Selim Bassoul - CEO Tim FitzGerald - CFO David Brewer - COO, Commercial Foodservice.

Josh Chan - Robert W. Baird Robert Barry - Susquehanna Jason Rodgers - Great Lakes Review Larry De Maria - William Blair Jeff Hammond - KeyBanc Capital Markets Joel Tiss - BMO Saree Boroditsky - Deutsche Bank.

Good day, ladies and gentlemen. Thank you for joining us for The Middleby’s Corporation First Quarter Conference Call. With us today from management are Selim Bassoul, CEO; Tim FitzGerald, Chief Financial Officer; and David Brewer, Chief Operating Officer of Commercial Foodservice.

We will begin the call with opening commentary, then open the lines for question-and-answer. [Operator Instructions] Right now, I’d like to turn the call over to Mr. FitzGerald for opening remarks. Please go ahead, sir..

Good morning. Thank you, everybody, for attending today’s conference call. I will -- this is Tim FitzGerald, CFO of Middleby, and I will make some initial remarks, then we’ll open the call for questions. Net sales in the 2018 first quarter of $584.8 million increased $54.5 million or 10.3% from $530.3 million in the first quarter of 2017.

The first quarter sales include the impact of acquisition activity not fully reflected in the prior year comparative results, which accounted for $63.9 million or 12% of the sales growth in the quarter, while the impact of foreign exchange in the quarter added an additional $14.8 million or 2.8% to sales in the quarter.

Adoption of ASC 606, the new revenue recognition standard, increased net sales by approximately $14.1 million, primarily associated with our Food Processing Equipment Group.

Excluding the impact of foreign exchange, acquisitions and the adoption of ASC 606, sales decreased by 7.2% for the quarter, including a organic sales decrease of 1.4% at the Commercial Foodservice Group, a net sales decrease of 8.4% at the Residential Kitchen Equipment Group and a sales decrease of 28.7% at the Food Processing Equipment Group.

Sales at the Commercial Foodservice Group for the quarter amounted to $359.9 million. Excluding the impact of acquisitions, net sales of the Commercial Foodservice Equipment Group increased $1.7 million or 4.5%. This included $6 million related to the favorable impact of exchange rates.

Although we realized an organic sales decline for the quarter, excluding the FX impact, we did see positive growth in incoming orders, which included initial orders related to several anticipated rollouts with major restaurant chains adopting new -- certain new technologies.

We continue to actively work with a broad group of customers on the adoption of a number of product innovations introduced in the past several years, which we believe will be reflected in improving sales as we move through the balance of the year.

We are also confident that the strategic changes that we made to restructure the selling organization by consolidating and strategically partnering with industry-leading sales rep organizations will enable us to better represent and promote our portfolio of brands and product innovations to our customers.

However, in the near term, this transformational change continue to impact the quarter, as we made final rep transitions in the first quarter and also continue to train the sales associates at these firms on our brands, products and programs. Sales in the Residential Group amounted to $136.3 million.

Excluding the impact of foreign exchange, sales decreased by 8.4% at the Residential Kitchen Equipment Group. We’re pleased to report sales growth at Viking, which increased by approximately 5% during the quarter and contributed to approximately 1.5% in sales growth to that overall segment.

We continue to see strong order rates, which have continued at a double-digit growth rate and outpaced sales in the first quarter. We’re confident that the significant investments we made during the past several years associated with new products, quality, service and sales have repositioned Viking for sustainable growth.

The growth in Viking was offset by the impact of strategic changes to move sales of other premium brands to our company-owned distribution. This impacted growth by approximately 4% and reduced sales during the quarter.

And additionally, the sales for the quarter reflected the impact of non-core businesses, and we continue to restructure and right size those businesses to focus on profitability improvements. When that impact, these noncore businesses, reflected a net sales decline of approximately 2% to the segment.

Sales at the Food Processing Group amounted to $88.6 million. Excluding the impact of acquisitions, sales decreased by 8.5%. Additionally, we recognized $14.1 million related to the adoption of ASC 606, the new standard related to revenue recognition.

The sales decline at this segment reflect fluctuations that we’ve seen in the past, driven by timing of larger projects.

We’ve had several anticipated larger potential orders not materialize, which resulted in a sales decline in the quarter and which will also continue to impact upcoming quarters, although we would expect the impact to lessen in the future quarters compared to Q1.

The gross profit for the first quarter increased to $211.6 million from $209.5 million in the prior year period, reflecting the impact of increased sales from acquisitions, offset by the impact of higher-margin organic sales declines. The gross margin rate decreased from 39.5% as compared to 36.2% in the current year quarter.

