Middleby Corp (MIDD) 2025 Q2 法說會逐字稿

Good day, and welcome to The Middleby Corporation second-quarter 2025 earnings conference call. (Operator Instructions) 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 Tim FitzGerald, CEO. Please go ahead.

Good morning, and thank you for joining today's call. Well, this quarter's results reflect the economic challenges our customers are navigating in key end markets. They don't appropriately capture the fundamental transformation we've achieved across our business to drive long-term growth. The strategic investments we've made over the past three years across innovation, go-to-market capabilities and operational excellence have created an unmatched platform that is poised for growth as market conditions normalize.

Given our confidence in Middleby's trajectory earlier this year, we chose to allocate the vast majority of our free cash flow towards share repurchases as we do not believe our current market valuation reflects the opportunities ahead of us. This isn't just optimism. This conviction rooted in measurable progress and wins we are experiencing across our business. That is an overarching thought.

I'll discuss what we're seeing in the current marketplace across our business segments. At our Commercial Foodservice business, we experienced growth with our dealer partners in the general market, along with sales increases in better performing segments such as our institutional business, and with emerging fast casual chains. We're also penetrating product categories such as ice and beverage. However, our revenues reflect the reduction in demand from our largest chain customers that are experiencing challenges with lower traffic and cost pressures, resulting in deferred replacement business and revisions down in restaurant openings.

While facing these near-term headwinds, our business is fundamentally stronger than any point in our history. We've invested heavily over the past three years building the preeminent Commercial Foodservice business in the industry. We revolutionized our innovation engine, we told our selling organization and we've dramatically strengthened our positioning with top customers. We also have strategically targeted and expanded into attractive new market adjacencies.

Our ice and beverage platforms deserve special attention as they represent transformational growth opportunities. While we are still in early stages with ice, we've already grown our market position. And as a new entrant in the faster-growing beverage category, we are positioned to take share from established competitors as we disrupt the segment with automation and game-changing innovations. We are realizing early benefits of strategic investments in automation, controls and IoT, investments that are long term in nature that we know will separate us from the competition in the years ahead.

Turning to our residential business. We're seeing encouraging signs and increased sales at our indoor categories, with momentum at our core Viking, La Cornue, and Aga range master brands. Product introductions over the past 12 months have been well received. New designs, colors and induction offerings are gaining the attention of designers, builders and channel partners.

And we have additional new products coming to market over the next six months, including the next-generation Viking Reveal, our new digitally connected product line with contemporary features capturing a new audience for Viking. Refrigeration and ice is another residential platform where we're making great progress with exciting things ahead. We'll be completing the construction and move into our new manufacturing center of excellence in Michigan in the third quarter. All of our Refrigeration ice brands will consolidate manufacturing operations into the state-of-the-art facility.

Along with the manufacturing investment, we'll be launching an entirely new product lineup under our barbell Uline and Viking brands, all coming to market in the second half of this year. This major initiative has impacted our sales in the first half as we transition manufacturing. While new product launches will take some time to ramp, we expect to build momentum in the second half and gain traction as we move into next year. Finally, within Residential, the Outdoor segment is faced with significant challenges from tariff-related pressures, causing our channel partners to reduce inventories.

That said, we do believe this segment is at the bottom of a challenging cycle and Middleby is well positioned to benefit once the market returns. As innovation becomes a greater demand to the outdoor space, we have already invested. Moving to food processing. We are pleased with the improvement in sales and orders from the first quarter.

Order conversion has been slow in the first half, driven by uncertainties from tariff and food costs, impacting the timing of orders, particularly for larger projects. However, we've seen our order pipeline build with conditions improving in both our protein and bakery segments. In the snack category, which is a new market for Middleby is growing rapidly with a large market opportunity ahead. Our strategy to offer best-in-class full-line solutions is continuing to differentiate us in the marketplace.

And we're confident this strategy has positioned us for sustained long-term growth, both organic and through strategic M&A. Across all three of our business segments, we're building stronger competitive positions that will drive growth when market conditions improve. We have confidence in our strategy and optimism about our business in the future. With that, I will turn it over to Bryan to break down the quarter and talk about our outlook before I provide some final thoughts ahead of Q&A.

Thanks, Tim. Looking back at the second quarter, we were pleased to see sequential revenue improvements across all three segments, including the significant step-up in food processing revenues relative to the first quarter. For Commercial Foodservice, while market conditions kept our Q2 revenues below prior year levels, demand for our leading technologies generated sequential top line growth. We delivered over $580 million of revenue and a strong 27% EBITDA margin.

