Q3 2019 Earnings Call
Ladies and gentlemen, nice standby to these conference will begin momentarily again, we stand by the conference will begin shortly thank you.
Joining us today for the Middleby Corporation third quarter conference.
With that should be for management or CEO , Tim Fitzgerald, CFO , Bryan Middle Man and C. O T withdrew where we will begin the call which comments for management then open the line for questions.
Structure on how to get into Q will be given at that time now I'll turn the call over to Mr. Fitzgerald. Please go ahead Sir.
Good morning. Thank you everybody for joining today's call I've got some initial comments about the quarter and then I'll turn it over to Brian .
In the third quarter, Oh, it was challenging across all of our business segments for a variety of reasons. Despite the current headwinds we remain optimistic because of a significant progress made on our long term initiatives during the quarter.
These important sales and profitability programs that we are currently putting in place or a solid foundation for 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, two offset increased tariffs immaterial costs.
Along with updated product pricing, we implemented additional profitability initiatives, including headcount reductions.
Another I see it cuts during the third quarter.
These profitability initiatives include the effort to drive margins are 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 to other brands acquired from Standex business early.
Earlier in this year into our existing fryer and open facilities.
These integrations will not only allowed us to expand margins, but position these brands for long term profitable growth.
Additionally, we have largely completed the consolidation of our outdoor cooking lives within the great biking, Greenwood, Mississippi campus.
The teams are doing a great job with these facility moves, making them seamless quick and without customer disruption.
We also continue to focus our efforts are the integration of our newly acquired companies to bring those two our target margins and portfolio average.
We have acquired 13 companies and 16 brand since the beginning of 2018.
Our margins for those companies that we've acquired prior prior to 2017 are significantly higher as acquisitions for the most part are dilutive to our margins for the for several years.
Currently represent approximately a 2% drag on our overall EBITDA margins.
Despite the drag.
On the margins, we realized margin expansion at these businesses individually well continue to execute on integration plans, which will continue to drive margins to the company average consistent with what we have done successfully for many years.
We also expanding our China operations with the opening of a new factory coming on line. This month.
This facility will allow us to increase capabilities and operate at a higher capacity with greater efficiency.
We will also be able to deliver product quickly in the region and sharpen our focus on local growth in the Asian region, we'll be adding a number of new products for the local market in 2020 and offering solutions for specific chain customers expanding into the Asian market.
Moving on from our operations a facility update I'd like to make some comments on each of our segments.
During the quarter, Hey, commercial foodservice, we made progress on a number of initiatives initiatives to capture growing trends and enter new markets.
First off we launched open kitchen or is he based connected smart kitchen platform that communicates with all commercial equipment.
Regardless of the piece of equipment or the manufacturer to be clear the solution can be utilized on all brands commercial equipment, not just middleby products.
And cover all operations of restaurants, including areas, such as lighting HVAC in both processes inside and outside the kitchen.
This technology, which has the potential of the change or industries from powerhouse dynamics. The company, we acquired just that April .
Powerhouse, which was a proven solution with close to 5000 existing restaurant installations.
The knowledge base resources capability to marry their solutions with our existing Aiotv Middleby connect platform.
And brought this advanced combined and enhance solution to market very quickly.
Open kitchen provides a wealth of automated an informational tools such as predictive analysis remote recipe distribution real time wireless temperature monitoring enabled with a powerful mobile app.
Armed with data operators have the ability to make decisions that affect overall kitchen operations, which in turn to improve profitability monitor food safety and provide the best experience for both customers and employees.
Initial feedback from customers on this technology has been very promising and we're working with many customers to valid evaluate the potential benefits to their operations.
Next I'd like to talk briefly about our continuing investment in the Ventless kitchen.
Quite simply we are the leader in this fast growing trend middleby as the broadest light of equipment that can be use in nontraditional locations.
Today, you see more kitchens in areas that were in the past consider dead spaces Warner venue that was not built for foodservice.
Now operates concerned this unusable space into profits by installing about was kitchen.
On this we have seen firsthand the need for Ventless solutions in many other non traditional and growing concepts, including fast casual chains convenience stores and food trucks, we continue to add our products and.
Products to our boundless portfolio market, our solutions and make it easy for our customers to understand and specify the equipment to meet their needs.
Heading this effort as Scott Heim, who was named our President of Ventless solutions as just a few months ago, Scott joined us from vivo in January the belt was drilled company, we acquired at the beginning of the year and he has helped us make significant inroads very quickly with a number of customers.
Also we are leveraging our knowledge in automation in large batch production to meet the specialized needs of goes kitchen and delivery concepts.
We are able to bring together capabilities from our L. Two up automation company are brought family of commercial products and equipment solutions from our industrial industrial food processing segment to develop unique solutions that fit the needs for these these.
New foodservice concepts.
These are unique solution customers could find only within the Middleby brands.
We have a team focused on developing concepts that could maximize space capacity and menu flexibility.
We are working with early stage customers and expect to be opening cloud and goes kitchens for customers as early as 2020.
Other investments in our commercial foodservice platform include the continued upgrade of our sales tools in the quarter, we launched an exclusive middleby sales effort to Porter to support our sales team, which provides access to middleby product information selling tools and digital marketing material at their fingertips.
We also launched our customer management and operation.
Unities tool, which enhances communication information availability across availability across all of our sales teams, which enhances collaboration across our brands.
Allowing us to better identify.
