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Middleby Corp  (NASDAQ:MIDD)
Q3 2018 Earnings Conference Call
Nov. 07, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for joining us for the Middleby Third Quarter Earnings Conference Call. With us today from management are Selim Bassoul, Chairman and CEO; Tim Fitzgerald CFO, and David Brewer, Chief Operating Officer for the Commercial Foodservice Group. We will begin the call with comments from management, then open the lines for Q&A. Instructions for getting in the Q&A will be given at that time.

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

Timothy Fitzgerald -- Chief Financial Officer

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

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

International sales continued to be soft with a decline of 2.2%, reflecting a challenging environment in the UK. However, we are seeing improved conditions and opportunities in a number of emerging markets such as Latin America, India and Russia, which should reflect favorably in the upcoming quarters. The gross margin during the quarter at Commercial Foodservice was 37.2%, as compared to 39.5% in the prior-year quarter. Excluding the impact of acquisitions, the gross margin rate would have increased to 40.8%.

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

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

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

Gross margin at the Residential Group improved to 36.9% as compared to 35.7% in the prior year period, while EBITDA margins improved to 18.1% from 16.5% in the prior year. The margin improvement reflects increased profitability at our domestic brands, driven by higher sales at Viking, along with the benefit of efficiency gains from manufacturing and distribution initiatives. Margins at the AGA business remained flat with the prior year, as savings from integration initiatives were offset by the volume decline.

The non-core businesses, including Grange detracted from EBITDA margins by approximately 2% in the quarter. We announced the closure of this business, Grange during the quarter and anticipate this effort to be completed by the end of the year. Grange had reported an EBITDA loss of $1.3 million, which is included in the results for this quarter and for the full-year of 2018 we'll report an EBITDA loss of approximately $5 million.

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

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

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

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

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

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

Non-cash expenses added back in calculating operating cash flows amounted to $31 million for the quarter and that included $9.9 million of depreciation expense, $17.6 million of intangible amortization and $3.5 million of share-based compensation. During the quarter, the company utilized $8.3 million to fund capital expenditures, primarily related to investments in manufacturing equipment and enhanced production capabilities. And net debt at the end of the quarter was $1.881 billion, this compares to $939 million at the end of fiscal 2017, with the increase reflecting the funding of the acquisitions, including Taylor. The company's net debt to EBITDA leverage ratio at the end of the quarter was just under 3-times.

So, Marial with that, if we could open up the call to questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions). And our first question comes from Mig Dobre from Baird. You may proceed.

Mig Dobre -- Baird -- Analyst

Hi, good morning guys. Good to be -- good to be on your call here. My first question is on Commercial Foodservice, I want to dig in a little more on organic growth, the core growth, maybe a little more color around the 7% growth that you had in the US business, how sustainable you think this is? And how should we be thinking about growth going forward, particularly if some of these drags in international start -- start to subside? Thanks.

Timothy Fitzgerald -- Chief Financial Officer

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

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Yeah, so the numbers you're seeing a result of what we've talk to everybody on the phone about for the past four, five quarters and those numbers -- those roll-outs, along with the smaller programs around the regional brands are coming through and that's what you're seeing. And then if you start looking forward, obviously from a confidentiality perspective, we just signed in the last week three independent roll-out that are going to start given in the quarter through next year on retail grocery, QSR and Fast Casual. And the exciting part of that is it's all, it's the same story of our best technology, our high-end technology that creates that ROI for our customer.

We have two, three distinct new programs just starting so that it's overlapping, what we promised, was going to happen a year, year-and-a-half ago into the fourth quarter, into full-year next year.

Mig Dobre -- Baird -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

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

Mig Dobre -- Baird -- Analyst

All right, great and last question from me. The core gross margin excluding acquisitions in Commercial Foodservice, I think, I heard you on the call say that it was up 20 basis points year-over-year, obviously price cost has been a real challenge for everyone, that does not seem to be much of an issue for you in a quarter here, should we -- should we expect something different going forward, I know, there is additional tariffs that came in, any impacts that we should be aware? Thanks.

