Middleby Corp (MIDD) 2018 Q3 法說會逐字稿

Thank you for joining us for the Middleby Third Quarter Earnings Conference Call. With us today from management are Selim Bassoul, Chairman and CEO; Tim FitzGerald, CFO; and David Brewer, Chief Operating Officer for the Commercial Foodservice Group. (Operator Instructions)

Now I'd like to turn the call over to Mr. FitzGerald for opening comments. Please go ahead.

Okay. Good morning, and thank you, everybody, for joining us today on our Q3 conference call. As Muriel said, I'll go through the financials of each of the segments and some overall comments on Q3, and then we'll open up the call to questions.

Our commercial foodservice segment sales for the quarter amounted to $471.6 million, which included an increase of $106.3 million related to acquisitions completed within the last 12 months, most notably, Taylor. Excluding the impact of acquisitions and foreign currency, sales for the quarter increased 4.1%. The increase in sales reflects growth of 7.1% in the domestic market, with increased sales to restaurant chains, as we begin to see benefits of the developed pipeline of customer opportunities with many of our new technologies.

International sales continued to be soft, with a decline of 2.2%, reflecting a challenging environment in the U.K. However, we are seeing improved conditions and opportunities in a number of emerging markets, such as Latin America, India and Russia, which reflect favorably in upcoming quarters.

The gross margin during the quarter at commercial foodservice was 37.2% as compared to 39.5% in the prior year quarter. Excluding the impact of acquisitions, the gross margin rate would have increased to 40.8%.

EBITDA at the Commercial Foodservice Group amounted to $125.4 million at 26.6% and includes the dilutive effect of recent acquisitions, most notably the recent acquisition of Taylor. Excluding the impact of recent acquisitions, the EBITDA margin increased to 28.8% versus 27.7% in the prior year quarter. The margin improvement reflects the favorable mix with sales of higher technology equipment and the continued benefits of efficiency gains at companies acquired over the last several years. We continue to focus on profitability improvements at Taylor and other recent acquisitions and remain confident in the expansion of profitability with targets to expand margins at the recent acquisitions consistent with levels of the overall platform.

At the residential segment, sales at the group amounted to $153.5 million. Excluding the impact of foreign exchange, the net sales increased 1.8% at the -- for the overall group. Domestic sales increased by 9.2%, as we've continued to see strong order rates at Viking. Sales at Viking grew by over 15% as compared to the prior year quarter, and we also realized solid growth amongst the other domestic brands, including Marvel, Lynx and U-Line.

The domestic growth has continued to be offset in part by lower sales at AGA Rangemaster, as international sales declined by 9.9%, reflecting the international -- reflecting the challenging market conditions in the U.K., which have been impacted by Brexit, in addition to declines at noncore businesses, including Grange, our furniture company that was acquired as part of the AGA acquisition.

Gross margin at the residential group improved to 36.9% as compared to 35.7% in the prior year period, while EBITDA margins improved to 18.1% from 16.5% in the prior year. The margin improvement reflects increased profitability at our domestic brands driven by higher sales at Viking, along with the benefit of efficiency gains from manufacturing and distribution initiatives.

Margins at the AGA business remained flat with the prior year, as savings from integration initiatives were offset by the volume decline. The noncore businesses, including Grange, detracted from EBITDA margins by approximately 2% in the quarter. We announced the closure of this business, Grange, during the quarter and anticipate this effort to be completed by the end of the year. Grange had reported an EBITDA loss of $1.3 million, which is included in the results for this quarter. And for the full year of 2018, we'll report an EBITDA loss of approximately $5 million.

At the -- moving on to the food processing segment. Sales at the Food Processing Group amounted to $88.3 million and net sales from acquisitions accounted for an increase of $11.7 million. Excluding the impact of acquisitions, sales decreased by 11.9%. And excluding the impact of foreign exchange acquisitions and the adoption of ASC 606, the sales decline amounted to 14.3%.

Gross margin at the Food Processing Group was 34.7% as compared to 40.5% in the prior year, and the EBITDA margin for the quarter was 18.4% as compared to 25.9%. Margins at this business continue to be significantly impacted by the lower sales volumes and mix impacting our meat processing division, which has the highest margins. This -- the lower margins within the group -- well, so the lower margins were impacted by the mix and the volumes, as I said. Although we have seen the unfavorable impact of the volume, we are seeing an increase in order rates, which by year-to-date, our order rate has actually increased by 10%, and that's given us the confidence that we'll see improvement in both the top line and a return in a more profitable sales mix as we head into 2019.

