Thank you for joining us for The Middleby Corporation First Quarter 2019 Conference Call. With us today from management are CEO, Tim Fitzgerald; CFO, Bryan Mittelman; and COO, David Brewer. We will begin the call with opening comments from management, then open up the lines for Q&A. Directions on how to get in the queue will be given at that time.

Now, I'd like to turn the call back to Mr. Fitzgerald for his opening comments. Please go ahead, sir..

Good morning. Thank you everybody for joining us today on Middleby's first quarter earnings call. We were pleased to continue with the positive momentum both in sales and profitability in the first quarter. We realized sales growth in both our Commercial Foodservice and Residential segments with improving trends in food processing.

We continue to make ongoing progress towards our long-term margin and profitability initiatives across the three business segments. In particular, we are focusing efforts to target profit improvement at companies recently acquired over the past several years.

As we are realizing the financial benefits of these actions we're also investing in targeted strategic growth initiatives related to sales and marketing, investments in international infrastructure and company-wide technology initiatives related to equipment controls, IoT and development of automation solutions.

More specifically at our Commercial Foodservice division, we realized sales growth through activities with our restaurant chain customers as they continued to adapt our latest technologies.

Internationally, we see continued improving trends in global and emerging markets, offset with ongoing challenges in the UK pertaining to the overhang of Brexit and the impact of disruption from tariffs on US equipment sold into the China market.

We continue to invest in our international infrastructure building upon the expansion over the past several years into key markets such as Brazil, India, Mid-East and Australia. We are further enhancing our service capabilities in the global markets to enhance support of our chain and regional customers as they expand operations.

And we are further investing in our manufacturing localization strategy in markets such as China.

We continue to invest in support and tools surrounding our brands, including further investment in training initiatives related to our consolidated strategic rep partners as we further deepen those relationships and focus efforts on the marketing of our technology solution offered across our brands and anticipate further benefits from this strategic initiative over the next several years.

We also continue to further invest in our automation initiatives following the acquisition of L2F in the past year.

Although our efforts towards automation is a long-term strategy and we will expect to have a slow adoption rate with our customers, we are pleased with the level of engagement we have with our customers and have several ongoing projects as we build the pipeline and develop product solutions to offer to the market, expected later this year.

We've also made significant strides in our IoT platform. Our Middleby Connect platform allows our customers to connect our high technology equipment to the cloud allowing for menu management, service and maintenance capabilities and operational monitoring of equipment.

We were excited to launch the Middleby Connect solution earlier this year at the NAFEM Show and have seen considerable interests. In April, we further broadened this platform with the acquisition of PowerHouse Dynamics and their SiteSage platform.

The SiteSage platform has been adopted by a number of leading restaurant chains and offers a complementary solution to Middleby Connect, supporting a broad array of tailored solutions to facilitate management of kitchen operations, providing for a variety of operational benefits, including savings related to energy, labor and food safety.

We will continue to invest and develop this combined initiative and complementary platforms to provide our customers with a comprehensive solution offering integrated equipment and IoT solutions. We were also pleased to announce the recent acquisition of cooking brands from the Standex Corporation.

Through this acquisition we are excited to add the highly respected brands of Ultrafryer, BKI, APW and Bakers Pride to the Middleby family. This acquisition further extends our technologies in our core businesses adding to our products in the frying, cooking and warming equipment categories.

Additionally the BKI brand is very strong in the retail and convenient store market and further bolsters Middleby's recent efforts to penetrate this segment. As we see customers in this category further expand their foodservice and beverage offerings.

Consistent with past acquisitions, we believe there are significant opportunities at the acquired Standex brands to expand margin and realize significant synergies over the past several years and will be developing initiatives and action plans over the next quarter as we engage with the teams at these operations.

At our residential platform, we continue to develop and launch new and innovative products to the market. From Viking, this includes the launch of our new Virtuoso line and the continued expansion of built-in refrigeration offerings.

We're also pleased to launch the new generation of under-counter refrigeration from the U-Line made available in the first quarter. And currently we are very excited to be coming to market with a new line of AGA-branded Eurostyle Cooking lines for the US market under the Elise and Mercury brands.

We continue to launch and support these new products leveraging our Middleby Residential sales and distribution platform.

We continue to invest in this platform established over the past several years with added sales personnel and the investment in our showrooms, including the most recent opening of our New York show room and planned opening of our third showroom in Southern California later this year.

As we progress through the year, we will continue to focus on improving profitability within the Residential segment. This will include efforts to improve manufacturing efficiencies at Viking following our significant efforts over the past several years to enhance quality and introduce significant new products to the marketplace.

We believe there are significant opportunities to further leverage synergies across the platform in the US market through ongoing supply chain and manufacturing improvements.

And during the first quarter, we realized that the margin benefit from the exit of our non-core Grange furniture business and we will continue to focus on efforts with the remaining non-core businesses, which also present a dilutive impact to the margins for this segment.

