Thank you for joining us today for The Middleby Corporation Third Quarter Conference Call. With us today from management are CEO, Tim Fitzgerald; CFO, Bryan Mittelman; and COO, David Brewer. We will begin the call with comments from management then open the line for questions. [Operator Instructions]. Now I will turn the call over to Mr. FitzGerald. Please go ahead, sir.

Good morning and thank you everybody for joining today’s call. I’ve got some initial comments about the quarter and then I will turn it over to Bryan. In the third quarter, it was challenging across all of our business segments for a variety of reasons. Despite the current headwinds, we remain optimistic because of the significant progress made on our long-term initiatives during the quarter. These important sales and profitability programs that we are currently putting in place are solid foundation for our future growth. We expect many of these strategic initiatives to be in effect by the end of this year and expect to reap the benefits in 2020. We continue to work on expanding margins and improving operations. Price increases were put in place in the third quarter to offset increased tariffs and material costs. Along with updated product pricing, we implemented additional profitability initiatives, including headcount reductions, and other SG&A cuts during the third quarter. These profitability initiatives include the effort to drive margins of recently acquired businesses as we adjusted to current market conditions. To continue, we continue to consolidate manufacturing facilities which I discussed at our previous call. Combining like companies will bring efficiency through manufacturing and workforce synergies. Our current efforts include consolidation of three facilities, which should bring in excess of $15 million of savings in 2020. We're moving two of the brands acquired from Standex business earlier in this year into our existing fryer and oven facilities. These integrations will not only allow us to expand margins, but position these brands for long-term profitable growth. Additionally, we have largely completed the consolidation of our outdoor cooking lines within the Viking, Greenwood Mississippi campus. The teams are doing a great job with these facility moves, making them seamless, quick, and without customer disruption.…

Thanks, Tim. Before I dive into the results by segment, I'd like to introduce a new measure adjusted EPS, which seeks to exclude items that are non-recurring or non-operational as well as those that do not correspond to current cash expenditures or inflows, namely amortization of intangible assets and the actuarial valuation gains from our pension assets. We believe this is a relevant metric to use as it aligns with areas that management focuses on as we operate the business. The reconciliation behind this metric has been included as an Exhibit to the press release. For the third quarter regenerated adjusted EPS with $1.72 versus $1.65 in the prior year. When evaluating recent acquisitions, excluding restructuring impacts and inventory purchase counting impacts, the ongoing operational contributions from the acquired brands of APW, Bakers Pride, BKI, and Ultrafryer, as well as Powerhouse Dynamics were $0.03 drag on earnings for the quarter. I will discuss restructuring charges collectively for all our segments later in my comments. So, our Commercial Foodservice segment sales for the quarter amounted to $501 million, which included an increase of $31 million related to acquisitions completed within the last 12 months, most notably the transition to acquire the APW, Baker's Pride, BKI, and Ultrafryer brands from Standex in April. Excluding the impact of acquisitions and foreign currency rate changes sales for the quarter increased 0.5%. Sales growth was 3.6% internationally with increases in all regions, while challenges in the UK persist, we did achieve modest growth in Europe, the domestic market decreased 1%. We're not confident that growth in this segment will continue in the near-term. As Tim noted major rollouts by used restaurant chains are continuing to take longer to materialize, which is leading to lower than expected organic revenue growth. I expect these challenging market conditions…

Thank you so much. [Operator Instructions]. Your first question comes from John Joyner of BMO. Your line is now open.

Good morning. So you touched on this a bit already, Tim and Bryan, but can you offer some additional color on your ability to improve margins quickly in the Residential business, which I thought was quite impressive despite the meaningful organic declines?