The gross margin at the Commercial Foodservice Group was 38.4% as compared to 40.9% in the prior year quarter. This reduction in the gross margin rate was due to the recent acquisitions in the past three quarters, which carry lower margin rates.

Excluding the impact of these acquisitions, the gross margin rate at the Commercial Foodservice Group amounted to 40.8% and was consistent with the prior year.

Consistent with our history, we anticipate that we will see margin expansion at the newly acquired business operations through the implementation of integrated initiatives and the realization of synergies within the group. The gross margin at the Food Processing Group was 31.7% as compared to 39.5% in the prior year quarter.

This is primarily reflective of lower organic sales within the group. The sales decline also impacted the product mix with our -- as our highest-margin brands that are typically involved with larger customer projects were impacted.

We anticipate this impact to margins will lessen in the second quarter as the margins in the quarter were also impacted by certain new product development costs that we incurred with new products coming online. The gross margin at the Residential group was 33.5% as compared to 36.9% in the prior year period.

The gross margin was impacted by the transition costs and lower volumes related to the cancellation of distributors in the second quarter, which impacted the margin. Additionally, we invested heavily in dealer product displays and promotions at Viking in the quarter.

We estimate that these transition and investment costs impacted the gross margin rate by approximately 3%.

Although we anticipate continued impact from the distribution changes in the second quarter, we expect margins to increase in the second half of the year as we realize the benefit of the strategic changes in the distribution channel that have had the negative short-term impact in the quarter.

Selling, distribution and general and administrative expenses during the quarter increased to 115 million -- or increased to 122.9 million in the quarter as compared to 115 million in the prior year. The first quarter of 2018 included 14.8 million in incremental expenses related to acquisitions completed within the past 12 months.

This included 4.3 million associated with noncash amortization expense. The increase also includes the unfavorable impact of foreign exchange rates, which added 3.4 million to expense during the quarter.

Additionally, we have realized increased professional fees in comparison to the prior year of approximately 3%, primarily associated with strategic transaction costs.

Excluding the impact of these items, SG&A declined by approximately 13 million as we realized reduced expenses from cost savings initiatives completed in the last year and lower incentive compensation costs.

The provision for income taxes in the first quarter amounted to 21.3 million at a 24.5% effective rate in comparison to 22.7 million at a 24.3% effective rate in the prior year quarter. The tax rate in the first quarter reflects the reduction in the federal tax rate from 35% to 21% due to the enactment of the Tax Cuts and Job Act of 2017.

The tax rate in the prior period was favorably impacted by a tax benefit associated with the adoption of ASC related to the stock compensation, which resulted in the recognition of excess tax benefits from share-based payments to be recognized as an income tax benefit, which added to EPS by approximately 14% -- or $0.14 per share in the prior year quarter.

As it relates to cash flow and the balance sheet, cash flow, as generated by our earning activities, remained strong and were approximately 44.7 million in the quarter as compared to 46.9 million in the prior year quarter.

Noncash expenses added back in calculating operating cash flows amounted to 19.8 million for the quarter, which included 8.2 million of depreciation expense and 11.5 million of intangible amortization. And net debt at the end of the first quarter amounted to 945.7 million as compared to 939.2 million at the end of fiscal 2017.

The company’s debt-to-EBITDA leverage ratio at the end of the quarter was approximately 1.9 times. Howard, that’s it for the initial overview. If you could open the call to questions, that would be great.

Howard, could you please open the call for questions and answers now?.

[Operator Instructions] Our first question or comment comes from the line of Josh Chan from Robert W. Baird..

I was wondering, within the Commercial Foodservice business, is there a way that you can give us some color about how the U.S.

business grew versus the international business? And then, I guess, you mentioned some distribution impact, and I was hoping for some color on how long do you think it’ll take to resolve the impact from the distribution changes..

So our sales in the U.S. were flattish. We were slightly down in international. That was really specific to a couple of targeted markets, India being one of them, where we had some management transition going on, on Australia [indiscernible], where we just saw a slower demand in that market.

So we do anticipate that we’d see things pick up in the India market as we go through and as well as some of the other international markets..

As far as second question was our rep distribution changes, as we mentioned that starting last year this time, we made a strategic decision, Josh, to basically build a long-term consolidated distribution channel where we’ve gone from almost 200 reps to less than 50.

And this has been something that we knew will disrupt our business because we had contractual agreements with our existing reps, and we had to honor those agreements.

And we wanted to make sure that the transition was smooth and morally ethical, because we’ve had reps who’ve represented us or represented one brand for us for years and we wanted to make sure. So with this, I’m going to turn it to Dave to explain a little bit why did we do this..