We remain confident in the growth prospects for this business, including the continued momentum at Viking, benefits from anticipated new product launches at AGA and Rangemaster and through the ability to leverage our established sales and distribution platform.

We do however anticipate softness in the upcoming quarter as market conditions domestically softened in the recent months. We believe this impact to be related in part to weather conditions, affecting remodels and housing starts and will not carry into the second half of the year.

At our Food Processing Group, we believe we will return to top line growth and improving mix in the second quarter.

We anticipate this improvement resulting from a measured recovery in core Hot Dog and Sausage markets driven in part by emerging markets and the adoption of upgraded technologies for our customers to drive operating efficiencies and profit improvements.

However, we are focusing our efforts to further extend into new and faster growth markets such as bacon, cured meats, pet foods and sous vide cooking applications. We've seen positive initial response to these efforts and have developed a pipeline of new products, leveraging our core brands and cooking expertise to reach these markets.

We are very excited to have recently introduced many of these new products with a positive response including this week at IFFA, a major industry trade show in Germany. Now I'd like to turn the call over to Bryan Mittelman, our CFO for further commentary on the financial results for the first quarter..

Starting with the Commercial Foodservice segment, sales for the quarter amounted to $458 million, which included an increase of $92 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 3.4%.

Sales growth was 2.8% in the domestic market and 4.8% internationally. In terms of regional contributions, Latin America and Asia were the primary drivers, while in the UK, a challenging environment continues. In the US, as Tim noted, restaurant chains continue to be the main driver of our growth.

The gross margin at Commercial Foodservice was 37.7% as compared to 38.4% in the prior year quarter. However, excluding the impact of acquisitions and foreign exchange the gross margin would have been just slightly down to 38.3%. EBITDA for Commercial Foodservice amounted to $113 million, representing 24.8% of sales.

We continue to focus on the expansion of profit margins. Our goal remains to grow margins at the recent acquisitions to levels consistent with the overall platform. Taylor, certainly has a meaningful impact on these margins. We've made solid improvements over the past nine months and we'll continue to do so.

Taylor's EBITDA margins improved to approximately 25% in the quarter and the division was accretive to our earnings by approximately $0.04.

The EBITDA percentage is also impacted by acquisitions over the last two years, especially where we have sought to increase our investments in technology and automation, namely L2F, as well as we are broadening our capabilities such as in fabrication and store design with QualServ.

This broadening of our portfolio brands, technologies and capabilities will drive top line growth and improved profitability over the long-term, but our work continues in the near term.

But in the first quarter product mix including the impact of a prior year significant beverage rollout and further investments to enhance our selling presence were detractors on the margins.

Moving on to the Residential Segment sales amounted to $137 million, excluding the impact of foreign exchange and the closure of a non-core business, growth was 5.5%. Domestic sales increased by 6.8% as we continue to see strong results at Viking, which increased double digits over the prior year quarter. International sales increased by 3.6%.

While we are pleased by this recent performance, primarily within the AGA Range Master family of products, given the continuing uncertainty around the UK market, such growth rates may not be sustainable in the near term.

Coming back to the North American market with our new Viking product offerings and successes in gaining dealer and consumer acceptance, our strong growth has continued, While, we have been successful in growing our business, increasing our market share sustaining this performance in the face of various market pressures will be challenging for the remainder of the first half of this year as Tim noted.

Gross margin at the Residential Group improved to 39% as opposed to 33.5% in the prior year period, while EBITDA margins improved to 17.7% from 10.9% in the prior year. Excluding the impact of FX rates and the disposed non-core business, EBITDA for the current year would have been 19%.

The margin improvement reflect increased profitability at our domestic brands, driven by higher sales at Viking as well as with under counter refrigeration along with some efficiency benefits in manufacturing and distribution initiatives. On to the Food Processing segment, sales amounted to $92 million of which acquisitions contributed $8.4 million.

Excluding the impacts of acquisitions and foreign exchange rates, sales decreased by 3.2% for this quarter. Gross margins at the food processing group improved to 35% as compared to 31.7% in the prior year period, while EBITDA margins improved to 17.5% as compared to 16.6% in the prior year.

Margins of this business have improved as we have worked to control costs. The absence of large customer orders will be a headwind for this segment. We are optimistic that we will see improvement in both the top line and EBITDA margins is 2019 progress, but meaningful increases remain a challenge in the absence of these large customer orders.

In terms of overall results for the quarter, as noted in our earnings press release, the agreements reached upon the retirement of our former Chairman and CEO impacted the quarter by $10 million or $0.14. It also negatively affected operating cash flows. Cash flow during - generation during the quarter amounted to $34 million from operations.

This represented a decrease of $11 million over 2018. Higher working capital substantially driven by inventory levels and payments to our former Chairman and CEO detracted from cash flows for the quarter.

For the first quarter and non-cash expenses added back in calculating operating cash flow included $25.1 million of depreciation and amortization expense and $1.1 million of share-based compensation expense. This total $26.2 million is higher by $6.4 million over the prior year period.