Yes, I mean, margin improvement remains a -- one of our top priorities across all three segments, not only Residential. So I mean, I think you heard in some of these comments that we have, very specific actions that we've either already implemented on it that would include pricing, it would include some of the headcount initiatives, and the headcount initiatives kind of cut across things that we would do an ordinary course as part of integration, and some of it also is kind of we -- we tend to react quickly as we're seeing changes in markets. So I mean that that was a piece of it. But, we've got the plant consolidation. So Bryan alluded to $20 million of cost savings going into to next year. So as I think we expect that either some of that's a) been done or b) will be completed at the tail end of this year or very early next year. So we kind of expect that to occur. And then on top of that, it really doesn't include, I would say, kind of a broad bucket of synergies that we're going after to really leverage the scale of the whole platform. So supply chain would certainly be on top of the list, but there's really a number of other areas that we've identified and put people in charge of and resources to go after things like distribution and strategic freight utilities costs. I can kind of go through a list so that that those are areas that we are -- have internal targets, we haven't put a number to it, but those are things that we will be leveraging next year. In the Residential area will kind of add into that manufacturing efficiencies. I mean, I would say we're still --…

Okay, excellent. That's very helpful. And just maybe one quick follow-up. I think it should be quick. So where does in sticking with Residential where does AGA stand, I guess, with integrating that business with the Residential distribution.

So, I mean, our business is split more so than the other segments of roughly half U.S. and half largely UK based. So, they're -- there's somewhat on a parallel and a bit distinct paths given that they've got different distribution models. But a) we really have just started to scratch the surface of how do we leverage the product portfolio of both sides. So some of that comes from an engineering standpoint, some of it comes from a sales standpoint; some of it comes from an operating standpoint. So as I mentioned, we're just -- we're excited about launching some of the AGA products here in the U.S. as we go into 2020. We're at the very early stages on that. So that's exciting for us. But certainly, there's supply chain initiatives and some potential manufacturing opportunities as we do that as well. So, given both of those companies have really been focused on their core businesses and kind of stirring it up with initial integration plans that that we've had. We hadn't gotten to the synergy piece of that yet. And I think that'll start to kind of will open doors on that as we go into -- to 2020. But and I'm not sure I frankly answered your question. But I think we will start bringing some of the AGA products here leveraging our -- the distribution capabilities, that we've built over the last several, several years, which have come a long way. And we've got a great sales team. Now we've got a great leader for that that business with Scott Grugel. The distribution capabilities and product availability have improved tremendously over the last several years, and probably most importantly, our service capabilities. So parts availability and the ability to react to issues in the field have been enhanced. So now that we kind of have that as a strong capability, it gives us the ability to bring new products and brands, through that with confidence. So that's something that we will continue to leverage in 2020 and 2021. And attached to that is the showrooms, which again, we just opened New York this year, we've got two more that are coming online. I think we're not fully leveraging the capabilities of those. I mean, our first showroom in Chicago, which is an amazing group of people and an asset that that really has paid dividends and kind of set the blueprint for us with future showrooms. And, so that is something that we will continue to invest in, and we're excited about as we get to this time next year, we should have four showrooms that that are open and will have been operating for a bit of time.

Thank you. Your next question comes from Larry De Maria of William Blair. Your line is open.

Hi, thanks. Good morning. I guess, I mean, we could talk about the weakness recently in Commercial Foodservice; on reality it’s been sluggish for a few years now. So what are we attributing this to or I mean has the market structure changed so much that there is probably a little prospect of getting back to that, above average organic growth, because now obviously seems to be more of a margin story here in Middleby than a growth story?

Well, I think we are focused on things that are in our control, right. So certainly margins is something that that we are -- in our control and we want to expand, obviously, it helps if the top-line is moving in the right direction versus we're overcoming weaker top-line, while we're expanding margins at the same time. But certainly that that is something we'll focus on. But and I think the industry on commercial, it's kind of in, I would say a transition period and domestic is probably different than international, but we feel there is a larger installed base here in the U.S. If you look at, we've got some; we have no concentration with any individual customer. That being said, we've got -- we're very focused on the chains. And if you kind of look across the top 50, 100 chains, we've got a good presence there. And I think they've got a large base of installed equipment. And the replacement cycle, I think it has extended out, and I think that partly the competitive landscape has changed. So, they've got a lot of different competitive pressures that they're thinking about, whether that's labor, whether that was before they had three or four main competitors. And now they're thinking about 50 competitors because there's fast casual, there's non-traditional locations, deliveries coming online. So they're evolving their businesses and when they do that, then those purchasing decisions have become more strategic and that tends to take a little bit longer. We believe the base of equipment in those customers is aged and they do need to go through a not only an upgrade cycle, but those things are going to be more strategically important and tie into their business plans. So we think that Middleby is better positioned than…

Okay, thanks. And if I could just one quick follow-up. The Open Kitchen IoT, how do you plan on charging for that and is that going to be an enterprise chain sale? Or is that more of a general market? I know if the enterprise potentially have their own IoT or just any color on how you're going to charge and the opportunity there? Thanks.

