Thank you for joining us for the Middleby Third Quarter Earnings Conference Call. With us today from management are Selim Bassoul, Chairman and CEO; Tim Fitzgerald; CFO; and David Brewer, Chief Operating Officer, for the Commercial Foodservice Group. We will begin the call with comments from management and open the lines for Q&A. Instructions for getting in the Q&A will be given at that time. Now, I'd like to turn the call over to Mr. Fitzgerald for opening comments. Please go ahead.

Okay. Good morning, and thank you, everybody, for joining us today on our Q3 conference call. As Mariale said, I'll go through the financials of each of the segments and some overall comments on Q3 and then we will open up the call to questions. Our Commercial Foodservice segment sales for the quarter amounted to $471.6 million, which included an increase of $106.3 million related to acquisitions completed within the last 12 months, most notably Taylor. Excluding the impact of acquisitions and foreign currency, sales for the quarter increased 4.1%. The increase in sales reflects growth of 7.1% in the domestic market with increased sales to restaurant chains as we begin to see benefits of a develop pipeline of customer opportunities with many of our new technologies. International sales continued to be soft with the decline of 2.2%, reflecting a challenging environment in the UK. However, we are seeing improved conditions and opportunities in a number of emerging markets such as Latin America, India and Russia, which should reflect favorably in upcoming quarters. The gross margin during the quarter at Commercial Foodservice was 37.2% as compared to 39.5% in the prior year quarter. Excluding the impact of acquisitions, the gross margin rate would have increased to 40.8%. EBITDA for Commercial Foodservice Group amounted to $125.4 million and 26.6% and includes the dilutive effect of recent acquisitions, most notably the recent acquisition of Taylor. Excluding the impact of recent acquisitions, the EBITDA margin increased to 28.8% versus 27.7% in the prior year quarter. The margin improvement reflects a favorable mix with sales of higher technology equipment and the continued benefits of efficiency gains at companies acquired over the last several years. We continue to focus on profitability improvements at Taylor and other recent acquisitions and remain confident in the expansion of…

[Operator Instructions] And our first question comes from Mig Dobre from Baird. You may proceed.

Good morning, guys. Good to be on your call here. My first question is on commercial foodservice. I want to dig in a little more on organic growth, the core growth. Maybe a little more color on the 7% growth that you had in the U.S. business. How sustainable you think this is and how should we be thinking about growth going forward, particularly if some of these drags in international start to subside? Thanks.

So, Mig, we’ve been talking for a number of quarters now about line of chain opportunities. So, we do feel pretty positive about that. We’ve got the pipeline built, we’re starting to see some of the initial benefits of that. Always the timing of chain business is questionable from quarter to quarter. But, we feel that we’re kind of back to sustainable growth in the U.S. And market conditions, late in the year show improvement, generally even beyond the chains relative coming into the year. Dave, I don’t know if you have any other comments on...

Yes. So, the numbers you’re seeing are a result of what we’ve talk to everybody on the phone about for the past four or five quarters. And those numbers -- those rollouts along with the smaller programs around the regional brands are coming through. And that's what you’re seeing. And then, if you start looking forward, I can’t -- obviously from a confidentiality perspective, we just find in the last week three independent rollouts that are going to start giving order through quarter through next year on retail grocery, QSR and fast casual. And the exciting part of that is it’s all -- it’s the same story of our best technology, our high-end technology that creates that ROI for our customer. We have three distinct new programs just starting, so that it’s overlapping what we promised was going to happen a year, year and half ago into the fourth quarter into full year next year.

All right. That's helpful. Also want to talk little bit about Taylor and the integration progress there. You mentioned targeting 25% margins in 2019. But I seem to remember you saying that you might be able to achieve 25% exiting 2018. Can you maybe parse that out for me a little more?

So, essentially, that’s the same comment. So, we’ve been working hard with the team there or the team has been working hard really on a whole host of opportunities to improve margins from SKU rationalization, the efficiency and certainly we’ll be focused on innovation going into next year. But with the actions that we’ve taken so far, really we think that the business is positioned to enter 2019 kind of at a 25% run rate. I mean that will flow from quarter to quarter, depending mix and volume. But essentially, that is where we expect the margins to be headed into 2019. A lot of those initiatives have really taken place already.

