Thank you for joining the Middleby Second Quarter Conference. With us from management today are the Chairman and CEO, Selim; Chief Financial Officer, Tim FitzGerald; and Chief Operating Officer, David Brewer. We will start today's call with remarks from management and then open the line for questions. [Operator Instructions]. I'd like to now turn the conference to Mr. FitzGerald.

Good morning, and thank you, everybody, for attending today's conference call. I'll make a few remarks on the financials and then pass it over to Selim here. Net sales in the 2018 second quarter of $668.1 million increased $88.8 million or 15.3% from $579.3 million in the second quarter of 2017. The second quarter sales include the impact of acquisition activity not fully reflected in the prior year comparative results, which accounted for $84.1 million or 14.5% of the sales growth in the quarter while the impact of foreign exchange in the quarter added $6.7 million or 1.2%. The adoption of ASC 606 increased net sales by approximately $0.4 million primarily related to previously recognized revenue on long-term equipment sales contracts at the Food Processing Equipment Group. Excluding the impact of foreign exchange, acquisitions and the adoption of ASC 606, sales decreased 0.4% for the quarter. This included an organic sales increase of 4.3% at the Commercial Foodservice Equipment Group. Our net sales increased 2.1% at the Residential Kitchen Equipment Group and a sales decline of 21.9% at the Food Processing Equipment Group. The sales at the Commercial Foodservice Group for the quarter amounted to $414.1 million. Excluding the impact of acquisitions, net sales at the Commercial Foodservice Group increased $16.6 million or 5%. This included $2.1 million of favorable impact on exchange rates. The organic sales growth reflects improving sales with major restaurant chain customers, including the benefit of rollouts with major chain and retail customers, which began in the second quarter. The sales at the residential group amounted to $160.4 million. Excluding the impact of foreign exchange, net sales increased 2.1% at the residential kitchen group. We continue to see strong order rates at Viking. And sales increased here over 20% for the quarter in comparison to prior…

Good morning, everyone. I want to thank everybody, and I appreciate the patience they've had over the last 5 quarters as we made significant changes to our business. I am also a shareholder of the company as is Tim and David Brewer. And we understand balancing the short term and the long term. However, we made a variety of structural changes to Middleby that we believe have strengthened the areas that are the hallmarks of the company. It is not surprising and it's not a little blimp that when we made those structural changes, we knew that there will be a short-term disruption that will have a negative impact. However, we prepared the company for the long term. As you've been with me for a long time, without being arrogant or cocky, we have always tried to balance the short term with the long term. And we've been rewarded for this handsomely. However, during those changes that have been structurally the deepest we've ever done in the company, we've gone back to basically strengthening our innovation pipeline, our customer relationship, the most broad offering of products in the industry and world-class talent by upgrading our people, our sales force and our suppliers. We also enhanced our customer experience as we traveled around the country and internationally to hear from our dealer partners and our chain customers and our residential customers and architects and designers how to make our business easier to do business with as we got bigger and more complex. The last time I felt this way was in 2009. I have to tell you in 2009, when our stock was dropping and when a recession was taking hold right after the Lehman Brothers crash, we made investment in national accounts, in changing dealer relationships and significant acquisitions, including…

[Operator Instructions]. Our first question comes from Joel Tiss from BMO.

So I just wondered as long as I have you guys here for a second, can you talk, Selim, a little bit? It seems like the restaurants have been spending a lot of money on the front of the house. You can order on your phone or on your computer, whatever. But it's not connected to the equipment in the back of the house. And that seems to be the next level that everyone's looking for to really accelerate this shrinking the employees, improving the food quality, all the things that you guys are moving toward. Can you just give us a sense of how far away a solution like that is? Or is that a misperception that maybe there's other things that are happening and that's not exactly right?

