Thank you for joining us today for the Middleby Fourth Quarter and Year-end Conference Call. With us today from management is Chief Executive Officer, Tim FitzGerald; Chief Financial Officer, Bryan Mittelman; Chief Operating Officer, David Brewer; and President of the Middleby Processing Group, Mark Salman. [Operator Instructions]. Now I'd like to turn the call over to Tim FitzGerald. Please go ahead.

Thank you, Tiffany, and thank you for everybody for joining our call today. Before we talk about the business and quarter, I wanted to take a moment to acknowledge Selim Bassoul, our Former Chairman and CEO, who announced his retirement last week after 23 years of service to Middleby. We will always be grateful to Selim for his vision and inspiration he brought to Middleby. Selim has been an outstanding leader, mentor and friend to many at Middleby and throughout the industry. During his tenure, Middleby has developed from modest beginnings into an industry leader in three business segments that we operate in today. Selim leaves in a place - Selim leaves in place a deeply embedded culture of innovation, customer focus and an entrepreneurial spirit, which will continue to thrive within Middleby and remain as a key factor in our ongoing success. Additionally, an important part of the continuing legacy Selim leaves behind is that very strong experienced and dedicated management team and group of presidents that have contributed to the success at Middleby over the many years. This team is deeply committed and will continue to work to shape the future of Middleby. I'm very thankful and proud to have worked very closely with Selim as a partner over the past two decades as we've built the business together. I along with many others learned much from him, and he has left an imprint on the culture of Middleby indefinitely, and we all wish to - wish him the best in his retirement. Moving forward, I'm very excited to continue on working with Dave, Bryan and Mark and our entire talented management team as we continue to grow Middleby together through acquisition, leading innovation and market expansion. Dave, if you'd like to add a few comments as well.

Yes. Thanks, Tim. I know Selim is listening in. And so on behalf of the management team, I just also wanted to add that we're going to continue on your vision of being disruptive in everything we do, creating equipment and processes that make us the easiest company to do business with. We'll always beat our competition through innovation, being disruptive and no quibble warranties and always taking care of the customer. Those have been instilled in me, Tim and the management team, and Selim that will continue on as long as I'm here and Tim's here and thank you very much for what you've instilled in all of us.

Thanks, Dave. So just before we turn over the call to Bryan, I'm going to kind of recap some of the accomplishments that we've had in 2018, which we expect to capitalize as we move forward into '19. In the commercial foodservice segment during the year, we continued to strategically add brands and technologies to the portfolio through acquisition. In 2018, we completed six acquisitions, which were added to our commercial foodservice portfolio. The recent addition of EVO adds to our ventless cooking platform with a unique and patented ventless downdraft system. Middleby has the largest and most diverse offering of ventless cooking products and solutions category which continues to grow in demand due to space constraints and cost advantages. Late in 2018, we also acquired Crown, a leading steam cooking equipment manufacturer. We're very excited to launch the Crown family at stream products in February at the NAFEM show. With other recent acquisitions of Firex and Market Forge, Middleby has the broadest and most innovative portfolio of steam cooking products, and we are pleased to now have entered this category with a very focused steam strategy. During 2018, we also added to our growing beverage platform, first with the acquisition of JoeTap, a leader in the fast-growing nitro brew and cold brewed trend, followed by our largest acquisition, Taylor. The Taylor edition significantly enhances and solidifies the Middleby beverage platform and alongside out recent acquisitions of Follett, Concordia, SkyFlo and Wunder-Bar provides for one of the industries' broadest portfolio of beverage-related technologies. During the year, we also continued to invest in our technology capabilities shared across all of our brands. Most notably, we made significant progress in launching Middleby Connect, our IOT platform, providing capabilities for remote menu management, preventive maintenance, service equipment monitoring. This platform is now operating…

Thanks, Tim. With that, I'm excited to go through our results for the fourth quarter. Our commercial foodservice segment sales for the quarter amounted to $484 million, which included an increase of $89 million related to acquisitions completed in - within the last 12 months, most notably Taylor. Excluding the impact of acquisitions and foreign currency, sales for the quarter increased 5.3% for this segment. Sales growth was 3.4% in the domestic market and 9.3% internationally. Latin America and Asia made significant contributions, while the challenging environment continues in the U.K. In the U.S., restaurant chains continued to be the main driver of our growth. The gross margin at commercial foodservice was 37.8% as compared to 38.5% in the prior year quarter. Again, excluding the impact of acquisitions and foreign exchange, the gross margin would have increased slightly to 38.7%. EBITDA for commercial foodservice amounted to $129 million, a 26.6% or 27.5% excluding the dilutive effect of recent acquisitions. Driving profitability improvements at Taylor and all of our acquisitions remains a critical mission for us. We will continue to focus on the expansion of profitability. Our goal continues to be to grow margins at the recent acquisitions to levels consistent with the overall platform. I also wanted to note the commercial foodservice GAAP income was impacted by an adjustment related to the Taylor purchase price accounting. During Q4, we continued working through the valuation process for various acquisition-related intangible assets. We refined our estimates of the intangible values and their associated lives, which resulted in Q4 amortization expense for Taylor being $3.6 million higher than what we had recorded in Q3. Now on a total company basis, Q4 total amortization expense was $21.6 million. At this point in time, we expect quarterly amortization expense to be approximately $15 million in…

