Middleby Corp 2026 Q2 Earnings Call

Please go ahead. Good morning, and thank you for joining today's call.

Early last year, we set out to separate our three leading food service 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. 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 standalone 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 worked 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 six quarters. We are very pleased with this 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 Middleby Commercial Foodservice. We are 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, bringing 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 has us closer to our customers than ever before, and we are viewed as a strategic partner. Our more recent investments in our operational capabilities are at early stages but are starting to take hold, and we are confident these initiatives will drive margin expansion and operational excellence over the next several years. Taken together, these investments are what underpin the three-year targets we have laid out at our Investor Day in May. Net sales organic growth of 3%-6%, adjusted EBITDA growth of 6%-9%, and adjusted EPS growth of 10%-15%. We are confident in our ability to deliver against these targets.

Turning to our Q2 results for Middleby 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. 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 the portfolio transformation now behind us, we'll 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 Britt 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 Middleby 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 Middleby 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 and 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 impact, 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-$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 slides 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 2.4 times. At spin, our estimated pro forma leverage ratio was 2.7 times. As stated at our Investor Day in May, we expect to de-lever to approximately 2.5 times 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-$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-$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-$2.53 billion, equating to organic revenue growth of approximately 7%. Adjusted EBITDA of $572 million-$588 million. Adjusted EPS is projected to be in the range of $6.73-$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.