Timothy Fitzgerald -- Chief Financial Officer

Yeah, so I just kind of repeat the numbers. I mean, our gross margins were strong, commercial 40.8%, when you back out acquisitions relative to 39.5% and EBITDA margins expanding to 28.8% versus 27.7%. So, we did have some nice margin expansion, a lot of that is efficiency gains, some of it is favorable mix with new product, and Dave kind of touched on some of the continuing wins that we're having there.

That being said, it doesn't mean we're not facing cost challenges because we certainly are. We had steel prices go up, earlier this year that was probably we starting to see that in the second quarter. The impact of that really keep started to come through in Q3, we did have a mid-year price increase that we instituted. So, that largely offset that, but we do have this other wave of tariffs that is coming through that really has not impacted us in fall in Q3, that's really more of a Q4 into 2019 challenge. And we are seeing a lot of cost increases, with that, so that will have some impact in Q4 on the margins.

That being said, we have just announced other price increases. So, literally announcements have gone out in the last week here of pricing actions that are going to be taken. Going into 2019, that would be in conjunction with kind of our normal annual price increase, but those increases will be higher than ordinary to offset the impact of tariffs. So, we do expect that there's probably going be a little bit of a gap here, but we will be able to offset the increased cost of tariffs going into '19. So, that will be able to neutralize that from a margin perspective next year.

Mig Dobre -- Baird -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

Yes.

Mig Dobre -- Baird -- Analyst

Okay, thank you. I'll let somebody else ask questions. Thanks.

Timothy Fitzgerald -- Chief Financial Officer

Okay. Thanks.

Operator

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

Larry De Maria -- William Blair -- Analyst

Thanks. Good morning, folks. Can you just talk about the full-year ASC benefit in processing for sales and profits. When you compare that to the -- I think, you said you have better orders in processing. Does that imply that moving into next year, I'm thinking, really more in 2019, if you pull forward some sales and profits. Does that imply next year is down or maybe neutral because of the better orders. So, how do we think about that from a high level?

Timothy Fitzgerald -- Chief Financial Officer

Yes. So, I'll be honest with you. I'm probably not, I shouldn't say, so point out the ASC 606 expert. But kind of big picture coming into this year, we did have a big benefit in the first quarter. In a lot of ways, the accounting guidance was -- we were recognizing revenue from last year, as you apply the new accounting principles. That's kind of gone away and a lot of the impact that we're having even in this quarter is really just how it flows from quarter-to-quarter. We're not rerecognizing necessarily revenue from '17. It's what the impact would have been -- would it have been normally recognized in Q4 or other periods.

So, I think, as we go into next year, we'll have kind of more of a normalized situation, where ASC 606 will be applied consistently year-over-year. The order rate is totally separate from ASC 606, which is accounting. So, we're pleased to see orders kind of coming back online, it is certainly not where we want it. Some of the larger projects that have been out there, still are out there and we're working on closing some of those. Although we've seen some come in, the mix helps us somewhat, as some of those have been -- some of the backlog is coming into some of our meat business, some of the higher margin companies, which that's really what's hurt us quite a bit this year.

The order rate on some of these projects, because they are -- they are some of more longer term projects. We're hopeful to do see improvement in Q4, we're kind of cautious on what improvement means. But better than Q3 and I think we can probably come back into growth as we go into 2019. If we continue to kind of see this order rate throughout the rest of the year, as well as having a better backlog, which by all measures right now looks like we'll have a better backlog going into '19 than we did come into 2018.

Larry De Maria -- William Blair -- Analyst

Okay, thanks. If I could just follow-up on that, I ask my second question. Are the order -- if were volatility due to tariffs or pricing like it was earlier in the year. And secondly, you guys adding back 4,000 million(ph)of acquisition related inventory step up, it seems kind of unusual. Has that happened before, and just what's -- is there anything specific driving that, it seems unusual to happen?