[Operator Instructions]. And our first question comes from Larry DeMaria with William Blair.

And congratulations on promotions everybody. In CFS, organic has been, obviously, began to rebound the last couple of quarters. Just trying to understand how you view the strength of the market moving forward? We've heard about 3%, 4% organic growth in some of the trade shows recently for '19. Is that in line with how you're thinking about the markets? And can you outgrow the markets given your comment the sales realignment being largely behind you and mixed European markets? So just some color about how to gauge strength of CFS in '19 for Middleby?

Yes. So I mean, I think, we got generally positive view on CFS. I mean, I think, the last several years have been somewhat uncertain. I mean, it is tough to have visibility, and I think you'll hear from others as well uncertainty of what the market growth is. The restaurants are growing 1% to 2%, CapEx spend is expected to be higher than restaurant growth. So - and I think that leads to a decent backdrop for the industry coming in into the year. I mean, our long-term expectations have always been to outgrow the market. That's why we built the platform on leading innovations and technology and really trying to gap ourselves relative to the competitors and have the higher ROI solutions. So certainly that remains a continued objective here. That being said, I mean, there's still some uncertainty in terms of timing of how business flows in the year. For us, we feel pretty good about the chain activity and probably slightly improving general market. That being said, specifically for us, some of the chain activity is probably geared towards second and third quarters where we've seen some of the things that are in our pipeline that we have good visibility to not really occurring in the first quarter, but so I would say for us might be little bit slightly less than kind of what we'd see going out of the year, but as the whole for 2019, we feel pretty positive about the year.

Okay. And then just a kind of question. I appreciate that, Tim. Can you just talk to - about incentive comp for '18? If I recall, it was not initially paid out if I'm not sure if that was a big tailwind that was in, obviously, the filing the other day. And then how to think about as a year-over-year comp for '19 headwind or tailwind?

So we'd like to think it's a headwind. So I would say - and in the fourth quarter, it really didn't have much of an impact. I mean, I think we kind of approved ratably through the year, so we didn't necessarily have big adjustments that were positive or negative in Q4. If - Middleby targets have always been relatively high. If we have strong performance in 2019, then we're very performance driven, so you'd see compensation go up ratably with that.

And our next question comes from Mig Dobre with Baird.

So sticking with CFS, if I heard you correctly, the growth in the U.S. was 3.4%. And I guess, I'm wondering if you can give us maybe a little bit of color on general market versus QSR? And I'm wondering for the U.S. specifically, how you view 2019 versus '18?

So in the fourth quarter, our growth there was really driven by the chains. And again, we - that may be somewhat choppy as we go through the year, but overall, we expect to continue to see chain growth in the year. The general market for the fourth quarter was a little bit choppy. I mean, there was a little - I mean, everybody saw stock markets moved around at the end of the year, probably some weather pattern. So - and - so maybe general market was not as strong in the fourth quarter. And for the year, the general market for us was flattish. So going into '19, we do believe that we'll do a little bit better in the general market and then kind of see a continued growth with the chains.

Got you. And if I heard you correctly, we should be thinking here that you're starting maybe a little bit slow and then you're picking up. I guess, that sort of bucks to the comps a little bit, which I'm struggling with to be honest with you.

Yes. I mean, I think that is what I said, and we do feel good about that chain business and that had been the growth driving force for much of the growth in 2018. That being said, again, timing of projects with large chains can move around from quarter-to-quarter and even year-to-year. We feel like we've got a pretty good visibility to pipeline for the year, but that is not - that's not laying up in the first quarter. So we're still anticipating to grow in the first quarter. But I think, we'd probably step back a little bit from what we had in the back half of the year and then kind of move forward from there.

Okay. From a margin perspective, I'm wondering how you're thinking about your core business here on a gross margin basis in 2019. And I'm really trying to get at a price cost dynamic and let's leave Taylor to the side, maybe we can talk about kind of the core business if you would in '19?

