The Middleby - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered stable top-line and record profitability: revenue $1.014B, GAAP diluted EPS $2.07, adjusted EPS $2.88, and record Adjusted EBITDA $251M (24.8% margin) — the strongest margins of the year.
• Food Processing was the standout: sales +14.4% to $219M with 29.6% adjusted EBITDA margin; Commercial and Residential declined modestly YoY but sustained strong margins (28.1% and 13.1%).
• Cash generation and balance sheet improved: Q4 operating cash flow $239.7M; FY operating cash flow $686.8M; net leverage reduced to 2.0x; Q4 buybacks $16.4M and ~$20M repurchased Q1-to-date.
• Strategic pivot: Middleby will separate Food Processing via a tax‑free spin-off targeted for early 2026, creating two focused public companies (RemainCo: Commercial + Residential; SpinCo: Food Processing).
• 2025 outlook: company organic revenue growth expected low-single-digits; Food Processing mid-single digits; modest margin expansion; capex ~2% of revenue; Q1 organic revenue roughly flat with mixed segment dynamics (Commercial down slightly, Food Processing slightly down, Residential up).

What Went Well and What Went Wrong

• What Went Well

  • Record profitability and year-end margin strength: “We closed 2024 by delivering our strongest margins of the year…led us to record cash flow for the year.” (CEO).
  • Food Processing momentum: Q4 organic growth +4.7% and adjusted EBITDA margin 29.6% (30.3% organic), with robust order pipeline and two acquisitions (JC Ford, Gorreri) broadening exposure to snack and baked-goods systems.
  • Cash conversion and deleveraging: CFO highlighted record FY free cash flow (~$640M) and ~140% FCF conversion, inventories down >$250M over two years, and net leverage at 2.0x.

• What Went Wrong

  • Organic sales declined 1.3% in Q4, with Commercial -2.8% and Residential -2.4% amid challenged end markets.
  • $38.6M of Q4 impairment (primarily Residential tradenames), though lower than $78.1M in prior-year Q4.
  • Chain customer project timing remains a headwind near-term; management expects a “slow start” in Commercial for Q1 and Food Processing Q1 organic slightly down due to project timing.

Transcript

Operator (participant)

Good day, and welcome to the fourth quarter 2024 Middleby Corporation earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone, and to withdraw your question, please press star then two. Please note this event is being recorded.

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 Mr. Tim Fitzgerald, Chief Executive Officer. Please go ahead, sir.

Timothy Fitzgerald (CEO)

Good morning. Thank you for joining us today on our fourth quarter earnings call. This morning, we have made several important announcements alongside our 2024 fourth quarter earnings. These announcements include the decision to separate our Middleby Food Processing business into a separate standalone public company. Additionally, we are pleased to announce the addition of two new board members to our board of directors. Please note there are two separate slide presentations covering our quarterly earnings and the food processing spin-off on the investor page of our website.

As we've shared, over the past several quarters, our board of directors and management team have been conducting a comprehensive review of our business portfolio with the goal of realizing Middleby's full value potential. As part of this process, our board has unanimously approved a plan to separate our food processing business into a standalone separate public company. This action will create two independent innovative industry leaders: the Middleby Corporation, which will be comprised of the commercial and residential kitchen equipment businesses, and Middleby Food Processing.

Our team has successfully built a premier food processing business with the necessary scale that now enables us to take this exciting next step in the evolution of the company, which we expect will unlock further value and growth opportunities for both Middleby Food Processing and our remaining Middleby kitchen equipment businesses.

As two market-leading but separate businesses, this separation will assure greater strategic and operational focus at each standalone entity, allowing each business to implement an optimized capital structure and capital allocation policy to best support growth opportunities while greatly enhancing the strategic and financial impact from M&A opportunities for each standalone business, and enabling Middleby Food Processing with its best-in-class growth and margin profile to be valued in line with key food processing peers. Now, to get into the specifics of each company, I'll first start with what this means for Middleby Food Processing.

As highlighted in our investor deck, Middleby Food Processing is well-positioned as a best-in-class equipment provider to the bakery and protein industries. We are poised for organic growth as we continue to execute on our strategy to be the full-line solutions provider of choice by enhancing the ROI and value delivered to our customers.

We see market expansion opportunities as we extend into attractive adjacent market segments such as poultry, pet, and snack food, leveraging our existing competencies, and with a strong track record of M&A, we expect to quickly scale the platform through continued strategic acquisition, which on a standalone basis will be more impactful financially and better understood by shareholders. At our Middleby Residential commercial and residential kitchen equipment business, we are positioned to capture market opportunities and will continue with an even greater focus executing on our strategic growth initiatives.

We are leading in innovation and are positioned to benefit from accelerating demand for automation, ventless kitchens, electrification, digital technologies, and IoT connectivity in the kitchen. We have exciting growth opportunities through our expansion into new categories of ice and beverage, with recent launches of new innovations highly relevant to our customers and current market trends. We expect to benefit from the differentiated go-to-market investments we have made over the past several years as we are creating an engine to drive long-term organic growth.