And collaborate on new and existing customer opportunities.
Along with these enhanced sales tools, we can since you in it to invest in our sales Rep partners to support training initiatives and further upgrade products available in their test kitchens, adding new products launched from a beverage solutions and our most innovative cooking technologies, we're committed to the two deepening the.
Existing partnership with our sales reps as we aligned our organizations to focus on the promotion of Middleby is capabilities and unique solution offerings.
The the final investment I'd like to talk about in commercial foods to the realignment of our national sales organization.
This recent updates allows us to better focus on underpenetrated in growing segments, such as convenient stores.
Retail outlets, the marine segment and emerging chains, we now have the ability of better target opportunities in these categories and promote solutions that are most relevant to operators and operators in these business segments.
Along with this realignment, we successfully launched our formal consultant and designer program.
And area Middleby had not focus on historically.
Recently, we hosted a successful of that one of our facilities with dozens of well known designers and respected media in attendance do this outreach and our technology advancements were quickly, making inroads with the designer community and have educated them on our unique product offerings in a short period of time.
Apart from our investments in commercial foodservice, we are those who enthusiastic about many new products that had been well received in the second half of the year.
Our Joe Tap Metro Brew, just launched in the second quarter.
Is rolling out at a large chunk coffee chain.
The Cibolo fast Cook oven, which was reduced introduced at the host Milan trade show.
Is gaining traction quickly and our PUC grabbing go cabinets are self service and automated to accommodate the delivery and carry out market and that presents an exciting opportunity for us in 2020.
An example of another recent acquisition Asus Brew Tech.
His product that addresses not only the growing craft beer market, but also other fast growing categories, such as Boucher cold brew coffee and CBD CVD oil extract.
And finally, the latest brought from Turbochef the band detail, which was successfully debuted last month at the host Ballade show.
Provides another innovative product from turbochef extending their existing industry leading platform.
And lastly, we're also looking forward to the opening of our commercial innovation center in Dallas and the first quarter of 2020.
Which will feature live middleby commercial appliances, alongside a residential showroom.
We will use this venue to host.
Both our current and prospective customers.
Turning now to the residential group.
2019 has been a difficult year for the appliance market, which has reported negative demand for the last four quarters.
Both in the U.S. and also in the UK market.
Particularly in the UK given the uncertainty of Brexit.
Despite the continued near term market situation. We're excited about the continued progress and investments, we're making to position. This platform and believe we're still in early innings for this segment.
Which we've entered with our Viking acquisition in 2013.
We believe the continued investments, we're making in sales distribution service and new product innovation will continue to translate into market share gains and growth or growth and profitability for many years to come.
As earlier.
Stated we are the final stages completed in the manufacturing consolidated river outdoor cooking line into Greenwood, Mississippi.
Which will add to profitability in 2020, as we continue our journey to expand margins in this segment.
We expect to address noncore businesses, which drag on the overall profitability in residential and implement strategies to further improve efficiencies of our manufacturing operations.
Both in the U. us in the UK.
We are excited about new innovation that we brought to market leveraging the technology and innovation from our commercial segment in the quarter, we added to our product offering with the expansion of our built in refrigeration lined up under the Viking brand.
We also began our initial introduction of AGA branded Mercury in a lease euro style products into the U.S market with a broader lynch broader launch plan for 2020.
Additionally, in the family of under counter refrigeration ice, making products will be available for sale under the under the our Marvell brand.
At the start of 2020.
As appliances with color are trending kitchens, a few days ago Viking introduced its new color options and next week Viking is launching it's beautiful exclusive rural roads gold range and limited production.
This range has been sought after since it was a concept p. showcase both in our New York.
In Chicago, Chicago residential showrooms and.
And speaking of showrooms, we will soon opened the doors of our southern California location next month.
Our largest location yet in a high traffic areas area of Orange County.
As mentioned earlier this will be followed by the opening of our fourth showroom.
In Dallas, Texas, which will be at the beginning of 2020.
And now moving on to our food processing business.
Sales continued to be disappointing.
As we've not had the benefit of large projects in our core meat processing business.
However, we have worked to reduce the input active cyclicality and volatility of this segment through the introduction of new products that reach into adjacent markets such as Bacon.
Pet feud pet foods cured meets jerky and alternative proteins.
We have also seen improvement in order activity, including orders from some of these new targeted segments.
Which gives us confidence that we will see a much improved backlog as we head into 2020.
We're very excited about the potential of some of these new product introductions, such as the newest launch of our conveyor Ized Turbochef rapid could platform by Alkar.
This new product brings together technology solutions from our commercial and food processing divisions.
The combination of microwave and high speed convection technology reduces cooking times by more than 60% and provides a small footprint and flexible platform supporting a bride abroad variety of applications.
At our Marine Aucs, we recently introduced our cat a mix continues pats pasteurization and cooking system.
This exciting new product allows processors to produce best quality protein, including alternative proteins.
For customers, who demand clean label products.
This type of thermal pasteurization is becoming the most reliable and cost effective method for guaranteeing food safety and automated and space efficient footprint.
We we debuted these products along with a number of others at our recent process export trade show here in Chicago.
Great customer receptivity.
Finally, I'd like to comment on our latest acquisition.
Pack Pro which we completed this exciting addition to the middle be family.
Early in the third quarter.
Peck Rosy true innovator in a market leader in automated packaging technologies for our customers both in the protein in bakery segments.