So, it's early stage so I mean, the model right now is we are selling for -- there's an equipment piece. So we sell in sensors and hardware technology. So that is kind of the one-time upfront cost. And then there is a continuing subscription fee that is ongoing, it’s a monthly fee that we charge for that service.

Thank you. Your next question comes from Jamie Clement of Buckingham. Your line is open.

Hey, Tim, I don't know if you want to take this or Bryan but you want a price increase during the quarter but no way would you have fully realized that across geographies and product lines a 100%. So in terms of excess costs tariff or whatnot versus the pricing increase, were you still negative for the quarter by roughly how much? And then kind of I don't know whether you'd be fully realized in the fourth quarter or whether that's more of a first half of 2020 but kind of assuming costs stay the same where do you think you'll be from a margin perspective on that front?

So I'll start and then I'll let Bryan add. So I mean, you're absolutely correct that we didn't realize the full benefit. So we took a price increase and we've got 50 brands in commercial and 90 brands overall. So we didn't take, they didn't go up all exactly on the same day, but largely we announced price increases similar midway through the quarter. And announcement doesn't mean that you start, as you know, realizing the benefit right away. So I mean I think we addressed parts where we had been hit hard on material costs and tariffs so that that, that we probably started to realize the benefit, let's say in September. So we got a third of the benefit on parts in the quarter. On the equipment side, I would say we got minimal. In Q3, we'll see it bleed in. In Q4 there's lead time that that we give to our customers, there's also the backlog that we burn through and hold pricing, and then you've got some longer-term price contracts that really, even when you tell them the price increase, you don’t get the benefit probably until early 2020. So, I guess, we will see some of the benefit roll through in Q4 certainly it won't be the full VAM audit and then going into early 2020, we will get probably the bulk of the price increase then.

Okay, thank you. Bryan, anything?

No, I don't have anything to add to that because; I don't have a specific quantification for you. But I do think it's fair that Q4 will be -- we won't be upside down on it any further.

Okay. And then Tim just a follow-up in terms of chain activity. You talked about the installed base, talked about kind of replacement cycle, those kinds of things. What I'm a little puzzled by is, when you see out there in the restaurant space, even in the case it seems like there's just been a lot of disruption and even if you just look at like the chicken sandwich market, and you see chains talking about a new chicken sandwich product to compete with you know who and one person's been successful and other people see. Like I'm just wondering why there hasn't been more chain spending on new equipment to support new menu items?

So I'm just going to make one comment and turn it over to Dave, I just like to comment that we're supporting all those many of the chicken chains including one that had done pretty well with the product. But Dave why don’t you maybe give your perspective?

Yes. I was just asking more from kind of a larger industry perspective. It just seems like you need a lot of commentary out of some of the public companies talking about initiatives, but we don't actually necessarily see purchases to support those things.

Yes, it's -- I couldn't agree more with you. The fact is there's I think the big chain customers are struggling with, what does their customer want? When do they want it? Where do they want it? And what type of food? There's so many dynamics going on with the trends in the food business, it used to be just straight across the counter and then I went through the drive-through window, then I went to delivery, now it’s delivery services. There's so many ways to get to the product. And I think that indecisiveness and I feel for the leadership of the big chains because they're shared figure that’s what customer wants. That indecisiveness especially in the face of large franchise operations, the franchisees freeze, they just stopped. And I think I would too and they wait for a good decision to be made. You can -- you can only put, you can only put the lettuce on top and then the bottom and there is different breading once or twice, and eventually you're going to have to change that product to get the customer to come back in after that new menu item and we are always there to help them bring in those new menu items. And we're already embedded in all the top chains. I just got one more piece of the good news is the one thing that is consistent in this business is every day in every restaurant, they come in and turn the equipment on. Doesn't matter whether there is new products or additional sales equipment gets used every day. And that eventually turns into useful cycles and replacement business for us. So I think that there has been a pent-up demand on decisiveness on new product entries and exciting new programs out there. I think the things that we're investing in, like the Open Kitchen, and like the Puck which allows for carryout and delivery efficiencies and speed ovens and that was technology that allows for ghost kitchens and different locations for restaurants to occur in an effective way that makes a difference for our customers’ customer. If you step back like you're doing and looking at the megatrends, we are the clear leader in supporting those trends.

