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Middleby Corp (NASDAQ:MIDD)
Q3 2019 Earnings Call
Nov 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for joining us today for the Middleby Corporation Third Quarter Conference Call. With us today from management are CEO Tim Fitzgerald, CFO Bryan MIttelman, and COO David Brewer. We will begin the call with comments from management then open the line for questions. Instructions on how to get in the queue will be given at that time.

Now I will turn the call over to Mr Fitzgerald. Please go ahead, sir.

Tim Fitzgerald -- Chief Executive Officer

Good morning and thank you everybody for joining today's call. I've got some initial comments about the quarter and then I'll turn it over to Brian. In the third quarter, it was a challenging across all of our business segments. For a variety of reasons, despite the current headwinds, we remain optimistic, because of the significant progress made on our long-term initiatives during the quarter. These important sales and profitability programs that we are currently putting in place are a solid foundation for our future growth. We expect many of these strategic initiatives to be an effect by the end of this year and expect to reap the benefits in 2020 we continue to work on expanding margins and improving operations, price increases were put in place in the third quarter to offset increased tariffs and material costs along with updated product pricing, we implemented additional profitability initiatives including headcount reductions and other SG&A cuts during the third quarter these profitability initiatives include the effort to drive margins are recently acquired businesses as we adjusted to current market conditions. To continue, we continue to consolidate manufacturing facilities, which I discussed on our previous call, combining like companies will bring efficiency through manufacturing and workforce synergies. Our current efforts include consolidation of three facilities, which should bring in excess of $15 million of savings in 2020. We are moving to of the brands acquired from Standex business early earlier in this year into our existing fryer and oven facilities these integrations will not only allow us to expand margins, but position these brands for long-term profitable growth.

Additionally, we have largely completed the consolidation of our outdoor cooking lines within the Viking Greenwood, Mississippi campus. The teams are doing a great job with these facility moves, making them seamless, quick and with our customer disruption. We also continue to focus our efforts on the integration of our newly acquired companies to bring those to our target margins and portfolio average. We have acquired 13 companies and 16 brands since the beginning of 2018. Our margins for those companies that we've acquired prior to 2017 are significantly higher, as acquisitions for the most part are dilutive to our margins for the first several years, and currently represent approximately 2% drag on our overall EBITDA margins. Despite the drag on the margins, we realized margin expansion at these businesses individually and we'll continue to execute on integration plans, which will continue to drive margins to the Company average consistent with what we have done successfully for many years.

We are also expanding our China operations with the opening of a new factory coming online this month. This facility will allow us to increase capabilities and operate at a higher capacity with greater efficiency. We will also be able to deliver product quickly in the region and sharpen our focus on local growth in the Asian region. We'll be adding a number of new products for the local market in 2020 and offering solutions for specific chain customers expanding into the Asian market.

Moving on from our operations and facility update, I'd like to make some comments on each of our segments. During the quarter, in Commercial Food Service, we made progress on a number of initiatives initiatives to capture growing trends and enter new markets. First off, we launched Open Kitchen, our IoT based connected smart kitchen platform that communicates with all commercial equipment, regardless of the piece of equipment or the manufacturer. To be clear, this solution can be utilized on all brands and commercial equipment, not just Middleby products and cover all operations of the restaurant, including areas such as lighting, HVAC, and both processes inside and outside the kitchen. This technology, which has the potential to change our industries from Powerhouse Dynamics, the company we acquired just in April.

Powerhouse, which was a proven solution with close to 5,000 existing restaurant installations have the knowledge base resources and capability to marry their solutions with our existing IoT Middleby Connect platform, and brought this advanced combined and enhanced solution to market very quickly. Open Kitchen provides a wealth of automated and informational tools such as predictive analysis, remote recipe distribution, real-time wireless temperature monitoring enabled with a powerful mobile app. Armed with data, operators have the ability to make decisions that affect overall kitchen operations, which in turn improve profitability, monitor food safety, and provide the best experience for both customers and employees. Initial feedback from customers on this technology has been very promising and we are working with many customers to evaluate the potential benefits to their operations.

Next I'd like to talk briefly about our continuing investment in the ventless kitchen. Quite simply, we are the leader in this fast-growing trend. Middleby as the broadest line of equipment that can be used in non-traditional locations. Today, you see more kitchens in areas that were in the past considered dead spaces, or in a venue that was not built for food service. Now operators can turn this unusable space into profits by installing a ventless kitchen. Beyond this, we have seen firsthand the need for ventless solutions in many other non-traditional and growing concepts, including fast casual chains, convenience stores, and food trucks. We continue to add products to our ventless portfolio, market our solutions, and make it easy for our customers to understand and specify the equipment to meet their needs. Heading this effort is Scott Heim, who was named our President of Ventless Solutions just a few months ago . Scott joined us from EVO in January, the ventless grill company we acquired at the beginning of the year, and he has helped us make significant inroads very quickly with a number of customers.

Also, we are leveraging our knowledge and automation in large batch production to meet the specialized needs of ghost kitchen and delivery concepts. We're able to bring together capabilities from our L2F automation company, our broad family of commercial products and equipment solutions from our Industrial Food Processing segment to develop unique solutions that fit the needs for these new food service concepts. These are unique solutions customers can find only within the Middleby brands. We have a team focused on developing concepts that can maximize space, capacity, and menu flexibility. We are working with early stage customers and expect to be opening and clouding ghost kitchens for customers as early as 2020 .

Other investments in our commercial food service platform include the continued upgrade of our sales tools. In the quarter, we launched an exclusive Middleby sales app to support our sales team, which provides access to Middleby product information, selling tools, and digital marketing material at their fingertips. We also launched our customer management and opportunities tool, which enhances communication and information availability across all of our sales teams, which enhances collaboration across our brands, allowing us to better identify and collaborate on new and existing customer opportunities. Along with these enhanced sales tools. We continue to invest in our sales rep partners to support training initiatives and further upgrade products available in their test kitchens adding new products launched from our beverage solutions and our most innovative cooking technologies. We are committed to deepening the existing partnership with our sales reps as we align our organizations to focus on the promotion of Middleby capabilities and unique solution offerings.