Pack Pro also brings to Middleby, a great management team and innovative culture.
Pack pro adds to our portfolio of solutions automatic food interleaving and food stacking equipment and allows us to offer high speed sorting and interleaving equipment for a growing number of food applications and the inner leaving process important to the ease of preparation and separation of food products for our retail and restaurant customers.
And this technology allows for greater food safety, along with speed labor savings and product consistency.
So while this quarter has been challenging in many ways. We believe that the actions taken in the progress made will continue to strengthen middleby and position the company for growth.
As we move into next year.
So.
Following those initial comments on third quarter I'd like to turn it over to Brian for some comments on the financial performance. 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 nonrecurring or non operational as well as those that do not course.
Upon to current cash expenditures are 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 focus is 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, we generated adjusted EPS of $1.72 versus $1.65 in the prior year.
When evaluating recent acquisitions, excluding restructuring impacts in inventory purchase accounting impacts the ongoing operational contributions from the acquired brands of APW Bakers Pride PKF BK Ein ultrafryer as well as powerhouse dynamics were three cents drag.
Earnings for the quarter.
I will discuss restructuring charges collectively for all their 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 12 last 12 months, most notably the transaction to acquire the.
PPW Bakers pride became 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 to 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 use restaurant chains are continuing to take longer to materialize, which is leading to lower than expected organic revenue growth.
Expect these challenging market conditions streaming into fourth quarter and could potentially impact Q1, we look forward to improving organic revenue performance as we progress through 2020.
Spite of topline challenges, we're pleased to have kept margins essentially constant in the current market conditions.
The gross margin to commercial foodservice was 37.3% and excluding the impacts of acquisitions and foreign exchange. The gross margin would have been slightly up to 37.6% as compared to 37.2% in the prior year.
Adjusted EBITDA for commercial foodservice amounted to $126 billion, representing 25.2% of sales or 26.4% when excluding the impacts from foreign exchange and acquisitions and this compares to 26.6% in the prior year quarter. While there has been a slight margin decline year over year they've been.
Proved sequentially.
Our current results are impacted from low margin acquisitions and transition costs being incurred in connection with plant consolidations as well as by the increasing R&D investments we're making.
We will begin to see the benefits from plant consolidations in Q1 of 2020, we will also see benefits from driving efficiencies across the other acquired businesses were plant can debt plant consolidations are not part of our integration strategy. Additionally, our R&D investments will generate increasing revenues and margin benefits in 2020.
Creating shareholder value through margin expansion and strong cash flows are key to our success. Our goal remains to grow margins it acquisitions to levels consistent with the overall platform.
This corresponds to growing margins from current levels, 30% in the mid term we will deliver these improvements through integration efforts at our recent acquisitions, continuing continuing to execute on supply chain initiatives that leverage our scale and harnessing our capabilities in best practices to improve business processes.
The margins for businesses, we have acquired prior to 2017 stands at approximately 29%.
While the total segment margins are obviously below this level. This is the result of the many strategic investments and acquisitions, we're making to maintain our leadership position for the long term for example technology efforts around controls Io T. In automation on which we are investing approximately $15 million annually investing interventionists comp.
He and his team platforms and internal teams to drive growth in these areas growing our fabrication and design capabilities developing and implementing tools to support enhanced sales effectiveness acquiring businesses that have an opportunity for margin expansion over a period of years and expanding our bay bridge platform and enhancing our technology.
He offerings.
Excluding the impact of potential future acquisitions, we expect margins to expand in 2020, we expect cash flow generation to increase to we're proud of the industry leading margins that are mature divisions are generating we've achieved this through pricing actions cost control activities, including rationalizing headcount in certain gene areas and continuing to deliver.
Our innovative solutions to our customers. So in the face of these current sluggish market conditions on generally pleased that we've been able to hold margins relatively flat. We faced challenges continued to continue to do so in Q4, given the mix impact from the prior years speed cooking rollout do we do not expect to overcome.
This will impact margins and our growth rate. Additionally, the host mill on trade show that occurred in October happens every other year, creating additional segment headwinds for the fourth quarter of this year.
In spite of the recent in near term challenges, we remain committed to undertaking investments and acquisitions that may be short term margin detractors in order to expand our cash flow generation and ensure our market leadership position.
Moving onto the residential segment sales amounted to $134 million, excluding the impact of foreign exchange in the closure of an encore business, we experienced a sales decline of 9.6% internationally, we have not seen improved market conditions in the face of Brexit domestically as we've discussed last quarter the.
Market slowdown we feared did materialize.
With lower consumer spending and appliances Vikings Viking did not grow and we struggled with under kind of refrigeration sales overall, our new products are driving increases in our market share as consumers positively rack to our new offerings. While we have achieved revenue growth in four of the six last quarters.
Performance has been challenge after the market recently turned down unexpectedly.
The change in trajectory in the short term is hard to predict but we remain confident in our long term positioning we're outperforming the competition now and we plan to do so in the future as we look forward. We're hopeful the consumer behavior will improve but we do not see from indicators that caused us to believe short term results will improve meaningfully.
Gross margin at the residential group improved to 38.9% as compared to 36.9% in the prior year period, which was impacted by the shuttered business well EBITDA improved to 18.8% from 18.1% in the prior year, excluding the impact of FX rates and the remaining noncore businesses EBITDA.
Current year would've been 20.6% an increase of 250 basis points over the prior year and 20.4%.
That was delivered in the prior quarter.