And we are well-positioned to benefit from a recovery at our residential business, which has been strengthened during the market downturn through strategic investments in sales and marketing, new product launches, and operational initiatives driving profitability and growth opportunities. We intend to execute the separation of the food processing business through a tax-free spin-off, which is expected to be completed by early 2026. Separately, I'm very excited to announce the additions of Julie Bowerman and Ed Garden to our board of directors.

Julie and Ed bring a wealth of relevant operating and director experience to Middleby as we implement our forward-focused growth strategies, execute on our portfolio evolution with the announced spin-off transaction, and drive value for our shareholders. I am confident that Julie and Ed will be strong additions to our boardroom as we drive value for shareholders, and I could not be more pleased to welcome them to the Middleby board. Julie and Ed's appointments are a continuation of our board refreshment process, which started last year with the additions of Steve Spittle and Tejas Shah to our director group.

Throughout this process, we have continued to focus on extending the capabilities of our board and bringing on fresh perspectives. We also announced that longstanding director Jack Miller has elected to retire from our board. Jack has been instrumental to the success of the company, greatly contributing to the growth of Middleby from its small beginnings when the company was only $25 million in revenues and throughout the journey into the global food service leader that we have become today. Our management team and board are incredibly grateful to Jack for his service to Middleby and our shareholders.

Lastly, I would like to briefly comment on our fourth quarter results. We closed 2024 by delivering our strongest margins of the year, with all three businesses posting strong results given the respective backdrop for each industry. We continue to make progress on our profitability initiatives across the businesses as we execute on supply chain, take action to drive operational efficiencies, and strategically reposition sales mix to our latest higher-margin product innovations. Macro conditions in the quarter remain challenged for our commercial and residential business, but are showing signs of gradual improvement as we move through the quarters ahead.

While the food processing business finished the year exceptionally strong, and we look to realize continued growth as we head into 2025 with favorable long-term drivers. We are navigating near-term market conditions, and we continue to execute on our strategic initiatives focused on driving sustainable long-term organic growth with recent launches of transformative product innovations across all three businesses and the development of our differentiated go-to-market capabilities.

We're competitively well-positioned across all three businesses to expand and realize growth in each segment as we progress through 2025. Bryan, I'll turn it over to you now for further comment on the quarter.

Bryan Mittelman (CFO)

Thanks, Tim. While challenging market conditions persisted throughout 2024, driving margins and cash flow continued to be demonstrated strengths of ours. With free cash flows of $229 million in the fourth quarter, we concluded the year with a new record, having delivered over $640 million. Revenues in 2024 declined modestly to around $3.9 billion. Adjusted EBITDA of $866 million at a 22.4% margin, which was slightly ahead of last year, showed the power of our overall system with particularly impressive performance by the food processing segment at 25.6%.

GAAP earnings per share were $7.90. Adjusted EPS, which excludes amortization expense and impairment charges, non-operating pension income, as well as other items noted in the reconciliation at the back of our press release, was $9.49. Looking at Q4, quarterly revenue returned to a level above $1 billion. Our adjusted EBITDA of over $251 million was a record at a margin of 24.8%. Q4 GAAP earnings per share were $2.07. Adjusted EPS was $2.88. Food processing was really cooking. 4.7% organic revenue growth in the quarter led to revenues of over $219 million.

The adjusted EBITDA margin was 29.6%, up 200 basis points versus the prior year. With organic growth over the back half of the year, we finished 2024 with $731 million of total revenue and expanded margins by 70 basis points to 25.6%. Now, considering the impact of fourth quarter acquisitions, the segment run rate revenues now exceed $800 million, with a run rate margin of around 24%. In residential, looking at Q4, $185 million of revenue was a sequential increase from Q3. This was down a modest 2.4% versus 2023 and was the slowest decline of the year.

Adjusted EBITDA margin was 13%, the highest level in one and a half years. For 2024 in total, revenues were $725 million at roughly 10% margins. In commercial, Q4 revenues of over $609 million were up sequentially, with organic revenues down 2.8% year over year, the slowest decline of the year. Margins remained healthy at over 28%. For 2024, revenues of $2.4 billion were supported by strong and fairly consistent margins of 27.4%. Given our strong cost control, moderated CapEx, and focus on reducing inventory levels, which have declined by over $250 million in two years, we delivered record cash flows.

Operating cash flows were $687 million for the year, with free cash flow conversion of 140%. Our total year-end leverage ratio is two times. Our balance sheet is strong. Share repurchases in the fourth quarter were $16 million, and we have repurchased an additional $20 million in the open market in the first quarter to date. We are planning further buyback activity at this pace for 2025 and thus would potentially utilize around 20% of our free cash flow in this manner. With respect to 2025 cash generation, we expect free cash flow to again exceed operational net income.

Capital spending in 2025 will be back up to more typical levels, around 2% of revenues. We continue to actively manage overall working capital levels. However, we may have a lower inventory reduction this year. Nonetheless, cash flow generation will remain a real strength for the business. Taking a look into the Q1 P&L, I will share a few perspectives. On a year-over-year basis and looking at total company revenue, we expect modest revenue growth benefiting from the impact of acquisitions in food processing, along with having slight margin expansion. Shifting to an organic view for Q1 on a year-over-year basis, revenues in total are likely generally flat.