Timothy Fitzgerald -- Chief Financial Officer

Okay. So, I guess taking that reverse order, that's a good way to do it. But the fair market value adjustments, that was Taylor related. We do have that regularly. So, anytime we buy a company, which is all the time by companies, we have step-up. So, we take their inventory and we have to write it up to fair market value, and then we basically sell it for no profit, which is not the economic reality.

But that's kind of how the accounting rules work and it always impacts our EBITDA and our gross margins in the first quarter. It's just a bigger number right? I mean so Taylor is a much larger acquisition, we did a whole bunch of other acquisitions and they're much smaller companies, not so impactful to Middleby. So, we're pointing it out because it causes Taylor to be fairly dilutive in that first quarter, and it's a non-cash, non-recurring items. So, that's kind of why we're pulling it out, but it does happen to us all the time, and it's kind of embedded in a lot of the -- probably that first quarter after anytime we do an acquisition, you see that.

Larry De Maria -- William Blair -- Analyst

But you guys stepping it up. Is it normal to step it up, or do you ever step it down?

Timothy Fitzgerald -- Chief Financial Officer

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

Larry De Maria -- William Blair -- Analyst

Yes, we will take it offline. Sorry about that. I just--

Timothy Fitzgerald -- Chief Financial Officer

That's OK.

Larry De Maria -- William Blair -- Analyst

-- benefit. It's slightly benefit.

Timothy Fitzgerald -- Chief Financial Officer

Just kind of going in to the other question you had, which was food processing. It is, we kind of live and die by the big orders, right? So, I mean that's kind of the beta the growth. I mean there's 5 or 10 projects a year, in any given year that will cause us to be up double-digit or down double-digit. And unfortunately we've had a drive spell, a lot of times these projects come in emerging markets, we've add projects in Thailand, and China, Brazil. I mean we have been working on a number in markets, you know, I'm going right now, Russia, and Middle East and in Asia, somethings have been slower to come through, and I think that kind of goes back to how we've always talk about this business, which is -- it's a lumpy business, and continues to be lumpy .

It's still a great business, it's high technology. The margins are struggling a little bit right now because obviously the volume are getting hit at higher margin businesses. But we do see a pipeline, obviously wasn't mentioned. We are seeing orders up, so that bodes well. We're still below what we consider our run rate trajectory. But see improvement going into next year and kind of hopeful with some of the opportunities that we see in kind of the international business. And that's been one of the areas that we've focused heavily on, as we've been building, the platform is really going a lot of these brands into markets that they haven't been, before putting together full line projects. And that's really an advantage that we can offer to our customers with a complete system in that, and we've had a lot of success with that. But projects aren't going projects are going, so I think when they're there, we will get a our fair share of the business, and we think gain market share in kind of these bigger opportunities.

Larry De Maria -- William Blair -- Analyst

Okay. Thank you.

Operator

And our next question comes from Jamie Clement from BRG. Your line is now open.

Jamie Clement -- Buckingham Research -- Analyst

Good morning, Tim.

Timothy Fitzgerald -- Chief Financial Officer

Hey Jamie.

Jamie Clement -- Buckingham Research -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

No, there is not. I mean, so we're obviously very disappointed with the EBITDA margins. I mean, at the end of the day, they are not -- they're 18%, 19% they're not that margins, we're not losing money, but we are very disappointed with them. But it drops because of the mix. So, it's not something structural or fundamentally you get some orders in those higher margin businesses, and those margins can come back up very quickly. So yes, the answer is that.

In addition to that, we have had a lot of acquisitions in food processing over the last 18 months. So, there is a -- also a drag to margins because just the typical Middleby situation, which is you buy a company and it's lower margins than the average, then we spend the next couple of years bring it up. So, you have that kind of also embedded in the platform and a piece of that is bakery versus meat. So, the bakery is still lower, it's coming up, but a lot of the acquisitions we've done have been within bakery. So, bakery is kind of two steps forward, one step back. We're making progress on efficiencies, but we're buying more companies in bakery at the same time. So, it's kind of keeping the margins of bakery lower, but that's all part of building the platform, right? I mean we'll continue to integrate those businesses, bakery will come up. Hopefully we'll get some of the orders in some of our higher margin businesses, and then you could then see what you're talking about, where you got margins back up to mid-20s like numbers.