While addressing our EBITDA performance I wanted to take a few moments to recall, our strong track record of improving EBITDA margins of acquired businesses as we look across our portfolio Viking has improved from money losing to margins in the mid Twentys. You line has improved from high teens to approximately 30% and move our.
Has improved from low double digits to approximately 30%.
He has improved from low single digits, the mid teens and links has improved from low teens to low twentys, while the aggregate EBITDA margin for our core businesses currently resides at over 20%. Our mission is to increase this to 25% over the medium term, we will achieve this by continuing actions such as exiting non core businesses.
Realizing benefits from factory consolidation as we are completing such with lengths driving for synergy benefits with commercial commercial foodservice executing and very supply chain initiatives to leverage our scale utilizing our know how and best practices to improve manufacturing processes, and bringing new and innovative products to the market.
Lastly onto the food processing segment sales amounted to $89 million of which the acquisition contributed approximately $10 million, excluding the impacts of the acquisition foreign exchange rates sales decreased 9.7% for the quarter.
Gross margin in the food processing group improved to 34.9% as compared to 34.7% in the prior year, while EBITDA margins improved due to the benefits from the acquisition.
As Tim noted the absence of large customer orders were continued to be a headwind for the segment. We're optimistic that we'll see improvement in both the topline and EBITDA margins as we enter 2020, but meaningful increases remaining immediate challenge given the current state of orders.
In terms of ensuring return to consistently extending expanding margins year over year outside of the impact of any future M&A activity I wanted to briefly discuss our restructuring actions as I noted last quarter in the face of numerous market challenges in order to drive improvements of acquired businesses. We're in the midst of a few plant consolidation efforts, which we will largely.
Complete around the end of this year as well we've undertaken other actions to reduce headcount during the quarter given the challenging environment.
Restructuring charges and associated transition cost, which do not qualify as restructuring under US GAAP were 4.2 million and 1.3 million respectively in Q3.
We will incur further expenses in Q4 savings will be realized beginning in 2020 for the most part and should annually exceed $20 million. We believe these actions along with continuing to execute numerous programs impacting day to day operations and spending levels, when coupled with pricing actions new product innovations in emerging technologies.
Actions will provide improved margins as we progress through 2020.
Net debt at the ended the quarter was approximately $1.9 billion, which was down approximately 100 million compared to the end of fiscal 2018, our net debt to EBITDA leverage ratio at the ended the quarter was just under three times.
I will conclude our comments with a discussion of cash flow generation.
During the quarter operations generated $128 million, which was a record for us after $12 million of capital expenditures, our free cash flow was 116 million for the quarter.
Noncash expenses added back in calculating operating cash flows included $27 million of depreciation amortization expense in $2 million of share based compensation expense. This total of 29 million is lower by 2 million over the prior year period.
Working capital changes were not is attractive to our performance in Q3, which was a big improvement over the same quarter last year, our year to date free cash flow to net income ratio was 81% we're committed to maintaining high conversion rate on our free cash flow and for the full year, we will exceed this level.
With that my comments are concluded an operator can you. Please open the call to questions.
Thanks, so much ladies and gentlemen, if you have a question at this time. Please press Star then the number one.
Touchtone telephone if your question was being answered or you wish to yourself from could you. Please press the pound.
Your first question comes from John Joyner of BMO. Your line is.
Hi.
Good morning to John .
Good morning, So so you touched on this a bit already.
Tim and Brian but.
Can you offer some additional color on your ability to improve margins probably 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 priority across all three segments not only 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 some at that would include pricing you include some of the head count initiatives in the head count initiatives kind of kind of cross.
Things that we would do an ordinary course is part of integration and some of that also.
Is kind of we we tend to.
React quickly is we're we're seeing changes market. So I mean that was a piece of it.
But we've got the plant consolidations, so Brian alluded to $20 million of cost savings going into two next year. So us I think were.
We expect that either some of that's been done or be will be completed.
At the tail end of this year or very early next year. So we've we've kind of.
I expect that to occur and then on top of that.
It really doesn't include I would see kind of a broad bucket of synergies that we're going after really leverage the scale. 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 to go after things like distribution and strategic freight utilities costs.
Kind of go go through a list of that those are areas that we are.
Have internal targets, we haven't put a number two it but those are things that will be leveraging next year in the residential area kind of add into that manufacturing efficiencies I mean, I would say we're still you know it is a still relatively young platform I know, we don't Viking for awhile, but if you look we've got 50 plus.
Brands in that portfolio.
Half of them have really been acquired only in the.
The last three to four years.
And during that period, we've focused on a lot with quality and new product innovation. So there's the opportunity to go back and really drive efficiencies through those factories. So that is something.
I would say there's ongoing efforts, but those efforts will get ramped up as we go in to next year. So I mean, we're we're kind of view, if you apps and some of the still existing.
Non core businesses, which is also something.
That we're addressing coming into the year I think everybody knows we exited a furniture.
Company that kind of came with the broader AGA portfolio, we still have some other pieces of business, but if you adjust for that were around 20%, but I mean, we've targeted to get too.
Twentys.
In a combination of kind of all those things that just mentioned our pieces of the journey to get us to.
To that level over the next several years.
Okay excellent that's very helpful and just maybe one quick follow up I think it should be quick so where does and sticking with residential where does AGA stand I guess with some integrating that business with the residential distribution.
So I mean, our business as you know it split.
More so than than the other segments of.