At Residential, tariffs significantly affected some of our outdoor products. Nonetheless, revenues grew sequentially to over $181 million and our EBITDA margin continued to exceed 10%. Notably, we saw improvements in our US and United Kingdom indoor appliance markets.

At Food Processing, we delivered a large sequential increase coming out of Q1 with Q2 revenue exceeding $216 million and an EBITDA margin of over 21%. Margins were below our expectations, owing to both tariffs and fewer large products that didn't yet materialize but do remain in the pipeline. The latter was driven by market uncertainty that impacted customer decision-making. Sequentially, we saw improvements across the majority of our platforms.

Moreover, the businesses we acquired over the past year that have expanded our region snack foods continued to perform very well. On a consolidated basis, total company adjusted EBITDA for Q2 was $200 million and adjusted EPS was $2.35. Regarding tariffs, which, by the way, are the driver of our year-over-year decrease in EBITDA, the situation remains fluid. We currently estimate that the incremental cost impact will be approximately $150 million on an annualized basis.

This does not include adverse impacts to sales, which we saw in the first half across all 3 segments, with the biggest hit to the residential outdoor business. While the adverse net impact to EBITDA in Q2 was approximately $10 million, we estimate that the costs will increase in Q3 due to the timing of tariff implementation and inventory flow through. Price increases will somewhat offset this, so we expect a $10 million to $15 million net negative impact to EBITDA in Q3. As pricing actions take greater hold in Q4, the tariff headwind should be further offset.

As of now, we estimate an adverse net impact of $5 million to $10 million. As you can imagine, all of this is subject to where tariffs finally land and is subject to risks, particularly in key supply chain markets of China and India. Q2 free cash flow was $101 million. Our leverage ratio per our credit agreement at quarter's end was 2.3 times, comfortably within our long-term target of 2 to 2.5 times.

Please recall that our convertible notes will mature on September 1. We intend to pay them off in approximate terms by using $250 million of cash on hand and drawing $500 million on our revolving bank facility. Accordingly, our interest expense will be higher in the second half compared with current run rates. We expect interest expense in Q3 of $23 million to $25 million and then $28 million to $30 million in Q4.

As far as capital allocation, earlier this year, we made the decision to deploy the vast majority of our free cash flow to share repurchases. During Q2, we repurchased over 2.2 million shares for nearly $323 million at an average price of about $145 per share. At the end of the quarter, we had 9.4 million shares remaining under our share repurchase authorization. We've continued to buy back shares with July purchases of $97 million for over 650,000 shares.

Looking ahead, we will continue to be opportunistic, and we will do so while maintaining the financial flexibility needed for strategic growth investments. As you can see in our earnings release and quarterly presentation, we issued quantitative guidance this quarter. Our plan going forward is to provide you an outlook for the upcoming quarter as well as providing an initial annual outlook in conjunction with reporting year-end results. Regarding today's outlook, I offer the following additional perspectives.

For Food Processing, there can be volatility on a quarter-to-quarter basis for our results. This is often driven by the timing of completing medium to large-sized projects that may not recur with the same regularity as other parts of the business. After a stronger-than-anticipated Q2, Q3 is currently expected to take a small step back compared to Q2 revenue. We still expect the fourth quarter to be the strongest of the year and a stronger second half versus the first half.

Overall, I would characterize the market conditions for our Food Processing segment is modestly improving. In the Residential segment, I would characterize market conditions as fairly stable. For the third quarter, we are forecasting a typical seasonal step down in addition to the impact of tariffs. We do see our strongest quarter of the year in Q4.

Lastly, thinking about Commercial Foodservice, we are seeing pressure at many of our large QSR customers, which represents a significant share of our business. We expect slight sequential increases in revenues over the coming two quarters, largely due to pricing benefits, mitigated by tariffs and the impact of current consumer sentiment and industry-wide traffic challenges. Overall, this thoughtful view of the coming quarters in no way diminishes the greater level of optimism for the years ahead. So for Q3, we expect to achieve the following: Total revenue of $950 million to $975 million.

And by segment, this is comprised of Commercial Foodservice at $580 million to $590 million; Residential Kitchen at $170 million to $180 million; and Food Processing at $195 million to $205 million. Adjusted EBITDA is forecasted to be between $185 million and $195 million, and adjusted EPS is projected to be in the range of $2.02 to $2.16, assuming approximately 50.8 million weighted average shares outstanding. Then for full year 2025, we expect to achieve the following: Total revenue of $3.81 billion to $3.87 billion with adjusted EBITDA of $770 million to $800 million, and adjusted EPS of $8.60 to $9 based on -- I'm sorry, $9.05 -- Let me correct that. Adjusted EPS of $8.65 to $9.05 based on the sum of four individual quarters.

