The Middleby Corporation (MIDD) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Middleby's conference call to discuss its residential joint venture. [Operator Instructions] Please note today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to CEO, Tim FitzGerald. Please go ahead, sir.

Thank you. Good morning, and thank you all for joining today's call. Today marks a pivotal moment in Middleby's evolution as we unlock significant shareholder value through the optimization of our portfolio via a residential joint venture with 26North. Going back in time, our residential platform originated with our acquisition of Viking as we look to bring the professional kitchen into the home. We sought to expand and grow our residential platform through acquisitions, product innovation and leveraging the Middleby platform. While the end markets may have not gone in the direction of our original plan, we still believe that we have created a unique business platform with an unmatched collection of industry-leading brands, including Viking, AGA Rangemaster, La Cornue, Viking, Kamado Joe and U-Line. We continue to believe that the residential segment has clear upside and an opportunity for sustainable long-term growth despite the current tariff-related uncertainty and pressures on the housing market. With that in mind, you're likely asking why we're choosing to divest a portion of the business now. Over a year ago, we began to explore avenues to enhance and unlock shareholder value. This transaction, along with the Food Processing spin plan for next year is the culmination of this strategic review to maximize the value of Middleby for its shareholders. The separation into 3 separate businesses will allow for organizational and operational focus with each segment best positioned to maximize its long-term growth potential. This includes setting the growth agenda and capital allocation philosophy for each business independently, along with optimization of capital structure to support those objectives. This transaction also sets up the business for value creation by positioning the 2 remaining Middleby businesses comprised of our higher-margin and higher return Commercial Foodservice and Food Processing segments for an equity revaluation ahead of the spin of the Food Processing segment next year. We will also be able to use the significant upfront cash proceeds from the residential transaction to repurchase shares and optimize the capital structure ahead of the Food Processing spin-off. As we and our Board of Directors analyze the company, we firmly believed that the sum of the parts was worth more than the whole. Accordingly, we believe our 2 upcoming transactions are both transformational for the company and the most efficient way to create long-term shareholder value. The other question that is likely to be top of mind, why is 26North the right partner? The 26North team has a long history of successfully creating value through corporate partnerships such as this with substantial knowledge of both our industry and Middleby. We believe through this deal, we've identified 26North as the right partner, and we've created the right structure to most efficiently deliver long-term value to our shareholders. Now turning to the specifics of the deal. 26North will acquire a 51% stake in Middleby's residential business at a valuation of $885 million. Middleby will receive approximately $540 million of upfront cash proceeds, a $135 million note from the joint venture, and we will retain a 49% stake in the business. The transaction has been unanimously approved by our Board of Directors and is expected to close in the first quarter of calendar year 2026. The Residential Kitchen business will be deconsolidated from Middleby's financial statements beginning in the fourth quarter. We believe this structure from a governance perspective, following the closing of the transaction, the joint venture will continue to be run by the leadership team currently in place and Middleby will retain oversight by maintaining 2 Board seats on the 5-person Board. For our employees, our dealer partners and our customers, we are incredibly excited about this next chapter. 26North believes deeply in the strength of our brands, our teams and the long-term opportunity ahead. They bring a long-term approach and an operating expertise that strengthens what our brands already do well with additional capabilities to add value to accelerate the successful path for the business. Following the transaction, the remaining Middleby Corporation will have substantially higher margins with both remaining businesses achieving adjusted EBITDA margins above 20% and higher returns on assets. We believe these segments are currently undervalued based on the strength of each of these 2 industry-leading platforms, which are both well positioned for long-term growth. The ultimate separation of our Commercial Foodservice and Food Processing businesses into 2 independent public companies will better allow for enhanced investor engagement and a more attractive valuation for each of these businesses. Finally, based on our results to date, we are reiterating the guidance we provided in our November 6 earnings release. Outside of this update, today's call is focused on the residential JV, and we will provide commentary on the quarterly trends for the Commercial Foodservice and Food Processing businesses during our fourth quarter earnings call. That concludes our prepared remarks, and we are now ready to take questions.

[Operator Instructions] Our first question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Congrats on the announcement. Just maybe just talk about initial dilution from the deal. It sounds like you're planning on buying back stock with the proceeds, but maybe clarify that. And then just as we get closer to the spin and with this announcement, if you could just level set us on how you're thinking about leverage for RemainCo and the Food Processing business.

Yes. So as kind of in the comments and kind of what we've been saying all year long, like the share repurchase is a priority. I think that's one of the attractive things about this transaction with the upfront proceeds that we can continue and accelerate really some of the share repurchase activities that we've had ongoing. So that's certainly an expected use of the proceeds. And I think we'll probably further clarify the expected leverage of RemainCo and Food Processing as we get closer to the spin. But certainly, the proceeds from this transaction allow us to ensure that we're properly capitalized for both of those businesses as well.

And dilution?

Yes, Jeff, I'm not quite sure what you...

Just if you put in disc ops and adjust for the proceeds and the buyback, if there's any dilution or maybe it's accretive?

Yes. I think as we kind of get through -- there's a lot of moving pieces right now. So I think as we get through the next couple of quarters and give more visibility to spin and the closing of this transaction, then I think we kind of put a finer point of all the impacts on EPS, assuming that's the question.

Our next question comes from the line of Tami Zakaria with JPMorgan.

I wanted to ask about your expectation for the EBITDA margin for the RemainCo post the spin-off as it relates to -- basically, the corporate expenses allocation, would that change the margin profile of either of the 2 businesses, the spin-off and the RemainCo?