The commercial business will have a slow start to the year with the timing of chain orders, so revenues will be down slightly for the quarter. For food processing, the timing of project completion was strong in Q4. Q1 will not be as robust, so organic revenue will be slightly down. In our residential business, we expect to continue to see positive momentum resulting in meaningful year-over-year growth. Now, considering performance on a sequential basis, please recall that seasonality in our business is such that Q1 results across our entire portfolio typically take a modest step down from Q4.

Residential, however, could be a positive exception to that trend this year, as they may demonstrate sequential as well as year-over-year growth. Now, taking a look at 2025 for the full year, in commercial and residential, we are expecting at least low single-digit organic revenue growth rates with modest margin expansion. For food processing, organic revenue growth is expected to be in the mid-single digits for the year. As I noted earlier, we called that the baseline on food processing margins is now in the 24% range due to recent acquisitions.

Margins here will likely fall below last year's strong level as the integration processes are just beginning, with two acquisitions having been completed late in 2024. Summing it up, for 2025 for the total company, we expect to deliver organic revenue growth in the low single digits, with profitability growth at rates in excess of our organic revenue growth. Our view is also that revenues are growing sequentially over the course of the year for all of the segments. Please note that this outlook excludes costs, which may be incurred to support the food processing spin we have announced today. We will provide updates on those activities throughout the year.

I will now turn it over to James for a NAFEM overview. If you come and see us there, you might find me serving ice cream, and I'm hoping to get adventurous and combine that with soda from our absolutely incredible new beverage dispensing platform by Newton to create ice cream floats. Innovation tastes great, but maybe isn't less filling. But I like it, and hopefully so will you. James.

James Pool (CTO and COO)

Thank you, Bryan. Today, I'd like to take a moment to extend a special invitation to our shareholders, analysts, and prospective investors to come experience Middleby's commercial food service equipment at the NAFEM Show in Atlanta, Georgia. The show runs tomorrow through Friday. You may refer to the accompanying earnings presentation for a detailed overview of our NAFEM setup and insight to what's cooking at Middleby. This year marks our most ambitious presentation for any show.

We are featuring nine live cooking vignettes, including two fully operational high-volume restaurants, one dedicated to smash burgers and fried chicken, and the other to pizza and wings. Both concepts will be powered by our cutting-edge embedded digital robotic automation solutions. Additionally, we will unveil and showcase our latest beverage dispensing technologies from Newton CFV, as Bryan mentioned, the Newton Gravity, and Wild Goose Filling, the Cervisi, along with a comprehensive lineup of ice solutions from Follett Ice and Icetro.

Be sure to also check out our new innovative ice, which is one and a quarter by one and a quarter by one and a quarter craft cube solution. Beyond these innovations, our full-service coffee café will highlight various solutions for Middleby Coffee and Marco, including the Marco Milk Pal, which I discussed on our last earnings call.

Our enterprise IoT solution, Open Kitchen, will be predominantly featured, seamlessly connecting all live equipment at the booth. We invite you to discover how we can quickly transform your kitchen operation from the front of the house with EMS, HVAC, and lighting control, the middle of the house with cold chain monitoring, passive reporting, and labor tracking, and the back of the house with equipment connectivity. Open Kitchen is quickly driving to become the IoT standard for the commercial food service industry. Within Open Kitchen, we are also introducing a new fryer profitability tool to drive fryer connectivity sales and differentiation for Middleby.

The tool is designed to help restaurant operators understand and optimize their frying processes by providing insights into oil usage per pound of food cooked, oil quality, efficiency, and waste through Open Kitchen's real-time analytics. I'd like to conclude by acknowledging the magnificent seven, seven innovative products selected for the What's Hot, What's Cool innovation section at NAFEM. Middleby is honored to have received more selections than any other manufacturer.

The magnificent seven will be showcased live and will feature the new Pitco torque fryer, the first commercialized continuously filtering high-efficiency fryer at the Vitless Nacho Bar, and the new Invoq combi, which will be preparing some delicious bites within the center of the booth. Thank you, and we look forward to seeing you at the show. We will now open it up for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Sere Boroditsky with Jefferies. Please go ahead.

Saree Boroditsky (Equity Research Analyst)

Good morning. Thanks for taking the question. I mean, I think we have to start with the decision to separate food processing. So could you just walk us through that decision process? What are the benefits of having the segment operate separately? And then how do you think about the standalone cash generation of food processing and the ability to sustain the acquisition pipeline? Thank you.

Timothy Fitzgerald (CEO)

Yeah, good morning, Sere. So we've been considering it for a while. I mean, every year and continuously, the board is always reviewing the portfolio and what we think makes most sense to maximize shareholder value and really support the growth of all three of those businesses. So I think we've been building, as I said in the comments, the food processing platform for a while now, and really over the last decade, that's accelerated. I think if you were to go back five years ago, it was not large enough, and I'll say it wasn't in the part of the life cycle of the journey where we could stand it up as a separate standalone business.

But now we feel that we're at that point. And I think it's benefited from being part of Middleby for a long time to get to this point. But now I think as a separate company, being part of Middleby will hold back the growth, and separating it will accelerate the growth. So we think it's really we're excited about it. I mean, I think the things that I commented on the greater focus with the management team now being one of three businesses.