And last question for me. The core gross margin excluding acquisitions in commercial foodservice, I think I heard you on the call say that it was up 20 basis points year-over-year. Obviously price, cost has been a real challenge for everyone. That does not seem to be much of an issue for you in a quarter here. Should we expect something different going forward? I know, there is additional tariffs that came in. Any impacts that we should be aware of?

Yes. So, I'll just repeat the numbers. I mean, our gross margins were strong, commercial 40.8% when you back out acquisitions relative to 39.5%, and EBITDA margins expanding to 28.8% versus 27.7%. So we did have some nice margin expansion. But, a lot of that is efficiency gains, some of it is favorable mix with new product, and Dave touched on some of the continued wins that we are having there. That being said, it doesn’t mean we are not facing cost challenges because we certainly are. We had steel prices go up earlier this year that was probably -- we started to see that in the second quarter, the impact of that really started to come through in Q3. We did have a midyear price increase that we instituted, so that largely offset that. But, we do have this other wave of tariffs that is coming through that really has not impacted us in full in Q3. That's really more of a Q4 and into 2019 challenge. And we are seeing a lot of cost increases with that. So, that will have some impact in Q4 on the margins. That being said, we have just announced other price increases. So, literally announcements have gone out in the last week here of pricing actions that we are going to be taking going into 2019. That would be in conjunction with our normal annual price increase but those increases will be higher than ordinary to offset the impact of tariffs. So, we do expect that there is probably going to be a little bit of a gap here but we will be able to offset the increased cost of tariffs going into ‘19. So that we’ll be able to initialize that from a margin perspective next year.

So, gap in the fourth quarter, better in 2019?

Yes.

And our next question comes from Larry De Maria from William Blair. You may proceed.

Can you just talk about the full year ASC benefit in processing for sales and profits? And when you compare that to the -- I think you said you had better orders in processing. Does that imply that moving into next year, I'm thinking really more of 2019, and if you pull forward some sales and profits, does that imply next year it’s down or maybe neutral because of the better orders? So, how do we think about that from a high level?

So, I will be honest with you. I’m probably not -- I shouldn’t say this but I’m probably not the ASC 606 expert. But big picture, coming into this year, we did have a big benefit in the first quarter in a lot of ways. The accounting guidance was we were re-recognizing from last year as you apply the new accounting principles. That’s kind of gone away. And a lot of the impact that we're having even in this quarter's is really just how it flows from quarter to quarter. We’re not rerecognizing a certainly revenue from ‘17. It's what the impact would have been, would it have been normally recognized in Q4 or in other periods. So, I think as we go into next year, we will have kind of more of a normalized situation where ASC 606 will be applied consistently year-over-year. The order rate is totally separate from ASC 606 which is accounting. So, we’re pleased to see orders kind of coming back on line. It is certainly not where we want it. Some of the larger projects that have been out there still are out there, and we’re working on closing some of those, although we've seen some come in. The mix helps us somewhat as some of those have been -- some of the backlog is coming some of our meat business and some of the higher margin companies, which that's really what's hurt us quite a bit this year. The order rate on some of these projects, because they are some of our longer term projects, we are hopeful to see improvement in Q4. We’re kind of cautious on what improvement means, but better than Q3. And I think we can probably come back into growth as we go in the 2019 if we continue to kind of see this order rate throughout the rest of the year, as well as having a better backlog, which by all measures right now, looks like we have a better backlog going into ‘19 and we did coming into ‘18.

Okay, thanks. If I could, just follow-up on that -- asking my second question. Is the order volatility due to tariffs or pricing, like it was earlier in the year? And secondly, you guys adding back million [ph] of acquisition-related inventory step up, seems kind of unusual. Has that happened before, and just what’s -- is there anything specific driving that? It seems unusual to happen.