Jamie Clement -- Buckingham Research -- Analyst

Like where you were in the third quarter, last year?

Timothy Fitzgerald -- Chief Financial Officer

Yes.

Jamie Clement -- Buckingham Research -- Analyst

Okay. All right. Dave, if I could ask you a quick one because you were talking pretty quick. I think you mentioned that some of the three new pieces of business that you signed recently, did you say QSR, fast casual, and Grocery Store, is that right?

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Yes, I did.

Jamie Clement -- Buckingham Research -- Analyst

Are those new customers for Middleby, or those similar trends, or mix of both?

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Mix of both, but the key points there is, they've all been single source, and those are actually incremental to the programs. I just pointed out those three there is, we've talked about the portfolio of roll-out that we have.

Jamie Clement -- Buckingham Research -- Analyst

Sure.

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

But those are a mix of both, which are great news, and the reason -- the reasons behind single source are also great news, from an engineering and ROI perspective. The customers are understanding this best technology that we have. So, it's very encouraging, very, very happy about the way the brands, the Middleby brands have responded. The leadership teams done a great job.

Jamie Clement -- Buckingham Research -- Analyst

All right. Thank you all very much for the time as always. I appreciate it.

Timothy Fitzgerald -- Chief Financial Officer

Thanks, Jamie.

Operator

And our next question comes from Jason Rodgers from Great Lakes Review. Your line is now open.

Jason Rodgers -- Great Lakes Review -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

Yeah. So, before I got to AGA, I mean just to repeat, I mean, we're pretty pleased with what's going on domestically with margin expansion there. Top-lines moving at Viking. So, it's a little bit of a tale of two cities, where we've got think sitting on, on a lot of cylinders. Now domestically in the last quarter, we talked about distribution integration and that, it's still ongoing a little bit, but that is largely behind us too. So, I think we did a lot of positives on the residential side of the platform.

Domestically from AGA, the restructuring is going very well, the cost structures are in to much better, better place. We did a lot to move -- there's the Rangemaster business, and there is the AGA business. The Rangemaster businesses is already kind of well north of 20% EBITDA margins, so it's really been the AGA business that's been lower margin. A lot of the focus there has been closing the foundry, which we announced last year, but really haven't gotten the full benefits of the costs yet. And actually some of the minor restructuring with AGA was really the final exit of that or writedown of some of the facility costs.

But we are moving to a new product line, which is to launch late this year, going into next year, which will have higher margins. And so there's a lot of the heavy lifting is behind us, so as we have had significant declines at AGA, the margins haven't decline there. So, we would have liked to obviously gotten the benefits of even just being a flat revenue, we would've gotten a nice margin boost there. So, really the challenge is the top-line and what's going to happen in the market there. I mean as we've tracked the market, the premium market is actually down more than our AGA brand. So, we think, we're not losing market share, we maybe even gaining market share with Rangemaster, but it is a difficult market condition now.

I think going into next year, we're going to be overlapping some pretty large declines, I mean, roughly 10% for the year for in the UK market. We unfortunately don't have a crystal ball, we'd like to think that market conditions flatten out, or maybe improve and we'll start to get some of the benefits of kind of initial new product launches certainly with AGA, but also some, some new products with Rangemaster, which I think those will accelerate more into 2020. But hopefully a better backdrop from a top-line and then that'll kind of translate to the bottom line, so.

Jason Rodgers -- Great Lakes Review -- Analyst

That's helpful. And then what's the timeline for introducing AGA to the US, and how will that work with the Viking product, so I know those two alongside each other?

Timothy Fitzgerald -- Chief Financial Officer

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

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Yeah, I would add two things to what Tim saying is, one as we brought AGA into the states, we have that after sales service and support the parts and the ability to take care of those customers is fully embedded. And so we're tracking as we evolve the business, we're leading with our ability to take care of the customer with these brands.