And as you can see in some of the slides that we had this morning, there's a very strong track record of M&A over a long period of time, which we think will continue on and perhaps even accelerate. So we think the platform will further scale on a more rapid basis outside of Middleby as a separate standalone company.

Saree Boroditsky (Equity Research Analyst)

Thank you. And then should we think about the free cash flow conversion of both separate businesses as being 100% or greater? How do we think about that?

Bryan Mittelman (CFO)

Yeah, I mean, it's a little early. We haven't provided, I'll call it specific, long-range guidance, certainly, for the food processing company. But I do think that's a fair assumption. All our businesses really have somewhat similar cash flow generating characteristics.

Saree Boroditsky (Equity Research Analyst)

Appreciate that. And then just one last one on Rezi, just given the positive inflection. How are you thinking about that recovery, and what are the incremental margins on that business given some of the factory investments you've made in recent years?

Timothy Fitzgerald (CEO)

Yeah. So I mean, I think we're clearly at a long-term cyclical trough. I've kind of put a bit of that in the deck as well. So I mean, I think there are significant opportunities for under-realized shareholders who kind of go through the next several years. So it's hard to tell what the inflection is going to be on the backdrop of the market with housing, but it is positive, and we've got a significant, I'll say, tailwinds through the next several years. So I think it'll be kind of gradual as we go through 2025 with some recovery, but that will pick up steam, we think, as the years go forward. We had been operating the business into the mid- to high-teens, kind of if you were to go back pre-COVID.

The business fundamentally is much stronger today in what is really a tough period relative to what it was in those years. We've certainly taken a lot of actions to improve the operation of the business, which drives margins higher. Also commercially, we've made a lot of investments around new product as well as kind of our sales and marketing capabilities. As we kind of get to more normalized levels, we think that that is all an exciting part of the story that shows up in the years ahead.

Bryan Mittelman (CFO)

Yeah. And Sere, this is Bryan expanding that a little bit as you think about the incremental. Certainly, I will say this business will have the largest incremental benefits as revenues grow compared to the other segments, given the low operating leverage we're seeing right now. Right? And you've seen that in our gross profit reporting. So I think the incrementals here can be over 40% going forward. And to echo what Tim noted, as we achieve, I'll say, revenue levels consistent with those that we have posted in the past, we will have higher levels of profitability than we achieved in the past because of the investments and improvements that have been made in the business.

Saree Boroditsky (Equity Research Analyst)

Appreciate the color. Thank you.

Operator (participant)

The next question will come from Ross Sparenblek, William Blair. Please go ahead.

Ross Sparenblek (Research Analyst of Industrials)

Hey, good morning, gentlemen.

Timothy Fitzgerald (CEO)

Good morning.

Ross Sparenblek (Research Analyst of Industrials)

Hey, guys. Just sticking with the spin, can we put a finer point on some of the moving parts as we think about one-time and ongoing dyssynergies and maybe the expectations of the tax benefit versus an outright sale of food processing?

Timothy Fitzgerald (CEO)

Yeah. So I mean, it's tax-free, so it's not a benefit, quote-unquote, but it's tax-avoid if we were to contemplate other options. But we do see long-term upside in this business. So we really think shareholders benefit it being a separate public company trading on its profile with the margins, the growth characteristic. We think it trades in line with kind of higher industrial companies, and that kind of comp set. From a dyssynergy/synergy standpoint, I mean, I think one of the philosophies of Middleby is running decentralized. That's been very core to us over a long period of time. So certainly, we're an engine for accelerating growth with kind of a lot of our strategies and our core company culture.

I mean, I think those things are exportable, and we think this is kind of Middleby 2.0 as we think about it with continuing with the culture, a lot of the best practices and operating philosophies of the business that we'll port over. But because the operations are largely centralized or decentralized, there's not a whole lot of dyssynergies here. So I think that makes it fairly clear for us from an operational standpoint to separate the business.

Bryan Mittelman (CFO)

Ross, this is Bryan. We're not prepared to specifically quantify those things today, but in future quarters, we will get into more levels of granularity around one-time costs and such.

Ross Sparenblek (Research Analyst of Industrials)

Yeah, I can appreciate that. Previously, it was under the expectation that food processing was more of the M&A engine here, just kind of given the fragmented white space. But with a strong free cash flow profile for Remainco, can you maybe just update us on what the M&A landscape looks like within commercial and kind of your early capital allocation expectations for the Remainco business?

Timothy Fitzgerald (CEO)

Yeah, I guess. So definitely, M&A is the core for a long period of time. That continues. However, we're at a different size and scale today. I mean, I think as you've kind of just noted, for more recent periods, food processing is still in early stages, so it's very fragmented. So it's gotten a bit more of the attention on M&A. And I think as a separate company, that's going to become even more clear and more focused. So I think that's one of the things that we're excited about.

As cash flow has grown over time, we've also kind of contemplated and built into really more recent actions being able to execute on M&A while at the same time really start taking action to return capital to shareholders through stock repurchases, which is what we've been doing in the fourth quarter and the first quarter, and Bryan alluded to in his comments. So I think it'll be a little bit more of a balanced approach given we've got much larger cash flow to deploy today. I think as you kind of look at Remainco, the platform is built out larger.