So let me give you a macro [indiscernible]. The trends in our customer base have started to improve. So in general, trends favorable to the equipment supply side of the house or the kitchen side is starting to improve. I would say [indiscernible] that the last -- I would say the last two years, customers, especially the large chains have been involved in better texting, better ordering online. They were concerned about the Blue Apron -- [indiscernible] gone, by the way, just to let you know. And everybody, if you go to customers, they were all concerned about, "Okay, is Blue Apron going to eat my lunch? Is it the grocery store? Is it the convenient store? What's going to happen?" So they were totally distracted by trying to -- the C-suite of the restaurant chains were distracted by all those elements. And they built a business to compete, whether it's delivery and take out. And now starting in 2018, we started seeing trends toward back of the house, where they are looking back at equipment and menu changes. And when it comes to menu changes, Middleby, it's the heart of what we do. We win on menu changes. If you look at almost every restaurant that had a menu change, Middleby is at the heart of it. They have to use an innovation of Middleby. It's faster, it's quicker, it's more reliable, it lasts longer, it's easier to integrate. However, I'm going to turn it to Dave to talk about it because I think, Joel, Dave has been more involved with it as he heads the national accounts. Dave?

Yes, I think that's a great question. Probably in the last 90 days, I had work sessions with no less than 20 of the top global chains with the top 3 people -- or 1 of the top three people. And I didn't -- I'm not talking about meetings, I'm talking about going in stores, walking into restaurants. And what you're talking about, the connectivity of the customer and order entry, is pressing through the POS system and then into the back of the house. So it's kind of -- you're talking about kind of an SAP system for the back of the house. And I'll tell you right now, Middleby leads as an organization the industry. I think we have -- I can show examples over 1,000 stores. Now relative to the industry, that's teeny, tiny. Relative to our competition, we are far in the lead of connectivity around back of the house to kitchen equipment manufacturing from a foodservice perspective to the POS. So the process is great for Middleby and great for our industry because as the front of the house takes on the capability of taking in more orders, that presses the manufacturing process in the kitchen to need technology and automation and innovation for speed of service, food quality and labor reduction. And that just -- I mean, that falls into right to our bull's-eye of capability as a corporation. It's actually a lot of fun. The last 90 days has been great, specifically strategically around the point you're making.

Okay. And then just a follow-up, can we just peak under the covers a little bit at food processing? And it seemed like early in the year, you had a lot of stuff percolating, especially in the bakery area. And can you just give us a sense of do you have your full product lines across the areas you're targeting? And what are the customers saying? And maybe what does the pipeline look as we go '19, '20, '21, like out a couple of years?

I will say on food processing, I will tell you, at one point -- well, it's a lumpy business. Let's start with the lumpy business, cyclical business that generates phenomenal returns for us. So when we hit the numbers, it's very good. And I think part of the EBITDA drop has been because the volume in our food processing was pretty low and the product mix hurt us. So specifically, when people want to figure out from an analyst standpoint, is it -- are we discounting to get the business? I will tell you that on food processing, we've seen some discounting among our competitors. And we worried about it because we decided not to discount. But what happened is [indiscernible] we see customers coming back to us. And that's how the backlog came through. And I think Middleby has had a formula over the 20-plus years of being here that if you take care of your customers -- and we're not perfect, we've made mistakes and we've fixed mistakes and we've taken care of them at our own cost. And that's where the No Quibble Warranty comes in, in every sense of the way. We've had it, it's printed, we've done it. We've done it on residential, we've done it on commercial, we've done it on food processing. So the question goes back is the fact that we have stuck to our principle of if you discount at the beginning, there is not enough money at the end and margin to take care of the customer in the long run. You start cutting back on your service level. You cut back on the way you innovate. You cut back on the parts you buy because now you're buying cheaper parts to make up for your margin. As long as…

Yes, 2006 is when we sold the ALKAR...

So 1two years later, we still are enamored of our food processing platform.

Our next question comes from Tim Wojs from Baird.

So just a couple of things I wanted to kind of ask about. I guess, first, on the commercial business, Tim, I just wanted to kind of clarify a little bit around the margin comment. I think some of the acquisitions, particularly QualServ, will start to anniversary here in the third quarter. So were you saying kind of reported gross margins would kind of be higher on a year-over-year basis as we go forward? Or is it just to underline that you continue to kind of improve and you still have that kind of acquisition mix headwind to think about?