A couple of other comments on the quarter. During the quarter, we reported restructuring charges of $12.1 million; $8.7 million of this charge related to the closure of the noncore Grange furniture business, with the remainder primarily related to continued integration initiatives at AGA Rangemaster and also now Taylor. This charge impacted earnings per share by approximately $0.16 for the quarter.

The third quarter is also the first quarter with Taylor included in our financial statements. Included in the results of Taylor was $4.6 million of nonrecurring purchase accounting adjustments to write inventory at the fair market value. The impact of the fair market value adjustment was approximately $0.06 per share to the quarter. And as a result, Taylor, inclusive of this fair market value adjustment, was diluted by $0.09 per share during this initial quarter. We anticipate that Taylor will be neutral to EPS in the fourth quarter, as the fair market value adjustment will not recur and we begin to realize the benefits of profitability initiatives late in this year.

We remain very excited about the opportunities at Taylor. And from a profit perspective, our focus on integration efforts to improve the EBITDA margins to approximately 25% in 2019 and 30% in the longer term. Adjusting for the impact of restructuring activities and the initial dilutive impact of Taylor, earnings per share amounted to $1.56 in the current quarter.

Now as it relates to cash flows. Cash flow generation remained strong during the quarter and amounted to $105.4 million and for the first 9 months of the year was $252 million. And this is a cash flow increase of $47.1 million from $204.9 million in comparison to the first 9 months of 2017.

Noncash expenses added back in calculating operating cash flows amounted to $31 million for the quarter, and that included $9.9 million of depreciation expense, $17.6 million of intangible amortization and $3.5 million of share-based compensation.

During the quarter, the company utilized $8.3 million to fund capital expenditures, primarily related to investments in manufacturing equipment and enhanced production capabilities. And net debt at the end of the quarter was $1.881 billion, and this compares to $939 million at the end of fiscal 2017, with the increase reflecting the funding of the acquisitions, including Taylor. And the company's net debt-to-EBITDA leverage ratio at the end of the quarter was just under 3x.

So Muriel, with that, if we could open up the call to questions?

(Operator Instructions) And our first question comes from Mig Dobre from Baird.

My first question is on commercial foodservice. I want to dig in a little more on organic growth, the core growth. Maybe a little more color on the 7% growth that you had in the U.S. business. How sustainable do you think this is? And how should we be thinking about growth going forward, particularly if some of these drags in international start to subside?

So Mig, we've been kind of talking for a number of quarters now about kind of this pipeline of chain opportunities. So we do feel pretty positive about that. I mean, we've got a -- the pipeline built, we're starting to see some of the initial benefits of that. Always the timing of chain business is questionable from quarter-to-quarter. But we feel that we're kind of back to sustainable growth in the U.S. and market conditions kind of late in the year, showing improvement generally even beyond the chains relative to kind of coming into the year. Dave, I don't know if you have any other comments on...?

Yes, so the numbers you're seeing are a result of what we've talked to everybody on the phone about for the past 4, 5 quarters, and those numbers, those rollouts, along with the smaller programs around the regional brands are coming through, and that's what you're seeing. And then if you start looking forward, I can't, obviously, from a confidentiality perspective, we just signed in the last week 3 independent rollouts that are going to start during the fourth quarter through next year: Retail grocery, QSR and fast casual. And the exciting part of that is it's all -- it's the same story of our best technology, our high-end technology, that creates that ROI for our customer. We have 3 distinct new programs just starting. So they -- it's overlapping what we promised was going to happen 1 year, 1.5 years ago, into the fourth quarter, into full year next year.

All right, that's helpful. Also, I want to talk a little bit about Taylor and the integration progress there. You mentioned targeting 25% margins in 2019. I seem to remember you saying that you might be able to achieve 25% exiting 2018. Can you maybe parse that out for me a little more?

Yes, I mean, we -- so essentially, that's the same comment, right? So I mean, I think we've been working hard with the team there, or the team has been working hard, really, on a whole host of opportunities to improve margins from SKU rationalization to efficiency and certainly, we'll be focused on innovation going into next year. But with the actions that we've taken so far, really, we think that the business is positioned to enter 2019 kind of at a 25% run rate. I mean, that'll flow from quarter-to-quarter depending on mix and volume, but essentially, that is kind of where we expect the margins to be kind of heading into 2019. And a lot of those initiatives have really taken place already.

All right, great. And last question for me. The core gross margin, excluding acquisitions, in commercial foodservice, I think I heard you on the call say that it was up 20 basis points year-over-year. Obviously, parts cost has been a real challenge for everyone. That does not seem to be much of an issue for you in the quarter here. Should we expect something different going forward? I know there's additional tariffs that came in. Any impacts that we should be aware of?

