Thank you for joining us for the Middleby Third Quarter Conference Call. With us today from management is Chairman and CEO, Selim Bassoul; and the CFO, Tim Fitzgerald. We will have opening remarks, then open the call for questions. [Operator Instructions] Now I would like to turn the call over to Mr. Fitzgerald for opening comments. Please go ahead, sir.

Good morning. Thank you, Charlotte. Thank you, everybody, for attending today's conference call. As Charlotte mentioned, I'll have a few initial comments on the third quarter activity and then we'll open the call to questions and answers. Net sales in the 2017 third quarter, of $593 million, increased 3.3% from $574.2 million in the third quarter of 2016. The third quarter sales include the impact of acquisition activity not fully reflected in the prior year comparative results, which accounted for $28.6 million or 5% of the sales growth in the quarter, while the impact of foreign exchange in the quarter added $2.3 million or 0.4% in the quarter. Excluding the impact of acquisition activity and foreign exchange, sales during the quarter decreased by 2.1%. This reflects an organic sales increase of 0.5% at our Commercial Foodservice Group, a decrease of 5.2% at our Food Processing Group and a decrease of 6% at our Residential Kitchen Equipment segment. Sales of the Commercial Foodservice Group for the quarter amounted to $354.8 million. The modest sales growth reflects lower sales with our major restaurant customers, as they have slowed replacement purchases in advance of expected new equipment approvals in the upcoming quarters. Additionally, international sales in the current quarter was approximately 1%, reflecting challenging comparisons into the prior year, which was up over 20%. We continue to have significant testing and approval activity across a number of our brands with the number of our major existing chain customer accounts, which we are -- we continue to be confident will translate to improved sales growth moving into 2018. Sales at the Food Processing Group amounted to $86.9 million in the quarter. The organic sales decline in the quarter reflects strong prior year comparison and normal quarter-over-quarter fluctuations driven by the timing of larger projects.…

[Operator Instructions] Our first question comes from the line of Larry De Maria from William Blair.

Just curious right now, first of all, most about pricing. Obviously, some talk with your competitors, etcetera, about discounting on the [house] side, specifically. And just curious what you're seeing, what the level of discounting is out there? And what your reaction is? And if you're discounting as well and to what level, first of all?

Well, Larry, I have been running this company for almost 20 years. Discounting has never been part of our system and hence the margins. So I don't have to justify who we are. You can look at our margin versus everybody else in the industry, and you can find out that we've been one of the highest margin in the industry. So discounting has never been part -- price discounting has never been part of our formula. However, adding value to our customers has always been what we have provided. So from that perspective, we believe that we create value. And if you look at even this quarter, that we're very proud of. I'd be telling you I think that you should look at every competitors that reported. They are -- everybody is down or slightly up. And basically, we feel very strongly that we're doing it by offering a value solution. So if you look at our business model, it's a business model that talks about being -- putting the customer best and first through solutions that are very value-driven. So any competitors can talk about discounting around the marketplace, and we can talk about that. If we're going to bring that up, I can be putting this on the table. Basically, we have a customer that we just lost. And that's a very good customer of ours. We had a long-standing relationship with that customer. And if I was that customer given the two bids that they had and given the price discount that took place, they opted to go to the heavily discounted bid. And we don't blame them, because the differentiation factor between us and the other bid was several million dollars, that we could not close. And simply, if I look at that, if I was a customer and I was faced by multimillion dollar bid, even though our product was superior in testing, it did not justify basically buying from us given the discount that the other bid was providing.

Okay. And maybe just following up on that specific customer that, obviously people are curious about. Can you talk to what kind of revenue impact that will have? Or how important that customer is and maybe next year and beyond? In other words, how much of a headwind will that be?

It's -- so Larry, I mean, I think, we fight for business every day. So I mean, I don't think it's unusual that sometimes there's accounts that are traded back-and-forth. That particular customer, which I don't think it makes sense focus too much on it, was a shared account. Our product is still approved and their product is approved and their -- that was -- we were -- that was a account that we were not in at all 5 years ago. So we moved into that account. And I think it's not -- it certainly would have been business that we would've been -- liked to have had. But I don't think it's a massive headwind or a significant headwind, really, in the scheme of things. I think, we're still very optimistic on the pipeline of accounts and chains that we have moving into 2018. And I would say, this was really one of the few unique situations that we actually are -- were in kind of a head-to-head RFP, where pricing really was a factor.