During the quarter, we utilized $8.1 million to fund capital expenditures, primarily related to investments in manufacturing equipment and enhanced production capabilities.

Net debt at the end of the quarter was approximately $1.8 billion, which was slightly lower compared to the end of fiscal 2018, and our net debt-to-EBITDA leverage ratio at the end of the quarter was just under 3 times. So with that, I will turn the call back over to Victor and open it up to questions from the analysts..

Thank you. [Operator Instructions] And our first question comes from the line of Mig Dobre from Baird. You may begin..

Thank you, and good morning, everyone..

Hi, Mig..

Hello. I would like to maybe start with Commercial Foodservice and get a little more color from you, Tim or Dave on how demand has progressed in the US through the quarter, if I heard you correctly 2.8% growth. I don't know, if you've seen anything unusual in terms of customer behavior, any impact from weather or anything of the sort.

And then maybe the second part here, Tim. The last quarter you talked about having some visibility on QSR customer beat activity coming through in the second quarter and beyond. Helping you maybe best some of these tougher comps that you're facing. I'm wondering, if your view there has evolved at all, changed at all? Thanks..

Yeah. So, I think it hasn't changed. I mean, certainly on Q2, I mean, we have some chain activities that carry in or start in the second quarter, should we anticipate that we'd have some slight improvement in terms of organic growth domestically kind of the broader market is kind of low single-digits, our beta is kind of driven by the chain.

So we had some good opportunities kind of leading into the second quarter. We also are continuing to work on a number of opportunities for the second half of the year.

As you get further out, it's always more difficult to understand kind of the timing of when orders land, just gives us a lot of that's driven by operating activities and menu initiatives at those customers.

But we do have a pretty good set of customer - customers are looking at a lot of our new technologies that are really helping to drive the new initiatives of their business. So, David, I don't know, if you have anything to add..

Yeah, I would say that the mega trend labor availability and the cost of labor and the training of labor is clearly taking the leading role this year with our chain customers and even the smaller chain customers. I think that the NAFEM Show was an outstanding show. We spent a lot of money strategically on it for the next year to two years.

And so we have a lot of visibility to what the customers are looking for around automation, specifically around labor, and then second to that would be around carry-out.

Their customers are demanding more food to be carried out in some of the innovation that we showed off with Carter-Hoffmann on the ability to enable the Grubhub's and the Uber Eats were just really well received. So I'm very positive. And then the acquisition of PowerHouse Dynamics.

I mean we now have a footprint of data management and data control systems for the restaurant operator that enables their employees to be more productive quicker and operate their kitchens more effectively and efficiently.

We've got - now we instantaneously have a footprint of close to 4,000 installed systems around the world in restaurants and probably that's more than what the next 10 competitors we have.

So it's a huge footprint of data management, data control systems, enabling our cooking solutions and holding solutions and beverage systems to be more productive around labor..

Got it. But to be clear here, your comparison, your comp here is getting above 500 basis points tougher as we look going forward.

Do you think that there is enough momentum in the market and our visibility from QSR customers for us to still be able to expect sequential uptick in growth in Commercial Foodservice?.

Yeah. I mean, I think as we're going into the second quarter there is some momentum that we're carrying in. I mean, certainly the comps get tougher as you said.

I mean, as you get further in the back half of the year the visibility gets a little bit more difficult, but we know we've got some activities that are ongoing in areas such as - that was an accelerated cooking with our beverage platform, it's been an area that we've invested in over the last couple of years particularly in things such as coffee, nature of brew, so there is some good opportunities there.

So I mean those were things that we're carrying into the second quarter so that will help us.

And we're certainly following the trends with the customers and that's where you've seen us make a lot of strategic acquisitions over the last several years and a number of new product introductions, many of those, which were on display at now from which Dave just mentioned.

And some of those are near-term opportunities and then we think that we've got some follow on longer term opportunities that we're starting to build the pipeline for as we move through 2019 and into 2020..

Okay. And my follow-up is on margin. And actually have a lot of margin questions, but I'll let other people ask them too. So in Commercial Foodservice, if I'm sort of looking at your performance in the quarter excluding Taylor looks to me like margins were down on a year-over-year basis there. So my question is, what's really going on here.

Is it price cost and or potentially something else that impacted the quarter? And how do we think about the rest of the year? What are your dynamics especially on material costs in Q2 and second half ?.

Yeah. So I'll make a couple of comments and then I'll flip it over to Bryan, yes, I'm sure have lot more details.

But I think on the price cost side, I mean we've had significant cost increases related to tariffs, so that's nothing probably too surprising to anybody and we've been talking about that and trying to get ahead of that with price increases as well as initiatives that we have on supply chain, which is one of the areas that we're really trying to leverage and drive synergies across the organization.