This also assumes 51 million weighted average shares outstanding for the fourth quarter. Please refer to slide 8 of the presentation we have posted on our website for these details. Taking a longer term more general view with our new capital allocation philosophy and assuming more normalized market conditions, we believe we can deliver annual earnings per share growth in the high single to low double-digit range. In some years, we could certainly be higher or lower than this range due to unforeseen circumstances.

But on average, we believe this is reasonable and achievable goal given our market position and positive outlook. I will conclude my comments with a quick update on the Food Processing spin-off, which we expect to complete in the first half of 2026. We are confident in our ability to execute the necessary actions to have a successful transaction. Activities to ensure the spin company will be operating efficiently and independently after inception remain on track.

We've previously mentioned in Investor Day planned for Q4, but have it in the new year will be more meaningful. As we get closer to the spin, we will cover matters such as leadership team, cost to complete the spin and stand-alone corporate costs.

With that, I will pass the call back to Tim.

Thank you, Bryan. Before we go to Q&A, I want to share some final thoughts of our Middleby is positioned to create exceptional value for shareholders going forward. First, we have best-in-class portfolio of brands that is second to none. Almost all hold number 1 or number 2 market positions.

The strength of this combined portfolio of brands under the Middleby umbrella is powerful, establishing Middleby is the most experienced and trusted partner to our customers. Second, our commitment to innovation is extending our lead over the competition. We have introduced more new products and innovations in the last three years than any time in our history. In just 18 months, we received 24 individual innovation awards, far more than any other industry player.

As solutions to reduce labor, increase speed of service, reduced food costs and address operational pressures continues to grow in importance with our customers that will be positioned to benefit. Third, the breadth of our product offerings and scale of our portfolio provides competitive advantages that are difficult to replicate. And it is only in the last several years that we have made investments and execute upon strategies to leverage the scale to drive both top line organic growth and bottom line profitability. We are confident these actions are unlocking new opportunities and providing growing benefits.

Finally, we have evolved our culture and organization over the past several years, along with our long-term strategic growth initiatives. I truly believe we have assembled the best team in the industry. We have attracted top industry talent and developed a new generation of leaders from within. Our people are empowered, they are running fast and what they do every day is steeped in a culture of winning as a team.

Repairing all these advantages with shareholder-friendly actions designed to create long-term value, the Food Processing spin, our Board refreshment with four new independent directors is all part of that plan. So is our share repurchase program, which smartly allocates our significant free cash flow to buybacks providing for increased leverage on our earnings per share growth. We're very excited about the prospects and our ability to drive shareholder value from all of these levers. So with that, operator, Mike, can you please open the line for questions now.

(Operator Instructions) Saree Boroditsky, Jefferies.

And I have to say, I appreciate all the details on the guidance this quarter. That was a great thing to see. Maybe if we can ask for a little bit more within the EBITDA guidance, maybe just talk through how you're thinking about the contribution by segment.

Yes. Saree, this is Bryan. I'll take that one. I think you'll see margins evolve a little bit similarly as the revenue trend works out through the year.

With Q3 revenues stepping down a little bit, we'll obviously lose a little bit of operating margin. So you'll probably see margins slightly down in Q3 as opposed to Q2 before stepping back up for Q4 is traditionally our strongest margin year of the quarter, and will also benefit from higher revenues in Q4 over Q3.

Great. And then on Residential, could you just update us on where the Grills run rate revenues and margin performance are? And then are there any footprint changes planned in this business? And just how do you think about mitigating some of that tariff impact?

The first part.

Yes. The -- obviously, the business was on a growth trajectory for us at the beginning of the Grille season before having the full force of the tariffs hit us. But it is still, I will say in that $100 million to $150 million range run rate that it's been operating in for the past couple of years now.

I appreciate the color.

And on your second part of the question. So I mean, as Bryan said, we actually were seeing real growth kind of come into the year with the tariffs that came to pretty much a switching halt and then actually versus the other way as our channel partners are taking inventory levels down to extremely low levels, we think -- we even potentially being out of stock later this year. So that's obviously challenging, and I think that's where the top line is putting pressure on the bottom line. I think as we play it out over a longer period of time, at some point, that is going to turn.