I think strategically, this was probably one of the greatest moves we’ve ever made.

The fact is if you looked at the changes and the cost of the change and the emotional, because they were great friends of ours and it’s been a tough business decision, but I couldn’t be more happy with the results that we’re starting to see here with the retraining of these reps.

And I think in the numbers, if you look at it, if you look at even just the top 20 reference in the United States, like, we are -- we probably have 17 of them now that we have a close, tight contractual relationship that is a long-term relationship and a partnership.

And now we have to get them trained, that we’ve been working on, and I think that they’re going to do a much better job representing us in the marketplace. And I think it’s going to continue to affect us here and for the next month or so. But the momentum is positive, but the relationship is powerful.

And I think at our National Restaurant Show coming up, we’re going to solidify that completely..

So I would like to reinforce that, yes, we’re going to most probably have a continued effect -- impact of the distribution chain, most probably somewhat in the second quarter. We’re going to see the impact. But I will continue to say what -- reinforce what Dave said.

It’s a long-term strategic move that most probably one of the most disruptive moves that we’ve done. We have not slashed our distribution in 20 years I’ve been at Middleby. And again, I go back and say what really please me at our team, and I have to give kudos to the team, is that we got aligned with 17 of the strongest 20 reps in the industry.

Top 17 have basically switched to be with us..

Our next question or comment comes from the line of Robert Barry from Susquehanna..

So when should investors expect to see organic growth in foodservice?.

I think we should see that this year. I think in 2018, we should see organic growth, and it should be this year. So from that perspective, this is the year. I can give more color to it, if you want to, but definitely, this is the year where -- we stated about it.

If you remember, 18 months ago or less, I spoke about $200 million to $300 million of rollouts. And at that moment, if you remember that, I said that it’s going to come. And at the time, everybody started asking when. And I told you that they will come. We have no -- nobody stole those business away.

Maybe yes, we talked about one that was taken away because of heavy discounting, which is Taco Bell. So I can address that, but we’ll address it in the press. So now let me give you a flavor on this. So out of the $200 million, 12 chains are coming through right now exclusively approved by us because of our innovation.

So we have an approved 12 chains coming through with orders. We are starting to ship 9 of them. We’re shipping nine of them now in the second quarter. It just started, in fact, in this month, and the bulk of it is going to come in the third and fourth quarter. So I gave you some flavor of that, so putting a little bit of numbers.

So out of the $200 million, we have -- of the 12 chains, represent $70 million. And of the nine that we’re starting to ship, they represent around $60 million of the $70 million. So that’s coming this year. And we expect now the rollout that we talked about of $200 million, $250 million to continue in 2018 and 2019..

So let me add some color to that. So Selim’s exactly right. We’ve got approved on 12. We’re starting -- the good news here is we’re starting shipments on 9. I think it’s been a story over the past six, seven months of when it happens, to if it happens, to now it’s happened. So that’s great news.

And the thing that I’m most proud of, of the Middleby, specifically the engineers that -- at each of the brands, is the innovation across four different products across these 9 startup -- or shipment, the customers, we’ve got true innovation where we’re the exclusive supplier on coffee, sandwich production systems, ventless cooking.

And separately, frying in the retail in a whole new marketplace in supermarkets, where we have the unique technology that’s made us the single-source supplier across these four different categories across 9 different customers. And frankly, 12 this year will start shipping; nine of them are shipping. So it’s good news..

Just to make sure the expectation is appropriately set, I mean, if you’re talking about numbers like $60 million or $70 million, that implies growth of about 5% in the business. And I know you don’t want to give specific guidance.

But is something in that ballpark a reasonable expectation for investors to have for this business to grow this year?.

I think we expected that we would see increasing momentum as we move through the year. I think that’s kind of what we had thought coming into this year. We thought we might actually be positive in the first quarter.

As I’d mentioned, some of the international markets were often -- and it was a little bit difficult to really see through the impact of the distribution changes, the rep changes, that Dave and Selim talked about. And the reality is, those are -- there’s huge changes, but our sales were not down 10% because of it.

So we were pleased that we’re able to work through and continue to work through a lot of the changes really without a massive impact to sales. The chains, we knew that, that was going to kind of gradually roll in as we move through the year. We really didn’t see the benefit of that in Q1 as it’s just initial stages.

We’re happy that some of these are starting to come online. Some of it will start to show up in Q2, so we think that we’re building positive momentum in our business. The lead times are short. And sometimes, it’s difficult to predict quarter to quarter, but we feel like we’re building momentum off of Q1.