Yes. I mean, so we will provide further visibility and guidance of that kind of over the next couple of quarters as well because, again, this is pretty transformational breaking the company into 3 independent segments. We will rightsize the corporate overhead, but there will be 3 independent entities. So as that happens, we will have a bit more corporate overhead each. But at the same time, we see opportunities to accelerate growth as well and kind of further leverage scale over time, much like we have done over the years as we've built the 3 platforms. So we'll comment on that with, I guess, further numbers in the quarters ahead.

Great. And my other question is, as these 2 businesses are separating, are there any top of mind immediate cost or revenue synergies or dissynergies that you would want to call out?

Yes. No. So I think one of the attractive things, I mean, a, we run decentralized generally at Middleby, but with the 3 platforms, they largely were running independent, and we had built leadership teams over each business in the last several years, which really allowed us to get to this successful point of being able to separate those. So there's some minimal activities, but nothing significant where there's meaningful dissynergies as we separate.

[Operator Instructions] Our next question comes from the line of Mig Dobre with Baird.

So on Slide 4, you have a footnote here that says the cited EBITDA for Resi includes $15 million of stand-alone company costs. So I guess going back to Tami's question, this $15 million, is this $15 million incremental? Or does this $15 million come out of the corporate expenses that you report in 2025?

Yes. So I would say it's a combination of both. I mean I think that is a placeholder to assume what -- to separate what the JV will include as additional or the stand-alone corporate expenses for that entity. So that is for the JV. There would be some reduction in the expenses of, I'll say, the RemainCo, but it would not be to that extent.

Okay. The $135 million seller note, can you tell us a little more about this? What are the terms of the note? Why was this note part of the transaction? And does it have a maturity associated with it, like an interest rate? Really, any context you can provide here?

Yes, there's a maturity that goes out to just over 5 years. There's provisions where it could be accelerated, which we think there's a good chance that some are all of it may be accelerated during that term. There's a blended rate of approximately 1% on that note. And I think that was to ensure that we had a proper capital structure for the JV kind of at its inception.

And then lastly, I'm seeing on Slide 12 in terms of how 26North seems to outline the strategy for Resi, a focus on luxury equipment and at least in my mind, some of the portfolio that you have here, the grills specifically do not fall in that category. So are we to understand that 26North is looking at maybe monetizing the grills business? And if so, what would you guess the time line would be for that and the value to be recognized?

Yes. So we're right at the inception. I mean, certainly, 26North and the leadership team is going to continue to map out what the future strategy of the business is. I think the slide is the highlight the very significant strengths of the business platform. So I think there's nothing that's anticipated or I'd comment on with the outdoor business there. It's certainly part of the overall platform that goes with the JV.

[Operator Instructions] Our next question comes from the line of Brian McNamara with Canaccord Genuity.

I'm curious, why is the JV the right route? I mean outside of maybe a full divestiture. And there's a school of thought here that maybe we're near the bottom of kind of this rough cycle here and the timing might be maybe really good for, obviously, you guys as you have -- you retain a piece of the business. But just thoughts on maybe investors thinking this timing might be a little rough.

Yes. Look, I mean, I think we balance all the different positives and kind of what the opportunity that maybe we're foregoing. But I mean, I think what's -- the #1 thing is separating the business platforms into 3 independent businesses. We think that accelerates growth of all 3. And again, I'll say, unlocks some of the value from a valuation perspective. So I think that is very attractive, number one. I think with the significant cash proceeds, repurchasing shares, which is also very high priority to us and attractive right now, particularly given where we think the shares are trading relative to the implicit value. I mean, I think that these are significant proceeds. So that's very attractive, but still retaining that 49% upside because we do believe that there is an upside to the business. But I think actually that upside will be worth more because of this JV structure working with 26North. I think it will -- in a private-like setting and having a great partner will actually be able to further enhance and accelerate the value of that 49% that we are retaining. So I think it really kind of hits on all different points. So I mean I think that's one of the reasons we're very excited about this structure and how this fits kind of within the overall transformation of the portfolio. And then when we're completed here, I mean, there'll be a great independent Food Processing public company, which we think is best-in-class. And then Middleby will be very focused on our core remaining strength, which is Commercial Foodservice, which we also see very significant growth opportunities, and we've invested heavily in the business over the last few years on innovation and go-to-market strategy. So I think it really allows us to kind of jump ahead to where the vision of the business was going.

Our next question is a follow-up from the line of Jeff Hammond with KeyBanc Capital Markets.

Just on Commercial Foodservice, I know when you reported 3Q, you talked about a couple of QSRs specifically holding back CapEx pretty meaningfully. I'm just wondering if -- since you've reported, if you've gotten any kind of updated trends on Commercial Foodservice, others that are considering doing the same? Clarity on is this kind of a 1 quarter event? Or does it leak into the second half? I know a lot of moving pieces in the restaurant space out there.

Yes. Jeff, I'm going to say I'm going to largely refrain because I do want to focus on residential. I don't think anything has changed in any meaningfully way from the comments that we had on the last quarter. I'll say that we're excited and optimistic as we kind of head into next year for a variety of reasons that we explained on the last call, but I'll probably leave it at that, that comments on the last quarter call continue to hold.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. FitzGerald for any final comments.

Okay. No, thank you again, everybody, for joining this morning's call. So again, I'll just kind of reiterate that this is a very transformational moment for Middleby. It's really exciting to allow the separation or announce the separation of really what early next year is these businesses become 3 independent businesses. So I think it's going to really allow us to unlock a lot of shareholder value. And just very excited about this transaction, the JV with 26North, which is going to be a tremendous partner. So thanks, everybody, for joining the call this morning.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.