And Dave, just -- I mean, at some point in time, a major QSR chain that has an alleged premium chicken sandwich that's dry and stringy; you are going to have to do something about this right?

Amen. I agree with you 100%, they will.

Thank you. Your next question comes from Jeff Hammond of KeyBanc Capital. Your line is now open.

Just want to focus on Q4 a little bit. So first in Food Processing, last year you had a big ramp in the year-end, maybe that's normal seasonally just how should we think about kind of the tough compare there, going in? And then just on Residential kitchen, it sounds like you think that business is -- it continues to be down year-over-year based on trends?

You want me to go? Okay. So, I just kind of give broad comment here. So I think with Food Processing, obviously, it's been disappointing year in terms of the cadence of orders coming in. We are seeing orders start to come in now, unfortunately with kind of the longer cycle to move these through, I mean, that's kind of where I had to comment that we think a lot of that goes into backlog as we go into next year. So that hopefully position us much better coming in -- into the year, it may not help the fourth quarter quite as much. So, I mean, I think we're thinking we won't necessarily be as down as in the fourth quarter, but I think where we think will be up in backlog, double-digit going into next year, that, that probably will translate into Q4. And Bryan might add some other specificity to that. But on the Residential side, I mean, very honestly, that that one, we felt we were very well-positioned coming into the year. We do have anecdotal data of how we're doing relative to our competitors at certain dealers and certainly we've got other points of information, how many displays we have on showroom floors. Net-net we've added about 75 dealers also a lot of those dealers were -- were partners that have walked away from Viking, either before or shortly after we bought the company and they are coming back. So we feel good that we're expanding in that area. So I mean, I think on the things that we think are positioning the business for long-term growth. We see kind of measurement tools that we have that will help us. But then what is the broader market? I think it's been a tougher market than…

I think it really fully covers Residential. Just obviously in Food Processing, it is our smallest division, and so we're -- we're dealing with lumpiness on small numbers. So that creates, I guess a wider range of potential outcomes in it. So a) as we noted before, I've been talking about previously, I'll say that our discussion levels with customers had been increasing and that now is turning into increasing orders and backlog. So just reiterating Q4, a fair amount of variability in what can be the outcome. But we do feel more confident about a more positive trajectory for 2020 in that segment.

Okay. And then just getting a little finer on the Commercial Foodservice margins into 4Q, I think you said, tough comp from a rollout last year, the Trade Show dropping in and then it sounds like price cost maybe gets better. So maybe how should we think about margins either sequentially or year-on-year in Commercial Foodservice into 4Q and I guess you got dilution from maybe some of the deals? Thanks.

Yes. I mean, so obviously as you've noted, there's a lot happening there. In terms of sequentially, it is probably going to be flat to slightly down, I would say which is negative to the prior-year. We are dealing with here if again, variations moving around a growth rate that is obviously close to zero. So that's why it's a little difficult to and I am unwilling to fully commit to will the number in the black or the red as far as the top-line, but our efforts are very much focused on, I'll call it, maintaining a consistent but essentially sequential margins, but there will be challenges to do that, namely HOST is a very large show, it really parallels may be slightly smaller for us NRA, so that is a sizable investments. And between that and again a specific rollout at a business that contributes healthy margins for us, is really creates the year-over-year pressures.

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

Good morning, Wal.

Hi thanks. Good morning. In Commercial Foodservice, you guys talked about the U.S be at down 1%. And I wonder if you could break that out the general market versus the large chains?

Yes. From that, we are seeing on a relative basis, strength in the general market and weakness in the chains. So, the first one is up and the second one is down.

Okay. And then internationally you mentioned the growth of 3.6%? Is that from same thing, general market or is that from chain?

Yes, no, it's really largely the same. I mean, there's obviously a different level of chain activity happening across the regions. APAC and Latin America do continue to be the stronger than EMEA for us.

Okay. And as we're thinking about fourth quarter, I think in the fourth quarter some of the larger customers, larger distributors, they get rebates and worked on volume purchases. I wonder what the markets looking like here in the fourth quarter -- for trying to get extra discounts?