But however, there still are significant opportunities out there. I think you'll see them be a bit more focused, particularly on the ice and beverage platform. I think that's something that we've also been excited to have built and scaled relatively quickly here. If you kind of think about the last five to seven years, it is a larger market. I continue to say we're still a new player, but you can see it's meaningful to our revenues, and it's already a very highly profitable business.

So we're pretty happy with the portfolio that we've got right now. We think that portfolio has significant organic growth opportunities given the different products, technologies, and kind of backdrop of what's going on in beverage. But there are additional opportunities to further build that ice and beverage platform. So I think that's one of the areas that we'll continue to be focused on. And then just technology overall. I mean, I think we've really positioned ourselves as kind of the leader in automation controls, IoT.

A lot of that has been a combination of our organic investments as well as some of the M&A activities that we've had. So I think we want to ensure that we're gapping the competition. And I think we've positioned ourselves very nicely there for what we think is going to be driving growth over the next three to five years. So that's certainly an area that we'll continue to focus on opportunistically.

Ross Sparenblek (Research Analyst of Industrials)

All right. That makes sense, well, thank you, Tim. Thank you, Bryan. I'll leave it there.

Operator (participant)

The next question will come from Mircea Dobre with Baird. Please go ahead.

Mircea Dobre (Associate Director of Research and Senior Research Analyst)

Thank you. Just maybe start with a clarification. In this strategic review process, where are you on this? Is it complete? Is it still ongoing? Maybe to ask this question more pointedly, is residential also being evaluated for strategic alternatives with something potentially happening down the line?

Are there portions of your CFS portfolio that are being considered for divestiture? I know that you've acquired a lot of businesses over time, and I do wonder if all those brands are as successful as you hoped or if you might find some better owners for some of those out there. So an update here would be helpful.

Timothy Fitzgerald (CEO)

Yeah. So I mean, look, I think we're continuously reviewing the portfolio. Right? I mean, just this announcement is part of taking action on something that we think makes compelling strategic and financial sense for that business at this point in time. But we always review where we're at with all the businesses and what is the best opportunity to continue to grow those businesses, considering where they're at in their life cycle, what we see upcoming opportunities in the future. And so I think right now, food processing is in a great place for us to take that next step. Right?

I mean, I think it will accelerate growth and be a continuation of the journey that we've been on for a long period of time. I mean, I think as we think about residential, it's a phenomenal platform. I mean, we have assembled industry-leading brands. Even at what is now the trough, we're at very respectable margins. I would argue the margins that we have right now are in line with some of our peers on commercial food service and some of the food processing companies out there.

And so we see significant margin expansion, knowing that we've been to much higher levels in the past, and it's a stronger platform today. Right? So those are things that we are considering for where we're at with the journey of residential. Right? So we're always going to be thinking about what is best for that business to reach its full potential and to maximize shareholder value.

Mircea Dobre (Associate Director of Research and Senior Research Analyst)

But just to press you a little bit on residential, I guess in a theoretical recovery here, what I've heard from you in the past is that when this business is operating in normal volumes, this is maybe a 20% EBITDA margin business. So in many ways, this business is dilutive to the overall portfolio from a margin standpoint. And it also carries an inherent degree of cyclicality that, arguably speaking, you do not have in commercial food service.

The customers are also different. The way you go to market is different. So what I'm trying to understand here is, other than where we are in the cycle, why this business would fit with the RemainCo longer term and how that would be additive to shareholder value?

Timothy Fitzgerald (CEO)

I think we had similar conversations with that with food processing for many years. Right? So I would say it's not so different. Right? I think we've kind of taken a long-term approach to build out that business and then take appropriate action when it was an opportune time, and we were at kind of an appropriate chapter of its cycle. Right? So we're not saying that residential maybe at some point in time may be in a similar junction, but it's not today. We see significant opportunity for improvement. And because food processing had been a very lumpy and cyclical business, we had been told by shareholders for many years, and it had also had lower margins. Right?

And we've kind of built it to the point that it is today that I think now we're excited to unlock a lot of shareholder value and continue on the journey. So I would say residential has its own timing and cycle and life of where it is within the Middleby portfolio.

Mircea Dobre (Associate Director of Research and Senior Research Analyst)

Understood. Last question for me. Just on your outlook in commercial food service, if I heard you correctly, we're starting a little bit slow, maybe slightly negative organic growth. Implicitly, things get much better in the back half to get to low single-digit growth. So I guess I'm curious, do you expect to inflect positive from an organic growth in Q2, or is this all a second-half story? And what gives you the visibility that growth here can actually improve? And maybe you can comment in terms of what the headwinds have been in recent years and what gets better. Thank you.

Bryan Mittelman (CFO)

This is Bryan. I'll start. I'll call it on the numbers side a little bit and turn it over to Steve for some of the market commentary. We do think things improve sequentially throughout the year. In terms of, I'll say, doing some math, the one nuance we have as we will compare 2025 to 2024 is that Q2 2024 was the high point. So I'm not going to yet note specifically whether we'll eclipse Q2 of 2024 and 2025.