Yes. So I mean, I think we continued to make some progress, again, if you were to back out acquisitions with many of our businesses, we focused on product mix, some efficiency opportunities. One of the challenges that we had in the year, along with many others, has just been kind of the backdrop of supply or material cost, right? So we had steel going up kind of second quarter and then we had the tariffs that started to hit as we went through the second half of 2018 and even into '19. So if you remember, we did take a price increase mid-year last year, that was really to offset steel. There's always a lag factor with us. So we probably had a little bit of margin headwind from that in the back half of the year. We did announce price increases going into 2019 as well. Those were really to address the incremental tariffs that have come through. We, certainly, were lagging that also late in the year, so we probably had a little bit of margin erosion, nothing massive, but we are still seeing some tariffs come through, but we really haven't had the benefit of price increases yet either. So we announced those and we've got a lot of brands and we don't necessarily hit them all on the same day, but they're largely one in the factory. As we kind of went into the year, there's always some delay as that kind of moves through the system just because we got to work in-house and some negotiated pricing with larger chains. So we'll probably start to get the benefit of that late in first quarter, so we still have a little bit of headwind there, but we feel pretty good. And as we kind of…

Great. I appreciate the color. One more question, and I'm done. On food processing, maybe a little bit of color on how your backlogs are looking, maybe order progression? And related to this, I understand that maybe you're still a little bit challenged in the front half, but maybe things get a little bit better. I'm trying to figure out if we reach the point where volumes stabilize, how should we think about the recapture of some of the 1,000 basis points to gross margin compression that we've experienced with the past years?

Okay. So I'll comment on the comments, and then I'm going pass it to Mark, maybe on kind of order cadence and pipeline. Look, so fundamentally, our food processing business looks the same as it did two years ago. There's nothing structurally that's changed, there's nothing that's changed with competitive pricing. It's really been where the orders have been falling in our portfolio. And obviously, we do have a wide range of margins. We've got businesses that have been in the portfolio for a long period of time, which have been operating at high EBITDA margins, high 20s, 30s, even up to 40%, and that's kind of where we've unfortunately not seen the orders on that side of the business in the more recent periods. I think, everybody has known that the bakery side of the business has - had been lower, and we're continuing to make efforts to move that up, but we're going to lopsided with where we've been with orders. So as quickly as margins have kind of come down, which are absolutely not where we want them, but they're still very profitable and probably outperforming many food processing companies in our industry, that can turn quickly if we get orders in the right place. We do think that, that we will have a better mix as we move through '19, not necessarily right at the top of the year, but that is kind of what we're anticipating. And then I'll let Mark add some color to the year.

Sure. Thank you, Tim. So on food processing, we're actually looking better than we looked, obviously, beginning of last year. Our backlog is higher. We're looking at a bigger sales pipeline. We are quoting more projects than we quoted 3 or 6 months ago. Global sales look very good. There are many global opportunities in emerging markets and larger markets. Innovation is helping us a lot. Beginning of this year, we just finished a show in Atlanta, poultry show. We showed many new innovative products there. We already turned in orders on these. We've got the tail end of the bakery show September, October last year, IBA, also allowed us to seize more opportunities. So really food processing is positioned to seize more opportunities this year based on all these new innovative products and the full line solutions that we are focused on that would allow us to bring a total solution seamlessly to a customer, which is basically what they all want. They don't have enough engineers, they don't have enough people to integrate, so this initiative is helping us also position food processing much better in 2019 and beyond.

Got it. Can you tell us how much backlog is up?

Of the top of my head, no. But it's definitely double-digit exactly, but it's a nicer backlog, we'd like to have it bigger, larger. We like to add another zero to it for sure.

I just - you made a comment, I mean, I know backlog is important, particularly in a business like this has got longer lead times. The backlog doesn't kind of necessarily move in and out like on a FIFO basis. Well, I think that's one of the reasons we've always been hesitant to maybe lean into it too much because as we go into every quarter, more than half of the businesses orders that's kind of - that report taking in during the quarter or just before the quarter some of the backlog that's there tend to be larger lead times. So that may help give a backdrop for the year, but not the upcoming quarter.

Understood.

One other thing just - I mean, I'm just going to add Mark's comment and I said it earlier, I think that even though '18 was a challenging year from an order standpoint, I would say it's been the best year in terms of new product innovation, and I give Mark and his team the credit for that. I would say we've made more innovation or more investments in new products. And Mark invited both Dave and I to that poultry show that we were at where we had chance to kind of review all the different initiatives in the platform. They don't necessarily turn up in orders in day one, but I would say the platform strategically is better positioned than it ever has been. And certainly, that - the product pipeline is probably key aspect to it as innovation always a driver for Middleby. And Dave, I don't know if you want to add to that because we were there together?