We did -- there was a fair bit of investment and integration over the last couple of years of consolidating our outdoor growth platform. So when you actually look at the platform where they're operating as one team, consolidated customer service, distribution, et cetera. We have better leverage in that model when volumes return, and that was part of our plan to expand the margins up to kind of double digits. So we're obviously far below that now.

But we're positioned to benefit as the market comes back to, I'll say, some level of reasonableness.

Mig Dobre, R.W. Baird.

It's Joe Grabowski on for Mig this morning. So I also wanted to say that we appreciated the guidance. It's very helpful. And I also wanted to ask a question on the guidance.

It seems like the guidance implies that Q3 consolidated organic sales are going to be down low single digit, but then Q4 consolidated organic sales are going to be down mid-single digit. Assuming that's correct, is it mostly just a factor of the prior year comparison? Or anything else you want to call out?

I think -- this is Bryan. This is -- that is an accurate representation of things. I've commented before, it's -- it is more useful to look at the business in terms of I say, what did it do yesterday and how it's performing sequentially versus last year is, obviously, from year to year, factors change and tariffs have been a big one this year and how consumer sentiment has evolved. So nonetheless, I think you've appropriately interpreted the guidance we've put out there.

Perfect. And then my next question would be on the outlook for the large QSR customers in the second half. It seems like maybe it's gotten a little worse than where we were 90 days ago. Maybe just talk a little bit more about what you're seeing with large QSR customers.

I think you mentioned that new store openings were being revised down. Do you think that's just going to get pushed out to next year or just -- any color you can give would be helpful.

Joe, this is Steve. Happy to cover it. I think what we've predominantly seen from the major QSR customers is a couple of dynamics that are affecting both new store development and just overall replacement upgrade orders. I think, number one, really, all of this year, traffic through the QSR segment has been down, predominantly pretty much the entire year.

They've been down in some cases, double digits over prior year period. So it's number one. Number two, I think just continued cost pressures that the QSRs are facing, whether it's labor, whether it's food, construction of opening new locations and then you have the backdrop of uncertainty from tariffs. So I think as a result of that, you're seeing their new store pipeline push out.

And I've talked about in prior calls about the benefit that we've seen over the last three years is we have a lot more transparency into the new store pipeline from our customers. But if you look at where that pipeline has evolved from the beginning of the year to even the end of the first quarter to now, that pipeline certainly has pushed out to the right, if you will, and it's pushing more and more into 2026 and out of the back half of the year. So that is a big driver of what you're seeing in the revised guidance. And I think, secondly, that all the dynamics that we're talking about from a headwind standpoint are also having an impact on just the overall replacement and upgrade cycle that those QSRs go through.

So those are -- those are the big drivers of what we're seeing from the QSRs in the back half of the year.

Got it. Okay. That's very helpful. And if I can just maybe sneak in one more question.

You mentioned that the tariff impact is expected to be fully offset by the start of next year in part through operating initiatives. You don't have to be specific, but just kind of generally speaking, what would some of those operating initiatives be in addition to price increases to offset the tariffs?

Well, I think it's several, but the largest is really supply chain. I mean I think one of the things that we had invested in over the last handful of years is our operating team, but we've got significant supply chain strength, a lot of that kind of went to, I'll say, firefighting as we went through the last few years with supply chain disruption. We spent a lot of time really leveraging our supply base expanding that, moving to other nontariff markets, et cetera. So there's a lot of, I'll say, scale and capabilities that we have there that are helping to offset some of the tariffs or perhaps even reduce cost, which is really our long-term goal is to drive supply chain for savings in the future.

So I think we're -- those are things that are well underway and roping some benefits.

Jeff Hammond, KeyBanc.

I'll echo the comments on the guide. I appreciate the color there and a formal guide. Just -- I just want to hit the -- I guess, the $25 million to $35 million of tariff impact that's not going to be covered this year, can you give us a better sense of how that's impacted by business? It seems like maybe FP and Res Kitchen are impacted a little bit more, but if you could break that down a little bit better, that would be great.

Jeff, this is Steve. I'm happy to take a pass at it. We covered a little bit on the last call. It's actually not quite as you outlined, if you think of the three segments and the tariff impact overall, I'd say roughly 60% to 65% of the impact is coming in commercial, which is about the overall spend for the company.

Residential is in the 20% to 25% of the overall impact and then Food Processing would be the remaining was at 10% to 15%. So food processing is actually probably the least impacted compared to the other two segments. And a big driver for that is that if you look at overall sourcing food processing sources, less componentry and parts from China compared to the other two segments. And again, remember, in residential, you also have the Grill impact.