And that's a big initiative for us in 2019. But the increases came hot and heavy in a couple of different waves late last year. And we probably had an inflection point where we're still catching up to it, so that was probably a little bit of a detractor in Q1. I think we - that - that lessens or maybe we kind of get neutral into Q2.

So I think there was an element of that. With margins - we - although Taylor was not accretive to margins, it was still a little bit less than kind of our historical.

So we've had significant improvement there moving to mid-20s, which is certainly respectable and a far jump from where it was when we bought the business, but we still have a ways to go there.

And we've bought - actually don't know the number of acquisitions over the last couple of years in Commercial Foodservice, but it's quite a bit and that's still is a drag and we're moving up the margins on those companies.

I mean, if you think about companies such as QualServ for example, we've completely retooled that business moving it from the distribution model to fabrication model. As we've done that we've actually disrupted the business more.

We're very excited about it, because it strategically fits with our platform really broadening our capabilities for our customers helping us design restaurant solutions and kind of integrated fabrication and cooking/beverage solutions. But that is kind of like two steps forward before we move - a few steps back before we move forward.

But what's exciting there is we actually have a whole new lineup of customers that are coming online that were not there at closer when we bought the company. So we're really re-positioning the business now.

So we're expecting margin expansion there as we move through the second half of the year and certainly into 2020, but that's been kind of a drag on the margin. So that's really very much a strategic re-positioning.

And then the other thing that I mentioned is, as we're moving forward with margin expansion really in all three platforms, we are making strategic investments. So that's controls, it's an IoT and it's an automation.

Those are things that do not have an EBITDA that are added investments that we are committed to making right now because we think that they really bring longer-term benefits in terms of growth and our ability to help our customers and provide more comprehensive solutions.

So that is something that we think we can fund as - through margin expansion with the three platforms. So that's really part of the investment that we're making this year.

So you've just seen a little bit in the Commercial Foodservice side of the business and we've made those investments in the first quarter maybe we didn't get quite the benefits with some of the margin expansion of some of the new companies and that we had kind of the headwinds on the price versus cost side of that platform in particular..

I see.

But on the price cost the element that surprised you, how does this gets alleviated? Is it through additional pricing, or is it through something that you can do on a cost side as the year progresses?.

Yes. So, I mean, we took price increases earlier in the year, right, but we didn't get the full uptake, right. So, I mean, I think we get - in the first quarter that you launch it, you don't get the full realization, particularly with chain customers that it takes longer to kind of run that through the cycle.

So I mean I think we're - we've back get better coverage in the second quarter, so we are anticipating that we would see margin expansion as we move into the second quarter..

Great. Thank you..

Yeah..

Thank you. And our next question comes from the line of Jamie Clement from Buckingham. You may begin..

Tim, Brian and David, good morning..

Good morning..

Good morning..

Hey, Tim, as we just rewinding like three months to the fourth quarter call, I think you guys were alluding to a little bit of low in the action in Commercial Foodservice.

Kind of looking back at the first quarter was - was that kind of early on in the quarter and did things kind of pick - how does the quarter kind of go from January to February to March and kind of what are you seeing right now?.

I don't think things changed that much from January to March and Dave and Brian can have their perspective, a lot of it's really kind of driven again by chain activities which are a little bit lumpy. But in terms of kind of the general market backdrop that, that didn't change all that much.

I mean, we were growing in the 5ish percentage in the back half of the year.

So, I mean, we expected to take a step down, which we kind of alluded to in the last call, which we saw, obviously things feared, probably a little bit better than what we expected we were uncertain with how the international markets, would fair and those seem to be outside of China in the UK did okay in the first quarter and we feel we'll probably pick up outside of those two markets.

So maybe growth was slightly better than we might have thought in the first quarter. And then we're hoping to see a little bit of improvement from here at least as we go into the second quarter with some of the chain activities picking up..

Okay, great. And I don't know maybe David, if you want to take a shot at this one. But on - I was intrigued by PowerHouse. And two things that I was kind of curious about is, number one, is that like - I mean could that over time be just a natural cross-selling complementary fit to QualServ. So that's number one.

And then number two, what I was a little bit curious about was, as I understood the way they kind of went market was they'd have a chain customers who they did business with and the PowerHouse will be kind of in between the chain and the equipment manufacturer. Now that you all in that.

Are you confident that other equipment manufacturers are going to kind of be okay, being involved in that kind of relationship?.

So, obviously little bit joking, but we're more than intrigued, we bought it. So, let me start the end and go backwards. I don't see a PowerHouse in between the customer and the equipment supplier. I see it as an enabler for the customer to manage their restaurants completely. So it's a solution that bolt on to anything the customer wants to buy.

So you have to really get above the cooking and equipment and holding concept of the engine of the kitchen.

And what we're doing is we're embedding technology across that whole thing from walk in coolers to the drive through window to the menu boards to everything about that kitchen that opens up that kitchen to the operator and allows the operator to do a better job, managing their restaurant. So it runs alongside of that relationship.