The final investment I'd like to talk about in commercial food service is a realignment of our national sales organization. This recent updates allows us to better focus on under-penetrated and growing segments such as convenience stores, retail outlets, the marine segment, and emerging chains. We now have the ability to better target opportunities in these categories and promote solutions that are most relevant to operators in these business segments. Along with this realignment, we successfully launched our formal consultant and designer program, an area Middleby had not focused on historically. Recently we hosted a successful event at one of our facilities with dozens of well-known designers and respected media in attendance. Due to this outreach, and our technology advancements, we are quickly making inroads with the designer community and have educated them our unique product offerings in a short period of time.

Apart from our investments in commercial food service we are enthusiastic about many new products that have been well received in the second half of the year. Our JoeTap Nitro Brew, just launched in the second quarter, is rolling out at a large coffee chain. The CBOE Fast Cook Oven, which was introduced at the HOST Milan trade show is gaining traction quickly and our PUC frab n' go cabinets are self-serviced and automated to accommodate the delivery and carryout market, and that presents an exciting opportunity for us in 2020. An example of another recent acquisition, Ss Brewtech, has product that addresses not only the growing craft beer market, but also other fast-growing categories such as Kombucha, cold brew coffee, and CBD oil extract. And finally the latest product from TurboChef, the Bandito, which was successfully debuted last month at the HOST Milan show, provides another innovative product from TurboChef, extending their existing industry-leading platform.

And lastly, we are also looking forward to the opening of our commercial innovation center in Dallas in the first quarter of 2020, which will feature live Middleby commercial appliances alongside a residential showroom. We will use this venue to host both our current and prospective customers. Turning now to the Residential Group, 2019 has been a difficult year for the appliance market, which has reported negative demand for the last four quarters both in the US and also in the UK market, particularly in the UK given the uncertainty of Brexit. Despite the continued near-term market situation, we are excited about the continued progress and investments we are making to position this platform, and believe we are still in early innings for this segment, which we have ventured with our Viking acquisition in 2013. We believe the continued investments we are making in sales distribution, service, and new product innovation will continue to translate into market share gains and growth in profitability for many years to come. As earlier stated, we are in the final stages of completing the manufacturing consolidate of our outdoor cooking line into Greenwood, Mississippi, which will add to profitability in 2020 as we continue our journey to expand margins in this segment.

We expect to address non-core businesses, which drag on the overall profitability in residential, and implement strategies to further improve efficiencies of our manufacturing operations, both in the US and the UK. We are excited about new innovation that we've brought to market, leveraging the technology and innovation from our commercial segment, and in the quarter, we added to our product offering with the expansion of our built-in refrigeration line up under the Viking brand. We also began our initial introduction of AGA branded Mercury and Elise Euro-style products into the US market with a broader launch plan for 2020.

Additionally, a new family of under counter refrigeration ice making products will be available for sale under our Marvell brand at the start of 2020. As appliances with color are trending in kitchens, a few days ago Viking introduced its new color options and next week Viking is launching its beautiful exclusive rose gold range in limited production. This range has been sought after since it was a concept piece showcase both in our New York and Chicago residential showrooms. And speaking of showrooms, we will soon open the doors of our Southern California location next month, our largest location yet in a high traffic area of Orange County. And as mentioned earlier, this will be followed by the opening of our fourth showroom in Dallas, Texas, which will be at the beginning of 2020.

And now moving into our food processing business, sales continue to be disappointing, as we have not had the benefit of large projects in our core meat processing business. However, we have worked to reduce the impact of cyclicality and volatility of this segment through the introduction of new products that reach into adjacent markets such as bacon, pet foods, cured meats, jerky, and alternative proteins. We have also seen improvement in order activity, including orders from some of these new targeted segments which gives us confidence that we will see a much improved backlog as we head into 2020.

We are very excited about the potential of some of these new product introductions such as the newest launch of our conveyorized TurboChef Rapid Cook platform by ALKAR. This new product brings together technology solutions from our Commercial and Food Processing divisions. The combination of microwave and high-speed convection technology reduces cooking times by more than 60%, and provides a small footprint and flexible platform, supporting a bright a broad variety of applications.

At Armor Inox, we recently introduced our Camatix continuous pasteurization and cooking system. This exciting new product allows processors to produce best quality protein, including alternative proteins, for customers who demand clean label products. This type of thermal pasteurization is becoming the most reliable and cost-effective method for guaranteeing food safety in automated and space-efficient footprint. We debuted these products, along with a number of others, at our recent process expo trade show here in Chicago with great customer receptivity.

Finally, I'd like to comment on our latest acquisition PacPro which we completed this exciting addition to the Middleby family early in the third quarter. PacPro is a innovator and a market leader in automated packaging technologies for our customers, both in the protein and bakery segments. PacPro also brings to Middleby a great management team and an innovative culture. PacPro adds to our portfolio of solutions automatic food interleaving and food stack equipment and allows us to offer high-speed sorting and interleaving equipment for a growing number of food applications. The leaving process important to the ease of preparation and separation of food products for our retail and restaurant customers, and this technology allows for greater food safety along with speed, labor savings, and product consistency.

So while this quarter has been challenging in many ways, we believe that the actions taken and the progress made will continue to strengthen Middleby and position the company for growth as we move into next year. So following those initial comments on the third quarter, I'd like to turn it over to Bryan for some comments on the financial performance.

Bryan Mittelman -- Chief Financial Officer

Thanks, Tim. Before I dive into the results by segment, I'd like to introduce a new measure, adjusted EPS, which seeks to exclude items that are nonrecurring or nonoperational, as well as those that do not correspond to current cash expenditures or inflows, namely amortization of intangible assets and the actuarial valuation gains from our pension assets. We believe this is a relevant metric to use as it aligns with areas that management focuses on as we operate the business. The reconciliation behind this metric has been included as an exhibit to the press release .

For the third quarter, we generated adjusted EPS of $1.72 versus $1.65 in the prior year. When evaluating recent acquisitions excluding restructuring impacts and inventory purchase accounting impacts, the ongoing operational contributions from the acquired brands of APWU, Baker's Pride, VKI and Ultra Fryer, as well as Powerhouse Dynamics were $0.03 drag on earnings for the quarter. I will discuss restructuring charges collectively for all our segments later in my comments.