As we move into Q2, hopefully we’ll see positive growth. As I mentioned, we did see orders for the quarter outpace the sales. So I think we came into the quarter with a little bit of a backlog.

And the chain activities that these guys are talking about, they’re difficult to predict quarter-to-quarter, but we have a high confidence level that they’re coming and they are translating. So I think in the back half of the year, it’s possible to see kind of us back to mid-single-digit growth..

I appreciate the color. Just one quick one on the margin. I wanted to make sure the message was clear on the foodservice gross margin. It sounds like excluding M&A, it was flat..

Yes. So if you -- I mean, this is the typical situation. I mean, almost by definition anytime Middleby buys a company, it’s lower margin, both gross margin and EBITDA. And that was -- we’ve had a flurry of acquisitions, so we’ve been very busy in the back half of last year. And we’ve already completed, I think, five acquisitions this year.

So those are -- those detracts to margins in all the segments, so that did draw down the gross margin by 2%. But when you back those out quarter-over-quarter, basically, the gross margin was flat. And I didn’t touch on EBITDA margins, but our EBITDA margin actually for commercial would’ve been up if you backed out the new company.

So we’re continuing to see the margin expansion from an EBITDA when you’re kind of excluding the new acquisitions. The new acquisitions are a headwind for us from margin. But long term, that’s -- they’re -- we’re very excited about all of them. It’s a lot of great brands, new technologies.

It’s opening us up to new market segments, whether it’s beverage, whether it’s in baking, in the retail. And we’ve got long-term plans in place to bring those margins up to Middleby standards just as we have done for the last 20 years with all the other companies that we’ve acquired..

Got it, got it. I mean, there’s a lot of concern about price cost and competitive pressure, so that’s good to see. I’ll pass it on..

Our next question or comment comes from the line of Jason Rodgers from Great Lakes Review. Your line is open..

If I could just switch gears here and talk a little bit about or ask questions about AGA. Just wondered how far along you are in the restructuring there. And you mentioned in the press release market conditions in the UK being a negative.

Has the market there gotten worse recently?.

I think, Jason, definitely, the market has been under pressure since Brexit. So it’s not new news for us. When we bought this company, Brexit was already part of the vote. And we have seen pressure in the market across the UK in that market.

However, what we’re looking at AGA is it does not have the same, most probably, attribute of what happened at Viking. So the story is not the same there. You had Viking quality issues, recalls, all of that in the past five years that we faced. AGA is not broken. It’s a market issue. It’s a timing.

But as I promised you, with Viking, I am looking at, two years from now, to have the same amazing story for AGA. So we’re looking at 24 months away to introduce new products. So there will be a bunch of new products coming in from AGA today that takes AGA outside the UK, which would bring us up back in the U.S.

So we’re working on specific products that extended beyond the UK. That’s one strategy. The second strategy is to go back and figure out the cost of the AGA cooker, which was high because it was a vertical integration. Remember, we closed the foundry we used to build our own cast iron and all of that.

So we’re now strategically outsourcing some parts of the product to become more efficient and better quality. Number three, we are basically revisiting our retail experience in the UK with AGA and Rangemaster. So I am very confident.

Given the experience I’ve had with Viking, and I’m sure I want to thank all of you for your patience through our residential foray. I think all of you and many of you had doubts about that, but I think standing here in front of you today, I think that our credibility should be very high. We’ve always never hyped.

We never lied on where we see expectation. We’ve always been realistic in what we do. I’ve always committed to you along the way when the bad news are bad, I tell you about it. When it’s positive, I get excited and tell you about it, too. But somehow, somewhere, Viking today, finally, the story is behind us, as expected.

And literally, it took five years. And we stuck with it. And you all basically were concerned about whether we knew that business, it’s a different business. I heard about that from investor, from analysts. Today, Viking is a driver, is a major driver. The Residential is a major driving force for us in our portfolio.

And AGA will continue to be, I would say, in the next two years, not five, in the next two years, AGA would become another driving force within our portfolio, to the company..

So just a quick follow-up on some of the comments that Selim made, just two things to point out. A piece of AGA, we’ve got a couple of noncore businesses. We pointed that out when we bought the company. They’ve been a challenge in terms of the cost structure and restructuring, which has taken longer given social requirements in Europe.

Those are -- those have been a headwind to both revenues and the profit margin. We are actively implementing changes in restructuring initiatives, which we do think those we’ll work finally through, probably in the third quarter of this year. So that headwind will go away.