Roughly half us and half.
Largely UK based.
So there there's somewhat on a parallel and a bit.
Distinct pass given that they've got to different distribution.
Models, but.
We really have just started the scratched the surface of how do we leveraged the the product portfolio on both sides. So some of that comes from an engineering.
Standpoint, some of the customer sales standpoint someone comes from operating standpoints as I mentioned, we're just we're excited about launching some of the ACA products here in the U.S. as we go into two to 2020 were at the very.
Early stages on that so thats exciting.
For us, but certainly.
Others supply chain initiatives and the potential manufacturing opportunities as we do that as well so given both of those companies have really been focused on.
Our core businesses and John assuring it up with initial integration plans that we've had we haven't gotten to the synergy piece of that yet and I think that will start to.
Kind of opened 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 built over the last several several years, which which is to have come a long way and we've got a great sales team.
Now, we've got great leader for that that business with with Scott Google.
You know 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.
I have been enhance so.
Now that we kind of have that as a.
A strong capability it gives us the ability to bring new products and brands.
Through that with with confidence so thats something that will continue to leverage.
In 2020, and 2021 and in attached to that is the showrooms, which.
Again, we just opened New York.
This year, we've got to more than are coming online I think we're not fully leveraging the capabilities of those I mean, our first showroom.
The Chicago, which is.
Amazing group of people and.
An asset that really is.
Paid dividends and Tennessee, the the blueprint.
For us with future showrooms and.
So that is something that we will continue invest and we're excited about as we get too.
This time next year, we should have four showrooms.
Our open and we'll have been operating for for a bit of time.
Okay excellent appreciate the time thank you.
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 with the weakness recently commercial foodservice, but in reality and sluggish for a few years now so what will be attributing this two or more.
The market structurally changed so much that.
There is probably a little prospectivity getting back to that.
Average organic growth.
And now obviously seems to be more of a margin story here at Middleby, then and 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.
Our in our control and we want to expand obviously it helps at the top line is moving in the right direction versus were overcoming.
Hello weaker topline will we're expanding margins at the same time.
But certainly that is something we will will focus on but I mean, 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 felt a theres 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 5100 100 chains.
We've got a good presence there and I think you know they've been 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.
Labour whether that was before they had three or four main competitors now theyre thinking.
Thinking about 50 competitors because there is fast casual there's nontraditional locations deliveries coming online. So they are evolving their businesses and when they do that then those those purchasing decisions have become more strategic and that tends to take a little bit longer we believe the the base of equipment in those customers is aged and they do.
I need to go through a and not only upgrade cycle, but those things are going to be more strategically important and tie into their to their business plan. So we think that middleby is better positioned than anybody in the industry given.
The breadth of the the products that we have and really the solution offering that we have and again, we're kind of gearing up to make sure that those customers understand what those solutions can can do for them in terms of and have an ROI and they fall into.
Key key trends, whether it's it's labor whether it's shrinking.
The equipment and.
And footprint, whether it's helping them with address areas that they are trying to move into it with delivery.
Or even as I mentioned on the call here goes kitchen, So I think we'll probably see a little bit more of a lump lumpy spend.
As you have.
These chains come online, which are tied to two strategic decisions and if they've got large franchise operations those franchisees.
Sometimes any clarity of what the specific initiatives that they're going to put money too. So I'm going I think that is just tended to push out the cycle, where we took where historically would have been here that piece of equipment breaks down or we came out with the next generation launch and it was 30% more energy efficient efficient and we're just kind of.
Right online. So yes, I think we do expect that there will be spending cycle as our customers are going to need to really addressed a lot of these major issues that are.
Facing them in the kitchen, and when that happens, we're better better position I think in this year, we thought that there'll be some some more activity coming online in the back half of the year, we still.
I believe we're well positioned in that we'll see more of that happened in 2020, but thats put some pressure on kind of the near term.
Okay. Thanks.
One quick follow up the open kitchen.
Do you plan on charging for that and is that going to be an enterprise chain sale or is that more for the general market and all the enterprise potentially have their own aiotv or just any color and are you going to charge and the opportunity there. Thanks.
So you know it's early stage. So I mean the model right. Now is we are selling for Theres an equipment piece. So we sell in.
Sensors and.
Hardware technology.
So that is kind of the the onetime upfront comp cost and then there is a.
Continuing subscription fee.
That is ongoing and some monthly fee that we charge for that service.
Okay. Thank you.
Thank you. Your next question comes from Jamie Clement of Buckingham. Your line is now open.
Good morning, good morning.
Kim I don't know if you want to take this or Brian , but a lot of price increase during the quarter, but no way would you have fully realize that across geographies and product lines, 100%. So in terms of.
Excess costs be careful whatnot versus the pricing increase where 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 thats more of a first half of 2020, but kind of assuming cost stay the same.
Where do you think you'll be from from a margin perspective on that front.
So I'll start and then I'll, let Brian to add so I mean, you're absolutely correct that we didnt realize the full benefit so it took a price increase and we've got.
50 brands in commercial and 90 brands overall, so we didnt take they Didnt go up all exactly on the same day, but largely.
We announced price increases some were midway through the quarter.
And you know announce announcement doesn't mean that you start as you know realizing the benefit right away. So I mean, I think it you know we we addressed parts, where we had been hit hard on material costs and tariffs so that that we probably starting to realize the benefits.