So our Commercial Food Service segment sales for the quarter amounted to $501 million, which included an increase of $31 million related to acquisitions completed within the last 12 months. Most notably, the transaction to acquire the APWU, Baker's Pride, VKI and Ultra Fryer brands from Standex in April. Excluding the impact of acquisitions and foreign currency rate changes, sales for the quarter increased 0.5%. Sales growth was 3.6% internationally with increases in all regions. While challenges in the UK persist, we did achieve modest growth in Europe. The domestic market decreased 1%. We are not confident the growth in this segment will continue in the near term. As Tim noted major rollouts by use, restaurant chains are continuing to take longer to materialize, which is leading to lower than expected organic revenue growth. I expect these challenging market conditions to remain in the fourth quarter, and could potentially impact Q1. We look forward to improving organic revenue performance as we progress through 2020. In spite of topline challenges, we are pleased to have kept margins essentially constant in the current market conditions.

The gross margin in Commercial Food Service was 3.37%, and excluding the impacts of acquisitions and foreign exchange the gross margin would have been slightly up to 37.6% as compared to 37.2% in the prior year. Adjusted EBITDA for Commercial Food Service amounted to $126 million, representing 25.2% of sales, or 26.4% when excluding the impact from foreign exchange and acquisitions, and this compares to 26.6% in the prior year quarter. While there has been a slight margin decline year-over-year, they have improved sequentially.

Our current results are impacted from low margin acquisitions and transition costs being incurred in connection with plant consolidations, as well as by the increasing R&D investments we are making. We will begin to see the benefits from plant consolidations in Q1 of 2020. We will also see benefits from driving efficiencies across the other acquired businesses where plant consolidations are not part of our integration strategy. Additionally, our R&D investments will generate increasing revenues and margin benefits in 2020. Creating shareholder value through margin expansion and strong cash flows are key to our success. Our goal remains to grow margins at acquisitions to levels consistent with the overall platform. This corresponds to growing margins from current levels 30% in the mid term. We will deliver these improvements through integration efforts at our recent acquisitions, continuing to execute on supply chain initiatives that leverage our scale, and harnessing our capabilities and best practices to improve business processes.

The margins for businesses we have acquired prior to 2017 stand at approximately 29%, while the total segment margins are obviously below this level. This is a result of the many strategic investments and acquisitions we are making to maintain our leadership position for the long term. For example, technology efforts around controls, IoT, and automation on which we are investing approximately $50 million annually. Investing in our ventless, Kambi, and steam platforms, and internal teams to drive growth in these areas, growing our fabrication and design capabilities, developing and implementing tools to support enhanced sales effectiveness acquiring businesses that have an opportunity for margin expansion over a period of years, and expanding our beverage platform and enhancing our technology offerings. Excluding the impact of potential future acquisitions, we expect margins to expand in 2020. We expect cash flow generation to increase, too. We are proud of the industry leading margins that our mature divisions are generating. We've achieved this through pricing actions, cost control activities including rationalizing headcount in certain G&A areas, and continuing to deliver innovative solutions to our customers.

So in the face of these current sluggish market conditions, while I'm generally pleased that we have been able to hold margins relatively flat, we faced challenges to continue to do so in Q4, given the mixed impact from the prior year's speed cooking rollout that we do not expect to overcome. This will impact margins and our growth rate. Additionally, the HOST Milan trade show that occurred in October happens every other year, creating additional segment headwinds for the fourth fourth quarter of this year. In spite of the recent in near-term challenges, we remain committed to undertaking investments and acquisitions that may be short-term margin detractors in order to expand our cash flow generation and ensure our market leadership position.

Moving onto the Residential segment sales, amounted to $134 million. Excluding the impact of foreign exchange in the closure of a non-core business, we experienced a sales decline of 9.6%. Internationally, we have not seen improved market conditions in the face of Brexit. Domestically, as we discussed last quarter, the market slowdown we feared did materialize. With lower consumer spending on appliances, Viking did not grow and we struggled with under counter refrigeration sales. Overall, Our new products are driving increases in our market share as consumers positively react to our new offerings. While we have achieved revenue growth in four of the six last quarters, performance has been challenged after the market recently turned down unexpectedly.

A change in trajectory in the short term is hard to predict, but we remain confident in our long-term positionin. We are outperforming the competition now, and we plan to do so in the future. As we look forward, we are hopeful the consumer behavior will improve,but we do not yet see firm indicators that cause us to believe short-term results will improve meaningfully. Gross margin at the Residential group improved to 38.9%, as compared to 36.9% in the prior-year period, which was impacted by the shutter business, while EBITDA improved to 18.8% from 18.1% in the prior year. Excluding the impact of FX rates and the remaining non-core businesses, EBITDA in the current year would have been 20.6%, an increase of 250 basis points over the prior year, and 20.4% that was delivered in the prior quarter.

While addressing our EBITDA performance, I wanted to take a few moments to recall our strong track record of improving EBITDA margins of acquired businesses. As we look across our portfolio, Viking has improved from money-losing to margins in the mid-20s, U-line has improved from high-teens to approximately 30%, and Marvel has improved from low double-digits to approximately 30%. AGA has improved from low-single digits to the mid-teens and Lynx has improved from low-teens to low '20s. While the aggregate EBITDA margin for our core businesses currently resides it over 20%. Our mission is to increase this 25% over the medium term. We will achieve this by continuing actions such as exiting non-core businesses, realizing benefits from factory consolidation as we are completing such with lengths, driving for synergy benefits with Commercial Foodservice, executing on various supply chain initiatives to leverage our scale, utilizing our know-how and best practices to improve manufacturing processes, and bringing new and innovative products to the market.

Lastly, on to the Food Processing segment, sales amounted to $89 million of which the acquisition contributed approximately $10 million. Excluding the impacts of the acquisition and foreign exchange rates, sales decreased 9.7% for the quarter. Gross margin of the food processing group improved to 34.9%, as compared to 34.7% in the prior year, while EBITDA margins improved due to the benefits from the acquisition. As Tim noted, the absence of large customer orders. We continue to be a headwind for this segment. We are optimistic that we'll see improvement in both the topline and EBITDA margins as we enter 2020, but meaningful increases remain in immediate challenge given the current state of orders.