Okay. So, I guess taking that in reverse order. I don’t know if that’s a good way to do it. But the fair market value adjustments, so that was Taylor related, we do have that regularly. So, anytime we buy a company, which is all the time by companies, we have step up. So, we take their inventory and we have to write it up to fair market value. And then, we basically sell it for no profit, which is not the economic reality. But that's kind of how the accounting rules work and it always impacts our EBITDA and our gross margins in that first quarter. It’s just a bigger number. So, Taylor's is a much larger acquisition. We did a whole bunch of other acquisitions and they’re much smaller companies, not so impact full to Middleby. So, we’re pointing it out because it causes Taylor to be fairly dilutive in that first quarter and it’s a non-cash, nonrecurring items. So, that's kind of why we’re pointing out but it does happen to us all the time and it’s kind of embedded in a lot of the -- probably that first quarter after anytime we do an acquisition, you see that.

But, you guys -- stepping it up, is it normal to step it up or do you have to step it down?

No, you’d always step it up. Yes. That is normal. I mean, that is the accounting rules. And so long as the inventory is less than what you would it for and even companies with lower margins have gross margins of 20% or better. So, you are always stepping it up to basically what the sale price is. And inventory and that I'm sure people want to hear, accounting -- dissertation on a conference call you. But, you basically take your inventory and you step it up to what the sales price is. So, whatever is sitting there in inventory, you are going to be selling it for little than margin out of the gate. So, the more inventory you have, the bigger the companies, the more impact that it would have from

Yes. I will take it offline. Sorry about that. But, just benefit...

Just kind of going to the other question you had, which was food processing. We live and die by the big orders right. So, that’s kind of the beta of the growth. There is 5 or 10 projects a year in any given year that it will cause us to be up double-digit or down double-digit. Unfortunately we have had a dry spell, a to a lot of time these projects come in emerging markets we’ve got projects in Thailand, in China, Brazil. We have been working on a number in markets. Ongoing right now in Russia, Middle East and in Asia. Some things have been slower to come through. And I think that goes back to how we've always talked about this business, which is it's a lumpy business. And it continues to be lumpy. It’s still a great business, it’s high technology. The margins are struggling a little bit right now because obviously the volume getting hit at the higher margin businesses. But, we do see a pipeline obviously -- or as I have mentioned, we are seeing orders up. So, that bodes well. We are still below what we consider our run rate trajectory but see improvement going into next year and are hopeful with some of the opportunities that we see in the international business. And that’s been one of the areas that we focus heavily on as we’ve been building -- the platform is really pulling a lot of these brands into markets that they haven't been before, putting together full line projects. And that's really an advantage that we can offer to our customers with a complete system. And we’ve had a lot of success with that, but projects are going. So, I think when they're there, we will get our fair share of the business and we gain market share in these bigger opportunities.

And our next question comes from Jamie Clement from BRG. Your line is now open.

If I could just delve a little bit more into pricing, specifically on the margins. If some of the protein projects start coming in 2019, you'll have some time to continue to integrate some of the recent acquisitions. Is there any reason why if that business line starts to coming back and generating orders, why you can't be reporting mid-20% EBITDA margins in quarters next year?

No, there is not. I mean, we are obviously very disappointed with the EBITDA margins. At the end of the day, they are not -- they are 18%, 19%, they are not bad margin, and we’re not losing money but we’re very disappointed with them. But, it drops because of the mix. So, it’s not something structural or fundamentally you get some orders in those higher margin businesses and those margins can come back up very quickly. So, yes, the answers is that. In addition to that, we have had a lot of acquisitions in food processing over the last 18 months. So, there is a also a drag to margins because just the typical Middleby situation, which is you buy a company and it’s lower margins than the average and we spent the next couple years bringing it up. So, you have that kind of also embedded in the platform. And a piece of that is bakery versus meat. So, bakery is still lower. It's coming up but lot of the acquisitions we've done have been within Bakery. So, Bakery is king two steps forward, one step back. We’re making progress on efficiencies but we’re buying more companies in bakery at the same time. So, it’s kind of keeping the margins of bakery lower. But that’s all part of building the platform, and we will continue to integrate those businesses. Bakery will come up, hopefully we’ll get some of the orders in some higher-margin businesses. And then you could then see what you're talking about where you get your margins back up to mid 20s like numbers.

Like where you were in the third quarter last year?

Yes.

Dave, if I could ask you a quick one, because you were talking pretty quick. I think mentioned that some of the three new piece of business that you signed recently. Did you say QSR fast casual and grocery store. Is that right?