Yes, so I'd just kind of repeat the numbers. I mean, our gross margins were strong. Commercial, 40.8% when you back out acquisitions relative to 39.5% and EBITDA margins expanding to 28.8% versus 27.7%. So we did have some nice margin expansion. A lot of that is efficiency gains, some of it is favorable mix with new product. And Dave kind of touched on some of the continuing wins that we're having there. That being said, it doesn't mean we're not facing cost challenges, because we certainly are. We had steel prices go up earlier this year. That was probably -- we started to see that in the second quarter. The impact of that really started to come through in Q3. We did have a midyear price increase that we instituted, so that largely offset that. But we do have this other wave of tariffs that is coming through. That really has not impacted us in fall in Q3. That's really more of a Q4, into 2019 challenge. And we are seeing a lot of cost increases with that. So that will have some impact in Q4 on the margins. That being said, we've just announced other price increases. So literally, announcements have gone out in the last week here of pricing actions that we're going to be taken going into 2019. That would be in conjunction with kind of our normal annual price increase, but those increases will be higher than ordinary to offset the impact of tariffs. So we do expect that there's probably going to be a little bit of a gap here. But we will be able to offset the increased cost of tariffs going into '19. So that will be able to neutralize that from a margin perspective next year.

I see. So gap in the fourth quarter, better in 2019?

Yes.

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

Can you just, Tim, talk about the full year ASC benefit in processing for sale to profits? And when you compare that to the -- I think you said you had better orders in processing. Does that imply that moving into next year, I thinking really more in 2019, if you pull-forward from sale to profits, does that imply next year is down or maybe neutral because of the better orders? So how do we think about that from a high level?

Yes, so I'll be honest with you, I'm probably not -- I shouldn't say this, but I'm probably not the ASC 606 expert. But kind of big picture, coming into this year, we did have a big benefit in the first quarter. In a lot of ways, the accounting guidance was we were re-recognizing revenue from last year as you apply the new accounting principles. That's kind of gone away. And a lot of the impact that we're having even in this quarter is really just how it flows from quarter-to-quarter. We're not re-recognizing, necessarily, revenue from '17. It's what the impact would have been would it have been normally recognized in Q4 or other periods. So I think as we go into next year, we'll have kind of more of a normalized situation where ASC 606 will be applied consistently year-over-year. The order rate is totally separate from ASC 606, which is accounting. So we're pleased to see orders kind of coming back online. It is certainly not where we want it. Some of the larger projects that have been out there still are out there, and we're working on closing some of those, although we've seen some come in. The mix helps us somewhat. And some of those have been -- some of the backlog is coming into sort of our meat business and some of the higher-margin companies, which that's really what's hurt us quite a bit this year. The order rate on some of these projects, because they are, some of them are more longer-term projects, we're hopeful that we'll see improvement in Q4. We're kind of cautious on what improvement means, but better than Q3. And I think we can probably come back into growth as we go into 2019, if we continue to kind of see this order rate throughout the rest of the year as well as having a better backlog, which by all measures right now, it looks like we'll have a better backlog going into '19 than we did coming into '18.

Okay. If I could just follow up on that as my second question. Is the -- on the order -- is the order volatility due to tariffs or pricing, like it was earlier in the year? And secondly, you guys added -- adding back $4.6 million of acquisition-related inventory step-up. It seems kind of unusual. Has that happened before? And just what's -- is there anything specific driving that? It seems unusual to happen.

Okay. So I guess, taking that in reverse order, I don't know if that's a good way to do it, but the fair market value adjustment, so that was Taylor-related, we do have that regularly. So any time we buy a company, which is all the time, buy companies, we have a step-up. So we take their inventory and we have to write it up to fair market value, and then we basically sell it for no profit, which is not the economic reality, but that's kind of how the accounting rules work, and it always impacts our EBITDA and our gross margins in that first quarter. It's just a bigger number, right? I mean, so Taylor is a much larger acquisition. We did a whole bunch of other acquisitions, and they're much smaller companies, not so impactful to Middleby. So we're pointing it out because it causes Taylor to be fairly dilutive in that first quarter, and it's a noncash, nonrecurring item. So that's kind of why we're calling it out. But it does happen to us all the time and it's kind of embedded in a lot of the -- probably, that first quarter after anytime we do an acquisition, you'd see that.

But you guys are stepping it up. Is it normal to step it up? Or do you ever step it down?