Obviously, the comps get a little bit easier in the back half of the year. Having said that, we're really looking at things over the perspective of a year and do expect generally improving conditions and hopefully delivering that revenue. I noted, but Steve, I'll give it to you for some market perspectives.

Steve Spittle (Chief Commercial Officer)

Yeah. Thank you, Bryan. Good morning, Meg. I would call out maybe three specific areas, Meg, that gives us confidence in really the year progressing in a positive direction. We talk a lot about new store openings with our bigger chain customers, which they've done back to the last couple of years. I think, unfortunately, we have seen the last couple of quarters of those new store openings being pushed out for a number of different reasons. Ranges from everything from weather to, obviously, the fires out west, snow, flooding, etc., has certainly impacted construction.

It's been allocation of personnel to actually build restaurants and just some of the broad macro challenges that the larger restaurant chains are facing. I think the positive there is if we look at our collective group of top chain customers and we compare their 2025 build plans holistically for the entire year, knowing stuff does push and move from quarter to quarter, that the 2025 build plans are up over 2024. So I think we're pretty confident in our chain customers in their new store build plans for this year over 2024. I think the other thing we're seeing with our chain customers is knowing that opening stores has been more challenging.

I do think you're seeing them add in sales layers to their existing footprints to try to capture market share. So that's where we're seeing beverage really start to pick up. That's going from being a concept to being actual reality in ag land. So that's the view on chains. I would say just two more things. When we look at more of the general market in the U.S., MAFSI, which is our association of reps here in the U.S., tracks every quarter their quoting and consultant activity.

If you look at their progression from the fourth quarter to the first quarter already, they see a very positive uptick in consultant and quoting activity to the general market, which aligns with what we're seeing from our reps and our dealers. So I think you're seeing that pipeline more or less build in the general market. And I think the third thing I would call out, if you picked up on the international markets that we talk about, I think we're very positive on what we've seen in our European divisions, knowing that there are some challenges in that market. But we've seen more and more people throw innovation kitchens in both Madrid and in the U.K.

We're opening a new innovation kitchen in Munich this summer. We see Germany is a big opportunity for us. We really see Europe actually with a lot of momentum as we go into this year. It's really the chains with the new stores. It's the quoting and consulting activity. And I think some of the international markets would give us the confidence for the rest of this year, Meg.

Bryan Mittelman (CFO)

We did grow in Q4 internationally.

Steve Spittle (Chief Commercial Officer)

Correct.

Mircea Dobre (Associate Director of Research and Senior Research Analyst)

All right. Thank you.

Operator (participant)

The next question will come from Jeff Hammond with KeyBank Capital Markets. Please go ahead.

Jeffrey Hammond (Managing Director and Equity Research Analyst)

Hey, good morning.

Timothy Fitzgerald (CEO)

Morning, Jeff.

Jeffrey Hammond (Managing Director and Equity Research Analyst)

Just last one I had on the spin. Can you just talk about what you think the leverage profiles of each of the businesses are going to be? Do you lean more leverage on Remainco and leave the balance sheet dry for acquisitions, or is it more balanced?

Timothy Fitzgerald (CEO)

Yeah. So we're still a year out from executing the spin. Right? So I think things will evolve during the course of the year. But on balance, we would expect less leverage on the food processing business kind of given the M&A opportunities post-spin.

Jeffrey Hammond (Managing Director and Equity Research Analyst)

Okay. And then in terms of adding Ed Garden to the board, can you maybe just, I didn't see the 8-K. I don't know if it's out yet. Something I think you mentioned cooperation agreement, maybe some of the key tenets in there. And if there's any kind of early feedback you've gotten from him or his group that's kind of been built into this strategic plan. Thanks.

Timothy Fitzgerald (CEO)

Yeah. So maybe I'll just kind of start with the board refreshment overall because that's been a process we've been going through for a couple of years. We had brought on two new board members with Steve Sugar and Deja Shaw, which has been tremendous. So we've been excited about that, and they've contributed greatly to our board. That process continued on as we kind of moved through the back half of last year. So I mean, I think the, we had a robust process that we were going through, thinking about the capabilities that we wanted to have to expand the board and, again, bring on fresh perspectives.

So we were kind of in later stages of bringing on two new members alongside Jack Miller's announced retirement, who had been a tremendous board member over many years. And so as Ed kind of came into the fold, we've had very constructive conversations, sharing of perspective. So truly, we are very excited to have Ed join the board. I think he's going to add a lot of financial, investor, operational expertise, insight, and capabilities. So that just kind of aligned. There is a cooperation agreement that's out there on an 8-K, but it's got, I would say, kind of standard standstill confidentiality provisions in it.

Jeffrey Hammond (Managing Director and Equity Research Analyst)

Okay. Thanks.

Operator (participant)

The next question will come from Bryan McNamara with Canaccord Genuity. Please go ahead.

Brian McNamara (Managing Director)

Morning, guys. Thanks for taking the questions. I know you mentioned you regularly review the portfolio, but when was the official strategic review launched? Did that date back to the JB Team Orel transaction last April? And is holding on to the residential business at this point just a function of nursing that business back to health before you contemplate a separation or so?