So that's why that's a little bit higher than food processing as well. So those would be the three breakdowns, but food processing will be the lowest of the three.

Okay. Great. And then -- that's very helpful. I think, Bryan, you said you characterized FP is modestly improving from a trend.

Can you just give us what you're seeing in terms of order rates and backlog growth kind of cutting through the quarter-to-quarter lumpiness? And then just -- I know you announced the deal, just kind of speak to M&A pipeline in FP as you think about -- as you head into the spin?

Yes. The order trends have been improving throughout the year. And so that was behind my commentary, I would say our book-to-bill is above 1, but some of those orders don't deliver in one, two, three months. So it takes a little bit of time for them to roll out and such.

So that's driving the positiveness in my tone there. Accordingly, backlog is also growing compared to where we started the year. And then as you have seen, we obviously made an acquisition in this space and do have an active pipeline. We've said that M&A will be part of the strategy for this segment.

So I would expect to see more of that in the future.

Great. It's one of -- amongst many reasons for the spin. So it is a very active pipeline. As we get closer to the spin, obviously, we'll focus on execution there, but it is a robust pipeline.

So we're excited about that last acquisition of FregaMechanica, it's -- while it's not large to Middleby, it's somewhat meaningful to Food Processing, it actually adds quite a bit of competencies to our platform, both product and in categories. So it's pretty strategic in nature. So there's exciting things with that.

Tim Thein, Raymond James.

First question was a follow-up for an earlier conversation with Steve on the Commercial business. And I'm just curious on these profit and margin pressures that have been ongoing for your restaurant customers and franchisees. I'm curious if you're seeing or have seen any impact in terms of maybe product mix or maybe share moving around, i.e., is there any shift to lower spec equipment or less technology uptake. I guess one could make the argument maybe they'd go the other way if there's issues around labor availability.

But just curious your thoughts on that just general question.

Yes. Tim, it's a great question. I think maybe to cover the first -- the last part of your question first. I think it is the opposite of what you're seeing.

I don't think we've seen it trade down in terms of cost and spec in the equipment. I think what's been interesting nuance, especially in the QSR segment as they're trying to figure out how to solve for getting traffic back factory locations trying to still overcome costs as you're seeing them focus on bringing in additional dayparts to their traffic. So that focuses around bringing in new menu items, new categories, they haven't been in before. A big push that we've seen with several of the big QSRs has been around beverage of -- adding beverage to their existing footprint and existing menu which obviously, we've talked a lot about beverage before, but we're so well positioned in these categories.

When you think of beverage being ice, coffee, dispense, to be frozen products from a company like Taylor. And there's companies out there that manufacture ice, manufacture dispense, manufacture coffee, there's nobody else that does it in one company. And so I think that's what's so powerful about how we're working with the QSRs right now in the space as we're the one-stop solution for what we can bring to the table. So I think to answer the question holistically is they're continuing to look for new menu items, new dayparts to drive traffic.

Again, the QSRs, it's not just competing with QSRs anymore, it's competing with C-stores. Competing with grocery stores, and I think that's why you're seeing it. And then to answer your last question, they are focused more and more on actually the higher technology products that allow them to be more efficient, reduce energy usage, take out labor, take out training. It just unfortunately takes a little bit of time to get through -- to get these products to market through the corporate side through the franchisee side to bring them to market.

But that's -- to answer the question but that's what we're really focused on working on with the big chain customers right now.

I would just kind of reach out that. I mean I think we would think we have -- despite that we're down there, we've actually gained share at the same customers that we're down with. And we have more products approved as you kind of go across our top chains in the system that we had prior. And if you look at a lot of the rollouts that Steve just alluded to, a lot of the things that maybe they deferred this year, but we see coming in the next couple of years.

That's part of our pipeline that we're excited about. So we feel like we're winning with that segment. It's just a segment under pressure, but we're pretty confident it's going to turn at some point.

Yes. Okay. And maybe, Tim, I don't know -- I forgot if it was you or Bryan that mentioned the comment about the long-term target to grow EPS high-single to low double-digit growth. I'm just thinking about the long-term profile of the Commercial business.

And obviously, this post-COVID period has been distorted in many ways. But how would you think about just kind of the underlying growth of the commercial business? Is it -- it used to be kind of a GDP plus-plus. And in recent years has kind of normalized. I'm guessing you have plans for -- I would think of pretty nice outgrowth.

And I'm just curious how you think in that construct to grow EPS double digit annually? what you would think about in terms of the underlying growth of the global Commercial business?