In the current quarter, that was detracted from sales at the segment by approximately 2%, and it was a headwind at margins as well. The other thing just to point out, Selim talked about the closure of the foundry, which we did last year and we took some pretty large restructuring costs. We have not seen the benefit of that yet.

So as we went through the transition, we invested and built up inventory so we could kind of bridge a transition to a new product line. So we are still working off of higher-cost inventory that’s kind of in our channel until we move to the new product line.

So the benefits of that is going to be margin enhancing, and that won’t show up until later in the year, until the new products start to come online and we work through the inventory that we built as we were closing the foundry..

Appreciate all that detail. And if I could just squeeze in one about food processing. Wondered if that -- the order is not materializing, if that was a competitive issue or just customers deciding to delay or cancel the project..

Yes. So it’s a combination of both. There were actually 2 specific projects that we thought would be coming through. And one -- those have been competitive situations. So one of them, there was a -- it was a pretty large project, we picked up some of the business on that. We had anticipated that we will get that order.

They did move to a lower-cost solution. Another large project, they were evaluating our solution versus another, and that’s still in process. So -- but we’ve seen some competitive pressures on pricing.

So I think some of the items that we thought would come in the channel, they’ve either moved to the right or, in some cases, they went with the kind of a lower-cost solution..

Our next question or comment comes from the line of Larry De Maria from William Blair..

Just maybe staying on processing for a second. Can you just discuss maybe the cadence of how to think about the year? Obviously, when we talked about it before, it’s supposed to be more of a second half than a first half story. And that’s been pushed out a bit.

So if you could just help us on the cadence and if we expect orders to hit that will actually help the second half or if we’re pushing that into ‘18.

And is this pricing issue in processing specific to a certain end market within price processing? Or is it widespread or not? Can you just give us some more color on that, please?.

Yes. I mean, this segment has always been driven by some large orders. And if you kind of look across the segments, we’ve got a few divisions that they tend to be our higher-margin companies. And it’s kind of feast or famine that we’ve got a number of divisions that kind of work on kind of irregular, smaller orders that come in monthly.

So it’s those bigger divisions. And sometimes, those bigger projects are really harder to forecast. We did expect some, as I mentioned, some of them to come in. They are getting pushed to the right. I mean, I think our whole expectation is that that’s getting -- is pushed to the right.

We do expect to have a better second half of the year, certainly not down as much as we saw in Q1. I think the impact will also be less down in Q2 as what we saw in Q1. Although I think going into Q3, we don’t have a good visibility to order.

So it’s possible we’d see down in Q3, depending on kind of the cadence of some of the things that are in the pipeline. But I will say that, I mean, there is still a strong pipeline of orders out there with some larger projects, so it is possible to turn back up to growth before we exit the year.

I think, overall, we would expect the year to be down, but we could see some growth at the tail end of the year..

Okay. That’s helpful.

And is pricing specific to one or two projects? Or is it company specific? Or can you just give a little more color on pricing?.

It’s -- first of all, we’re very disciplined in pricing. We’ve got very innovative solutions that deliver a lot of value to the customer. Typically, when we’ve lost some of these projects, it hasn’t been -- there’s not a similar system where it’s a competition for 5%. Basically, they’re looking for a very high-end, high-performance system with us.

And if they choose that doesn’t fit within their budget, they’re literally going with a totally different solution that might be half the cost or less. It’s got less throughput. It’s got less capacity. Maybe....

As automated as we have. Less automation, more manual..

So that’s really been the situation where they just chose to not make the investments at this time..

Okay. Fair enough. And then just my second question. I can understand the distribution challenges you guys have had. Obviously, you did it strategically to make it better for the future. And that should be done or close to done in Commercial.

But in late February, you guys said that you’re -- more or less industry is doing better, taking share, outpacing competitors. And that was a great flavor. I’m curious -- and they have negative comp organic in food -- in commercial.

Did anything change in it throughout the quarter? Did things get better or worse? It sounds like things may have been worse in the third month of the quarter compared to where you guys were. So curious about the cadence of the quarter and what’s going on there? And secondly, if there’s anything going on with TurboChef, specifically.

Because obviously, in the speed cook side, we’re hearing a lot from your competitors on that side and we haven’t heard much from you guys. So just curious about your updated thoughts on where TurboChef stands. And I’ll leave it there..

So Larry, first of all, you’ve been with me for -- I’ve been running this company with Tim and Dave for now almost 20 years. I’ve never been concerned about 1 quarter, and I will not be concerned about 1 quarter. But I will address what we’ve done over the year.