In terms of ensuring return to consistently expanding margins year-over-year, outside of the impact of any future M&A activity, I wanted to briefly discuss our restructuring actions. As I noted last quarter, in the face of numerous market challenges and in order to drive improvements of the acquired businesses, we are in the midst of a few plant consolidation efforts, which we are largely complete around the end of this year. As well, we have undertaken other actions to reduce headcount during the quarter, given the challenging environment. Restructuring charges and associated transition costs, which do not qualify as restructuring under US GAAP, were $4.2 million and $1.3 million respectively in Q3. We will incur further expenses in Q4. Savings will be realized beginning in 2020 for the most part and should annually exceed $20 million. We believe these actions, along with continuing to execute numerous programs impacting day-to-day operations and spending levels when coupled with pricing actions, new product innovations, and emerging technology solutions will provide improved margins as we progress through 2020.

Net debt at the end of the quarter was approximately $1.9 billion, which was down approximately $100 million compared to the end of fiscal 2018. Our net debt to EBITDA leverage ratio at the end of the quarter was just under three times. I will conclude our comments with a discussion of cash flow generation. During the quarter, operations generated $128 million, which was a record for us. After $12 million of capital expenditures, our free cash flow was $160 million for the quarter. Non-cash expenses added back in calculating operating cash flows included $27 million of depreciation-amortization expense, and $2 million of share-based compensation expense. This total of $29 million is lower by $2 million over the prior year period. Working capital changes were not as attractive to our performance in Q3, which was a big improvement over the same quarter last year. Our year-to-date free cash flow to net income ratio is 81%. We are committed to maintaining a high conversion rate on our free cash flow, and for the full year, we will exceed this level.

With that, my comments are concluded and operator, can you please open the call to questions.

Questions and Answers:

Operator

Thank you so much. Your first question comes from John Joyner of BMO. Your line is now open.

John Joyner -- BMO Capital Markets Group -- Analyst

Hi.

Tim Fitzgerald -- Chief Executive Officer

Good morning.

Hi, John.

John Joyner -- BMO Capital Markets Group -- Analyst

Hey, good morning. So, you touched on this a bit already Tim and Bryan, but can you offer some additional color on your ability to improve margins, particularly in the residential business? Which I thought was quite impressive, despite the meaningful organic declines.

Tim Fitzgerald -- Chief Executive Officer

Yeah, I mean, margin improvement remains a one of our top priorities across all three segments, not only only residential. So I mean, I think you heard in some of these comments that we have very specific actions that we've either already implemented. So I mean, that would include pricing, it would include some of the head count initiatives, and the head count initiative is going to cut across things that we would do an ordinary course as part of integration, and some of it also is kind of we tend to react quickly as we're seeing changes in markets. I mean, that was a piece of it, but we've got the plant consolidation. So, Bryan alluded to $20 million of cost savings going into next year. So, I think we're -- we expect that either some of that's A, been done or B, will be completed at at the tail end of this year or very early next year. So, we've kind of expect that to occur.

And then on top of that that really doesn't include, I would say, kind of a broad bucket of synergies that we are going after to really leverage the scale of the whole platform. So supply chain would certainly be on top of the list, but there's really a number of other areas that we've identified and put people in charge of and resources to go after things like distribution and strategic freight, utilities costs. I can kind of go through a list. So that, those are areas that we have internal targets. We haven't put a number to it, but those are things that we'll be leveraging. Next year in the residential area, kind of add into that manufacturing efficiencies. I mean I would say we're still, it is a still a relatively young platform. I know we been with Viking for a while, but if you look, we've got 15 plus brands in that portfolio. Half of them have really been acquired only in the, the last three to four years. And during that period, we focused on a lot with quality in new product innovation, so there is the opportunity to go back and really drive efficiencies through those factories. So that is something I would say there is ongoing efforts, but those efforts will get ramped up as we go into next year. So I mean, we are kind of if you absent some of the still-existing non-core businesses, which is also something that we're addressing coming into the year. I think everybody knows we exited a furniture company that kind of came with the broader AGA portfolio. We still have some other pieces of business. But if you adjust for that, we're around 20%. But I mean, we've targeted to get to mid-20s and a combination of kind of all those things that I just mentioned are pieces of the journey to get us to that level over the next several years.

John Joyner -- BMO Capital Markets Group -- Analyst

Okay, excellent. That's very helpful. And just maybe one quick follow-up, I think it should be quick. So where does, and sticking with Residential, where does AGA stand, I guess, with some integrating that business with the Residential distribution?

Tim Fitzgerald -- Chief Executive Officer

So I mean, our business as you know, it's split more so than the other segments of roughly half US and half largely UK-based. So they are somewhat om a parallel and a bit distinct paths given that they've got different distribution models, but we really have just started to scratch the surface of how do we leverage the product portfolio both sides. So some of that comes from an engineering standpoint, some of the customer sales standpoint, some of it comes from an operating standpoint. So as I mentioned, we're just, we're excited about launching some of the AGA products here in the US as we go into 2020. We're at the very early stages on that. So that's exciting for us. But certainly there is supply chain initiatives and some potential manufacturing opportunities as we do that as well. So given both of those companies have really been focused on their core businesses and shoring it up with initial integration plans that we've had. We haven't gotten to the synergy piece of that yet, and I think that we will start to kind of open doors on that as we go into 2020.

But, and I'm not sure I frankly answered your question, but I think we will start bringing some of the AGA products here, leveraging our, the distribution capabilities that we've built over the last several, several years, which have come a long way. I mean, we've got a great sales team now. We've got a great leader for that business with Scott Grugel. The distribution capabilities and product availability have improved tremendously over the last several years, and probably most importantly, our service capabilities. So parts availability and the ability to react to issues in the field have been enhanced. So now that we kind of have that is a strong capability, it gives us the ability to bring new products and brands through that with with confidence. So that's something that we'll continue to leverage in 2020 and 2021.

And an attached to that is the showrooms, which again we just opened New York this year. We've got two more that are coming online. I think we're not fully leveraging the capabilities of those. I mean our first showroom, the Chicago, which is an amazing group of people and an asset that really has paid dividends and kind of set the the blueprint for us with future showrooms. And so that is something that we will continue to invest in and we're excited about. As we get to this time next year, we should have four showrooms that are open and we'll have been operating for a bit of time.

John Joyner -- BMO Capital Markets Group -- Analyst

Okay, excellent. I appreciate the time. Thank you.