Yes, I did.

Are those new customers for Middleby or those similar trends or mix of both.

Mix of both but the key point there they’ve all been single sourced. And those are actually incremental for the program. I just pointed out the three of there -- we talked about the portfolio rollout that we have. But, those are the mix of both which are great news. And the reasons behind single source are also great news from an engineering and ROI perspective. The customers are understanding the best technology that we have. So, it’s very encouraging very, happy about the way the brand, the Middleby has responded but leadership team is doing a great job.

And our next question comes from Jason Rodgers from Great Lakes Review. Your line is now open.

I wondered if you could talk about AGA where you guys are now in the restructuring, and what’s the general outlook there?

So, before I go to AGA, just to repeat, we’re pretty pleased with what's going on domestically with margin expansion there, topline is moving at Viking. So, it’s a bit tale of two cities where we’ve got things hitting on lot of cylinders, now domestically. And the last quarter, we talked about distribution, integration, and that -- so ongoing a little bit but that is largely behind us too. So, I think a lot of positives on the residential side of the platform. Domestically from AGA, restructuring is going very well. The cost structures is in a much better place. We did a lot to move -- there is the Rangemaster business and there is the AGA business. The Rangemaster business is already kind of well north of 20% EBITDA margin, so it’s really the AGA business that’s been a lower margin. A lot of the focus there has been closing the foundry which we announced last year but really haven't gotten the full benefits of the cost yet. And actually some of the minor restructuring with AGA was really the final exit of that or write-down of some of the facility costs. But we are moving to a new product line which is launched late this year going into next year which will have higher margins. And so, there's a lot of heavy lifting is behind us. So, as we have had significant declines at AGA, the margins haven’t declined in there. So, we would have liked to obviously gotten the benefits of these and just being flat, revenue would have gotten a nice margin boost there. So, really, the challenge is the topline and what's going to happen in the market there. As we have tracked the market, the premium market is actually down more than our AGA brand. So, we think we are not losing market share, we may be even gaining market share with Rangemaster. But, it is a difficult market condition. Now, I think going into next year, we are going to be overlapping some pretty large declines, I mean, roughly 10% for the year in the UK market. We unfortunately don't have a crystal ball. We’d would like to think that market conditions flatten out or maybe improve and we will start to get some of the benefits of initial new product launches, certainly with AGA, but also some new products with Rangemaster, which I think those will accelerate more into 2020. But hopefully, a better backdrop from a topline and then that'll translate to the bottom line.

And then, what's the timeline for introducing AGA to the U.S.? And how will that work with the Viking products, those two alongside each other?

So, we have been introducing AGA to the U.S. this year. You will find it on a number of dealer showroom floors. It is in the Middleby showrooms. So, we’ve got our new showroom that we just opened in the New York, which actually has a number of AGA products there and in Chicago as well. It’s still a small line of products because we do not have all the sizes. Right now, we have got 48-inch products. We will be focused on launching 36-inch products, which is where the larger part of the U.S. market is. The products are very exciting. So, different styling than Viking. So, really kind of broadens out our whole platform of technologies and designs that we have really across this great portfolio of brands and products and that has really been the vision of really having these leading brands and products similar to what we have on the commercial side of the business. And now that goes to the distribution and leveraging that and really having everything that a consumer would want kind of all in one package within Middleby. Dave?

Yes. I would add two things to what Tim is saying, is one, as we brought AGA into the space, we have that after sales service and support, the parts and the ability to take care of those customers is fully embedded. So, we’re tracking; as we evolve the business, we’re leading with our ability to take care of the customer with these brands. And the second thing I would encourage everybody on the phone to do is to go to our showrooms. These showrooms are very powerful and it really demonstrates how we’re lining up the AGA brand with the Viking brand. Go in and talk to people there and I think it’s a great visit, really shows off how we’re managing from a brand standard, the AGA brand and the Viking brand, which is I think near perfect in those showrooms. And it’s right there for you.

Sounds good. Just Tim, tax rate for the fourth quarter, any thoughts there?

I think it’d be fairly consistent with what we saw in Q3, so, in the 25% to 26% range.