Yes. I mean, the underlying margins actually improved. I think both gross margin and EBITDA went up. So it's the acquisitions that drove it down. QualServ, as you mentioned, is a piece of it. We're going to have Taylor rolling on, right, which is a larger piece. So that's going to dilute both the gross margin and the EBITDA. But I think fundamentally kind of boats all are rising. So the base margins of our long-term business, those are expanding as we're starting to see some top line growth again. And then obviously, with the new acquisitions that we've completed over the last year or two years, those margins are improving steadily. They're still maybe lower than the overall. So they're diluting, but they're coming up as we realize benefits in integration activity. So Taylor, we'll now layer in and we'll see the benefits of that as margins rise over the next year. But we'll also pull back. And that's kind of been the story here at Middleby, where the margins kind of -- they stay around the same level. But as the new ones come in, they're always -- we improve them pretty quickly.

Okay. And then just around some of the steel and tariff costs, it sounds like you think those are manageable. Do you feel like you have enough price kind of in the market to be able to offset that? Or do you think you'll have to, over the next 12 months, kind of push through some more price to offset those headwinds?

Yes. So the answer is it's a headwind, right? So we have the tariffs coming on steel in the first half. We implemented a price increase generally at most of our brands. That's kind of going into effect in the August time period. So steel was actually a little bit of a headwind. And that was a little bit of the margin detraction that we had across all of our segments in Q2. We'll start to overcome the steel piece in Q3 with the price increase that we had. And we would've covered that. But now we've got kind of the second round of tariffs coming in, in a lot of component parts. So that is going to be a headwind. We're still kind of getting our arms around that. But that's probably a $10 million to $20 million type number annually. So realistically, probably it won't have as much of an impact in Q3, but some. And then accelerating into Q4, there's still a lot of moving pieces and we're still trying to get a handle on it. I think we will be able to offset that with price increases. But that's going to be a lag, too. So realistically, it's going to drag in the back half of this year and then it will be 2019 where we can kind of get in front of it again.

Okay, great. And then just -- I know it varies by customer and by project. But when you think of kind of the chain rollout relative to maybe growth and maybe, call it, on a day-to-day business, but are the margins with some of the menu change rollouts better than kind of your core margins, just given the products you're rolling out? Or does it really vary across the backlog?

It's comparable. I mean, I think again as we have -- I wouldn't necessarily call it chain versus non-chain. But I would say is we've got new technologies that are coming up that are -- Selim talked about adding value to the customer. We're heavily focused on ROI. So generally, our portfolio is moving to higher technology over time and that's been a long-term trend. So that does have a margin benefit. So it's not customer-specific, it's really more product initiatives.

Okay, it sounds good. And then just last question for me. Just as we think about growth in kind of the back half of the year in commercial food, I think it was 4% kind of ex M&A and ex FX in the second quarter. The comp has been a little tougher. So relative to the -- I think, Selim, you commented that growth should improve in the second half. Should it improve relative to that 4%? [indiscernible] comparison, just any sort of color there would be helpful. Good luck on the second half.

Yes, thanks, Tim. So I think overall, if you look at first half versus second half, we certainly expect improvement. Obviously, Q2 is a step-up from Q1. I think it's -- the chain timing is kind of always very impactful to us in how growth lays out quarter-over-quarter. So we saw some of the improvement there as we talked about. In Q2, I think we see kind of a steady second half. It probably steps up more in Q4 relative to Q3, which I think we're kind of thinking of as kind of a steady continuation of what we saw in Q2.

Our next question comes from Jamie Clement from Buckingham Research.

So Selim, I was thinking back actually over the last 4 or 5 quarters when you talk about the growing backlog and all the testing that's been going on by some big chain customers, both preexisting and new customers, a lot of the discussion on the earnings conference calls had been around automation and labor costs and obviously still energy costs and water costs and all those kinds of things. This call, the topic of menu changes and food quality has come up a little bit more. So my question is has that been going on all along? Or has the new interest that you guys have been receiving from chains, has it focused a little bit more on the menu changes and on the food quality? And follow-up question there is can you give us some insight on how that stands with maybe some fast casual and casual dining customers, who in my opinion might need some menu changes?