Lets say in September so we've got a third of the benefit of parts in the in the quarter on the equipment side I would say, we got minimal in in Q3, we'll see it bleed in Q4.
Theres lead time.
That that we give to our customers is 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 the price increase you get the benefit probably until early 2020, So I guess, what we'll see some.
You know.
Some of the benefit roll through in Q4, certainly it won't be the the full Lam on it and then going and.
Early 2020, we will get probably the the bulk of the of the price increase then.
Okay. Thank you.
Brian Thanks.
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 at any further okay. And then just a follow up in terms of chain activity.
You talked about the installed base talked about kind of replacement cycle those kinds of one of a little puzzled by is when you see out there in the in the restaurant space.
Even in the chase it seems like there's just been.
A lot of disruption and even if you just look at like chicken sandwich market.
And you see chains.
You know talking about.
Chicken sandwich product to compete with.
Ill add one person has been successful and other people seem like I'm, just wondering why there hasn't been more chain the spending on new equipment to support new menu items.
Yes.
So.
Just going make one kind of turned over to Dave I just like to.
To comment that we are supporting all of those those the many of the chicken chains, including one that that.
Had done pretty well with the with the yet with the product, but they want to give maybe give your perspective I was just asking more from kind of larger industry perspective. It just seems like you hear a lot of commentary out of some of the public company is talking about initiatives.
We don't actually necessarily see.
Purchases to support those thanks.
Yes, it's I couldn't agree more with you. The fact is.
There is I think the big chain customers are struggling with when does their customer want when do they want to where do they want it and what type of food. There's so many dynamics going on with the.
The trends in the food business it used to be just spread across the counter and then it went through the drive your window. They don't want to delivery now. It's you know delivery services. There's so many ways to get to the product and I think that indecisive this and I feel for the leadership of the big change because they're Cherokee global customer once that in decisiveness, especially.
In the face of large franchise operations the franchisees freeze they just stop and I think I would too and they wait for.
Hey, good decision to be made.
You can you can only but you can only but with the let us on top and then the bottom in the 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 items, and we're always there to help them.
Bringing those new menu items, and we're already embedded in all the top chains.
I'll just put one more piece of the good news is.
The one thing that is consistent in this business is everyday and every restaurant they come in and turn the equipment on doesn't matter, whether there is new products or additional sales equipment gets used everyday and that the that eventually turns into useful cycles and replacement business for us. So.
I think that there has been a pent up demand on decisiveness, and 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 PUC, which allows for carry out and delivery efficiencies.
In in speed opens and Ventless technology that allows for goes kitchens and different locations for restaurants to occur in or the effective way that makes a difference for our customers customer.
I think if you step back like you're doing in looking into Mega trends. We are we are clear leader in supporting those trends just I mean, but at some point in time.
A major QSR chains that hasn't alleged premium chicken sandwich, it's dry in string is going to have to do something about that's right Amen.
I agree with your 100% they will.
Thank you thanks guys.
Jamie Thanks, Jamie.
Thank you. Your next question comes from Jeff Hammond of Keybanc capital Your line is.
Hey, good morning.
Hi, Jeff.
Just want to focus on Q4, a little bit so.
First in food processing last year, yet a big ramp into year end, maybe that's normal seasonally just how should we think about.
The tough compare there.
Going and then just on residential kitchen. It sounds like you think that business continues to be down year over year based on trends.
You Omega.
Okay. So.
I just got to get broader comment here, so I think with food processing.
Obviously.
It's been disappointing year in terms of of the cadence of orders coming in we are seeing orders start to come in now.
Unfortunately with kind of the longer.
Yes cycle to move these through I mean, thats kind of where I had the comment that we think a lot of it goes into backlog as we go into next year, so that hopefully positions us much better coming in into the year. It may not help the fourth quarter.
Quite as much. So I mean, I think you know we are.
Looking at.
We won't necessarily be is down as in the is in the fourth quarter, but I think where we think will be up in backlog double digit going into next year that that probably won't all translate into.
Lending into Q4 and Brian .
Some other specificity to that but on the.
Residential side, I mean, very honestly it that one we felt we were very well positioned coming into the year.
We do have.
Add total data of how we're doing relative to our competitors at certain dealers and.
In certainly we've got other.
You know points of information, how many displays we have and showroom floors net net we've added about 75 dealers also a lot of those dealers were.
We are partners that have walked away from from Viking either before or shortly after we bought the company in there 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.
Our positioning the business for long term growth. We you know, we see kind of betterment tools that that we have that will help us, but then what what is the broader.
Market I think it's been a tougher market than we thought coming in into the year.
And certainly that showed up.
Most significantly in the third quarter, obviously Brexit everybody.
I've been talking about till I think role.
On the face and.
Particularly the people who are living in the UK dealing with it everyday but the.
On the domestic sided.
Probably thought that the market should should perform better given kind of the economic backdrop. So thats been a little bit of a mystery I would say kind of in the in the very recent periods, we've seen things start to.
Improve let's say the the industry reports that are out there are still down but they are less down and again, we were bucking the trend in the first half of the year because the industry was down and we were up.
We held on for.
For as Brian said, you know have and having growth I think.
For a six for five to seven quarters.
So we're hopeful that the market backdrop is starting to improve a little bit we have maybe some initial signs, but I would say you know.
Unfortunately.
There's not a crystal ball.
The conference room here and our confidence level, we'd like to say say is higher so our competencies that we will outperform we seem to think that the the domestic market as you know is starting to improve.