Thank you. Our next question comes from Jeff Hammond from KeyBanc Capital Markets. You may proceed.

So, can you just talk about the core trends in Taylor, how it performed? And then just on inventory step up, is there carryover of inventory step up in the 4Q?

So, the setup is done. So, Taylor -- I mean it is our first quarter. I think, it’s going to -- there is not necessarily trends to take out of the quarter. I think initially, we’re focused on frankly some product line simplification. We did reduce the SKUs by quite a bit. Typically, this isn’t necessarily a trend but typically we buy a company and we do try to simplify and focus on the core that’s part of the profit initiative in us getting to 25%. So, it's literally like 40% of the SKUs, which accounts for about $10 million of the revenue of the business that we’re exiting. We hope to make up some of it in other -- and shifting the sales to some of the other products, although there may be some sales loss there. There is some good opportunities with chain customers there and things that the Taylor team had been working on before we arrived. So, I think that's all positive, some large customer opportunity. But, I think we’ll talk more about trends as we move into 2019 on the next quarter. I don’t know, Dave, do you have anything else to add?

No, I would just say that Tim and I both spent a week last week with the Taylor leadership team, getting our hands dirty with some distributors. And I know the Taylor team is listening in as we speak. And so, I would tell you and them that I couldn't be happier with the results they’ve gotten on rationalization of product lines. The work they are doing on the supply chain is just phenomenal. They are right on schedule. Tim and I done this 40 to 50 times, they’re doing as well as anybody. And the innovation, they are accelerating their innovation in new products. And there manufacturing changes are right on schedule. I couldn’t be happier with the team and they are right on schedule, little bit ahead. And we will not back off that pressure.

Okay, great. And you mentioned that the wins in commercial. Can you just talk about what you’re seeing in the general market? And how do you think work shapes up, given some of these bigger wins, do we see an acceleration in that domestic growth into 4Q?

So I think we’re going to see a continuation into Q4, I mean we were pretty solid with the chain business. The general market which was softer in the beginning of the year did sort of revert and pick up in Q3. So we expect that to continue into Q4. So I would see fairly similar in Q4 with some pretty good set of opportunities on the chain side of the business going into '19.

And then just quickly on food processing. 4Q I think you said a little bit better. Should we think of that comment as in sequentially or year-on-year on a core basis?

I would take it as sequentially.

And then I guess with the order growth in Food Processing, I mean that seems like as long as we stop seeing these deferrals, you’ve got pretty easy comps and a building backlog. So that’s set up pretty well.

Yes, yes. I mean it’s promising. Honestly, it’s not, again, great, where we wanted it though -- there is some good things in the pipeline. Certainly 2018 is not a barrier by any means. So I mean I think we should be set up to have a pretty good opportunity in '19 off of a weak ‘18.

And our next question comes from Walter Liptak from Seaport Global. Your line is now open.

I want to ask a couple of follow-ups. On Taylor, last quarter you said that it was going to be about 140, 150 in the back half. We’re looking at how much revenue was Taylor this quarter and is it still going to be back half or back quarter loaded?

When you said back half -- so it was in the low 70s in Q3. That is still the range. In Q3 there was a little bit of disruption, just throughout the company we actually shut down operations for a week to do a physical inventory. There’s transition items going on and some of that affects revenues in the year, but that is not the guidance for revenues roughly in the back half of the year.

Right. So the Taylor is new and you are going through this product line simplification and I think you called out 10 million. So when you bought it I think it was about 315 million, so certainly a run rate now of about 305, is that a good base to use looking at next year?

Yes, I think that’s fair.

And you also talked about a 15 million profit improvement I think in 2019 versus '18, the EBITDA margin of 25%. Is that still on track?

Yes, that is on track.

And then I want to ask Commercial Foodservice, and one of your competitors had a little bit of problems with price costs and other things. I wonder what are you thinking about the pricing environment for the fourth quarter and I guess how things were for pricing in the third quarter?

Well, yes, I mean as I mentioned earlier, we are taking price increases in ‘19, I mean I think it's pretty broadly understood that our substantial headwind to all domestic manufacturers and we are seeing a number of other companies alongside take pricing increases also to try to offset that. So I do think that is the market backdrop and we have made announcements already that to our customer base that we are doing that in ‘19.