Operator

Thank you. Your next question comes from Larry De Maria William Blair. Your line is now open.

Larry De Maria -- William Blair -- Analyst

Hi, thanks, good morning. I guess, I mean we could talk with the weakness recently in Commercial Food Service, but in reality has been sluggish for a few years now. So what do we attributing this to? Or, I mean, has a market structure changed so much that there is probably little prospect of it getting back to that above average organic growth? Because now obviously it seems to be more of a margin story here at Middleby than a a growth story.

Tim Fitzgerald -- Chief Executive Officer

Well, I think we are focused on things that are in our control, right? So certainly margins is something that we are in our control and we want to expand. Obviously it helps if the topline is moving in the right direction versus we're overcoming a weaker topline while we're expanding margins at the same time. But, so certainly, that is something we will focus on. But I mean, I think the industry on commercial, it's kind of been I would say a transition period and in domestic it is probably different than international, but we've got a, there is a larger installed base here in the US. If you look at, we've got some, we have no concentration with any individual customer. That being said, we've got, we're very focused on the chains and if you kind of look across the top 50, 100 chains we've got a good presence there. And I think they've got a large base of installed equipment and the replacement cycle, I think it has extended out.

And I think that partly the competitive landscape has changed. So they've got a lot of different competitive pressures that they're thinking about whether that's labor whether that was before they had 3 or 4 main competitors, and now they're thinking about 50 competitors, because there's fast casual, there's non-traditional locations, deliveries coming online. So they're evolving their businesses and when they do that, then those purchasing decisions have become more strategic and that tends to take a little bit longer. We believe the base of equipment in those customers is aged and they do need to go through a not only upgrade cycle, but those things are going to be more strategically important in tie into there to their business plan. So we think that Middleby is better positioned than anybody in the industry, given the breadth of the products that we have and really the solution offering that we have. And again, we're kind of gearing up to make sure that those customers understand what those solutions can can do for them in terms of of an ROI and they fall into key trends, whether it's labor, whether it's shrinking the equipment and footprint, whether it's helping them with address areas that they're trying to move into with delivery or, even as I mentioned on the call here, a ghost kitchen.

So I think we'll probably see a little bit more of a lumpy spend as you have these chains come online, which are tied to strategic decisions. And if they've got large franchise operations those franchisees sometimes need clarity of what the specific initiatives that they're going to put money to. So I mean, I think that is just tended to push out the cycle where we historically, it would have been hey, the piece of equipment breaks down or we came out with the next-generation launch and it was 30% more energy efficient and we were just kind of right online. So I think we do expect that there will be spending cycle as our customers are going to need to really address a lot of these major issues that are facing them in the kitchen, and when that happens we're better positioned. I think in this year, we thought that will be some more activity coming online in the back half of the year. We still believe we're well positioned and we'll see more of that happen in 2020 but that's put some pressure on kind of the near-term.

Larry De Maria -- William Blair -- Analyst

Okay, thanks. And if I could, just one quick follow-up. The Open Kitchen IoT, how do you plan on charging for that? And is that going to be an enterprise chain sale or is that more for the general market and all the enterprises potentially have their own IoT? Or just any color on how you going to charge and the opportunity there. Thanks.

Tim Fitzgerald -- Chief Executive Officer

So its early stage. I mean the model right now is we are selling for, there is an equipment piece. So we sell in sensors and hardware technology. So that is kind of the one-time upfront cost. And then there is a continuing subscription fee that is ongoing. It's a monthly fee that we charge for that service.

Larry De Maria -- William Blair -- Analyst

Okay, thank you.

Operator

Thank you. Your next question comes from James Clement of Buckingham. Your line is now open.

James Clement -- The Buckingham Research Group -- Analyst

Hey, good morning.

Tim Fitzgerald -- Chief Executive Officer

Good morning.

James Clement -- The Buckingham Research Group -- Analyst

Hey, Tim, I don't know if you want to take this or Bryan, but you all had a price increase during the quarter, but no way would you have fully realized that across geographies and product lines 100%. So in terms of excess cost, be it tariff or whatnot, versus the pricing increase were you still negative for the quarter? By roughly how much? And then, kind of, I don't know whether you'd be fully realized in the fourth quarter or whether it's more of a first half of 2020, but kind of assuming cost data same where do you think you'll be from the margin perspective on that front?

Tim Fitzgerald -- Chief Executive Officer

So I'll start and then I'll let Bryan add. So I mean, you're absolutely correct that we didn't realize the full benefit. So we took a price increase and we've got 50 brands in commercial and 90 brands overall. So we didn't take, they didn't go up all exactly on the same day, but largely, we announced price increases, somewhere midway through the quarter. An announcement doesn't mean that you start, as you know, realizing the benefit right away. So I mean I think we we addressed parts where we had been hit hard on material costs and tariffs, so that we probably started to realize the benefit let's say in September. So we got a third of the benefit of parts in the quarter.

On the equipment side, I would say we got minimal in Q3. We'll see it bleed in, in Q4. There is a lead time that we give to our customers. There's also the backlog that we burn through and hold pricing and then you've got some longer-term price contracts that really even when you tell them the price increase you get the benefit probably until early 2020. So, I guess we'll see some of the benefit roll through in Q4, certainly it won't be the full win on it and then going into early 2020 will get probably that the bulk of the price increase then.

James Clement -- The Buckingham Research Group -- Analyst

Okay, thank you.

Tim Fitzgerald -- Chief Executive Officer

Bryan, anything?

Bryan Mittelman -- Chief Financial Officer

Yeah, I don't have anything to add to that because I don't have a specific quantification for you. But I do think it's fair that Q4 will be, we won't be upside down on it any further.

James Clement -- The Buckingham Research Group -- Analyst

Okay. And then, Tim, just to follow-up in terms of chain activity. You talked about the installed base, talked about kind of replacement cycle, those kinds of things. What I'm a little puzzled by is when you see out there in the restaurant space, even in the chase, it seems like there's just been a lot of disruption. And even if you just look at like the Chicken Sandwich market and you see chains talking about a new Chicken Sandwich product to compete with -- who and one person has been successful in other people seem like I'm just wondering why there hasn't been more chain the spending on new equipments to support new menu items?