Timothy Fitzgerald (CEO)

Again, we continuously have been reviewing the portfolio. That was not only last year. That was the year before. I mean, that is something our board does regularly. I mean, I think with these things, they evolve. I mean, certainly, we were looking at many different options as we entered the year last year. And then I think as we started evolving what we thought might be the most strategic option to unlock shareholder value for the long term, that was probably mid-year when we made that kind of more of an official comprehensive review, bringing on advisors in that regard.

Look, the residential business, I would not frame it the way you did. I mean, I think we, again, it is a tough period for residential. There's no question about it, where housing, existing home sales, remodels are disrupted operationally even by trying to execute in the marketplace because getting contractors, electricians, etc. I mean, I think that's been pressure on longer lead time products in the housing market, and when you're dealing kind of with a premium sector, we get hit a bit harder, so it takes a little bit longer to start the engines, but when it comes back, it's going to come back strong, so we're confident of that, so it is an exciting platform that I think when it is not in, I won't call it a cycle.

I would call it a disrupted period. I mean, kind of coming out of COVID, that's just kind of that normal macro up and down. It's a significant disruption. So we think in better days that this is a best-in-class, highest margin, very unique portfolio of premium brands with nothing else like it. And we think there's a lot of shareholder value there. That being said, we always will continue to review the portfolio, what is the best opportunities for each of the businesses for the long term and to create shareholder value.

But we think that the residential business, again, presents probably some of the higher growth and higher margin expansion opportunities as we go through the next several years, kind of flipping it from where we are to where we think we will be.

Ross Sparenblek (Research Analyst of Industrials)

Great. That's helpful. Secondly, on commercial food service, can you talk about your price and volume expectations for 2025 and compare that to recent years? Are volumes expected to be negative?

Bryan Mittelman (CFO)

No. I mean, I think the pricing benefits for 2025 are modest. At best, we haven't maybe had the same level of pricing actions to start this year that we have in prior years as you look at what's kind of cumulatively happened over the past, let's say, four years or so. So I think we are in a year here where it will be more volume-driven than price-driven.

Brian McNamara (Managing Director)

Great. And then finally, I guess for just your restaurant customers, how would you characterize the current operating environment? You have big players really leaning into value for limited time offers going from one month to one year. You said you're confident in your store's opening plans, I guess your store customers' opening plans this year. I guess what drives that confidence kind of given the mid-year surprise in 2024? Thank you.

Steve Spittle (Chief Commercial Officer)

Yes. It's a great question. I think, yes, there has been this push towards value that I think has probably been more in the traditional fast food QSR segment. I think what you're seeing, though, is I think you're seeing some of the more fast casual, casual dining concepts really start to thrive. I mean, I give so many of them a lot of credit for thinking creatively about adopting new operational initiatives, new technology initiatives to help with throughput, to help drive labor costs down, to help drive food costs down, and I think you're seeing those actually thrive in this scenario.

So it's a little bit of a nuance that, yes, there are challenges around value, but you're also seeing, again, those, I'd say, more forward-thinking chains again really adopt the new technologies and try to drive their costs overall down to give a better product experience to consumers. So I think that's very positive. I think in terms of what gives us confidence is all the chains are very open with their new store plans. And I do believe that if you look at them, there's so many new markets that they're entering in, especially from an international standpoint.

And so I think when you look at markets like in India, certainly parts of Europe, parts of Africa that are still new up-and-coming markets for these chains, they have to get there. I think they're looking to us more and more to drive down the unit economics of opening those restaurants, which I think we're coming through for them. So I think, yes, there's been a couple of quarters where things have been kind of pushed out to the right.

I think what gives us confidence is nobody, for the most part, in those chains has pulled their numbers down holistically for the year. So again, things are always going to move from quarter to quarter, but really feel like they have held to their overall next 12- to 15-month build plan.

Timothy Fitzgerald (CEO)

I'm just adding a couple of other things. I mean, I think some of the chains were surprised with traffic in the back half of the year. I mean, it was expected to grow, and that became a little bit more of a challenge. I think as of late or as we left the year, traffic patterns had started to improve. So I mean, I think that gives a little bit more confidence to the chains. Food cost was also another driver, and it's kind of a whole cycle. Food costs being up, menu goes up, traffic goes down. I think, and we did see inflation in food costs in the back half of the year, which I don't think a lot of our chain customers were anticipating.

So I think it was kind of a function of some of those dynamics and how that worked through their operation. I think going into this year, there's more stability in food costs, which then I think allows them to think about menu pricing, which then helps drive traffic and then traffic patterns improving. So I just think it's some of the issues that we saw in the third quarter have started to kind of work their way through the cycle, which then allows the chains to be a little bit more confident on executing on their plans.

Brian McNamara (Managing Director)

Great. Thanks for the call, guys. Appreciate it.

Operator (participant)

The next question will come from Tamy Zakaria with J.P. Morgan. Please go ahead.

Tami Zakaria (Executive Director)

Hi. Good morning. Thank you so much. A question on the parts and services business. I saw on the presentation the remain co has about 17%, and the spin co would be about 33%. Do you have any targets in mind to increase the mix of parts and services over time for either of these businesses? Is that going to be a focus or strategy going forward, or do you think this mix is pretty reasonable through the cycle?