A bit.
Unfortunately, Brexit as everybody knows garik extended for the up team time.
So.
I think going into next year I think we feel.
Better about what we've we've seen as the market backdrop for the last couple of quarters and were.
Better position that than others. So we expect to kind of get the market.
I think it really fully covers residentially noticed 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.
And it.
So.
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 a Q4, a fair amount of variability in what could be the outcome.
But we do feel more confident.
About a more positive trajectory for 20 in that segment.
Okay, and then just getting a little finer on the commercial foodservice margins into Fourq you I think you said.
From a roll out last year, the trade show dropping 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 into Fourq, and I guess, you got dilution from maybe some of the deals. Thanks.
Yes, I mean, so obviously as you noted there so there's a lot.
Happening there the.
In terms of sequentially.
It is probably going to be.
Flat to slightly to slightly down I would say, which is is negative to the prior year. We're dealing with here you know if.
Again variations moving around a growth rate that is obviously close to zero. So thats why its a little difficult to and I'm unwilling to fully committed to will the number and into black or the red as far as the topline.
But our efforts are very much focused on.
I'll call it maintaining a consistent essentially sequential margins, but there will be challenges to do that namely host is a very large show it really parallels maybe slightly so while smaller for us and our ray so that is a sizeable investment and between that and.
And again, a specific rollout at a business that contributes healthy margins for us.
Is.
Really creates the year over year pressures.
Okay very good thanks, guys, yes, thank Jeff.
Your next question comes from Walter Liptak Seaport Global Your line is now open.
Good morning, while high thanks, good morning warning.
In that commercial foodservice you guys talked about.
You asked the down 1%.
And I Wonder if you can break that out the general market versus.
The large chains.
Yes from that we are seeing on a relative basis strength in the in the general market and and weakness in the chains. So.
The first one is up in the second one is down.
Okay, and then internationally you mentioned the growth of 3.6 is that from.
Okay. Thank general marketers that from chains.
Yeah I know its.
It's really largely the same I mean, there's.
Obviously, a different level of chain.
Activity.
Happening across.
Across the regions.
APAC and Latin America do continue to be.
The stronger than than EMEA for us.
Okay, and as we're thinking about fourth quarter, I think you that fourth quarter some of that.
The larger customers larger distributors.
They get.
Rebates and.
At work on volume purchases I wonder what the.
With the markets looking like you're in the fourth quarter four.
Get extra discounts.
Well.
I don't think would.
I just made comment that I mean, we feel that were positioned.
Pretty well with our.
Our our large in strategic channel partners, I mean, I think weve.
Really work with them and continue to bring new solutions in product opportunities. So.
I think we're we feel good about that and not only.
The individual products as we grow the portfolio right. We've got to 50 brands, but really educating them on the solution. So I think a level. We're trying to do is were.
Continue to drive.
Market share and opportunities is really leverage the scope and scale of everything that we can work with them on to present unique technology solutions to their their customers I mean in terms of.
Discounting and all that I mean, I would say nothing has changed.
Significantly ahead of how we interact with those.
Buying groups and customers from what we've done in any.
What we've done in the last.
Five plus years, so no no major change there.
Okay, great. Okay fair enough and then a number of times you guys talked about procurement program and I Wonder what inning are we in and just there's a way of.
Summarizing it for us how big is that opportunity.
What's the timing and started to get the benefits from that.
So I think I'll start and Dave OLED on but looking at I think we've had supply chain for a long time, but our supply chain approach was what we buy a company and then we hit the top 50 items and Middleby buys better than they do in dollars turned up and we've done that very effectively for a long period of time, but the.
Roche coming into this year was.
Hey.
What if we all come together is 50 companies and we think about how we're buying controls and thermostats and wire harnesses and motors and.
And even.
Fasteners and can we extend the leverage changed chain due to other geographies and can we consolidate too fewer strategic supplier. So part of it as a cost element some of its a performance element as well as we kind of think about how does our.
Equipment performance in the field.
And.
After sales service and warranty costs. So it's been a much broader and more strategic approach going and ended the year.
We enhance kind of the leadership.
Around that we do not have a big.
Corporate team. So 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 you know.
That effort really started in April of this year, so and it's I think it's November if I, if I'm right and so I think.
So we're really we're we've made obviously significant.
Progress in terms of processes collaboration is identifying opportunities certainly some of it is turned up into.
Dollars, but we expected a more significant impact as we go into next year in the year.
The year after.
Yes, Tim.
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 ending.
So we're still very early on.
I think what's unique is and what we're seeing has 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 in that we're it's a it's embedded in our it's are part of our DNA now it's an operating system if not a project.
The lower cost one time, it is becoming an operating system by by basically incorporating all our talent across all divisions and and cooperating all the best suppliers.
In which improve our quality and lower cost at the same time. So what we're still early on and to answer your question directly I think we're in the second I mean, and it's going extremely well.
Okay. Thanks for that keeps telling us.
Thank you. The next question we have time for TD is from sorry Board of Jefferies. Your line is now open.
Thanks for fitting the yen.
Correct.
Now you're thinking about capital deployment, and if you would consider buying back shares given the current level and then any color on acquisition pipeline.
So.
Kind of in reverse order there I mean acquisitions continues to remain a strategic focus and priority of Middleby, obviously, we've been.
Executing on that strategy for the better part of of 20 years and certainly.
Last year in this year's spend a different I think weve added six new.
