as you look into next year?

Yes. So I'll start with a little bit on the margin headwind. So as we wrapped up the first quarter, obviously, we had some inflation. And as we sit here 90 days later, that inflation has accelerated, and that's what we have anticipated here in the back half of that incremental $10 million to $15 million. When we put in the pricing, obviously, that's general market pricing, which has to be announced well ahead of the 8/1 effective date that we had. So that was really to start to partially offset the cost and inflation that we are seeing at that time. So -- and as mentioned, we'll start to see some of that benefit roll through on the pricing in the fourth quarter. So it will be a headwind for us on this inflation into Q3 and some of Q4 as well.

Okay. And then ice and beverage called out a couple of times. And I think maybe, Tim, as you were going through the initial comments, you mentioned just more of a pipeline building. And I think you mentioned that into -- more of that hits in '27 on top of that. Any -- I know we touched on a lot of this at the Investor Day, but I mean, is that size that pipeline as you think about the contribution to what that can mean for '27? Any further clarity on that in terms of meaningful that could be?

Yes, I don't think we're going to lay out the magnitude in terms of top line, but I would say it's just positive, right? Like I mean I think that's a big addressable market that we've identified. We've made a lot of investments. We continue to make those investments. We've got momentum. It's part of the revenue growth that we're we're seeing now, and there is more to come because we have new products that we're launching going into 2027. Those are some of the investments we're making right now, the size of that pipeline has been expanding a bit ahead of some of the products that we'll be launching next year. And those are some of the continuing investments that we're making right now. So I mean I think that gives us confidence in our growth outlook and algorithm for the next several years because is and beverage will continue to play a part of it.

Next question is from Tami Zakaria with JPMorgan.

My first question is organic growth. Can you clarify what your organic growth outlook is for CFS. I think when you started the year, you said 4% to 6%. I'm guessing it's now higher, more like 6% to 7% or whatever. So can you clarify what that number is for the year? And within that number, how much is driven by price versus volume? And is there any thing embedded in terms of headwind from the product line simplification initiatives that you spoke to. So if you could parse out the organic growth outlook for CFS, that would be helpful.

Yes. I could speak, Tami, to the full year guidance that we've given for Commercial Foodservice. That has now increased to be between 6% to 8% for the full year.

Yes. Tami, this is Steve. In terms of the price volume dynamic, the predominant driver this year has been on volume. We took some low single-digit pricing towards the end of last year into the beginning of this year, and we just put forward, as Brit talked about, another one, low single digit in general market in early August. But the predominant driver is on the volume side. And again, that's coming through a lot of new product adoption from our chain customers. That's what gives us the confidence and that's volume versus price. In terms of the product line simplification that we highlighted at the Investor Day, we're certainly still early days in that process. So really have not seen or don't expect much of a headwind from a top line volume perspective the rest of this year.

Understood. That's very helpful. And second question is on tariffs. I wanted to clarify your tariff headwind is now expected to be -- it seems $77.5 million for the full year, net of the additional increases and reductions under Section 122, 232 and 301 that you called out. So can you clarify how much of that $77.5 million is already absorbed in 1Q and 2Q and how much is expected in 3Q versus 4Q?

Sure. With regards to the range that you provided, that's our gross tariff exposure as we look at the Commercial Foodservice business on a continuing basis. As we look to kind of the spread between the quarters. I would say it's pretty -- it's starting to be more evenly split between the first half and the second half. Obviously, we're going to have a little bit of a step up, as we mentioned, with the new 301 tariffs that will start here towards the later part of the second half. But that the $2.6 million annualized is an annualized number that will start here in the back half of gross exposure on those.