Our next question comes from the line of Joel Tiss from BMO.

I have a little bit of a philosophical question for Selim or whoever wants to answer it. And it's -- it seems like kind of the casual -- fast casual segment is not, maybe is not as providing as much growth. And maybe some of these rapid cooking innovations that you guys have been the leader in is maybe -- there's not as much room in front of us. And it's also starting to feel like everyone is competing against each other. You're buying a slicer business kind of pushing into ITW's territory a little bit. And there's a little more quick serve overlap. And I just wonder like, can you give us a sense of where you think the biggest opportunities are over the next 5 years? And are the new focus areas or the new opportunities, are they as profitable as some of the oldest stuff that you guys have really been excelling at?

Joel, let me take you through and give you some perspective. So from a data standpoint, you're right that, basically, fast casual has had a slowdown, which is our main dominant player. So we've been a dominant player in fast casual, and the fast casual has slowed down. So if you look at sales of fast casual, the sales -- the foodservice sales of fast casual, it has gone down to around 4%, and that's economic data. So if you look at that, it used to be in the 6% to 7%. So fast casual has slowed down, especially in the U.S. It's not definitely at 1.5% to 2%, which is what casual dining is. However, let's go back and take a bigger picture, since you've asked to look at the next three years. I'm not going to look at the next five years. I'm going to look at this and say that the global restaurant sector continues to be attractive, with high growth potential in several markets. So if you look at the restaurant market size and the size of the bubbles, it's still a strong consumer spend per meal is taking place in the U.S. will continue. And you're going to start seeing the other markets continues to go even more aggressively. So if I look at the chains, the chains are accelerating expansion efforts in new market to capture that growth. So let's talk about the markets a little bit more in specific. So if I look at the markets globally and where we spent the last 20 years, spending time in looking at the growth per market where we've invested heavily in massive investments starting in 1999, specifically when we opened China. While we opened Philippines in 1996; we opened China in 1999; India in 2003.…

Our next question comes from the line of Jamie Clement from Macquarie. Your line is now open.

Tim, so the 7 million in professional fees that you called out. That certainly seems like a lot, and obviously you closed some deals. But that number, in your commentary both in the press release and in the call, I mean, is this related to the pipeline that you talked about last quarter being full? And I guess, the side question to that is, are you all open to doing a larger transaction these days?

Okay. So we do have professional fees in ordinary course just because we are so acquisitive and that's part of our DNA. I did call it out just because it is higher than usual. I think, it's kind of a combination of a lot of activities. We've closed now six acquisitions during the year and the pipeline remains to be full. So those transactions were international. And some of them required things such as anti-trust approval. So there's been a little bit more cost associated with tax planning and getting regulatory approvals and things of that nature. But I think as we've consistently indicated, the pipeline is very strong. I think you can see that we've had a -- not anything that's massive, but a lot of really great brands that have come into the portfolio, strengthening Commercial Foodservice, strengthening Food Processing this year. And that's after, really, the last few years of building up Residential very quickly. So yes, so there's a lot of activities and the costs were just kind of inordinately higher this quarter, so worth mentioning. We're always open to larger transactions. And I think that, you've seen in the past, I mean, we've had deals such as Viking and AGA, which at the time were larger for us, come along. And when we see the right opportunities that are great strategic fits, we're very forward-thinking about business development and acquisition ideas. So...

Okay, okay. And Selim, if I could ask you question. It seems like lot of your customers in talking about cost pressures, obviously, over the last two years, labor has been up there. It also seems, though, like some energy prices have actually started to kind of move up a little bit. So historically, that's been a big differentiator between Middleby products and perhaps some of your competitors and a real reason to upgrade equipment. Are you starting -- are you seeing customers kind of refocus on energy again? I mean, I'm sure they were always focused on it, but has that kind of come back to the table in a bigger way yet?