And the second thing, I'd encourage everybody on the phone to do, is to go, go to our showrooms. These showrooms are very powerful and it really demonstrates how we're lining up the AGA brands with the Viking brands. Go in and talk to the people there and I think it's a great visit, it really shows off how we are managing from a brand standard, the AGA brand and the Viking brand, which is, I think, it's near-perfect in the showrooms, and it's right there for you, I mean that the right turn here for you.

Jason Rodgers -- Great Lakes Review -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

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

Jason Rodgers -- Great Lakes Review -- Analyst

All right, thanks very much.

Operator

Thank you. Our next question comes from Jeff Hammond from KeyBanc Capital Markets. You may proceed.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys.

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Good morning.

Timothy Fitzgerald -- Chief Financial Officer

Hey, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

So, the step-up is done. So Taylor, I mean, it's our first quarter, right, so I mean, I think, it's kind of -- I mean there's not -- not necessarily trends to take out of the quarter. I mean I think initially we're focused on frankly some product line simplification. We did reduce the SKUs by quite a bit. I mean, typically this isn't necessarily a trend, but typically we buy a company, we do try to simplify and focus on the core, that's part of a profit initiative in us getting to 25%.

So, it's literally like 40% of the SKUs, which accounts for about $10 million of the revenue of the business that we're exiting. We hope to make up some of it in other, in shifting the sales to some of the other products, although there maybe some -- some sales loss there. There is some good opportunities with chain customers there and things that the Taylor team had been working on before we arrived. So, I mean I think that's all positive, some large customer opportunity. But I think we'll talk more about trends, kind of, as we move into 2019 and on the next quarter. And Dave, if you have anything else to add.

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, great. And when you mentioned that the wins in commercial, can you just talk about what you're seeing in the general market? And then just how do you think 4Q shapes up, given some bigger wins, do we see an acceleration in that domestic growth rate in to 4Q?

Timothy Fitzgerald -- Chief Financial Officer

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

I would take it as sequentially.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

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

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, thanks guys.

Operator

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

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

Hi there, good morning.

Timothy Fitzgerald -- Chief Financial Officer

Good morning.

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Good morning.

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

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

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

Okay. And right, so Taylor knew and you're going through this product line simplification, and I think you call about $10 million. So, when you bought it, I think, it was about 315 -- $315 million. So, is certainly where the run rate now of about $305 million, is that a good base to use looking at next year?

Timothy Fitzgerald -- Chief Financial Officer

Yes, I think that's fair.

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

Yes, that is on track.

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

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

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

Well, look, I think, from the Middleby perspective and sorry about us, I mean, I think that's something that we've always been disciplined on and we focus on sale on -- return on investment with our customers and demonstrate the value that it delivers to them with a payback and that is really our sales process. So, we're very focused on that discounting.

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

Okay. And one more if you don't mind. I understand Commercial Foodservice being weak international because of Brexit in the UK. But I wonder when do you start to see international start to get a little bit better? Is it a thing, where you could have other parts of the world outside of -- out of the UK that start to improve? Is there any pipeline or funnel of projects that we can talk about?

Timothy Fitzgerald -- Chief Financial Officer

Yes, it's just international also been the softer year and it's not unusual. I mean Middleby historically will have high growth and that will kind of be down. We do touch a lot of emerging markets and that is our strategy. And we've had a lot of investments in number of the markets that we mentioned earlier India, Brazil, China, now opening in Russia, Middle East. So, those are the markets that we want to be -- that we think that will have outsized growth in -- in the long run, it's kind of had a mix this year in those emerging markets. We've had some chains that have grown fast and reset. We've had some markets that have had conditions such as Latin America, which are -- there was recovering from both weather and political issues and then we have softness in the UK.