No. Yes -- no, you'd always step it up, yes. That is normal. I mean, that is the accounting rules. And so long as the inventory is less than what you'd sell it for and even companies with lower margins have gross margins of 20% or better, so you're always stepping it up to basically what the sale price is. Yes, that's what you're doing. You take your inventory -- and I'm sure people want to hear accounting dissertation on a conference call, but you basically take your inventory and you step it up to what the sale price is. So whatever is sitting there in inventory, you know you're going to be selling it for little to no margin out of the gate. So the more inventory you have and the bigger the company is, the more impact that it would have to Middleby.

Yes, we'll take offline, sorry about that. But I was surprised to see a benefit. I was surprised to see a benefit.

So just kind of going to the other question you had, which was food processing, yes, I mean, it's -- we kind of live and die by the big orders, right? So I mean, that's kind of the beta to growth. I mean, there's 5 or 10 projects a year. In any given year, that will cause us to be up double digit or down double digit. And unfortunately, we've had a dry spell. A lot of times, these projects come in emerging markets. We've had projects in Thailand and China, Brazil. I mean, we have been working on a number in markets, ongoing right now, Russia, Middle East and Asia. Some things have been slower to come through, and I think that kind of goes back to how we've always talk about this business, which is it's a lumpy business and continues to be lumpy. It's still a great business. It's high technology. The margins are struggling a little bit right now because, obviously, the volume is getting hit at the higher-margin businesses, but we do see a pipeline. Obviously, it was mentioned, we are seeing orders up, so that bodes well. We're still below what we consider our run rate trajectory, but see improvement going into next year and kind of are hopeful with some of the opportunities that we see in kind of the international business. And that's been one of the areas that we focus heavily on as we've been building the platform is really pulling a lot of these brands into markets that they haven't been before, putting together full line projects. And that's really an advantage that we can offer to our customers with a complete system. And that -- and we've had a lot of success with that. But if projects aren't going, projects aren't going. So I think when they're there, we will get our fair share of the business, and we think gain market share in kind of these bigger opportunities.

Your next question comes from Jamie Clement from BRG.

Tim, if I could just delve a little bit more into processing, specifically on the margins. If some of the protein projects start coming in, in 2019, you'll have had some time to continue to integrate some of the recent acquisitions. I mean, is there any reason why, if that business line starts coming back and generating orders, why you can't be reporting mid-20% kind of EBITDA margins in quarters next year?

No, there's not. I mean, so we're obviously very disappointed with the EBITDA margins. I mean, at the end of the day, they're not -- they're 18%, 19%, they're not bad margins and we're not losing money. But we're very disappointed with them. But it drops because of the mix. So it's not something structural or fundamental. You get some orders in those higher-margin businesses, and those margins can come back up very quickly. So yes, the answer is that. In addition to that, we have had a lot of acquisitions in food processing over the last 18 months. So there is a -- also a drag to margins because just the typical Middleby situation, which is you buy a company and it's lower margins than the average. And then we spend the next couple of years bringing it up. So you have that kind of also embedded in the platform. And a piece of that is bakery versus meat. So the bakery is still lower. It's coming up. But a lot of the acquisitions we've done have been within bakery. So bakery is kind of 2 steps forward, 1 step back. We're making progress on efficiencies, but we're buying more companies in bakery at the same time. So it's kind of keeping the margins of bakery lower, but that's all part of building the platform, right? I mean, we'll continue to integrate those businesses. Bakery will come up. Hopefully, we'll get some of the orders in some of our higher-margin businesses and then you could then see what you're talking about, where you've got margins back up to mid-20s like numbers.

Like where you were in the third quarter last year?

Yes.

Okay. Dave, if I could ask you a quick one, because you were talking pretty quick. I think you mentioned that some of the 3 new pieces of business that you signed recently. Did you say QSR, fast casual and grocery store? Is that right?

Yes, I did.

Are those new customers for Middleby? Or are those some old friends or a mix of both?

A mix of both. But the key point there is they've all been single source. And they -- those are actually incremental to the programs. I just pointed out those 3, there's that -- we've talked about the portfolio rollouts that we have and -- but those are a mix of both, which are great news. And the reasons behind single source are also great news from an engineering and ROI perspective. Customers are understanding this best technology that we have. So it's very encouraging. Very, very happy about the way the brand, the Middleby brand, has responded. The leadership team's doing a great job.

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

Yes, I wonder if you could talk about AGA, where you guys are now in the restructuring and what's the general outlook there.