I think we see it. I can tell you where it's happening the most. So I would tell you where the biggest energy problem is happening is water. So as far as we're seeing customers coming and testing with us has been about water savings. So -- and we've been a driver of ventless steamer and -- or waterless steamer and reducing water. So it's been a big thing for us. If you look at our combi oven, which has been an amazing product, where we can provide data after data against every one of our competitors. I would say against the 42 competitors we have in combi, and against the biggest one, which is the Nimbus combi oven company. We basically save 1/3 to 50% less water on a combi, which is a big user of water. So when you look at water, it's going to be a big thing. And I see that a lot. Of course, energy continues to be a big thing. So everybody is looking at energy-saving devices. It's no different than today if you're going to put a light bulb in your house, you're most probably looking at LED bulb. You're not going to go and look at an old bulb. And if you go to Home Depot and go buy a lightbulb at Home Depot, you could see shelves after shelf of LED light and the old traditional lightbulbs is almost shrinking. We've been at this for a long time, and we are leader in energy efficiency. And we can prove it in many ways. We have a lab here in Chicago, that people can come in. We've invested in those energy-saving monitors and sensors now for the last 10 years. So we've been doing this, Jamie. But water is most probably where we're getting the frontier. So the next, basically, issue is waste. So I'm going to transcend you to talk of waste as a labor saving. Waste has become a huge cost to our customers. So if you are a hotel, if you are chains that have thousands of stores, the amount you spend to a company like Waste Management is a lot. But disposing of waste -- I'm talking solid and food waste, is a big issue. And if you see the biggest trend, that we just came back from Europe, and there is registration taking place. Our waste management system have become one of our fastest-growing systems. Our [bite] is very small still. It's very embryonic, but it's coming on very, very strong, and we're looking at investing in waste management. And we are a leader in waste management. We've been not only taking solid waste and food waste into reduction of 80% or into composting or into pulps. And we see waste management as our next frontier.

Okay. And Selim, one last one if I can. It seems to me -- and this really hasn't come up on your calls, and perhaps it should have. But it seems like when the U.S. market for Commercial Foodservice slowed down a little bit, at the same time, we saw a big trend towards refranchising. Has that process and that trend, has that distorted the ordering patterns of your customers a little bit? Is that one of the reasons maybe why some of this backlog has built up? I'm just curious for your thoughts.

I tell, there's two things -- there's 3 things that have affected the U.S. markets. And it's not only affecting Middleby, it affects every player in that market. There is a major change of leadership or executive management at most of our customers. So let's make that clear. And when there is an executive management change, maybe the vision doesn't change. Maybe we're a small part. Equipment is not the first thing that a new CEO or a new VP of Operations is going to focus on and disrupt. But it slows down the whole process. And we're seeing a significant change in management at most of our customers. And that has most probably slowed down the whole ordering process. It has not taken it out or delayed it -- it has delayed it but not basically eliminated it. Number two. This next one, which is most important, everybody's trying to get after the Millennials. And everybody's trying to figure out their tech savvy business. How do I reach the millennials? They're all on mobile app. They need to create the apps. They are trying to create that concept. So everybody is investing in, what I call, delivery system and apps. However, you could have the best app possible. If you're not delivering quality food, millennial will walk away from you. So part of this has become, there has been a shift in the last two years from a vision of let's go and get those consumer into the store and a lack of focus on equipment and getting the food quality back. And the pendulum will come back. And I have seen that happening. I remember, almost 10 years ago, when everybody went and invested in texting. So everybody needed to text. So now we can text your food…

Thank you. Our next question comes from the line of George Godfrey from CL King. Your line is now open.

Tim, I just wanted to touch on the Commercial Foodservice's gross margin, down about 220 basis points year-over-year, I think you said. I just want to get an idea of how much was related to, specifically, the acquisition costs and perhaps new product lines that haven't been revamped by Middleby as opposed to a revenue mix shift?

Well, I don't think it's that second piece of -- I mean, maybe I didn't understand it. But it's about half of the difference of kind of -- the reduction is because of some of the new acquisitions, which kind of by nature most companies have lower margins than Middleby, so initially it's dilutive. So we had that dilutive impact related to a couple of the companies that we acquired in Q2 and Q3. So that's about half of the impact. The other half is kind of -- is really a mix across the brands. I mean, where we've got -- really all of our brands have pretty high gross margins, but some of them tend to be higher. So if we move from a speed cooking to a 6-burner range to a toaster, you've got different alliances. So it's really just a function of the mix during that quarter. So it wasn't anything that was a reduction in margins, really kind of structurally. It's really just a mix of how those revenues came in during the quarter.