Okay. Well, I'll let Bryan kind of pick up on the second part of the EPS translation, but we do think of it as in GDP-plus business, right? Like I think we have built a lot of the pluses with the innovation pipeline, our go-to-market incremental new target markets, right, that are new to us. Obviously, we talked a lot about ice and beverage, which are -- we're just in early stages of attacking. So that's kind of incremental on top of industry growth and then you have kind of the longer-term pieces of IoT in automation.

So we do think those things are going to show up and be of growing importance once we kind of get past the disrupted period. So that's going to get us to the GDP or industry plus growth.

And translating that to EPS growth, I think there are two reasons that the EPS grows, I'll say, two levels above what the revenue is happening. We've consistently demonstrated in the past that, I'll call it, our earnings growth exceeds our revenue growth as we look at how well we manage margins, operating leverage, the benefits of offering better technologies to our customers, right, the things that Middleby has been doing for decades now. Again, I would say that has earnings at higher growth rates than revenue. And then layer on top of that, the additional benefits from our capital allocation and our buyback gives it one more lift up.

So I think that's how you can bridge from, let's say, a mid- to high single-digit growth rate into potentially a double-digit earnings growth rate. So our products, our operational excellence and our capital allocation all work together really well there is what we see in the future.

Tami Zakaria, JPMorgan.

My first question is, could you refresh us on how you're thinking about your direct-to-customer initiatives? Any thoughts on furthering your equipment and part sales by enhancing the DTC channel, any launches in the pipeline or ideas in the pipeline that we should look forward to in the coming quarters or the coming years, I think that would be helpful.

Tami, I think we're all trying to make sure we understand your question properly. I'll maybe start talking a little bit, but then I'll ask you to clarify. So -- over the last few years, when I talk about go-to-market a lot, we are very focused on how do we build the machine that surrounds the end user, right? So that has to do with how do we bring innovation to market, leveraging, I'll say, newly created capabilities. So for example, you've been to our innovation center, right? So that's big investment.

We've had 30,000 plus customers come through there, built a culinary team. Totally revamped our rep organization, which a lot of those reps are new -- they are fully aligned with Middleby to sell the breadth of all of our brands and really focus on higher technology solutions, right? So that that's not only a big investment, but we kind of disrupted ourselves in the process, but we're also great at training that team and working side by side. We've invested heavily in digital tools, and maybe that's what you're alluding to a bit, and that cuts across a lot, but we do think that, that goes right to the end user with content education and developing a funnel. I mean one of the things that we have not talked a lot about, but we will in upcoming quarters in the year as our service initiatives, which we think will further differentiate us.

We're not necessarily selling direct to the end user, but we've got all of these capabilities and channel partners that were very well aligned with and we strengthened those partnerships to kind of provide not only excellent engagement, but bring to them the latest innovations that we have. So -- it's taken us a while to build these capabilities and significant investments, but we believe we're kind of gaining significant traction that we can see on a quarter-by-quarter basis.

Understood. That's very helpful. Just a follow-up. I was wondering, is there any plan? Or is there any business case for going direct to customer even with sales by having a website and having some of your business customers onboarded there so they can directly order from you in parts and new equipment alike.

So that was the genesis of my question, but I think you answered most of it.

Okay. Yes. I'll just comment two things. One, I mean, although we've got channel partners, we are engaging directly with end users in multiple ways.

All those different elements I talked to are all about how we engage with those customers. So end user customer engagement. I can say, is at an all-time high, and we've got capabilities we didn't have a few years ago to do that. And I think that's paying dividends in some of the pipeline we are building Digital is a piece of that, and we're evolving it.

We are not going direct to customers, but it provides a channel for us to engage and educate customers. And there's new tools that are being deployed that our investments already made that will gain traction over the last -- next year.

Brian McNamara, Canaccord Genuity.

So I understand there's a lot of headwinds to deal with. I think CFS organic growth has declined for seven straight quarters now. This business used to grow high single digits organically. But has been well below that for -- we're going out to 2017 now.

So I guess when should investors expect a sustainable return to growth here? And is the expectation when that growth returns to be more volume driven?

Yes. I mean I think we tried to maybe comment on a few things, like we are seeing growth in certain areas, right? The general market is starting to improve. Certain of the better-performing segments within Commercial Foodservice, we are seeing a lift in doing pretty well. So I mean, it really does come down to larger major chains where we're extremely well positioned.