Yes, so before I go to AGA, I mean, just to repeat, I mean, we're pretty pleased with what's going on domestically with margin expansion there. Top line is moving at Viking. So it's a little bit of a tale of 2 cities, where we've got things hitting on a lot of cylinders now domestically. In the last quarter, we talked about distribution integration, and that's still ongoing a little bit, but that is largely behind us, too. So I think a lot of positives on the residential side of the platform. Domestically, from AGA, the restructuring is going very well. The cost structures are in much better place. We did a lot to move -- there's the Rangemaster business and there's the AGA business. The Rangemaster business is already kind of well north of 20% EBITDA margins. So it's really been the AGA business that's been lower margin. A lot of the focus there has been closing the foundry, which we announced last year, but really haven't gotten the full benefits of the cost yet. And actually, some of the minor restructuring with AGA was really the final exit of that or write-down of some of the facility cost. But we're moving to a new product line, which is launched late this year going into next year, which will have higher margins. And so there's -- a lot of the heavy lifting is behind us. So as we have had significant declines at AGA, the margins haven't declined there. So we would have liked to, obviously, gotten the benefits of even just being a flat revenue, we would have gotten a nice margin boost there. So really, the challenge is the top line and what's going to happen in the market there. I mean, as we've tracked the market, the premium market is actually down more than our AGA brand. So we think we're not losing market share. We may be even gaining market share with Rangemaster. But it is a difficult market condition. Now I think going into next year, we're going to be overlapping some pretty large declines. I mean, roughly 10% for the year for -- in the U.K. market. We, unfortunately, don't have a crystal ball. We'd like to think that market conditions flatten out or maybe improve and we'll start to get some of the benefits of kind of initial new product launches, certainly with AGA, but also some new products with Rangemaster, which I think those will accelerate more into 2020. But hopefully, a better backdrop from a top line and then that'll kind of translate to the bottom line, so...

That's helpful. And then what's the time line for introducing AGA to the U.S.? And how will that work with the Viking products lineup, those 2 alongside each other?

So we have been introducing AGA to the U.S. this year. And you will find it on a number of dealer showroom floors. It is in the Middleby showrooms, so we've got our new showroom that we just opened in New York, which actually has a number of AGA products there, and in Chicago as well. It is still a small line of products, because we do not have all the sizes. Right now, we've got 48-inch products. We'll be focused on launching 36-inch products, which is where the larger part of the U.S. market is. The products are very exciting, so different styling than Viking. So it really kind of broadens out our whole platform of technologies and designs that we have really across this great portfolio of brands and products, and that has really been the vision of really having these leading brands and products similar to what we have on the commercial side of the business and now that goes to distribution and leveraging that and really kind of having everything that -- that a consumer would want kind of all in one package within Middleby. Dave?

Yes, I would add 2 things to what Tim's saying, is one, as we brought AGA into the States, we have that aftersales service and support, the parts and the ability to take care of those customers, is fully embedded. And so we're tracking, as we evolve the business, we're leading with our ability to take care of the customer with these brands. And the second thing I'd encourage everybody on the phone to do is to go to our showrooms. These showrooms are very powerful, and it really demonstrates how we're lining up the AGA brand with the Viking brand. And go in and talk to the people there. And I think it's a great visit. It really shows off how we're managing, from a brand standard, the AGA brand and the Viking brand, which is, I think, is near perfect in those showrooms. And it's right there for you. They're right there in New York for you.

Okay, that sounds good. Just Tim, tax rate for the fourth quarter, any thoughts there?

Yes, I think it'd be fairly consistent with what we saw in Q3, so in the 25%, 26% range.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

So can you just talk about the core trends in Taylor, how it performed? And then just on the inventory step-up, is there any carryover of inventory step-up into 4Q?

Okay, yes, so the step-up is done. So Taylor, I mean, it's our first quarter, right? So I mean, I think it's kind of -- I mean, there's not necessarily trends to take out of the quarter. I mean, I think, initially, we're focused on, frankly, some product line simplification. We did reduce the SKUs by quite a bit. I mean, typically, this isn't necessarily a trend, but typically, when we buy a company, we do try to simplify and focus on the core. That's part of a profit initiative in us getting to 25%. So it's literally like 40% of the SKUs which accounts for about $10 million of the revenue of the business that we're exiting. We hope to make up some of it in other -- and shifting the sales to some of the other products, although there may be some sales loss there. There's some good opportunities with chain customers there and things that the Taylor team had been working on before we arrived. So I mean, I think those -- that's all positive, some large customer opportunity. But I think we'll talk more about trends kind of as we kind of move into 2019 and on the next quarter. I don't know, Dave, if you have anything else to add?