It does not get in between the customer and the supplier. It clearly - if you step back and look at strategically what we're doing, it clearly runs in parallel with QualServ manufacturing and fabrication and solution capability of QualServ. When you bolt on data management and sensors solution that enables the operator.

So it's a parallel strategic opportunity for QualServ PowerHouse. When you bought those together along with our capability of satisfying the customer with our fundamental technologies, you've got a total solution for the customer that enables them to take care of their customer in a safe way..

And I would imagine that combining those two businesses, if you kind of think out five years to 10 years or something like that.

As you think about the trend towards more automation and that kind of thing, I mean, you would seem that this would be helped drive that rate?.

Yeah. And obviously we can talk more one on one when you come to the NRA, but you're exactly right, 10 years is too long, but I'm thinking more like maybe....

Arbitrary numbers for me. Arbitrary numbers.

So yeah, we can get more into this at the NRA..

Okay, great. Thanks a lot guys..

Thanks, Jamie..

Thank you. And our next question comes from the line of Larry De Maria from William Blair. You may begin..

Hi, thanks. Good morning, everybody. Just to clarify and get a little bit more specific on mix question. It sounds like net pricing versus material was negative 1Q get to neutral 2Q.

But how do we think about full year net pricing above material inflation connected up to 2%, 3%?.

Yeah, I think....

Give your best, obviously, yeah..

Yeah, I mean, the high end of the range you put out there is probably a big restive is I just think about the amount of pricing we took in across the divisions. So we do obviously expect a pricing to cover materials and to be up about slightly positive, I'm not going to commit to 3%..

Okay. Fair enough. And then obvious it's Cassandra in housing and Viking has been doing better albeit, some of the residential stuff impacted by weather, maybe in the first half of the year.

But given the housing versus upgrades, how are you thinking about that residential business in North America maybe over the next year or so, a year or two, given the cyclicality of that business and maybe some slowdown in housing.

How do you think about that given the changes you guys have made positively versus maybe some end market headwinds?.

Yeah. So, I mean on one hand, we continue to be very excited and confident in the strategy that we're executing to the new line of products from Viking as well as kind of the other brands in the portfolio are being well adopted by the market, we're seeing more and more displays go into our dealer partners.

And certainly we're continuing to come out with new products. I mentioned the Virtuoso line and refrigeration were still in early stages really of seeing that out in the marketplace with the 5 Series and 7 Series built in refrigeration specifically coming out with columns, which is really just hitting the market down.

So I mean I think new products in the acceptance and I would say continued momentum with our dealer partners. That's all kind of part of the story and we feel like we're gaining market share there.

And certainly the investments that we've made over the last couple of years with our own Middleby Residential distribution platform that, that's paying dividends. We've got a phenomenal sales team there now. We've got a distribution platform with a strong service capability that we've built.

So with that, I mean, I think we are confident that we're gaining market share. That being said, I mean, if you look at some of the industry reports particularly A-HAM [ph] report over the last couple of quarters Q4 and in Q1 is actually down kind of mid-single digits, we've grown through that.

And then we've seen whether you know kind of as we move through the first quarter is, second kind of effect, I think that was an element of the housing starts and certainly the remodels. But again the premium category there's a little bit more of a lag on that business relative to white good appliances.

So I think we're seeing a little bit of a delayed effect on that. So I think that's kind of where we are indicating some of that is probably going to hit us in the second quarter, but we think a lot of that is not a long-term trend. I mean, I think the backdrop is consumer confidence and are pretty well.

I mean there was - if you look at the stock market it was disrupted in Q4, but it's pretty solid now. So I kind of think that the appliance market will - fair pretty well this year.

Overall, we probably have a little bit of a gap in the second quarter to overcome domestically, but then I think we're kind of back on line as we move back through the year. If the trends are still softer, I think we'll be - will better those trends just kind of given them the momentum and that we've got in those investments made.

That's really domestic market you know kind of flip into the UK, just kind of add-on to comments that Bryan had. I mean, we very positively saw growth out of the Rangemaster, which was great to see given that, that is still very challenging market with Brexit.

I don't want to say it's an anomaly, because I think we've done a lot to enhance our Sales and Marketing with some initiatives that we've done with the team there as well as start to launch some new products, which I think we're on the front end of probably a couple of years of new products coming to market both in the UK as well as the initial launches that we've got here in the US, which we're excited about the Elise and Mercury line, which is just coming to market with 36-inch product, which is kind of fits into the US markets, which we have not had before.

So the new product should help us there that being said - somewhat surprised that we were up in the first quarter, we don't anticipate that really will be sustainable until we get to the other side of Brexit. So we probably got a little bit short-term headwinds in the UK as well as waiting to get to the other side of Brexit.

And then but long-term we got a very positive view of the - that segment overall..