So, I think, going into next year -- unfortunately, I think, UK is a market that we do have -- that is our largest single market outside the US and I think we do have a backdrop there that will be challenging. But I think on a lot of the other markets we're seeing momentum in more of them hitting on -- more cylinders firing next year than this year. As we going into '19 China probably improving, what we saw this year with our customer base. India, the same way, I think we'll well position there. Latin America also improving. So, I think a lot of these other markets will be doing better and that will help offset whatever the condition is in the UK, which I would just say is uncertain to us right now.

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

Okay, great. Okay. Thank you.

Operator

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

George Godfrey -- CL King -- Analyst

Thank you. Good morning, Tim and Dave. Thank you for taking my question.

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Great.

Timothy Fitzgerald -- Chief Financial Officer

Hey George.

George Godfrey -- CL King -- Analyst

Tim, could you share a book-to-bill on the Food Processing segment, or a comment, is it over 1?

Timothy Fitzgerald -- Chief Financial Officer

Yeah, I mean, it would have been over 1. I don't really have that metric and maybe that something we'll start considering reporting in future periods. It's 1, but it's not a metric that we've reported. I don't actually have it handy, but it would have been over 1.

George Godfrey -- CL King -- Analyst

Okay. And then if memory serves the, the revenue breakdown in that segment was roughly 75% meat processing and 25% bakery post the acquisition, that's still the case?

Timothy Fitzgerald -- Chief Financial Officer

You know what, I don't have it here, but it is shifted a little bit, because we've been hit more in meat. So, I would venture to guess, if I'm recalling it, that right now it's probably more like two-thirds, one-third. And that's part of the impact with the margins here.

George Godfrey -- CL King -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

Yes. So, yes, so we've -- bakeries grown partly through acquisition, so it's becoming larger and then meet is, where we've been hit with the orders the hardest. So, that it's kind of have been a double, a double whammy.

George Godfrey -- CL King -- Analyst

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

Timothy Fitzgerald -- Chief Financial Officer

Yes.

George Godfrey -- CL King -- Analyst

Got it. Great. Thank you for taking my questions.

Timothy Fitzgerald -- Chief Financial Officer

Thank you.

Operator

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

Selim Bassoul -- Chairman and Chief Executive Officer

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

So, from a macro standpoint, I see a shift from traditional dining to delivery and fast service. Millennials are choosing more convenient fast-paced chains with fresh alternatives, a sweet spot for us, where we are very well positioned with fast casuals. The second trend, I see is open kitchens. This forces operators to replace their equipment like ovens, fryers, soup warmers, countertop equipment like toasters, grill was bright colors.

And the new equipment was featured sleek, touchscreen, instead of bulky buttons and nuts. So, we are going to see some replacement of business toward of equipment toward more sleek looking. I'm not saying it's going to be like Viking. But it's going to most probably start moving toward this trend.

Number three, something we've been aware of for years. Labor is a critical issue for operators across the globe. Finding worker is a problem and the cost of labor is rising tremendously. We at Middleby have been at the forefront of labor saving-equipment for over 10 years. Our vision, which I've stated many, many times on conference call or with customers of second and inches is what driving our R&D to innovate by improving efficiency and reducing labor as restaurant kitchens are getting smaller.

The trend is for equipment that trend smarter, smaller and easier to operate. Equipment that saves on labor and makes training easier with technology that is simple. This is the trend. Less labor, less training, more intuitive, smaller, easier to operate.

A months ago, I was the VP of Operation of one of the largest pass-through chains. He told me that they have over 350,000 open position throughout their system, but they are unable to fill. It is truly holding them back. Their only option is to configure automated and smart kitchen as well as being more customized and automated on the front of the house.

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

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

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

Now going to us specifically, going from the macro to the micro, what are we doing? What have we been doing at Middleby? Two and a half years ago, we reinvented ourselves. It was painful. We reinvented our selling structure externally, our distribution system in residential, we restructured many of our organization, especially internationally and how we work together, we simplified our business. However, the biggest reinvention has been in term of our investment in equipment innovation.