So I guess the answer to your question is kind of when does that -- what is that turn. I don't think any of us believe that the chains are going away. And if you kind of look at what's going on right now, there's a lot of retooling, right? There's -- how they addressing menu, not only from a pricing standpoint, but from innovation, as Steve talked about, there's management changes going on. So I mean, I think right now, there's been a lot of disruption in the marketplace.

They're all kind of recapturing where they're at and then they're going to surge at some point is kind of our expectation. So when that happens, we think that, that's a longer runway, right? Because I think a lot of the headwinds that have happened over the last few years, which there's -- we can go back each year and talk about what the new crisis of the year was, hopefully, we'll have a couple of years without prices in those chains will be able to execute on their strategies and then we're very well aligned with them. And I think that's kind of when you get back to sustainable growth. And I think we are very confident that we're better positioned than anybody, and we've made those investments.

So I think that's kind of where you hear us talk about our business with confidence because we know we've done the work. And that's why we've also elected to buy back shares. So I mean I think there's not a better investment out there than Middleby in our view, and we've been aggressive on that because I think we think about this over a long time, and we know that's going to pay off.

Great. And then we saw a lot of impressive innovation at NAFEM earlier this year that kind of addresses customer pain points, whether it be labor savings or addressing other inefficiencies. Open Kitchen seems exciting. Fribo PizzaBot just to name a few.

Like how are those products performing relative to your internal expectations? And how much do you quite frankly, think the sales cycle has perhaps lengthened given tariff noise and other uncertainty in the marketplace?

So I'm going to -- James going to hit on it. I'll just kind of that second piece, like the tariffs has extended things, right? Like I mean, anytime you have uncertainty, and that the tariffs were a cost impact, too, not only to equipment, but it did affect other areas, paper packaging food, et cetera, right? So I mean, I think anytime you have uncertainty disruption, things get pushed to the right. So that is definitely part of what we've seen this year and certainly some of our thoughts about the market as it sits right now, which we also think will change. We do think we're getting -- picking up -- gaining traction on a lot of the exciting things that you alluded to at maybe James, maybe you can hit IoT and some of the average automation.

Yes, let's talk about IoT first. I think with our investments over the past several years, we've kind of hit a nice critical mass with connected products to offer to our customers, and we're continually seeing an uptick in connected equipment sales through the channel, which is exciting. It's also been a tailwind for us on certain chain wins where we are winning rollouts because of our connectivity solution and having the products connected kind of out of the gate. So we're appreciating that.

Also on the Open Kitchen side, we're seeing some wins out in the market on the energy management side of the Open Kitchen platform. If you remember, Open Kitchen has energy management, has middle of the house cold chain management and then it also has connected equipment management. No other platform out in the market has all 3 of those pieces tied together with a single pane of glass. So very exciting there.

On the new products that we showed at the NAFEM and I will say that they are setting very nicely in the marketplace, starting to see some good traction there. And we'll start to benefit nicely in '26 and as we go into '27 as volume picks up. I'd tell you we're really excited is with beverage.

Tim talked a lot about the beverage innovation that we have coming down the pike. And I just want to echo that we have some really game-changing dispensing and dosing technologies coming out from Newton and L2F where we are bringing kind of future-proof beverage dispensing to the restaurant industry, enabling them to rapidly adopt new beverage platforms within their organizations and coupling that with some game-changing automation from L2F, we really expect to see some nice revenues in '26 from our beverage platform.

I give a little bit of perspective of the heavy lifting James and team have done. Because we bought what we thought was the industry-leading platform with Powerhouse Dynamics. James and team developed the application Open Kitchen. So that's a kind of lift in investment.

At the same time, the team developed the Middleby One Touch control, and that was kind of done in a period when controls weren't available. It wasn't that long ago, I was probably forgotten about it, but you couldn't buy controls a couple of years ago. But we've launched the Middleby One Touch control, which James has across the breadth of our brands in our platform. So that's very powerful for everybody to kind of have that one simple experience when you're interacting with Middleby, and those controls are tied to IoT out of the box.

That all came together effectively at the beginning of 2025. So this is a several year multipronged initiative that really like Game time was the beginning of this year, and we're building new muscle with the sales team as we're right to market, but now our customers are asking for it. As Scott James said, like we've got some wins, and we've got customers who it was a factor in why they bought the equipment. In some cases, it was the deciding factor.

So like, I mean, I think we feel good about where we're at in what is a long-term journey. And nobody else is anywhere positioned to where we are. These are significant investments that not only we've made that are hard to remake but because of the scale of the portfolio, they kind of bring a different value with Middleby than that was kind of an individual product.

(Operator Instructions) Walt Liptak, Seaport Research.