Okay, thanks. Can I sneak one more last question here Tim. The - I know it was a good color. Given obviously backdrop of the consulting fee paid out owing the numbers tell you just Selim, how the transition been since you took over any surprises, customer discussions you can share and what is Selim's role been. And I'll get back into queue. Thanks..

Yeah, look - I mean, so it's been - the transition has been very smooth, right. I mean, because I've been here for 20 years and work side-by-side with Selim building the company since 1998, right. So that's been part of the long-term you know, put the building blocks in place working side-by-side for hour in a day.

Dave has been here for over a decade also working side-by-side with myself and Selim and then we've got a broader management team with phenomenal Group Presidents that have taken on greater responsibilities in our leading actually a lot of the - I would say broader strategic initiatives that we've got across the Group.

I mean things from service to rep consolidation to the IoT initiatives, so we're very excited about that. Those were things that we were really have them been allocating to them and working with them over the last 18-months prior to the transition. And then obviously Bryan coming on board mid-last year. He is a quick learner.

As I think many of you know and done a great job. So it's been a pretty smooth transition. The relationship that we have with Selim kind of goes beyond simply a contract, it's a personal relationship and frankly a friendship that we've had for a long period of time. So he's very accessible to us and anything that we need, he is a phone call away.

So really nothing has been unexpected and it's really been business as usual..

Okay, thank you..

Thank you. And our next question comes from the line of Saree Boroditsky from Jefferies. You may begin..

Thank you, and good morning.

On Food Processing, could you provide some additional color on the order activity in the quarter and then any commentary on how you're seeing the cadence of project activity through the remainder of the year?.

So we saw some improving trends as we went through the quarter. It's always hard to read too much into it, because improving trends can be - get an order one-week and then you don't get orders next week just because of the - just like sales the order trends tend to be the same way, they're very lumpy in nature.

I think the good news is, we've seen some positive activity with some orders coming through particularly in some of our core meat businesses, which that had been overdue. We are not back to where we think kind of our normalized run rate is, but that's kind of a build in the right direction.

So I think that's kind of where we think we'll start to crossover into the positive side of things. We're hoping to get there in the first quarter, but it didn't fall that way, but I think we're still kind of moving in a positive direction.

As we kind of put in the press release and talked about a little bit on this call and the last one, we have made significant investments in the product pipeline over the last year. So that is something that we're excited about with.

I would say we had more innovation come out in the last six months to 12 months then we've had in the, the three years to four years prior.

And a lot of that touch is not only our core markets, but some expanded markets as we really have kind of thought about how do we move outside of just - I would say areas such as hot dog sausages, ham into faster-growing categories as I mentioned which is bacon, pet foods, sous-vide cooking and jerky.

I mean that's a market that's growing pretty significantly right now. If you walk into any convenience store you'll have your choice of 20 different flavors and 10 different manufacturers and that's something that we think we're actually pretty uniquely positioned for with a lot of products that just have hit the market in the last six months.

So we're pushing those heavily right now. So we think is some of our core markets continue to be maybe a little bit slower growth will start to come online with some of these other markets that will take time, but we've got some initial wins there and some products that are getting looked at by a number of customers, we are launching them.

Some of these as we speak at the IFA Show in Germany, I know our team is very excited to go there with a lot of these innovations on the floor and a lot of customer meetings lined up. So we think that's going to kind of come online gradually over the next four quarters.

And I think that's going to kind of position us for better results as we move into 2020 and kind of improvement as we kind of go through the rest of this year..

Great. That was helpful.

Can you provide any color on the expected cost of some of the strategic initiatives that you mentioned earlier, including the automation and technology, maybe the international infrastructure build-out?.

You know, I think I'll probably refrain, let maybe Bryan add to my refrainment. Here he wants to add more of a non-answer, but I maybe just going to do with color. Look, I mean, I think, we are - as I said kind of committed to that.

I mean, I think as we are realizing the benefits from a profit enhancement across all three of our categories related to acquisition, integration, some of the supply chain initiatives that we've got going on.

We feel that these are really important initiatives that we need to do to drive large, longer term growth and these are things that will be important to our customers and help us with expand our profits in the long run and technology solutions. So I would just say that it's - they're not insignificant you know investments, right.

I mean, there are you know millions and millions of dollars, right. So I mean they are impactful. But I think we're also trying to manage those relative to the cadence of our profit growth. So we're trying to fund those with profit enhancements..

Yeah, and I think that's the key point here. Overall, we are not doing them as detractors from our overall EPS growth EBITDA, where we don't expect them to be a detractor from overall EBITDA margins, but they are a headwind in terms of achieving the expansion and the increasing rate of those EBITDA margins to the historical levels..

Great. Thanks for taking my questions..

And our next question comes from the line of Jeff Hammond from Keybanc Capital. You may begin..

Hey, good morning guys..

Good morning..

Just go back on Residential Kitchen.

Do we still think core growth is down in 2Q, just given some of the slowness and I know there's a comp issue to some degree in Viking?.