In the past two years, we have been working on the following. In beverage, we have been working on multi-type dispensers, hosting sodas, beer, and water. In water, we are creating dispensers with our solid division, where we are dispensing, sparkling and still water and adding flavor shots down the road. Water is something our customer could make money on and they wanted to be in-house.

In beverage, we've been working on injecting nitro in to many things, into coffee, into tea and kombucha. In soda, we have been working on creating an affordable substitute to customizing soda. And our main patents that differentiate us with our other competitor, our only single competitor is the safety of our model in terms of bacteria and no flavor transfers. We have been working on tea dispensing and innovation in that segment. We have invested heavily through L2F our newly acquired division into our SkyFlo our automated bot system that chooses artificial intelligence and sensors.

On the cooking side, we've been working on multi-functional cooking equipment that can perform multiple functions and we have been leading the way in to rapid cook ovens. Restaurant kitchen space is always at the premium and so our vision of second-and-inches, we have been able to maximize cooking time and minimize space.

Delivery and takeout has become a major trend among millennials. We have reformulated our delivery bag and catering systems to becoming ultralight and much more efficient and longer holding. We redesigned our CookTek, holding bags to be lighter and more durable, which lessens the strain of employees, when carrying heavy pizza bag or food pan to hold or cater events. When you look at our smart cooking technology, giving chefs and chain operators opportunity to connect the equipment with an iPad or a smart phone, allowing them to control the temperature and cooking method remotely, ensuring that the food is cooked perfectly.

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

Then I would like to go to waste reduction. Waste is a hot trend, especially food waste. We have been working through our IMT division the last few years on creating the most advanced food waste system. We are aiming to create the long hour customer is zero waste kitchen within the next five years. Our Waste management system today for foodservice is very advanced. It works on minimizing food wastes, reducing solid waste except metal and we are among the very few that can do both. We can also go from in-house waste compacting to onsite composting and to pulps.

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

Let me define -- give you a little bit what unit looks like. It has four compartments that can be separately programmed via touch screen. To supply the right amount of light, water and temperature for each shell, creating zone to grow a variety of green, very quickly. It's fully automated, all they have to do, is put the tray of seeds and they don't have to do anything else beyond the just name the type of seed and doing it does everything else, we are highly patented on this unit.

Ventless remain a key driving force for us. We are the leader in ventless technology with 11 new ventless product coming out in early 2019. Let's give you a number of flavor of a product called the TurboChef double batch oven. It is a ventless impingement oven comprised of two independently control high speed ovens that produce more food faster especially which with its patented oscillating rack. Oven is a space saver with only 27 inches wide and reduces energy consumption by 50%.

Most impressively chefs control each oven, with his split screen WiFi connected -- connected touch controller. This is a little bit a flair of our future of innovation and where we're going. I can share with you another interesting innovation from our newly acquired QualServ division. They are the leader in building out restaurant concept. They have now developed a new grab-and-go display units with both heating and cooling as one unit, instead of leading multiple pieces one unit can be programmed via a touch screen to a number of different temperature at once.

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

So, the last two years, I'm very proud of how we reinvented the company. And I want to thank you for sticking with us. Some of you did not understand a little bit maybe the strategy, you were wondering, what was going on, but we stuck to our guns to pull back, so what has been threw to us all along which has been validation of our innovation back at the customer, through payback and now through data analytics and making sure that our vision of second and inches is real.

This concludes my comments and thank you.

Operator

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

Duration: 63 minutes

Call participants:

Timothy Fitzgerald -- Chief Financial Officer

Mig Dobre -- Baird -- Analyst

David Brewer -- Chief Operating Officer-Commercial Foodservice Equipment Group

Larry De Maria -- William Blair -- Analyst

Jamie Clement -- Buckingham Research -- Analyst

Jason Rodgers -- Great Lakes Review -- Analyst

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Walter Liptak -- Seaport Global Securities, LLC -- Analyst

George Godfrey -- CL King -- Analyst

Selim Bassoul -- Chairman and Chief Executive Officer

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