So let me start first. This is a fantastic question because for me, this is the heart of what makes our commercial food -- our commercial foodservice division successful. And we'll continue to do what I call Middleby 2.0 that will grow very well in the next five years, starting in the second half of this year and will move on. Jamie, we've always been at the heart of what I call essentials, which are labor -- we've tackled labor and automation before anybody else tackled it. And I will tell you that when we tackled it in 2000, it was not a big issue. People say, "Well, I still can get labor." And then we kept on investing in automation more than anybody else. We invested, we bought companies in that, like Nieco that helped us even take the automation to the next level. We've gone into automation early on. We've gone into energy. If you remember, we were the first to talk about energy even then. And then we started talking about speed. Speed of -- I used to call it seconds and inches. So when we go to our customer, when I sat with CEOs of foodservice chain operations, I talk about seconds and inches. We're going to shave off seconds off your food preparation and inches off your kitchen. And seconds and inches end up being minutes and feet. But the question has been what happened to menu changes? It's an interesting revelation when I had several of my customers say to me, and that's happened this year, they said, "Selim, when we think of menu changes and we think about every division that has come into our existence and we introduce a new menu, you do that better than anybody else." And I think I would like to turn it to Dave because I think Dave can give a lot more color to this.

Yes, I think your point about fast casual is right on. We're obviously very connected to that segment. We're focused on them. We've been focusing on fast casual, which is in between that full service and QSR and you're struggling on the menu mix and new products. And I think the thing that we do and the reason that we're winning specifically around fast casual -- and you're exactly right, they need menu changes. But when we come in and allow them to add a menu item, an LTO or a permanent line item change, we not only allow them to do that. But we also maintain the quality of the food on their existing menus and we lower their labor. So I think it's the strategy of and. So we allow them to add a menu, change their menu and we lower their energy cost and we lower their labor cost. And when you put a couple ands on that statement, we are the obvious solution because they need that customer experience. They're looking for additional menu items, limited time offers. But they also need labor reduction. They also need food quality improvements and temperature of food delivered to the table. So we can give them those 2 or 3 ands that nobody else can.

Okay, I appreciate. Selim, if I could ask one more, very big quarter at Viking. Can you refresh us a little bit on the timing of kind of the recent refrigeration rollout at Viking, whether refrigeration is also selling better in addition to the ranges? Because obviously you had the big range recall. But I think Viking's reputation in refrigeration over the last couple of years had gotten a little bit spotty.

So I'm going to give you a complete flavor on Viking. I think you know and you've been involved with that because you went to visit many of our dealers. And you were most probably at the forefront as one of our analysts who cares about us. And you went out and started -- you remember at the beginning, we had quality service. And I have many of your messages that would say, "Selim, is Viking for you? Is it something that Middleby should get in?" And today, when I look back, it took several years of hard work. And I give credit -- again, I gave credit before to our team, I will give it again. I think our team, our salespeople in the field, our direct salespeople, our -- Scott Grugel, who's running our selling organization, Kevin Brown, Pat Hynes, Sue Bailey, I can keep on going, Jane Moss, Andy Doberstein, I can go on and on in our residential platform of all those people who've committed and became Middleby-like in terms of quality and service, ease of doing business, innovation. So what happened? Why I kept on telling you we will turn the corner? And some people started not believing because they said, "Well, it's taking too long." So yesterday, I had a chance to remind one of our board members that when we started in foodservice, and I remember right after September 11, we bought Blodgett, Pitco and MagiKitch'n. And that was an acquisition from Maytag, Maytag commercial. At that time, people did not believe that we've never made an acquisition. We borrowed heavily. We overpaid for almost what people assumed it was -- I don't know how much multiples at that time. And it was right after September 11. The markets were still jittery. People…

And our final question comes from Larry De Maria from William Blair.

Selim, thanks for the color on the Viking there. Just curious, the 24% increase is -- do we view that as sustainable for the rest of the year, I guess? Obviously, you're getting tough comps after that, but -- And then is that sold through to the end user? Or is that go into the channel? And by channel, I guess, it's your inventory at this point, right, because it's company-owned. So just curious if that's sold through or if that's an inventory build.

Okay. Tim, do you want to [indiscernible] the inventory build?

Yes. So Larry, I mean, yes, we own distribution, but I mean, that is sold through. So I mean, those are sales that are going through our dealer partners to the end users. In residential, our dealers really don't carry stock. So those are pretty much orders that are flowing through. In terms of the order rate, we think that we're kind of in a period of sustainable double-digit growth. Obviously, 24% is a high number. I don't think we're projecting what that's going to be. But we feel that we've got a consistent step-up now at Viking for a period of time.