Yes. No, let me add just a shout out to Mark's team. Mark and his team at that show, Mark incorporated some technology from actually from TurboChef that literally they have a production line, meat processing line for international that kept the processing time by 50%. It was an overwhelming engineering application, proven ready to sell. So Mark, good job.

Thank you, Dave.

And our next question comes from John Joyner with BMO Capital Markets.

So yes, definitely, an upgrade to the CFO role there. I'll echo that.

Thanks, John. So it is very true by the way. I think everybody knows that.

All right. All right. But - so since I mentioned the greater mix from parts will likely prove, I guess, pivotal to eventually taking EBITDA margins toward the top 30% level. Can you discuss more about your parts initiative in areas that such as the recently launched e-commerce site that you mentioned and maybe leveraging Taylor's independent service agents as well?

Okay. Yes, so I think one of the things just generally is, as we're growing, we're kind of evolving and trying to leverage the platform across all the brands more efficiently, we're holding on to a culture of being fiercely decentralized, but on certain key areas, we're coming together. Services is one of those. So the initiative this year really was twofold. One, providing just better service to our customers. So we've got an initiative called service first, that's been well received and that's kind of fastest response times in the industry. But this - but that kind of falls under the umbrella of Middleby Advantage. This is our online web-based service portal and getting service parts to our service partners as well as end users is quickly important, so that, that was something that we had focused on in 2018. And we think we've got kind of an industry-leading solution there, so we're kind of excited to launch that really in the last 60 days or so.

Okay, okay.

And really - I mean, really with that - I mean, that is - it's margin enhancing, but it's really more about providing better customer service across all of our brands, which we believe is a differentiated factor and will continue to help us support our customers and grow our - and our support to them.

And well, we are decentralized, Middleby Advantage is prominent in all our brands. Websites, we're really using as opportunity to pull things together. People can order across multiple brands in one stop, get same-day shipping. So we really do think it's a differentiator for us and will help to drive up that more repetitive parts business that I know you're getting after.

And our next question comes from Jeff Hammond with KeyBanc Capital Markets.

This is Brad on for Jeff. Just starting with residential kitchen, if you look at the top line compare and what to expect in 2019, just trying to calibrate maybe some less downside in AGA following a challenging year this year and maybe tougher comps in Viking, especially in the back half and then you have this distribution headwind that kind of goes away. So just trying to figure out what that means for growth in 2019, the best you can?

Yes. I mean, those were all good questions, moving pieces, and we're kind of watching how they evolve as well. I mean, I think, we do remain pretty confident about continued momentum that we've got kind of domestically here for the platform. Certainly, as you said, Viking's got tougher comps. That being said, we also feel like we've got building momentum. We are continuing to deepen and engage with the dealer relationships. As I mentioned in the call, we're continued to add displays into showrooms, that's an investment that we're going to make. And we think that will continue to pay off with sustained growth for Viking and that is our expectation is to grow Viking for many years to come. With the other brands, we're excited that they're all going to be coming through or are already coming through the Middleby Residential platform, which we've developed over the last number of years. Really, we're kind of at a very different point than we were a few years ago in terms of we're not constructing it anymore, it's really running and hitting on, if not - maybe not all, but most cylinders. So I mean, as I mentioned, sales - the sales team's fantastic. Service capabilities are much stronger and the ability to bring the portfolio brands together, which was the original vision is now being - it's now in place as we go into 2019. So that should benefit all the brands and then kind of behind that and supported with these showrooms, which we're very excited about. Chicago has been a phenomenal success. We have a terrific team that's leading it there and that's really enhancing the brand image. And we're looking to repeat that in New York, which has already opened and Chicago. So I think, we…

Okay, great. And I appreciate the color there. Then just going back to your comments you made on the general market and possibly seeing some improvement here in 2019. I guess, if we look back at the last three years, certainly last two years and there's this optimism for this acceleration in general market that really hasn't meaningfully materialized. I guess, kind of what gives you confidence that this is the year and may be supported by any kind of trends and particularly the first quarter?

Yes. Look, I think, our confidence has really been more about the chain business because we've been dealing with specific customers, and maybe Dave can add some color to that. And I think that's where - going into the year, we feel like we've got some continued momentum. I think in the general market, I think, the - I don't think we're making overly bullish comments here. We're just basically saying that, "Hey, it was flattish in 2018, and our sense is that we'll have some general improvement there." So certainly, we think that it's not a headwind going into '19. So it's - so hopefully, even if it's still a modest improvement, it potentially could help us out a little bit in '19. And Dave, maybe you want to add some color?