No, I'd just say that Tim and I both spent a week, last week, with the Taylor leadership team, getting our hands dirty with some distributors. And I know the Taylor team is listening in, as we speak. And so I would tell you and them that I couldn't be happier with the results that they've gotten on rationalization of the product line. The work they're doing on supply chain is just phenomenal. They're right on schedule. Tim and I have done this 40 or 50 times, they're doing as well as anybody. And the innovation, they're accelerating their innovation of new products and their manufacturing changes are right on schedule. I couldn't be happier with the team. And they're right on schedule, if not a little bit ahead, so -- and we will not back off that pressure.

Okay, great. And you mentioned the wins in commercial. Can you just talk about what you're seeing in the general market? And just how do you think 4Q shapes up, given some of [your wins], do we see an acceleration in that domestic growth rate going into 4Q?

So I think we kind of see a continuation into Q4. I mean, we're pretty solid with the chain business. The general market, which was softer in the beginning of the year, did start to revert and pick up in Q3. So we expect that to continue into Q4. So I would say fairly similar in Q4, with some pretty good set of opportunities on the chain side of the business going into '19.

Okay. And then just quickly on food processing, 4Q, I think you said a little bit better. Should we think of that comment as in sequentially or year-on-year on a quarter basis?

I would take it as sequentially.

Okay. And then, I guess, with the order growth in food processing, I mean, that seems like as long as we stop seeing these deferrals, you've got pretty easy comps and a building backlog, so that should set up pretty well?

Yes, yes. I mean, yes, it's promising, it's honestly, it's not, again, great where we want it, but there is some good things in the pipeline. Certainly, 2018 is not a banner year, by any means. So I mean, I think we should be set up to have a pretty good opportunity in '19 off of a weak '18.

And our next question comes from Walter Liptak from Seaport Global.

I wanted to ask a couple of follow-ups. On Taylor, last quarter, you said that it was going to be about $140 million, $150 million in the back half. I wonder if we can get how much revenue was Taylor this quarter? And is it still going to be back half or back quarter loaded?

When you say back half -- look, so it was in the low 70s in Q3. It'll -- that is still the range. And Q3, there was a little bit of disruption, just -- we just bought the company. We actually shut down operations for a week to do a physical inventory. There's transition items going on and some of that affects revenues in the year, but that is kind of the guidance for revenues roughly in the back half of the year.

Okay, okay. And right, so Taylor's new and you're going through this product line simplification. And I think you called out $10 million. So when you bought it, I think it was about $315 million. So does that mean we're at a run rate right now of about $305 million? Is that a good base to use looking at next year?

Yes, I think that's fair.

Okay. And you also talked about a $15 million profit improvement, I think, in 2019 versus '18 for getting to that EBITDA margin of 25%. Is that still on track?

Yes, that is on track.

Okay, great. And then what -- I wanted to ask about commercial foodservice. And one of your competitors is -- had a little bit of problems with price, cost and other things. I wonder what the way you're thinking about the pricing environment for the fourth quarter, and I guess, how things were for pricing in the third quarter?

Well, yes, I mean, as I mentioned earlier, I mean, we are taking price increases in '19. I mean, I think it's pretty broadly understood that tariffs are a substantial headwind to all domestic manufacturers. And we are seeing a number of other companies alongside us take pricing increases also to try to offset that. So I do think that is the market backdrop. And we've had made announcements already to our customer base that we are doing that heading into '19.

Okay. I guess, I was wondering more about price discounting, if there's pressure, especially in the U.S.?

Well, look, I think from a Middleby perspective, let's talk about us, I mean, I think that's something that we've always been disciplined on, and we focus on a sale, on return on investment with our customers and demonstrate the value that it delivers to them, with a payback, and that is really our sales process. So we're very focused on not discounting.

Okay, okay. One more, if you don't mind. The -- I understand commercial foodservice being weak internationally because of Brexit and the U.K. But I wonder, when do we start to see international start to get a little bit better? Is it the thing where you could have other parts of the world outside of -- out of the U.K. that start to improve? Is there any pipeline or funnel of projects that we can talk about?