So again, I gave a lot of flavor that I should not be giving, honestly, on -- I don’t like to talk about customers in terms of rollouts and whatsoever. I would like to elevate the game to what we’ve always done for the last 20 years. It’s part of it that we are winning on innovation. We have always been a long-term strategy.

And I will address TurboChef in a minute. But specifically, when you look at our long-term strategy, the biggest validation of that is Viking. I don’t know where you stood on Viking, but I know many analysts were concerned about our entrée into residential. We stuck with it. And today, Viking will deliver significant shareholder value.

And that’s important to us. I will go back and I talk about our entrée in energy. And I will tell you, maybe you were not also covering us at the time, but if you were and many of you would have most probably freaked out in 2000. In 2000, we’re a lot -- a much more company than we are today. We had, at the time, bet our total company on energy.

We started putting energy devices and we changed all our labs to become energy measuring labs. We invested over $1 million in 2000. Our EBITDA was big enough in measuring equipment for energy, natural gas, electricity. We started adding energy sensors on all our ovens, including specifically driven by our -- started with our pizza oven.

At the time, our customers did not embrace energy savings. I remember vividly, one of our leading exclusive supplier came to us and said, I am not willing to pay for this. And we stayed the course. It took us five years for that specific customer to embrace our wall oven, which had all energy-saving on it. And since then, we never backed away.

We induced those costs, we kept on looking at it. This strategy continues story after story over 20 years of my tenure as -- at this company and 18 years as CEO that we never compromised on one quarter or one year. And that has been why when we hit it big and we stick to our principle, we basically grow and generate amazing returns.

And that’s what happened to us. And if you look at the foray of our energy, you look at our water saving and now when you look at our automation, three main important facets of what Middleby innovation revolves around. And now both are not hypes. We didn’t start about them today or yesterday. We’ve been at it for a long term, and we stick with it.

Now let’s talk about TurboChef specifically. TurboChef is up in the quarter despite the changes in the selling organization. TurboChef incurred a heavy hit in terms of the distribution. In fact, most probably, 80% to 90% of the reps were changed. And we are not discounting. We gained new customers.

So in this quarter, we gained new customers, and we are not discounting. So I want to go back and talk about accelerated cooking and rapid cook. This is a growing market. And from that perspective, I’m going to give you some color, and then we’ll talk about what’s happening to us specifically in that market.

So if you go around and look at what people want, the biggest trend that our customers are asking us to fix for them is speeding their order to table. And they tell me people didn’t -- don’t want to sit and wait. They want to expedite the experience. I’ve heard it from many, many COOs. We are at the forefront of that trend.

Millennials would rather dine in on the run, often racing home to eat their food while staring at their 55-inch TV and watching Netflix. So they’re not going to sit there and have an hour dinner. So all the fast casual, many of the QSR, are speeding up order to table. Now that segment in general is going to grow pretty fast.

Rapid cooking, accelerate cooking, is a growth market. Right now, there are two players, major players in this market and it’s divided into the following. There is a premium player, which is TurboChef; and there is another player, which is Icon, the economy player. And in the difference, we are priced consistently, both in the U.S.

and overseas, 25% above -- our premium innovation price is 25% above the economy player. And we are still growing, and we are still capturing new customers. So the market is divided. The whole segment is up. Both of those players will be up. We will basically win on innovation, and people who want most probably the premium product.

Somebody else would say I want the economy product, maybe a franchisee who’s under pressure, they would come back and get economy player. So both parts are being lifted. Now what is surprising and very validating what I just said as we basically disrupted TurboChef during the rep changes, and they were still up in this quarter.

I hope that gives you some flavor about the rapid cook market and what’s happening in that segment..

Yes. That’s helpful. I mean, with all due respect, I do care about more than just a quarter, so thank you for your long-term thoughts on TurboChef. I appreciate it..

Our next question or comment comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open..

Okay. Just back on commercial food, I guess, a couple things. One, I think when you originally talked about some of the backlog opportunities and the customers, I think you had talked about a $300 million number. And I think now, today, you said 200 million.

So just what’s changed there? Have you shipped some? And is some of that Taco Bell? How has that number changed? And then just what’s your confidence that with this sales reorgs disruption that it’s done by 2Q versus lingering into the second half?.

Well, I will address that. I will tell you that we started shipping. The numbers I gave you will most probably ship this year. So we’ll have close to $70 million shipped this year. And Dave would like to give a little more flavor on that..

Yes. Let me kind of add to that and tag on to what Selim was just talking about on the previous question. But the innovation cycle, it’s a long-term cycle with these chains.