Well, I don’t -- I think we -- I would just make the comment that we feel that we're positioned, pretty well with our large and strategic channel partners. I mean, I think we've really worked with them on continuing to bring new solutions and product opportunities. So, I think we feel good about that and not only kind of the individual products as we grow the portfolio, right? We've got 50 brands, but really educating them on the solution. So I think a lot what we're trying to do is we're continue to drive market share and opportunities is really leveraged the scope and scale of everything that we can work with them on to present unique technology solutions to their customers. I mean, in terms of discounting and all that. I mean, I would say nothing has changed significantly of how we interact with those buying groups in and its customers from what we've done in any -- what we've done in the last five plus years, so, no major change there.

Okay, great. Okay, fair enough. Number of times you guys about procurement program and I wonder what ending are we in and just to -- there's a way of summarizing it for us, how big is that opportunity? And what's the timing on starting to get the benefits from that?

So I think I'll start and Dave will add on. But like, I mean, I think we've had supply chain for a long time, but our supply chain approach was here we buy a company and then we hit the top 50 items and Middleby buys better than they do and dollars turn up. And we've done that very effectively for a long period of time. But the approach coming into this year was, hey, what -- what if we all come together as 50 companies and we, think about how we're buying controls and thermostats and wire harnesses and motors and even fasteners and can we extend the leverage change chain due to other geographies and can we consolidate to fewer strategic suppliers. So part of it is a cost element. Some of it's a performance element as well as we kind of think about how does our equipment performed in the field and after sales service and warranty costs. So it's been a much broader and more strategic approach going into the year. We enhanced kind of the leadership around that. We do not have the big corporate teams. I would say this is a bottoms up approach. But we did leverage some of the capabilities that we have within existing businesses. And I would say that effort really started in April of this year. So -- and it's -- I think it's November if I'm right. And so I think -- so really we’re -- we’ve made, I would say significant progress in terms of processes, collaboration, and identifying opportunities. Certainly some of it is turned up into dollars, but we expected, a more significant impact as we go into next year and the year, the year after.

I agree with what Tim said. Obviously, I think what if you're asking for where we are, I'd say we're in the second and third inning. So we're still very early on. I think what's unique is and what we're seeing is not only advantages from a cost perspective, but from a quality perspective. And the other thing, we're approaching that quite a bit differently than all of our competitors and that, we’re -- it's embedded in our -- it's a part of our D&A now, it's an operating system, it's not a project to lower cost at one-time, it is becoming an operating system by basically incorporating all our talent across all the divisions and coopting all the best suppliers and which improve our quality and lower cost at the same time. So, but we're still early on. To answer your question directly I think we're in the second inning and it’s going extremely well.

Thank you. The last question we have assigned for today is from Saree Boroditsky of Jefferies. Your line is now open.

Thanks for fitting me in. Could you just talk about how you're thinking about capital deployment and if you would consider buying back shares just given the current level and then any color on the acquisition pipeline?

So, kind of in reverse order there. I mean acquisitions continues to remain a strategic focus and priority. At Middleby obviously we've been executing on that strategy for the better part of 20 years and certainly last year, and this year has been no different. I think we've added six new great brands and technologies to Middleby this year. So we see opportunities across all three segments. We’re very focused in terms of strategic asset portfolio. Again this has never been a -- certainly it translates to financials but it's not a financially driven initiative it's a strategic initiative. And I think if you look over the last few years, you've seen us extend into the beverage we've showed up some areas that we had some gaps in the portfolio steam cooking, probably being one of the most significant which is a category Middleby really had not been in and you have seen acquisitions such as Firex and Crown which all happened in about the last 12 months. And then we're really investing more in technology as well in L2F and Powerhouse Dynamics as we just mentioned, which is already we're very excited about the opportunities that both of those are bringing to us. So pipeline continues to be robust. We're always busy with new and exciting ideas. And I think that that will continue. I mean I think from a stock buyback, I mean other than debt pay down, that's the other area that we think about it is opportunistic at time -- times and it kind of depends on obviously where the stock is trading. But really the acquisitions are what create long-term shareholder value as opposed to buyback which I'm not saying it doesn't create long-term shareholder value, because it certainly does but it's a bit more of a financial advice. So that's kind of the prioritization and both of those are things that we think about on a regular basis.