Yes, so it's just -- international has also been a softer year, and it's not very -- it's not unusual, I mean, Middleby, historically, will have high growth and then we'll kind of be down. We do touch a lot of emerging markets, and that is our strategy. And we've had a lot of investments in a number of the markets that we mentioned earlier: India, Brazil, China, now opening Russia, Middle East. So those are the markets that we want to be -- that we think that will have outside growth in the long run. We've kind of had a mix this year in those emerging markets. We've had some chains that have grown fast and have reset. We've had some markets that have had conditions, such as Latin America, which are -- that was recovering from both weather and political issues. And then we have softness in the U.K. So I think going into next year, unfortunately, I think we -- the U.K. is a market that we do have -- that is our largest single market outside the U.S. And I think we do have a backdrop there that will be challenging. But I think on a lot of the other markets, we're seeing momentum in more of them hitting on -- more cylinders firing next year than this year. As we go into '19, China, probably improving. What we saw this year with our customer base, India, the same way, I think we're well-positioned there. Latin America also improving. So I think a lot of these other markets will be doing better, and that'll help offset whatever the condition is in the U.K., which I would just say is uncertain to us right now.

And our final question for today comes from George Godfrey from CL King.

Could you share a book-to-bill on the food processing segment or a comment? Was it over 1?

Yes, I mean, it would have been over 1. I don't really have that metric. And maybe that's something we'll start considering reporting in future periods. It's one of the -- but it's not a metric that we've reported. I don't actually have it handy. But it would have been over 1.

Okay. And if memory serves, the revenue breakdown of that segment was roughly 75% meat processing and 25% bakery. Post the acquisitions, is that still the case?

You know what, I don't have it here. But it has shifted a little bit, because we've been hit more in meat. So I would venture to guess, if I'm recalling it, that right now, it's probably more like 2/3, 1/3. And that's part of the impact with the margins here.

Yes, because meat has a higher margin than bakery, right?

Yes, so -- yes, so we -- bakery has grown partly through acquisitions, so it's becoming larger. And then meat is where we've been with the orders the hardest. So that it's kind of been a double whammy.

Okay. So that was my final, the other thing that I wanted to follow up on, is so the bakery got hit as well as the meat, but the meat is the larger portion, so that's why you called that out in the press release?

Yes.

And I am not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Tim and Dave, I'm going to make some closing remarks. First of all, I want to thank everybody who's been with us for a long time. Some of you analysts have been with us for a long time, investors who believe in us. And I want to give you a little bit of a flavor of where Middleby is going and where the industry is going, from my perspective, having been in it now for many, many years.

So from a macro standpoint, I see a shift from traditional dining to delivery and fast service. Millennials are choosing more convenience, fast-paced chains with fresh alternatives, a sweet spot for us, where we are very well-positioned with fast casuals.

The second trend I see is open kitchens. This forces operators to replace their equipment, like ovens, fryers, soup warmers, countertop equipment like toasters, grills with bright colors. And the new equipment will feature sleek touchscreens instead of bulky buttons and knobs. So we're going to see some replacement of business toward -- of equipment toward more sleek-looking. I'm not saying it's going to be like Viking, but it's going to most probably start moving toward these trends.

Number three, something we've been aware of for years. Labor is a critical issue for operators across the globe. Finding workers is a problem, and the cost of labor is rising tremendously. We at Middleby have been at the forefront of labor-saving equipment for over 10 years.

Our vision, which I've stated many, many times on conference calls or with customers, of seconds and inches, is what's driving our R&D to innovate by improving efficiency and reducing labor as restaurant kitchens are getting smaller. The trend is for equipment that runs smarter, smaller and easier to operate. Equipment that saves on labor and makes training easier, with technology that is simple. This is the trend. Less labor, less training, more intuitive, smaller, easier to operate.

A few months ago, I was with the VP of Operations of one of the largest fast food chains. He told me that they have over 350,000 open positions throughout their system that they are unable to fill. It is truly holding them back. Their only option is to configure automated and smart kitchens as well as being more customized and automated on the front of the house.

Sustainability is the new buzzword, both at the operator and consumer level. Unfortunately, many equipment manufacturers are touting sustainability in their marketing brochures. However, very few have built a data management system to help the operators track how much water, energy, frying oil, as examples, are used and discarded. We at Middleby, our story is our validation and payback through data analytics.

We have worked very hard the last 3 years driving our smart equipment and our data analytics. And we are ready to unveil this system at the upcoming NAFEM, with almost most of our divisions to be online with a unique data analytics system and a data management system that allows the equipment to connect with the end user and the operators across the system.

I will be the first to admit that our industry is not quick to adopt new technologies. However, I can honestly say that starting somewhere in the second quarter of 2018, we are seeing -- we are starting to gain traction in our new innovative platforms. And I believe that it will accelerate in 2019 and 2020. So I'm very optimistic about that.