Tim Fitzgerald -- Chief Executive Officer

So I'm just going to be one kind of turn it over to Dave, I'd just like to comment that we are supporting all of those. Many of the chicken chains, including one that that had done pretty well with the product, but Dave, why don't you give a perspective on that?

James Clement -- The Buckingham Research Group -- Analyst

Yeah, I was just asking more from kind of a larger industry perspective. It just seems like you had a lot of commentary out of some of the public companies talking about initiatives, but we don't actually necessarily see purchases to support those things.

David Brewer -- Chief Operating Officer

Yeah, it's, I couldn't agree more with you. The fact is there is, I think the big chain customers are struggling with, what does the customer want? Where do they want it? And what type of food? There is so many dynamics going on with the trends in the food business. It used to be just straight across-the-counter and then went through the drive-thru window. Then it went to delivery, now it's delivery services. There's so many ways to get to the product. And I think that indecisiveness, and I feel for the leadership of the big chains because they're trying to figure out what the customer wants. That indecisiveness, especially in the face of large franchise operations, the franchisees freeze. They just stop. And I think I would, too. And they wait for a good decision to be made. You can only put the lettuce on top and then the bottom and then the different breading once or twice, and eventually you're going to have to change that product to get the customer to come back in after that new menu item. And we're always there to help them bring in those new menu items and we're already embedded in all of the top chains.

I'll just put one more piece of the good news is the one thing that is consistent in this business, is every day in every restaurant, they come in and turn the equipment on. It doesn't matter whether there is new products or additional sales, equipment gets used every day and that eventually turns into useful cycles and replacement business for us. So I think that there has been a pent-up demand on decisiveness and on new product entries and exciting new programs out there. I think the things that we're investing in like the Open Kitchen and like the PUC, which allows for carry out and delivery efficiencies, and speed up in some ventless technology that allows for ghost kitchens and different locations where restaurants to occur in an effective way, that makes a difference for our customer's customer. If you step back like you're doing, and looking at the mega trends, we are the clear leader in supporting those trends.

James Clement -- The Buckingham Research Group -- Analyst

And Dave just I mean, but at some point in time, a major QSR chain that has an alleged premium chicken sandwich that's dry and stringy is going to have to do something about this, right?

David Brewer -- Chief Operating Officer

Amen. I agree with you 100%, they will. That's the good news.

James Clement -- The Buckingham Research Group -- Analyst

Okay, good. Thank you. Thanks guys.

Tim Fitzgerald -- Chief Executive Officer

Thanks Jamie.

Operator

Thank you. Your next question comes from Jeff Hammond of KeyBanc Capital. Your line is now open.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning.

Tim Fitzgerald -- Chief Executive Officer

Hey, good morning, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

I just want to just want to focus on Q4 a little bit. So first in Food Processing, last year you had a big ramp in the year-end. Maybe that's normal seasonally. Just how should we think about kind of the tough compare there going in? And then just on Residential Kitchen, it sounds like you think that business is, it continues to be down year-over-year based on trends?

Tim Fitzgerald -- Chief Executive Officer

Okay, so I'm just going to give a broader comment here, so I think with Food Processing, obviously it's been disappointing year in terms of the cadence of orders coming in. We are seeing orders start to come in now. Unfortunately with kind of the longer cycle to move these through. I mean that's kind of where I had the comment that we think a lot of it goes into backlog as we go into next year. So that hopefully positions us much better coming into the year. It may not help the fourth quarter quite as much. So I mean, I think we are thinking we won't necessarily be as down is in the fourth quarter, but I think where we think will be up and backlog double digit going into next year, that probably won't all translate into Q4. And Bryan might add some other specificity that.

But on the Residential side, I mean very honestly, that one we felt we were very well positioned coming into the year. We do have anecdotal data of how we're doing relative to our competitors at certain dealers, and certainly we've got other points of information, how many displays we have on showroom floors. Net-net, we've added about 75 dealers also. A lot of those dealers were partners that have walked away from Viking, either before or shortly after we bought the company, and they are coming back. So we feel good that we're expanding in that area. So I mean, I think on the things that we think are positioning the business for long-term growth, we see kind of measurement tools that we have that will help us. But then what is the broader market. I mean I think it's been a tougher market than we thought coming into the year and certainly that showed up most significantly in the third quarter. Obviously Brexit everybody, we've been talking about it all, I think we're all blue in the face and particularly the people who are living in the UK dealing with it every day.

But on the domestic side, probably thought that the market should perform better given kind of the economic backdrop. So that's been a little bit of a mystery. I would say kind of in the very recent periods, we've seen things start to improve, let's say the industry reports that are out there are still down, but there are less down. And again, we were bucking the trend in the first half of the year because the industry was down and we were up. We held on for, as Bryan said, having growth I think four out of six or five out of seven quarters. So we're hopeful that the market backdrop is starting to improve a little bit. We have maybe the initial signs, but I would say, Unfortunately there's not a crystal ball. we have in the conference room here, and our confidence level we'd like to say is higher. So our confidence is that we will outperform, and we seem to think that the domestic market is starting to improve a bit. Unfortunately Brexit, as everybody knows got extended for the umpteenth time. So I think going into next year, I think we feel better about what we've seen is the market backdrop for the last couple of quarters and we're better positioned than others. So we expect to kind of get the market.

Bryan Mittelman -- Chief Financial Officer

Yeah, I think it really fully covers Residential. Just obviously in Food Processing, it is our smallest division and so we're dealing with lumpiness on small numbers. So that creates, I guess, a wider range of potential outcomes in it. So, as we noted before, I'm talking about previously. I'll say that our discussion levels with customers had been increasing, and that now is turning into increasing orders and backlog. So, just reiterating on Q4, a fair amount of variability in what could be the outcome, but we do feel more confident about a more positive trajectory for 2020 in that segment.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, and then just getting a little finer on the Commercial Food Service margins in the 4Q, I think you said tough comp from a rollout last year, the trade show dropping in, and then it sounds like price cost maybe gets better. So maybe how should we think about margins, either sequentially or year-on-year in Commercial Food Service into 4Q? And I guess you got dilution from maybe some of the deals? Thanks.