Great brands and.
Technologies to Middleby. This year, so we see opportunities across all three segments were very.
Focused in terms of strategic.
Adds to the portfolio again this has never been a tough.
Certainly it translates to financials, but it's not a financially driven initiative. It's it's a strategic initiative and I think if you look over the last few years.
You've seen us.
Extend into the beverage weve shirt up some areas that we.
No.
I had some gaps in the portfolio steam cooking, probably being one of the most significant which has a category middleby.
Really had not been in and you'd seen acquisitions, such as fire Xsan Crown, which all happening at about the last 12 months.
And then we're.
Really investing more and technology as well our.
Ill too often powerhouse dynamics as we just mentioned which has already.
We're very excited about the the opportunities that both of those are our bring to us. So pipeline continues to be robust were always busy with new and exciting ideas and I think that that will.
That will continue I mean, I think from a stock buyback I mean that other than debt pay down that's the other.
Area that we think about.
It is opportunistic at time it.
Times and.
Kind of defense on obviously, where the stock is trading.
But really the acquisitions or 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 by so thats kind of the the the prioritization and both of those are things that.
We think about on a regular basis.
I appreciate the color.
Brian .
Passing has been pretty volatile over the last couple of years I know you guys and then I agree things to improve that business.
About the.
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 an industry leading portfolio are the the companies and brands that we have in there.
There are very strategically linked in the portfolio is you know is very synergistic.
And so it is.
Right now which is a very.
A challenging period, but is that a trough and we're we have industry, leading margins and kind of the worst cycle right now so I mean it you know 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 too.
We're just the volatility so even though I mean.
Being down a fair bit and third quarter, which which none of us are happy about.
We don't view it is 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 kind of look out I mean, I mentioned it in the comments, but we do think that there are adjacent.
Areas that are you know mark some of those are growing markets and we're well positioned for so as we get in 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 trends. We're excited about those and we think that will help us further.
Diversify so there's a journey that that we are on now look you know the core competency of what we do you know.
It's obviously, we're foodservice company in this platform has been built around.
Thermal processing. It I think you know 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 of its a.
So a large scale high speed rapid cook very flexible conveyor EIS platform I mean, Thats 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.
And that goes kitchens.
Actually very interesting is we're going into segments such as that what we have customers are dealing with right now were specifying.
Kitchens that actually.
You would have thought we would have been Poland at 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 had have greater levels of automation.
So it's kind of very interesting it and those are things that nobody else in our you know at our industry.
Can do so really honestly, we we see a lot of synergies there and we think they will actually increase over overtime.
Let me, let me just double down on that this is Dave.
The turbochef.
Injection of Turbochef technology into that processing line literally doubled production capacity of that dry beef production system in the same square footage in that processing plant. Thanks to the Turbochef technology. We're a manufacturer can now double the output per square foot the reverse side of that as Tim was just talk.
Talking about there is clearly a trend here.
Using gross kitchens and other types of remote production system for our foodservice operators, we're we're bringing in the capacity the other way from our food processing equipment to allow for restaurants in foodservice operators to expand their ability to service our customers. So the technology is going both ways and kind of.
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 on food processing and food service.
That's great color. Thank you so much.
Thanks, Eric operator, well, so I'm just going to.
One last comment and then we'll let bullet.
Well close it I just want to also emphasize and this is kind of maybe a follow up to one of the other questions that.
Brian answered and.
In the in this year, including in third quarter. It we will Susan in the fourth quarter I mean, we are making.
Incremental and significant investments that we think position us for.
For for longer term growth I mean, certainly we're focused on margin improvement, we're doing that in the face of.
Some of these investments and we just talked about a lot of what these are translating into but R&D.
Technology investments is a big ones. So we have a controls initiative and that we're putting money to that and.
That will show up next year I mean, obviously, we just talked about Aiotv and we've talked about automation a lot I mean, I think those are things.
We want to be the the brains of the kitchen. In addition to kind of the Braun with all these.
Great brands and.
Innovative of technology, so that continues to be a big investment and that was certainly there in the third quarter and we'll we'll continue to have it in.
In the fourth quarter, so as we're thinking about margins I just want to kind of Reemphasized everybody. We're 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 the and it was really the comment about the.
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 tools that are.
You know are going to help us sell.
Bring the company to be more collaborator collaborative.
Closer together bring solutions to market pretty quickly allow people to see across all of our brands.
In new product introductions very quickly.
Those are there enough free.
Both the technology tool as well as the content that that we're developing and then a top of that.
You know the trade shows which has been heavy this year I mean host Didnt happen last year Nevsun Didnt happen last year in a number of international So show so thats been a significant add to.
The current year, which we think will pay off and.
You know investing in innovation centers right. So we opened up the protein center, which which which I mentioned.
We've been invested in the residential showrooms and we're opening.
This innovation center in early next year and although we don't have the operating costs, we are spending money.
To get that up and going so I just.
As you know people are thinking about.
Margin expansion, which were focused on we are also investing heavily.
In positioning for the the future with technology new products in.
Tools that are going out with spring solutions and better sales processes.
You know that to market, which we think it's kind of part of the evolution and reinventing of what we're doing here. So just just does just kind of a follow up I wanted to make sure we drove home.
So instead with that operator that concludes our time for today.
Well thank you.
Everybody for being on todays call, we look forward to catching up with you on next quarter.
Thank you.
Ladies and gentlemen, you may now disconnect.