And then, my second question is, looking at the OpEx as a percentage of revenue this quarter. If I exclude the restructuring charge, it looks like it's about 17.9, at least in my math. And looking across the company over the last five years, that looks to be the lowest as a percentage that I can find. Was there anything unusual in cost management this quarter that wouldn't be repeatable in future periods?

Well, I think it's a combination of two things. One is repeatable, which is, we've had a lot of restructuring initiatives and cost-savings initiatives. I mean, you've seen we've taken a lot of charges over the last year and this year. Much of it's related to the residential platform, and broadly, but including AGA. But we also had restructuring initiatives at some of the other platforms as well as we're just trying to leverage synergies across the group more greatly. So I think that's the big piece. But in addition to that, I mean, as I mentioned, stock compensation and some of the other compensation is down, it's tied to incentives. So I mean, just given the lower growth during the year, you've got some variable cost that's tied to performance and then, you've got more than half of the reduction that was certainly kind of permanent cost savings.

Got it. Understood. And then, my last question is, I just wanted to touch on the Food Processing segment. Looking at the organic growth by quarter: Q1, minus 1; Q2, plus 9; then Q3, minus 5. Is there any reason why it's varying intra-quarter so much in that specific segment? And I'll leave there.

I'm sorry, George, before you jump off, I'm sorry, can you repeat the question, I didn't actually catch it.

If I look at the organic growth just in Food Processing by quarter, here in this year: minus 1 in Q1; plus 9 in Q2; then minus 5 in Q3. Is there any reason why it seems to -- whereas Commercial Foodservices and Residential were each negative, but this one seems to be bouncing around.

Okay, I wasn't sure which segment you were referring to and what numbers you're quoting. Okay. So yes, I mean, look, Food Processing is a lumpy business. And we kind of, every quarter we get on the phone and then we talk about how lumpy it is when it's up and how lumpy it is when it's down. And it's because it's still relatively, for us, a small platform. We think there's a lot of opportunity to grow it organically and through acquisitions. And the lumpiness is actually less than what it was if you go back five years ago where we had swings of 20% and 30%, literally. But it is a lumpy business. And if you have a single order or a few orders that move from 1 quarter to another, those are in dollars, they don't really feel like they're big movements to us, but as percentages, they are. And so that's just kind of the nature. And sometimes, we have a hard time also predicting from quarter-to-quarter. Look, last year, we were up, I think, about 12% organically through the whole year. So it was strong. So we're overcoming a stronger year. As we went into the second quarter, we were kind of initially predicting it was going to be less. Then we had some orders that got finished up and pulled in a little bit stronger in Q2. So that bolstered the growth, which was higher in Q2, and that probably took away a little bit from Q3. So we're feeling the effects of that now, and now we're kind of talking about, hey, there's a couple of larger projects out there. A lot of them are emerging markets where they're opening up new plants and you're talking tens of millions of dollars. So tens of millions of dollars on a $350 million platform, annually, if that goes out in a quarter or over two quarters, that affects growth. So I think that's kind of the nature of that business and why you see it moving around like that. But if you look at the business over a long period of time, I think, if you look at the last five to seven years, that's grown organically in the 6% to 7% range. So it's been -- we view that it is a strong growing business. It's just that it's lumpy, and we hope, over time, as we build up the platform, that lumpiness will continue to shrink.