Okay. And then secondly, obviously, Selim, you noted that you knew short-term disruptions would occur and that would have a negative impact. And obviously, we also have some optimism in the near term on some of the previous calls. So just to clarify, do we think the short-term disruptions are over now, and moving into next year, we can get 6% to 8% organic growth? And secondly, as it relates to that, can you just maybe just give net pricing by segment for the quarter? Because you gave a lot of color on pricing, but just to hear the net pricing would be helpful. I'll leave it there.

Let me take a shot at that one. So yes, so over the hump, it's never done. So are we going to continue to refine and stay focused on the end user at the restaurant level or food processing at the customer level and the manufacturing plants or in the home at the residential or commercial at the restaurant level, then we're constantly going to fine-tune our ability to take care of the end user. But clearly, the reset of those organizations on how do we get our product and how do we take care of our customer, we're over the hump. Work is never done. But I think the results of the work that we did last year and the beginning of this year are being seen.

Let me add. So I'm going to break -- there's residential and there's commercial. we've obviously made changes in both. So just on the residential piece, as we've talked about, we're bringing all the brands through our company-owned distribution that we've built over the last three years. So you've got Marvel, U-Line, Lynx, which we pulled into our distribution, and La Cornue. So we are largely through those changes and there's still a little bit of lifting to do it going into Q3. But that was a disruption that we saw in the first quarter, a little bit in the second quarter. Certainly, we've got a little bit of work to do in Q3. But we start to really get more of the benefits of that as we go into the back half of the year. On the commercial side, I mean, I think you've heard that we're starting to see that initial benefits of all the changes made with the rep organization. Obviously, QualServ was a big disruption, which we do think that's largely in the rearview mirror. The reps though, I mean, we still have a fair bit of work to do. We're getting a lot of positive comments. Selim mentioned them. The strategic reasons why we did it, we know it's starting to pay off anecdotally from -- we're seeing specific wins. But there is still some disruption there as well. We've got -- we have some training to do. We've got some pockets where we got to basically fill gaps to make sure that we're covering all the brands. So I mean, it's still mixed right now. I think the takeaway is going into 2019, the strategy is working. We've got some bumps as we go through this year. But we feel very positive about this strategic move. On the net pricing, we have a number, we haven't really reported that before honestly. Our organization is big enough and complicated enough that it's hard to come up with an accurate number. That being said, we had steel as a headwind, right, in Q2 that had started to come through and we had none of the price increases, right? So net-net, that's a negative across all 3 segments. And the margin, probably most significantly felt in the residential because our volumes were up at Viking so much. So as we were buying steel later in the quarter, we probably got hit most in the residential segment. So we probably get to be net neutral in Q3, given price increases will start going into effect kind of absent the next round of tariffs coming through, which that will be again more felt in Q4.

So let me add to that a little bit more, Larry. I think Viking has turned the corner. I think whether it's going to be 25% or whatever it will be, definitely double digit moving into the second half of the year. Because that's what I would say, is very confident about that. I think it's now unstoppable. As you've just seen, we've had the fact to see somewhat of a little bit of preview in July. And it's been very, very strong. I would say that part of it is residential. So let me go to residential. I want to do the same thing I've done in Viking to take it back to AGA. So I guess I'll be spending a lot of time in Europe to take the AGA Rangemaster, which is almost as big as Viking, and make sure that we are instilling the same innovation, product knowledge and take them outside the U.K. So my challenge is most probably the next year, 1.five years will be focusing on AGA Rangemaster. It never happens overnight because you have -- even if you produce an innovation, you have to have it certified by UL and CE and all of what we need to do. But my comment is to take it to the Viking level and start seeing the same results we're seeing at Viking at AGA Rangemaster. And that's where I'm definitely I know what to do now. We've done it. It's a second act for me, so I'm taking there and getting done. So I'm ready to move to my closing comments. I would like to remind everybody that what makes Middleby unique is the fact that we are a leading hot side foodservice equipment supplier that has basically taken that expertise into the hot side…

Okay. Thank you, everybody, for attending today's conference call. We look forward to speaking with you the next quarter.

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