I guess I was wondering more about price discounting pressure especially in US?

I think from a Middleby perspective, and I was talking about that and I think that’s something that we’ve always been disciplined on and we focus on sale on return on investment with our customers and demonstrate the value that it delivers to them with a payback and that is really our sales process. So we’re very focused on that discounting.

And one more if you don’t mind. The -- I understand Commercial Foodservice being weak internationally because of weather in the UK but I wonder, when will we start to see international start to get a little bit better, also I think you could have other parts of the world outside of UK that start to improve during the pipeline or funnel of projects that we can talk about it?

International has also been softer year and it's not unusual I mean Middleby, historically we will have a high growth and then we will kind be down, we do touch a lot of emerging markets and that is our strategy and we’ve had a lot of investments in a number of the markets that we mentioned earlier, India, Brazil, China, now opening Russia, Middle East. So those are the markets that we want to be -- that we think that we will have outsized growth in the long run. We’ve kind had a mix this year in those emerging markets. We’ve had something chains that have grown faster and reset. We’ve had some markets that have had conditions such as Latin America, which that was recovering from both weather and political issues and then we have softness in the UK. So I think going into next year unfortunately I think UK is a market that we do have, that is our largest single market outside the US, and I think we do have a backdrop there that will be challenging but I think in a lot of the other markets we’re seeing momentum in more than hitting on more cylinders firing next year than this year as we go into ‘19, China probably improving. What we saw this year with our customer base, India, the same way I think we are well-positioned there, Latin America also improving. So I think a lot of these are these markets will be doing better and that'll help offset whatever the condition is in the UK, which I would just say is uncertain to us right now.

And our final question from today comes from George Godfrey from CL King. You may proceed.

Could you share book-to-bill on the Food Processing segment or a comment is it all over 1?

Yes, I mean it would have been over 1. I don’t really have that metric, maybe that’s a something we will start considering reporting in future periods. It’s one that -- but it’s not a metric that we have reported, I don't actually have it handy but it would've been over 1.

And then, if memory serves the revenue breakdown in that segment was roughly 75% meat processing and 25% bakery, post the acquisitions, is that still the case?

You know what? I don't have it here but it is shifted a little bit because we've been hit more in meat. So I would venture to guess from recalling it, right now it's probably more like two-thirds one-third. And that’s part of the impact with the margins here.

Yes, because meat has a higher margin than bakery, right?

Yes, so bakery has grown partly through acquisitions so it’s becoming larger than meat is where we have been hit with the orders the hard, so that it’s kind of been a double one in there.

Okay, so that was my final. The other thing I want to follow-up on is so the bakery got hit as well as the meat but the meat is the larger portion, that’s why you called out that in the press release?

Yes.

I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Tim and Dave I'm going to make some closing remarks. First, we want to thank everybody who have been with us for a long time, some of you analysts have been with us for a long time, investors who believed in us. And I want to give you a little bit of flavor of where Middleby is going and where the industry is going, from my perspective, having being in now for many, many years. So from the macro standpoint, I see a shift from traditional dining to delivery and fast service. Millennials are choosing more convenient fast paced chains with fresh alternatives, a sweet spot for us, where we are very well positioned with fast casuals. The second trend I see is open kitchens. This forces operators to replace their equipment like ovens, fryers, soup warmers, counter-top equipments like toasters, grill, with bright colors and the new equipment would feature sleek touch screen instead of bulky buttons and knobs. So we do see some replacement of business tools of equipment toward more sleek looking, I am not saying it’s going to be like Viking but it’s going to most probably start moving toward this trend. Number three, something we have been aware of for years. Labor is a critical issue for operators across the globe. Finding workers is a problem and the cost of labor is rising tremendously. We at Middleby have been at the forefront of labor saving equipment for over 10 years. Our vision which I have stated many, many times on conference call or with customers of seconds and inches is what’s driving our R&D to innovate by improving efficiency and reducing labor as western kitchens are getting smaller. The trend is for equipments that are smarter, smaller and easier to operate, equipment that saves on…

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.