The successes we’re seeing right now that we just started shipping over these nine different customers, that actually started back when four quarters ago, maybe five quarters ago on the innovation cycle with the engineers at Middleby.

The reason we are successful with innovation is we approach innovation fully different than anybody else in the industry. And that is we create innovation for the customer, versus the customer coming and asking for specific things, we actually come to them.

And that results in these success stories across coffee, across sandwiches, across ventless cooking, across the supermarkets, the single-source supermarket solution. So it’s exciting to see this innovation, this very unique innovation being developed over a long four or five quarters.

And that ties right back into our confidence in this three year, 300 million that Selim has referenced, and the successes are starting this year. And so I don’t see any stop to that because we have more programs coming. And we have actual programs being shipped..

So let me just add. I’ll kind of point out a couple of numbers too and this maybe will kind of tie in some of Larry’s question before as well. Just to kind of break out the cadence. I mean, domestically, despite all these changes, we actually were up. I mean, it’s not -- we’re not up significantly.

I think going into -- coming into the year, we did not expect that the first quarter was going to take off. We thought that it would turn positive, and then we’d see a gradual growth. If you look at domestic sales, we were up 0.5% in the quarter.

So despite the rep changes, despite the fact that really the change have been -- come online, we were slightly positive in -- domestically. So I just want to point that out. We’re driven down by international. It’s always more difficult for us to really see what the sales are in some of the emerging markets.

They’re more volatile when you’re talking about countries like Brazil, India, China. And it’s also a little bit difficult sometimes for us to understand the foreign currency impact when we’re thinking about the forecast for the quarter. So internationally, we’re actually up as well.

It’s just that when you -- it’s the foreign currency drove the growth in there with some of the offset of the decline. But I just want to make sure from our expectation coming into the year, where we thought things would gradually improve through the year, we did see improvement domestically as we had positive sales growth in the U.S.

and that should build from there. And internationally, it’s emerging markets where, okay, we’re off in a couple of markets that drove it down. So just to kind of put a backdrop to where we are and the cadence coming into the year..

And just on -- can you just talk about what you’re seeing on price/cost? I think you announced a price increase follow-on as of May. But just talk about what you’re seeing on input costs and what you’re able to cover on price..

So we are seeing -- yes, obviously, there’s been discussion on tariffs as well as surcharges on steel. We’ve seen that start to come through not only on cheap steel, but on component costs. So that is an item that we’ve been focused on heavily, and we are anticipating some significant, meaningful increases in the back half of the year.

We do think that we can offset that with price. We are working on instituting price increases that will go into effect sometime in the third quarter. We’ll probably see a little bit of a headwind that for 60- to 90-day period until we kind of get the price increases offset.

We’re anticipating that, that increase could be an impact or a headwind of $10 million to $15 million in terms of 2018, largely in the second half from a cost perspective, and that we would be able to offset that with price increases with a little bit of lag probably hitting us in late Q2, early Q3..

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

I just wondered if you could talk a little bit about -- I know recently you’ve been working a little more to get traction outside of the chains and pizza, in convenience stores and supermarkets.

And I just wondered if you could go through some of those different end markets and talk a little bit about -- without naming customers, talk a little bit about the traction you’re getting and what you see as the outlook in those areas..

Yes. That’s a tough question. Without getting specific, I can say that we did go after that, starting -- beginning first, second quarter last year. We brought on a group of successful individuals and pooled them together to focus across specifically what you’re talking about.

And I wish I could tell you the names of the companies and the specific success stories, but obviously, I can’t do that. We’re measuring them differently. We’re looking at market share. We’re looking at the customers that are both big and small, but the smaller customers that are influential in their marketplace.

And we’re looking at market share of the products that are in their kitchens and displacing so that we own the kitchen and that we’re supporting that with solutions that actually make a difference for these small operators in food quality, in speed of service, in food costs, in energy management.

And when you do those and when you do this and that and that and that for an operator in an emerging market, in an emerging chain, it affects the marketplace. And we’ve had tremendous success with that strategy..

So let me maybe add to this, Dave, specifics to answer the question. In the supermarkets, grocery store, convenience store, we just picked up a major supermarket chain in a multimillion-dollar rollout. So that answers your question. I can’t say more than that. There are new to us..

Single source. Single source..

Single source. Single source. So we picked that up. The orders just came in, and this is our first major win. It’s a big chain, so it’s a big -- one of those non-eating establishment. That’s all I can say because we are under confidential agreement with the customer..

And then just on sort of a more -- I don’t know, a question I get a lot from investors is sort of how do we think about as your customers, as the chains need to change their strategy for more of a destination -- or a restaurant used to be a destination 10 or 20 years ago and now maybe it’s half destination and half distribution outlet.