Timothy Fitzgerald (CEO)

Yeah. No, that's a great question. I mean, I think we have initiatives and expectations to increase and invest in service for both food processing as well as remaining co. One of the slides that we also put in the investor deck, a lot of the go-to-market initiatives that we have to drive organic growth, that includes service. I think we're very focused on how do we provide an enhanced and more efficient customer experience, kind of leveraging the scale of the platform, leveraging some of the new tools that we've got coming out.

IoT is included in that as we start leveraging data for service. And those statements are true both for food processing as well as for commercial. So I mean, I think over time, our expectation is to increase the percentage of that piece of the pie for all the businesses respectively.

Tami Zakaria (Executive Director)

Understood. That's very helpful. So a quick follow-up to that is, would you be able to tell us what the mix was for these two businesses, call it in 2019? I'm just trying to understand how the mix has changed over time in the last five years.

Bryan Mittelman (CFO)

Yeah. Tammy, this is Bryan. I'd have to go back and see. I forget if we started breaking that out as early as 2019. My colleagues think maybe it was around 2021 we started publishing some, I'll say, pie charts on that. I'll say residential has always had the lowest portion of its business in terms of parts as you think about the three segments. I bet commercial has been probably fairly consistent in the high teens to 20%-ish area.

Steve Spittle (Chief Commercial Officer)

Certainly the last five years.

Bryan Mittelman (CFO)

Yeah. And then food processing is one that we've probably been doing, has seen the most growth in it as we've been really working to offer more services to our customers, and with that comes parts. And also our customers have seen how their operations have been managed as being evolving. As we've been working through, I'll call it labor issues for the past couple of years, a lot of our large customers, I'll say, have lost some of their maintenance and service abilities on their own, and it's giving us nice opportunities to be providing that level of service to them.

As Tim noted, in commercial, we're working on certain things strategically to be an even better and more aligned service provider with different networks out there.

Tami Zakaria (Executive Director)

Wonderful. Thank you. That's all I had.

Steve Spittle (Chief Commercial Officer)

Great.

Operator (participant)

The next question will come from Walt Liptak with Seaport. Please go ahead.

Walter Liptak (Industry Analyst)

Hi. Thanks. Good morning. Yeah. I wanted to ask about your supply chain work. I think you've been doing procurement and supply chain operations or consolidations for a number of years now. And I think I heard in the prepared remarks that there's going to be some benefits in 2025. I wonder if you could talk about if that's true and if you guys are getting some benefits in 2025 from that.

Steve Spittle (Chief Commercial Officer)

Yeah. Good morning, Walt. This is Steve. I'd call out a couple of things from a supply chain standpoint. I think our team really over the last four or five years has done a phenomenal job first navigating all the supply chain disruption, certainly from a couple of years ago. And then as we kind of move into this new chapter with the tariffs coming through, I think we are extremely well-positioned to navigate that from a competitive landscape standpoint.

I think from a pure cost-savings perspective, I think it's a challenge that we put in front of every one of our divisions every year to be thoughtful and creative on how we can come up with supply chain savings. And then you layer in the Middleby supply chain team on top of that to leverage our brands together, to leverage the network together to come up with savings. So we do feel like there are savings that will come through this year from a supply chain standpoint.

But I also really want to call out, I think that we are extremely well-positioned to navigate the tariffs, having focused so much, obviously, being predominantly domestic manufacturer across really all three of our segments. Our team has done a great job over the last couple of years, really. I'll call it nearshoring our supply chain and manufacturing in many ways. I think we've been very focused on diversifying our qualified supplier roster, if you will, to make sure that we have domestic suppliers if we had an international supplier in some aspect.

And I think fundamentally, we're always leveraging the Middleby Global Supply Chain Network, having 120 brands across the globe and leveraging that to really build up a more resilient supply chain. So I think that positions us uniquely. It's a great competitive advantage, I think, as we come into this year, both from a savings standpoint, but really from a competitive selling perspective as well.

Walter Liptak (Industry Analyst)

Okay. Great. Maybe this is a follow-up. With the food processing out, are there or have there been supply chain cost savings between the other two segments, between commercial food service and residential, or are those supply chain benefits unique to each of the segments?

Steve Spittle (Chief Commercial Officer)

So we've got one supply chain team that facilitates across all three of the businesses, and there's kind of unique, I'll say, synergies depending on product by product, brand by brand. The food processing is inherently different in terms of the products, obviously, size of the products and some of the components that go into it. So there's probably a bit less synergies there with the food processing than there is with commercial and residential, which you've got great similarity, frankly, in the process and has very much in overlapping and shared supply chain.

Walter Liptak (Industry Analyst)

Okay. Great. All right. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Mr. Tim FitzGerald for any closing remarks. Please go ahead, sir.

Timothy Fitzgerald (CEO)

Yeah. No, thank you, everybody, for joining us today on the call. Obviously, we're excited about all the announcements that we've made and looking forward to the future of Middleby and the food processing spin. And we think this is going to create meaningful value to all of our shareholders and looking forward to updating everybody on those activities as we kind of move through the next several quarters. Hopefully, we'll see some of you at NAFEM, as James mentioned. We've got an exciting trade show with our latest and greatest products. And otherwise, we will talk to you next quarter.

Operator (participant)

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