Now going to us specifically, going from the macro to the micro. What are we doing? What have we been doing at Middleby? 2.5 years ago, we reinvented ourselves. It was painful. We reinvented our selling structure externally, our distribution system in residential. We restructured many of our organizations, especially internationally, and how we work together. We simplified our business. However, the biggest reinvention has been in terms of our investments in equipment innovation. In the past 2 years, we have been working on the following: In beverage, we have been working on multi-task dispensers, both in sodas, beer and water. In water, we are creating dispensers with our Follett division, where we are dispensing sparkling and still water and adding flavor shots down the road.

Water is something our customer could make money on and they want it to be in-house. In beverage, we've been working on injecting nitro into many things, into coffee, into tea and kombucha. In soda, we have been working on creating an affordable substitute to customizing soda. And our main patents that differentiate us with our other competitor, our only single competitor, is the safety of our nozzle in terms of bacteria and no flavor transfers. We have been working on tea dispensing and innovation in that segment.

We have invested heavily, through L2F, our newly acquired division, into our Skyflo, our automated bar system that uses artificial intelligence and sensors. On the cooking side, we've been working on multifunctional cooking equipment that can perform multiple functions, and we have been leading the way into rapid cook ovens.

Restaurant kitchen space is always at a premium. And through our vision of seconds and inches, we have been able to maximize cooking time and minimize space. Delivery and takeout has become a major trend among millennials. We have reformulated our delivery bag and catering systems to becoming ultralight and much more efficient and longer-holding. We redesigned our CookTek holding bags to be lighter and more durable, which lessens the strain on employees when carrying heavy pizza bags or food pans to homes or catered events.

When you look at our smart cooking technology, giving chefs and chain operators the opportunity to connect their equipment with an iPad or a smartphone, allowing them to control the temperature and cooking method remotely, ensuring that the food is cooked perfectly.

Our next generation of recipe, which is to put programs inside our cookers, includes the option to push out recipes from one corporate hub to individual stores and to be tracked via app using the machines as a smart piece of equipment that requires less training.

Then I would like to go to waste reduction. Waste is a hot trend, especially food waste. We have been working, through our IMC division the last few years, on creating the most advanced food waste system. We are aiming to create, along our customers, a 0 waste kitchen within the next 5 years. Our waste management system today for foodservice is very advanced. It works on minimizing food waste, reducing solid waste except metal, and we are among the very few that can do both. We can also go from in-house waste compacting to on-site composting into pellets.

The next trend where we've been unveiling uniqueness has been freshness. Our Carter-Hoffmann GardenChef unit is a unique product that allows individual operators to create their own organic vegetables without any labor required. We allow restaurants now to create a small footprint, do-it-yourself herb garden, so they can grow their own herbs, lettuces, microgreens in-house.

Let me define, give you a little bit what unit looks like. It has 4 compartments that can be separately programmed via a touchscreen to supply the right amount of light, water and temperature for each shelf, creating different zones to grow a variety of greens very quickly. It's fully automated. All they have to do is put the tray of seeds and they don't have to do anything else beyond that. They just name the type of seeds they're putting in and the unit does everything else. We are highly patented on this unit.

Ventless remains a key driving force for us. We are a believer in ventless technology, with 11 new ventless products coming out in early 2019. Let's give you another flavor of a product called the TurboChef Double Batch oven. It is a ventless impingement oven comprised of 2 independently controlled high-speed ovens that produce more food faster, especially with its patented oscillating rack. The oven is a space saver, with only 27 inches wide and reduced its energy consumption by 50%. Most impressively, chefs control each oven with a split-screen WiFi-connected touch controller. This is a little bit the flavor of our future of innovation and where we're going.

I can share with you another interesting innovation from our new acquired QualServ division. They are the leader in building out restaurant concepts. They have now developed a new grab-and-go display unit with both heating and cooling as one unit. Instead of needing multiple pieces, one unit can be programmed via a touchscreen to a number of different temperatures at once.

So when you think about where we're going, our batch oven is no longer a prospect. It's being rolled out at one of our flagship chain restaurants. Our innovation is real, not prototypes. Every project I spoke about and every product is now out or coming out within the next 8 months or less. So our innovation has been driven through ventless, multifunctional, energy-saving, space-maximizing, labor-saving and smart connected technology.

So the last 2 years, I'm very proud of how we've reinvented the company. And I want to thank you for sticking with us. Some of you did not understand a little bit maybe the strategy. You were wondering what was going on. But we stuck to our guns to go back to what has been true to us all along, which has been validation of our innovation, back at the customer, through payback and now through data analytics and making sure that our vision of seconds and inches is real. This concludes my comments, and thank you.

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