And there’s probably going to be a headwind from closing a bunch of locations and then a tailwind from reequipping the remaining locations.

Like how do we think about that as a big driver, as a driver for the industry? Is that a net positive or a negative? And just how do we think about it?.

So I can -- Joel, that’s a very good question because, literally, for us, we are looking -- we’ve looked at this and I can answer it. And it’s most probably a macro issue. That’s what we do. We’ve extend [ph] the trends, and that’s what we’ve done.

So we’ve gone about and did a proprietary study on where we see the market in the next 10 years, not in another one year or two years or three years.

And the results were -- well, I don’t want to share all of it, the opportunity assessment starting in 2017 through 2027 is that the foodservice equipment and mostly cooking, I’m going to talk specifically cooking because that’s where we are mostly in, is going to be growing, basically, when you take that 10-year period at a compounded average growth rate of 4.7% throughout this period.

So if you look at this, it goes back to where we used to be at the best of times. So when you look at all that noise that we also look at and we’re out in the marketplace, we meet with those customers, that’s the culture of Middleby. I’m out of the kitchen.

Last night, I was with one of the COO of one of the top emerging chain and one of the leading chef in the world yesterday. And I listen to them. But we went down with a study, and we’re looking at 4.7% in the next 10 years between 2000 and -- starting 2017 through 2027, a 4.7% compounded annual growth rate for the cooking segment.

So for us, we will beat that average. So in the next 10 years, we will beat the average. And we’ve done it in the past 20 years, and we’ll do it in the next 10 years. So from that perspective -- I cannot go back specifically because I don’t want to give that study to everybody, this is proprietary for us.

But if you look at the segment, that is a lot of opportunity. We are basically at the pivot point for Middleby. We are at a major pivot point for Middleby again. And of course, we did that study because we wanted to understand where we go, and we feel very good about that pivot point..

Howard, are there other questions in the queue?.

Our final question or comment for today comes from the line of Saree Boroditsky from Deutsche Bank..

Now you provided some color on your outlook for -- I wanted to see if you could provide some color and outlook for Viking this year, just given the double-digit incoming order rates you’re seeing.

And do you expect sales to accelerate from the 5% seen this quarter?.

Yes..

So from that perspective, yes. So the orders have been base drawn. Yes, so we’re ramping up production. We’re setting in place. But the biggest concern I have, and that’s been -- I can give you color to it is we’ve been testing heavily for quality, which is the culture of Middleby. So what we’ve done is we have processing equipment that we put in place.

We invested millions of dollars on them. And we test every piece of equipment, whether it’s a range or an oven or a refrigerator for hours. The refrigerator is tested 24 hours. So what happens is as the order rate have ramped up hugely, we have not compromised our quality testing. So that has been the bottleneck.

And I’ve not been willing to go through random testing. So as we rethink of how we get the production to flow much better, the bottleneck has been the quality testing, which has been imposed and implemented by Middleby. And it’s been a big success for us, and that’s why you’re seeing the returns.

So yes, we will basically exceed the 5% growth at Viking starting -- you’ll see that in starting the second half of the year pretty strongly..

And a follow-up on the price cost question. Can you help us understand impact by segment? And if you’re able to pass on the price in the Residential specifically..

Yes, Saree, we’re probably not going to break it out. I mean, obviously, it affects all the segments. I don’t think I could specifically talk to each one. We do expect that we will take price increases not only Commercial, but at Residential as well. They will probably be staggered, depending on the brands and when they took the last increase.

So some of them will be going into place midyear, some of them will go into place later in the year..

Thank you. Ladies and gentlemen, this concludes our Q&A session. I’d like to turn the conference back over to management for any final or closing comments..

So I would like to summarize the comment.

Dave, do you want to say something before I close the comments?.

No. I was going to comment on one of those questions around our technology and the trends in the United States and the cultural change in the restaurant industry around the millennials really wanting the food where they want the food. And this is classic Middleby from an innovation perspective.

Outside the States, we saw, two years ago, the home delivery development. We are the primary supplier of home delivery solutions for all the top chains outside the United States, whether it’s pizza or sandwiches around the world. We bring the food from the facility to the home.

And we’re leveraging those kind of technology evolutions outside the States into the U.S. through the innovation that we’ve created a number of years ago.

So that innovation cycle will continue to stay ahead of leveraging as we see -- as with getting our hands dirty in the marketplace with the customer understanding their issues around how they supply and support their customers. So....

great innovation, great brands, great service. This concludes my comments. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day..