So let me, George, answer the Food Processing in a different perspective. So I think everybody wants to know where we are. We've been at it for 10 years. We love that business. We love that segment. It's a phenomenal segment for us. Ten years later, it's the best decision we've made to create that platform. So let's tell you why. Now there is lumpiness. There is cyclicality. But it comes from two things -- reasons. One, not only the customers sometimes bring orders that gets deferred from one quarter to a quarter and then -- or even from one year to another. But the second thing is, we were getting, on average, orders about $5 million apiece. It takes a long time to produce those orders. Sometimes, we don't get them done in specific quarter or the customers say, my plant is not ready to receive that order, please delay it for another two quarters -- or to receive that equipment. And those are large pieces of equipment. So what happens is, the lumpiness happens both internally because of our production cycle as well as externally because of orders. But if you look at the margins of that product, the margins today are -- when we took that business, it was less than 5% EBITDA to sales ratio. It's now equal to Foodservice and I believe that, that has room to grow. We believe that Food Processing has still room to grow. And what we've done in Food Processing, what we've learned from Food Processing is a platform and a logistical system that forces us to be very efficient. And we're taking that concept. We've learned a lot from the last 10 years, and we're applying that model now to our Foodservice division. And I'll talk to that in specifically in my conclusion -- in my concluding remarks about specifically what are we doing to create a unique platform in serving the customer. So from that perspective, we look at Food Processing as literally a very -- the next 10 years will be as good if not better than the last 10 years. One, we continue to acquire a lot of companies there. And as Tim mentioned, we are still a very small player in that platform. And we see a lot of opportunity to grow in there, and we see the margins growing. And we tend to see safety and rising income forcing people to go into supermarkets and prepared food in other parts of the world, especially in emerging markets, China, India, Middle East, Latin America. Even Africa as being a next frontier for us to grow our Food Processing business as factories become being built to serve the needs of the middle class in those emerging markets.

Our next question comes from the line of Jason Rodgers from Great Lakes Review.

Looking at next year, seems like you have a lot of potential positives on the horizon. Improved orders at restaurant chains and Food Processing customers, margin improvements from acquisitions and restructurings, better growth at Viking. If you take all those together, would you expect to see any benefits beginning in the fourth quarter? Or to put it another way, maybe you could talk about the positives and the negatives, both on the sales and the cost side, looking at the fourth quarter into early 2018?

Okay. So now you're pushing me to do some guidance we've not done -- almost. So Jason, I've avoided in 20 years of running this business to be cornered in 1 quarter. And I'm going to respond to your question somewhat to try to give you something back. But usually, I have never been willing to respond to even 1 quarter or 1 year. And that has been part of our -- what we make. We are not going to give ideas of what we're doing. So I'm going go back and tell you that the fourth quarter, sitting almost in the middle of it, seems to be a continuation of what I've seen in the third quarter, basically, if that's some type of a indication. However, let me make the perspective even better on 12 to 18 months. I have mentioned publicly to everybody that we have a pipeline in products that are around $200 million to $300 million in projects out there. That pipeline has not disappeared. So we're still there. We're still testing. And we're seeing some of it being approved. And we started seeing the orders coming through. And some of those orders are going to fit into the fourth quarter, so just to let you know. So some of the pipeline that I talked about, this $200 million or $300 million -- I don't know what the number was, but it was a big number. I think it was between $200 million to $300 million over the next 24 months. We're starting to see orders coming in immediately this quarter. So other than the order we talked about that was taken away, heavily discounted, we have not seen loss of any orders from that big pipeline taking place. In fact, we're seeing some additional opportunities…

Our final question today is coming from the line of Walter Liptak from Seaport Global. Your line is now open.

So I wanted to just ask a couple of follow-ons and, I guess, in relation to the Commercial Foodservice, the comments that you just made. Your organic growth rate was good -- or it was up for the first time so far this year. And so, I wondered if you attributed that to a pick-up in the pipeline that you just commented about or if there was something else about the third quarter that got you to organic growth? And then also, are we finally at an inflection? Because I think everyone is kind of waiting and the comments you made are kind of, I guess, mixed. Some things sound like they're picking up, others you're still waiting for tax reform. Or do you think we might be at the inflection where we start seeing organic revenue growth more consistently?

So I will answer the question. So in the third quarter, we did not see anything from the pipeline. So from that perspective, the pipeline that I talked about did not come in, in the third quarter. And I will share with you that our third quarter should be -- should have been much higher and we need to put it on the table. You might have heard that when we bought QualServ, it created disruption. It was in our dealer business. And there was a perception that we now became competing with our dealer network. So when we bought QualServ, the perception in the marketplace that -- among our distribution partners, is that we've become a competitor. And we spent the full -- whole quarter having to answer the question. And many of our dealer partners, basically, diverted business away from us. So we were up despite a major headwind that occurred in the distribution business. As of last night, we had just cleared -- in fact, a letter came out on Monday. It's public. Not only came from me to the whole dealer community, clearing the way that we are not competing with them. Number two, last night, there was the meeting here in Chicago, where I attended the meeting and -- which is the largest buying group for us and our largest -- it's the largest dealers in the country. And we got a -- we're going back to doing business as normal. But it was disrupted because, I think -- partly because we did not understand the perception that QualServ gave, and we did not react quickly in communicating early on, letting our dealer partners understand that we're not competing with them. On the other side, it created the concept that, hey, is it Amazon buying…

Okay, that's great. Congratulations on getting that letter to clear the decks with your dealers, or the distributors, that's great.