Tim Fitzgerald -- Chief Executive Officer

Yeah, I mean, so obviously as you've noted, there is there's a lot happening there. In terms of sequentially, it is probably going to be flat to slightly slightly down, I would say, which is is negative to the prior year. We're dealing with here, again, variations moving around a growth rate that is obviously close to zero. So that's why it's a little difficult to, and I'm unwilling to fully commit to the number in the black or the red as far as the top line, but our efforts are very much focused on I'll call it, maintaining a consistent essentially sequential margins, but there will be challenges to do that. Namely HOST is a very large show. It really parallels maybe slightly smaller for us, NRA, so that is a sizable investment. So between that and again a specific rollout at a business that contributes healthy margins for us, it is, really creates the year-over-year pressures.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, very good, thanks guys.

Tim Fitzgerald -- Chief Executive Officer

Yeah, thanks, Jeff.

Operator

Thank you. Your next question comes from Walter Liptak of Seaport Global. Your line is now open.

Tim Fitzgerald -- Chief Executive Officer

Good morning, Walter.

Walter Liptak -- Seaport Global -- Analyst

Hi, thanks, good morning . Good morning. In the Commercial Food Service, you guys talked about the US being down 1%, and I wonder if you could break that out, the general market versus the large chains?

Tim Fitzgerald -- Chief Executive Officer

Yeah, from that we are seeing on a relative basis strength in the general market and weakness in the chains. So the first one is up in the second one is down.

Walter Liptak -- Seaport Global -- Analyst

Okay and then internationally, you mentioned that growth of 3.6. Is that from same thing general marketers, or is that from chains?

Tim Fitzgerald -- Chief Executive Officer

Yeah, no, it's really largely the same. I mean, there is obviously a different level of chain activity happening across the regions. APAC and Latin America do continue to be the stronger than EMEA for us.

Walter Liptak -- Seaport Global -- Analyst

Okay. And as we're talking about fourth quarter, I think in the fourth quarter, some of the the larger customers, larger distributors, they get rebates and and work on volume purchases. I wonder what the market is looking like here in the fourth quarter for trying to get extra discounts?

Tim Fitzgerald -- Chief Executive Officer

Well, I think I just make a comment that I mean, we feel that we're positioned pretty well our are large and strategic channel partners. I mean, I think we've really worked with them on continue to bring new solutions and product opportunities. So I think we feel good about that. And not only going to the individual products as we grow the portfolio, we've got 50 brands, but really educating them on the solutions.. So I think a lot of what we're trying to do as we're continuing to drive market share and opportunities, is really leverage the scope and scale of everything that we can work with them on to present unique technology solutions to their customers. I mean in terms of discounting and all that, I mean, I would say, nothing has changed significantly of how we interact with those buying groups and customers from what we've done in any, what we've done in the last five-plus years. So, no major change there.

Walter Liptak -- Seaport Global -- Analyst

Okay, great. Okay , fair enough. And then a number of times you guys talked about a procurement program, and I wonder what inning are we in and just kind of, if there is a way of summarizing it for us? How big is that opportunity and what's the timing and starting to get the benefits from that?

Tim Fitzgerald -- Chief Executive Officer

So I think I'll start, and Dave will add on. But look, I mean, I think we've had supply chain for a long time. But our supply chain approach was hey, we buy a company, and then we hit the top 50 items, and Middleby buys better than they do and dollars turn up. And we've done that very effectively for a long period of time, but the approach coming into this year was hey, what if we all come together as 50 companies and we think about how we're buying controls and thermostats and wire harnesses and motors, and so and even fasteners, and can we extend the leverage chain to other geographies, and can we consolidate to fewer strategic suppliers? So part of it is a cost element, some of it's a performance element as well, as we kind of think about how does our equipment perform in the field, and after sales service and warranty costs.

So it's been a much broader and more strategic approach going into the year. We enhanced kind of the leadership around that. We do not have a big corporate team, so I would say this is a bottoms-up approach, but we did leverage some of the capabilities that we have within existing businesses. And I would say that effort really started in April of this year. So, and it's -- I think it's November, if I'm right. And so I think, really we've made I would say significant progress in terms of processes, collaboration, and identifying opportunities. Certainly some of it has churned up into dollars, but we expect a more significant impact as we go into next year, and the year after.

David Brewer -- Chief Operating Officer

Yeah, Tim, I agree with what Tim said. Obviously, I think what, if you're asking for where we are, I'd say we're in the second and third inning, so we're still very early on. I think what's unique is, and what we're seeing is not only advantages from a cost perspective, but from a quality perspective. And the other thing, we're approaching quite a bit differently than all of our competitors in that we're, it's embedded in our, it's part of our DNA now. It's an operating system, it's not a project to lower cost one-time. It is becoming an operating system by basically incorporating all our talent across all the divisions and and co-oping all the best suppliers, which improves our quality and lowers our cost at the same time. So, but we're still early on. To answer your question directly, I think we, in the second inning and it's going extremely well.

Walter Liptak -- Seaport Global -- Analyst

Okay, thanks for the detail on it.

Operator

Thank you. The last question. We have time for today is from Saree Boroditsky of Jefferies, your line is now open.

Saree Boroditsky -- Jefferies -- Analyst

Thanks for fitting me in. Can we just talk about how you're thinking about capital deployment, And if you would consider buying back shares, just given the current level? And then, any color on the acquisition pipeline?

Tim Fitzgerald -- Chief Executive Officer

So kind of in reverse order there, I mean acquisitions continues to remain a strategic focus and priority of Middleby. Obviously we've been executing on that strategy for the better part of 20 years, and certainly last year and this year has been no different. I think we've added six new great brands and technologies to Middleby this year. So we see opportunities across all three segments. We're very focused in terms of strategic adds to the portfolio. Again this has never been a -- certainly it translates to financials, but it's not a financially driven initiative. It's a strategic initiative. And I think if you look over the last few years, you've seen us extend into beverage. We've shored up some areas that we had some gaps in the portfolio, steam cooking probably being one of the most significant, which is a category Middleby really had not been in. And it's in acquisitions such as FireEx and Crown, which all happened in about the last 12 months. And then we're really investing more in technology as well, L2F and Powerhouse Dynamics as we just mentioned, which is already, we're very excited about the opportunities that both of those are bringing to us.