Yes. I think that there's a couple things from the restaurant operators perspective, especially on the chain side. They haven't been spending. Their brands just inherently like Gravity need to be updated. The equipment does wear out, and they haven't been spending and they need to bring in new menu items to create same-store traffic growth, and so those haven't been. And then there are pressures on labor and food cost, those have all been accumulating. And the market is now, I think - the market, they're confident enough to start spending against those headwinds that they have. So - and then, secondly, we have a number of technology test - market test that are going on where we're exclusive and it's just a matter of getting through the testing period. And over the next 3, 6 months and - then we'll activate those programs. So the pressure to change is at a point where they have to spend money.

And our next question comes from Jason Rodgers with Great Lakes Review.

A lot of my questions are answered, but I do want to ask about the M&A pipeline, the valuations you're seeing and if you're finding more opportunities currently in a particular segment of the market?

Okay. So I'm going to probably - my answer will probably about same as it's been probably about 40 different phone calls, which is, I mean, M&A is obviously core to Middleby. I mean, that will continue to be the strategy going forward. Pipeline remains very similar to what we've had in many years before. We're always - we think there's opportunities in all three business segments, and we're always going after the best idea that's most actionable at the time. So we feel pretty good about the pipeline coming into the year. Valuations is, frankly, I mean, I think, I don't want to talk too much about that, but I mean, obviously, I think, the valuations trends up and down over time. I mean, I think, it - we'd seen them in recent years kind of move up just kind of given where maybe capital markets are and so forth. I mean, our sense is that, that those might move down a little bit in the next few years. And obviously, we're hopeful that that's the case, but feel very good about the M&A pipeline.

And did you mention what the EBITDA margin for Taylor was at year-end?

I'm not sure if we did, but I mean, I think, we - I'll just kind of go back to our initial perspective and comments when we first bought Taylor. It was a 20% EBITDA business. Our long-term objective was to get it to be around 30%. I mean, that's kind of where our commercial platform was x acquisitions. I would say that we're leaving the year in the mid-20s, which is kind of where we wanted to be. So we kind of feel that we're on track and good about where we're at this stage kind of moving into 2019.

All right. And just a final question might be for Bryan, but just wondering your thoughts on the tax rate and CapEx for 2019.

Yes. I think the tax rate will probably see consistent with 2018. We came in this year around 26%. Our business isn't - I'd would say is impacted by some of the more exotic challenges that other companies have had in the environment, so not expecting much change. And our CapEx is usually 1% to 2%. We've been trending right around 1.5% in recent years. And I think, we'd - we will continue to be in that range with maybe a potential bias to higher than lower, but I wouldn't expect great deviations.

And our next question comes from George Godfrey with CL King.

And I'll add my congratulations, Tim and Bryan, on your positions.

Thanks.

Yes. Just want to ask on the food processing side, Tim, you talked about new product developments. My question is, with these products that you saw competitors had and you didn't were the products that customers specifically requested?

I'm going to turn that one to Mark because I think...

Sure. So no, these are new solutions for trends and needs in the marketplace. What drives food processing are pretty much the same driver as food - commercial food. We - people think in inches and seconds and grams, and they need to do more with less. And so I think we were able to, for the past 12 months, 12 to 18 months and continuous, we are able to create these solutions that our customers need that make us present the lowest cost of ownership in terms of solutions. And no, these are new. They're - we don't like to spend too much time on creating me-too product that matters. We really create disruptive product. And I think food processing has done many of these in the past couple of shows, and we have another show coming up at IFFA, which is once every three years, and you're going to see a lot of new products there that will create even further momentum in terms of new sales from new solutions.

And that's all the time we have for Q&A today. I'd like to turn the call back over to management for closing remarks.

Okay. Thanks, Tiffany. And thanks everybody for joining the call today. I would just like to quickly reinforce that we remain committed to our culture of innovation and the focus on the customer as we have for the last 20 years. We're going to continue to execute on our core competency of strategic acquisitions, and we have a clear and continued strategy for growth, both in sales and profitability, across all three of our business segments. And I'm just - personally, I'm very excited to be moving forward with the team here, Dave, Bryan, Mark, but many, many, many other people on the team or group of presidents and other talented executives. I know we're all very excited as we move into 2019. So with that, thank you for - today for everybody for joining us on the call and look forward to speaking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.