Just kind of looking forward to -- so I mean, I think I'm going to touch just on the Residential because those are big initiatives. And I think we're, as I mentioned, we're seeing some -- we believe that we're seeing some positive trends with Viking. That being said, as Selim just mentioned, we're making distribution changes for a lot of the other brands. Some of that includes AGA. So as we had with Viking, we'll probably see a little bit of -- we were down in the third quarter, and we'll probably continue to see a mix of Viking improving with some headwinds because of the impact of some of these distribution changes as we go through the rest of the year. But I think as we move into 2018, that'll clearly be margin enhancing, but I think that will actually help us boost sales. So that's kind of the short-term picture there. I think on Commercial Foodservice, I think it's a gradual improvement that we're going to see as the chains come on. Because when the chain business was negative, the general market despite some of the dealer disruption was positive and international was flattish following last year, which we were up 22%. And if you look at international, it was really kind of drawn down by Latin America. And I think some of that may be weather and hurricane related or earthquake related. So I think, hopefully, that would come back in next year as well.

Okay, great. And if I may just ask two more real quick ones. You mentioned the heavy lifting that you've done this year with the distribution and Residential, but also with the AGA restructuring. Is there a step change that happens next year as you finish with the manufacturing restructuring? I think that's happening right now. When do you start to see benefits from that?

I think we'll see, probably realistically, it's going to be second quarter and second half. I mean, I think that there are some of the manufacturing initiatives, we'll complete them this year. The -- because of actually some higher cost inventory in the channel, because we're producing at an inefficient level and that's going to be in inventory. It's going to take us a while to move that out. And then it's going to -- and then, we'll see kind of the step-up moving to the second half of the year. And the distribution changes, because AGA does through La Cornue and Marvel and also some AGA product that we're introducing in the U.S. Those distribution changes are going to probably be more disruptive and a little bit margin-dilutive in the short-term, which I would think would be through the first quarter. And then, I think second quarter and beyond is when that steps up. So those are kind of two. And there's probably some other initiatives going on, but those two things that are actually a little bit of a headwind right now will be kind of a step-change up. And look, overall, the AGA -- I mean, the margins are very strong right now. So I mean, these are continued improvements. But we bought that business, the EBITDA margins were 30%. And exiting this year, they're approaching 20% EBITDA. So we're very much on track with, frankly, still some improvements that'll be embedded going into next year. And still significant opportunities that we see going beyond that. So I mean, I think we feel very strong about where AGA is and that group of companies as well as Residential overall.

And at this time, I would like to turn the call back over to the company management for closing comments.

So first, thank you for, everybody, listening to us on this. So let me give you a bigger macro picture of where we're going as a company and where the industry is going. So as I mentioned earlier on in my opening comments, I look at growth opportunities in the next three years within the foodservice business that exist globally, as consumer remains strong in many markets. Consumer sentiments remain strong in many markets. The challenge is going to be that our customers have to change the way they do business. Delivery is a big part of what's going to happen. So it's a big trend that's going to affect everybody. So you look at what's happening in the U.S. and most probably internationally even more at the fastest rate as well, restaurant might not exist on the street. They might just be kitchen with equipment that serve good and high-quality food, such as [poultry] sandwiches, salads that are only served as foods online delivery market. However, those kitchens still will require equipment. They might be virtual stores, but they will require equipment. On the other hand, you're going to start seeing QSR, fast casual, and casual dining and grocery stores having to resort to delivery. And what's going to happen is they're going to require different type of equipment. Now look at what happened in the pizza business. Today, if you were doing a wood-burning oven, you will not be able to deliver as well as if you had a conveyor oven. Why? Because a conveyor oven, it does keep -- retains the heat better. It gives -- it makes the food faster [indiscernible] somewhere else in terms -- on a counter or it takes time for somebody to forget that pie. It comes out, it has to get…

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