So the pipeline continues to be robust. We're always busy with new and exciting ideas and I think that that will continue. I mean, I think from me stock buyback, I mean, I know that other than debt pay down, that's the other area that we think about. It is opportunistic at times and it's kind of defense and obviously where the stock is trading. But really, the acquisitions are what create long-term shareholder value as opposed to buyback, which I'm not saying it doesn't create long-term shareholder value because it certainly does, but it's a bit more of a financial buy. So that's kind of the the prioritization and both of those are things that we think about on a regular basis.

Saree Boroditsky -- Jefferies -- Analyst

I appreciate the color. And then last one, so Food Processing has been pretty volatile over the last couple of years and I know you guys have done a great things to improve that business, but could you just talk about the fit of that business within the overall portfolio, and I guess your commitment to continuing to grow that?

Tim Fitzgerald -- Chief Executive Officer

So the Food Processing business is a great business. I mean honestly, we really believe that we've got a very differentiated and industry-leading portfolio. Our, the companies and brands that we have in there are very strategically linked and the portfolio is very synergistic, and so at right now, which is a very a challenging period, but is that a trough, and we have industry-leading margins in kind of the worst cycle right now. So I mean, this business is a very profitable business, it's very uniquely focused on solutions. And we also believe that there is the ability over a period of time to reduce the volatility.

So even though, I mean, being down a fair bit in the third quarter, which which none of us are happy about, and we don't view it as acceptable. If you were to go back five years ago, we would have swings of 20% and 30%, right? So now we're kind of down to single digit swings, and as we kind of look out, I mean, I mentioned it in the comments, but we do think that there are adjacent areas that are, some of those are growing markets and we're well positioned for. So as we get into those, and we are having initial success in jerky, cured meats, certainly pet foods and alternative protein, which we see as a longer-term trend. We're excited about those and we think that will help us further diversify. So that's a journey that we are on. And look, the core competency of what we do, I mean it's obviously we're food service company and this platform has been built around thermal processing and I think as time is evolving, we're seeing more and more synergies across the platform.

So as I mentioned in the comments, we just launched this TurboChef oven. It's a large scale, high-speed rapid-cook very flexible conveyorized platform. I mean, that's a great example of where you've got technology crossing over segments. And I would also say, not only is the sharing of technology, but I mentioned that ghost kitchens. It's actually very interesting as we're going into segments such as that. We have customers we're dealing with right now who are specifying kitchens that actually, you would have thought we would have been pulling in our commercial food service brands, which we are, but we are also pulling in our food processing brands because they have the higher capacity. They actually have greater levels of automation. So it's kind of very interesting in those are things that nobody else in our industry can do. So really honestly we see a lot of synergies there, and we think they will actually increase over time.

David Brewer -- Chief Operating Officer

Yeah, let me just double down on that. This is Dave. The TurboChef and the injection of TurboChef technology into that processing line literally doubled production capacity of that dried beef production system. In the same square footage in that processing plant, thanks to the TurboChef technology a manufacturer can double the output per square foot. The reverse side of that, as Tim was just talking about, there is clearly a trend here on using ghost kitchens and other types of remote production systems for our food service operators where we're bringing in the capacity the other way from our food processing equipment to allow for restaurants and food service operators to expand their ability to service their customers. So the technology is going both ways, and kind of to an earlier question, when change occurs, you want to be there with the solutions. And that partnership can be driven by those two different types of technologies, both on Food Processing and Food Service.

Saree Boroditsky -- Jefferies -- Analyst

That's great color. Thank you so much.

Tim Fitzgerald -- Chief Executive Officer

Thanks, Operator, so I'm just going to, one last comment and then we'll close it out. I just want to also emphasize, and this is kind of maybe a follow-up to one of the other questions that Bryan answered, and in this year, including in third quarter, and we will see this in the fourth quarter, I mean we are making incremental and significant investments that we think position us for for longer-term growth. I mean, we certainly we're focused on margin improvement and we're doing that in the face of some of these investments. And we just talked about a lot of what these are translating into, but R&D and technology investments is a big one.

So we have a controls initiative and we're putting money to that. And that will show up next year. I mean, obviously we just talked about IoT and we've talked about automation a lot. I mean, I think those are things that we want to be the brains of the kitchen in addition to kind of the brawn, with all these great brands and innovative of technology. So that continues to be a big investment, and that was certainly there in the third quarter and we'll continue to have it in the fourth quarter. So, as we're thinking about margins. I just want to kind of reemphasize to everybody, we are doing that as we're making investments for long-term growth.

And I think the other thing I just want to point out, and it was really the comment about the the trade shows, but I mean also higher levels of spend that we've had on trade shows and I would say sales tools and marketing. I mean, so we talked about, we really did have some meaningful launches of internal sales tools that are going to help us sell, bring the company to be more collaborative, closer together, bringing solutions to market pretty quickly, allow people to see across all of our brands and new product introductions very quickly. And they're not free. Both the technology tool as well as the content that we're developing, and then on top of that, the trade shows, which has been heavy this year. I mean, HOST didn't happen last year, [indecipherable] didn't happen last year, and a number of international shows. So that's been a significant add to the current year, which we think will pay off, and we're investing in innovation centers, right? So we opened up the protein center which I mentioned, we've invested in the residential showrooms and we're opening this innovation center in early next year. And although we don't have the operating cost, we are spending money to get that up and going.

So I just, as people are thinking about margin expansion, which we're focused on, we are also investing heavily in positioning for the future with technology, new products, and tools that are going to help us bring solutions and better sales processes to market, which we think is kind of part of the evolution and reinventing of what we're doing here. So just, that was just kind of a follow up I wanted to make sure we drove home.

Bryan Mittelman -- Chief Financial Officer

And so with that, operator, that concludes our time for today.

Tim Fitzgerald -- Chief Executive Officer

Well, thank you everybody for being on today's call. We look forward to catching up with you on next quarter. Thank you.

Operator

[Operator Closing Remarks].

Duration: 72 minutes

Call participants:

Tim Fitzgerald -- Chief Executive Officer

Bryan Mittelman -- Chief Financial Officer

David Brewer -- Chief Operating Officer

John Joyner -- BMO Capital Markets Group -- Analyst

Larry De Maria -- William Blair -- Analyst

James Clement -- The Buckingham Research Group -- Analyst

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Walter Liptak -- Seaport Global -- Analyst

Saree Boroditsky -- Jefferies -- Analyst

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