Yeah. I mean, look - so it's still early in the quarter. So, I mean, I think we're not quite sure how the remainder of the quarter will unfold, but I mean I think as we cannot think about it now, it is flattish and perhaps down. I mean, I think we would expect, honestly, I think we were at - who surprise that we got to growth in Rangemaster and AGA.

We're not surprised that our actions have been positive and that we're taking market share and we believe that we had seen that in the latter part of the year.

But I think we were expecting will be down in the UK, again and then once we get through Brexit we'll see growth, but I think the domestic side of things you know that curve probably flattened. So that could net, net get to - to be on the downside negative you know the second quarter..

Okay, great. And then if I look at inventories they kind of being grinding hires.

If you look at some of the metrics, just talk about how you're thinking about inventory levels is that skewed at all by the acquisitions?.

Yeah. There are variety of factors happening with inventory levels.

Acquisitions are some of them, as well as investments following on some of our previous acquisitions, namely in, in residential we have been increasing inventory levels there, somewhat robustly to ensure that we are well-positioned to take advantage of the opportunities that are there in front of us, whether it would be Viking or AGA Rangemaster.

So that has been a big driver. We also saw some impacts this quarter with a little bit of order timing where some things didn't happen at the end of Q1 roll into Q2. So we got a little bit higher there as well as being somewhat opportunistic around from purchasing. But there is a lot of divisions who have a lot of positive thoughts.

So we - it has been again this is probably the biggest factor has been somewhat across the board and is an area we also will be focusing on, we speak a lot obviously about our focus on cost control and margin expansion and will probably be increasing the pressure on the inventory management along the line.

Now we obviously want to be well-positioned, so that we're not missing opportunities, but it has admittedly been growing..

Okay. And then just last one on the Standex acquisitions. It looks like there's a fair bit of overlap. Just wanted to get your thoughts on how you're thinking about any kind of simplification or SKU rationalization, or how maybe they fit into different sub-markets or price points? Thanks..

Yes. So, there's four distinct brands there and which is kind of exciting for us. I mean, the fact that we added four brands that are very - not only well recognized but they each mean something different in the marketplace. If you look at Ultrafryer that, that is very complementary to what we do.

It really adds on well to our pickle frying platform and we've got PerfectFry. And we've got Anets and we've got FriFri, so Ultrafryer that kind of fits at the high end, it's extremely and perhaps the most high efficiency fryer on the market, it's very high capacity.

So that is really a product extension it brings with it some additional chain customers. So it's really a technology and product enhancement. And with Middleby we've got the ability to expanded not only the customers, but internationally. I mean, I think that's one of the things we bring a great international support capability and so that's great.

BKI that is very complementary to what we do there is not any product overlap there, but it really extends what was already strategic initiative that we had going after retail and convenience stores, which we know is a growth category for us is those customers are investing.

So kind of having that sales team and complementary product portfolio that really fits well on the strategy and we're working closely our team and their team right now to identify opportunities together to come with a more comprehensive solution and realize the synergies there.

So really the more the overlap would probably come on the APW and Bakers Pride, but there is product differences that they have in their portfolio and relative to ours. Certainly with any acquisition we go through an effort of looking at SKUs in rationalization.

So we would do that in an ordinary course here and that would be - we're in early stages here, but that's something we'll be doing in the next quarter or so. And kind of if there are opportunities to right size to focus on core competencies and the business that probably would be something that we would take a look at.

But certainly there is synergies between our platform and there are other platform that will be part of the margin improvement opportunities which will carry into supply chain and will carry into some of the leveraging that the channels and the strength of our platform that APW and Bakers Pride brands can tap into.

And Dave I don't - if you have anything to add to that..

Yeah, real quickly. Just if you go, it would appear that way from the outside. And if you come to the NRA, I'll walk you through it, but the product lines across that Standex acquisition. Every product line has a technology, a unique technology that really has a loyal customer base.

And there is some really interesting technology that - I think Middleby globally can exploit. And so I'm actually very excited about. I see very little overlap, if you get into the engineering side of it in the features and benefits for the customers that are loyal to the specific brands.

So, I can walk you through those specifics at the NRA, if you want..

Great. Thanks guys..

Thanks..

Thank you. And our next question comes from the line of Jason Rodgers from Great Lakes Review. You may begin..

Just to follow up on the Standex acquisition, where are EBITDA margins now, and where would you like them to be and obviously have a short-term target on that acquisition?.

Yes. So look I mean we're - 30-days, little bit over 30 days and do it. So I mean I think you were in this four distinct businesses. So I think we will come with kind of more specific criteria and although it's a very important acquisition. It's not massive either this comparatively relative to Taylor. So I'm not sure exactly how much will lay out.

But you know, I mean just conceptually they're in the mid to high teens. And I think that we said that there were approaching something that was mid-to-high single digits, when we bought the company. And any time we buy - any acquisition that being fundamentally a criteria for us is that we need.