I appreciate the color. And then last one, so Food Processing has been pretty volatile over the last couple of years, and I know you guys have done lot of great things to improve that business. But could you just talk about the state of that business within the overall portfolio and I guess your commitment to continuing to grow that?

So the Food Processing business is a great business. I mean honestly, we really believe that we've got a very differentiated and industry-leading portfolio. The companies and brands that we have in there are very strategically linked in the portfolio is very synergistic. And so it is at right now, which is a very challenging period, but it's at a trough and we're -- we have industry-leading margins and kind of the worst cycle right now. So I mean this business is very profitable business, it’s very uniquely focused on solutions. And we also believe that there is the ability over a period of time to reduce the volatility. So even though I mean being down a fair bit and third quarter which none of us are happy about and we don’t view it as acceptable. If you were to go back five years ago, we would have swings of 20% and 30%. Right, so now we're kind of down to single-digit swings. And as we can look out, I mean, I mentioned it in the comments, but we do think that there are adjacent areas that are -- some of those are growing markets and we're well-positioned for so as we get into those and we are having initial success in jerky, cured meats. Certainly, pet foods and alternative protein which we see as a longer-term trend, we're excited about those and we think that will help us further diversify. So that is a journey that that we are on. Now look the core competency of what we do I mean it's obviously we are a Foodservice Company. And this platform has been built around thermal processing. And I think as time is evolving, we're seeing more and more synergies across the platform. So as I mentioned in the comments we just launched this TurboChef ALKAR, it’s a large scale, high speed, rapid cook, very flexible conveyorized platform. I mean, that's a great example of where you've got technology, crossing over segments. And I would also say, not only is the sharing of technology, but I mentioned the ghost kitchens, it's actually very interesting as we're going into segments such as that, we have customers we're dealing with right now we're specifying kitchens that actually you would have thought we would have been pulling in our Commercial Foodservice brands, which we are but we're also pulling in our Food Processing brands because they have the higher capacity. They actually have greater levels of automation. So it's kind of very interesting and those are things that nobody else in our industry can do. So really, honestly, we see a lot of synergies there and we think they will actually increase over time.

Yes, let me just double down on that. This is Dave. The TurboChef, the injection of TurboChef technology into that processing line literally doubled production capacity of that dried beef production system. In the same square footage in that processing plant thanks to the TurboChef technology, where a manufacturer can now double the output per square foot. The reverse side of that, as Tim was just talking about; there is clearly a trend here on using ghost kitchens and other types of remote production systems for our Foodservice operators. We're bringing in the capacity, the other way from our Food Processing equipment to allow for restaurants and Foodservice operators to expand their ability to service their customers. So the technology is going both ways and kind of to an earlier question. When change occurs, you want to be there with the solutions. And that partnership can be driven by those two different types of technologies, both in Food Processing, and Foodservice.

Thanks Saree. Operator, well, so I'm just going to one last comment and then we'll close it out. I just want to also emphasize, and this is kind of maybe a follow-up to one of the other questions that Bryan answered. And in this year, including the third quarter, and we will see this in the fourth quarter, I mean, we are making incremental and significant investments that we think position us for longer-term growth. I mean, certainly we're focused on margin improvement. And we're doing that in the face of some of these investments. And we just talked about lot of what these are translating into but R&D, and technology investments is, is a big one. So we have a controls initiative, and that -- that we're putting money to that, and that will show up next year. I mean, obviously, we just talked about IoT. And we've talked about automation a lot. I mean, I think those are things that we want to be the brains of the kitchen, in addition to kind of the brawn with all these great brands and innovative technology. So that continues to be a big investment. And that was certainly there in the third quarter and we will continue to have it in the fourth quarter. So, as we're thinking about margins, I just want to kind of reemphasize to everybody, we're doing that as we're making investments for long-term growth. And I think the other thing I just want to point out is and it was really the comment about the Trade Shows but I mean also higher levels of spend that we've had on Trade Shows, and I would say sales tools and marketing. I mean, so we talked about, we really did have some meaningful launches of internal sales…

And so with that, operator, that concludes all our time for today.

Well thank you, everybody for being on today's call. We look forward to catching up with you on next quarter. Thank you.

Ladies and gentlemen, you may now disconnect.