My question is on the capital allocation. And it looks like with the purchases that you might have made so far in the third quarter, you're at about $500 million of buybacks so far this year. Do we continue -- do you think you'll be continuing on with buybacks sort of at that rate in the back half of the year? Or are you thinking about other sorts of capital allocation for the back half?

I think -- I'll start off with Bryan will kind of clean up. So I mean, I think we indicated that, that was the strategy. And then obviously that we indicated that was a accelerated or more committed strategy. So I think we're very focused on making sure we executed on the buybacks sooner rather than later, give it a variety of things, including -- it's the best idea be things that we're focused on operationally in other areas.

But I mean, I think we wanted to make sure that we kind of got ahead of our buyback strategy. So I mean, I think we're going to continue with buybacks. So that is a longer-term view, and we think a great investment. But we definitely kind of weighted it towards the front end was the thinking there to take advantage of where the stock price --

Okay. Great. And so your debt ratio looks like it's about 2.5%. And I just wanted to understand the M&A strategy going forward.

It sounds like FP might have some deals that you could do maybe in the back half, but -- in the past, you've always consolidated and done good acquisitions in the CFS segment, too. During the sector weakness, wouldn't this be a good time to be consolidating and looking at deals? Or -- is CFS still -- do they still have a deal pipeline?

Look, I think -- a couple of things. The -- if you look at where we were allocating capital, new acquisitions over the last several years, it was heavy -- food processing was a significant portion of the deal. In that was growing because of where that business in the life cycle, the fragmentation of the industry and hence, again, one of the factors of us thinking about the separation, and that's going to be a fast-growing company driven both by organic growth as well as strategic M&A, right? So -- but that is where a lot of the acquisition capital was going. So that doesn't really change with the strategy of it separating.

When you look at Commercial Foodservice, we're at a different size and scale today, right? Like we have done a lot of acquisitions. We've built out a lot of the platforms. And even as of the more recent periods, a lot of the acquisition capital turn to beverage and ice, which there are some opportunities there, but we've also built that out nicely. And I will see some of our longer-term initiatives around IoT, automation and controls.

So I won't say that we're done, but we also added a lot over the last several years, and we're very focused on, I'll say, integrating all of those opportunities and driving organic growth. There are -- we will continue to evaluate compelling and opportunistic -- opportunities that we think would strategically fit the platform. But given where we're at right now, the -- our share price is compelling. Number one, we want to focus on execution of the spin from a bandwidth standpoint and see probably the most significant or obvious opportunities are still in food processing today.

So I think that's kind of how we're thinking about the priorities. But it doesn't mean that there will never be another Commercial Foodservice acquisition. But I think we're focused on kind of those immediate priorities.

Okay. Yes, that would be surprised if you didn't do any more CFS deals. And maybe just a last one. While you were answering another question, you talked about how replacement of equipment in the field that in CFS is there's some delays in refurbishments or replacement.

And I can't remember, I've ever heard you guys talk about that in the past. What's the driver of that? And what should we think about for when maybe some pent-up demand for replacement comes back?

Yes. Good question, Walt. This is Steve. We have talked about a fair bit in the past.

If you look at the last, I'll call it, 10 years of commercial growth, a lot of the growth going back to, call it, the 2012 to 2016 period, think about all that equipment that has been in the field and a normal life cycle of a piece of equipment is anywhere between five to seven years. I would -- this is so seven years as the baseline. So you would normally expect that all that equipment in that period of growth would be up for replacement. And then what happened was so many of the franchisees going into COVID, we're focused on front of the house initiatives.

And then COVID happened and then supply chain happened and then disrupt and then now the tariff disruption has happened. So everything has kind of kicked the can down the road just push it out further and further to the right. But now I think we are going to have to come to an inflection point. If you do have a pretty large base of existing equipment that does need to be upgraded.

It is more and more expensive to repair the equipment. And ultimately, if you lead to a place where you cannot serve food because your equipment is down, it's just going to push more and more towards a replacement period. And then they have to still solve for, hey, can my equipment help me with labor efficiencies, energy savings, everything we've already talked about. So I think we feel like it has been pent up for such a long period now, but it has to come through, I guess, a little bit of a question of when does it come through, but I do think we're getting closer just because you can only push it off for so long until you really have to take a hard look at upgrading the equipment.

So I think it's something you see start to pick up as we get into probably next year and the years following.

Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Tim FitzGerald for any closing remarks.

Thanks, everybody, for joining us on today's call, and we look forward to speaking to you next quarter.

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