We believe we're going to get those businesses to be north of 20%. And ideally longer term we would expect them to be closer to 30% than 20%. So I don't think there's anything different here. You've got four phenomenal brands.

You've got - they've got significant advantages in the markets they serve and then they've got - in our core wheel house in terms of cooking, warming, frying. So I mean, I think those are areas that we know well and how to leverage that with our platform.

So I think as we kind of move through the year, we would expect to get to a cadence that would be something that would be double-digit by the time we were certainly exiting this year and get to a 20% plus margin exactly what the timing of that would be.

I think that's yet to be determined and that'll be where our team is working with the teams there and they do have great management team. So we're excited to have them on board with us. And I know we've had great initial conversations and are working hard to identify those opportunities and prioritize them..

And just a few numbers questions.

If you have estimate for CapEx for the year-end as well as the tax rate for the remainder of 2019?.

Yeah, you know CapEx is generally been around 1.5% of revenues, maybe a tad bit higher, so that would be on that point and that the tax rate will start to normalize to 25% or a little bit over that as we move throughout the year.

We do expect the Q1 rates to be - that the low point, we had some discrete benefits in kind of reserve reversals upon the expiration of certain periods of time that where the benefit this quarter, but will be higher, 25-ish percent for the full year..

Just a quick reminder and Bryan can correct me if I'm wrong on the number, but one of the things that doesn't reflecting our tax rate is, we do have some non - some cash benefits that don't run through the effective rate.

Specifically as it relates to the Taylor acquisition we had - I think it's a $16 million cash benefit that we get annually that's outside of the P&L..

Okay, thank you..

And our final question for today is from the line of Walter Liptak from Seaport Global. You may begin..

Hi, thanks. Good morning. Thanks for taking my question. Just a couple of follow-up questions. One on just understanding the second quarter, you're going to have that tough comp and weather some investment. Your profitability looked pretty good this quarter.

Did something change and step up or are we looking at kind of similar trends to revenue on the profit side where things could be flattish?.

Well, some of the improvement just make sure that you have lost side of it was not having the Grange business in the results as well as then it starts to become more a factor I'd say if a volume as well as the volume at the lower - benefiting from the lower cost structure and the other efforts we put forth in the past..

Okay.

So it sounds like it will step up because of that they're using in that business in the second quarter?.

Yeah. So maybe just kind of breaking into pieces; one, I mean we've had non-core drags for a while so one piece we solved for permanently which was brunch. So that, that benefit will continue. We still have some other non-core businesses that were improving as we go through the year.

And so there'll be a drag on the overall margins, but we'll get positive benefit as we kind of go through the year. And then there's our core business, which I mean I think as Bryan said certainly volume is always a positive factor. But I think we're getting into the next mode of fine-tuning and going after efficiencies, right.

I think we went through a lot of initial stages of restructuring, which we did early on with Viking. And then we kind of went through a lot of heavy lifting with building our Residential distribution platform, which we're on the other side of now where we're enhancing it because it's built out.

And then AGA obviously, we took a lot of restructuring charges over the last couple of years as we right-sized AGA, the AGA Rangemaster businesses. But I think we're going after profit enhancement opportunities certainly at Viking and then AGA Rangemaster as well.

As I said in kind of the opening comments Viking, we spent a lot of time really getting products from market as quickly as possible and making sure that the quality was set up to Middleby standards. And you know while we did that profits we're in line, but we rush to market with products.

So kind of as we go back and think about okay how - what the manufacturing efficiencies look like. Are we leveraging supply chain as we're coming to market with new products. I mean there are opportunities there. So those were things that will kind of build on as we go through the year.

So, I mean I think that's where some of the longer-term journey that we make as we drive the margins on residential up towards where they are in commercial will come from..

Okay, great. Sounds good. And then just a follow on to the tariffs looks like Friday, the US will implement another round of tariffs. And so I wondered how you position for that.

How important is China tiers overall supply chain and how quickly you have to relax though you don't take it in the second quarter?.

Yeah, I mean, so look at - those services not gone through at least I didn't read any news this morning frankly, but every day is a new box of chocolates on that front. So certainly, I mean, if we have another round of tariffs, we are going to have to react to that you know along with a lot of other manufacturers.

And I think our approach should be what it's been with the last couple rounds. And certainly we will consider price increases as part of it, so it would be impactful, but right now we're kind of monitoring and waiting to see what's going to happen on those fronts..

Okay, great. Thank you..

Okay, thanks..

Thank you. And I would like to turn the call back to management for any closing remarks..

Okay. Well, you know, yeah, thanks everybody for joining today's call. We appreciate everybody being on the line this morning and look forward to speaking to you all next quarter. And also just kind of mentioned quickly we've got the NRA Show coming up next week at Cameron pretty quickly following NAFEM was a very successful show for us.

We're excited to be at NRA and we'll have our newest acquisitions there with us too, which will be fun to have them with our Middleby family brands. So, thanks everybody and talk to you next quarter..

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